SAMUEL NAKASIAN

30 ROCKEFELLER PLAZA
NEW YORK 20, N. Y.

February 14, 1963

Dear Hugh,

In accord with our talk yesterday, I enclose a copy of my speech on "Soviet Oil and Free World Security" and the Senate Committee report of my testimony last July.

I am quite sure the Governor is well informed on this subject matter, but I would appreciate it if you would give him an opportunity to know the point of view I have taken.

You will find the speech pretty rough in places. I hope you do not mind getting an early draft.

It should be clear that the problem is not limited to oil - oil is only used as a vehicle for getting at the problem. There is a definite vacuum in our national policy. It would make good sense for the Governor to consider filling it with some concrete suggestions.

If I can be helpful, you can count on me.

Kindest regards.

Mr. Hugh Morrow
22 West 55th Street
New York, New York

COMMITTEE ON THE JUDICIARY

JAMES O. EASTLAND, Mississippi, Chairman

ESTES KEFAUVER, Tennessee

OLIN D. JOHNSTON, South Carolina

JOHN L. McCLELLAN, Arkansas

SAM J. ERVIN, JR., North Carolina

JOHN A. CARROLL, Colorado

THOMAS J. DODD, Connecticut

PHILIP A. HART, Michigan

EDWARD V. LONG, Missouri

ALEXANDER WILEY, Wisconsin

EVERETT MCKINLEY DIRKSEN, Illinois

ROMAN L. HRUSKA, Nebraska

KENNETH B. KEATING, New York

HIRAM L. FONG, Hawaii

HUGH SCOTT, Pennsylvania

SUBCOMMITTEE TO INVESTIGATE THE ADMINISTRATION OF THE INTERNAL SECURITY
ACT AND OTHER INTERNAL SECURITY LAWS

THOMAS J. DODD, Connecticut, Vice Chairman

JOHN L. McCLELLAN, Arkansas

ROMAN L. HRUSKA, Nebraska

KENNETH B. KEATING, New York

HUGH SCOTT, Pennsylvania

J. G. SOUBWINE, Counsel

BENJAMIN MANDEL, Director of Research

II

SAMUEL NAKASIAN
COUNSELOR AT LAW

Statement made before the
Pipeliners Club
Tulsa, Oklahoma
February 18, 1963

Soviet Oil and Free World Security

Mr. Chairman, pipeliners, members of the great oil industry. I am honored by your invitation to visit Tulsa, the capital of our national oil industry and the home of the free world's pipeline builders, oil finders and drillers, as well as many refinery and marketing specialists.

Not long ago, only a few companies were international. Today, every company in the industry regardless of size, whether in production, construction or in service, either participates in the international business or is affected by it. The great change from a largely local to an international industry took place rapidly following the war. International companies of the pre-war period were joined overseas by almost every sizable American company. The internationals also made way for new foreign companies both private and state-owned which now account for a significant part of the overseas business. Fortunately, the competitive impact of these many new firms in foreign markets has been cushioned by a sky-rocketing demand with

markets have been conditioned by a sky-rocketing demand with
the competitive impact of these many new firms in foreign
international business. Fortunately, both private and state-owned which now account for a
significant part of the overseas business. Fortunately, both private and state-owned which now account for a
The international trade made way for new foreign companies joined overseas by almost every American company.
war. International companies of the pre-war border were an international industry took place rapidly following the
affected by it. The Great war brought to an end participation in the international business or in
trade, whether in production, construction or in service, of
international. Today, every company in the industry regardless of
not only so, only a few companies were interna-
societies.

and grilles, as well as many refinery and marketing
ports of the free world, a pipeline pipeline, oil pipelines
Tulsa, the capital of our national oil industry and the
oil industry. I am honored by our invitation to visit
Mr. Chairman, pipeline, members of the great

February 18, 1963

Tulsa, Oklahoma
Pipeline Pipeline Corp
Statement made before the

CONSEJER FOR AT LAW

SAMUEL NAKASIAN

[LC]

both newcomers and oldtimers both scoring tremendous gains in their operations. More than 7 billion barrels of oil are consumed annually by the free world, and 3 of every 5 barrels are imported.

In the past several years, the Soviet* jolted the industry by exporting oil to free world markets in such large volume and under such unique circumstances of strategic advantage to the Soviet as to pose a real threat to the security of the free world.

