["If we are to build a foreign economic policy to serve our national objectives\non. We have to deal with the world as it is, not as we should like it to be.\ngone -- shattered beyond recall by the two World Wars and the Great Depression--\nbeginning of rational thinking in this field is to realize that this world is\nrivively minor iterations) is the primary object of American policy. But the\ntheir youth as the \"normal\" world whose reconstruction (with some compar-\nIf it is understandable that many Americans should regard this world of\ntion to economic developments in other countries.", "United States could do about its domestic business without paying much attention to trade and stable currencies, with a single center in Western Europe and the United States. In the economic field, it was a world of orderly growth, of free trade and stable currencies, with a single center in Western Europe, more specifically, in the City of London. It was a world in which the United States could do about its domestic business without paying much attention to trade and stable currencies, with a single center in Western Europe and the United States. In the economic field, it was a world of orderly growth, of free trade and stable currencies, with a single center in Western Europe and the United States.

February 14, 1958

it must take account of the new world in which we find ourselves. It must
deal with the major problems and opportunities that face the United States
at the present time.

In this sixth decade of the 20th century, there is much in the basic
economic position that is good. World production outside the Soviet Com-
munist orbit is at record levels. The volume of free world trade is also at
record levels, the increase in real terms amounting to some 80 per cent since
the period immediately before World War II. In both its performance and its
promise, the American economy continues to demonstrate the immense produc-
tivity and widespread enjoyment of the fruits of its production which have been
its hallmark. These facts must be recognized, and kept in mind. It should
also be kept in mind that a significant part of these favorable developments
may fairly be attributed to the vitality of the free world's institutions and to
wise policies soundly administered.

Amid these favorable factors in the free world economy are a number
of serious problems. Our next step must be to outline these problems and
their main implications for our foreign economic policy. The problems are
essentially of two kinds. Here we will discuss the first kind -- the problems
which would face us even if the Communist world did not exist. In the next
Chapter we will discuss the problems which are largely or wholly the result
of the communist challenge.

of the communist challenge.

Chapter we will discuss the problems which are largely or wholly the result
which would face us even if the Communist world did not exist. In the next
easily of two kinds. Here we will discuss the first kind -- the problems
their main implications for our foreign economic policy. The problems are
of serious problems. Our next step must be to outline these problems and
avoid these favorable factors in the free world economy are a number
wise policies adversely administered.

may fairly be attributed to the vitality of the free world's institutions and to
sao be kept in mind that a significant part of these favorable developments
its hallmark. These factors must be recognized, and kept in mind. If should
tivity and widespread enjoyment of the fruits of its production which have been
promised, the American economy continues to demonstrate the immense produc-
tive period immediately before World War II. In both its performance and its
record levels, the increase in real terms amounting to some 80 per cent since
soviet orbit is at record levels. The volume of free world trade is also at
economic position that is good. World production outside the Soviet Com-
In this sixth decade of the 20th century, there is much in the basic
at the present time.

des with the major problems and opportunities that face the United States
it must take account of the new world in which we find ourselves. If not

February 14, 1928

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February 14, 1958

A. Economic Interdependence

It is no longer possible for any nation, regardless of its power or
wealth, to preserve its independence or advance its other objectives in iso-
lation from other nations. This fact of interdependence is widely recognized
in political affairs. It is not so well appreciated in the economic field.

Yet international trade is a vital and growing part of our economic
life. In the first place, imports are an important supplement to our domestic
resources. How far we have moved from self-sufficiency is seen most clearly
in the fact that we now look outside our borders for 10 per cent of our raw
material requirements. We import almost all of our natural rubber, chromium,
tin, and managanese (which is essential to the manufacture of steel). We also
import one-half of our lead and zinc and one-third or more of our copper,
mostly from the underdeveloped countries of the world.

With the growth of our population and production and the continued
depletion of our natural resources our dependence on foreign materials is bound
to increase. It has been estimated that by 1975 our domestic production will
at least double the 1950 rate and that by that time we will have to import at
least 20 per cent of our raw material requirements and at least 55 per cent of
our metals requirements.

Our dependence on imports is not measured only by our need for essen-
tial materials which we cannot obtain at home. There are some essential
materials which are available here -- but only at a much higher cost than the

materials which are available here -- put only at a much higher cost than the
tial materials which we cannot obtain at home. There are some essential

Our dependence on imports is not measured only by our need for essential
وم ماتریالات مطلوب و کنترل می کند.

least 20 per cent of om rsm material requirements and at least 22 per cent of
at least double the 1920 rate and that by that time we will have to import at
to increase. It has been estimated that by 1922 om domestic production will
depletion of our natural resources our dependence on foreign materials is pound
With the growth of our population and production and the continued
mostly from the underdeveloped countries of the world.

import one-third of om lead and zinc and one-third or more of om copper,
tin, and manganese (which is essential to the manufacture of steel). We also
material requirements. We import almost all of our natural rupper, chromium,
in the fact that we now look outside om borders for 10 per cent of om rsm
reasons. How far we have moved from self-sufficiency is seen most clearly
life. In the first place, imports are an important supplement to our domestic
Yet international trade is a vital and growing part of our economic
in political affairs. It is not so well appreciated in the economic field.

lation from other nations. This fact of interdependence is widely recognized
wealth, to preserve its independence or advance its other objectives in iso-
If it is no longer possible for any nation, regardless of its power or

V. Economic Interdependence

February 14, 1928
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February 14, 1958

cost of buying them abroad. By importing these materials we reduce our pro-
duction costs and give our consumers more for their money. And quite apart
from providing us with essential raw materials, imports bring us many non-
essentials which are "the spice of life." Some of these, like coffee, tea and
cocoa, we cannot produce at all. Others, like bicycles, watches, wines
and spirits, kitchenware, gloves, cheese, handmade glass, and certain tex-
tiles, we produce only in greatly inferior quality or at much greater cost. In
short, we heavily depend on imports to maintain our high living standards.

Our living standards depend on imports for yet another reason -- they
are an important stimulus to domestic production. This is a qualitative advan-
tage of international trade which has little to do with its size. Even when
imports are small they exert a continuous competitive pressure on domestic
industry, inducing an intensive search for lower costs and technical improve-
ments which benefit the economy as a whole.

So far we have considered only the role of imports. Our dependence
on trade becomes more striking when we include exports in our calculations.
Some four and one half million workers -- about 7% of our entire labor force
-- owe their livelihood directly to international trade. These are the workers
employed in producing exports, dealing with imports, and transporting and
selling internationally traded goods. International trade thus provides more
employment for American workers than the textile, auto, chemical and steel

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February 14, 1958

industries combined. And even these figures leave out of account the work-
ers indirectly dependent on foreign trade, such as those whose employment
would cease without the imported materials essential to the industries in
which they work.

Our dependence on international trade is particularly acute in certain
sections of the economy. We export between one-fifth and one-third of our
total production of civilian aircraft, railroad cars, construction and mining
equipment, textile machinery, sewing machines and steel and rolling mach-
inery. We export between 20 per cent and 40 per cent of our rye, barley and
tobacco, and more than one-half of our wheat, rice and cotton. Overseas
markets for our farm products are an important factor in maintaining commodity
price levels and alleviating domestic surpluses. The loss of these export
markets would have devastating consequences for our farm community as a
whole.

But the full measure of our economic interdependence is not taken by
considering our own needs alone. We must also consider our relation to
other countries of the world which themselves depend on international trade.

The ratio of international trade to total production in the United
Kingdom and France is three to four times as great as in the United States.
For smaller nations such as Belgium, The Netherlands, Sweden and Switzer-
land, it is five to nine times as great. Our main industrial allies are even
more dependent than we are on foreign supplies of raw materials. For

more dependent than we are on foreign supplies of raw materials. For
land, it is five to nine times as great. Our main industrial allies are even
for smaller nations such as Belgium, The Netherlands, Sweden and Switzerland
and France is three to four times as great as in the United States.

The ratio of international trade to total production in the United
other countries of the world which themselves depend on international trade,
considering our own needs alone. We must also consider our relation to

But the full measure of our economic interdependence is not taken by
whole.

markets would have devastating consequences for our farm community as a
price levels and alleviating domestic amphiæa. The loss of these export
markets for our farm products are an important factor in maintaining commodity
topacco, and more than one-half of our wheat, rice and cotton. Overseas
inquiry. We export between 20 per cent and 40 per cent of our rye, barley and
equipment, textile machinery, sewing machines and steel and rolling mach-
total production of civilian aircraft, railroad cars, construction and mining
sections of the economy. We export between one-fifth and one-third of our
Our dependence on international trade is particularly acute in certain

which they work.

would cease without the imported materials essential to the industries in
era indirectly dependent on foreign trade, such as those whose employment
industries combined. And even these figures leave out of account the work-

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February 14, 1958

example, Western Europe relies on the Middle East for 70 per cent of its oil requirements. For the major industrial countries who are our principal allies international trade is not simply an important element in the economy -- it is the means of survival itself.

The same may also be said for the underdeveloped countries. Few of these countries are self-sufficient even in food. All of them must look abroad for machinery and technical aid vital to their economic development. To pay for imports they have had to specialize heavily on one or two export crops. The loss of foreign markets for these crops or a collapse in their world prices can plunge these countries into an economic crisis.

The natural forces of interdependence have bound the United States, the industrial countries, and the underdeveloped countries of the non-communist world into an intimate economic relationship. We must nourish the natural flow of trade and investment not only because it directly promotes our domestic prosperity but also because it promotes the prosperity of our allies and thus indirectly promotes our national objectives. Although individual or group interests may sometimes be served by obstructing this flow, we should regard every obstacle we place in its path as a self-imposed blockade which must have grave consequences for the general welfare both of our country and of the free world as a whole.

