Technology and East-West Trade

November 1979

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Library of Congress Catalog Card Number 79-600203

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Foreword

This assessment was made in response to requests

tee on Foreign Affairs and the Senate Committee on

h-em the House CommitCommerce, Science, and

Transportation. Its purpose is to examine the economic and national security

implications of the transfer of technology between the United States and the

Communist world.

The study identifies and, where possible, evaluates the economic, political,

and military costs and benefits that accrue to the United States in its trade with

the Soviet Union, Eastern Europe, and the People’s Republic of China, taking

account of the complex ways in which these factors interrelate. It sets forth a

spectrum of policy options which could potentially affect these relationships,

and explains the difficulties in projecting their consequences.

The report also provides background information on the functioning and the

implications of U.S. trade policy vis-a-vis the Communist world, including the

areas of tariff and credit policy and export control, both in the United States and

in selected allied nations. Finally, it surveys the past and potential contributions

of Western technology to the economies of the Soviet Union and China.

The Director of this project is Dr. Ronnie Goldberg of OTA’s International

Security and Commerce program. That program is managed by Dr. Peter Sharfman (who succeeded Dr. Henry Kelly in September 1979) and is part of OTA’s

Energy, Materials, and International Security Division headed by Assistant

Director Lionel S. Johns.

OTA is grateful for the assistance of its Technology and East-West Trade

Advisory Panel, chaired by Mr. McGeorge Bundy, as well as for the assistance

provided by the Central Intelligence Agency and the Departments of Defense,

State, and Commerce. It should be understood, however, that OTA assumes full

responsibility for its report, which does not necessarily represent the views of individual members of the Advisory Panel or of any Government agency.

JOHN H. GIBBONS

Director

. . .

Ill
Technology and East-West Trade

Advisory Panel

McGeorge Bundy, Chairman

New York University

Igor Birman

Consultant on Soviet Economics

Morris Bornstein

University of Michigan

Lawrence Brainard

Bankers Trust

Jonathan Bunge

Keck, Mahin, and Cate

Daniel Drucker

University of Illinois

Melvin Duncan

Export Programs, Inc.

Patricia Feltes

League of Women Voters

Thomas Fingar

Stanford University

Frederic Fleron

State University of New York

Henry Forrest

Control Data Corporation

Elizabeth Jaeger

AFL-CIO

Rhoda H. Karpatkin

Consumers Union of the United States

Jan Lodal

American Management Systems

J. Ray Pace

Baker World Trade, Inc.

Charles Phipps

Texas Instruments, Inc.

Gertrude Schroeder

University of Virginia

David Smith

Levi-Strauss, Inc.

Seymour Weiss

SY Corporation
Technology and East-West Trade Project Staff

Lionel S. Johns, Assistant Director

Energy, Materials, and International Security Division

Henry Kelly, Program Manager (to September 1979)

Peter Sharfman, Program Manager (from September 1979)

International Security and Commerce Program

Ronnie Goldberg, Project Director

Pamela Baldwin Robert Rarog

Marvin Ott Irene Szopo

Administrative Staff

Dorothy Richroath Helena Hassell

OTA Publishing Staff

John C. Holmes, Publishing Officer

Kathie S. Boss Joanne Heming
Acknowledgements

This report was prepared by the International Security and Commerce Program staff of

the Office of Technology Assessment. The staff wishes to acknowledge the assistance of the

following contractors in the collection, analysis, and preparation of material for the report:

Michael Checinski Stephen Sternheimer Business Experience

Robert Fraser Richard P. Suttmeier International

Seymour Goodman Rudi Volti International Economic

Mark Kuchment Angela Stent Yergin Studies Institute

Phillips Kuhl

The following Government agencies also provided assistance:

The Central Intelligence Agency The Department of Defense

The Department of Commerce The Department of State

vi
Contents

Chapter Page

I. Summary:Issues and Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

11. Future Policy Governing East-West Trade and Technology Transfer 19

III. The Economic Implications of East-West Trade and

Technology Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

IV. The Foreign Policy Implications of East-West Trade and

Technology Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67

V. The Military Implications of East-West Technology Transfer . . . . . . 85

VI. Technology Transfer: Definition and Measurement . . . . . . . . . . . . . . . 99

VII. The East-West-Trade Policy of the United States . . . . . . . . . . . . . . . . 111

VIII. Multilateral Export Control Policy: The Coordinating Committee

(CoCom). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153

IX. The East-West Trade Policies of Americans Cocom Allies . . . . . . . . . . 173

X. Western Technology in the Soviet Union . . . . . . . . . . . . . . . . . . . . . . . 205

XI. Western Technology in the People’s Republic of China . . . . . . . . . . . . 245

Appendix: Export Administration Act of 1979. . . . . . . . . . . . . . . . . . . . . . . . 287

vii
ACEP — Advisory Committee on

Export Policy

AWG — Aussenwirtschaftsgesetz

(West Germany)

BGW – Bundesamt fuer gewerbliche

Wirtschaft (Ministry of

Industrial Economy, West

Germany)

c c c – Commodity Credit

Corporation

CCL – Commodity Control List

CDC – Control Data Corporation

CDU –Christian Democratic Party

(West Germany)

CG –Consultative Group

ChinCom – China Committee

CIA – Central Intelligence Agency

CMEA or – Council for Mutual

COMECON Economic Assistance

CoCom

COFACE

CTEGs

DOD

EARB

EDAC

EE

EEC

Eximbank

FRG

GAO

GATT

GDR

GNP

HVEC

IAEA

ICs

IREX

ITC

I.W.

JDA

. . . Vlll

– Coordinating Committee for

Multilateral Export Controls

– Compagnie Francaise

d’Assurance pour le

Commerce Exterieur

(France)

– Critical Technology Expert

Groups

– Department of Defense

— Export Administration

Review Board

— Economic Defense Advisory

Committee

– Eastern Europe

— European Economic

Community

– Export-Import Bank

– Federal Republic of

Germany (West Germany)

– General Accounting Office

— General Agreement on

Trade and Tariffs

— German Democratic

Republic (East Germany)

—gross national product

– High Voltage Engineering

Corporation

— International Atomic

Energy Agency

— integrated circuits

– International Research and

Exchanges Board

– International Trade

Commission

— industrialized world

– Japan Defense Agency

LIST OF ACRONYMS

JERC

LDCs

LIBOR

LSI

MFN

MFT

MIRVs

MITI

NAS

NRC

NSC

OC

OEA

OECD

PRC

PRM 31

R&D

SCCC

SCST

SEC

SITC

SPC

SPD

S&T

STC

sub-ACEP

TACs

— Japanese Economic

Research Center

— less developed countries

– London Interbank

Borrowing Rate

— large-scale integration

— most-favored-nation

– Ministry of Foreign Trade

(PRC)

— multiple independently

targetable reentry vehicles

– Ministry of International

Trade and Industry (Japan)

– National Academy of

Sciences

– Nuclear Regulatory

Commission

– National Security Council

– Operating Committee

— Office of Export

Administration

— Organization for Economic

Cooperation and

Development

– People’s Republic of China

— Presidential Review

Memorandum on East-West

Technology Transfer

— research and development

— State Capital Construction

Commission (PRC)

– Soviet Committee on

Science and Technology

– State Economic Commission

(PRC)

– Standard International

Trade Classification

— State Planning Commission

(PRC)

– Social Democratic Party

(West Germany)

— science and technology

– State Science and

Technology Commission

(PRC)

— sub-Advisory Committee on

Export Policy

— Technical Advisory

Committees -

TECH IMPORT – China National Technical

Import Corporation

TTG –Technical Task Group

U.S.S.R. – Union of Soviet Socialist

Republics

VLSI — very large-scale integration
CHAPTER I

Summary: Issues

and Options
CONTENTS

Page

INTRODUCTION . . . . ... , . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

ISSUES AND FINDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Economic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

l. Howi mportant is trade with the Communist world to the U.S.

balance of trade?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2. What are the major barriers to continued growth in U.S. trade with

the East?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3. How much technology does the Communist world buy from the West,

and how important is that technology to the economies of the

importing countries? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4. What are the prospects for future Eastern purchases of Western

technology?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5. Could the sale of American technology to the Communist world

produce effects detrimental to sectors of the U.S. economy?. . . . . . . . .

Political . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

l. What basic positions have been taken regarding the use of

trade leverage, i.e., using trade to achieve political objectives of

foreign policy?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2. Is there evidence to either confirm or deny theutility of trade

leverage in East-West relations? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Military and Strategic. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

l. Can the military risk entailed in the proposed sale of a dual-use

technology be determined? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2. Will the compilation of a list of militarily criticaltechnologies,

embargoed to the Communist world, substantially reduce this risk? . .

3. Have American technology exports contributed significantly to

the military capabilities of the Soviet Union?. . . . . . . . . . . . . . . . . . . . .

America’s Allies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

l. How effective is CoCom? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2. How do other members of the Western alliance view the problems

raised by East-West trade and technology transfer?. . . . . . . . . . . . . . .

3. What is the likely future of CoCom and how much influence can

the United States expect to exercise over its policies?. . . . . . . . . . . . . .

POLICY OPTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

l. Actions in keeping with the existing policy but designed to make

current procedures more efficient. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2. Actions that could increase restrictions on East-West trade or

strengthen the use of trade as a foreign policy lever. . . . . . . . . . . . . . . . . . .

3. Actions designed to expand East-West trade. . . . . . . . . . . . . . . . . . . . . . . .

3

5

5

5

5

6

7

8

10

10

11

11

11

11

12

12

12

12

13

13

13

14

14
CHAPTER I

Summary: Issues and Options

INTRODUCTION

Trade and commerce between nations is a necessary, if not sufficient, requisite for achieving peaceful relationships. On the other hand, trade with a potential adversary will inevitably, to some extent, strengthen the economy and the

military capability of the trading partner. It is in the context of this dilemma

that present debates over the value and wisdom of selling US. goods and technology to the Communist world take place. This study has been undertaken at

the request of the House Committee on Foreign Affairs and the Senate Committee on Commerce, Science, and Transportation to help provide Congress with

the capability to address the complex issues raised by this trade, including the

extent to which international trade in high technology endangers the national

security of the United States. It addresses the controversies that surround the

issue of East-West trade and technology transfer, i.e., the costs and benefits of

the United States’ selling technology to and expanding its commercial relations

with the Soviet Union, Eastern Europe, and the People’s Republic of China.

This subject is complicated by both conceptual problems and disagreements about

the nature and future of U.S.-Soviet relations. The conceptual problems concern the

difficult task of defining and measuring

technology. These problems are dealt with in

chapter V 1. The disagreements are manifested in the divisiveness and ambivalence

which surround the question of the appropriate nature and extent of U.S. trade with the

East. At the center of these disagreements

seems to lie an even more fundamental difference of views about the basic strategies

that the United States should employ in its

dealings with the Communist world.

From one perspective, technology transfer

is a necessary part of a policy of expanded

contacts with the Communist world. Out of

this policy of detente arises a series of international and interpersonal relationships

which, over time, could contribute to a lasting structure of peace. Those that argue

from this perspective assert that present policies that restrict U.S. exports are both politically and economically ill-advised. The risk

of some erosion of U.S. technical leadtime incurred by trade in technology is justified by

the economic benefits of trade. Moreover,

strict export controls are unworkable given

the availability of much comparable technology abroad and the inability of the United

States to obtain adequate cooperation from

its allies for a restrictive trade policy. From

this perspective, the denial of all but a small

and specialized category of military technology is practically impossible. The safest policy therefore becomes one of vigorous promotion of 1) all U.S. exports to reduce balance-of-trade deficits, and 2) U.S. research

and development to maintain a technological

lead over friends and adversaries alike, thus

minimizing the national security risks entailed in technology transfer. Consistent

3
4 ● Technology and East-West Trade

with this view is the argument that corporate interest should be more than adequate

to protect the United States from suffering

substantial economic losses through trade in

technology; it is, after all, in the interest of

every corporation to protect its position of

technical leadership.

Others view the basic nature of East-West

confrontation in more Manichean terms, arguing that the fundamentally adversary relationship between East and West is unlikely to be changed in the near future through

any gradual relaxation of tension brought

about by trade. Trade is not seen as an opportunity for strengthening peace; rather it

is contended that the West is being slowly

bled of its most important assets by nations

it has every reason to distrust. From this

perspective, present policy is not restrictive

enough. The only safe course is to deny assistance to our adversaries wherever possible, using trade only as necessary to extract

political concessions. The difficulty of obtaining cooperation from our allies is acknowledged but countered by the argument

that opinion in Western Europe and Japan is

not monolithic and present official sentiments are not fixed for all time. With sufficient determination, funds, and energy it

could be possible both to strengthen Western military alliances and to convince our allies to restrict trade in a common front.

From this perspective even relatively passive aspects of trade in technology assume a

strategic significance; programs allowing a

constant interchange between Eastern and

Western technologies, for instance, can gradually deplete advantages in technology,

management skills, and other areas in which

the West now enjoys substantial superiority.

The middle ground is occupied by those

who feel that no judgments need necessarily

be made about the prospects for detente.

They argue that while existing policies may

require adjustments to increase the efficiency and reliability of their administration, no

basic reformulation is required. From this

point of view, the objective of the export administration system is to maintain the militarily relevant technological leads that the

West presently holds relative to the Communist world. The system, it is argued, is functioning properly so long as it delays the acquisition in the East of technologies that

could close these gaps or ensures that their

acquisition is relatively difficult and costly.

Realistically, a Communist nation can ultimately acquire any item it prizes highly

enough; either alternative suppliers will be

found outside the United States, or it will be

developed indigenously, at greater cost perhaps than if it were purchased from the

West. It is acknowledged that the licensing

system as it is presently administered may

occasionally err either in subjecting harmless technologies to excessive and needless

delay, or, less often, in allowing items of

military significance to slip through the net.

These defects can be remedied without altering the fundamental premises of the policy,

however. Attempts to weight the policy on

the side of economic advantage may have

serious national security implications; efforts in the opposite direction must contend

with economic and political realities. The

United States is not the sole supplier of most

of the technologies desired in the Communist

world and U.S. allies in Western Europe and

Japan are not likely to concur in more restrictive policies.

To discuss and evaluate these positions in

a meaningful way requires the review of a

host of complex economic, political, and military benefits and liabilities that may not be

quantifiable, but which nevertheless must

enter into any calculation of the risks inherent in all trading relationships with the

Union of Soviet Socialist Republics

(U.S.S.R.), People’s Republic of China (PRC),

and Eastern Europe. It is the goal of this assessment to present these and related points

of view as clearly as possible, acknowledging

the uncertainties which exist and which will

continue to exist, but providing material

that will allow a better analysis of the kinds

of military, political, and economic costs and

benefits that any program affecting EastWest trade and technology transfer is likely

to incur.
Ch l—Summary Issues and Options ● 5

ISSUES AND FINDINGS

The following is a capsule summary of the

major issues arising from U.S. trade—particularly in technology-with the Communist

world. The discussion addresses the economic, military, and political concerns related to

this trade and its role in relations between

the United States and its major allies.

ECONOMI C

How Important Is Trade With

the Communist World to the

U.S. Balance of Trade?

East-West trade is a relatively small component of U.S. foreign trade, and a minor

component of the overall American economy. Although trade with Communist

States has grown rapidly since the beginnings of detente, and although trade with

the People’s Republic of China increased dramatically during 1979, trade with Communist nations is not expected to become a critical factor in the U.S. balance of trade in the

foreseeable future.

Total turnover of U.S. trade with the East

in 1978 was $6.3 billion—4.l percent of U.S.

world trade. The United States had a balance of trade surplus with the Communist

world of $2.6 billion in 1978, as compared to

a U.S. worldwide trade deficit of approximately $28.4 billion. Moreover, East-West

trade remains a relatively small part of the

Organization for Economic Cooperation and

Development (OECD) trade as a whole, and

the United States has captured only a minor

share of this limited market. In no instance

is the United States the major Western trading partner of a nonmarket economy.

What Are the Major Barriers to

Continued Growth in U.S. Trade With

the East?

Three factors are commonly cited as inhibiting the expansion of American trade with

the Communist world: 1) the lack of official

credits and guarantees to finance U.S. exPhoto credit World-W/de Photo

Coca Cola is now available in the PRC

Photo credit TASS from SOVFOTO

Pepsi Cola production line at Novorossiisk, U.S.S.R.

ports; 2) the lack of normal trading relations,

including extension of most-favored-nation

(MFN) status to Communist countries, notably the U.S.S.R. and PRC; and 3) U.S. export

controls.

In fact, the primary obstacle to rapid

growth of trade with the Communist world is

the Communists’ inability and/or unwillingness to export on a competitive basis to

Western markets. Consequently, a shortage

of hard currency inhibits Communist imports from the West. Credits that supply
6 ● Technology and East-West Trade

hard currency would attack this shortage

directly; extension of MFN would facilitate

some Communist exports; direct export controls are significant only in certain industries to which Communist nations accord priority in their allocation of hard currency

(e.g., computers or oil extraction technology

in the case of the U.S.S.R.).

Therefore, credit is and will continue to be

a major factor influencing the growth of

East-West trade. Subsidized credits and/or

loan guarantees, especially for the U. S. S. R.,

are far more readily available from America’s Western allies—West Germany, France,

Great Britain, and Japan–than from the

United States. In 1977, for instance, West

Germany and France supplied on the order

of $7 billion in official export credits to the

U.S.S.R. and Eastern Europe; Japan provided nearly $5 billion; and the United

States $945 million. There are strong indications that the availability of official credits

substantially affects the choice of Western

suppliers. For instance, all Soviet orders for

American turnkey plants came during the

brief period in which the U.S.S.R. was eligible for U.S. Export-Import Bank (Eximbank) credits. Contracts are now often concluded by American multinational firms

with subsidiaries in countries that provide

the U.S.S.R. with more competitive financing. This means that although American

firms supply the technology, the United

States does not receive the economic benefits of major equipment orders. It is unlikely

to do so until Eximbank financing is once

again available to the U.S.S.R.

Lack of MFN status appears hitherto to

have had greater symbolic than practical impact on the volume of U.S. imports from the

East.

Owing to the commodity composition of

trade and the demand elasticity characteristics of Eastern products, absence of MFN

status has had a relatively minor effect on

the largest nonmarket exporters (U.S.S.R.

and PRC, although the situation with respect to the latter may now be changing).

The existing tariff schedule has, however,

probably had a relatively greater effect on

the volume of U.S. imports from—and ability to export to—East Germany and Czechoslovakia.

Many U.S. firms contend that U.S. export

controls are a serious barrier to expansion of

trade with the East. Careful analysis does

not support this proposition. While export

controls may affect the U.S. market share of

present trade, significant growth is retarded

more by chronic hard-currency shortages

and deliberate policy decisions in the Communist world. Even if U.S. trade with the

PRC continued to grow at its present rate,

for instance, changes in the Communist

world’s share of U.S. foreign trade would be

incremental. Major increases in the volume

of East-West trade can only occur if the

Communist world alters certain of its fundamental policies regarding the degree of

worldwide economic interdependence acceptable to it and establishes alternative ways of

handling its current hard-currency problems. It is highly unlikely that any such decisions will dramatically affect trade volumes

over the next few years.

How Much Technology Does the

Communist World Buy From the

West, and How Important Is That

Technology to the Economies of

the Importing Countries?

Communist imports of technology, including technology-intensive products, constitute in value terms a minor share of total

purchases from the West, but the value to

the East of the technological component of

Western trade is high relative to other imports. Some contend that this is due to Western underpricing on technology sales to the

East. Be that as it may, it is certainly true

that Eastern purchasers carefully choose

only those processes and products with the

highest possibility of productivity gains.

Estimates of the macroeconomic impact of

Western technology imports on the Soviet

economy vary, but it is clear that impacts in
Ch. l—Summary: Issues and Options ● 7

discrete areas of the economy have been significant. Thus, while aggregate Western resource inflows into the U.S.S.R. have relatively little impact on overall growth, there

is no doubt that imports of certain commodities–capital equipment and associated technology in particular—have played a large

role in the expansion of key sectors, and

have thus made a significant contribution to

total economic growth. This is particularly

manifest in the chemical and motor vehicle

industries.

The U.S.S.R.’s most productive domestic

use of imported technological developments

has come in industries that were based on

well-established technologies. But in most

industries in which significant technology

transfer from the West has occurred, the

technology gap between the U.S.S.R. and

the West has not diminished substantially

over the past 15 years. This may be due to

the fact that imported technology substitutes for the development of domestic capabilities and therefore actually impedes the

ongoing domestic innovation necessary to

close technological gaps. In these sectors,

Western technology has been extremely important, but it has never acted as a panacea

for Soviet economic difficulties.

The Soviets will experience a sharp decline

in the growth of the labor force in the near

future. Technological improvement, aided by

imports from the West, is to be the basis of

planned increases in Soviet labor productivity. However, the rigidities of central planning inhibit the diffusion of imported technology in Communist nations. This is particularly true in the U. S. S. R., where lack of

communication between producer and user,

and lack of effective cost criteria hamper the

Soviet ability to effectively assimilate and

diffuse imported Western technology

throughout the economy.

What Are the Prospects for Future

Eastern Purchases of Western

Technology?

In the U. S. S. R., the allocation of convertible currency is the most important single element in import planning. Decisions to allocate currency among purchase options in the

West are made either within the framework

of regular 1- and 5-year plans governing the

entire economy or through irregular (ad hoc)

decrees that concern single branches of industry or individual enterprises.

The Soviets are careful customers. Each

ministry, nearly all R&D organizations, and

many large enterprises systematically collect and process available Western scientific

and technical data. The Ministry of Foreign

Trade collects technological and marketing

data abroad. Nevertheless, import priorities

change over time and the U.S.S.R. has developed no consistent and universally applicable criteria for selecting Western imports.

The decisionmaking process is time-consuming, complex, and often inconsistent.

The hard-currency debt of the East, although small from the standpoint of worldwide borrowing, has risen dramatically in

the last 8 years. In spite of debt increases

the credit ratings of nonmarket economies in

the West are good, and their debt in the

United States is relatively small. But because the short-term prospects of greatly increasing exports to the West are dim, the

cost of hard-currency capital may be expected to rise. As the accumulation of hardcurrency debt in the East increases, further

borrowing will become more expensive.

Should this occur, there are three alternatives open to Communist nations. They can

allow more direct Western involvement in

their enterprises in the form of joint ownership; they can resort to internal financing; or

they can expand and diversify their hardcurrency earnings from exports. On examination, only the latter option seems viable in

the long term. It will require the import of

Western manufacturing and marketing technology.

In the short and medium term, credit will

constrain further technology purchases only

insofar as it becomes difficult to obtain financing for large and costly projects (as in

the U.S.S.R.). As the cost of capital increases, nonmarket economies may begin to
8 ● Technology and East-West Trade

place a higher priority on purchasing technology and technology-intensive commodities since these products promise the highest

returns. The purchases of Western commodities as short-term means of achieving 5-yearplan targets will probably diminish as

planned technology purchases increase in

relative importance.

The situation of the PRC is quite different

from that of the U.S.S.R. Imports of Western products and technology have traditionally been regarded by the Chinese leadership

with ambivalence. The history of Chinese

technological interaction with the West is

punctuated with attempts to ignore or suppress the cultural consequences engendered

by the transplant of Western productive

techniques. But while Chinese imports of industrial plant and technology have (until

recently) been relatively small, their importance in providing a cumulative qualitative improvement in key industries has been

substantial.

Foreign technology provides the cutting

edge of the general program of economic

modernization announced by Premier Hua

Guofeng in February 1978. The current leadership has manifestly committed itself to

generating policies that will control Western

cultural influence during the process of

technological development, but it will nevertheless aggressively push for technological

modernization. While the overly optimistic

plans announced at that time have since

been scaled down, major purchases of Western plant and technology will still occur, financed in part through increased levels of

borrowing in the West.

The Chinese will experience no difficulty

in obtaining credits. Their borrowing in the

West, until now, has been extremely modest

and their credit rating is high. They also

would appear to have significant potential

for hard-currency earning exports such as oil

and labor-intensive handicrafts and consumer products.

The PRC has shown increasing sophistication in the search for and acquisition of foreign technology. There has been a coordinated national effort to accumulate as much

published technical and scientific data as

possible from Western sources. The last 2

years have seen an enormous growth in Chinese technical delegations traveling abroad

to Western Europe, Japan, and the United

States. The Chinese also seek to extract the

maximum amount of information from technology negotiations as well as to utilize contractual arrangements that will yield as

much experience to China as possible. Productivity gains resulting from Western capital and technology inflows will be most

marked in centrally controlled urban industries, which stand to benefit greatly from the

import of modern process equipment and

complete plants.

Chinese import selection and hard-currency allocation procedures are relatively decentralized in comparison with the Soviet

Union. Accordingly, it is possible that recent

orders of foreign plant and equipment were

permitted to outstrip China’s ability to generate the hard currency needed to pay for

them. Even though the decentralization of

decisions regarding allocation of currency

for foreign trade may be expected to continue, decisions regarding the purchase of

whole plant and high-technology items are

likely to remain centralized and the central

government will exert closer control over foreign exchange.

Could the Sale of American

Technology to the Communist World

Produce Effects Detrimental to

Sectors of the U.S. Economy?

Some sectors of the U.S. economy are

more vulnerable to the repercussions of technology transfer than others. Perhaps the

most important of these is the chemical industry, where American plants have been

sold to the U.S.S.R. and are to be paid for by

products produced in them. As a result of

this “buy-back” transaction, U.S. firms producing anhydrous ammonia have experienced domestic plant closures and significant declines in prices over the last 2 years.
The U.S.-U.S.S.R. contract has a life of 20

years and it will probably result in serious

market disruption for domestic producers of

ammonia. Other problems in the same industry have arisen in Western Europe where

product buy-back provisions in contracts for

turnkey plants have required the import of

large quantities of chemicals, to the detriment of domestic producers.

Despite this growing threat to the West

European chemical industry, existing legal

mechanisms have proven ineffective in dealing with the glut. “Dumping,” i.e., selling

goods cheaply in overseas markets at below

domestic production costs, is also a problem.

Chemical firms have found it difficult to

demonstrate dumping because the required

evidence includes the exporters’ prices in the

home market or actual costs (prices in Communist nations are administered and are

therefore unusable for comparisons). Although rulings in the United States have

found dumping of some Eastern goods, often

it takes Western firms at least a year to assemble a case based on the exporter’s internal costs. By this time the damage has already been done.

It is highly unlikely in the near or medium

term that any Eastern economy could offer

serious competition to the United States in a

product area involving advanced design and

manufacturing technology. But Eastern nations are anxious to increase their export

potential and any significant increase in

East-West trade in the long term must include more Eastern exports.

In the long term, the proliferation of industrial technology in the East might weak54 - 202 0 - 79 -2 .
10 . Technology and East-West Trade

en the competitive position of U.S. firms as

suppliers of technology to newly industrializing nations. Nonmarket economies are increasingly attempting to break into this

market.

On the other hand, there may be significant advantages to sectors of the U.S. economy actively engaged in East-West trade.

Although the total volume of trade in technology between the United States and the

Communist world has been relatively small

in dollar terms, some firms contend that

such technology sales play an important role

in their corporate strategy and are linked

both to potential sales of much greater size—

in third markets as well as in the East—and

to decisions regarding innovation and extension of product lifecycles. Should trade

volumes increase, so too may these indirect

effects.

Another potential benefit may lie in reverse technology transfer—from East to

West–which is at present miniscule. The

failure of Western firms to search for technology in the East and the inability of the

centrally planned economies to market effectively in the West has resulted in significant

opportunities for Western technology purchases being missed.

POLITICA L

What Basic Positions Have Been

Taken Regarding the Use of Trade

Leverage, i.e., Using Trade To

Achieve Political Objectives of Foreign

Policy?

The question of the political uses of trade

has generated considerable controversy and

at least three schools of thought. The first

rests on a judgment that trade is not an effective instrument to achieve political objectives. This is the official view of the Soviet

Union and is held by a number of OECD governments which contend that history has

shown that efforts to obtain political concessions from the nonmarket economies

through policies of economic pressure or inducement have been unsuccessful. Consequently, each trade and credit transaction

should be judged on its economic merits

alone.

The second perspective is associated with

detente. It rests on the proposition that

trade can have a moderating effect on international politics by enmeshing national economies in a web of interdependence. The Soviet economy’s acute need for imports of technology and capital equipment from the West

provides the opportunity to deliberately

bind the U.S.S.R. in such a web. Additional

benefits could include a strengthening of the

Soviet consumer economy as a claimant on

domestic resources and a moderating factor

in national policymaking; and increased opportunities for the penetration of Soviet society with Western products, culture, and values. This perspective adopts a limitationist

view of American power and is skeptical of

the extent to which the United States can coerce Soviet policy. Washington is seen to

have little real choice but seek a stable cooperative relationship with Moscow. Through a

combination of economic inducement and benign political subversion, trade offers one

means of drawing the Soviet Union into such

a relationship.

The third perspective accepts the proposition that technology transfers can be harnessed to political purposes, but is profoundly skeptical of the hypothesized connection

between such trade and political moderation.

Proponents of this view contend that the

basic relationship between the Soviet Union

and the West is, and will remain, one of conflict due to deep-seated differences in

ideology, social and political systems, and

foreign policy objectives and interests. Consequently, Western transfers of technology

may have the net effect of strengthening an

adversary—particularly if they are financed

by credits at low rates. Such transactions

can only be justified if the West obtains concessions in Soviet domestic or foreign policy

in return. Thus the need for Western technology can and should be exploited as a source

of leverage on Soviet policy.
Ch 1— Summnary: Issues and Options 11

Is There Evidence to Either Confirm

or Deny the Utility of Trade Leverage

in East-West Relations?

To date the effort to use trade for political

leverage has focused on establishing the

freedom of Soviet Jews to emigrate. An analysis of Jewish emigration in the context of

the Jackson-Vanik amendment, which links

U.S. trade concessions to such emigration,

provides no conclusive evidence that the

amendment either has or has not had a significant impact on Soviet emigration policy.

Much disagreement surrounds the question of whether there exist technologies

critical to the U.S.S.R. in which the United

States has a clear worldwide monopoly.To be

effective for this purpose a technology must

be highly valued by the Communist countries and must be unavailable from alternative sources. Few technologies meet these

tests. Attempts to identify technologies

with the greatest promise as instruments of

U.S. leverage have focused on advanced oil

and gas exploration and extraction equipment and on certain types of computers.

Even in these cases, careful analysis suggests that while some leverage may indeed

be possible, it will be of limited potency and

duration as supplies from alternative foreign

sources and domestic production become

available. Leverage in other technologies

would depend on cooperative efforts in the

Western alliance.

Efforts to use trade to moderate Soviet

policy as part of a broader detente policy

have led to inconclusive results. During recent years there has, in fact, been a substantial growth in Soviet trade with the United

States but there is little evidence that such

trade has so far had the desired effect on

Soviet foreign policy or domestic politics.

Whether it will do so in the future is open to

debate.

MILITARY AND STRATEGI C

Can the Military Risk Entailed in

the Proposed Sale of a Dual-Use

Technology Be Determined?

A conclusive determination is probably

impossible. Assessment of the military contribution of a product or process entails consideration of the following: the capabilities of

the technology itself; the nature of the transfer mechanism; the character of the recipient

environment, including infrastructure capabilities; the relative technological capabilities of the seller and the recipient; the available deterrents to diversion of end use; the

priorities and intentions of the recipient; and

the character and volume of related purchases in the past. Much of this information

is necessarily based on informed speculation.

Determinations of the motives and probable

behavior of potential adversaries, for instance, are judgmental and can never wholly

account for the impact of unforeseen events

on priorities and decisions. The sale of any

dual-use technology-and this means virtually all high technology-therefore necessarily entails some degree of security risk,

which end-use guarantees or monitoring arrangements cannot eliminate.

Will the Compilation of a List of

Militarily Critical Technologies,

Embargoed to the Communist World,

Substantially Reduce This Risk?

The critical technology approach currently under examination in the Department of

Defense (DOD) is far from implementation.

One present difficulty is the degree of confusion in Government and business community alike over its intention and probable consequences. For instance, it is hailed both by

those who believe it may reduce the number

of items currently controlled and by those

who feel that it will make export controls

more extensive. The recent DOD reorganization may well add momentum and a renewed

sense of purpose to the critical technology
———.——

12 ● Technology and East-West Trade

exercise, but it is unwise to regard it as a

panacea to the difficult problems inherent in

administering export controls. A list of embargoed technologies cannot simply replace

the existing licensing system. No export control system can be effective unless it makes

provision for case-by-case reviews of export

applications. This case method approach

may be combined with procedures such as

the critical technologies list, designed to

screen the number of applications subjected

to detailed analysis, but it cannot be wholly

eliminated.

Have American Technology Exports

Contributed Significantly to the

Military Capabilities of the Soviet

Union?

Most observers of the export-licensing

process would agree that U.S. and other

Western technology has contributed to Soviet military capabilities. There is no agreement, however, on the degree or significance

of any such contributions. This is partly due

to lack of explicit policy guidance in the present export administration system on the

specific military objectives and desired relative force capabilities of the United States;

but disagreements also stem from divergent

perception of Soviet capabilities and basic

intentions, and even from different assessments of the technological capabilities of exported items. In this connection, it is relevant to note that no export license has ever

been granted over the objection of the Secretary of Defense.

It is unlikely that these contributions

could have been totally avoided without a

complete economic embargo of the Communist world by the entire West.

AMERICA’S ALLIE S

How Effective Is CoCom?

CoCom (Coordinating Committee for Multilateral Export Controls), the multinational

organization that attempts to implement a

uniform export control system throughout

the Western bloc, remains a viable, albeit imperfect, organization despite its informal

nature, the lack of sanctions or adequate

policing mechanisms, and the equivocal attitude of several of its members towards the

continuation of present levels of export control. There are frequent charges, both in the

business community and Government circles, that firms in other CoCom nations have

evaded or ignored CoCom restrictions. There

is at least convincing anecdotal evidence to

support such charges, but the extent of foreign government connivance at such practices is open to question.

How Do Other Members of the

Western Alliance View the Problems

Raised by East-West Trade and

Technology Transfer?

East-West trade has always been economically more important for Western Europe

and Japan than for the United States. Germany and Japan lead the United States in

exports of “high technology” products to

the East and consider such sales desirable

elements of their normal foreign trade. West

Germany, for instance, is the leading Western overall supplier of machinery and equipment to the U. S. S. R., providing nearly onethird of such Soviet imports. Japan supplies

approximately 20 percent and the United

States less than 10 percent. Japan is the

U.S.S.R.’s leading Western supplier of oilrefining equipment.

America’s allies do not deny the basic necessity of withholding items of direct military relevance from the Communist world.

But although there does not appear to be

much enthusiasm for disbanding CoCom, its

European and Japanese members would

grant it a narrower role in export control

than would the United States.

There is little, if any, debate similar to

that in the United States over the political,

military, and strategic implications of transferring technology to the East in Western

Europe and Japan. It appears that Japan,

West Germany, France, and Great Britain
Ch, 1—Summary: Issues and Options ● 13

all consider the sale of technology a primarily economic issue and are content to rely on

the self-interest of the companies affected to

protect domestic industry. Any use of export controls for political purposes is largely

eschewed. West Germany, in fact, considers

trade with East Germany a part of its domestic commerce and not “foreign trade, ”

although it does observe CoCom restrictions

in its sales of dual-use and military items to

East Berlin.

With the exception of the small number of

cases subject to delays in CoCom, or held up

in the U.S. reexport licensing system, Japanese and West German export controls work

quickly and efficiently and appear satisfactory to their business communities. Unlike

U.S. firms, companies in these countries usually know how their cases will be resolved

before a license application is submitted.

What Is the Likely Future of CoCom

and How Much Influence Can the

United States Expect to Exercise

Over Its Policies?

Because of its position of leadership in a

number of technologies of critical military

significance, the United States feels it has a

special responsibility to ensure their safekeeping. If it can play this role with intelligence and integrity, the United States may

be able to initiate and maintain a strong and

unified Western bloc position on the transfer

of technology. Policymakers, however, must

be cognizant of the fact that the attitudes

and behavior on the issue of technology

transfers to the East of at least four major

CoCom partners (West Germany, France,

Britain, and Japan) differ from those of the

United States. Without major changes in the

international climate and U.S. policy and behavior, attempts to strengthen the organization or impose formal sanctions on its members are likely to be resisted. Meanwhile,

there is no immediate reason to expect any

fundamental changes in the operation of the

organization or the behavior of its members.

POLICY OPTIONS

There are three basic sets of options for future East-West trade and technology transfer policy. Each rests on a basic orientation

toward the Communist world and set of beliefs and expectations regarding America’s

future relations with it. These orientations

were discussed in the introduction to this

chapter.

Present U.S. export control policy is the

result of a decision to forego attempts at

economic warfare against the Communist

world and to further the dual aims of encouraging trade with the Eastern bloc and protecting U.S. national security. Legislation

has attempted both to eliminate procedural

barriers to trade and to strengthen national

security safeguards. At times provisions of

the law have pulled in opposite directions,

but the trend over the past 1O years has been

toward liberalization of export controls.

There are three broad categories of policy

which can impact on East-West trade and

technology transfer. Suggestions in each

category are listed here and discussed at

length in the body of the report.

1. Actions in Keeping With the

Existing Policy But Designed to

Make Current Procedures More

Efficient.

The vast majority (90 to 95 percent) of

U.S. exports are shipped under a general
14 ● Technology and East-West Trade

license that requires no formal application

procedure. Similarly, only a minority of exports to Communist destinations require validated licenses. However, these must enter

an export-licensing system which is complex

and which has come under severe criticism

for the delays it occasions. In fact, given the

volume of applications handled by the system, it works reasonably efficiently and only

a small number of cases are actually subject

to excessive delays. Delayed cases assume a

disproportionate importance, however, because they are often large and highly visible

and concern areas of high trade-growth potential.

Suggestions for increasing the efficiency

and reducing delays in the licensing process

include the following: increasing appropriations for export-licensing administration;

establishing a new form of export license; instituting timetables to curtail excessive

delays; ensuring that application rejections

are undertaken at the recommendation of all

agencies in the review system; improving the

data base for East-West trade; and enhancing the foreign availability assessment capabilities of the Office of Export Administration.

Procedures can and should be instituted

to streamline the system without tampering

with its basic structures or effectiveness,

thus eliminating unwarranted, costly delays.

Most promising among this family of suggestions is finding a means of systematically

monitoring the availability of technologies

desired by the Communist world from

sources outside the United States. This is a

crucial task of the export administration system. The establishment of a continuing

capacity for undertaking such “foreign availability assessments” would be an important

resource for administrators and policymakers alike.

2. Actions That Could Increase

Restrictions on East-West Trade

or Strengthen the Use of

Trade as a Foreign Policy Lever.

Suggestions that aim at shifting the balance of U.S. policy in the direction of restricting increases in trade with the East include the following: enhancing the role of the

Secretary of Defense in the licensing process; compiling a list of embargoed critical

technologies; exercising trade leverage

through foreign policy controls, MFN, and

official credit restrictions; strengthening

CoCom; and curtailing academic and scientific exchange programs.

The effectiveness of several of these suggestions is problematic. First, the critical

technology exercise currently underway in

DOD has made slow progress in the past 3

years and is the subject of widespread misconceptions. Even the compilation of a

critical technologies list will not allow easy

or comprehensive solutions to the problems

posed by East-West technology transfer.

Second, the United States is restricted in the

degree of potential trade leverage it can exercise. As discussed above, evidence of the

past effectiveness of such leverage has been

ambiguous. Finally, the United States at

present has a limited ability to persuade its

allies to strengthen CoCom. Such changes

might be possible only if the United States

itself embarked on a new and clearly confrontational policy vis-a-vis the Communist

world.

3. Actions Designed to Expand

East-West Trade.

The third group of suggestions for shifting the balance of U.S. policy in the direction

of increasing trade with the East includes
Ch 1—Summary. Issues and Opt/ens . 15

the following: expansion of official export

financing; granting MFN to Communist nations not presently enjoying it; limiting

Presidential discretion in imposing export

controls; reducing and/or indexing the Commodity Control List; bringing U.S. export

control procedures into closer conformity

with those of other CoCom nations; and a

family of measures designed at export promotion in general.

Here, providing access to official export

financing is probably the Government policy

with the highest potential for increasing the

volume of U.S. trade with the East. The impact of granting MFN varies greatly among

individual recipients. From a purely economic perspective, MFN to selected Eastern

European nations might have greater impact

than granting it to the U.S.S.R. and PRC.

And while the removal of items from the

Commodity Control List might affect U.S.

market shares in certain industrial sectors,

this would have less overall impact on U.S.

trade with the East than would changes in

credit and tariff policies.
CHAPTER II

Future Policy Governing

East-West Trade and

Technology Transfer
CONTENTS

Page

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

REFORMS AIMED AT EFFICIENCY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Increase Appropriations for Export-Licensing Administration . . . . . . . . . . . 20

Institute a New Form of Export License . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Improve Efficiency and Accountability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Require License DenialsToOccur at the Level of a Deputy

Assistant Secretary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Improve Assessment of Foreign Availability . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Improve the Monitoring of Trade in Technology . . . . . . . . . . . . . . . . . . . . . . . 21

Clarify CoCom Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

POLICIES DESIGNED TO RESTRICT EAST-WEST TRADE AND

TECHNOLOGY TRANSFER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Enhance the Role of the Secretary of Defense in Licensing . . . . . . . . . . . . . . . 23

Compile a List of Embargoed Critical Technologies. . . . . . . . . . . . . . . . . . . . . 23

Exert Leverage Through Foreign Policy Controls and Use of Tariffs and

Official Credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

Limit Foreign Availability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

Strengthen CoCom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

Curtail Scientific and Academic Exchange Programs . . . . . . . . . . . . . . . . . . . 27

POLICIES DESIGNED TO ENCOURAGE EAST-WEST TRADE AND

TECHNOLOGY TRANSFER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

Expand Export Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

Grant MFN to CountriesNot Presently Enjoying It . . . . . . . . . . . . . . . . . . . . 28

Restrict the Use of ForeignPolicy Restraints on Trade . . . . . . . . . . . . . . . . . . 29

Reduce the Commodity Control List . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

Alter Export-Licensing Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

Create a Trade Promotion Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

Relax Antitrust Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

Encourage Export Promotion Activities in U.S. Embassies and

Missions Abroad . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

Bolster the U.S. R&D Enterprise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

Table l.—Recommendations for Bolstering the U.S. R&D Enterprise . . . . . . 32
CHAPTER II

Future Policy Governing East-West

Trade and Technology Transfer

The continuing objective of U.S. regulation of East-West trade has been to

balance both the commercial benefits of trade and the objectives of detente

against the need to safeguard U.S. security interests. Continuing controversy

about the proper balance is inevitable: there is no objective test of whether such

a balance has been achieved, the economic and political circumstances affecting

East-West relationships are in constant flux, and the United States has no comprehensive East-West trade policy. Alternatives for reforming existing policy

can be broadly divided into three categories:

●

●

●

Policy options premised on an assumption that existing policy has, on the

whole, achieved an acceptable balance between trade and security interests. Such recommendations are designed primarily to make existing procedures more efficient and less costly.

Policy options designed to increase restrictions on East-West trade in

order to decrease the risk that such trade could enhance the military interests of the nonmarket nations; and to use the threat of trade curtailments to exact political concessions from the East.

Policy options designed to move U.S. policy closer to that of our European-and Japanese allies by relaxing some of the current restrictions on

East-West commerce, making licensing procedures less onerous, and providing trade incentives through the Export-Import Bank (Eximbank) and

other mechanisms.

The disagreements that have characterized the debate on U.S. trade policy

as it applies to nonmarket nations result primarily from differences in the interpretation of the broader direction of East-West relationships. These are discussed at length in chapters I and IV. This chapter describes policy measures

(some already incorporated in the Export Administration Act of 1979) that can

affect the implementation or direction of U.S. trading policy with the East; analyzes whether these policies would have the desired effect; and reviews any inadvertent or unintended consequences that might result from their implementation.

REFORMS AIMED AT EFFICIENCY

The administration of U.S. export control tics in chapter VII indicate that the situapolicy has come under repeated attack by tion has recently improved (i. e., the licensing

U.S. businessmen who charge that it is cum- procedure is being speeded), few would argue

bersome, expensive, and slow. While statis- with the desirability of streamlining some of

19
20 . Technology and East-West Trade

the more mechanical parts of the decisionmaking process. Suggestions to accomplish

this have included the following:

Increase appropriations for export=

licensing administration.

One way to accelerate the licensing process would simply be to increase the funding

and staff available for processing applications; most offices in the Departments of

Commerce and Defense dealing with these

areas appear to be overworked. This solution, of course, would not resolve any flaws

which might exist in the basic structure of

the system. Moreover, the Office of Export

Administration (OEA) claims that, at present, lack of qualified applicants has made it

unable to fill all the positions for which funds

have already been authorized.

Institute a new form of export

license.

Recent legislation has created a new category of export license, a “qualified general licerise. ” These authorize multiple exports to

the same end user for items that have been

routinely approved in the past, and will

hopefully reduce the volume of validated license applications as well as the cost and delay associated with the present need to apply

for a separate license for each transaction.

The strength of controls should not be diminished and their implementation should

be made more efficient through the consequent reduction of the stress placed on the

Federal administration of licensing. However, one potential ramification should be

noted. At present, the U.S. Government

keeps records only of those technology

transfers that proceed under validated

license. Unless data is also kept on trade conducted under qualified general licenses,

there is the possibility that information on

sales volumes, which could be valuable in inferring the intentions of the purchasers or

the impact of sale on the U.S. economy,

could be lost.

Improve efficiency and accountability

● Establish detailed timetables and deadlines for review of applications for validated licenses;

● Establish procedures by which applicants could take legal action against the

Government if undue delays occur; and

● Improve reporting to applicants on the

reasons for denial of applications.

Each of these measures was incorporated

in the Export Administration Act of 1979.

Taken together, they could significantly improve the relationship between applicant

and Government.

Deadlines, for instance, would provide

greater predictability for applicants and

eliminate cases dragging on for months,

even years, without resolution. Some industry critics have charged that present licensing procedures are overly complex and involve too many layers of consultation, and

that important policy decisions are being

made by midlevel bureaucrats. Administration goals for processing claims have already

had the effect of speeding up the licensing

process, and the recent reorganization of the

Department of Defense’s (DOD) exportlicensing activities may also help in this

regard (see chapter VII). But deadlines can

only accelerate licensing to the extent that

delays result from overworked, unresponsive, or sluggish bureaucracies. This is plainly not always the case; major delays in controversial cases may be occasioned by internal disagreement or uncertainty and extensive analysis on the part of the agencies involved. The speediest approach to resolving

such cases would be simply to summarily

deny controversial licenses. A forced deadline, therefore, could conceivably have the

unintended consequence of reducing the

number of approvals granted.

Until now, OEA has been neither always

prompt nor explicit in informing applicants

of the grounds for the rejection of their ap-
Ch. II—Future Policy Governing East-West Trade and Technology Transfer ● 21

placations. The reason given has been as

vague as simply “national security objections. ” Prompt disclosure will improve the

atmosphere of business-Government relations; fuller details (security classifications

permitting) will help industry prepare future

cases and might forestall applications subject to the same objections.

Require all license denials to occur

at the level of a Deputy Assistant

Secretary.

This reform alone would have little bearing on the de facto policymaking occasioned

by delay. Indeed, it might even increase it.

The requirement could, however, have some

impact. on the process by creating a situation

in which midlevel officials could approve,

but not deny, license applications. Chapter

VII demonstrates that, as the system now

stands, the vast majority of validated license applications are eventually approved

in any case; this change would affect those

relatively few rejections that occur at midlevels by requiring the participation of all

the agencies involved in the review process.

Improve assessments of foreign

availability.

The determination of whether products or

processes equivalent to those in the United

States are available to controlled destinations from sources outside the United States

is an important factor in decisions to grant

validated export licenses. Determining

“availability y’ requires either establishing

that the controlled country already possesses the technology or product in question

or that another Western nation has a technology functionally equivalent to the one

proposed for sale and is itself prepared to sell

it.

Problems of assessing foreign availability

begin with gathering information; but this is

only a prelude to the difficult task of developing policy guidelines for deciding claims of

equivalency and comparability for a wide

variety of complex technologies.

Until now, the assessment of foreign availability has proceeded in an ad hoc manner—

carried out on a case-by-case basis by various agencies involved in the technical assessments of applications. A new plan to manage

this activity from a single office within OEA

can improve the continuity of foreign availability assessment in the Government and

help create institutional expertise. The data

base established by such a coordinating organization could become a valuable resource

for ensuring uniform and equitable treatment of foreign availability issues. If properly staffed by engineers and technicians familiar with a large spectrum of technologies,

it will also give the Government an independent resource for verifying and interpreting the assertions of comparability made by

the industrial Technical Advisory Committees (see chapter VII). Because no one body

in the licensing system has been responsible

for foreign availability assessments, the U.S.

Government has been criticized by some industry observers for failing to adequately

monitor activities such as trade fairs or to

take advantage of opportunities to inspect

products and processes in the East. This

situation could be remedied by hiring individuals specifically assigned to travel

abroad, especially in the East, to make such

inspections.

It must be pointed out, however, that the

establishment of such a capability will not

eliminate difficult decisions. Just as the

determination of strategic significance is

partly judgmental, so too the determination

of the degree of technical equivalency necessary before items are deemed comparable

can never be automatic.

Improve the monitoring of trade in

technology.

Chapters III and VI discuss the difficulties encountered by analysts in locating statistics that accurately characterize the size

and character of U.S. trade in technology.

Better data would undoubtedly improve the

analysis of trade policy both in the Administration and in Congress. But steps to ensure
—

22 ● Technology and East-West Trade

that the development of techniques for improving monitoring of technology and translating this technique into a workable datagathering program entail agreement on the

following difficult definitional problems:

1. obtaining a clear definition of what represents technology, including embodied

technology and high-technology products;

2. refining the definition of “high-technology products;”

3. arriving at some measure for the level of

activity conducted under cooperation

agreements between U.S. firms and

Communist nations; and

4. arriving at a way to acquire accurate,

up-to-date, and easily accessible information on the number of turnkey facilities constructed by U.S. firms in controlled-market economies.

Data gathering could be improved in the

near term by:

1. obtaining interagency agreement on the

format for collecting information from

U.S. firms trading in the East; and

2. revising the manner in which data on

sales of patents and licenses is kept in

accordance with the General Accounting Office (GAO) recommendations (see

chapter III).

More explicit reporting requirements have

now been applied to the details of any agreements between U.S. companies and Communist nations. This will almost certainly be

strenuously opposed in the business community. Similarly, more comprehensive data

might be collected on the activities of Communist nationals engaged in academic exchange programs. This would elicit objections from those concerned with the issue of

academic freedom.

Clarify the Coordinating Committee for Multilateral Export Controls

(CoCom) procedures.

As chapters VIII and IX indicate, the

United States has little freedom to change

CoCom procedures. Many of our allies are extremely sensitive on the whole issue of

CoCom. Some are willing to cooperate in the

organization but not willing to publicly

acknowledge that they are doing so for fear

either of alienating Communist nations or

political groups within their own countries.

With some caution, however, it may be possible to open the proceedings and deliberations of CoCom to public scrutiny without embarrassing any member nation. For

example, it may be possible to be more explicit about the precise nature of the CoCom

list reviews and about the internal procedures that lead to alterations. At present, it

is difficult to be overly optimistic about the

chances for persuading some of our allies to

take even such simple steps, for any increase

in public information about CoCom could

make it more difficult for them to maintain

the fiction that they are not active members.
Ch. II—Future Policy Governing East-West Trade and Technology Transfer ● 23

POLICIES DESIGNED TO RESTRICT

EAST-WEST TRADE AND TECHNOLOGY TRANSFER

Recommendations designed to move the

balance of current policy in the direction of

increased concern about security (and possibly a corresponding relative diminution of interest in trade) would reverse the direction of

the evolution of U.S. trade policy since the

major export control reforms of 1969 (see

chapter VII). Since 1969, the United States

has moved in the direction of incrementally

normalizing trade with the East. While few

argue that we should attempt to restore the

strict export controls which were in force immediately following the Second World War,

there has been repeated concern that U.S.

policy has drifted too far in the direction of

promoting short-term corporate profits at

the expense of fundamental security concerns. A number of measures have been proposed for reversing this drift:

Enhance the role of the Secretary

of Defense in licensing.

This proposal would probably have a

greater symbolic than operational impact.

DOD now plays a major role in all cases involving questions of military relevance. If

the Secretary of Defense is concerned about

a license application, the Secretary is in a

position to make these views known and, in

disputed cases, to demand a ruling from the

President. In fact, no item has ever been exported to the East over the objection of the

Secretary of Defense. The proposal’s symbolic value could be significant, however. It

might be a first step in an overall program to

persuade allies that the United States is

making a serious attempt to increase the importance of security interests in overall trade

policy. In the U.S. business community it

would certainly be taken as a signal that

Government policy was moving in the direction of restricting trade with the East.

Move rapidly to compile a list of

critical technologies, and embargo

their export.

The preparation of a comprehensive “critical technologies” list was advocated in a

report of the Defense Science Board Task

Force early in 1976 (the Bucy report). At

that time, work was initiated in DOD with a

view to implementing the report’s recommendations. Little substantial progress has

yet been made, however. The chief difficulty

is probably not a lack of resources (see

chapter V) so much as the inherent difficulty

of the task and lack of consensus over the object of the exercise. There has been uncertainty, for instance, about whether the completion of the exercise will have the effect of

increasing the restrictiveness of U.S. trade

controls (by placing more severe tests on any

product or technology qualified for export

and increasing the number of such items), or

of weakening the controls by limiting the

categories of products that would require export licenses. If the former, the establishment of such a list provides an opportunity

for strengthening trade restrictions and

reducing the flow of products and know-how

to the East.

It is difficult to be overly sanguine either

about the imminence of results or the degree

to which the appearance of a list of embargoed critical technologies will solve the difficult national security problems posed by

the existence of dual-use technologies. As

chapter V points out, determinations of the

degree of risk posed by any particular sale

cannot be made in an automatic way. Caseby-case analysis will always be necessary

and subjective judgments and policy considerations inevitably enter the decisionmaking

process. The critical technology exercise
24 ● Technology and East-West Trade

may, at the very least, be a useful in-house

exercise for DOD, but it is unlikely to be a

panacea for the complex problems posed by

East-West technology transfer.

Retain the existing restraints on

East-West trade exercised through

foreign policy controls, tariffs, and

official credits and work to

strengthen the leverage available

through these mechanisms.

Although the utility of attempting to use

trade to extract political concessions is the

subject of considerable debate, the tactic is

plainly a current part of U.S. East-West

trade policy. Indeed, the effect of the Trade

Act of 1974, which prohibits the United

States from extending most-favored-nation

(MFN) tariff treatment and Eximbank credits and guarantees to nations which, in the

view of the President, are violating human

rights, has been to institute the maximum

restrictions possible in this area. The Export

Administration Act, moreover, gives the

President the authority to deny certain

classes of export licenses for reasons of

foreign policy (see chapter VII). European

and Japanese trading policy contain no such

provisions (see chapter IX).

An examination of the effectiveness of using trade leverage as an element of foreign

policy must address the following issues:

●

●

●

Would denial of U.S. technology have a

significant impact on the economy of

the target nation?

Would the tactic of using trade to extract concessions have the desired effect?

What technique could best be employed

to curtail trade when such curtailments

are required by the leverage policy?

Opportunities for Exercising Leverage

There are only two areas in which the

United States is widely thought to have a

significant unilateral lead in a technology

critical to the Soviet Union: computers and

equipment for discovering and producing oil

and gas. But even in these cases, equipment

available from other Organization for Economic Cooperation and Development

(OECD) nations could provide a workable

substitute for U.S. technology. Leverage

with respect to the People’s Republic of

China (PRC) and nations in Eastern Europe

may be somewhat greater, but in all cases

the flexibility of unilateral U.S. actions is

severely constrained by foreign availability.

It is clear that a coordinated OECD effort

would be needed to significantly increase

areas where a threat of an embargo of technology would have significant impact on

Eastern economies.

The Utility of Attempting to Exercise Leverage

How will the Soviets or any other Eastern

nation react to the exercise, or the threat to

exercise trade leverage? There can be no unambiguous answer to this question. Several

criteria must be considered.

●

●

●

●

●

How central to the maintenance of the

entire system of the target nation and

how integral to the country’s aims

abroad is the object of the leverage?

To what degree can the issue be framed

so that the country can comply without

losing face, either at home or abroad?

Has the country yielded before on this

or a similar issue?

How will compliance be viewed within

the country, in the United States, by

the rest of the world?

What stake does the United States have

in the issue, i.e., how important are the

activities in question of the target nation to the United States?

Soviet response to previous attempts to

exercise trade leverage is discussed in chapter IV. The record is ambiguous at best, but

certainly when leverage fails, trade is constricted. It must be recognized, of course,

that some observers feel that regardless of

the practical impact on Eastern economies,

the practice of withholding trade from nations whose internal policies are offensive to

the United States is amply justified by ethical considerations and the need to focus in-
Ch. II—Future Policy Governing East-West Trade and Technology Transfer ● 25

ternational attention on those aspects of the

Communist system that violate human

rights.

The reaction of an Eastern nation to a

U.S. attempt to exercise leverage cannot be

easily anticipated. In some cases these nations may prefer to accept economic damage

rather than make political concessions under

pressure. Moreover, even in cases where the

United States could inhibit an economic activity clearly critical to the target economy,

the nation could take actions that might

adversely affect U.S. foreign policy interests

in unanticipated areas. A case in point is the

embargo of oil and gas extraction equipment

to the U.S.S.R. Here,

● The U.S.S.R. might turn to Japanese

and Western European firms for massive orders of equipment and technology, many of which would otherwise

have come to U.S. industries. The

United States would thereby be deprived of revenues and the Soviet Union

would receive the help it needs in any

case.

● The U.S.S.R. might become unable to

export enough oil to Eastern Europe to

fulfill its needs. This would increase the

economic distress of many Eastern

European countries and contribute to

domestic unrest, place stresses on the

relationships between Warsaw Pact nations, and perhaps force countries of

Eastern Europe increasingly on world

markets for oil.

● The U.S.S.R. might itself become a net

oil importer. This would cause a serious

disruption in the present market situation. These potential liabilities would

need to be weighed against the potential foreign policy gains that could be

realized from an attempt to exercise

leverage.

Policy Mechanisms

The United States has restricted trade for

political purposes in three ways: Presidential

intervention in the granting of export licenses, tariff policies, and denial of official

credits and guarantees.

Executive Discretion in Granting Export

Licenses

Existing law gives the President the

authority to withhold export licenses in

cases where the denial would serve broad

foreign policy interests. This power, and the

flexibility it implies, can be used in a timely

way to influence fast-moving events: licenses are always pending in OEA. The need

to make a rapid political point, however, may

lead to a somewhat arbitrary selection of the

license to be denied, the most convenient

licensing issue at hand being seized for the

purpose.

Presidential use of the power to deny exports for reasons of foreign policy has been

the subject of a number of recent controversies. Use of such controls may be effective as

statements of principle on the part of the

United States, but there is no doubt that the

use or threatened use of such power has introduced an element of unpredictability into

the export-licensing system. This may have

adversely affected the bargaining position of

U.S. corporations in the East. A good example is the recent denial of a license for a

Sperry-Univac computer ordered by the

U.S.S.R. This action has had greater symbolic than practical value. The computer

itself was identical to models already installed in the U.S.S.R. and its capabilities inferior to those of previously licensed computers. Moreover, the Soviets have now purchased an equivalent computer from France

(see chapter IX).

It is possible for the President to be given

greater latitude in controlling trade as an element in an overall program to indicate U.S.

interest in strengthening its determination

to confront the Soviet Union and other Communist nations. But, as the above example

would suggest, the value of such Presidential latitude as a foreign policy tool in the absence of complete cooperation from our allies

is open to question. This is the subject of

more complete discussion in chapter IV.

54-202 0 - 79 - 3
26 ● Technology and East- West Trade

Most-Favored-Nation Status.—The economic value of MFN varies among individual Communist nations, depending on their

export mix. A detailed discussion of the economic aspects of granting MFN appears

later in this chapter. For leverage purposes,

however, its symbolic importance to the

PRC and U.S.S.R. is perhaps even more significant. Granting MFN to China while still

withholding it from the Soviet Union will

almost certainly in itself be construed as an

attempt to apply leverage in foreign policy.

Official Credits.–The availability of

cheap Government credits and loan guarantees is a matter of substantial importance in

the Communist world where hard-currency

shortages restrict the ability to purchase

Western goods and technologies (see below

and chapter III). The high level of Soviet

borrowing before the cutoff of Eximbank

credit in 1974 (see chapter VII) suggests

that the impact of this policy was felt strongly in the U.S.S.R. China’s modernization

plans will require substantial use of Western

credit (see chapter XI) and the PRC is obviously anxious to take advantage of credits in

the United States. Again, extension of Eximbank and other official credits to the PRC

and not to the U.S.S.R. could have serious

foreign policy repercussions. As noted

above, restrictions on official credits to most

Communist nations are already as stringent

as possible. Further contraction would require legislation covering the extension of

U.S. private commercial credits to the Communist world.

Attempt to limit as far as possible

the foreign availability of technologies that appear only on the U.S.

export control lists.

One way of accomplishing this is through

present U.S. policy requiring reexport licenses for technologies originally developed

in the United States, sold to a CoCom member, and subsequently shipped to a controlled country. Under this rule, West European and Japanese businessmen obtain both

U.S. and CoCom licenses for such shipments.

The United States is the only CoCom member to impose this kind of control, and its existence conveys an impression that the

United States lacks confidence in the CoCom

mechanism. But such a policy obviously has

no impact on the availability of technologies

not of U.S. origin. Efforts to limit such sales

through diplomatic efforts outside of CoCom

have met with limited success (see chapters

VIII and IX). It may be possible to undertake bilateral or multilateral agreements

with OECD nations with conservative governments if these nations can be persuaded

to reverse the trend of European and Japanese trade policy and entertain more restrictive export programs.

Attempt to strengthen CoCom by

recognizing the organization

through treaty; increasing policing

of CoCom decisions, and/or formalizing sanctions to be used

against transgressors in member

nations; or expanding the CoCom

list to more closely conform to the

U.S. Commodity Control List

(CCL).

There is every indication that, at present,

suggestions for a longer list, more stringent

policing or the imposition of sanctions in

CoCom would be strenuously resisted by

some members. Attempts to strengthen the

organization would probably better prosper

through the continuation of quiet, informal,

high-level negotiations. Only given a different international climate and a broad

change in U.S. foreign policy, might the

United States be able to persuade its allies to

alter their policies on East-West trade. If, for

instance, the United States entirely abandoned detente and adopted a clearly confrontational policy with respect to the Soviet

Union, parties and individuals in other Western governments more sympathetic to a

strengthened CoCom might be expected to

grow in influence.
Ch. Il—Future Policy Governing East-West Trade and Technology Transfer ● 27

Curtail the transfer of information

through academic and scientific

exchange programs by controlling

the subject matter and/or facilities

to which visiting scientists and

scholars are admitted.

It has frequently been charged that academic and scientific exchanges are an important and relatively unmonitored and uncontrolled source of technology transfer. A consistent attempt to restrict the flow of potentially strategic information to the East

would have to include careful supervision of

this channel, at least as it allows visits from

high-level technicians in strategic areas.

This might amount to the determination

that the potential danger to the national

security of the United States of such visits

outweighs the political, scientific, and

cultural benefits which accrue from exchange programs. It must be pointed out,

however, that many regard these passive

mechanisms of transfer as far less likely to

result in the ability to absorb, diffuse, and

improve on a technology than are other commercial channels. Moreover, even those who

see such exchanges as important channels of

technology transfer are often reluctant to

impose any requirements on the institutions

involved for fear of violating academic freedom. In this sense, there may be something

of a double standard in regard to the constraints placed on academic versus commercial exchange activities. Proposals to require

company reporting of commercial exchange

agreements have received more widespread

support.

POLICIES DESIGNED TO ENCOURAGE

EAST-WEST TRADE AND TECHNOLOGY TRANSFER

The special role of technology in EastWest trading relationships is difficult to

define. It is theoretically possible to increase

trade volumes without increasing trade in

high technology, but this opportunity is

ultimately limited by the fact that without

some increase in technological sophistication, the Eastern trading partners will be

unable to improve their capacity for earning

hard currency. Moreover, it is often impossible to decouple sales of technology from

sales of products in the corporate strategies

of many U.S. firms (see chapter III).

Policies oriented toward expanding and

encouraging U.S. trade with the East fall

into two categories: 1) measures designed to

change the trade/security balance in the

direction of increased trade in technology by

relaxing some of the current restrictions inherent in the licensing regulations, and 2)

measures designed to increase the overall

level of U.S. exports to the East. Most of the

latter are indistinguishable from the family

of suggestions that have been made for generally improving the U.S. export enterprise.

Many elements of the U.S. business community have pressed anxiously for a relaxation of those regulations restricting U.S.

technology trade with the East which, in

their view, put them in a position of disadvantage vis-a-vis European and Japanese

competitors. Further steps to encourage the

transfer of U.S. technology would inevitably

risk repercussions on U.S. national security,

while more general trade policies aimed at

products rather than technology entail lesser

risks.

It must be recognized, however, that there

is little likelihood that even complete removal of political barriers would lead to vastly increased trade between East and West. Such

trade is now limited primarily by a shortage

of hard currency in the Communist world.

While increasing the availability of debt

financing can provide short-term gains, the

only long-term gains likely to be achieved

must be the result of an increased ability of

Eastern nations to export. Promoting trade,

therefore, must ultimately lead to a promotion of the strength of the trading partner.
28 ● Technology and East-West Trade

This imposes commercial risks in any

trading relationship, since there is a danger

that a strengthened trading partner will

begin to replace U.S. exports with domestic

production and possibly begin exporting

into third nations that currently purchase

U.S. goods. In the case of Communist nations, there is the additional risk that a

strengthened economy will inevitably lead to

increased military prowess.

The following policies aimed at the expansion of U.S. trade with the Communist world

must be considered in light of these caveats,

and the potential benefits accruing in the

U.S. economy must be weighed against

them.

Expand export financing.

Given the chronic hard-currency shortages in the East, access to Eximbank and

Commodity Credit Corporation guarantees

and credits is probably the single most important factor in significant expansion of

overall levels of U.S. trade with the East.

The United States ranks fifth behind

West Germany, France, Japan, and the

United Kingdom as a supplier of official

credits to the Communist world. In 1977,

West Germany extended nearly eight times

Photo credit U S Department of Commerce

Former Secretary of Commerce Juanita Kreps in China

for U.S.-PRC trade negotiations

more export credit to the East than did the

United States, France over seven times, and

Japan about five times. While no quantitative estimates of the impact of this situation on overall trade volume are available,

many U.S. exporters contend that it puts

them at a serious competitive disadvantage

vis-a-vis other OECD nations. There are indications, for instance, that the availability

of credit is an important reason for multinational corporations’ preferring to handle

their Eastern transactions through European subsidiaries.

Although purchases of U.S. technology

would almost certainly increase with the

availability of credits, a program to expand

credit in the East might be targeted at financing for “nonstrategic” commodities

such as grain. Credit expansion would require both raising the ceilings on available

credit, and also eliminating barriers to financing exports to the East posed by the

Trade Act of 1974. Congress might, for instance, make financing equally available to

all countries with which it is U.S. policy to

encourage trade, subjecting the policy to

periodic review for individual nations. The

availability of Government credits would be

attractive to those Eastern nations in which

borrowing has risen dramatically in recent

years, but which are still considered good

credit risks in the West (see chapter III).

Grant MFN to countries not

presently enjoying it.

Amending the Trade Act to allow nondiscriminatory trade treatment for Communist

countries not presently receiving it would

also have an impact on levels of U.S. trade

with the East. However, at least in the short

run, these increases would not materially affect the U.S. balance of trade—either in

terms of flooding the United States with

Communist imports or of significantly increasing the prospects for U.S. exports. In

order to purchase goods and technologies

from the West, Eastern nations must earn

hard currency through their own exports

(see chapter III). Nondiscriminatory tariff
Ch. II— Future Policy Governing East-West Trade and Technology Transfer ● 25

levels, by encouraging import of Eastern

goods in the West, can thus indirectly affect

the volume of Eastern purchases.

A number of factors determine the extent

to which levels of trade with individual nations can be increased through the granting

of MFN. Foremost among these is the commodity composition of the exports. The extension of MFN does not result in a uniform

reduction of tariffs. Under the existing

Hawley-Smoot tariff scheme, tariffs on some

items are more severe than on others; further, negotiations over the years have resulted in differing rates of relaxation, and

the granting of MFN leads to considerable

variation in tariff reductions. For example,

the Soviet Union is predominantly an exporter of raw materials which at present

have relatively low tariffs. Czechoslovakia,

on the other hand, is an exporter of light

manufactured products on which high tariffs

are levied. From a purely commercial point

of view, extension of MFN would affect

Czechoslovakian exports relatively more, although MFN retains a great symbolic value

to the U.S.S.R.

In 1977, the U.S. Department of Commerce estimated that the extension of MFN

to the two largest Communist economies,

the U.S.S.R. and the PRC, would result in a

very modest increase in U.S. imports from

those countries—together in the $30 million

to $40 million range. This may be contrasted

with the expected $50 million increase resulting from recent MFN extension to Hungary. Extension of MFN to Czechoslovakia

and East Germany if accompanied by concurrent normalization of commercial relations could increase imports from those

countries by as much as $200 million in the

absence of other, nontariff barriers. And

MFN extension to all other Communist nations could mean an increase in imports from

those countries of between $200 million and

$225 million. This figure would represent

less than 0.2 percent of total U.S. merchandise imports in 1977.

These figures are based on the assumption

that volume of U.S. trade with the East and

its commodity composition remain static.

However, long-term effects could be significantly greater. To the extent that the removal of political barriers fosters familiarity

both with U.S. markets and with U.S. producers, U.S. imports from the East and consequent U.S. export potential may be improved in the future. Eastern nations will

not only earn hard currency through their

sales; MFN agreements create legal and financial structures under which commercial

interaction can be carried out more efficiently and with more certainty for U.S. entrepreneurs. In this regard U.S. business operates

at a disadvantage vis-a-vis West European

and Japanese firms in marketing products in

the East.

Owing to relatively late normalization of

trading relations with the East, however,

U.S. business may be at a permanent disadvantage with its OECD competitors in Eastern markets, even if MFN is extended in the

near future. Moreover, a note of caution is

warranted: while such background agreements are a necessary condition for greater

U.S. exports, they are not sufficient. Expectations regarding significant increases in

Romanian purchases in the United States

since extension of MFN in 1975, for example, have not materialized. The entire trade

climate, including availability of credit and

level of export controls, must be taken into

account when projecting the possible impacts of MFN extension.

Restrict the President’s ability to

impose trade restrictions for

reasons of foreign policy.

A proposal recently adopted by Congress

requires that the President stipulate that

reasonable efforts had been made to achieve

foreign policy objects through other instruments than trade before the leverage of trade

restrictions could be exercised. In addition,

some have argued that Congress also be empowered to overrule such prohibitions by

concurrent resolution. The enactment of

such a regulation would have some effect in

reducing the uncertainties inherent in the
30 . Technology and East-West Trade

potential use of trade for foreign policy purposes. The uncertainties would not be entirely removed, however, since in many cases

Congress could be expected to concur with

the President. Moreover, restrictions on the

President’s freedom to use trade in this way

could, in some circumstances, dilute the admittedly weak leverage now available to the

United States.

Bring the U.S. CCL into closer conformity with the CoCom list and/or

“index” the list to allow for

automatic removal of obsolete or

out-of-date technologies.

It is argued that U.S. producers are

uniquely disadvantaged by the fact that the

U.S. CCL is more restrictive than those

maintained in other CoCom nations. At the

heart of this issue is the question of whether

the United States because of its technical

strengths has a special responsibility for

restricting categories of products beyond

the CoCom list. While the perception (and

the reality) of broad U.S. technological

leadership has changed during the last

decade, the United States does retain some

supremacy in certain military technologies

and therefore a special responsibility for

safeguarding them. Whether this special responsibility is fairly represented in the U.S.

export list has become a matter of contention.

A less comprehensive means of scaling

down the CCL is to index it, i.e., to require

annual updates on the performance levels of

goods and technologies and the automatic

removal of items that fall below these levels.

There is obviously a range of standards by

which such levels might be set. Items removed from the list because they are obsolete in terms of the Western state-of-the-art

might still significantly improve existing

military capabilities in the East. Other

standards, based perhaps on levels already

sold to or developed in the East, might involve less chance of this, but any automatic

alteration of CCL entails the danger of eliminating items of potential military significance.

Alter the present export-licensing

system so that it more closely

resembles those of other CoCom

nations.

Descriptions of the export-licensing

systems of West Germany, France, the

United Kingdom, and Japan (see chapter IX)

reveal significantly more informal consultation between industry and Government over

license applications than in the United

States. In many cases this includes prior

consultation which permits firms to know

the disposition of their cases before applications are actually submitted.

Unquestionably, U.S. export-licensing

procedures are universally regarded as the

most time-consuming, rigorous, and uncertain of all CoCom nations. To the extent that

delays or denials of licenses result in loss of

contracts or deter Eastern countries from

seeking out U.S. suppliers or U.S. firms from

actively pursuing business in the East, this

may have an impact on U.S. market shares

in existing East-West trade. It is unlikely,

however, that the relaxation of these controls would have much effect on increasing

overall trade volume without concurrent alteration of credit and tariff policy in the

United States and increase in export capabilities in the East (see chapter III). Moreover,

the licensing systems in Europe and Japan

reflect judgments on East-West trade and

national security that have not been shared

by U.S. policymakers. They also reflect close

and consensual business-Government relationships that are not typical of private and

public sector relations in the United States.

It is unlikely that U.S. institutions would

readily lend themselves to procedures which

are predicated on such consensual relationships.

Create a single Government agency charged with advancing U.S.

trading interests.

Proposals have been made for establishing

a Department of Trade incorporating a variety of trade-related Government activities.

Alternatively, the existing Office of the
Ch. II—Future Policy Governing East-West Trade and Technology Transfer . 31

Special Trade Representative in the White

House could be established as a permanent

organization and enlarged to embrace trade

policy coordination and trade negotiations

with the East.

The United States has no concerted, coordinated policy on East-West trade. The development of such a policy would be welcomed in many quarters of the Government

and business communities. Proponents of a

Trade Department argue that it could help

to counter activities of organizations in

other nations where the interests of business

and Government are more closely tied than

is the case in the United States. Japan,

where trade-related ministries work very

closely with private industry, is an extreme

example. Whether such a system is either

appropriate to or even possible in the United

States is open to question, and a complete

analysis of the issue is beyond the scope of

the present study. Objections may be expected to the creation of a new bureaucracy,

especially if this is not accompanied by conscious formulation of coherent and internally

consistent aims in East-West and other

world trade.

Relax antitrust restrictions inhibiting consortia of U.S. industries organized for export.

Present antitrust law is vague and has

sometimes been narrowly interpreted as it

applies to the cooperative activities of U.S.

firms abroad. Revision to allow various export trade associations, trading companies,

etc., could help U.S. firms to compete with

Japanese trading companies and European

bidding consortia, without precluding the

possibility of penalties for impeding fair

competition.

Increase participation and improve

performance of overseas Government personnel in fostering U.S.

exports.

American businessmen have charged that,

unlike their Western European and Japanese counterparts, U.S. embassies do little if

anything to further U.S. commercial interests abroad. Redefinition of the responsibilities of commercial attaches or other

State Department personnel to explicitly include active support for businessmen attempting to conclude foreign contracts (so

long as such aid does not discriminate

among U.S. firms) would help to eliminate

some of the competitive edge presently enjoyed by firms in other nations. If it is felt

that such activities are inappropriate for existing embassy staff, new export-related offices could be created in appropriate countries.

Bolster the U.S. R&D enterprise.

All other things being equal, trade with

the East will benefit from the same kinds of

measures that promote U.S. foreign trade in

general. Moreover, regardless of whether

East-West trade in technology expands or

contracts, the best way to ensure continued

U.S. superiority in technology is to maintain

a vigorous program of Federal and private

R&D projects. Attempts to control the export of technology can be effective only up to

a point. It would be foolhardy to rely entirely

on such controls to maintain a position of

relative technical strength. Investigation of

all the actions that could be taken to

strengthen the R&D enterprise in the United

States would require a much lengthier analysis than can be conducted here. Several proposals for mitigating certain perceived barriers to expansion of U.S. R&D and for providing incentives for accelerated R&D are listed

in table 1.
32 . Technology and East-West Trade

Table 1 .—Recommendations for Bolstering the U.S. R&D Enterprise

Amelioration of disincentives

— — .

Establishment of incentives

●

●

●

●

●

●

●

●

Modification of antitrust regulations to permit easier

pooling of research efforts for environmental improvements.

Institution of a uniform patent and licensing policy for

Government-sponsored research.

Passage of legislation controlling third-party product liability litigation.

Partial stabilization of raw material costs by stockpiles,

trade agreements, and long-term national planning.

Modification of Government regulations to make them

less expensive and time-consuming, while still achieving

the desired goals.

Continuation of the effort to strengthen the present patent system.

Development of better integration of antitrust laws and

patent laws.

Extension of the life of a patent beyond 17 years, possibly

for a period of 10 to 15 years after final Government approval, if long-term testing is required for Government approval, or other factors delay commercialization.

-.

●

●

●

●

●

●

●

●

●

●

●

●

●

●

●

Greater than 100-percent deductibility of research expenses from taxable income.

Grants-in-aid for cost of new research facilities and/or

equipment.

Tax credits (possibly at the rate of 80 percent) for increases in industrial R&D over base-period expenditures.

Exclusions from taxable income or part of any royalty received from the export of technology.

Accelerated depreciation allowances for research facilities and equipment.

Long-term low-interest loans for high-risk R&D.

Cash grants repayable only from successful projects for

high-risk R&D.

Inclusion of R&D expenses under the 10-percent investment tax credit provision,

Initiation of a technological depletion allowance program.

Deduction (or accelerated depreciation) of the cost of

new technology or patents.

Special, low capital gains taxation for small businesses

engaged in R&D.

Institution of an option for small businesses to capitalize

their research expenses.

Direct deduction from Federal income taxes of all expenses incurred in the performance of research associated with Federal regulations. This deduction can be prorated, at 80 percent for example, so that the Federal

Government and companies can share the expenditures

roughly in proportion to the direct benefits obtained from

the research.

Increase of Federal support of basic research in universities to compensate for decreased basic research in industries.

Encouragement of cooperative research between universities and private industries.

SOURCE: The American Chemical Society, U.S. Chemical and Engineering News, Apr. 30,1979
.

CHAPTER III

The Economic Implications

of East-West Trade and

Technology Transfer
CONTENTS

EAST-WEST TRADE AND U.S.

MARKET SHARES . . . . . . . . . . . . .

The Present Volume of East-West

Trade. . . . . . . . . . . . . . . . . . . . . . . . . .

U.S. Policies Affecting Trade Volumes.

Import Barriers. . . . . . . . . . . . . . . . . .

Credit. . . . . . . . . . . . . . . . . . . . . . . . . .

U.S. Export Controls . . . . . . . . . . . . .

Eastern Policies Affecting Trade

Volumes . . . . . . . . . . . . . . . . . . . . . . . .

The Growth of East-West Trade . . . . . .

THE CONSTRAINTS ON GROWTH

OF EAST-WEST TRADE. . . . . . . .

The Size of the Eastern Debt . . . . . . . . .

The Composition of the Eastern Debt. .

The Credit-Worthiness of the

Communist World. . . . . . . . . . . . . . . .

The Growth of the Eastern Debt. . . . . .

Alternatives to Borrowing. . . . . . . . . . .

Western Involvement in Eastern

Enterprises . . . . . . . . . . . . . . . . . . .

Internal Financing . . . . . . . . . . . . . . .

Increased Exports to the West . . . . .

Conclusions. . . . . . . . . . . . . . . . . . . . . . .

THE ROLE OF TECHNOLOGY IN

EAST-WEST TRADE . . . . . . . . . . .

Future Prospects . . . . . . . . . . . . . . . . . .

Present U.S. Market Shares. . . . . . . . . .

Sales of High-Technology Products .

Industrial Cooperation Agreements .

Conclusions. . . . . . . . . . . . . . . . . . . . .

THE IMPACT OF TRADE WITH

AND TECHNOLOGY SALES TO

THE EAST ON THE U.S.

ECONOMY. . . . . . . . . . . . . . . . . . . . .

Technology Vendors: U.S. Corporate

Strategy . . . . . . . . . . . . . . . . . . . . . . .

Page

37

37

38

39

40

40

41

41

43

44

46

47

47

48

48

48

48

49

50

50

51

51

52

53

54

54

Page

Import Competitive Industries . . . . . . . 58

Importers of Eastern Technology . . . . . 61

The Consumer . . . . . . . . . . . . . . . . . . . . . 63

SUMMARY AND CONCLUSIONS. . 63

Table 2.–U.S. Trade With the World and

With Selected Nonmarket

Economy Countries. . . . . . . . . . .

Table 3.–The Trade of the Industrial

Market Economies With Eastern

Europe and the Soviet Union ., .

Table 4.–0fficial Export Credit

Commitments to CMEA

Countries, as of End-1977. . . . . .

Table 5.–Trade With the Developed West

Table 6.–Average Annual Rates of

Change of East-West Trade and

World Trade by Commodity

Category, 1955 -76. . . . . . . . . . . .

Table 7.–Estimated Net Hard-Currency

Debt of Eastern Europe,

U. S. S. R., and CMEA Banks,

End of Year, 1970, 1974-77 . . . . .

Table 8.–Hard-Currency Debt and

Foreign Trade, 1977 of CMEA

and Selected Western Countries.

Table 9.–Estimated Composition of Net

Hard-Currency Debt of Eastern

Europe, U. S. S. R., and CMEA

Banks, Dec. 31, 1977 . . . . . . . . . .

Table 10.–Growth in Debt, Selected

Communist Countries, 1974-77.

Table il.–Comparison of High-Technology

Exports With Manufactured

Goods and Total Exports–15

Industrialized World Countries

to the Communist Countries and

to the World. . . . . . . . . . . . . . . . .

Table 12.–U.S. High-Technology Exports

to the Communist Countries and

to the World, 1977 . . . . . . . . . . . .

37

38

40

42

43

45

45

46

48

51

52

Figure l.–East-West Trade and U.S. Share 39

Figure 2.–U. S.-Eastern Trade, 1972-78. . . . 41
CHAPTER III

The Economic Implications

of East-West Trade and

Technology Transfer

Policy decisions regarding the future of U.S. trade, including transfer of

technology, with the Communist world require weighing the economic and political benefits of such trade against the military risks it may incur. This is difficult, not only because it entails the comparison of unlike things, but because the

economic merits, particularly of technology sales, are difficult to assess and the

results of such assessments are controversial. For instance, the profits and

other returns of technology exports to the East must be balanced against the

possibility that unrestrained technology transfer by U.S. corporations could be

detrimental to this country’s long-term economic interests. In this connection,

the economic dangers of technology sales currently lie primarily in transactions

with our Western trading partners and not in trade with the East where major

risks are military; the Communist nations at the moment have a relatively small

export capacity and a systemic difficulty in rapidly assimilating and diffusing

Western technology. This is not to say, however, that this situation could not

change, especially with the help of Western management expertise and Eastern

impetus to expand trade in technology.

The economic balance sheet which must be drawn up in technology trade includes the following considerations: On the positive side are the final gains resulting from the sale of patents, licenses, construction of turnkey plants, and

the sale of items that may embody sophisticated technology. The balance of

payments in such items has historically been decidedly in favor of the United

States. Further, even where the direct income from technology transfers is

small, broad agreements in other trading areas often depend critically on such

transfers, and there may be indirect commercial benefits to U.S. firms operating

in Eastern markets.

On the other hand, the possibility exists

that transferred technology can be used to

build industries in the purchasing nation

which will eventually supplant U.S. export

markets in that country or in other nations,

perhaps eventually even in the United

States itself. These situations would clearly

threaten a loss of employment in the United

States. The difficulties now being encountered by Occidental Petroleum in the United

States and by other companies in Italy and

West Germany as a result of buy-back agreements with Eastern Europe highlight these

fears, as does the U.S.S.R.’s emergence as a

competitor to Fiat in Europe and Canada

with cars produced at the Italian-built Togliatti (Volga) auto plant.

In an attempt to evaluate the economic

value of East-West trade and technology

35
—

36 . Technology and East-West Trade

transfer to the United States, this chapter ● the impact of sales of technology to the

examines the following issues: East on the U.S. economy.

. the volume of East-West trade in general and trade in technology in particular,

● the potential for growth in East-West Discussions of the value of Western techtrade, including trade in technology, nology to the Soviet and Chinese economies

and appear in chapters X and XI.

Photo credit: The National Council for U.S. China Trade

Ammonia concentrator, La Madian #2 Multipurpose Pump Station, Taching, China
Ch. Ill— The Economic Implications of East-West Trade and Technology Transfer ● 37

EAST-WEST TRADE AND

THE PRESENT VOLUME OF

EAST-WEST TRAD E

Trade with the Communist world has

never constituted a large part of U.S. foreign

trade. Despite the fact that the total turnover of American trade with the East grew

by approximately 50 percent between 1977

and 1978, the volume of this business in absolute terms, including sales of agricultural

commodities, is small. In 1978, the United

States earned about $4.5 billion from exports to Communist nations, half of which

came from the U.S.S.R. The net trade balance with these countries was $2.7 billion.

This must be evaluated in the context of

1978 U.S. worldwide trade turnover of over

$315 billion and overall deficit of $28 billion.

The Communist world thus accounted for

only 3.1 percent of U.S. exports and 1 percent of U.S. imports in 1978. Even the recent

acceleration in trade with the People’s ReU.S. MARKET SHARES

public of China (PRC) has done very little to

alter this overall trade picture (see table z).

Part of the reason for these magnitudes

lies in the fact that for both trade in general

and trade in technology in particular, the

United States has captured only a small

share of the Eastern market relative to the

other countries of the industrialized West.

Since the end of World War II, the United

States has never held more than 10 to 15 percent of the total Western trade with Communist nations (see table 3 and figure 1). There

are a variety of reasons for this: because of

its vast domestic market the United States

has traditionally been relatively less active

in foreign trade than Japan or Western Europe; Western and Eastern Europe are natural trade partners; and as chapters VII to IX

argue, America’s allies have been less restrictive in controlling trade with the Communist world.

Table 2.— U.S. Trade With the World and With Selected Nonmarket Economy Countries

(in millions of U.S. dollars)

U.S./world trade

1977 1978 January to June 1979

Exports. . . . . . . . . . . . . . . . . . . . . . . . 121,206 143,659 85,532

Imports . 147,492 172,025 95,506

Balance. . . . . – 26,286 – 28,366 -9,973

Trade turnover (exports plus Imports) 4,077 6,303 3,972

U.S. trade with selected nonmarket economies

—

Exports Imports Balance

Jan-Jun

————

Jan-Jun Jan-Jun

1977 1978 1979 1977 1978 1979 1977 1978 1979 . — —.— —

U. S. S. R., . . . . . . . ... ... . . . . . . . . . . . 1,623 2,249 1,457 422 ‘25 4

- - 2 4 3 1,201 1,995 1,214

People’s Republic of China . . . . . . ., 171 818 704 197 324 245 – 2 6 593 459

Poland. . . . . . . . . . . . . . . . . . . ... . . . . 437 677 275 327 439 212 110 238 63

Romania . . . . . . . . . . . . . . . . . . . . . . . . . . . 259 317 260 231 347 167 28 29 93

Czechoslovakia . . . . ... ... . . . . . . . 74 105 83 36 163 25 38 47 58

East Germany. . . . . . . . . . . . . . . . . . . . . . . 36 170 138 17 205 19 19 135 119

Hungary . . . . . . . . . . . . . . . . . . . . . . . . . . 80 98 42 47 69 48 33 29 – 6

Bulgaria . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 48 31 26 19 23 – 2 29 8

Total . . . . . . . . . . . . . . . . . . . . . . . . . . ‘2,704

——— . —

4,483- 2,990 1,303 1,820 982 1,401 2,663 2,008

1977 1978 January to June 1979

NME share of total U.S. trade

Exports (percent). . . . . . . . . . . . . . . . . 2.2 3.1 3.5

Imports (percent). . . . . . . . . . . . . . . . . . .9 1.09 1.03

. — —

NOTE Both Imports and exports are valued on a free-along-side basis

. — .

SOURCE U S Department of Commerce
— . —

38 ● Technology and East-West Trade

Table 3.—The Trade of the Industrial Market Economies With Eastern Europe and the Soviet Union

West German y

Italy . . . . . .

Yugoslavia . ,

France. .

United Kingdom

Finland . . .

Austria .

Sweden. . .

Netherland s

Belgium-Luxem..

Denmark . .

Switzerland .

Spain . . . . . . . . . . . .

Greece. . . .

Norway . .

Turkey. .. .

Ireland. .. .

Iceland . . . .

Portugal . . . . . .

Total Western

Europe. . .

United State s

Canada . . . .

Japan. . . . . . . . . .

Subtota l

Grand total . . . .

Imports, c.i. f.

Percentage

Value share of Percentage

million country’s change over the

u s total same period of the

dollars) imports preceding year

Jan -

May

1977 1976 1977 1978

4,474

2,596

2,714

2,216

2,172

1,795

1,249

1,141

1,040

718

593

598

345

385

395

344

119

75

166

4

5

28

3

3

24

9

6

2

2

4

3

2

6

3

6

2

12

3

25 11

28 6

16 26

18 11

23 16

2 11

15 14

4 0

18 11

– 5 22

10 4

45 20

– 7 – 2 0

47 – 5

38 15

31 7

0 30

7 15

— —97 1 —

27

2

4

22

5

9

15

- 2 2

15

28

—

9

78

11

54

—

- 3

1

1

12

14 —

23,135 5 18 12 13

977 1 19 5 49

189 0 22 –4 –1 1

1,627 2 – 1 19 0

2,793 1 7 12 16

— .

25,928 3 17 12 13

— —

Exports, f.o. b.

Percentage

Value share of Percentage

(million country’s change over the

u s total same period of the

dollars) exports preceding year

Jan.-

May

1977 1976 1977 1978

$ 6,649

2,287

2.044

2.781

1,457

1,709

1,416

945

816

760

286

878

284

334

276

172

29

62

81

6 –3 6 14

5 - 1 0 16 – 10

39 8 1 14

4 5 2 – 12

3 –9 23 35

22 14 14 24

14 1 10 17

5 –6 –8 – 1

2 –4 7 5

2 –8 –4 –2

3 –9 2 1

5 7 11 34

3 18 – 6 15

12 9 16

3

8 0 11

10 35 4 35

1 – 43 46 51

12 1 51 – 51

4 96 – 3 –37

$23,266 5 0 7 9

2,542 2 26 –27 35

546 1 31 –31 15

2.669 3 27 – 5 2

$ 5,757 2 27 – 18 19

$29,023 4 5 1 11

Trade balances

Exports minus

Imports a (million

U.S. dollars)

Jan.-

May

1976 1977 1978

$2,439 $2,327 $ 952

-33 9 – 153 – 9 4

55 – 446 -12 3

832 663 119

- 521 – 584 11

2 32 85

228 214 114

– 19 – 116 56

- 116 – 171 – 5 7

222 77 1

- 263 – 275 – 124

309 298 102

- 9 1 – 3 2 17

– 70 – 10 – 1

– 48 – 107 – 71

– 121 – 135 1

– 67 – 85 – 3 0

– 14 – 6 - 9

– 6 6 – 7 0 - 4 1

$2,352 $1,421 $ 908

2,638 1,626 1,203

595 362 132

1,590 1,225 625

4,823 3,213 1,960

$7,175 $4,634 $2,868

aExports f.o.b. minus imports f.o.b. The latter have been adjusted according tO data taken from IMF, International Financial Statistics for each Industry

SOURCES: OECD, Statistics of Foreign Trade, Series A, Pans, IMF, Direction of Trade and International Financial Statistics, Washington, D C national statistics; and

U N Economic Bulletin for Europe, vol. 30, No 1, New York, 1978

But equally important is the fact that

overall volumes of East-West trade are artificially low. Foreign trade has played a relatively minor role in the Communist world

and within this already circumscribed arena,

the volume of East-West trade is particularly small. China until very recently virtually

excluded itself from world markets. The Soviet Union has been far more active in world

trade, but in 1977 imported only $150 in

goods per capita, as compared to $700 for

the United States.

U.S. POLICIES AFFECTING

TRADE VOLUMES

American policies on trading with the

Communist world probably influence U.S.

market shares in existing trade more than

they do the volume of East-West trade overall. These shares are determined generally by

U.S. foreign trade and export promotion

strategies and in particular by credit, tariff,

and export control regulations directed at

Communist countries.
Ch. IIl—The Economic Implications of East-West Trade and Technology Transfer ● 39

Billions

of dollars

30

25

2C

Is

10

5

(

I

Total West

Us.

Figure 1 .—East-West Trade and U.S. Share

48.8

——

51.7 54.1

—

19.9

Total

11.6 —

6.2

1968

15.0 —

8.2

1970

16.9

9.1

1971

29.6

41.5

23.4

30.1

1974 1975

East = Bulgaria, Czechoslovakia, East Germany, Hungary, Poland, Romania, U. S. S. R., and PRC.

West = Austria, Belgium, Canada, Denmark, West Germany, France, Italy, Japan, Luxembourg, The

Netherlands, Norway, Sweden, Switzerland, United Kingdom, and the United States.

SOURCE Selected Trade and Economics Data of the Centrally Planrred Economies, U S Department of Commerce, Industry and Trade Administration, Bureau of EastWest Trade, 1979

Import Barriers

Eastern exports have elicited strong protectionist sentiment among some American

producers, and the tendency has been for

commercial import policies to remain restrictive even in the face of stimulative export

strategies. In a number of Western countries, the United States among them, both

tariffs and quantitative restrictions, and voluntary restraints inhibit the quantities of

Eastern goods that are imported. The aim of

nontariff barriers is to help the balance of

payments and in particular to assist import

competitive labor-intensive industries such

as woodworking, textiles, and shoe manufacturing. There is now even discussion of extending protection to such technology-intensive products as electronics and chemicals,

in which Western countries enjoy or have enjoyed a comparative advantage.

U.S. action on tariffs–notably the denial

of most-favored-nation (MFN) status to

most Communist nations—has been politically rather than economically motivated

(see chapter VII). It is virtually impossible

to link the lack of MFN status directly to existing levels of trade, although it is unlikely

that the extension of MFN over recent years

would have led to dramatic increases in

Eastern imports. As chapter II has pointed

out, however, the removal of the political

barriers to trade symbolized by the U.S. ’S

withholding of MFN status might, over the

long run, contribute to more regular and expanded trade relations with the East.
40 . Technology and East-West Trade

Credit

Chapter VII documents the history of the

U.S. restrictions on the amount of subsidized official export credits available to the

Communist world. The availability of such

financing is often an important factor in the

choice of a Western supplier. The curtailed

role of the United States in this area can be

seen by comparing it to other Western nations (see table 4). The Chase World Information Company has estimated that at the end

of 1977 outstanding commitments on export

credits extended to Eastern Europe and the

U.S.S.R. by Western governments totaled

nearly $32 billion. The U.S.S.R. and Poland,

which together are responsible for nearly 60

percent of the Communist bloc’s total hardcurrency debt, received the bulk of these

–$14.2 billion and $8.3 billion respectively.

West Germany was the greatest lender, providing official credits of $7.5 billion; France

ranked second at $7 billion, followed by

Japan at $5 billion. The United States, with

the activities of the Export-Import Bank

(Eximbank) severely curtailed by Congress,

ranks fifth, after the United Kingdom, with

$945 million.

This fact may support the contention of

some U.S. exporters that the availability of

cheap official credits in other nations puts

them at a competitive disadvantage. It also

highlights the limited role of the U.S. Government in promoting exports to the East.

The impact of such credit policies on U.S.

trade cannot be assessed with any precision,

but the general effect seems to have far outweighed any positive actions to encourage

trade with the Communist world.

U.S. Export Controls

A third important factor in the maintenance of low levels of trade with the Communist world is the restrictions imposed on

technology sales. These, as well as the attitudes of U.S. businessmen toward them, are

described in detail in chapter VII. There is a

widespread perception among businessmen

that U.S. export control policies are a significant, if not the most important, barrier to expansion of U.S. trade with the East.

It is impossible to estimate the amount of

business lost to American companies because of the stringency or inefficiency of export controls and licensing procedures, but it

is probably safe to assume that—the perceptions of some businessmen apart—it is by no

means the predominate factor. An as yet unpublished report being prepared by the U.S.

Table 4.—Official Export Credit Commitments to CMEA Countries, as of End-1977

(in millions of U.S. dollars)

—— —

East

Bulgaria Czech. Germany Hungary Poland Romania U.S.S.R. Total

Commitments on signed contracts offered by:a

— —— .

Austria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 183 $ 85 $ 455 $ 395 $ 600 36 $ 260 $ 2,014

Britain. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 50 45 40 960 100 720 1,945

Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 3 0 0 454 9 173 639

France. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 540 350 480 110 1,800 390 3,400 7,070

West Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140 450 1,200b 65 1,900 430 3,300 7,485

Italy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 70 530 70 800 200 1,950 3,700

Japanc

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 280 0 400 200 450 500 3,150 4,980

United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 0 0 0 408d

74 463 945

Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 265 195 465 95 950 215 750 2,935

. — .

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,518 $1,203 $3,575 $ 965 $8,322 $1,954 $14,166 $31,713

Estimated drawings on official creditse 

. . . . . . . . . 798 841 2,455 460 5,775 1,256 10,730 22,315

Undrawn balance. . . . . . . . . . . . . . . . . . . . . . . . . . . . 720 362 1,120 515 2,547 698 3,436 9,398

aRefers to active commitments of official credit. Figures take into account maturing credits and are adjusted for repayments.

blntra-German trade swing credits

clncludes sup[plier credits that are provided jointly by Japan’s Eximbank and commercial banks

dlncludes $220 million in U S Eximbank commitments and $188 million in CCC credits

eApproximate disbursements.

SOURCE: Adapted from a review of CMEA debt by Miriam Karr in East-West Markets, Chase World Information Co., May 15, 1978, p. 3, and May 29, 1978, p 3.
Ch. Ill—The Economic Implications of East-West Trade and Technology Transfer . 41

International Trade Commission (ITC), for

instance, investigated cases involving the

loss by U.S. firms of 85 separate contracts

with the U.S.S.R. between 1972 and 1977.

Noncompetitive price was cited by the firms

involved more than twice as often as any

other reason for the failure. Inability to obtain Government credits, guarantees, and insurance; and competition from firms with a

better foothold in the Soviet market were

next more frequently mentioned. Export

controls and license delays appeared far

down the list.

EASTERN POLICIES

AFFECTING TRADE VOLUMES

While part of the reason for the low volume of U.S. trade with the East may be attributed to American failure to capture high

market shares, decisions on the other side of

the Iron Curtain have had greater impact on

the nature and extent of East-West commercial relations.

The great majority of Soviet and Eastern

European trade is conducted within the

Council for Mutual Economic Assistance

(CMEA or COMECON). The members of

CMEA are the U. S. S. R., Poland, East Germany, Czechoslovakia, Romania, Hungary,

Bulgaria, Cuba, Mongolia, North Korea, and

Vietnam; associate agreements have been

concluded with Yugoslavia and Finland. The

CMEA, founded in 1949 as the Soviet response to the Marshall plan, was intended to

give the Communist bloc economic as well as

political and military cohesion. It provides

for the exchange of economic and technical

information among Socialist countries, and

approximately 70 percent of all Eastern-bloc

trade takes place within it. Potential trade

with the West is circumscribed by the politically motivated controls imposed on CMEA

members. These are both direct and indirect.

For example, Eastern European dependency

on Soviet raw materials diminishes opportunities for Western raw material exports.

Further, Eastern European manufactures

are frequently of such design and quality

that they can be marketed only in the Soviet

Union. The effect of CMEA, together with

the barriers to complete economic interdependence posed by the structural differences

between market and nonmarket economies,

and the lack of hard currency in the East

(discussed below) work against the possibility that East-West trade will ever rise to

levels comparable to those between Western

nations.

THE GROWTH OF

EAST-WEST TRADE

Barriers to increased trade in both the

East and the West have eroded steadily

since the onset of the era of detente. As

figure 2 demonstrates, although absolute

Figure 2.— U.S.-Eastern* Trade, 1972-78**

Billions of dollars

6 “ — Total trade

--- U.S. exports

5 - --U.S. imports

4

3 -

2 -

1

0

1972 1973 1974 1975 1976 1977 1978

U.S. exports:

Bill Ions of dollars

5t t

. I --- U.S. exports J

1972 1973 1974 1975 1976 1977 1978

U.S. imports:

Bill Ions of dollars

1972 1973 1974 1975 1976 1977 1978

● Bulgaria, Czechoslovakia, East Germany, Hungary, Poland,

Romania, U. S. S. R., and PRC.

** 1978 trade estimated imports do not include U.S. imports

of nonmonetary gold from U.S.S.R.

SOURCE: Selected Trade and Economic Data for the Centrally Planned

Economies, U S Department of Commerce, 1979
42 ● Technology and East-West Trade

levels of East-West trade have been small, it

has grown rapidly in recent years. Table 5

shows this growth in absolute terms. Table 6

demonstrates the fact that the rate of

growth in trade between the industrialized

West and the East has consistently outrun

world trade as a whole from 1955 to the present. This trend has been particularly manifest in Eastern exports of raw materials and

labor-intensive commodities and imports of

manufactured goods.

sion to expand contacts with the West in all

fields. An attempt was made to exploit the

advantages offered by trade with Western

States, but to avoid if possible the social and

political liabilities inherent in East-West

communication. A second decision involved

a shift in development strategy, which required the use of advanced Western capital

and techniques to increase productivity in

specific sectors. Finally, purchases in the

West began to be utilized on a wider basis to

compensate for shortfalls in annual plans.

This has been especially true for agricultural

products and, to some extent, consumer

goods. The result has been that increases in

Eastern imports from the West have occurred at a greater rate than has expansion

of exports.

On the Eastern side, an important set of

reasons for this growth lies in three interrelated decisions made at some point in the development of each Communist nation. First,

the policy of detente involved a political deciTable 5.—Trade With the Developed West

(in millions of U.S. dollars)

1972 1973 1974 1975 1976 1977

Bulgaria

Exports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Imports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Balance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Czechoslovakia

Exports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Imports ... ... . . . . . . . . . . . . . . . . . . . .

Balance. . . . . . . . . . . . . . . . .

East Germany

Exports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Imports . . . . . . . . . . . . . . . . . . . . . . . . . . .

Balance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Hungary

Exports. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Imports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Balance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Poland

Exports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Imports. ., ., ., . . . . . . . . . . . . . . . . . . . . . . . .

Balance. ,. . . . . . . . . . . . . . . . . . . . . . . . .

Romania

Exports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Imports ..,..... . . . . . . . . . . . . . . . . . . . . . .

Balance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

U.S.S.R.

Exports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Imports. . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

PRC

Exports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Imports, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Balance. ..., . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 310

349

- 3 9

$ 403

480

–77

$ 403

928

–525

$ 363

1,204

–841

$ 420

940

–520

$ 392

821

–429

921

1,056

–135

1,266

1,513

–247

1,639

2,031

–392

1,600

2,178

–578

1,600

2,178

-57 8

1,698

1,443

–245

1,406

1,929

–523

1,915

2,735

–820

2,646

3,540

–894

2,586

3,630

–1,044

2,850

4,050

–1,200

2,695

2,906

–211

739

851

–112

1,085

1,135

- 5 0

1,221

1,862

-641

1,096

1,843

–747

1,290

1,860

-57 0

1,562

2,195

–633

1,397

1,772

–375

2,063

3,431

–1,368

2,865

5,233

–2,368

3,026

6,076

–3,050

3,330

6,660

–3.330

3,495

4,570

–1,075

826

1,043

–217

1,203

1,451

–248

1,402

2,436

–534

1,653

2,164

–511

1,450

2,150

–200

1,682

2,152

–470

2,570

3,317

–747

4,121

4,957

–836

6,341

6,250

91

6,750

10,714

–3,964

8,773

11,653

–2,880

10,079

11,412

–1,333

1,085

1,670

-58 5

1,825

3,525

–1,700

2,415

5,305

-2,890

2,620

5,480

–2,860

2,695

4,110

–1,415

2,939

3,585

-64 6

SOURCE UN Trade Data from the U S Department of Commerce, East-West Trade Center, CIA, “PRC-lnternational Trade Handbook,’’ 1976
-— —

Ch. Ill—The Economic Implications of East-West Trade and Technology Transfer ● 43

Table 6.—Average Annual Rates of Change of East-West Tradea and World Trade by

Commodity Category, 1955-76

(percentages computed on the basis of current prices)

——— ——————

Raw material-and Capital- and

Food and labor-intensive skill-intensive

Period beverages Raw materials Fuels manufacturers manufacturers Total exports

Western exports to the East

—————

1955 -60.... 3.9 8.7 18.3 27.3 20.0 17.0

1960-65 . . . . 27.2 5.4 30.3 2.4 14.1 11.0

1965 -70.... 2.9 1.7 42.5 18.1 13.4 10.9

1970-76 . . . . 31.0 20.3 16.8 25.7 20.0 26.1

1955 -76.... 14.6 9.3 15.4 18.3 18.6 16.5

Eastern exports to the West

1955 -60.... 10.9 9.3 9.7 15.9 11.0 10.5

1960 -65.... 6.9 8.6 8.7 18.0 10.7 9.1

1965 -70.... 6.5 6.3 10.5 12.3 11.3 12.2

1970 -76.... 15.7 27.7 53.8 24.0 25.7 30.2

1955 -76.... 10.2 13.3 20.8 17.8 15.0 15.9

World exports

1955 -60.... 4.1 4.2 4.3 7.7 10.0 6.6

1960 -65.... 6.8 3.1 7.2 8.5 10.5 7.9

1965-70 . . . . 5.9 5.9 9.6 11.8 14.0 10.9

1970 -75.... 20.4 15.1 41.9 18.7 22.3 22.8

1955 -76., . 9.1 7.0 15.0 11.6 14.1 11.9

aExcluding Inter-German trade

.