This development has been the subject of testimony before Congressional Committees, including my own testimony last July, and the comprehensive study of the National Petroleum Council published in October. The facts may be summarized as follows:

(a) Soviet oil exports to the free world increased from 13,000,000 barrels in 1952 to 250,000,000 barrels in 1961. An expansion of pipelines, of tanker fleets and a major exploration and drilling program is designed to increase this export capability to 500,000,000 barrels annually by 1972.

When the term Soviet is used geographically it refers to the entire Communist world; when used politically it refers to the controlling power - the Kremlin.

-2-

(b) The Soviet sedimentary basins are greater in area than the 50 United States and 3 times larger than all our sedimentary basins.

(c) A substantial number of foreign oil companies, mostly state-owned but also private provide access to free world markets.

(d) It has become an effective means of payment for foreign procurement to strengthen Soviet economic power and to penetrate underdeveloped free world countries lacking fuel.

In this brief talk, I will make some observations about strategic considerations of Soviet oil exports under several headings:

(a) Impact on the oil industry

(b) Effect on importing countries

(c) Benefits to the Soviet

(d) The security of the free world, and

(e) The position of the United States

I also have some thoughts on a course of action which will be discussed here for the first time.

## Impact on the Oil Industry

The bulk of Soviet oil exports are made to

-3-

-3-

The bulk of Soviet oil exports are made to
<u>Impact on the Oil Industry</u>

(b) The security of the free world, and

(c) Benefits to the Soviet

(p) Effect on importing countries

under relevant pushings:

upon strategic considerations of Soviet oil exports

In this brief fair, I will make some observations
here.

and to penetrate underdeveloped free world countries tracking
for foreign broomment to attainment Soviet economic power.

(b) It has become an effective means of payment
to free world markets.

banes, mostly state-owned but far private provide access

(c) A substantial number of foreign oil com-

pany all our documentary gains.

(d) The Soviet documentary gains are
greater in areas than the 30 United States and 3 times larger

[12]

[L.C.]

Europe* and Japan and account for a substantial part of consumption in these countries. Less than 25% of exports go to underdeveloped countries, and for some of these countries, the Soviet is the major supplier. This oil has been absorbed in the free world markets, overall speaking, without the loss of volume by the large companies. However, the foreign state-owned and private companies accepting this oil are increasing their share of the market at the expense of free-world suppliers. Discounts as much as 50% below world prices effectively subsidize these companies to expand the market for Soviet oil.

Oil exported to Europe and Japan is delivered at the border or ocean terminal. In underdeveloped countries, such as Ceylon, India, Guinea, Iraq, Pakistan, the Soviet participates in local refining or exploration activity. It is not likely that the industrial countries of Europe and Japan would permit such participation, no reciprocal opportunities being offered by the Soviets.

Unless Soviet oil imports are curtailed under a long range policy, this large source will influence the

*For brevity, when the term Europe is used it includes the United Kingdom and Scandinavia.

-4-

["4-", "the United Kingdom and Scandinavia.", "*For brevity, when the term Europe is used it includes", "long range policy, this further advance will influence the\nunless Soviet oil imports are curtailed under a\nreciprocal opportunity being offered by the Soviet.\nof Europe and Japan would benefit from participation, so\nactivity. It is not likely that the industrial countries\nthe Soviet barter trade in local refining or exploration\ncountries, and so Celovon, India, Guinea, Iran, Pakistan,\nat the longer or ocean terminal. In underdeveloped", "Off exported to Europe and Japan is delivered", "off.\nsupplement these countries to expand the market for Soviet\n口\n口\n口\n口\n口\n口\n口\n口\n口\n口\n口\n口\n口

[LC]

developing structure of the overseas oil industry. For
example, pipelines projected for construction from
Mediterranean ports to markets in the north must reckon
with the competition of Soviet oil delivered by pipeline
from the East or by tanker via the Baltic and southward
by barge. With a million barrels a day of such oil hanging
over Europe, development of a rational distribution system
for this large market is frustrated.

While the European common market has reached
agreement on many economic problems and has created a single
market for many products, the energy problem of Europe is
complex and unsettled. Recently the Eurocrats, the pro-
fessional commission staff, attempted to draft an energy
policy, including restrictions on Soviet oil imports. But
they gave up hope for any action in the near future. The
causes are several:

(1) The restrictive policies of France, the member country with the largest position in oil production,

(2) The peculiar status of Italy by reason of its state-owned oil empire.