How can we strengthen the free world economic relationship on which the achievement of our objectives depends? In the nineteenth century this

How can we strengthen the free world economic relationship on which
tree world as a whole.

have great consequences for the general welfare both of our country and of the
every obstacle we face in its path as a self-imposed blockade which must
interests may sometimes be served by opacinating this flow, we should regard
this indirectly promotes our national objectives. Through individuals or groups
the prosperity put also because it promotes the prosperity of our allies and
flow of trade and investment not only because it directly promotes our domes-
ican world into an intimate economic relationship. We must maintain the natural
the industrial countries, and the underdeveloped countries of the non-commu-

can bungee these countries into an economic crisis.

The loss of foreign markets for these crops or a collapse in their world prices
for imports they have had to abate heavily on one or two export crops.

for machinery and technical aid vital to their economic development. To pay
these countries are self-sufficient even in food. All of them must look abroad

is the means of amending itself.

international trade is not simply an important element in the economy -- it
requiresments. For the major industrial countries who are our principal allies
example, Western Europe relies on the Middle East for 20 per cent of its oil

February 14, 1929
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February 14, 1958

relationship was developed in a complex many-sided pattern which included colonial empire as one of its elements. This element is alien to our traditions, inconsistent with our objectives, and impractical in the modern world. The challenge of economic interdependence must be met today by an alternative to empire -- by cooperative action in which independent states make markets and resources available in the common interest. This is the basic implication for American policy of the first enduring reality of the present-day world.

## B. The Revolution of Rising Expectations

The world today is in a state of turbulence and upheaval unique in its history. Around the globe there is a restlessness, a rejection of traditional ways, and a fervent, sometimes fanatical search for new ones. These disturbances are largely related to another aspect of the challenge of the contemporary world -- the revolution of rising expectations. To frame policies which will promote our national objectives we must understand what this term means.

Until the dawn of the nineteenth century the majority of mankind accepted the view that their position in life was determined by forces over which they had no control. Poverty and want were no more to be questioned than illness and death. In the pyramid of each society some would be born to wealth or power; a very few might rise there; but for the mass of mankind, the best that could be hoped for was subsistence.

the beat that could be hoped for was ambivalence.

to wealth or power; a very few might rise there; but for the mass of mankind,
than illness and death. In the pyramid of each society some would be born
which they had no control. Poverty and want were no more to be questioned
accepted the view that their position in life was determined by forces over
until the dawn of the nineteenth century the majority of mankind
would.

which will promote our national objectives we must understand what this term
temporary world -- the revolution of raising expectations. To frame policies
tremendous are largely related to another aspect of the challenge of the con-
way's, and a fervent, sometimes statistical search for new ones. These di-
pository. Around the globe there is a reatleaseneas, a rejection of traditional
The world today is in a state of turbulence and upheaval unique in its
B. The Revolution of Raising Expectations

for American policy of the that enduring reality of the present-day world,
and resonces available in the common interest. This is the basic implication
to empire -- by cooperative action in which independent states make markets
curiosity of economic interdependence must be met today by an alternative
inconsistent with our objectives, and impractical in the modern world. The
colonial empire as one of its elements. This element is alien to our traditional
relationship was developed in a complex many-aided pattern which included

February 14, 1958

In the late eighteenth century the inevitability of this social order was challenged and with it the validity of the political systems with which it was associated. The philosophers of the American Revolution proclaimed the doctrine of political equality and of the inalienable right of all men to life, liberty and happiness. The French Revolution issued a clarion call for liberté, égalité, and fraternité. During the next century most nations of the western world (with the notable exception of Russia) embraced these principles and revised accordingly their systems of government.

The concept of equality and progress was soon extended to the economic field. It was not a far step from the assertion of political equality to the doctrine that political equality was meaningless without economic well-being. The conviction grew that when men lacked the material basis of a good life they could not make any real use of the right of political participation.

This doctrine might have remained of interest only to philosophers but for several factors: the growing productivity made possible by the industrial and technological revolution which has now reached a new phase with the advent of nuclear energy; the Great Depression of the 1930's; and the impact of the two World Wars. The first showed that improvement in material circumstances was possible as well as desirable. The second required nearly every government to intervene in the economic life of its people to maintain the stability of the social order. The third forced governments waging total war to intervene deeply into economic affairs; and left an alternate of collapse and

intervene deeply into economic affairs; and left an alternate of collaboee and
purity of the social order. The third forced governments making total war to
government to intervene in the economic life of its people to maintain the at-
stance was possible as well as desirable. The second redanted nearly every
of the two World Wars. The first showed that improvement in material circum-
vent of nuclear energy; the Great Depression of the 1930's; and the impact
and technological revolution which has now reached a new phase with the
for several factors: the drowning productivity made possible by the industrial

This doctrine might have remained of interest only to bibliobehere but
were they could not make any real use of the right of political participation.
being. The conviction drew that when men lacked the material basis of a good
to the doctrine that political equality was meaningless without economic well-
economic field. It was not a far step from the assertion of political equality

The concept of equality and progress was soon extended to the econom-

ics and revised accordingly their systems of government.
western world (with the notable exception of Brazil) embraced these branci-
liberie', equality', and staterne'. During the next century most nations of the
life', liberty and happiness. The French Revolution issued a cation call for
the doctrine of political equality and of the insurmountable right of all men to
it was associated. The bibliobehers of the American Revolution proclaimed
was challenged and with it the validity of the political system with which
In the late eighteenth century the inevitability of this social order

17

February 14, 1928

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February 14, 1958

dislocation which led to popular demands and political promises of further
changes in the social and economic order.

The processes of world trade; the facility in transportation and com-
munication which was itself a product of the technological and industrial
revolution; and the far-flung troop movements and world-wide involvement in
the two World Wars of peoples of many nations, cultures and races; also
made unnumbered millions of people aware of the power and potential of
modern instruments of production, and of the high levels of widely-distributed
consumption achieved in some societies. This awareness has been raised
to a new pitch of excitement by the portent of nuclear technology.

The resultant of these varied forces is the revolution of rising expect-
ations, now a dominant current of contemporary affairs. Conditions accepted
for centuries have come to seem intolerable. There is a widespread conviction
among the peoples of the world that what was good enough for their fathers
is not good enough for them. Change is demanded -- within the existing
social framework, if possible -- through a new framework, if necessary.

Although the revolution of rising expectations is a world-wide pheno-
menon, its impact is perhaps most striking in the underdeveloped countries.
Here live two-thirds of the world's people, many of whom have only just been
released from colonial rule. For them the revolution of rising expectations
is a triple revolution -- a revolution of rising economic expectations, of rising
resentment at racial discrimination and social inequality, and of rising demands

reentitlement at racist discrimination and social inequality, and of raising demands
is a triple revolution -- a revolution of raising economic expectations, of raising
released from colonial rule. For them the revolution of raising expectations
Here live two-thirds of the world's people, many of whom have only just been
menon, its impact is perhaps most striking in the underdeveloped countries.

Although the revolution of raising expectations is a world-wide phenon-
 social framework, it possible -- through a new framework, if necessarily,
 is not good enough for them. Change is demanded -- within the existing
 among the peoples of the world that what was good enough for them fathera
 for centuries have come to seem intolerable. There is a widespread conviction
 ations, now a dominant current of contemporary afflata. Conditions accepted
 The resultant of these varied forces is the revolution of raising expect-
to a new pitch of excitement by the potent of nuclear technology.

consumption achieved in some societies. This awareness has been raised
 modern instruments of production, and of the high levels of widely-distributed
 made unnumbered millions of people aware of the power and potential of
 the two World Wars of peoples of many nations, cultures and races; siao
 revolution; and the far-flung troop movements and world-wide involvement in
 communication which was itself a product of the technological and industrial

The processes of world trade; the facility in transportation and com-
changes in the social and economic order.

dislocation which led to popular demands and political brooms of further

iii - report

February 14, 1958

for political independence. This three-pronged revolution, largely the product of Western example, Western philosophy and Western activity is now in full swing throughout Asia, Africa and Latin America.

The revolution of rising expectations has created a great gap between what men have and what they want. For the United States this gap presents both grave problems and great opportunities.

The problems are caused by the size of this gap and the question of how it will be closed. Unless the disparity between aspirations and realities is somehow reduced there may well be built up in the underdeveloped countries tremendous tensions which may destroy the chance for their orderly development within an open world society. If the gap should be closed by means of communist or other totalitarian institutions, these would equally frustrate the achievement of our national objectives. In such an eventuality, the underdeveloped countries would be seeking economic advance by rigid suppression of consumption and forced mobilization of capital and labor. For their vast populations, economic development would be a Frankenstein which crushes freedom. For us, it would spell the loss of vital raw materials and markets, an enormous threat to our security, and most important, the end of our opportunity to further our universal goal of human freedom.

It would be the height of folly for us to sit idly by and let such a course develop. It need not happen if we participate in the development of the underdeveloped countries in a manner which reflects an imaginative grasp of

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February 14, 1958

the fact of our economic interdependence. We can be an important source of the capital needed to promote their economic development and this capital can be made available in a mutually beneficial way. We can be an important market for their raw material and industrial production -- again in a mutually beneficial way. We can be a source of scientific and administrative know-how, and help them to develop their own.

Our own philosophy and historical experience puts us in a position to give to the underdeveloped countries a vision of the process by which their expectations can be satisfied within an environment of human freedom. Their cause of economic progress, social equality and political independence is our cause as well. It is of the utmost importance to the United States that these societies should achieve their objectives in ways which encompass peaceful international attitudes and genuine national independence (including freedom from old-fashioned colonial or new-fangled communist control); and that they have governments which, through forms and procedures organically appropriate to those societies, rest upon the consent of their people and a respect for human personality.