NOTE Figures are rounded

SOURCES United Nations, Monfhly Bulletln of Sfatistics, 1955.76, Organization of Economic Cooperation and Development, Trade Commodities Country Summaries,

series B (Paris OECD, 1955.76)

THE CONSTRAINTS ON GROWTH OF EAST-WEST TRADE

Some U.S. corporations point to this

growing volume of Eastern imports from the

West as evidence of the fact that U.S. policies that inhibit trade in general and trade in

technology in particular with the Communist world exclude the United States from

the economic benefits of lucrative and growing markets. This claim assumes that the

patterns and growth rates of recent years

will continue. This assumption, however,

must be evaluated against the economic

forces at work to inhibit the continued

growth of East-West trade and to ensure

changes in the structure of that trade. By far

the greatest of these forces is the chronic

shortage in Communist nations of the hard

currency with which to pay for imports.

Trade between the nations of the industrialized West is denominated in “hard” or

“convertible” currencies, i.e., currencies

whose value is determined by market forces

outside the complete control of individual

countries. CMEA and the PRC have chosen

not to participate in this system. To do

otherwise would be to allow outside forces to

make de facto decisions with significant impact on domestic economies. Such an alternative is unacceptable to Communist nations which desire to concentrate economic

decisionmaking in hands of central planners

and which wish to be as insulated as possible

from world market forces.

The decision not to have a convertible currency, however, entails drawbacks in trading

with the Western nations that accept cash

payment only in hard currency. An Eastern

country therefore has three choices: it can

earn currency by selling to the West; it can

arrange countertrade agreements (i.e., transactions in which the seller delivers technology, finished products, and/or machinery

and equipment and at the same time, con-
—

44 . Technology and East-West Trade

tractually agrees to purchase goods from the

buyer equal to an agreed percentage of the

original value of the contract); or it can go

into debt. The policy decisions that have resulted in expanded overall levels of EastWest trade have greatly increased demand

for Western goods in the East, but they have

not been accompanied by a corresponding

growth in demand for Eastern goods in the

West. So far, Eastern nations still lag in

their capacities to produce salable manufactured goods for export. Moreover, although

countertrade is important, it involves complex transactions that Western firms enter

into with reluctance. It is the latter choice,

therefore, which has most often been made.

This means that Eastern nations have had

increasingly to be willing to resort to borrowing to finance their trade, and Western nations have had to be willing to supply the

necessary credits.

The rapid growth in East-West trade turnover has therefore been accompanied by a

rise in Eastern balance of payments deficits.

In 1976, this deficit for the Communist

world as a whole was $7.3 billion, and the

only country that managed to achieve surplus in trade with the developed West was

the U.S.S.R. in 1974, the direct result of the

increase in the price of oil in world markets.1

The paradox of the current chronic Western

export surpluses vis-a-vis the East is that,

desirable as these balances may be in the

near term, they are financed largely through

debt and cannot continue indefinitely. The

greatest single curb to the continued expansion of East-West trade has become the limitations posed by this debt.

It is important to note, however, that

nothing sets the East apart in this connection from other nations, such as less devel1 In 1976, the PRC had a favorable trade balance in total

world trade. This was due to its large trade surplus with the

less developed countries. Deficits have been partially offset

by Eastern revenues from shipping, tourism, and sales of

arms and gold, in all of which the East has a positive balance

of payments. But the ability of individual countries to utilize

this method of financing varies greatly, and only in the case

of the U.S.S.R. is it a major means of significantly redressing

trade balances.

oped countries (LDCs), plagued with hardcurrency shortages. The size and composition of the East’s hard-currency debt has

become a matter of controversy. Allegations

are sometimes made that Communist nations borrow huge and disproportionate

amounts from the West, that these sums are

virtually “given away” both because they

are provided in the form of cheap Government credits and because the debts go unpaid, and that for nonmarket economies,

there is no incentive to restrict borrowing.

None of these contentions hold up under examination.

THE SIZE OF THE

EASTERN DEBT

Estimates of the net amount of Communist debt in the West in 1977 range from between $37 billion to $40 billion (U.N. Economic Commission for Europe Secretariat),

to $42 billion, excluding the PRC (Bankers

Trust), to $47 billion to $58 billion (U.S.

Department of Commerce).* This variation is

probably due to different methods of accounting. Until 1979, the PRC had not made

extensive use of Western credit facilities; its

hard-currency debt in 1978 had yet to exceed

$1.6 billion. Table 7 demonstrates the expansion of CMEA debt since 1970.

A recent Department of Commerce study

compared the magnitude of CMEA external

debt to that of other nations, and found that

Eastern debt is relatively small compared

with the aggregate external debt of many

Western borrowers.3 Table 8 shows Eastern

external debt as compared with other States

with large loan commitments. Here, Eastern

‘In 1977, the debt was distributed as follows:

%. of total hard-currency debt

Bulgaria . . . . . . . . . . . . . . . . . . 5.3

Czechoslovakia . . . . . . . . . . . . . . 5.3

East Germany . . . . . . . . . . . . . . . 11.9

Hungary. . . . . . . . . . . . . . . . . . . 6.’7

Poland . . . . . . . . . . . . . . . . . . . . 25.4

Romania. . . . . . . . . . . . . . . . . . . . 7,5

U.S.S.R. . . . . . . . . . . . . . . . . . . . . 31.7

PRC . . . . . . . . . . . . . . . . . . . . . . . 2.6

CMEA banks. ... , . . . . . . . . . . . 3.4

3L. Theriot, “Communist Country Hard Currency Debt in

Perspective” in Joint Economic Committee, Issues in EastWest Commercial Relations, 1979.
Ch. Ill— The Economic Implications of East- West Trade and Technology Transfer ● 45

Table 7.— Estimated Net Hard-Currency Debt

of Eastern Europe, U. S. S. R., and CMEA Banks,

End of Year, 1970, 1974-77

(in billions of U.S. dollars)

1970 1974 1975 1976 1977

Bulgarla . $0.7 $ 1.2$ 1.8 $ 2.3 $ 2.7

Czechoslovakia 0 3 1.1 1.5 21 2.7

East German y 1.0 28 3.8 6.0 5.9

Hungar y 0.6 1.5 2.1 2.8 3.4

Poland 08 39 6.9 10.2 13.0

Romani a 1.2 2.6 3.0 3.3———4.0

Total Eastern Europe. ‘4 6 13.1 19.1 25.7 317

U.S.S.R . 1.9 5.0 10.0 14.0 16.0

CMEA banks o 0.1 0.5 1.1 1.7 ———

Grand tota l ‘$6.5 $18.2 $29.6 $40.8$49,4

SOURCE Paul Marer statement in U S PoIicy Toward Eastern Europe (hearings

before the Subcommittee on Europe and the Middle East Committee

on International Relations U S House of Representatives 95th

Cong 2d sess Sept 7 and 12 1978) (Washington D C U S Govern

ment Printing Off Ice 1 979) p 100

nations compare favorably to countries with

similar gross national product (GNP).

Another method for measuring the economic

burden of the debt—relating its size to exports (in the Eastern case, hard-currency exports)—is shown in table 8. From this perspective too the Communist world does not

borrow to an excessive degree compared to

other nations.

Care must be taken in drawing these kinds

of comparisons. First, comparisons of the

U.S.S.R. with even the largest developing

nations are distorted to the extent that they

fail to take into account the size and sophistication of the Soviet economy. Second, in

comparing Communist to capitalist nations,

the criteria of relative debt size or level of

debt servicing must be modified to reflect

the points on which State-controlled and

market economies differ.4 Even with these

caveats, however, it is clear that the levels of

Eastern debt are by no means alarming or

unusual in the context of the world economy.

‘For instance, Communist nations have no recourse to risk

capital (i.e., the sale of stocks). Second, much East-West

trade is conducted under “self-liquidating”’ countertrade

agreements, i.e., the creditor accepts as payment the goods

produced by the facility for which credit was given. Third, the

great legal and social powers of a centrally planned economy

give Eastern Governments much greater flexibility in meeting international financial obligations than is possible in the

West.

Table 8.— Hard-Currency Debt and Foreign Trade, 1977 of CMEA and Selected Western Countries

Net debt Exports

——.——-

Imports Balance Ratio of debt/hard-

($ billions) ($ millions) ($ millions) ($ millions) currency exports

Country 1977 1977 1976 1977 1976

Bulgaria . $ 2.7 $ 608 $ 997 $ -389 $ -422 4.4

Cuba . . . . . . . . . . . . . . . . 2.2

4.7 “-

784 1,565 – 872 – 711 2.8 1.7

Czechoslovakia . 2.7 1,903 2,639 – 736 – 758 1.4 1.2

East Germany. . . . . . . . . . . . . . 6.0 2,900 4,070 – 1,140 – 1,456 2.1 1.7

Hungary. ... . . . . . . . . . . . . 3.7 1,712 2,441 – 729 – 474 2.2 2.3

Poland . . . . . . 12.8 3,852 6,374 – 2,522 -3,235 3.3 3.1

Romania . . . . . . . . . . . . . 3.8 2,270 2,660 – 390 – 4 1.4 1.7

U.S.S.R. . . . . . . . . . . . 11.3 11,666 14,747 – 3,081 – 5,516 0.97 1.4

Vietnam. . . . . . . . 0.2 128 434 – 306 – 183 1.6 1.8

Total CM EA. . . . . . . . . . . . . . . . $49.6 $25,823 $35,927 -$10,104 -$12,759 1.9 1.8

Other developing countries

Argentina . . . . . . . . . . . . . . . . . .

Brazil . . . . . . . . . . . . . . . . . . . . . . . . . . .

Colombia. . . . . . . . . . ., . . . . . .

Mexico. . . . . . . . . . . . .

South Korea ., . . . . . . . . . . .

Spain ., ... . . . . . ... . . . . . . . . .

Venezuela . . . . . . . ... . .

Yugoslavia . . . . . . . . . . . . . . . . . . .

$ .5

19.3

2.6

20.9

8.5

7.0

4.5

6.5

$ 5,800

12,139

1,900

4,166

10,047

10,223

9,487

3,600

$ 4,400

13,229

2,000

5,489

10,814

17,835

9,269

7,400

-t- $1,400

-1,090

– 100

– 1,323

– 767

-7,612

+ 218

– 3,800

-$883

– 2,200

– 125

– 2,732

– 1,059

– 8,732

+ 2,844

– 2,515

0.84

1.6

1.38

5.0

0.84

0.7

0.47

1.8

1.7

2.6

1.4

6.5

0.96

1.2

0.3

1.2

SOURCE Lawrence H. Theriot, Communist Country Hard-Currency Debt in Perspective,” Department of Commerce Project D-66.74
46 . Technology and East-West Trade

THE COMPOSITION OF THE

EASTERN DEBT

There are three major sources of financing

available to Communist nations—Western

Government financing in the form of guarantees, insurance, and direct credits; regular

private commercial credits, including Eurocurrency financing; and supplier credits. The

mix of these varies among countries. In the

U.S.S.R. approximately 60 percent of the

gross foreign debt is financed by official

credits; Western commercial banks hold 25

percent, and supplier credits constitute the

remainder. Eastern Europe, however, relies

much more heavily on commercial bank

loans, although again the mix varies among

individual countries. PRC debt still consists

almost exclusively of supplier credits.

It is impossible to generalize about the

degree to which the Communist world as a

whole relies on “cheap” Government credits

and guarantees, but it is clear that the shortage of negotiable currency in the East means

that Western official and private credits can

have a significant impact on the growth of

East-West trade.

Not all this borrowing is subsidized, however. At year end 1977, Western commercial

banks held approximately $25 billion in net

claims on CMEA nations (see table 9).

Again, the value of comparison between

market and nonmarket economies is limited,

but some perspective on this figure may be

gained by considering that for the same period non-OPEC LDCs owed Western banks

approximately $30 billion.

Furthermore, the share of CMEA debt in

public and private facilities in the United

States is relatively modest. As of June 1977,

U.S. private bank claims totaled $4.9 billion

or about 10 percent of the net debt of the

U.S.S.R. and Eastern Europe. In contrast,

U.S. banks hold 41 percent of Brazilian debt

and 44 percent of Mexico’s. In addition, although U.S. banks hold about 10 percent of

CMEA external debt, their claims represent

only a relatively small commitment of the

total equity capital of the banks. The shares

Table 9.—Estimated Composition of Net Hard-Currency Debt of

Eastern Europe, U. S. S. R., and CMEA Banks, Dec. 31,1977

(in millions of U.S. dollars)

— ———————— — ———

Net liabilities IMF

Drawings on Supplier to Western Outstanding and IBRDc

official credits credits a

banks bbonds & notes drawings Total

Bulgaria . . . . . . . . . . . . . . . . . . . $ 798 —

$ 100 ‘

–-- –

$2,06 5

——

$ 0 $ 0 $ 2,963

Czechoslovakia . . . . . . . . . . . . . 841 200 884 0 0 1,925

East Germany . . . . . . . . . . . . . . 2,455 400 3,729c

o 0 6,584

Hungary ., . . . . . . . . . . . . . . . . . 460 0 3,630 180 0 4,270

Poland . . . . . . . . . . . . . . . . . . . . 5,775 1,200 6,890 82 0 13,947

Romania. . . . . . . . . . . . . . . . . . . 1,256 200 1,073 0 670 3,199

Total Eastern Europe . . . . . .

. —

$11,585 $2,100

——

$18,271 $262 $670 $32,888

U. S. S. R.. ., . . . . . . . . . . . . . . . . . 10,730 2,200 3,411 0 0 16,341

CMEA banks . . . . . . . . . . . . . . . 0 0 3,500 0 —.———— 0 3.500 —

Grand total. . . . . . . . . . . . . $22,315 – ——

$4,300 $25,182 $262 $670

— —

$52,729

aIncluding outstanding a Iorfait

-—obligations. —— — ——

bBanks in Group of Ten countries, Switzerland, and foreign branches of U S banks in the Caribbean and Far East.

clnternational Bank for Reconstruction and Development

dExcluding net Iiabilities of East Germany to banks in West Germany.

SOURCE East-West Markets, May 15.1978, pp. 3 and 10
Ch. Ill— The Economic Implications of East-West Trade and Technology Transfer . 47

of capital accounted for by outstanding

loans range from 0.9 percent for Czechoslovakia to 5.6 percent for the U. S. S. R..

THE CREDIT-WORTHINESS OF

THE COMMUNIST WORLD

The borrowings of Communist nations

are, therefore, not alarmingly large in absolute terms, and the private market’s evaluation of the risk entailed in lending to them

has been generally favorable. Commercial

banks reflect their evaluation of this risk

through the terms at which individual Eastern nations are granted loans; i.e., the interest rate spreads between their rates and

the London Interbank Borrowing Rate

(LIBOR), the risk-free rate utilized in the

Eurocurrency market.’ The interest spread

on commercial loans to the East, therefore,

reflects the private market’s objective and

carefully weighted evaluation of credit

worthiness.

Poland, with the highest debt-export ratio

of the countries under consideration and the

highest interest rate spread, is the least

credit-worthy of the Eastern nations. Nevertheless in April 1979, Poland received $550

million, the largest syndicated loan it had

ever obtained in the Euromarket, and the 11⁄4

point spread over LIBOR was identical to

that granted on a similar loan to Egypt. This

loan was oversubscribed, a fact interpreted

in Warsaw as a relatively positive market

evaluation of Poland’s credit-worthiness,

although there are growing indications that

the Poles may be increasingly hard-pressed

to begin hard-currency repayments to the

West.

A syndicated loan of similar magnitude

($500 million) was recently granted to the

PRC. As might be expected from the very

‘These spreads presently are as follows:

Poland . . . . . . . . . . . . . . . . . . . . 1 1/4

Romania. . . . . . . . . . . . . . . . . . . . 3/4

Hungary. . . . . . . . . . . . . . . . . . . . 5/8

Czechoslovakia . . . . . . . . . . . . . . 5/8

U.S.S.R. . . . . . . . . . . . . . . . . . . . . 5/8

PRC . . . . . . . . . . . . . . . . . . . . . . . 1/2

(LIBOR = 119. for 6 months)

low debt/export ratio as well as conservative

Chinese borrowing practice in the past, the

Chinese were granted an extremely low rate

—one-half percent over LIBOR. The size and

interest spread of this loan indicate a positive evaluation not only of Chinese ability to

repay, but also of political stability in the

near term.

During 1977, Communist countries arranged for approximately $3.4 billion in

publicized Eurocurrency credits. While considerable, this borrowing accounted for only

about 8 percent of total borrowing on the

Euromarket during 1977. Borrowing by all

Eastern nations in that year was roughly

equal to that of Canada, and in general, with

the exception of Poland and the CMEA investment bank, Eastern use of the Eurocurrency markets has been relatively modest

compared to many developing countries.

Furthermore, international bankers have not

only been willing to increase the debt, but

have rendered relatively favorable interest

rate judgments on the Eastern economies.

THE GROWTH OF THE

EASTERN DEBT

Discussion thus far has centered on the

level of the Communist world’s external debt

and concluded that its volume and structure

are unexceptional in the context of world

trade as a whole. This does not mean, however, that this debt can continue to accrue at

its present rate.

Between 1974 and 1977, the debts of Bulgaria, Czechoslovakia, East Germany, and

Hungary roughly doubled. Growth in Polish

and Soviet debts was proportionately even

higher, 230 and 220 percent, respectively.

Only the debts of Romania and China grew

somewhat more slowly (see table 10), but as

chapter XI discusses, the hard-currency

debt of the PRC can be expected to grow

rapidly over the next several years.

In addition to debt incurred by individual

nations, CMEA’s two international banks,

the International Bank for Economic Cooperation and the International Investment
48 ● Technology and East-West Trade

Table 10.—Growth in Debt, Selected Communist

Countries, 1974-77

Country % growth in debt, 1974-77

Bulgaria . . . 125

Czechoslovakia . 145

East Germany . 115

Hungary , 150

Poland . . 230

Romania. ..., ..., ..., ..., . 48

U.S.S.R. . . 220

PRC . . . . . . . . . . . . . . . . . . . . . . . 30

SOURCE: Offlce of Technology Assessment

Bank, have been active borrowers in Western private credit facilities. The Eurocurrency obligations of these two banks rose

from $100 million in 1974 to $l.7 billion in

1977.6

These enormous growth rates reflect the

expansion of East-West trade. But while additional loan capital seems to be available in

varying degrees to all the Eastern nations, in

the long run continued growth of East-West

trade cannot be financed through borrowing,

even should the East wish to do so. According to Department of Commerce estimates,

East European nations would have to sustain growth rates of between 6 and 9 percent

and cut import growth to zero to stabilize

their debt levels by 1985.7 As both these possibilities are highly unlikely, all other things

being equal, the accumulation of debt will

probably increase. If this happens, the financial risk component of interest rate spreads

on East European loans will increase until

borrowing becomes uneconomical.

ALTERNATIVES TO

BORROWING

Should further borrowing become prohibitively expensive to the East or should Western lending be restricted for noneconomic

reasons, three alternatives are open to the

‘Morris Bornstein, “Issues in East-West Economic Relations, ” unpublished paper for Research Conference in EastWest Relations in the Eighties, Rockefeller Foundation

Study and Conference Center, Bellagio, Italy, 1979.

‘Allen Lenz, “Potential Hard-Currency Debt of the

U.S.S.R. and East Europe Under Selected Hypotheses” in

Joint Economic Committee, op. cit.

centrally planned economies. They can allow

more direct Western involvement in their enterprises; they can resort to internal financing; or they can expand and diversify their

hard-currency earnings from exports.

Western Involvement in

Eastern Enterprises

There are at least two ways of increasing

Western involvement. A country can obtain

risk capital by establishing joint enterprises

which enable foreign firms to invest directly

in its economy. Such entities are permitted

in Hungary, Romania and, to a lesser extent,

in Poland. In the PRC the possibility is under discussion. The current contribution of

these enterprises is small, however. Alternatively, eater use may be made of leasing,

although the existence of foreign-owned

property in a Socialist country raises ideological problems. This has not prevented the

Soviets from leasing containers from the

West, but there are no prospects for rapid or

widespread basic policy changes in this

regard.

Internal Financing

Internal financing requires the allocation

of a larger share of the national income to investments. Because standards of living inevitably suffer as a result of this tactic, it is

subject to political constraints. Poland, for

example, has found it extremely difficult to

raise internal consumer prices without immediate and violent reaction from the populace.

While this is an extreme example, the increases in savings necessitated by internal

financing make this alternative unattractive.

Increased Exports to the West

Given the limitations inherent in both

these approaches, it seems inevitable that

the hard currency necessary to finance trade

and economic growth in the Communist

world over the long term can be obtained in

sufficient quantities only through the sale of

goods in the industrialized West and the

LDCs. Western imports must ultimately be
——

Ch. Ill— The Economic Implications of East-West Trade and Technology Transfer ● 49

paid for through Eastern exports, and presumably through the reduction or elimination of present Western trade surpluses with

the Communist nations. The Western technology sold to the East will help to accomplish this to the extent that it is aimed at

capacity expansion or long-term productivity increases in potential export sectors.

Undoubtedly, the attempts of many Communist nations to transform themselves into

net exporters of manufactured goods have

already been aided by technology imported

from the West, much of which is specifically

directed into export industries. At the same

time that Eastern markets for technologyintensive goods have been expanding, Eastern exports to the West have become increasingly capital intensive. Structural

changes in Eastern exports in favor of capital-intensive products do not, however, adequately reflect the progress in industrialization or capital accumulation and technological expertise which has been achieved by

Eastern countries. In particular, relative to

the level of economic development in the

East, too few technologically advanced and

sophisticated capital-intensive products of

too low a quality are produced for sale to

Western countries. This is largely due to the

nonmarket economies’ inherent systemic difficulty in developing products suitable to

Western demands and effectively marketing

them. Comparisons of Eastern export development to that of Japan, Taiwan, or Korea

are therefore invalid.

CONCLUSION S

In the last analysis, deliberate policies in

both the East and West may be hostage to

larger economic conditions. CMEA behavior

during the 1974-75 recession provides an example of the problems many planned economies have experienced in controlling their

trade balances with the West. Except in the

U. S. S. R., which is the sole oil exporter in

CMEA, growth in East-West trade and resulting trade imbalances became a particularly acute problem to CMEA members after

1974, when the slow pace of world economic

recovery hindered the growth of Eastern export earnings at a time of greatly expanded

imports of food and other items. In Eastern

Europe, restrictive action directed at importelastic sectors such as industrial investment

was instituted. As a result, industrial expansion in the region declined from 8 to 8.5 percent in 1974, to 5.5 percent in 1978. This

decline in the growth rate of domestic output

seems to have affected the expansion of exports more strongly than that of imports,

with the result of a further widening of the

deficit in 1978. In other words, attempts to

reduce the deficit indirectly have only increased it.

In contrast, when the PRC was faced with

lagging demand for its goods in Western

markets in 1975, it simply slashed its agricultural imports by $1 billion. Its ability to

take such incisive action was predicated on

the low absolute value of its trade with the

West and its consequent lack of dependence

on Western imports, a situation which, at

least in some sectors, no longer exists in

many CMEA countries.

It may be, therefore, that world energy

prices and Western economic growth levels

(and their effect on import demand) ultimately have as much direct and indirect impact

on the level of East-West trade as any policy

decisions taken in either East or West.

In any case, it is clear that U.S. (and other

Western States’) willingness and ability to

purchase more Eastern exports are vital conditions for the long-term expansion of EastWest trade. How large could this trade ultimately grow? One optimistic assessment

has been made by Michael Forrestal, President of the U.S.-U.S.S.R. Trade and Economic Council, who estimated recently that

“over a relatively tranquil five-year period

ahead with no remedial U.S. tariff or credit

legislation, U.S.-U.S.S.R. trade could reach

20 billion; 15 billion in U.S. exports and 5

billion in Russian sales to the U.S. If tariff

and credit limitations were removed, the total would be substantially higher.”8

*Industry Week, Mar. 5, 1979.
50 ● Technology and East-West Trade

While significantly expanded East-West

trade rates may be possible in the long run,

Forrestal’s estimates are spectacularly optimistic for the near future. Given the size

and diversity of its economy, the U.S.S.R. retains an extremely low level of foreign imports per dollar of gross domestic product,

and there is no reason to expect this policy to

change in the near future. Moreover, Soviet

imports from the United States could increase fivefold and still be only $7 billion to

$10 billion annually. And these figures fail to

take into account the limitations posed by

present Eastern export potential and the

limitations of demand for Eastern exports in

the West. Nor do they allow for the fact that

the United States has never captured a large

fraction of Eastern markets. Large increases

in East-West trade as a whole would benefit

other Western countries proportionally

more, especially in the absence of vigorous

U.S. export promotion campaigns, favorable

financing terms, relaxation of export controls, and other policies aimed at foreign

trade expansion in general.

THE ROLE OF TECHNOLOGY IN

EAST-WEST TRADE

FUTURE PROSPECTS

Trade in technology has remained a relatively stable and relatively small component

of East-West trade as a whole. There is reason to believe, however, that Eastern imports of technology may rise, and that this

will occur regardless of whether East-West

trade expands or whether world economic

conditions, U.S. commercial or political policies, or the pressure of increasing hard-currency debt cause it to stagnate or contract.

Indeed, the very structure of East-West

trade is creating a situation in which Eastern

importers will have higher incentives to acquire foreign technology.

In the future, the Communist world is likely to place a greater emphasis on obtaining

technology than on pure capital inflows.9

Presently technology-intensive products

constitute only a minor share of the total

resource inflows from the West. These, however, have a disproportionate importance to

the economies of the Eastern nations (see

chapters X and XI). This is not only because

of the need to expand exporting sectors of

the economy, but also because the increase

in productivity resulting from the use of the

‘Padma Desai, “The Productivity of Foreign Resource Inflows to the Soviet Economy, ” in American Economic Reuieu~, LX I I (2), p. 74.

new technology usually more than offsets

the cost of the credit needed to obtain it. So

long as this remains the case, Eastern nations will be increasingly eager to borrow in

order to purchase Western technology. By

the same token, if as Eastern debt continues

to grow, interest rate spreads increase, other

types of imports will become even less economical; high-productivity technology imports will thus begin to constitute a larger

relative share of Eastern imports. This suggests caution in concluding that debt constraint will inhibit technology purchases. On

the contrary, it may create incentives for

purchasing more technology at the expense

of other imports. Demand for technologically

intensive products in Communist nations is,

therefore, unlikely to abate in the future. In

the absence of foreign production and marketing know-how, however, long-term ability

to market usable products cannot be created

without major structural changes that such

countries are unwilling to make. The demand

for Western management technology is

therefore expected to grow enormously. The

medium-term result of this is that Western

technology-intensive industries and firms

providing management expertise will benefit

most from expanded East-West trade over

the next several years, while import-sensitive capital and labor-intensive industries

may be injured by increased competition.
Ch. Ill— The Economic Implications of East-West Trade and Technology Transfer ● 51

PRESENT U.S.

MARKET SHARES

The implications of this for the U.S. economy must be understood in the context of

the U.S. share in Eastern technology purchases. This is impossible to determine with

any precision. A rough picture of the value of

U. S., sales of technology to the East relative

to those of America’s major Western trading

partners may be constructed, but this is possible only through categories of technology

transfer for which data exists–trade in hightechnology products and industrial cooperation agreements (see chapter VI).

Sales of High-Technology Products

As table 11 demonstrates, in 1977 U.S. aggregate sales of high-technology products to

the U. S. S. R., Eastern Europe, and the PRC

amounted to less than $300 million, and in

no case did these products constitute a major share of U.S. exports to individual Communist countries. High-technology sales

thus ranged from a high of 19.7 percent of

U.S. exports to Bulgaria to 3.3 percent of

total exports to East Germany.

Nor is the United States a leading source

of high-technology products among Western

sellers. In the case of the U. S. S. R., West

Germany is by far the largest single exporter

of high-technology products, followed by

Japan and France. In 1977 those three countries accounted for more than 62 percent of

total Soviet imports of such items from the

West. The U.S. share in high-technology

products in that year amounted to only 9.1

percent. Nearly a third of Western high-technology exports to the PRC originate in Japan. West Germany and France account for

another 29 percent, and the United States

ranked fifth in this category with a 6-percent

share.

Table 11 has also demonstrated that Eastern purchases of high technology from the

United States have, if anything, occurred at

a slightly lower rate than purchases from the

Table 11 .—Comparison of High-Technology Exports With Manufactured Goods and Total Exports—

15 Industrialized World (1. W.) Countries to the Communist Countries and to the World

(in millions of U.S. dollars)

1977 1976 1974 1972

High-tech. High-tech. High-tech. High-tech.

exports exports exports export

Destination as % of as 0

/0 of as % of as 0

/0 of

U.S.S.R. - ‘

-

High-technology I.W. exports. . . . . . . $ 2,003 – $ 1,627 – $ 1,036 – $ 582 —

Manufactured goods I.W. exports . . 9,537 21.0 9,169 17.7 5,546 18.7 2,430 24.0

Total I.W. exports. . . . . . . . . . . . . . . . . 11,412 17.6 11,653 14.0 6,250 16.6 3,317 17.5

Eastern Europe

High-technology I.W. exports. . . . . . . 1,741 — 1,525 — 1,223 — 619 —

Manufactured goods I.W. exports . . . 11,769 14.8 11,438 13.3 10,432 11.7 4,738 13.1

Total I.W. exports. . . . . . . . . . . . . . . . . 12,866 13.5 12,757 12.0 11,322 10.8 5,098 12.1

PRC

High-technology I.W. exports. . . . . . . 248 – 342 – 410 — 64 –

Manufactured goods I.W. exports . . . 2,986 8.3 3,094 11.1 3,166 13.1 1,090 5.9

Total I.W. exports. . . . . . . . . . . . . . . . . 3,585 6.9 3,423 10.0 4,369 9.5 1,445 4.4

Total all Communist countries

High-technology I.W. exports. . . . . . . 4,886 – 4,140 — 3,197 – 1,562 —

Manufactured goods I.W. exports . . . 29,991 16.3 27,955 14.8 23,714 13.5 10,266 15.2

Total I.W. exports. . . . . . . . . . . . . . . . . 34,263 14.3 32,808 12.6 27,261 11.7 12,234 12.8

World

High-technology I.W, exports. . . . . . . 71,576 — 64,366 – 49,314 — 29,092 —

Manufactured goods I.W. exports . . . 523,890 13.7 459,351 14.0 381,983 12.9 214,182 13.6

Total I.W. exports. . . . . . . . . . . . . . . . . 669,393 10.7 590,833 10.9 498,470 9.9 273,045 10.7

SOURCE Quantification of Western Exports of High Technology Products to Communist Countries, prepared by John Young, Industry and Trade Administration, Off Ice

of East-West Policy and Planning, U S Department of Commerce, Project No D-4I.
52 ● Technology and East-West Trade

industrialized world as a whole. In 1977, the

fraction of high-technology, as a percentage

of total Soviet imports from the United

States was 11.3 percent as opposed to 17.6

percent for the total industrialized world.

The comparable figures for Eastern Europe

were 10.6 percent for the United States versus 13.5 percent for the industrialized world.

Only in the PRC did America garner a higher

than world share of high-technology sales—

8.8 percent as opposed to 6.9 percent.

As is evident in table 12, Communist

world (including Yugoslavia and Cuba)

shares of total high-technology exports from

the United States are slightly higher than

overall world averages (14.3 versus 10.7 percent). Of the Eastern countries, the U.S.S.R.

purchased the highest proportion of high

technology (17.6 percent). In the cases of

both the U.S.S.R. and Eastern Europe, however, these shares have not risen notably

over the past 5 years, despite large increases

in the total volume of East-West trade.

Industrial Cooperation Agreements

The paucity of information available on

the value of coproduction agreements, licenses and patents, and turnkey ventures

can be seen from a brief survey of the best

existing data. In 1975, U.S. firms participated in 424 agreements. Nearly four-fifths

of these (79.3 percent) were in the manufacturing sector. Within this sector machine

building and chemicals predominated, each

with approximately one-fifth of total agreements. Electrical machinery and petroleum

processing industries were also important.

The U.S.S.R. and Poland signed the largest

number of agreements with U.S. firms.

Care must be taken in interpreting this information however. Although the U.S.S.R.

ranks third, after Hungary and Poland, in

the number of substantive arguments concluded, it has been estimated that the total

value of the Soviet agreements exceeds that

of all Eastern European cooperation agreements combined. ’” Thus, the number of

10Paul .Marer and Joseph C. Miller, “U.S. Participation in

East-West Industrial Cooperation Agreements, ” Journal of

International Business Studies, fall-winter 1977, p. 21.

Table 12.—U.S. High-Technology Exports to the

Communist Countries and to the World, 1977

Millions of High tech.

Exports to: dollars as % of

Bulgaria

High technology. . . . . . . .

Manufactured. . . . . . . . . .

Total exports . . . . . . . . . .

Czechoslovakia

High technology. . . . . . . .

Manufactured. . . . . . . . . .

Total exports . . . . . . . . . .

East Germany

High technology. . . . . . . .

Manufactured. . . . . . . . . .

Total exports . . . . . . . . . .

Hungary

High technology. . . . . . . .

Manufactured. . . . . . . . . .

Total exports . . . . . . . . . .

Poland

High technology. . . . . . . .

Manufactured. . . . . . . . . .

Total exports . . . . . . . . . .

Romania

High technology. . . . . . . .

Manufactured. . . . . . . . . .

Total exports . . . . . . . . . .

Total Eastern Europe

High technology. . . . . . . .

Manufactured. . . . . . . . . .

Total exports . . . . . . . . . .

U.S.S.R.

High technology. . . . . . . .

Manufactured. . . . . . . . . .

Total exports . . . . . . . . . .

$ 4.7

20.1

23.9

7.1

18.4

74.0

1.2

4.1

36.1

12.9

44.8

79.7

37.0

114.2

436.5

23.6

61.0

259.4

86.5

262.6

909.6

182.7

547.4

—1,623.5

Total Eastern Europe & U.S.S.R.

High technology. . . . . . . . 269.2

Manufactured. . . . . . . . . . 810.0

Total exports . . . . . . . . . . 2,533.1

.—. —

PRC

High technology. . . . . . . . 15.1

Manufactured. . . . . . . . . . 86.9

Total exports . . . . . . . . . . 171.3

—

23.4

19.7

—

38.5

9.6

—

29.1

3.3

—

28.7

16.2

—

32.4

8.5

38.6

9.1

32.9

9.5

—

33.4

11.3

—

33.2

10.6

—

17.4

8.8

SOURCE: Quantification of Western Exports of High Technology Products to

Communist Countries, prepared by John Young, Industry and Trade

Administration, Office of East-West Policy and Planning, U S Depart.

ment of Commerce, Project No D-41

agreements tells nothing of their magnitude

or technological significance. Unfortunately,

no comprehensive data exists to fill these

gaps. This is a reflection not simply of the

complexity of the deals, many of which involve other countries as well as U.S. foreign

subsidiaries, but also of the reluctance of

firms to divulge details of their transactions.

There is at present, therefore, no way of accurately estimating the amount earned by

U.S. firms in cooperation agreements.
Ch. Ill— The Economic Implications of East-West Trade and Technology Transfer 53

The little information that is available for

the United States is in data for the value of

license and patent sales collected by the Department of Commerce. Unfortunately, this

is presented in a form that makes interpretation difficult. Although for the past 3 years,

the General Accounting Office has suggested that the Department of Commerce

disaggregate this data, Commerce continues

to report only cumulative revenues from royalties, not payments collected annually.

Among Western countries, West Germany is the leading licenser to the East. It is

followed by the United Kingdom, the United

States, France, Japan, Italy, Sweden, Switzerland, the Netherlands, and Belgium. But

while certainly a common mode of technology transfer, licensing is by no means a

major money-earner for any nation. While

the number of transactions involving the

sale of licenses by Western firms is not accurately known, a 1976 estimate placed the

figure at less than 2,400. Again, this in itself

is deceptive. The U.S.S.R. has sold more licenses to the West than it has bought, but

the price paid for Western licenses has been

estimated by Licensintorg, the Soviet licensing agency, as an average of 10 times greater

than the price paid by Western firms for

Soviet licenses. It has been estimated that in

the mid-1970’s annual proceeds in the West

from Eastern license purchases were in the

order of $300 million. Much of this, however,

was paid for in the goods produced by the

license under countertrade agreements.

There is no official estimate of the share of

this revenue accruing to the United States—

in cash or in goods.

Moreover, although there are persistent

rumors about patent infringements by the

Soviet Union, no reliable estimates exist on

the magnitude of this problem. A recent

study by the National Research Council reported that “conversations with several experts on international patent law have led

the panel to believe that Western companies

tend not to take legal action even when they

believe their rights have been infringed upon

by the U.S.S.R. simply because ‘it is too

great a hassle. ’ 11

Conclusions

The only reliable information for measuring the value of U.S. technology sales to the

East is in data for high-technology product

exports. Even this must be treated with extreme caution since many subjective judgments are made in preparing quantitative

estimates. The information is valuable primarily for indicating changes in overall trade

volumes and for making crude estimates of

rates of change. The gross outcome of this

analysis suggests that U.S. trade in technology and technology-related products with

the East is relatively small (less than $300

million in 1977) and has been growing at

roughly the same rate as overall East-West

trade. The data does not clearly support the

thesis that the nonmarket nations have

made a concerted effort to extract technologies from the United States on a massive

scale to support economic or military interests. Nor can it be taken as a certain

rebuttal of the thesis. The Soviet Union and

Eastern Europe did import relatively more

technology as a fraction of total imports

than the world average, but the PRC imported considerably less. The differences

may be due primarily to relative degrees of

industrial development and deliberate Chinese policy which, as chapter XI demonstrates, is changing. Beyond this, it is safe to

conclude that sales of technology constitute

only a small fraction of U.S. trade with the

Communist world, trade which itself has

been very circumscribed. If, as is likely,

technology purchases from the West accelerate, U.S. policies designed to capture

larger market shares would be necessary for

American firms to benefit as much as would

firms in allied nations.

1 INationa] Academv of Sciences, “Review of U.S.-U.S.S.R.

Interacademy Exchange and Relations, ” National Research

Council, May 1977.
54 ● Technology and East-West Trade

THE IMPACT OF TRADE WITH AND TECHNOLOGY

SALES TO THE EAST ON THE U.S. ECONOMY

Any evaluation of the merits of expanding

U.S. trade as a whole or trade in technology

with the Communist world must take into

account the net effects of such trade on the

U.S. economy. Many attempts have been

made to approach this conceptually complex

question, but qualitative generalizations

have addressed themselves to relatively narrow segments of the issue. Satisfactory

quantitative assessments, except for single

sectors or commodities, simply do not exist.

The reasons for this paucity of analysis are

manifest. Technology is notoriously difficult

to measure empirically, either for particular

commodities or through macromodels of entire economies. At present, for instance,

there is no universally accepted model for assessment of aggregate technical change in

the U.S. economy. Furthermore, any satisfactory model of the macroeconomic effects

of technology transfer in the United States

would entail an accurate assessment of technology not only as a factor in U.S. growth,

but in the nonmarket and third-country

economies as well. This is not only beyond

current capabilities; it is unlikely that a sufficient data base for such an attempt will

ever be assembled. In light of this, assessment of the impact of East-West technology

transfer on the U.S. economy must be limited to narrowly defined generalizations.

In the United States, those with a stake in

commercial technology transfer to nonmarket economies may be divided into four categories: the vendors of U.S. technology; industries that must compete with Communist

exports both in the United States and in

third markets; purchasers of Eastern technology; and the U.S. consumer. Policymakers must aggregate and balance the interests

of all four.

TECHNOLOGY VENDORS:

U.S. CORPORATE STRATEGY

The primary motive for American firms’

sales of technology to the East is profit. Export income is generated by the sale of

“high-technology” commodities and knowhow, and also by the sale of associated plant,

equipment, and services. In addition, indirect results of the transfer transaction

may bear fruit in the medium or long term in

the form of future sales. Highway construction equipment, for example, may be purchased in the future as a result of the transfer of automotive manufacturing technology.

Gains to individual firms obviously increase the aggregate income of the United

States as a whole. Moreover, sales resulting

from growing demands for exports lead to increased employment, not only in research,

design, and engineering services directly associated with technology sales, but in associated industries which benefit from the derived demand. In addition, there is an important sense in which overall trade levels,

analyses of numbers of plants and licenses,

or of the revenues received from these sales,

may not provide a useful estimate of the full

role of technology sales to the East in international commerce. In most cases, technology transfers are only a part of complex

transactions which include barter, two-way

technology transfers, coproduction agreements, buy-back agreements, and other arrangements often involving third countries.

The participation of a U.S. firm in such relationships can become an integral part of its

corporate strategy and therefore assumes an

importance disproportionate to the dollar

value of the transactions.
Ch. Ill— The Economic Implications of East-West Trade and Technology Transfer . 55

Companies engaged in East-West trade,

therefore, often contend that its value to

U.S. corporations cannot be measured solely

by its present volume or profitability. The

continued ability to compete in the sale of

technology to the East is important to a variety of other corporate activities. OTA

sought to explore this argument by conducting interviews with high officials in 10

firms,12 all of which have clearly articulated

positions on the importance of trade with

Communist nations to their corporate strategy. No attempt was made to assemble a representative or statistically relevant sample,

and the following discussion should therefore be regarded merely as an attempt to

synthesize as a cohesive argument the views

of an identifiable segment of U.S. industry.

Interviewees by no means agreed on every

point, but the case presented here is faithful

to the opinions of many of those interested in

fostering trade with East.

U.S. firms seem rarely to enter Communist markets as part of a deliberate global

strategy. More often their initial involvement is the result of an isolated opportunity

which comes about either as the result of

other international activities, or of approaches by representatives from the East.

In some cases, however, the contacts developed in an initial venture result in the establishment of closer forms of cooperation with

the Eastern nation.

Control Data Corporation (CDC) provides

a good example of the way in which such an

opportunity can grow into a larger relationship. In 1968 it sold a CDC 1604 computer to

the Soviets. This model was being phased

out in the United States; nor did it represent

1 ZThe firms included an international chemicals company

and an international consumer industrial manufacturer (both

of which declined to be identified); Control Data Corporation;

Corning Glass Works, Inc; Hewlett-Parkard Corporation; International Harvester; Herman Corporation; Levi-Strauss;

Texas Instruments; and Satra Corporation.

a major technological innovation for the Soviets. The sale resulted in additional contacts which led CDC to evaluate the Soviet

market potential and eventually resulted in a

protocol agreement between the company

and the Soviet State Committee on Science

and Technology. CDC is now actively involved in marketing products and technology in the U.S.S.R.

Once an initial transaction is successful

and longer term contacts are established,

U.S. firms evaluate their involvement in the

East in the context of their worldwide activities, and begin to examine broader forms

of cooperation, e.g., coproduction agreements. This sequence of events is not unique

to dealings with the Communist world. Early

transactions generally have little or no impact on corporate strategy. Similarly, the

complexity of the issues associated with

closer cooperative relationships necessitates

a building of trust that may only be obtained

through extended personal or corporate contact. But as the involvement in the East increases, there is a tendency to consider these

markets as a concrete part of the new product planning and development process.

The development and introduction of new

products is a large, complex, and costly process. Because initial activities in the Communist world are usually based on exploitation of isolated opportunities, there is no indication that companies explicitly consider

these markets in their early new product decisions. This situation may now be changing,

and some large firms consider Eastern markets in the evaluation of worldwide market

potential for new products. This tendency is

particularly marked in companies with coproduction and joint venture agreements

with Eastern-bloc partners. Movement

towards explicit consideration of the Communist world market potential appears to be

less a reflection of corporate philosophy than
56 ● Technology and East-West Trade

of the broadened geographical perspective of

corporate decisionmakers.

Those executives who argue that EastWest transactions are part of new product

decisions also contend that increases in this

trade will stimulate the U.S. economy by increasing innovation, creating new jobs, and

improving productivity.

Other firms contend that, for the first

time, they are considering Eastern market

potential as part of the R&D justification on

new product technology because East-West

trade is now sufficiently institutionalized to

become part of the global marketing plan.

This may include ongoing discussions with

Eastern trading companies which involve cooperation in design, development, testing,

and production of new product models.

The past profitability of East-West transactions has been mixed. Some companies

openly admit that business with the Communist world has not been as profitable as was

originally expected. In fact, although no firm

would provide concrete examples, several

stated that in retrospect their expectations

had been unrealistic. Throughout history examples abound of companies’ continuing to

fail to realize profits in their dealings with

the Communist world. This is particularly

true of the Soviet Union, where it is almost

impossible to document cases of American

corporations’ showing direct profits. Despite

this disappointing record, many firms continue to believe that it simply takes time

before profits begin to accrue from trade

with the East. There are several reasons for

this:

●

●

It takes time to develop enough insight

into centrally planned economies, their

institutions, and people, to know what

business opportunities are possible and

where to look for them.

The authorization and security procedures within such countries are rigid

and complex. It may take many years

before a firm’s counterparts in the East

feel secure enough to propose meaningful deals.

● The difficulty in getting access to end

users and to research institutions

makes it difficult to collect the information often essential to transactions.

It may be that some companies are not

getting an adequate return because they are

not working hard at developing closer relationships in the East. Those most willing to

discuss complex joint ventures are the most

likely to identify meaningful areas for future

transactions. Moreover, some returns in

East-West trade do not involve direct profits, but rather may involve the acquisition of

design, engineering, and technical development capabilities of Eastern counterparts.

A firm may also benefit from the sale of

technology that is no longer competitive in

Western markets, but is appropriate to Eastern technical sophistication. This is a way of

partially recouping R&D costs, and is likely

to be a factor in industries with a particularly high rate of technical innovation (e.g.,

computers or integrated circuits).

At the same time, however, U.S. firms

have made very extensive investments in

the East. Anecdotes of negotiations that

have taken place over several years, costing

millions of dollars, abound. To these costs

must be added those of participation in activities viewed as necessary to the development of successful East-West ventures—

e.g., membership in trade councils or maintaining foreign offices. These expenses are of

sufficient magnitude to warrant continued

efforts, even in the absence of short-run profits. They represent a vested interest in the

health and continuity of East-West commercial relations.

Perhaps most importantly U.S. companies

fear that difficulties in dealing with the Communist world will have the long-run effect of

shutting them out of other markets. World

trade relationships have implications that go

far beyond the contact between two companies. Often transactions are initiated because they meet the needs of worldwide marketing strategies. For example, a U.S. company may enter into a coproduction agree-
Ch. Ill— The Economic Implications of East-West Trade and Technology Transfer ● 57

ment with an Eastern European counterpart

to produce products that are no longer costeffective within the United States, but which

can be sold in LDCs as part of the company’s

larger strategy.

As a company’s experience and expertise

in foreign commercial relations increase, it

begins to evaluate the role of these relations

in terms of global market needs. Any relationship with an individual country tends,

therefore, to be regarded as a potential lead

to new markets. In this area, involvement

with some Eastern European countries is

viewed as an entree elsewhere. Two quotations from OTA’s interviews with selected

businessmen indicate this:

We started negotiating with the Chinese in

their Embassy in Bucharest many years

before there were serious thoughts about

regularizing relations with the PRC.

We have been contacted by trade representatives from one of the Eastern European

countries regarding the possibility of joint

ventures to address the needs of LDCs, particularly Africa. We are actively following

up on these possibilities since they are a

logical extension of our total marketing interests.

Thus, both China and Eastern Europe are

looked towards for potential assistance in

dealing with third countries. Trade with

China is seen by some firms as an entree into

parts of the Far East. Similarly, Eastern

European ventures can become part of a

strategy to address markets throughout the

CMEA, in Western Europe, and in LDCs.

Because of these interrelationships, there

are fears that the diminution of East-West

trade will have effects beyond immediate

bilateral relationships, including isolation

from other markets. The problem is exacerbated by the prevalence of barter and countertrade in East-West transactions. This

form of trade is often new to American firms,

but once involved, the need to market the

items purchased in the transaction perforce

involves breaking into new markets.

In sum, it would appear that both direct

and indirect benefits accrue to those exportoriented industries that engage in technology transfer. Moreover, some of these benefits can be diffused throughout the economy, although it is usually impossible to

disaggregate the effects of technology transfers from other sales. However, there can be

negative effects stemming from such transfers, and policymakers must decide whether

individual firms can be depended on to prevent transactions in which long-run harmful

effects will make themselves felt in their own

industries. There is some evidence, for example, that U.S. firms are encountering increasing difficulties in adjusting to technical

change and are considering the marketing of

their technology as an alternative to aggressively engineering for competitive production in the high-wage U.S. economy. ’3

The nonmarket economies encourage this

trend through providing a market for technology no longer competitive in the West.

While such transactions may indeed improve

the cash flow of an individual firm, the longterm effects on an entire industry can be

devastating.

Further, the proliferation of industrial

technology in the Socialist economies may

be weakening the bargaining position of U.S.

firms as suppliers of technology to newly industrializing nations. At present, U.S. firms

reap the greatest return on technology

through sales to LDCs. Communist nations

are attempting to break into this market,

notably in order to procure raw materials.

When the long-term interests of a given industry are considered, the immediate shortterm gains resulting from the sale of industrial technology may be more than offset

both by the possibilities of future inability to

compete in Western markets, and by increased competition in technology sales in

third world markets.

13Jack Baranson, International Transfers of Industrz”al

Technology by U.S. Firms and Their Implications for the U.S.

Economy, U.S. Department of Labor, 1976, p. 35.
58 ● Technology and East-West Trade

IMPORT COMPETITIVE

INDUSTRIES

The negative effects of technology transfer rebound most acutely in the second major group interested in the process—those industries that compete with Communist exports both in domestic and foreign markets.

Owing to the centrally planned economies’

desire to increase their exports, their technology purchases are often in export oriented sectors. Indeed, compensation agreements by their very nature involve U.S. imports of the commodity produced as a result

of the technology transfer transaction; other

types of countertrade involve Eastern exports of unrelated goods which may also affect U.S. markets.

The negative effects of Communist imports as a whole are rare but relatively easy

to document. Victims of Eastern imports

may initiate import restraint petitions with

the ITC charging market disruption. Problems arise however in connecting specific exports of technology not only to export capability in the same sectors in the East, but

also in identifying sectors which may become problems in the future.

One clear example of a U.S. transfer of

technology to the East that resulted in a

direct and significant increase in imports occurred in 1976, when a U.S. firm signed a

$3.2 million contract with Hungary for the

sale of equipment, designs, and know-how to

manufacture women’s shoes. The direct result of this transaction was a fivefold increase in Hungarian shoe exports to the

United States between 1977 and 1978. In

1978, women’s footwear became the largest

single Hungarian export to the United

States, and the value of U.S. imports in that

year alone was nearly double the value of the

original contract. It is relatively unusual,

however, for cases of this kind to occur in the

consumer goods sector.

There are sectors of the economy that are

more vulnerable to the repercussions of technology transfer. Perhaps the most important

of these is the chemical industry. In April

1973, Occidental Petroleum Corporation

agreed to purchase from the U.S.S.R. 33.3

million metric tons of ammonia and 18.5 million metric tons of urea, most to be marketed

in the United States. The Soviets in return

agreed to make comparable purchases of

U.S. goods, including 18.5 million tons of

superphosphoric acid. The deal also involved

the construction of several ammonia plants

in the Togliatti area of the U. S. S. R., although the technology transfer involved in

these plant sales was handled largely by

another U.S. firm, Chemica.

In 1977, the U.S.S.R. exported no ammonia to the United States. As a result of this

single transaction, 1 year later the Soviet

Union became this country’s second largest

foreign supplier. Meanwhile, over the last 2

years the United States has experienced domestic plant closures and significant declines in ammonia prices. The U.S.-U.S.S.R.

contract has a life of 20 years and ITC has

already judged that it has led to serious

disruption in the domestic anhydrous ammonia market.

Other problems in the same industry have

arisen in Western Europe. After a crash program of expansion in the chemical industry

greatly aided by technology sales by Western European firms, CMEA production in

plastics, ammonia, fertilizers, urea, and soda

ash has more than doubled since 1970. Now

CMEA's growing self-sufficiency in chemicals has eroded one of the West European

chemical industry’s largest export markets.

In 1975, CMEA purchases from Western

firms amounted to over $2.5 billion; since

then they have declined to less than $2

billion. In addition to the loss of export

markets, CMEA producers have begun to

challenge West European firms in their own

markets for the sale of many petrochemicals

and plastics. In 1976, CMEA accounted for

20 percent of world production of basic

chemicals, compared with Western Europe’s

30 percent and 25 percent for the United

States. Forecasts predict that CMEA will

overtake the U.S. share bv 1986.
Ch. Ill— The Economic Implications of East-West Trade and Technology Transfer ● 59

The major West European chemical firms

are thus experiencing the results of a boom

in technology sales to CMEA for which they

negotiated countertrade deals and accepted

payment in kind. So long as this payment

was largely in the form of raw materials,

there was little problem in utilizing it profitably. CMEA payments in intermediate

chemical products were also welcomed. Some

firms, in fact, came to rely on CMEA for

quantities of bulk chemicals that they could

not themselves supply without expensive capacity additions. Now, however, not only are

compensation agreements becoming more

common, they are involving more sophisticated chemicals. Once these are sold to

user industries or placed in the spot market

in Rotterdam, the Western companies lose

control of the market. By now it may be impossible for chemical companies to stop this

flow. Most large European producers are

committed to long-term compensation arrangements, deals that proliferated because

of a depressed market for chemical plants in

the West.

Despite the growing menace to the West

European chemical industry, existing legal

mechanisms have not been able to deal with

the glut effectively. Chemical firms also find

it difficult to prove dumping under European Economic Community (EEC) procedures, where (as in the United States) relevant criteria are the exporter’s prices in the

home market or actual costs. CMEA prices

are administered and are therefore unusable

for price comparisons. Moreover, it usually

takes Western firms at least a year to assemble a case based on internal CMEA costs. By

this time the damage has already been done.

The case of chemicals illustrates the development of a novel export strategy in those

nonmarket States whose exports have been

largely composed of primary products. This

strategy is to increase the degree of fabrication of primary exports in order to gain hard

currency from the increased value added.

This is a particularly attractive option because the resulting semifabricate can also be

used in domestic industry, thus eliminating

the danger of excess supply in times of lagging world demand.

This strategy is now being used in the

PRC. In 1974, an American firm, SOHIO, licensed a process to the PRC for producing

acrylonitrile, a chemical used in acrylic

fibers: This process was to be used to produce 50,000 metric tons annually. Engineering and construction services were provided

by two Japanese firms. The synthetic fiber

produced in this scheme could be absorbed

by the domestic market in the PRC. It is

possible, however, that the Chinese may

choose to export and use this product as a

major foreign exchange earner. Already,

synthetic fabric from China is being sold to

Hong Kong and Macao where it is made into

clothing and then exported to the United

States under a favorable (MFN) tariff structure. While in the near future it is unlikely

that China’s production of synthetic fibers

will compete directly in the U.S. market

against domestic producers, the PRC is already breaking into U.S. export markets in

the Far East.

The market disruption caused by technology transfer in the chemical industry is

clear, as is the lesson it provides for the

United States. But this case may not be generalizable to other industries. The chemical

market is more open to CMEA assaults than

other sectors because purchase decisions on

chemical suppliers are made almost entirely

on the basis of price. Soviet ammonia, in

other words, is identical in quality to that

produced anywhere else. It is likely that

price elasticity of more sophisticated CMEA

manufacturers (i.e., automobiles, tractors,

etc. ) will depend more significantly on nonprice factors–quality, design, availability of

service—and aggressive marketing. For example, in spite of heavy infusions of Western

technology and highly competitive prices

abroad, Soviet exports of passenger automobiles constitute only 1.2 percent of Soviet

exports (in value terms) to the industrialized

West and have not significantly increased

their share of world markets in recent years.
60 ● Technology and East-West Trade

Photo credit: TASS from SOVFOTO

“Lada” cars, produced at the Italian-built Togliatti (Volga) plant. Similar cars are being exported to the West

Threats of disruption in American mar- aluminum, where capacity increases have ockets are therefore more likely to appear in curred as a direct result of infusions of

categories of semifabricates. Most U.S. Western technology to the U. S. S. R.: Finland

dumping actions against nonmarket com- has provided nickel-refining technology to

modities have, in fact, occurred in these the Soviet Union and a French consortium

areas. The threat of disruption is also great built a l-million-ton-per-year alumina plant

in the area of metals such as nickel and on the Black Sea. It is apparently as com-
Ch. Ill— The Economic Implications of East-West Trade and Technology Transfer ● 61

mon for West European and Japanese firms

as it is for their U.S. counterparts to sell

technology to nonmarket economies, conscious that in doing so they may ultimately

decrease the market share of their capitalist

competitors.

This is an important point, for only rarely

is U.S. industry the sole contributor of technology necessary to increase nonmarket export potential. In the ammonia case, for example, both Japanese and French firms contributed heavily in terms of equipment and

know-how to Soviet productive and delivery

capability, and the American supplier of the

technology did not possess unique or otherwise unobtainable technology. It is safe to

assume, therefore, that had limitations been

placed on U.S. sales of plant and technology,

the Soviets would have obtained them

elsewhere.

A U.S. Department of Labor study of the

effects of industrial technology transfer has

concluded that in most cases restrictions on

technology transactions made by U.S. firms

could not have eliminated the negative effects in terms of market disruption either in

the U.S. or third-country markets. U.S.

firms in most cases do not possess monopolies of the required technologies, and limiting

sales only deprives the economy of additional income. The long-term negative effects on sales and market shares will still

manifest themselves.

Obviously, this argument does not hold in

those areas where U.S. firms hold a monopoly in a given technology, at least for the

term of that monopoly. But there are very

few of these areas and it is possible that embargoes in these instances may accelerate

the development of the technology both in

the East and the West. It has been asserted

by Hungarian trade representatives, for instance, that when U.S. export controls denied them access to advanced computer-controlled machine tools, they were driven to

develop their own models. These now compete with U.S. products in other markets.

In sum, the threat of net losses in U.S.

development through technology transfer is

most significant in those sectors where market disruption is likely. In these cases, loss

in sales by U.S. firms in both domestic and

foreign markets may be greater than the

value of the transfer contract, and net loss in

income will translate into a loss of employment. Moreover, the cost of the resulting

loss of jobs in other sectors may be compounded by labor market adjustment, relocation, and retraining. In terms of the aggregate economy, however, these cases may be

partially offset by instances where the increased sales of technology and technologyintensive products result in a gain in employment in the selling industries.

IMPORTERS OF EASTER N

TECHNOLOG Y

By any standard, Eastern sales of technology to the West have been small. As of October 1977, for instance, the total value of all

license fees and royalties paid by the United

States to the U.S.S.R. was less than $14 million. It has been asserted that there is considerable potential for increasing the amount

of technology transfer from Eastern Europe

and the U.S.S.R.,14 but barriers to such expansion exist on both sides. In the Soviet

Union, and to a lesser extent in Eastern

Europe, inadequate organization of sales efforts and poor marketing inhibit the growth

of such trade; in the United States, the widespread perception that no technology of interest to American firms is to be found in the

East, and the resources required to learn and

evaluate the market may preclude U.S. firms

from taking advantage of such opportunities

as do exist. The continued dearth of Eastern

technology in the West thus becomes a selffulfilling prophecy.

Despite these handicaps, however, a few

U.S. firms have aggressively marketed products produced as a result of Eastern technologies. Notable instances from the U.S.S.R.

include excavation machines and surgical

stapling devices. Technologies in several

“See John Kiser, “Report on the Potential for Technology

Transfer from the Soviet Union to the U.S., ” prepared for the

U.S. Department of State, October 1977.

Ch. III— The Economic Implications of East- West Trade and Technology Transfer ● 63

It is unlikely that hitherto unsuspected

major technological breakthroughs will

come from access to Eastern technologies.

The real potential lies in the possibility of

marginal improvements in products and

processes. In some segments of mass-production industries these can be significant.

Furthermore, access to new products or

processes may be an entry to large bodies of

associated technical information. Soviet construction equipment for permafrost conditions, for example, has evolved from a volume of basic and applied research on arctic

conditions. This would be useful both in

Alaska and

tica.

The poor

selling their

in the development of Antarcshowing of Eastern nations in

technology abroad is related less

to the availability of-useful technology than

to systemic factors such as the lack of incentive to sell abroad, lack of personnel trained

in marketing, and bureaucratic structures

poorly suited to facilitating foreign sales.

Technological performance in the East, especially in the U. S. S. R., is erratic. Generalizations concerning poor performance may

often cloak formidable accomplishments in

priority sectors.

Thus, the potential for increased technology transfer from the East is heavily dependent on the ability of the Communist nations to organize themselves efficiently and

to make buying less difficult. On the other

side, U.S. firms must actively seek these

technologies. Systematic monitoring of technological developments of salable Soviet and

East European technology in the civilian

sector would greatly enhance the ability of

U.S. firms to identify opportunities. Without such an effort, purchases of Eastern

technology in magnitudes large enough to

affect the U.S. economy as a whole, or even

significant sectors of it, are unlikely.

THE CONSUME R

The effects of increased competition, even

that induced by sales of technology abroad,

are not always negative. Such competition

may result in increased initiative in product

design, manufacture, and marketing. It may

also be argued that, given protection against

predatory trade practices, inefficient producers should be eliminated if they cannot

compete. In this way consumers benefit, and

through them, the entire economy. Disposable income that was previously used to purchase more expensive consumer goods can

be used elsewhere. Factor costs are lowered,

raising profit ratios. These gains may be

slight but are well distributed throughout

the economy.

SUMMARY AND CONCLUSIONS

The volume of U.S. trade with the Communist world has been low, and the sale of

U.S. technology to the East has as yet made

little impact, either positive or negative, on

the U.S. economy as a whole. A number of

economic benefits have accrued to the

United States through technology transfer

to nonmarket economies. These are primarily in increased sales and employment in

those industrial sectors that conclude the

sales. In other sectors these benefits may be

outweighed by potential negative effects

such as decreasing market shares for U.S.

firms both at home and abroad. It is unlikely, however, that deregulation of technology

transfer can ameliorate these adverse economic effects except in a few cases where the

U.S. completely controls the relevant technology. Furthermore, given the present magnitude of East-West trade, any aggregate effects on the U.S. economy have been minimal. Should this trade grow significantly,

Eastern exports to the United States will

certainly increase. This may necessitate

balancing the negative impact of the exports

on individual industrial sectors with benefits

in other parts of the economy.
64 . Technology and East-West Trade

Western technologies, while no panacea

for Eastern economic problems, appear to

benefit the economy of the purchaser to a

much larger degree than that of the seller

(see chapters X and XI). Barriers to expanding this trade exist on both sides, but the importance of restraints on the U.S. side–

tariff and credit restrictions and export

controls—may be outweighed by the problem of Eastern export potential. Overall

volumes of East-West trade are unlikely to

expand significantly in the absence of improved manufacturing and marketing capabilities in the East, although demand for

Western technology in these and other areas

is unlikely to abate. U.S. policies on the extension of MFN and credits and export controls may affect the market share of American firms in the Western technology sold to

the East, but will have less long-run impact

on overall trade volumes than will improved

Eastern capacity to export.
CHAPTER IV

The Foreign Policy

Implications of East-West

Trade and Technology

Transfer
CONTENTS

PERSPECTIVE I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Thesis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Critique . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

PERSPECTIVE II. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Thesis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Critique . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

PERSPECTIVE III. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Thesis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Critique . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

EMIGRATION POLICY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

CHINA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

COMPARISON OF PERSPECTIVES . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

CASES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Oil and Gas Equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Computers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

67

67

68

68

68

69

71

71

72

75

78

78

80

80

81

82
CHAPTER IV

The Foreign Policy Implications of

East-West Trade and

Technology Transfer

One of the basic issues of technology transfer to the Soviet Union concerns

the opportunities for and utility of using trade to achieve political objectives of

U.S. foreign policy. Such efforts are distinct from controls on trade designed to

restrict the transfer of military-relevant equipment and technologies. The question of the political uses of trade has generated considerable controversy and at

least three major schools of thought. They divide according to whether they

view trade as, in fact, usable for achieving the political objectives of U.S. foreign

policy toward the Communist world and, if so, whether the strategy should be

one of using trade to build a constraining web of interdependence within an overall framework of “detente” or as leverage to obtain specific policy concessions in

the context of superpower conflict.

The following analysis sets forth the logical assumptions and policy implications of three different perspectives on the political utility of trade. These perspectives are not intended to reproduce the views of any particular individual.

Nor does the analysis seek to capture all the manifold detail and nuance of the

policy debate on this question. Finally, there is no effort to pass judgment concerning the relative merits of the different perspectives and the policy recommendations that flow from them. It is hoped, however, that an identification of

the major ways of viewing the question and the logical assumptions and implications of those perspectives will help clarify what has become a highly complex

and emotional debate.

PERSPECTIVE I

THESI S

The first perspective rests on a judgment

that, for good or ill, trade is not an effective

instrument to achieve political objectives.

This is the official view of the Soviet Union

and is held by a number of America’s allies,

who contend that history has shown that efforts to obtain political concessions from the

nonmarket economies through policies of

economic pressure or inducement will be unsuccessful. Consequently, countries like

Japan and France have largely decoupled

trading policy from other aspects of their

foreign policy toward the Communist countries. Each trade and credit transaction is

judged on its economic merits alone. What

distinguishes this perspective from the two

that follow is the belief that attempts to extract a political price for trade—however desirable the objective-will be ineffective and

counterproductive in practice. The logic and

implication of this approach is discussed in

considerable detail in the chapters reviewing

6 7
68 ● Technology and East-West Trade

European and Japanese trade policies (see

chapters VIII and IX).

CRITIQUE

In the most general terms, this perspective has the advantage of allowing economic

transactions to provide economic benefits

unfettered by extraneous requirements. The

vexing policy dilemmas that inevitably follow any attempt to attach political conditions to trade are thereby avoided.

On the other hand, any opportunities to

use trade to further other, noneconomic,

State interests are forgone. Moreover, there

is an important asymmetry in economic

transactions between pluralist and centralized economic systems. The former tends to

judge the merits of each transaction in macroeconomic terms, i.e., whether it is to the

advantage of the particular corporation(s) involved. The latter judges the same transaction in macroeconomic terms—its net benefit to the economic system (i.e., the State) as

a whole. A particular business deal may well

be to the net advantage of a specific American company, but to the net disadvantage

of the United States relative to the U.S.S.R.

Finally, for a nonsuperpower with relatively

circumscribed interests vis-a-vis the

U. S. S. R., any effort to use trade as a means

of altering Soviet policy may make little

sense. But for the United States, whose interests engage those of the U.S.S.R. along a

very wide front, trade controls may be one

instrument among many in an ongoing and

unavoidable effort to influence Soviet policy.

PERSPECTIVE II

THESIS

The second perspective rests on four propositions:

1.

2.

3.

4.

trade can and often does have political

consequences and utility;

a stable cooperative relationship between the United States and the

U.S.S.R. is achievable and the United

States has no real choice but to try to

build such a relationship:

trade tends to have a moderating effect

on international relationships due in

part to the interdependencies it fosters;

and

the Soviet need for Western imports of

technology provides one of the most effective means for inducing moderation

in Soviet policy.

These propositions tend to be associated,

in turn, with a series of assumptions and observations about the Soviet Union. First,

there are powerful forces tending toward a

lessening of the ideological fervor and revolutionary commitment of the regime. Among

them are the gradual emergence of a consumer economy; the transformation over time of

the ideology from revolutionary guide to

ritual incantation; the aging of the Soviet

leadership and Soviet society generally; the

status of the U.S.S.R. as a “have” nation

relative to most of the less developed countries of Afro-Asia; recognition of the dangers

of pursuing a radical foreign policy in the

nuclear era; the potential for a complementary economic relationship involving the exchange of Soviet raw materials for Western

capital and technology; and the existence of

several areas of common interest with the

West, including arms control and such areas

of common concern as the prevention of nuclear proliferation and the protection of the

global environment.

Second, the Soviet Union is viewed as

being in the early stages of a deepening

systemic crisis manifested initially by economic stagnation and a failure to close the

gap relative to the West in the civilian applications of science and technology. The

U.S.S.R. is burdened with a chronic shortage

of hard currency resulting from a seeming inability to develop a range of manufactured

products that are competitive on world markets–this despite the advantages of a rich
Ch. IV— The Foreign Policy Implications of East-West Trade and Technology Transfer 69

and varied resource base and a very large

pool of trained scientific and technical manpower. These shortcomings are rooted in the

inappropriateness of a rigidly authoritarian

political and social structure for a complex,

advanced industrial economy. The Soviet

system does not permit and foster the flows

of information, the innovation, the experimentation, and the general flexibility and

adaptability such an economy requires. As a

consequence, the Soviet economy has been

unable with its own resources to provide for

the broad modernization of Soviet life. The

problem is greatly exacerbated by the heavy

burden of military expenditures.

In this situation the Soviet regime has

three broad options: 1) maintain or even

tighten political-ideological controls in the

name of Marxist orthodoxy, but at the price

of economic inferiority vis-a-vis the West,

2) ease controls to stimulate economic

growth, but at the risk of changing the political character of the system, and 3) retain

controls, but try to escape the economic consequences by obtaining needed technological

and managerial innovations and know-how

from the West. A similar situation and set of

choices confront the Soviet-occupied nations

of Eastern Europe.

A third assumption posits the existence of

conflicting views within the Soviet leadership concerning whether to adopt a general

posture of negotiation or confrontation vis-avis the West. This division assumes particular importance given the imminent passing

of the aged Brezhnev leadership and the uncertainty concerning the identity and policies of his successor. In short, the near

future may witness a policy decision of historic dimensions by the Soviet Government

regarding its relations with the West.

Based on these propositions and assumptions, proponents of Perspective II have advocated a broad U.S. strategy for dealing

with the U.S.S.R.—an approach identified

with the term “detente.” The basic idea is to

take advantage of the Soviet need for Western technology and capital and of other opportunities for interchange (e.g., tourism,

cultural and scholarly exchanges, sports,

etc. ) to build what Henry Kissinger called “a

web of constructive relationships. ” This

should have a number of beneficial effects:

1. It should give Moscow a greater stake

in the existing world order and the attendant “disciplines of international

life” by integrating the Soviet economy

into the international economic system.

2. It should strengthen the Soviet consumer economy as a claimant on Soviet

resources and as a generally moderating

factor in national policymaking.

3. It should strengthen the hand of moderates in the Soviet leadership by demonstrating the opportunities for useful cooperation with the West.

4. It should provide increased opportunities for the penetration of Soviet society with Western products, culture, and

perspectives, i.e., the greater number of

peaceful interactions the U.S.S.R. has

with the non-Communist world, the

more likely that it will become responsive to Western canons of international

and domestic behavior.

5. It should, with time, make Soviet policies and behavior increasingly susceptible to foreign pressures.

For example, scientists who have participated in exchange programs with Soviet

counterparts argue that these contacts have

been effective in achieving a better integration of Soviet scientists with the world scientific community. This has made it much

more difficult for the Soviet Government to

repress individuals without attracting world

attention to the fact. It has allowed Westerners an opportunity to assist scientists officially denied the opportunity to receive literature in their fields or to communicate

with other scientists working in related

fields.

CRITIQUE

There is no agreed systematic formulation

of the detente perspective that can be used
70 . Technology and East-West Trade

to evaluate the concept. In large part the

viability of detente as a strategy will depend

on what is expected of it. It can be viewed as

a comprehensive framework for integrating

and managing the strategic, political, and

economic dimensions of relations between

the United States and the Soviet Union. Alternatively, it may simply be viewed as a

series of specific agreements between the superpowers designed to ease tensions and

build a network of mutually beneficial interactions, particularly in the economic area.

The criteria for evaluating detente and the

judgment reached concerning its viability as

a strategy will clearly vary according to the

definition used.

For the critics of detente, the key question

is to what extent detente has served to restrain Soviet actions. In the economic sphere

the value of U.S. exports to the U.S.S.R. rose

from $105.5 million in 1969 to $546.7 million

(1972), $1.2 billion (1974), $1.6 billion (1977),

and $2.2 billion (1978). Although trade is still

very low relative to the total Soviet economy

and compared to other industrial nations

(see chapters III and X), there has been a

clear growth in Soviet involvement in international commerce. As Helmut Sonnenfeldt

notes:

Trade with the outside world has long

been used to fill gaps that the Soviet economy itself could not fill. But the volume and

diversity of this trade have steadily increased in recent years; the methods have

evolved from barter or straight cash deals to

more complex commercial arrangements, including considerable reliance on foreign credits. These latter have now risen to some $40

billion for the Soviet bloc COMECON countries as a whole; Soviet hard-currency indebtedness is in the neighborhood of ten billion dollars. A substantial volume of economic activity in the U.S.S.R. and other

Eastern countries must now be devoted to

earning hard currency to finance imports

and to service mounting indebtedness.1

‘Marshall D. Shulman, Special Adviser to the Secretary of

State on Soviet Affairs, testimony before the Subcommittee

on Europe and the Middle East of the Committee on International Relations, House of Representatives, Sept. 26, 1978.

Committee print, p. 164.

Other forms of interaction, e.g., scholarly exchanges and tourism, have shown a similar

pattern of growth. However, the political implications of these trends are uncertain. It is

difficult to demonstrate that Soviet international behavior in the 1969-79 decade has

been significantly more considerate of Western interests than it was in the preceding

decades. The same is true of the hypothesis

concerning the moderating effect of international transactions on domestic Soviet policies. In the short term, the characteristic reaction of the Soviet internal security apparatus is to tighten controls during periods

of international relaxation.

The most explicit agreement between the

two superpowers concerning the political

content of detente was embodied in the declarations of basic principles signed at the

1972 Moscow summit conference and the

1975 Helsinki Conference on Security and

Cooperation in Europe. The intent was to

develop a broad code of conductor “rules of

the game” to which the United States and

U.S.S.R. agree to adhere in their interactions. Such codes are designed to impose restraints on the scope of acceptable behavior

and thereby manage the competitive aspects

of U.S.-Soviet relations. From the U.S.

perspective, however, there are serious

grounds for questioning whether subsequent

Soviet policy, notably concerning Africa and

the human rights of political dissidents

within the U. S. S. R., has been faithful to

these agreements. Other events to which

critics point as evidence of the failure of

detente to exert restraint on Moscow include

Soviet aid to Arab forces during the Yom

Kippur War, Soviet approval of North Vietnam’s disregard of the Paris Accord, Soviet

support for the Portuguese Communist Party’s attempted putsch, and most importantly, the dramatic buildup of Soviet military

capabilities.

Not surprisingly, Soviet spokesmen have

taken pains to disabuse proponents of Perspective II of their belief that the U.S.S.R.

can, in effect, be co-opted through trade or

other economic arrangements. For example,
Ch. IV— The Foreign Policy Implications of East-West Trade and Technology Transfer ● 71

D. Gvishiani, a Deputy Chairman of the Soviet State Committee of Science and Technology, has objected strongly to the proposition that joint production arrangements are

a way to overcome political or ideological differences:

We have different socio-economic systems

and different ideologies—that is an existing

reality to be reckoned with. Ideological differences between us exist and will continue

to exist and we should not count on eliminating them by way of developing industrial

cooperation or by some other way. z

In addition to ambiguities concerning the

scope of detente and doubts concerning the

lessons of history, it is not always clear how

detente relates to efforts to exert pressure on

Moscow. There is a theoretical tension be-

*D. Gvishiani, statement at 8th “Dartmouth Conference”

held in Tbilisi, Republic of Georgia, 1974. Cited in National

Academy of Sciences, Reuieu’ of the U. S./U.S.S.R., Agreement on Cooperation in the Fields of Science and Technology,

1977, p. 34.

tween the notion of building a web of cooperative interaction and using those same

transactions to coerce Soviet policy. This is

particularly true if pressure is exerted before

such transactions have become well-established. Thus, the opportunities for using detente to leverage Soviet policy will tend to be

greater after the relationship has matured

when, paradoxically, such pressures may become unnecessary.

Finally, criticism of detente focuses on the

role of science and technology in U.S.-Soviet

relations. Proponents of detente argue that

these are the most promising areas and instruments for achieving cooperative solutions to common problems. Critics contend

that the Soviet leadership views science and

technology as the key determinants of national power in the modern era and hence a

decisive arena of competition between East

and West. By facilitating the transfer of

scientific and technological knowledge to the

U. S. S. R., detente plays into the hands of

Soviet global ambitions.

PERSPECTIVE III

THESIS

The third major school of thought accepts

the basic proposition that transfers of technology can have political consequences, but

is profoundly skeptical about the linkage between simple economic interaction and policy moderation. It argues that the Soviet

Union’s behavior has not visibly moderated

since it began to import Western technology

on a substantial scale and that history is full

of examples of wars and confrontations between major trading partners. Proponents of

this view contend that the Soviet-U.S. relationship is, and will remain indefinitely, one

of conflict. The Soviet Union needs imports

of technology to compensate for the rigidities, low productivity, and lack of innovation

in its economy, and, consequently, Western

transfers of technology may have the net effect of strengthening an adversary. This is

particularly true if such imports are financed

by credits at low rates; they then amount to

a kind of foreign aid. Such assistance to the

Soviets is only justified if we receive something in return in the form of more congenial

Soviet policies.

Any real hope for a long-term easing of the

confrontation between the U.S.S.R. and the

West will require basic changes in the policies of the Soviet Government—changes

that will not come voluntarily and can be induced only by outside pressure. Moscow’s

need for Western technology and the credits

to pay for it offer one of the best, if not the

best, instruments available to exert such

pressure. For example, Senator Stevenson,
72 ● Technology and East-West Trade

in arguing for amendments to the ExportImport Bank Act of 1974 that would significantly curtail the extension of U.S. official

credits and guarantees to the Soviet Union

(see chapter VII), contended that:

Credits and the withholding of credits can

at times serve useful political purposes . . . .

The $300 million limitation of credits to the

Soviet Union for the next year will permit a

tighter rein on Eximbank activities. Major

project review by the Congress, whether it

involves loans, guarantees, or insurance,

would force a more careful assessment of the

overall implications of Exim credit assistance and provide the Congress with a tool for

exercising appropriate influence. The evolution of detente, peace in the Middle East,

SALT, and human rights in the Soviet

Union will all influence future Congressional

decisions as to whether a particular large

project should be financed or the availability

of credits continued.3

Adherents of Perspective III agree with

the proponents of Perspective II that the

U.S.S.R. faces a deep-seated economic and

political dilemma, but they are far less

sanguine that the forces and trends shaping

the Soviet system are pressing toward a

moderation of Soviet policies. They see the

regime as determined to avoid such an outcome and as using the importation of Western technology and capital as a key element

in that effort. Perspective III agrees with

Perspective II that divisions almost certainly exist within the senior Soviet leadership

concerning policy toward the West and that

it is in the interest of the West to strengthen

the hand of those in the leadership that favor

a more moderate, cooperative posture.

Where Perspectives II and III diverge is on

the best tactics for achieving such an outcome. Proponents of detente Perspective II

argue that the overt use of trade pressures to

alter unfavorable Soviet policies will tend to

strengthen the hand of the Soviet hardliners

whereas proponents of Perspective III main-

— .

‘Helmut Sonnenfeldt. “Russia, America, and Detente, ’

Foreign Affairs, vol. 56, No. 2, January 1978, p. 286.

tain that Soviet hardliners are strengthened

whenever the United States fails to vigorously defend its interests.

There is a variant of Perspective III that

carries the assumption of the adversary nature of U.S.-Soviet relations to its logical

conclusion. It is argued that if the Soviet

Union is considered to be a direct and relatively immediate threat to Western security,

the United States and its allies should respond with an embargo on all trade and capital flows that could strengthen Soviet capabilities. The objective here is not to leverage

Soviet policy, but to limit Soviet power.

Thus the U.S. embargo against Nazi Germany was not intended to modify Hitler’s policies, but to deny that regime needed resources. To be effective such a strategy

would require close cooperation among the

major Western exporters to the U.S.S.R.

Consequently, the feasibility of this approach hinges on calculations concerning the

possibility of a hardening of attitudes

toward the U.S.S.R.—born of disillusionment with detente—among the Coordinating

Committee for Multilateral Export Controls

(CoCom) governments. At the present time

such a shift is not evident. Consequently, the

predominant tendency with Perspective III

is to look to trade as a lever on Soviet policy.

CRITIQUE

There are very few high-technology products that the Soviet Union wants to import

in which the United States has an effective

monopoly by virtue of the fact that the

U.S.S.R. has no adequate alternative suppliers. It is generally agreed that the major

plausible exceptions are computers and certain types of advanced oil- and gas-drilling

equipment (see below). Wheat may also be in

this category, but as a primary product export, it falls outside the purview of this report. When the United States does not enjoy

a monopoly, leverage is feasible only if a

coordinated approach can be negotiated

among all the major suppliers. At present,
—

Ch. IV— The Foreign Policy Implications of East-West Trade and Technology Transfer ● 73

the other major exporters of technology to

the East (West Germany, Great Britain,

France and Japan) are generally opposed to

the use of trade to achieve political leverage

(see chapter IX), although a change in domestic political alignments might change

that situation. Even with stronger coordinated actions, controls over trade in technologies tend to be effective for a relatively

short period due to the emergence of alternate suppliers or the domestic development

of the controlled technology in the embargoed State. The latter point is particularly

applicable in the case of a large, advanced,

and diversified economy like that of the

U.S.S.R.

There can be no doubt that the Soviet

Union’s need for certain imported technologies is considerable and that the priority

assigned to those imports is high. They are

required to overcome serious bottlenecks in

an economy that is showing unmistakable

signs of stagnation. In all probability the

need for technology imports from the West

will increase over the foreseeable future.

Nevertheless, it remains true that the

U.S.S.R. can probably develop and produce

domestically any technology that it wants

badly enough and cannot obtain from

abroad, although the opportunity costs for

other sectors of the economy may be considerable as the required resources are

diverted and committed. The consequences

of forgoing imports are likely to appear most

directly in the civilian economy, since it can

be assumed that a concentrated effort has

been made to avoid reliance on imported

technologies in the military sector.

While the consequences of affecting the

civilian Soviet economy are difficult to

assess, there is little evidence that the

regime need fear domestic political unrest as

a consequence of such costs. The drive for

economic advance probably comes less from

a need to respond to public desires for increased living standards than from the regime’s own ambition to match the economic

and technological achievements of the West.

Consequently, under present circumstances

it is unlikely that the importation of any particular technology will be viewed as sufficiently critical to justify altering policies

that derive from the Soviet Union’s basic objectives concerning national security, international influence, and preservation of the

domestic political system and the dominant

role of the Party. An important caveat may

be necessary with regard to Eastern Europe.

Events in recent years suggest strongly that

domestic economic conditions can give rise

to serious political unrest in at least some of

the Eastern European countries.

The calculation of the cost of acquiescing

to U.S. trade pressures is presumably affected, perhaps decisively, by the manner in

which leverage is exerted. Critics of attempts to compel changes in Soviet policy

by use of legislative sanctions argue that

such public ultimatums inevitably raise the

price of compliance to prohibitive levels by

making national pride the overriding issue.

They contend that quiet diplomacy outside

the public spotlight is more likely to achieve

results. A related argument questions

whether it is advisable or even legitimate for

the United States to demand changes in Soviet domestic policies—those being within

the sovereign jurisdiction of the Soviet

State.

Defenders of the legislative approach respond that proponents of quiet diplomacy

have had ample opportunity to test that approach without notable success. As for domestic jurisdiction, it is contended that international practice has clearly established

that such matters as human rights and emigration are the proper concern of the international community. Moreover, a long-term cooperative relationship between East and

West will become possible only if some of the

more totalitarian characteristics of the Soviet regime are substantially modified. Thus,

Soviet domestic policy becomes an appropriate litmus test of the regime’s intentions in

its relations with the West.

To date, efforts to use technology transfer

for political leverage on the U.S.S.R. have
74 ● Technology and East-West Trade

focused on the issue of the right of Soviet

Jews to emigrate and to a lesser extent on

the treatment of political dissidents in the

U.S.S.R. and on Soviet activities in Africa,

particularly the use of Cuban troops in that

continent’s conflicts. It is extremely difficult

to rank order the policy priorities of the

Soviet Union or any other State. Nevertheless, it seems clear that at least in the two instances of Soviet policy regarding domestic

political dissent and foreign policy toward

Africa, the cost of acquiescing to U.S. pressure would be high from a Soviet perspective. At stake in Africa is Moscow’s claim to

the rank of a great power with global interests on a par with the United States. It is

most unlikely that any imported technology

would be of such value to the Soviet Union

that it would, in effect, back away from its

claim to global great power status to obtain

it. The same is true for the handling of political dissidence where what is ultimately at

stake is the basic authoritarian structure

and ideological identity of the political system. It would take powerful pressures indeed to induce the Soviet leadership to

undertake so profound a change—one that

would in a real sense constitute a political

revolution. This is not to say that no effective pressure can be brought to bear by the

West in support of such objectives. It is to

suggest that to accomplish the desired

results, trade leverage would almost certainly have to be supplemented by other pressures and inducements in a coordinated

allied strategy. Emigration policy, while also

of considerable importance to the Soviet regime, probably ranks somewhat lower on the

scale of priorities and is, therefore, presumably more susceptible to Western pressure.

Whether enough leverage can be exerted

through the trade sector to significantly

alter emigration policies is a question that

4A distinction must be made between “dissidence,” and

“dissidents.” Whereas the prerogative to suppress dissidence

as a political phenomenon is a vital interest to the Soviet

Government, that same Government has shown some flexibility in its handling of individual dissidents, including allowing or compelling a number of the most prominent to emigrate.

has been put to an empirical test by the

Jackson-Vanik amendment discussed below.

It is important to note that attempts to

exercise leverage, even when successful, can

have unanticipated and sometimes costly

side effects. Marshall Shulman, Special Advisory to the Secretary of State on Soviet Affairs, has contended in congressional testimony that U.S. pressure on the U.S.S.R.

concerning human rights, to which the administration is deeply committed, may adversely affect the prospect of achieving

agreement with the Soviet Union in other

areas:

It is true . . . that when we make an issue

of human rights, and particularly, we speak

of individual dissidents, who are being arrested, harassed, or tried, that is a factor of

[sic] the political deterioration of the relationship, it affects other aspects, and perhaps it affects the degree of cooperation we

can achieve in other matters.5

Another adverse side effect of imposing political conditions on trade may be to damage

the competitive position of American exporters in world markets by jeopardizing the reputation of the United States as a reliable

supplier.

Even if leverage is exerted successfully,

the Soviet Government may vow “never

again, and make extraordinary efforts to

avoid any subsequent need for Western technology, thereby diminishing the prospects

for successful leverage in the future. If the

attempt to exert leverage fails, Soviet policy

will not be adjusted to U.S. requirements

and, consequently, the technology will not

be transferred. In this event, the Soviets

may again take steps to minimize future dependence while the United States incurs economic and possibly political costs from the

embargo. Soviet officials have tried to give

credibility to this argument by vigorously

contesting the morality and utility of Western efforts to use trade as a lever on Soviet

policy.

5Adlai E. Stevenson III, “Views on Eximbank Credits to

the U. S. S.R., ” in U.S. Financing of East-West Trade, ed. by

Paul Marer, International Development Research Center, Indiana University, Bloomington, Ind., 1975, pp. 253-4.
Ch IV— The Foreign Policy Implications of East-West Trade and Technology Transfer ● 75

The most visible recent attempt to utilize

a leverage strategy is the Jackson-Vanik

amendment to the Trade Act of 1974 (Public

Law 93-618), which explicitly links U.S. tariff policies and export credits to the willingness of other nations to allow free emigration

of those desiring to leave. An unstated target of the amendment is Jewish emigration

from the Soviet Union. The Jackson-Vanik

amendment must be differentiated in one

crucial respect from the use of technology

exports for leverage as described above. The

amendment is sweeping in its scope; by focusing on Export-Import Bank credits and

most-favored nation (MFN) status it puts at

risk the entire spectrum of trade between the

Soviet bloc and the United States, not just

the export of a particular technology or family of technologies. Consequently, the amendment represents a more forceful instrument

than the manipulation of technology exports

alone.

EMIGRATION POLICY

The question of the advisability of focusing leverage on Soviet emigration policy as

opposed to other Soviet policy targets has

been much discussed. In support of the former choice, the following arguments can be

made:

1. For the Soviet Government emigration

policy is important, but not so important as to render it immune to external

pressures.

Z. It is a relatively discrete policy, subject

to monitoring by outside observers.

3. Emigration is not an academic question; it involves real costs to the

U.S.S.R. in terms of the loss of valuable

human resources and in terms of political symbolism as significant numbers of

persons overtly and successfully reject

the Soviet system.

4. Conversely, the decision by many of the

emigres to come to the United States

provides this country with a steady infusion of talent.

5. Support for freedom of emigration is a

tangible manifestation of U.S. concern

for human rights.

The two principal contrary arguments are:

1. Emigration is a domestic policy and

therefore an inappropriate target for

leverage.

Z. Soviet foreign policy would be a more

appropriate target both under international law and in terms of the potential

benefits to the U.S. national interest.

In attempting to assess the impact of this

legislation it must be remembered that U.S.

attitudes are not the only factors influencing

Soviet emigration policy. Additional considerations include the reaction of other nonRussian ethnic minority groups in the

U. S. S. R., the advantage to Moscow in some

instances of permitting or even compelling

particularly troublesome individuals to

leave, the strenuous objections of the Soviet

Union’s Arab allies to the continued flow of

Soviet Jews to Israel, and the costs in terms

of political symbolism and the loss of human

resources noted above.

The first year of significant Jewish emigration from the U.S.S.R. was 1965, when

1,500 were granted exit permits. The number

rose dramatically in 1971 to more than

14,000, and again in 1972 (31,500) and 1972

(almost 35,000). The number fell sharply to

20,700 in 1974 and to 13,300 in 1975. The

Jackson-Vanik and Stevenson amendments

became law in December 1974. Through

1976 and 1977 the outflow remained at low

levels (14,300 and 16,700 respectively) before

beginning a marked upturn in 1978 to nearly

30,000 with a projected increase to perhaps

50,000 this year (1979)–the highest total

ever.

These numbers have been interpreted in a

variety of ways. How they are interpreted

speaks directly to the utility of JacksonVanik and by implication, the utility of leverage more generally. Two principal schools
76 ● Technology and East-West Trade

of thought can be identified. The first begins

with the proposition that fluctuations in the

number of emigrants reflect in large part

deliberate Government policy, i.e., the Soviet regime can and does turn the emigration

spigot on and off to serve its own domestic

and foreign policy objectives. Instruments

available for this purpose include:

1.

2.

3.

4.

interfering with the delivery by Soviet

mail of the formal “invitations” from

Israel to potential emigres;6

making the application process prolonged and difficult,

intimidating potential applicants with

harsh reprisals; and

manipulating, as necessary, the rejection rate of applications.

From this perspective the rise in emigration in the early 1970’s can be attributed to

Moscow’s desire to forestall Jackson-Vanik

by adopting a relatively liberal policy on

emigration. However, the actual passage of

the amendment then put the Soviet Government under public pressure, which it defied

by sharply reducing the number of exit permits. The recent upturn is seen as an effort

to breathe new life into detente, and perhaps

more specifically to win Senate approval of

the SALT II agreement and forestall a further warming of U.S.-China relations.

Even among those who agree on this basic

interpretation of recent events, the question

is still open as to the impact of the amendment. Some argue that the amendment (both

as a threat and then as an accomplished fact)

had the net effect of forcing Moscow to permit more emigration than it would have

otherwise tolerated—although the impact

was delayed. Others contend that the

amendment served a useful purpose as long

as it was only a threat, but that its actual

passage was counterproductive as indicated

by the sharp fall in emigration following its

enactment into law. Still others feel that it is

as yet too early to reach a conclusion about

the consequences of the legislation. Jewish

‘Soviet law requires that any Soviet citizen desiring to emigrate must receive a written invitation from relatives in

another country.

groups and Soviet specialists in this country

are divided on the issue, but Jewish activists

in the Soviet Union apparently favor the

first interpretation.7

An alternative school of thought accepts

the proposition that the sudden increases in

emigration in 1965 and 1971 were a consequence of a liberalization of Soviet Government policy—due in part to the perception

that such an action would facilitate U.S. support of detente. Since 1971, however, fluctuations in the level of emigration are attributed not to Soviet policy but to attitudes

within the Soviet Jewish community concerning the desirability of emigrating.8 That

is, the number of actual emigres monthly

and annually correlates closely with the

number of applications submitted for exit

visas. In support of this argument are the

following contentions based on limited (and

unconfirmed) informal surveys done within

the Soviet Jewish community:

●

●

●

Although the Government could in

theory regulate the number of invitations delivered to Soviet citizens from

Israel, it has not done so. Inquiries

within the Soviet Jewish community indicate that all invitations that are requested are eventually received.

A comparison of the number of invitations sent and the number of persons

actually emigrating is not meaningful

because: 1) it is common for an individual to solicit and receive more than one

invitation and 2) many of those who

solicit and receive invitations choose to

defer or forgo application for an actual

exit permit.

The percentage of applications for emigration permits that are denied has re-

‘Some supporters of the amendment feel that a larger principle is at stake: human rights (of which the treatment of

Soviet Jews is a major example). Proponents argue that U.S.

policy should insist that the principle remain central to the

overall U.S.-U.S.S.R. relationship, and the importance of doing so transcends the question of the utility of economic leverage, i.e., the principle embodied in Jackson-Vanik should be

upheld even at the risk of a counterproductive effect in terms

of the amount of actual emigration.

“See Igor Birman, “Jewish Emigration from the U. S. S.R., ”

unpublished manuscript.
Ch. IV— The Foreign Policy Implications of East-West Trade and Technology Transfer ● 77

●

●

mained relatively low (probably less

than 5 percent) and stable throughout

the period.

There is no evidence to attribute the

1974-75 decline in emigration to any effort by the Government to make the

process of emigration more burdensome. In fact, after the Helsinki accords, the fee required for emigration

was reduced and the procedures involved became increasingly routine

making entry into the process psychologically easier for a potential emigrant.

Although emigration to Israel fell off

sharply from 1974 through 1977, this

was not true of Soviet Jewish emigration to the United States, which increased throughout the period. Several

possible explanations are suggested.

The 1973 Middle East war indicated

that Israel could be a dangerous place

to live. Also, it became increasingly

clear that the capacity of Israel’s economy to absorb intellectual and professional emigres was quite limited. Emigration to the United States grew only

slowly from 1971 because it constituted

a leap into the comparative unknown

and because many of the first emigrants

reported difficulty in finding employment during the recession of the early

1970’s. However, the number began to

grow as conditions in the United States

became better known— particularly the

fact that there was a demand for doctors, scientists, and other professionals—and as a core emigre community

became established that could assist

new arrivals.

As far as the Jackson-Vanik amendment

is concerned, the implication of this line of

argument is that the legislation has had no

significant impact on the level—up or

down—of Soviet Jewish emigration.

There is a cautious middle position between the two extremes of asserting that

fluctuations in Jewish emigration are due

either entirely or not at all to Soviet Government manipulation. It is based on the proposition that a variety of factors probably affect the level of emigration, including both

Soviet Government actions and attitudes

within the Jewish community. If this is correct, the observed fluctuations in Soviet emigration cannot be used to support or rebut

arguments concerning the utility of the

Jackson-Vanik amendment.

At this time it is not possible to reach any

definitive conclusion as to which of the perspectives on Jackson-Vanik is more accurate. A key to doing so would be to obtain official data concerning the number of applicants for exit visas to enable comparison

with the number of exit permits actually

granted. The latter number is known but the

former is kept classified by the Soviet Government.

The State Department seems to be of two

minds on the question of whether or not the

fluctuations in the level of emigration reflect

a deliberate policy on the part of the

U.S.S.R. Mr. Shulman has noted, however,

that most of the recent increase seems to

have come from new applicants.

It is noteworthy that two Communist governments, Romania and Hungary, have successfully appealed for annual waivers of the

ban on MFN and Government credits under

the 1974 Trade Act. Both have assured the

United States that their citizens are being

accorded the right to emigrate and both have

had their performance in this regard judged

adequate by the administration and Congress. Whether either case has implications

for U.S.-Soviet relations on this issue is

speculative.
78 ● Technology and East- West Trade

CHINA

Although policy questions regarding technology transfer have focused overwhelmingly on sales to the U. S. S. R., during the

1950’s and 1960’s similar issues arose in the

context of U.S. and allied relations with

China. Like the U. S. S. R., the PRC was

viewed as an adversary State that posed a

serious threat to U.S. security interests.

Consequently, a U.S. trade embargo was imposed against the Mainland regime. With

the end of the Vietnam War and the Nixon

Administration’s opening to China, official

perceptions changed. China was viewed less

as a threat and more as a potential weight in

the balance of power against the U.S.S.R.

Perspectives on technology transfer to

China hinge heavily on which view of China

is adopted. If Beijing is seen essentially as

an adversary, then the issues surrounding

sales of technology are similar to those involving transfers to the U.S.S.R.—although

the specific technologies involved and the

volume of transactions will differ significantly. Proponents of Perspective I on trade leverage have no difficulty applying it to China.

Perspective II also has its China analogue,

but whereas restrictions on transfers to the

Soviet Union are usually advocated as a way

to exert leverage on Soviet policy, controls

on transfers to China would more likely be

justified as forestalling the growth of Chinese power. The major potential exception

might be an effort to influence Beijing’s policy toward Taiwan. Perspective III would be

rationalized and applied much as in the case

of the Soviet Union, but with a different

technological content because of China’s

much lower level of economic and technological development. If Beijing is viewed as

more of a threat to the U.S.S.R. than the

West, then questions of technology transfer

to China are posed largely in terms of their

implications for U.S.-Soviet relations. Three

broad policy options emerge in this circumstance:

1.

2.

3.

Technology can be sold to China in an

essentially uncontrolled manner with a

view to strengthening Beijing vis-a-vis

Moscow. Such a policy will almost inevitably antagonize the Soviets.

Sales to China can be controlled and

regulated with a view to either pressuring or reassuring the U.S.S.R. Whether

or not this approach successfully influences Moscow, it will have the effect of

making U.S. policy regarding exports

to China a hostage to U.S.-Soviet relations. Beijing is unlikely to view such

an arrangement with enthusiasm.

U.S. trade policy can be made identical

toward the two Communist powers. The

advantage of apparent impartiality will

be purchased at the price of forswearing

any effort to use trade as an instrument

for exploiting the Sine-Soviet rivalry to

American advantage. Also, it is not

clear that such an approach will be truly

evenhanded because the same U.S. policy may have quite different consequences for Moscow and Beijing. On

the other hand, any effort to manipulate

the Sine-Soviet rivalry would be a hazardous and delicate enterprise and there

is serious question whether trade control is a sufficiently refined instrument

or whether the information needed to

use it effectively is available.

COMPARISON OF PERSPECTIVES

In the debate over U.S. trade policy

toward the East, proponents of Perspectives

II and III share the belief that trade can

be used to achieve desirable changes in

Soviet domestic and foreign policy. They differ as to the most effective tactics for achieving the agreed end. They also tend to differ

in their assumptions concerning the nature
Ch. IV— The Foreign Policy Implications of East-West Trade and Technology Transfer 79

of the Soviet Union and U.S.-Soviet relations.

In terms of assumptions, proponents of

Perspectives II and III see the basic character of U.S.-Soviet relations in somewhat different terms. Proponents of Perspective II

tend to emphasize the areas of common interest and the potential for a stable cooperative relationship. Adherents of Perspective

III are more impressed with the ingrained

conflict between the two superpowers rooted

in sharp differences in ideology, social and

political systems, and foreign policy objectives and interests. A closely related assumption concerns the ease and extent to

which the Soviet regime modifies its perceptions and policies in response to the actions

of other countries. Perspective II tends to

view the Soviets as capable of substantially

moderating their approach to international

relations if the actions of others, notably the

United States, consistently suggest that it is

in the Soviet Union’s interest to do so. Perspective III is based on a more mechanistic

model of Soviet policymaking. Seeing it as

responsive to internal imperatives and largely unaffected by U.S. actions except to the

extent those actions bring power to bear sufficient to compel Soviet policy to take them

tactically into account. An analogous assumption relates to the conditions of longterm coexistence between the two countries.

Perspective II sees detente becoming the

basis for a long-term stable relationship as

the Soviet system evolves in a moderate direction, i.e., the Soviet system is seen as dynamic and malleable over time. Proponents

of Perspective III disagree and see the only

real hope for coexistence in either of two

strategies:

1. confronting the U.S.S.R. with durable

countervailing power structures that

force long-term restraint on Soviet policy or

2. depriving the U.S.S.R. of the economic

benefits of detente in the hope of forcing the emerging Soviet economic crisis

to a point of systemic transformation.

Although not necessarily following logically from the two perspectives, there tend

to be contrasting judgments concerning the

potential value to the U.S. economy of trade

with the U.S.S.R. and Eastern Europe. Perspective II places a comparatively high value on such trade, citing the chronically

adverse U.S. balance of payments, concern

about a new recession, and the sales by

European and Japanese firms to the Soviet

Union. Perhaps more important, proponents

of this perspective see a basic complementarily between the Soviet and American

economies that should permit the large-scale

exchange of Soviet raw materials for American capital and technology. Adherents of

Perspective III are more impressed by the

lack of hard currency available to the Soviet

bloc for purchases in the West and the seeming inability of those countries to develop

the product exports that could be used to

earn such currency. Moreover, the Soviet

bloc may soon be an importer rather than an

exporter of the raw material most needed in

the West—oil.

In terms of policy strategies and instruments, Perspective II tends to emphasize integration of the Soviet economy with the

West through a range of trade opportunities

and other economic inducements. Negative

sanctions would be used reluctantly, particularly in the short term, because they would

jeopardize the process of weaving the fabric

of interdependence. In contrast, Perspective

III stresses the utility of negative sanctions

with a lesser emphasis on positive inducements for influencing Soviet policy in the

present and near future. Perspective II

tends to adopt a limitationist view of American power and to be skeptical of the extent

to which the United States is capable of coercing Soviet policy. At the root of the tactical differences between the two perspectives is a sharply differing judgment concerning the consequences that will fOllOW

from a policy of facilitating economic transactions with the Soviet bloc. Whereas Per-
80 Technology and East-West Trade

spective II sees the eventual outcome as a confronts it. Without that timely infusion of

kind of benign subversion of the Soviet sys- external resources, the Soviet regime may be

tern, Perspective III argues the opposite— compelled to seriously consider a basic althat Western credits and technology will teration of the economic and political strucprovide the Soviet Union with the means of ture of the U.S.S.R.

escaping the systemic crisis that currently

CASES

One means of assessing the utility of export controls as instruments of political

leverage is to examine the most plausible

candidate technologies in some detail. It is

generally agreed that the two technologies

with the most promise for this purpose are

advanced oil- and gas-drilling equipment and

computers.

The purpose of the following analysis is to

assess the costs that export controls on the

technology in question would impose on the

Soviet economy. This is a necessary, but not

sufficient, condition for any effort to predict

the Soviet policy response to such controls.

Costs are a function of such factors as the

availability of alternative Western suppliers,

the extent of the U.S. lead over the Soviet

technology, the importance or value of the

technology to the Soviet economy, the Soviet capability to develop the technology with

domestic resources and the time required to

do so, the inherent susceptibility of the technology to export controls, and the probable

course that future innovation will take and

what that implies for the other factors mentioned above. Clearly, these factors will

weigh differently depending on the technology in question. Consequently, conclusions

relevant to export policy must be based on a

case-by-case analysis of the technologies to

be controlled.

OIL AND GAS EQUIPMENT

There are a number of considerations that

suggest oil- and gas-drilling technologies

could be an effective source of political leverage. The United States retains a monopoly

position in the West on a few items of petroleum equipment that the U.S.S.R. needs:

electric centrifugal submersible pumps,

high-pressure blowout preventers, and subsea blowout preventer systems. Because the

U.S.S.R. has already purchased most of the

important oil production equipment it needs

through the mid-1980’s (submersible pumps,

a drill-bit plant, and gas lift equipment) the

impact of a U.S. embargo on oil equipment

would be negligible in the short term. However, although the longer term impact on

production cannot be estimated with certainty, the effect on the Soviet Union of a complete cutoff of Western equipment and technology would be serious. There are several

reasons for this. First, according to the Central Intelligence Agency (CIA) estimates,

the Soviet oil industry is at a critical point in

its development; i.e., production is likely to

peak within the next few years. Output is

now declining in all of the major oilproducing regions except West Siberia, and

production gains there promise to be much

more difficult to achieve now that the giant

Samotlor oilfield is reaching its peak. Development of the smaller West Siberian fields is

lagging. These are more remote and costly to

develop and are proving to be less productive than other fields. This situation is exacerbated by the fact that previous Soviet extraction policies appear to have been shortsighted, stressing maximum current production at the expense of conservation and exploration.