(3) Refiners and marketers of Soviet oil.

(4) Widely varying price of petroleum to the consumer.

-5-

[LC]

(5) The unreconciled political opposition of the rival coal industries.

Hence, the interests are so divergent and unstable that a common agreement on oil at present is not a prospect. In this confused picture Soviet oil is a major unsettling factor. Companies importing this oil are enjoying a price windfall. And, moreover, the unsettled conditions are favorable to their expansion in the market.

Americans refuse to process this oil. To encourage this boycott, our government withholds procurement of petroleum supplies from companies which do process Soviet oil. It is doubtful that this rejection does any more than antagonize the Soviets because local private and state-owned facilities are available, and are being expanded to handle increased imports.

The big international companies, having their own crude sources, their own refineries, and their own marketing facilities can, up to a point, be contemptuous of this invasion of their markets. I daresay that until two years ago, such was the case. Now there is real cause for their alarm. National companies are in effect being subsidized by the Soviet to expand a market

-6-

[LC]

for its oil. As a result both the price levels and the
structure of the market are threatened.

American companies which have recently developed
foreign production, Continental, Marathon, and Amerada
in Africa, and Indiana in the Persian Gulf, find them-
selves more directly in a headon conflict with Soviet oil
in the European markets. Soviet cut-price oil has an ob-
vious advantage in preempting the capacity of private and
state-owned refiners and marketers. Unless restrictions
are put on this cheap oil, these companies must enter the
European market either by heavy investment in refinery and
marketing facilities, or by selling to the major interna-
tional companies. Since the majors are well situated with
their own sources of crude, a price concession to them
must be substantial to induce them to replace their own
production.

Despite the general surplus of crude, the Soviet
finds the free world an attractive market. Prices es-
tablished by private companies are at levels high enough
to cover costs and payments to producing countries. The cost
floor under prices in the Eastern Hemisphere, the Persian
Gulf for example, is from $1.10 to $1.25 a barrel, of
which 75¢ to 85¢ are royalties and other payments to

-7-

-7-

which led to 82% of all revenues and other payments to Gilt for example, in from $1.10 to $1.20 a parer, of floor under price in the Eastern Hemisphere, the British to cover costs and payments to producing countries. The cost capitalized by private companies are at levels high enough to fund the free world an attractive market. Prices es-

Denbife the Generaloplus of crude, the Soviet production.

must be substantial to induce them to replace their own their own sources of crude, a price concession to them from companies. Since the markets are well attuned with marketing facilities, or by selling to the motor industries- European market either by heavy investment in refinery and are but on this cheap oil, these companies must enter the state-owned refineries and marketers. Unless restrictions above advantage in preempting the capacity of private and in the European markets, Soviet cut-price oil has an op- solve more directly in a serious conflict with Soviet oil in Africa, and Indians in the Persian Gulf, find them-

American companies which have recently developed structure of the market are threatened.

[r]

[LC]

producing countries. The Soviets have no royalties to pay. Moreover, it can disregard the cost-price relationship whenever it suits a national and strategic purpose. It has been feasible, therefore, for the Soviet to export crude oil at prices less than the equivalent of $1 per barrel at the Persian Gulf.

The price, at which the Soviet exports oil, is relatively unimportant provided it achieves a purpose considered vital to the state. Thus, the value of such oil is not measured by price tags on oil exported for the industrial products imported. Rather, of importance to the state, is the value of such imports, measured by alternative Soviet costs of production of such machinery and equipment, by the economic and strategic value of immediate delivery, by the acquisition of new designs and technology, and by superior quality. So long as the West will make such an exchange, the Soviet gets a bargain even when it exports oil at a fraction of world prices.

## Impact on Importing Countries

Large volume exports of Soviet oil and other raw materials are a powerful factor in shaping the future

-8-

[LC]

economic policy of free world countries. Although the free world has an adequate supply, countries accept such exports in order to sell their heavy products to the Soviet.

Highly urbanized and industrialized Europe and Japan are committed to expand export markets, particularly for high-capital-and-labor content machinery and equipment. Governments of these countries must support such exports in order to provide employment for an ever-increasing labor force. With cash on the barrel head, the Soviet offers a convenient large volume market. This market is almost insatiable because the people behind the iron curtain live not much better than the lowest living standards in most of the free world and far below the living standards in most of the free world and far below the living standards of many countries.