### C. The Pressured Population Growth

The revolution of rising expectations would be a formidable problem in itself. It is immensely complicated by the pressure of growing population, a development so striking that it has been described as "the population explosion."

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February 14, 1958

World population will increase by several thousand persons in the hour or so it takes to read this study. In the course of the day it will increase by about 100,000 -- the population of a fair-sized town. In the course of this year it will increase by nearly forty million -- the population of a whole country.

Since 1650 the population of our planet has been increasing at an ever-accelerating rate. From 1940 to 1954 the annual percentage increase was one and one-half times the rate of increase between 1900 and 1950 and over twice the rate of increase between 1850 and 1900. Since the base of the population is ever larger, the rise in percentage increase means huge absolute increases in numbers. In the short span between 1920 and 1954, for example, the number of persons added to our world was greater than the entire world population of 1750.

The present population of the world is about two billion persons. If the present rate of growth were maintained on a constant basis, it will increase by one billion in the next generation; in another century, it will have doubled; in 200 years, it will have multiplied five times to fifteen billion.

Yet this in a sense understates the prospect. The rate of increase of population is not constant -- it is accelerating. If the rate of acceleration of the last fifty years is projected into the future, the world's population will double in the next generation, quadruple in a century, and in 200 years will reach the fantastic total of 191 billion or forty times its present size.

will reach the fantastic total of 191 billion or forty times its present size.
will double in the next generation, quadruple in a century, and in 200 years
of the last fifty years is projected into the future, the world's population
will not be constant -- it is accelerating. If the rate of acceleration
Yet this in a sense underestates the prospect. The rate of increase of
pillion.

have doubled; in 200 years, it will have multiplied five times to fifteen
increase by one billion in the next generation; in another century, it will
the present rate of growth were maintained on a constant pace, it will
The present population of the world is about two billion persons. If
entire world population of 1120.

for example, the number of persons added to our world was greater than the
absolute increases in numbers. In the short span between 1920 and 1924,
the population is ever larger, the rate in percentage increase means under
over twice the rate of increase between 1920 and 1900. Since the pace of
was one and one-half times the rate of increase between 1900 and 1920 and
ever-accelerating rate. From 1940 to 1924 the annual percentage increase
Since 1920 the population of our planet has been increasing at an
of a whole country.

increase of this year it will increase by nearly forty million -- the population
increase by about 100,000 -- the population of a fair-sized town. In the
point or so it takes to read this study. In the course of the day it will

February 14, 1928

27 - 28

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February 14, 1958

It is difficult for most Americans to take seriously this explosive increase in population. In the first place, our own experience has inclined us to believe that population growth can be matched by the growth of production. When industrialization began in the Western Hemisphere and in Europe, the relation of population to resources was favorable. In the New World, the existence of virgin lands meant that increases in population led to the settlement of new territory and the development of natural resources. In Europe, the greatest growth of population occurred after industrialization had widened the economic base. In our Western world industrialization, population, and living standards were able to increase at the same time.

The present population explosion, however, poses a different problem. The rate of increase is greatest in the underdeveloped countries where it is most difficult to assimilate. In most of these regions, with the exception of Latin America, population is vastly greater in relation to resources than was the case in Western Europe or in North America at the beginning of our industrial revolution. Moreover, population increase in these countries, in contrast to our own experience, is occurring quite independently of domestic economic progress. As yet, it has not been accompanied by a growth in resources sufficient to produce a better standard of living.

An additional reason why we tend to discount the importance of population growth is our feeling that the present rate of growth will not be maintained. Industrialization in the Western countries was accompanied by

February 14, 1958

profound changes in social and religious attitudes which led to some diminu-
tion in the birth rate.

While comparable developments may occur in Asia and Africa, their
scope and timing in relation to the accelerated population growth are unpre-
dictable. In this connection we must bear in mind that population growth
rates in these areas have been powerfully affected by factors imported from
outside -- notably medical science, sanitary engineering and other aspects
of modern science and technology which have reduced the death rate. These
factors, being external in their source, have been largely unconnected with
comparable domestic changes in belief, knowledge, attitude and habit which
might reduce the birth rate.

What are the implications of these facts for American policy?

To begin with, the population explosion makes it immensely more
difficult to cope with the revolution of rising expectations. The under-devel-
oped areas are tending toward a three per cent annual increase in their popu-
lations -- a rate sufficient to double their numbers every 23 years. It is
extremely difficult to raise national income to keep pace with this increase,
much less to improve the standard of living. If the population is increasing
at the rate of two to three per cent a year, even an annual investment of 10 -
15 per cent of the national product will probably do no more than maintain
per capita income. To improve the standard of living may require an invest-
ment of 20 - 25 per cent of the national product. Such rates of investment are

ment of 30 - 32 per cent of the national product. Such rates of investment per capita income. To improve the standard of living may require an invest- 12 per cent of the national product will probably do no more than maintain at the rate of two to three per cent a year, even at annual investment of 10 - much less to improve the standard of living. If the population is increasing extremely difficult to raise national income to keep pace with this increase, it is obvious areas are tending toward a three per cent annual increase in their popu- lated to cope with the revolution of raising expectations. The under-devel- oped areas are tending toward a three per cent annual increase in their popu- lations -- a rate sufficient to double their numbers every 32 years. It is difficult to cope with the revolution of raising expectations. The under-devel- To begin with, the population explosion makes it immensely more

might reduce the birth rate.

comparable domestic changes in belt, knowledge, attitude and habit which factors, being external in their source, have been largely unconnected with of modern science and technology which have reduced the death rate. These outside -- notably medical science, sanitary engineering and other aspects rates in these areas have been powerfully affected by factors imported from outside. In this connection we must bear in mind that population growth acquires and timing in relation to the accelerated population growth are numbe- While comparable developments may occur in Asia and Africa, their tion in the birth rate.

profound changes in social and religious attitudes which led to some dimin-

February 14, 1928

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February 14, 1958

beyond the present capacity of most of the countries where population pressure
is most severe.

Because of the population explosion, the underdeveloped countries, like Alice in Wonderland, are having to run faster and faster to stay in the same place. Some of them may not even be able to do that. While the statistical record is meager and hard to appraise, it may well be true in some of these countries that *per capita income* may be standing still or even declining despite overall gains in production. At the same time, there has been an increase in the living standards of the advanced industrial societies of the world.

To the extent that this may continue to be the case, the situation is clearly inconsistent with the achievement of our national objectives. In economic terms, it would make the underdeveloped countries weaker and weaker elements in the network of trade so vital to prosperity. Unless production grows faster than population or at least keeps pace with it, population growth in these countries will absorb an ever-greater proportion of their foodstuffs and natural resources -- leaving less and less available for export. Their low living standards and stagnant economies would make them poor markets for American exports and poor risks for American capital. In desperation at their economic difficulties they might pile obstacles and exactions on our trade and investment.

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February 14, 1958

In moral and political terms, the consequences would be even more serious. If the rate of increase in population should outrun the rate of increase in production, the hopes and demands which mark the revolution of rising expectations would be increasingly frustrated. The frustration would tend to intensify any sense of grievance left over from an earlier colonial condition. The contrast between this frustration and the steady improvement in the standard of consumption of the western societies would tend to exacerbate racial resentments. It is hardly necessary to point out how easily adventurers or communits or both could feed on such a condition.

The population explosion will eventually be brought to a halt -- let us make no mistake about that. In one form or another, it will meet a "corrective." It may be brought to a temporary halt from time to time through the brutal consequences of pestilence, famine or war. If this consequence is to be avoided, some more rational and constructive means of coping with it must be developed.

q The undeveloped countries must find a way to achieve rates of increase in their production which will enable them in some reasonable measure to meet the rising expectations of their people, and give hope of continued gains in the future. They may also find some appropriate means of gaining control over their birth-rate itself. In certain countries, this is likely to prove indispensable.

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February 14, 1958

D. <u>The Precarious Position of our Industrial Allies</u>

Another challenge to America in the world we live in is the precarious
position of certain of the advanced industrial societies. This is no temporary
difficulty suffered by one or two of them in isolation. It is a long-term prob-
lem common to many of them, resulting from profound changes in the structure
of the world economy.

We have already noted the great dependence of our industrial societies
like those of Western Europe and Japan upon overseas supplies of foodstuffs
and raw materials. To be self-supporting these countries must be able to
finance their imports of these and other products from the proceeds of their
exports. In recent years, they have been unable to do this -- to maintain
balance of payments equilibrium simultaneously with tolerable living standards
and rates of growth. Their inability to do so and their resulting dependence
on grants and loans from the U.S. government has come to be known popularity
and misleadingly as the "dollar shortage."

Although experts are not unanimous in their diagnosis of the "dollar
shortage" most of them attribute it to some or all of the following causes: the
damage done to European industry and to the normal pattern of international
trade by the Second World War; excessive demands for imports resulting from
inflation; a change in the so-called "terms of trade", in that commodity prices
have risen more rapidly than the prices of manufactured goods; and the refusal
of the United States to adjust its policies to permit an adequate increase in
American imports.

JAN. 14, 1958

February 14, 1958

In the early postwar years, the dollar'sollarsentimenttointernational trade
billions of dollars a year. In the early 1950's it seemed to disappear -- but
it was only covered by special U.S. government financing. This special
financing (apart from direct military assistances) has included some three
billion dollars a year in American military expenditure abroad -- base con-
struction, NATO contributions, troop pay spent overseas, and procurement
of military equipment in other countries. Our government has also continued
to make available nearly two billion dollars in non-military grants and loans.
This makes a total of nearly five billion dollars -- nearly one-quarter of the
dollar volume of our total international trade.