There is reason to believe that the Soviet

domestic oil equipment industry will have

difficulty in meeting new demands; it lacks

the physical capacity and technology to simultaneously sustain production, meet vast
Ch. IV— The Foreign Policy Implications of East-West Trade and Technology Transfer ● 81

new drilling requirements in West Siberia,

intensify exploration in remote areas, and accelerate offshore production. If it is to

reverse current production projections and

achieve productivity gains, the U.S.S.R.

must convert from turbo to rotary drilling.

This will require the import, not only of additional bit technology, but also of most of the

associated drilling equipment—kelly bashings, drill pipe, drill collars, and tool joints.

In these areas, therefore, Western equipment could ease critical constraints on oil development. This is especially important for

the Soviet Union in view of the fact that oil

accounts for approximately half of all Soviet

hard-currency exports, and there is already a

maximum emphasis on nonpetroleum energy

sources with limited opportunities for additional energy conservation.

There are, however, reasons to question

how much leverage the United States could

in practice obtain by threatening to withhold

exports of oil production equipment. Although U.S. firms presently dominate the

world market in the kinds of equipment discussed above, their position could be seriously eroded in the next 2 or 3 years if the

U.S. Government embargoes petroleum

equipment and technology to the Soviet

Union. Soviet oil production would be affected and Soviet development costs would

rise, but substitutes for U.S. equipment

would ultimately appear, and the substitution of equipment from other Western manufacturers would mitigate the impact of U.S.

denials. Moreover, a likely effect of withholding exports will be to constrain Soviet oil

production. It is at least debatable whether

this outcome is desirable from the U.S.

standpoint since it may hasten the emergence of the Soviet Union as an oil importer

thereby putting more pressure on what is already a tight international supply situation.

COMPUTER S

Another logical candidate for exerting

leverage is the computer industry. As the

discussion in chapter X indicates, despite

rapid progress in recent years, the Soviet

Union still lags well behind the United

States in such areas of computer technology

as very large-scale integration, high-density

magnetic disks and the precision manufacturing techniques required to produce them.

Transfer of any of the more advanced computers and peripheral technologies will help

the Soviet Union upgrade its own capability

to produce and utilize computers—a capability that is a critical aspect of efforts to

reverse the lagging productivity of the Soviet economy. Moreover, any such computer

technology will have military capabilities,

whatever the initial intended use. The latter

point assumes particular significance given

the difficulty of devising effective controls

against the diversion of exported computer

technologies to military use. Monitoring systems are not foolproof and sanctions involving the termination of maintenance services

or actually reclaiming the equipment would

have limited effectiveness in the one case

and almost no credibility in the other. A

computer can be modified (“lobotomized”) to

reduce its capabilities as a prerequisite for

export to the U.S.S.R. However, such a procedure is expensive and clearly reduces the

attractiveness of the sale to the purchaser.

Ironically, the computer that was scheduled

for sale to the Soviet news agency TASS had

been altered in this way before the transaction was canceled to express U.S. displeasure over the treatment of Soviet dissidents.

While the potential value of U.S. computers to the Soviet Union would argue for the

utility of that technology for political leverage, the existence of alternative non-Communist suppliers argues against it. Japan, in

particular, has rapidly emerged as a potentially serious challenger to American supremacy in this field. As previously noted,

Tokyo has resisted any efforts to attach political conditions to trade with the Communist countries.

Besides the size of the technological gap,

the value of computers for the Soviet Union,

and the availability of alternate suppliers,

the potential for U.S. political leverage will

be affected by the direction of technological
82 ● Technology and East-West Trade

innovation in the industry. For example, two

areas that are currently attracting attention

are mathematical modelling and new architectural configurations of the hardware and

innovative ways of knitting hardware and

software together in patterns and networks

for specialized problem-solving. On a conceptual level each is essentially a task of applied

mathematics—one of the strong suits of SOviet science. They are also types of innovation that will disseminate relatively easily

through the scientific literature and the technological marketplace. Advances in mathematical programing allow certain types of

calculations to be performed with less powerful computers. This suggests that export

controls on computer hardware may have a

declining utility. It is not to say that the

Soviet Union will readily close the current

gap in computer technology. There are, for

example, very difficult institutional problems involved in networking that may be

particularly troublesome for the Soviets.

These considerations, plus the growing

capacity of the Soviet Union to acquire, imitate, and absorb Western technology,

strongly suggest that the potential for political leverage inherent in computers is modest

and probably declining. However, these considerations may be at least partly offset by

the high level of technological sophistication

required to actually produce and use software for managing the most advanced systems and by the recent tendency of computer companies to protect software as a proprietary corporate technology, something they

have not done in the past. This, in turn, may

be undermined by pressures to standardize

software throughout the industry given the

huge costs of developing and implementing

advanced systems.

CONCLUSIONS

This complex situation does not easily

lend itself to firm conclusions about the utility of export controls for political leverage. It

does seem clear that the technological advantage in oil- and gas-extraction equipment

and computers enjoyed by the United States

relative to the Soviet Union will continue

and that Moscow will place a high value on

opportunities to obtain advanced technologies that will help bridge that gap. This

should create some leverage potential for

U.S. policy. That potential is circumscribed,

however, by the emergence of alternate nonCommunist suppliers and the increasing

rapidity with which technological innovations in all fields disseminate internationally. It maybe further limited in the case of oildrilling technologies by doubts about the desirability of constraining Soviet petroleum

output. In any case, U.S. policy must be formulated under the assumption that, at best,

American technology can maintain a few

years’ lead over that of the Soviet Union and

any opportunities for leverage will have to be

exercised within that context.

On the basis of the above analysis it is not

possible to state conclusively whether either

technology can be used to generate enough

leverage to move Soviet policy. In short,

there is no “magic” technology as far as

political leverage is concerned. Given the

complexities involved it is very difficult to

calculate with any precision the costs that

could be imposed on the Soviet Union by denial of any particular technology. This element of unpredictability is exacerbated by

the inherent limitations on our ability to predict the behavior of the Soviet decisionmaking apparatus and the reactions of Soviet

policymakers in any specific situation.
CHAPTER V

The Military Implications

of East-West Technology

Transfer
CONTENTS

INTRODUCTION:THE CONCEPT OF MILITARY RISK . . . . . . . . . . .

ASSESSING MILITARY RISK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The Case Method Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The Critical Technology Approach. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Table 13.—Categories of Military Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

85

88

8892

96

87
CHAPTER V

The Military Implications of

East-West Technology Transfer —

INTRODUCTION: THE CONCEPT OF MILITARY RISK

All trade, and trade in technology in particular, necessarily carries with it a

risk that the trade will enhance the military capability or at least the military

potential of the trading partner. In the case of U.S. trade with the Soviet Union,

it can be argued that any accretion in Soviet military capacity weighs against

the United States in an overall worldwide balance of power. Whether the political or economic benefits of trade with the U.S.S.R. offset the military costs is a

matter of judgment. In order to consider such potential tradeoff’s carefully, it is

useful to distinguish among five categories of possible military risk:

1.

2.

Technologies which not only have a

clear and direct military application

that could have a substantial effect on

relative force capabilities, but which

also make possible the construction of

weapons or the development of skills

currently outside the realm of the recipient technical competence;

Technologies whose immediate application would advance civilian industry,

but which might also be applied to military purposes in a way that would give

the recipient access to weapons or military skills that it does not now possess,

including:

A. Technologies that lend themselves

to direct diversion, with or without

modification. An example of the former

might be the precision-grinding machines sold in 1972 to the Soviet Union.

It has been alleged that these machines

were instrumental in allowing the Soviets to produce precision ball-bearings

needed for the guidance system in multiple independently targetable reentry

vehicles (MIRVS), thereby providing

3.

them with a capability they would not

otherwise have possessed at the time.

A hypothetical case of diversion with

modification would arise if a large computer, sold to TASS or Aeroflot for a

specific civilian end use, were reprogramed to perform military functions

and/or actually moved from one site to

another; and

B. Technologies that lend themselves

to indirect diversion, either by providing hands-on training that would be

otherwise unavailable (again, the example of large computers applies), or by

providing the opportunity for reverse

engineering;

Technologies with clear and direct military application that could improve,

simplify, or render cheaper or more efficient a military industrial activity already within the recipient’s technical

competence, or that would help to move

‘See “}”:xpf~rt licensing of ,Adlranced ‘1’whnolog~.: A Ht’-

kriewf, Hearing Iwfor[> the Sut)[’ormrmitttw on 1 nternationa]

‘1’rade ancl ~onlrnerce of the (’onlrnit tt~c on International 1{t~-

Iations, U.S. I ious(j of Repros[lnt ati~.t~s, ,+\pr. ] 2, ] 976.

85
86 . Technology and East-West Trade

4.

Photo credit. U.S. Department of the Air Force

Left: model of the MIRV warhead that is positioned in the nose cone (circled on right) of the U.S. Minuteman Missile

existing military development activities

ahead on promising paths;

Technologies whose immediate application would advance a civilian industry,

but which might be applied to military

purposes in a military industrial activity already within the recipient’s technical competence, or which would help to

move existing military development activities ahead on promising paths. The

same subgroups in #2 above apply here.

An example of a civilian technology

capable of direct diversion is semiconductor production technology; direct

diversion after modification occurred

when the equipment of the Kama River

truck plant was altered to produce military vehicles. All computer sales carry

with them the danger of indirect diversion, as all provide important training

opportunities for programmers who may

later be employed in the military sector;

and finally

5. Technologies that would be applied to

civilian industry, thereby releasing resources that might be used in the military sector. Any consumer good technology is an example, as are turnkey

plants for the production of fertilizer.

The latter not only make a significant

contribution to agricultural productivity, but if the products of these plants

are exported, also may generate the

hard currency necessary for further purchases of other technologies, including

those with direct military application.

These categories and the examples that illustrate them are summarized in table 13.
Ch. V — The Military Implications of East-West Technology Transfer ● 87

Table 13.—Categories of Military Risk

Direct military

Diversion from civilian use “ - – “

-

—

Nature of equipment application Direct With modification

Permits capabilities that would not otherwise ‘1‘Nuc-lear-w;apons 2A. Precision machines 2B. Advanced computer

exist i n this time frame design information in hardware or software

mid-1 940’s

Improves or makes-more efficient-an existing 3.-Naval nuclear 4A. Semiconductor pro- 4B.Turnkey truck plant

capability reactor production duction technology

techniques

Frees resources for miIitary use - N/A 5A. Fertilizer production N/A

technology, or technology expanding

production of manu -

facturing goods for

export, thereby con

tributing to hardcurrency earnings

SOURCE: Office of Technology Assessment - -

-.
88 ● Technology and East-West Trade

The likelihood that a given technology will

markedly improve the recipient’s military

capacities decreases as one moves from category one to five. There is unanimity among

the United States and its allies that technologies in the first category should be stringently protected, and there is little argument that the third category deserves protection as well. Similarly, most would oppose

the blockage of items falling in the low-risk

fifth category, and the remainder would

Two fundamentally

can be used to restrict

agree that it is impracticable. Given the wide

availability of acceptable alternatives to

most U.S. technology, only a coordinated

policy of economic warfare both within and

outside CoCom(Coordinating Committee for

Multilateral Export Controls) could impose

such a blockage. There is clearly little hope

for support of such a policy in Western Europe and Japan. Thus, the most difficult risk

assessment lies with the dual-use technologies in categories two and four.

ASSESSING MILITARY RISK

different techniques

trade involving technologies with potential military significance.

In the first system, decisions are made caseby-case. Each proposed technology sale is

subjected to careful analysis to determine

the possible military uses to which it might

be put, and to decide the significance and

likelihood of these military applications occurring. Decisions are made on the merits

after detailed consideration of the individual

case, using some standard of acceptable risk.

The second basic approach proceeds deductively. It first establishes lists of specific and

generic capabilities that are deemed militarily significant and of the technologies that

are instrumental to these capabilities. The

sale of any item on this list becomes, by definition, detrimental to the security interests

of the United States, and is therefore prohibited. The difference between these approaches is largely one of basic orientation;

actual licensing systems combine elements

of both. Nevertheless, the fundamental orientation of a licensing system towards either

a case method or a list strategy shapes its

possibilities and its weaknesses. The following pages consider these alternative approaches in more detail.

THE CASE METHOD

APPROACH

Ideally, a case method or ad hoc system of

export control includes a comprehensive system of risk assessment in which a number of

characteristics of the technology in question

and of the circumstances of its sales are ascertained, the importance and implications

of each piece of information are weighed, and

a decision is made on the basis of a complete

understanding of both the technology and

its probable end use. At least seven different

considerations may enter into this kind of

assessment:

1.

2

3.

The capabilities of the technology must

be thoroughly understood; its various

uses must be identified; and the ease or

difficulty with which it might be modified and diverted must be assessed. The

task can be performed only by experts

thoroughly conversant with the technology and its range of applications.

For each application of the technology,

the comparative capabilities of the

United States and the recipient nation

must be assessed. This assessment involves determining technical leads and

lags and estimating the rate of change

in the differentials. In this connection,

the possibility cannot be dismissed that

a technology which is obsolete in the

West may still have a significant impact

on the military capacity of, for instance,

the Soviet Union or the People’s Republic of China (PRC).

The mechanisms of transfer must be

considered. In 1976, the Defense Sci-
Ch. V— The Military Implications of East-West Technology Transfer ● 89

4.

ence Board produced an analysis of the

transfer of technology and U.S. national

security. 2 The resulting document, commonly known as the Bucy report, assessed selected areas of high technology, their impact on U.S. strategic requirements, the full range of mechanisms through which they may be transferred (see chapter VI), and the effectiveness of current export control restrictions. One principal finding of the

Bucy report (others are summarized below) is that the effectiveness of a technology sale varies according to the relationship between seller and buyer; the

more active and continuing the relationship, the better the chance that the

technology will be assimilated. The report ranks transfer mechanisms according to this criterion and concludes that

the most effective—and therefore the

most risky— transactions are the sale of

turnkey plants, licenses with extensive

teaching efforts, joint ventures, and

training and exchanges that involve

prolonged contact between buyer and

seller and the provision of technical information. As a rule, these should be

subject to closer scrutiny and tighter

controls than less active mechanisms,

like product sales, which do not usually

transfer current design and manufacturing technology.

Knowledge of the recipient environment is required. There is a common

misconception that technology transfer

is “something like a pass from a thrower

to a receiver. In fact, it has more of the

characteristics of an organ transplant,

with all the attendant requirements of

compatibility with the environment,

plus the surgical (i.e., managerial) skills

necessary to establish all the intimate

working relationships between the

transplant and the connecting parts of

‘An Analysis of Export Control of U.S. Technology–a

DOD Perspective (Washington, D. C.: Defense Science Board

Task Force on Export of U.S. Technology, Feb. 4, 1976).

~ q - ~ ~ ~ ~ - “, g - -

the system.”3 The Soviet system, for instance, is often characterized as inefficient and inflexible, and therefore

unable to make optimum use of imported technologies. Chapter X discusses the fact that the ability of the

U.S.S.R. to absorb, diffuse, and duplicate Western technology has been hampered by a system in which enterprise

managers, who are responsible for introducing new technology, often have

no incentive to do so. Such impediments

make it less likely that the technology

will be used in a manner that produces

results similar to those achieved in the

country of origin. Even more importantly, the U.S.S.R.’s ability to improve imported technologies through domestic

R&D and innovation is constrained by

the difficulties of translating new concepts into serial production. For instance, according to recent testimony

by Rauer Meyer, former Director of the

Office of Export Administration (OEA),

the Western-built Volga automobile

plant has not revolutionized the Soviet

motor vehicle industry; instead, the

Soviets are currently conducting negotiations with Western firms to modernize

other car plants. Meanwhile equipment

similar to that used at Volga is currently being supplied to a tractor plant at

Cheboksary. Despite the restructuring

of civilian R&D activities in the Soviet

Union during the late-1960’s, the link

remains weak between the economic incentives and material rewards of research institutions and the economic

contributions of the new technologies

developed by them. It would be a mistake, however, to extrapolate too easily

from the civilian to the military sector.

In the Soviet Union, the military takes

priority; resource allocations are made

first to the military, regardless of short-

‘Herbert Fusfeld, Director of Research, Kennecott Copper,

quoted in National Academy of Sciences, Review of the

U.S./U.S.S.R. Agreement on Cooperation in the Fields of Science and Technology, National Research Council, May 1977.
90 . Technology and East-West Trade

5.

6.

ages elsewhere in the economy, and the

military sector receives the best manpower and equipment. The consequences of the inefficiencies that permeate other parts of the society, therefore,

are not necessarily as serious in that

sector.

The risk of diversion of a dual-use technology is substantially affected by the

requirements, priorities, and intentions

of the recipient. If, for instance, the

technology is essential to meeting a

need that has a very high civilian priority, the chances diminish that it will be

diverted for direct military use. Large

computers that direct oilfield operations are low-risk items from this perspective, not simply because they would

be cumbersome and difficult to move

and reprogram without detection, but

because oil and gas production is extremely important to the Soviets. Similarly, it is unlikely that equipment installed in plants to manufacture drill

bits will be put to any other use; the bits

are sorely needed in the Soviet oil industry. There is always a chance, however,

that priorities may change. Risk of diversion will therefore fluctuate over

time, and for reasons not always apparent to Western observers.

The existence and effectiveness of techniques to prevent conversion of civilian

technologies to military use must be

considered. In some cases the technique

is one of deterrence; while diversion to

military use remains possible, the likelihood that the United States would learn

of such diversion and react by cutting

off future technology transfers diminishes Soviet incentives to divert a given

technology. The ability to conduct onsite inspections, to monitor plant output, or to incorporate in the technology

devices designed to prevent reverse

engineering or alteration all have this

effect. It must be recognized, however,

that no deterrent is infallible. The large

computer installed in the Kama River

truck factory, for instance, is monitored

by the American firm that supplied it as

part of its contractual agreement with

the U.S.S.R. Periodic reports showing

the allocation of computer time are

made to the Department of Commerce,

but there is good reason to believe that,

if it is analyzed at all, this data (which

arrives in the form of voluminous computer printouts) is subject only to spot

checks. Another approach is to render

diversion physically difficult or impossible; e.g., to seal electronic components

in a medium that will destroy the component if any attempt is made to disassemble it. Such attempts are expensive

and according to technical experts are

rarely, if ever, infallible.

7. Finally, individual sales of technology

cannot always be evaluated in isolation.

Sometimes the impact of a technology

transfer can only be appreciated in the

context of a number of related sales that

may have preceded it; the importance of

a single item may derive from its position as one of a series of items that,

taken together, enhance an existing capacity or provide a new one. There is,

for instance, a qualitative as well as a

quantitative difference between providing 5 computers and 5,000; similarly, a

relatively small piece of machinery may

only assume its proper importance after

it is perceived as a link in the chain of an

entire process that has been acquired

piecemeal.

If all the preceding factors could be

weighed, knowledge of the chances of a technology’s enhancing the military capabilities

of an adversary would be substantial. But

the effectiveness of this kind of risk assessment, and the case-by-case decisions that it

entails, is vitiated by two problems. The first

is the absence of clear policy guidelines. The

Export Administration Act of 1969 (see

chapter VII) declares that it is the policy of

the United States “to restrict the export of

goods and technology which would make a

significant contribution to the military po-
Ch. V— The Military implications of East-West Technology Transfer ● 91

tential of any other nation or nations which

would prove detrimental to the national

security of the United States. ” The law does

not define “significance;” presumably this is

left to the officials who administer the licensing process. The Department of Defense

(DOD) maintains a list of criteria to be applied to the potential sale of any dual-use

technology. These criteria form the basis of

judgments about the probability of diversion taking place and being detected, and the

consequences of such a diversion:

1.

2.

3.

4.

5.

6.

Is the item appropriate in quantity,

quality, demonstrable need, design,

etc., to the stated civilian end use?

Is there any evidence that the stated

end user is engaged in military or military support activities to which this

item could be applied?

How difficult would it be to divert this

item to military purposes?

Could such diversion be carried out

without detection?

Is there evidence of a serious deficiency

in the military sector which this item, if

diverted, would fill?

Is technology of military significance,

which is not ‘already available, extractable from this item?4

The answers to these questions would provide much of the information needed to make

an accurate judgment of the probability of

military diversion and impact of this diversion on the adversary’s military capacities.

This information does not, however, help

those making the decisions on export licensing to evaluate the “significance” of such impacts against the objectives of U.S. strategic

policy. But a yardstick against which “significance” may be measured will probably

never be forthcoming.

The significance of any given improvement in Soviet or Chinese military capability

‘See Jonathan B. Bingham and Victor C. Johnson, “A Rational Approach to Export Controls, ” Foreign Affairs, April

1979, p. 889.

and potential is almost impossible to define

in the abstract. An improvement in the capacity to acquire a new military capability

may not matter unless the country concerned makes the effort to translate potential into real capabilities. The significance of

actual military hardware depends on whether a situation arises in which it can be put to

use. How useful a given military capability

may be—whether in battle or for political

intimidation—may depend on the way in

which the United States structures its own

foreign policy or military objectives and the

capabilities demanded of U.S. forces. Even if

the United States were to articulate a detailed array of political/military objectives,

and the force characteristics necessary to

achieve these objectives, doubt would remain about the significance of incremental

improvements in the military forces of potential opponents. In the absence of such a

clear and explicit set of objectives, the officials who administer an export-control system must to some extent rely on commonsense and conventional wisdom.

A second problem lies in the actual administration of the case-by-case approach.

Limitations on the resources available to administer export controls and the complexity

of the procedures may make the system so

inefficient as to be counterproductive. As

chapters III and VII document, industry

criticism has centered on the delays in the

processing of export license applications by

OEA. The volume of cases that must be

handled, the volume of information that

must be assembled on controversial cases,

and the diversity of interests represented in

the process have resulted not only in delays,

but in decisions which have been subject to

intense retrospective criticism on the

grounds that military risk or foreign availability were improperly assessed or that

foreign policy interests improperly outweighed serious military implications. Examples of such criticism may be found in the

Kama River truck plant, the Bryant grinder

case, and the controversy surrounding the

Dresser drill-bit plant.
92 . Technology and East-West Trade

THE CRITICAL TECHNOLOGY

APPROACH

The recognized need both to clarify policy

and to simplify and sharpen the licensing

procedure has caused Congress to endorse

the DOD investigation of the critical technology approach to export control. This exercise, which represents a systematic effort

to confront the problem of military risk

through a comprehensive reappraisal of the

Commodity Control List (CCL) could potentially shift the weight of present U.S. exportlicensing policy from the case method to the

“list approach. ” The critical technology approach grows directly from the findings and

recommendations of the Bucy report, which

may be summarized as follows:

●

●

●

Design and manufacturing know-how

are the most important elements in

strategic technology control. Therefore,

the categories of export that should receive primary emphasis are arrays of

design and manufacturing know-how;

keystone manufacturing, inspection

and test equipment; and products accompanied by sophisticated operation,

application, or maintenance know-how.

The more active the participation of the

transmitter, the more effective the technology transfer mechanism. Therefore,

more active mechanisms of transfer

must be tightly controlled, but product

sales may be largely decontrolled since

these usually do not transfer current

design and manufacturing technology.

Control of product sales should stress

their intrinsic utility.

The United States should preserve its

strategic leadtime by denying all exports of technology that represent revolutionary advances to the receiving

country. Transfers may be approved if

the technology represents only an evolutionary advance, unless both nations

are on the same evolutionary track. In

this case, the receiving country’s immediate gain from the acquisition of the

technology should be assessed.

Current U.S. export control laws should

employ simplified criteria in order to expedite the majority of license requests.

Currently, the absence of established

criteria for evaluating technology transfers requires a cumbersome case-bycase analysis of all export applications.

DOD should, therefore, develop policy

objectives and strategies for the control

of key high-technology fields that specifically identify the key elements of

technology, including critical processes

and key manufacturing equipment.

These key elements of technology

should be released only to other CoCom

nations. Any CoCom nation that allows

this technology to pass to any Communist country should be prohibited from

receiving any further strategic knowhow.

Techniques meant to discourage diversion of products to military applications

are not a meaningful control mechanism

when applied to key design and manufacturing know-how, and should not be

relied on to prevent diversion to military use.

The critical technology approach is predicated on the assumption implicit in the Bucy

report that “one can select the subset of

technologies of significant military value on

which our national military technology superiority can be presumed to be most dependent.” 5

It goes on to assume that this set

of critical technologies will be small in number and relatively stable over time; that they

can be subjected to stringent export controls

that deny them automatically to any Communist country; and that the development of

a Military Critical Technology Product and

Information List, which will replace the present Controlled Commodity and CoCom lists,

will allow the decontrol of many products

‘Testimony of Dr. Ruth M, Davis, former Deputy Under

Secretary of Defense for Research and Advanced Technology, before the Subcommittee on International Economic

Policy and Trade, Committee on Foreign Affairs, U.S. House

of Representatives, Mar. 22, 1979.
Ch. V—The Military Implications of East-West Technology Transfer . 93

and processes which currently appear on the

latter, but which are not in fact “critical.”

The approach is intended both to enhance

the protection of U.S. technological leadtime

and to make the export control process simpler, quicker, and more predictable by eliminating most of the present need for case-bycase review; the goal is to protect the military leadtime of the United States with minimal interference with trade.

As originally conceived, the methodology

employed by DOD in the critical technology

exercise may be summarized as follows:

1.

2.

Determinations of critical technology

areas. The first list of military critical

technologies was completed in January

1979. It identifies 15 broad areas of applied science or engineering that will

serve as indicators of the fields in which

the specific critical technologies to be

controlled will be found. The 15 areas

are:

—computer network technology;

–large computer system technology;

— software technology;

—automated real-time control technology;

— composite and defense materials

processing and manufacturing technology;

–directed energy technology;

—LSI-VLSI design and manufacturing

technology (LSI refers to large-scale

integration and VLSI to very largescale integration in microelectronics);

— military instrumentation technology;

— telecommunications technology;

–guidance and control technology;

— microwave componentry technology;

— military vehicular engine technology;

—advanced optics technology (including fiber optics);

— sensor technology; and

—underseas system technology.

Determination of specific component

technologies within each of these 15

areas of applied science and engineering. Various degrees of progress have

apparently been made in 9 of the 15

3.

4.

5.

areas listed above. This work has been

accomplished by Critical Technology

Expert Groups (CTEG) composed of

volunteers from industry working with

DOD and other Government officials.

CTEGS are examining such areas as

computer networks, LSI manufacturing

design technology, ray processors,

acoustical rays, lasers, wide-body aircraft, etc., but not all of the groups have

reported their findings. DOD has testified that the date of completion of this

step will be determined by the budgetary allocation, and has made no prediction of when activities in all 15 areas

might be completed.

After completion of step 2 for each of

the 15 broad areas, analysis of the military critical technologies to determine

the elements of design, manufacture,

utilization, testing, and maintenance

functions that can be subjected to export controls. This step recognizes the

fact that it may be impossible to fully

control all critical technologies because

some mechanisms of technology transfer may be difficult or impossible to contain; e.g., information in the public domain.

Recommendations as to which products, technical information, or other

controllable features of each military

critical technology should be placed on

a list of embargoed items. This step will

utilize criteria that correspond to those

employed by DOD and listed above.

They include the determination of foreign availability; the technological capability in and military reliance on the

critical technology by the potential recipient; and the comparison of these

capabilities and dependencies with

those in the United States, including

the rate of change of this comparative

differential.

Formulation of a Military Critical Technology Product and Information List of

items not to be exported, accompanied

by a list of technology transfer mecha-
--

94 ● Technology and East-West Trade

nisms effective for each of the critical

items which should be subject to Government control.

At the end of this process, DOD will presumably have arrived at a list of critical

products and information that should be

barred from export and a list of technology

transfer mechanisms that should be subject

to Government control. Some assume that

the United States will propose CoCom’s

adoption of this list in place of its present

one and that it will also replace the existing

CCL with the list of critical technologies.

These changes may or may not be accompanied by a transfer of the main responsibility

for export control from the Secretary of

Commerce to the Secretary of Defense.

It is by no means clear, however, that this

will be the outcome. Since its inception in the

summer of 1976, progress on the critical

technology approach has been slow. High

DOD officials have, in the past, attributed

this to inadequate resources, asserting that

there have been “no technological or institutional hurdles which would prevent the implementation of the Critical Technology Approach.“ 6 This assertion is somewhat controversial. Discussions within DOD have indicated a lack of consensus on the aims and

probable results of the critical technologies

exercise. This uncertainty, as well as the conceptual difficulties inherent in the enterprise, has almost certainly contributed to the

delay.

Some in DOD regard the critical technologies approach primarily as an in-house exercise. They expect that the product will not be

a new form of CCL, but rather an enhanced

internal capability for assessing the military

impact of dual-use technologies. A variety of

offices within DOD perform technical assessments for license applications. In the

past, these offices have not always applied

uniform criteria to the cases under their consideration.

In August 1979, those offices in DOD responsible for export licensing and those en81bid.

gaged in the critical technology exercise

were reorganized (see chapter VII) and their

activities centralized. This should provide an

excellent opportunity, not only for strengthening and rationalizing the Department’s

role in the export-licensing process, but for

defining with more precision the Department’s practical expectations for a critical

technologies list. At the least, an important

product of the critical technologies approach

should be refined and internally consistent

guidelines for assessing the strategic capabilities of technologies.

It would be premature at this stage in the

development of the critical technology approach to speculate on the difficulties that

may arise in attempts to implement it, or on

the possible consequences of its implementation. Several observations are in order, however. First, whatever the procedural outcome of the current exercise, DOD will profit

from the detailed information it has gathered and the insights it has gained on the

military capabilities of many technologies.

On the other hand, it would be both misleading and unwise to regard the development of

a critical technology list as a panacea to the

difficult problem of protecting U.S. military

technology leads. Skepticism already exists,

both in Government circles and within the

business community, as to whether the revised lists will indeed be shorter than present ones; there is fear, in other words, that

reluctance to decontrol items or a broad definition of criticality will result in similar or

longer lists. This might further inhibit EastWest trade and could also provoke objections among some members of CoCom. From

the other side, there are fears that a critical

technology list will be too short, i.e., that

items of marginal, but potentially important,

military utility will be decontrolled to the

ultimate detriment of the United States.

It is highly likely that, whatever the outcome, the list will be criticized, either for the

items it includes or excludes. The belief that

a critical technology list can ever be entirely

noncontroversial rests on the assumption

that definitive, highly refined, empirical

judgments can be made regarding the mili-
Ch. V— The Military Implications of East-West Technology Transfer ● 95

tary utility of a myriad of products and processes. This is unlikely. In the final analysis,

inclusion on such a list requires judgments

on the part of policy makers; the issues are

not purely matters of technical or scientific

“fact.” Moreover, it is dangerous to assume

that the existence of a critical technologies

list can in itself obviate the case-by-case review. Considerations of both foreign availability and end use can never be entirely eliminated; simply because an item appears on a

U.S. list of embargoed technologies does not

prevent its export from abroad; and simply

because an item does not appear on this list

does not mean that under certain circumstances it could not constitute a significant

improvement in the strategic position of an

adversary. Finally, because the cutting edge

of technology moves so rapidly, any list

must be subject to constant review and update.

Those involved in the critical technology

effort recognize these problems. One important aim of their activities is to substantially

decrease the volume of cases that are presently subjected to detailed case analysis so

that resources may be concentrated on those

cases involving difficult judgments. In order

for this to occur, however, methods must be

devised to screen export applications to the

Communist world–not necessarily in the exhaustive manner that pertains now, but in

some way that will “catch” potentially troublesome cases involving technologies that do

not appear on the critical technologies list,

assuming that this list is generally viewed as

comprehensive without being overly inclusive. One might imagine a system that proceeded roughly in the following manner:

1. All requests for export licenses to the

Communist world would be subjected

to an initial screening process. The

criteria applied here would reflect the

concerns of all the executive departments involved in licensing and might

ask such questions as:

2.

3.

4.

5.

–Is the item on the critical technologies control list? If so, presumably no further inquiry is necessary.

If not,

– Is the stated end use plausible?

—Are large amounts of training entailed in the sale?

–Is there any obvious military relevance, even if this is not “critical”?

–Have inordinately large quantities of

this equipment been exported?

The object is to raise a “red flag;” to

catch-out potentially troublesome

cases. In this way, the volume of cases

that require further review should be

greatly reduced and the serious “logjam” which presently plagues the licensing procedure substantially eliminated.

Any case in which a red flag appears

would then be subject to a moderate degree of examination specifically targeted to answer the particular objection

raised in the first cursory screening.

Should this moderate examination not

resolve the problem, an analysis similar

to the intensive case-by- case review

presently conducted by OEA should be

conducted.

In addition, random checks should be

made to ensure that the procedure is

producing the desired results. These

might take the form of periodically

selecting isolated applications that

otherwise would have been granted

after step 1 and subjecting them to the

deeper consideration of steps 2 or 3.

In cases where threat of reverse engineering or diversion appears to be a major problem, an analysis should be conducted of the procedural or technical

mechanisms that could minimize the

dangers.
— -—..

96 ● Technology and East-West Trade

SUMMARY

The process outlined above is intended as

nothing more than a suggestion for a way of

thinking of export control in a manner that

combines the case study and list approaches

discussed here. It should be apparent that

unless both are utilized, no one formula can

resolve the immensely complex issue of determining which technologies make “significant contributions” to the military capacities of our adversaries, and no simple procedure is likely to soon be instituted to protect

such technologies. The protraction of the

critical technology exercise itself indicates

the extreme difficulty which confronts even

the Nation’s foremost technical experts in

making recommendations in these areas, and

should caution all observers of the folly of

expecting magical automatic solutions to

such complex problems. Western technology

has undoubtedly contributed to Soviet military capabilities in the past and it will continue to do so in the future, regardless of any

unilateral efforts the United States could

undertake. There is no reason to believe that

drastic changes in DOD’s efforts in the area

of export control will materially alter this

situation. In the final analysis, the national

security of the United States is most surely

protected by its maintenance of technological leads in those areas that have been

deemed militarily critical.
CHAPTER VI

Technology Transfer:

Definition and Measurement
CONTENTS

Page

DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99

PROBLEMS OF MEASUREMENT. . ..............................100

Commercial Trade in Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ....100

High-Technology Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ....100

Industrial Cooperation Agreements . . . . . . . . . . . . . . . . . . . . . . ........102

Noncommercial Technology Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..105

Table 14.–High-Technology Items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..102

Table 15.–Types of Contractual Arrangements Included indifferent

Definitions of East-West Industrial Cooperation . . . . . . . ..............103

Table 16.—Classification of East-West Industrial Cooperation

Agreements by Percent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..........104
CHAPTER VI

Technology Transfer:

Definition and Measurement

Discussions of the economic consequences of trade in technology for both

the United States and the Communist world have been hampered by conceptual

and practical difficulties in gathering and interpreting data. There is no universally accepted definition of “technology,” and in many critical instances, useful

data is simply unavailable. Any attempt to assess the economic importance of

this trade must therefore include a discussion of the nature of technology and

technology transfer and the ways in which they can be measured.

DEFINITIONS

Technology must be differentiated from

science on one hand and from products on

the other. Science is the pursuit of knowledge, whereas technology is the specific application of knowledge to the production of

goods and services. Science flows freely

across international boundaries, and even if

it were possible to effectively control this

flow, the prospect of doing so raises at the

very least grave Constitutional questions.

Some control of technology, however, is both

desirable and necessary in the interests of

national security because of the military or

strategic capabilities it may provide.

The distinction between technology and

products is more troublesome. If technology

is broadly defined to mean the knowledge

necessary to design, create, or implement a

process; the process itself; or any services

related to the process, the problem of how to

treat the resulting product remains. Often

this will be a “technology intensive” product, one that might be said to “embody”

technology or from which the technology

may be extracted through a process known

as “reverse engineering ’’—the deduction of

the techniques of manufacture from examination of the product itself. Often too technology-intensive products have military applications that cause them to pose as severe

a problem to national security as the design

and manufacturing know-how that went into

them.

For commercial purposes, “technology”

usually refers either to equipment and processes that transform raw materials into

goods and services, to the training that accompany these, or to final products like computers that embody high technology, But

there is little agreement, in the United

States or abroad, as to exactly which products and process should be included in these

categories. There are, furthermore, problems

of measurement within each category. The

cost of equipment or of the licenses for rights

to processes, for instance, may not necessarily reflect the value to the buyer in terms of

the quality, output, innovativeness, and

profitability of the final product. The value

of a purchase, which includes the skills of the

workplace—the training required to operate

machines, to achieve practical familiarity

with the theoretical aspects of equipment,

and to become able to adapt and extend the

operation of the equipment—is difficult to

quantify. Finally, there is disagreement over

99
100 . Technology and East-West Trade

which products qualify as “high technology

items.

To these empirical problems must be

added the difficulties engendered by the fact

that a number of both commercial and noncommercial vehicles exist through which

technology of potential economic value is exported to the East. Commercial vehicles of

technology transfer include turnkey factories (i.e., a factory built in the recipient

country by a foreign firm, which is turned

over to the recipient only when it is ready to

“turn the key” and start production); licensing (with and without training programs):

joint ventures; technical exchanges; training

in high-technology areas; sale of processing

equipment; provision of engineering docuPROBLEMS OF

COMMERCIAL TRADE IN

TECHNOLOGY

The most common forms of commercial

technology transfer are the direct sale of

products embodying high technology and

various forms of industrial cooperation

agreements.

High-Technology Products

The U.S. Department of Commerce recently attempted to isolate trade in high

technology through the examination of exports in selected categories of the Standard

International Trade Classification (SITC).

This classification scheme summarizes trade

information for approximately 10,000 different items by organizing it into commodity

groupings. The Commerce study selected 25

categories of products which, it contends,

contain all those goods that reflect best practice in critical technology sectors—machinery and transport equipment and professional, scientific, and controlling instruments (see table 14). This effort is by far the

most precise and comprehensive attempt to

mentation and technical data; consulting;

proposals (documented and undocumented);

and sale of products that embody technology. Noncommercial vehicles include visits

in both directions of students, scientists,

and businessmen or managers; the use of unclassified published technical data and

patents; the reverse engineering of single

machines or components; and clandestine activities. All of the latter modes of technology

transfer cost negligible amounts of hard currency and, for the most part, have been beyond Government control. Communist

states have made the most of these techniques, although they are by no means

unique in this regard. These channels of

technology transfer have historically been

and will continue to be of great importance

to market and nonmarket nations alike.

MEASUREMENT

use trade statistics to measure technology

transfers.

There are problems with the Commerce

list, however. Aside from quarrels over what

constitutes a “high technology” good, no list

based on trade data can be sufficiently detailed to precisely distinguish between levels

of technology. This could be accomplished

only through a case-by-case examination of

individual exports in light of an accepted set

of criteria defining “high technology. ” The

Commerce Department classifications are

therefore overly inclusive; they “catch”

items which do not in fact embody “high”

technology, if by that is meant state-of-theart or items unobtainable in the East. This

means that calculations of high-technology

trade based on these categories are inflated.

Second, techniques used to value and describe exports at point of origin in the

United States cannot reflect the contribution of third nations. U.S. technology embodied in products originating from American subsidiaries in Europe or Japan appears

in the trade statistics of these countries and
Ch. VI—Technology Transfer: Definition and Measurement ● 101

Photo credit: Bureau of East-West Trade, U S Department of Commerce

U.S.-U.S.S.R. technology transfer through the mechanism of trade fairs
102 ● Technology and East-West Trade

Table 14.—High-Technology Items

— .—— —.—.— ——

SITC

71142

7117

7142

7143

71492

7151

71852

7192

71952

71954

71992

7249

72911

7293

72952

7297

7299

7341

73492

7351

73592

8611

8613

86161

8619

Description

Jet and gas turbines for aircraft

Nuclear reactors

Calculating machines (including electronic

computers)

Statistical machines (punch card or tape)

Parts of office machinery (including computer

parts)

Machine tools for metal

Glassworking machinery

Pumps and centrifuges

Machine tools for wood, plastic, etc.

Parts and accessories for machine tools

Cocks, valves, etc.

Telecommunications equipment (except TC & radio

receivers)

Primary batteries and cells

Tubes, transistors, photocells, etc.

Electrical measuring and control instruments

Electron and proton accelerators

Electrical machinery, n.e.s. (including

electromagnets, traffic control equipment,

signaling apparatus, etc.)

Aircraft, heavier than air

Aircraft parts

Warships

Special purpose vessels (including submersible

vessels)

Optical elements

Optical instruments

Image projectors (might include holograph

projectors)

Measuring and control instruments, n.e.s.

SOURCE: Quantlfication of Western Exports of High Technology Products to

Communist Countries, prepared by John Young, Industry and Trade

Administratlon, Office of East-West PoIicy and Planning, U.S. Department of Commerce. Project No D-41

not in those of the United States. Finally,

customs valuations are determined by the

price of the sale. Price does not necessarily

reflect the full market value of the commodity, however; some firms deliberately underprice an initial sale in order to break into

Eastern markets.

With these reservations, and in the absence of alternative superior measures, the

Commerce system has been used in chapter

III to analyze U.S. and industrialized world

exports of high-technology products to the

Communist nations.

Industrial Cooperation Agreements

Industrial cooperation agreements have

become increasingly common in East-West

trade. In its most general sense, the term

refers to a broad charter extending over a

number of years to conduct commercial relations between a Western firm and a centrally

planned economy. Industrial cooperation includes a wide variety of possible relationships, ranging from the sale of licenses and

patents to coproduction agreements and

turnkey plant sales. The comprehensive list

incorporated into table 15 summarizes the

basic mechanisms and techniques utilized in

these ventures. These frequently involve relationships between trading partners which

extend beyond simple sales of goods and

services, to continuous and close contacts

between trading partners, training, and technical assistance programs. It can be expected that these agreements lead to considerable communication of technical know-how

congruent with sales of plant and capital

equipment.

Activities in this area are extremely difficult to measure. Cooperation agreements

are often complex and their values particularly difficult to establish because many

East-West transactions involve countertrade rather than cash (see chapter III).

Countertrade is particularly attractive to

Eastern nations with scarce hard-currency

resources and a need to foster exports to the

West. But while its importance in Communist countries is becoming increasingly apparent, little data on such agreements exist.

The U.S. Department of Commerce estimates that in Poland, 40 to 50 percent of

electrical products and machinery exports to

the West in the 1980’s will be part of

countertrade agreements; and 38 percent of

Soviet trade turnover between 1976 and

1980 will be generated through countertrade.l There are no comprehensive studies

of the full range of countertrade transactions, although the Organization for Economic Cooperation and Development

(OECD) has studied individual categories of

contracts. 2

‘See U.S. Department of Commerce, East-West Courztertmde Practices: An Introductory Guide for Business, Industry and Trade Administration, August 1978.

‘Organization for Economic Cooperation and Development, Countertrade Practices in East-West Economic Relutiorzs, Paris, Mar. 23, 1978.
Ch. V/—Technology Transfer: Definition and Measurement . 103

Table 15.—Types of Contractual Arrangements

Included in Different Definitions of East-West

Industrial Cooperation

—— — —

1.

2.

3.

4.

5.

6.

7.

8.

9.

10.

11.

12.

13.

14.

Sale of equipment for complete production systems, or

turnkey plant sales (usually including technical assistance).

Licensing of patents, copyrights, and production knowhow.

Franchising of trademarks and marketing know-how.

Licensing or franchising with provision for market sharing and quality control.

Cooperative sourcing: long-term agreement for purchases and sales between partners, especially in the

form of exchanges of industrial raw materials and intermediate products.

Subcontracting: contractual agreement for provision of

production services, for a short term and on the basis of

existing capabilities.

Sale of plant, equipment, and/or technology (l-3 above)

with provision for complete or partial payment in resulting or related products.

Production contracting: contractual agreement for production on a continuing basis, to partner specifications,

of intermediate or final goods to be incorporated into

the partner’s product or to be marketed by him. In contrast to subcontracting, production-contracting usually

is on the basis of a partially transferred production capability, in the form of capital equipment and/or technology (on basis of a license or technical assistance contract).

Coproduction: mutual agreement to narrow specialization and exchange components so that each partner

may produce and market the same end product in his respective market area. Usually on the basis of some

shared technology.

Product specialization: mutual agreement to narrow the

range of end products produced by each partner and

then to exchange them so that each commands a full

line in his respective market area. In contrast to cooperative sourcing, product specialization involves adjustment in existing product lines.

Comarketing: agreement to divide market areas for

some product(s) and/or to assume responsibilities for

marketing and servicing each other’s product(s) in respective areas. Joint marketing in third markets may be

included.

Project cooperation: joint tendering for development

projects in third countries.

Joint research and development: joint planning, and the

coordinated Implementation of R&D programs, with provision for joint commercial rights to all product or process technology developed under the agreement.

Any of the above in the framework of a specially formed

mixed company or joint venture between the partner

firms (on the basis of joint equity participation, profit

and risk-sharing, joint management).

SOURCE: OffIce of Technology Assessment

Table 16 summarizes one of the most recent attempts to classify types of cooperation agreements by frequency. It shows that

in 1976 coproduction based on the principle

of specialization accounted for more than 38

percent of East-West agreements. This kind

of transaction involves the transfer of an entire production activity to a new location,

usually in Eastern Europe. After coproduction, the next most common agreements

were turnkey plant sales and the sale of

licenses.

Coproduction.—Under this kind of agreement, each partner specializes either in the

production of certain parts of a finished

product, which is then assembled by one or

both partners; or in the manufacture of a

limited number of articles in the production

range, which are exchanged so that each

partner can offer a full range of products.

The technology is usually provided by one of

the partners, but in some cases may be the

culmination of joint R&D effort. Generally,

coproduction and specialization agreements

also include cooperative marketing arrangements. Usually the product bears the trademark of both partners, each of which has exclusivity for the market in its own area but

shares the market in other countries. In cooperative agreements with the Soviet Union,

the Western partner usually has priority for

selling in the industrialized West, and the

Soviet Union confines its sales to Warsaw

Pact nations and possibly certain developing

countries.

The attraction of such agreements for

both the Western and Eastern partners is

obvious. The Western firm may acquire raw

materials and/or labor in the East. The

Eastern country expands its repertoire of

manufacture, its markets, and often its potential for earning hard currency.

Turnkey Plants.—Of all cooperation

agreements, turnkey transactions are perhaps the most effective means of technology

transfer. Although technology may in many

cases be purchased or leased through

straightforward transactions in the marketplace, turnkey projects afford the possibility

of acquiring whole production systems—

from feasibility studies, construction, and

training through technical assistance during

the initial run-in period. Further, most trans-
104 ● Technology and East-West Trade

Table 16.—Classification of East-West Industrial Cooperation Agreements

by Percent

supply of Delivery of Specialization Joint venturing

Total Iicensea

plant coproduction Subcontracting and other

Survey of June 1,1976

Bulgaria . . . . . . . . . . . . . . . . . . . 100.0 17.1 25.7 31.4 11.4 14.4

Czechoslovakia. . . . . . . . . . . . . 100.0 27.3 — 22.7 9.1 40.9

East Germany . . . . . . . . . . . . . . 100.0 — 23.5 14.2 7.1 33.8

Hungary . . . . . . . . . . . . . . . . . . . 100.0 29.5 16.3 32.6 9.6 12.0

Poland . . . . . . . . . . . . . . . . . . . . 100.0 21.7 24.2 32.3 6.4 15.4

Romania. . . . . . . . . . . . . . . . . . . 100.0 19.4 25.5 14.2 7.1 33.8

U. S. S. R.. . . . . . . . . . . . . . . . . . . . 100.0 3.2 20.4 61.5 4.7 10.2

Total CMEA countries

1972. . . . . . . . . . . . . . . . . . . . . . . 100.0 28.2 11.9 37.1 7.9 14.9

1975. . . . . . . . . . . . . . . . . . . . . . . 100.0 26.1 21.7 33.3 6.8 12.1

June 1,1976 . . . . . . . . . . . . . . . . 100.0 17.1 20.5 38.3 7.4 16.7

CMEA= Council for Mutual Economic Assistance or Comecom.

aSupply of license in exchange (in part at least) for products or components

SOURCE: Economlc Commisslon for Europe, Unlted Nations

actions guarantee an ongoing relationship

with the supplier, opening the possibility of

access to developing technology. The continuity of these relationships is universally

regarded as the most important single element affecting the success of a technology

transfer.

Turnkey projects in their pure form, involving purchase of an entire installation

from one firm or one country, are relatively

rare—at least in the case of the Soviet Union.

Most often, a Communist nation contracts

with many Western firms for particular components of a complex, including marketing

and subsidiary services. The Soviet Kama

River truck plant is a good example. Here,

the U.S.S.R. dealt with Western firms in

several countries, assembling its own sophisticated mixture of goods and services to fit

its own specifications.3

Licenses and Patents.—The acquisition of

technology through licenses accelerates indigenous technological progress and enhances potential export capabilities in the

East. According to one estimate, the purchase of a license may cause technological

progress in the affected field to leap by 7 to 8

‘See Harlan S. Finer, Howard Gobstein, and George D.

Holliday, “KamAZ: U.S. Technology Transfer to the Soviet

Union, ” in Henry R. Nau, cd., Technology Transfer and U.S.

Foreign Policy (New York: Praeger Publishers, 1976).

years, compared to only 3 to 5 years with the

purchase of know-how and 1 to 2 years for

coproduction. 4 Often the acquisition of a license creates requirements for other improvements, more imports, further licenses,

and the promotion of exports. Licenses may

be paid for in either currency or in products

through countertrade arrangements. In

Eastern Europe, the latter predominate.5

Licensing arrangements are varied, ranging from a straightforward authorization to

exploit an individual patent to complex

agreements on industrial cooperation. These

may provide for the grant of licenses for

using patents linked with the importation of

certain capital goods; of licenses to use

know-how and technical assistance in building turnkey plants or other industrial installations; and of licenses to use trademarks.

It is apparent that the diversity of modes

through which technology is transferred and

the complex interdependence of activities, which are directly or indirectly involved

in the process, make it extremely difficult to

accurately measure the value of technology

that flows to the East in commercial transac4

See Jozef Wilczynski, “License in the West-East-West

Transfer of Technology, ” Journal of World Trade LauY,

March-April 1977.

5The U.S. Perspective on East-West Industn”al Cooperation, International Development Centre of Indiana University (Bloomington, Ind., 1975).
Ch. Vi—Technology Transfer: Definition and Measurement ● 105

tions. No extensive statistical analysis of the

transfer function in this respect has been

made, and available data can support only

crude analyses of overall volumes and

trends. Any comprehensive assessment of

the economic importance of these transactions would require data of a sophistication

presently unavailable.

NONCOMMERCIAL

TECHNOLOGY TRANSFER

Open and regular contacts between the

scientific and engineering communities of

the United States and the Soviet Union have

received official encouragement through a

number of bilateral agreements. In July

1959, a formal agreement was concluded between the U.S. National Academy of Sciences (NAS) and the Academy of Sciences in

the U. S. S. R.; in the same year the International Research and Exchanges Board

(IREX) began a program that sent American

graduate students and young instructors to

the U.S.S.R. In 1972, the U.S./U.S.S.R.

Agreement on Cooperation in the Fields of

Science and Technology (S&T) was completed, instituting bilateral cooperative programs in a number of scientific fields. The

S&T agreement is predicated on the idea of

building and maintaining a world scientific

community through open channels of communication. More recently, exchanges with

the People’s Republic of China (PRC) have

begun.

The role that such contacts have in transferring American technology with potential

commercial value is the subject of considerable disagreement.

Two recent studies of the S&T agreements

and the exchanges program by NAS have attempted to assess the value to both sides of

the information exchanged in these programs.’ Both concluded that exchanges with

‘National Academy of Sciences, ReUiPti, of the

U.S./U.S.S.R. Agreement on Cooperation in the Fields of Science and Technology, National Research Council, May 1977,

and Reuieuf of U.S./U.S.S.R. Interacademy Exchanges and

Relations, National Research Council, September 1977.

the Soviet Union were worthwhile, although

their value to U.S. participants may be limited by American scientists’ lack of familiarity with the Soviet Union’s unique style of

science and engineering and by the lack of

Soviet candor regarding weaknesses in many

areas of its research. Both programs were

plagued by the rigidity of the Soviet bureaucracy (although problems with the U.S.

bureaucracy seemed to rank a close second)

and by erratic attendance on the Soviet side.

In 1978, for example, NAS extended invitations to 44 Soviet scientists; only 4 participated.

A review of the two studies indicates that

while the initial contacts provided some

useful information about Soviet research

(especially in the fields of medicine, weather

forecasting, accelerated drug testing, nuclear fusion, magnetohydrodynamics, superconducting magnets, and earthquake prediction), the primary value of the U.S./U.S.S.R.

exchanges to America has been one of educating the scientific and engineering community about the nature of the Soviet scientific

system:

Not only do U.S. scientists and engineers

have the opportunity of acquiring at first

hand new ideas and new perspectives from

their Soviet colleagues, they also become

more familiar with the relevant Soviet scientific literature and are alerted to particular

Soviet scientists and engineers whose future

publications likely merit special attention . . . . [The Soviets] have probably received more technical value in computer

topics, in econometrics, and in management

science than has the U. S., largely because

the U.S. is more advanced in these areas.

But the most significant value to the U.S.

. . . lies in better U.S. understanding of the

Soviet planning and management process,

and of Soviet status and approaches in economics, management science and computer

science. 7 It is nevertheless true that the

United States has, on the whole, taught the

Soviets more than it has learned from them.

The NAS expects the future balance to shift

toward greater equality.8

7

1 bid., Agreement on Cooperation, pp. 7, 43.

‘Ibid., Interacademy Exchanges and Relations, p. 3.
106 Technology and East-West Trade

According to NAS, the risk of inadvertently communicating important technology

through scientific exchange is minimal. The

Commerce Department’s Office of Export

Administration regularly briefs U.S. scientists on topics they should not discuss in the

exchange programs, and “except in certain

narrow and well-delineated fields, problems

of technology do not loom large . . . The

Soviets have not managed to translate into

practice the wealth of American technical

data already available to them through the

open literature [and as a result] their technology is unlikely to benefit greatly from

any further technical data we might disclose

except certain specific data which are proprietary or classified. ‘g

A different cost/benefit balance may exist

in the student exchanges between the

United States and the U.S.S.R. These can

result in the transfer of technology that is

difficult to quantify or even identify. Since

about 1972, Soviet “students,” who are

usually experienced engineers, scientists,

and managers of R&D establishments, have

concentrated on study programs in the

United States in semiconductor technology,

‘I bid., Interacademy Exchanges, p. 4; Agreement on Cooperation p. 43.

Photo credit U S Department of Energy

American magnetohydrodynamic (MHD) technology arrives in the Soviet Union

as part of the U.S./U.S.S.R. Cooperation Program
Ch. V/— Technology Transfer: Definition and Measurement ● 107

computers, and other fields related to problems of applied research. Large numbers of

Chinese “scholars” are similarly beginning

to appear in the West. Data reflecting the

number of such students and the institutions they attend tell little of the nature and

amount of the technology they carry back

with them. It has been alleged that this information carries potential military significance. As far as can be determined, however,

no systematic attempt has ever been made

to quantify its value in either military or

commercial terms. Any complete assessment of such exchanges must weigh both

strategic and potential commercial losses

against their political and cultural value.
—. .— -

CHAPTER VII

The East-West Trade Policy

of the United States
CONTENTS

Page

EXPORT-LICENSING CONTROLS. . . . . . . . . . . . . . . . . . . . . . ..........112

Laws and Amendments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .........112

The Export Control Act of 1949 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .112

The Mutual Defense Assistance Control Act of 1951. . ...............113

The 1960’s—The Beginnings of Moderation. . . . . . . . . . ..............114

The Export Administration Act of 1969. . . . . . . . . . . ................115

The 1972 Amendments: The Equal Export Opportunity Act . .........117

The Export Administration Act Amendments of 1974 . ..............119

The Export Administration Act Amendments of 1977 . ..............120

The Export Administration Act of 1979. . . . . . . . . . . ................122

Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .............126

 The Administration of U.S. Export Controls: The Licensing System .......126

The Commodity Control List. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ....127

The Executive Agencies in the Licensing Procedure . ................130

The Mechanics of the Validated Licensing Procedures . ..............131

Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...........136

Criticism of the System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .......138

Control of NuclearExports. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .......143

CREDITS AND TARIFFS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. ..144

The Export-Import Bank of the United States . . . . . ....................144

The Commodity Credit Corporation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...148

Tariffs: Most-Favored-Nation Status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..149

Table 17.–Export Administration System: Country Grouping . .................129

Table 18.–Export License Applications Pending for More Than 90 Days . .........139

Table 19.–Funding, Authorized Positions, and License Applications Volume .. ....140

Table 20.–Export-Import Bank Exposure in Selected Communist Countries . ......146

Table 21.–Communist Countries: Eligibility for U.S. Programs . . . . . . . . . .........148

Figure 3.-Sample Page of the U.S. Commodity ControlList . ...................128

Figure4.-Industry and Trade Administration, U.S. Department of Commerce. . . . . 130

Figure 5.-Office of Export Administration, U.S. Department of Commerce. . ......132

Figure6.-Export License Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .133

Figure 7.-Multiagency Advisory Committee on Export Policy Structure. . ........136

Figure8.-Economic Defense Advisory Committee Structure . ..................137

Figure9.-Age of DOD Export Control Cases (January-September 1978) ..........141

Figure l0.-Age of DOD Export Control Cases (October-December1978) . .........141
— . —.

CHAPTER VII

The East-West Trade Policy

of the United States

The present state of U.S. trade policy toward Communist nations reflects

the ambivalence and dissension which, for the past three decades, have characterized U.S. posture toward the Eastern bloc. Much of the basic structure of

present programs was designed at the height of the cold war, when suspicions

about the capabilities and intentions of the Communist world ran very deep. The

early legislation was intended to impose a virtual trade embargo on these countries. Since that time, however, three major changes have occurred: 1) the United

States has lost much of its leverage with its Western trading partners and is

now unable to impose a unified trading posture within the Western bloc; 2) it is

no longer possible to treat Communist nations as a monolithic bloc; and 3) there

has been an overall improvement of relations with the Eastern world. Together,

these developments have led to a series of alterations in the basic policy of the

United States, beginning with the Export Administration Act of 1969. This policy, however, is implemented through an administrative structure which was

fashioned some 30 years ago. The product of years of incremental modification,

this system embraces a cumbersome and sometimes confusing set of procedures

that reflect diverse and frequently conflicting interests.

U.S. policy that has a direct impact on trade with the East can be divided

into three categories:

1. export-licensing controls that govern the export of products or technologies appearing on a list of controlled commodities, and nuclear equipment and nuclear fuels;

2. controls over export and import facilities that regulate the use of credits,

loan guarantees, or other incentives for trade with certain categories of

nations; and

3. control over tariffs that allows the United States to levy higher rates of

duties on imports from countries to whom “most-favored-nation” (MFN)

status has not been granted.

Apart from these measures, there is a range of possible legislation which if

adopted could facilitate trade with the Communist world. This includes tax, patent, and antitrust law. There appears to have been little interest in Congress in

reformulating U.S. tax, patent, and antitrust policy in ways that might expedite

East-West transactions. These issues are touched on elsewhere in this report

(see chapters II and III).

111
112 ● Technology and East-West Trade

EXPORT-LICENSING CONTROLS

LAWS AND AMENDMENTS

The Export Control Act of 1949

The decision to exert strict peacetime controls over U.S. exports to certain countries

in the name of national security marked the

advent of the modern era of U.S. foreign and

national security policy. Export controls as

such were no innovation. The Trading With

the Enemy Act of 1917, for instance, had

granted the President power to impose such

controls in time of war or, with the consent

of Congress, national emergency. But until

the end of World War II and the beginning

of the cold war, the idea of continuing national security controls over trade on a regular peacetime basis was unprecedented. Such

a notion was premised on the thesis that

trade and other economic transactions constituted a “weapon” of considerable potential impact; and that technology was an increasingly important determinant of national power. The development of nuclear weapons provided a potent example of the military significance of technology.

The Export Control Act emphasized the

danger to U.S. national security of the unrestricted export of materials without regard

to their potential military significance and

declared it to be the policy-of the United

States to “exercise the necessary vigilance”

over exports to ensure this security. Its purpose was to deny militarily useful exports to

the Soviet Union and its allies. The effect of

the Export Control Act was to make exporting a privilege and not a right, and it signaled a policy in which national security considerations took precedence over the economic advantages of foreign trade.

The Act was broadly worded. It empowered the President to prohibit or curtail the

export of “any articles, materials, or supplies, including technical data, except under

such rules and regulations as he shall prescribe, ” (sec. 3(a)). Any materials or technology could come under the purview of the

Act, so long as the President determined

that their export would contribute to the

military potential of any country threatening the national security of the United

States. Thus, the language of the Act was

clearly consistent with the control of items

with only indirect military utility. The President was authorized to delegate the power to

determine which articles to control to the appropriate executive departments and Federal agencies concerned with the domestic and

foreign policy aspects of trade.

Theoretically, the Export Control Act extended equally to all countries. As it was administered, however, licenses were usually

easily obtainable for exports to Western nations and, from the start, Communist destinations were singled out for the proscription

of exports. The early list of controlled commodities was long and comprehensive and

the Act was rigidly enough interpreted that

items of economic, as well as military significance, came under its purview.1 Responsibility for the administration of export controls

was lodged in the Office of Export Control of

the Department of Commerce, which had

already operated similar controls to ensure

the availability of supplies during World

War II. These controls came to extend to

three categories of items: exports of commodities and technical data; reexports of

U.S.-originated commodities and technical

data from one foreign country to another;

and U.S.-originated parts and components

used in a foreign country to manufacture a

foreign end product for export. Despite the

basic changes in policy over the next 30

years (see below), the apparatus that grew to

administer these controls has survived nearly intact to the present.

‘U.S. House of Representatives, Investigation and Study

of the Administration Opemtion and Enforcement of the Export Control Act of 1949, and Reluted Acts, 87th Cong., 1st

sess., October and December 1961. See also R. J. Carrick,

East- West Technology Transfer in Perspective, Policy Papers

in International Affairs (Berkeley, Calif.: University of California, 1978), p. 25.
Ch. VII—The East-West-Trade Policy of the United States ● 113

The Mutual Defense Assistance

Control Act of 1951

The Export Control Act represented the

unilateral response of the United States to

the Communist threat that confronted the

free world in the aftermath of World War II.

It was clear, however, that if a policy of virtual trade embargo was to succeed for long

the cooperation of America’s allies was vital.

The need for the United States to solicit this

cooperation had become apparent at least as

early as 1947 when Congress discussed the

use of U.S. foreign aid as a lever to ensure

allied accord in limiting exports to the Soviet

bloc. In both the Economic Cooperation Act

and Foreign Assistance Act of 1948, aid was

tied to trade. In the former, the prospect of

U.S. aid was used to encourage cooperation;

the latter Act made the Marshall plan hostage to restraint in exports to the East.

These were not popular policies in Japan or

in Western Europe, which not only had different perceptions of the nature of the Communist threat, but which also had relied

much more extensively than the United

States on trade with Eastern Europe.

The United States first attempted to enforce a united Allied approach to trade with

the Communist bloc in October 1951, with

the passage of the Mutual Defense Assistance Control Act or Battle Act (Public Law

87-195). The Battle Act had a dual thrust.

First, it reaffirmed the objectives of the Export Control Act by clearly stating a policy

in which trade was to be used as a weapon

against the Soviet Union and its satellites.

This is apparent in title II, which declared it

to be U.S. policy to regulate the export of

commodities other than arms, ammunition,

implements of war, etc, “to oppose and offset by nonmilitary action acts which threaten the security of the United States and the

peace of the World” (sec. 201).

Even more important, however, the Battle

Act formally announced the intention of the

United States to seek multilateral cooperation in the implementation of this policy. It

created sanctions through which such cooperation might be enjoined and provided a legislative mandate for active U.S. participation in multilateral organizations designed

to realize the embargo. Title I of the Act empowered the President of the United States

to terminate all forms of military, economic,

and financial assistance to any nation that

knowingly permitted the sale of U.S. embargoed goods to a prohibited destination; i.e.,

to any country “threatening the security of

the United States. ” These embargoed goods

included arms, ammunition, implements of

war, atomic energy materials, petroleum,

transportation materials of strategic value,

and items of strategic significance used in

the production of arms, ammunition, and implements of war (sec. 101). Moreover, Congress stipulated that the United States

negotiate with those countries receiving its

aid “to undertake a program controlling exports of items (other than arms, etc.) . . .

which should be controlled to any nation or

combination of nations threatening the

security of the United States, including the

Union of Soviet Socialist Republics and all

countries under its domination” (sec. 202).

Allied response to the Battle Act was

never enthusiastic. As a 1969 House Banking Committee report noted,

From the outset, few West European or

Japanese statesmen or businessmen shared

the underlying assumption, or for that matter, the ultimate objective of the embargo.

Only under the most intense pressure and coercion did Europe and Japan accede to this

restrictive policy . . . . A chain of legislation

followed stipulating that nations receiving

U.S. aid had to conform to rules laid down by

the United States concerning exports to

Communist countries. The threats of these

laws to cut off American aid became the

main bargaining weapon with which Western European governments were brought to

cooperate in the embargo policy.

Allied differences with the United States

rested both on policy and economic interests.

Europeans simply could not accept the view

that denying trade would put an end to communism or even curtail the Communist countries’ development. In more pragmatic

terms, trade with Eastern Europe was a
114 ● Technology and East-West Trade

matter of no small consequence to our West

European partners .. ..2

At this time, however, U.S. economic and

military aid far outweighed such trade in

economic importance to Western Europe.

Thus, although export controls there and in

Japan would never be as severe as those in

the United States, America’s allies did

evince some willingness to join in a coordinated trade policy. This can be seen in the

founding in 1950 of the Coordinating Committee for Multilateral Export Controls, or

CoCom. CoCom, which remains a functioning body today, is an informal multilateral

organization made up of the United States

and its principal allies. It attempts to coordinate the national export controls of its

members into a unified policy that limits

strategic trade with the Communist bloc.

The history and operations of CoCom are discussed in chapter VIII.

The 1960's – The Beginnings

of Moderation

By the early 1960’s, pressure from Europe

and from some parts of the U.S. business

community led to a major reevaluation of

U.S. export policy. Discussion in the United

States over the shape and future of export

controls began to emphasize a search for a

proper balance between the economic benefits of expanded trade with the East and the

threat to U.S. national security posed by

this trade. The history of export controls

since the 1960’s has been a gradual movement from an exclusive emphasis on the

security aspects of trade toward relaxation

of controls. There was, however, no major

change in policy during the 1960’s.

President Kennedy, for example, in his

January 30, 1961 State of the Union address,

requested greater discretion for using “economic tools . . . to help reestablish historic

ties of friendship” between the United

States and the Eastern bloc whenever this

*Hearings on H.R. 4293 to extend and amend the Export

Control Act of 1949, Committee on Banking and Currency,

1969, p. 4.

was “clearly in the national interest.”3 In

order to facilitate any resulting trade, Kennedy established by executive order the Export Control Review Board, a cabinet-level

body which considered the merit of applications for exports to the Communist world.

Congress, on the other hand, took no initiative to formulate a less restrictive policy.

On the contrary, a 1962 amendment to the

Export Control Act explicitly broadened the

criteria for adding items to the list of controlled commodities by formally including

exports of economic as well as military significance under its aegis. The language of the

Act was thus altered to read that “unrestricted exports of materials without regard

to their military and economic significance

may adversely affect the national security of

the United States. ” (Emphasis added.) Licenses for any export making a “significant

contribution to the military or economic

potential” of nations threatening this national security were to be denied. This

amendment may not have substantially affected the number and kinds of commodities

under control; criteria for inclusion on the

list were already broadly interpreted. But

the spirit of the amendment implies the declaration of outright economic warfare on the

Communist world.

In an attempt perhaps to ameliorate the

effect of this declaration, President Johnson

in 1965 created a Special Committee on U.S.

Trade Relations with East European countries and the Soviet Union. Its task was to

explore “all aspects of expanding trade” in

support of the President’s policy of “building bridges” between the United States and

the countries of Eastern Europe and the

U.S.S.R., 4 a policy which the President reaffirmed in a State of the Union address in

which he announced that the Government

was “now exploring ways to increase peaceful trade with the countries of Eastern

Europe and the Soviet Union.”5 Immediate

‘Department of State, The Battle Act in New Times, 15th

Report to Congress, p. 5.

4Department of State, The Battle Act Report, 18th Report

to Congress, p..49.

‘Ibid.
Ch. VIl— The East-West-Trade Policy of the United States ● 115

increases in such trade were not forthcoming, however. The members of the Special

Committee–labor, business, and financial

leaders–were generally “hardliners” on

East-West relations and the committee’s

recommendations did little to encourage expansion. Although the committee recommended that the President be given discretionary authority to grantor withdraw MFN

tariff treatment to and from individual Communist countries when he determined this to

be in the national interest, it also felt that

trade with Communist countries should neither be subsidized nor receive artificial encouragement. 6 No basic alterations were proposed to the system of export controls, but it

was suggested that the role of the Department of Defense (DOD) be expanded and

that it, rather than the Department of Commerce, become the primary agency responsible for identifying strategic goods.

The Export Administration Act

of 1969

By the time of the first Nixon Administration, however, the policy of “economic warfare” had come under increasing attack. The

economic leverage on which the Battle Act

relied had been greatly diminished by the

rapid reconstruction of the Japanese and

West European economies and the consequent reduction of their need for U.S. aid.

The Battle Act, in fact, had never been invoked to enforce sanctions. This by no

means indicated that the export controls of

all nations receiving U.S. aid were as stringent as those of the United States, or that

America’s allies were willing to pursue policies of economic embargo. Often, the executive used its waiver authority under the Battle Act to countenance European exports to

the East that otherwise would have violated

the law. During the mid-1950’s Western

European exports to the Warsaw Pact nations increased while the amount of American aid to Western Europe decreased (see

chapter VIII). Furthermore, American manufacturers had begun to complain that over61bid., pp. 67-69.

ly restrictive legislation placed them at a

competitive disadvantage with Japan and

the countries of Western Europe, whose

trade with the Soviet Union, the People’s Republic of China (PRC), and Eastern Europe

was expanding.

Congress was responsive to these pressures. In the face of the national weariness

with the cold war and changing perceptions

of superpower relations, a burgeoning balance of payments deficit, and recognition of

the growing commercial value of an EastWest trade in which the United States was

not participating, the initiative to liberalize

export controls began to come from Congress. This resulted in the passage of the Export Administration Act of 1969 (Public Law

91-184). This Act symbolized the attempt to

achieve a new emphasis for export controls—

away from a restrictive and strategic embargo toward a careful expansion of exports.

This is not to say that the Export Administration Act had the wholehearted support

of a unanimous Congress. On the contrary,

the controversies that surrounded its passage are significant, for the disagreements

that surfaced in 1969 over the future of export controls have yet to be resolved. They

reflect differing perceptions of the nature of

the threat to the United States posed by the

Soviet Union and of the ways in which this

threat should be faced.

Extension of the Export Control Act in

the House came under the jurisdiction of the

Committee on Banking and Currency, which

originally reported out a bill extending the

existing 1949 legislation with only minor

changes in administration. This was consistent with the position of the Nixon Administration at the time. But a dissent to the majority report of the committee argued for a

fundamental change in the law, asserting

that the basic premises that underlay the

Export Control Act were no longer valid: the

Sine-Soviet bloc was no longer monolithic;

goods withheld from the Soviet Union by the

United States could be obtained elsewhere;

and the attempts of the United States to impose unilateral export controls more severe
116 ● Technology and East-West Trade

than those of its allies were divisive. According to one Representative, the United States

had

. . . moved into a period in which the Congress should maintain a close, in-depth review of our export control laws with a view

to reshaping them in light of political, economic, and technological changes taking

place in Western Europe, Japan, and the

Communist countries of Eastern Europe . . . . At this stage of development, the

United States has at least as much to gain as

the Communist countries from mutual trade

and the barring of this trade today is hurting

us more than them . . . . Controls on commercial goods continue not only as an irritant to

our allies but as a loss in business to U.S.

firms . . . . The Export Control Act should be

amended to include a finding that expanded

trade in peaceful goods and technology with

all countries with which we have diplomatic

or trading relations can further the sound

growth and stability of the U.S. economy as

well as further our foreign policy objectives.7

Another proposed amendment would have

introduced the criterion of foreign availability in the disposition of export license applications. The President, it was suggested,

should “take into consideration the availability of an export from any nation with which

we have a defense treaty commitment in determining whether or not an export license

shall be denied or granted to one of our own

exporters.”8

These minority views in the House of Representatives were consonant with the prevailing opinion in the Senate. In its report on

the Senate version of the export control legislation, the Senate Committee on Banking

and Currency asserted that since 1949, “virtually every circumstance which made the

Export Control Act both advisable and feasible has changed. ” It was no longer possible

to “impede the development of Russia by

refusing to sell goods to it, ” for the Soviets

could obtain what they desired elsewhere.

‘Representative Thomas Ashley, in U.S. Congress, House

Committee on Banking and Currency, Export Control Act

Extension, report no. 91-524, Sept. 29, 1969, pp. 9-11.

‘Representative Gary Brown, ibid., pp. 18-19.

The competitive disadvantage suffered by

American businessmen and the U.S. balance

of payments deficit were added reasons for

overhauling the existing legislation. In sum,

The attitude apparent in the language of

the Export Control Act is one of open hostility, which is an accurate reflection of the prevailing attitude 20 years ago. The committee

believes that it will be helpful in the attempt

to reach greater understanding with Russia

and nations of Eastern Europe if the legislation which deals with the regulation of exports accurately reflects current attitudes.9

The minority view in the Senate, on the

other hand, resembled that of the majority in

the House. At the heart of the disagreement

both within and between the two Houses

were the protagonists’ assumptions about

the nature and future of East-West relations. Some Senators were in favor of maintaining the existing export control legislation with minor administrative changes.

They wrote of the proposed Senate revisions:

The proposal which would replace the

present Export Control Act is based on the

assertion that factors which brought about

the enactment of the Export Control Act no

longer exist. We cannot agree with such an

assertion. It is suggested that we are now

living in an era in which the Soviet Union

presents a reduced threat to the security of

the United States. We find no evidence that

such a new era has been ushered in. In fact,

we consider the Soviet Union as a much

greater threat to the security of the United

States than it was when the Export Control

Act of 1949 was passed.10

The views of the majority of the Senate

Banking Committee eventually prevailed in

Congress and “export control” was replaced

by “export administration. ” The new Act attempted to reconcile an encouragement of

trade with the East with the maintenance of

national security concerns by declaring it to

be the policy of the United States both “to

‘U.S. Congress, Senate Committee on Banking and Currency, report no. 91-336, July 24, 1969, pp. 2-3.

‘“Senators Wallace F. Bennett and John G. Tower, ibid., p.

22.
Ch. VII—The East-West-Trade Policy of the United States 117

encourage trade with all countries with

which we have diplomatic or trading relations, ” and “to restrict the export of goods

and technology which would make a significant contribution to the military potential of

any other nation . . . detrimental to the national security of the United States” (sec. 3).

The Act specifically noted the negative impact of unwarranted regulation of trade on

the U.S. balance of payments and the impediment of this regulation to the efforts of businessmen to expand trade. The employment

of America’s technological resources abroad

was no longer to be regarded merely as an instrument of foreign policy and national security; in the Act, trade also became an instrument to “further the sound growth and stability” of the U.S. economy, and Congress’

intention to promote trade in peaceful goods

was clearly expressed. All language implying that trade restrictions might be used to

pursue policies of economic warfare was deleted. Under the Act, therefore, export controls became exceptions limited to three

basic purposes: to protect the national security, to protect goods and commodities in

short supply, and to further foreign policy

aims as determined by the President. The

presumption had now shifted in favor of

more normal economic relations with the

Communist world.

In order to implement this intention, the

Secretary of Commerce was authorized to

undertake the organizational and procedural

changes necessary to revise control regulations and shorten lists of controlled commodities by removing items of purely economic or marginal military use; only goods

and technologies that would make a significant military contribution, were in short supply, or would in the view of the President further a foreign policy aim of the United States

were subject to control. Exporters were

given the right to obtain information on the

criteria for export licenses, to learn the

reasons for denials or delays in granting

licenses, and to present evidence to support

their applications in regulatory proceedings.

Finally, the administrative agencies responsible for export control were enjoined to consult among themselves and with affected industries for information and advice on the

revision of the controlled commodity lists.

The 1972 Amendments: The Equal

Export Opportunity Act

The Export Administration Act expired in

1972, at which time it was amended and extended until 1974 by the Equal Export Opportunity Act (Public Law 92-412). Its provisions reflect two problems with the implementation of the 1969 Act—reviews of the

unilateral and multilateral commodity control lists, and the proposed consultations

among agencies and with affected industries. Although 21⁄2 years had passed since

this legislation was enacted, the House Committee on Banking and Currency found that

the required reviews and revisions had not

been made and that consultations with industry still left much to be desired. According to the committee, this situation

stemmed, first, from a shortage of Federal

agency manpower and technical expertise regarding the “state of the art” of many products available both in the United States and

in Europe. Second, sufficient procedures for

consultation with domestic producers who

knew the product, the competition, and the

“state of the art” had not been developed.11

Although the House report voiced these

concerns, the committee recommended extension of the 1969 Act without alteration,

rejecting not only amendments addressed to

these problems but also one which would

have declared it to be “the policy of the

United States to use export controls to oppose the denial by any country of the rights

of its Jewish and other citizens to free emigration and the free exercise of religion. ” In

this connection, the committee expressed its

sympathy in the plight of Soviet Jews, but

felt “that the amendment in question might

not be the best approach to the resolution of

the problem at this time.“12

“U.S. Congress, House Committee on Banking and Currency, International Economic Policy Act of 1972 report no.

92-1260, July 27, 1972, p. 4.

12u.s. ConWess, House Committee on Banking and Currency, International Economic Policy Act of 1972, report no.

92-1260, pt. II, Aug. 3, 1972, p. 2.
118 . Technology and East-West Trade

The amendments which would eventually

be embodied in the Equal Export Opportunity Act ultimately evolved from the report of

the Senate Committee on Banking, Housing,

and Urban Affairs, which shared the House

Committee’s concerns over the necessity for

review of unilateral and multilateral controls, and over consultation with industry.

Of particular interest to the Senate was the

possible handicap the Act might pose to

American businessmen in competing with

other CoCom countries for markets in the

East:

At this time the United States controls

495 classifications of goods and technology

by multilateral (CoCom) agreement with our

Allies. In addition, the United States

chooses to retain unilateral controls on 461

classifications of goods and technology. The

United States is the only CoCom country

which controls the export of a significantly

greater number of items than those which

the CoCom agree to control multilaterally . . . . Items which are available in comparable quality and quantity from foreign

sources shall be removed from unilateral

controls unless the Secretary gives adequate

evidence that such decontrol would threaten

the national security .13

The committee also found that the establishment of Technical Advisory Committees

(TACs) would “enable the Government to

utilize more effectively the technical and

commercial expertise which only representatives of industry affected by export controls

can provide,”14 and it recommended the creation of such committees.

These proposals encountered the same opposition as had the Export Administration

Act 3 years before. Senators Tower and Bannett particularly felt that the Act as it stood

was flexible enough for a policy of expanding

trade without jeopardizing national security

interests. They objected to the establishment of TACs, for instance, on the grounds

that the judgments required in export-licens-

‘3U.S. Congress, Senate Committee on Banking, Housing

and Urban Affairs, Equal Export Opportunity Act and the

International Economic Policy Act of 1972, report no. 92-890,

June 19, 1972, pp. 2-3.

“Ibid., p. 4.

ing decisions were governmental responsibilities that industry experts were ill-equipped

to make; that TACs would introduce new administrative burdens to the licensing system; that the informal consultation arrangements already adopted by the Department

of Commerce were adequate; and finally,

that the requirement of consultation with

TACs would inhibit the Commerce Department from placing new items under control.

These objections notwithstanding, Congress passed the Equal Export Opportunity

Act and gave legislative mandate to the

views of the majority Senate report. First,

the new Act emphasized the adverse effect

on U.S. balance of payments of excessive export controls, particularly those which are

more restrictive than those imposed by

America’s CoCom allies. It directed the Secretary of Commerce to remove, so far as the

national security of the United States permitted, unilateral U.S. controls over commodities available “. . . without restriction

from sources outside the United States in

significant quantities and comparable in

quality to those produced in the United

States” (sec. 4(b)(2)(B)). This made foreign

availability-the existence of significant

quantities of comparable goods outside the

United States–a formal reason for granting

a U.S. export license.

A second provision ensured the use of private sector expertise by requiring the Government to consult with qualified private industry experts on all licensing decisions. To

accomplish this, the Secretary of Commerce

was directed “upon written request by representatives of a substantial segment of any

industry” that produces commodities subject to export controls to appoint TACs consisting of representatives of U.S. industry

and Government. The TACs were to be “consulted with respect to questions involving

technical matters, worldwide availability,

and actual utilization of production and technology and licensing procedures which may

affect the level of [unilateral U.S. and

CoCom] export controls” (sec. 5(c)(l), 5(c)(2)).

Since 1972, the Secretary of Commerce has

established eight TACs in the following
Ch. VII—The East-West-Trade Policy of the United States 119

fields: semiconductors; semiconductor manufacturing and test equipment; numerically

controlled machine tools; telecommunications equipment; computer systems; computer peripherals, components, and related

test equipment; and electronic instrumentation.

The Export Administration Act

Amendments of 197415

Consideration of the Export Administration Act in 1974 occurred in the aftermath of

the OPEC oil embargo, economic recession,

and serious domestic shortages in several

commodities. Although the discussions in

both Houses were understandably dominated by the issue of short supply controls,

Congress also passed amendments that had

an impact on the transfer of technology

through national security and foreign policy

controls.

In the House Banking and Currency Committee, the central concern arose from the

bilateral exchange agreements in science and

technology that had been signed after the

1972 U.S.-U.S.S.R. summit. As a result of

these agreements and the Joint Commission

established under them, many U.S. companies entered into technical cooperation

agreements with the Soviet Union, some of

which called for the exchange of pure, unembodied technology. Under the existing legislation the Department of Commerce and the

other agencies of Government concerned

with export control were not informed of the

details of these technical cooperation agreements until they led to application for export

licenses. This made it difficult for the Government to effectively discharge its export

control responsibility. The Subcommittee on

International Trade of the House Committee

on Banking, therefore, considered an early

notification system for technical cooperation

agreements. It also investigated charges

that technical secrets that would endanger

“

>

’I’he material in this and the following section is drawn

from Patricia t$’ertman, “A Brief Overview of the Amending

of the Export Administration Act of 1969, W’ith Special Emphasis on N’ational Security and Foreign Policy Controls, ”

Congressional Research Ser\ice, Feb. 8, 1979.

national security were being exported to the

U.S.S.R. through the agreements. Testimony from expert public witnesses, as well

as from representatives of the Departments

of Defense, State, and Commerce, discounted these charges. And although Government officials testified that new reporting requirements would give them better

control of exports to protect national security, no provision on prior notification of

technical cooperation agreements appeared

in the Senate version of the bill or in the final

legislation.

As before, the amendments to the Export

Administration Act adopted by the full committee originated in the report of the Senate

Committee on Banking, Housing, and Urban

Affairs. The Senate discussions of national

security controls resurrected the twin concerns of prior Congresses that U.S. businesses not be unduly penalized in the administration of export controls and that the national security not be jeopardized by the

transfer of sensitive technologies. On the

subject of the administration of licensing

provisions, the Senate proposed a new section to the Export Administration Act requiring that applications for export licenses

be acted on within 90 days of their submission. If the deadline could not be met, the applicant was to be informed of the reasons for

the delay and an estimate given of the time

needed for decision. Other amendments required the Secretary of Commerce to report

to Congress on the steps taken to expedite

the licensing process; the Departments of

Commerce, Defense, and State, as well as

other appropriate agencies, to be represented on TACs; and disclosure to the House

and Senate of information on the reason for

export controls already in effect or contemplated.

A final amendment called for review by

the Secretary of Defense of all exports to

“controlled” countries (i.e., Communist

countries). The Military Procurement Authorization Act of 1974 (Public Law 93-365)

had already mandated such a review for

technologies developed directly or indirectly

as a result of R&D funded by DOD. This
120 . Technology and East-West Trade

oversight was now extended to all license applications. The Secretary was empowered to

recommend to the President disapproval of

any export if it would significantly increase

the military capability of a controlled country. A Presidential decision to override the

Secretary of Defense was to be submitted to

Congress, which had 30 days in which to

overrule the President’s decision by majority vote. These provisions were designed “to

insure that DOD has an adequate opportunity to consider the military and national security implications of exports to Communist

countries and that the Congress has a voice

in the decision in the event of White House

and DOD disagreement.“16

The Export Administration Act

Amendments of 1977

In 1977 there was no serious disagreement

between the two Houses on the substance of

the proposed amendments to the Export Administration Act. In both the mood was

clearly in favor of facilitating the expansion

of East-West trade so far as this was consistent with national security. One important

area of discussion was the issue of foreign

availability. Section 4(b)(2) of the existing

legislation stipulated that “goods freely

available elsewhere shall not be controlled

for export from the United States unless it is

demonstrated that the absence of controls

would damage the national security. ” The

existing legislation allowed Presidential

discretion in imposing national security controls “regardless of the availability” (sec.

4(b)(l)). The House wanted to ensure that the

necessity for control was justified, i.e., it

wanted to make exemptions from control on

the grounds of foreign availability the basic

policy of the Act. The Senate agreed, providing in its bill that in the cases where “adequate evidence has been presented to the

President demonstrating that the absence of

such controls would prove detrimental to the

national security of the United States . . .

such evidence is to be included in the annual

“U.S. Congress, Senate Committee on Banking, Housing,

and Urban Affairs, Export Administration Act Amendments

of 1974, report no. 93-1024, July 22, 1974, p. 9.

report required by the act.”17 Moreover, the

Senate version required the President to initiate negotiations with other countries to

eliminate foreign availability in such instances. Both of the latter requirements

were included in the enacted legislation.

In addition, the bills voted out of committee in both Houses sought to alter the ideological classification of countries to which

exports should be controlled. Under the existing legislation the Secretary of Defense

was directed to review applications for exports to “controlled” countries, i.e., Communist countries as defined in section 620(f) of

the Foreign Assistance Act of 1961. ’8 Both

Houses substituted for “controlled country”

the phrase “country to which exports are

restricted for national security purposes. ”

According to the Senate, the previous approach was both “straitjacketed” and “inconsistent, ” little serving the Nation’s interest in maintaining flexibility in the scope

and application of export control. It was

crucial that export control policy reflect the

changing complexion of international relations, yet existing legislation foreclosed or

diminished new market opportunities in

Eastern Europe. At the same time, it ignored the possibility, however remote, of potential threats to the Nation’s security from

entirely different parts of the world. As the

Senate observed, one of the major purposes

of the amended legislation was to “promote

and encourage a continuing reexamination of

export control policies and practices to insure that they reflect changing world conditions and the changing dimensions of national security . . . The bill is intended to

diminish the tendency of rigid cold war

perceptions of national security to dominate

the export control process.“19

“U.S. Congress, Senate Committee on Banking, Housing,

and Urban Affairs, Export Administration Amendments of

197z report no. 95-104, Apr. 26, 1977, p. 29.

‘

nThese countries include the Soviet Union, Albania, Bulgaria, Czechoslovakia, Estonia, East Germany, Hungary,

Latvia, Lithuania, Poland, Romania, People’s Republic of

China, Yugoslavia, Tibet, Outer Mongolia, North Korea,

North Vietnam, South Vietnam, and Cambodia.

‘

gSenate report no. 95-104, op. cit., p. 9.
Ch. VII—The East-West-Trade Policy of the United States 121

The House similarly desired to reduce emphasis on Communist countries as the focus

of export controls, recognizing that Communist and non-Communist countries alike

might vary in the extent to which they constituted a threat to the national security of

the United States. But implicit in this reduction of emphasis on specific countries as the

basis for export controls was the need to put

greater emphasis on the nature of commodities to be exported.20 What both Houses

sought, therefore, was a more flexible approach to export controls that would shift

emphasis from the country of destination to

the exported commodity. Both bills expressed this in identical language: “In administering export controls for national

security purposes, United States policy

toward individual countries shall not be

determined exclusively on the basis of a

country’s Communist or non-Communist

status but shall take into account such factors as the country’s present and potential

relationship to the United States, its ability

and willingness to control retransfers of

United States exports in accordance with

United States policy, and such other factors

as the President may deem appropriate.“21

The President was to periodically review

policy toward individual countries.

The amended Act also limited the grounds

on which the Secretary of Defense could

recommend against export for national security reasons. Instead of restricting exports

of products that “significantly increase the

military capability” of a country, it became

necessary to show that the exports would

“make a significant contribution to the military potential of such country. ” In another

section the original language, “significantly

increase the military capability of such country” became “make a significant contribution, which would prove detrimental to the

national security of the United States, to the

military potential of such country” (sec.

4(h)(l)). The import of these changes was

that it was no longer sufficient simply to

*“House report no. 95-190, op. cit., pp. 3-4.

21 Senate report no. 95-104, op. cit., p. 57; House report no.

95-190, op. cit., p. 32.

show that an export in some way contributed to foreign military capabilities (presumably a very wide range of products and technologies contribute in some way to military

uses). The Secretary must now stipulate that

the military impact is detrimental to the

security of the United States.

The 1977 amendments also embodied several procedural changes in the administration of export controls. Both the House

and the Senate were displeased with the persistently slow processing of licenses for export, and both proposed bills reiterated the

provision that all export licenses be approved within 90 days unless the applicant

was notified in writing that additional time

was needed. In addition, the applicant was

enabled to respond fully in writing to the

questions and considerations raised by the

application. In the event of interagency

review of a proposed export, the applicant

could review the documentation to determine that it accurately described the proposed export. If the export license was

denied, the applicant was to be informed of

the specific statutory authority for the

denial, i.e., national security, foreign policy,

or short supply. (The Commerce Department

had been denying export licenses on the nonstatutory grounds of “national interest.”) In

addition, the Secretary of Commerce was required to review the export regulations and

lists in order to simplify and clarify them.

Within 1 year the Secretary of Commerce

was to report to Congress any actions to simplify the export rules and regulations.

The 1977 amendments also extended

terms of service on TACs from 2 to 4 years,

instructed TACs to review multilateral as

well as unilateral controls, and the Secretary

of Commerce to report to Congress semiannually on consultations with TACs. But

while the Senate bill provided that TACs be

informed of the reasons for the failure of the

Government to accept their advice, the

House bill stated that:

The committee notes that it considered

and rejected recommendations by industry

that the Government be required to justify
122 ● Technology and East-West Trade

directly to the TACs any refusal to accept

their advice. The committee views such a requirement as an unwarranted intrusion of

the private sector into governmental decisionmaking. The committee bill preserves

the requirements that the Government be

accountable for its actions, without creating

a presumption that the Government is constrained to accept the advice of any single interest group. z

’

The final legislation incorporated the House

version.

The Export Administration Act

of 1979

The 1977 amendments extended the Export Administration Act until September 30,

1979. But by September 1978, attempts

were already underway in the House of Representatives to produce legislation that

would impose conditions restrictive to the

growth of East-West trade. The Technology

Transfer Ban Act (H.R. 14085), introduced

by Representative Dornan on September 14,

1978, asserted that no coherent national

policy controlled the transfer of technology

to the Communist world; that actions taken

by the Soviet Union, including human rights

violations and enterprises in Africa, demonstrated that Soviet and American views of

detente basically differed and belied the expectation that increased economic interdependence with the West would moderate

Soviet military and political objectives; that

trade with the West was being utilized by

the Communist world to acquire strategic

technology; and that current U.S. procedures did not adequately prevent the transfer of critical technology to the Soviet Union,

Eastern Europe, and China nor adequately

encourage America’s allies to do the same.

The bill therefore proposed to restrict the export of goods and technology that “could

make any contribution to the military or economic potential” of any nation, which would

prove detrimental to the national security of

the United States.

“House report no. 95-190, op. cit., p. 16.

This language could obviously be interpreted broadly enough to virtually embargo

all trade with the Communist world. After

the bill died in Committee, its supporters

modified it, and in March 1979, the “Export

Administration Reform Act of 1979” (H.R.

3216), introduced by Representative Lester

Wolff and cosponsored by Representatives

Miller, Ichord, Dornan, and 21 others was

referred jointly to the House Foreign Affairs

and Armed Services Committees. This bill

sought to assign a larger role to DOD in export control proceedings by giving the Secretary of Defense the primary responsibility

for identifying the types of technologies and

goods to be controlled for national security

purposes. It furthermore mandated the formulation of a list of critical technologies (see

chapter V) and prohibited the export of “any

critical technology or critical good to any

controlled nation” as well as such exports to

any other nation, except under validated

license. “National security impact statements” were to be required by Congress in

all cases of the President’s deciding to overrule or modify classifications of technologies

by the Secretary of Defense, or in any cases

of licensing decision made on grounds of

foreign availability. Congress was given the

power to overrule such Presidential determinations by a resolution in either House.

The major alternative to this bill in the

House was H.R. 2539, introduced by Representative Jonathan Bingham in March 1979.

This bill emphasized the importance of exports to the U.S. national interest, and noted

the detrimental effects of the present “uncertain” administration of export controls to

the U.S. economy. It declared it to be the

policy of the United States to use export controls to further the national security of the

United States, but also to encourage trade

with all nations with which the United

States had diplomatic or trading relations,

and to restrict exports only in exceptional

circumstances after full consideration of the

economic impact of such restrictions. The

legislation sought to make the process of export licensing more accountable to the public
Ch. VII— The East-West-Trade Policy of the United States . 123

and to Congress, and to encourage multilateral cooperation in the use of export controls.

The legislation that was ultimately reported out of Committee, H.R. 4034, most

closely resembled the Bingham bill. Under

H.R. 4034, the Department of Commerce retained the lead role in the administration of

the export control system with the Departments of State and Defense providing principal supportive roles, but the working relationship between the three was formally defined. DOD, whose responsibility lay in the

national security aspects of the exportlicensing system, would continue to conduct

technical evaluations of the military implications and potential military diversion of proposed exports. Its concurrence was formally

required in any changes in the commodity

control list. The Secretary of Defense was

also given authority to appeal directly to the

President on any licensing decision inconsistent with national security. The critical

technologies approach was encouraged and

the Secretary required to report annually on

its progress.

The State Department continued to have

responsibility for recommending the use of

export controls for foreign policy purposes

and for representing the United States in

CoCom, although authorization for participation in CoCom was transferred from the

Battle Act to the Export Administration

Act. In addition, the Secretary of State was

given the authority to appeal directly to the

President on any licensing decision inconsistent with U.S. foreign policy interests.

In the hearings on H.R. 4034, a considerable amount of testimony focused on the inefficiency of the present system in processing export license applications. The bill had

provided for a series of “suspense points”

that would automatically elevate undecided

cases to higher policy levels, although the

President was given authority to waive

these time limits in important cases for purposes of renegotiating with the seller or foreign customer. The bill also provided for congressional veto over the intended (or expanded) use of export controls for foreign

policy purposes. In addition, a new form of

export license, a “qualified general license”

(see chapter II) was instituted to expedite

the licensing process by allowing exports of

certain categories of previously licensed exports, obviating repeated validated license

application.

H.R. 4034 explicitly distinguished the criteria and procedures in the use of national

security and foreign policy export controls.

National security controls were designed to

. . . prevent the acquisition or delay [the

acquisition] by hostile or potentially hostile

countries of goods and technology which

would significantly enhance their military

capabilities to the detriment of U.S. national

security .23

This statement had clear implications for

the issues of both foreign availability and of

the role of Congress within the licensing

process. By their very nature, licensing decisions in the national security arena are

highly technical; this tends to preclude major congressional involvement; foreign availability makes U.S. controls ineffective in any

case.

The bill was less precise on the use of controls for foreign policy reasons, the purposes

of which can range from the human rights

policy of another country; to inhibiting

another country’s capacity to threaten countries friendly to the United States; to associating the U.S. diplomatically with a particular group of countries; to disassociating the

United States from the policies of a repressive regime. Because foreign policy controls

involve political-as opposed to technical—

decisions, congressional involvement was

deemed more appropriate. Thus, H.R. 4034

contained a provision for congressional veto

on the Presidential use of foreign policy controls.

On the issue of foreign availability, the

House report noted that U.S. ability to unilaterally deny goods and technology to the

“House Committee on Foreign Affairs, Report on the Export Administration Act Amendments of 1979, report no.

96-200, May 15, 1979, p. 7.
124 . Technology and East-West Trade

Eastern bloc has been eroded by an array of

factors, including the increased competition

in the high-technology marketplace. In acknowledgment of this fact, the bill required

the Secretary of Commerce to establish a

capability within the Office of Export Administration (OEA) to continuously monitor

the issue of foreign availability, utilizing in

part the Government-industry TACs and

seeking a more unified CoCom response to

the foreign availability problem.

The primary legislation considered in the

Senate was S. 737, introduced on March 22,

1979, by Senator Adlai Stevenson and referred to the Committee on Banking, Housing, and Urban Affairs.24 The bill was reported out on May 7, 1979, with committee

amendments. Under S. 737, a new export

control statute—the Export Administration

Act of 1979—was to be established, superseding the Export Administration Act of

1969, as amended.

As with the House bill, findings and policy

declarations stressed the importance of exports to the U.S. economy. Particular attention was given to the minimization of “uncertainties in export control policy” as a means

of encouraging trade with all countries with

which the U.S. has diplomatic or trading relations, except in cases where such trade

would be against the national interest.

As introduced, S. 737 had referred to the

“right to export. ” The bill was amended to

substitute the word “ability,” the intention

being not to denote a constitutional or otherwise legally enforceable right to export free

from Government restriction, but rather to

reinforce the strong presumption that citizens should be free to engage in international

commerce except in instances where regulation is clearly needed to advance important

public interests. Thus, the control of exports

should be the exception and not the rule.

The bill reaffirmed the notion that export

controls administered for national security

Zion Apr. 23, 1970, S. 977 was introduced by Senator proxmire at the request of the Administration. Its provisions offered no major reforms in the administration of export controls.

purposes should give special emphasis to

controlling exports of technology (and goods

that contribute significantly to transfer of

such technology) that could make a significant contribution to the military potential of

any country, detrimental to U.S. national

security, and also declared that the United

States should cooperate with its allies for

this purpose. The President was required to

annually review unilateral national security

controls and to review multilateral export

controls maintained for national security

purposes every 3 years. High administrative

priority was given to the prevention of exports of critical goods and technology, and

the Secretaries of Commerce and Defense

were enjoined to revise controls to ensure

they are focused on and limited to militarily

critical goods and technology.

The criteria for using export controls for

foreign policy purposes as set forth in S. 737

included the following:

(1) alternative means to further the foreign policy purposes in question; (2) the likelihood that foreign competitors will join the

United States in effectively controlling such

exports; (3) the probability that such controls will achieve the intended foreign policy

purpose; (4) the effect of such controls on

United States exports, employment, and

production, and on the international reputation of the United States as a supplier of

goods and technology; (5) the reaction of

other countries to the imposition or enlargement of such export controls by the United

States; and (6) the foreign policy consequences of not imposing contro1s.25

The President was required to reconsider

annually export controls maintained for foreign policy reasons and to report the results

to Congress. Thus, foreign availability was

to be assessed in both the foreign policy and

national security cases. The Department of

Commerce’s OEA would be responsible for

assessing foreign availability. Review and

revision of export control lists were also required.

‘Wee Senate Committee on Banking, Housing, and Urban

Affairs, Report on the Export Administration Act of 1979,

report no. 96-169, May 15, 1979, pp. 5-6.
Ch. VII— The East-West-Trade Policy of the United States . 125

Like its counterpart in the House, S. 737

instituted a qualified general license, to be

used to permit multiple shipments to a particular consignee or for a specified end use.

Similarly, it established a timetable for export license review, placing a 90-day limit on

review of a license if referral to other agencies or CoCom was not required, and a 180-

day limit where referral was necessary.

Finally, S. 737 contained a subsection that

superseded the Battle Act and required the

President to initiate negotiations with

CoCom members for the purpose of reaching

agreement on: 1) publishing the CoCom control list, 2) modification of controls to obtain

full acceptance and enforcement by CoCom

members, and 3) adoption of more effective

enforcement procedures.

Debates in both the House and the Senate

on their respective bills underlined the two

major themes which, since 1969, have surrounded the passage of and amendments to

the Export Administration Act: the threat

to U.S. national security posed by the sale of

dual-use technologies to the Communist

world; and the importance to the U.S. national interest of a positive trade balance and

therefore of a healthy export sector. The Act

that ultimately emerged, the Export Administration Act of 1979 (Public Law 96-72),

closely follows both H.R. 4034 and S. 737

and therefore leans to the latter preoccupation. This Act, which expires on September

30, 1983, is reproduced in its entirety in the

appendix to this volume. A selection of its

major provisions may, however, be summarized as follows:

. The Act finds that the ability of U.S.

citizens to engage in international commerce is a fundamental concern; that

exports contribute significantly to the

national security and well-being of the

United States; and that over-restriction

or uncertainty in the exercise of export

controls can be detrimental to the interests of the United States. On the other

hand, export of goods or technology

without regard to whether they make a

significant contribution to the military

●

●

●

●

●

●

potential of recipient countries may

adversely affect the national security of

the United States.

The Act declares it to be the policy of

the United States to minimize uncertainty in export controls and to encourage trade. Export controls are to be utilized only after full consideration of

their economic impacts and only to the

extent necessary to protect U.S. national security, to further significant foreign policy goals, or to protect the domestic economy in cases of short supply.

A qualified general license, as proposed

in the Senate bill, is established and a

detailed procedure for processing export-licensing applications, including

deadlines, provisions for multiagency

consultation, and applicant notification

and consultation is outlined. Qualified

general licenses, in lieu of validated

licenses, are to be encouraged to the

maximum feasible extent.

The Battle Act is superseded and authorization provided for U.S. participation in CoCom. The President is enjoined to enter into negotiations with

other CoCom governments with a view

toward reducing the scope of export

controls, publishing the CoCom lists

and other pertinent documents, and

holding periodic high-level meetings on

CoCom policy.

U.S. firms or enterprises (excepting

educational institutions) entering into

commercial agreements with controlled

countries must now report these agreements to the Secretary of Commerce if

they cite an intergovernmental technical cooperation agreement and will result in the export of unpublished technical data.

In cases where reliable evidence shows

diversion of dual-use items to military

use, the Secretary of Commerce is authorized to deny all further exports to

the end user responsible for the diversion until such time as it ceases.

Foreign availability shall be continuously reviewed by the Secretary of Com-
126 ● Technology and East-West Trade

merce in consultation with other agencies and with the TACs, and an office

established to gather information and

engage in ongoing monitoring activities.

● Validated licenses may not be required

in cases where foreign availability has

been demonstrated, except in cases

where this provision is waived by the

President. In these cases, the Secretary

of Commerce must publish the details

of the basis and estimated economic impact of the decision.

● The Commodity Control List (CCL) may

be indexed, i.e., annual increases in performance levels of items subject to controls identified and items automatically

deleted on the basis of these stipulations.

● The President is enjoined to consider

alternative actions and the following

criteria before curtailing exports for foreign policy purposes:

—the probability that such controls

will achieve the intended foreign

policy purpose in light of other factors, such as foreign availability;

—the reaction of other countries;

—the likely effect of the controls on the

U.S. economy; and

–the ability of the United States to effectively enforce the controls.

Summary

The present Export Administration Act is

the embodiment of a policy of encouraging

trade with the Communist world in a manner

that nevertheless protects U.S. national

security and allows the President flexibility

in the use of export controls to further foreign policy aims. The fact that these aims

may not always be entirely consistent is reflected in the content of the congressional

debates that have surrounded the Act since

its passage in 1969, and in the nature of the

amendments to it. These amendments have

sometimes pulled in different directions—

some attempting to facilitate the expansion

of trade, others expressing concern at the

strategic implications of that trade. The general drift of the legislation has, however,

been toward liberalization of export controls

of goods and technologies to the East.

As the nature and quantity of the goods

and technologies permitted for export to

Communist nations have expanded and the

climate of detente has encouraged American

businessmen to seek new markets in the

East, the system for the administration of

export controls has had to contend with

growing numbers of cases involving increasing technological variety and complexity. In

addition, it has had to balance the sometimes

conflicting demands of facilitating trade and

protecting national security. The following

sections describe the operation of this system and discuss the problems that it has encountered.

THE ADMINISTRATION OF

US. EXPORT CONTROLS:

THE LICENSING SYSTEM

In U.S. law, the freedom to export is a

privilege and not a right. All U.S. exporters

require permission from the Government to

ship their goods. In accordance with the requirements of the Export Administration

Act, the licensing system through which this

permission is granted is administered by the

Department of Commerce, which has jurisdiction over most commodities and unclassified technical data. The only exceptions,

which fall under the jurisdiction of other

Federal agencies, are munitions exports,

which are controlled by the Department of

State; nuclear materials by the Nuclear

Regulatory Commission; and gold and foreign currency by the Treasury Department.