Alternatively, Europe's and Japan's industrial capacity could be fully employed supplying the equally needy countries of South America, Africa and Asia. But unfortunately conditions in these free countries are not accommodating, and sales made to them are fraught with

-9-

[LC]

high costs, major credit risks, and a vexatious
technical assistance burden.

In contrast, the Soviet business is easy and
profitable for Europe and Japan. Procurement specialists
know what they want, purchase in large quantities and
complete the transaction with delivery at the border.
No large sale force is required. No technical assistance
obligation must be assumed, and payment is assured, either
immediate or by credit against exports of raw materials.

As exports increased in the last 10 years, Soviet
foreign procurement rose threefold to 5 billion in 1961,
more than one-half being heavymachinery, equipment and
other capital goods. If planned export capacity in the
next 10 years is achieved, of which the largest product
would be oil, I estimate that Soviet procurement abroad
will approximate 9 billion annually by 1972, of which 6
billion will be machinery, equipment and other productive
facilities.

The iron curtain world is now the largest cus-
tomer of Europe for such heavy equipment and capital goods.
By 1972 the heavy industry of these countries, including
Japan, will be almost completely wedded to the Soviet
market. Moreover, Europe and Japan will have become in

-10-

large part dependent on Soviet oil and vulnerable to its power to cut off such supply. In the event that happens, free world companies could not replace such oil in time to prevent disaster.

## Benefit to the Soviet

Brief mention should be made of the obvious benefits to the Soviet of exchanging raw materials for productive goods. Chemical plants, and other basic industry, are imported as complete units. Heavy industry products such as large diameter pipe (more than 1,000,000 tons in the last few years), generators and metal working equipment, make it possible for the Soviet to speed up its economic development to a very short period. With free access to the heavy industry and technology of the West, this hostile power can become as highly industrialized as any Western power. Moreover, as the most recently industrialized nation, it will have an industrial capacity more modern than the West which supplied it.

The Soviet has always taken advantage of opportunities to acquire free world technology. But, its capacity to buy has always been limited by insufficient export. Until a few years ago, Exports were so limited

-11-

[L.C]

as to be described as "fish eggs and furs". Nevertheless, it has always had access to the inventions of the free world. Since the patent system of the free world requires publication, it thus puts every invention covered by a patent in the hands of the Soviet for nothing more than a nominal printing and mailing charge. In addition, it purchases every technical journal and scientific book which Americans and Europeans publish annually in tens of thousands. In contrast, the West is prevented from acquiring Soviet inventions. However, recently Premier Krushchev has made a gesture of reciprocity by ordering the publication and release of patents covering some selected inventions.

With the death of Stalin some ten years ago, it became clear to his successors, especially to the resourceful Nikita Krushchev that to win the cold war reliance could not be placed on propaganda and military power alone. Economic power was required to offset the industrialization of the United States, Europe and Japan. It was clear to Krushchev that economic development could not be accomplished by merely importing blue prints, inventions, and scientific books. Local capital and know-how were not adequate. But this development could be achieved by importing heavy

-12-

-12-

that development could be achieved in importing pikes
pikes. Local capital and know-how were not adequate. But
pions merely importing pion bruta, inventions, and scientific
Kraepelen that economic development could not be accomplished
of the United States, Europe and Japan. It was clear to
economic power was required to offset the industrialization
could not be placed on a broad basis and military power alone.
that United Kraepelen that to win the cold war reliance
became clear to the successors, especially to the resource-
With the death of Stalin some ten thousands who, if
selected inventions.

the duplication and release of patents covering some
Kraepelen had made a feature of reproductivity in ordering
during Soviet inventions. However, recently Premor-
t thousand. In contract, the West in prevented from re-
which Americans and Europeans duplicated simultaneously in ten of
bureaucracies every technical journal and scientific paper
a national printing and writing course. In addition, it
began in the late 1940's the idea of the Soviet for notching more than
duplication, if time but every invention covered a new
world. Since the patent system of the tree world requires
it has always had success to the inventions of the tree
as to be described as "first eggs and tins". Nevertheless,

[c]

[LC]

industry, which expanded exports of raw materials would
make possible.

I might mentioned that one of the greatest re-
sources in the Soviet is in the person of Ananstas
Mikoyan who is credited with direction the nation's
economic policy. He has been so valuable, that despite
changes in dictators and political intrigues, he has
survived as the economic brain trust for more than 25
years. Mikoyan understands his country's strength as
well as its weaknesses. Mikoyan also understands the West -
both its power and its vulnerability. This understanding, I
daresay, is perhaps clearer than that of some Western
leaders.