Most of the special financing which has helped disguise the "dollar
shortage" is of a temporary nature which will eventually taper off; some of it
is already doing so. Base construction expenditures are being reduced, off-
shore procurement programs are drawing to a close, and a gradual withdrawal
of troops stationed in foreign countries will cut the dollar proceeds from troop
spending. There has also been a tapering off of direct U.S. government assist-
ance to the industrial countries. Thus the special expenditures of recent years
provided a breathing spell rather than a durable solution to the dollar problem
of the industrial countries.

Recently we have become increasingly aware of this fact. In the last
few years our overall trade surplus -- a rough measure of the global "dollar
shortage" -- has grown alarmingly. A large part of this surplus is in trade with

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February 14, 1958

our industrial allies. As our special financing has been reduced their gold and dollar reserves have fallen seriously. As a result the free world has had to fight off a financial crisis by various stopgap measures -- loans and standby credits (from the International Monetary Fund and other agencies), unpopular tight money policies, and the devaluation of the French franc. These mini-strations have kept the heart of the free world economy beating -- but they have not provided the basis for durable health.

The long-term character of the difficulty facing our industrial allies can be illustrated by two examples -- the United Kingdom and Japan. The British problem is a central one. About one-quarter of Britain's pre-war national wealth was lost in the last war. This took the form of shipping losses, physical destruction at home, the running down of industrial equipment, the liquidation of external investments, the loss of gold and dollar reserves, and the frightful increase in external debt. To make matters worse British exports at the end of the war were only one-third of their prewar volume.

These wartime losses gravely impaired Britain's capacity to achieve equilibrium in her external accounts. The British leaders estimated that merely to keep up her prewar level of imports the United Kingdom would have to increase its exports by 75 per cent. Even this figure proved too conservative: it made no allowance for adverse changes in Britain's terms of trade (the fact that the prices of its raw material and food imports rose faster than the prices of its industrial exports) or for the increased imports required to satisfy domestic demands for higher living standards.

February 14, 1958

In spite of its weakened economic position Britain has been trying to carry out its accustomed responsibilities as a world power. Amid growing postwar tensions it has sought to maintain military forces around the globe and to develop the capacity to wage a nuclear war. It has clung tenaciously to its position at the center of one of the two great financial systems of the world -- the sterling area. Thus it continues to serve as banker for a group of countries whose populations total 700 million persons and which account for nearly one-half of free world trade. In performing this function it is obliged to maintain a large measure of free trade and payments with these countries and to offer them liberal credit facilities. It does this with reserves of only $2 billion against annual imports of $10 billion and external liabilities of $12 billion. In such a situation normal fluctuations in the foreign trade of Britain or other members of the sterling area can bit edeeply into the common reserves, induce a speculative flight from sterling, and precipitate a full-scale financial crisis affecting a large share of world trade.

The position of Japan is scarcely less precarious. Unlike Britain, Japan does not carry on its shoulders the burden of upholding a great world currency. But it has some extraordinary difficulties of its own. Japan's ratio of population to domestic resources is even less favorable than Britain's. It supports about 600 persons per square mile (compared to 60 persons per square mile in the United States). Moreover, Japan has very few mineral resources.

while in the United States). Moreover, Japan has very few mineral resources. Authorizes 500,000 tons per annum per admine (compared to 60 tons per annum per admine of population to domestic resources is even less favorable than Britain's. If currency. But it has some extraordinary difficulties of its own. Japan's ratio of population to domestic resources is even less favorable than Britain's. It does not carry on its shoulders the burden of upholding a great world The position of Japan is scarcely less precarious. Unlike Britain's, acute financial crisis affecting a large share of world trade.

reserves, induce a speculative flight from sterling, and precipitate a full-
Britain or other members of the sterling area can bit eepply into the common
of $12 billion. In such a situation normal fluctuations in the foreign trade of
of only $2 billion against annual imports of $10 billion and external liabilities
countries and to offer them liberal credit facilities. If does this with reserves
opposed to maintain a large measure of free trade and payments with these
for nearly one-half of free world trade. In performing this function it is
of countries whose populations total 700 million persons and which account
world -- the sterling area. Thus it continues to serve as a bank for a group
to its position at the center of one of the two great financial systems of the
and to develop the capacity to make a nuclear war. It has clung tensiously
boastar tenacities it has sought to maintain military forces around the globe
carry out its accoutomated responsibilities as a world power. Amid drooping
In spite of its weakened economic position Britain has been trying to

February 14, 1928

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February 14, 1958

Only about 16 per cent of its land is cultivated, the remainder being in pas-
ture, forests or rugged volcanic wastelands.

Prior to the Second World War Japan built a prosperous empire by sup-
plementing its home island resources with coal, iron, raw cotton, fertilizers,
soy beans, rice, sugar and other necessities from the Chinese mainland, Korea
and Formosa. Since the war, the resources and markets of the mainland have
been largely closed to Japan. It has had to look elsewhere for its raw material
supplies and for the export markets to pay for them. Unfortunately, it has
found few countries eager to expand their imports of Japanese goods. Instead
of being able to pay its way in world trade, it is living from hand to mouth on
American military expenditures and periodic doses of American aid.

What does the precarious economic position of Britain, Japan, and other
industrial countries mean for the United States? In economic terms, it repre-
sents a serious threat to our own and to world prosperity. These countries are
the best customers for the output of our factories and farms. In the case of
Britain, there is an additional factor -- our interest in preserving and strength-
ening the position of sterling as a key instrument of free world trade.

The economic weakness of these countries is no less a threat to our
moral, political and defense objectives. Europe is the source of our humanistic
tradition and shares our passion for individual freedom. Japan is a crucial
testing ground for these values in the Far East. We have alliances with the
industrial countries of Europe and the Far East. They provide major air bases,

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February 14, 1958

trained armies, and other contributions to the common defense. The security
and freedom of these countries is intimately related to our own. Their weak-
ness tends to our weakness; their strength to our strength.

To promote our national objectives we must help these societies to
reduce their economic difficulties. Several lines of action are indicated.
They must correct the domestic causes of their external deficits. They must
maintain continued access to overseas supplies of raw materials, and in this
we must seek to help. In some situations, like that of Western Europe, they
may be able to develop regional efforts to achieve economic stability and
growth.

Finally, the United States must pursue appropriate trade and investment policies -- policies which result in larger U.S. purchases from the rest of the world and large U.S. investment abroad.

Finally, the United States must purchase appropriate trade and investment
growth.

may be able to develop regional efforts to achieve economic stability and
we must seek to help. In some situations, like that of Western Europe, they
maintain continued access to overseas supplies of raw materials, and in this
They must correct the domestic causes of their external deficits. They must
reduce their economic difficulties. Several lines of action are indicated.

To promote our national objectives we must help these societies to
raise tends to our weakness; their strength to our strength.

and freedom of these countries is intimately related to our own. Their weak-
trained armies, and other contributions to the common defense. The security

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February 14, 1958

# IV. THE COMMUNIST CHALLENGE

Our task would be difficult enough if we had only to deal with problems and opportunities of the kind described in the preceding chapter. It is immensely complicated by additional problems which are largely or wholly due to the activities of Soviet Russia and Communist China.

## A. Comparative Rate of Growth

The first of these problems is raised by comparative rates of economic growth in the communist and non-communist worlds. It was posed for us dramatically in Khrushchev's remarks last Thanksgiving:

"We declare war upon the United States ... in the field of peaceful production. We are relentless in this and it will prove the superiority of our system.

"We want to win over the United States not in arms but in the production of commodities. We want to win in housing, construction, goods, more food, improvements, services rendered to the people.

"You have a higher standard of living in the United States. After all, you started years earlier than we. But we will win. We will outstrip the United States. And it will be this that will convince the people that we are right."

Economic developments of recent years give us no reason for complacency about this Communist challenge. Even allowing for the unreli-

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February 14, 1958

-33-

ability of Soviet statistics, it is roughly accurate to say that the Soviet
growth *rate* is running at about double our own. This is a long-term estimate
for the economy as a whole (Gross National Product) which averages fluctu-
ating rates of growth in different years. In 1957 there was no increase (in
*real* terms?) in our national product over 1956 while Soviet production con-
tinued to grow at a rapid rate.

The contrast in growth <u>rates</u> is even more dramatic in the case of
certain key heavy industries. Between 1928 and 1955, Soviet iron and steel
production (in millions of metric tons) grew from 3.3 to 33.3; United States
production grew from 38.8 to 70.5. Soviet coal production (in millions of
metric tons) grew from 35.5 to 391.0; United States production dropped from
522.6 to 448.5. Soviet electric power production (in billions of kilowat+
hours) grew from 5.0 to 170.1; United States production grew from 108.1 to
624.9.

With respect to both the overall economy and certain basic industries,
therefore, it would appear that the Soviet Union is growing at a faster <u>rate</u>
than the United States. This fact has led many people to give considerable
weight to Khrushchev's boast. Will the Soviet Union eventually overtake
the United States? Will this prove the superiority of the Soviet system?

In answering the first question, we obviously have no formula to
foretell the future. But there are reasons for suggesting that a positive
answer is by no means a foregone conclusion from the present disparate <u>rates</u>

of growth. To begin with, our smaller growth *rate* applies to a much larger production base. As a result, the actual annual increment in production -- the amount by which our production grows each year -- remains larger than the actual annual amount of Soviet growth. Measured in absolute terms, therefore, the size of our lead over the Soviet Union is actually increasing. It will continue to do so as long as the Soviet's relative advantage in growth rate does not exceed our relative advantage in absolute size. The fact of our increasing absolute lead applies not only to overall production but also to the production of basic industries, with the notable exception of coal. In this field the slackening margin of the United States is due to a special factor -- the development of alternative fuels such as petroleum and natural gas.