Commerce’s authority extends to the reexport of commodities and data to third countries; to the utilization of American technical

data overseas; to the use of U.S.-origin parts

and components in commodities manufactured abroad and destined to a third country; and to exports of commodities and data

by any person subject to the jurisdiction of

the United States.

As the orientation and objectives of U.S.

trade policy with Communist countries have
Ch. VII— The East-West-Trade Policy of the United States ● 127

shifted since the end of World War II, so too

have variations occurred in trade levels and

in the number and kinds of items on the list

of controlled commodities. But the procedures and institutions of the export control

administration system established over 30

years ago persist. This phenomenon was

summed up in a recent Government study

which noted:

In the aftermath of World War II, in response to problems of the Cold War, security

defined in military terms became the overriding purpose abroad—both in concept and in

organizational form. Today, the concept has

somewhat changed, but the organizational

form mostly remains. (author’s emphasis)”

The Commodity Control List

There are two types of export license—

general and validated. A general license permits the export of certain commodities and

technical data without the need to submit a

formal application or obtain a license document for each transaction. These apply to

most commercial transactions, and approximately 90 to 95 percent of all U.S. exports

are shipped under their authority. The remaining 5 to 10 percent, sent under validated license, are subjected to a rigorous application process.

Technologies requiring a validated license

are specified by the U.S. Department of

Commerce in the CCL (see figure 3). The

present CCL is the descendant of the lists of

controlled commodities that the Secretary of

Commerce, with the advice of the Secretaries

of State and Defense, was first enjoined to

compile under the Export Control Act.

Under the terms of this Act and Department

of Commerce regulations, the CCL contains

those technologies, products, or commodities that fall into the following general categories:

-“Graham T. Allison, “Overview of Findings and Recommendations from Defense and Arms Control Cases, in appendixes: (’omission on the Organization of the Go~)ernmen t for the Conduct of Foreign Policy, June 1975, vol. IV

(Washington, DC.: U.S. Government Printing Office, 1975),

p. 21.

●

●

products and technical data that the

U.S. Government determines capable of

contributing significantly to the design,

manufacture, and utilization of military

hardware, or that fall under the CoCom

strategic control system; petroleum and 

other products or commodities in short

supply; and

some devices related to nuclear weapons and explosive devices; certain nuclear power facilities; and crime control

and detection equipment, that is controlled for foreign policy reasons.27

Most items on the list are also on the

CoCom list of controlled commodities; but at

present 38 items are unilaterally controlled

by the United States,28 according to the interpretation of Commerce, Defense, and

State officials of the general criteria provided in the law. U.S. industry, anxious to

expand exports to Communist-bloc countries, is particularly critical of this fact, and

as will become apparent below, much of the

criticism of the export-licensing system as a

whole is directed at the composition of the

list itself.

At the present time, the CCL contains

some 200 entries, many of which embody

high technology. These are grouped in the

following 10 categories:

Group Types of commodities

O Metalworking machinery

1 Chemical and petroleum equipment

2 Electrical and power-generating equipment

3 General industrial equipment

4 Transportation equipment

5 Electronics and precision instruments

6 Metals, minerals, and their manufacture

7 Chemicals, metalloids, and petroleum products

8 Rubber and rubber products

9 Miscellaneous

*’See the testimony of Rauer Meyer, Director of the Office

of Export Administration, U.S. Department of Commerce,

before the Subcommittee on Domestic and International Scientific Planning, Analysis, and Cooperation, Committee on

Science and Technology, U.S. House of Representatives, Oct.

4, 1978.

‘“See the testimony of Stanley Marcuss, Senior Deput} Assistant Secretary for Industry and Trade, U.S. Department

of Commerce, before the Subcommittee on International

Economic Policy and Trade, Committee on Foreign Affairs,

U.S. House of Representatives, Mar. 7, 1979.
128 . Technology and East-West Trade

Figure 3.—Sample Page of the U.S. Commodity Control List

Commodity Control List—399.l CCL-1

Export Control Commodity Number GLV $ Value Limits

and Validated

Commodity Description Precees- License

unit ing Code Required T v Q

GROUP *METAL-WORKING MACHINERY 1

Forming Machines:

1072A Presses and specialized controls, accessories, Il.. --_-s II MC II QSTVWYZ II 1,000 11 1,000 II o

and parts therefor, as follows:

(a) Presses (stabilized equipment using rams) for applying high impact energy work forces through use

(b)

(c)

(d)

(e)

of explosives or compressed gases including air;

Presses specially designed or re-designed for the working or forming of metals, alloys, or other materials

with a melting point exceeding 3,452° F (1,900o C) ;

Hydraulic presses, as follows:

(1) vertical presses having a total rated force of over 10,000 tons; or

(2) horizontal presses having a total rated force of over 5,000 tons;

Isostatic presses, as follows (isostatic presses are those capable of pressurizing a closed cavity through

various media (gas, liquid, solid particles, etc. ) to create equal force in all directions within the cavity

upon a workpiece or material) :

(1)

(2)

capable of achieving a maximum working pressure of 20,000 of psi ( 1,406 kg/cm2) or greater and possessing a chamber cavity with an inside diameter in excess of 16 inches (40.6 cm) ; or

capable of achieving a maximum working pressure of 5,000 psi (351 kg/cm2) or greater and having a controlled thermal environment within the closed cavity, except those possessing a chamber

cavity with an inside diameter of less than 5 inches (127 mm) and which are also capable of achieving and maintaining a controlled thermal environment only between + 176°F (+80” C) and —S1“F

(–35oC); and

Control equipment, accessories, and parts which are specially designed for the above presses.

1075A Spin-forming and flow-forming machines, II------S II MC II QSTVWYZ II 1,000 II 1,000 II O

double support or three roller types, as follows:

(a) Horizontal spindle type designed to have and having a drive motor of 80 hp (59kW) or more; or

(b) Vertical spindle type designed to have and having a drive motor of 50 hp (37kW) or more; and

(c) Specially designed parts and accessories therefor.

Other Metal- Working Machinery:

108OA Machines and equipment, including special- l{- -- --.sII MC II QSTVWYZ [I 1,000 II 1,000 II O

ized tooling and fixtures, and specially designed

parts and accessories therefor, specially designed for making or measuring gas turbine blades, including but

not limited to the following:

(a)

(b)

(c)

(d)

(e)

(f)

(g)

Blade belt grinding machines;

Blade edge radiusing machines;

Blade aerofoil milling and/or grinding

machines;

Blade blank pre-forming machines;

Blade rolling machines;

Blade aerofoil shaping machines, except

metal removing type;

Blade root grinding machines;

(h) Blade aerofoil scribing equipment;

(i) Blade aerofoil and/or root automatic

measuring equipment;

(j) Precision vacuum investment casting

equipment;

(k) Small home drilling equipment for producing

holes less than 0.030 inch (0.76mm) in

diameter; and

(1) Directional solidification casting equipment.

1 See $ 370.10 for commodities which require export authorization from other U.S. Government DeDartmente and Agencies.

J Report machines in “number.”

Export Administration Regulations June 1, 1978
Ch. VII—The East-West-Trade Policy of the United States ● 129

Each entry on the CCL contains a general

description of the technical commodity, the

countries for which validated licenses are required, and in some cases, value limitations

on exports which set restrictions on the number or dollar value of items that may be exported.

For export control purposes, all foreign

countries except Canada, which is subject to

minimal restrictions, are divided into seven

separate country groups, designated by alphabetic symbols (see table 17). Most Communist-bloc countries are included in a single

group, but Poland and Romaina both have

MFN status and are treated separately.

Communist countries to which most trade is

embargoed (North Korea, Vietnam, Cambodia, and Cuba) also form a distinct group.

The need for an exporter to apply for a validated license therefore turns both on the

commodity or data to be exported and the

country of destination. Exporters may have

to consult the CCL for guidance on each

separate transaction. Validated licenses are

required for most high-technology exports to

Communist destinations and for strategic

materials and products to all destinations

except Canada. The Commerce Department

issues and updates a series of regulations

that lay out these requirements.29

*’U.S. Department of Commerce, L’.rport Administration

Regulations, June 1, 1978. This is a looseleaf publication that

includes Export Administration regulations and supplementary Export Administration bulletins.

Country Group O

Romania

Country Group S

Southern Rhodesia

Table 17.— Export Administration System: Country Grouping

——. - . ——..——

Country Group T

North America:

Greenland

Miquelon and St. Pierre Islands

Southern Area:

Mexico (including Cozumel and

Revilla Gigedo Islands)

Central America:

Belize

Costa Rica

El Salvador

Guatemala

Honduras (including Bahia and

Swan Islands)

Nicaragua

Panama

Bermuda and Caribbean Area:

Bahamas

Barbados

Bermuda

Dominican Republic

— —.—. —.

French West Indies

Haiti (including Gonave and

Tortuga Islands)

Jamaica

Leeward and Windward Islands

Netherlands Antilles

Trinidad and Tobago

South America:

Northern Area:

Colombia

French Guiana (including Inini)

Guyana

Surinam

Venezuela

Western Area:

Bolivia

Chile

Ecuador (including the Galapagos

Islands

Peru

Eastern Area:

Argentina

Brazil

Falkland islands (Islas Malvinas)

Paraguay

Uruguay

Country Group V

All countries not included in any other

country group (except Canada)

Country Group W

Poland

Country Group Y

Albania

Bulgaria

Czechoslovakia

Estonia

German Democratic Republic (including

East Berlin)

Hungary

Laos

Latvia

Lithuania

Outer Mongolia

People’s Republic of China (excluding

Republic of China)

Union of Soviet Socialist Republics

Country Group Z

North Korea

Vietnam

Cambodia

Cuba

NOTE Canada IS not Included In any country group

SOURCE U S Department of Commerce, Export Adrn/n(sfrat/on /?egu/af/ens, supplement no 1, pt 370, June 1.1978
130 ● Technology and East-West Trade

The Executive Agencies in the

Licensing Procedure

The Department of Commerce.—Exporters seeking validated licenses must enter a

system primarily administered by the Department of Commerce, which works in cooperation with the Departments of State, Energy, and Defense. Its export control responsibilities give Commerce a somewhat contradictory mandate. On one hand, it is charged

with the general promotion and encouragement of U.S. exports; on the other, it is required to administer an elaborate system designed to limit certain of these transactions.

The Department has attempted to reconcile these activities by keeping export restrictions to the minimum necessary to fulfill the objectives of the Export Administration Act, thus causing the least negative

impact on U.S. trade. Jurisdictional ambiguities and conflict cannot be entirely

avoided. Reorganizations in the past few

years have been designed to minimize their

effects, and recent discussions within the

Administration have once again raised the

prospect of further reorganization. Offices

responsible for the promotion of East-West

trade and those charged with the control of

such trade were once housed together in the

‘ Department’s Bureau of East-West Trade,

which was established in 1972 to encourage

and facilitate the trade resulting from the

U.S./U.S.S.R. trade agreement. The two

functions have since been separated. In

1977, a new Industry and Trade Administration was established. It contains two parallel

bureaus with functions relevant to EastWest trade and its administration: the

Bureau of Trade Regulation, which houses

OEA and is responsible for administering export controls; and the Bureau of East-West

Trade, which retains trade promotion operations. Figure 4 illustrates this organization.

The Department of State.–The Department of State is primarily concerned with

the foreign policy, as opposed to the economic and commercial, implications of export

control. Its involvement in export control is

threefold. First, State advises the Commerce

Department on any foreign policy considerations arising from U.S. export license applications. These foreign policy issues may

cover matters as diverse as U.S. national

security, virtual embargoes on trade with

certain Communist countries, U.N. sanctions on trade with Rhodesia, selected restraints on trade with South Africa, the

former embargo on trade with Uganda, and

controls for human rights, antiterrorism,

and regional stability purposes. State is also

involved with nuclear nonproliferation cases

and the export of hazardous substances. SecFigure 4.— Industry and Trade Administration, U.S. Department of Commerce

SOURCE Off Ice of Technology Assessment
Ch. VII— The East-West-Trade Policy of the United States . 131

end, the State Department assumes the leading role in U.S. efforts to implement multilateral export controls. In this connection, it

represents the United States in all CoCom

sessions, including CoCom list reviews and

exception cases (see chapter VIII). Third,

under the Battle Act the State Department

has primary responsibility for the development of a list of items completely embargoed

to the Communist world. This list, the Mutual Defense Assistance Control List, includes

arms, ammunition, implements of war,

atomic energy materials, and certain dualuse items.

All of these activities are handled in the

Office of East-West Trade in the Bureau of

Economic and Business Affairs. The Office’s

seven officers, two of whom reside in Paris

where CoCom is headquartered, all have fulltime responsibility for export controls.

The Departments of Energy and Defense.

–The Departments of Energy and Defense

play important roles in the system by providing technical expertise and advice on national security matters. The Department of

Energy advises on energy-related exports.

such as oil-extractive equipment, and reviews all cases involving nuclear materials.

As would be expected, DOD has been

heavily involved with the export control system from the outset. In 1962, the Assistant

Secretary of Defense for International Security Affairs was charged with the responsibility for DOD’s role in the implementation

of trade control policies, and subsequent

amendments to the Export Administration

Act have further delineated the role of the

Secretary of Defense within the control system (see above). DOD’s task is to evaluate

the military and strategic potential of items

under review. This entails a complex consulting system within the Department that may

involve the technical and intelligence arms of

the military services as well as a number of

other offices and agencies.

Until recently, responsibility for export

licensing within DOD was diffused. Although the processing of applications came

under the jurisdiction of the International

Security Affairs Branch, policy functions, including obtaining technical evaluations,

were carried out in the Office of the Deputy

Under Secretary of Defense for Research

and Advanced Technology. Both functions

have now been centralized in the Office of

the Deputy Under Secretary for International Programs and Technology. The reorganization is intended to streamline the

Department’s role in processing export

license applications.

Other Agencies.– In addition to the Departments discussed above, any other agency with pertinent expertise may be asked to

contribute technical advice on individual applications. Bodies sporadically involved in

the licensing process include the Treasury

Department, the Central Intelligence Agency (CIA), the National Aeronautics and

Space Administration, and the National

Bureau of Standards.

The Mechanics of the Validated

Licensing Procedures

Entry to the export control licensing system is by way of OEA, which receives all export license applications. Figure 5 delineates

its present administrative structure. A

license application requires detailed technical information on the product or process to

be exported, the quantity to be exported,

unit selling price, and total sales receipts.

Details concerning the foreign buyer, including intermediate and final consignees, and

on the end use of the product must also be

provided (see figure 6). In theory, the prospective exporter may obtain an advisory

opinion on the likely disposition of the application, and thus avoid costly pre-sale promotion. In some instances, however, this

process has been as time-consuming as the

formal application itself. Furthermore, the

advisory opinion is delivered orally and is

not binding.

An application is initially received in the

Operations Division where it is logged in,

entered into a computerized information system, and briefly reviewed against a list of

known or suspected violators of export con-
132 . Technology and East-West Trade

Figure 5.—Office of Export Administration, U.S. Department of Commerce

SOURCE. Comptroller General, Export Controls. Need to Clarify Policy and Simplify Administration, Report to the Congress, March 1, 1979, p. 34

trol laws. It then moves to one of the three

Licensing Divisions—Computers, Electronics, or Capital Goods and Production Materials. At this point the application is given a

careful technical review by OEA staff. This

review focuses on the following items: the

function and use of the equipment; its level

of sophistication; normal military/civilian

use in the United States and the country of

destination; foreign availability of comparable equipment in terms of both quantity

and quality; suitability of the equipment for

the proposed end use; the known activities of

the end user; likelihood of diversion; and the

economic and commercial implications of the

proposed export. In investigating these

points, the staff may draw on outside resources, including TACs, the Nation’s intelligence agencies, and the Export Information

Service of the Department of Commerce.

Specifically, they attempt to answer the following questions:

● Is the item designed or intended for

military purposes? Does it have significant military use?

●

●

●

●

If the item has both military and

civilian uses, will the transaction involve only the latter?

Does the item contain advanced or

unique technology of significance in

terms of the export control program’s

objectives?

Is there a shortage of the item in the

area of destination that affects military

potential?

For strategically significant nonmilitary items, can non-U.S. sources supply

a comparable item or an adequate substitute? What is the normal use in the

country of destination?

After this information has been gathered

and evaluated, the request moves to the Policy Planning Division where it is reviewed in

terms of general OEA policy. At this stage

the Division must determine whether it has

sufficient data on which to base a decision

and sufficient authority to unilaterally make

that decision, or whether consultation with

other Federal agencies is required. If the latter, it must also determine what kind of consultation is called for.
—

Ch. VII—The East-West-Trade Policy of the United States ● 133

FORM DIB-622P (REV 3-75)

(FORMERLY FC.419)

Form Approved OMB No. 41-R.0735

CONFIDENTIAL – Information furnished

herewith iS deemed confidential and will

not be published or disclosed except in accordance with provision of Section 7 (c) of

the Export Administration Act of 1969, as

amended.

DATE OF APPLICATION

Figure 6.— Export License Application

U.S. DEPARTMENT OF COMMERCE

DOMESTIC AND INTERNATIONAL

BUSINESS ADMINISTRATION

BUREAU OF EAST WEST TRADE

OFFICE OF EXPORT ADMINISTRATION

WASHINGTON D C 20230

APPLICATION FOR

EXPORT LICENSE

APPLICANT’S TELEPHONE NO.

DATE RECEIVED (Leave Blank) CASE NO (Leave Blank)

1 APPLICANT S NAME I 2 PURCHASER IN FOREIGN COUNTRY

I

(If same as ultimate consignee, state “SAME AS ITEM 3”, If same

as intermediate consignee, state “SAME AS ITEM 4. “)

‘ NAME

STREET

ADDRESS

STREET

ADDRESS

CITY. STATE

ZIP CODE I CITY AND

COUNTRY

3 ULTIMATE CONSIGNEE IN FOREIGN COUNTRY ] 4. INTERMEDIATE CONSIGNEE IN FOREIGN COUNTRY

(If none. state “NONE”, if unknown, state “UNKNOWN.“)

NAME I NAME

STREET

ADDRESS

STREET

ADDRESS

CITY AND

COUNTRY

CITY AND

COUNTRY

S COUNTRY OF ULTIMATE DESTINATION 6 APPLICANT’S REFERENCE NUMBER

1

7 (a) QUANTITY TO (b) COMMODITY DESCRIPTION AS GIVEN IN COMMODITY CONTROL

BE SHIPPED LIST (Include characteristics such as basic ingredients, composition,

(c) EXPORT CON- (d) TOTAL SELLING PRICE A N D

TROL COMMODITY POINT OF DELlVERY

type, size, gauge, grade, horsepower, etc. ) NUMBER AND PRO- (Indicate b’. o. B., b’, A. S., C.I.F., etc. )

CESSING NUMBER

UNIT PRICE I TOTAL PRICE

TOTAL

8 FILL IN IF PERSON OTHER THAN APPLICANT IS AUTHORIZED TO 9. IF APPLICANT IS NOT THE PRODUCER OF COMMODITY TO BE

RECEIVE LICENSE EXPORTED. GIVE NAME AND ADDRESS OF SUPPLIER.

NAME (If unknown. state "UNKNOWN.”)

STREET

ADDRESS

CITY, STATE.

ZIP CODE

10 END USE OF COMMODITIES COVERED BY THIS APPLICATION 11 IF APPLICANT IS NOT EXPORTING FOR HIS OWN ACCOUNT,

DESCRIBE FULLY GIVE NAME AND ADDRESS OF FOREIGN PRINCIPAL AND

EXPLAIN FULLY

1 12 ADDITIONAL INFORMATION (Attach separate sheet if more space is needed. )

13 APPLICANT’S CERTIFICATION, — The “undersigned applicant hereby makes application for a license to export and certifies as follows: That all statements herein,

and in any documents or attachments submitted in support hereof, are true and correct to the best of his knowledge and belief; and that (a) he has read the instructions on the fifth copy of this application and is familiar with the U.S. Department of Commerce Export Administration Regulations: (b) this application conforms

to such instructions and regulations: (c) unless Item 14 is completed, he negotiated with and secured the export order directly from the purchaser or ultimate consignee or through his or their agents abroad. (d) all Parties to the export transaction. the exact commodities and quantities, or the exact technical data, and all other

terms of the order and other facts of the export transaction are fully and accurately reflected herein; (e) documents and records evidencing the order and other facts

of the export transaction to which this application relates will be retained by him for 2 years from whichever is later. the time of (i) the export from the United

States, or (ii) any known reexport, transshipment, or diversion, or (iii) any other termination of the transaction, whether formally in writing or by any other means.

and made available to the Department of Commerce upon demand: (f) any material or substantive changes in the terms of the order or other facts of the export

transaction as reflected in this applicatlon or any certification made in connection therewith, whether the application is still under consideration or after a license

has been granted, will be reported promptly by him to the Department of Commerce; and (g) if the license iS granted, he will be strictly accountable for its use in accordance with the Department of Commerce Export Administration Regulations and all terms and conditions specified on the face of the license.

Type SIGN Type

or HERE

Print

or

IN INK Print

(Applicant (Same as Item 1)) (Signature of person authorized to execute (Name and title of person whose signature

this application. ) appears on the line to the left)

14 ORDER PARTY ‘S CERTIFICATION (see § 372.6 (c) of the Export Administration Regulations ) – The undersigned order party certifies to the truth and correctness of Item 13 (d) above, and that he has no information concerning the export transaction that iS Inconsistent with. or undisclosed bv the application and agrees

to comply with Items 13 (e) and 13 (f) above.

Type SIGN Type

or HERE o r

Print IN INK Print

(Order Party) (Signature of person authorized to sign for (Name and title of person whose signature

the Order Party) appears on the line to the left)

This license application and any license issued pursuant thereto are expressly subject to all rules and regulations of the Department of Commerce. Making any false

statement or concealing anv material fact in connection with this application or altering in any way the validated license issued. iS punishable by imprisonment or fine.

or both, and by denial of export privileges under the Export Administration Act of 1969. as amended, and any other Federal statutes.

FOR OFFICIAL USE ONLY

ACTION TAKEN VALIDITY AUTHORITY RATING DV TECH

❑ APPROVED PERIOD

DATA

n

o REJECTED MONTHS END USE RE-EXPORT SUPPORT TYPE OF (Licensing officer) (No. )

~ “’”” 1

(Date)

DOCUMENTATION DOCUMENT LICENSE

~ t (Review officer)

NOTE:

(Date)

Submit the first four copies of this application, Form DIE-622P (with top stub attached). to the Off Ice of Export

Administration, Room 16 17M, Domestic and International Business Administration, U.S. Department of Commerce. Washington. D.C. 20230, retaining the quintuplicate copy of the form for your files. Remove the long car- ORIGINAL

bon sheet from in front of the quintuplicate copy. Do not remove any other carbon sheets. See Special Instructions on back of quintuplicate. Reproduction of this form iS permissible, providing that content, format, size, and O E A FILE COPY

color of paper and ink are the same
134 ● Technology and East-West Trade

In theory, all applications for validated

licenses should be subjected to a formal interagency review process; in practice, the

Commerce Department often takes unilateral licensing decisions, with the consent of the

other agencies involved in the system, i.e.,

the Departments of State, Defense, and Energy. This is a practical necessity: unless the

vast majority of cases were decided without

prolonged multiagency review, the system

would be overwhelmed by the number of applications to be processed. The requirement

for multiagency consideration is met, therefore, in any one of three ways, each involving

progressively more active and formal interagency consultation. These are first, a unilateral decision by OEA based on prior delegations of authority from the other agencies;

second, informal consultation which is usually bilateral; or third, full-scale formal multiagency review.

OEA decides which of these routes to take

on the basis of internal guidelines called

“policy determinations. ” A policy determination establishes procedures governing

the disposition of particular categories or

types of export applications. Policy determinations specify limitations or conditions

respecting commodity, destination, and use

or end uses that determine how an application decision must be resolved. In instances,

therefore, where a new license application

falls within the technical specifications, end

use, and destination criteria previously established as acceptable for export, OEA may

make a unilateral decision without the necessity of actual interagency consultation. The

performance characteristics of the product

or its destination will therefore indicate

when OEA should discuss a case with

another agency, even if it itself feels confident that the export can proceed. The majority of cases are decided by OEA alone. These

usually involve exports to free world destinations. Most exports to Communist countries

require some explicit consultation.

There are several kinds of informal consultation, but no rigid or explicit criteria govern

the choice of one over another. In some instances, a single phone call to another agency (or, if the problem is the application itself,

to the prospective exporter) may be sufficient. Alternatively, the Policy Planning

Division may send a memorandum and supporting documents, which summarize the

case on the basis of the technical evaluation

conducted in the Licensing Division, to

another agency, requesting its opinion or its

concurrence in Commerce’s recommendation. OEA may also send “waiver memoranda. ” These outline the case and request the

acquiescence of each consulting agency to

Commerce’s decision on an application. Usually, this concurrence is forthcoming. For example, of the approximately 12,000 memoranda sent through the first 6 months of

1976, DOD recommended denial of only 9 applications that Commerce had favored. Defense concurred in 76 Commerce recommendations for denial and in 6 cases for partial

approval. 30

In some cases, however, the mechanisms

of day-to-day contacts among staff-level personnel, bilateral agreements, and waiver

memoranda cannot resolve a case, and more

extensive interagency consultations are required. The applications subjected to this

procedure nearly always involve dual-use

items—nominally civilian products or processes that nevertheless have military applications which could enhance the strategic

capabilities of a potential adversary. The

product lines most frequently involved here

include numerically controlled machine

tools, semiconductor processing equipment,

high-strength materials, high-temperature

polymers, nuclear-related materials, computers, electronic testing and measuring

equipment, magnetic recorders, and integrated circuits.

The formal interagency review process

begins with the operating Committee (OC).

This is a senior staff-level group which meets

weekly and is chaired by an executive director, a Commerce employee in OEA. Every effort is made to resolve interagency differences informally before a case is brought be3oRepOrt of the president’s Task Force to InlprOVe ~XpOlt

Administration Licensing Procedures (draft). Sept. 22, 1976,

p. 23.
Ch. VII—The East-West-Trade Policy of the United States ● 135

fore OC. Referral there requires careful and

often protracted consideration of the strategic significance of the proposed transaction,

the foreign availability of comparable commodities or data, and the licensing history of

past applications for like or similar commodities or data.31 All interagency decisions

must be unanimous.

Obviously, the most complex and controversial cases reach this stage. It is these

cases that cause delays in the system. At the

weekly meetings, an average of 5 cases are

discussed, although the agenda may contain

up to 30 cases. One of the principal barriers

to the consideration of more cases is the frequent inability of member departments of

OC to arrive with prepared agency positions

on applications. This is due in many instances to the complexity of the procedures

for receiving technical advisory guidance

within these departments. Each consulting

agency in the system may decide whether to

refer an application to any of a number of its

own offices for technical evaluation. Thus,

licensing responsibilities are not only diffused among executive branch agencies and

departments; they are also diffused within

departments. This point is further discussed

below in the context of criticisms of the present system.

It is difficult to obtain an accurate count of

the number of cases handled by OC. Estimates from senior personne132 have ranged

from 250 to 300 cases for 1977 and 1978, but

these figures are at variance with information supplied for the public record by other

Department of Commerce officials. Congress

has heard testimony, for example, that during 1977 “608 transactions were submitted

to the Operating Committee for formal re-

“See Arthur T. Downey, in Export Licensing of Adlwnced

Tec}lnoiog>v: A Reliell, hearing before the Subcommittee on

International Trade and Commerce of the Committee on International Relations, House of Representatives, 94th Cong.,

2d sess. (Yt’ashington, D. C.: U.S. Governmen~ Printing Office, 1976), p. 72.

“Including Lawrence Brady, former Deputy Director, Office of Export Administration, and Thomas A. Hoya, Chairman of the operating Committee.

view. ’33 For Communist-bloc countries only,

other public testimony indicated that “374

[cases] required full-blown multiagency

review within the Operating Committee, ” in

1978.34 One reason for these discrepancies

may be the fact that the lower numbers refer

to categories on the OC agenda, where

groups of similar cases may be handled

together. Be that as it may, it is clear that

only a small percentage of validated license

applications actually reach the OC level. Furthermore, very few cases proceed beyond

this level.

Cases that cannot be resolved at the OC

level theoretically move through a series of

committees involving progressively higher

level decisionmakers (see figure 7). This formal structure is rarely utilized, however. Until recently, the sub-Advisory Committee on

Export Policy (sub-ACE P), which is made up

of Department Deputy Assistant Secretaries, was inactive; and even when it was

operative, it met infrequently. For example,

between 1975 and 1976, sub-ACEP met five

times, discussing a total of six disputed

cases. It has been suggested that the group

meet monthly, in an effort to provide more

policy guidance for the overall system on a

continuing basis and to review unresolved

cases, but meetings remain irregular.

ACEP itself, which is composed of Assistant Secretaries, has not met since at least

1975. Instead, issues still remaining in

dispute above the sub-ACEP level have been

referred to the Cabinet-level Export Administration Review Board (EARB). EARB exists to assure the highest level consideration

of trade control policies and actions. In 1975

it met twice to discuss these policy matters

and to deal with four disputed cases.

“Testimony of Rauer H. Meyer, Director, Office of Export

Administration, before the Subcommittee on Domestic and

International Scientific Planning, Analysis, and Cooperation,

Committee on Science and Technology, U.S. House of Representatives, Oct. 4, 1978, p 15 (typed lnanuscript}.

]’Testimony of Stanley J. Marcuss, Senior Deputy Assistant Secretary for Industry and Trade, Subcommittee on International Economic Policy and Trade, Committee on Foreign Affairs, U.S. House of Representatives, Mar. 7, 1979, p.

8 (typed manuscript).
136 . Technology and East-West Trade

Figure 7.— Multiagency Advisory Committee on

Export Policy Structure

SOURCE Comptroller General, Export Controls Needs to Clarify PolIcy and

Simplify Administration, Report to the Congress, Mar. 1, 1979, p. 35.

Through September of 1976, the Board met

once to review policy issues and three cases.

It has not met since, although it has handled

a few matters via exchange of memoranda.

In the event of EARB inability to resolve a

case, the President is the final arbiter. The

recent proposed sales of a Dresser drill-bit

factory and a Sperry-Univac computer to

TASS, the Soviet news agency, are examples

of cases decided at the Presidential level.

An applicant whose export request is rejected at any point in the review process

receives a “negative consideration” letter.

The exporter may respond formally to any of

the reasons given for denial, and unofficial

discussions may also continue between the

applicant and the licensing officer. In some

instances, however, the Government’s sensitivities about strategic or foreign policy interests and the exporter’s proprietary interests may circumscribe forthright and frank

exchanges, and the reason given for denial

may be as vague as “national security considerations.” This is one source of the dissatisfaction of some parts of the business

community with the licensing process.

A similar and parallel structure (see figure

8) exists to carry out U.S. multilateral responsibilities under the Battle Act. These include the periodic CoCom list reviews and

the processing of the individual exception requests.

The Department of State handles interagency involvement in CoCom cases in a

manner similar to Commerce’s administration of U.S. unilateral export controls. That

is, it relies on interagency advisory mechanisms. In this system, the counterpart of

OC is Working Group I, and the formal

higher policy level entity dealing with

CoCom matters is the Economic Defense Advisory Committee (EDAC). It is composed of

Assistant Secretaries from the Departments

of State (the chair), Defense, Commerce,

Energy, and Treasury. CIA acts in an advisory capacity.

The bulk of the workload of EDAC falls on

Working Group I, a senior staff-level interagency group. An executive committee,

chaired by the Director of the Office of EastWest Trade, provides its operational guidance. Cases that remain unresolved here are

passed along to successively higher policy

levels and, ultimately, if necessary, to the

President. Technical Task Groups (TTGs),

composed of interagency technical experts

and the private industry technical experts

on TACs, both provide input and advise on

decisions affecting CoCom list reviews and

exceptions. CoCom itself is the subject of

chapter VIII.

Compliance

Efforts to enforce domestic compliance

with export controls are centered in OEA’s
.

Ch. VII—The East-West-Trade Policy of the United States ● 137

Figure 8.— Economic Defense Advisory Committee Structure

Seni;rstaf(m Gover — n

SOURCE: Comptroller General, Export Controls Need to Clarify PolIcy and Slrnplify Admlnlstratiion Report to the Congress. March 1, 1979. p. 19

Compliance Division; overseas enforcement

activities are handled through the Department of State. OEA’s Compliance Division

has three branches—facilities, intelligence,

and investigations—with personnel in Washington and New York. OEA’s computerized

list of approved applications and discrepancies, such as overshipments, are forwarded

to the Compliance Division. Although it also

enforces controls made for short supply and

foreign policy purposes, its major efforts lie

in the area of strategic goods and technologies. These are concentrated in five kinds of

activities: prelicensing checks, physical inspections of cargo shipments, postshipment

document reviews, general license review,

and validated license comparisons. Violations of export controls are punishable under

the Export Administration Act, which provides for civil and criminal penalties, including fines and/or imprisonment.

The intelligence branch provides information to licensing officers on those potential

exporters singled out during a preliminary

54-202 0 - 79 - 10

screening process. This screening is accomplished through checking all applications

against the Department of Commerce’s Economic Defense List, a comprehensive index

of firms and individuals previously denied

export privileges or listed as suspect on the

basis of allegations received by Commerce.

The intelligence branch also provides information at this stage on individuals or

firms that have supplied insufficient documentation for their applications. In both

cases, information is gathered through cooperation with the Department of State, the intelligence agencies, and trade and industry

sources.

Spot checks are made on cargo to physically verify that the contents of shipments correspond to licenses. There are also reviews of

postshipment documents: the Bureau of

Customs verifies that every shipment over

$250 is listed on an outgoing carrier’s manifest, a service for which it is reimbursed by

OEA. In addition, OEA reviews declarations

of cargo shipped under general license and
138 . Technology and East-West Trade

searches for discrepancies between declarations and the data appearing on approved

validated licenses. General license reviews

ascertain, through the descriptive data on

the customs declarations, whether previous

shipments should in fact have been made

under validated license. Finally, for items

sent under validated license, the Bureau of

Customs collects information on shippers’

export declarations.

The State Department administers two

programs in foreign countries to inspect

commodities that have been licensed by the

Department of Commerce. One, the safeguard program, applies to computers. It

comes under the jurisdiction of CoCom, and

is implemented by industry representatives

in Communist countries. The other is a U.S.

program performed by U.S. overseas posts.

The purpose of both programs is to ensure

that dual-use items are being used for the

purpose designated on the license. Violators

who fall under U.S. jurisdiction are subject

to administrative and criminal penalties

specified in the Export Administration Act;

others may be denied future U.S. shipments.

It is obvious, however, that monitoring

third-party transfers of technology of U.S.

origin is virtually impossible without the active cooperation of foreign states.

The safeguard program has been in effect

since 1976 and applies to those licenses

granted under a CoCom stipulation that:

Responsible Western representatives of

the supplier will have the right to access to

the computer facility and all equipment

wherever located during normal working

hours or at any time when the computer is

operating and will be furnished information

demonstrating continued authorized application of the equipment.35

Individual licensing agreements designate

the frequency of required inspections. In addition to these inspections, the Commerce

Department may request that U.S. officials

overseas examine strategic commodities

“Quoted in the Comptroller General, Export Controls:

Need to Clarify Policy and Simplify Administration, op. cit.,

p. 55.

that have previously been licensed for export

by the United States. This usually occurs in

cases of suspected diversion from the original end use.

Criticism of the System

The export-licensing system has often

been the object of criticism from U.S. industry, America’s CoCom trading partners,

Congress, and members of the academic

community. The criticisms may be summarized as follows:

c

●

●

●

The system suffers from needless delays and an excessive amount of uncertainty. This is exacerbated by the cumbersome interagency review process

and the time-consuming case-by-case

approach to applications.

The diffusion of responsibility among

and within agencies results in a lack

of administrative responsiveness and

forthrightness in the system. This further discourages efforts by American

business to expand exports.

The system suffers from a lack of adequate policy guidance. This results in a

situation in which too much discretion

is allowed to midlevel administrators

and too little influence is exerted by

those who are both technically qualified

and attuned to both the changing environment of U.S./U.S.S.R. relations and

the vital role of exports in the U.S. economy.

The U.S. CCL is too restrictive. By attempting to control items unilaterally,

it incurs the antagonism of foreign exporters who need reexport licenses for

technology of U.S. origin. Moreover, the

unilateral control puts U.S. businessmen at a competitive disadvantage. Not

only are more products controlled than

in Western Europe and Japan, but

neither the list itself nor the system

that administers it takes adequate consideration of foreign availability.

Delays. —The first of these criticisms is

the most frequently heard and most universally recognized. U.S. exporters testifying
Ch. VII—The East-West-Trade Policy of the United States . 139

before Congress have been virtually unanimous in their condemnation of a system that

subjects their license applications to long

and often seemingly arbitrary delays. Cases

that are subjected to holdups—sometimes of

many months or even several years—create

serious problems for the potential exporter

and may damage the credibility of American

suppliers abroad. The law has set a 90-day

limit on the entire licensing process, from application to approval or denial; but in 1978

almost 2,000 applications exceeded this

limit, about twice the 1977 figure (see table

18). As might be expected, licenses involving

the export of high-technology dual-use

items, like sophisticated electronic equipment and computers, to Communist destinations accounted for the largest portion of

these delinquent cases. In 1975, of the 1,105

delayed cases, 923 were destined for the

Communist world. In all, 957 cases involved

computers and electronic equipment, 827 of

which were for export to Communist countries. Similar patterns have prevailed since.

However, delayed cases represent only

about 3 percent of all license applications. It

is not the number, therefore, but the visibility of these cases that is disturbing. The fact

that they usually represent large orders of

high-technology items, and that they involve

Table 18.—Export License Applications Pending

for More Than 90 Days

— Ending period - – Number of applications

1975a . :“. .“. ... : ‘. ., . . . . . . . . . . ‘-

1,10 5

Apr. 30, 1976a . . . . . . . . . . . . . . . . . . . . 294

Sept. 2, 1976b . . . . . . . . . . . . . . ... . . 298

Sept. 2, 1977b . . . . . . . . . . . . . . . . . . . . 454

June 1978c. ., . . . . . . . . . . . . . . . . . . . . 603

Sept. 1, 1978b . . . . . . . . . . . . . . . . . 645

Feb. 2, 1979c . . . . . . . . . . . . . . . . . . . . . 585

1976 d . . ... . . . . . . . . . . . . . . . . . . . . 689

1977d . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,032

1978 d . . . . . . . . . . . . . . . . . . . . . . . . . 1,988

SOURCE S

- -

--

aReporrt of the president's Task Force to Improve Export Administration

Licenslng Procedures, Sept 22 1976 (draft)

bOffice of Export Administration data

cTestlmony of Stanley Marcuss, Senior Deputy Assistant Secretary for in.

dustry and Trade, Office of Export Administration before the Subcommittee

on International Economic Policy and Trade Committee on Foreign Affairs

U S House of Representatives, Mar 7, 1979

dExport Administration Act Amendments of 1979, Report, Committee on

Foreign Affairs, U S House of Representatives, 96th Cong 1st sess May

15, 1979, p 4

highly sensitive issues of national security

and foreign policy, make them the subject of

the bulk of the publicity concerning export

licenses. It is worth noting here that, in

cases held for national security considerations, the applications are requesting exceptions for items that have serious potential

military uses. The very fact that the cases

are considered at all indicates a willingness

on the part of the Government to assist exporters and permit sales wherever possible.

Obviously, the quickest response would be a

simple “no.” This is not necessarily the case

when applications are delayed for foreign

policy reasons.

A second important point to be made

about the delayed cases is that, although

their numbers may be relatively small, they

are growing. This points to a disturbing

trend. Between the enactment of the Export

Administration Act in 1969 and 1974, the

number of applications received by OEA declined steadily—from over 145,000 to less

than 66,000, a drop of 55 percent. This decrease is a reflection of the liberalization of

U.S. policy toward East-West trade, and can

be attributed to the fact that items of purely

economic significance were dropped from the

CCL, thus reducing the number of required

validated license applications. After 1975,

however, the downward trend in application

numbers ceased. The workload has since

been growing at an increasing rate. In 1976,

OEA processed 54,359 cases; in 1977,

58,967; and in 1978, 63,476. The total for the

1979 calendar year is expected to exceed

77,000.

A comparison of authorized funding and

staff levels of OEA with workload estimates

over the past 11 years indicates the problem

facing OEA staff (see table 19). In the past 5

years, the number of authorized positions

has risen about 18 percent;36 if one assumes

that 68,000 cases will be processed in FY

1979, the number of license applications will

have risen more than 27 percent during the

3

’168 positions are authorized for FY 1979. OEA presently

employs 145 professionals and clerical personnel and is, according to recent testimony, actively seeking additional staff.
140 . Technology and East-West Trade

Table 19.—Funding, Authorized Positions, and

License Applications Volume

— —— —....——

Export license

Funding applications Posi- –--–——––––- .

Fiscal year ($000) tions Received Processed

1979 . . . . . . $~,~jo–‘- -

~ 168 –

– --~--––--68,000 *

1978 . . . . . . 5,550 162 — 63,476

1977 . . . . . . 5,256 167 — 58,967

1976 . . . . . . 4,626 142 — 54,359

1975 . . . . . . 4,400 142 — 52,600

1974 . . . . . . 4,634 114 65,883 –

1973 . . . . . . 4,103 154 64,070 –

1972 . . . . . . 6,111 256 78,561 –

1971 . . . . . . 5,900 256 107,615 —

1970, . . . . . 5,358 256 132,498 —

1969 . . . . . . 5,358 272 145,369 —

“ Estimated

NOTE. After 1974 the Department of Commerce changed its method of count.

ing license applications Instead of tabulating the number of applications received, it now reports the number actually processed The two

may not be Identical, as some applications are withdrawn before a deci.

sion is made

SOURCE Office of Export Administration, U S Department of Commerce.

same period. Moreover, the system’s administrators contend that the complexity of the

issues surrounding export license applications has increased tremendously since the

passage of the Export Administration Act,

so that a simple comparison of workload

measured by number of applications processed is misleading. There has also been an

increase in the number of CoCom exception

cases, which tend to be the most complex. To

this must be added the fact that the overall

workload is clearly growing at an accelerated

pace.

Similar or heavier workloads may be

found in the other Departments involved in

the license process. The number of cases

referred to the State Department’s Office of

East-West Trade because of their foreign

policy implications more than doubled between 1977 and 1978, rising from 1,200 to

2,500, but the Washington staff level of five

employees has remained unchanged. Before

the recent DOD reorganization, the Office of

Strategic Technology and Munitions Control

of DOD had a staff of three to four professionals and two secretaries who were responsible both for coordinating and developing

all DOD positions on U.S. license applications, and for the Department’s contribution

to CoCom list reviews and exceptions. The

workload of each professional employee in

the Office was enormous; in 1975 alone, it

handled 2,200 cases. This excessive workload is one of the primary reasons for license

decision delays.

The previous Deputy Assistant Secretary

responsible for the licensing process in

Defense did institute a “Guillotine Closure”

system designed to speed-up the system. Its

goal is to provide the Secretary of Commerce

with an advisory opinion regarding the national security aspects of an export license

application within 30 days. The procedure

operates on the assumption that a license

can be issued unless the technician recommends otherwise within a specified period of

time. Before the guillotine was put into

place, only 72 percent of the cases handled

by Defense between January and September

1978 were closed within 30 days. With the

system in-place, from October to December

1978, 98 percent of the cases were closed

within the stipulated period. In addition, the

average time per case was reduced from 29

days to 12 and the age of the most delinquent case from 165 days to 35 (see figures 9

and 10). It would appear from this that the

present system is sufficiently flexible to respond to calls for increased efficiency.

In addition to the sheer volume of paperwork which comes before DOD, holdups are

often occasioned by the need to tap additional technical resources in the Army, Air

Force, and Navy; in Department-wide research laboratories and facilities; and in

other Pentagon offices. For instance, in 1975

virtually all computer cases were referred to

the Institute for Defense Analysis. In addition, most computer, electronics, and technical data cases went to the Office of the

Under Secretary of Defense for Research

and Engineering, while the Office of the Assistant Secretary of Defense for Installations and Logistics screened most machine

tool and technical data cases. As the system

has been administered, the processing of

export control requests gets low priority

among technical experts whose main tasks

lie elsewhere. Whether the recent reorganiza-
Ch. VII The East-West-Trade Policy of the United States ● 141

Figure 9.—Age of DOD Export Control Cases

(January-September 1978)

$’waethllll --- I “130day. .

.-

f

1. ,.:. . ’

80

I

1 ’

060

=

z-.

“Aviqja

“*days

(

I

I A-3Sdayi

w

C-I I

fwaxknum 14M dajf# ‘- 4 &CL I

6s% of +3aaW am ~ “ ‘

40 less than *dW6 ,. .

I

I

: . , , ‘.

20 I

< ,;.

I

I

o

i I I I 1 I 1 I a I s 1 a I 1 I t

o 20 40 60 80 100 120 140 160 1

Days in DOD

SOURCE Testimony of The Honorable William J Perry, March 5, 1979,

Senate Committee on Banking, Housing, and Urban Affairs

Figure 10.—Age of DOD Export Control Cases

(October. December 1978)

1

m

80 -

w day objective

I -’.7

60 -

40

.

I&M tkaff 30 days

20

if

o

0 10 20 30 40 50 60

Days in DOD

SOURCE: Testimony of The Honorable William J Perry, March 5, 1979. Senate

Committee on Banking, Housing, and Urban Affairs

tion, described above, will alleviate this situation remains to be seen, but one immediate

change will be staffing levels. The new

export-licensing program will have a staff of

14 and an initial budget of $500,000.

Policy Guidance.– It is possible, however,

that the quality of decisions may suffer from

attempts to speed- up the system as it is

presently constituted and that fundamental

changes are needed to preserve both the responsiveness demanded by industry and the

policy guidance and technical evaluation

necessary to protect of U.S. national security. It is here that the charges of inadequate

policy guidance arise.

A recent Presidential Review Memorandum on East-West Technology Transfer

(PRM 31) investigated this and other problems in the present licensing system and concluded that the present organization should

be augmented. It suggested that the National Security Council (NSC), the Office of

Science and Technology Policy, and the

Arms Control and Disarmament Agency all

be given export control responsibilities, presumably to lend policy guidance. Implementation of this recommendation has begun.

Representatives from the three agencies now

may participate in OC discussions, and an ad

hoc technology transfer group has been created within NSC.

After its own investigation of the system,

however, the General Accounting Office

(GAO) has declared that it does “not believe

the problems associated with diffused management authority can be solved by adding

more Government agencies to the licensing

process. This is not a regulatory activity

which suffers from a lack of bureaucratic attention, and better attention, not more attention, is needed at the licensing level.”37

Restrictiveness of Export Controls.—

Many of the companies engaged in EastWest trade are multinationals. Their ex-

“ComptrolIer General, Export Controls: Need to (’lan”~y

Polic>~, op. cit., p. 66.
142 ● Technology and East-West Trade

perience in developing technology, moving

personnel, and monitoring research activities around the world has convinced them

that technology comparable to their own is

almost always otherwise available. They contend that the administrators of U.S. export

controls underestimate the degree of technical sophistication in the East and ignore

technical developments in Western countries

both within and outside CoCom.

Many examples illustrate the availability

of technology from multiple sources:

●

●

●

●

Hungary exhibited advanced computercontrolled machines at the 1978 machine tool show in Chicago. Many of the

machines that it brought to the United

States would not have been exportable

by U.S. firms under Export Administration guidelines.

The sale of a U.S. Univac computer to

TASS was stopped during the summer

of 1978 for foreign policy reasons. Although the decision was later reversed,

TASS has now signed with a French

computer manufacturer.

A U.S. firm was unable to obtain a

license for the sale of an aluminum production plant. Here too, a contract was

signed with the French within a very

short period of time.

A U.S. firm was approached by the PRC

regarding the sale of some electronic

equipment. After preliminary discussions with OEA, the American firm

withdrew because it feared it could not

get the necessary export licenses. The

Chinese were confident, however, that

the equipment could be obtained elsewhere: the PRC had a close relationship

with a Japanese firm that could supply

the equipment and indeed had done so

under similar circumstances in the past.

Many firms also contend that U.S. export

controls extract high costs of compliance

and discourage entry into Eastern markets.

Accounting methods do not usually lend

themselves to ready identification of the

direct costs of validated license applications,

but large corporations heavily engaged in

trade with the East have estimated that

they incur annual licensing-related costs of

as much as $1 million, a figure that includes

the salaries of several employees solely assigned to deal with OEA and the intermittent services of numerous executives.

But, the largest costs may be indirect and

unmeasurable. U.S. businessmen contend

that the current export control procedures

have resulted in suspicion toward the United

States and U.S. firms–suspicions that have

caused Eastern nations to go elsewhere.

Some firms report that over the past few

years approaches to U.S. business officials in

Eastern nations have markedly decreased.

This is attributed to the fact that the delay

and uncertainty associated with dealing with

the United States has caused potential

customers to turn to other suppliers. The

perceptions of the potential customers are

important. An illustrative example can be

found in the case of a U.S. company that had

been negotiating for over a year with the

PRC. If consummated, the deal in question

would have provided the PRC with access to

the use of new communications technology,

but not the technology itself. The day before

the contract was to have been signed, a highlevel U.S. Government official made a comment that was interpreted by the PRC delegation as an indication that the U.S. Government might not fully support the sale.

Negotiations broke down and the PRC soon

signed with another country—an agreement

that gave them access to the same capabilities and to the underlying technology.

Moreover, as chapter IX demonstrates,

firms in other countries can sometimes get

license pre-approvals that eliminate a major

area of doubt from negotiations with Communist countries. Differences in the administration of the export controls between the

United States and its CoCom partners lead

some American corporations to perceive the

U.S. Government as the greatest obstacle to

their international business activities.
Ch. VIl—The East-West-Trade Policy of the United States ● 143

The unilateral controls embodied in the

U.S. CCL are believed to contribute to this

problem. By reflecting unrealistic technical

decisions for controlled items (i.e., setting

technical parameters unnecessarily low),

they allow firms in nations with different

standards to capture business that would

otherwise come to the United States. Finally

many companies seem to feel that the administration of export controls does not sufficiently take into account the policing capabilities of the private sector. Corporations

see it in their own interest to control the unauthorized transfer of goods by requiring

that critical components be acquired from

the original supplier.

Thus, industry argues that because of

U.S. export controls, a considerable volume

of trade with the Communist world is being

administered by foreign subsidiaries and its

benefits are being lost to the U.S. economy.

Many of the administrative activities associated with East-West trade are carried out

through divisions, subsidiaries or affiliates

of U.S. firms located abroad. Reasons for

this lie in the affinity between European

businessmen and their Soviet-Eastern European counterparts; the reduced operating

costs that result from geographic proximity;

and the fact that relationships between the

U.S. companies and centrally planned economies are closely related to their marketing

efforts in Western Europe.

But U.S. executives sometimes also contend that companies operate in this manner

because it avoids much of the “aggravation”

associated with the administration of export

controls in the United States. No body of

data appears to be available on the extent to

which U.S. export controls motivate multinationals to remove their operations from

the United States. Given the relatively low

volume of U.S. trade with the East it is

unlikely that this is often a primary consideration.

Recommendations for Improvement.–

These criticisms have sometimes generated

tension between business and Government,

and have resulted in a spate of proposals for

reform of export-licensing procedures. Finding that the complex system for administering export controls is plagued by “vague

criteria, insufficient funding, and low priorities, ” GAO has recommended, in part, that:

The Export Administration Act should

be amended to state that the President

shall consider foreign availability when

imposing export controls for foreign

policy purposes.

The President’s semiannual report to

Congress should discuss in more detail

the uses and reasons for foreign policy

controls.

The foreign availability clause should be

administered as a separate effort under

a “foreign availability evaluator. ”

A new procedure to process routine

license requests should be established

in OEA.

A multiagency Export Policy Advisory

Committee should be established at an

appropriate administrative level. This

would allow the abolition of the entire

EDAC and ACEP referral structures.

Export license application management

responsibility should be centralized in

the Department of Commerce’s OEA so

that responsibility for license applications is no longer diffused.

Funding of technical evaluations should

be centralized in OEA.38

The Export Administration Act of 1979

(see above and appendix) has gone some way

toward meeting these suggestions, but it has

not instituted fundamental alterations in the

licensing system, and is unlikely to entirely

still criticism from that part of the business

world engaged in East-West trade.

CONTROL OF NUCLEAR

EXPORTS

Since the Atomic Energy Act was passed

in 1954, special controls have been imposed

on the export of nuclear equipment and technology. These are presently governed by the

‘“Ibid., p. 18, vi, 42-49.
144 ● Technology and East-West Trade

Nuclear Non-Proliferation Act (Public Law

95-242), enacted in March 1978, which established new procedures for controlling the export of nuclear facilities, equipment, materials, and technology; and dealt with the criteria, organization, and procedures for control of U.S. nuclear exports, both domestically and abroad. Under this Act, nuclear technology was added to the Department of

Commerce’s Control List, and primary responsibility for the controls divided between

the Department of Energy, the Nuclear Regulatory Commission, the Department of

Commerce, and the Department of State, depending on the specific materials and technology being licensed. In addition, special

controls were placed on the export of components specially designed or prepared for

use in nuclear facilities. Components for

uranium enrichment facilities, fuel-reprocessing facilities, or heavy water production

plants may now be exported only when specifically licensed for a cooperative agreement. Finally, the Act imposed additional

conditions for Government approval of

nuclear exports and expanded Government

control over the export of component parts

for nuclear facilities. It directs the Nuclear

Regulatory Commission (NRC), in consultation with the Secretaries of State, Energy,

and Commerce, and the Director of the Arms

Control and Disarmament Agency, to determine which items should be subject to export controls because of their importance in

nuclear explosions. Export licenses for these

must be granted by NRC and only then if the

following criteria are met:

1. International Atomic Energy Agency

safeguards exist for the items;

2. No such item shall be diverted for any

nuclear device; and

3. No such item shall be retransferred

without prior U.S. consent.

In addition, NRC must certify in writing

that the issuance of each export license will

not result in adverse consequences for U.S.

national security and defense.

The Department of Energy has primary

jurisdiction over the control of transfer of

certain types of nuclear technology. This

control emanates from a provision of the

Nuclear Non-Proliferation Act, which forbids any person to directly or indirectly

engage in the production of any special

nuclear material outside the United States,

except as authorized by a determination by

the Secretary of Energy that such activity

would not be detrimental to the national

security of the United States. The Department of Energy coordinates with other agencies, including the Arms Control and Disarmament Agency, in this process. Under

the legislation, if NRC is unable to issue a

license or takes too long to do so, the President has the authority either to block or to

authorize exports.

CREDITS

THE EXPORT-IMPORT BANK

OF THE UNITED STATES39

When the U.S. Government extended diplomatic recognition to the Socialist regime in

Russia in 1933, the Soviet Union represented

a vast, new, and badly needed market for

American exports. To facilitate the U. S.-

Soviet trade that was expected in the wake

AND TARIFFS

of recognition, in February 1934, President

Roosevelt issued Executive Order No. 6581

directing the Secretaries of Commerce and

39 For a complete history of the Bank, see George Holliday,

“History of the Export-Import Bank,’” in Paul Marer, cd.,

U.S. Financing ofl?ast-kt’est Trade (Bloomington, Ind.: International Development Research Center, 1975).

State to organize the Export-Import Bank

(Eximbank) of Washington as a banking corporation under the laws of the District of

Columbia. Although financing trade with

the U.S.S.R. was the acknowledged primary

purpose of Eximbank, the executive order

also stated a general aim: “To aid in financing and to facilitate exports and imports and

the exchange of commodities between the

United States and other nations or the agen-
Ch. VII—The East-West-Trade Policy of the United States ● 145

cies or nationals thereof. ” Ironically, it was

to be 39 years before Eximbank extended

any credit to the Soviet Union.

At first a relatively obscure institution

with an initial total capitalization of $11 million, Eximbank has grown to participate in a

variety of programs in over 140 countries.

Presently it has an obligation ceiling of over

$40 billion and over the past few years, has

been responsible for the financing of approximately 10 percent of all U.S. exports. This

support has been primarily concentrated in

transportation and construction equipment

and powerplants (especially nuclear), but

manufactured goods and capital goods are

also heavily supported. Approximately 18

percent of all U.S. manufactured exports and

21 percent of capital goods exports have

been financed by Eximbank.

At first, Eximbank operated without official Government support, but in 1945 it received legislative mandate in the Export-Import Bank Act (Public Law 79-173). Under

this Act, the Export-Import Bank of the

United States became an independent agency of the Government, its management

vested in a bipartisan Board of Directors.

Four of these are appointed by the President

with the advice and consent of the Senate; in

addition, the Secretary of State sits on the

Board ex officio. An Advisory Committee

consisting of the Bank’s chairman; the Secretaries of State, Treasury, and Commerce;

and the Chairman of the Board of Governors

of the Federal Reserve System advises on

major policy questions. The U.S. Treasury

provided Eximbank’s original funds by purchasing $1 billion of the capital stock of the

Bank and, in addition, by continuing at intervals to purchase part of its obligations.

Eximbank receives no direct appropriation

from Congress, however, although Congress

does retain oversight control of the Bank’s

operations through the exposure ceilings it

establishes on new and outstanding credit

authorizations. In addition, Eximbank may

borrow up to $6 billion directly from the U.S.

Treasury to meet its short-term needs. It

must satisfy its medium- and long-term requirements through borrowing from the Federal Financing Bank.

Eximbank carries out its mandate to promote U.S. exports through four programs:

●

●

●

●

First, it can make direct loans in the

form of dollar credits to foreign borrowers purchasing U.S. goods and services.

These loans must be used to pay U.S.

exporters and they must be repaid in

dollars. This program is designed to

supplement, not replace, private financing; it provides credit at favorable

terms in cases where private institutions are unwilling to assume risks and

it extends credit for longer terms than

will private lenders. Eximbank usually

demands a downpayment of at least 10

percent from the borrower. It then finances part of the loan through its own

funds and requires private financing at

commercial terms for the balance.

Second, Eximbank can provide guarantees to private financial institutions

that their loans financing U.S. exports

will be repaid. These guarantees are

backed by the full faith and credit of the

United States and are designed to encourage private lenders to extend export credits, and to lower their interest

costs. They are available for mediumterm transactions (181 days to 5 years).

Third, Eximbank, in cooperation with

the Foreign Credit Insurance Association, a group of approximately 50 U.S.

insurance companies, can insure U.S.

exporters against the exceptional risks

inherent in foreign transactions. In

these cases, private insurance covers

normal risks, and Eximbank extends

coverage for extraordinary events such

as war or expropriation.

Finally, Eximbank can provide incentives for private banks to finance U.S.

exports by administering a discount

loan program. Discount loans are advance commitments to discount export

debt obligations acquired by commercial banks. The commitment assures the

private lender that additional funds will
146 ● Technology and East-West Trade

be available should they be needed during the full maturity of the obligation,

which is generally short term. Loans in

which Eximbank is participating as a

direct lender are ineligible for this program.

Eximbank activities in the Communist

world have had a troubled and complex history. In 1934, the establishment of such an

institution seemed desirable for several reasons. First, the Soviets were short of the

hard currency necessary to pay for imports.

Second, many U.S. private financial institutions were unwilling to risk providing credit

to the U.S.S.R. Finally, Great Britain, Germany, Italy, and France had all successfully

established similar organizations to provide

foreign trade financing. The atmosphere of

the time was one of intense competition for

dwindling world markets and the Soviet

Union seemed a potentially rich prize.

The barrier to Eximbank credit at first

was the refusal of the Soviet Government to

settle Tsarist debts to U.S. citizens. The

Johnson Debt Default Act of 1934 (Public

Law 80-772) had prohibited the extension of

credits or financial assistance in any form to

any foreign government in default on its

obligations to the United States. In 1945,

the Export-Import Bank Act expressly removed prohibitions on loans from Eximbank

to governments in default as of April 1934.

By this time, however, U.S.-U.S.S.R. relations had begun their rapid postwar deterioration. With the exception of Yugoslavia,

the Bank made no loans to the Communist

world through the cold war period of the

1950’s. This self-imposed limitation was formalized in 1964, when the Foreign Assistance and Related Agencies Appropriation

Act (Public Law 88-634) prohibited Eximbank from lending to or in any way participating in the extension of credits to any

Communist country, except when the President determined that the extension of such

credit was in the national interest. In 1964

and 1966, President Johnson did make such

determinations as part of an effort to improve East-West relations, but with the exception of small loan guarantees to Romania

and Hungary in 1964, little Eximbank activity took place. In 1968, the prohibition of Eximbank involvement in trade with the Communist world was made absolute through an

amendment to the Export-Import Bank Act

that barred, without provision for Presidential waiver, the extension of Government

credit to any country furnishing by direct

Government action “goods, supplies, military assistance or advisors” to any nation

engaged in armed conflict with the United

States (Public Law 90-267). Thus, the Vietnam War had the effect of denying Eximbank credit to all Communist nations except

Yugoslavia.

The absolute prohibition was lifted in

1971 for those countries not themselves in

armed conflict with the United States (Export Expansion Finance Act, 85 Stat. 345),

and once again the President was empowered to determine if a credit transaction with

a specific Communist country would be in

the national interest. President Nixon made

such determinations for Romania in 1971

and Poland in 1972. Also in 1972, the formal

inception of detente and the signing of the

U.S.-Soviet trade agreement paved the way

for a Presidential declaration in favor of

allowing Eximbank credit to the U.S.S.R.

The Soviet Union finally received its first

Eximbank loan in February 1973, and in the

next 15 months Eximbank exposure on the

Soviet debt grew to over $460 million, an

amount that supported over $1 billion in

U.S. exports. Table 20 shows Eximbank exposure in the Communist world as of September 30, 1978. Eximbank was one of the

Table 20.—Export-Import Bank Exposure in

Selected Communist Countries

(Sept. 30, 1978)

—

Country Millions of dollars

U.S.S.R. . . . . . . . . . . . . .:. . . . . . . . . . . $456.4

Poland . . . . . . . . . . . . . . . . . . . . . . . . . . 228.4

Romania . . . . . . . . . . . . . . . . . . . . . . . . 90.2

Yugoslavia . . . . . . . . . . . . . . . . . . . . 858.9

China. . . . . . . . . . . . . . . . . . . . . . . . . . . 26.4*

“Granted before 1948

NOTE Exposure consists of the combined total of direct Eximbank credit, guar.

antees, and Insurance programs The bulk of this exposure IS in direct

loans

SOURCE Export.import Bank of the United States, 1978 Annual Report.
Ch. VII—— The East-West-Trade Policy of the United States ● 147

Administration’s major tools in detente, and

the Soviets had been quick to take advantage of the credits newly available to them.

All indications were that the amount of these

credits and guarantees would continue to

grow rapidly. Projects already partially

funded by Eximbank included a $400 million

chemical complex, the $342 million trade

center, and a $36 million iron ore pellet plant.

By 1974, applications were pending for help

in financing $110 million in oil and gas exploration equipment and a $50 million tractor factory. $1.2 billion to $1.4 billion in new

credits were projected through calendar year

1977. In 1974, the issue of Eximbank credits

to the Soviets became enmeshed in a larger

debate over the future of detente and the role

of Congress in foreign policy. One focus of

these concerns was the reaction of Congress

against the use of subsidized credits. Testimony before the Senate International Finance Subcommittee, for instance, made it

increasingly clear that Government-supported credits could no longer be regarded as

a costless way of promoting exports.40 Eximbank loans to the U.S.S.R. had, in accordance with Bank policy, been provided at the

highly favorable fixed rate of 6 percent, but

rapidly rising commercial rates were steadily

increasing the export subsidy. Even after

July 1974, when the Bank responded to

severe congressional criticism by instituting

a flexible interest rate, Eximbank’s maximum was still below rates obtainable in the

private sector.

The point of view that eventually held

sway in Congress was summarized by Senator Stevenson:41

Both the level and rate of Exim assistance

[to the U. S. S. R.] as well as the kind of projects involved raise serious questions about

the policies being pursued. It is clear that detente is one of the goals. It is a goal which we

all seek . . .

But it is far from certain that the United

States can buy detente with credits. A genuine and lasting easing of tensions requires

resolution of the difficult issues which divide

the United States and the Soviet Union . . .

difficult and long-standing problems which

will not be resolved overnight and most certainly will not vanish at the first sign of

American cash.

Unless the underlying factors which gave

rise to these problems are solved, credits are

unlikely to be of much avail. What is worse,

they may have the effect of boosting Soviet

military capability and in turn lead to a worsening of relations. It is significant, for example, that none of the Exim-assisted Soviet

projects to date, and none of those which are

planned, involve the export of U.S. consumer

goods. Instead, all relate to capital construction or the development of productive capability by freeing Soviet resources for other

purposes; the United States may be indirectly contributing to Russian military potential.

Thus, there was concern over actual or

proposed projects–chemical complexes, the

Kama River truck plant, oil and gas development projects, the construction of widebodied aircraft production facilities–which

might have direct military possibilities. The

completion of such projects would be tantamount to financing the military production

capability of a long-standing adversary before the achievement of a permanent improvement in relations.

Congress was also concerned that rapid increases in Eximbank’s financial exposure in

the Soviet Union might unwittingly increase

Soviet leverage over the United States. The

possibility of Soviet threats to withhold payment on almost a half a billion dollars

seemed an unacceptable risk. These doubts

were enhanced by the apparent lack of need

for such massive credits. West Germany had

only recently declined to provide financing

for a $1 billion iron and steel complex in

Kursk, but the Soviet Union found the necessary cash itself. Similarly, it had agreed to

pay $48 million in cash to a British firm for a

new plastics factory, and still found itself

with sufficient reserves to extend $600 million in credits to Argentina for an electric
148 ● Technology and East-West Trade

power project. With such apparent financial

capability, why should the Soviets require

massive Eximbank assistance? An additional worry was the potentially adverse impact of Eximbank’s worldwide activities on

the competitive position of U.S. industry.

The creation of production facilities abroad

could result in the long-run export of U.S.

jobs and decline of U.S. markets.

In response to these fears, Congress

passed legislation that made the use of credit—and the withholding of credit—a political

weapon. First, the Stevenson amendment to

the 1974 Export-Import Bank Act put a

$300 million limitation on new loans and

guarantees to the Soviet Union. Within this

ceiling, specific restrictions were placed on

energy-related projects, reflecting Congress’

particular concern with the potential military and practical relevance of Soviet oil and

gas development. A maximum of $40 million

was set for energy exploration and research,

and no Eximbank loans were to be used for

Soviet energy production and transmission.

Congress was to periodically review these

ceilings, which could be lifted by the President if he found it in the national interest to

do so, and if Congress approved the increase

by concurrent resolution.

The effect of this amendment was made

moot, however, by the passage of the Jackson-Vanik amendment to the Trade Act of

1974 (Public Law 93-618). This resulted in

the scrapping of the U.S.-Soviet trade agreement and effectively terminated all credits

to the U.S.S.R. by linking trade benefits to

nonmarket economies to the free emigration

of their citizens. The Jackson-Vanik amendment is discussed in more detail below.

THE COMMODITY CREDIT

CORPORATION

In addition to the financial assistance provided by Eximbank, credit is available to the

Communist world through the Commodity

Credit Corporation (CCC), created in 1933 by

executive order. Since 1956 this organization

has administered an export credit sales program designed to help U.S. agricultural exporters expand their sales in foreign markets. During the early years of detente in the

1970’s, CCC provided the Soviet Union with

over $550 million in credits for the purchase

of U.S. grains. Like Eximbank credits, CCC

support was effectively suspended by the

passage of the Jackson-Vanik amendment to

the Trade Act of 1974. The provisions of that

amendment have, however, allowed selected

Communist-bloc countries to be deemed eligible for CCC programs (see below and table

21). CCC makes credits available to importers at somewhat better terms than could be

obtained elsewhere. Although interest rates

vary, they are usually slightly below equivalent market rates, and maturities are often

longer than agricultural credits offered by

private banks.

A related program was created by the

Agricultural Trade Act of 1978 (Public Law

95-501). Under the provisions of this law,

credit with commercially competitive repayment terms of up to 3 years is available to

many foreign buyers of American farm products. Communist countries currently eligible

for the 3-year credits—Yugoslavia, Romania,

Poland, and Hungary–are also eligible for

“intermediate” credit, with repayments of

up to 10 years, for the following purposes:

To finance purchases of grain for reserve

stockpiling under international commodity

agreements or other plans acceptable to the

United States; to finance purchases of breedTable 21 .–Communist Countries: Eligibility

for U.S. Programs

(as of July 15, 1979)

Country MFN Eximbank ccc

U.S.S.R. . . . . . . . . . . . No No No -

East Germany ... No No No

Yugoslavia .. . Yes Yes Yes

Poland ... . . . . . . Yes Yes Yes

Romania. . . . . . . . . Yes Yes Yes

Hungary . . . . . . . Yes Yes Yes

Bulgaria . . ., No No No

Czechoslovakia, . . . . No No No

PRC. ., . . . . No No Yes

MFN = Most-favored-nation

——

CCC = Commodity Credit Corporation

SOURCE Off Ice of East-West Trade, Department of State
Ch. VII— The East-West Trade Policy of the United States ● 149

ing livestock, including freight costs; to

finance, where feasible, establishment of facilities for improved handling of imported

farm products; and to meet credit competition from other countries, but not to initiate

credit wars.

The Agricultural Trade Act further authorizes the Agriculture Department to offer

CCC financing for up to 3 years on sales of

commodities to the PRC. In a related action,

the bill authorizes CCC credits up to 3 years

to private U.S. exporters who make deferred

payment sales to currently eligible countries, including China.

TARIFFS: MOST-FAVOREDNATION STATUS

Most-favored-nation status guarantees a

nondiscriminatory U.S. tariff rate to the foreign exporter, i.e., a rate as low as that negotiated for any other American trading partner for any given commodity. Beginning in

1934 and continuing into the postwar era

under the auspices of the General Agreement on Trade and Tariffs, a series of trade

negotiations has resulted in the reduction or

elimination of nearly all substantive tariffs

levied on U.S. imports. Denial of MFN denies the potential foreign exporter any benefits flowing from these progressive relaxations of the tariff structure. Those States to

which the United States denies MFN must

attempt to market their products under the

1930 Hawley-Smoot Tariff, a system of relatively high tariff barriers which was constructed after the crash of 1929 to insulate

the U.S. market.

The Trade Agreements Extension Act of

1951 withdrew MFN status from all Communist countries except Yugoslavia. The

major obstacle at present to the granting of

MFN to the U.S.S.R. and other remaining

centrally planned economies is the JacksonVanik amendment to the 1974 Trade Act.

The Jackson-Vanik amendment proscribes the extension of any Government

credits and/or investment guarantees, the

signing of commercial treaties, or the granting of MFN to any nonmarket nation that:

1.

2.

3.

denies its citizens the right or opportunity to emigrate;

imposes more than a nominal tax on

emigration or on the visas or other

documents required for emigration, for

any purpose or cause whateever; or

imposes more than a nominal tax, levy,

fine, fee, or other charge on any citizen

as a consequence of the desire of such

citizen to emigrate to the country of his

or her choice.

Communist nations that already enjoyed

MFN—Poland and Yugoslavia-were exempt from these provisions. but in order for

any other Communist country to qualify for

MFN, credits, or commercial treaties, the

President must submit to Congress a report

indicating that the country is not in violation

of any of the above conditions, including information on the nature and implementation

of emigration laws and policies and restrictions applied to those wishing to emigrate.

The amendment further gives the President

authority to waive its restrictions on reporting to Congress that:

. he has determined that such waiver will

substantially promote the objectives of

free emigration; and

s he has received assurances that the emigration practices of that country will

eventually lead to free emigration.

A majority vote (within 90 days of receipt of

the President’s report) in either house of

Congress can veto the extension of MFN

status or U.S. Government credits, and the

President retains the authority to suspend

or withdraw the extension of MFN treatment to any country at any time.

Thus far, the President has used this waiver authority on two occasions—for Romania

and Hungary, which both now enjoy MFN

and Eximbank eligibility. In the case of

Romania, confidential diplomatic discussions, which took place between senior U.S.

and Romanian officials in 1975, resolved the
.

150 . Technology and East- West Trade

major emigration issues to the satisfaction

of President Ford. No written assurances

were provided. In the case of Hungary, oral

discussions in 1978 were supplemented by

an exchange of letters containing assurances

on emigration between the U.S. Ambassador

to Hungary and the Hungarian Foreign Minister.42

The economic importance of MFN to recipient countries is discussed elsewhere (see

chapters I I and III), but it is important to

note that the granting or withholding of

MFN has important symbolic value in the

Communist world and may therefore affect

the political climate as well as overall trade

levels. This is true for both the PRC and the

U.S.S.R. It is in this context that media

speculation surrounding the granting of

MFN to the Soviet Union must be understood. One key factor in any administration

strategy to resume U.S. trade and tariff

benefits to the U.S.S.R. must be the nature

of the recent trade agreement with the PRC,

which, among other things, proposes the extension of MFN. This agreement must still

be ratified by Congress. Table 21 summarizes the present status of selected Communist countries with respect to their eligibility

for U.S. credit and MFN.
CHAPTER VIII

Multilateral Export Control

Policy: The Coordinating

Committee (CoCom)
CONTENTS

Page

THE HISTORY OF COCOM. . . . . . . . . . . . . . . . . . . . . . ................153

THE OPERATIONS OF COCOM. . . . . . . . . . . . . . . . . . . . . . ............155

The CoComLists . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. ....155

Exception Cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..................157

Enforcement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .....................160

U.S. AND ALLIED VIEWS OF COCOM. . .........................160

United States. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...........161

West Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. ....161

France . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..................162

Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..............164

THE FUTURE OF COCOM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..166

Table 22.–U.S. Aid to Western Europe Compared to East-West Trade 1949-55 . . . . .155

Table 23.–Number of Items on the CoCom Embargo List. . .....................156

Table 24.–CoCom Approved Exceptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158

Table 25.—Volume of CoCom-Approved Exceptions . . . . . . .....................158

Table 26.–CoCom Approved Computer Requests . ............................159

Table 27.–Disposition of CoCom Exception Cases . ...........................159
CHAPTER VIII

Multilateral Export Control Policy:

The Coordinating Committee

(CoCom)

THE HISTORY OF COCOM

The Coordinating Committee for Multilateral Export Controls (CoCom) is

the informal multilateral organization through which the United States and its

allies attempt to coordinate the national controls they apply over the export of

strategic materials and technology to the Communist world. It was originally

conceived in postwar discussions between the United States, Britain, and

France. By 1948, the U.S. Government had begun to enlist the cooperation of its

West European allies for a coordinated embargo policy against the Communist

bloc. Early negotiations on this matter were private and informal, but they were

lent impetus by the events of 194$-49: the proclamation of the People’s Republic

of China (PRC), the Berlin crisis, the Tito-Stalin split, and the explosion of the

Soviet atomic bomb. As East-West tensions grew, the coordination of export

controls took on increasing importance.

Nonetheless, there was far from universal

or enthusiastic agreement on the extent of

the economic blocade that should be undertaken. After consensus had been reached by

the United States, Britain, and France on

the general direction of export controls,

careful, delicate—and secret—discussions

began with other European nations, several

of which had doubts about the legality of the

proposed embargo measures and many of

which were pursuing neutral policies which

seemed threatened by participation.

The formulation of the framework of the

organization, completed in November 1949,

is thus shrouded in secrecy. It is, in fact,

doubtful whether any written understanding

has ever existed; most likely, a “gentlemen’s

agreement was undertaken, members

agreeing to follow the licensing rules laid

down by unanimous decisions among the

group. CoCom began operations on January

1, 1950, with a membership consisting of the

United States, England, France, Italy, the

Netherlands, Belgium, and Luxembourg. In

early 1950, Norway, Denmark, Canada, and

West Germany joined, followed by Portugal

in 1952 and Japan, Greece, and Turkey in

1953. Nonmembers, Western countries that

chose not to compromise their neutrality, include Sweden, Switzerland, Iceland, Austria,

and Finland. ] Of these, Switzerland and

Sweden are recognized as major alternative

sources of some products and technologies

on the CoCom lists. Their relations with

CoCom involve an informal, albeit a somewhat unpredictable, cooperation. Neither

seems desirous of allowing a sale that would

push its relations with CoCom members to a

serious confrontation, but neither is particu-

‘Sc’L’ ( ;unnar ,.ldltJr-Karlssf Jn, 1~ ‘ei t(’r)l F,’(’onon)i(” II ‘clrf(lrc,

1;)J;.(;;, ..I ( ‘(150 ,~tll(]l I jl F’or{,igtt ]Y(’onomi(” l’oii(j {StcJ~kholm: Alnlq\rist and Jl:iksell, 196HI.

153
154 ● Technology and East- West Trade

larly interested in formalizing its cooperation. Generally, these non-CoCom countries

favor a liberalization of multilateral export

restraints, a view they share with important

CoCom members (see chapter IX).

Initially, the organization had two operating entities, the Consultative Group (CG)

and CoCom. The function of CG was to set

the broad outlines of policy and settle issues

of principle. It consisted of ministerial level

officials or their personal representatives

from all member countries. It was expected

that CG would meet only rarely. In fact, it

soon ceased to operate at all, and the entire

multilateral organization has now come to be

known simply as the Coordinating Committee or CoCom. Originally intended to be the

operational arm of the system, CoCom was

to implement the broad policy decisions

made by CG. CoCom now meets in continuous session in Paris. Its representatives are

midlevel diplomatic and technical specialists, who deal with the day-to-day problems

of the export control system.

During the Korean war a special China

Committee (ChinCom) was established to administer restrictions on trade with China and

North Korea. For a time, these restrictions

were more severe than those that applied to

the Soviet Union and its European allies, but

this “China differential” was eliminated in

1957 and ChinCom ceased to operate as a

separate entity. Now the same CoCom controls apply to both the Soviet Union and

PRC.

Because it is an informal and voluntary organization, CoCom has no power of enforcement. It is based neither on treaty nor executive agreement. Its members have no legal

obligation to participate in its deliberations

or to be bound by its recommendations and

decisions. Furthermore, its operations have

from the outset been highly confidential and

its activities, at least in Europe, attract little

or no publicity. It has been suggested that if

this were not the case, some non-U.S. members might be forced to withdraw from

CoCom, either because of internal domestic

pressures or the incompatibility of individual country domestic laws with its controls. z

The force that initially brought CoCom

into being and held it together through its

formative years was the enormous economic

leverage the United States could exert on its

Western allies in the immediate aftermath of

World War II and the early years of the cold

war. But as table 22 demonstrates, the

amount of U.S. economic and military aid to

the West began to decline seriously after

1955. As it decreased, Western European

trade with the East was beginning to rise. In

1949, the combination of U.S. military and

economic aid to Western Europe amounted

to almost $6.3 billion while the total volume

of trade of these Western European countries with Eastern Europe was only about

$1.8 billion. It was not until 1955 that the

balance shifted and this trade turnover exceeded the amount of U.S. aid. The Battle

Act (see chapter VII) had attempted to use

U.S. aid as a lever to compel allied compliance on export controls by providing for

the discontinuance of U.S. financial assistance to countries that exported restricted

commodities to Communist countries. Its

sanctions have never been invoked, but

whether this was due to its success in limiting East-West trade or to high-level policy

decisions to avoid sensitive confrontations is

unclear. In any case, the increasing interdependence of all CoCom members with the

East at economic, political, and diplomatic

levels has by now eliminated whatever leverage actually existed. It is significant, therefore, that in Europe and Japan CoCom is still

perceived as a useful institution. This point

is discussed further below.

‘Richard T. Cupitt and John R. McIntyre, (’o(’orn: Ea.st-

~’e.st Trade ~eiation.<, The I.i.$t ~eL~ie117 f+oce.ss, a paper presented to the International Studies Association Convention,

Toronto, March 1979.
Ch. V///— Multilateral Export Control Policy: The Coordinating Committee (CoCom) . 155

Table 22.—U.S. Aid to Western Europe Compared to East-West Trade 1949-55

(in millions of dollars)

“ 1949 1950 195 1 1952 1953 - 1954 -

1955

Economic aid . . $6,2760 - $3,819.2 $2,267.8

$1,349.1 --- $1,264.9 --- . 636:6 .. $464. 4

Military aid ., . . . . . . . . . . . . . . — 37.1 604.6 1,013.9 2,866.8 2,225.9 1,541.2

Total ... ... 6,276.0 3,856.3- 2872.4 ‘- ‘2,363.0 4,131 .7 2,862.5 2,007.6

Western European exports to

— — —

Eastern Europ e 832.4 653.3 745.9 742.5 790.9 973.8 1,100.1

Western European imports from

Eastern Europ e 1,011.7 812.9 1,009.8 995.4 908.7 1,039.4 1,357.9

SOURCE From Gunnar Adler Karlsson Western Economic Warfare - 1947-1967, -p. 46. -

THE OPERATIONS OF COCOM

Obtaining a clear picture of CoCom’s daily

operations, to say nothing of assessing their

effectiveness, is complicated by the secrecy

which generally pervades the organization

and its workings. Basically, the representatives of CoCom engage in three kinds of activities: the development of lists of technologies and products that will be embargoed,

controlled, or monitored; weekly consultations on exceptions to these lists; and consultation on enforcement.

THE COCOM LISTS

There are three CoCom lists, organized according to the technical specifications and

applications of the items contained on them:

1. a munitions list that includes all military items,

2. an atomic energy list that includes

sources of fissionable materials, nuclear

reactors, and their components, and

3. an industrial/commercial list.

Most of the activities of CoCom emanate

from the last of these. By their very nature,

munitions and nuclear materials have clear

military purposes and strategic importance,

and there is generally little debate over the

wisdom of restricting their sale. The industrial list, on the other hand, contains those

dual-use items (e.g., jet engines, air traffic

control equipment, computers) that, although nominally civilian, have military potential. The technological content of these

items is usually high.

The industrial list is subdivided into three

categories: International List I (embargoed

items); International List II (quantitatively

controlled items); and International List III

(exchange of information and surveillance

items). List I contains those items that member nations agree not to sell to the Communist bloc unless permission is specifically

granted after a request for an exception. List

II contains items that may be exported, but

only in specified quantities. Licenses to export more than the quantity specified for a

given item–which may be expressed either

in value or in number of units—require special exceptions. List III contains items that

may be sold, but over which the exporting

nation must maintain surveillance of end

use. This information as well as the fact of

the sale must be reported to CoCom.

Most of the dual-use items that pose the

greatest problems for export controls are

contained in List I, which is divided into 10

individual groupings. These conform closely

to those on the Battle Act List and the U.S.

Commodity Control List (CCL):

1. metalworking machinery;

2. chemical and petroleum equipment;
156 ● Technology and East- West Trade

3.

4.

5.

6.

7.

8.

9.

10.

electrical and power-generating equipment;

general industrial equipment;

transportation equipment;

electronic and precision instruments;

metals, minerals, and their manufacture;

chemicals and metalloids;

petroleum products; and

rubber and rubber products.

The CoCom list itself is not public information, but it is virtually identical to the

national lists of controlled items published

by some CoCom members. Furthermore, the

American CCL distinguishes between multilaterally and unilaterally controlled items,

and the content of the CoCom industrial list

can be inferred simply by subtracting the

former from the latter.

At the outset, CoCom controls, at least as

measured by the number of items on the

lists, were quite stringent, although never as

restrictive as U.S. unilateral controls. Debate among and within member countries on

the relative weight that should be given to

security concerns and trade advantages has

been continuous. In order to accommodate

this debate and to keep lists current, periodic

list reviews for purposes of deletion, addition, and amendment were undertaken in

1954, 1958, 1961, 1964, 1967, 1971, and

1974-75. Another review is presently (1979)

underway. No details of the decisions made

in these reviews or the debates surrounding

them are ever published. However, a comparison of U.S. and other national lists indicates that the overall trend in CoCom has

been toward liberalization of controls.

Table 23 summarizes one attempt to estimate the changes in the magnitude of the list

from its inception through the last completed review. This information was compiled from a variety of sources, including

published national lists and private interviews.

As is evident from this table, the length of

the list has fluctuated over the years, but the

greatest single alteration was the eliminaTable 23.—Number of Items on the

CoCom Embargo List

—.——— — _.

List as of, Number of items-

.—— ———— ———.—

November 1949 86

November 1951 270

January 1952 285

March 1954 265

August 1954 170

March 1958 181

July 1958 118

April 1961 NA

July 1962 NA

June 1964 1507

August 1965 161

March 1967 NA

September 1969 156

September 1972 151

March 1976 149

SOURCE CUpitt and McIntyre. CoCom. East-West Trade Relations The List

Review Process p 23

tion of large numbers of items after the cessation of hostilities in Korea and some easing of U.S./U.S.S.R. tensions. The changes

in numbers may be attributed both to shifts

in East-West relations and to increased pressures from European members to decrease

the definition of strategic goods to a minimum in order to foster East-West trade. The

stabilization of the numbers that has characterized the list since this time may be interpreted as a sign that drastic reductions are

unlikely in the future. According to a 1978

administration statement:

The process of considering which items

meet the strategic criteria has been repeated

many times over the years. As a result,

changes during list reviews are now seldom

dramatic. A few items are deleted and a few

new ones added. But most of the changes

consist of modernizing the technical descriptions to reflect technological progress.3

The procedures by which the 1979 review is

being accomplished include the following

steps:

● Original proposals for items to be added

or deleted were due from member na-

‘Special Report on Multilateral Export Controls, submitted

by the President pursuant to sec. 117 of the Export Administration Amendments of 1977, printed in Export Administration Act: Agenda for Reform, hearings before Subcommittee

on International F;conomic Policy and Trade, Oct. 4, 1978, p.

53.
Ch. Vlll—Multilateral Export Control Policy The Coordinating Committee (CoCom) ● 157

●

●

●

tions not later than 4 months before the

beginning of the review.

Counterproposals could be submitted

by any member on any item for which

an original proposal was submitted,

preferably 45 to 60 days before the beginning of the review.

The review is then completed in two

rounds. A draft document is distributed

incorporating the proposals and counterproposals agreed to. If this is acceptable to the member nations, the revised

list becomes effective after 60 days. Revisions to this draft may be submitted if

two countries concur on an item.

Additional proposals for changes that

help achieve consistency among the

items may also be submitted at this

stage.

The main responsibility for the U.S. contribution to this procedure lies with the Department of State, but each principal department in the export control system is involved in developing U.S. proposals. Interagency Technical Task Groups (TTGs) provide technical analysis and evaluation of all

items to be considered. This evaluation is

based on the following:

a laymen’s description of items to be

considered;

a comparison of U. S., CoCom, neutral,

and Communist country manufacturing

capability and availability for each

item;

the potential civilian and military uses

of the item and their significance, e.g.,

their strategic role;

the technical feasibility of controlling

the item including the possibility and

ease of substitution;

changes in use parameters resulting

from technological progress and the

rate of these changes;

the present controls on design and manufacture of the equipment;

the feasibility of reverse engineering,

i.e., of extracting the technology from

the product and the principal military

and civilian uses of the result; and

G identification of critical technologies

and keystone equipment.

TTGs draw on both public and private

sources for their information, including the

Government-industry Technical Advisory

Committees (TACs) established to provide

private sector guidance on the implementation of the Export Administration Act. One

problem with this procedure, however, is

that the apparatus of the review system

tends to disappear between reviews, sometimes resulting in a substantial delay in generating U.S. positions for the list review.

EXCEPTION CASES

Once a week, representatives of each member nation meet in CoCom headquarters in

Paris to consider exception requests. These

are, in effect, petitions from firms in member

countries to exempt from CoCom control, on

a one-time basis, an item that appears on the

CoCom embargo list and would otherwise be

prohibited from sale. Each member government reviews all such requests and recommends full or partial approval or denial to

CoCom, which in turn advises the petitioning nation. Decisions must be unanimous.

In the United States, exception requests

from other CoCom countries, as well as applications for exceptions from U.S. exporters, are first sent to the Office of East-West

Trade in the State Department. The administration of these requests is handled through

the Economic Defense Advisory Committee

(EDAC) structure described in chapter VII.

This involves a multiagency review that

begins in Working Group I with consultation among office director-level representatives of the Departments of State (which

chairs the Group), Defense, Commerce, Energy, and the Treasury, with the Central Intelligence Agency (CIA) advising. If consensus on the application cannot be reached in

the Working Group, the request is appealed

to the sub-EDAC or Deputy Assistant Secretary level and ultimately to EDAC itself

on which the Assistant Secretaries of each
158 ● Technology and East-West Trade

Department sit. The criteria for granting

these exceptions and the system for evaluating the requests are the same as those applied in the Advisory Committee on Export

Policy (ACEP) structure for granting U.S.

validated licenses, i.e., the case rests on the

technical specifications of the proposed export, the proposed end use and end user,

availability outside CoCom, etc.

As tables 24 and 25 demonstrate, both the

value and number of CoCom-approved exceptions have risen substantially over the

past several years.

The exceptions procedure has played a

variety of roles in U.S. policy toward CoCom.

In the early years of the organization, U.S.

acquiescence in exceptions requests was a

means of fulfilling the conditions of the Battle Act without actually having to impose

sanctions on Western allies. The Battle Act

allowed U.S. aid to be continued to those

countries shipping embargoed items to the

Communist bloc if a Presidential determinaTable 24.—CoCom Approved Exceptions

(from all sources, in millions of current dollars)

. ————.

Year ‘- Value of except ions —-.

1967 . . . . . . . .-: :-. : . . . . . . . ~. . . . . . ,: :-. ‘.-.: $11 –

1968 . . . . . . . . . . . . . . . . . . . . ... ... . . . . 8

1969 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

1970 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62

1971 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56

1972 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124

1973 . . . . . . . . . . . . . . . . . . . . ... ... ... 106

1974 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119

1975 . . . . . . . . . . . . . . . . . . . . . . . . . . . 185

1976 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162

1977 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 214

SOURCE: Special Report on Multilateral Export Controls, submitted by~he

President pursuant to sec. 117 of the Export Administration Amendments of 1977

Table 25.—Volume o fCoCom-Approved Exceptions

—————..

Year Total —— United–States”

 ———-.—- — .

1971-75 . . . . . . . . . . . . 4,423 2,178

1976 . . . . . . . . . . . . . . 884 432

1977 . . . . . . . . . . . . . . 886 358

1978 . . . . . . . . . . . . . . 1,035 500

SOURCE Testimony of William A Root before the Subcommittee on Research

and Development.Committee on Armed Services. U S House of Rep.

resentatives, May 24, 1979

tion stated that “unusual circumstances indicate that the cessation of aid would be

clearly detrimental to the security of the

United States.” Exceptions granted by

CoCom thus became grounds for determinations which in turn obviated unpopular and

possibly divisive U.S. actions against its

allies. The fact that no U.S. aid was ever terminated under the Battle Act, therefore, reflects policy decisions on the part of the U.S.

Government and does not necessarily indicate that no U.S. ally ever violated the terms

of the Act by selling goods and technology

unilaterally embargoed by the United

States. At the sometime, allied sales of U.S.

unilaterally embargoed items were possibly

deterred by the knowledge that details of the

countries of destination, products, and values would be published in the State Department’s annual Battle Act Report which provides details of all Presidential determinations to Congress.

The character of the exception procedure

has now changed; it is the channel through

which export controls can be waived in favor

of the requests of U.S. exporters to conduct

business with the Communist world. As

table 25 also demonstrates, the United

States itself generates approximately half of

all exception requests; at the same time, it

has the reputation of being the CoCom member most concerned with maintaining the

strictest possible embargo. Although other

nations may have national control lists (see

chapter IX) slightly more rigorous than

CoCom’s, the United States has the longest

and strictest unilateral list. It is ironic,

therefore, that since the early 1970’s the

United States has emerged as the major

source of CoCom exceptions requests. One

reason for this may be in the substantial

worldwide technological lead the United

States has in computers: computers and

computer-related technology are among the

most frequent entries on the CoCom embargoed list, and the United States is a preferred or sole supplier of many of these

items. U.S. firms have therefore more often

had the occasion to seek exceptions for these

items than have firms in other countries.
Ch. VIII— Multilateraeral Export Control Policy; The Coordinating Committee (CoCom) . 159

Table 26 shows the dominance of computers

in the exception process.

The vast majority of exceptions requests

submitted to CoCom are approved. For example, of the 1,380 cases considered in 1974,

only 12 were disapproved; in 1977 of 1,087

requests, 31 were rejected. The United

States objected in 30 of the 31 disapproved

cases. This information for the years 1974-77

is summarized in table 27.

One of CoCom’s major problems in dealing

with exception cases has been the delays involved in reaching decisions—delays that

originate most often in the United States.

CoCom procedures call for a decision on an

exception request 18 days after it has been

submitted, with an automatic 2-week rescheduling in the absence of a decision, and

additional weekly extensions at the discretion of the requesting member. The United

States has been the major violator of these

Table 26.—CoCom-Approved Computer Requests

(in millions of dollars)

Year Value ‘Percent of total

1971 .“ $ 21 2 3

--

1972 . . . 66 39

1973 . . . . 80 5 0

a

197 4 120 66a

1975 . . . . . . 147 6 4

a

1976 . . . . . . . . . . 123 52

197 7 168 63

aOmitting two exceptionally high-value cases in 1973 and one each in 1974 and

1975 which would distort the figures None of the four proposed exports actually took place

SOURCE Special Report on MuItilateral Export Controls, submitted by the

President pursuant to sec. 117 of the Export Administration Amend

ments of 1977

procedural rules and the elaborate EDAC

review process may very well preclude U.S.

compliance with the time constraints.

U.S. delays in dealing with CoCom have

involved both exception requests initiated

by U.S. exporters and those initiated by

other CoCom members. The latter category

of cases includes not only exceptions but

licenses for the reexport of U.S. origin products. This is the result of the fact that in U.S.

export administration law, the Department

of Commerce retains jurisdiction over the

resale of goods and technologies even after

they have been sold abroad. If, for instance,

a French firm wishes to reexport an item

that it obtained through a U.S. validated

license, it must apply to the Office of Export

Administration (OEA) for a new license, just

as though it were a U.S. firm.

The draft report of the President’s Task

Force to Improve Export Administration Licensing Procedures has noted that the necessity to obtain CoCom approval added an

average of 40 days to the processing time of

most U.S. export cases.4 Delays in deciding

exceptions requests submitted by other nations may last even longer. The General Accounting Office (GAO) recently examined 76

test cases of CoCom exception requests submitted to the United States in 1977 and

found not only that the United States is the

perpetrator of inordinate delays, reserving

‘Report of the President’s Task Force to Improve Export

Administration Licensing Procedures (draft), Sept. 22, 1976,

p. 112.

Table 27.—Disposition of CoCom Exception Casesa

——————————

Year Approved Disapproved Withdrawn——Pending

By number

1974 . . . . . . . . . 1,243 (-) 1 2(o) 16(-) 1 09(-)

1975 . . . . . . . . . 1,646 (-) 22(o) 36(-) 94(-)

1976 . . . . . . . . . 884(432) 36(0) 36(7) 101(1 8)

1977 ........, 836(358) 31(0) 44(5) 176(55)

By value (dollars in millions)

1976 . . . . . . . . . $162 (71) $24(0) $187(1) $73(7)

1977 ..., ... 214(55,2) 1 9(0.03) 9(0.03) 74(20.5)

Total

1,380 (567)

1,798 (798)

1,057 (457)

1,087 (419)

$446 (79)

317 (76)

a U.S. cases are in parentheses

. —. - . -————— ——— . —

SOURCE Cupitt and McIntyre CoCom East-West Trade Relations p 26

——
160 ● Technology and East- West Trade

opinion on more requests than other members and for longer periods, but that the U.S.

CoCom delegation is often unable to explain

why the system takes so long. It concluded

that “the elaborate U.S. review process isn’t

designed to provide a response within the required time frame; indeed, some U.S. export

control officials are not (even) aware of these

deadlines.”5

Delays not only fuel the criticisms of U.S.

exporters, but subject the United States to

antipathy from abroad. Foreign governments and businessmen have attributed delays by the United States in deciding their

exception requests to a number of motives.

These range from allegations that the U.S.

Government is attempting to provide a commercial advantage for U.S. business by holding up the competition, to recognition of the

fact that the cumbersomeness of the U.S. export control system itself is responsible for

the tardiness with which the United States

processes the requests. In neither case are

friendly relations promoted within CoCom.

This subject is discussed in greater detail in

the concluding sections of this chapter.

ENFORCEMENT

Because no CoCom decision is legally

binding on a member nation, all its decisions

must be unanimous. Given the informal nature of the organization and the sensitivity

of the issues with which it deals, however, little is known and less is publicized about the

extent of overt or covert violations of CoCom

‘Comptroller (;eneral, E.tpc>rt (’on trols: .~’e(d to (’luri[v POlio! cJfl(/ .Simplif]’ .4 cff?lirzi.strc~tioft, \lar. 1, 1979, p. 11.

rules by members. Violations of individuals

and firms can only be punished by national

legislation; in the United States violations

by other member countries are dealt with, if

at all, out of the public eye in high diplomatic

circles.

CoCom provides for the possibility that a

country may determine that it must proceed

with a particular export even in the face of a

negative CoCom decision by allowing “national interest exceptions. ” These have been

used very sparingly. According to a wellinformed State Department official, they

have been invoked about 12 times over the

past 30 years, with each case having its own

unique history and characteristics. It is far

more common for problematic cases never to

appear before CoCom at all, either because

the Government determines that there is no

need to submit them or because it prefers to

deal with other member governments directly at the highest political levels. This occurred, for instance, when Great Britain first

proposed selling Harrier jets to the PRC.

Language differences and the complex

technical nature of same exports complicate

the issue of compliance but, undoubtedly,

covert exports do leak through the CoCom

net. Although it is impossible to quantify

the extent of this problem, there is a widespread perception among U.S. businessmen

that CoCom regulations are not applied

equally within all member countries. An

often cited example is the sale of French

semiconductor technology to Poland, a technology transfer that has probably already

benefited Soviet efforts to manufacture

semiconductors and that could not have

taken place under U.S. export controls.

US. AND ALLIED VIEWS OF COCOM

Like any multilateral organization,

CoCom is subject to the strains occasioned

by the differing perceptions and interests of

its sovereign members. But CoCom’s unofficial status makes it particularly vulnerable

to internal tensions. U.S. businessmen frequently remark on the “laxity” of export

controls in other member nations, and

charges of deliberate evasion of CoCom restrictions by firms in other countries are not

uncommon. But America too is the subject

of often heated criticism from its partners.
Ch. VIII—— Multilateral Export Control Policy: The Coordinatlng Committee (CoCom) c 161

As part of an investigation of the differing

export control policies of major U.S. allies

(see chapter IX), OTA has also assembled information on the attitudes of businessmen

and Government officials in West Germany,

France, and Japan toward the utility of

CoCom and America’s role in it. The following discussion is necessarily impressionistic;

no attempt was made to question a statistically significant sample of officials or industrial representatives in either the United

States or abroad. The uniformity of response

encountered, however, indicates that the

generalizations that follow represent, if not

every point of view, at least widely shared

opinions.

UNITED STATES

Chapter VII has discussed the fact that

many U.S. firms feel that they are under a

competitive disadvantage in their dealings

with the East. Not only does the exportlicensing procedure sometimes subject them

to excessive delays in the fulfillment of their

contracts, but there is a widespread perception that the domestic control policies of

America’s major CoCom allies are significantly more liberal and more flexible than

those of the United States. This is borne out

in OTA’s own studies of the export control

policies of West Germany, France, Britain,

and Japan that appear in chapter IX.

But the operations of CoCom are also discriminatory in the eyes of some U.S. executives who believe first, that the policies of

other members give their industries advantages over the United States; and second,

that CoCom regulations are not equally or

consistently applied among all the member

nations. Although American businessmen

perceive the need for controls of militarily

significant items, they contend that European and Japanese interpretation of this

‘‘significance is much more liberal than

that of the United States. This allows foreign firms to export to the Communist world

items that U.S. exporters may not sell, In

the view of U.S. business, the result is that

the Communist nation gets the technology,

and the United States loses the sale. In addition, France, Japan, and West Germany are

mentioned frequently as “unfair competitors” because it is thought that firms there

often manage to evade or avoid CoCom regulations. Evidence for these allegations is usually circumstantial or anecdotal, and the

charges may well be unfounded. Nevertheless, a significant number of highly placed

U.S. executives appear to believe that firms

in other Western countries consistently flout

CoCom regulations, and that this often occurs with the active or passive connivance of

the Governments involved.

Sources in several U.S. Government agencies have privately expressed similar views,

but documentation of CoCom violations by

member governments is universally regarded as highly sensitive material. The

common position expressed by U.S. Government officials is that, given its informal

nature and the constraints under which it

operates, CoCom works surprisingly well.

Problems between governments have traditionally been worked out quietly at very high

policy levels, and this practice should continue. Attempts to formalize or significantly

strengthen the organization are generally

regarded as unwise, for they would almost

certainly be resisted. As the following sections indicate, this apprehension was amply

confirmed in discussions with individuals in

other member countries. The impression

gained is that pressure for any major

changes in the organization might precipitate its demise.

WEST GERMANY

West German officials agree that CoCom

is a necessary and useful organization, inasmuch as it prevents the export of strategic

technology to Communist nations. No one in

Bonn questions the need to embargo exports

of military technology. Moreover, some officials feel that, were it not for CoCom, the

Japanese would be less vigilant about preventing strategic technology exports to the

Eastern European nations–Tokyo does not

feel threatened by such distant countries.
162 . Technology and East- West Trade

The Germans also support the principle of

coordinating Western export policies in a

multilateral organization. Despite the approval of CoCom’s aims, however, there is

widespread feeling that CoCom must be reformed and made less cumbersome, that

there must be more genuine equal competition on the industrial list, and that this list

must be modified to take into account considerable technological progress within

Eastern Europe.

The most frequent criticisms expressed

were not of CoCom itself, but of the American role in CoCom, in particular the delays

involved in reexport licenses, and inconsistencies in U.S. policy. The reexport-licensing

process is often unpredictable because not

only are the American national export control lists more restrictive than the CoCom

lists, but licenses can be denied for ad hoc political reasons, which may be incomprehensible abroad. Officials cited with some bewilderment, for instance, President Carter’s

decision in July 1978 to deny Sperry-Univac

an export license, and his subsequent reversal of this policy in April 1979, suggesting that these developments do not help the

functioning of CoCom.

Moreover, there is a general feeling in

Bonn that the various agencies of the American Government that deal with licensing

questions are uncoordinated, further exacerbating the problem of delays and unpredictability and giving the impression of lack of

policy direction, and that the American criteria for granting licenses are unclear. Regardless of the accuracy of these perceptions, the predominant view in West Germany seems to be that the American lists

should be brought more in line with the

CoCom lists; the license-granting procedure

in Washington rationalized; and the criteria

for making decisions on reexport licenses not

be determined by the current state of human

rights in the U.S.S.R.

Another German concern is the future

treatment of the PRC within CoCom. There

is a fear that if there is a new “China differential, ” this time to China’s advantage,

CoCom may well disintegrate. This is based

on the feeling that, in order for CoCom to be

a viable organization, all Communist countries must be treated equally. By the same

token, therefore, there should be no differential for Eastern European countries (for instance, Romania) within CoCom, because

any technology exported to Eastern Europe

may find its way to the U.S.S.R. German

spokesmen emphasize that they favor more

discussion in CoCom of these issues. Finally,

there is a general belief that German corporations, out of purely commercial motives,

often act as unofficial watchdogs to ensure

that controlled technology is not exported

by a company from another country that has

evaded CoCom rules. Thus, there are mechanisms other than CoCom for ensuring that

the latest technology does not leak to the

East, not the least of which is the Western

companies’ concern not to create potential

competitors for their domestic markets in

the U.S.S.R. This is an argument that has

also been made by U.S. firms. As chapter III

demonstrates, however, it is not indisputably clear that such “enlightened self-interest” always does protect domestic industry

from economic, let alone strategic, repercussions.

German officials agree that if CoCom were

to be made a formal organization it would

probably collapse, because other members

(notably the French) would not agree to

acknowledge it publicly. If CoCom had to be

ratified in national parliaments, the embargo

policy would have to be openly discussed

and justified, which would be counterproductive to its effectiveness. Thus, to the Germans at least, CoCom must remain informal.

FRANCE

Despite often vociferous criticisms made

by French officials, the attitude towards

CoCom in Paris is not uniformly negative.

One CoCom official characterized it as a

“useful organization because it acts as a

brake on technology transfer. ” Most officials agree that it works as a “gentlemen’s

club, “ and that, in view of its unofficial
Ch. VIII—Multilateral Export Control Policy The Coordinating Committee (Co Corn) ● 163

status, it functions rather well. No Government official questions the need to control

weapons exports to the Communist nations

for reasons of national security; the bulk of

the criticism of CoCom arises from its attempts to limit dual-use technology exports,

particularly in light of the current industrial

list reviews.