Under the confident cosmopolitan leadership of
Krushchev, Mikoyan has the perfect setting to perform
his role of chief executive officer of the world's greatest
buying-selling operation. This function consists of two
parts - to procure from the West what the Soviet needs;
and the other, to expand production of raw materials which
the markets of the free world will buy.

Under this policy, the Kremlin places the highest
priority on oil development, the scope of which is now the
world's largest industrial undertaking under a centralized
management.

-13-

If Mikoyan is right in his appraisal, industrial Europe and Japan cannot withstand the temptation of orders for the output of its heavy industry. Heavy industry as well as the beneficiaries of low-priced Soviet oil assure the necessary political support. If the issue of Soviet oil imports in the future is dealt with on a national basis, as it has been, the big oil companies in Europe, mostly expatriate owned, are no match for the political pressure heavy industry and local importers of Soviet oil can bring to bear on local governments to expand this exchange.

## Impact on Free World Security

In view of the cold war conflict, serious concern must be expressed that the opportunity of the Soviet to procure freely from Europe and Japan must ultimately weaken the security of the free world. The cold war conflict is not the figment of imagination but is a clear and present threat to survival. Underscoring the necessity for mounting defense expenditures, Secretary of Defense McNamara recently told a Senate Committee that the military striking force of the United States is superior to the Soviets. He explained that while a surprise attack by the Soviets with

-14-

[L.C]

resulting enormous damage cannot be prevented, the United
States can, at present, withstand such attack and launch
a retaliatory attack that would completely destroy the enemy.
He warned, however, that further technological progress
by the Soviet in its industrial development could result in
a strengthened defense system which could make it possible
for the enemy to withstand a retaliatory attack by the
United States.

This being the case, it would appear clear that
the free world security is being directly threatened in
the military sector by the growing Soviet economic power
to which Europe and Japan regrettably are making a major
contribution.

However, the security of the free world is not
alone a matter of relative military strength. Security
is also dependent on economic survival. The bulwarks of
free world defense are the highly urbanized and indus-
trialized communities of the United States, Europe and
Japan. These areas cannot survive economically without
the raw materials of Asia, Africa and South America.

Because of the mutually deterrent effect of
modern arms, the build up of Soviet economic power is, in

-15-

-12-

modern arm, the build up of Soviet economic power in
Because of the maturity deterrent effect of
the raw materials of Asia, Europe and South America,
Japan. These areas cannot survive economically without
tried communities of the United States, Europe and
free world defense are the highly ununited and inadequate
in size dependent on economic survival. The numbers of
alone a matter of relative military strength. Security
However, the security of the free world is not
contrIBUTION.

to which Europe and Japan regrettably are making a major
the military sector by the growing Soviet economic power
the free world security is being directly threatened in
This being the case, it would appear clear that
United States.

for the enemy to withdraw a retaliatory attack by the
a strengthened defense system which could make it possible
by the Soviet in its industrialized government could result in
He warned, however, that further technological problems
a retaliatory attack that would completely destroy the enemy.
States can, at present, withdraw such attack and issued
resulting enormous damage cannot be prevented, the United

[r]

[LC]

my view, a more likely threat to free world security.
The Kremlin can and will employ its greater economic
power not only to perfect its military apparatus, but also
to wage a contest for the support of Asians, Africans and
Latin Americans. Keeping down its own standard of living,
the Soviet can export the created surplus goods to the
underdeveloped continents, using such aid to subvert these
immature, shaky governments with its imported political
controls.

Can Europe and Japan, having become dependent
economically on the Soviet market, resist being influ-
enced in their political and defense policies? These
politically mature countries present an entirely different
problem than the underdeveloped free countries. While
sophisticated politically and capable of resisting the
Communist propaganda, these highly urbanized communities
nevertheless are highly vulnerable to economic pressure
which the Soviets in time could exert. A depression in
these countries would accentuate an increased dependence
on the Soviet market and create a dangerous condition for
the security of the free world.

The tragic reality of the free world position
is that there is no expressed policy on an overall

-16-

[LC]

economic relationship with the Soviet. What prevails is an old world tradition that a country continues to trade even with a hostile nation until the shooting starts, and history records that this tradition goes so far as to permit trade even between belligerents. Obviously, this old world tradition has not been reappraised in the context of the present global conflict for survival. Europe and Japan still adhere to the tradition. The United States Congress repudiates it.