Beyond this point, there are good reasons for believing that the present rate of Soviet growth cannot be indefinitely maintained. The Soviet Union began by importing the accumulated technology and know-how of the West. Thus its relative backwardness enabled it to move ahead at a relatively faster rate once it had embarked on a determined effort to catch up. Moreover, the Soviet Union began with great unemployed or underemployed resources of material and manpower. The availability of these resources facilitated rapid expansion in the early stages. As the Soviet Union approaches the West in the development of technology and the effective employment of its resources, its rate of growth is likely to decline.

the development of technology and the effective employment of its resources,
existon in the early stages. As the Soviet Union approaches the Meat in
material and manpower. The availability of these resources facilitated rapid
the Soviet Union began with great unemployed or underemployed resources of
faster rate once it had embarked on a determined effort to catch up. Moreover,
Meat. Thus its relative backwardness enabled it to move ahead at a relatively
Union began by importing the accumulated technology and know-how of the
present rate of Soviet growth cannot be indefinitely maintained. The Soviet
Beyond this point, there are good reasons for believing that the
des.

factor -- the development of alternative fuels such as petroleum and natural
this field the slackening margin of the United States is due to a special
the production of basic industries, with the notable exception of coal. In
our increasing spastic leadabbles not only to overall production but also to
rate does not exceed our relative advantage in spastic size. The fact of
It will continue to do so as long as the Soviet's relative advantage in growth
therefore, the rise of our lead over the Soviet Union is actually increasing.
the actual annual amount of Soviet growth. Measured in spastic terms,
the amount by which our production grows each year -- remains larger than
production phase. As a result, the actual annual increment in production --
of growth. To begin with, our smaller growth rate applies to a much larger

With respect to the second question, we must not make the error of accepting the Communist thesis that the relative growth of overall production or of certain basic industries is an adequate measure of the success of an economic system. For us, growth is not an end in itself; it is a means to the satisfaction of human needs. This must be true so long as our objective is the fullest possible self-realization of the individual human personality.

When measured in these terms, the rates of growth of the two systems are placed in a very different perspective. The tremendous growth rate of the Soviet economy has been achieved by diverting a very high proportion of the national product to capital accumulation and to armament and leaving a relatively small proportion for current consumption. Consequently there is a tremendous gap between the Soviet and American economies in the material goods they offer the individual. For example, a Soviet worker has to work six times as long as an American worker to buy a quart of milk, 13 times as long to buy a pair of shoes, 18 times as long to buy a radio, 22 times as long to buy a shirt, and 25 times as long to buy a pound of sugar.

These figures should be placed alongside the statistics of overall growth in assessing the relative accomplishments of the two economic systems. Moreover, we must keep in mind that our ultimate objective is not just growth of total production or even of individual consumption -- but rather growth in satisfying human potentials. This larger kind of growth requires expanding opportunities for the individual outside the economic field -- something which can never be fully accomplished by the Communist system.

thing which can never be fully accomplished by the Communist system. expanding opportunities for the individual outside the economic field -- some- growth in satisfying human potentials. This larger kind of growth requires just growth of total production or even of individual consumption -- put rather systema. Moreover, we must keep in mind that our ultimate objective is not growth in satisfying the relative accomplishments of the two economic

to buy a shirt, and 52 times as long to buy a bound of angar.

long to buy a pair of shoes, 18 times as long to buy a radio, 52 times as long six times as long as an American worker to buy a quart of milk, 13 times as a tremendous gap between the Soviet and American economies in the material goods they offer the individual. For example, a Soviet worker has to work relatively small proportion for current consumption. Consequently there is the national product to capital accumulation and to absorption and leaving a

When measured in these terms, the rates of growth of the two systems is the fullest possible self-realization of the individual human potential.

the satisfaction of human needs. This must be true so long as our objective economic system. For us, growth is not an end in itself; it is a means to or of certain basic industries is an adequate measure of the success of an accepting the Communist theory that the relative growth of overall production

February 14, 1928

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February 14, 1958

Nevertheless, despite all these qualifications, the Soviet rate of
growth does pose serious problems for the United States. Three at least
deserve special attention:

First, the greater rate of Soviet growth has tremendous psychological
significance. Its effect is felt by our own people, by the Soviet people,
and, perhaps most important, by the vast numbers of people in the underde-
veloped countries of the world who are yet uncommitted in the cold war. If
the differences in growth rates between the Soviet and American economies
should widen much further, the Soviet Union would begin to overtake us --
to reduce the absolute margin of our economic advantage. This could not
help but influence the judgment of many people concerning the relative
efficiency of our two systems.

The psychological problem is particularly acute when the growth
problem is seen not simply as a contest between the United States and the
Soviet Union but as a contest between other countries in the ~ommunist and
non-Communist worlds. Communist China, for example, is now concentrating
an estimated 22 per cent of its national product on capital accumulation,
most of it for the development of heavy industry, transportation and power.
At the same time, India has so far been unable to push the annual rate of
savings available for similar development to more than 7 or 8 per
cent. One result of this disparity is that China's steel production is expected
to grow from the 1952 level of 1.5 million tons to 17 million tons in 1962,

to grow from the 1928 level of 1.2 million tons to 17 million tons in 1935, cent. One result of this disparity is that China's steel production is expected savings available for similar development to more than seven or eight per cent.

At the same time, India has so far been unable to push the annual rate of most of it for the development of heavy industry, transportation and power.

An estimated 22 per cent of its national product on capital accumulation, non-Communist worlds. Communist China, for example, is now concentrating Soviet Union put as a contrast between other countries in the Communist and problem is seen not simply as a contrast between the United States and the

The psychological problem is particularly acute when the growth efficiency of our two systems.

Help put influence the judgment of many people concerning the relative to reduce the spillover margin of our economic advantage. This could not should widen much further, the Soviet Union would begin to overtake us -- the difference in growth rates between the Soviet and American economies developed countries of the world who are yet uncommitted in the cold war. It should be most important, by the vast numbers of people in the under-significance. Its effect is felt by our own people, by the Soviet people,

First, the greater rate of Soviet growth has tremendous psychological
deserve special attention:

growth does pose serious problems for the United States. Three at least
Nevertheless, despite all these qualifications, the Soviet rate of

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February 14, 1958

while India's production, which in 1952 started at a similar point, will by
then have reached only 30 per cent of the Chinese total. Obviously such
dramatic differences in growth rates will profoundly influence the economic
and political institutions which other countries choose to speed their eco-
nomic advance.

The second problem posed by comparative rates of growth relates to
the capacity for foreign economic activity. As a result of its high rate of
growth, the Soviet Union will have an increasing margin of resources which
it can devote to economic development abroad. It has been estimated that
the Soviet Union can double its aid shipments to other countries during the
next eight years by drawing on only 5% per cent of the projected increase in
its national production. Moreover, the Soviet Union is turning out scientists,
technicians and other trained personnel at a rate which will enable it to send
increasing numbers of these people abroad in years to come.

The third problem posed by comparative rates of growth is in their
military significance. Economic growth generally means the growth of
military power. This is particularly true of selective and unbalanced com-
munist growth which is concentrated on heavy industry. Since we devote a
much greater share of our resources to peacetime consumption the Soviet
Union is able to build a proportionately greater military effort on a much smaller
economic base. If we wish to have both high living standards and military
superiority over the Soviet Union we have no choice but to preserve and
strengthen our present lead in the economic race.

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February 14, 1958

B. The Communist Economic Offensive

The rapid rate of growth of the Soviet economy, as we have already noted, greatly increases the Soviet capacity for foreign economic activity. The new Soviet determination to use its economic potential abroad to promote its political objectives provides another major element of the Communist challenge.

Until recently the Soviet Union placed a very low priority on international trade and investment. It sought self-sufficiency so far as possible, importing only what could not be produced at home and exporting only what was needed to pay for imports. It supplied relatively little capital for the economic development of foreign countries. Only in exceptional cases did it use trade or aid as major weapons of its foreign policy.

This pattern has changed significantly since the death of Stalin. Beginning in 1953 the Soviet Union, blocked in its attempt to expand its influence by force or direct subversion, turned to a more subtle approach. It launched a peaceful offensive in the economic field. This offensive is now being developed on three fronts -- with other members of the Communist bloc, with the industrial countries of the West, and with the underdeveloped countries.

With respect to the Communist bloc, Soviet policy until quite recently was predatory in nature -- to draw as much as possible out of these countries and to put as little as possible in. By means of so-called joint companies

and to but sa little sa bousible in. By means of so-called joint combattants
was predestory in nature -- to draw sa much sa bousible out of these countries
With respect to the Communist bloc, Soviet policy until quite recently
countries.

bloc', with the industrial countries of the West', and with the underdeveloped
now being developed on three fronts -- with other members of the Communia-
It launched a besetful offensive in the economic field. This offensive is
influence by force or direct annexation, turned to a more subtle approach.
Beginning in 1923 the Soviet Union, blocked in its attempt to expand its
This pattern has changed significantly since the death of Stalin.

it use trade or aid as major weapons of its foreign policy.
economic development of foreign countries. Only in exceptional cases did
was needed to pay for imports. It supplied relatively little capital for the
importing only what could not be produced at home and exporting only what
national trade and investment. It sought self-sufficiency so far as possible,
Until recently the Soviet Union placed a very low priority on inter-
challenge.

its political objectives provides another major element of the Communia-
The new Soviet determination to use its economic potential abroad to promote
noted, greatly increases the Soviet capacity for foreign economic activity.

The rapid rate of growth of the Soviet economy, as well as already

B. *The Communist Economic Offensive*

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February 14, 1958

(dominated by Soviet managers) and by reparations and long-term trade agree-
ments (by which the Soviets received large and unrequited annual deliveries
of goods), the Soviet Union detached the satellites from the world market
and exploited them for its own domestic economic purposes.