Apart from the more general problem of

complying with American-inspired controls,

French spokesmen make a variety of other

criticisms of CoCom. It is, according to

some, a cold war vestige, which is “against

the spirit of detente. ” Moreover, they claim,

it is politically counterproductive to have a

multilateral strategic embargo directed

against the U.S.S.R. More specifically the

French regard the whole CoCom procedure

as overly burdensome with far too many detailed technical discussions. The general

French preference would be to change the

system and make CoCom a loosely structured framework organization with general

guidelines, avoiding case-by-case discussions of specific license requests. This would

give the individual members of CoCom more

autonomy within the organization and make

it more acceptable. As one spokesman said,

“We want to be able to judge for ourselves

about how to protect France from the Russians.

Like the Germans, French officials are

concerned about how CoCom will deal with

China in the future, but in general the

U.S.S.R. is a more important market for

France than is China. There was some criticism of Britain’s eagerness to sell “defensive” Harrier jets to China, since the difference between offensive and defensive planes

was considered to be academic. There was a

general feeling that it would be counterproductive to give China special treatment in

CoCom, because this would make a mockery

of the security interests that the organization is supposed to protect.

Most French officials feel that there is a

large element of commercial rivalry that influences CoCom decisions. As one spokesman put it, “When the real interests of a

country are concerned, CoCom doesn’t matter. ” While other CoCom members cite

France as the most frequent violator of

CoCom regulations, French officials deny

this charge and claim that other countries

find ways of avoiding CoCom regulations—

especially Great Britain. In addition, according to some French spokesmen, American multinational corporations use their subsidiaries in Europe to produce goods that are

exported to Communist nations with European credit support and are not affected by

the more stringent American national export

controls.

Since much French technology is of American origin, French corporations are often

dependent on American reexport licenses. A

frequent complaint is that U.S. corporations

have a double advantage–they can avoid

American credit restrictions by exporting

through European subsidiaries, while the

U.S. Government can delay French exports

through the reexport license system, thereby

giving American corporations a competitive

edge. Moreover, a Soviet predisposition

towards American technology is thought to

enhance the lead of U.S. firms. In light of

these perceptions, it is perhaps surprising

that there was so much French criticism of

President Carter’s initial decision to deny

Sperry-Univac an export license for the Tass

computer. The French, after all, profited

from this decision when the contract eventually went to a French firm.

Some officials also claim that CoCom can

be used by those whose products are less

highly developed to prevent other members

from gaining commercial leads. For instance,

if Japan has a monopoly on a state-of-the-art

piece of technology and wants to export it,

another CoCom member may object to

granting the Japanese CoCom permission to

export the product. When that country itself

has developed the technology, however, it

may reverse its position. Thus the French

feel that there is much hypocrisy in CoCom:

“If I do not have what you have, I shall prevent you from selling it until I acquire the

product too. ”
164 ● Technology and East- West Trade

Finally, the French agree that commercial

rivalry can be one of the best guarantees

against exporting the most sophisticated

technology to the U. S. S. R., and a more effective deterrent than CoCom. The threat of potential competition is a built-in economic incentive for corporations to guard against

selling the U.S.S.R. the latest technology,

and will cause them to carefully watch companies in other countries. There is therefore

a self-regulating international mechanism

based on commercial interest, which can detect violations of CoCom regulations. However, the motives for this vigilance are purely commercial; French corporations are not

generally concerned about the security aspects of technology exports.

According to all those interviewed, the

opinions expressed here represent the current consensus of interested parties, and a

new government, whether leftist or rightist,

would not implement fundamentally different policies with regard to the transfer of

technology to Communist countries. The desire to secure French jobs through exports

and to maintain good relations with Communist nations is shared by all elements of the

political spectrum.

JAPAN

Japan has historically evinced a willingness to adhere to CoCom and to incorporate

the CoCom list of embargoed goods into its

own list of licensed exports. This policy can

be traced in part to the forces that propelled

Japan into CoCom at the outset. The role of

U.S. aid in Japanese postwar economic recovery, the importance of the American political and military “umbrella” for Japanese

security, and the psychological dependence

bred by the trauma of wartime defeat left

their impression on successive Japanese

Governments until well into the 1960’s.

Each followed the American lead in basic

matters of foreign policy, sometimes under

other pressure, sometimes not. Such factors

were reinforced by legitimate security concerns on the part of the Japanese, given the

absence of a peace treaty with the Soviet

Union; ongoing political disputes with the

U.S.S.R. over the Northern Territories and

fishing grounds; and relations with the PRC,

which were erratic at best.

But it is by no means certain that Japan

will continue to accept CoCom constraints

on its trade with the U.S.S.R. and China.

The expansion of trade with both the Soviet

Union and the PRC since 1968, the Nixon

“shocks” of 1972, and the diplomatic rapprochement with China in 1978, have probably weakened many of the forces that led

Japan to initially adhere to the CoCom

system.

Another important consideration is the

strong Japanese “policy sentiment” against

exporting arms, nuclear weapons, or anything of obvious military significance. Such

sentiments, rooted as they are in the postwar psychology of leaders and masses alike,

are reinforced continually by eminently

pragmatic considerations. The Asian nations, which in 1977 accounted for fully onethird of Japan’s export market and over onehalf of its sources of imported commodities,

would react economically as well as politically to any signs of revived Japanese militarism or other elements of a “Greater East

Asia Co-Prosperity Sphere.”’ The point here

is simply that CoCom or no, Japan probably

cannot afford to export obviously militarily

relevant products. Further, the “unilateral’”

controls imposed on any export mix by the

characteristics of Japan’s own history may

mitigate whatever opposition to CoCom restrictions of exports otherwise exists.

A case can also be made that CoCom is

useful to Japan in a variety of ways that

have little to do with U.S. perceptions of

security. It fits well with Japan’s efforts to

develop a policy of “even-handedness” in

dealing with its two powerful Communist

neighbors. In the event of pressure from

either (more likely from the Chinese) for

Japan to sell ships, aircraft, or machinery

with clear strategic significance, the CoCom

list provides a handy rationale for a refusal.

Second, the Japanese still have genuine

policy interests that lead them to tread wari-
Ch. Vlll—Multilateral Export Control Policy The Coordinating Committee (CoCom) . 165

. .

ly so far as the Soviet Union is concerned. If

anything, to judge from Prime Minister

Ohira’s statements on the eve of his visit to

the United States in May 1979, political concern over the U.S.S.R. military posture in

the Far East is becoming increasingly pronounced among the Japanese leadership.

The Northern Territories have taken on increasing strategic as well as economic importance in the eyes of both parties to the

dispute. Thus, despite their principled refusal to use trade for political leverage, successive Japanese Governments have resisted

the kind of long-term trade commitments

that the Soviets have been urging on them.

Further, according to Soviet sources, the

Japanese have been dragging their heels in

implementing an intergovernmental agreement on scientific and technical exchanges.

The agreement was signed in 1974, but no

timely steps were taken to implement it.

In the last resort, CoCom arrangements

may be maintained, primarily because there

is no effective domestic political coalition

pushing for their elimination. The historically pro-Soviet stance of the Japanese Communist Party is now balanced by the antiSoviet posture of the Japanese Socialists,

and Japan’s enormous quasi-public corporations present a consensual front regarding

trade policy—at least as far as can be detected by the outsider. There is no Japanese

equivalent of the public debate on East-West

technology transfer that has occurred in the

United States.

But other factors may be at work undermining the CoCom consensus from the Japanese perspective. Japan’s economic recovery

has generated new areas of economic competition between itself and other Western nations, especially in areas where U.S. goods

and technology have been predominant (e.g.,

large computers). It is possible that the Japanese will be increasingly disposed to interpret American behavior in CoCom as motivated more by economic considerations (i.e.,

preserving U.S. markets in the East) than by

intelligible security-strategic calculations.

Meanwhile, growing Western protectionism

against Japanese goods and import restrictions now arising in Western Europe may

render the Communist bloc increasingly important as a market for Japanese exports.

In terms of domestic economic forces, the

depressed state of Japan’s shipbuilding industry may have already inclined certain

Japanese firms to push for a relatively more

liberal approach on the part of the Japanese

Government towards the export of vessels

with possible military application. Japanese

firms as a whole have made a major contribution to the aggregate of the Soviet merchant

fleet, as well as contributing to increases in

the mean size of its vessels (one indicator

of a successful modernization program). As

American naval strategists have frequently

noted, a major ingredient in Soviet strategic

thinking in the area of naval warfare is provision for rapid conversion of its merchant

marine to military purposes. Under such circumstances, controversies over naval exports may become more frequent.

Such factors, when combined with a diminished American presence in Asia (the return of Okinawa, the withdrawal from South

Vietnam, the reduction of the military presence in South Korea) and Japanese rapprochement with the Chinese may sooner or

later yield a situation in which traditional

American arguments regarding the need for

bolstering security arrangements against

Communist States in all areas, including

trade, will ring with decreasing conviction on

Japanese ears. At the same time, growing

Japanese self-reliance in defense matters

may engender an increased R&D effort to develop a homegrown weapons technology and

an adequate production base. Western experience in this area has shown that under

such circumstances the impulse to recoup investments through the sale of related products, abroad as well as at home, subsequently becomes quite strong. How compatible

this impulse might be with CoCom restrictions remains to be seen.

All the same, it is far too early to speculate

that the balance will shift decisively in the

direction just described. A number of countervailing factors still operate and their com-
166 Technology and East- West Trade

bined impetus promises to maintain the

CoCom arrangements, including Japanese

participation, intact. Whether or not such

forces are adequate to sustain any U.S. attempts to formalize the consensus is a separate question. The first such factor is the

comparatively small proportion of Japanese

trade with the Communist countries. Although the absolute amount has been growing steadily, the percentages have remained

generally stable at a low level (see chapter

IX).

In sum, the future of the Japanese position on the subject of export controls, while

laced with a number of uncertainties and

contradictions, still shows no firm evidence

of a collision course with American policy as

it stands today. By the same token, there appears to be little or no sympathy for the idea

of tighter controls over either end products

or technology.

THE FUTURE OF COCOM

Any assessment of CoCom must acknowledge its surprising longevity. Despite its informal status and the increasingly divergent

interests of its members, it has functioned—

and functioned with reasonable success—for

nearly 30 years. If many nations regard the

continuance of CoCom with little enthusiasm, there at least appears to be similarly little enthusiasm for its dismemberment. In

the face of the military risks that might accompany its disappearance, CoCom is tolerated.

But it is undeniably the predominant U.S.

interest in CoCom that holds it together, and

it has become an increasingly controversial

organization in the last decade, its purpose

and methods questioned. The preceding discussion has explored some of the important

issues and strains within CoCom. It is useful

to summarize the current state of debate

within the organization in order to consider

the directions it may take in the future.

Japan, Germany and, with more ambivalence, France continue to accept CoCom as a

necessary and useful organization for the

control of military exports to Communist nations.’ Even if there were no CoCom, they

‘

) While 1+’rance only reluctantly concedes its membership,

several F:uropean officials reported that Italy is mwn more

reticent about admitting that it is in CoCorn-although the

President of CoConl is Italian. The fact that the Italian Communist Party recei~ed just under one-third of the vote in the

last general election may not be unconnected to this reticence.

would restrict armament exports for national security reasons.

On the question of nonmilitary technologies, however, there is more skepticism

about U.S. motivation and the efficacy of

CoCom. None of the foreign countries investigated has an explicit technology transfer

policy toward Communist nations; in none is

East-West technology transfer a matter of

public debate. There is a general feeling that

no Western country has a monopoly on any

form of technology; there are always alternative suppliers for Communist nations. Officials in each country argue that if they are

not allowed to sell a technology to the

U. S. S. R., it will purchase the equivalent

elsewhere. Furthermore, given the lack of a

coordinated Western technology transfer

policy, the perceived impossibility of arriving at a general agreement in the West on

which nonmilitary technologies should be

controlled, and CoCom’s inability to invoke

sanctions against violators, the overall inclination is to export most nonmilitary

technologies to the East.

This, according to U.S. businessmen, is

the point at which official U.S. policy

diverges from that of its allies–to the detriment of the interests of the U.S. economy.

The United States has always maintained a

wider interpretation than its allies of military significance, and has at times attempted to control a large range of items
Ch. VIII— Multilateral Export Control Policy The Coordinating Committee (CoCom) . 167

because of what might seem very indirect

military implications. (For a complete discussion of the gamut of military relevance,

see chapter V.) So long as these differences

continue, U.S. firms will be prohibited from

exporting items that, in Europe or Japan,

would raise no national security problems.

Further, most European officials agree

that there is no satisfactory all-purpose

definition of technology that can be applied

to export controls in a realistic operational

way. U.S. attempts to shift the emphasis of

control from end products to design and

manufacturing know-how have led other

CoCom members to object that their Governments lack the legislative authority to

control the sale of “know-how,”’ as opposed

to equipment. The general view is that one

cannot separate technology from the product and that attempting to switch from end

product to technology control will aggravate

CoCom’s problem.

Some businessmen in Europe remain

skeptical about the value of the end-use

statements and safeguards demanded by

CoCom. It is difficult to take action against a

Communist end user who violates the signed

consignee statement, and even harder to

detect possible diversions of equipment from

civil to military use. Many businessmen

would prefer a less elaborate system with

fewer safeguard obligations. An American

official discussing these problems admitted

that end-use statements may have limited effectiveness, but said “it makes us feel good”

to receive the signed end-use letters. Moreover, there is a general agreement that there

are various ways for corporations to evade

CoCom through American multinational

subsidiaries in Europe and through third

countries, although it is obviously impossible to fully document these evasions.

Both the Europeans and Americans accuse each other of hypocrisy in CoCom. The

Europeans claim that, on the one hand, the

United States upbraids them for not being

vigilant enough in their export control, for

being too crassly commercial, and for not

considering political factors enough in their

export policies; on the other hand, America,

which possesses the most advanced technology, submits more exception applications to

CoCom than any other country. Moreover,

cases such as that of the TASS computer inevitably lead to charges of U.S. commercial

motivation in first holding up an export

license and then granting it after corporations in other countries have been deterred

from pursuing it. American officials point

out that while the Europeans criticize the

United States for its overly political attitude

towards East-West technology transfer,

they profit commercially from its more restrictive East-West trade policy by securing

orders that might otherwise have gone to

U.S. firms.

The skepticism about the degree to which

one can or should control the transfer of

technology to Communist nations is reinforced by other lingering suspicions of

American motivation in Western Europe. A

brief discussion of two separate cases–the

1962-63 North Atlantic Treaty Organization

(NATO) pipe embargo and a West German

nuclear powerplant deal—highlights these

concerns.

In November 1962, the United States attempted to impede the completion of the

Friendship oil pipeline from the U.S.S.R. to

Eastern Europe by preventing its allies from

exporting large-diameter steel pipe to the

Soviet bloc. The pipe embargo order was

passed in NATO because the United States

knew that the British would not agree to it in

CoCom. Several instructive points emerged

from this attempt to prevent export to the

U.S.S.R. Washington was able to prevail on

the West German Government to force several German corporations to cancel already

concluded deals for the sale of pipe. This naturally caused an outcry in the German business community. However, since the United

States did not have as much political leverage over its other allies as it did over Bonn, it

was unable to prevent Great Britain, Italy,

or Japan (which, of course, was not in

NATO) from selling similar pipe to the

U.S.S.R. Britain, in particular, chose to ig-
168 ● Technology and East-West Trade

nore the NATO directive. Ultimately, not

only did the U.S.S.R. find alternative

sources of supply for pipe, but the embargo

induced it to step up the development of its

own pipemaking capacity. The completion of

the Friendship pipeline was delayed by only

a year as a result of the embargo. Moreover,

there was a strong suspicion in most European capitals that the real American motivation for the embargo was not fear of enhancing Soviet military capabilities, but rather

the wariness of U.S. oil companies about the

U.S.S.R. dumping cheap oil on the West

European market. Whatever the truth of

this allegation, and it may well have been utterly unfounded, it made a powerful argument. The net result of the pipe embargo was

damage to U.S.-West European relations

and only a marginal effect on the Soviet

ability to complete an oil pipeline that supplied Red Army troops in Eastern Europe.

The pipe embargo has not been forgotten

in Western Europe and the issues it raised

remain important to the perceptions of

Western Europeans of the utility of export

controls and of the U.S. role in them. The

basic themes that recur are the suspected

hypocrisy of the United States, its overzealousness in enforcing stricter controls than

necessary, and the basic ineffectiveness of

such controls in preventing the acquisition

of technology or technical capacity in the

Communist bloc.

Similar issues resurfaced in 1973, when

West Germany and the U.S.S.R. settled the

economic aspects of a major project in which

the West German Kraftwerkunion would

build a $600 million, 12,000 megawatt nuclear powerplant in Kaliningrad. The Soviets

undertook to supply West Germany with

electric current from this plant. Both the

United States and Britain raised objections

to the deal in CoCom in January 1975, claiming that the issue at stake was inspection of

nuclear facilities by the International

Atomic Energy Agency: the Soviets had

never agreed to onsite inspections as part of

the nuclear nonproliferation treaty. The

United States also raised doubts about the

security aspects of selling nuclear technology to the U.S.S.R. West Germany, however, claimed that the Soviets already possessed nuclear power technology. The situation was complicated because West Germany imports enriched uranium from the

United States, and it feared that Washington might embargo exports of uranium to

West Germany as a means of preventing the

deal.

In March 1976, the West German Government announced that the Kaliningrad project had been abandoned because of insuperable difficulties. The ostensible reason was

the failure of West Germany and the

U.S.S.R. to agree over electricity supplies

from the plant to West Berlin. However,

there was much speculation that the real

reason for the cancellation of the deal was

American objections in CoCom.7 Moreover—

and here similarities to the 1962 pipe embargo case are clear–there was speculation

that the real reason for U.S. objection was

not fear of enhancing Soviet nuclear capabilities, but commercial rivalry. Westinghouse

had outbid the German Kraftwerkunion

(jointly owned by Siemens and AEG-Telefunken) in reactor sales to Spain and Yugoslavia, and was reportedly also interested in

the Soviet deal. It is equally obvious, of

course, that if CoCom prevented the sale,

Westinghouse stood less chance of selling

nuclear reactors to the U.S.S.R. in the

future. Nevertheless, whatever the truth of

the matter, it is significant that American

motives in CoCom were still perceived as

dominated by an interest in controlling commercial competition rather than retarding

Soviet technological development and protecting Western security. Some have even

argued that the CoCom procedure consti-

‘1 lanns-Diet.er ,Jacobsen, “Die h;ntwick]ung der W’irLschaftIichen Ost-W’est 13eziehungen als Problem der W’esteuropaeischen und At.lantischen Gerneinschaft, ”” .’$tiftung kl’i.ssenschuft und hlitik ( E benhausen, 1975), p. 70; Simone

Courteix, “Le Comite de Coordination Des Echanges EstQuest (CoCom),” Annuaim de I’URSS et de %3.s Sociaiistes

Europeens, pp. 1-7. German Government and business officials, in interviews, disagreed about whether CoCorn had

given final approval for this project.
Ch. VIII— Multilateral Export Control Policy: The Coordinating Committee (CoCom) 169

tutes a forum for intra-Western commercial

espionage by providing market opportunity

information.

These charges may have been politically

motivated and entirely unfounded. It is significant, however, that U.S. behavior has

permitted this kind of interpretation, although recently Europeans seem increasingly willing to attribute U.S. recalcitrance and

delays to the complex and time-consuming

U.S. export control procedures rather than

to sinister commercial reasons.8 This may or

may not be regarded as a positive step in

U.S. relations with its CoCom partners.

In a larger context, many European officials question the utility of embargoes in

general, and of the CoCom embargo in particular. Some argue that the most effective

embargo against the U.S.S.R. would be an

embargo of wheat as opposed to technology.

The Soviets cannot produce wheat if there is

a bad harvest, but they can always manufacture equipment, however primitive.9 Disagreements about the effectiveness of embargoes depend not only on one’s evaluation

of the U.S.S.R. ability to absorb and diffuse technology (see chapters IV and X).

They once again invoke the problem of defining national security and determining how

directly useful to the military sector a technology must be before it is considered “significant. ” In addition, some argue that, were

it not for CoCom, the U.S.S.R. today would

be a more formidable antagonist militarily,

and that it has made most of its technological breakthroughs by obtaining Western

technologies. A counterargument holds that

it is better to create interdependencies

through the export of technology to the

U.S.S.R. than to force it to become more

technologically self-sufficient through a strategic embargo. According to this view, technology transfer to the East is a factor for

stability to be balanced against the potentially destabilizing economic effects of a continued complementary trade structure between East and West. 10

If there were no CoCom, would things be

different? In Europe and Japan, the general

answer appears to be “yes, but not much. ”

Government officials in West Germany,

France, and Japan insist that they would

have their own national controls on the export of military technology. Granted, the

absence of multinational controls might

mean that some military hardware would

leak through to the Communist countries. In

addition, European governments would

probably lessen controls on industrial exports that contain dual-use technology.

Most important, the value of regular and

continuous channels of communication between exporting nations would be lost. However, given the problems of trading with

Communist nations and their lack of suitable

exports to pay for Western imports, the economic limits to East-West trade would act as

a barrier to any great increase in technology

exports to Communist nations (see chapter

III). Businessmen in all countries agree with

this assessment. Even if export restrictions

were removed, they say, the problems of selling to the U.S.S.R. would limit the amount

of technology exported. One computer executive gave as an example of this problem a

Soviet offer to have his firm build a computer in Sverdlovsk. Even if there was no

CoCom, he claims, the logistical problems of

dealing with the Soviet bureaucracy and installing machines in the provinces would

deter him. Thus, there are economic deterrents to East-Wrest technology transfer that

exist regardless of the political environment.

In sum, so long as the Soviet Union is

perceived as presenting a threat to Western

security, there will be general agreement in

Western Europe about the need to embargo

exports of directly military technology.

However, the question of the transfer of
170 . Technology and East- West Trade

dual-use technology may become more controversial. The crucial issue to the future of

controlling technology for national security

purposes will therefore center on the question of the ultimate contribution of such

technologies to Communist military and

strategic capabilities. It appears that America is at present more seriously concerned

than its CoCom allies over this problem. Certainly, the German approach to detente is

somewhat different from that of the United

States, as the recent U.S.-West German disagreements at the Belgrade followup to the

Conference on Security and Cooperation in

Europe showed. In the current international

climate, exports of technology are seen as

good business in West Germany, beneficial

to the economy, and helpful to West German

foreign policy inasmuch as they promote a

better atmosphere in relations with Communist nations. They are not portrayed as a potential threat to national security; indeed

uncertain U.S. leadership is perceived by

some as a greater security danger than the

transfer of technology. The French and Japanese take a similar view, and go even further in divorcing technology transfer from

political considerations. The fact remains,

however, that CoCom has remained a viable,

albeit imperfect, institution for some 30

years, weathering disagreements among its

members over both practice and policy. The

United States may continue to depart from

its partners, but in the absence of attempts

to drastically alter the organization or of

events that dramatically affect allied foreign

policy, there is little reason to expect much

change in CoCom-if it is unlikely to adopt

more stringent restrictions, so too is it

unlikely to disappear.
CHAPTER IX

The East-West Trade Policies

of America's CoCom Allies
CONTENTS

Page

WEST GERMANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. ....173

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...................173

Economic Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .............175

Political Factors . . . . . . . . . . . . . . . . . . . . . . . .....+... . ................177

Trade in Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .............179

Export Control Policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...........181

Credits and Tariffs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..............184

FRANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..............185

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ................185

Economic and Political Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185

Trade in Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .............186

Export Control, Credit, and Tariff Policy . ............................187

THE UNITED KINGDOM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. ...189

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .....................189

Economic and Political Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. ....190

Trade in Technology, Export Controls, and Credits . ....................190

JAPAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .....................192

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .....................192

Economic Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .................192

Political and Foreign Policy Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 194

Trade in Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...........,.196

Export Control Policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..........198

SUMMARY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...........201

Tab1e 28.—Russo-German Trade Percent of Total Russian Imports and Exports ....173

Table 29.–West German Trade With Communist Nations, 1970 and 1978 . ........176

Table 30.–French Trade With CMEA Members, 1970-’76. . .....................186

Table 31.–United Kingdom Trade With the U.S.S.R. . . . . . . ....................190

Table 32.–Japanese Trade With the U.S.S.R. East Europe, and the PRC–1978. . . .193

Table 33.–Postwar Development of Japanese-Soviet Trade . ....................194

Table 34.–Japanese Machinery Exports, 1978, by Region . . . . . . . . . . . . . . . . . . . . . . 197

Table 35.–Soviet Imports of Machinery and Equipment From Japan, the United

States, and West Germany, 1977 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .197

Figure ll.-Regional Distribution of West Germany’s Trade With the East, 1978 ...176
CHAPTER IX

The East-West Trade Policies

of America’s CoCom Allies

East-West trade has always been more important to Western Europe and

Japan than to the United States. Economic and political imperatives in other Organization for Economic Cooperation and Development (OECD) nations have

combined to create a generally favorable attitude toward trading with the Communist world, an atmosphere that prevails today in both government and business circles. It has also carried over to Western European and Japanese views on

export controls and technology transfer. Indeed, while the issue of technology

transfer to Communist nations is a matter of controversy in the United States,

such debate is virtually nonexistent in Japan and most West European countries; they accept trading with Communist countries as a more or less normal

part of foreign economic policy. For a variety of reasons, America’s European

and Japanese allies do not necessarily share its concern over the economic and

security problem raised by trade and technology transfer to Eastern Europe, the

U.S.S.R., and the People’s Republic of China (PRC). This fact has relevance to

the debate within the United States over East-West trade and technology transfer policy.

WEST GERMANY

INTRODUCTION

Current West German policies towards

trading with the East are best understood in

their historical context.

Germany has been transferring technology to Russia for well over a century. The

long historical tradition of Russo-German

economic interdependence is characterized

by the German export of machinery in return

for imports of Russian raw materials. Table

28 demonstrates the degree to which the two

economies were oriented towards each other

prior to World War I.

Bilateral trade was always more important for Russia than for Germany, and after

the Bolshevik Revolution, the Soviet Government continued to seek German machinery imports. In fact, there was considerable

Table 28.— Russo-German Trade Percent of Total

Russian Imports and Exports

Russian imports Russ Ian exports

1858-62 28% 16%

1868-7 2 44 24

1914 47 29

SOURCE: Juergen Kuczynski and Grete Wittkowski. Die Deutsche russischeschen

Handelsbeziehungen in den ietsten 150 jahren Berlin: 1947 pp. 24-

25.

German-Soviet clandestine military cooperation. Although the volume of trade between

the two countries declined after the Nazis

came to power, German-Soviet economic cooperation continued until the 1941 Nazi invasion of the U.S.S.R. After the War, for political reasons. West German trade was
174 ● Technology and East- West Trade

largely reoriented away from the East, but

the historical legacy of close economic ties

has profoundly affected present German attitudes towards trading with Russia. Despite the cold war, many West German businessmen look on the U.S.S.R. and Eastern

Europe as natural and desirable markets for

their manufactures.

The German business community has

long favored trading with Communist countries and separating political from economic

relations with the U. S. S. R., but early postwar West German Governments did not take

this view.2 Prior to the election of Chancellor

Winy Brandt in 1969 and the inauguration of

a new Ostpolitik, German Governments led

by the Christian Democrats (CDU) looked

upon trade with the East as a primarily

political problem: since trade with the East

was relatively unimportant economically, it

should be controlled and used to promote

West Germany’s political goals. The most

important of these was the reunification of

Germany under a Western system or, failing

that, a strengthening of East Berlin’s ties

with Bonn. Governments of West Germany

under Chancellors Adenauer, Erhard, and

Kiesinger attempted to implement linkage

strategies, making trade conditional on

Soviet political concessions on the German

question. Both negative linkage or trade

denial (the predominant form of leverage

prior to 1969) and positive linkage or trade

inducement were attempted, but these produced only marginal compromises, and no

substantial Soviet political concessions. )

‘In 1954, a survey by Gabriel Almond found that, on the

question of trade with the F;ast,

1 [ remains Interes[ In~ [ hat the husiness cwmmunitj in (;cr.

man\ i+ rcia [ II elj untrw arc ot L he priorit~, of p{)lit ical fa~’tors i n

(’t~n~nlunlst pohc:.nlaking, onl> go~wmnwnt oificials and som e

Itwcitm ot t)u~lnt+~ prt~s+ure-~roup< stwm [o wit, this point. k’m 01

I ht~ indu+t r-la lists, tn en i n [ tw largest estahlishnwnts. art, aw are ()!

i[, ‘1’ht>]r [ hlnklng ahou t [ ht~ p(wsihilit ]tw ot [he (’omrnun is[ market

I< cit~nlinti t td 1)1 +Implt,, ap(di [ ic’al economic calcula [ ion.

See Gabriel Almond, “’f’he Politics of German Business, ” in

Hans Speier and W’. Phillips Davison, eds., tl’e.st German

l.eader.s)tip and F’oreign Polic>’ (E\fanston, Ill., 1957), p. 237.

‘For a fuller discussion of the policy of linkage in W’est

(;efman-Soviet relations, see Angela Stent Yergin, 4“1’he PoIit ical Econom y of M’est-Gernlan-So\iet Relations,

1955-1 9’73” (unpublished Har\’ard Uni\’ersit~’ Ph.D. dissertation, 1977).

As early as 1952, however, an organization of businessmen was created to promote

and coordinate East-West trade. Known as

the Ostauschuss der deutschen Wirtschaft,

or Eastern Committee, the group was sponsored by the powerful Federation of German

Industry, and charged both with furthering

trade with the Communist countries and

with representing West German business on

that subject before the Government. The Ostauschuss has always had a semiofficial

character; it has nevertheless disagreed publicly with some Government attempts to restrict trade. It remains today an important

organization for furthering East-West trade,

although some German firms claim it has

lost momentum in recent years. The Ostauschuss favors technology exports to

East, but it also supports strict German

herence to the Coordinating Committee

Multilateral Export Controls (CoCom).

Adenauer in particular felt that since

U.S.S.R. was West Germany’s political

the

adfor

the

antagonist, it was wrong in principle to sell it

any products that could enhance its military

capacities. Until 1963, the various Adenauer

administrations used political and security

arguments against trading with Communist

nations, claiming that such trade was dangerous and economically unimportant. That

part of the business community engaged in

trading with Eastern countries countered

with economic arguments in favor of trade,

holding that it was economically beneficial

for German industry and could even have

positive political consequences, by creating

desirable interdependencies and giving the

U.S.S.R. a stake in the stability of the West.

The clash between Government and industry over exporting to Communist nations

peaked in the late 1950’s, although as late as

1963 Chancellor Adenauer upbraided those

German businessmen exporting to the Russians for their disloyalty to the German reunification cause. Soon after erection of the

Berlin wall, he also criticized the United

States for selling wheat to the U. S. S. R.: “I

can’t stand any more of this wretched talk of

detente. ”
Ch. IX— The East-West Trade Policles of America's Cocom Allies ● 175

In the mid-1960’s, the Erhard and Kiesinger administrations retained a basically restrictive attitude towards trade with the

Communists, but attempted to use it to induce greater polycentrism in Eastern Europe. Thus, they offered more favorable credit

terms to Eastern Europe than to the Soviet

Union. The business community was largely

opposed to this policy, favoring the total

separation of trade and politics.

After Will Brandt’s election, the Social

Democrats (SPD) took over the formulation

of Osthandel (trade with the East) policy. In

general, they favored a depoliticization of

trade and eschewed negative linkage, although they were not averse to employing

positive linkage strategies and offering economic incentives in return for relatively

minor political concessions. Since 1969, the

German Government and the business community have converged in their desire to

separate trade and politics. Whereas previous Governments intervened to hinder EastWest trade (e.g., by preventing the granting

of credits, or by canceling specific orders),

present ones frequently act to facilitate it. In

several of the biggest deals involving the export of technology to the U.S.S.R. (for instance, the Kursk deal, described below) the

Government has pressured the Soviet Government to accept terms favorable to German corporations. Since 1952, the Ostauschuss has consistently favored trade with

Communist nations while warning against

exaggerated expectations. During the last

Brezhnev visit to Bonn, the business community was noticeably cooler than the Government towards the 25-year economic

agreement signed by Brezhnev and Schmidt.

Ironically, the business community is sometimes now more skeptical than the Government about the value of increasing trade

with Communist nations, including the benefits to German employment.

As the West German Government has relaxed its political restrictions on trade with

the Eastern bloc, the U.S. Government has

been moving in the opposite direction. As a

result, the United States and West Germany

disagree with increasing frequency over the

politics of East-West trade. The reaction of a

German Government spokesman to the

Jackson-Vanik amendment illustrates the

prevailing German attitude toward U.S. efforts to use trade for political purposes in

dealing with Communist countries:

A policy like the one Congress thought

was right or like what our own opposition occasionally recommends, cannot only fail to

achieve the desired goal, but can even make

it more difficult.4

ECONOMIC FACTORS

West Germany is heavily dependent on foreign trade, which accounts for 30 percent of

its gross national product (GNP). A healthy

export sector is a vital component of its

economic viability. Since West Germany is

far more heavily trade dependent than is the

United States, it tends to favor exports

regardless of the destination. West Germany’s postwar economy was built on Chancellor Erhard’s implementation of the Soziale Marktwirtschaft (social market economy) theory, designed to create a truly competitive market. In the 1950’s, exports of

manufacturers and engineering goods 1ed

the way to remarkable economic growth, and

German officials and businessmen generally

assume that exports of technology are necessary for continued economic growth. This

applies to exports to the East.

In 1978, total West German trade with

Communist countries (excluding East Germany and including China, North Korea, and

Mongolia) amounted to over 30 billion

Deutschmarks (DM) (roughly $15 billion,

see table 29). This was 5.7 percent of total

West German foreign trade. Trade with East

Germany, which West Germany considers

“inner-German trade, ” rather than foreign

trade, came to 8 billion DM. The U.S.S.R.

4.11’CI( Y’ork Times, Jan. 18, 19’7.5. The W’est (;ermans hate

succeeded, behind the scenes, in securing the emigration of

about 60,000 ethnic (ierrnans per year from the U.S.S.R. and

h;astern h;urope. In 1978, 58,000 emigrated: 36,000 from Poland, 12,000 from Romania, 8,500 from the U. S. S. R., 900

from Czechoslo\’akia, and 500 from elsewhere. After the

Jews, ethnic (;ermans are the largest group allowed to emigrate from the U.S.S.R.
176 ● Technology and East-West Trade

Table 29.— West German Trade With Communist Nations, 1970 and 1978

(million DM, figures rounded off)

—

1970 “-

Total ‘Import “- - ‘Export “Balance

U.S.S.R: : .“. . . . . : - 2,800 1,254 1,546 +29 2

-

Poland. . . . . . . . . . . 1,402 744 658 - 8 6

Czechoslovakia . . . . . 1,785 727 1,058 + 331

Hungary . . . . . . . 1,012 490 522 + 32

Romania . . . . . . . . . . . . 1,302 580 722 + 142

Bulgaria. . . . . . . . . . . . 477 237 240 + 3

East Germany. . . . . . . . 4,548 2,064 2,484 + 420

China. . . . . . . . . . . . 1,001 389 612 + 223

Total . . . . . . . . . . . 14,327 6,485 - – -7,84 2 + 1,357

SOURCE: Statistisches Bundesamt Statistiches Jahrbuch fuer die Bundesrepublic Deutschland -

Der Bundesminister fuer Wirtschraft, Der Deutsche Osthandel zu Beginn des Jahres 1979

Der Bundesminister fuer Innerdeutsche Beziehungen. Die Entwicklung der Beziehung

Demokratischen Republik, 1969.1976

was Germany’s single most important Communist trading partner ($5-1/2 billion total

turnover), representing 39 percent of its

Osthandel. Poland followed at 16 percent,

Hungary and Czechoslovakia at 11 percent,

Romania and China at 9 percent’ (see figure

11). West Germany is also the most important Western trading partner of the Communist countries and represents 21 percent of

all OECD exports to Communist nations.6

Today West Germany is the leading capitalist trading partner of the U. S. S. R., Bulgaria,

Poland, and Hungary. Indeed, it is Hungary’s second largest trading partner, after

the U. S. S. R.’ Manufactured goods constitute 89 percent of Germany’s exports to the

East, while 50 percent of its imports are of

raw materials. Trade with all of these countries is conducted under bilateral trading

agreements, and West Germany grants

most-favored-nation status to all Communist countries, within limits imposed by the

European Economic Community (EEC).

From the point of view of the German economy, overall dependence on trade with Communist countries is small. Nevertheless, certain sectors of the West German economy

(e.g., the steel industry) are quite dependent

on exports to the East, and technology

.—

1978 ‘-

Total Import Export – Balanc e

11,707 -

- 5,406 6,301 + 895

4,732 2,086 2,646 + 560

3,178 1,357 1,821 + 464

3,487 1,293 2,194 + 901

2,983 1,214 1,769 + 551

1,032 314 718 + 404

8,820 4,066 4,754 + 688

2,723 734 1,989 + 1,255

38,662 16,470 22,192 + 5,722

.—

zwischen der Bundesrepublli Deutschland und der Deutschen

transfer to the East also provides substantial employment in certain industries. The

Soviet Union and Eastern Europe are the

largest export market for the West German

machine-tool industry; approximately onethird of machine-tool exports from West

Figure 11 .—Regional Distribution of

West Germany’s Trade With the East, 1978

Turnover in percent

3.4 ”/0 1.1 “/0

Bulgaria Other

5Der Bundesminister fuer Wirtschaft, Der Deutsche Osthandelzu Beginn des Jahres 1979 (Bonn, 1979), p. 26.

‘Ibid., p. 16.

‘I bid., pp. 4-10.
Ch. IX— The East-West Trade Policies of America’s Cocom Allies ● 177

Germany go to Communist nations, and

East-West technology trade is a significant

employment guarantor for medium-sized

machine-tool firms. Ten percent of German

investment goods exports go to Eastern

Europe and the U. S. S. R., and some large

firms, Salzgitter for example, are fairly dependent on trade with Communist nations to

keep their workers employed. Indeed, to the

extent that Osthandel is still debated in

West Germany, Government statements

emphasize its positive economic aspects.

During the 1976 election campaign, the opposition CDU criticized the Government for

granting overly generous credit to Communist nations. The Government’s reply

stressed the importance of trade with the

East to domestic employment. It claimed

that Osthandel provided 300,000 jobs, and

was vital for West Germany’s continuing

economic health. Interestingly, it was left to

the business community, and particularly

companies engaged in trade with Communist countries, to point out that imports

from the East could have a negative effect

on employment.8

In opposition to this historic trade dependency and regardless of the political

climate, a number of economic factors act as

deterrents to greater technology transfer

from West Germany to the Communist nations. The central problem limiting trade

with the Communist countries, as one German official put it, is simply that the Russians and Eastern Europeans cannot pay.

The chronic shortage of hard currency in the

East, combined with the Soviet and East

European insistence that trade be bilateral,

means that Eastern trading partners must

find noncurrency means of paying for their

West German imports. Although Easternbloc countries would like to export machinery to Germany, the West Germans are still

unwilling to buy such manufactures in large

quantities: they are of inferior quality and

pose a potential competitive threat to domestic products. The lack of suitable East

European and Soviet imports therefore

places substantial limitations on West Germany’s exports of technology. Additionally,

since the German Government does not subsidize interest rates on credits, the Soviets

prefer to deal with nations from whom more

favorable credit terms are available. Such

credits do, however, provide one means of

freeing hard-currency to pay for additional

German imports. In some Eastern European

nations, German corporations are able to

enter into joint ventures, giving them 49-

percent ownership, but the U.S.S.R. does not

permit any foreign investment in Soviet

enterprises.

Given these problems, the most viable

form of West German-East European economic relations has been the use of compensation agreements. Under these the Soviets

and East Europeans pay for their imports of

German technology with products produced

from German machinery and equipment.

The West Germans see limited benefits in

such countertrade, however, and are reluctant to respond to Soviet and East European

initiatives to expand this kind of business.9

Together, these built-in economic constraints inhibit a massive expansion in West

German trade with the East. Moreover, the

need to protect German domestic production

has given rise to import restrictions. These

further limit the amount and kind of East

European goods that can be imported to pay

for West German exports.

POLITICAL FACTORS

A variety of political factors, some of

them contradictory, also affect West German trade with the East. Most important is

West Germany’s desire to maintain and im-

‘The head of the West German Eastern Committee (Ostauschuss) of the Federation of German Industry replied to Government claims by arguing, “If you calculate that way, you

must compare the jobs which are secured through trade with

the East with those that are threatened through imports

from the Eastern bloc.”’ See W’rit.schufts{{ oche, Oct. 1, 1976.

‘For a German discussion of the limits of compensation

deals and the advantages of cooperation, see Matthias

Schmitt, Industn”elle Ost-B’est Cooperation (Stuttgart,

1974).
178 ● Technology and East-West Trade

prove relations with East Germany. InnerGerman relations are a key factor determining West Germany’s differentiated technology transfer policies toward Eastern Europe, the U. S. S. R., and the PRC. Prior to

1969, West Germany predicated its economic relations with East Germany on the declared aim of achieving German reunification. This goal has shifted somewhat since

the Brandt Ostpolitik and the 1972 basic

treaty between West and East Germany. In

this treaty, Bonn gave de facto, but not de

jure, recognition to East Berlin. Although

the East Germans count their trade with

West Germany as foreign trade, Bonn does

not. To do so would be to imply recognition

of East Germany as a legitimate foreign

country. Inner-German trade comes under a

special category; imports from East Germany are called “supplies,” and exports to it

are called “deliveries.” Inner-German trade

is today more highly politicized than West

German trade with other Communist countries; its chief stated aims are to improve political contacts between the two countries

and to facilitate greater family reunification

and a more favorable environment in Berlin.

West Germany uses technology transfer as

well as other forms of trade to facilitate

greater inner-German contacts. Thus, innerGerman economic relations are a special and

unique category in West German export control policies towards the Communist countries.

Inner-German relations have largely determined West Germany’s political and economic relations with other Communist countries, and at various times Bonn has implemented different trade policies toward Eastern Europe. In the mid-1960’s, a “bridgebuilding” policy was designed to encourage

East European independence from Moscow

by offering Eastern Europe (excluding East

Germany) special economic incentives, including easier credit terms than those available for the U.S.S.R. This policy proved politically counterproductive when the Soviets

began to resist Western encouragement of

polycentrism in Eastern Europe, and after

the invasion of Czechoslovakia, Bonn altered

its policy so as not to alarm Moscow. Eastern Europe remains an important market for

West Germany, and differences remain in

economic policies toward Eastern Europe

and the U. S. S. R., but Bonn no longer views

its trade with Eastern Europe as an instrument with the express political purpose of

creating greater independence from MosCow. “)

Today, the economic and political aspects

of Osthandel are generally perceived as mutually reinforcing rather than as a specific

source of leverage. West German policies regarding technology transfer to Communist

countries reflect Bonn’s desire to promote

better relations with East Germany and the

rest of Eastern Europe, while ensuring that

the U.S.S.R. complies with the 1971 FourPower Agreement on Berlin. Bonn prefers to

deal with the U.S.S.R. only on matters of

bilateral foreign policy; it eschews public

criticism of Soviet domestic policies. The

German goal of encouraging greater civil

rights in the U.S.S.R. and Eastern Europe is

pursued by carefully offering the U.S.S.R.

certain political and economic incentives out

of the public eye. This policy has led to U. S.-

West German disagreements over President

Carter’s human rights policy. In Chancellor

Schmidt’s words, “As regards human rights,

we on this side of the Atlantic—and that includes my Government—are on the whole

more reserved in our approach than the

United States.’’11 The German approach is

basically that of Egon Bahr, special assistant to former Chancellor Winy Brandt,

whose policy for dealing with the East was

“change through rapprochement, ” as opposed to change through confrontation.

Bonn views technology transfer to the East

as one of several means of improving relations with the U. S. S. R., which, it hopes, will

eventually ease the inner-German situation.

“’Jf’est Germany does differentiate between East European countries in its arrangements for the emigration of

ethnic Germans. I t gives large-scale credits to Poland for the

35,000 or so Polish Germans who emigrate every year, but

does not have this arrangement with other East European

countries.

1, I nter~,iew in ~-)i{> Zeit, J U]Y ~ 1, 1 g’7~.
—

Ch. IX— The East-West Trade Policies of America's Cocom All!es . 179

According to one German official, it is advantageous to Germany to assist through

the export of technology in the construction

of a Soviet industrial infrastructure. A more

industrialized Soviet Union, so the argument

goes, is less likely to be interested in war.

Some in Germany feel that purchases of

West German technology give Soviet leaders

an increasing stake in peace and the economic status quo, thereby discouraging aggression. Proponents of this view favor increasing technology exports to the U.S.S.R.

and ensuring its development as a highly

technological society. Not all German officials agree, however.

Germany continues to place the effectiveness of the North Atlantic Treaty Organization (NATO) at the center of its foreign

policy. ” Bonn’s concern with the security of

the Western alliance therefore tempers its inclination to use technology transfer as a

reward and incentive for good Soviet behavior; West Germany recognizes the need to

comply with American security goals and to

avoid sales of militarily useful technologies.

Most German firms dealing with the East

also accept the necessity of export controls

and the need to comply with CoCom. Thus,

there is a fairly comfortable modus vivendi

between business and Government on questions of technology exports to the East. But

different concepts of national security

within the Atlantic Alliance create contradictory pressures influencing West Germany’s technology transfer policy towards

the Communist nations. Its Wespolitik demands a restrictive stance toward technology transfer, while its Ostpolitik suggests a

more flexible use of trade to promote political moderation.

West Germany has been wary of any significant rapprochement—either political or

IJFor a general sur~ey of (;errnany’s position, see Angela

Stent Yergin, ‘‘ Soviet -W’est German Relations: Finland iza -

tion or Normalization’?’” in George (iinsburgs and Al\in Z.

Rubinstein, eds., .$or ‘iet b’orcigrl Polic,s I’t)tlarcl II”P,s t[’rr) Eu rOI)C ( New York: Praeger Publishers, 1978), pp. 102-133.

economic—with the PRC. Although West

Germany has sold technology to China,

Eastern Europe and the U.S.S.R. remain far

more important both politically and economically, and West Germany is wary of

playing the “China card” for fear of repercussions in Europe. The recent heightened

Western interest in the PRC has led to concern in Germany that other Western nations

may begin to differentiate among Eastern

trading partners, giving China preferential

treatment, West German Government officials stress their even-handedness in dealings with all Communist countries. The guiding German principle is that one should not

export to Czechoslovakia (or even Yugoslavia) any technology that one would not export to the Soviet Union; there is no guarantee that technology sold to any Eastern

European country will not find its way to the

U.S.S.R. The German Government applies

the same logic to China. It favors a consistent East-West export control policy. Moreover, since trade with both China and the

U.S.S.R. remains a marginal portion of West

Germany’s foreign trade from the point of

view of the Ostauschuss, German exporters

could well increase sales to both China and

the Soviet Union. Discriminating against or

in favor of either makes no economic sense.

TRADE IN TECHNOLOGY

Most officials claim that West Germany

does not have a technology transfer policy

towards the Communist nations. It does cooperate with other Western nations in

CoCom, but apart from these multilateral export controls, the German administration

has not developed clear, national guidelines

on West-East technology transfer. Rather, a

series of German laws and procedures comprise in aggregate an operating system for

regulating the export of technology to Communist nations, and the technology transfer

system therefore defines, rather than reflects, policy,

Interviews with Government and business officials in Bonn and Frankfurt reveal

the absence of a generally accepted defini-
180 . Technology and East-West Trade

tion of technology; as in the United States,

most agree that the concept lacks precise

definition. On the whole, international technology transfer is considered “part of the

general process of diffusion by which the

knowledge of, and use of, new products and

processes passes from one production unit to

another. 13 Most officials differentiate between technology and machinery in theory,

but many have found it impossible to distinguish between software and hardware on a

practical level, since technology is often

embedded in equipment. Those officials who

had read the Bucy report were somewhat

skeptical of the feasibility of implementing it

in CoCom.

West Germany is the largest single Western supplier of advanced technology to the

Soviet Union. In 1977, for instance, 34 percent of the Soviet imports of high technology

came from West Germany, as did 29 percent

of its imports of manufactured goods. Japan

was the next largest supplier, providing 17

percent of the U.S.S.R.’s high-technology

imports and 20 percent of her imported

manufactures. Germany is the second largest supplier of high technology to China, following Japan. In 1977, 15 percent of Chinese

high-technology imports came from West

Germany, as did 16 percent of its imported

manufactures. 14

West Germany exports a variety of technologies to the U. S. S. R., with machine tools

and petrochemical plants leading the field.

One-third of West Germany’s machine-tool

exports go to Communist countries. 15 Other

larger scale exports are of mechanical engineering, electrotechnical, optical, and capital

construction goods.

The most notable example of recent West

German technology transfer to the U.S.S.R.

is a giant steel complex being constructed at

‘ ‘Philip I{anson and Heinrich l’ogel, “Technology Transfer

Between East and Wrest: A Review of the Issue,”’ O.steuropa

}t’ir-t.schuft, Februar~’ 1978, p. 97.

“John P. Young, “Quantification of W’estern Exports of

High Technology Products to Communist Countries, ” U.S.

Department of Commerce, pp. 15-16

“

>

John Dornberg, “Trade J$’ith the East Bloc is Causing

Some Concern, ” [nternationulHeruld 7’ribune. Apr. 19, 1977.

Kursk by a consortium of German firms

(among them, Slazgitter, Krupp, Korf Stahl,

Siemens, AEG, and DEMAG), originally

slated to cost more than 5 billion DM. Although recently reduced in size, the Kursk

plant represents the largest single deal in the

history of East-West trade and will be the

world’s largest steel complex based on the

direct reduction method. Under the terms of

the agreement, the Soviets will sell back to

West Germany iron ore pellets made at the

plant.

Other large-scale German-Soviet deals involve the building of the new Sheremetyevo

airport at Moscow, construction of several

petrochemical plants and automobile factories, exports of energy technology, and collaboration on nuclear energy research. In

Eastern Europe, among other projects, West

Germany is supplying passenger jets to Romania, and constructing coal gasification

plants in Poland and petrochemical plants in

Hungary.

The Germans operate most often through

turnkey projects, although the sale of licenses is growing.16 West Germany has sold

licenses for waste incineration to Czechoslovakia; know-how to make bus engines, color

TVs, washing machines, chemicals, and windows to Hungary; production technology for

high-pressure safety-valves, concrete mixers, and shoe products to Poland; and knowhow for axis-blowers for nuclear power stations, furnaces for sulfur burning, herbicides, electrical equipment, and wedge

presses to the U.S.S.R.

Private agreements between German

firms and the Soviet State Committee on Science and Technology (SCST) are also becoming increasingly common. Siemens, Germany’s largest computer manufacturer, has

concluded an agreement with SCST to estab-

“lAccording to E. C. I?. Secretariat, “General Aspects of

East-West Licensing, ” b’astern Business Magazine, vol. 3,

No. 1, the United States and the United Kingdom are the

world’s two greatest technology-exporting countries, with 30

to 40 percent of world trade in hcenses.
Ch. IX— The East- West Trade Policies of America Cocom Allies ● 181

lish a Center for Automation in Moscow.

This is the first joint East-West scientific institute in the U .S.S.R., and Siemens hopes to

facilitate its computer exports through it.

While Siemens does not compete with American corporations in the large computer field,

its smaller computers and microprocessors

are competitive with American products.

Yet computers represent less than 1 percent

of German exports to the East, and Germany exports only a fifth as many computers to

the Communist world as does the United

States. About 6 percent of Siemens’ computer exports currently go to the U. S. S. R.;

Hungary and Czechoslovakia are more important markets at present. Despite the

desire to expand computer sales to the East,

when President Carter vetoed the SperryUnivac computer sale to TASS in July 1978,

the German Government discouraged

Siemens from bidding for the contract.

German officials point out that Soviet intransigence on the Berlin issue continues to

inhibit their exports of high technology to

the U.S.S.R. For some years, the Soviets

have delayed signing of a West GermanU.S.S.R. agreement on scientific cooperation

because of West Germany’s insistence that

West Berlin be included in its provisions.

The absence of an agreement now means

that Germany has less State-financed technological cooperation with the Communist

world than do other Western countries. Although German officials believe that the

Berlin issue will eventually be resolved and

the agreement signed, they point out that

today France is more likely than Germany to

export high technology to Communist nations. German exports will remain largely

composed of machinery.

from China are mainly textiles and primary

products. Two-way Sine-German trade rose

by 49 percent in 1978, to $1-1/2 billion, and

West German exports to China rose by a

spectacular 72 percent over 1977. German

businesses are now discussing cooperation

with the Chinese in the energy and nonferrous metal areas where, in exchange for technology, China will export raw materials. German exports to China now include largediameter pipe, machinery, electrotechnical

equipment, trucks, ships, and chemical products.17 A $4 billion deal involving the sale of

West German coal mining equipment and

the training of Chinese personnel was recently concluded,’” and another $14 billion contract has been discussed. If it is concluded

the German Metalgesellschaft will supply

the Chinese Ministry of Metallurgy with 22

plants for nonferrous metal industry, jointly

explore iron ore deposits, and market ores

and processed materials.19 But while many

German businessmen welcome the potential

of the vast Chinese market, Government officials and the Ostauschuss warn of exaggerated expectations for trade with China. The

Chinese, they argue, are reluctant to incur a

crippling debt; moreover, they prefer to accept credits in dollars rather than in

Deutschmarks. 20

EXPORT CONTROL POLICY

The legal framework under which exports

of technology to the Communist world take

place in West Germany differs markedly

from that of the United States. Exports are

unrestricted under German law, although

the administration may recommend exceptions to the Bundestag (Parliament). 21 German exports are governed by the 1961 law

on foreign trade and payments (Aussenwirtschaftsgesetz or AWG ), supplemented by a

In the last year, German trade with the

PRC has grown faster than its trade with

any other Communist country, and the question of technology exports to China is becoming more important. Germany today is

China’s third largest trading partner after

Japan and Hong Kong. German imports

‘7Der Bundesminister fuer W’irtschaft, op. cit., pp. 11-12.

‘Hh’inancial If’ime,v, Sept. 27, 1978.

“’Ibid., Nov. 15, 1978.

“}l~ltl(l~l.vhlutt, Ilec. 29/30, 1978.

‘

]

’I’his section is based on Russell Baker and Robert Bohlig,

“’l’he Control of F;xports: A (’ornparison of the I.aws of the

United Sta~es. Canada, ,Japan, and the h’ederal Republic of

( ;ermany, In terna til)tlal I.at!>er. \’ol. 1, No. 2, 1967, pp .

163-191.
182 ● Technology and East-West Trade

foreign trade ordinance. Although the Federal Government has authorization to control

exports of commodities and technical data

(sec. 5-7, AWG) in the interests of national

security, the Bundestag may cancel these

restrictions within 4 months of their promulgation. This gives the legislature immediate

and compulsory review of all foreign trade

regulations issued by the West German Government. The working presumption of the

law is that exports should remain uncontrolled except where special circumstances

require use of standby statutory controls.

This approach runs directly counter to U.S.

export control policies, which require special

approval for virtually all exports to Communist nations (see chapter VII).

Section 7 of AWG cites national security

and foreign policy as criteria for restricting

trade, but the AWG regulations encourage

the granting of licenses for restricted goods

unless it can be conclusively proven that the

exports will injure Germany’s economic or

political security. The details of license requirements are found in periodic supplements to Annex AL of the Foreign Trade Ordinance of 1961. (The latest full list dates

from December 1976, and the latest extra

supplement from December 1978. )

The first three control lists–covering munitions, atomic energy, and “other strategic

goods’ ’—are essentially the CoCom lists, or

the International Strategic Lists. The German Government recently added three items

not covered under CoCom to the national

atomic energy and industrial list—heavywater containers, installations of fuel elements for nuclear powerplants (which the

German Government tried unsuccessfully to

add to the CoCom international atomic energy list), and rocket installations. The fourth

list largely covers nonindustrial goods, like

botanical plants, alcohol, and raw materials,

controlled either because of Common Market

regulations or because they are in short supply in Germany.22 AWG also restricts the export of certain kinds of technical data, and of

‘

J For the latest list of goods subject to export licensing, see

Beiiage zurn Bli/t(ivsutlz(~lg(~r, No. 246, Dec. 30, 1976.

documents concerning the manufacture of

goods on the International Strategic Lists.

The German system of export licensing

for technology sales to Communist nations is

well-organized, and information on the procedures is readily available to businessmen.

A company wishing to export a controlled

item to the East applies to the Bundesamt

fuer gewerbliche Wirtschaft (BGW or Ministry of Industrial Economy) in Frankfurt.

BGW is empowered to grant licenses that do

not need CoCom permission, and 30 to 40

percent of all applications are decided in the

Ministry. Once the application is complete, it

takes only about 3 weeks for the Ministry to

grant a license. Applicants must promise in

writing that the products will be used only

for the stated purposes. For instance, when

the Soviet Academy of Sciences purchased a

Siemens computer, it had to sign an end-user

statement regarding its use. German corporations must also include assurances that

the products will remain in the country to

which they are exported. Officials admit,

however, that technology may reach Communist nations via neutral non-CoCom countries like Austria, Switzerland, and Sweden.

Bonn has few means of preventing this.

BGW refers about 60 percent of all license

applications to the Ministry of Economics

for further consideration. The Ministry of

Economics cooperates with the Ministries of

Foreign Affairs and Defense in deciding

whether the application should be brought

up in CoCom. The criteria for deciding

whether a license should be granted internally or should go to CoCom relate to possible strategic use, end use in general, whether

other corporations or countries have already

sold the item to Communist countries, and

the character of the technology embodied in

the product. German cases in CoCom require

about 3 months for a decision, unless American reexport licenses are required. In this

case, they may take up to 2 years.

The Foreign Ministry’s most important licensing criteria are political, but do not in-
Ch. IX— The East-West Trade Policies of America's Cocom Allies ● 183

elude the use of export control as a reaction

to short-term political developments as in

the United States. President Carter’s denial

of a license to Sperry-Univac in response to

the Soviet dissident trials in 1978 prompted

the West German Foreign Ministry to publicly state that Germany would never link

exports to domestic developments within

the Soviet Union. There is, in fact, no legal

way for Bonn to deny export licenses for

such reasons. The Government is bound by

AWG to grant licenses unless it can show

that there is a real national security danger

involved in the export. However, the Foreign

Ministry may deny export licenses if it

judges that the export of a particular product could exacerbate international conflict

and threaten German security. For instance,

Germany once exported small handguns to a

Communist country. These were intended

for sports use only and were permitted under

CoCom regulations. When very similar guns

later appeared in terrorist hands in the Middle East, the German Government refused,

despite repeated requests, to grant any more

export licenses for this type of weapon. German firms can sue the Government if they

are not satisfied that their export license denial was based on a threat to national security. Another political criterion for export

license decisions is the German Government’s desire to maintain equivalent technology export policies toward both the PRC

and the Soviet Union. Germany does not

want to exacerbate tensions with the

U.S.S.R. by adopting a more lenient stance

toward China.

Because West Germany’s trade with East

Germany is considered domestic inner-German trade, it is not covered by AWG.

Rather, it is regulated by a special legal system. The highly sensitive nature of innerGerman relations makes it extremely difficult to elicit information on technology

transfer between East and West Germany.

Here, export control more closely resembles

American law than the West German foreign

trade law: exports are forbidden unless expressly permitted, and CoCom regulations

apply to East Germany. Thus the system of

granting export licenses is the same for East

Germany as it is for the rest of the Communist world. There have periodically been proposals to differentiate in export licensegranting procedures as between East Germany and other Communist countries, but

these suggestions have so far been rejected.

Inner-German technology transfer is

sometimes controversial among West European nations because, according to the 1957

Treaty of Rome, East Germany receives the

same tariff privileges as does West Germany, making it the de facto 10th member of

the Common Market. East Germany is considered part of the West German domestic

market; it is not treated as a foreign country,

and therefore the EEC common external tariff does not apply to West German imports

from East Germany.23 other EEC members

periodically complain about East Germany’s

privileged treatment, but Bonn has thus far

succeeded in retaining this special status.

Inner-German trade, like Germany’s trade

with other Communist countries, consists

largely of the exchange of West German

manufactures for East German primary

products.

There are periodic charges that high technology finds its way to the Communist nations via inner-German trade because of

loopholes in the intricate system. German

Government officials deny these allegations.

They assert that technology is unlikely to

slip through to East Germany because there

is less technological cooperation with East

Germany than with any other Communist

nation. Moreover, East Germany is the most

highly developed Communist society, well

able to produce its own technology. The

question of inner-German technology transfer remains a matter of debate. and hard

data on the issue are difficult to find. The

East German press ignores the subject of

technology transfer, but defends trade with

West Germany in general.

‘I+’or a cfeta ilwf discussion of F;ast (;ernlan~! status in t hc~

Common ILlarket, sw Si~har[ Nehrirtg, “I)er Sonderstatus

des I nnw-deutschen I {andt~ls ”” (’l’he Spt’c.ial Status of’ 1 nner-

(;erman ‘1’rade), It i/”t.sf//f//’l(t//(t/,\t, 1 !)T? X1,1., pp. 6111-637.
184 ● Technology and East- West Trade

CREDITS AND TARIFFS

West Germany’s credit regulations differ

from those of many Western countries. Although commercial interest rates have

tended to be lower than other countries, the

West German Government does not subsidize interest rates on official credits. An Economics Ministry spokesman states, “West

Germany is unlikely to set up an institution

similar to the Eximbank (Export-Import

Bank) unless competition from other Western countries forces us to. ”

In general, therefore, West German official credits are no more competitive than

those of other NATO countries. This gives

rise to frequent East European complaints.

Nevertheless, Government-guaranteed,

long-term commercial bank credits are readily available to Communist countries. An interagency Government committee meets bimonthly with representatives of banking

and industry to discuss export credit decisions. West German banks sometimes

charge lower than the current market rate,

but in such cases companies charge the purchaser higher prices and reimburse the

banks for the difference between the market

rate and the rate of interest charged. Given

the healthy state of the German export economy, and West Germany’s continual trade

surplus with Eastern nations, there is little

pressure from business to facilitate more

East European purchases.

In 1977, German banks and firms extended a total of $11 billion in credits to

Communist nations; of these, two-thirds

were bank-to-bank credits that did not

qualify for Federal insurance. The Soviet

debt to West Germany is currently about

$2.8 billion, and the total East European

debt is about $8 billion, or a quarter of the

Communist countries’ total debt to the

West.

24 In addition West Germany has

granted East Germany an annual interestfree “swing’ credit—meaning that either

side can use it—of 850 million DM.

Compensation deals now constitute about

15 percent of West German trade with Communist nations. In May 1978, Brezhnev and

Schmidt signed a 25-year agreement on economic cooperation which envisages a broadening of trade relations and cooperation. z

’

)

Given Communist lack of hard currency, it is

likely that the number of compensation deals

will increase in the future.

While West Germany still restricts some

imports, particularly textiles, to protect

domestic industries, it has gradually liberalized its import restrictions on Communist

goods. Only 7 percent of imports from the

East are restricted–mainly textiles, steel,

glass, ceramics, and leather goods. Import

restrictions do not apply to the minimal

technology imports from Communist nations. The Soviets export only a tenth as

much technology to West Germany as the

West Germans export to Russia. The

U.S.S.R. has sold West Germany some steel

technology and Hungary has sold pharmaceutical technology. Another example is

Salzgitter’s purchase from the U.S.S.R. and

East Germany of a licensed process to produce low-density polyethylene.” The

U.S.S.R. has also sold at least 18 licenses to

West Germany for metallurgical, chemical,

and electronic products.27 Despite these very

limited technology imports from Communist

countries, West German-COMECON technology transfer is, according to one German

official, essentially a “one-way street. ”

“LP Monde, Aug. 112, 1976.

“

)

For the text of the “Agreement on Developing and Deepening Economic Cooperation, ” see .Sotfiet A’euss, May 9, 1978.

“Leslie Colitt, 4’P;ast-West I.icensing Turnaround, ” F’inancia[ ‘Times, Apr. 30, 1976.

“John W. Kiser 1 II, “Report on the Potential for Technology Transfer From the Soviet Union to the United States’”

(unpublished), October 1977.
—

Ch. IX– The East-West Trade Policies of America's Cocom Allies ● 185

FRANCE

INTRODUCTION

France’s approach towards East-West

trade and technology transfer is determined

by its overall foreign policy stance: a strong

desire to be independent, sovereign, and free

from American hegemony; a preference for

diversifying international links as much as

possible, irrespective of the ideological and

political character of other nations; and an

aversion to mixing politics and economics,

particularly where doing so would interfere

with France’s goal of maximizing foreign

policy options. Technology transfer to Communist nations is not a political issue in

France; indeed, relations with the U.S.S.R.

arouse little controversy within the country,

while relations with the United States are a

far more delicate and contentious subject,

particularly given the strength of the French

Communist Party. The question of adhering

to American-based export control policy

through CoCom arouses much more disagreement in Paris than the issue of what

should be sold to Communist countries. The

general French approach is to support and

increase trade with Communist nations in

any goods and by all possible means; to

eschew the use of economic levers in the pursuit of political goals; and to maximize the

economic and political benefits to France

which can be gained from East-West economic exchanges.

ECONOMIC AND POLITICAL

FACTORS

France, like West Germany and Britain,

enjoys an export-oriented economy, and its

high level of trade dependence influences its

attitudes towards trading with Communist

nations. The French Government views

trade with the U.S.S.R. and Eastern Europe

as “normal’ ’-’’just like our trade with the

United States, ” according to a Foreign Ministry official. Trade links with the PRC are

newer and less well-established. The French

are primarily concerned with diversifying

their exports as much as possible, and welcome Communist markets for their trade expansion potential. They also view trade with

the East as an important employment

source. Although trade with the U.S.S.R.

and Eastern Europe forms only 4 percent of

total French trade, officials point out that

trade with Communist countries has kept

alive some branches of French industry. Six

years ago, the medium-sized machine-tool industry was struggling to survive; since then

exports to the U.S.S.R. have revived machine-tool production and enabled the industry to reorganize more efficiently.

One official also claims that trade with

Communist countries is a stabilizing factor

for the French economy, since the Eastern

countries with their countercyclical markets

are secure even in times of economic crisis in

the West. (This is a debatable point. See

chapter II I.) In global terms, France’s comparative trade advantage lies in its consumer

products, but there is relatively little demand for these in Communist nations.

French exports to the East are primarily industrial goods. The main drawbacks of EastWest trade for France lie in the lack of

suitable Eastern imports and the difficulties

raised by compensation deals.

France, therefore, faces many of the same

economic problems in its relations with the

U.S.S.R. and Eastern Europe as do its European allies and the United States. It is the

political aspects of French trade with Communist countries, not the economic factors,

which distinguish French policy towards

trade and export control.

The political determinants of French export control policy reinforce the economic determinants, and both point towards encouraging East-West trade. Since de Gaulle’s

1966 overtures towards the Soviet Union,

France has sought to establish a “special

relationship” with Russia, and has consistently tried to improve France-Soviet relations. According to official spokesmen,

French national security is enhanced by improving economic and political relations with

54-202 0 - 79 - 13
—

186 . Technology and East-West Trade

the U. S. S. R., and to this extent economics

and politics are linked. France has historically accorded top priority to its relations with

the U.S.S.R. (as opposed to the rest of Eastern Europe), and it is more concerned with

France-Soviet trade than with economic relations with other Communist nations. Poland

comes next in economic and political importance.

TRADE IN TECHNOLOGY

France has been losing relative importance as a trading partner for the Communist countries, moving from third largest

capitalist trading partner of Communist

countries in 1970 to fourth in 1976, after

Germany, Japan, and the United States.28

French trade with the Communist world

amounted to $5.3 billion in 1976. Nearly 90

percent of this was with the Council for Mutual Economic Assistance (CMEA) nations,

the most important of which are the

U.S.S.R. and Poland (see table 30).

France is the Soviet Union’s third most

important source of Western technology,

supplying 11 percent of Soviet high-technology imports, and 14 percent of its manufactured imports in 1977. It also ranks third

among Western exporters of technology to

‘mLe Courier des Pays de L’Est. Mensuel D’Informations

klconomiques, LC Commerce de lu b’rance A tIQC Ies Pa.vs de

L’Est en 19701976 pp. 7-8.

China, supplying 14 percent of China’s hightechnology imports in 1977, but only 2 percent of its manufactured imports.29

Technology plays a relatively important

role in French exports to the East, although

the French Government does not have an official definition of technology. Some officials

define technology as know-how, exclusive of

machinery; others say one cannot separate

technology and equipment; still others seem

to apply different definitions of technology

to different circumstances. The share of

machinery in French exports to the U.S.S.R.

is significantly higher than in exports to

other countries. Fifty percent of French exports to the U.S.S.R. are of machinery; 30

percent are of semifinished products. The

main technologies sold to the Communist nations are turnkey plants for chemicals and

gas-lift equipment (which uses computers);

computers; and metallurgical, industrial,

and petrochemical equipment.

In April 1979, Giscard d’Estaing and

Brezhnev signed a 10-year economic accord

designed to invigorate France-Soviet trade

during the 1980’s. The treaty provides for

tripled bilateral trade and emphasizes industrial cooperation agreements and longterm deals. These cooperative projects in-

/~John p. Young, op. cit., PP. 1 5-16“

Table 30.— French Trade With CMEA Members, 1970-76

(in millions of dollars)

—. .—— —

—--

1970 1976- —...—

Export Import Balance Export Import Balance

CMEA . . . . . . 647,640 452,640 + 195,000 2,735,400 1,995,840 + 739,560

Bulgaria ~ 47,760 18,960 + 28,800 102,240 49,920 + 52,320

Hungary . . . . . . . . . . . . . 46.680 27,120 + 19,560 129,360 98,520 + 30,840

Poland . . . . 81,240 67,920 + 13,220 749,880 429,840 + 320,040

East Germany . . . . . . . 59,640 42,240 + 17,400 214,680 187,680 + 27,000

Romania. . . . . . . . 82,080 53,280 + 28,800 258,360 206,040 + 52,320

Czechoslovakia . . . . . . . . . . 57,120 39,720 + 17,400 161,640 108,480 + 53,160

U.S.S.R. . . . . . . . . . . . : : : : : 273,120 203,400 + 69,720 1,119,240 915,360 + 203,880

Total Communist countries. . . . . . .

——

‘$734,520 $535,440 + $199,080 $3,143,760 $2,210,160 + $933,600

CMEA = Council for Mutual Economic Assistance

—

SOURCE Organization for Economic Cooperation and Development Statistics
Ch. IX— The East-West Trade Policies of America’s Cocom Allies ● 187

elude new sources of energy, energy-saving

equipment, electronic products (including

computers), machinery and machine tools,

and metals, chemicals, and petrochemical

products. The agreement further specifies

that French companies and banks will take

part in building industrial complexes in the

U.S.S.R. and that similar Soviet institutions

will participate in projects in France. The

French companies providing equipment, licenses, and credit for factory construction in

the U.S.S.R. will be partially or totally reimbursed in products manufactured by these

Soviet industries.30

In the first 6 months of 1979, $340 million

worth of new France-Soviet contracts were

signed, the key ones in high-technology

areas. Meanwhile, in 1978 the French company Technip won one of the biggest single

Soviet orders placed in a Western country, a

$213 million contract for gas-lift installations to improve oil recovery levels in Western Siberia.31 Another major new contract

won by Thompson-CSF will supply $100 million of telephone equipment to the U.S.S.R.32

Under the most publicized France-Soviet

high-technology deal, a group of French companies will sell a computer and ancillary

equipment to the Soviet news agency TASS.

The $20 million contract involves an Iris 80

computer from CII-Honeywell Bull SA, ancillary equipment from three subsidiaries of

Thompson-CSF SA, and programing and

software from Steria (Societe de Realizations

en Informatique et Automatique). Although

the 1980 Olympics will be a major user of the

system, it will not be fully operational until

1981. 33 This order originally went to the

American firm Sperry-Univac, but in July

1978, President Carter vetoed the license application as a sign of U.S. displeasure with

Soviet dissident trials. In the wake of this

action, and following U.S. guidelines, both

the German and British Governments discouraged firms from bidding for the deal. 34

‘

(

’ b’inanciul Times, Apr. 30, 1979; Le Alonde, May 2, 1979.

“b’inaneiul Times, Apr. 27, 1979.

“~’inunriul 7“ime.<, Apr. 4, 1979,

“Ea.st-Ll’e.stTrude Are[(.s, Apr. 4, 1979.

“Le.s li’chos, Aug. 18, 1978.

The French corporation won the contract

before President Carter decided to reverse

his decision. The French Government opposes the practice of subjecting technology

exports to short-term political interference.

EXPORT CONTROL, CREDIT,

AND TARIFF POLICY

France enjoys good cooperation between

business and Government on questions of

Soviet and East European trade. The Government encourages industry through subsidized credit and other policies, and the Department of Industry maintains close contacts with businessmen on East-West issues. Government and business also appear

to have worked out a viable modus vivendi

for licensing technology exports. According

to a computer industry spokesman, firms

have learned to write applications for export

licenses that are virtually certain to be approved. More skeptical observers claim that

the French Government turns a blind eye to

violations of export license application procedures, particularly where end-use statements from Soviet organizations are concerned. In any event, industry and Government appear harmonious over these questions. The French Communist Party, working through various companies, encourages

trade with Communist nations, and several

prominent Communist businessmen are engaged in East-West trade.

France’s ambivalent attitude towards the

United States in general, and towards U.S.

attempts to limit technology exports

through CoCom in particular, complicates

its export control policy. As one spokesman

put it, “We can’t always align ourselves with

Washington–we would not have a foreign

policy if we did that. ” This gives rise to

paradoxes. Officials point out that France is

even more concerned about Soviet military

strength than is the United States: Paris is

geographically more vulnerable to Moscow

than is Washington. On the other hand,

French export control policy is greatly affected by France’s general aversion to complying with U.S. demands. Unlike Britain
188 ● Technology and East-West Trade

and Germany, staunch supporters of NATO,

France is only a marginal member. In 1966,

after resisting American efforts to integrate

NATO forces, France removed its troops

from NATO. Presently it participates only

selectively in military and related activities.

The French are also sensitive about admitting that they belong to CoCom; official

spokesmen even claim it is not known publicly that France is a member. The great secrecy surrounding France’s relationship to

CoCom testifies to the extreme sensitivity of

the whole subject of allied cooperation on

technology exports to Communist countries.35 officials indicate that France alone is

the best judge of its security interests, an attitude that applies equally to relationships

in both NATO and CoCom. While France

shares with Germany and England a basically favorable predisposition toward EastWest trade, it resists U.S. attempts to control technology exports.

The domestic legal framework governing

technology transfer is elusive. While no laws

state the rules on export licensing, various

pieces of information suggest how the system functions. Products for which export licenses are needed appear on export control

lists published periodically by the Ministry

of Economics and Finance in the Journal Officiel de la Republique Francaise.36 An interministerial committee establishes the criteria for items requiring export controls. The

lists are essentially the three CoCom lists.

France has few, if any, unilaterally controlled items, and only about 8 percent of exports to Communist nations need licenses.37

‘

> Although it is housed in a section of the U.S. Embassy in

Paris, CoCorn is not listed in the Paris telephone directory–

neither under its name nor in the street directory.

‘(’See Ministere de L“Economie et de Finances, “Avis aux

Importateurs et aux Exportateurs relatif aux produits

soumis, au control de la destination finale, ” Journal offi”ciel

de la Republique l’rancai.se, July 14, 1977, for the latest list.

Curiously, the first export list was published in this journal

on Dec. 31, 1961. The question of how French businessmen

knew prior to 1961 for which goods they required licenses remains unanswered.

‘7Le Monde Diplornatique, September 1978. However, Professor Marie Lavigne, author of this article, cites a U.S.

source, explaining that it is impossible to obtain French information on these figures.

Unlike the other systems under review, the

French process of export licensing begins

with customs officials, to whom firms needing licenses submit applications and copies

of contracts. If customs officials decide that

the license application requires CoCom approval, they send it to the Ministry of Industry, which sends it in turn to the Ministry of

Foreign Affairs. On more sensitive items,

the Ministry of Defense may also become involved. No regular interministerial committee comparable to those in Britain and West

Germany exists to deal with sensitive technology licensing applications. Nevertheless,

if the CoCom representative in the Ministry

of Foreign Affairs requires further consultation, an unofficial committee of intergovernmental advisors can be summoned to discuss

the case. The CoCom representative from

the Ministry of Foreign Affairs also presents

the French position before CoCom, signs the

license application after approval, and sends

it through the Ministry of Industry to customs, which notifies the firm. From the companies’ point of view, therefore, the exportlicensing system begins and ends with customs.

France appears not to require formal

third-country statements (promising that

the technology will remain in the country to

which it is sold and not be exported to third

parties) prior to licensing, as do Britain and

Germany. Soviet and East European enduser statements are required, however.

The French Government facilitates the export of technology to the East by providing

generous credit supports and other financial

facilities. Medium-term credit insurance (up

to 3 years) is available in France from the

Compagnie Francaise d’Assurance pour le

Commerce Exterieur (COFACE), a quasipublic agency under the supervision of the

French Government. COFACE provides

East-West trade credit insurance with both

commercial and political risk coverage for 8

to 95 percent of the credit. A few large commercial and investment banks provide the

bulk of export credits for East-West trade.

The most prominent of these are the Credit

Lyonnais and the Societe Generale, both
Ch. IX— The East-West Trade Policies of America’s Cocom Allies ● 189

large nationalized banks, and the Banque de

Paris et des Pays Bas. A corporation seeking

to finance trade with Communist countries

usually deals directly with one of the contracting French banks and then with

COFACE. After it has secured COFACE

credit insurance, it has access to French

Government-supported refinancing facilities

through the Banque Francaise du Commerce

Exterieur, a publicly chartered bank whose

capital is held by the Banque de France (the

Central French bank) and various other

banks.

France charges all-inclusive rates on Government-supported export credits.38 In this

it differs from other major Western trading

partners of Communist countries. For the

1974-79 period, for example, the France-Soviet intergovernmental agreement stipulates

that France grant the U.S.S.R. a $3 billion

credit at interest rates ranging from 7.20

percent to 7.55 percent (depending on the

value of the projects) to facilitate Soviet purchases of French machinery. Similar agreements exist with other Communist countries.” There is, therefore, ample credit support available for exports of French technology to the East.

Like Germany, France has felt the lack of

sufficient and suitable East European imports to balance its exports. Only a few

‘“E’or a more detailed discussion of French export credit

support, see Suzanne F. Porter, Ea.st-11‘es f Trade F’ina ncin~r.

A n in (ro(lu(t[)r}f (;uide, U.S. Department of Commerc e

(Washington, IJ.C.: (government Printing Office, 19’76).

“’See lx courier(ie.v Pa>IA cie L ‘E.st, October 1978, No. 222,

pp. 1 ~-~ 1, for details of credit agreements with other socialist

countries.

French import controls cover Eastern goods,

and these are mainly on textiles and shoes.

No import controls exist on Communist

technology, perhaps because very little

Soviet or East European technology is presently imported. In 1971, after the U.S.S.R.

criticized France for not buying enough of its

finished goods, a French company called

Gisofrac was established to promote Soviet

manufactured imports. Supported by the

Government and the three nationalized

banks, Gisofrac deals exclusively with

Soviet, not French, exporters. The director

of the company admits that the results so far

have been disappointing. On some occasions,

the Soviets have been unable to supply machines in the quantities ordered. France imports a small number of Soviet Lada automobiles and it has also acquired some Soviet

technology, including a recooling system

(purchased on license), a press (the price of

which was considered by some to be too

high), and some petrochemicals. The problems of inferior Soviet quality limit the attraction of these products for the French

market. France and the U.S.S.R. have a

mutual credit agreement, but until now very

few Soviet credits have been used to finance

Soviet exports to France.40 A France-Soviet

intergovernmental commission has formed

working groups to resolve some of these

problems, but for the moment Soviet technology exports are only a marginal part of

France-Soviet trade.

“’interview with Paul Nouailhac, (;isofrac, hla} 30, 1979,

Paris.

THE UNITED KINGDOM

INTRODUCTION

The British attitude toward technology

transfer to Communist nations more closely

resembles the West German than the French

approach, although the British share the

French view that trade and politics are two

separate activities which should be linked

tenuously, if at all, While the Germans have

revised their views of the political dimensions of Osthandel, the British have fairly

consistently separated their economic from

their political relations with Communist

countries. This stance has caused occasional

friction in British-U.S. relations. But the

United Kingdom not only values its membership in NATO; it also prizes its close relations with the United States. As a result,
190 Technology and East-West Trade

Britain is not averse to cooperating with the

American-inspired export control policy

toward Communist nations.

ECONOMIC AND POLITICAL

FACTORS

The economic and political determinants

of British technology transfer policy to Communist countries are somewhat different

from those of West Germany and France.

Britain, too, is an export-oriented economy

with a high trade dependence, and trade with

Communist countries is viewed as a guarantor of employment. Consequently, the

United Kingdom favors technology transfer

to Communist nations for domestic economic reasons. Nevertheless, there is also some

concern about the negative employment effects of imports from the East and about the

problems of countertrade. British-Soviet

trade suffers from the same economic restraints as do German-Soviet and France-Soviet trade; the predisposition to trade with

the East is modified by the difficulties of the

Communist nations in paying for these imports.

Because there is no problem equivalent to

that of the two Germanies in British foreign

policy, London’s trade with the Eastern

countries is less influenced by political goals

than is that of Bonn. Moreover, the constraints limiting Germany’s China policy do

not apply to the United Kingdom. For some

years, in fact, the United Kingdom has been

actively engaged in the transfer of technology to China, and it intends to continue this

policy. National security considerations,

therefore, place only limited restraints on

British technology transfer. However, given

Britain’s perception of its “special relationship” with America, its economic interest in

expanding all forms of trade can conflict

with its political goal of maintaining a relationship with the United States.

TRADE IN TECHNOLOGY,

EXPORT CONTROLS,

AND CREDITS

Total United Kingdom-Soviet trade in

1978 amounted to $2.2 billion (see table 31).

Major exports were of machinery, chemicals,

and nonferrous metals, and the primary imports were petroleum products and nonmetallic minerals.

Britain’s technology exports to the East

are primarily petrochemical plants, machine

tools, transport equipment, gas pipeline,

polyethylene plants, methanyl plants, secondary recovery for oil, and glass fibers. Exports of energy technology are expected to

increase as the United Kingdom develops its

North Sea oil reserves. Some British energy

technology is also being exported via U.S.

multinational subsidiaries in Britain, and

British credits are used for these exports.

Sale of turnkey plants is the predominant

form of technology transfer, although license

sales are also important. Britain is not as

large a supplier of high technology to Communist nations as West Germany, however.

In 1977, the United Kingdom supplied the

U.S.S.R. with 2.2 percent of its high-technology imports and 6 percent of its manufactured imports.41

Table 31.— United Kingdom Trade With the U.S.S.R.

(in million pounds sterling)

—— ——

1972 1978

Imports. . . . . . . . . . . . 218.7 688.2

Exports. . . . . . . . . . . . 90.3 423.1

Total . . . . . . . . . . . . 390.0 1,111.3

Balance . . . . . . . . . . . – 128.4 – 265.1

SOURCE Department of Trade, London

“John P. Young, op. cit., p. 15.
Ch. IX— The East- West Trade Policies of America Cocom Allies . 191

The British definition of technology

stresses the software concept: it includes

technical data, expertise, information, and

patents, and not merely equipment, machinery, and other hardware. However, controls

are regarded as most practical in the case of

hardware. Indeed, the British generally

regard the Bucy report recommendations on

control of “know-how’” as too restrictive and

unworkable. One former British delegate to

CoCom argues that end-use statements on

software do have value. This official expresses the hope that the Bucy recommendation should not “herald a change in Western

policy and practice. “42

Technology transfer to Communist nations is regulated by the export of goods

(control) order, supplemented by a Consolidated List of Goods Subject to Security Export Control, which includes all those goods

requiring export licenses when sold to Communist nations. The lists contain three sections: the Munitions List, the Atomic Energy List, and the Industrial List. These closely parallel the German lists, and contain the

items on the CoCom lists. In addition, Britain prohibits the export of certain goods for

domestic reasons.43 The licensing system

functions on the exceptions principle. License applications are handled by the Department of Trade, which discusses the license requests with an interdepartmental

committee. About 1,000 license applications

are processed every year, and the average

time required for a decision is 1 month. The

major criteria affecting these decisions are

CoCom considerations, national security,

and the possibility of technology diversion

1(R. J. Carrick, k’a.~t- 14’est Technology Transfer in Perspective (Berkeley, Calif.: University of California Policy Papers

in International Affairs, 1978), pp. 42-43.

“See Consolidated List of Goods Subject to Security Export Control, Trade and )ndustry (London, Apr. 30, 1976).

to Communist nations via third countries.

These are balanced against the effect on domestic employment.

The British Government encourages industry to consult with the Department of

Trade before submitting license requests, so

that by the time the applications are made

the outcome is usually assured. The British

Government has, however, been known to

turn down licenses for which CoCom approval has been granted. There is an appeals procedure for licenses that are denied. After the

British Government has approved the

license, it goes to CoCom and, if the product

embodies American-originated technology,

to the United States. In 1978, a series of interdepartmental meetings investigated the

effectiveness of controls on the export of

technology to third countries, and decided

that they were effective.

The British Government subsidizes interest rates for credits to Communist countries,

and guarantees credits granted by commercial banks through the Export Credit Guarantee Department. In an attempt to boost

United Kingdom-Soviet trade, in 1975 Britain offered the U.S.S.R. a $2 billion credit

line for the purchase of British technology

over a 5-year period at an interest rate of

about 7 percent—a rate lower than that paid

by Britain itself for money borrowed overseas.44 The U.S.S.R. has been very slow to

take up these credits, and Britain still maintains a large trade deficit with the Soviet

Union. Given Britain’s economic problems,

its major concern regarding East-West trade

is on the import, rather than the export, side.

“Christopher S. W’ren, “Britain to offer So\iet $2 Billion

in Trade Credits,’” IVeu’ York Tirne.s, Feh. 18, 1 975; hle]~vn

k$”estlake, “Where Critics of Russian Trade Credits (10

N’rong, ” Times, Mar. 4, ~ 975.
192 ● Technology and East-West Trade

JAPAN

INTRODUCTION

The volume and policy framework of

Japan’s trade with the Communist world derive more from commercial than from political factors. Though small in terms of Japan’s

overall foreign trade, business with the East

operates under liberal Government policies.

Export controls reflect purely economic concerns: balance of payments, the stability of

the yen, the growth of the Japanese economy, and the development of its foreign

trade. Singularly absent from the theory and

practice of Japanese foreign trade and technology transfer are strategic and national

security, or political concerns (e.g., human

rights). Nonetheless, Japan has traditionally

cooperated with the United States through

CoCom on matters of export control.

ECONOMIC FACTORS

Japan’s dramatic postwar development

was facilitated both by cheap labor and by

the prudent use of imported technology to

boost productivity. As Japan’s economic

miracle emerged and domestic industry developed its own technologies, the country’s

dependency on imported raw materials and

energy grew. To balance such imports,

Japan has looked increasingly to foreign

markets for finished goods and consumer

products, machinery, and technology. Given

the limited markets for consumer goods in

China, the Soviet Union, and–to a lesser extent—Eastern Europe, the Japanese are increasingly likely to emphasize machinery exports to those areas.

Japan is the world’s second largest petroleum consumer (after the United States) and

the largest importer of crude oil. In the mid1970’s, its purchases accounted for 16.7 percent of the international oil market, compared with 13.4 percent for the United

States. Furthermore, Japan is heavily dependent on both OPEC and what the Japanese call the “umbrella of the majors:” 72

percent of its oil imports, 43 percent of its refining operations, and 47 percent of its

distribution network is in the hands of the

large multinational oil companies. Japanese

oil imports from the Middle East require a

month in transit in supertankers of 100,000

tons, and cost 1,000 yen per ton to transport.

These considerations provide a powerful

incentive to seek alternative suppliers of

petroleum. China and the Soviet Union both

offer such sources to Japan, albeit with a

number of unresolved questions about the

Communist nations’ own future energy

needs and their ability to quickly and economically bring new oil reserves into production. If such questions could be resolved, oil

imported from the U.S.S.R. would require

only 2 days in transit aboard smaller tankers

in the 25,000- to 50,000-ton range, and would

cost only an estimated zOO yen per ton to

transport, exclusive of transportation from

the Soviet oilfields to port.45 Soviet oil would

also provide the Japanese with some protection against supply interruptions caused by

unrest in the Middle East, sparing them the

traumas they endured during the 1973-74

embargo.

In the now-moribund Tiumen oil development project, the U.S.S.R. promised Japan a

maximum of 25 million tons of oil a year at a

cost of $1 billion, with delivery scheduled to

commence in 1980. Soviet behavior, however, indicated that any such deal would be

fraught with political and strategic difficulties—as when, in March 1974, the Soviet side

suddenly shifted its plans from a TiumenNakhodka pipeline (to be built with Japanese

assistance) to a request for Japanese aid in

building the BAM (a second Trans-Siberian

railroad) in order to ship the oil by train.46

“

)

John P. Hardt, George D. Holliday, and Young C. Kim,

M’e.stern Investment in Communist Economies (Washington,

D. C.: Government Printing Office, 1974), p. 45; Roger Swearingen, ‘The So(’iet Union and %.st - Pl”ar ,Jupun: Escalating

(’hallenge and Response (Stanford, Calif.: Hoover Institution, 1978), pp. 121-128.

‘

(

’Gerald I.. Curtis, “’I’he Tyumen Oil Development Project

and Japanese Foreign Policy Decision -Making,” in Robert A.

Scalapino, cd., The b’oreign ~~licy of Modern <Japan

(Berkeley, Calif.: University of California Press, 1977), pp.

157-158.
Ch. IX— The East-West Trade Policies of America’s Cocom Allies ● 193

Meanwhile, the Chinese have persistently

offered “oil without strings” to Japan.

Shipments have grown in relative terms but

remained small in absolute quantity in comparison to the Soviet proposal: 1 million tons

in 1973, 4.9 million tons in 1974, and about 8

million tons in 1975. The Chinese apparently

feel that the provision of “oil for the lamps of

Japan” (and Japanese factories) is advantageous to them politically as well as economically. Among other things, it can serve

to mute Japanese enthusiasm for an “energy

alliance” with the U.S.S.R. Thus, Chinese oil

exports to Japan have risen steadily even as

PRC exports in other areas have diminished,

and the 1975 quoted price per barrel, worldwide inflation in oil prices notwithstanding,

was 70 cents lower than in the previous

year. 47 But the fact remains that Chinese oil

is heavy, with a high wax and sulfur content,

and is generally difficult and expensive to

refine, especially by comparison with the

lighter crude the Soviet Union can provide.

Coal, which provided roughly one-sixth of

Japan’s energy needs in 1972, is almost twothirds imported. In the mid-1970’s, Japan

could import coal from Siberia for $3 per ton,

compared with $18 a ton for U.S. coal.48

Lower costs, transportation savings, and the

guarantee of long-term, stable supplies

through imports from either the U.S.S.R. or

the PRC will continue to make such nations

attractive as trading partners. Japan extended $150 million in bank credits to the

U.S.S.R. in 1974, in return for which Japan

will receive 104 million tons of coal between

1979 and 1998. Approximately one-seventh

of these credits will be returned to Japan for

the purchase of consumer and manufactured

goods.

Japan has also recognized the Soviet

Union as an important source of the other

raw materials required by Japanese industry. In 1975, the U.S.S.R. provided 20 percent of Japan’s lumber and cotton imports,

21 percent of its potassium salt imports, 26

percent of its nickel imports, 29 percent of

its asbestos, and between 40 and 80 percent

of all precious metal imports. The Soviet

Union ranked third in importance as a source

of iron ore, chromium, and copper respectively, and fourth in terms of coking coal.

For Japan, each of these commodities falls in

an area of high import dependency (in many

cases, 85 to 100 percent) .49

Given the critical nature of these raw

materials for Japanese industry, it is safe to

say that the U.S.S.R. is more important as a

supplier to Japan than Japan is to the Soviet

Union, despite the recent achievement of a

trade balance favorable to Japan. In fact, the

volume of Japanese trade with the Communist world is relatively small. In 1977, China

and the U.S.S.R. ranked 10th and 11th, respectively, among Japan’s export markets,

and 11th and 13th among the sources of

Japanese imports. This trade is growing,

however. Trade figures for 1978 (see table

32) reveal that exports to the PRC rose by 47

percent and those to the U.S.S.R. by 26 percent over the previous year. Similarly, imports from China rose by 32 percent from

1977 to 1978, although imports from the

U.S.S.R. remained virtually unchanged.

Table 32.—Japanese Trade With the U. S. S. R.,

East Europe, and the PRC—1978

(in thousands of dollars)

‘Della-rs ‘- Percent -

—— —————

Exports

U.S.S.R. . . . . $2,253,840 ( + 26.2%. 1977)

PRC. . . . . . . . . . . . . . . 2,613,736 ( + 47.20/., 1977)

East Europe. . . . . . . . 616,318 ( - 17.0°/0, 1977)

Total . . . . . . . . . . . . $5,837,935 ‘-

( + 30.970, 1977)

Imports

U.S.S.R. . . . . . . . . . . . $1,318,765 (+ 0.6°/0, 1977)

PRC. . . . . . . . . . . . . . . 1,809,000 ( + 32.2% 1977)

East Europe. . . . . . . . 212,291 (+ 9.1%, 1977)

Total . . . . . . . . . . . . $3,473,793- ‘- - ( + 15.7% , 1977)

SOURCE Summary Report Trade 01 Japan, no 11. November, 978, p 68 Data

for’ January-November 1978, period only

“Ibid., pp. 169-170.

‘

n

Sir John Crawford and Saburo Okita, eds., Rati Materials

and Pacific Economic Integration (Vancouver: University of

British Columbia Press, 1978), p. 218. qgHardt, Ho]liday, and Kim, op. cit., P. 44”
194 ● Technology and East-West Trade

Seen in their historical context, these

figures indicate that while the relative importance of Japanese-Soviet trade has not

increased markedly since World War II, the

increase in absolute terms has been phenomenal, reflecting the remarkable overall

growth of the Japanese economy and foreign

trade. Table 33 summarizes Japan’s postwar

trade with the Soviet Union.

Japan’s trade with Eastern Europe has remained small and largely stagnant. Poland

and Romania are Japan’s two major East

European trading partners, but trade with

them between 1977 and 1978 either increased only marginally (Poland 1.1 percent)

or actually declined (Romania, minus 16.6

percent). Japan reportedly hopes to remedy

this situation with a major breakthrough in

computer exports to the Eastern European

telecommunications market. Its major competitor here would be Britain.

Japan appears to be in a better position

than Germany, Britain, and the United

States to circumvent the problem of severe

limits in the Communist nations’ ability to

pay for imports. Given the nonmarket countries’ preference for bilateral deals involving

counterpurchase, barter, or buy-back arrangements, the Japanese sogo shosha (allround trading companies) have an unmatched natural affinity for compensation

negotiations that stems from a long history

of multifaceted, multilateral business and

trading arrangements.50 Japanese trading

companies possess worldwide marketing

Table 33.—Postwar Development of

Japanese-Soviet Trade

(in thousands of U.S. dollars)

Year Exports Imports Total Balance

1946 . . . $ 24 $ 0 $ 24 + $ 24

1950 . . . 723 738 1.461 – 15

1960 . . . 59,976 87,025 147,001 – 27,049

1970 . . . 340.932 481,038 821,970 - 140,106

1975 . . . 1,626,200 1,169,618 2,795,818 + 456,582

1978 . . . 2,502,195 1,441,723 3,943,918 + 1,060,472

SOURCE Japanese.Soviet.East European Trade Association, Tokyo, Japan,

1979

networks, and have the financial ability to

engage in triangular or “switch” trading

(whereby Japanese firms sell the ruble credits they have earned to a third country or

company at a markup), as well as the ability

to dispose of a wide variety of unrelated

products. The Japanese have also shown

themselves sensitive to the importance of

structural arrangements in East-West trade.

In recent times, major Japanese traders

have modified their organizational frameworks (especially where the sales function

was geared primarily to handle a single item)

in order to better manage the kinds of multidimensional projects demanded by EastWest trade.51

POLITICAL AND FOREIGN

POLICY FACTORS

Taken by themselves, a number of political, strategic, and foreign policy aspects of

the Soviet-Japanese relationship might be

expected to affect Japanese policies on trade

with and technology transfer to the Communist world. That they are not the major determinants of Japanese policies and practices in these areas can be attributed to the

primacy of economic factors and to Japanese

recognition of the fact that “linkage” between its trade and foreign policy objectives

cannot be carried out successfully. Japan

simply does not have the cards to play in a

trade-and-foreign-policy poker game with

the Soviet Union. Economic and political relations with the U.S.S.R. are therefore kept

clearly separated.

The Soviet Union presents Japan with

several irksome diplomatic problems. Most

important, perhaps, is the insistence of the

Soviets on retaining the Northern Territories, a group of Japanese islands captured in

the final days of World War II. In fact, the

U.S.S.R. and Japan have never signed a formal peace treaty, because neither side has

been willing to yield on the Northern Territories issue. Fishing rights have been

‘“Raymond Mathieson, Japan Role in Soviet Economic

Grouth: 7’ransfer of Technology Since 1965 (New York:

Praeger Publishers, 1979), p. 29, pp. 236-237.

51 Japan International Trade Organization (JETRO),

Japan’s Plant Exports, No. 11, (Tokyo: JETRO, 1977), pp.

13-14.
Ch. IX— The East-West Trade Policies of America Cocom Allies 195

another source of Japanese-Soviet dispute.

In this area the Soviets have clearly and consistently held the upper hand. Annual negotiations over catch quotas, and the recent

imposition of Soviet sovereignty over waters

within 200 miles of its coast, have slowly

eroded Japanese competitiveness with the

giant and technologically advanced Soviet

fishing industry.

Numerous public opinion surveys have indicated that the U.S.S.R. is “the most disliked” country among the Japanese public.

Indeed, in 1978, anti-Soviet feeling ran as

strong as at anytime during the past 15

years, with 40 percent of all respondents listing the U.S.S.R. at the top of the list of nations they most disliked.52

China, by contrast, has fared much better,

with only about 10 percent of the 1978 sample listing it as “the most disliked” (and with

15 percent describing it as the “most liked, ”

in contrast to less than 5 percent for the

U. S. S. R.).” Moreover, with the exception of

a brief reversal during the height of the

Great Cultural Revolution, Japanese public

opinion has tilted increasingly towards

China. For whatever it is worth in terms of

its actual influence over the making of Japanese foreign policy, public opinion does not

seem to regard the Communist bloc homogeneously as a “security threat, ” and is unlikely to be sympathetic to a campaign to restrict exports on those terms.

Unfortunately, there is no comparable information on the general attitudes of Government and foreign policy elites. Nevertheless, American Japan-watchers and Japanese scholars agree that the Japanese defense and foreign policy establishments view

the U.S.S.R. as the chief military threat to

Japanese security. But if Japanese strategic

and diplomatic vulnerability has affected

trade and technology transfer policies, the

effect appears to be more to encourage than

discourage trade. As a nation defenseless on

‘L[’{jreign oi]inicjn .!’c)IP.s: [ ‘.,?. lntcrnutionul (’(jntn2unication A,qcJfIc>I, h! ay 7, 1979, p. 4 (figure 2).

‘11 bid., p. 2 (figure 1).

all sides, Japan pursues a strategy of “being

friends with everybody” and maintaining an

evenhanded stance in the Sine-Soviet conflict. Reflecting the great importance of

economic needs, a 1974 White Paper on Foreign Trade prepared by the Ministry of International Trade and Industry (MITI)

noted that to ensure stable supplies of essential resources, Japan would be required to

pursue a policy of “orderly imports” and

“diversification of import markets.’” Among

other things, this meant deepening interchanges with the Communist bloc as well as

with Latin America and Africa.54 Similar

sentiments were expressed by Mr. Hatoyama, Minister of Foreign Affairs, in a speech

to the Diet in October 1977. According to the

strategy he outlined for Japanese-Soviet

relations in the coming year, Japan would (a)

strive to develop relations across a number

of fronts (economic, cultural, political) simultaneously, but (b) would insist that any longterm relations depend on a peace treaty and

a settlement of the territorial issue.55

Practical experience effectively precludes

the Japanese from accepting the idea of controls or embargoes on technology transfer on

political or general foreign policy grounds.

Such a stance is reinforced by the fact that

the “leverage-through-linkage” strategy has

its critics on the Japanese scene. Japanese

scholars and officials alike have argued

variously that the Japanese need to take the

initiative in increasing Soviet trust in their

intentions, that issues such as the return of

the Northern Territories should be subordinated to pragmatic trade considerations,

and that the overwhelming military might of

the U.S.S.R. makes linkage an impractical

ploy. Others see increased trade and other

exchanges as one way to halt the “spiral

model of insecurity and conflict” that has

been at the root of Japanese-Soviet relations

since at least the end of the 19th century.

From these perspectives, Japanese demonstrations of “good faith” and “reliability”

“Crawford and oki[a, pp. 170-171.

‘‘k~pewh h? lt~’ltirott~itoj~an)a, Alini.s ter of b’orc~i,qn .4 fftl irs

(Tokyo: Foreign I’rt>ss (’enter, oct. 3, 1977).
— —

196 . Technology and East-West Trade

through trade, they feel, can serve to alter

prevalent attitudes and to create a more

fruitful atmosphere for political negotiations.

On occasion, controversy internal to the

Japanese Government has arisen over the

issue of linking or not linking trade and

economic cooperation with foreign policy

considerations. A case study of the now defunct (for economic, not foreign policy, reasons) Tiumen oil project reveals that certain

officials in the Foreign Ministry did favor a

linkage strategy vis-a-vis Japanese participation in Siberian development, while MITI

and the Ministry of Finance were adamantly

opposed to the idea. In the end, the opponents of linkage (including then-Foreign

Minister Ohira) carried the day.56

Nor is there any evidence that officials in

the Japan Defense Agency (JDA) see a

threat to Japan’s security as a result of the

transfer of Japanese technology to the

Soviet Union. Unlike the U.S. Department of

Defense, JDA appears to be a captive of

other bureaucratic interests, centered chiefly

in MITI, Foreign Affairs, and Finance. Its

position papers, at least until quite recently,

failed to reflect an independent agency viewpoint. In fact, according to some sources,

they were drafted outside the confines of

JDA, though bearing its imprimatur. In any

event, though a recent JDA paper called for

increased R&D expenditures for domestic

production of defense equipment, there is no

mention of the strategic ramifications of

technology transfer, economic competition

with the Communist bloc, or the military implications of foreign trade.57

Japanese defense and foreign policy specialists who are concerned about the Soviet

military threat view a continuing defense

relationship with the United States as their

best defense. They see a substantially lower

level of security threat from China. Indeed,

Japanese officials have suggested that Japanese technical assistance to aid in China’s

modernization and industrialization makes a

positive contribution to Japanese security

by reducing the possibility of domestic upheavals and foreign policy radicalism.

This view would also appear to coincide

with Japanese public opinion. According to a

December 1978, poll by the Japanese Public

Survey Opinion Organization, most Japanese see “domestic political order” (47 percent) and the “state of the economy” (33 percent) as more critical to Japan’s security

than military measures or defense per se (14

percent) .58

TRADE IN TECHNOLOGY

Determining the share of Japanese trade

that can be categorized as “technology

transfer” is difficult. In 1976, machinery accounted for 40 percent of Japan’s exports to

the Soviet Union and 11 percent of its exports to China, in terms of dollar value.

Among exports to all nations, Japanese machinery represented slightly under a third of

total value. But Japanese machinery exports

appear to be rapidly expanding. By 1978,

machinery represented 64 percent of all Japanese exports, and 35 percent of all exports

to Communist-bloc countries (including 4?

percent of exports to the Soviet Union and

20 percent of exports to the PRC) (see table

34). This expansion can be at least partly explained by the fact that Japanese industrial

output and export product lines have been

affected by increasing competition from

abroad, as other Asian nations (such as

Korea and Taiwan) have gained the advantage of cheap labor in labor-intensive industries like ceramics and textiles. These

changes have led the Japanese to develop

new export lines in machinery, technologyintensive goods, and metals.

However, by using the U.S. Commerce

Department’s definition of “high-technology

items” (see chapter VI) Japan is a relatively

“Curtis, pp. 163-164.

“Japan Defense Agency, The Defense of Japan (Tokyo:

JDA, 1976), p. 128.