The United States trade embargo is ineffectual in preventing the Soviet from obtaining all their requirements of heavy industry from Europe and Japan. This division of policy must look ridiculous to Krushchev and Mikoyan and indeed it is.

## The United States Position

The position of the United States in embargoes trade with the Soviet is undoubtedly correct under the circumstances of the cold war conflict. However, our embargo is ineffectual in preventing the same procurement from other sources. Premier Krushchev loses no opportunity to call attention to this fact.

But United States trade with the Soviet would not

-17-

-13-

But United States trade with the Soviet Union would not
opportunity to call attention to this fact.

cument from other countries. Premier Krustelevich does no
om emprise in intellectual in preventing the same bro-
the circumstance of the cold war conflict. However,
ing trade with the Soviet Union undoubtedly correct under
The position of the United States in emprise-

The United States Position

USSR and indeed it is.

division of policy must look redolences to Krustelevich and
ments of heavy industry from Europe and Japan. This
in preventing the Soviet Union obtaining all their requirements.

The United States trade emprise is intellectual
Congress rebukes it.

and Japan still adhere to the tradition. The United States
of the present Soviet conflict for survival. Europe
world tradition has not been reshaped in the context
trade even between different peoples. Obviously, this of
practical records that this tradition goes so far as to permit
with a hostile nation until the shooting ensues, and
old world tradition that a country continues to trade even
economic relationship with the Soviet Union. What brevails in an

[fc]

[L.C.]

solve the problem. It would provide competition for
European suppliers, to the benefit of the Soviet, but it
would lessen the dependence of Europe and Japan on the
Soviet market.

If we take the cold war at face value, then the
United States has the obligation to take the necessary
steps to deal with hostile power, economic as well as
military. The steps required, to be successful, must be
based on a full use of United States economic power, and
should follow along two paths of action:

(a) The United States should attempt to reach an
agreement with our highly industrialized allies on a
common economic policy regarding the Soviet. This policy
should be responsive to the dangers of hostile economic
power to the security of the free world. This agreement
should provide that exports of capital goods and supplies
critical to the development of Soviet economic power
shall be made conditional on assurances of a political and
military policy designed to promote a real peaceful co-
existence with the free world. Such Soviet assurances must
be demonstrated by action, including (a) an immediate
implementation of an internationally inspected disarmament
program, (b) cessation of political and subversive actions

-18-

[Lc]

in free world countries, and (c) the adoption of an
internal economic policy to raise living standards
rather than to support Communist imperialism. Based on a
meaningful peaceful coexistence, free world trade with
the Communists might then be justifiable, provided that
adequate measures are taken to prevent the dumping of
raw materials in free world markets.

(b) An agreement with our industrialized
allies for the creation of a free world economic apparatus
that would facilitate the export of technology, organiza-
tion and capital to South America, Africa and Asia,
and thus make it possible for the less developed countries
to respond to the economic needs of their people.

Neither of these two ideas is new to United
States foreign policy. Gigantic efforts are being made
to offset the Soviet military threat, and great sums of
money are being spent for economic development abroad
to prevent Communist economic and political penetration.
But these efforts are failing in the cold war despite the
enormity of our peacetime defense expenditure and the 70
billion dollars spent for foreign aid since World War II.

*A multi-national foreign aid program was recently
advocated by George Champion, Chairman, The Chase Manhattan
Bank.

-19-

[Lc]

It should be clear by now that piecemeal
actions by the free world cannot succeed. We mush match
Soviet ability to marshall resources and to bargain from
positions of maximum strength. And, we must be clear
on objectives.

Our Government has not yet employed its sub-
stantial economic muscle in molding policies which are
consistent with the requirements of staying alive in the
cold war. The one overt act we can point to is the embargo
on trade with the Soviet. Otherwise, United States
policies of the pre cold-war era remain largely unchanged.
American foreign economic policy is not responsive to the
conditions of the cold war, nor to our dependence on
foreign resources.