The growing unrest in Eastern Europe, culminating in the Hungarian
uprising of the autumn of 1956 and the Polish unrest of the same period forced
the Soviet Union to alter its policies. Under new arrangements, it is making
substantial contributions to the satellite economies. In the twelve months
following the Hungarian revolt the Soviet Union has granted to other members
of the Communist bloc at least $1 billion in new credits. It has also granted
other economic concessions such as the revision of unfair prices and exchange
rates, and debt cancellations in the amount of $1.5 billion. These changes
have been designed not only to increase the stability of Communist regimes
in the satellite countries but also to prevent any substantial increase in
their economic relations with the non-Communist world.

The change in Soviet policy has been no less marked with respect
to the industrial countries of the West. Since 1953, the level of Soviet
trade with these nations has been rising rapidly. The Soviet Union has in-
creased its efforts to bring to Western markets its timber, petroleum, coal,
wood pulp, cotton, manganese, platinum, pig iron and steel mill products.
It has imported an increasing amount of goods helpful to its own development --
metals (notably copper), industrial machinery, electrical equipment and ships.

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February 14, 1958

It has ordered whole new industrial plants, including the latest technology in the field of fuel, to assist its neglected civilian industries. In particular, it has sought to provide markets within its own and the satellite economies for the industrial production of Germany and Japan.

Much of the Soviet trade with the West has been designed -- often successfully -- for political effect. Iceland provides a case in point. In 1951, that country exported virtually nothing to the Soviet Union or its satellites. It made its territory available for a NATO airbase and a large number of American troops. At about this time the American fishing industry (which employs several thousand workers) intensified its campaign to restrict our imports of fish. Since 97 per cent of its export trade consists of this product, Iceland was placed in a fearful dilemma -- a dilemma the Soviet Union was quick to exploit. By 1955, Iceland was sending 28 per cent of its exports to the Soviet Union and taking 22 per cent of its imports from the Soviet Union in return. There was a striking increase in Soviet economic and political influence on the island. In the middle of 1956, Iceland's Parliament called for the removal of both the NATO airbase and American troops. Although this decision was later reversed, the Soviet Union has weakened Iceland's attachment to the NATO alliance.

The Soviet Union is employing its trade offensive to detach other countries of the West. But its most ambitious efforts of all are now concentrated in the underdeveloped areas -- particularly in the vast arc of countries

running from Southeast Asia through the Middle East to Africa. Here again, the change has been dramatic. Prior to 1953, Soviet economic activity in these areas was exceedingly small. The underdeveloped countries looked almost exclusively to the United States and our industrial allies for export markets and for the capital essential to economic development.

Stalin's techniques for spreading Communist influence in these countries was military pressure and political subversion rather than the subtler art of economic penetration. The first sign of change in Soviet policy came shortly after Stalin's death. Khrushchev and Bulganin toured several Asian and Middle East nations, making large promises of Soviet aid. Since then, the Soviet bloc has made agreements with ten underdeveloped countries to provide them with about $1.5 billion in economic aid. Although only 10 to 15 per cent of this amount has actually been expended so far, the funds are being made available as projects are approved, and about half of the total is already obligated or covered by specific contracts.

This increase in Soviet aid is matched by an increase in its trade with these countries. The Soviet Union has been taking the agricultural surpluses of underdeveloped countries -- Egypt's cotton and Burma's rice -- while sending arms or capital goods in return. Between 1953 and 1956 the Soviet Union nearly doubled its imports from the underdeveloped countries and increased its exports to them by more than five times. Other members of the Communist bloc -- Poland and Czechoslovakia, for example -- increased their trade with the underdeveloped countries by lesser amounts.

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February 14, 1958

The increase in Communist bloc aid and trade with underdeveloped countries has been matched by an increase in technical assistance and cultural exchange. During the first six months of 1957 more than 2000 Soviet bloc technicians worked for one month or longer in 19 underdeveloped countries of the non-Communist world. During the year as a whole about the same number of technicians, professional people, and students went for training in the Soviet Union. Moscow, suddenly become a world center, is swarming with Arabs, Africans, and Asians eagerly absorbing Soviet Russian know-how.

There are certain facts that should be specially noted about the Communist bloc economic offensive. For one thing, it is highly selective -- largely concentrated in ten underdeveloped countries -- Afghanistan, Cambodia, Ceylon, Egypt, India, Indonesia, Nepal, Syria, Yemen, and Yugoslavia. For another, it emphasizes big industrial projects which are expected to have an important psychological impact in the recipient countries -- a steel mill in India, a petroleum refinery in Syria, a flour mill in Afghanistan, a sugar refinery in Indonesia. For still another Communist aid is provided on terms specially adapted to the needs and desires of the underdeveloped countries -- long-term low interest loans (commonly at 2-1/2 per cent), with provisions for at least partial repayment in commodities or local currencies, with no formal political or economic commitments, and with a minimum of administrative red tape.

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February 14, 1958

What is the importance of the Communist economic offensive for the United States? Khrushchev provided a clue to answering this question when he told a group of United States Senators: "We value trade least for economic reasons, and most for political reasons, as a means for promoting better relations between countries." The Soviet Union is using trade and aid for political purposes -- to influence other countries to adopt or maintain policies consistent with Soviet objectives. Although Communist bloc loans and grants may not be used to aid local Communist elements directly, they do so indirectly by raising Communist respectability and prestige. And while Communist training and Communist technicians may be formally restricted to "scientific" or "economic" subjects, they may nevertheless have an influence on the basic institutions of the developing country. In short, their new economic offensive is an instrument by which the Communists hope to effect a basic change in political orientation -- particularly in the underdeveloped countries which contain the vast majority of the world's people.

Our foreign economic policy must be adequate to the challenge presented by the Communist economic offensive. If we would promote the independence of the countries which are now Soviet satellites, strengthen collective security with our industrial allies, and keep the underdeveloped countries out of the Communist fold, we must have trade policies which offer a superior alternative to trade with the Communist bloc and foreign investment policies which surpass the Communist effort both in quantity and quality --

bolicies which ambasas the Communist effort both in quantity and quality -- a superior alternative to trade with the Communist bloc and foreign investment countries out of the Communist fold, we must have trade policies which offer collective security with our industrial allies, and keep the underdeveloped dependence of the countries which are now Soviet satellites, strengthen armed by the Communist economic offensive. If we would promote the inferior foreign economic policy must be adequate to the challenge before

a basic change in political orientation -- particularly in the underdeveloped economic offensive is an instrument by which the Communists hope to effect on the basic institutions of the developing country. In short, their new "scientific" or "economic" subjects, they may nevertheless have an influence Communist training and Communist technicians may be formally retrained to do so indirectly by raising Communist respectability and brevette. And while and grants may not be need to aid local Communist elements directly, they policies consistent with Soviet objectives. Although Communist bloc loans for political purposes -- to influence other countries to adopt or maintain better relations between countries. The Soviet Union is making trade and aid

What is the importance of the Communist economic offensive for the United States? Kunanichev provided a clue to answering this question when

February 14, 1958
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February 14, 1958

particularly in key uncommitted countries. In short, our policies must enable us to say: "Remain or become a free nation and thrive!" If they do not do not do this, we will wake up one day to find that we have been cut off from the resources and the people of these countries, with a corresponding impairment of our own security, economic stability and growth, and political and moral prospects.

### C. Nuclear Weapons and The Burden of Armaments

The United States presently is confronted with a grave threat to its security. The nature of this threat and the steps essential to meet it have been described in the report of Subpanel II, "International Security -- The Military Aspect." This report recommended measures to safeguard our security requiring successive additions to defense spending of about $3 billion each year for the next several years.

The federal budget for 1958-59 already provides some $47.4 billion for the nation's protection -- or 64 per cent of all contemplated expenditures. Even this figure does not include all categories of spending that have their origins in war -- past, present and future. These other expenditures, such as veterans payments and interest on that part of the government debt accumulated in fighting two world wars and the present cold war, amount to an additional $14.5 billion. This brings the combined total of spending related to war to $61.6 billion, or 83 per cent of the entire budget. Our peace budget, by contrast is a mere $12.3 billion.

that it was $15.3 billion.

$61.6 billion, or 83 per cent of the entire budget. Our best budget, by comparison, is $14.2 billion. This brings the combined total of spending related to war to in fighting two world wars and the present cold war, amount to an additional veterans payments and interest on that part of the government debt accumulated ordinary in war -- best, present and future. These other expenditures, and as even this flame does not include all categories of spending that have their the nation's protection -- or 64 per cent of all contemplated expenditures.

The federal budget for 1928-29 already provides some $47.4 billion for year for the next several years.

reducing successive additions to defense, abating of about $3 billion each Military Budget." This report recommended measures to safeguard our security been described in the report of Subsidiary II, "International Security -- The security." The nature of this threat and the steps essential to meet it have The United States presently is confronted with a grave threat to its

broadsides.

of our own security, economic stability and growth, and political and moral resources and the beadle of these countries, with a corresponding impairment do this, we will make up one day to find that we have been cut off from the nation to say: "Remain or become a free nation and thrive!" If they do not do not permanently in key uncommitted countries. In short, our policies must ensue

February 14, 1928

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February 14, 1958

This is a tragic state of affairs. Our high level of defense expenditure constitutes a heavy economic burden. It diverts industrial facilities and raw materials from productive uses. It bloats national budgets to inflationary proportions. It takes trained manpower away from peaceful occupations. It takes trained manpower away from peaceful occupations. It imposes a cloud of fear inhibiting fruitful long-term programs of investment and training. These negative effects are felt even more keenly by our principal allies. Having a much smaller industrial base and much lower per capita income, they have but a slender margin of resources which can be diverted to military use.