‘8Research Memorandum: U.S. International Communication Agency, Apr. 27, 1979, p. 7.
Ch. IX— The East-West Trade Policies of America Cocom Allies ● 197

Table 34.—Japanese Machinery Exports,

1978, by Region

(in thousands of U.S. dollars)

Machinery Machinery as

exports All exports 0

/0 of total

IW nations $27.144,870 $37,268,971 72.8

LDC. 22,158,104 37,017,595 59.9

Communist bloc 1,817,140 5,181,217 35.1

U.S.S.R . 952,194 2,012,288 47.3

PRC. : 460,546 2,311,332 19.9

East Europe. 310,269 554,815 55.9

Tota l $51.120,220 $79,467,933 64.3

SOURCE Summary Report Trade of Japan, no 10 October 1978, PP 128-29

(table 10) Data available for January October 1978, only

insignificant source of technology to the

U. S. S. R., which purchased only about 18

percent of its Western machinery and equipment imports from Japan in 1977 (as opposed to 28 percent from West Germany and

9.4 percent from the United States, see table

35). The Japanese led the competition (West

Germany, France, Britain, and the United

States) only in Soviet imports of calculating

machines (including computers), specialpurpose vessels, and optical instruments

between 1972 and 1977; and ranked second

as suppliers of valves; batteries and cells;

tubes, transistors, and photocells; optical

elements; and image projectors. Japan supplied the Soviet Union with none of the following high-technology items, which could

be viewed as strategically or militarily sensitive: aircraft turbines; nuclear reactors; telecommunications equipment; electron and

proton accelerators; aircraft; and aircraft

parts. In the area of oil-refining equipment,

however, Japan far outstripped all competition. In this category it supplied 87 percent

of the Soviet Union’s imports from Western

sources, although this only amounts to 36

percent of total Soviet oil-refining equipment

imports. Other categories of technology-intensive imports in which Japan was an important Western supplier include power-generating and electrical equipment (with 40.6

percent of imports from Western sources);

chemical industry equipment (2 I percent);

excavation equipment (36 percent); and compressor equipment (19 percent).

Plant exports comprise the dominant

share of technology transfer by the JapaTable 35.—Soviet Imports of Machinery and

Equipment From Japan, the United States,

and West Germany, 1977

‘

0

/0 of alI

0

/0 of all M&E imports

M&E imports M&E imports from West

Japan . . 684.9 6.0 18.3

United States. 350.8 3.1 9.4

West Germany. 1,041.6 9.1 27.8

SOURCE Summary Report: Trade of Japan. no. 10 October 1978 pp. 128-29

(table 10) Data available for January-October 1978 only

nese, with license and patent exports playing

only a minor role. Japan’s plant exports to

the rest of the world totaled $6.5 million in

1976, an increase of about one-third over the

previous year, even though total exports

grew by only one-fifth. Chemical plants represented about 40 percent of the value of

transferred technology, and plants to manufacture heavy electrical equipment also

figured prominently. The Communist bloc

ranked first among regional customers for

Japanese plants (purchasing almost 30 percent of the total), with the Middle East second, and Latin America third.

In many cases, the Japanese have proven

particularly adept at importing technologies,

improving on them, and exporting the new

generation to both Communist and free

world countries. For instance, in 1968, Toyo

Engineering obtained basic patents for an

ammonia production process. In a year the

firm’s alterations led to a 30-percent increase

in output. Mitsui and Co. then sold the process to the Soviet Union.59

Two recent Japanese economic forecasts,

one developed by the prestigious Japanese

Economic Research Center (JERC) and one

by MITI, predict that technology will become an increasingly important component

of Japanese exports in the next 5 years.60

Specifically, these studies foresee the following changes in Japanese output and exports:

● 1985 machinery exports, especially

products related to new technology and

‘

g

Japan International Trade Organization, op. cit.

eOKiyo~hi Kojima, Japan and a Neu~ World Economic Order

(Boulder, Colo.: Westview Press, 1977), pp. 130-136.
198 ● Technology and East-West Trade

●

●

●

●

commodities incorporating electronics,

will be 22 percent above 1975 levels;

exports of plant construction material

will increase;

exports of finished chemicals, petrochemical products, plastics, iron and

steel will decline;

the share of value-added, “knowledgeintensive” products in the chemical industry’s output will rise; and

1985 exports of precision instruments

will increase 15.7 percent above 1975

levels.

In general, then, the Japanese economy is

expected to continue its current move away

from labor-intensive, low-productivity industries—which will emerge increasingly in the

developing countries and will find a growing

Japanese import market–towards knowledge-intensive industries dependent on high

value-added per unit of raw material and

labor. Since the Soviet capacity to absorb

imports of finished products and consumer

goods is somewhat limited, Japan can be expected to continue seeking Soviet markets

for other Japanese exports–particularly

those in which Japanese technology is embedded–to counterbalance imports of Soviet raw materials.

At the same time, according to JERC,

China will pursue a course of economic development that will closely parallel the earlier

Japanese experience. China, like early postwar Japan, will rely heavily on low-paid but

plentiful and highly motivated labor, a high

degree of capital formation, and extensive

imports of technology. This pattern would

make China an increasingly important market for Japanese technology exports. This

attractive market can be expected to reinforce Japan’s already-liberal stance toward

technology transfer to Communist nations.

EXPORT CONTROL POLICY

The basis for Japanese export controls is

provided by the foreign exchange and foreign trade control law enacted on December

1, 1949. It presumes that trade development

is desirable and that trade with all nations,

including Communist countries, should be

permitted without controls except under certain circumstances relating primarily to

fiscal considerations. This principle of “export freedom” is secured by article 47 of the

law, as modified by the provisions of article

48. Licenses may be required for export at

the discretion of the Government, depending

on the goods involved, the designated recipients, or the mode of payment. The latter provision allows the Government to exercise authority over sales involving payments other

than “standard measures of financial settlement” or cash.61 It is under this provision

that the executive branch—or, more precisely, MITI—is authorized to regulate the

transfer of technology to other nations.

The law itself, however, contains no mention of the control of goods or technology for

either military or political reasons. Nor is it

specific regarding either the areas or the

commodities for which controls are to be invoked. Substantive limitations are contained

only in a Government export trade control

order, of which 89 variants have been promulgated between June 1950, and June

1977.62 The order is altered from one to eight

times a year, depending on changes in

Japan’s domestic economic situation, its

balance-of-payments positions, or shifts of

Japan’s national list. The latest available

varient of the order contains 204 items. The

few items that are not derived from CoCom

are included for reasons of domestic short

supply, to prevent dumping, or to improve

quality control.

“Area restrictions” figure only marginally

in the order’s control provisions. They are

not applied to Communist states per se, for

the latter are lumped together with market

economies under a broad designation “Area

A.” “Area B“ restrictions apply only to

those countries for which there are special,

non-CoCom, embargo provisions (e.g., Rhodesia) and to others (e.g., Iran, Iraq, Nigeria)

“Baker and Bohlig, op. cit., pp. 163-191.

“Ibid., pp. 174-1 76; Export Control: Export Trade Control

Order (Tokyo: MIT1, 1978), n.p. (pt. I I-B).
Ch. IX— The East-West Trade Policles of America’s Cocom Allies ● 199

with whom Japan has special balance-ofpayments problems.

Both the law and the various orders operate in an atmosphere best characterized as a

“presumption of license” rather than a “presumption of denial. ” In contrast to the

United States, Japan has never introduced a

so-called “blanket clause” whereby restrictions pertain unless or until a general license

is established or validated. 63 Indeed, article 2

and article 47 of the law foresee the eventual

removal of export restrictions entirely by

means of a periodic review of each order and

through administration of both the law and

orders according to minimal rather than

maximal standards. 64 Currently (1979), certain additional steps in this direction appear

to be under consideration. One involves a redrafting of the 1949 law by MITI so as to

further reinforce the presumption-of-license

provisions and to eliminate any vestiges of

an atmosphere of restriction.

Explicit provisions for the regulation of

technology per se are conspicuous by their

absence in the law, the orders, and Japanese

discussions of export controls. As noted

above, such transfers can be regulated legally according to the provisions pertaining to

methods of payment. But all interviews

strongly suggest that they are not. It appears, rather, that Government officials

strongly believe (and businessmen concur)

that restrictions on the flow of technology

are best left to the normal operation of commercial forces, i.e., to the desire of firms to

retain a competitive advantage. They also

suggest that the economic rather than security aspects of export regulation are firmly

fixed in the minds of both those administering the law and those subject to it.

It should be noted here that the restrictions contained in the law and the orders apply only to Japanese firms located on Japanese territory and not to foreign subsidiaries, branches, or Japanese-based multinationals. There is no concept of extraterri-

“’I bid., p. 174.

“I bid., p. 171: Export (’on troi, op. cit.

toriality in Japanese trade law—or in Japanese law in general for that matter, except

for serious criminal cases. Violation of export controls is a criminal offense, with sanctions of up to 3 years in prison and a minimum fine of 300,000 yen (about $1,500 at the

current exchange rate). If, however, the price

of the item involved “times three” exceeds

the value of the minimum fine, the penalty is

automatically trebled. Although the law contains no formal provisions for the Government to revoke a firm’s export privileges,

MITI’s legal authority to exercise “administrative guidance” in granting licenses

means that it can de facto indefinitely delay

an offending firm’s export privileges.

The licensing process in Japan operates on

consensus between business and Government. It is not an adversary procedure, and

it provokes few complaints, if any, from Japanese businessmen. Most Japanese-Soviet

and Sino-Japanese trade passes through the

hands of the 14 or 15 “all round trading companies” (the sogo shosha).65 Thus, in comparison to the United States where large and

complex deals involving the exchange of

multiple products by trading conglomerates

are more common in validated license decision cases than individual contracts signed

by relatively small firms, there are probably

few licensing instances that must be handled

by the Japanese Government.

The setting in which the Japanese licensing process operates differs from that in the

United States in other ways. Since its resumption following the 1956 agreements,

Japanese trade with the Soviet Union has always taken place within the framework of

intergovernmental trade compacts. Since

1966, these have provided comprehensive, 5-

year projections of all aspects of trade exchanges. Not coincidentally, these also correspond to the time frames provided by Soviet

5-year plans. The original initiative for these

“Yataro Terada, “System of Trade Between Japan and

Eastern Europe, Including the Soviet Union, ” Lau and Contemporary?’ Pro blem.v, 37, 3 (summer 1972): 434-435; Alexander K. Young, Th~ .so~ro Sho.shu: ,Japan Alu[ti-,1’a tionu[

Trading (’ompanies (Boulder, Colo.: J4’estview Press, 1979),

pp. 195-221.
200 ● Technology and East-West Trade

agreements came from the Soviets and, since

1968, the U.S.S.R. has tried unsuccessfully

to get Japanese negotiators to commit themselves to trade agreements stretching over

15 to 20 years. Until the 1971-75 trade agreement, each trade “plan” also included a list

of products to be exchanged and estimates

of the volume or monetary amounts involved. For subsequent agreements, no estimates of amounts have been supplied, and

the annual breakdowns of both products and

amounts have been suspended. The list of

items, however, has been retained. The

1971-75 trade agreement listed some 300

separate items for export and import, with a

supplemental schedule of items provided to

cover the “coastal trade” of the Soviet Far

East.

The Japanese do not regard these agreements as legally binding, but they nonetheless affect licensing operations in important

ways, as summarized below:

1. A priori agreement on what can and

cannot be traded exists. Hence, instances of conflict between Government

and business (and instances of denial)

are extraordinarily rare.

2. The lists are useful to Japanese companies seeking trade as a means of identifying favorable market opportunities

in the U.S.S.R. They also shape the

long-term planning of production and

immediate production decisions of firms

involved in import-export exchanges

with the U.S.S.R. In point of fact, the

quantities actually traded usually surpass the levels provided for in the

agreements. Both sides use the item

lists and designated quantities in their

annual trade reviews to determine if

“trade on a regular basis, ” the catch

phrase of every agreement, is in fact occurring.

3. The lists are credited with “greasing

the wheels” of the licensing bureaucracy.

4. Japanese business is protected by the

agreements against Soviet dumping.66

“Terada, op. cit., pp. 432,433.

The licensing process itself is characterized by extensive informal consultation between MITI and the exporting firm even

before negotiations with a Communist foreign trade organization commence. Companies brief MITI on the trade and payment

provisions, returning for further consultation at successive stages if the package

alters. For exports to non-Communist nations, such a review process apparently occurs only when Japan Export-Import Bank

credits are involved.

In effect, therefore, a system of thorough

preliminary clearance operates. The licensing process is expedited by the flexibility of

the Soviets. If they do not think that a

license will be forthcoming, they do not seek

trade agreements. There is no evidence of

Soviet pressure in cases where a license has

been denied. At a second stage, the Japanese

firm brings the negotiated package back to

MITI for approval of credit and payments

provisions, which will also likely involve the

Ministry of Finance and the Export-Import

Bank. At the present time, about half of all

Japanese-Soviet deals involve exporter credits. The other half involve buyer’s credits

that depend on loans from the Export-Import Bank to the Foreign Trade Bank of the

U.S.S.R.

By law as well as practice, export licensing

remains largely the prerogative of MITI. No

interagency boards or committees are involved. The Ministry of Foreign Affairs apparently plays an occasional consultative

role, being contacted to “hear its views, ”

while the Ministry of Finance is involved on

a more regular basis.

Issues of conflict rarely surface in the licensing process. When there are differences

of opinion within MITI or strong communications by one of the other ministries, then

MITI convenes an informal “committee,”

which is usually made up of members from

the economic agencies (Ministry of Finance,

Export-Import Bank, Economic Planning)

and Foreign Affairs. Only when bank-tobank loans are at stake is the conflict likely
Ch. IX— The East-West Trade Policies of America's Cocom Allies ● 201

to be referred to the Cabinet and Prime Min- (Japanese Parliament) or the public at large.

ister. Although notification of completed contracts is published in an official gazette, information about license approvals or denials

There are no provisions for public account- is not. There has been no discussion of the

ability in the licensing process. The Govern- issue of export controls, technology transfer,

ment is not required to bring instances of ap- or licensing procedures in the Diet during

proval or denial to the attention of the Diet the past few years.

SUMMARY

A number of factors, both economic and

political, serve to create differences between

the United States and its CoCom allies in

East-West trade and export control policy.

Our major Western trading partners–West

Germany, France, Britain, and Japan–are

all far more heavily dependent on foreign

trade; West Germany, for example, derives

nearly one-third of its GNP from international commerce. Similarly, trade with the

Soviet Union, China, and Eastern Europe

provides economic benefits of far greater

relative importance to our CoCom allies than

it does to the United States.

While the value of technology exports to

the U. S. S. R., Eastern Europe, and the PRC

is not large as a percentage of total German,

British, French, or Japanese foreign trade,

such exports do provide critical support of

key sectors within each nation’s economy.

Jobs, markets, foreign exchange, and balance of payments are all at stake, and these

economic factors clearly influence the policies and practices of our CoCom partners

with respect to the transfer of technology to

Eastern-bloc nations. In general, it can be

said that Germany, France, and Britain tend

either to see their economic and political interests as harmonious or to separate economic interests from any conflicting political

factors, and in either case to base their EastWest technology transfer policies primarily

on economic factors. To the limited extent

that trade with the East is used for political

leverage, the linkage tends to be positive

rather than negative—that is, trade is used

as an inducement to political accommodation, and not as a weapon for punishment.

Japan’s economic circumstances differ

somewhat from those of the European nations, but the Japanese situation also encourages East-West trade and technology

transfer. Highly dependent on imports of

raw materials and energy from both the

Soviet Union and China, Japan relies heavily

on export markets that are shifting increasingly away from consumer goods and toward

technological items. The Communist nations

provide attractive markets for technology

exports. Furthermore, problems in SovietJapanese relations are submerged by these

economic interests, partly because Japan

lacks the strategic and diplomatic strength

to use foreign trade as a diplomatic playing

card, and partly because the Japanese Government sees trade with the U.S.S.R. as a

tool for lessening tensions between the two

nations.

The CoCom nations’ generally favorable

stance regarding trade with and technology

transfer to the East is reflected in the ease

with which export licenses are granted. The

export control systems employed by West

Germany, France, Britain, and Japan all

operate on the presumption that exports

should be permitted in all cases except those

involving items with clear and exclusive military value. A cooperative relationship between business and Government appears to

exist in each of our allies’ export control programs, making it possible for licenses to be

granted swiftly and easily. In most cases, a

time-consuming scrutiny by Government officials is not considered necessary before permission to export technology is granted.

54-202 0 - ?9 - 14
202 . Technology and East-West Trade

Nonetheless, all four CoCom allies adhere

to CoCom’s policies and regulations with respect to exports that might jeopardize Western security. Even France, a nation that in

recent years has pursued a foreign policy

pointedly independent of United States interests, has found it expedient to follow

CoCom guidance in regulating exports to the

East. Each nation maintains a list of embargoed exports or items requiring special permission for export, and in most cases the national lists largely coincide with CoCom lists.

In at least one instance involving nuclear

powerplant components, West Germany has

taken an even stricter stance than CoCom in

adding items to its list.

The major constraint on West European

and Japanese transfers of technology to

Communist nations stems from the inability

of the purchasing nations, particularly the

U. S. S. R., to arrange for payment. The Soviet

Union suffers both from a shortage of hard

currency and from a lack of exports attractive in Western markets. Consequently, the

sale of Western technology must frequently

be based on buy-back agreements that involve future payment in imports of products

produced with the exported technology. The

CoCom nations generally provide the

U.S.S.R. with favorable credit terms

through subsidized interest rates, and even

Germany which does not offer lower official

rates is generous in the amount of official

credit available to the East.

In summary, our West European and

Japanese allies and trading partners perceive East-West technology transfer as part

of a larger picture involving trade in general,

rather than as an issue in its own right. Like

other aspects of export policy and other

features of diplomatic relations with Communist nations, the sale of technology to the

East is dealt with through a relatively

routine weighing of national economic and

political costs and benefits. Germany,

France, Britain, and Japan have weighed

their interests and determined that they are

best served by a technology transfer policy

that is generally liberal, yet remains within

the boundaries of the strategic requirements

of Western security.
CHAPTER X

Western Technology in

the Soviet Union
CONTENTS

Page

THE HISTORY OF WESTERN TECHNOLOGY IN

THE SOVIET UNION. . . . . . . . . . . . . . . . . . . . . . ..................205

THE NATURE OF THE SOVIET ECONOMY. . . . . . . . . . . . . . . . . . . . . .209

The Communist Party. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...........209

The Government Apparatus. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ........209

Economic Planning. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .............209

DECISIONMAKING ON FOREIGN TECHNOLOGY.. ..............211

Institutions Involved in the Acquisition of Foreign Technology. . .........211

State Apparatus and Technology Acquisition . . . . . . . ...............211

The Communist Party and Technology Acquisition . ................215

TECHNOLOGY ACQUISITION AND PLANNING. . ................216

Criteria and Priorities for Technology Purchases . . . . . . . . . . . . . . . . . . . . .. .217

THE ROLE OF WESTERN TECHNOLOGY IN THE

SOVIET ECONOMY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .219

Absorption and Diffusion of Western Technology . . . . . . . . . . . . . . . . . . . . .. 219

The Economic Impacts of Western Technology . . . . . . . . . . . . . . . . . . . . .. ..225

Chemicals ... ... ... ... ... ... ... ... ... ... ... ... a s . . . . . . . . . . . . . 227

Machine Tools . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 229

Motor Vehicles. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .......230

Oil and Gas . . . . . . . . . . . . . . . . . . . . . . . . . . . ..+...... . .............237

CONCLUSIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ........240

Table 36.–Western and U.S. Computer Sales to the U.S.S.R., 1972-77 . ...........234

Table 37.–First Production of Comparable Soviet and Amercian Computers . ......237

Table 38.–Soviet Imports of Western Oil and Gas Exploration and Extraction

Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..............239

Table 39.–Breakdown of U.S. Oil and Gas Equipment Sales to the U.S.S.R . ......239

Figure 12. –U.S.S.R. Council of Ministers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. ...213

Figure 13.-Organizational Structure of Operational Management of Foreign Trade .214

Figure 14.-Composition of Soviet Imports From the Industrialized West, 1977 ....216
CHAPTER X

Western Technology in

the Soviet Union

THE HISTORY OF

THE

WESTERN TECHNOLOGY IN

SOVIET UNION

Debates in the United States over the national security implications of bolstering the Soviet economy through the sale of advanced technology are of relatively recent origin, but the desire to profit from Western technological advances vastly predates both the cold war and the creation of the Soviet State. In

this sense, Western technology transfer to the U.S.S.R. has had ample precedent; foreign technology and capital infusion have played a relatively large role

in Russian economic growth for the past 300 years. From Petrine times until the

present, Russian statesmen have attempted to compensate for domestic inability to generate competitive innovation by importing know-how from abroad. The

motivation for this interest in technical and economic progress has varied, and

technical advance, economic growth, and military power have all been closely intertwined. Successive heads of both the Russian and Soviet Governments have

emphasized the necessity of competing with the advanced states of Europe not

only in terms of domestic standard of living, but also in terms of national

security.

The first systematic and nationwide attempts at modernizing the Russian State

through Government edict occurred during

the reign of Peter the Great (1682-1725).

During his tenure, the number of manufacturers and mining enterprises quadrupled.

Western impact in this period was felt more

through the transfer of know-how, ideas, and

people than through the transfer of hardware. The main thrust of the Petrine economic reforms directed toward the development of an efficient, modernized Russian

armed force that could match those of

Poland and Sweden, Russia’s major European adversaries. The almost continuous

state of war, punctuated by periodic invasions of the Russian homeland, made the development of a modern navy and munitions

industry seem crucial to the survival of the

Tsarist State.

The State bureaucracy under Peter I,

remolded along Western lines, was the prime

mover in the development of key militaryrelated sectors of the economy. This established a pattern which was to persist until

the October revolution. Growth in the new

armaments, metallurgy, shipbuilding, and

textiles industries was encouraged by guaranteed demand for their products from the

Government sector. The State, in turn,

strictly regulated the quality of the product,

demanding standards comparable to German and Dutch industry. In 1702, Peter initiated a drive to induce foreigners to settle in

Russia. This was intended to be a spur to innovation; Russia was importing both the

necessary know-how and what the Tsar regarded as superior Western cultural traits.

Peter attempted a deep and comprehensive Westernization of Russia, but it was

205
206 ● Technology and East-West Trade

based on narrow premises. While a relatively

competitive military sector was established

by the middle of the 18th century, the structure of the new industries precluded ongoing

growth and innovation in the absence of

State influence. Manufacturing was based

on serf labor, and there was no impetus to

discover labor-saving and capital-intensive

modes of production. Product quality and

quantity in those industries wholly dependent on the State were in many cases determined by administrative decree, but low

quality in the private sector was tolerated in

the absence of alternatives. Finally, raising

the proportion of foreigners in the intelligentsia was an insufficient first step toward

the comprehensive educational system necessary for permanent increases in worker

productivity and domestic innovation.

The 18th and early 19th century modernization drives depended for the most part on

State resources as their motive force, but, by

the end of the Crimean War, it was clear that

this technique could not support industrial

development on a par with that in Western

Europe. It was not until Count Sergius

Witte became Minister of Finance in 1892

that Government financial policy deliberately focused on industrial development.

Witte stabilized State finances, returned the

ruble to the gold standard and borrowed extensively abroad. At the same time, he channeled a great deal of foreign capital into the

expansion of the railway system, thus lending an added impetus to growth.

Witte was a disciple of Frederick List,

whose ideas on tariff protection for developing industries had helped to industrialize

Prussia. The result of these policies was a

surge of industrial growth unprecedented in

Russian history, and based essentially on

private initiative. Between 1892 and 1903,

when Witte left office, the annual rate of industrial growth consistently exceeded 8 percent.

During this period, the major vehicle of

technology transfer was the import of foreign machinery. Its role in the modernization

process was considerable: in 1912, only 55

percent of the ruble value of all machinery

sold in Russia was of domestic origin, and

imports of agricultural machinery increased

from 6 million to 50 million rubles from 1895

to 1914. Foreign investment in the last Tsarist period was particularly important in the

mining, metallurgy, textile, and chemical industries.

The success of the October revolution

ended the period during which economic

growth was nurtured by private initiative.

According to Lenin, the industrial growth of

the prerevolutionary era was based on the

exploitation of the masses by the capitalist

class and had fostered backwardness in the

Russian worker. The Soviet task was to rebuild through State control a society as productive as the most advanced Western nation. Western assistance remained vital to

this enterprise.

Lenin’s New Economic Policy, which came

into effect after 1921, had as its central

mechanism of technology transfer the granting of concessions to Western entrepreneurs.

Technical assistance contracts, the employment of foreign engineers and experts in the

U. S. S. R., and the dispatch of Soviet experts

to training positions in the West were also

utilized.

Over 200 concessions were made to foreign firms between Lenin’s death and the

first 5-year plan. While Soviet literature

downgrades the contributions of foreign

technology transfers accomplished through

this medium, it is clear in retrospect that

much of the rapid growth of the 1920’s was

dependent on foreign operative and technical

skills. The Soviets at this time made little or

no attempt to develop completely new mechanisms of domestic productions; even experimentation was limited and soon abandoned. They concentrated on acquiring new

productive processes from the West, training politically reliable engineers, and establishing basic and applied research institutes.

By the end of the 1920’s the Soviets were

convinced that they had found a more effective mode than the pure concession or the

joint venture for the transfer of Western

skills and technology. After 1928, technicalassistance agreements and individual work

contracts with foreign companies, engineers,

skilled workers, and consultants replaced
● 2 0

7
208 Technology and East-West Trade

the pure and mixed concessions. Under these

arrangements the capitalist firms could no

longer claim a share of ownership. In addition, the control of technology transfer operations lay totally in the hands of the Soviets.

Existing concessions were closed out

through taxation, breach of contract, harassment and, in some cases, physical force. 1

In their place, in the summer of 1929,

many wide-ranging technical-assistance

agreements were concluded with foreign

firms. These were to be of specific, limited

duration. The units designed and begun between 1929 and 1932 were some of the

largest in the world, so large in fact that in

many cases contracting Western firms had

not previously dealt on a similar scale. Design and layout of these complexes came

mostly from America, with Ford, General

Motors, Packard, General Electric, and U.S.

Steel contributing heavily. And although

nearly a half of the installed equipment was

German, it was very often manufactured in

Germany to American specifications.

For 2 years there was an unparalleled infusion of foreign technology in the form of

skilled labor, technical data, and equipment.

Although most of the engineers were gone

by 1932, they left behind designs based on

Western models which contributed to a large

increase in manufacturing capacity. Until

1941, production increases in most Soviet industrial sectors were the result of the installation and expansion of the Western

plants acquired in the massive transfers

which took place during this brief period.

Stalin had used the threat of war to initiate the new era of industrialization and collectivization in 1919. First priority was

therefore given to the military departments

of the new works, and many plants built in

this period simultaneously produced civilian

and military equipment. After World War

II, the most significant vehicle of technology

transfer was the stripping of German industry. It has been estimated that at least twoI Anthony Sutton, 14re.stern Technology and Sol~iet Economic DeL’elopmen t, 1930 to 1945 (Stanford, Calis., 1977), pp.

20-26.

thirds of the German aircraft and electrical

industries, most of the rocket production industry, several automobile plants, several

hundred ships, and a host of military equipment were transferred en masse to the

U.S.S.R.

In the late-1950’s, the Soviets turned their

attention to technology transfer in industries where the German acquisitions had

been slight–the chemical, computer, shipbuilding, and consumer industries. During

this period, the U.S.S.R. began a massive

complete plant-purchasing drive. Between

1959 and 1963, at least 50 complete chemical

plants were bought for chemicals not previously produced in the U.S.S.R. In addition, a

large ship-purchasing program was initiated

in order to expand the Soviet merchant fleet.

In sum, whatever the role of technology

transfer in the contemporary Soviet economy, it is clear that Western technology has

long been looked on as a way to overcome domestic economic shortcomings. These imports have played a major—and continuous—role in both the Russian and Soviet

States. In this sense, Soviet efforts to obtain

imported technology are neither surprising

nor new. In addition, throughout both Russian and Soviet history such transfers of

know-how and capital from the West have

been conscious tools of State economic and

military policy. The centralization of economic decisionmaking, particularly as it relates to the selection and use of foreign technology, has been practiced in Russia for at

least 300 years.

Equally normal, however, has been great

vacillation in the ways in which foreign exporters and technicians have been treated.

While Western-Soviet trade has had a long

history, this history has been characterized

by periodic State-imposed deteriorations of

trading conditions and by a conspicuous lack

of predictability in commercial contacts. On

the basis of the historical evidence, at least,

there is no reason to expect that increased

sales of technology to the U.S.S.R. will much

enhance the opportunities for Western exports of manufactured goods.
Ch. X— Western Technology in the Soviet Union 209

THE NATURE OF THE SOVIET ECONOMY

THE COMMUNIST PARTY

No market mechanism officially operates

in the U.S.S.R. Instead, economic decisions

concerning allocation of resources and rates

of expansion of different sectors are made

administratively, and basic economic policy

formulation is one of the principal functions

of the Communist Party.

The Party exercises control and supervision over the economy in a number of ways.

Many branches of the Government report

directly to Party organs. The State Planning

Committee (Gosplan), for example, reports

directly to the Politburo (Executive Committee) of the Party.2 At lower levels, building

projects are first submitted to the Party

before being submitted to the appropriate

Government office. At the enterprise level,

the Party organization both mobilizes workers to fulfill the plans and monitors the activities of enterprise managers.

The most potent tool used by the Party to

direct the economy is the nomenklatura system. The nomenklatura is a comprehensive

list of appointments under Party control. It

nominates individuals to all important posts

in the State, industry, and army. As a result,

although only about 6 percent of the Soviet

population belongs to the Party, nearly all

agricultural or industrial managers

ty members.

THE GOVERNMENT

APPARATUS

are ‘ParThe State apparatus administers the detailed planning and organization of the econ-

‘P. Gregory and R. Stuart, Souiet Economic Structure and

Performance (New York, 1975), p. 118.

omy. The Soviet economy operates under a

ministerial system in which individual enterprises belonging to a particular branch of the

economy (petrochemicals, metallurgy, etc. )

are subordinated to a single ministry. There

are three types of ministries: the all-union

ministries run the enterprises under their

control directly from Moscow, and these

enterprises are not answerable to regional

authorities; the union-republic ministries

have offices both in Moscow and the republics; and the republic ministries direct enterprises in their own republics. The heads of

these ministries are either members of the

Council of Ministers of the U.S.S.R. or of the

other republic Councils of Ministers.

ECONOMIC PLANNING

Coordination of ministry activities is done

primarily by Gosplan, the principal planning

agency.3 While only a limited number of commodities are centrally planned and distributed by Gosplan, the planning process is extremely complex.

The first step in this process is for the Party to establish priorities, in the form of output targets, for the upcoming plan period.

These targets are sent to Gosplan, which

tentatively formulates a detailed set of output goals and determines the resources required to produce them. These goals or “control figures” are sent down through the planning hierarchy to the individual enterprises.

At this point, enterprises and ministries formulate their own input estimates for Gosplan’s output targets. Gosplan must reconcile the two. Should demand for a particular

commodity input exceed supply over the

‘Ibid., p. 119.
210 . Technology and East-West Trade

economy as a whole, Gosplan may decide to

reduce demand, to draw on stocks, or to import. After it has arrived at this “material

balance, ” Gosplan submits the plan to the

Council of Ministers for approval and/or

modification. The finalized targets are then

communicated down the hierarchy to individual firms.

This system of material balance planning

is cumbersome and slow; it stresses quantitative output goals and requires the maintenance of a vast bureaucracy. While it strives

for consistency (equating outputs to inputs),

it has proven incapable of achieving optimality, i.e., the most productive resource mix for

desired production levels. On the positive

side, material balance does permit the Government to channel growth in high-priority

sectors while maintaining strict control over

the economy.

The monetary counterpart of each enterprise’s input and output plans are financial

plans. These facilitate planner control over

enterprise operations to the extent that deviations from the financial plan signal deviations from the physical plan. This control is

reinforced by the fact that all legal interfirm

transactions, with the exception of certain

investment allocations and foreign trade, are

handled by the State Bank (Gosbank), which

is the sole center for settling of accounts.

Each year, Gosplan formulates and the

Council of Ministries approves an investment plan for the entire economy. The plan is

carried out by “project-making” organizations in charge of investment planning at the

enterprise level, and its implementation is

supervised by Gosplan and the ministries.

Thus, decisions to expand enterprise capacity are made outside the enterprise itself. Investment choice in the U.S.S.R. is hampered

by the inefficiencies that arise from the reluctance of planners to rely exclusively on

profitability criteria, and from overly taut investment planning.

Soviet enterprises operate on an independent “economic accounting” system. This is

often taken to mean that they operate to

maximize profits. The system guarantees,

however, only that enterprises have financial

relations with external organs such as Gosbank and that their operations are evaluated

in terms of value indicators using official

prices. Under this system, future production

targets bear no relation to profits.4

The plan, formal and informal constraints,

and the managerial incentive structure have

made gross output the most important indicator of enterprise performance. A manager

is rewarded primarily for rapid expansion in

physical output in a given planning period,

irrespective of poor performance in other

areas. Managers therefore tend to avoid

change, expecting negative impacts from innovation in process or products.

These factors, which inhibit incentives

and may result in misallocation of investment funds, are endemic to the Soviet system of economic organization. Even where a

measure of local decisionmaking power exists, such decisions must conform to the

wishes of the central planners, who perform

without necessarily according priority to

issues such as prices or profits.

The declining rate of economic growth in

recent years has lent impetus to attempts to

reform the Soviet economy. In 1965, Premier

Kosygin submitted a plan designed to reduce the number of enterprise targets set

from above and, most important, to replace

gross output by “realized output” (sales) as

the primary indicator of the success of an

enterprise. Further, profits were to be an important source of funds for decentralized investment by enterprise managers and were

to be used as a source of funds for bonus

payments to workers. These changes were to

be phased over 5 years.

The period since 1971 has witnessed a reversal of official attitudes toward the solution of basic economic problems. Rather

than relying on economic “levers” at the

enterprise level—the basis of the Kosygin

reforms—attention is being increasingly

directed toward improving planning methods and increasing control over enterprises

‘Ibid., pp. 179-230.
Ch. X— Western Technology in the Soviet Union ● 211

to improve economic performance. Empha- nology are therefore more likely to come

sis is now on new planning methods such as from technological infusions from the West

perspective planning, automated plan calcu- than from domestic R&D.

lations, automated information retrieval

systems, and new organization methods.

One of the major motivations of the 1965

reforms and of the later modifications to

them was the continuing reluctance of managers to introduce new technology and raise

product quality. The subsequent recourse to

more centralized administrative techniques

means that those features of the economy

that deterred innovation in the past continue

to exist.’ Major innovations in Soviet tech-

‘

)

See Gertrude Schroeder, “Recent Development in Soviet

Planning and Incentives,’” in .~ot’iet Economic Prospects for

the .’$e[’entie.s, Joint Economic Committee, 1973.

In conclusion, while modest attempts at

reform have been undertaken in the Brezhnev era, the basic problems of economic incentive in the innovation process have not,

in the final analysis, been seriously addressed. The economic reforms of 1965 have

been so modified as to dilute their effect. In

lieu of emphasis on economic “levers” as

spurs to innovation, reorganizational and administrative solutions have met with little

success. Western technology continues to be

important to future Soviet economic growth.

DECISIONMAKING ON FOREIGN TECHNOLOGY

INSTITUTIONS INVOLVED IN

THE ACQUISITION OF

FOREIGN TECHNOLOGY

Decisions concerning the purchase of foreign technology, like any other economic

decision in the Soviet Union, take place

within the framework of a system of central

economic planning. A brief catalog of the

major institutions involved in this process

suggests the variety of the interests involved in such purchases and the complexity

of the process itself. These actors fall into

two major categories, the State and the

Communist Party apparatus.

State Apparatus and Technology

Acquisition

The Council of Ministers.–At the top of

the Soviet Government organization is the

Council of Ministers of the U.S.S.R. This

body is the formal repository of all State authority. As such, it is the theoretical locus of

administrative responsibility for trade matters. In practice, however, decisions are usually taken in ministries and agencies that

operate under the Council and are rubberstamped at the highest level. To administer

the massive Soviet economy, the Government relies on the operation of a variety of

general and specialized bodies.

Gosplan.–Gosplan, the State Planning

Commission, is the central Government’s

chief agency for conducting the work of general economic planning. Part of its work consists of import planning, which is conducted

by Gosplan’s own Department of Foreign

Trade. The primary responsibility of this

Department is to integrate foreign trade into

the national economic plans. In addition,

Gosplan is responsible for planning R&D

and innovation. This work is carried out in a

separate Department for the Comprehensive

Planning of the Introduction of New Technology into the National Economy.6

Gostekhnika.–Known in the West as the

State Committee on Science and Technology

(SCST), this organization bears primary responsibility for the coordination of R&D

work throughout the economy.7 It is chief

advisor to the central Government on national technological policy. Part of the latter

‘See Joseph S. Berliner, The Inno[fation Decis[on in Societ

~ndustq~ (Cambridge, Mass.: MIT Press, 1976).

‘Ibid.
212 ● Technology and East-West Trade

function consists of developing strategies to

acquire Western technology and integrate it

with domestic R&D capabilities. SCST participates in negotiation for the acquisition of

sophisticated technology from the West,

often providing technical expertise.

U.S.S.R. Academy of Sciences.—This

body consists of about 600 members who

bear the responsibility for supervising the

greater part of scientific research work in the

U.S.S.R. The Academy’s jurisdiction includes about ZOO scientific establishments

employing some 30,000 scientists. Through

its Administration of Foreign Affairs, the

Academy not only monitors scientific developments in the West, but plays an active role

in scientific exchanges. While the Academy’s primary concern is basic research, it is

obliged to submit proposals to SCST concerning applied R&D leading to innovation.

Military Industrial Committee of the

U.S.S.R. Council of Ministers.–The existence of this committee has never been officially confirmed, but it is probable that it

holds primary responsibility in the State

structure for the coordination of all activities

in the area of armaments production. While

the role of the Military Industrial Committee

in technology acquisition is unclear, it undoubtedly participates in decisionmaking on

technology purchases.

Ministries. –The central administration

could not possibly directly supervise each of

the 43,788 industrial enterprises that fall

under the Soviet system of central planning.

An intermediate level of administration is

therefore provided by ministries, which are

interposed between enterprises (or production associations) and the central and republic Governments.

Ministries are organized by branch and

those dealing with the economy are differentiated by product (e.g., Petroleum Ministry)

(see figure 12). A major function of the economic ministries is to formulate and implement technical policies in relevant sectors.

This function is accomplished through the

Main Technical Administration of each ministry. Each ministry also includes a Department of Foreign Affairs.

Different economic ministries are involved

in acquisition decisions to the extent that

foreign technology can be incorporated into

their sectors. At present, the extractive industries, chemicals, and machine tools are

especially active in foreign trade.

The Ministry of Foreign Trade administers all Soviet trade; no foreign trade operations can be processed outside of its structure. The Ministry encompasses dozens of

import-export foreign trade associations

organized according to product category.

These associations act as intermediaries between relevant Soviet ministries and foreign

firms and are empowered to sign contracts.

They are governed by boards which are composed of specialists of the associations and

representatives of the relevant ministries.

Administrative decisions in the Ministry

of Foreign Trade are made through the cooperation of three internal divisions:

1.

2.

3.

The trade-political administrations.

These are divided by region. A separate

trade-political administration exists for

trade with the United States, while a

second administration deals with all

other capitalist countries.

Functional administrations for planning, currency, legal matters, etc.

Administrations for single commodity

groups. A separate administration of

this type exists for machinery and

equipment imports from capitalist

countries. The relationship of these administrations to their import-export associations is shown in figure 13.

Other Agencies. –There are many other

Government agencies involved in some portion of the process of technology acquisition.

The Ministry of Finance participates in the

development of hard-currency plans and administers their implementation. The Vneshtorgbank, or Bank of Foreign Trade, is subordinated to the State Bank. It gives credit

to all Soviet organizations for foreign trade
Ch. X— Western Technology in the Soviet Union ● 213
214 ● Technology and East-West Trade

\

mc

.-o

.-%

;

am

n

>
Ch. X— Western Technology in the Soviet Union ● 215

in rubles and deals with clients in hard currency. The All-Union Chamber of Commerce

primarily arranges exhibitions and contacts

between foreign firms and Soviet organizations.

Within the Soviet R&D establishment, organizations exist which in many cases adapt

Western technology purchases and advances

in applied research to domestic production.

Research and development institutes (under

individual ministries) specialize in applied

research in a specific technological area.

Once a new product or process has been developed to a point where it is thought ready

for commercial application, it is handed over

to engineering-design organizations, which

mark out the details of materials, grades,

sizes, shapes, and other technical specifications of the final product and the precise

machinery, assembly quality control, and

other production arrangements for manufacturing it. If reverse engineering of a Western

product is possible, these organizations will

have the expertise to accomplish it. There

are over 2,000 such organizations in the

U.S.S.R. subordinated to various ministries.

In addition to the organizations listed, a

number of other segments of the State structure intercede in the process of technology

acquisition. In particular it is clear that the

Ministry of Defense is not only concerned

with Western technological achievements,

but may have a deciding voice in individual

import decisions. The precise structure of

the relationship between the Ministry of Defense and the negotiations conducted by the

Ministry of Foreign Trade is not, however,

known in detail.

The Communist Party and

Technology Acquisition

All levels of Soviet administration—including that of the Communist Party—may

provide inputs in the process of foreign technology acquisition. In the most general

sense the Government, including the planning bodies, exercises detailed control over

planning and purchase of technology, and

the Party bureaucracy avoids direct involvement in practical decisions once broad policy

goals have been met. The relationship between State and Party in technology acquisition is, however, ambiguous and varies not

only with time but with the political sensitivity of a given purchase. Under the present regime, Party organs ordinarily exercise

a veto over initiatives made by the state

bodies while eschewing contact with representatives of Western firms.

In addition to its functions of policy formulation and monitoring of administrative

operations, the Party bureaucracy exercises

ultimate control over technology acquisition

as it would over any other Government function, through its absolute control of personnel in the State structure. All officials concerned with technology acquisition are carefully screened not only by State but also by

relevant Party organs.

The influence of Party organs is not confined to the national level. Party structures

on the republic and provincial levels often

have considerable input in technology acquisition. This is particularly true in the case of

construction of facilities to house new equipment and machinery. Local Party organizations are directly responsible for monitoring

construction of all plants in their regions.

Their inability to organize such efforts has

often proved to be a major barrier to swift

implementation of Western technology purchases.
216 ● Technology and East-West Trade

TECHNOLOGY ACQUISITION AND PLANNING

There are indications that the role of

foreign technology transfer in the foreign

trade planning system as a whole is being

reevaluated. At present, import decisions

are made as part of annual planning cycles,

and foreign trade is often utilized as a means

of filling short-term planning shortfalls. The

result of this is that, as figure 14 demonstrates, the vast majority of Soviet imports

from the industrialized West have consisted

of non-technology-intensive manufactured

goods, and agricultural and other primary

products. Attempts to more fully integrate

current and prospective foreign trade plans

into national economic plans are likely to result in a greater proportion of hard-currency

expenditure devoted to more productive

high-technology imports.

The acquisition of technology from the

West is accomplished in two general stages.

First, hard currency is allocated among secFigure 14.—Composition of Soviet Imports

From the Industrialized West, 1977

tors. Secondly, individual purchases are

determined through the participation of ministries, their production associations, research institutes, and engineering-design

bureaus. In sensitive cases, detailed decisions are formally made by higher levels of

administration.

Both the distribution of hard currency and

concrete purchases are accomplished either

in the framework of the 1- and 5-year plans

or through irregular (ad hoc) decrees of

relevance to single industrial branches or

enterprises. From year to year the allocation

of hard currency—the primary quantitative

determinant of imports—is basically preserved across sectors. Changes in particular

priority targets or drastic reductions in the

hard-currency stock do, however, periodically alter these proportions. World market

prices quoted in hard currencies are utilized

for export-import operations with the West.

As is true of all aspects of Soviet planning,

hard-currency allocations are determined on

the basis of level achieved—every year the

allocation is marginally increased as compared to the preceding year (subject to highlevel changes in national economic priorities).8

Engineering-design bureaus, which project new construction or modernization

needs, determine which particular types of

Western technologies can be used. They present to their ministries specifications of

needed equipment and know-how. Ministries

then send drafts of their requests to Gosplan

and the Ministry of Foreign Trade.

If these requests are within the limits of

the hard-currency plan, they are routinely

approved and included in the trade plan. But

this is usually not the case. Ministry requests often exceed the hard-currency allocation. Such discrepancies are resolved

through bureaucratic negotiation between

primary products

3.90/0

SOURCE Off Ice of Technology Assessment

“Igor Birman, “From the Achieved Level, ” Souiet Studies,

xxx (2).
Ch. X— Western Technology/n the Soviet Union ● 217

ministries, SCST, local Party organs, etc. If

Gosplan cannot resolve the discord, it is

usually settled by a Deputy Chairman or

Chairman of the Council of Ministers and, in

the most crucial cases, by the Politburo of

the Party.

National economic plans specify only

large purchases of Western technology. In

addition, ministries are allocated limited

amounts of hard currency with which to deal

directly with the associations of the Ministry of Foreign Trade. In recent years some

large enterprises engaged in the production

of goods for export have similarly been permitted relatively small amounts of hard currency to be used at their own discretion for

the purchase of capital goods.

Flexibility in planning is achieved through

irregular decrees, issued every 3 to 7 years

by the Central Committee of the Party and

the Council of Ministers for each branch of

the economy. Such decrees often plan shifts

in the distribution of hard currency among

sectors and are very concrete in nature, exactly itemizing equipment and technology to

be imported. They are incorporated into subsequent national plans.

Decisionmaking on individual technology

purchases is based on a coordinated system

of collecting and processing Western scientific and technical information. This is supervised by SCST. Nearly all R&D bodies—in

particular the engineering-design bureaus—

and many large enterprises collect relevant

information. In addition, each ministry includes at least one Institute of Scientific and

Technical Information, one of the functions

of which is to process available Western scientific and technical data

Under this system, Western technical literature is translated, published, and made

available to relevant specialists in a relatively short time. Specialists who are sent

abroad are required to report on Western

technological achievements. Soviet intelligence services also engage in scientific and

technical espionage.

As a buyer of Western technology, the

U.S.S.R. actively encourages trade fairs and

other exhibitions in which foreign firms may

bring their most advanced and salable products to Moscow. While such exhibitions are

accepted practice in overseas marketing, it is

common Soviet practice to attempt to obtain

as much detailed technical and operational

data as possible on desired products without

actually concluding purchase agreements.

The Soviet system of information gathering on Western technological developments,

while not ideal, guarantees that the Soviet

negotiator is relatively well-informed and

cognizant of both the technical specifications and availability of a given product in

different Western markets.

CRITERIA AND PRIORITIES

FOR TECHNOLOGY

PURCHASES

Writing in 1941, Soviet economist D.

Mishustin summarized the basic aims of

Soviet technology acquisition from the

framework of import policy:

The basic task of Soviet importation is to

use foreign goods, and first of all machinery,

for the rapid accomplishment of the plans of

socialist construction and for the technical

and economic independence of the U. S. S.R.9

Then, as now, one of the fundamental

goals of Soviet import policy in general was

to improve the technological base of production with the help of foreign technology

while at the same time carefully avoiding

dependence on those imports.

In the Brezhnev era the concept of comparative advantage has been added to the

dominant theme of technical and economic

independence:

In the final analysis, the purpose of foreign trade is the procurement of imported

goods and services a) which are not produced

‘IL), hl ishustin, L’nc.qhna>!a Torgo[l>ta SS&’R (N 1OSCO W,

194 1), p. 6.

54-202 0 - 79 - 15
218 . Technology and East-West Trade

within the country at all, b) are produced, as

a result of whatever temporary reasons, in

insufficient quantity and c) whose production within the country is more expensive

than their purchase on the foreign market. 10

After hard currency is distributed sectorally in the planning process, a number of

criteria based on these general policies of

technical independence and economic advantage are utilized to make individual purchase

decisions. These criteria are not entirely

economic. Since the middle of the 1960’s,

Soviet economists have attempted to determine the economic benefits of import choices

through the use of foreign trade efficiency indices. These are formulae that provide a

measure of the cost to the national economy

of producing a good for export relative to the

foreign exchange received abroad, or of the

foreign exchange expended abroad in purchasing a good or technology relative to

what it would have cost to produce the good

domestically. ” Thus far, such attempts have

been singularly unsuccessful, and there is at

present no reliable method of measuring foreign trade efficiency at the disposal of decisionmakers. At the heart of the problem lies

the insulation of the Soviet price system

from world markets and the failure of internal prices to reflect relative scarcity. In lieu

of reliable economic evaluation of technology

purchases, Soviet buyers simply attempt to

minimize hard-currency cost within the context of a shifting set of preferences and priorities.

The first of these is military. All other factors being equal, those types of technology

that directly or indirectly enhance military

capabilities are given first priority. While

many Soviet purchases do not, in fact, embody any military potential whatsoever, it is

true that some transfers of an ostensibly

‘“G. Smirrmv, “K Voprosu Ob Otsenki Economicheskoi Effektivnosti Vneshnei Torgovlyi SSSR, ” in Voprosy Ekonorniki, No. 12 (1965), p. 94.

‘lSee I.awrence J. Brainard, “Soviet Foreign Trade Planning’” in Souiet Ecvnom>f in a Neu’ Perspective, Join t

Economic Committee, 1976.

purely civilian nature have been given higher

allocation priority due to their potential contribution or convertibility to military use.

A second factor involves a general preference for disembodied as opposed to embodied technology, i.e., know-how as opposed to products. The transfer of disembodied technology may require a relatively

high domestic contribution of R&D, but buying large amounts of hardware generally

raises hard-currency costs. Since an individual ministry is allocated a fixed sum of hard

currency, whenever possible it will attempt

to minimize the cost of Western inputs while

maximizing relative domestic inputs in the

development of a given innovation.

Third, purchases of technological complexes are preferred to purchases of single

items or processes, so long as the hard-currency cost is not prohibitive. Such systematic transfers ensure the swiftest and most

productive utilization of foreign technology

purchases.

Another element in setting technology

purchase priorities is that preference be afforded those products and processes that

can be easily duplicated for production in the

U.S.S.R. This tendency stems from the desire to minimize increasing dependence on

Western technology.

Finally, an increasingly important criteria

for technology purchases involves their use

in export industries. Since the generation of

hard currency (and further imports) is directly dependent on export potential to the

West, increasing priority has been given to

projects producing goods for Western markets. It is impossible to definitely rank these

criteria in order of their importance in the

decisionmaking process. The factors influencing the choice of an individual technology

purchase are often ambiguous and priorities

vary according to situation. It is clear, however, that a lack of definitive economic formulae for import decisions allows for the influence of noneconomic–e.g., military –factors in the decisionmaking process.
Ch. X— Western Technology in the Soviet Union ● 219

THE ROLE OF WESTERN TECHNOLOGY IN THE

SOVIET ECONOMY

ABSORPTION AND DIFFUSION

OF WESTERN TECHNOLOGY

A recent study of Soviet technological

levels done under the auspices of the University of Birmingham (England),12 found that

in most of the industries it examined—armaments, nuclear, electric power, metallurgy,

machine tools, computers, and chemicals—

the technology gap between the U.S.S.R.

and the West has not diminished substantially over the past 15 to 20 years, either at

the prototype/commercial application stages

or in diffusion of advanced technology. The

Birmingham study further concluded that

Soviet growth has been largely based on output using traditional technology. For example, the study points out that even though

the higher technology sector of petrochemicals has grown relative to the chemical industry overall and dominates the total industry output, petrochemical products are

manufactured with older, proven technologies.

This pattern of growth, a result of slow absorption and diffusion of new technology,

can be seen in the areas in which Soviet industry has performed best. The U.S.S.R.'s

most productive technological developments

came in industries that were based on wellestablished technology, with advances coming primarily from successful scaling-up of

existing technology. Advances in the metallurgy, power generation, and power transmission industries, for example, are the

result more of engineering than of innovation in processes.

The pattern of better performance of those

industries that are not based on rapidly

changing technology is part of the reason

behind the apparent shift in the technology

import policies of the U.S.S.R. over the past

decade. As the Soviet economy expanded

during the early postrevolutionary years,

and again following World War II, the industries most needed to support growth

were traditional ones such as metallurgy,

machine-building, machine tools, and the

energy sector. The growth was produced by

relying on slowly changing technologies,

limited but sometimes essential imports of

foreign technology, and massive increases in

the supply of labor and capital.

This chapter has already shown that to

bring about the rapid industrialization of the

economy envisioned by the first 5-year plan

which began in 1928, the U.S.S.R. turned to

large imports of machinery and equipment.

Prior to this period, such imports had averaged only about 0.3 billion rubles per year;

during the next 5 years, they rose to an average of 1.4 billion rubles per year. Following

the end of the first plan, imports of machinery and equipment dropped back to an average of 0.3 billion rubles per year. 13 Relations

with Western firms supplying technology

were designed to be short-lived, with the aim

of minimizing Soviet dependence. This aim

also guided the country’s overall import and

export policy.

The fear of relying on a potential adversary was one reason for the Soviets’ strong

desire to minimize dependence on the West

for technology and products. In time, such

technology transfers were also limited by

constraints imposed by Western export controls.

The Soviets began to copy prototypes of

equipment that they had been able to obtain

from the West. The ultimate failure of this

practice, coupled with an inability to rely on

domestic innovation, has led to several

changes in import policies during the past

decade: an apparent shift toward greater reliance on Western technology; a willingness

‘JR. Amman, J. I’vl. Cooper, and R. W’. Davies, cd., The

Technological I.e(ei of .Yo(’iet Industr?’ (New Haven, Corm.:

Yale Uni\’ersity Press, 1 977).

‘‘George Ho]liday, “The Role of M’estern Technology in the

Soviet Economy,’” in l.~sue.s in li’ast- 1! ‘es t {’commercial Relations, Joint I+~conoic Committee, January 1979, p. 47.
220 . Technology and East-West Trade

to permit—in fact encourage–long-term

agreements involving large volumes of foreign exchange with Western firms supplying

technology; and in some cases, limited

changes in Soviet management practices.

Although the Soviet Union is not willing

to open its economy to full interdependence

with the West, more extensive use of Western technology is no longer feared. At the

same time, the West has also liberalized its

constraints on export control. In the United

States, for instance, the Export Administration Act of 1969 as amended has reduced the

list and raised the permissible performance

characteristics of controlled items (see chapter VII).

Soviet technology transfer policy is also

strongly affected by the country’s growth

policy, which has been revised. The Soviet

Union no Ionger enjoys vast pools of underutilized labor that could be mobilized for

economic growth by transfers from the agricultural sector to industry or by increased

labor participation rates of women. According to the Central Intelligence Agency’s

(CIA) projections, the Soviet Union will experience a sharp decline in the rate of expansion of its labor force in the 1980’s to less

than 1 percent per annum by 1982.14 Other

factors, such as the distribution of population, will further strain the amount of

growth that can be obtained through larger

labor inputs.

This labor constraint also comes at a time

of decreasing productivity of capital inputs.

Furthermore, an increasing share of Soviet

capital investment is now going by necessity

to agriculture, the consumer goods industries, and other sectors that do not directly

increase the productive capacity of the economy. As a result, increases in labor productivity are expected to account for up to 90

percent of all growth in industrial output,

and virtually all growth in the agricultural

sector.

“Central Intelligence Agency, So[’iet Economic Problems

and Prospects: 1977, p. ii.

Technological improvement is to be the

basis of planned increases in Soviet labor

productivity. Industries based on traditional

technology are becoming less important

relative to those based on sophisticated,

rapidly changing technology. These include

the organic chemical, electronics, and computer industries. More traditional sectors,

such as oil and gas and machine tools, are

being modernized with technology from the

electronics industry: computer numerical

control for precision machine tools, computer analysis of seismic data, and automatic control of hydrocarbon production.

The growing importance of new technology, and the increasing importance of industries that are experiencing rapid advances in technology, coincides with a continuing weakness in the Soviet economic system’s capacity to absorb and diffuse technology. The U.S.S.R. problems in this area

increase the need for importing technology

from the West, since the transformation of

domestic innovation into new technology is

often slow. On the other hand, the same

problem reduces the effectiveness of imported technology. The problem lies not so

much in the quality of Soviet basic research,

nor in the level of theoretical knowledge, but

rather in the system’s inability to turn theoretical knowledge into prototypes, and even

more importantly, to move rapidly from prototypes to large-scale industrial production.

The reasons for this lie in such factors as insufficient incentive, poor organization, and

the rigidities that result from central planning.15

In the West, innovation and new technology development are encouraged by a desire

to beat the competition and thereby maximize profits and cut costs. Rewards for firms

that innovate successfully, and competitive

pressures felt by those firms that do not innovate or at least duplicate new technology a

1 sDavid Granick, so~,jet Introduction

A Depiction of the Process, Stanford

January 1975.

of Neu’ Technology:

Research Institute,
Ch. X— Western Technology in the Soviet Union ● 221

short time after a competitor does so, provide sufficient incentive to ensure Western

capabilities for development, absorption,

and diffusion of new technology.

Large research institutes are responsible

for R&D in the U. S. S. R., but such institutes

lack incentives to consider adequately the

practical application of their work. Planners

determine the direction that scientific inquiry will follow in research institutions.

They are encouraged to develop ideas that

qualify as innovations, but not to apply the

ideas to the production process. Separate institutions, called Engineering Design Organizations, have responsibility for applying

new technologies, but their successes do not

reflect as favorably on the research institutes as does the propagation of additional

new ideas, whether practicable or not. Research and development receive the greatest

emphasis, followed by application engineering and—with the least concentration of

funds and effort–product development. In

the West, the emphasis is reversed.

A number of other factors at the enterprise level also inhibit the introduction of

new technology. The use of new processes

and the development of new products involve risks; since not all attempts are successful in the West, the risks must be minimized and the rewards for success maximized in order to promote such efforts. The

Soviet system works in reverse, maximizing

risk and minimizing reward. Success for a

production enterprise in the U.S.S.R. is

measured primarily in ability to exceed the

output quota set for the year, although recent reforms permit limited consideration of

other factors in determining bonuses for

workers and plant managers. The risk of trying a new technology or product is great,

since an unsuccessful effort is bound to

result in failure to meet the plant’s output

goal for the year. Even if the innovation is

moderately successful, the increased output

once the new equipment is operating may

not be sufficient to offset the loss of output

during conversion. The benefits of very successful efforts are short-lived, because while

a jump in output due to the introduction of

new technology will surely result in bonuses

for managers during the first year, they will

just as surely result in a jump in the plant’s

output quota the following year.

In the West, managers often try several

new technologies before finding one that provides sufficient long-run benefits to justify

the cost of all the experimental efforts.

Similarly, managers find that new processes

often require several years to work the

“bugs” out of the system. The ability to

judge a new technology on its return over a

long period of time, and the willingness to accept the fact that most innovations will

probably not prove to be successful, are major advantages of the Western competitive

system over the Soviet model.

Cost reduction is a major incentive for innovation in the West. In the U. S. S. R., on the

other hand, even otherwise successful innovations often produce unacceptably high

overall costs due to the rigidities of central

planning. A Soviet plant seeking to employ a

new process often must rely on other plants

to supply related new equipment, and may

find the necessary equipment unavailable. In

the latter case, the plant may be forced to

develop the equipment on its own at relatively high cost. Similarly, a Soviet plant beginning to produce a new product does not have

the right to determine the price at which the

new product will be sold. This means that

the centrally determined price may not cover

the plant product development and production costs.

The rigidities of central planning lead to

another problem which tends to inhibit the

diffusion of technology. In the U.S.S.R. extensive use is made of vertical integration of

production facilities. This minimizes the

enterprise’s dependence on outside suppliers. While this structure does encourage a

firm to develop equipment and technology to

meet its own needs, it also leads to a lack of

standardization and to the inefficient production of equipment in small quantities.

Furthermore, this horizontal independence

means that new technology is less likely to
222 . Technology and East-West Trade

be transferred to other plants that might

benefit from it. ”

In theory, the Soviet Union should have a

distinct advantage over the West in the diffusion of technology, since new technologies

developed in the U.S.S.R. are State property

rather than trade secrets, and should be freely available to any enterprise able to use

them. In practice, however, communication

among Soviet production enterprises is poor,

and there may be long delays in the publication and dissemination of information about

new developments. The slowness of journals

to publish research papers and report other

developments may result in a great deal of

duplicated effort. It has been reported that

the average time between submission of a

paper and its publication in the important

Soviet journal “Electrochemistry” was as

much as 21⁄2 years, and individual articles

have been delayed as long as 4 years.17 Cooperation and communication among plants

within the same industry, and between organizations in different industries, are seriously inadequate.

The factors mentioned above all inhibit

the introduction and diffusion of new technology throughout the Soviet economy; as a

result, the share of total output in the

U.S.S.R. due to the introduction of new

methods or new products is lower than the

comparable share for other industrialized

countries. When performance is measured

solely in terms of increased output, there is

little incentive to change the form of the output. This leads to production of unchanged

equipment over a long period of time, often

even after better equipment has been developed.

Other forces also encourage U.S.S.R. enterprises to continue using outdated production equipment. Because of shortages of

“John Hardt and George Holliday, “Technology Transfer

and Change in the Soviet Economic System, ” Issues in EastWest Commercial Relations, Joint Economic Committee,

January 1979, p. 74.

“M. Perakh, “Utilization of Western Technological Advances in Soviet Industry, ” in East-West Technological

Cooperation (Geneva: NATO Colloquium, 1976), p. 179.

equipment and the lack of direct connection

between the cost of production and the cost

of the final product, depreciation rates for

Soviet equipment are set very low by Western standards. In the West, out-dated machinery is taken quickly out of production

and replaced by newer equipment that will

lower production costs. High depreciation

rates for equipment encourage these shifts,

as does a strong market for secondhand

equipment. No such secondhand market exists in the U. S. S. R., so the equipment continues to be used at the plant. As a result,

the replacement rate for Soviet equipment in

most industries is much lower than in corresponding industries in the West.

Many of these same problems reduce the

effective introduction of new technology imported into the U.S.S.R. from abroad. This

seems to be particularly true for those

technology transfers that require application

of Soviet design and manufacturing engineering to the imported technologies and can

best be seen in U.S.S.R. attempts to duplicate Western technology based on trade publications, product literature, plant tours, personal conversations, etc., or the import of a

small number of product units to serve as

models or prototypes for Soviet production.

As previously noted, the U.S.S.R. also maintains an extensive collection of Western

journals, some of which are systematically

translated into Russian.

While the use of Western equipment as

prototypes for production of new technology

reduces the need for Soviet R&D, it still requires significant application of domestic effort, particularly in terms of developing production methods. For rare pieces of equipment or products that can be dismantled so

as to uncover production techniques by examination, “reverse engineering” is relatively simple. With more sophisticated products,

such as integrated circuits or petrochemicals, however, reverse engineering is much

more difficult and impractical.

One of the highest cost components in innovation in the West, and one of the great

advantages of the competitive market sys-
Ch. X— Western Technology in the Soviet Union 223

tern over central planning, is the determination of which products and processes will

eventually prove to be economically and

technically viable. In the West, the market

system makes this selection based on efficiency and profitability, thus screening out

innovations that are not worth further development. The work done on products and

processes that never reach the final stage of

commercial introduction and acceptance is

as much a cost of technological advancement

as the work done on successful innovations.

Marx considered this process to be a major

flaw in the capitalist economy–a wasteful

misallocation of resources. The innovation

engendered by this method of selection, however, tends in the long run to more than compensate for its real costs. Thus, by concentrating their efforts only on those new products or processes that have already been

screened by the Western market mechanism,

the U.S.S.R. is able to avoid the cost of

following infeasible or uneconomical ideas.

According to East European officials, an

average of 5 to 7 years elapses between the

beginning of efforts to copy a Western product and successfully readying it for production in worthwhile quantities.18 This timelag means that the copied equipment is often

outdated, at least in Western terms, by the

time it is used. This period may, however, be

shorter than the time it would have taken for

the U.S.S.R. to develop the product completely on its own.

But the U.S.S.R. is increasingly interested

in obtaining from the West technology of the

type that is difficult to copy without assistance. The Soviet desire and willingness to

seek more active forms of technology transfer is enhanced by the rate at which Western

technology is advancing in such leading industrial fields as petrochemicals, electronics,

and precision instruments. In the past, if the

technology embodied in a piece of equipment

could be duplicated within a few years, the

U.S.S.R. could remain only slightly behind

the level of technology being used in the

West. Now, where technology is advancing

rapidly, keeping up with the West is more

difficult, and there is pressure to increase the

speed with which technology is imported

from abroad, assimilated, and diffused.

These circumstances also encourage greater

emphasis on more efficient selection of technology imports.

Studies by Western specialists have noted

several factors that make Soviet technology

acquisition less efficient than it could be.

One frequently voiced criticism is the length

of time it takes for the Soviet Union, once a

decision has been made to import certain

equipment or technology, to decide which

nation and firm will supply it, and then to accept delivery and get the equipment set up

and into working order. One study has compared the time required for the U.S.S.R. to

accomplish this with the average time required in the West in the chemical and

machine-tool sectors. It found first, that the

U.S.S.R. required about twice as long to sign

a contract for a particular need as would

have been the case in the West. This was due

to several factors. Initial inquiries from the

Soviet Union were frequently vague, and the

form of the final order was often different

from the original specifications. The study

concluded that vagueness at the initial stage

probably results from a genuine lack of Soviet knowledge or decision on what will be the

best choice, rather than from any deliberate

attempt to make the process more difficult.

Second, the Soviets require much more extensive documentation than other countries.

While some of this may be attributed to a

lack of trust on the part of Soviet trade officials, there is no doubt that the additional

documents ultimately make it easier for the

U.S.S.R. to assimilate and possibly duplicate the technology being provided.

Third, there is no direct contact between

the supplier of technology and the final user.

This is an important source of delay in the

acquisition process. The supplier must work

with the Foreign Trade Organization which
224 ● Technology and East-West Trade

handles that type of equipment, and communication between the supplier and user takes

much longer and is subject to greater possibilities of misunderstanding than would be

the case in the West. Inexperience in the installation, operation, and maintenance of

complex equipment, along with poor management and planning, frequent shortages of

adequately trained personnel to learn to

operate and repair equipment, and problems

with the quality of raw materials or other inputs to be processed with the new equipment, are additional factors that lengthen

the time between equipment delivery and

proper startup. ”

Delays, the desire to reach certain production levels within a set period of time, and

the inability of Soviet industry to supply

sufficient equipment to meet those goals, are

also important factors in the Soviet decision

to import machine tools and chemical equipment. Once a decision to import is made, the

user typically seeks the best equipment

available. This leads to the purchase of

equipment with performance characteristics

that exceed anything the U.S.S.R. is itself

capable of producing.

The Soviet Union seems to be increasingly

aware of the need to use foreign trade and

technology acquisition to improve its economic performance. Foreign trade is no

longer viewed as a necessary evil; in fact,

there is a growing awareness that the demands of Western markets can have a positive effect on the quality of goods produced

for export, and thus on the level of quality in

the entire economy. Some of the hard currency earned by an enterprise’s exports is being

returned to the enterprise, providing an incentive to improve the technology used by

the plant, as well as the means by which the

enterprise can afford to import additional

Western technology .’” Importing Western

technology has become more attractive during the 1970’s, as Western suppliers have

competed for the Soviet market, as longterm credits have been made increasingly

l“l)hilip IIanson and T’Y1. R. }Iill, unpublished manuscript.

“’l{olliday. op. cit., p. 55.

available, and as Western firms have become

increasingly willing to accept product buyback provisions as a means of financing

technology imports.

The increased attractiveness of technology transfer, coupled with the U.S.S.R.’s

growing need, has resulted in more purchases of machinery and equipment from the

West, together with the use of cooperation

agreements and other arrangements with

Western firms and countries to promote

technology transfer. The CIA and other

sources have estimated that as much as 10

to 12 percent of total Soviet investment in

machinery and equipment has come from

abroad during the 1970’s. While purchases

of equipment from the West have increased

rapidly, purchases of licenses have been

growing quickly as well; according to Soviet

officials, license purchases are expected to

increase even faster than equipment purchases. 21

The U.S.S.R. has signed Government-toGovernment cooperation agreements with

most countries of the West since its initial

agreement with the United States in 1972.

Some 150 authorized projects are either

underway or planned on the basis of these

technology agreements with the United

States. A number of American, West European, and Japanese firms have also signed

private cooperation agreements with the

State Committee for Science and Technology. These cooperation agreements have

been concentrated in high-technology areas

such as electronics, computers, instruments,

and various types of engineering.

But while the U.S.S.R. has expanded the

number and variety of technology transfer

mechanisms available to it, the most effective form of technology transfer, the joint

venture, has not been permitted. Joint ventures with Western interests have been used

in Yugoslavia since 1967, in Romania since

1971, and in Hungary since 1972.

~)Z. Zeman, “East-West ‘1’echnology Transfers and Their

Impact in Eastern Europe, ” in East- 14’e.st 7’ethnological

(’oop<~ration, op. cit., p. 171.
Ch. X— Western Technology in the Soviet Union ● 225

It is very difficult to estimate the actual

impact of Western equipment and technology on the performance of the Soviet economy. The available information does not

even permit an accurate determination of the

share of Soviet capital equipment that comes

from the West, although most specialists

who have studied this problem estimate the

share to be between 4 and 6 percent. This low

level is the combined result of the shortage

of hard currency in the U. S. S. R., the Soviet

policy of wanting to avoid excessive dependence on the West, and Western export controls.

In sum, however, a general picture of

Soviet import policies and their effectiveness

may be drawn. The U.S.S.R. has had a long

history of systematically utilizing Western

technology to compensate for domestic economic shortcomings. The present system

through which decisions regarding imported

technology are made is incompletely understood in the West, and is characterized by its

complexity and slowness. The prioritization

of technology for import seems to be dominated by the availability of hard currency

and the potential economic and military impacts of the technology, but no consistent

and universally applicable set of criteria has

emerged. The Soviets are well-informed,

however, about Western technologies under

consideration and their selections usually reflect careful evaluation of the properties of

the technology relative to their specific

needs.

The absorption and diffusion of Western

technology in the U.S.S.R. have been retarded by structural features of the Soviet

economy and the rigidities inherent in central planning. The Soviets appear to be

aware of these defects and may attempt to

correct them with further purchases of

Western management and other know-how.

Meanwhile, the economic impact of imported

technology is not as great as it might have

been on a Western nation purchasing on a

similar scale.

THE ECONOMIC IMPACTS OF

WESTERN TECHNOLOGY

Several factors affect the degree of economic benefit to be derived from the purchase of any technology. Obviously the initial selection is important. In situations

where the availability of hard currency poses

restraints on the amount of technology that

can be acquired, a Communist country can ill

afford to make a poor choice—either in terms

of the industry or sector singled out as liable

to benefit from Western technology, or in the

selection of a particular machine or process

from all those available in the West. The criteria that ideally govern this choice include

fundamental investment decisions (the

choice of capital versus labor-intensive technologies); the sophistication of available domestic technology relative to the imported

technology; the indigenous capabilities of

the country’s R&D sector; and the available

infrastructure.

A Western technology may prove economically beneficial in several ways. First,

assuming the existence of the necessary

infrastructure, including trained manpower,

the productive capacity of an industry may

be enhanced. Even if no diffusion of the

technology occurs, this may be a net gain to

the economy. Of course, in the absence of infrastructure, the new technology may produce a net loss in macroeconomic terms. This

is the case with “resource-demanding’ technologies, i.e., those that require substantial

capital or labor inputs before they become

operative.

Second, the economic benefits of the technology may be enhanced if it can be used to

increase productivity in other industrial sectors, or if the technology embodied in imported equipment can be replicated in equipment produced by the domestic economy.

Such diffusion requires certain capabilities
226 ● Technology and East-West Trade

in the domestic R&12 sector, yet this alone is

not sufficient to close a technology lag or

gap. The true test of the effectiveness of

technology transfer is not only whether imported technology can be diffused at a technological level comparable to that of the

West, but if it can also be the basis of domestic R&D efforts to upgrade it. It is only when

imported technology can be fully absorbed in

the economy—and improved on—that technology gaps can be reduced.

It is generally true that innovations in the

Soviet economy have followed their introduction in the West. This impression is supported by a number of studies, some of them

concentrating on a single industry, others

taking a broader perspective and attempting

to measure the effects of technology transfer

on Soviet productivity, income, and technological level.

The impact of Western capital equipment

on Soviet economic performance appears to

be much larger than the small Western share

of total capital stock would suggest. The

decision to import technology and equipment is based on the judgment that it will

produce better results than if that money

were spent on domestic equipment. Thus,

theoretically at least, the worth of a given

unit of imported equipment has a greater effect on economic performance than the same

unit’s worth of the domestic equipment for

which it is being substituted.

Whether all import decisions are made

with net productivity as the deciding factor

is, however, open to question. Import decisions are based partly on noneconomic criteria, and the Foreign Trade Organization

negotiating a purchase often does not know

the grounds for the decision or the net effect

of the purchase on the industrial sector. This

is not only due to a lack of communication

between organizations responsible for putting any new process into production, but

also to the administered price system which

does not reflect relative scarcities. Within

the Council for Mutual Economic Assistance

(CMEA), a growing body of literature on the

use of foreign trade indexes, which would address this problem, has appeared. But such

indexes are not used extensively and provide

only one of many kinds of information on

which import decisions are based. It must be

noted, however, that in spite of the Soviets’

inability to determine precisely the profitability of proposed technology imports, they

have rarely had to make decisions on projects of marginal value. Owing to the relatively small volume of trade, the Soviets

have had their choice of transactions in

which productivity gains were clearly high.

An econometric study conducted jointly

at the Stanford Research Institute and

Wharton School constructed an input-output model of the Soviet economy (SovMod),

which attempted to determine the effect of

the growth in equipment and technology imports from the West between 1968 and 1972

on Soviet overall economic performance.22

The study concluded that if Western exports

during this period had stayed at 1968 levels,

the Soviet Union would have had an installed stock of Western equipment that was

20 percent below the actual 1973 level, and

that Soviet growth during this period would

have dropped from 32.1 to 29.6 percent. This

conclusion implies that Western equipment

accounted for approximately 2.5 percent of

the U.S.S.R.’s rate of growth during this

period, or several times the share of this

equipment in Soviet capital investment.

Studies like this are controversial, however. The assumptions on which the model is

based have been questioned and other researchers have reached significantly different conclusions using the same data. It

has been contended, for instance, that the

existence of significant differences between

the productivity of Western and Soviet capital equipment is not supported by statistical

analysis. 23 This finding implies that the contribution of Western equipment to the per-

“See Herbert Levine and Donald W. Green, “Implications

of Technology Transfer for the U. S. S.R., ” in li’a.st-u’est 7’ech -

nologicul Cooperation, op. cit.

“Philip Hanson and M. R. IIill, unpublished manuscript.
Ch. X— Western Technology in the Soviet Union ● 227

formance of the Soviet economy is not significantly different from the contribution of

Soviet equipment. More than anything else,

the conflicting results obtained from these

macroeconomic approaches point to the wisdom of reverting to the study of the actual

effect of Western equipment and technology

on the capacity of individual sectors of the

Soviet economy. A disaggregate approach

in which each industry is examined individually to determine what equipment and technology has been transferred, how well and

how quickly it has been absorbed and diffused, and what changes there have been in

comparative levels of technology, may be

more productive and accurate. It must be

noted that such information is very difficult

to obtain even in the West, where access to

information is relatively free. The details assembled here must necessarily be taken as

partial and impressionistic. This report will

concentrate on two in-depth examinations of

the industries in which Western technology

is most important—the oil and gas equipment industry, and the computer industry.

This will be preceded by brief discussions of

the other Soviet industries that have received significant attention from researchers

concerned with Western technology transfer; they are chemicals, machine tools, and

motor vehicles.

Chemicals

The Soviet chemical industry has been

long and heavily dependent on the West as a

source of both technology and productive

capacity. The subsectors of the chemical industry in which technology has remained

fairly traditional–basic inorganic chemicals

and the production of phosphates and potash fertilizers—have performed relatively

well. But performance in petrochemicals and

nitrogenous fertilizers has lagged considerably. In the latter two areas, modern technology in the West has changed rapidly in

ways that have allowed a significant expansion of plant size at reduced production

costs. The Soviet chemical industry has been

unable both to duplicate the technology and

to keep up with the constant development of

new processes and products in the petrochemical field. The demand for Western

technology in these areas is significant, not

only for this reason, but also because these

are areas in which the U.S.S.R. has sought to

rapidly expand output. These two factors

have combined to demand large expenditures of foreign currency for turnkey plants

that will provide modern technology and

rapidly expand the industry’s productive

capacity.

In the late 1950’s and early 1960’s, when

the U.S.S.R. initiated its drive to import

technology in chemicals, the Soviet chemical

industry seemed likely to remain about 10

years behind the West in a number of areas.

It was then taking 6 to 7 years to import and

absorb technology that was already about 3

or 4 years old in the West. In recent years,

however, the chemical industries of the West

have experienced excess capacity and the

rate at which new plants and equipment

employing the latest technology have been

coming onstream has slowed considerably.

The chemical engineering companies that

provide new technology and equipment have

not slowed their innovations, and have been

selling their latest technology to any

customers in the market for new capacity.

As a result, some of the new plants being

built in the U.S.S.R. incorporate technology

that is as advanced as that coming onstream

in the West.

But despite significant contributions from

Western plants, the Soviet chemical industry continues to lag considerably in the introduction of new products and technologies, and the output profile of the industry

remains biased toward the production of

chemicals based on older and simpler technologies.

In the case of plastics, for example, there

has not been a single documented instance in

which the U.S.S.R. first produced a major

plastic material; in fact, the U.S.S.R. is

usually the last industrialized economy to

begin commercial production of each major
228 ● Technology and East-West Trade

group.24 In synthetic fibers, total production

in the U.S.S.R. between 1955 and 1973 expanded at a more rapid rate than in Western

countries, but it took 11 years for synthetics

to increase from 10 to 33 percent of all

chemical fibers produced, while in the United

States, Japan, Britain, and West Germany,

this diffusion of new technology took only 5

to 8 years.25 Even when synthetic fibers

reached a significant share of total chemical

fibers, output was dominated by those synthetics based on older technology.

These impressions were confirmed in the

CIA’s recent report on the sale of turnkey

plants to the Soviet chemical industry and

the share of Soviet chemical output accounted for by Western plants.26 This study,

based on a survey of more than 100 turnkey

chemical plants purchased from the West

between 1971 and 1977, concluded that the

Soviet Union depends heavily on Western

chemical technology. The U.S.S.R. placed

orders for slightly more than $3.5 billion

worth of turnkey chemical plants between

1971 and 1975, and ordered an additional $3

billion or more during the following 2 years.

The study concluded that these imports did

not lead to a noticeable advance in the level

of overall plant technology in the U.S.S.R.

Although since plants ordered as early as

1971 have only been in place for a few years,

the effect of technological diffusion from

them may only begin to show up over the

next several years. The study also concluded

that gains in overall efficiency and product

quality have come more slowly and at greater cost than Soviet planners had anticipated.

The value of Western plants ordered between 1971 and 1975 equaled an estimated

20 to 25 percent of total Soviet investment in

chemical industry equipment during that

period, an amount that may have been higher than planners had in mind. When domestic and East European equipment suppliers

were unable to meet commitments, the

24 Amman, Cooper, and Davies, op. cit., p. 275.

‘

5

1 bid., p. 53.

“Central Intelligence Agency, “Soviet Chemical Equ@-

ment Purchases From the West: Impact on Production and

Foreign Trade, ” October 1978.

U.S.S.R. was forced to increase orders from

the West in order to meet planned output

goals. The East European chemical industry

has concentrated in the more traditional

technology areas of basic chemicals and fertilizers. Soviet output based on plants from

Eastern Europe is significant for several

types of chemicals, with 20 percent of sulfuric acid output, 25 percent of ammonia output, and 40 percent of urea production in

1975.

In comparison, the CIA estimated that

plants supplied by the West accounted in

1975 for 40 percent of the Soviet output of

complex fertilizers, 60 percent of polyethylene production, and 75 to 85 percent of polyester fiber output. In addition, they were

responsible for 72 percent of new ammonia

production capacity to come onstream from

1971. to 1975, and 85 percent of the scheduled new ammonia capacity for 1976-80.

Some plants supplied by Eastern Europe

also incorporated some Western technology

which was thereby transferred to the

U.S.S.R. indirectly.

The largest share of chemical plants supplied to the U.S.S.R. from the West came

from Italy (26.4 percent), followed by France

(22 percent), West Germany (17.5 percent),

the United States (14.3 percent), and Japan

(14 percent). The prominence of Western

European nations is largely explained by

their willingness to accept product buy-back

provisions in payment,

All Soviet orders for U.S. plants came

while the U.S.S.R. had Export-Import Bank

(Eximbank) credits available, but technology

has also been supplied by American multinational firms with subsidiaries in countries

that provide the U.S.S.R. with competitive

financing. This means that although American chemical firms supply the technology,

the United States does not receive the economic benefits of major equipment orders

and is unlikely to do so until Eximbank

financing is once again available to the

U.S.S.R.

The CIA conjectures that the U.S.S.R.

has had only limited success in attempts to
Ch. X— Western Technology in the Soviet Union ● 229

copy Western chemical technology, although

it is still possible that the new ethylene

plants being built by the U.S.S.R. might incorporate some features of larger ethylene

plants that have been supplied by the West.

The increasing complexity of modern equipment not only makes it more difficult for the

technology in the equipment to be copied,

but also makes it increasingly difficult to

determine the origin of a given technology.

Technology transfer in the chemical sector

has also been felt indirectly in other sectors,

particularly agriculture. A recent study by

Philip Hanson of the University of Birmingham attempted to measure the economic impact of Western technology in the Soviet

mineral fertilizer industry by first estimating the increased fertilizer output that could

be attributed to Western plants, and then estimating the increased agricultural output

attributable to expanded supplies of these

fertilizers. Hanson concluded that between

1970 and 1975 the Soviet Union achieved approximately 4 billion rubles of additional

agricultural output by using fertilizer plants

imported from the West and installed between 1960 and 1975, at a cost of approximately 2 billion rubles.27

All studies of the Soviet chemical industry

conclude that the problems experienced by

the U.S.S.R. are in developing technology

and bringing it into industrial production in

areas where technology is changing rapidly,

where there must be close communication

between research and production work, and

where the number of unsuccessful experiments is high compared with the limited

number of successful innovations. In the

future, the Soviet chemical industry may

need to choose between continued reliance

on Western technology and turnkey plant

capacity, or scaled-down targets for production growth, concentrating on increases

based primarily on current technology.

Machine Tools

The Soviet Union has the largest stock of

machine tools in the world; in the early

1970’s, its inventory of metal-cutting

machine tools was about one-third larger

than that of the United States. Soviet

metalforming equipment also outsizes the

comparable U.S. stock. When measured in

terms of performance and capability, however, even Soviet specialists have admitted

that American machine tools exceed their

Soviet counterparts .2’

Demand for machine tools still far exceeds

supply in the U.S.S.R. This is due in part to

the inefficient use of existing equipment.

Soviet machine-tool output is dominated by

relatively simple, general purpose machines,

which are more easily built than the more

complex equipment that machine-tool users

increasingly demand. More than 60 percent

of Soviet machine tools have been mass-produced with few design changes over many

years. 29 In contrast, most machine tools in

the United States are specialized models

designed for a specific purpose and built in

small quantities according to the needs of

each customer.

The shortage of specialized machine tools,

combined with the need for many plants to

be self-sufficient, means that specialized

machine tools built in the U.S.S.R. are often

designed and produced by the users themselves. In these circumstances it is relatively

unlikely that any machine-tool innovations

will be diffused through the industry as

rapidly as they would be if a regular machine-tool supplier had produced the innovation. The user-builder has no incentive to deploy new technology elsewhere.

Studies of the machine-tool industry concur that traditional Soviet machine tools—

drills; lathes; boring, grinding, milling equipment; and transfer lines—do not differ sig-

“Philip Hanson, “The Impact of Western Technology: A

Case-Study of the Soviet Mineral Fertilizer Industry, ” presented at the Conference on Integration in Eastern Europe

and East-Yt’est Trade, Bloomington, I rid., October 1976.

‘sAmman, Cooper, and Davies, op. cit., p. 122.

“’James Grant, “Soviet Machine Tools: Lagging Technolog and Rising I reports,”” unpublished paper, p. 25.
230 . Technology and East-West Trade

nificantly from those used in the West,

although Western models often perform better in terms of operating speed, tolerances,

or durability. The greatest difference between Soviet and Western technology lies in

the area of advanced machine tools, such as

numerically controlled equipment. Due to

technological lags in the Soviet electronics

industry in the 1960’s, Soviet numerically

controlled machine tools began to fall increasingly behind the Western technology.

In 1968 the Ministry of Machine Tools and

the Ministry of the Aviation Industry–the

latter an important user of numerically controlled equipment—decided to step up production. As a result, output of these machine

tools in the U.S.S.R. jumped from 200 units

in 1968—about 7 percent of U.S. production—to about 2,500 in 1971, exceeding the

level of American output.30

This rate of growth was made possible by

assistance from the West. Since 1968, the

U.S.S.R. has signed agreements with firms

in Japan, France, and West Germany. At the

same time, Soviet cooperation with East

European enterprises in this field has also increased. East Germany has been a leader in

the development of computer numerical control having shown models at the Leipzig

Fairs as early as 1972.3’ Computer numerical

control, which first appeared in the United

States in the late-1960’s, allows a great deal

of flexibility and precision. There are no indications that the Soviets have been able to

improve on this technology, however.

Furthermore, even with these boosts, and

despite lengthy effort, the U.S.S.R. has experienced a great difficulty in trying to copy

Western gear-cutting and grinding technology. This may be an indication that the Soviet Union will continue to find it difficult to

raise the productivity, reliability, and level

of precision of conventional machine tools,

and will have problems keeping abreast of

technological development in sophisticated

models .32

301 bid., p. 20.

~lAmman, Cooper, and Davies, OP. Cit., P. 190.

“Grant, op. cit., p. 38.

The latter have been restricted by Western export controls, but during the past few

years, as export regulations on advanced

machine tools have been liberalized, the

share of advanced machine-tool imports has

risen.

Motor Vehicles

The Ford Motor Company first helped

provide technology and equipment for

Soviet automobile plants at Gorky and

Moscow in the 1920’s; since then, the

U.S.S.R. has continued to look to the West

for assistance with motor vehicle production. The initial contract signed by Ford

called for the company to transfer any new

technology developed during the 9 contract

years, yet the U.S.S.R. chose not to introduce the V-8 engine developed by Ford

during this period, electing instead to stay

with older and somewhat simpler technology. Soviet specialists reportedly recognized

limits to their technological capabilities and

the problems they might have in absorbing

new technology .33 These problems have persisted. Adequate R&D facilities have never

been established in this field and the Soviets

have difficulty keeping abreast of technological innovations.

Although the stock of trucks in Western

economies is usually several times smaller

than that of private automobiles, until a

decade ago Soviet vehicle output was dominated by trucks. Owing to lack of production

capacity, Soviet planners very early on restricted private ownership of automobiles.

In the late-1960’s, however, in response to a

plan to increase worker incentives through

major concessions to consumers, the decision was made to rapidly increase the production of cars.

In order to accomplish this, the Soviet

Union’s automobile industry received a

massive infusion of Western technology. It

“John Hardt and George Holliday, “Technology Transfer

and Change in the Soviet Economic System, ” in Issues in

East-West Commercial Relations, Joint Economic Committee, January 1979, p. 71.
Ch. X— Western Technology in the Soviet Union 231

contracted with Fiat for a huge automobile

plant at Tolgliatti . The Italians coordinated

the selection and integration of technology

from various sources. Some $550 million in

Western equipment, primarily machine

tools, were purchased from the West for the

plant, with additional Soviet investment, including plant construction, coming to at

least another $1 billion. ”

Fiat was also asked to provide a large

number of technicians and to train others in

Italy. Ultimately 2,500 Western technicians

assisted in equipment installation, training,

and startup, and 2,500 Soviet technicians

were trained in Italy .35 This direct personal

contact was instrumental in reducing the

problems of absorbing the new technology.

One important test of the U.S.S.R.’s ability to absorb and diffuse the Fiat and other

Western technology would measure improvements in the technology employed at

the Tolgliatti plant and duplications of the

technology at other plants. Significantly, the

U.S.S.R. has twice chosen to renew the contract with Fiat, first in 1970 and again in

1975. It would appear from this that the

technology employed at the plant has not

been significantly improved upon by the

Soviets and that further Western imports

are needed. Moreover, in the Soviet motor

vehicle industry, as in most other industries,

output increases more from the expansion of

existing plants than from the construction of

new ones. The technical level of the expanded plant tends to be similar to that of

the original plant, leading to growth, but little modernization.36

A desire for new production technology,

and for a rapid expansion in capacity, led to

a second major project involving the transfer of Western technology to the Soviet

motor vehicle industry in the past decade. In

building the huge Kama River truck plant

with assistance from the West, the U.S.S.R.

had hoped to entice a Western truck manufacturer to provide the same leadership that

“i bid.. p. 6H.

“’I bid., p 7’7

“)1 bid., p. 75.

Fiat had for the Tolgliatti plant. But no

Western firm was willing to act as general

contractor. This was probably due to a number of factors, including the size of the project and awareness of the difficulties experienced by Fiat in dealing with the Soviet

system. At the time, the U.S. Secretary of

Defense opposed having an American company act as contractor for a plant capable of

producing vehicles that might eventually be

used for military purposes. The U.S.S.R.

therefore served as its own general contractor, selecting firms to supply the major components of the plant, who then chose subcontractors in turn.

Problems at Kama River appear not to

have resulted from the choice of major suppliers, but from poor coordination and integration of technologies from different

sources. This is a frequent problem and appears to be a major reason behind Soviet

willingness to spend so much of its hard currency for Western turnkey plants. The

U.S.S.R. is as much in need of expertise in integrating technologies and systems into efficient, highly automated plants as it is in

need of new technology.

These industries—chemicals, machine

tools, and motor vehicles—have been the

most dependent on technology and production capacity of Western origin. Although

Western technology has made crucial contributions in all three, it has neither eliminated

Soviet lags with the West nor apparently

much aided domestic abilities to absorb, diffuse, and improve on the technology. The

Soviet computer industry has also been technologically dependent on the West, but

Western export controls and corporate interests have limited the computer production capacity that could be imported by the

U.S.S.R. The question of technology transfer has become vital in the Soviet oil and gas

equipment industry, due to Soviet needs and

the state of energy supplies worldwide.

These two industries are reviewed in depth

below, in discussions of the comparative

level of technology in these industries, the

extent of technology transfer from the West,

the predominant forms that these transfers
232 ● Technology and East-West Trade

have taken, and the overall impact of Western technology transfer on industry performance.

Computers37

To an increasing extent, the computer industry plays a key role in the overall planning, development, and capabilities of the

Soviet economy. Because of the usefulness

and interchangeability of computer systems

in both civilian and military applications, the

question of technology transfer is relevant to

U.S. policy for both economic and security

reasons.

The United States is presently the leading

developer of computer technology, a position

it has held since the early 1950’s. For foreign

producers, American dominance in the industry has meant not only extensive contact

with American products and services, but

also problems of competition from American

firms in overseas markets. Restriction of

American inroads by competing States

would, in practical terms, have meant depriving themselves of the advantages that

access to American technology could offer.

During the early years of the development

of the U.S.-dominated international computer community, the U.S.S.R. remained at

a distance. This choice reflected both Soviet

desire to develop an indigenous capability

and a narrow perception of the potential

value of computers. In the late-1950’s, however, the Soviet view of the computer began

to change. Beyond its capabilities in the

military sector, computer technology was

now seen as crucial to low-level data processing and industrial process control.

The Soviets thus discovered that some

contact with Western computer producers

was necessary to develop a domestic computer industry suitable to the needs of their

economy. While they possessed significant

“See Seymour E. Goodman, “Soviet Computing and Technology Transfer: An Overview, ” in World Politics, vol. XXXI, No. 4, July 1979, pp. 539-570.

Photo credits: Control Data Corporation

Soviet computer equipment displayed in a recent trade fair

domestic potential for hardware R&D, they

chose to utilize the Western market mechanism to weed out those new processes and

technologies that were not viable. This policy was particularly useful in the computer

industry, with its rapid rate of technical innovation. Thus it is not surprising that the

Soviets developed a close relationship with

the Western world in this industry.

The Soviet-U.S. computer technology gap

has grown over the years. In 1951, the first

Soviet stored program electronic digital

computer became operational, less than a

year after its American counterpart. The

machine was put into serial production only

2 years later, again less than a year behind

the United States. These early successes

suggested a substantial indigenous computer capability.
Ch. X— Western Technology in the Soviet Union 233

There was little transfer of technology

during this period, despite a certain similarity between Western and Soviet hardware.

Technical literature was the major vehicle

for what little interaction took place.

Unlike the United States, the Soviet

Union did not have a well-developed business equipment industry, nor an established

organizational structure of user support.

Close interaction between the designers and

final users of equipment is typical with

market-oriented firms like IBM; such relationships are virtually nonexistent in the

U.S.S.R. This interaction is vital in the competitive and fast-changing business equipment market, and it provided a crucial advantage to U.S. firms in developing new and

usable technology.

The Soviet military could have diverted

sufficient resources into the computer industry to close the widening gap with the

United States in the early 1960’s; apparently

it chose not to do so. While the Soviets

followed the basic pattern of Western technical achievement, the pace of innovation in

the U.S.S.R. fell far behind. It produced no

major new practical contributions and it

built functional equivalents of some Western

products long after they had originally been

introduced.

The Soviets began to change their attitude toward the computer in the early

1960’s, when recordkeeping and data-processing tasks required the production of an

upward-compatible series of computers.

Such a system consists of a sequence of increasingly powerful computers that have

been designed so that programs and data

run on a smaller machine can also be run on

the larger ones. The first Soviet attempt to

produce such a series came in 1965. The U.S.

functional counterpart to this machine had

appeared in 1960. Here the U.S.S.R. initiated its policy of minimizing technological

risk by using a proven U.S. system as a

model for its own efforts.

In 1966-67, the Soviets began working on

another upward-compatible series of computers, which attempted to copy the architecture of an IBM system that had appeared

in 1965. The attempt was abandoned after

the production of several machines.

In its next attempt, however, the U.S.S.R.

organized a cooperative effort with five other

CMEA countries–Bulgaria, East Germany,

Hungary, Poland, and Czechoslovakia–all

of which had computer industries. East Germany enjoyed access to IBM technology.

The fruits of this collaboration, the Ryad

computers, began appearing in late-1972.

They are not reverse-engineered from the

IBM model; rather, they are functional duplications. The Soviet-led consortium required as long to design the Ryad computers, put them into production, and adopt

them to IBM operating software as it took

IBM to design, produce, and place the original family in operation. In spite of this, the

Ryad system represents a significant

achievement. It gives the U.S.S.R. and Eastern Europe a much improved indigenous

capability for the production of computers,

and has provided extensive experience in the

design of computers based on foreign models. Ryad computers are still not produced at

the rate at which IBM produced the original

line, nor is the performance of the Ryad

equipment strictly up to the standards of the

IBM models. Nevertheless, U.S.S.R. and

East European satisfaction with this program is indicated by the decision to move

ahead with Ryad 2, also based on IBM models. By early 1977 most of these new models

were well into the design stage, and the first

prototypes of some models began appearing

in 1978.38

The Ryad 2 program will concentrate on

increased production of higher quality peripheral equipment, an area of significant

technology lag and a source of past complaints by customers in the U.S.S.R. The

core memory capacity for most Soviet computers is relatively small compared with the

operating speed of the central processing

‘“N. C. Ila\’is and S. k:. (;oodman, “rI’he So\riet BIOC’S LJnified System of Computers,”” in (’omputing Surl~e.v.s, Jun e

1978, pp. 109-110.

54 -202 0 - 79 - 16
234 . Technology and East-West Trade

unit, thus limiting system capabilities. It is

hoped that core storage for Ryad computers

in this new series should at least be doubled,

if not quadrupled. 39

The U.S.S.R. also cannot match the West

in the quality and availability of magnetic

tapes and disks. IBM introduced the first

magnetic disk in the early 1960’s, permitting

the storage and readier availability of vast

quantities of information compared to tape.

The first Soviet computers to use disk storage may have appeared as early as 1970, but

it was not until 1973 that such equipment

regularly appeared with any models .40

Large memory capacities and input-output devices are important for a variety of

data-processing applications. A larger proportion of Soviet input continues to be of the

papertape and cardreader types, varieties

that are being progressively phased out in

the West. Soviet output devices, such as

printers, plotters, and graphic displays, also

leave much to be desired compared with

Western systems. Much of the best Easternbloc input-output equipment is produced in

Eastern Europe rather than in the U. S. S. R.;

a number of models are produced under

license from Western firms. Soviet software

capabilities have been limited by each of the

above-mentioned factors. By making use of

the IBM operating system for the Ryad computers, the U.S.S.R. was able to gain access

to software which required only minor modification for use on Ryad hardware, compared

with what would have been involved in developing such software independently. Designing its own software is a major Soviet

goal, yet it is questionable whether such

copying aids this process.

Application programs tell the computer

how to process data that is entered. Problems with hardware have held back application software development in the U. S. S. R.,

despite recent improvements. The lag between Soviet and Western software capabilities, as in other areas, has systemic origins.

“’Amman, Davies, and Cooper, op. cit., p. 386.

““Da\ ’is and Goodman, op. cit., p. 98.

The Soviets lack the Western motivation to

look for more efficient and less expensive

ways to accomplish given tasks.

Calculating the precise value of computers

shipped from the West to the U.S.S.R. is difficult, due to the nature of Western and

Soviet trade data. Neither provides breakdowns into categories for computers, and

case-by-case information about sales is

limited. One report, based on detailed trade

data for each Western country that supplies

computers to the U. S. S. R., has produced the

figures shown in table 36. Several industry

experts believe these figures to be misleadingly low, particularly as regards products

transferred by American firms via their

Western European subsidiaries. These sales

are not completely accounted for in Department of Commerce statistics. Orders placed

in 1977 and later indicate that the downward

trend observed in 1977 has been reversed,

and 1978 U.S. data show a near return to the

record 1976 levels.

The commercial interests of Western computer manufacturers and export controls

have together strictly limited the transfer of

manufacturing technology to the U.S.S.R.

Only one Soviet plant order–for purchase of

a Japanese facility for production of minicomputer memory devices—has been recorded. In addition, Romania and Poland

(and perhaps other East European nations)

have purchased Western licenses for production of several computers and peripheral

equipment.

Table 36.—Western and U.S. Computer Sales to

the U. S. S. R., 1972-77

(in millions of dollars)

Sales from Total sales from

United States the West

1972 ., . . . ... $ 4.1 $ 16.1

197 3 4.0 15.7

1974 : : : : : : 3 7 201

197 5 9.4 28.3

1976 17.2 41.6

1977 : : : 5.7 28.3

1972-77 total . $441 $1501

SOURCE IRD, Inc. The Market for Computers in the PRC and the USSR (New

Canaan Corm January 1979)
Ch. X— Western Technology in the Soviet Union ● 235

— .

Although the Soviet Union has not acquired any licenses, some of the production

technology obtained by Eastern Europe is

likely to have been made available to it. The

U.S.S.R. has thus derived its greatest

benefits from importing computer systems

to provide models of new technology to aid

the Soviet computer R&D sector and provide capabilities otherwise unavailable. Export controls prevent the U.S.S.R. from importing the most advanced Western computers, although some sales have given them

units with better reliability, software, and input-output capabilities than the best Soviet

models.

Except for 1977, the 1970’s have seen an

upward trend in Soviet purchases of computers from the West (see table 36). Most computer sales are of systems costing several

million dollars each. Users of large Western

computer systems in recent years have included reservation systems for Intourist and

Aeroflot, analysts of seismic data for geological prospecting, controllers of large industrial enterprises (particularly in the

motor vehicle sector), and systems for inventory control and management. All these applications involve handling and managing

large amounts of data. Soviet computers are

less well-suited to such work in terms of

memory and input/output capabilities, and

the software required to perform such functions is frequently unavailable in the

U.S.S.R. The purchase of these systems may

sometimes be motivated as much by the desire to gain access to software as to hardware. The most important factor in a purchase decision, however, is generally the

desire of the end-user management to obtain

an entire system that, with a minimum of

risk, will safely, effectively, and reliably address applications problems.

Scientific institutes and Government

planners also buy Western computers to

obtain good computer capability. These

smaller sales receive much less press coverage than the headline-making orders for

million-dollar computers. But as planners

and scientific users have become more aware

of the many uses to which computers can be

put and given higher priority to the purchase

of Western equipment, such sales have

grown in importance.

Turnkey plants imported from the West

also frequently include computers or sets of

computers as part of the process control

system. Almost without exception, the

U.S.S.R. has insisted that plants imported

from the West contain the latest process

control and automation equipment. While

this request may be partly motivated by the

desire to obtain the embodied technology, it

is also a reflection of the U.S.S.R. acute

shortage of skilled operators for many industrial sectors; such automation is seen as

an efficient means of reducing the labor requirements of new plants.

Because of its desire for maximum feasible self-sufficiency in such a strategic field,

the U.S.S.R. cannot be expected to become a

very large customer of Western computers.

The Soviets will continue to rely on Western

imports to meet certain needs. Such purchases may even reach a level several times

higher than that of the past, but computer

needs will compete with needs for other

equipment and materials. Imports will tend

to be restricted to those cases where the cost

of doing the work without a computer is exceptionally high.

In addition to these constraints on the

Soviet side, Western export license restrictions inhibit West-to-East computer sales.

Often, the sales that are prohibited are the

very ones which the U.S.S.R. desires most,

i.e., they are sales of systems with those

capabilities that the U.S.S.R. finds it most

difficult to produce domestically. If export

restrictions were eased, it is likely that the

purchase of these systems would be of sufficiently high priority that hard currency

would almost certainly be allocated for them.

Under these conditions, the volume of such

imports would probably rise sharply.

Computer sales to the U.S.S.R. tend to be

won by those firms that are most aggressive

in pursuing the Soviet market. Thus, the

market share for American computers is

much lower in the U.S.S.R. than in other
236 ● Technology and East-West Trade

markets around the world. The Japanese,

like the Americans, have not yet pursued the

Soviet computer market vigorously, but the

West Europeans–particularly the British

and French—have long sought involvement

in the market.

The United States does enjoy a distinct

advantage over competitors in the quality of

its computer technology. This advantage is

partially offset, however, by the strong

disadvantage of uncertainty and delay due

to export control. Only the United States

fails to provide its companies with early indications that a license can or cannot be obtained. Only the United States will block a

sale for political rather than strategic reasons. The United States takes longer than

any other nation to approve a license, and

regularly enforces stricter licensing regulations than those set by CoCom. As a result,

American firms are sought as suppliers

when they are able to provide products

markedly better than those available from

Japan or Western Europe, but not as suppliers of first choice when all else is equal. The

difficulties experienced by American computer exporters lead to much of their business being handled out of Europe, since at

least some of the problems are then avoided.

In many industries, the amount of time required for delivery is a factor in the selection

of a supplier. American computer manufacturers should compete very well with suppliers from other Western countries in this regard, since U.S. firms often have more experience in putting together custom-designed systems. This potential advantage is

frequently more than offset, however, by the

regulatory delays a U.S. supplier may face.

Even if the license is ultimately approved

within a reasonably short time, the initial

uncertainty of the outcome of the licensing

procedure can chill the negotiations between

an American computer supplier and the

U.S.S.R. and can impose higher costs on the

supplier, the Soviet Foreign Trade Organization negotiating the contract, and the Soviet

user waiting for delivery of the equipment.

Financing is a factor only in those cases

involving sales of computers for process control. The United States sells very few process control computers. The selection of turnkey plant suppliers is highly dependent on

financing and on the willingness of the supplier to accept buy-back contracts for products produced at the plant. In both regards,

the United States is at a disadvantage.

Often, even though a plant is based on U.S.

technology and incorporates an American

license, it is financed and equipped by a

Japanese or Western European firm. In such

a case, the computer for process control, like

all the other equipment for the plant, will

come from the country that is supplying the

credits for the plant. All U.S. turnkey plants

that have been supplied to the Soviet chemical industry during the past few years resulted from orders that qualified for Eximbank credits, which have since been disallowed. No further chemical turnkey plants–

and no process control computers for Soviet

chemical plants—have been purchased from

the United States since then.

It is difficult to assess the impact of

Western computer sales on the economic

performance of the U.S.S.R. The effect of

any computer is difficult to measure in quantitative economic terms, but one can identify

those areas of the Soviet economy that have

benefited the most from Western computers.

Western computers have had a strong impact on the motor vehicle manufacturing sector, as British and, more recently, American

computers have been used to control production processes at a number of plants. Western computers have also become important

for the analysis of seismic data, thus benefiting the identification of oil and gas reserves. Other sectors of the economy that

have benefited include the chemical industry, from both the process control computers

in imported turnkey plants, and the Ministry of the Chemical Industry’s purchase of

several computers to assist in the design of

new chemical plants. Gosplan has received
Ch. X— Western Technology in the Soviet Union ● 237

some Western computers, but has not used

them with optimum efficiency. The greatest

beneficiaries of Western imports have probably been scientific organizations, particularly those involved with nuclear physics.

In conclusion, virtually all major developments in Soviet computer technology

have first taken place in the West. The

U.S.S.R. has been a follower rather than an

innovator in the computer technology field.

Once a new technology has appeared in the

West, the U.S.S.R. has usually succeeded in

reproducing the technology domestically, although the timelag between Western and Soviet introduction of similar technologies has

not diminished over time (see table 37).

As long as the U.S.S.R. continues in the

role of follower, the technological lead of the

West is assured. Even if the difficulties of

moving swiftly through development stages

into actual production of hardware are

solved, the Soviets will still face difficulties

in diffusing and effectively using the hardware they produce. Such problems do not

lend themselves to ready solutions.