Adequate recognition has not been given to the
fact that American economic power is no longer the
product of resources within the United States. Nor, is
it fully understood that United States power is now sub-
stantially generated by American companies operating
abroad both in extraction of raw materials and in manu-
facturing. But most vital are the overseas raw materials,
on which our home industry depends. Our security interests
dictate full support for American companies operating
abroad. Yet, quite the opposite is true in both our

-20-

[LC]

executive as well as legal policies which compel
American companies to conduct their operations in the
foreign market place as they would within the United
States. This policy is a severe handicap to American com-
panies operating overseas as they meet the onslaught of
state buying and selling organizations - not only those
of the Soviet Union, but also of free world nations.

## Prospects

Our present Government machinery, I believe,
is now badly designed for fashioning and implementing a
foreign economic policy that is realistic. A basic
weakness is that foreign economic policy, foreign aid,
security and strategic consideration, as well as diplomatic
relations, are all centralized in the State Department.
My experiences, both Washington and overseas, convince me
that it is a mistake to centralize all these functions in
any one agency. The Turkish-Greek aid program of 1946-47
conducted by the State Department, was such a dismal failure
that Congress established a separate agency to administer
the Marshall Plan for European Recovery. The wisdom of
Congress was vindicated by the success of that program.
Ten years ago, the powerful personality of John Foster Dulles
persuaded Congress to centralize all foreign economic and

-21-

[Lc]

aid functions in the State Department he headed. There
is now almost unanimous agreement that this function is
being performed badly, and that this has been the case
for many years.

During the war, the Board of Economic Warfare
employed the economic strength of the nation to support
the military. After the war, that Agency was disbanded
and any like functions have been buried in the bureaucracy
of the State Department and the Central Intelligence
Agency. Such function is needed now, but it can not be
performed effectively under these agencies.

Considering the demands on State Department officers
to participate in diplomatic functions, they have little
time to deal with substantive problems. In Washington,
there are more than 100 embassies whose Ambassadors must
be received by the Secretary or his top assistant, not to
speak of hundreds of foreign dignitaries who visit this
country on official business. Adding to this burden,
is the very large diplomatic community at the United Nations
in New York. It is not surprising then that our foreign
economic problems are neglected when the responsible

-22-

[Lc]

officials are overworked with such duties.

The two courses of action I outlined have little chance of success unless the responsibility for foreign economic policy is put under a separate agency. This agency should report directly to the President and coordinate with the State and Defense Departments. Thus, proper conditions could be established so that our qualified and responsible public servants can function.

To meet the Soviet economic threat, an agreement must be reached with our allies. True, our aid to Europe has terminated long ago. Nevertheless, we still have bargaining power by reason of our defense and substantial private procurement overseas. This was demonstrated recently. After much publicity in Congress on Soviet Oil, our pressure through NATO persuaded Germany and Japan to forego accepting Soviet orders for large diameter pipe. Italy responded that it should honor any existing orders by the Soviet, but would reconsider any further shipments.

-23-

-23-

and further shipments.

expanding orders by the Soviet, but would reconsider
the diameter pipe. Italy responded that it should honor and
leave Japan to forego accepting Soviet orders for large
Soviet Oil, our breakeaway through NATO bypassed Germany
strategically. After much publicity in Congress on
essential private procurement overseas. This was demon-
strate pursuing power by reason of our defense and sup-
Europe has terminated long ago. Nevertheless, we still
must be reached with our letters. True, our aid to
To meet the Soviet economic threat, an agree-
disposed and reasonable public servant can function.
Thus, proper conditions could be established so that our
and coordinate with the State and Defense Departments.
This agency should report directly to the President
for foreign economic policy in but under a separate
little chance of success unless the reasonableness
The two courses of action I outlined have
officials are overworked with and duties.

[r]

[Lc]

This single case is reassuring in that we do
have bargaining power and that it can be made felt.

I believe that our bargaining power is substantial but that the use of it is stymied through lack of direction and purpose.

Recently, a publisher of a leading weekly magazine had a three hour private talk with Premier Krushchev. He stated that this meeting gave him hope to believe that the Soviet was moving toward a real peaceful coexistence and that we might hope for a powerful Soviet ally against the Chinese Reds. I asked him to what extent the notion prevailed in the State Department and official high places that if the Soviets were economically built up they would be less imperialistic, and to what extent this notion influences United States policy. He replied that based on his contacts and conversations, this idea was widely held and did influence our policies.

It is apparent that such notions, to me fanciful thinking, could well prevail and influence our policies without any public disclosure that this is what is happening.
The real cause of such unspoken premises that may influence our policies, is that our Presidents have not specifically dealt with the threat of Soviet economic

-24-