Yet there is no realistic alternative in the present world situation to such increased armament. We and our allies must meet the draft on our economies necessary for our collective security. Our task is to develop ways to make sure that this draft is met without abondoning pursuit of our great objectives of freedom and property. While we must face the problem of survival, we are still interested in other than military values. We must reject the argument that military expenditures (of the kind and scales currently required) and productive peaceful expenditures are incompatible alternatives -- that we cannot have missiles and schools. Our economy is large enough and strong enough to provide an increased measure of both.

We emphasized earlier that there are important non-military ingredients of military power. The most complete armory of modern weapons is useless in

of military power. The most complete annony of modern weapons is needless in
We emphasized earlier that there are important non-military ingredients
strong enough to provide an increased measure of both.

that we cannot have missiles and schools. Our economy is large enough and
required) and productive peaceful expenditures are incompatible alternatives --
text the argument that military expenditures (of the kind and scales currently
survival, we are still interested in other than military values. We must re-
objectives of freedom and property. While we must face the problem of
to make sure that this draft is met without spoonding burden of our great
economies necessary for our collective security. Our task is to develop ways
such increased annowment. We and our allies must meet the draft on our
Yet there is no realistic alternative in the present world situation to
nac.

they have put a slender margin of resources which can be diverted to military
Having a much smaller industrial base and much lower per capita income,
These negative effects are felt even more keenly by our principal allies.
of fear inhibiting fruitful long-term programs of investment and training.
takes trained manpower away from peaceful occupations. If it possesses a cloud
proportions. It takes trained manpower away from peaceful occupations. It
materials from productive areas. It spoils national budgets to inflationary
constitutes a heavy economic burden. It diverts industrial facilities and raw
This is a tragic state of affairs. Our high level of defense expenditure

February 14, 1928

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February 14, 1958

the hands of a nation which lacks the moral or economic strength to make use
of them. In assessing the prospects for sharing the burden of armament among
the economies of the ~~non-communist~~ world, we must constantly remind our-
selves of this fact.

In the preceding section we emphasized the importance of maintaining
rapid growth in our economy and in the economies of our allies. As our foreign
economic policies promote economic growth at home and abroad, they will
also help us to shoulder the arms burden without unduly sacrificing our other
values.

vaines.

also help us to shoulder the arms burden without unduly sacrificing our other
economic policies promote economic growth at home and abroad, they will
rapid growth in our economy and in the economies of our allies. As our foreign
in the preceding section we emphasized the importance of maintaining
selves of this fact.

the economies of the noncommunist world, we must constantly remind our-
of them. In assessing the prospects for sharing the burden of armsament among
the hands of a nation which lacks the moral or economic strength to make use

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# CHAPTER V. THE APPROACH TO ACTION: ATTITUDES AND RELATIONSHIPS

We have said -- and it bears repeating -- that the foreign economic policy of the U.S. is a part of U.S. foreign policy. It is also a part of general U.S. economic policy. It must make sense in terms of both. Since the economy also furnishes the underpinning for our military establishment, it must make sense in terms of U.S. national security policy as well.

## Foreign Economic Policy in Relation to U.S. Foreign Policy

The ultimate objective of American foreign policy is a peaceful, just and workable international order, in which free societies may flourish and free men have a reasonable chance to fulfill their potentialities as human beings. (The moral and political implications of this objective for American policy in the contemporary world have been developed in Part II of this report). Our aim has been expressed by successive American administrations, Republican and Democratic, as peace with justice and freedom. As an expression of the central objective of American foreign policy, this is valid and realistic in the sense that it expresses in definite terms the incentive and persistent attitudes and aspirations of the ordinary American citizen. This objective

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has been translated into operating terms. In operating terms, it means
that American foreign policy should continue to seek to build political
arrangements which give effect to common interests among the U.S.,
nations allied or associated with us, and the uncommitted areas. These
arrangements should also be designed to reduce the consequences of
differences in interest which exist, while taking realistic account of
them.

This has in fact been the direction of American foreign policy
since the end of World War II. For more than ten years, we have put
an immense and sustained effort, along with like-minded nations, into
building political structures of collective security and mutual support.
For some of these structures, the past ten years have marked a continuing
development from beginnings which reach back to earlier periods. This
is notably true, for example, of the Organization of the American States.
One is world-wide in scope: the United Nations. Several are primarily
alliances for military defense; of these, the most conspicuous and
important is the North Atlantic Treaty Organization.

This operating foreign policy has an economic aspect. This may
be described as a policy of economic cohesion or economic cooperation.
In practical terms, this means the identification of actual economic
interests which the U.S. and other free nations have in common and the

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organization of arrangements to give effect to those common interests.

It also means the realistic identification of points at which the economic interests or tendencies of the U.S. may diverge from -- or conflict with -- the economic tendencies or interests of other free nations or uncommitted societies, and the organization of arrangements to reduce the effect of such divergence or conflict to a minimum.

There is another aspect of foreign economic policy which should also be kept in mind. Recent events have demonstrated that the Soviet Communist bloc is not monolithic, and should not be so regarded. Our foreign economic policy may properly include elements designed to foster the breaking away from the Soviet Communist bloc of nations now in it. If and when such nations should break away, for whatever reasons and through whatever means, our policy should encompass economic measures to reap advantage from such developments.

At this point, our positive aims and policies can be illuminated by light drawn from the reverse economic strategy of the Soviet Union. That strategy was compactly expressed by Josef Stalin shortly before his death, in a statement published at the time of the Nineteenth Congress of the Communist Party in the Soviet Union in the autumn of 1952. At that time, Stalin's statement was hailed by Pravda as one of the major

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pronouncements in the historic development of Soviet ideology. Whatever
the changes by Stalin's successors may eventually prove to be, there is
no reason to believe that they would dissent from the views which Stalin
then expressed. Briefly, Stalin sketched out in some detail a systematic
plan to intensify the forces of disintegration which he considered present
in the free world economy. He argued that two parallel world markets
existed -- the free world market and the economy of the Soviet Communist
bloc. The growth of the Soviet Communist bloc and its economy, he
insisted, meant shrinkage of the free world market and a sharpening of
all the divisive tendencies within it. Stalin then sketched out a course
of Soviet policy designed to foster the divisive tendencies. His strategy
of disruption underscores in reverse the wisdom and necessity of an
American policy of economic cohesion.

The problems of U.S. foreign policy -- and therefore of foreign
economic policy -- have to be appraised in reference to three contingencies:
an indefinite prolongation of international tension and unrest; a possible
eruption of general war; and the possible emergence of a period of peace
in which modern man, free of major international tensions, could
concentrate his incalculable resources of science and organization upon
constructive purposes. Most Americans would probably estimate the

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first as the most likely to be realized; while it is our objective as a nation
to prevent the second, and seek the third. Despite our expectations and
purposes, the uncertainties are so profound, and the consequences of
miscalculation would be so serious, that we cannot base our policies
on a difficult assumption that any one of these contingencies would be
realized. We must seek possible lines of action which would prepare
us for all three. The policy of economic cooperation is such a line of
action.

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U. S. Foreign Economic Policy
In Relation To General Economic Policy

The American economy represents some 40 per cent of the economic activity of the world; and almost half the economic activity of the world outside the Soviet Communist orbit. In terms of relations within the free world, the importance of the American economy both as a market and as a source of supply is fundamental. Our efforts throughout the free world in advanced industrial economies and in the under-developed areas are quite clear as to the stake which they have in a vigorous and growing American economy. This is the central need, supported by the common understanding of the world outside the Soviet Communist bloc. It represents a large and important element of harmony between foreign economic policy and domestic economic policy.

This harmony has a converse aspect. The importance of the American economy to the free world has a counterpart in the importance of the economies of the other societies of the free world to American economic vigor and growth. To state the matter conservatively, it is improbable that the American economy can grow at a satisfactory rate if the economies of the other free societies and uncommitted areas do not also expand. Our experience suggests that a wide-spread depression in Europe, Asia and Latin America would scarcely be conducive to American prosperity. Our historic experience and the common sense of this appraisal are supported by concrete data.

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We cannot expect to maintain 40 per cent of the world's production on 6 per cent of the world's land surface indefinitely without becoming increasingly dependent upon imported raw materials. As long ago as 1951, the report of the President's Materials Policy Commission gave warning that the requirements of the United States for metals already exceeded our capacity to produce them except in the case of two metals -- magnesium and molybdenum. In substantial degree for some metals, and in some degree for almost all metals, the needs of American industry must be met through imports. American productivity grows steadily from year to year as does our population. Even if the years ahead of us should be years of peace, the annual domestic deficit and the need for importation will continue to grow. Any acceleration in the rate of armament would intensify the shortfall. It has been estimated that by 1975, if present growth rates are maintained, we shall have to import at least 20 per cent of our total raw materials requirements and no less than 55 per cent of our requirements of metals. In consequence, the economy of the United States has a long-range need for growth in metals supplies and in the supplies of other raw materials throughout the free world and the uncommitted areas. The production of raw materials and metals cannot be supported from the economic life of the countries within which this production must be sought. It is unrealistic to expect the necessary expansion in these supplies except as part of a vigorous general growth throughout the free world and the uncommitted areas.

From a consideration of the relationship of foreign economic policy to general foreign policy and general economic policy, two broad themes thus

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emerge to guide us. These themes are economic growth in which all participate on a just basis of economic cohesion: economic growth within the United States, the nations allied or associated with it, and the uncommitted areas; and economic cohesion among these societies. These broad themes must be translated into operating policies, which must themselves be applied in turn into concrete decisions upon concrete problems into day to day processes of government and economic life. In the development of operating policies, it is important to distinguish among ends and means and to work out a suitable relation of means and ends. Particular trade or investment policies or measures of economic aid or technical assistance are most usefully considered as instruments to help achieve ends. They can be simply appraised only in reference to the particular purposes for which we propose to use them, and the alternative means which may be available.