Oil and Gas

The U.S.S.R. is the world’s leading producer of oil, and one of the largest suppliers

of natural gas. Most of the equipment used

Table 37. —First Production of Comparable Soviet

and American Computers

—

Similar Date of

Soviet appearance in Lag

American computer model the U.S.S.R. (in years) ——-— . ——————

IBM 650 , Ural 1 1955 1

IBM 702 , Ural 4 1962 7

IBM 1620, : : Nairi I 1964 4

IBM 7094 . . . . . . . BESM-6 1966 4

IBM 360 series ES series 1972-3 6-8

Soviet lag in entering successive generations of computers

First Second Third

generation generation generation

First Soviet computer 1952 1961 1972 —

First American computer 1946 1957 1965

Lag (in years) 6 4 7

— — . ———

aComparison of dates of first American commercial Installation and first Soviet

lndusrial production

SOURCE M Cave Computer Technology in The Technological Level of

Sovief Industry, Amann Cooper and Davies eds (London 1977)

for exploration, drilling, and extraction

comes from within the U. S. S. R., with its relatively strong oil and gas equipment industry. The bulk of Soviet reserves of oil and gas

is located in relatively shallow and very large

fields, making it possible to reach high production levels without the most advanced

technology.

But the Soviet concentration on these

shallow deposits reflects the country’s

limited geological prospecting capabilities,

which make the exploration of deeper reserves difficult. Recently, the U.S.S.R. has

shown interest in acquiring more advanced

Western prospecting equipment, such as sophisticated seismic mapping equipment and

field units to assist in the recovery and

analysis of seismic data. A number of computers have been sold to the U.S.S.R. to provide this analytical capability.

The turbodrill has long facilitated significant advances in the productivity of Soviet

drilling. About 85 percent of Soviet drilling

was done by turbodrills in the early 1960’s;

since 1970, the share has stabilized near 74

percent. Turbodrill technology was attractive because it permitted the industry to use

pipe and tool joints which were readily available, while reducing breakdowns and increasing speed. Unfortunately, however, the

drill loses effectiveness when deeper drilling

is required. The high drill speed required for

efficient use of the pumps that run the drill

results in comparatively short drill-bit life,

so the deeper the well, the more time lost in

replacing bits. The power transfer to the bit

also becomes less effective when used with

jet bits. Finally, while good for drilling in

hardrock formations, the drill is far less effective in soft formations. The Soviet oil and

gas equipment industry has addressed these

problems by providing improved designs for

new turbodrills, rather than by increasing

production of rotary drills, which are most

common in the West, even though as early as

1960 some planners recommended development work on rotary drills .4*

“Robert Campbell, Trends in the So[’iet 0/1 and Gas Zndu.strv {Baltimore, Md., 1976), pp. 20-22.
238 ● Technology and East-West Trade

A 1977 CIA study of the Soviet oil industry pinpointed the inefficiency of Soviet drilling as a major reason for probable problems

in meeting future production goals.42 The

CIA estimates that the U.S.S.R. will need 50

percent more drilling rigs by 1980 to meet its

drilling targets. The U.S.S.R. hopes, however, to reach its increased drilling goals primarily through improved rig productivity.

The quality of Soviet drill bits has also

been blamed for poor drilling performance.

The U.S.S.R. recently agreed to purchase a

turnkey drill-bit plant from U.S.-based Dresser Industries to help remedy this situation.

Soviet technology for wellhead equipment

is reasonably good, although better wellhead

equipment is reportedly needed when the oil

or gas being extracted is particularly corrosive or under very high pressure. There

has also been a lag in the U.S.S.R. development of multiple completion equipment.

This equipment permits a number of producing wells to exist on the same structure.

Soviet oilfields are being depleted rapidly

but with a relatively poor rate of recovery.

The Soviet economic system, with its production quotas and demands for immediate

results, is one reason why fields in the

U.S.S.R. are exploited quickly. Soviets inject water into wells on about 80 percent of

U.S.S.R. fields to increase immediate production rates. This practice, known as secondary recovery, increases field pressure and

the flow rate of the well, and may increase

the ultimate field recovery. According to the

CIA, however, this method may also reduce

the field’s long-term production potential

and result in a serious fluid-lifting problem.

Centrifugal pumps must be installed to

pump out the water and oil; while the Soviet

Union produces such pumps, their capacity

and service life do not match that of the

equipment produced in the United States.

Alternatively, secondary recovery might

involve the injection of detergents, polymers, steam, or carbon dioxide instead of

“See Central Intelligence Agency, The So[iet Oil Industry,

April 1977; and The So[!iet Oil Industry: A Supplementary

Anal}lsis, June 1977.

water. To learn more about these methods,

the U.S.S.R. has increased its testing of such

procedures and has imported equipment and

material from the West.

Soviet experience and technology lag far

behind that of the West in all phases of offshore work. The U.S.S.R.’s offshore drilling

and production has been limited largely to

activity on fixed platforms in shallow coastal

waters of the Caspian and Baltic Seas, with

only limited experience in jack-up drilling.

The Soviet Union has avoided work further

offshore because of technological difficulties

and much higher production costs. The

U.S.S.R. buys a larger share of its offshore

equipment from the West than for any other

phase of the oil and gas industry. U. S. S. R.-

built equipment can only be used in limited

water depths and for relatively shallow

wells. The U.S.S.R. also lacks experience in

subsea completion equipment, which is at

the forefront of current Western technology,

in underwater storage and transport, and in

other advanced phases of offshore activity.

An offshore development project off Sakhalin Island, north of Japan, has produced

the most active joint cooperation to date between the U.S.S.R. and the West. Japan is

the U.S.S.R.’s principal partner in the project, although Gulf Oil plays a small part in it.

In exchange for providing the technology

and financing the exploration, the Western

partners are assured a share of any resulting

oil or gas production. The U.S.S.R. experience in this project will help it in further efforts to expand offshore drilling and production.

A similar arrangement will permit the

joint development of gas onshore in Yakutia,

in Eastern Siberia. For this project, Japanese and two American firms hold shares

amounting to 50 percent of the project, with

the U.S.S.R. retaining the other 50 percent.

The progress on this project has been slow,

largely because Eximbank financing for the

American share of the cost is unavailable,

and because sufficient gas reserves at the

site to justify the project have yet to be

proven. If successful, the project will entail
Ch. X— Western Technology in the Soviet Union ● 239

the construction of a pipeline to the

U.S.S.R.’s Pacific coast, a distance of some

3,100 kilometers. The U.S.S.R. claims one

trillion cubic meters of reserves exist at

Yakutia.

The Yakutia project will require sizable

quantities of Western technology for the

construction of the pipeline, and for drilling

and extraction under extremely cold conditions. To exploit the field on its own, the

Soviets would face much higher costs in both

time and money, and time may be the critical

factor. To meet increased production goals,

the U.S.S.R. needs both increased supplies

of equipment that is in short supply, and better technology. If the United States restricts

the sale of certain types of equipment or

technology, it is likely that the U.S.S.R. will

seek it from other Western sources (see chapter IV).

The difficulties of measuring the amount

of equipment and technology sold by the

West to the Soviet oil and gas exploration

and extraction sector is shown by the wide

discrepancies between Soviet data and

Western estimates, as shown in tables 38

and 39.

The Soviet-supplied data in table 38 excludes pumps, but this omission does not fully account for the discrepancies between it

and CIA figures. The problem is further

compounded by a third source, the New

York-based consulting firm of Frost and

Sullivan, whose recent study contained the

following figures for U.S. sales of oil and gas

exploration and extraction equipment to the

Table 38.—Soviet Imports of Western Oil and Gas

Exploration and Extraction Equipment

(in millions of dollars)

Purchases from - Total purchases

United States from the West

1972 ., ... ... .-. . ‘- ‘$-4.6‘- ‘-

$ 19.4 –

1973 . . . . . . . ., 4 3 23.5

197 4 5 9.0

1975 : : : : : 49.5 150.1

1976 . . . . . . 406 2265

1977 . . . . ... 29.3 1210

NOTE These figures do not include turnkey manufacturing equipment ‘

SOURCE Vneshnaya Torgovlaya (Soviet Trade Data) category 128

Table 39.—Breakdown of U.S. Oil and Gas

Equipment Sales to the U.S.S.R. (1972-76)

(in millions of dollars)

—— ——— . . — —— -.—.—-—— — - -

Category Value .. —...——— ——

Pipelines, ., “ ~ $304

Submersible oil pumps : 148

Offshore and refining equipment 49

Othe r 49

Tota l $550

SOURCE Central In tell Intelligence Agency The Soviet 0il Industry A

- Supplemental

Analysis June 1977

U. S. S. R.: $3.7 million in 1973, $28.5 million

in 1974, $10.9 million in 1975, and $34.0 million in 1976. The CIA data covered orders

placed as sales, while the other two sources

recorded actual deliveries. Subsequent investigation has shown that the CIA figure

for submersible pumps was high by about

$50 million, partly because of an order that

was never filled.

It can be said with certainty that since

1976, the volume of Soviet orders for Western oil and gas equipment has risen significantly. There has also been a shift toward

turnkey projects, either for plants to produce equipment or materials required by the

industry, or for full-service contracts with

firms to provide all equipment needs for an

entire project. A recent order to a U.S. firm

to supply gas equipment for wells in Western Siberia is an example of the latter.

The U.S.S.R. clearly realizes that it must

import this equipment and technology to increase production of oil and natural gas at

rates that meet domestic needs and allow it

to sell surpluses to Eastern Europe and to

the West, thereby earning hard currency.

The sale of oil and gas has accounted for approximately half of all Soviet hard-currency

earnings in recent years. These earnings are

used for financing continued imports of

Western grain, equipment, and technology.

Failure to meet oil and gas production

goals would involve extreme costs in the loss

of this earning power. But, if the U.S.S.R.

were extremely concerned about its future

oil and gas production, it would be logical for

it to permit greater involvement of Western
240 ● Technology and East-West Trade

firms in joint production projects to speed

up development of reserves. Instead, the

U.S.S.R. has chosen for the present to concentrate on acquiring equipment and technology beneficial to the long-run production

capabilities of the country, with special emphasis on technology that requires only relatively short leadtimes to produce increases

in output of oil or gas.

The selection of equipment and technology suppliers for the Soviet oil and gas industry is based on a number of factors, including financing and the kind and quality of

technology. The oil and gas industry, as a

major earner of hard currency, receives a

very high priority when it comes to the allocation of foreign exchange for imports.

When the technology offered by different

suppliers is relatively the same, financing

terms may determine the chosen supplier. In

most cases, however, differences in technology will provide the basis of the choice.

When a multinational firm can have equipment produced in a country that will provide

better financing than the United States, the

package becomes more attractive to the

U. S. S. R.; American firms have done this a

number of times.

The Carter administration decided in

mid-1978 (during and presumably because of

the Soviet dissidents’ trials) to place all

oilfield equipment on the Commodity Control List. This action may have affected Soviet perceptions of American firms as reliable suppliers. Although no sales of oil and

gas equipment have been denied licenses

since the order was given, in some cases the

U.S.S.R. may have decided not to pursue negotiations with American firms to avoid the

possibility that the license might be blocked

for political reasons.

In other cases involving equipment such

as seismic prospecting instruments or computers used to analyze seismic data, the

stricter controls placed on American suppliers are more than offset by the superior

American technology, which ensures that

the American firm is the most likely choice

as supplier.

In summary, the U.S.S.R.’s pattern of

relying on Western technology to rapidly increase its capabilities in offshore operations

and secondary recovery suggests that the

primary interest of the U.S.S.R. in importing

this equipment and technology is more to

gain the productive capacity which the

equipment represents than to obtain the opportunity to duplicate new technology. For

the most part, oil and gas equipment imported from the West has not been integrated with Soviet equipment, partially

because equipment purchases have primarily included complete units. This approach

allows the U.S.S.R. to achieve the greatest

possible productive capacity with the equipment it imports. The recent shift toward imports of turnkey plants will, however, increase the U.S.S.R.’s exposure to Western

technology, and may speed the rate at which

this equipment is absorbed by the Soviet industry.

It is still too early to tell how efficiently

the U.S.S.R. will absorb most of the equipment and technology it has imported for oil

and gas development. It may be expected

that the rate of active oil and gas technology

transfer between the West and the U.S.S.R.

will increase in

Sakhalin Island,

advance.

CONCLUSIONS

the future, particularly as

Yakutia, and other projects

Western technology has made a marked eralizations, however, either concerning agimpact on each of the Soviet industrial sec- regate economic effects of Western imports

tors considered here—chemicals, machine or motivations for importing Western techtools, automobiles, computers, and oil. Gen- nology are misleading. There are two basic
Ch. X— Western Technology in the Soviet Union . 241

rationales for importing foreign industrial

technology and/or products: 1) such items

could not, under any circumstances, be produced domestically and 2) it is economical to

import rather than to produce domestically.

But the role of imports in each particular industry is markedly different. Thus, a sophisticated and useful approach to sectoral impact of imports must recognize that between

these two points lie a range of rationales for

individual import decisions in any given sector. Motivations for foreign imports are

closely associated with the capabilities of

domestic industry. The range of categories

of imports relative to domestic productive

capacity is as follows:

1.

2.

3.

4.

5.

technology and/or products that cannot

be domestically developed or produced

at any cost;

technology and/or products that can be

developed or produced domestically at

great cost in time and resources, and

the lack of which create bottlenecks in

other productive processes;

technology and/or products that can be

developed at great expense in time and

resources, but do not create bottlenecks;

more productive versions of technology

or products similar to those already

available in the U. S. S. R.; and

technologies that can lead to capacity

increases in products equivalent to

those available domestically or products providing marginal economic returns.

This range of choices may be regarded as a

continuum, and the rationale for individual

imports from the West may fall anywhere

along it. Given the decision by Soviet planners to increase production in all the sectors

under consideration, those imports that fall

in the initial categories will be most beneficial in an economic sense. But products of

technologies that the Soviets are incapable

of producing at any cost are extremely rare.

Most analysts have concluded that only time

and commitment separate the Soviets from

any given advance otherwise available to

them through imports. At the opposite end

of the spectrum, it is highly unlikely that import decisions are often made for cases of

marginal returns, both because a wide range

of more productive processes are always

available in the West and because of Soviet

propensity to avoid expending hard currency on cases of doubtful return.

The relative role of Western imports in individual sectors may be determined by

where in the range of import types purchases

of Western products and processes cluster.

In the chemical industry imports are generally used as a vehicle to acquire new equipment and processes that could be produced

in the U. S. S. R., but at great R&D cost.

Chemical output is also central in capacity

increases in other crucial sectors—agriculture in particular. Imports in the chemical industry tend to occur in the higher range of

import choices; equipment and processes acquired are consequently crucial to planned

growth in the industry.

While imports in the automotive sector

are made at all levels of the choice range,

large imports tend to be made both for productivity and capacity increases. The Soviets are perfectly capable of producing automobiles with domestic technology, but

Western imports increase the speed, efficiency, and overall capacity of their industry.

In the area of machine tools, productivity

and capacity increases also appear to be the

major factors behind imports. In this sector

as well as in the oil industry, a relatively

strong domestic industrial base exists. The

Soviets have, however, planned large capacity increases in both. The fastest and most efficient way to accomplish this goal is

through imports of Western capital, which

transfer Western technological advance in

addition to adding to capacity.

Soviet computer imports fall into the

higher range of import types; R&D costs in

this industry would be immense in the

U.S.S.R. This is due both to the speed with

which innovations are developed and the fact

that they are often motivated by the needs

of the user. A centrally planned economy is

particularly unsuited to high levels of in-
242 . Technology and East-West Trade

novation in this industry. Soviet practice

has been to wait for major innovations to be

proven viable in Western markets before attempting to incorporate them into its own

production.

In conclusion, the impact of Western imports differs significantly across sectors,

both from a qualitative and quantitative

point of view. There can be no doubt that

economic benefits have accrued to all the industries under consideration as a result of

imports from the West; the process by which

this has been accomplished is complex and

differs from industry to industry. It is clear

that any policy aimed at affecting the economic impact of Western technology in the

East must be tailored to achieve specific effects in specific industries.
CHAPTER XI

Western Technology in the

People's Republic of China
CONTENTS

Page

THE HISTORY OF TECHNOLOGY IN CHINA. . ..................245

Prerevolutionary Development . . . . . . . . . . . . . . . . . . . . . ................245

Postrevolutionary Technology Policy . . . . . . . . . . . . . . . . . . . . . ...........248

PRESENT TECHNOLOGY ACQUISITION POLICY . ...............254

THE NATURE OF THE CHINESE

THE STRUCTURE OF ECONOMIC

DECISIONMAKING ON FOREIGN

ECONOMY . . . . . . . . . . . . . . . . . . . . 259

DECISIONMAKING . ..........264

TECHNOLOGY . ...............265

THE ROLE OF WESTERN TECHNOLOGY IN THE

CHINESE ECONOMY. . . . . . . . . . . . . . . . . . . . . ...... .............272

Computers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ............273

Oil and Gas. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ................277

CONCLUSIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ........283

Table 40.–China’s Foreign Technology Budget, 1978-85 . ......................257

Figure 15.-China: Balance of Trade, 1950-76. . . . . . . . . . . . . . . . . . . . . . . . . . . .. ....257

Figure 16.-China: Technology Import Decisionmaking Procedure . ..............266
CHAPTER XI

s Western Technology in the

. People’s Republic of China

THE HISTORY OF TECHNOLOGY IN CHINA

PREREVOLUTIONARY DEVELOPMENT

During the past 300 years, technological progress flourished in Western

Europe and North America while China languished. That China was for so long

bypassed by technological progress is one of history’s great ironies, for few

countries can match its long-term record of inventiveness and technological sophistication. There are many familiar examples of Chinese inventiveness including gunpowder, paper, and the compass. To these may be added many diverse

artifacts and techniques, including oil refining, the chain-drive transmission, the

segmental arch bridge, iron casting, the differential gear, deep drilling, the

piston bellows, and the stirrup.* The sophistication and richness of early Chinese civilization staggered all who came into contact with it.

This outpouring of sophisticated techniques and devices resulted in significant

changes in productive, military, and commercial activities. The introduction of new

crop varieties and new strains of established

crops had enormous repercussions, allowing

the settlement of frontier areas to the South

and permanently shifting the demographic

center away from the former heartland of the

Yellow River basin. ’ Use of the compass,

along with fundamental innovations in shipbuilding and sailing techniques, led Chinese

navigators perhaps beyond the Arabian Peninsula. Improved roadbuilding techniques

and bridges of every description knitted the

empire together and put every major city in

regular communication with the imperial

capital. In sum, traditional China went

through many changes as new technologies

‘ Sw .Jwph Nwdham, “Science and China Influence on

the W’orlci in Raymond I)aw son, ed., Y’/z ( f.{,,<rtl{? of ( ‘Ain~/

11.ondon: Oxford [Jni\wrsit~r Press, 1964).

‘Ho Ping-ti, ,?tuclic? in I}te !){)piilatic)rl f)~ (’}linu, l:{(i8-19:i’)

((’amhridge, hl ass.: I+ar\’ard [Jni\ersity Press. 1959), pp.

169-’76; 1 8:1-92.

elicited responses in productive efforts and

administrative capabilities. This occurred

despite substantial inertia created by established cultural and bureaucratic structures.

But while technological development provided a secure foundation for the governing

elite and the civilization they created, new

ways of doing things did not alter customary

societal and political arrangements. In sharp

contrast with the history of Europe, technological changes were not associated with fundamental changes in the social order or the

rise of new classes that could threaten the

existing order. Merchants remained politically and culturally subordinate, and Chinese cities remained firmly under the control

of the existing Mandarin elite.

The traditional cultural and political system demonstrated a remarkable resilience in

the face of extensive technological changes;

the Confucian culture was deemed more valuable than the products of a new technology.

Moreover, the cultural hegemony of Confu245
246 ● Technology and East-West Trade

cianism helped to retard technological progress; the mental patterns fostered by the

study of the Confucian classics were at considerable variance with those appropriate to

the continuous development of new ways of

doing things. Although there was not always

outright hostility to technology, active involvement in technological matters fitted

poorly with the dominant culture. It induced

a reluctance to become involved with innovations of any sort, particularly those that centered on the improvement of menial existence.3

The literary and bookish nature of the

elite culture in China stood in clear contrast

to the empirical, practically oriented spirit

necessary for the development of new technologies. The content of Confucian philosophy was not conducive to a spirit of conquering nature through the application of

new devices and techniques. The primary

concern of the scholar and the putative role

of the official centered on learning the correct principles of human relationships, and

using these principles for the maintenance of

harmony, both between man and man, and

man and nature. In contrast, technological

change by its very nature disrupts existing

relationships and dissolves harmony. Whatever the practical benefits of technological

change, the disruption of the existing state

of affairs could hardly be applauded by the

traditional official who had been schooled in

Confucian philosophy.

In sum, therefore, the main inhibiting

cause (for the lack of development of science

and technology) was the intellectual climate

of Confucian orthodoxy, not at all favorable

for any form of trial or experiment, for innovations of any kind, or for the free play of

the mind. The bureaucracy was perfectly satisfied with traditional techniques. Since

these satisfied its practical needs, there was

nothing to stimulate any attempt to go beyond the concrete and the immediate.’

When stimulation to technological advance did come, it came in the form of a profound external threat. Technological stagnation was never absolute in China, but it was

most sharply revealed when the Western

powers attempted to extend their influence

there. From the point of view of the West in

the 18th and 19th centuries, China was poor,

ignorant, and backward. It was China’s misfortune to be in a period of dynastic decline

during the time that an aggressive West

(and later, Japan) bolstered by formidable

technological prowess, was extending its influence across the seas. The technological

stagnation that afflicted late traditional

China might have continued were it not for

the intervention of the West; indeed, it can

be argued that the shock of Western and

Japanese domination was essential if China

was to rejuvenate. But China’s inferiority to

foreign powers left an enduring sense of powerlessness and debility; the development of

technology became an indispensible part of

efforts to regain a modicum of security and

independence, especially relative to those nations that took part in its subjugation and

humiliation.

The application of new technologies was

essential to this endeavor. This in turn necessitated a greater receptiveness to ideas,

processes, and materials that had been developed elsewhere. But nagging doubts attended the effort to transform China’s technological order: could foreign products and

techniques be adopted without their bringing a profound dislocation to Chinese culture? The answer was negative. Achieving a

rapprochement between imported modernity

and indigenous patterns of life proved difficult; technological progress could not be

pursued in disregard of the cultural consequences. China’s recent history can thus be

seen as the search for “modernization with

pride. ”5

3

See Liu Ta-chung, “Economic Development of the Chinese

Mainland, 1949-1965” in Ho Ping-ti and Tang Tsou, eds., China “s Hen’tage and the Communist Political System (Chicago,

Ill.: University of Chicago Press, 1968), pp. 134-5.

4

Etienne Balazs, Chinese Civilization and Bureaucracy

(New Haven and London: Yale University Press, 1964), p. 22.

‘See Joseph Levenson, Confucian China and Its Modern

Fate: A Trilogy (Berkeley and Los Angeles, Calif.: University

of California Press, 1968).
Ch. Xl— Western Technology in the People’s Republic of China . 247

The evident military superiority of the imperialist powers jarred the Chinese ruling

elite into the realization that some adjustments would have to be made, and that the

foreigners would have to be met by equivalent military strength. No serious ideological

obstacles stood in the way of this; even the

most conservative Confucian official recognized that military defense was a legitimate

area of interest and concern.

Modern science and technology thus

found their first home in China in the shipyards and armories established to counter

the might of the West. A new generation of

engineers, technicians, and scientists began

to be trained in the Government’s arsenal,

where, after 1865, foreign instructors

schooled their Chinese pupils in modern

shipbuilding, metallurgy, and arms manufacture.6 Despite earlier Chinese advances in

nautical architecture, explosives, and ordnance, a new set of skills had to be developed

as China attempted to preserve its national

and cultural integrity.

The realization that improvements in defensive capabilities could not be pursued in

isolation from other modernizing currents

came slowly. At first, each step of military

and technological modernization was justified in terms of its immediate importance for

keeping out the foreigners. But the fact remained that the development of weapons

and other items of military technology required at the least such supportive industries as railroads, steamships, and coal

mines.7 For “progressive” Chinese thinkers,

the assimilation of Western science and technology took on an importance which transcended the strengthening of the military

and its supporting infrastructure. Science

and technology were to be the foundation of

a new Chinese society erected on the remains

of a crumbling civilization, and scientific inquiry and rational thought became “slogans

in an anticlerical war against superstition

and authority. ”8 Even after the collapse of

China’s last dynasty and the establishment

of the Republic an aggressive belief in the intellectual and spiritual superiority of scientific ways of thought continued to challenge

traditional religious and philosophical

beliefs.’

There could be no easy incorporation of

scientific thinking or technological application into the corpus of traditional Chinese

elite thought and culture. Effecting the necessary changes in the basic elements of the

traditional order posed a great threat to

many Chinese, especially those whose selfidentity and authority were bound up with

the Confucian world view. The development

of modern ways of doing things could not be

initiated without thoroughgoing changes in

Chinese culture and society, and the techniques necessary to preserve Chinese national integrity from the onslaughts of the West

would paradoxically result in the complete

conquest of the traditional way of life. The

fact that the conquest would come from

within would make it no less complete.

Some Chinese, however, endeavored to

have it both ways, seeking to retain the essential features of Chinese civilization while

at the same time acquiring and assimilating

the foreign technologies necessary for

China’s resurgence. According to their prescription, new technologies and organizational structures could be incorporated for

their utility, leaving unchanged the essence

of Chinese civilization. The surface plausibility of this synthesis was quickly challenged

by the more unregenerate members of the

Chinese political and cultural elite. To them,

a China that took the path of technological

and organizational modernization would

soon lose its way in its pursuit of foreign

‘Charlotte Furth, Ting 14’en-chiang: Science and China

A’eu’ (’ulture (Cambridge, Mass.: Harvard University Press,

1970), p. 11.

‘Albert Feuerwerker, The Chinese Economy, 1912-1949

(Ann Arbor, Mich.: University of Michigan Center for Chinese Studies, 1968), pp. 1-2.

“Furth, op. cit., p. 70.

9C. K. Yang, Religion in Chinese Society (Berkeley, Los

Angeles, and London: University of California Press, 1970),

pp. 363-7.
.

248 . Technology and East-West Trade

novelties: a commitment to acquire and assimilate modern technologies could only result in the dissolution of the established

culture. These qualms were not enough to

stem the tide of change, and there was little

chance that the Confucian elite could maintain the world in which they had been so

comfortable. By the beginning of the 20th

century, China was ripe for fundamental

change.

With its commitment to modernization

and technological development, the People’s

Republic of China (PRC) could be viewed as

the culmination in the transformation of Chinese culture, a process that began with the

opium wars. This would be an oversimplification, for even today it is premature to conclude that modernization through the balancing of imported technologies with indigenous Chinese culture has been achieved. If

anything, the problem is now even more

acute, for cultural patterns in today’s China

are compounded of ancient tradition and

modern socialist doctrine, and tensions between technological development and ideological patterns—both ancient and contemporary—persist.

Technology has not acted as an independent force which has autonomously transformed the traditional culture and shaped

the postrevolutionary society. In traditional

China, patterns of political and cultural domination in large measure determined the nature and extent of technological change. This

is still the case, as the Communist government has manifestly committed itself to generating the policies that will guide the process of technological development. Yet it has

never had a free hand in this matter; the possibilities of technological advance have been

circumscribed by both the characteristics of

Chinese society and the other goals of the

leadership. The next section considers the

evolution of technological policies in the

PRC and the limitations on their implementation. Although the political actors and

many of the fundamental goals are different

from those of traditional China, technological change has remained firmly in a Chinese

context.

POSTREVOLUTIONARY

TECHNOLOGY POLICY

Although many changes have come to the

PRC over the last three decades, there remains a certain continuity of goals and activities. Any analysis of technological policy

must be cognizant of continuity as well as

change. Most analyses of policy in China

have given relatively little consideration to

continuity; instead, most Western scholars

have focused their attention on the apparently wide fluctuations in basic policies as

the PRC has oscillated between periods of

radical change and periods of retrenchment.

From this perspective, “Maoist” methods of

employing mass mobilization, popular initiative, and ideological incentives have been

counteracted in succeeding phases by policies that were built around expertise, precise organization, and remunerative rewards. Although this characterization of

social change in China has put policy

changes in context, the policy cycle model

can be taken as only a rough approximation

of historical reality. Despite apparent shifts

of considerable magnitude, there has remained a basic continuity of goals in China

and a narrowing range of policies has been

employed as a means of achieving these

goals. ’” Moreover, in any given period, there

are considerable divergencies between the

specific policies employed in different economic and political realms (such as agriculture, education, and foreign relations). Even

technological policy is itself too broad an

analytic category to be easily fit into a

broadly drawn policy cycle model; at any

time, technological policy is really a cluster

of separate policies which reflect the differential impact of general policies on specific

sectors of the economy .11 Finally, the chronology of policy changes in China is not an

unending series of back and forth movements along a single axis; the history of the

PRC has been a learning experience for the

‘{’See Andrew Nathan, “Policy Oscillations in the People’s

Republic of China: A Critique, ” C’hina Quurterlj~ 68 (December 1976).

‘ ‘See Alexander Eckstein, {’hina A’conomic Bevolution

(Cambridge, Mass.: Cambridge University Press, 1977), p. 85.
Ch. Xl— Western Technology in the People’s Republic of China ● 249

Chinese people and the leadership alike.

Neither a “Maoist” nor a “pragmatic” model

of development is likely to be taken as an inclusive blueprint for social change and economic progress, and the years to come will

likely see continued efforts to produce a

workable resolution of the conflicts between

egalitarian participation and managerial

direction, mass motivation and professional

expertise, and ideological incentives and

monetary rewards.

When the Communists gained control

over the Chinese mainland in 1949, these

dilemmas were faint concerns. After years of

foreign invasion and civil war, China was in

desperate need of economic reconstruction.

Providing a modicum of economic organization and meeting the minimal subsistence

needs of a war-ravaged populace were in

themselves staggering tasks. In addition,

the Communists had set a more ambitious

task—the transformation of a backward and

easily exploited country into a strong and

self-sufficient Socialist nation.

Technological development was to be an

integral part of this transformation. In addition to restructuring economic institutions

and relationships through land reform, the

nationalization of key industries, and the

construction of a central-planning apparatus, the new Government began to take

the first steps toward the formidable task of

modernization of production. Despite some

promising starts in industrial development

during the 1930’ s,” China had scarcely risen

above the agriculture-and-handicrafts economy which had endured for centuries. To

build a foundation for China’s economic

modernization, 156 large industrial projects

were designed and built with the direct assistance of the Soviet Union. China’s isolation from the capitalist world made Soviet

assistance crucial, and the U.S.S.R. responded with one of the largest programs of

economic aid and technology transfer in history .

It can be argued that the pattern of economic development that emerged under Soviet sponsorship was in fact ill-suited to

China’s developmental needs. The Chinese

embarked on an essentially Stalinist strategy which emphasized the rapid development of heavy industry through the construction of the large industrial projects

under Soviet patronage. At this time, the

Government plowed 20 to 25 percent of the

country’s total output into investment, a

percentage similar to the Soviet Union and

other Communist countries during the first

years of their existence. ” This investment

was confined to a narrow part of the economy; in 1952, industry received nearly 40

percent of investment funds, and heavy industry was allocated 76 percent of this. ”

The distribution of investment funds was

reflected in the choice of technologies. Few

efforts were made to develop and apply technologies that could make use of China’s

abundant labor supply or be tied into the

agricultural economy. The Chinese received

state-of-the-art technologies from the Soviets, particularly in the area of steelmaking, 16

but modernity in the emerging industrial

sector underscored the continued backwardness of farm technologies. In the agricultural

sector investment rates remained astonishingly low. Less than 8 percent of the State

budget was invested in agriculture during

the first 5-year plan (1953-57), and of this, a

sizable percentage went toward the construction of hydraulic projects only marginL. - 2-1
250 ● Technology and East-West Trade

ally connected to the needs of farm production.

Technological change would have to come

to the countryside if the perennial problem

of feeding China’s people was ever to be

solved. But this realization was slow in coming, and stipulated technological priorities

bore little relevance to agricultural needs. In

September 1956, a 12-year plan for the development of science and technology was formulated. Although the details of the plan

were never released, 12 areas earmarked for

future technological advance were published:

1.

2.

3.

4.

5.

6.

7.

8.

9.

10.

11.

12.

peaceful uses of atomic energy,

radio and electronics,

jet propulsion,

automation and remote control,

petroleum and scarce mineral exploration,

metallurgy,

fuel technology,

power equipment and heavy machinery,

the harnessing of the Yellow and

Yangtze Rivers,

chemical fertilizer and the mechanization

of agriculture,

prevention and eradication of diseases,

and

problems of basic theory in natural

science. *8

As the list indicates, the main thrust of scientific and technological research and application was to be directed at the development

of technologies essential to the operation of a

sophisticated modern economy. With the exception of items 9 and 10, none of the areas

selected for intensive development had any

immediate relationship to the needs of the

agricultural economy, nor were they congruent with the development of labor-intensive

modes of production. In sum, ambitions

seemed to have exceeded economic and political realities; after decades of submission

1-I,i Choh-ming, E<[>nt>mic l)elc~loprnent of (’omrnuni.~t

( ‘hinu: A n Aj~prui.~ul of k’i[ ‘e l’curs of Indlistrialization

(Berkele~’, Calif.: (Jni\ersity of California Press, 1959), p. 53.

IHRichard P. Suttmeim-, Fic,swirch un(l RvIIo//i tion: Scientc

/~f)/tf), ~J)t[/ ,$()(,if)tu/ ( ‘hun~f~ in ( ‘hinii (1.exington, hlass.: Lexingt(;n l~ooks, 19’74), pp. 60-1.

and inferiority, China was determined to

catch up with the scientific and technological accomplishments of the West.

The limitations of the Chinese economy

soon overwhelmed these ambitions. Although industrial growth during the 5-year

plan period was impressive, the agricultural

sector continued to lag. Collectivization and

other administrative rearrangements had

not resulted in an increase of peasant income19 and by 1957 Chinese agriculture was

in the hold of diminishing returns as the

farm sector began to exhaust its traditional

sources of growth. Although industrial development was impressive, it was apparent

that future economic progress in that sector

was tied to economic progress in agriculture.

Improved agricultural productivity was of

foremost importance in the economic development of the countryside, but at first the

Government sought to generate it in an

oblique fashion, using political mobilization

as a means of coaxing out the “productive

forces” which had hitherto lain dormant.

The Government accurately gauged that a

technological revolution in crop growing was

ultimately dependent on the widespread development of water-control projects. In

order to effect the necessary changes in irrigation, the Communist leadership began to

make massive efforts to tap China’s seemingly limitless supply of rural labor for the

building of dams, canals, wells, and reservoirs. During the slack farming season in the

winter of 1957-58, 100 million people worked

an average of 130 days each on hydraulic

projects of this kind. ’() It was hoped that the

construction of these projects would make a

“’rl’homas ~. 13erst~in, “leadership and Nlass ~lobili~a~ion

in the Soviet and Chinese C’ollecti\’ization Campaigns of

1929-30 and 1955-56: A Comparison, ‘“ (’hi))u Quurtc>rl~ 31

(July-September 1967), p. 35.

‘

(

’Karl A. N’ittfogel, “U.S.S.R. and Mainland China: Agrarian Systems, ” in M’ .A, Douglas Jackson, cd., Agruriun

Policie,s un(i Pro blern.s in (’omrntini. st und hrc)tl-(’~)mm[irti.vt

(’o(intries (Seattle and l.ondon: University of M’ashington

press, 197 1), p. 46. A]\,a I,ewis Erisman presents a n~u~’h

lower figure of nine million man days: cf. “China: Agricultural

Ile\’elopment, 1949-71,’” in Pec)plc ‘.v Repli blic of (’hinu: A n

Economic Asse.s.snt{>nt (U’ashington, 1). C.: U.S. (government

Printing Office, 1 972), p, 1 !26. In any event, statistical ambiguity was a hallmark of the I.eap.
Ch. Xl— Western Technology in the People’s Republic of China ● 251

major contribution to the Great Leap Forward, which sought to transform China’s

economy in the space of a few years.

So massive a mobilization of rural labor

had to be complemented by fundamental

changes in the organization of rural society.

At first, special water conservancy organizations were formed. These and other forms of

cooperatives were used to deploy peasant

labor for projects that exceeded the boundaries of the village. Eventually most of these

units were amalgamated into people’s communes. In the summer of 1958, the communes began to proliferate, and by the end

of the year 99.1 percent of the peasant households were reportedly incorporated into

them.

The establishment of the communes was

paralleled by a major effort to decentralize

political authority and administration. Initiative in economic and technological matters was passed to lower administrative levels. Industry, agriculture, commerce, education, and defense became the concerns of

commune administrators, thus vastly expanding the responsibilities of local cadres.

This expanded role for local-level leadership had important ramifications for technological policies and their implementation.

Party cadres began to assume many of the

technical and managerial tasks previously

held by Government officials.” This did not

simply mean the imposition of political control over the activities of technical and managerial personnel; political cadres, it was

hoped, would become experts in their own

right, the cadres’ personal involvement with

productive labor would result in the synthesis of “red” and “expert. “22 The transfer of

political cadres to basic-level posts, where

they could participate in labor while overseeing day-to-day operations, was a key policy

of the Great Leap Forward.

First-hand involvement with local economic affairs was an absolute necessity;

with the radical decentralization measures of

the Great Leap Forward, the formal national

planning apparatus and the statistical work

that supported it were dismantled. The detached and rationalized style appropriate to

administration by Government officials and

specialized experts was forsaken in favor of a

“combat style” through which leaders were

to form an intimate association with the people, share in their struggles, and make policy

on a largely ad hoc basis. 23 The Great Leap

Forward was a time of politically mandated

uncertainty and disjointed or nonexistent

planning.

The technological consequences of the

Great Leap Forward were soon evident. The

12-year plan for the development of science

and technology was all but forgotten as uncoordinated local initiatives became the

basis of technological change. Each locality

began to push its own programs of economic

and technological development through the

communes. Although great emphasis continued to be placed on the rapid development

of the heavy industrial sector in the cities,

the countryside now became the scene of

myriad labor-intensive projects. In the

cities, heavy industry continued to be the

primary recipient of State-supplied capital

and technical assistance; in the countryside

productive enterprises were to be developed

through the mobilization of local labor and

resources. The urban enterprises established

during the 5-year plan period would continue

to grow through the conscious fostering of

economic dualism, while new small-scale,

labor-intensive ones took root in the countryside. There were few connections between

the two sectors.24

The most dramatic example of local initiative in technological and economic develop-

: ‘Such a mode of leadership is often found among circumstances of danger and uncertaint~r. See Alvin W’. Gouldn[,r, ~~<ltt(,rrl,~ ~,1 Illc]ll,~ trilli ~]lir”(~il(i(r(lo ( N(>W l’ork: Frt)(>

Press, 195’7), pp. 105-16.

- ‘k;ckstein, op. cit., p. 57.
252 Technology and East-West Trade

ment were the “backyard blast furnaces”

which were erected for the local production

of steel. Coinciding with the commune movement in the summer of 1958, thousands of

furnaces sprung up each day in the countryside; by September, 350,000 were in operation.” This effort was a sad failure: the steel

produced was of such low quality that it had

few applications. Other efforts at decentralizing production were more successful, however, and the foundation of local industries

for the production of cement, agricultural

chemicals, and energy was laid during this

period. Meanwhile, the urban industrial sector continued to emphasize capital-intensive

higher technology methods of production.

In the critical agricultural sector, however, the policies embodied in the Great Leap

failed. A key assumption–that mobilized

labor could be effectively tapped without

complementary inputs—soon proved fallacious. Agriculture continued to languish in

the absence of modern inputs and techniques, and China found itself in the grips of

a severe economic crisis. This was exacerbated in the middle of 1960 when the SinoSoviet rift widened and Soviet economic and

technical support missions were withdrawn.

The Chinese leadership now had little

choice but to retrench, and mass mobilization under the leadership of technically unsophisticated political cadres was abandoned

as the most appropriate road to economic

progress, A decentralized economic system

with strong inputs from technical experts

once again took precedence over efforts to

create an autarkic rural economy through

collective labor and political leadership.

Although the policies of the Great Leap

Forward had been specifically constructed to

provide an improved productive base in the

countryside, the rural economy remained

critically deficient in both the kind of technologies employed and the capital investment necessary for their application.

In 1962, the critical importance of the

farm sector was officially recognized and a

~þ ‘(’l~rk, op. cit., p. 69.

slogan declaring agriculture the “foundation” of the economy was adopted. Industrial production was more closely tied to

agricultural needs, and the central Government began importing complete plans from

Japan and Western Europe for fertilizer

manufacture. At the same time, the rural

sector was better enabled to make effective

use of these inputs. Agricultural taxes were

eased and the price relationships between industrial and agricultural goods altered in

favor of the latter, thereby increasing the incentives for increasing crop production.26

Industrial policy now shifted, and a more

rationalized and coordinated approach to increasing production was taken, stressing

technological innovation over untrammeled

mobilization of labor. The responsibilities

and authority of managers and technicians

were expanded. The political cadres who had

supervised local production and technological innovation were replaced by engineers

and managers with the specialized skills

necessary for modernizing China’s economy.

Yet engineers still did not have a free hand

to design projects according to the standards of technical competence alone. Efforts

to synthesize mass participation in technological development with the more regularized procedures of engineers, scientists, and

technical specialists continued. During the

design reform campaign which began in late

1964, engineers became more closely involved with actual production work. They

were expected to break away from accepted

engineering traditions, established during

the period of Soviet influence, to engage in

on-the-spot design work in close collaboration with the workers and managers in the

plant. This was expected to result in a combination of technical experts, managers, and

shop-floor workers who could pool their talents in order to solve technical problems. 27

“h;ckstein, op. cit., p. 60.

-’See Gene\ ’ie\’e Dean, “A Note on the Sources of ‘I’echnological Inno\”ation in the People’s Republic of China, ” ,lourno/

()/’l)(Jf ‘(J/()/)mP)tt .Stu[lie.s 9, 1, (Ortober 1 9’72), pp. 190-193.
Ch. Xl— Western Technology in the People's Republic of China 253

Despite this effort to unite all segments of

the Chinese work force, tensions remained,

and Mao and his followers feared that the extension of expertise and administrative

power would result in the formation of new

social classes and new sources of oppression.

In late 1965, Mao launched the Great Proletarian Cultural Revolution as a means of

redressing the inequalities reemerging in

Chinese society. Although the cultural revolution did not take up the issue of technological policy directly, it did have important

repercussions on the people and institutions

directly responsible for promoting technological development. The Chinese Academy

of Sciences came under heavy criticism from

“Mao Zedong Thought Propaganda Teams, ”

which had been organized by the army under

the guidance of Lin Biao. The State Scientific and Technological Commission fared

even worse. Its Chairman Nie Rong-Zhen

was sharply attacked, and for a while the

Commission was threatened with dissolution; an ad hoc Science and Education Group

under the State Council seemed likely to

assume its functions.28

For all the strident attacks on the entrenched centers of technological expertise,

however, political control over technological

change was not a prime issue during the

course of the cultural revolution. The chief

struggles of the period were directed at

political (rather than technical) cadres who,

it was claimed, had become entrenched in

their offices, separated themselves from the

masses, and forgot their revolutionary roots.

The convening of the Ninth Party Congress in April 1969, signaled an official end

to the militant phase of the cultural revolution. The ensuing period was marked by conflicting political signals and uncertainty in

technological policy. Imports of machinery

and whole plants began to increase dramatically by 1973,29 hardly a hallmark of the success of the radicals’ efforts to insulate China

‘“SutLmeier, op. cit., pp. 104-5.

‘<’SW I lans I{eyrnann, ,Jr., [ ‘hinu‘.s Approach to Tech nolog>I

A cqui.sitic~n,” Part 111, .9(I m mar>’ ob.ser[ 10 tions (Santa L1 onica,

Calif.: ‘1’he RAND Corporation, 1975), p. 7.

from foreign influences. The fundamental

changes that the cultural revolution

wrought in education and research activities

generated considerable discontent, including

complaints about the excessively practical

orientation of research efforts and the absence of adequate basic research. In 1972,

the Chinese press featured articles calling for

the improvement of science curricula and for

more attention to the conduct of theoretical

research.30

On the other hand, the cultural revolution

left an inhibiting policital legacy. Although

technological policy was never publicly debated, the postcultural revolution climate

was not conducive to bold new thrusts in the

technological realm. Ideological rectitude

seemed to count more than economic expansion, and with Mao’s succession very much

in doubt, few leaders were willing to challenge basic Maoist tenets about the primacy

of political and ideological mobilization.

This impasse was seemingly broken in

January 1975, when Chou En-lai delivered

an important speech at the Fourth National

People’s Congress. In it, he asserted that

China’s prime task lay in the “four modernizations” (in agriculture, industry, defense,

and science and technology). These would

pave the way for China’s sustained development as a “powerful socialist nation’ by the

beginning of the next century .3’

Chou’s assessment of the pressing need

for technological modernization was seconded by Deng Xiaoping, who had reemerged from his cultural revolution disgrace. Deng used his newly regained influence to aggressively push for technological

modernization, even at the expense of class

struggle and party domination over technical work. But with Mao’s health steadily

weakening and China’s political course in

doubt, Deng was made the target of continual attacks in the Chinese press. He was

“)See ‘1’homas Fingar and C~enevie\’e Dean, I)e I)e(op men ts

in PK( Science and Tech nolc)g}t, oct(~[~(~r-l)ccenlb(~r, 1.976

(Stanford, Calif.: U.S.-China Relaiions Program, 1977), p 5.

“Chou F;n-lai, f’heng-~u Arun<q-tso Paw h’ao (Report on the

Ll”ork of the (;o~’ernment) (Peking: Shen-wu Yin-shu Kuan,

1975), p. 16.
254 ● Technology and East-West Trade

again purged in April 1976, and his report,

which called for an expanded and more autonomous role for the Academy of Sciences,

was labeled a “poisonous weed.”32 Deng’s

alleged enthusiasm for importing advanced

technologies from abroad in return for raw

material exports,33 was also criticized. This

policy was in direct opposition to the

autarkic economy advocated by his Maoist

opponents.

)’Thomas Fingar and Genevieve Dean, l)e~’elopments in

PRC Science and Technology, January-March 1977 (Stanford,

Calif.: U.S.-China Relations Program, 1977), pp. 5-7.

33 See Hung Yuan, “Ultra-Right Essence of Teng Hsi

p’ing’s Revisionist Line, ” Hung Ch ‘i 10, (1976), in Foreign

Broadcast Information Seruice, Oct. 8, 1976, p. E 1.

PRESENT TECHNOLOGY ACQUISITION POLICY

Mao Zedong died in 1976; by the beginning of 1977, it was clear that a return to the

principles of the four modernizations could

be anticipated. Indeed, throughout 1977

there were abundant signs of departure from

many of the practices and policies of the

previous 10 years. In February 1978, a statement of the goals of the four modernizations

program was made by Premier Hua Guofeng

in his “Report on the Work of the Government” delivered to the first session of the

Fifth National People’s Congress. Hua’s report contained the outlines of an ambitious

10-year economic development plan designed to produce an independent and comprehensive national industrial and economic

system.

Among other things, this plan provided

for enormous increases in agricultural output; agroscientific research; increases in the

value of industrial output of 10 percent per

year to 1985; the development of transport,

communications, postal, and telecommunications networks big enough to meet growing industrial and agricultural needs; and

120 large-scale industrial projects. It was followed by plans for investment in science and

technology including theoretical research

and the establishment of nuclear power stations, the development of satellites, laser

research, genetic engineering, and integrated circuit and computer applications.

To foreign observers, this program was

exceedingly ambitious and it seemed to lack

a sense of priorities. Doubts within China
Ch. Xl— Western Technology in the People’s Republic of China ● 255

Northeast China farm introduces agricultural machines from America

A U.S.-made sprayer at work

Photo credits Ben Lanwu Xinhua News Agency

Combine harvesters working in a soybean field of the Friendship Farm
256 ● Technology and East-West Trade

In redefining the objectives of the four

modernizations, Beijing has begun to stress

the concepts of “balance” and “proportionate development, ” and the thinking associated with the economic administration characteristic of the 1950’s is now being praised.

“Three major balances, ” have been identified as the foundation for economic policy:

the balance in the expenditures and revenues

of the State budget; the balance in the issuance and withdrawal of bank credits; and the

balance in the supply and demand of materials, including the balance of receipts and

payments of foreign exchange. It is claimed

that during the last 30 years, when these balances were observed, the economy progressed nicely; when they were not observed,

development slowed. According to this line

of reasoning, serious imbalances have now

occurred between development in agriculture and industry, particularly heavy industry; within industry itself (for instance, between the fuel, power, and raw materials industries and the processing industries;

among farming, forestry, and animal husbandry; and between food crops and industrial crops); between investments and capital

construction and the availability of manpower, materials and financial resources; between accumulation and consumption; and

within accumulation itself (e.g., between accumulation for productive purposes and accumulation for nonproductive purposes) .34

It is safe to assume that fears of new “imbalances” are behind the current efforts to

scale down the four modernizations, and that

balance and proportion in development are

the objectives now being sought. This conclusion is borne out by the main points of the

revised program which is intended to check

the spurt of investments in heavy industry,

and return to the principle of priority for

agriculture and light industry. There have

been reports that the proportion of investment in iron and steel will be reduced: past

investments have not yielded expected returns because of serious shortages of electricity, transport, and other necessary sup-

“Beijing Retieu’, May 11, 1979, pp. 17-18.

porting infrastructure. Major investments in

harbor construction are to be postponed.

Agriculture is to receive the most attention,

although the grand objectives for agricultural mechanization announced in early 1978

have been abandoned. Instead, it is likely

that investment will foster greater differentiation of agricultural production based on

the comparative characteristics of different

regions, and that more attention will be

given to cash crops and to industries supporting agriculture. The performance of Chinese agriculture is of utmost importance to

the four modernizations; successful performance in this sector would release foreign

exchange for other purposes.

The serious problems of Chinese infrastructure development will be addressed by

additional investments in coal, electric power, oil, transport, and building materials.

Some of the 120 key industrial projects identified in the original four modernizations program will be postponed, and only a limited

number will be in operation by 1985. Housing construction is to be accelerated. New attention also is to be given to light industry,

both to satisfy domestic aspirations, and to

make light industry the chief export and foreign exchange earner over the short run. Although foreign borrowing has not been completely ruled out, the Chinese are stressing

that future investments should come mainly

from domestic savings.

In spite of these cutbacks, it is clear that

foreign trade and the acquisition of foreign

technology will play an important role in Chinese modernization programs, although not

as great a role as the euphoric estimates of

1978 might have suggested. China’s foreign

trade has fluctuated somewhat over time,

but it has tended to rise consistently

through the 1970’s. Figure 15 shows the Chinese balance of trade from 1950 to 1976, including the shares of trade that non-Communist countries have enjoyed since the early

1960’s.

In addition to agreements with individual

foreign companies, China has entered into

trade agreements during the last 2 years
Ch. Xl— Western Technology in the People’s Republic of China ● 257

Figure 15.— China: Balance of Trade, 1950-76

Million

Us. $ Balance

1200

800

F

400

0

1 11 1 1

– 400 -

– 800 L

7500

600 0

4500

3000

I

Imports

Total

Non-Communist countries

1500

-.

I Exports

6000

t

— Total

_ - Non.Comm un Ist countries

4500

t f

3000

1500

0

t 1 s I

1950 1955 1960 1965 1970 1976

SOURCE Richard E. Batsavage and John L. Davie, “China International

Trade and Finance, in Chinese Economy Post Mao,

Joint Economic Committee, 1978. p. 709

with a number of countries. The most dramatic example is a $20 billion agreement

with Japan calling for Chinese imports of

technology in exchange for oil and coal.

These agreements indicate that at least

through 1985 China will continue to have an

active interest in foreign trade and particularly in foreign technology. A recent estimate of China’s budget for imports of foreign technology through 1985 shows that

$11.4 billion was contracted for in 1978, and

that negotiations to acquire additional technology could amount to as much as $59 billion by 1985. China’s foreign technology

budget is summarized in table 40.

While revisions in the four modernization

programs may lead to a scaling down of Chinese foreign technology purchases, there will

undoubtedly be major acquisitions in the

next 5 to 8 years. According to a recent Central Intelligence Agency (CIA) report, the

areas that China has designated for closest

attention are as follows:

1. Iron and Steel.—It is expected that

this sector will require the greatest expenditure of foreign exchange. The

plans for doubling China’s steel proTable 40.—China’s Foreign Technology Budget,

1978-85

(in billions of dollars)

Contracted

Category for in 1978a

Iron and steel . . . ~ . ‘------- ~. .$ 0.1

Coal . . . . . . . . . . . . . . . . . . . . 4.0

Other mining and processing 2.4

Ports . . . . . . . . . . ... 2.1

Petrochemical plants and

equipment. . . . . . . 0.5

Hotels . . . . . . . . . . . . . . 0.5

Shipping . . . 0.5

Petroleum . . . . . . . . 0.4

Electronics ., ., . . 0.3

Agriculture-related plants and

equipment . . . . . . . 0.1

Power development . . . . . . . . . . 0,2

Fisheries . . . . . . ... . . . . . . —

Aircraft . . . . . . . –

Other transportation . —

Construction plants and

equipment. . . . . 0.2

Under

negotiatin

b

(rounded

estimates)

$19.0

1.6

4.4

11

2 3

3.0

—

3-5

0.1

0.6

3.0

2.0

10

10-15

0 5

Textile plants and equipment . —

Miscellaneous machinery and

machine tools. . . . . . . . . 0.1

Total. ... ... ... ... ... ... ..$11.4

Data as of Apr. 15, 1979-

0.1

0.2

$52-59

aExcludes approximately $15 billion in projects contracted after mid-December

1978 which were postponed until financing iS arranged

bSome projects under negotiation wiII be completed after 1985

SOURCE The China Business Review, March-Aprll 1979 p 57
258 . Technology and East-West Trade

2.

3.

4.

5.

duction to 60 million tons by 1985 can

only be achieved by importing major

new steel complexes. Contracts under

discussion have included a $15 billion,

10-million ton complex near Tianjin in

Hubei Province, and a $2 billion major

facility at Baoshan near Shanghai. The

latter was to be a complete plant purchased from Japan, a deal which has

now been delayed but not canceled.

Coal and Electric Power.–China’s

original plan called for the opening of 8

new major coal mines and 30 power

stations by 1985. A coal industry development project worth $4 billion has

been under discussion with West Germany. Discussions have been held

with France for the construction of

two nuclear powerplants, but no contracts have resulted. Priority in electric power development will probably

go to conventional sources of power,

including major new hydroelectric stations.

Transportation.—This has been a hitherto neglected area, and Beijing has

been moving aggressively toward reversing this situation. Reportedly,

since 1976 more than $1 billion has

been set aside for foreign equipment in

road, rail, water, and pipeline transportation, and negotiations valued at $4

billion have been conducted for imports of truck, automobile, railroad

car, and locomotive plants and for

shipping facilities.

Petrochemicals and Synthetic Fibers.

—Approximately $3 billion in contracts for technology in petrochemical

and synthetics fields have been signed.

Communications and Electronics.—

This is another sector that has been

neglected in the past but which now

has a high priority. China evidently

wishes to leapfrog toward the most

modern communications systems and

has entered into discussions with the

United States for a communications

satellite. It has also concluded an

6.

7

8.

9.

10.

11.

agreement with Japan for manufacturing facilities for color television sets.

Part of this deal included the purchase

of an integrated circuit plant.

Nonferrous Metals.–Signed agreements exist in this area with Japan

and the United States for a copper

mining concentration complex and a

copper smelter. Of the 120 key projections in Hua’s original formulation of

the 4 modernizations, 9 dealt with nonferrous metals complexes.

Construction.—China’s construction

industry has also been somewhat neglected in the past and has become a

major bottleneck for the expansion of

other sectors that require massive construction programs. As a result, China

has been interested in cement, asbestos plate, insulation, and construction

equipment. These have a projected value of about three-fourths of a billion

dollars.

Petroleum and Gas.–Both because of

domestic energy shortages and because of the potential of this sector as

a foreign exchange earner, the petroleum and gas industry has received

high priority. Since 1976, $500 million

has been spent on oil and gas exploration and exploitation equipment.

Machine Building.—China is interested in foreign forges, foundries,

press lines, and cutting tools which

could lead to whole plant contracts totaling more than $70 million.

Instruments and Controls.—China’s

economic leaders have, in the last few

years, shown a renewed interest in

quality control and standardization of

products. As a result there has been

considerable interest in measuring instruments and analytic devices, and

control mechanisms for quality control.

Agriculture.—Thus far, a relatively

small amount of agricultural machinery has been purchased, primarily for
Ch. Xl— Western Technology in the People’s Republic of China . 259

use in the large-scale State farms in

the north. With the reduction of mechanization goals in the revised version

of the four modernizations program,

machinery imports in this sector could

be less than originally anticipated. On

the other hand, China will probably

continue to be interested in turnkey

projects for fertilizers and insecticides .

3 5

“)(’entral 1 ntelligence Agenc~’, (’hina: Post-~tla(l Seurch for

{’i[’ilian Ifl(ius trial 7’f~(htrO1O.q),” National 1+’oreign Assessment Center, 19’79, pp. 4-6.

In addition, China has shown considerable

interest in engineering and service contracts

intended to supply design-engineering knowhow and managerial skills. Such contracts

provide for foreign firms to design, act as

prime contractor, and supervise the development of various projects. The transportation

and mining sectors have received the most

attention: contracts have been signed with

West Germany and the United Kingdom for

coal mine development, and a major service

contract for railroad development has been

under discussion with Japan. Negotiations

have also been conducted with Denmark on

port construction.

THE NATURE OF THE CHINESE ECONOMY

When the PRC was established, Chinese

leaders looked to the Soviet Union for guidance and to the Soviet economy as a model to

emulate. Although this close relationship

lasted only until 1956, the Chinese and Soviet economies still resemble each other. Both

are characterized by central planning, and

both tend to focus on physical output as a

criterion for evaluating performance. This

has resulted in less attention to the value of

production efficiency.

While there are similarities in the two

economies there are also significant differences, The Chinese economy is both more decentralized and far more ideologically driven

than the Soviet. As a consequence, China

has had a looser approach to economic planning than has the U. S. S. R., and at times

ideologically induced decisions have superseded planner preferences. Decentralization

stems from 1956 to 1957, when dissatisfaction with the Soviet model began to surface.

As previously noted, the first significant

decentralization occurred as part of the

Great Leap Forward in 1958, when a wide

range of industries and financial resources

were placed under provincial control and

Communist Party committees at the province and subprovincial levels were assigned a

more direct role in running economic activities.

This had many negative results and was

modified during the early 1960's. It is the

second model of decentralization which

largely persists today. The significant differences from the Great Leap model are first,

that professional managers and engineers

share responsibility with Party committees

in the leadership of enterprises; and second,

that responsibility for finance and commerce

is held closely by the central Government in

contrast to the Great Leap years when this

responsibility was relinquished. It should be

noted that China’s search for a balance between centralized and decentralized forms of

economic management is closely related to

the search for a balance between economic

efficiency (which has tended to lead to decentralization) and the distribution of wealth

and economic equity (which has tended to

support the continuation of an active central

role in interprovincial redistributive revenue-sharing).36

There have also been attempts to accommodate the power interests of influential

provincial leaders. It is possible to think of

the Chinese industrial economy as a three-
260 . Technology and East-West Trade

tiered phenomenon, the three tiers being

“center,” “local,” and “collective.” Although the collective sector is subject to

planning, it experiences a measure of autonomy not enjoyed by the other two tiers because it is entitled to use aftertax profits in a

locally discretionary fashion. Establishing

and upgrading rural industry have been important investment options for the collective

sector.

The “local” sector includes enterprises

under provincial, municipal, and county control. Unlike those in the collective sector,

these enterprises are all under State ownership, and, despite the nomenclature, are subject to a significant amount of central influence. Local sector output forms a substantial part of the total value of Chinese industrial output.

Despite considerable decentralization, the

central Government continues to be important. It maintains control over much heavy

and strategic industry; it acts as the allocator of such priority goods as energy, key

raw materials, capital goods, military equipment, important exports, staple food products, and cotton; and it controls interprovincial trade.37 The center maintains control

over the economy through such mechanisms

as material supply planning; the fiscal and

banking systems; and control over prices,

wages, and foreign trade.38

According to a recent statement by the

State Planning Commission (SPC), the center’s responsibilities include:

1. the guidelines and policies of the national economy; 2. output targets for major industrial and agricultural products; 3. basic

construction investment and major construction projects; 4. allocation of important

materials; 5. the purchase and allocation of

key commodities; 6. the state budget and the

issuance of currency; 7. the number of

workers and employees to be added and the

total wage bill; 8. the prices of major industrial and agricultural products .39

SPC plays a key role in the planning system of the Chinese economy. It is generally

believed that the preparation of economic

plans involves both vertical or functional

planning, and horizontal or territorial planning.40 This dual approach is consistent with

the concept of dual control over the economy

in which enterprises are subject both to central ministries and a unit of local government. At the central level there are a large

number of economic ministries that oversee

the operation of the economy. These are

organized along functional lines. Enterprises

throughout the country that have the same

functional identification come under their

jurisdiction. One stream of planning activity

apparently occurs in this vertical system.

On the other hand, there is a second

stream of planning activity that is territorial, centered around the province. Planning is

a process of aggregation and disaggregation

of data and tasks. Whereas in the vertical

stream the aggregation and disaggregation

is performed by ministries and subordinate

enterprises, in the territorial stream this is

done by provinces and by the enterprises

within provincial boundaries. It is the responsibility of SPC to aggregate on a national basis the information produced in

these two streams of activity.

The planning process is thought to involve

three main stages which the Chinese refer to

as “sent down twice, reported up once.”41

The process begins when SPC issues “control numbers” for the coming year. These include value of output, amount of investment,

number of workers, and total wage bill and

are determined on functional and territorial

bases. These flow down through the system,

territorially and functionally, generating

more specific planning information which is

“Gordon Bennett, (’hina ‘.s l’inarzc[~ and Trade (M. E.

Sharpe, 1978), p. 74.

‘mLardy, op. cit., pp. 15-16.

“’Quoted in Nai-Ruenn Chen, “Economic Modernization in

Post-hlao China; Policies, Problems, and Prospects, ” in Joint

Economic Committee, (’hirze.scEconorn> Po.st-hlao (Washington, D. C.: U.S. Government Printing Office, 1978).

“’I.ardy, op. cit., pp. 15-16.

4’ Ibid.
Ch. Xl— Western Technology in the People’s Republic of China ● 261

“reported up” and eventually gets back to

SPC. This upward and downward flow of information is by no means a purely technical

operation; it is highly political, characterized

by bargaining and tradeoffs, and probably

resembles the U.S. budget process. After the

“reporting up once” stage, SPC aggregates

the information and produces a final plan for

the economy.

Provisions for innovation, presumably

also including the incorporation of foreign

technology, are folded into the plans during

this process. But as with the Soviet economy, significant structural constraints on innovation are related to the system of management. China has seen a variety of approaches to enterprise management since

the 1950’s; it has been the subject of political

dispute and ideological debate, centering

around the problem of whether “reds” or

‘‘experts should run factories. Additional

issues have concerned whether production

norms should predominate in management,

and the use of material incentives, Managerial systems have varied from the Soviet style

“one man management” to management by

Party committee. Since 1978, the role and

authority of professional managers and expert engineers has been emphasized, although the Party still has final responsibility and many, if not most, managers are

members of Party committees.

Regardless of managerial form, it is important to note the criteria used by higher authorities to evaluate management, and the

performance of firms in fulfilling the objectives of the plans. Performance criteria have

changed over 30 years, but there have always been multiple, sometimes contradictory, criteria. For example, a 1972 report

lists performance criteria as quantity, quality, variety, cost relationship, labor productivity, profits, and funding; plus numbers of

workers and total wage bill.42 The targets

were output, variety, quality, consumption

of raw materials, fuel and power, labor productivity, costs, profits, and working capital

ratio .43

While enterprises are expected to meet all

of these targets, from time to time there has

been a tendency for enterprises to focus only

on physical output in the belief that the planning system is biased in this direction. Attention to this target has led to losses in efficiency, product quality, and innovation:

Innovation is another frequent casualty of

the drive to raise output. Research and experimentation require the attention of engineers and skilled workers whose services are

also needed to maintain high levels of output. Complaints that “many enterprise leaders who are very concerned about plan fulfillment pay little attention to new product

work” fall on deaf ears as long as quantity

rules supreme. Conflict between research

and production persists. In 1971, at Shanghai’s Hung Ch’i shipyard, “Under the condition of the urgency of the task of production,

there were some people including some members of the basic level revolutionary committee who said, ‘the task of production is already so heavy, where is there time for carrying out innovation?’ There are even some

who said, ‘The task of production is a hard

target, but the task of scientific research is a

soft target. “44

Although there are signs that in some respects, particularly in terms of intersectoral

communication, the Chinese economy is

more innovative than the Soviet economy, it

nevertheless imposes technically conservative norms on enterprise managers. In the

Soviet case, this has inhibited not only indigenous innovation, but also the effective

absorption of foreign technology .4’ (See

chapter X.)

As discussed above, one of the central

Government’s reactions to the chaos of the

Great Leap Forward was to reassert tight financial control over the economy. This con-
26.2 ● Technology and East- West Trade

trol has continued, and it is exercised primarily through the State budget and the

banking system. State enterprises are expected to remit most of their aftertax profits

to the center, and these remittances makeup

a substantial share of the State budget.

Therefore, for capital construction and other

forms of investment, enterprises must rely

on investment resources returned to them

via the State budget. This system, known as

unified revenues and unified expenditures,

has resulted in a lack of a direct connection

between investment funds and economic performance, and has also been a source of inefficiency. Recent policies have attempted to

overcome this problem by shifting from

budgeted capital construction funding to

loans supervised by the People’s Bank.

Bank loans have, therefore, been used for

overcoming production difficulties, and will

be used more for working capital than for investment in capital goods. Reportedly, however, enterprises do try to get around banking regulations and use bank loans for capital stock. Because of the importance attached to physical output norms, enterprise

managers seek investment funds. When

these funds are available through the State

budget, only depreciation, not interest, is

charged. To meet production quotas, firms

therefore have a natural tendency to pursue

a relatively costless strategy of seeking vertical integration, especially the acquisition of

well-stocked machine shops which can repair

equipment received from the outside, or retool existing machinery.46

Such patterns of management have produced defects in the Chinese economy, including weak quality control, neglect of innovation, excessive vertical integration, and

stockpiling—problems endemic to Sovietstyle economies.47 Not surprisingly, the Chinese have sought remedies for these kinds of

problems. During the early 1960’s, a number

of reforms were implemented, and some of

the current discussion seems inspired by the

events of this period.

“>Rawski, op. cit., p. 183.

‘ Ibid.

The reforms of the early 1960’s were

soundly denounced as revisionist during the

cultural revolution. In fact, a series of these

measures came to be called “the five soft

daggers. ” They included the use of profits as

the chief success indicator for enterprises;

the subordination of “politics’ ’-especially

political campaigns and ideological remolding sessions—to production; the widespread

use of material incentives; reliance on experts in factory management; and movement

towards greater enterprise autonomy .4’

Current economic thinking shows many

similarities to the “five soft daggers. ” The

leadership is concerned with achieving

greater economic efficiencies and higher

quality goods. It therefore feels that production goals should be expressed in value

terms (such as profits) rather than mere

physical output. The idea of “production

first” also is now widely discussed; Deng

Xiaoping has suggested that in the current

historical period, putting production first is

the key political task. Material incentives in

the form of bonuses and wage increases have

been reintroduced in the past 2 years (although not without problems), and expertise

in factory management is being stressed

with a consequent downplaying of the role of

Party committees. Finally, new approaches

are being taken to the principle of enterprise

autonomy. In addition, it appears that at

least one leading economist of the 1960’s,

Sun Yefang, has been rehabilitated following

his cultural revolution disgrace, and has

been asked to take the lead in designing six

regional economic systems. The establishment of regional economic units above the

province level is a step towards the assertion

of greater central control over the local economy and the simplification of planning to

achieve better economic results.

In an attempt to free up economic activity

from restrictive bureaucratic control exercised by central ministries, China has reestablished industrial companies (reminiscent

of the “trusts” of the early 1960’s that were

“Bennett, op. cit., pp. 31 ff.
Ch. Xl— Western Technology in the People’s Republic of China . 263

denounced during the cultural revolution), at

least 15 of which have been established during the last 2 years. Companies are designed

to rationalize internal commerce and contracts and to cut across vertical bureaucratic

lines. They have responsibility for planning,

production, and coordination in their respective fields. In addition, there are corporations which are “economic accounting units”

and operate on the basis of profit and loss.49

These serve as consultants for their respective parent ministries and foreign trade corporations on matters relating to the import

of foreign technology. In any particular field

there will be one corporation and several

companies. As of late 1978, a partial list of

corporations included: The China Agricultural Machinery Corporation, The China

Cereal and Oils Corporation, The China

Chemical Construction Corporation, The

China Chemical Fiber Corporation, The

China Coal Industry Technique and Equipment Corporation, The China Cotton Spinning and Weaving Corporation, The China

Feedstuffs Corporation, The China Geological Exploration Corporation, The China Oil

and Gas Exploration and Development Corporation, The China Petroleum Corporation,

The China Radio Equipment Corporation,

The China Railway and Technical Equipment Corporation, The China Seed Company, The China Shipbuilding Corporation, and

The China Waste Materials Reclamation

Corporation.

Recently, these have entered into direct

contracts with foreign vendors. For example,

the Chemical Construction Corporation was

responsible for importing hydrocracking

know-how from Lummus and purchasing

eight synthetic ammonia plants from Kellogg in 1974. The China National Chemical

Fibers Corporation evaluates petrochemical

fiber technology from Europe, the United

States, and Japan, and recommends which

technologies China should buy.50

The reintroduction of the corporation

form of organization has also been accompanied by calls for greater enterprise specialization designed to break down excessive

patterns of vertical integration. Some Chinese economists are beginning to discuss a

version of market socialism in which enterprise specialization would be matched by a

much greater reliance on market mechanisms in the industrial economy. Currently

they are at least officially forbidden. The approach to economic organization would also

make use of contracts to enforce interenterprise agreements, and would rely more heavily on the banking system both for supplying

investment capital and for enforcing economic discipline. These proposed reforms are

at various stages of discussion and implementation. While some of them do in fact appear to be steps in the direction of great efficiency, quality consciousness, and innovativeness, they are unquestionably subject to

opposition in a number of quarters, including provincial authorities and corporation officials.51

In sum, China’s planning and management practices, and indeed the structure of

the economy itself, are now in a state of flux,

and it is difficult to predict how far or how

fast economic reform might go. Those members of the leadership, including many of

China’s economists, favoring an aggressive

pursuit of the four modernizations, undoubtedly favor significant economic reform. But there are others in the leadership

who, while wishing to promote the four modernizations, are, for reasons of self interest

and ideology, hesitant to encourage significant economic reform. This is particularly

true of reforms that will emphasize profit,

market exchanges, and more rationalized

management practices. The ongoing debate

bears watching. It will have a major impact

at least on the pace, if not the character, of

the four modernizations program, and will

affect the extent of China’s reliance on and

capacity to absorb foreign technology.

4’(( ‘Altto BU.SI tl(>.~.~ A’(II ifll , Septemher octoher 1978, pp. 21

ff.

‘“l hid., p, 22. “ Ihici., hlarch ,+\pril 1979, p. 56.
264 . Technology and East-West Trade

THE STRUCTURE OF ECONOMIC DECISIONMAKING

At present, the highest levels of economic

policymaking take place in the State Council

on the Government side, and in the Politburo

of the Central Committee of the Communist

Party on the Party side. The pinnacle of

power in China is the standing committee of

the Politburo of the Central Committee.

While the body is clearly the locus of decision for issues of strategic national importance, studies of policymaking in China indicate that participation in policymaking is

considerably broader. Of particular interest

are various kinds of sectorial work conferences (that is, national conferences in a given

functional area involving Central Committee

members, and central Government and provincial government officials) and various

kinds of meetings of the Central Committee

itself. The State Council is China’s cabinet.

It interprets policy coming from the Party

and oversees the work of the Government.

Most high Government officials are also

members of the Politburo, while most ministers are members of the Central Committee.

Under the State Council are a series of specialized agencies, ministries, and commissions. Of particular importance in economic

policy are the State commissions dealing

with economic and technical affairs. These

are SPC and the State Science and Technology Commission (STC).

SPC is the center of economic policymaking after the Central Committee and the

State Council. The other planning bodies

follow the SPC’s policy; it approves the

budgets of the other commissions which

then make detailed plans within these budgetary guidelines. Reportedly, SPC has bureaus for production, foreign trade, communications, agriculture, and construction, as

well as other bureaus corresponding to each

ministry. It also has field offices at the provincial and municipal levels .52

STC, abolished during the cultural revolution, was reestablished in October 1977. A

“Ibid., p. 14.

measure of the importance the regime attaches to science and technology in the four

modernizations can be seen in that fact that

a member of the Politburo was made minister in charge. STC is known to have a bureau

for foreign affairs, a planning bureau, a policy research office, a bureau for energy and

petrochemicals, a bureau for computers and

machinery, and five or six other bureaus of

unknown functions. These functions probably reflect the eight priority areas of the national science plan which was announced in

early 1978—agriculture, energy, materials,

computers, lasers, space, high energy physics, and genetic engineering. Prior to the

cultural revolution, STC had an important

role in coordinating national R&D activities,

in science and technology planning, and in

setting national standards.

The Chinese planning process involves

both vertical plan development through the

functional ministries and horizontal plan

development through the provinces. While

STC develops its own plans, it presumably

also acts to provide specialized advice and

information to SPC in the formulation of national plans. It is SPC that has the key role

in turning national economic policy as specified by the Party and the State Council into

a set of priorities, although little is known

about how and by what criteria this is done.

Nor is it entirely clear how technological requirements are set, although decision on incremental technological improvements and

evaluation of the utility of technologies

result from the downward and upward flow

of planning information. The process of setting major new nonincremental technological requirements is less clear. On issues of

major national importance, the State Council and the Central Committee undoubtedly

play important roles, but information available to, and the strategic position of, SPC

should ensure it a lead role in identifying at

the policy level significant areas of technological need. In evaluating that need, particularly from the technical side, SPC has at
Ch. Xl— Western Technology in the People Republic of China ● 265

its disposal the competencies of the State resources of the Academy of Science, minisCapital Construction Commission (described terial research institutes, and professional

below) and STC. The latter can draw on the societies.

DECISIONMAKING ON FOREIGN TECHNOLOGY

Predictably, given the multiple bureaucratic actors involved in making Chinese

economic policy and managing the economy,

there is no single or simple pattern of decisionmaking concerning the importation of

foreign technology. Moreover, little detailed

knowledge of this process is available in the

West. Nevertheless with the growth in Chinese foreign trade and in the number of contacts relating to foreign technology, understanding of the decisionmaking process is increasing. Figure 16 represents a recent attempt by the CIA to summarize the decisionmaking procedure.

According to the CIA, the procedure begins with an initial request for foreign technology from provincial governments, individual plants, or industrial ministries. In addition, China has recently resurrected various types of industrial corporations that

typically would be the end users of technology, and which undoubtedly generate their

own requirements for foreign technology.

Requests then go to SPC which approves the

initiation of an investigation into obtaining

technology. The SPC behavior presumably is

guided by national economic policy directed

from the State Council and the Central Committee, and by its own preliminary estimates

and initial control figures for imports and exports based on overall economic goals and

statistical information it has received from

various sources.” SPC works with the Ministry of Foreign Trade (MFT) setting priorities

for foreign technology. Reportedly, MFT has

responsibility for mapping out general import and export plans that accord both with

foreign policy and with existing contractual

commitments to foreign trading partners.

‘

y ‘Gene T, Hsiao, 7’he F’oreign Tradp of China: Polic?~, Lau,

and Practice (Berkele~’, Calif.: The University of California

Press, 1977), p. 74.

Also taken into account are the nature of import and export commodities, world market

conditions, domestic demand and export

capability, and available foreign currency

and external credits .54

According to the CIA, the State Economic

Commission (SEC) also may initiate requests

for foreign technology. SEC is responsible

for the implementation of production plans

approved by SPC on an annual and quarterly

basis. It coordinates the supply and demand

of industrial raw materials, energy, and

other inputs. If domestic sources are unavailable it can turn to imports to overcome

shortages. The SEC’s activities in foreign

trade are thus limited more to raw materials

and other industrial inputs, than to plant

and equipment orders.55 But according to information received during a recent SEC mission to the United States, the Commission

also has a bureau of technical affairs, and

may, therefore, have a more active role in

assessing and evaluating technology than

had been thought.

An important actor which is not included

in the CIA scheme is the State Capital Construction Commission (SCCC), which probably coordinates with SPC in the early

stages of the decision process. SCCC has the

lead role in overseeing the administration of

projects exceeding a certain size. SCCC coordinates the work of various ministries—for

example, the Ministry of Metallurgical Industry with regard to steel investments.

Once the SCCC’s budget receives SPC approval, it coordinates investment plans of

ministries, and in turn approves their investment budgets. SCCC has liaison bureaus for

‘)’ I hid.

“’)(’ hirza Busine.s.s F/r[ieu. Nlarch April 1979, p. 14.

r 4 -:J 1“ : -, - -’ ‘i — 18
266 ● Technology and East-West Trade

Figure 16.—China: Technology Import Decisionmaking Procedure

7

.,7%.

, i ..M:+:,*: End-User Corporations Professional Societies Industrial Ministries I

Trading Corporations ~~~<~~ .&{,&#= !. T 7

Obtain and research available literature

Form delegations to visit foreign manufactures

I

. ... 

.,!% > ~~ % ,. ..: ,:; .

Consult with foreign counterpart-experts “6#%;@F

Evaluate available technologies . . . ..

: ~$~$

Make recommendations to

Ministries and State Planning Commission

‘::4&~&: ~:j+ *’

Tech import I

SOURCE Central Intelligence Agency. National Foreign Assessment Center. China post Mao Search for Cwd(an Indusfrlal Technology, 1979 P 8

each ministry except agriculture. These in- likely that SCCC has become considerably

elude bureaus of coal, petrochemicals, ma- more influential since the beginning of 1978.

chine building, petroleum, railroad, metal- Some have speculated that it was the motive

lurgy, and water conservation and power. force behind the reconsideration of the four

SCCC maintains branches at the local level.56 modernizations and the move toward more

Unlike SEC, SCCC can initiate requests “balanced” and proportionate development

for plant equipment orders from abroad. It is as it began to aggregate the enormous capital construction requirements coming from

“Ibid. various ministries .
Ch. Xl— Western Technology in the People’s Republic of China ● 267

Once authorization for beginning an investigation for obtaining technology has

been approved, the action shifts to other institutions. Until recently a lead role in this

stage was played by the foreign trading corporations. These fall administratively under

MFT which transmits to them guidelines for

specific import and export plans. The foreign

trade corporations add detail to the guidelines, and return them to MFT. Once approved, they become part of the general

trade plans and, in turn, part of the national

economic plan. Finally, after approval of the

national plan by the State Council, MFT

assumes ultimate responsibility for supervising the national foreign trade corporations in executing their specific plans.57 However, at the search stage, industrial ministries, professional societies, and end-user

corporations are also important. As the CIA

has pointed out, these groups obtain and research available literature, form foreign delegations to visit foreign manufacturers, consult with foreign counterpart experts, evaluate foreign technology, and finally make recommendations to the ministries and SPC.

The Chinese have shown increasing sophistication in this search procedure, and a

great deal of technology and technical information is transferred during this search

stage. The Chinese have been making a coordinated national effort to accumulate as

much written material as possible. The

China National Publication Import Corporation procures technical titles from Western

booksellers, and the Beijing Document Service was recently established to serve as a

focus for a national technical information

system linking the libraries of the Chinese

Academy of Sciences, research institutes,

ministries, and other organizations. The Chinese are interested in using the latest information-handling technology to provide a

high-speed technical information network on

a national scale.

The last 2% years have seen an enormous

growth in Chinese technical delegations

traveling abroad to Western Europe, Japan,

‘ 1 {siao, op. cit., pp. 74-5.

and the United States. Some 2,000 Chinese

technicians and officials have traveled in

this capacity in 1977 and 1978. Members of

these delegations appear to their Western

contacts to be knowledgeable and well-informed. It has been suggested that these

delegations are logically arranged in a serial

fashion beginning first with “survey

groups” which visit potential vendors to discuss technology and prices. They are the

window shoppers who then report back their

findings. Follow-on “study groups” then

visit only a few selected firms chosen on the

basis of the reports. These study groups engage in a more detailed investigation oriented toward the specific applicability of foreign technology to specific Chinese needs,

and may be composed of individuals with

greater technical expertise. The reports of

the study groups become the basis for selecting a vendor. 58

In addition, the Chinese have been inviting many Western firms and Western experts to present technical seminars in China,

Reportedly, more than 250 such seminars

were held during the first 6 months of 1978.’’”

The results of these technical survey activities are widely discussed in China within

the economic ministries. Additional technical advice is supplied by professional societies such as the China Chemical Society or

the China Civil Engineering Society. Such

societies occupy a strategic position in networks of information since they have contacts with foreign counterparts on one hand

and they are linked to domestic industrial

ministries and research institutes on the

other. China’s R&D efforts are vertically organized by production ministries, the Academy of Sciences, and the higher educational

system. The professional societies on the

other hand, draw their members from the

vertically organized R&D sectors, and from

production units. They thus appear to offer a

significant horizontal linkage that may overcome some of the worst forms of "bureaucra -

“(’ IA, op. cit,, pp. 3-4,

“’I bid., pp. 2-3.
268 . Technology and East-West Trade

tism” induced by strong vertical organizations.

Once the search and survey are completed,

a recommendation is made to the ministries

and the Planning Commission and the purchase is then factored into national economic

plans. As the CIA scheme shows, MFT is

again involved at this stage. SCCC also probably plays an important role in approving

the selection of the foreign vendor. Depending on the scale of the project, the State

Council may also be asked to intervene in the

final stage of the decisionmaking process.

Once approval of the project has been given,

the Ministry of Finance, working through

the Bank of China, must authorize funds.

Although it had been assumed that foreign exchange was closely controlled by the

center, in the last few years individual enterprises may have had greater discretion than

has been thought. Institutes of the Academy

of Sciences have their own foreign exchange

budgets, and reportedly allocations of foreign exchange to local production units for

the purchase of foreign equipment have recently doubled. However, China has apparently been dissatisfied with authorization

and control procedures for the use of foreign

exchange which make it possible for buyers

and users of technology to minimize their

consultations with the Bank of China.60 As a

result, it was announced in April 1979, that a

new General Administration of Exchange

Control has been established directly under

the leadership of the State Council.61

The final phase of the technology acquisition process is the initiation of formal purchasing procedures by a foreign trade corporation. The corporation most directly involved with acquiring foreign technology

and responsible for importing whole plants

and high-technology equipment has been the

China National Technical Import Corporation (TECHIMPORT). While the use of

TECH IMPORT and other corporations may

facilitate central control, particularly control

over foreign exchange, in the past these cor-

‘Y’hina~usine.~.< h’et’iel[, March April 1979, p. 3.

“’BeiJing Rc[iell, Apr. 20, 1979, p. 2.

porations have prevented direct contacts between vendors and end users. The Chinese

seem now to be moving away from the use of

middlemen by encouraging users to enter

into direct negotiations with vendors. The

foreign trade corporations may then take responsibility for administrative details. The

first such contract signed with a U.S. firm

was between Atlantic Richfield and the

China Petroleum Corporation. The contract

was signed on March 17, 1979, and provides

for seismic survey work in offshore waters.

Another organization with a role in

China’s technology acquisition procedures is

the China Committee for the Promotion of

International Trade. Officially a nongovernmental body which nevertheless maintains

close ties with MFT, it has helped establish

and maintain contacts with foreign trading

firms and agencies, and has also had a role in

sponsoring foreign travel and exhibits in

China. Its U.S. counterpart, particularly in

the period prior to normalization and direct

government-to-government contacts, is the

National Council for U.S.-China Trade.

A final, and possibly significant, omission

from the CIA scheme is STC. It is likely

that, at least for some types of technology,

this commission would play a role both in the

initial stages and in the search and evaluation stages.

It is difficult to assess the effectiveness of

China’s decisionmaking processes for importing foreign technology. It is possible

that the initial surge of interest in foreign

technology in 1977 and 1978 exceeded

China’s decisionmaking capacity, and that

one of the reasons for retrenchment evident

in early 1979 was the realization that the

multiple demands for foreign technology

coming from the various sectors of the economy would exceed the PRC’s ability to pay

and to absorb. It is curious, however, that

discussions with foreign firms should have

gone as far as they did without apparent central control. One explanation for these

events is that the new policies were intended

to shake up the economic structure, and/or

were part of strategy to encourage Chinese
Ch. Xl— Western Technology in the People’s Republic of China . 269

economic managers to survey the technology available on world markets. An alternative explanation is that things did get out of

control, and that only when SPC and SCCC

began to aggregate the demands did China’s

top leaders begin to realize that the country’s capacity to pay for and absorb technology was being taxed. The charge of inadequate management of the technology acquisition program is supported by the establishment of the General Administration of Exchange Control in April of this year.

The Chinese are clearly seeking a balance

between central control and flexibility. The

sanctioning of contracting authority for enduser corporations is a step in the direction of

greater flexibility. It is also possible that

with the greater liberalization of the economy described above, additional flexibility in

foreign trade and technology acquisition will

follow. For instance there have been reports

of industries under local government control

entering into product payback schemes with

foreign firms on their own authority. It is

likely, therefore, that a greater measure of

decentralization in foreign trade can be expected. There are two caveats to this generalization, however. First, the central Government is likely to retain careful control over

foreign exchange. Second, acquisition of

whole plants and high-technology items is

also likely to remain in centralized hands.

Apart from exchange control functions,

the two main centers of authority for foreign

trade appear to be SPC and SCCC, which reportedly “direct the work of the Ministry of

Foreign Trade.’’62 Undoubtedly the tasks

confronting SPC and SCCC are numerous

and complex since they have major roles in

directing the domestic economy as well. Reportedly the personnel at SPC are of the

highest quality. Unfortunately, it is impossible to determine the views of the SPC staff

on the series of important matters of economic policy confronting China: the mix of

heavy industry, light industry, and agriculture investments; the degree of technological

self-reliance; the relative share of effort going to military work; etc. Officially, SPC carries out national economic policy handed

down from above, but because of its strategic position in economic management it is

presumably also in a position to influence

the agenda of the top policy makers, there affecting policy itself.

Some sense of the operation of the technology acquisition procedures can be extracted

from the following examples, which, however, are not intended to be typical examples

of China’s negotiating strategies.

Decisionmaking for acquiring foreign

technology needed in Chinese scientific research is nicely illustrated in a recent report

on the efforts of the Institute of Oceanography to procure an advanced research vessel.

This project is reportedly one of the top 25

priority items in the new science development plan. The decisionmaking process involved an initiative from the Institute, approval from the Academy’s central offices,

and authorization from the State Council.

The first phase took less than 1 year and was

completed in December 1977. With this

high-level authorization, the Institute began

detailed studies of its objectives and its

domestic capabilities for reaching those objectives, and concluded that the ship should

be procured abroad. An interdisciplinary and

interorganizational team was then formed to

investigate the state-of-the-art in Japan and

the United States. The delegation was

abroad for nearly 6 weeks. Its recommendations will require the approval of the Academy of Sciences, which in turn will pass it on

to the Ministry of Foreign Trade, and finally

to the China National Machinery Import and

Export Corporation, which will contact potential suppliers.63

A second example concerns a $5.2 million

contract between TECH IMPORT and the

High Voltage Engineering Corporation

(HVEC) of Burlington, Mass., for the purchase of an HI-13 tandem accelerator to be

“’I bid., hlay ,June 1978, pp. 9 ff.
270 . Technology and East-West Trade

used by the Atomic Energy Institute of the

Chinese Academy of Sciences. In 1975, the

Chinese initiated correspondence with the

American firm. The corporation attracted

Chinese attention because one of its founders had been Robert Van de Graff, a wellknown figure in modern physics and the inventor of the Van de Graff accelerator.

Nothing came of these initial contacts until

1978, presumably because of the confusion

in Chinese scientific circles occasioned by

the succession struggle involving the Gang

of Four. In 1978, however, TECHIMPORT

invited a representative from HVEC to

Peking for preliminary talks. In July 1978,

TECHIMPORT sent its own 10-man delegation to the United States to visit the firm

and also one of its chief competitors. In August, HVEC was invited to Peking to discuss the possible installation of the HI-13

machine, and it sent its top people in engineering and management.

Photo credit: U.S. China Trade Council

13-million volt HI-13 Tandem accelerator, sold by High Voltage Engineering Corporation

to the PRC
Ch. Xl— Western Technology in the People’s Republic of China ● 271

What was expected to be a 2-week visit

lasted 32 days. The U.S. team met with its

Chinese counterparts 35 times during this

period, the Chinese inevitably outnumbering

the Americans. Representatives from the

Academy of Sciences as well as from TECHIMPORT participated. The scientist members of the Chinese team produced a barrage

of questions and kept seeking an improved

version of the HI-13. According to the American side, the Chinese objectives were to extract the maximum technical information

and to wear down the Americans with highly

technical questions in order to enable TECHIMPORT to get the best possible contract

terms. The patience of the Americans wore

thin, and on the second occasion that they

threatened to leave without concluding the

contract, the Chinese moved quickly to an

agreement and the contract was promptly

prepared. In the final 2 days while the contract was being typed, the Chinese asked the

Americans whether they would be prepared

to meet with a second group of end users

who were also interested in their equipment.

HVEC agreed, and this led to preliminary

discussions on a second purchase.

The endurance of HVEC paid off. Not only

was it able to incorporate favorable terms

into the contract, but there is now potential

for further business. Once assurance has

been given that the equipment is not subject

to U.S. or CoCom export controls, the Chinese will put down 15 percent of the price

and will make installments at 6-month intervals with the last two 5-percent payments

coming after demonstration and a 12-month

performance evaluation. ”

A third example involves an engineering

service contract between TECH IMPORT

and Kaiser Engineers of Oakland, Calif. This

contact was initiated when Kaiser sent a representative to China to give a paper on coal

mine maintenance. At this time, the firm

was not actively soliciting business in China.

In March 1978, however, the Chinese contacted the firm via the PRC liaison office in

Washington, to discuss the possibility of

“’lt)ici., No\emt)er I)w(’mber 1 97X, pp. 5-6.

developing iron ore mines. Kaiser first ascertained that the Chinese were aware that they

were purely an engineering service concern

and then supplied the Chinese with information about their firm. After this material was

thoroughly reviewed, TECHIMPORT provided Kaiser with sufficient information

about its requirements to enable it to organize an appropriate team to go to China the

following month.

As with the previous case, the Chinese

subjected the Kaiser representatives to exhaustive questioning. Among the questioners was the Minister of the Metallurgical

Industry. The Chinese were apparently satisfied with Kaiser’s answers, for 1 month

after the visit it obtained the contract from

TECHIMPORT to develop two mines. One

was an old mine that needed upgrading; the

other involved opening mining operations at

a new iron ore deposit. The contract is for 1

year and provides for one lumpsum payment. According to the contract, Kaiser is to

do the general engineering, although there

are also possibilities for detailed engineering

developments. Kaiser has begun sending

teams to China and also has been receiving

Chinese engineers for training in California.

Although Kaiser dealt primarily with the

mining and metallurgical technology specialists at TECH IMPORT, they also had contact with the Chinese Society of Metals, confirming again the importance of professional

societies in technology acquisition decisions.

Although there is undoubtedly considerable variation in China’s approach to negotiations, on the basis of these and other cases,

a few generalizations about the style of acquiring technology can be tentatively advanced. First, when technical requirements

enter the decisionmaking process, efforts

will be made, as in the oceanographic vessel

case, to assess the possibility and desirability of meeting the need with indigenous technology. Second, these and other cases indicate that China prepares for its searches

and negotiations with great care. Third, efforts are made to extract the maximum

amount of information from the negotiations, and increasingly to use contractual ar-
272 . Technology and East-West Trade

rangements that will also yield as much information and experience to the Chinese as

possible. For instance, it has been reported

that China wants to change from fixed-fee to

cost-plus contracts, which offer more intimate contacts with vendors. Fourth, the

Chinese are hard bargainers seeking to get

as much for their money as possible. As

HVEC and other cases show, they sometimes use delaying tactics and gruelling

negotiating sessions to wear down the seller

in order to get better terms. Finally, China’s

search for technology and negotiating tactics may have political and diplomatic, as

well as economic and technical objectives.

In conclusion, mention should be made of

the technology transfers and knowledge

flows that will result from the exchanges of

students and scholars. While this area has

generally been beyond the scope of export

control legislation, it is important to recognize that such exchanges are mechanisms of

transfer. The Chinese have estimated that as

many as 10,000 students and scholars could

be sent abroad for training by 1985. The exchange agreement with the United States

provides for a target of 500 to 700 Chinese to

come to this country to study during the

first year of the agreement. Most of those

who have come thus far have been midcareer

research scientists. It should be noted that

in keeping with the highly decentralized and

pluralistic system of higher education in the

United States, student and scholar exchanges are at present largely beyond most

kinds of central U.S. policy controls.

THE ROLE OF WESTERN TECHNOLOGY

IN THE CHINESE ECONOMY

Western technology has become economically significant in the PRC only in the past

decade. For this reason, and because hard

economic data for the PRC is extremely

scarce (the population of the country was unknown until 1979), attempts at macroeconomic analyses of the economy would be

meaningless exercises. The role of foreign

trade and the technology component in that

trade can only be treated anecdotally. In this

area the most meaningful generalizations

that can be made concern the potential,

rather than past, impacts of trade with the

West.

Chinese foreign trade presently involves

the exchange of crude oil, coal, ores, foodstuffs, simple machine tools, textiles, bicycles and other manufactures for equipment and technologies for oil exploration,

coal mining, steelmaking, chemical fertilizers, power generation, petrochemicals, and

a small number of consumer goods. In addition, after 1961, bad harvests forced the

PRC to import several million tons of grain

from non-Communist countries, and it has

continued this practice as an economical way

of feeding its large northern cities.

The PRC reaps substantial gains from its

comparative advantage in foreign trade. It

exports items that have a high labor and

natural resource content, and imports products that it could produce, if at all, only with

great expenditure of high-technology resources. Its exports—specialty foods, silk,

textiles, and high-grade handicrafts—command a high price abroad but are accorded

low-priority domestically; with these earnings, it imports wheat, steel mill products,

and electronics—items that command a comparatively low price in world markets, but

are of great usefulness in running and expanding the economic machinery at home.

Foreign technology will provide the cutting edge of the general program for economic modernization discussed above. This technology will be most useful in the urban industries where large-scale plants are engaged in basic industry and military production. These plants typically are under central
Ch. Xl— Western Technology in the People’s Republic of China ● 273

control, mass producing standardized products of tried a-rid prove-n design. They-tend

not to be highly innovative. The quality of

their products and production efficiency

stand to benefit greatly from the import of

modern process equipment and complete

plants. In contrast, the medium- to smallscale enterprises that are typically under

provincial or municipal control have been

described as innovative and dynamic. Some

of these are also important potential and

actual end users of such foreign technology

as production equipment and prototypes for

adoption and copying.

In the 1950’s embodied technology in the

form of imported industrial goods from the

U. S. S. R., particularly in complete plant purchases, was crucial in equipping basic industries such as iron and steel, transport,

and mining. Imports were also responsible

for the creation of virtually new industries,

including machine building, electrical power

generation, chemicals, and crude oil production. Soviet withdrawal, halfway through

the agreed program, virtually halted China’s

industrial progress in some sectors.

The expansion of industrial imports in the

1970’s is important, but not in the same way

as that of the 1950’s. The scale of total imports is now relatively small; for instance,

the average value of imports of machinery

and transport between 1970 and 1973 was

below the average for 1952 to 1960. Further,

since domestic output of these commodities

has increased several times between the two

phases, the imported share of the total value

of deliveries of machinery and transport

equipment has fallen dramatically.

But despite the low overall volume of industrial imports, their importance to the

economy cannot be overemphasized. Not

only have Chinese imports of complete

plants risen from the 1950’s, but these imports are crucial in the context of particular

industries. In fact, nearly all of the $2.6

billion spent between 1973 and 1976 has

been to support two industries: chemicals

and steel. In chemicals, imports are adding

over a third to the capacity of the chemical

fertilizer industry, and in the case of manmade fibers and petrochemicals, imports are

practically creating new industries.

The situation with respect to steel is different. This is a well-established industry

that, due to planning errors, is technicall y inefficient and unable to satisfy domestic demand. Imports of finished steel products

now account for over 90 percent of total Chinese steel purchases, paid for at the expense

of machinery. The effect of steel plant imports should be to increase steel finishing

capacity by a third as compared to the early

1970’s.

The industrial imports are more important

than their quantitative level suggests precisely because of their component of embodied technology, They have the capacity

to provide a cumulative, quantitative improvement in Chinese industry. The Chinese,

like the Soviets, acquire foreign technology

in many ways. They read literature; they

send specialists to study abroad; they encourage foreign firms to give expositions in

China. They also purchase prototypes that

they try to copy in substantial quantities.

All of this is useful, although prototype

copying has been more difficult than expected. For example, in 1963, the Chinese

purchased a Dutch urea plant that they

planned to replicate in a twin plant. They

were unable to do so, and in general prototype copying has not so far proven feasible

as a solution to technology acquisition. The

Chinese have, therefore, had to purchase

substantial quantities of equipment and to

obtain the technical assistance necessary to

adapt and integrate specialized equipment

into their industrial systems. The remainder

of this section deals with two industries in

which this process has been facilitated by

U.S. industrial exports; computers and oil

drilling and exploration equipment.

COMPUTER S

The computer industry in the PRC has received relatively little attention in the West.

Western computers did not begin to appear

in China until several years ago, and relative-
274 ● Technology and East-West Trade

ly little information on this industry is available. Western sources are primarily limited

to a series of trip reports which record the

observations of delegations that have traveled in China in the past 5 years,65 and a 1973

CIA report on computers in the PRC. The

latter provided details on production facilities and on performance characteristics of

many domestically produced computers.66

The CIA material reveals the extent to

which the Chinese computer industry before

1960 relied on Soviet assistance; the trip reports often provide excellent information on

the present technical level of these computers. Nevertheless, discussion of this industry

must remain incomplete and inconclusive.

‘]’rrhese are available through the National Council for U. S.-

China Trade.

“Central Intelligence Agency, The Computer industry in

the People Republic of (’hina, National Foreign Assessment

Center, 1973. I

China produced its first computer in 1958

from designs provided by the U.S.S.R. Subsequent models were also based on Soviet

designs or prototypes. The Sine-Soviet split

occurred before the development of Soviet

computers based on transistors, but the

PRC was able to continue its domestic development. It produced a second-generation

computer in 1965, only about 3 years after

the introduction of transistorized computers

in the U.S.S.R. A computer based on integrated circuits appeared within about 2

years of such models in the U.S.S.R. In 1974,

the PRC announced the production of its

first computer capable of 1 million operations per second. (In comparison, American

computers were then operating with speeds

of about 12 million operations per second.)

The Chinese are presently capable of building computers with speeds higher than any

reported Soviet computer in production.

Photo credit: Hsinhua News Agency

Testing calculators produced domestically in the PRC
Ch. Xl— Western Technology in the People’s Republic of China . 275

This might suggest that the Chinese have

been able to surpass the U.S.S.R. in computer technology, but the impression is misleading. The U.S.S.R. is capable of producing

relatively large quantities under conditions

of serial production, but virtually all Chinese

computers are prototypes or small batch

models. The stock of computers in the

U.S.S.R. is at least 10, if not 20, times that of

the PRC. Only a few factories in China produce more than a few computers each year,

and only one of these is equipped with

modern automated equipment for assembly

and testing of computer components and

final products.

As was the case in the U. S. S. R., the quality of Chinese computer peripherals and software lags significantly behind the performance of the central processing unit, thus limiting the effectiveness of the computer. This

is an area that is currently receiving high

priority, as is the development of better production capabilities to meet the demand for

larger quantities of higher quality integrated

circuits. At present, China’s integrated circuits are about 7 years behind the state-ofthe-art in the West, and the lag in production

technology and production capacity is even

greater. Although China has been able to

close some of the gap in its production of advanced integrated circuits, it. has done so

only in small-scale laboratory production.

The methods used to achieve these results

are outdated, the production process inefficient, and the number of devices that can be

manufactured is limited. In order to meet

this shortcoming, the PRC attempted to purchase a Japanese turnkey plant for the production of integrated circuits (ICs). This

plant was to be part of a deal that included

facilities for the production of color television sets. The IC portion of the project was

blocked by CoCom restrictions. Nonetheless,

the Chinese have begun to close the gap in

the production of ICs. As their capability in

this area increases, computer production will

also begin to expand more rapidly. But,

while the availability of better ICs is important to the production of new computers

with very high speeds, the most important

advantage of their increased availability will

be to reduce the size and production costs of

those computers already available in limited

quantities in China.

Essential to the effective use of those computers produced in the PRC are improvements in the quality and range of peripheral

devices. Available primary memory, for instance, lags far behind both Western and

Soviet computers. Although access time is

reasonably good by Western standards, the

limited core memory is a great problem,

especially in light of an even greater lag

behind the West in other online storage

capabilities.

Magnetic drums and magnetic tapes continue to be the predominant form of other online storage for Chinese computers. Magnetic disk use did not appear on a prototype

computer until late in 1977. Thus far, there

are believed to be only two models capable of

making use of disks for storage, and those

disks that are available have a capacity onethird that of the best disks now being produced in the U.S.S.R. and Eastern Europe.

In addition to problems with insufficient

memory capacity, Chinese computers are

limited in the rate at which information can

be fed into the computer and put out by the

system. The principal forms of input continue to be keyboard and papertape readers.

There has been no evidence of the use of

cardreaders, which would represent a significant improvement over the current state of

input technology. This is a particular liability for problems that involve large data-handling requirements, or frequent updating of

data banks. Such tasks are also difficult for

Chinese computers since they place a high

demand on the availability of a range of

high-quality output devices,

The Chinese produce standard line printers in quantities that seem to meet their demand but, at 600 to 800 lines per second, the

unit is slow by Western standards. A newer

model, which employs electrostatic printing

technology and has a speed of 1,800 lines per

minute, has appeared in the most advanced
276 ● Technology and East-West Trade

computer prototypes, but is unlikely to be

widely available soon. The availability of

other terminals and output devices is similarly limited, and those that are produced

employ early technology.

The small number of standardized computer models has delayed the development

of software, a situation similar to that in the

U.S.S.R. prior to the introduction of Ryad.

Efforts are now focused on extending the

repertoire of the languages most commonly

used in the West and on training programmers

in adapting programs for use in different

models.

The architecture of the first series of

Chinese minicomputers seems to have been

based on an American prototype, but the

second series was almost certainly designed

by the Chinese themselves—after extensive

examination of the architecture of both IBM

and Control Data computers. The goal for

this second series is to achieve software comparability and program interchangeability,

but there are indications that different factories producing the same model are using

different hardware designs.

Since the cessation of extensive transfers

of technology from the U. S. S. R., the Chinese

computer industry has received very limited

assistance from abroad, in either manufacturing technology or computers themselves.

In fact, no country appears to have transferred computer manufacturing technology

to China since 1960. This partly explains the

comparatively slow progress of the Chinese

in serial production relative to their progress

in the design of prototypes. Limited imports

of Western computers took place during the

mid-1960’s, but no complete or detailed survey of the sales from this period, or for the

1970’s, is available.

France and Britain both sold several computers to the PRC between 1964 and 1967,

before imports of virtually all Western technology were blocked by the policies of the

cultural revolution. These systems went to

several different end users for seismic data

analysis, process control, plant automation,

and medical research. The two largest are believed to be in Beijing’s Central Statistical

Office. The primary source of demand

throughout the 1970’s has continued to be

plant automation and data handling or analysis.

Accurate figures for computer imports

during the 1970’s are unavailable, but it is

unlikely that major orders were placed

before 1973, and these have remained quite

limited since. Orders during 1973 and 1974

probably amounted to about $6 million to $7

million per year, rising about $25 million for

each of the next several years. During 1978,

these figures rose dramatically, primarily as

a result of a single $69 million contract with

an American firm, but imports much in excess of $100 million per year are considered

unlikely.

China desires to be as self-sufficient as

possible, but difficulties in serial production

of computers are likely to persist. Imports of

individual Western models will contribute

much by providing computers with large

data-handling capabilities for networks that

involve data transmission and the use of

remote terminals, and for various business

and advanced scientific uses. The acquisition

of software and the increased exposure of

Chinese programmers and users to Western

technology will also aid the Chinese in the

advancement of their own software capabilities. Imported computers will be placed in

high-priority areas, but less-than-critical

users will have to await improvement in

domestic manufacturing capabilities. Thus,

China has little interest in purchasing many

small- or medium-size computers. These will

be produced domestically; until then, end

users will do without.

A shift in the primary motivation behind

the selection of computer imports appears to

have occurred in recent years. The demand

for computers with specific applications,

particularly in the all-important petroleum

industry, indicates a preoccupation with the

specific services rendered by individual com-
Ch. Xl— Western Technology in the People’s Republic of China ● 277

puters rather than more general software acquisition. Most other computers imported

by the Chinese have been for process control

at imported turnkey plants, or for end uses

for which domestic computers are not particularly well-suited—analyses of weather

data, computers and terminals for the Bank

of China, and air traffic control.

On the other hand, some imports are motivated primarily by the desire to obtain prototypes for domestic production. Minicomputers probably fall into this category. The

secondary benefits of all imports, moreover,

lie in the exposure they provide to terminals,

peripherals, software, etc. Any Western

computer, therefore, may ultimately help in

the design of better Chinese products.

Western export controls place a severe

constraint on the purchase of computer manufacturing technology. They also limit the

sale of systems with certain performance

characteristics. Relaxation of these regulations would almost certainly result in the

allocation of greater amounts of foreign currency for the purchase of large, advanced

Western computers in high-priority sectors.

Access to these systems would provide technology surpassing China’s present technical

frontier and specific capabilities to benefit

the entire economy.

Little is known about the criteria employed in selecting Western suppliers. As in

the U. S. S. R., the most important factor

seems to be the desire to obtain the best

available technology. In many cases this

would point to American suppliers, despite

the difficulty of obtaining U.S. export

licenses. For example, a Japanese firm

recently contracted to supply computers for

the Chinese Meteorological Center, but only

after an American computer firm withdrew

from negotiations for export control reasons.

When the contract was signed by the Japanese, the United States tried to block the

sale through CoCom. Safeguards were added

and the sale was ultimately approved. At the

moment, the Chinese have no difficulties obtaining financing, although this may change

as their hard-currency debt grows (see

chapter III). Thus, the only other factor influencing choice of supplier may be the

special relationship between the PRC and

Japan. The Japanese are willing to provide

the Chinese with large amounts of sophisticated technology. In the future, this may include manufacturing technology for the production of computers or peripheral equipment. The Japanese are more likely to agree

to supply such technology than any other

Western country (see chapter IX) and further enjoy the advantage of their experience

with the character alphabet. It is likely,

then, that the two most important sources of

computer technology for the Chinese will be

firms from the United States and Japan.

It is still too early to determine the impact

of Western computer technology on the Chinese economy. Although the imports of the

1960’s clearly aided the design of later domestically produced computers, no Chinese

models seen since closely resemble Western

prototypes. The major effect of Western

technology so far has been as a source of information and starting point for R&D within

the domestic computer industry. The lack of

direct transfers of manufacturing technology is the most important factor affecting

future impacts.

It will take time for the Chinese to make

full use of imported technology. Some Western computers remain advanced beyond the

understanding of many of the people working with them. The adaptation and diffusion

of the technology embodied in accompanying software is likely to be more rapid than

that of the hardware. Again, however, there

will be significant lags before the availability

of this software has an appreciable effect on

the ability of the Chinese to generate their

own software capabilities.

OIL AND GAS

The oil industry, like most other sectors of

the economy, was extremely underdeveloped

in 1949, when the PRC came into existence.

Levels of production were very low and

China had relied heavily on imports to equip
278 ● Technology and East-West Trade

its small domestic industry. Potential reserves were believed to be inconsequential,

and much of the country had not been fully

explored.

During the 1950’s, due primarily to the efforts of the U. S. S. R., this picture changed

considerably. One of the most important

forms of assistance provided by the Soviet

Union was in training. Between 1950 and

1958, some 8,000 skilled workers, 6,500 students, and about 1,000 industry experts

from China were trained in the Soviet Union.

The data does not show how many of these

were involved in the oil industry, but it is

known that about 450 Soviet petroleum experts were sent to the PRC to provide technical assistance.

In addition, the U.S.S.R. provided large

amounts of equipment to the Chinese oil industry. Imports from the U.S.S.R. and Eastern Europe accounted for nearly 65 percent

of all equipment supplied to this sector during the first 5-year plan (1953-58).

By 1954, China had begun expanding its

production of basic tools and parts (e.g., oilextraction drilling tools, pumps, and small

compressors), but it was not until the

U.S.S.R. helped it to establish several large

plants for the production of oilfield equipment that China’s output began to expand

significantly. By 1958, using Soviet models,

the Chinese had increased production of oil

industry equipment.

All Soviet technical help was withdrawn

and equipment sales virtually ceased in

1960, although Romania remained an important source of oil and gas technology. The

loss of Soviet aid was sorely felt, however,

particularly in the area of geological prospecting. The U.S.S.R. had provided extensive help in carrying out a number of serial

magnetic, gravity, and seismic surveys.

These had led to the identification of the

fields that have since become the center of

China’s industry.

The most important oil reserves in China

now, and for the past two decades, have been

the Taching fields in the northeast part of

the country. The U.S.S.R. began prospecting

in this area in 1955, and drilling began in

1958. Fortunately, most of the wells drilled

during the first years were relatively shallow

and did not tax the capacities of domestically produced rigs.

After 1960, research programs aimed at

improving technological levels in the oil industry were begun and many of these centered on the analyses of the available foreign

equipment. These efforts paid off. From

1962 to 1963, China’s output of oil equipment increased by more than 60 percent. By

the following year, 1963 production was

more than doubled.

But the equipment now being produced,

primarily for shallow drilling, was patterned

primarily on Soviet and Romanian design

which lagged behind the technology employed in the West. The Chinese made only

very limited use of equipment imports from

the West before the 1970’s. Although small

purchases were made from Japan and

France there were no direct sales by the

United States until after 1972, although

there is evidence that some American equipment designs were used by the Chinese to

aid in the development of domestic designs.

This technology was acquired either through

equipment sales from third parties, or

through foreign equipment incorporating

U.S. technology.

Detailed knowledge of equipment and oil

production in China is limited in the West,

where, again, trip reports are among the few

sources of information. Furthermore, because most Western oil technology was not

acquired until after 1972, its full impact on

production and the level of domestic equipment development has not yet become apparent.

According to most Western oil industry

experts, the technology being employed by

the Chinese for geological prospecting, drilling, and production is about at the level of

U.S. technology circa 1950. The Chinese

themselves estimate that their technical capabilities in various phases of the oil indus-
Ch. Xl— Western Technology in the People’s Republic of China ● 279

i

Photo credit: U.S. China Trade Council

Drilling platform in the Pohai Gulf

try lag behind Western state-of-the-art by 15

to 20 years. Often, Chinese oil equipment

technology has been copied or adapted from

the dated technology of the U.S.S.R. or

Eastern Europe. China, therefore, experiences many of the same problems in this sector as the U. S. S. R.. although often on a

larger scale. Geological prospecting technology is unsophisticated, and this limits the

usefulness of other activities. Further, the

Chinese seem to lag the Soviet Union in

deep-drilling capabilities, the level of most

well-completion equipment and automation

of production facilities could be significantly

improved and technical assistance is sorely

needed in offshore operations.

Much of China’s oil reserves still lie undiscovered, and domestic prospecting equipment is inadequate to this task. The geology

of China’s three largest fields, Taching,

Shengli, and Takang, involves complicated

structures, the result of unpredictable fracturing which has left oil dispersed in a number of small pools. Efficient exploration requires sophisticated prospecting equipment,

including such equipment for the collection

and analysis of seismic data as computers
280 ● Technology and East-West Trade

with specially designed software. The Chinese have already imported several of these,

in order both to obtain the capabilities of the

equipment itself and to gain access to the

software. It will be some time before domestic production is adequate to meet the demand for large-scale high-quality prospecting equipment.

Most of the geological prospecting equipment imported by China thus far has come

from the United States, which sells the best

technology available in the field. The National Council for U.S.-China Trade has estimated that such sales totaled nearly $40 million between 1973 and mid-1977.

At the end of 1977, it was reported that

workers at the Shengli oilfields had both

greatly increased drilling speeds and reduced costs by 50 percent by using domestically produced synthetic diamond drill bits

and high-pressure jet drilling techniques.

Western drilling and well-completion technologies that might lead to further improvements are mud technology and cementing.

Drilling-mud lubricates the cutting bit, aids

in removing waste material from the well,

and seals the borehole. In the West, a variety of chemical additives for the mud are

available, but a more primitive practice is to

mix soil with the fluid being pumped into the

well. The Chinese primarily use the latter

technique.

There are also indications that significant

improvements could be made in the cementing operations necessary for well completion.

Present cementing methods are predominantly either domestic or imported from

Romania or France.

There is no detailed information on quality

of Chinese wellhead equipment or the number of operating wells. Whatever their number, several production problems are being

encountered. Most Chinese oil has a high

paraffin content. This means that extractive

equipment must be heated during the winter

to maintain oil flow. Other production problems arise from the high water content of the

oil and from complex geological structures.

By early 1979, 85 percent of the oil output of

at least one field was measured and recorded

by computer, but there have been no reports

of automatic metering at other fields, and

very little evidence of automation of any

other aspects of field operations.

The Chinese claim to be relatively advanced in their understanding and use of

water-flooding as a means of increasing well

production, but there is evidence, for example, that injection control and the monitoring of injection performance remains limited.

In the West, water injection is used heavily

in mature or declining fields. In both the

U.S.S.R. and the PRC, however, water injection is often used at new fields and with

recently completed wells. This may increase

the initial rate of production, but it also

reduces the ultimate recovery rate from the

reserve. Because the reserves at China’s major oilfields are fragmented into small pools,

it is difficult to know whether low pressures

at a particular well is symptomatic of the

state of the field as a whole. Low wellhead

pressure would indicate that rapid growth

rates from the field cannot be achieved by

modern technology alone.

Initially, China depended heavily on the

U.S.S.R. for assistance with drilling and extraction of onshore reserves; the Soviets provided both equipment and assistance in the

manufacture of equipment. Eastern Europe’s technological contribution to the Chinese industry was relatively minor at this

time. The role of the West was virtually nonexistent.

During the 1960’s, after the U.S.S.R.’s importance to China as a source of drilling and

extraction equipment drastically declined,

the Chinese continued to rely on the Soviet

equipment already in place, using it as

models for domestic production. In the

1970’s, China turned increasingly to the

West for both equipment and technology to

improve and expand domestic production,

but as yet there have been no sales of turnkey plants for production of oilfield equipment. Earlier, Chinese desire for self-sufficiency led them to accept delivery of equip-
Ch. Xl— Western Technology in the People’s Republic of China ● 281

ment without participating in training on

operation and maintenance. More recent

sales have included such training, however.

Most sales of drilling and extraction

equipment from the West to the PRC have

come from American firms, but Western

sales of onshore drilling and extraction

equipment through mid-1976 totaled only

about $13.4 million. The pace of these purchases has since been stepped up. The Chinese oil equipment market is now highly

competitive, and many Western companies

competing in it are reluctant to discuss the

details, particularly the value, of recent

sales. Accounts of oil equipment sales can,

therefore, be assumed to understate the true

volume of equipment and technology transferred.

An upswing in Chinese equipment purchases for drilling and extraction of onshore

reserves has occurred over the past few

years. In 1978, the Chinese bought a wide

variety of drilling and extraction equipment.

One French company has signed a $22.9 million contract for drilling equipment, but all

other major sales are believed to have been

made by U.S. companies. Sales have included $10 million worth of drill bits, drilling

tools, submersible pumps, down-hole instruments, and wellhead equipment. In some

cases, China has chosen to pay a higher price

in order to gain access to the latest technology. For example, it has purchased drill bits

with tungsten-carbide cutting structures

and a new bearing design. These are said to

last three to four times as long as previous

designs and are particularly important to

help China with deep drilling.

China also gained access to a variety of

other equipment to help improve drilling performance and extraction capabilities. It has

purchased $100,000 worth of petroleum-handling tools, $7 million worth of workover rigs

and blowout preventers, as well as unknown

values of down-hole instruments, wellhead

and well-completion equipment, well-testing

instruments, and other equipment. Much of

this has been bought in limited quantities,

suggesting that China is seeking primarily

to import prototypes for duplication.

The total value of 1978 contracts for

which values are known is about $50 million.

These figures indicate that China is likely to

continue looking to the West as a primary

source of drilling and extraction technology,

although Romania may continue to be an important source of technology and equipment

for drilling rigs and cementing equipment.

While purchases from the West are made primarily for the embodied technology, purchases from Romania are used to obtain supplies of currently needed equipment.

Serious difficiencies exist in Chinese prospecting, drilling, and extraction methods

and equipment, yet China has successfully

developed several major oilfields, and

reached a production level of about 200 million tons per year. This is about 25 percent of

U.S. output. Extensive reserves of oil and

possibly natural gas, still largely unexplored, are believed to exist in fields in the interior of China and in its offshore waters. To

exploit the interior fields, China must use

deep-drilling equipment. Heretofore, little

deep drilling has been carried out; the development of these fields has been delayed, primarily by the tremendous cost involved in

building long-distance pipelines to transport

the oil.

Delays in offshore production result more

from technological problems. The Chinese

(as the Soviet) oil industry lags farthest

behind the West in offshore technology.

China’s first offshore drilling activity began

only in the late 1960’s, when limited drilling

was undertaken from fixed platforms in shallow water in the Pohai Gulf. The Chinese

have relied extensively on foreign technology for offshore geological prospecting capabilities, purchasing entire vessels as well as

smaller pieces of equipment. Two of three

prospecting vessels in use in offshore waters

in 1976 were outfitted by copying Western

equipment.

A large program to import Western offshore equipment was begun in late 1972,
282 ● Technology and East-West Trade

starting with the purchase of a Japanese

jack-up drilling rig and accompanying workship. The value of orders, all placed with the

West within little more than a year, came to

more than $175 million, a figure greatly exceeding the total value of all Chinese equipment then in use for offshore exploration and

development. Most purchases were for

equipment that embodied high technology,

but in some cases–dredges, for example–

the technology is not sophisticated. Some of

the PRC’s decisions to import rather than

build such equipment can be attributed to a

desire to begin using the equipment quickly.

This approach typifies the Chinese use of

Western imports to fill production gaps as

much as to fill technology gaps.

The orders placed in 1972 and 1973 for oil

industry equipment ultimately resulted in a

sharp drop in foreign exchange reserves, and

the drive for offshore equipment contracts

from the West greatly abated thereafter.

The decision to cut back imports was partially the result of traditional Chinese conservative fiscal policy, but the political uncertainties as rival political factions battled for

position before and after the death of Mao

Zedong were also factors. This political conflict made planners more cautious, particularly since reliance on foreign products and

technology was a central point over which

the two sides disagreed.

Despite this retrenchment, equipment imports for offshore needs totaled at least

another $125 million through mid-1977, reflecting the priority accorded them. They

continue to dominate oil industry equipment

purchases. Over the past 2 years, Chinese

orders for Western offshore equipment have

again risen sharply. The PRC decided to

make much greater use of Western technology in high-priority industries as Chinese

foreign exchange reserves recovered and the

industry had more time to assimilate foreign

technology that had already been imported.

Preliminary estimates for the 2-year period

from mid-1977 to mid-1979 indicate Chinese

orders for more than $275 million in offshore

equipment, about 80 percent in drilling

equipment.

Geological prospecting has generated a

great deal of interest as the first area in

which Western firms have considered going

beyond equipment sales and training. A

number of major U.S. oil companies, along

with representatives from Japan and several

European countries, have discussed the possibility of assisting the Chinese directly with

exploration, and even production, of offshore

reserves. The most important roles in such

cooperative ventures are likely to be played

by Japan and several American oil firms.

By early in 1974, three U.S. oil companies—Exxon, Phillips, and Union Oil of California–had signed a “group shoot” exploration contract, in partnership with the foreign-owned firms of Shell, Elf-Aquitaine, and

British Petroleum (project leader); and Atlantic Richfield became the first American

firm to sign a contract for sole exploration of

Chinese prospects. Other companies are also

expected to enter the market, since it appears that the Chinese are willing to permit

extensive Western involvement in offshore

development. Reportedly, the Chinese have

not imported any turnkey plants for the production of offshore or onshore oil equipment,

but moves in this direction may be underway.

The Chinese have clearly made a serious

commitment to the development of their offshore oilfields. They realize that the active

acquisition of Western equipment, technology and experience will significantly speed

the development process. It maybe that Chinese experience in this stage of offshore development will help to shape the size and direction of Western involvement in China’s

onshore oil program.

Until 1972, the amount of Western technology transferred to the oil industry was

limited by conscious policy decision. Yet

even then the Chinese recognized their need

for such technology. They had relied heavily

on the U.S.S.R. during the 1950’s, and later

on Romania, particularly for deep-drilling

equipment. There is ample evidence that individual pieces of equipment have been

copied by the Chinese from Western, and
Ch. Xl— Western Technology in the People’s Republic of China 283

particularly American, models. Several oil

industry experts believe that the Chinese

could make very effective use of greater

transfers of technology from the West in

several areas of the onshore oil industry. The

Chinese have reportedly made detailed

studies of the state of Western technology,

and are likely to make a greater effort in the

future to increase its acquisition. Shortages

of seismic equipment and computerized field

units are posing serious problems for the

geological prospecting sector in locating

deeper reserves. Improvements in drilling instruments could produce important changes

in performance by raising the effectiveness

of the limited number of available rigs. The

Chinese have limited experience with secondary recovery methods other than water injection. Greater experience with alternative

techniques could produce results without a

major need for additional equipment.

It is still too soon to assess Chinese

capabilities to absorb the technology embodied in purchased equipment. Some experts point to the low level of experience of

the average oil industry workers and express

doubts as to the level at which this equipment can be operated and maintained. Imported equipment used in technical schools

and colleges for training may ameliorate this

problem.

CONCLUSIONS

Transfers of foreign technology have influenced both the level and direction of

economic progress in the PRC. In the immediate postrevolutionary period, Soviet equipment and expertise contributed heavily to

Chinese industrialization. With the intensification of the Sine-Soviet rift in 1960 this

source of technology was eliminated. Imports of technology did not again play a significant role in Chinese growth until the mid1970’s—this time, however, through transfers of plant, equipment, and associated

technology from the West. Japan has been

the major beneficiary of the process; thus

far, the United States has succeeded in

garnering only a small (7 to 8 percent) share

of PRC imports.

China’s imports from the West have been

crucial to the development of key industrial

sectors such as steel and petrochemicals.

China’s modernization drive, although significantly less ambitious now than as originally announced in February 1978, depends

on imports of plant and associated technology to play an important role in strengthening the industrial infrastructure, raising productivity in the agricultural sector, and in

the exploration and development of energy

resources. While Japan will undoubtedly

benefit most from this drive in terms of increased export receipts, the United States

can significantly increase its share of Chinese purchases through a normalization of

trade relations as well as extension of official

export credit facilities.
Appendix

Export Administration Act

of 1979
PUBLIC LAW 96-72—SEPT. 29, 1979 93 STAT. 503 93 STAT. ,504 PUBLIC LAW 96-72—SEPT. 29, 1979

Public Law 96-72

96th Congress

An Act

To provide authority to regulate exports, to improve the efficiency of export Sept 29, 1979

regulation, and to minimize interference with the ability to engage in commerce [S 737]

Be it enacted by the Senate and House of Representatives of the

United States of America in Congress assembled, Export

Administration

SHORT TITLE Act of 1979

SeCTION 1. This Act may be cited as the “Export Administration 50 USC app. 2401

Act of 1979”. note

FINDINGS 50 USC app 2402.

SEC. 2. The Congress makes the following findings 50 USC app.

( 1 ) The ability of United States citizens to engage in interna- 2401

tional commerce is a fundamental concern of United States

policy.

(2) Exports contribute significantly to the economic well-being

of the United States and the stability of the world economy by

increasing employment and production in the United States, and

by strengthening the trade balance and the value of the United

States dollar, thereby reducing inflation. The restriction of

exports from the United States can have serious adverse effects

on the balance of payments and on domestic employment,

particularly when restrictions applied by the United States are

more extensive than those imposed by other countries.

(3) It is important for the national interest of the United States

that both the private sector and the Federal Government place a

high priority on exports, which would strengthen the Nation’s

economy.

(4) The availability of certain materials at home and abroad

varies so that the quantity and composition of United States

exports and their distribution among importing countries may

affect the welfare of the domestic economy and may have an

important bearing upon fulfillment of the foreign policy of the

United States.

(5) Exports of goods or technology without regard to whether

they make a significant contribution to the military potential of

individual countries or combinations of countries may adversely

affect the national security of the United States.

(6) Uncertainty of export control policy can curtail the efforts

of American business to the detriment of the overall attempt to

improve the trade balance of the United States.

(7) Unreasonable restrictions on access to world supplies can

cause worldwide political and economic instability, interfere

with free international trade, and retard the growth and development of nations.

(8) It is important that the administration of export controls

imposed for national security purposes give special emphasis to

the need to control exports of technology (and goods which

contribute significantly to the transfer of such technology) which

could make a significant contribution to the military potential of

any country or combination of countries which would be detrimental to the national security of the United States.

(9) Minimization of restrictions on exports of agricultural

commodities and products is of critical importance to the maintenance of a sound agricultural sector, to achievement of a positive

balance of payments, to reducing the level of Federal expenditures for agricultural support programs, and to United States

cooperation in efforts to eliminate malnutrition and world

hunger.

DECLARATION OF POLICY

SEC. 3. The Congress makes the following declarations:

(1) It is the policy of the United States to minimize uncertainties in export control policy and to encourage trade with all

countries with which the United States has diplomatic or trading

relations, except those countries with which such trade has been

determined by the President to be against the national interest.

(2) It is the policy of the United States to use export controls

only after full consideration of the impact on the economy of the

United States and only to the extent necessary—

(A) to restrict the export of goods and technology which

would make a significant contribution to the military potential of any other country or combination of countries which

would prove detrimental to the national security of the

United States;

(B) to restrict the export of goods and technology where

necessary to further significantly the foreign policy of the

United States or to fulfill its declared international obligations; and

(C) to restrict the export of goods where necessary to

protect the domestic economy from the excessive drain of

scarce materials and to reduce the serious inflationary

impact of foreign demand.

(3) It is the policy of the United States (A) to apply any

necessary controls to the maximum extent possible in cooperation with all nations, and (B) to encourage observance of a

uniform export control policy by all nations with which the

United States has defense treaty commitments.

(4) It is the policy of the United States to use its economic

resources and trade potential to further the sound growth and

stability of its economy as well as to further its national security

and foreign policy objectives.

(5) It is the policy of the United States—

(A) to oppose restrictive trade practices or boycotts fostered or imposed by foreign countries against other countries

friendly to the United States or against any United States

person;

(B) to encourage and, in specified cases, require United

States persons engaged in the export of goods or technology

or other information to refuse to take actions, including

furnishing reformation or entering into or implementing

agreements, which have the effect of furthering or supporting the restrictive trade practices or boycotts fostered or

imposed by any foreign country against a country friend] y to

the United States or against any United States person; and
Ill Ill IllI I I

PUBLIC LAW 96-72—SEPT. 29, 1979 93 STAT. 505

(C) to foster international cooperation and the develop

ment of international rules and institutions to assure reasonable access to world supplies.

(6) It is the policy of the United States that the desirability of

subjecting, or continuing to subject, particular goods or technology or other information to United States export controls should

be subjected to review by and consultation with representatives

of appropriate United States Government agencies and private

industry.

(7) It is the policy of the United States to use export controls,

including license fees, to secure the removal b foreign countries

of restrictions on access to supplies where such restrictions have

or may have a serious domestic inflationary impact, have caused

or may cause a serious domestic shortage, or have been imposed

for purposes of influencing the foreign policy of the United

States. In effecting this policy, the President shall make every

reasonable effort to secure the removal or reduction of such

restrictions, policies, or actions through international cooperation and agreement before resorting to the imposition of controls

on exports from the United States. No action taken in fulfillment

of the policy set forth in this paragraph shall apply to the export

of medicine or medical supplies.

(8) It is the policy of the United States to use export controls to

encourage other countries to take immediate steps to prevent the

use of their territories or resources to aid, encourage, or give

sanctuary to those persons involved in directing, supporting, or

participating in acts of international terrorism. To achieve this

objective, the President shall make every reasonable effort to

secure the removal or reduction of such assistance to international terrorist through international cooperation and agreement before resorting to the imposition of export controls.

(9) It is the policy of the United States to cooperate with other

countries with which the United States has defense treaty

commitment in restricting the export of goods and technology

which would make a significant contribution to the military

potential of any country or combination of countries which would

prove detrimental to the security of the United States and of

those countries with which the United States has defense treaty

commitments.

(10) It is the policy of the United States that export trade by

United States citizens be given a high priority and not be

controlled except when such controls (A) are necessary to further

fundamental national security, foreign policy, or short supply

objective, (B) will clearly further such objectives, and (C) are

administered consistent with basic standards of due process.

(11) It is the policy of the United States to minimize restrictions

on the export of agricultural commodities and products.

GENERAL PROVISIONS

SEC. 4. (a) TYPES OF Licenses.-Under such conditions as may be 50 USC app.

imposed by the Secretary which are consistent with the provisions of

this Act, the Secretary may require any of the following types of

export licenses:

(1) A validated license, authorizing a specific export, issued

pursuant to an application by the exporter.

(2) A qualified general license, authorizing multiple exports,

issued pursuant to an application by the exporter.

93 STAT. 506 PUBLIC LAW 96-72—SEPT. 29, 1979

(3) A general license, authorizing exports, without application

by the exporter.

(4) Such other licenses as may assist in the effective and

efficient implementation of this Act.

(b) COMMODITY CONTROL LIST–The Secretary shall establish and

maintain a list (hereinafter in this Act referred to as the “commodity

control list”) consisting of any goods or technology subject to export

controls under this Act.

(c) FOREIGN AVAILABILITY.-In accordance with the provisions of

this Act, the President shall not impose export controls for foreign

policy or national security purposes on the export from the United

States of goods or technology which he determines are available

without restriction from sources outside the United States in significant quantities and comparable in quality to those produced in the

United States, unless the President determines that adequate evidence has been presented to him demonstrating that the absence of

such controls would prove detrimental to the foreign policy or

national security of the United States.

(d) RIGHT OF EXPORT.-NO authority or permission to export maybe

required under this Act, or under regulations issued under this Act,

except to carry out the policies set forth in section 3 of this Act.

(e) DELEGATION OFAUTHORITY -The President may delegate the

power, authority, and discretion conferred upon him by this Act to

such departments, agencies, or officials of the Government as he may

consider appropriate, except that no authority under this Act may be

delegated to, or exercised by, any official of any department or agency

the head of which is not a pointed by the President, by and with the

advice and consent of the Senate. The President may not delegate or

transfer his power, authority, and discretion to overrule or modify

any recommendation or decision made by the Secretary, the Secretary of Defense, or the Secretary of State pursuant to the provisions

of this Act.

(f) NOTIFICATION OF THE PUBLIC; CONSULTATION WITH BUSINESS.—

The Secretary shall keep the public fully apprised of changes in

export control policy an procedures instituted in conformity with d 

this Act with a view to encouraging trade. The Secretary shall meet

regularly with representatives of the business sector in order to

obtain their views on export control policy and the foreign availability of goods and technology.

NATIONAL SECURITY CONTROLS

50 USC app. SEC. 5. (a) AUTHORITY.--(1) In order to carry out the policy set forth 2404. in section 3(2)(A) of this Act, the President may, in accordance with

the provisions of this section,

he

prohibit or curtail the export of any

goods or technology subject tojurisdiction of the United States or

exported by any person subject to the jurisdiction of the United

States, The authority contained in this subsection shall be exercised

by the Secretary, in consultation with the Secretary of Defense, and

such other departments and agencies as the Secretary considers

appropriate, and shall be implemented by means of export licenses

described in section 4(a) of this Act.

Publication in (2)(A) Whenever the Secretary makes any revision with respect to Federal

Register. any goods or technology, or with respect to the countries or destinations, affected by export controls imposed under this section, the

Secretary shall publish in the Federal Register a notice of such

revision and shall specify in such notice that the revision relates to

controls imposed under the authority contained in this section.

●

.
PUBLIC LAW 96-72—SEPT. 29, 1979

(B) Whenever the Secretary denies any export license under this

section, the Secretary shall specify in the notice to the applicant of

the denial of such license that the license was denied under the

authority contained in this section. The Secretary shall also include

in such notice what, if an , modifications in or restrictions on the

goods or technology for which the license was sought would allow

such export to be compatible with controls imposed under this

section, or the Secretary shall indicate in such notice which officers

and employees of the Department of Commerce who are familiar with

the application will be made reasonably available to the applicant for

consultation with regard to such modifications or restriction, if

appropriate.

(3) In issuing regulations to carry out this section, particular

attention shall be given to the difficulty of devising effective safeguards to prevent a country that poses a threat to the security of the

United States from diverting critical technologies to military use, the

difficulty of devisingeffective safeguards to protect critical goods, and

the need to take effective measures to prevent the reexport of critical

technologies from other countries to countries that pose a threat to

the security of the United States. Such regulations shall not be based

upon the assumption that such effective safeguards can be devised.

(b) POLICY TOWARD INDIVIDUAL COUNTRIES--.-In administering

export controls for national security purposes under this section,

United States policy toward individual countries shall not be determined exclusively on the basis of a country’s Communist or nonCommunist status but shall take into account such factors as the

country’s present and potential relationship to the United States, its

present and potential relationship to countries friendly or hostile to

the United States, its ability and willingness to control retransfers of

United States exports in accordance with United States policy, and

such other factors as the President considers appropriate. The President shall review not leas frequently than every three years in the

case of controls maintained cooperatively with other nations, and

annually in the case of all other controls, United States policy toward

individual countries to determine whether such policy is appropriate

in light of the factors specified in the preceding sentence.

(c) CONTROL LIST.--(1) The Secretary shall establish and maintain,

as part of the commodity control list, a list of all goods and technology

subject to export controls under this section. Such goods and technology shall be clearly identified as being subject to controls under this

section.

(2) The Secretary of Defense and other appropriate department

and agencies shall identify goods and technology for inclusion on the

list referred to in paragraph (l). Those items which the Secretary and

the Secretary of Defense concur shall be subject to export controls

under this section shall comprise such list. If the Secretary and the

Secretary of Defense are unable to concur on such items, t e matter

shall be referred to the President for resolution.

(3) The Secretary shall issue regulations providing for review of the

list established pursuant to this subsection not less frequently than

every 3 years in the case of controls maintained cooperatively with

other countries, and annually in the case of all other controls, in

order to carry out the policy set forth in section 3(2)(A) and the

provisions of this section, and for the prompt issuance of such

revisions of the list as may be necessary. Such regulations shall

provide interested Government agencies and other affected or potentially affected parties with an opportunity, during such review, to

submit written data, views, or arguments, with or without oral

presentation. Such regulations shall further provide that, as part of

93 STAT. 507 93 STAT. 508

Export license

denial, notice

Review

Regulatory

safeguards for

U.S. security.

Publication in

Federal

Register

Report to

Congress

Validated

Regulations. licenses,

requirement

Submittal of

written data,

views, or

arguments.

PUBLIC LAW 96-72—SEPT. 29, 1979

such review, an assessment be made of the availability from sources

outside the United States, or an of its territories or possessions, of

goods and technology comparable to those controlled under this

section. The Secretary and any agency rendering advise with respect

to export controls shall keep adequate records of all decisions made

with respect to revision of the list of controlled goods and technology,

including the factual and analytical basis for the decision, and, in the

case of the Secretary, any dissenting recommendations received from

(d) MILITARILY CRITICAL TECHNOLOGIES.-(1) The Secretary, in consultation with the Secretary of Defense, shall review and revise the

list established pursuant to subsection (c), as prescribed in paragraph

(3) of such subsection, for the purpose of insuring that export controls

imposed under this section- cover and (to the maximum extent

consistent with the purposes of this Act) are limited to militarily

critical goods and technologies and the mechanisms through which

such goods and technologies maybe effectively transferred.

(2) The Secretary of Defense shall bear primary responsibility for

developing a list of militarily critical technologies. In developing such

list, primary emphasis shall be given to—

(A) arrays of design and manufacturing know-how,

(B) keystone manufacturing, inspection, and test equipment,

and

(C) goods accompanied by sophisticated operation, application,

or maintenance know-how,

which are not possessed by countries to which exports are controlled

under this section and which, if exported, would permit a significant

advance in a military system of any such country.

(3) The list referred to in paragraph (2) shall be sufficiently specific

to guide the determinations of any official exercising export licensing

responsibilities under this Act.

(4) The initial version of the list referred to in paragraph (2) shall be

completed and published in an appropriate form in the Federal

Register not later than October 1, 1980.

(5) The list of militarily critical technologies developed primarily

by the Secretary of Defense pursuant to paragraph (2) shall become a

part of the commodity control list, subject to the provisions of

subsection (c) of this section.

(6) The Secretary of Defense shall report annually to the Congress

on actions taken to carry out this subsection.

(e) EXPORT LICENSES.—(1) The Congress finds that the effectiveness

and efficiency of the process of making export licensing determinations under this section is severely hampered by the large volume of

validated export license applications required to be submitted under

this Act. Accordingly, it is the intent of Congress in this subsection to

encourage the use of a qualified general license in lieu of a validated

license.

(2) To the maximum extent practicable, consistent with the

national security of the United States, the Secretary shall require a

validated license under this section for the export of goods or

technology only if—

(A) the export of such goods or technology is restricted pursuant to a multilateral agreement, formal or informal, to which the

United States is a party and, under the terms of such multilateral agreement, such export requires the specific approval of

the parties to such multilateral agreement;

(B) with respect to such goods or technology, other nations do

not possess capabilities comparable to those possessed by the

United States; or
111111111 I I I

PUBLIC LAW 96-72–SEPT. 29, 1979 93 STAT. 509

(C) the United States is seeking the agreement of other

suppliers to apply comparable controls to such goods or technology and, in the judgment of the Secretary, United States export

controls on such goods or technology, by means of such license,

are necessary pending the conclusion of such agreement.

(3) To the maximum extent practicable, consistent with the

national security of the United States, the Secretary shall require a

qualified general license, in lieu of a validated license, under this

section for the export of goods or technology if the export of such

goods or technology is restricted pursuant to a multilateral agreement, formal or informal, to which the United States is a party, but

such export does not require the specific approval of the parties to

such multilateral agreement.

(4) Not later than July 1, 1980, the Secretary shall establish

procedures for the approval of goods and technology that may be

exported pursuant to a qualified general license.

(f) FOREIGN AVAILABILITY . --(1) The Secretary, in consultation with

appropriate Government agencies and with appropriate technical

advisory committees established pursuant to subsection (h) of this

section, shall review, on a continuing basis, the availability, to

countries to which exports are controlled under this section, from

sources outside the United States, including countries which participate with the United States in multilateral export controls, of any

goods or technology the export of which requires a validated license

under this section. In any case in which the Secretary determines, in

accordance with procedures and criteria which the Secretary shall by

regulation establish, that an such goods or technology are available

in fact to such destinations from such sources in sufficient quantity

and of sufficient quality so that the requirement of a validated license

for the export of such goods or technology is or would be ineffective in

achieving the purpose set forth in subsection (a) of this section, the

Sexretary may not, after the determination is made, require a

validated license for the export of such goods or technology during

the period of such foreign availability, unless the President determines that the absence of export controls under this section would

prove detrimental to the national security of the United States. In

any case in which the President determines that export controls

under this section must be maintained notwithstanding foreign

availability, the Secretary shall publish that determination together

with a concise statement of its basis, and the estimated economic

impact of the decision.

(2) The Secretary shall approve any application for a validated

license which is required under this section for the export of any

goods or technology to a particular country and which meets all other

requirement for such an application, if the Secretary determines

that such goods or technology will, if the license is denied, be

available in fact to such country from sources outside the United

States, including countries which participate with the United States

in multilateral export controls, in sufficient quantity and of sufficient

quality so that denial of the license would be ineffective in achieving

the purpose set forth in subsection (a) of this section, subject to the

exception set forth in paragraph (1) of this subsection. In any case in

which the Secretary makes a determination of foreign availability

under this paragraph with respect to any goods or technology, the

Secretary shall determine whether a determination of foreign availability under paragraph (1) with respect to such goods or technology

is warranted.

(3) With respect to export controls imposed under this section, any

determination of foreign availability which is the basis of a decision

Qualified

general license

Revie w

Export controls

maintenance.

Validated

license approval

93 STAT. 510 PUBLIC LAW 96-72—SEPT. 29, 1979

Information

gathering

Regulations.

Site visitation

requirement,

removal

to ant a license for, or to remove a control on, the export of a good or

technology, shall be made in writing and shall be supported by

reliable evidence, including scientific or physical examination, expert

opinion baaed upon adequate factual information, or intelligence

information. In assessing foreign availability with respect to license

applications, uncorroborated representations by applicants shall not

be deemed sufficient evidence of foreign availability.

(4) In any case in which, in accordance with this subsection, export

controls are imposed. under this section notwithstanding foreign

availability, the President shall take steps to initiate negotiations

with the government of the appropriate foreign countries for the

purpose of eliminating such availability.Whenever the President has f’

reason to believe goods or technology subject to export control for

national security purposes by the United States may become available from other countries to countries to which exports are controlled

under this section and that such availability can be prevented or

eliminated by means of negotiations with such other countries, the

President shall promptly initiate negotiations with the government

of such other countries to prevent such foreign availability.

(5) In order to further carry out the policies setforth in this Act, the

Secretary shall establish, within the Office of Export Administration

of the Department of Commerce, a capability to monitor and gather

information with respect to the foreign availability of any goods or

technology subject to export controls under this Act.

.(6) Each department or agency of the United States with responsibilities with respect to export controls, including intelligence agencies, shall, consistent with the protection of intelligence sources and

methods, furnish information to the (Mice of Export Administration

concerning foreign availability of goods and technology subject to

export controls under this Act, and such Office, upon request or

where appropriate, shall furnish to such department andagencies

the information it gathers and receives concerning foreign

availability.

(g) INDEXING.-1n order to ensure that requirement for validated

licenses and qualified general licensee are periodically removed as

goods or technology subject to such requirement become obsolete

with respect to the national security of the United States, regulations

issued by the Secretary may, where approriate, provide for annual

increases in the performance levels of g00/s or technology subject to

any such licensing requirement. Any such goods or technology which

no longer meet the performance levels established by the latest such

increase shall be removed from the list established pursuant to

subsection (c) of this section unless, under such exceptions and under

such procedures as the Secretary shall prescribe, any other department or agency of the United States objects to such removal and the

Secretary determines, on the basis of such objection, that the goods or

technology shall not be removed from the list. The Secretary shall

also consider, where appropriate, removing site visitation requirement for goods and technology which are removed from the list

unless objections described in this subsection are raised.

(h) TECHNICAL ADVISORY COMMITTEES .--(1) Upon written request by

representatives of a substantial segment of any industry which

produces any goods or technology subject to export controls under

this section or being considered for such controls because of their

significance to the national security of the United States, the Secretary shall appoint a technical advisory committee for any such goods

or technology which the Secretary determines are difficult to evaluate because of questions concerning technical matters, worldwide

availability, and actual utilization of production and technology, or
PUBLIC LAW 96-72–SEPT. 29, 1979

licensing procedures. Each such committee shall consist of representatives of United States industry and Government, including the

Departments of Commerce, Defense, and State and, in the discretion

of the Secretary, other Government departments and agencies. No

person serving on any such committee who is a representative of

industry shall serve on such committee for more than four consecutive years.

(2) Technical advisory committees established under paragraph (1)

shall advise and assist the Secretary, the Secretary of Defense, and

any other department, agency, or official of the Government of the

United States to which the President delegates authority under this

Act, with respect to actions designed to carry out the policy set forth

in section 3(2)(A) of this Act. Such committees, where they have

expertise in such matters, shall be consulted with respect to questions

involving (A) technical matters, (B) worldwide availability and actual

utilization of production technology, (C) licensing procedures which

affect the level of export controls applicable to any goods or technology, and (D) exports subject to multilateral controls in which the r

United States participates, including proposed revisions of any such

multilateral controls. Nothing in this subsection shall prevent the

Secretary or the Secretary of Defense from consulting, at any time,

with any person representing industry or the general public, regardless of whether such person is a member of a technical advisory

committee. Members of the public shall be given a reasonable

opportunity, pursuant to regulations prescribed by the Secretary, to

present evidence to such committees.

(3) Upon request of any member of any such committee, the

Secretary may, if the Secretary determines it appropriate, reimburse

such member for travel, subsistence, and other necessary expenses

incurred by such member in connection with the duties of such

member.

(4) Each such committee shall elect a chairman, and shall meet at

least every three months at the call of the chairman, unless the

chairman determines, in consultation with the other members of the

committee, that such a meeting is not necessary to achieve the

purposes of this subsection. Each such committee shall be terminated

after a period of 2 years, unless extended by the Secretary for

additional periods of 2 years. The Secretary shall consult each such

committee with respect to such termination or extension of that

committee.

(5) To facilitate the work of the technical advisory committees, the

Secretary, in conjunction with other departments and agencies participating in the administration of this Act, shall disclose to each such

committee adequate information, consistent with national security,

pertaining to the reasons for the export controls which are in effect or

contemplated for the goods or technology with respect to which that

committee furnishes advice.

(6) Whenever a technical advisory committee certifies to the

Secretary that goods or technology with respect to which such

committee was appointed have become available in fact, to countries

to which exports are controlled under this section, from sources

outside the United States, including countries which participate with

the United States in multilateral export controls, in sufficient

quantity and of sufficient quality so that requiring a validated license

for the export of such goods or technology would be ineffective in

achieving the purpose set forth in subsection (a) of this section, and

provides adequate documentation for such certification, in accordance with the procedures established pursuant to subsection (f)(1) of

this section, the Secretary shall investigate such availability, and if

93 STAT. 511

Membership

Term of Office

Travel and other

expenses,

reimbursement

Termination

Export controls

maintenance.

93 STAT. 512 PUBLIC LAW 96-72—SEPT. 29, 1979

such availability is verified, the Secretary shall remove the requirement of a validated license for the export of the goods or technology,

unless the President determines that the absence of export controls

under this section would prove detrimental to the national security of

Determination, the United States. In any case in which the President determines that publication export controls under this section must be maintained notwithstanding foreign availability, the Secretary shall publish that determination together with a concise statement of its basis and the estimated

economic impact of the decision. Coordinating

Committee. (i) MULTILATERAL EXPORT CONTROLS .--The President shall enter

functions into negotiations with the government participating in the group

known as the Coordinating Committee (hereinafter in this subsection

referred to as the “Committee”) with a view toward accomplishing

the following objectives:

(1) Agreement to publish the list of items controlled for export

by agreement of the Committee, to ether with all notes, understandings, and other aspects of such agreement of the Commit- f

tee, and all changes thereto.

(2) Agreement to hold periodic meetings with high-level representatives of such governments, for the purpose of discussing

export control policy issues and issuing policy guidance to the

Committee.

(3) Agreement to reduce the scope of the export controls

imposed by agreement of the Committee to a level acceptable to

and enforceable by all government participating in the

Committee.

(4) Agreement on more effective procedures for enforcing the

export controls agreed to pursuant to paragraph (3).

(j) COMMERCIAL AGREEMENTS WITH CERTAIN COUNTRIES.--(1) Any

United States firm, enterprise, or other nongovernmental entity

which, for commercial purposes, enters into any agreement with arty

agency of the government of a country to which exports are restricted

for national security purposes, which agreement cites an intergovernmental agreement (to which the United States and such country are

parties) calling for the encouragement of technical cooperation and is

intended to result in the export from the United States to the other

party of unpublished technical data of United States origin, shall

report the agreement with such agency to the Secretary.

(2) The provisions of paragraph (1) shall not apply to colleges,

universities, or other educational institutions.

(k) NEGOTIATIONS WIYH OTHER COUNGTRIES.-The secretary of

State, in consultation with the Secretary of Defense, the Secretary of

Commerce, and the heads of other appropriate departments and

agencies, shall be responsible for conducting negotiations with other

countries regarding their cooperation in restricting the export of

goods and technology in order to carry out the policy set forth in

section 3(9) of this Act, as authorized by subsection (a) of this section,

including negotiations with respect to which goods and technology

should be subject to multilaterally agreed export restrictions and

what conditions should apply for exceptions from those restrictions.

(1) DIVERSION TO MILITARY USE OF CONTROLLED GOODS OR TECHNOLOGY.-(1) Whenever there is reliable evidence that goods or technology, which were exported subject to national security controls under

this section to a country to which exports are controlled for national

security purposes, have been diverted to significant military use in

violation of the conditions of an export license, the Secretary for as

long as that diversion to significant military use continues—

(A) shall deny all further exports to the party responsible for

that diversion of any goods or technology subject to national
PUBLIC LAW 96-72–SEPT. 29, 1979 93 STAT. 514 ●
Ill Ill Ill II

PUBLIC LAW 96-72—SEPT. 29, 1979 93 STAT. 515

United States export controls apply of any goods or technology

comparable to goods or technology controlled under this section.

(h) INTERNATIONAL OBLIGATIONS .—The provisions of subsections

(b), (c), (d), (f), and (g) shall not apply in any case in which the

President exercises the authority contained in this section to impose

export controls, or to approve or deny export license applications, in

order to fulfill obligations of the United States pursuant to treaties to

which the United States is a party or pursuant to other international

agreements.

(i) COUNTRIES SUPPORTING INTERNATIONAL TERRORISM .—The Secretary and the Secretary of State shall notify the Committee on Foreign

Affairs of the House of Representatives and the Committee on

Banking, Housing, and Urban Affairs oft}:: Senate before any license

is approved for the export of goods or technology valued at more than

$7,000,000 to any country concerning which the Secretary of State

has made the following determinations:

(1) Such country has repeatedly provided support for acts of

international terrorism.

(2) Such exports would make a significant contribution to the

military potential of such country, including its military logistics

capability, or would enhance the ability of such country to

support acts of international terrorism.

(j) CRIME CONTROL INSTRUMENTS.— (1) Crime control and detection

instruments and equipment shall be approved for export by the

Secretary only pursuant to a validated export license.

(2) The provisions of this subsection shall not apply with respect to

exports to countries which are members of the North Atlantic Treaty

Organization or to Japan, Australia, or New Zealand, or to such other

countries as the President shall designate consistent with the purposes of this subsection and section 502B of the Foreign Assistance

Act of 1961.

(k) CONTROL LIST.--The Secretary shall establish and maintain, as

part of the commodity control list, a list of any goods or technology

subject to export controls under this section, and the countries to

which such controls apply. Such goods or technology shall be clearly

identified as subject to controls under this section. Such list shall

consist of goods and technology identified by the Secretary of State,

with the concurrence of the Secretary. If the Secretary and the

Secretary of State are unable to agree on the list, the matter shall be

referred to the President. Such list shall be reviewed not less

frequently than every three years in the case of controls maintained

cooperatively with other countries, and annually in the case of all

other controls, for the purpose of making such revisions as are

necessary in order to carry out this section. During the course of such

review, an assessment shall be made periodically of the availability

from sources outside the United States, or any of its territories or

possessions, of goods and technology comparable to those controlled

for export from the United States under this section.

SHORT SUPPLY CONTROLS

SEC. 7. (a) AUTHORITY .—(1) In order to carry out the policy set forth

in section 3(2)(C) of this Act, the President may prohibit or curtail the

export of any goods subject to the jurisdiction of the United States or

exported by any person subject to the jurisdiction of the United

States. In curtailing exports to carry out the policy set forth in section

3(2 XC) of this Act, the President shall allocate a portion of export

licenses on the basis of factors other than a prior history of exportation. Such factors shall include the extent to which a country engages

Notification to

congressional

committees.

22 USC 2304.

Periodical

review

50 USC app.

2406

Export licenses,

allocation.

93 STAT. 516 PUBLIC LAW 96-72—SEPT. 29, 1979

Publication in

Federal

Register

Fees

7 USC 612c-3

Weekly or

monthly reports

in equitable trade practices with respect to United States goods and

treats the United States equitably in times of short supply.

(2) Upon imposing quantitative restrictions on exports of any goods

to carry out the policy set forth in section 3(2)(C) of this Act, the

Secretary shall include in a notice published in the Federal Register

with respect to such restrictions an invitation to all interested parties

to submit written comments within 15 days from the date of publication on the impact of such restrictions and the method of licensing

used to implement them.

(3) In imposing export controls under this section, the President’s

authority shall include, but not be limited to, the imposition of export

license fees.

(b) MONITORING .-(1) In order to carry out the policy set forth in

section 3(2 XC) of this Act, the Secretary shall monitor exports, and

contracts for exports, of any good (other than a commodity which is

subject to the reporting requirements of section 812 of the

Agricultural Act of 1970) when the volume of such exports in relation

to domestic supply contributes, or may contribute, to an increase in

domestic prices or a domestic shortage, and such price increase or

shortage has, or may have, a serious adverse impact on the economy

or any sector thereof. Any such monitoring shall commence at a time

adequate to assure that the monitoring will result in a data base

sufficient to enable policies to be developed, in accordance with

section 3(2)(C) of this Act, to mitigate a short supply situation or

serious inflationary price rise or, if export controls are needed, to

permit imposition of such controls in a timely manner. Information

which the secretary requires to be furnished in effecting such

monitoring shall be confidential, except as provided in paragraph (2)

of this subsection.

(2) The results of such monitoring shall, to the extent practicable,

be aggregated and included in weekly reports setting forth, with

respect to each item monitored, actual and anticipated exports, the

destination b country, and the domestic and worldwide price,

supply, and demand. Such reports may be made monthly if the

Secretary determines that there is insufficient information to justify

weekly reports.

(3) The Secretary shall consult with the Secretary of Energy to

determine whether monitoring or export controls under this section

are warranted with respect to exports of facilities, machinery, or

equipment normally and principally used, or intended to be used, in

the production, conversion, or transportation of fuels and energy

(except nuclear energy), including, but not limited to, drilling rigs,

platforms, and equipment; petroleum refineries, natural gas processing, liquefaction, and gasification plants; facilities for production of

synthetic natural gas or synthetic crude oil; oil and gas pipelines,

pumping stations, and associated equipment; and vessels for transporting oil, gas, coal, and other fuels.

(c) PETITIONS FOR MONITORING OR CONTROLS .-(1)(A) Any entity,

including a trade association, firm, or certified or recognized union or

group of workers, which is representative of an industry or a

substantial segment of an industry which processes metallic materials capable of being recycled wit respect to which an increase in i

domestic prices or a domestic shortage, either of which results from

increased exports, has or may have a significant adverse effect on the

national economy or any sector thereof, may transmit a written

petition to the Secretary requesting the monitoring of exports, or the

imposition of export controls, or both, with respect to such material,

in order to carry out the policy set forth in section 3(2)(C) of this Act.
111111111 I I

PUBLIC LAW 96-72—SEPT. 29, 1979 93 STAT. 517

(B) Each petition shall be in such form as the Secretary shall

prescribe and shall contain information in support of the action

requested. The petition shall include any information reasonably

available to the petitioner indicating (i) that there has been a

significant increase, in relation to a specific period of time, in exports

of such material in relation to domestic supply, and (ii) that there has

been a significant increase in the price of such material or a domestic

shortage of such material under circumstances indicating the price

increase or domestic shortage maybe related to exports.

(2) Within 15 days after receipt of any petition described in

pagraph (1), the Secretary shall publish a notice in the Federal

Register. The notice shall (A include the name of the material which

is the subject of the petition,(B) include the Schedule B number of the

material as set forth in the Statistical Classification of Domestic and

Foreign Commodities Exported from the United States, (C) indicate

whether the petitioner is requesting that controls or monitoring, or

both, be imposed with respect to the exportation of such material, and

(D) provide that interested

f

persons shall have a period of 30 days

commencing with the date o publication of such notice to submit to

the Secretary written data, views, or arguments, with or without

opportunity for oral presentation, with respect to the matter involved. At the request of the petitioner or any other entity described

in paragraph (1)(A ) with respect to the material which is the subject

of the petition, or at the request of any entity representative of

producers or exporters of such material, the Secretary shall conduct

public hearings with respect to the subject of the petition, in which

case the 30-day period maybe extended to 45 days.

(3) Within 45 days after the end of the 30-or 45-da period described

in paragraph(2), as the case maybe, the Secretary shall—

(A) determine whether to impose monitoring or controls, or

both, on the export of such material, in order to carry out the

policy set forth in section 3(2)(C) of this Act; and

(B) publish in the Federal Register a detailed statement of the

reasons for such determination.

(4) Within 15 days after making a determination under paragraph

(3) to impose monitoring or controls on the export of a material, the

Secretary shall publish in the Federal Register proposed regulations

with respect to such monitoring or controls. Within 30 days following

the publication of such proposed regulations, and after considering

any public comments thereon, the Secretary shall publish and

implement final regulations with respect to such monitoring or

controls.

(5) For Purposes of publishing notices in the Federal Register and

scheduling public hearings pursuant to this subsection, the Secretary

may consolidate petitions, and responses thereto, which involve the

same or related materials.

(6) If a petition with respect to a particular material or group of

materials has been considered in accordance with all the procedures

prescribed in this subsection, the Secretary may determine, in the

absence of significantly changed circumstances, that any other petition with respect to the same material or group of materials which is

filed within 6 months after consideration of the prior petition has

been completed does not merit complete considerationi under this

.

(7) The procedures and time limits set forth in this subsection with

respect to a petition filed under this subsection shall take precedence

over any review undertaken at the initiative of the Secretary with

respect to the same subject as that of the petition.

Publication in

Federal

Register.

Hearings

Publication in

’Publicatlon in +

Federal

Register.

Petitions,

consolidation

93 STAT.

Temporary

monitoring 01

controls

Exportation,

conditions.

Report to

Congress

30 USC 18.5.

518 PUBLIC LAW 96-72—SEPT. 29, 1979

(8) The Secretary may impose monitoring or controls on a temporary basis after a

akes

petition is filed under paragraph (1)(A) but before

the Secretary makes a determination under paragraph (3) if the

Secretary considers such action to be necessary to carry out the

policy set forth in section 3(2KC) of this Act.

(9) The authority under this subsection shall not be construed

affect the authority of the Secretary under any other provision of this

Act.

(10) Nothing contained in this subsection shall be construed to

preclude submission on a confidential basis to the Secretary of

information relevant to a decision to impose or remove monitoring or

controls under the authority of this Act, or to preclude consideration

of such information by the Secretary in reaching decisions required

under this subsection. The provisions of this paragraph shall not be

construed to affect the applicability of section 552(b) o title 5, United

State Code.

(d) DOMESTICALLY PRODUCED CRUDE OIL.-(1) Notwithstanding any

other provision of this Act and notwithstanding subsection (u) of

section 28 of the Mineral Leasing Act of 1920 (30 U.S.C. 185), no

domestically produced crude oil transported by pipeline over right-ofway granted pursuant to section 20 of the Trans-Alaska Pipeline F + ’

Authorization Act (43 U.S.C. 1652) (except any such crude oiI which

(A) is exported to an adjacent foreign country to be refined and

therein in exchange for the same quantity of crude oil

being exported from that country to the United States; such exchange

must result through convenience or increased efficiency of transportation in lower prices for consumers of petroleum products in the

United States as described in paragraph (2)(A)(ii) of this subsection, or

(B) is temporarily exported for convenience or increased efficiency of

transportation across parts of an adjacent foreign count and

reenters the United States) may be exported from the United States,

or any of its territories and possessions, unless the requirements of

paragraph (2) of this subsection are met.

(2) Crude oil subject to the prohibition contained in paragraph (1)

may be exported onlv if—

(A)-the President makes and publishes express findings that

exports of such crude oilj including exchanges—

(i) will not diminish the total quantity or quality of

petroleum refined within, stored wit in, or legally committed to be transported to and sold within the United States;

(ii) will, withthin 3 months following the initiation of such

exports or exchanges, result in (I) acquisition costs to the

refiners which purchase the imported crude oil being lower

than the acquisition costs such refiners would have to pay

for the domestically produced oil in the absence of such an

export or exchange, and (II) not less than 75 percent of such

savings in costs being reflected in wholesale and retail prices

of products refined from such imported crude oil;

(iii) will be made only pursuant to contracts which maybe

terminated if the crude oil supplies of the United States are

interrupted, threatened, or diminished;

(iv) are clearly necessary to protect the national interest;

and

(v) are in accordance with the provisions of this Act; and

(B) the President reports such findings to the Congress and the

Congress, within 60 days thereafter, agrees to a concurrent

resolution approving such exports on the basis of the findings.

(3) Notwithstanding any other provision of this section or any other

provision of law, including subsection (u) of section 28 of the Mineral

Leasing Act of 1920, the President may export oil to any country
111111111

PUBLIC LAW 96-72–SEPT. 29, 1979 93 STAT. 519

pursuant to a bilateral international oil supply agreement entered

into by the United States with such nation before June 25, 1979, or to

any count pursuant to the International Emergency Oil Sharing

Plan of the International Energy Agency.

(e) REFINED PETROLEUM PRODUCTS.-(1) No refined petroleum product may be exported except pursuant to an export license specifically

authorizing such export. Not later than 5 days after an application Export license

for a license to export any refined petroleum product or residual fuel applications

oil is received, the Secretary shall notify the Congress of such notification of

application, together with the name of the exporter, the destination committees

of the proposed export, and the amount and price of the proposed

export. Such notification shall be made to the chairman of the

Committee on Foreign Affairs of the House of Representatives and

the chairman of the Committee on Banking, Housing, and Urban

Affairs of the Senate.

(2) The Secretary may not grant such license during the 30-day

period beginning on the date on which notification to the Congress

under paragraph (1) is received, unless the President certifies in

writing to the Speaker of the House of Representatives and the

President pro tempore of the Senate that the proposed export is vital

to the national interest and that a delay in issuing the license would

adversely affect that interest.

(3) This subsection shall not apply to (A) any export license

application for exports to a country with respect to which historical

export quotas established by the Secretary on the basis of past

trading relationships apply, or (B) any license application for exports

to a country if exports under the license would not result in more

than 250,000 barrels of refined petroleum products being exported

from the United States to such country in any fiscal year.

(4) For purposes of this subsection, ’’refined petroleum product”

means gasoline, kerosene, distillates, propane or butane gas, diesel

fuel, and residual fuel oil refined within the United States or entered

for consumption within the United States.

(5) The Secretary may extend any time period prescribed in section

10 of this Act to the extent necessary to take into account delays in

action by the Secretary on a license application on account of the

provisions of this subsection.

(f’) CERTAIN PETROLEUM PRODUCTS.— Petroleum products refined in

United States Foreign Trade Zones, or in the United States Territory

of Guam, from foreign crude oil shall be excluded from any quantitative restrictions imposed under this section except that, if the

Secretary finds that a product is in short supply, the Secretary may

issue such regulations as maybe necessary

-

to limit exports.

(g) AGRICULTURAL COMMODITIES .-(1) he authority conferred by

this section shall not be exercised with respect to any agricultural

commodity, including fats and oils or animal hides or skins, without

the approval of the Secretary of Agriculture. The Secretary of

Agriculture shall not approve the exercise of such authority with

respect to any such commodity during any period for which the

supply of such commodity is determined by the Secretary of Agriculture to be in excess of the requirements of the domestic economy

except to the extent the President determines that such exercise of

authority is required to carry out the policies set forth in subparagraph (A) or (B) of paragraph (2) of section 3 of this Act. The Secretary

of Agriculture shall, by exercising the authorities which the Secretary of Agriculture has under other applicable provisions of law,

with respect to export sales of animal hides and skins.

Secretary of Agriculture, agricultural commodities purchased by or

“Refined

petroleum

product. ”

Time extension

Regulations

Export sales of

animal hides and

skins. data

93 STAT. 520 PUBLIC LAW 96-72—SEPT. 29, 1979

for use in a foreign country may remain in the United States for

export at a later date free from any quantitative limitations on export

which may be imposed to carry out the policy set forth in section

3(2)(C) of this Act subsequent to such approval. The Secretary may

not grant such approval unless the Secretary receives adequate

assurance and, in conjunction with the Secretary of Agriculture,

finds (A) that such commodities will eventually be exported, (B) that

neither the sale nor export thereof will result in an excessive drain of

scarce materials and have a serious domestic inflationary impact, (C)

that storage of such commodities in the United States will not unduly

limit the space available for storage of domestically owned commodities, and (D) that the purpose of such storage is to establish a reserve

of such commodities for later use, not including resale to or use by

Regulations another country. The Secretary may issue such regulations as may be

necessary to implement this paragraph.

(3) If the authority conferred by this section or section 6 is exercised

to prohibit or curtail the export of any agricultural commodity in

order to carry out the policies set forth in subparagraph (B) or (C) of

paragraph (2) of section 3 of this Act, the President shall immediately

report such prohibition or curtailment to the Congress, setting forth

the reasons therefor in detail. If the Congress, within 30 days after

the date of its receipt of such report, adopts a concurrent resolution

disapproving such prohibition or curtailment, then such prohibition

or curtailment shall cease to be effective with the adoption of such

resolution. In the computation of such 30-day period, there shall be

excluded the days on which either House is not in session because of

an adjournment of more than 3 da to a day certain or because of an

adjournment of the Congress sine die.

(h) BARTER AGREEMENTS .-(1) The exportation pursuant to a barter

agreement of any goods which may lawfully be exported from the

United States, for any goods which may lawfully be imported into the

United States, may be exempted, in accordance with paragraph (2) of

this subsection, from any quantitative limitation on exports (other

than any reporting requirement) imposed to carry out the policy set

forth in section 3(2)(C) of this Act.

(2) The Secretary shall grant an exemption under paragraph (1) if

the Secretary finds, after consultation with the appropriate department or agency of the United States, that—

(A) for the period during which the barter agreement is to be

performed—

(i) the average annual quantity of the goods to be exported

pursuant to the barter agreement will not be required to

satisfy the average amount of such goods estimated to be

required annually by the domestic economy and will be

surplus thereto; and “

(ii) the average annual quantity of the goods to be imported will be less than the average amount of such goods

estimated to be required annually to supplement domestic

production; and

(B) the parties to such barter agreement have demonstrated

adequately that they intend, and have the capacity, to perform

such barter agreement.

“Barter (3) For purposes of this subsection, the term “barter agreement”

agreement “ means any agreement which is made for the exchange, without

monetary consideration, of any goods produced in the United States

for any goods produced outside of the United States.

(4) This subsection shall apply only with respect to barter agreements entered into after the effective date of this Act.
Ill Ill Ill I I I

PUBLIC LAW 96-72—SEPT. 29, 1979 93 STAT. 521

(i) UNPROCESSED RED CEDAR.-(1) The Secretary shall require a

validated license, under the authority contained in subsection (a) of

this section, for the export of unprocessed

ecl’O

western red cedar (Thuja

plicata) logs, harvested from State or Federal lands. The Secretary

shall impose quantitative restrictions upon the export of unprocessed

western red cedar logs during the 3-year perio dbeginning on the

effective date of this Act as follows:

(A) Not more than thirty million board feet scribner of such

logs may be exported during the first year of such 3-year period.

(B) Not more than fifteen million board feet scribner of such

logs may be exported during the second year of such period.

(C) Not more than five million board feet scribner of such logs

may be exported during the third year

After the end of such 3-year period, no unp western red cedar

logs maybe exported from the United States.

(2) The Secretary shall allocate export licenses to exporters pursuant to this subsection on the basis of a prior history of exportation by

such exporters and such other factors as the Secretary considers

necessary and appropriate to minimize any hardship to the producers

of western red cedar and to further the foreign policy of the United

States.

(3) Unprocessed western red cedar logs shall not be considered to be

an agricultural commodity for purposes of subsection (g) of this

section.

(4) As used in this subsection, the term “unprocessed western red

cedar” means red cedar timber which has not

(A) lumber without wine;

been processed into-

(B) chips, pulp, and pulp prroducts;

(C) veneer and plywood;

(D) poles, posts, or pilings cut or treated with preservative for

use as such and not intended to be further processed; or

(E) shakes and shingles.

(j) EXPORT OF Horses.(1) Notwithstanding any other provision of

this Act, no horse maybe exported by sea from the United States, or

any of its territories and possessions, unless such horse is part of a

consignment of horses with respect to which a waiver has been

granted under pargraph (2) of this subsection.

(2) The Secretary, in consultation with the Secretary of Agriculture, may issue regulations providing for the granting of waivers

permitting the export by sea of a specified consignment of horses, if

the Secretary

%

in consultation with the Secretary of Agriculture,

determines t ‘ t no horse in that consignment is being exported for

purposes of slaughter.

FOREIGN BOYCOTTS

SEC. 8. (a) PROHIBITIONS AND EXCEPTIONS .-(1) For the purpose of

implementing the policies set forth in subparagraph (A or (B) of

paragraph (5) of section 3 of this Act, the President shall issue i

regulations prohibiting any United States person, with respect to his

activities in the interstate or fore@ commerce of the United States,

from taking or knowingly agreeing to take any of the following

actions with intent to comply with, further, or support any boycott

fostered or imposed b a foreign country against a country which is

friendly to the United

[

States and which is not itself the object of any

form of boycott pursuant to United States law orregulation:

(A) Refusing, or reuiring any other person to refuse, to do

business with or in t e boycotted country, with any business

concern organized under the laws of the boycotted country, with

93 STAT. 522

Employment

discrimination,

prohibition.

Export

terminations

Export licenses,

allocation. Business

information,

“Unprocessed

western red

cedar.”

Letter of credit.

Regulatory

exceptions.

v

Iationa

50 SC app. za47.

PUBLIC LAW 96-72—SEPT. 29, 1979

any national or resident of the boycotted country, or with any

other person, pursuant to an agreement with, a requirement of,

or a request om or on behalf of the boycotting country. The fr!

mere absence of a business relationship with or in the boycotted

country with any business concern organized under the laws of

the boycotted country, with any national or resident of the

boycotted country, or with any other person, does not indicate

the existence of the intent required to establish a violation of

regulations issued to carry out t is subparagraph.

(B) Refusing, or requiring any other parson to refuse, to employ

or otherwise discriminating against any United States person on

the basis of race, religion, sex, or national origin of that person or

of any owner, officer, director, or employee of such person.

(C) Furnishing information with respect to the race, religion,

sex, or national origin of any United States person or of any

owner, officer, director, or employee of such person.

(D) Furnishing information about whether any person has, has

had, or proposes to have an business relationship (including a

relationship by way of sale purchse, legal or commercial representation, shipping or other transport, insurance, investment, or supply) with or in the boycotted country, with any

business concern organized under the laws of the boycotted

country, with any national or resident of the boycotted country,

or wit ‘ any other person which is known or believed to be

restricted from having any business relationship with or in the

boycotting country. Nothing in this paragraph shall prohibit the

furnishing of normal business inormation in a commercial f

context as defined by the Secretary.

(E) Furnishing information about whether any person is a

member of, has made contributions to, or is otherwise associated

with or involved in the activities of any charitable or fraternal

organization which supports the boycotted country.

(F) Paying, honoring, confirming, or otherwise implementing a

letter of credit which contains any condition or requirement

compliance with which is prohibited by regulations issued pursuant to this paragraph, and no United States person shal , as a r

result of the application of this paragraph, be obligated to pay or

otherwise honor or implement such letter of credit.

.-. - . (2) Regulations issued pursuant to paragraph (1) shall provide

exceptions for—

(A) complying or agreeing to comply with requirements (i)

prohibiting the import of goods or services from the boycotted

country or goods reduced or services provided b any business

concern organ”izedunder the laws of the boycotted country or by nationals or residents of the boycotted country, or (ii) prohibiting

the shipment of goods to the boycotting country on a carrier of

the boycotted country, or by a route other than that prescribed

by the boycotting country or the recipient of the shipment;

(B) complying or agreeing to comply with import and shipping

document requirements with respect to the country of origin, the

name of the carrier and route of shipment, the name of the

supplier of the shipment or the name of the provider of other

services, except that no information knowingly furnished or

conveyed in response to such requirements may be stated in

negative, blacklisting, or similar exclusionary terms, other than

with respect to carriers or route of shipment as may be permitted

by such regulations in order to comply with precautionary

requirements protecting against war risks and conflation;
PUBLIC LAW 96-72—SEPT. 29, 1979 93 STAT. 523

(C) complying or agreeing to comply in the normal course of

business with the unilateral and specific selection by a boycotting country, or national or resident thereof, of carriers, insurers,

suppliers of services to be performed within the boycotting

country or specific goods which, m the normal course of business,

are identifiable by source when imported into the boycotting

country;

(D) complying or agreeing to comply with export requirement

of the boycotting country relating to shipments or transshipments of exports to the boycotted country, to any business

concern of or organized under the laws of the boycotted country,

or to any national or resident of the boycotted country;

(E) compliance by an individual or agreement by an individual

to comply with the immigration or passport requirements of an

count with respect to such individual or any member of such

individual’s family or with requests for information regarding

requirements of employment of such individual within the boycotting country; and

(F) compliance by a United States person resident in a foreign

country or agreement by such

his

, person to comply with the laws of

that country with respect to activities exclusive therein,

and such regulations may contain exceptions for such resident

complying with the laws or regulations of that foreign country

governing imports into such country of trademarked, trade

named, or similarly specifically identifiable products, or components of products or is own use, including the performance of

contractual services within that country, as may be defined by

such regulations.

(3) Regulations issued pursuant to paragraphs (2)(C) and (2)(F) shall

not provide exceptions from paragraphs (1)(B) and (1)(C).

(4) Nothing in this subsection may be construed to supersede or

limit the operation of the antitrust or civil rights laws of the United

States.

(5) This section shall apply to any transaction or activity undertaken, by or through a United States person or any other person, with

intent to evade the provisions of this section as implemented by the

regulations issued pursuant to this subsection, and-such regulations

shall expressly provide that the exceptions set forth in paragraph (2)

shall not permit activities or agreements (expressed or implied by a

course of conduct, including a pattern of responses) otherwise prohibited, which are not within the intent of such exceptions.

(b) FOREIGN POLICY CONTROLS.-(1) In addition to the regulations

issued pursuant to subsection (a) of this section, regulations issued

under section 6 of this Act shall implement the policies set forth in

section 3(5).

(2) Such regulations shall require that an United States person

receiving a request for the furnishing of in ormation, the entering f

into or implementing of agreements, or the taking of any other action

referred to in section 3(5) shall report that fact to the Secretary,

together with such other information concerning such request as the

Secretary may require for such action as the Secretary considers

appropriate for carrying out the policies of that section. Such person

shall also report to the Secretary whether such person intends to

comply and whether such person has complied with such request.

Any report filed pursuant to this paragraph shall be made available

promptly for public inspection and copying, except that information

regarding the quantity, description, and value of any goods or

technology to which such report relates may be kept confidential if

the Secretary determines that disclosure thereof would place the

Reports,

Public

inspection and

copying.

93 STAT. 524 PUBLIC LAW 96-72—SEPT. 29, 1979

Transmittal to United States person involved at a competitive disadvantage. The Secretary of

State Secretary shall periodically transmit summaries of the information

contained in such reports to the Secretary of State for such action as

the Secretary of State, in consultation with the Secretary, considers

appropriate for carrying out the policies set forth in section 3(5) of

this Act.

(c) PREEMPTION.-The provisions of this section and the regulations

issued pursuant thereto shall preempt any law, rule, or regulation of

any of the several States or the District of Columbia, or any of the

territories or possessions of the United States, or of any governmental subdivision thereof, which law, rule, or regulation pertains to

participation in, compliance with, implementation of, or the furnishing of information regarding restrictive trade practices or boycotts

fostered or imposed by foreign countries against other countries.

PROCEDURES FOR HARDSHIP RELIEF FROM EXPORT CONTROLS

50 USC app SEC. 9. (a) FILING OF PETITIONS.-Any person who, in such person’s 2408 domestic manufacturing process or other domestic business operation, utilizes a product produced abroad in whole or in part from a

good historically obtained from the United States but which has been

made subject to export controls, or any person who historically has

exported such a good, may transmit a petition of hardship to the

Secretary requesting an exemption from such controls in order to

alleviate any unique hardship resulting from the imposition of such

controls. A petition under this section shall be in such form as the

Secretary shall prescribe and shall contain information demonstrating the need for the relief requested.

(b) DECISION OF THE SECRETARY . —Not later than 30 days after

receipt of any petition under subsection (a), the Secretary shall

transmit a written decision to the petitioner granting or denying the

requested relief. Such decision shall contain a statement setting forth

the Secretary’s basis for the grant or denial. Any exemption granted

may be subject to such conditions as the Secretary considers appropriate.

(c) FACTORS To BE CONSIDERED .-For purposes of this section, the

Secretary’s decision with respect to the grantor denial of relief from

unique hardship resulting directly or indirectly from the imposition

of export controls shall reflect the Secretary’s consideration of factors

such as the following:

(1) Whether denial would cause a unique hardship to the

petitioner which can be alleviated only by granting an exception

to the applicable regulations. In determining whether relief shall

be granted, the Secretary shall take into account—

(A) ownership of material for which there is no practicable

domestic market by virtue of the location or nature of the

material;

(B) potential serious financial loss to the applicant if not

granted an exception;

(C) inability to obtain, except through import, an item

essential for domestic use which is produced abroad from the

good under control;

(D) the extent to which denial would conflict, to the

particular detriment of the applicant, with other national

policies including those reflected in any international agreement to which the United States is a party;

(E) possible adverse effects on the economy (including

unemployment) in any locality or region of the United

States; and
PUBLIC LAW 96-72–SEPT. 29, 1979

(F) other relevant factors, including the applicant’s lack of

an exporting history during any base period that may be

established with respect to export quotas for the particular

good.

(2) The effect a finding in favor of the applicant would have on

attainment of the basic objectives of the short supply control

In all cases, the desire to sell at higher prices and thereby obtain

greater profits shall not be considered as evidence of a unique

hardship, nor will circumstances where the hardship is due to

imprudent acts or failure to act on the part of the petitioner.

93 STAT. 525

PROCEDURES FOR PROCESSING EXPORT LICENSE APPLICATION

SEC. 10. (a) PRIMARY RESPONSIBILITY OF THE SECRETARY .-(l) All 50 USC

export license applications required under this Act shall be submitted

by the applicant to the Secretary. All determinations with respect to

any such application shall be made by the Secretary, subject to the

procedures provided in this section.

(2) It is the intent of the Congress that a determination with respect

to any export license application be made to the maximum extent

possible by the Secretary without referral of such application to any

other department or agency of the Government.

(3) To the extent necessary, the Secretary shall seek information

and recommendations from the Government departments and agencies concerned with aspects of United States domestic and foreign

Policies and operations having an important bearing on exports. Such

departments and agencies shall cooperate fully in rendering such

in ormation and recommendations. f

(b) INITIAL SCREENING .-Within 10 days after the date on which

any export license application is submitted pursuant to subsection

(a)(l), the Secretary shall—

(1) send the applicant an acknowledgment of the receipt of the

application and the date of the receipt;

(2) submit to the applicant a written description of the procedures required by this section, the responsibilities of the Secretary and of other departments and agencies with respect to the

application, and the rights of the applicant;

(3) return the application without action if the application is

improperly completed or if additional information is required,

with sufficient information to permit the application to be

properly resubmitted, in which case if such application is resubmitted, it shall be treated as a new application for the purpose of

calculating the time periods prescribed in this section;

(4) determine whether it is necessary to refer the application to

any other department or agency and, if such referral is determined to be necessary, inform the applicant of any such department or agency to which the application will be referred; and

(5) determine whether it is necessary to submit the application

to a multilateral review process, pursuant to a multilateral f

agreement, formal or informal, to which the United States is a

party and, if so, inform the applicant of this requirement.

(C) ACTION ON CERTAIN APLICATIONS .-In each case in which the

Secretary determines that it is not necessary to refer an application

to any other department or agency for its information and recommendations, a license shall be formally issued or denied within 90 days

after a properly completed application has been submitted pursuant

to this section.

93 STAT. 526 PUBLIC LAW 96-72—SEPT. 29, 1979

(d) REFERRAL TO OTHER DEPARTMENTS AND AGENCIES .—In each case

in which the Secretary determines that it is necessary to refer an

application to any other department or agency for its information

and recommendations, the Sec retary shall, within 30 days after the

submission of a properly completed application—

(1) refer the application, together with all necessary analysis

and recommendations of the Department of Commerce, concurrently to all such departments or agencies; and

(2) if the applicant so requests, provide the applicant with an

oportunity to review for accuracy any documentation to be

ref erred to any such department or agency with respect to such

aplication for the purpose of describing the export in question in

or er to determine whether such documentation accurately d

describes the proposed export.

(e) ACTION BY OTHER DEPARTMENTS AND AGENCIES.-(1) Any department or agency to which an aplication is referred pursuant to

subsection (d) shall submit to the Secretary, within 30 days after its

receipt of the application, the information or recommendations

requested with respect to such application. Except as provided in

paragraph (2), any such department or agency which does not submit

its recommendations within the time period prescribed in the preceding sentence shall be deemed by the Secretary to have no objection to

the approval of such application.

Recommendations, (2) If the head of any such department or agency notifies the time extension

Conflicting

recommendations

Applicant

notification and

opportunity for

written

response.

Applicant denial

procedures.

Secretary before the expiration of the time period provided in

paragraph (1) for submission of its recommendations that more time

is required for review by such department or agency, such department or agency shall have an additional 30 day period to submit its

recommendations to the secretary. If such department or agency

does not submit its recommendations within the time period prscribed by the preceding sentence, it shall be deemed by the Secretary

to have no objection to the approval of such application.

(f) ACTION BY THE SECRETARY.-(1) Within O days after receipt of

the recommendations of other departments and agencies with respect

to a license application, as provided in subsection (e), the Secretary

shall formally issue or deny the license. In deciding whether to issue

or deny a license, the Secretary shall take into account any recommendation of a department or agency with respect to the application

in question. In cases where the Secretary receives conflicting recommendations, the Secretary shall, within the 90 day period provided

for in this subsection, take such action as may be necessary to resolve

such conflicting recommendations.

(2) In cases where the Secretary receives questions or negative

considerations or recommendations from an other department or

agency with respect to an application, the Secretary shall, to the

maximum extent consistent with the national security and foreign

policy of the United States, inform the applicant of the specific

questions raised and any such negative considerations or recommendations, and shall accord the applicant an opportunity, before the

final determination with respect to the application is made, to

respond in writing to such questions, considerations, or recommendations.

(3) In cases where the Secretary has determined that an application

should be denied, the applicant shall be informed in writing, within 5

days after such determination is made, of the determination, of the

statutory basis for denial, the policies set forth in section 3 of the Act

which would be furthered by denial, and, to the extent consistent

with the national security and foreign policy of the United States, the

specific considerations which led to the denial, and of the availability
PUBLIC LAW 96-72–SEPT. 29, 1979 93 STAT. 527

of apeal procedures. In the event decisions on license applications

are referred inconsistent with the provisions of this section, the

aplicant shall be so informed in writing within 5 days after such

deferral.

(4) If the Secretary determines that a particular application or set

of applications is of exceptional importance and complexity, and that

additional time is required for negotiations to modify the application

or applications, the Secretary may extend any time period prescribed

in this section. The Secretary shall notify the Congress and the

applicant of such extension and the reasons therefor.

(g) SPECIAL PROCEDURES FOR SECRETARY OF DEFENSE.—(1) Notwithstanding any other provision of this section, the Secretary of Defense

is authorized to review any proposed export of any goods or technology to any country to which exports are controlled for national

security purposes and, whenever the Secretary of Defense determines

that the export of such goods or technology will make a significant

contribution, which would prove detrimental to the national security

of the United States, to the military potential of any such country, to

recommend to the President that such export be disapproved.

(2) Notwithstanding any other provision of law, t e secretary Of h

Defense shall determine, in consultation with the Secretary, and

confirm in writing the types and categories of transactions which

should be reviewed by the Secretary of Defense in order to make a

determination referred to in paragraph (l). Whenever a license or

other authority is requested for the export to any country to which

exports are controlled for national security purposes of goods or

technology within any such type or category, the Secretary shall

notify the Secretary of Defense of such request, and the Secretary

may not issue any license or other authority pursuant to such request

before the expiration of the period within which the President may

disapprove such export. The Secretary of Defense shall carefully

consider any notification submitted by the Secretary pursuant to this

paragraph and, not later than 30 days after notification of the

request, shall—

(A) recommend to the President that he disapprove any request for the export of the goods or technology involved to the

particular country if the Secretary of Defense determines that

the export of such goods or technology will make a significant

contribution, which would prove detrimental to the national

security of the United States, to the military potential of such

country or any other country;

(B) notify the Secretary that he would recommend approval

subject to specified conditions; or

 ) (C recommend to the Secretary that the export of goods or

technology be approved.

If the President notifies the Secretary, within 30 days after receiving

a recommendation from the Secretary of Defense, that he disapproves such export, no license or other authority may be issued for

the export of such goods or technology to such country.

(3) The Secretary shall approve or disapprove a license application,

and issue or deny a license, in accordance with the provisions of this

subsection, and, to the extent applicable, in accordance with the time

periods and procedures otherwise set forth in this section.

(4) Whenever the President exercises his authority under this

subsection to modify or overrule a recommendation made by the

Secretary of Defense or exercises his authority to modify or overrule

any recommendation made by the Secretary of Defense under subsection (C) or (d) of section 5 of this Act with respect to the list of goods

and technologies controlled for national security purposes, the PresiTime extension,

notification to

Congress and

applicant

Review

Export

transactions,

review

93 STAT. 528 PUBLIC LAW 96-72—SEPT. 29, 1979

Multilateral

review process.

Notification to

Congress and applicant.

Applicant status,

report to

Congress.

Filing of petition

by applicant.

Presidential

statement,

transmittal to

Congreas

dent shall promptly transmit to the Congress a statement indicating

his decision, together with the recommendation of the Secretary of

Defense.

(h) MULTILATERAL CONTROLS .-In any case in which an application,

which has been finally approved under subsection (c), (f), or (g) of this

section, is required to be submitted to a multilateral review process,

pursuant to a multilateral agreement, formal or informal, to which

the United States is a party, the license shall not be issued as

prescribed in such subsections, but the Secretary shall notify the

applicant of the approval of the application (and the date of such

approval) by the Secretary subject to such multilateral review. The

license shall be issued upon approval of the application under such

multilateral review. If such multilateral review has not resulted in a

determination with respect to the application within 60 days after

such date, the Secretary’s approval of the license shall be final and

the license shall be issued, unless the Secretary determines that

issuance of the license would prove detrimental to the national

security of the United States. At the time at which the Secretary

makes such a determination, the Secretary shall notify the applicant

of the determination and shall notify the Congress of the determination, the reasons for the determination, the reasons for which the

multilateral review could not be concluded within such 60 day period,

and the actions planned or being taken by the United States Government to secure conclusion of the multilateral review. At the end of

ever 60 day period after such notification to Congress, the Secretary

shall advise the applicant and the congress of the status of the

application, and shall report to the Congress in detail on the reasons

for the further delay and any further actions being taken by the

United States Government to secure conclusion of the multilateral

review. In addition, at the time at which the Secretary issues or

denies the license upon conclusion of the multilateral review, the

Secretary shall notify the Congress of such issuance or denial and of

the total time required for the multilateral review.

(i) RECORDS.-The Secretary and any department or agency to

which any application is referred under this section shall keep

accurate records with respect to all applications considered by the

Secretary or by any such department or agency, including, in the case

of the Secretary, any dissenting recommendations received from any

such department or agency.

(j) APPEAL AND COURT AcTIoN.-(1) The Secretary shall establish

appropriate procedures for any applicant to appeal to the Secretary

the denial of an export license application of the applicant.

(2) In any case in which any action prescribed in this section is not

taken on a license application within the time periods established by

this section (except in the case of a time period extended under

subsection (f)(4) of which the applicant is notified), the applicant may

file a petition with the Secretary requesting compliance with the

requirements of this section. When such petition is filed, the Secretary shall take immediate steps to correct the situation giving rise to

the petition and shall immediately notify the applicant of such steps.

(3) If, within 30 days after a petition is filed under paragraph (2),

the processing of the application has not been brought into conformity with the requirements of this section, or the application has been

brought into conformity with such requirements but the Secretary

has not so notified the applicant, the applicant may bring an action in

an appropriate United States district court for a restraining order, a

temporary or permanent injunction, or other appropriate relief, to

require compliance with the requirements of this section. The United
1111111111 I

PUBLIC LAW 96-72—SEPT. 29, 1979

States district courts shall have jurisdiction to provide such relief, as

appropriate.

VIOLATIONS

SEC. 11. (a) IN GENERAL.—Except as provided in subsection (b) of

this section, whoever knowingly violates any provision of this Actor

any regulation, order, or license issued thereunder shall be fined not

more than five times the value of the exports involved or $50,000,

whichever is greater, or imprisoned not more than 5 years, or both.

(b) WILLFUL VIOLATIONS .-(1) Whoever willfully exports anything

contrary to any provision of this Act or any regulation, order, or

license issued thereunder, with knowledge that such exports will be

used for the benefit of any country to which exports are restricted for

national security or foreign policy purposes, shall be freed not more

than five times the value of the exports involved or $100,000,

whichever is greater, or imprisoned not more than 10 years, or both.

(2) Any person who is issued a validated license under this Act for

the export of any good or technology to a controlled country and who,

with knowledge that such a good or technology is being used by such

controlled country for military or intelligence gathering purposes

contrary to the conditions under which the license was issued,

willfully fails to report such use to the Secretary of Defense, shall be

fined not more than five times the value of the exports involved or

$100,000, whichever is greater, or imprisoned for not more than 5

years, or both. For purposes of this paragraph, “controlled country”

means any country described in section 620(f) of the Foreign Assistance Act of 1961.

(c) CIVIL PENALTIES ; ADMINISTRATE SANCTIONS .-(1) The head of

any department or agency exercising any functions under this Act, or

any officer or employee of such department or agency specifically

designated by the head thereof, ma impose a civil penalty not to

exceed $10,000 for each violation of this Act or any regulation, order,

or license issued under this Act, either in addition to or in lieu of any

other liability or penalty which maybe imposed.

(2)(A) The authority under this Act to suspend or revoke the

authority of any United States person to export goods or technology

may be used with respect to any violation of the regulations issued

pursuant to section 8(a) of this Act.

(B) Any administrative sanction (including any civil penalty or any

suspension or revocation of authority to export) imposed under this

Act for a violation of the regulations issued pursuant to section 8(a) of

this Act may be imposed only after notice and opportunity for an

agency hearing on the record in accordance with sections 554 through

557 of title 5, United States Code.

(C) Any charging letter or other document initiating administrative proceedings for the imposition of sanctions for violations of the

regulations issued pursuant to section 8(a) of this Act shall be made

available for public inspection and copying.

(d) PAYMENT OF PENALTIES.-The payment of any penalty imposed

pursuant to subsection (c) maybe ma e a condition, for a period not

exceeding one year after the imposition of such penalty, to the

granting, restoration, or continuing validity of any export license,

permission, or privilege granted or to be granted to the person upon

whom such penalty is imposed. In addition, the payment of any

penalty imposed under subsection (c) may be deferred or suspended in

whole or in part for a period of time no longer than an probation

period (which ma exceed one year) that may be imposed upon such

person. Such a deferral or suspension shall not operate as a bar to the

93 STAT. 529

50 USC app.

2410.

“controlled

country”

22 USC 2370

Deferral or

suspension.

93 STAT. 530

50 USC app. 2021

note, 2401 note.

PUBLIC LAW 96-72—SEPT. 29, 1979

collection of the penalty in the event that the conditions of the

suspension, deferral, or probation are not fulfilled.

(e) REFUNDS .–Any amount paid in satisfaction of any penalty

imposed pursuant to subsection (c) shall be covered into the Treasury

as a miscellaneous receipt. The head of the department or agency

concerned may, in his discretion, refund any such penalty, within 2

years after payment, on the ground of a material error of fact or law

in the imposition of the penalty. Notwithstanding section 1346(a) of

title 28, United States Code, no action for the refund of any such

penalty may be maintained in any court.

(f) ACTIONS FOR RECOVERY OF PENALTIES.—In the event of the

failure of any person to pay a penalty imposed pursuant to subsection

(c), a civil action for the recovery thereof may, in the discretion of the

head of the department or agency concerned, be brought in the name

of the United States. In any such action, the court shall determine de

novo all issues necessary to the establishment of liability. Except as

provided in this subsection and in subsection (d), no such liability

shall be asserted, claimed, or recovered upon by the United States in

any way unless it has previously been reduced to judgment.

(g) OTHER AUTHORITIES.-Nothing in subsection (c), (d), or (f)

limits—

(1) the availability of other administrative or judicial remedies

with respect to violations of this Act, or any regulation, order, or

license issued under this Act;

(2) the authority to compromise and settle administrative

proceedings brought with respect to violations of this Act, or any

regulation, order, or license issued under this Act; or

(3) the authority to compromise, remit or mitigate seizures and

forfeitures pursuant to section l(b) of title VI of the Act of June

15,1917 (22 U.s.c. 40l(b)).

ENFORCEMENT

SE C. 12. (a) GENERAL AUTHORITY. -TO the extent necessary or

appropriate to the enforcement of this Actor to the imposition of any

penalty, forfeiture, or liability arising under the Export Control Act

of 194 or the Export Administration Act of 1969, the head of any 9 

department or agency exercising any function thereunder (and officers or employees of such department or agency specifically designated by the head thereof) may make such investigations and obtain

such information from, require such reports or the keeping of such

records by, make such inspection of the books, records, and other

writings, premises, or property of, and take the sworn testimony of,

any person. In addition, such officers or employees may administer

oaths or affirmations, and may by subpena require any person to

appear and testify or to a pear and produce books, records, and other

writings, or both, and in the case of contumacy by, or refusal to obey a

subpena issued to, any such person, the district court of the United

States for any district in which such person is found or resides or

transacts business, u n application, and after notice to any such

person and hearing, shall have jurisdiction to issue an order requiring such person to appear and give testimony or to appear and

produce books, records, and other writings, or both, and any failure to

obey such order of the court may be punished by such court as a

contempt thereof.

(b) IMMUNITY. -NO person shall be excused from complying with

any requirements under this section because of his privilege against

self-incrimination, but the immunity provisions of section 6002 of
Ill Ill Ill

PUBLIC LAW 96-72–SEPT. 29, 1979 93 STAT. 531

title 18, United States Code, shall apply with respect to any individual who specifically claims such privilege.

(c) CONFIDENTIALITY .(1) Except as otherwise provided by the third

sentence of section 8(b)(2) and by section ll(c)(2)(C) of this Act,

information obtained under this Act on or before June 30, 1980, which

is deemed confidential, including Shippers’ Export Declarations, or

with reference to which a request for confidential treatment is made

by the person furnishing such information, shall be exempt from

disclosure under section 552 of title 5, United States Code, and such

information shall not be published or disclosed unless the Secretary

determines that the withholding thereof is contrary to the national

interest. Information obtained under this Act after June 30, 1980, Information

may be withheld only to the extent permitted by statute, except that disclosure

information obtained for the purpose of consideration of, or concerning, license applications under this Act shall be withheld from public

disclosure unless the release of such information is determined by the

Secretary to be in the national interest. Enactment of this subsection ACCess to boycott

shall not affect any judicial proceeding commenced under section 552 ‘ -

,) reports

of title 5, United States Code, to obtain access to boycott reports

submitted prior to October 31, 1976, which was pending on May 15,

1979; but such proceeding shall be continued as if this Act had not

been enacted.

(2) Nothing in this Act shall be construed as authorizing the Information,

withholding of information from the Congress, and all information availability to

obtained at any time under this Act or previous Acts regarding the Congress

control of exports, including any report or license application required under this Act, shall be made available upon request to any

committee or subcommittee of Congress of appropriate jurisdiction.

No such committee or subcommittee shall disclose any information

obtained under this Act or previous Acts regarding the control of

exports which is submitted on a confidential basis unless the full

committee determines that the withholding thereof is contrary to the

national interest.

(d) REPORTING REQUIREMENTS . —In the administration of this Act,

reporting requirement shall be so designed as to reduce the cost of

reporting, recordkeeping, and export documentation required under

this Act to the extent feasible consistent with effective enforcement

and compilation of useful trade statistics. Reporting, recordkeeping,

and export documentation requirements shall be periodically reviewed and revised in the light of developments in the field of

information technology.

(e) SIMPLIFICATION OF REGULATIONS.—’he secretary, in consulta- Review of

tion with appropriate United States Government departments and regulations

agencies and with appropriate technical advisory committees established under section 5(h), shall review the regulations issued under

this Act and the commodity control list in order to determine how

compliance with the provisions of this Act can be facilitated by

simplifying such regulations, by simplifying or clarifying such list, or

by any other means.

EXEMPTION FROM CERTAIN PROVISIONS RELATING TO ADMINISTRATIVE

PROCEDURE AND JUDICIAL REVIEW

SEC. 13. (a) EXEMPTION.-Except as provided in section 11(c)(2), the 50 USC app.

functions exercised under this Act are excluded from the operation of

sections 551, 553 through 559, and 701 through 706 of title 5, United

States Code.

(b) PUBLIC PARTICIPATION .—It is the intent of the Congress that, to

the extent practicable, all regulations imposing controls on exports

93 STAT. 532 PUBLIC LAW 96-72–SEPT. 29, 1979

under this Act be issued in proposed form with meaningful opportunity for public comment before taking effect. In cases where a

regulation imposing controls under this Act is issued with immediate

effect, it is the intent of the Congress that meaningful opportunity for

public comment also be provided and that the regulation be reissued

in final form after public comments have been fully considered.

ANNUAL REPORT

Report to

Congress. SEC. 14. (a) CONTENTS .-Not later than December 31 of each year,

50 USC app. the Secretary shall submit to the Congress a report on the adminis2413 tration of this Act during the preceding fiscal year. All agencies shall

cooperate fully with the-secretary in providing information for such

report. Such report shall include detailed information with respect

to—

(1) the implementation of the policies set forth in section 3;

(2) general licensing activities under sections 5, 6, and 7, and

any changes in the ‘exercise of the authorities contained in

sections 5(a), 6(a), and 7(a);

(3) the results of the review of United States policy toward

individual countries pursuant to section 5(b);

(4) the results, in as much detail as maybe included consistent

with the national security and the need to maintain the confidentiality of proprietary information, of the actions, including reviews and revisions of export controls maintained for national

security purposes, required by section 5(c)(3);

(5) actions taken to carry out section 5(d);

(6) changes in categories of items under export control referred

to in section 5(e);

(7) determinations of foreign availability made under section

5(f), the criteria used to make such determinations, the removal

of any export controls under such section, and any evidence

demonstrating a need to impose export controls for national

security purposes notwithstanding foreign availability;

(8) actions taken in compliance with section 5(0(5);

(9) the operation of the indexing system under section 5(g);

(10) consultations with the technical advisory committees

established pursuant to section 5(h), the use made of the advice

rendered by such committees, and the contributions of such

committees toward implementing the policies set forth in this

7 USC 612c-3.

Act;

(11) the effectiveness of export controls imposed under section

6 in furthering the foreign policy of the United States;

(12) export controls and monitoring under section 7;

(13) the information contained in the reports required by

section 7(b)(2), together with an analysis of—

(A) the impact on the economy and world trade of shortages or increased prices for commodities subject to monitoring under this Act or section 812 of the Agricultural Act of

1970:

(B) the worldwide supply of such commodities; and

(C) actions being taken by other countries m response to

such shortages or increased prices;

(14) actions taken by the President and the Secretary to carry

out the antiboycott policies set forth in section 3(5) o this Act;

(15) organizational and procedural changes undertaken in

furtherance of the policies set forth in this Act, including

changes to increase the efficiency of the export licensing process

and to fulfill the requirements of section 10, including an
Ill Ill Ill I I

PUBLIC LAW 96-72—SEPT. 29, 1979 93 STAT. 533

analysis of the time required to process license applications, the

number and disposition of export license applications taking

more than 90 da s to process, and an accounting of a peals

received, court orders issued, and actions taken pursuant thereto

under subsection (j) of such section;

(16) delegations of authority by the President as provided in

section 4(e) of this Act;

(17) efforts to keep the business sector of the Nation informed

with respect to policies and procedures adopted under this Act;

(18) any reviews undertaken in furtherance of the policies of

this Act, including the results of the review required by section

12(d), and any action taken, on the basis of the review required by

section 12(e), to simplify regulations issued under this Act;

(19) violations under section 11 and enforcement activities

under section 12; and

(20) the issuance of regulations under the authority of this Act,

including an explanation of each case in which regulations were

not issued in accordance with the first sentence of section 13(b).

(b) REPORT ON CERTAIN EXPORT CONTROLS .-TO the extent that the

President determines that the policies set forth in section 3 of this Act

require the control of the export of goods and technology other than

those subject to multilateral controls, or require more stringent

controls than the multilateral controls, the President shall inclu e in d

each annual report the reasons for the need to impose, or to continue

to impose, such controls and the estimated domestic economic impact

on the various industries affected by such controls.

(c) REPORT ON NEGOTIATIONS .-The President shall include in each

annual report a detailed report on the progress of the negotiations

required by section 5(i), until such negotiations are concluded.

REGULATORY AUTHORITY

SEC. 15. The President and the Secretary may issue such regula- Regulations.

tions as are necessary to carry out the provisions of this Act. Any 50 USC app

such regulations issued to carry out the provisions of section 5(a), 6(a),

7(a), or 8(b) may apply to the financing, transporting, or other

servicing of exports and the participation therein by any person.

DEFINITIONS

SEC. 16. As used in this Act—

(1) the term “person” includes the singular and the plural and

any individual, partnership, corporation, or other form of association, including any government or agency thereof;

(2) the term “United States person” means any United States

resident or national (other than an individual resident outside

the United States and employed by other than a United States

person), any domestic concern (including an permanent domestic establishment of any foreign concern) an any foreign subsidi- d

ary or affiliate (including an permanent foreign establishment)

of any domestic concern which is controlled in fact by such

domestic concern, as determined under regulations of the Presi-

(3)’ the term “good” means any article, material, supply or

manufactured product, including inspection and test equipment,

and excluding technical data;

(4) the term “technology” means the information and knowhow that can be used to design, produce, manufacture, utilize, or

50 USC app.

2415.

93 STAT. 534 PUBLIC LAW 96-72–SEPT. 29, 1979

reconstruct goods, including computer software and technical

data, but not the goods themselves; and

(5) the term “Secretary” means the Secretary of Commerce.

EFFECT ON OTHER ACTS

50 USC app. SEC. 17. (a) IN GENERAL.—Nothing contained in this Act shall be 2416. construed to modify, repeal, supersede, or otherwise affect the provisions of any other laws authorizing control over exports of any

commodity.

(b) COORDINATION OF CONTROLS .-l%e authority granted to the

President under this Act shall be exercised in such manner as to

achieve effective coordination with the authority exercised under

section 38 of the Arms Export Control Act (22 U.S.C. 2778).

(c) CIVIL AIRCRAFT EQUIPMENT.-Notwithstanding any other provision of law, any product (1) which is standard equipment, certified by

the Federal Aviation Administration, in civil aircraft and is an

integral part of such aircraft, and (2) which is to be exported to a

country other than a controlled country, shall be subject to export

controls exclusively under this Act. Any such product shall not be

subject to controls under section 38(b)(2) of the Arms Export Control

Act. For purposes of this subsection, the term “controlled country”

means any country described in section 620(f) of the Foreign Assist22 USC 2370. ance Act of 1961.

(d) NONPROLIFERATION CONTROLS .-(1) Nothing in section 5 or 6 of

this Act shall be construed to supersede the procedures published by

the President pursuant to section 309(c) of the Nuclear Non-Proliferation Act of 1978.

(2) With respect to any export license application which, under the

procedures published by the President pursuant to section 309(C) of

92 Stat. 141 the Nuclear Non-Proliferation Act of 1978, is referred to the Sub42 USC 2139. group on Nuclear Export Coordination or other interagency group,

the provisions of section 10 of this Act shall apply with respect to such

license application only to the extent that they are consistent with

such published procedures, except that if the processing of any such

application under such procedures is not completed within 180 days

after the receipt of the application by the Secretary, the applicant

shall have the rights of appeal and court action provided in section

IO(j) of this Act.

(e) TERMINATION OF OTHER AUTHORITY .—On October 1, 1979, the

Mutual Defense Assistance Control Act of 1951 (22 U.S.C.

1611-1613d), is superseded.

AUTHORIZATION OF APPROPRIATIONS

50 USC app. SEC. 18. (a) REQUIREMENT OF AUTHORIZING LEGISLATION.—Notwith- 2417 standing any other provision of law, no appropriation shall be made

under any law to the Department of Commerce for expenses to carry

out the purposes of this Act unless previously and specifically

authorized by law.

(b) AUTHORIZATION .There are authorized to be appropriated to

the Department of Commerce to carry out the purposes of this Act—

(1) $8,000,000 for each of the fiscal years 1980 and 1981, of

which $1,250,000 shall be available for each such fiscal year only

for purposes of carrying out foreign availability assessments

pursuant to section 5(0(5), and

(2) such additional amounts, for each such fiscal year, as may

be necessary for increases in salary, pay, retirement, other

coo

M

●
Ill Ill Ill I I I

PUBLIC LAW 96-72—SEPT. 29, 1979 93 STAT. 535

employee benefits authorized by law, and other nondiscretionary

costs.

EFFECTIVE DATE

SEC. 19. (a) EFFECTIVE DATE. -This Act shall take effect upon the

expiration of the Export Administration Act of 1969.

(b) ISSUANCE OF REGULATIONS .-(1) Regulations implementing the

provisions of section 10 of this Act shall be issued and take effect not

later than July 1,1980.

(2) Regulations implementing the provisions of section 7(c) of this

Act shall be issued and take effect not later than January 1, 1980.

TERMINATION DATE

SEC. 20. The authority granted by this Act terminates on September 30, 1983, or upon any prior date which the President by proclamation may designate.

SAVINGS PROVISIONS

SE C. 21. (a) IN GENERAL .—A11 delegations, rules, regulations,

orders, determinations, licenses, or other forms of administrative

action which have been made, issued, conducted, or allowed to

become effective under the Export Control Act of 1949 or the Export

Administration Act of 1969 and which are in effect at the time this

Act takes effect shall continue in effect according to their terms until

modified, superseded, set aside, or revoked under this Act.

(b) ADMINISTRATIVE Proceedings.-’hishis Act shall not apply to any

administrative proceedings commenced or any application for a

license made, under the Export Administration Act of 1969, which is

pending at the time this Act takes effect.

TECHNICAL AMENDMENTS

SEC. 22. (a) Section 38(e) of the Arms Export Control Act (22 U.S.C.

2778(e)) is amended by striking out “sections 6(c), (d), (e), and (f) and

7(a) and (c) of the Export Administration Act of 1969” and inserting in

lieu thereof “subsections (c), (d), (e), and (f) of section 11 of the Export

Administration Act of 1979, and by subsections (a) and (c)of section 12

of such Act”.

(b)(1) Section 103(c) of the Energy Policy and Conservation Act (42

U.S.C. 6212(c)) is amended—

(A) by striking out “1969” and inserting in lieu thereof “1979”;

and

(B) by striking out “(A)” and inserting in lieu thereof “(C)”.

(2) Section 254(e)(3) of such Act (42 U.S.C. 6274(e)(3)) is amended by

striking out “section 7 of the Export Administration Act of 1969” and

inserting in lieu thereof “section 12 of the Export Administration Act

of 1979”.

(c) section 993(c)(2)(D) of the Internal Revenue Code of 1%54 (26

U.S.C. 993(c)(2)(D)) is amended—

(1) by striking out “4(b) of the Export Administration Act of

1969 (50 U.S.C. App. 2403(b))” and inserting in lieu thereof “7(a)

of the Export Administration Act of 1979”; and

(2) by striking out “(A)” and inserting in lieu thereof “(C)”.

50 USC app.

2418

50 USC app 2401

note

50 USC app. 2409

note

50 USC app. 2406

note.

50 USC app.

2419

93 STAT. 536

Effective date.

22 USC 3108

note

7 USC 1732.

PUBLIC LAW 96-72–SEPT. 29, 1979

INTERNATGIONAL INVESTMENT SURVEY ACT AUTHORIZATIONS

SEC. 23. (a) Section 9 of the International Investment Survey Act of

1976 (22 U.S.C. 3108) is amended to read as follows:

“AUTHORIZATIONS

“SEC. 9. To carry out this Act, there are authorized to be appropriated $4,400,000 for the fiscal year ending September 30, 1980, and

$4,500,000 forthe fiscal year ending September 30, 1981.”.

(b) The amendment made by subsection (a) shall take effect on

October 1, 1979.

MISCELLANEOUS

SEC. 24. Section 402 of the Agricultural Trade Development and

Assistance Act of 1954 is amended by inserting “or beer” in the

second sentence immediately after “wine”.

Approved September 29, 1979,

50 USC app.

2420

50 USC app. 2021

note.

LEGISLATIVE HISTORY.

HOUSE REPORTS No 96-200 accompanying H.R. 4034 (Comm. on Foreign Affairs)

and No 96-482 {Carom of conference).

SENATE REPORT No. 96-169 (Comm on Banking, Housing, and Urban Affairs)

CONGRESSIONAL RECORD, Vol. 125 (1979)

July 18, 20, 21, considered and passed Senate

May 31, July 23, Sept 11, 18, 21.25, H.R 4034 considered and passed House;

passage vacated and S. 737, amended, passed m lieu

Sept 27, Senate agreed to conference report

Sept 28, House agreed to conference report.

o