We believe that our foreign economic operating policies should be developed with particular reference to three central elements of contemporary national need and purpose. These are (1) our relations with advanced industrial societies allied to us or dedicated to purposes in harmony with our own; and (2) our relations with the less developed societies, allied to us or uncommitted; and (3) the assurance of a satisfactory raw materials base for the stability and vigorous growth of our own economy.

In our relations with the advanced industrial societies, notably the countries of Europe and Japan, the essential underpinning is the promotion of mutual and multilateral trade and investment on a stable basis of cooperative economic policy.

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In our relations with the countries whose economies are less highly
developed, the essential underpinning is a stable and constructive policy
of investment, economic aid and technical assistance geared into programs
of economic development.

In the assurance of a satisfactory raw materials base for our own
economy, the essential underpinning is to be found in raw material import and
investment policies conceived and executed within a framework of multilateral
trade and economic development of the under-developed areas.

To a consideration of these operating policies we now turn.

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CHAPTER VI. TRADE POLICY

Even at the cost of some repetition, we stress again the urgency of keeping our consideration of foreign economic policy on the plane where it belongs: that is, as a vital element to our national purpose of establishing a peaceful, just and workable national order; a vital element in our national strategy for survival; and a vital element in our national economic purpose of growth. This is a central point in the development of trade policy. It is also the point which tends most often to be overlooked.

It is our judgment that American trade policy today does not reflect an adequate recognition of this central point. Too often and in too many quarters, lip service is paid to the need for multilateral trade, while the policy and practice is honored more in the breach than in the observance.

The gap between our exports of goods and services (excluding military items) and our imports of goods and services -- i.e. the margin by which our exports exceed our imports -- has risen in the last few years. It now stands at an annual figure of over $5 billion. We should understand clearly just what this gap means. When we sell $5 billion more of goods and services than we buy, we are left with $5 billion worth of claims for repayment. These claims will be held by many American enterprises, as well as by the American government. They will be held by agricultural producers, manufacturers, airlines, shipping companies, banks. Payment will be due to them from purchasers in many parts of the world. In the main, these purchasers will be sound and honest ready and able to pay in their own currencies. They will not be able to navin

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dollars, unless they can obtain dollars for their own monies through the
mechanism of foreign exchange. This will not be possible for the dollar
reserves in their respective countries are inadequate. Those dollar reserves
can only be earned by those countries if those countries can sell their goods
or services for dollars.

Suppose that we should continue this exports surplus indefinitely.
This would mean a concealed and unconscious give-away of a corresponding
part of our national production each year. As we shall see in a few later
chapter of this report, carefully considered programs of public investment
or economic aid or technical assistance for clearly understood national
purposes constitutes sound national action. A blind and unconscious give-
away, in the form of indefinitely maintained export surpluses, with a frame-
work of trade policy which makes payment for such surpluses impossible,
does not.

Since the indefinite continuation of such a gap cannot be justified,
what are we to do about it? If our sole concern were abstract arithmetic
rather than the life of this Republic, we could eliminate the surplus by
allowing our exports to fall. This would mean throwing out the baby with
the bath. It would cause serious dislocations within the economy of the
United States and impair our rate of growth. It would gravely injure the
economies of allied or friendly nations dependent upon quantities of American
goods and services. It would disrupt the organization of collective security,
alliances and mutual support which we have so painstakingly been building.

The point has already been demonstrated in this report that the United States
has a vital stake in the stability and independence of such areas as Western
Europe, Latin America, Japan, Asia and the Middle East. It is scarcely
necessary to labor the point that these areas cannot achieve stability, or
achieve or maintain independence, if their economies should be feeble and
undependable.

The only remaining course, and in the long run the only sound one, is
to allow our imports to rise.

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If we should retreat into pessimism, or if we should permit the growth of a spiral of retaliative discrimination, this would weaken present American elements and strengthen neutralist or "third-force" sympathizers among the members of the North Atlantic Treaty Organization; and that might well start with our closest partners in Canada and Britain.

In the underdeveloped countries, it would gravely weaken their capacity to resist being seduced or pressured into a rapidly expanding Soviet Communist economic orbit. In this connection, we must take account not only of the economic consequences of American trade policy but also its psychological effect. The psychological consequences of protectionist policies upon the attitudes of other countries could be more serious, at least more immediately serious, than the strictly economic consequences.

This is not to say that we should disregard the problems of specific industries or specific localities within the United States which might be adversely affected by a rise of import competition or by price changes in the world markets. It is to insist that we must find solutions to these problems which harmonize with and reenforce our general national policy and strategy rather than to undermine or frustrate it.

In our judgment, it is not enough merely to hold the line which, during the past few years, has been repeatedly eroded by protectionist exceptions. On the contrary, we must push forward.

Our main instrument for tariff reduction is our reciprocal trade agreements program, carried forward in accordance with the Trade Agreements Act. We

believe that this Act should be renewed for a long-term period by the initial
Congress. We also believe that the mere renewal of the President's authority
is not enough.

Since the Trade Agreements Act was first passed in 1934, vast changes
have occurred in the position of the United States in the world. The Act has not
been adjusted to take account of these changes. On the contrary, as we have
said, there has been a tendency to erode it by protectionist exceptions and minor
changes which have moved in a direction contrary to American needs and
American purposes.

In accordance with these views, we propose that:

(a) The present Congress should renew the Trade Agreements Act and
the President's authority to reduce tariffs.

The extension should be for a long enough period to give stability to our
trade policy.

(b) The purposes of the Trade Agreements Act and the standards for its
interpretation and administration should be revised to bring them into accord
with the major objectives of our national policy.

The Trade Agreements Act was passed in the depths of the Great
Depression of the 1930's. Its stated purpose was to expand American exports
and that purpose was interpreted in the short-run and immediate sense appropriate
to the conditions of 1934. The problem now, as we have seen, is to create a
trade and payment system which will underpin our foreign policy, our national

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security strategy and the maintenance of our economic growth upon an adequate
base of raw material supplies. This is not to say that our purpose is no longer
to maintain and increase American exports. This still remains and should remain
one of the purposes of our trade policy but it must be understood and applied in
a long-range and fundamental sense by creating the means of payment for our
exports through sound import policies.

As matters stand, the President has no authority to reduce tariffs for the
purpose of raising American levels of consumption, assuring the means of payment
for our exports, increasing imports of materials fital to our national defense,
strengthening the economic basis of the Western alliance, accelerating the
economic growth of the free world, or countering the Soviet trade offensive.

The Trade Agreements should be revised to include these and other
objectives of contemporary U. S. foreign policy among the criteria to guide
Presidential action.

(c) The negotiating authority of the President under the Trade Agreements
Act should be broadened and strengthened.

The President's power to negotiate effectively in the long-term interests
of the United States should be increased by freeing him from the present
originally conceived reciprocity requirement, which obliges him to extract from
other countries in each case reductions and bindings in tariffs quantitatively
equivalent, case by case, to reductions which he makes in the American tariff.
He should be empowered to negotiate for the achievement of other objectives of

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our foreign economic policy, such as fair treatment and just protection of
American investors; fair opportunity to American shipping lines and airlines;
the assurance of vitally needed raw material supplies; or other benefits germane
to the basic purposes of American policy.

(d) The "escape clause" and "peril point" provisions of the Trade Agreements Act should be modified to remove the present exclusive preoccupation with injury to specific segments of industry.

Under the present administration of these provisions, increases in tariffs
have been recommended simply because imports enjoyed a larger share of a
growing American market, even though American producers suffered no losses in
employment, profits or sales. Tariff increases have also been recommended in
circumstances where imports caused losses in only one subdivision of the pro-
ducing process within one import-competing segment of an industry (even though
the American producers could avoid serious injury by shifting the emphasis in
their production to other products). This is like trying to judge a balance sheet
by looking exclusively at one or two items on the liability side. We must
appraise our tariff policy and administration as we do a balance sheet: as a
whole. We must not be precluded from following a course dictated by our larger
interests merely because it may involve elements of loss at particular points.
The criteria for the "peril point" and the "escape clause" should be broadened to
include consideration of the effects of the withdrawal of tariff reductions upon
American consumers, American exporters, and our relations with the supplying
countries.

If particular elements of loss occur, these can and should be handled
in a more specific and sensible way. This question is considered in the
following paragraph.

(e) If injury to particular industries or localities should occur from a rise in imports due to tariff reduction, we should deal directly with this injury by temporary government aid to help partners, workers and communities adjust to a more efficient pattern of production,

With this recommendation, we return to the point already made. That
is, that the problems of specific industries or localities which may be adversely
affected by a rise of imports should be dealt with, but in a way which harmonizes
with and reenforces our general national policy and strategy rather than to under-
mine or frustrate it.

We believe that in such cases ways can be worked out to do this, through
transitional programs of adjustment aid. Such aid could come from Federal,
state or municipal sources. The purpose would be to assist the producer, the
employees, and the communities to carry through a transition to other forms of
production or work more in keeping with contemporary conditions and to do so
in a manner consistent with steady progress toward our major national objec-
tives. Such temporary and transitional aid could take many forms: technical
assistance to businesses and communities; moving allowances, retraining
services, and expanded unemployment compensation for employees; in some
cases, in which the effect upon a particular business may fairly be judged to
be comparable to the taking of property for a public purpose in an eminent domain

proceeding, a direct compensation payment might be warranted. Whatever the
cost of such assistance might be, if well conceived and well administered, it
would be far less than the burden upon our national life and our national
economy caused by our present tariff policies. In addition, in such cases it
may well be feasible to fashion tariff reductions in rhythm with programs of
readjustment assistance.

(f) We should eliminate import restrictions justified on the alleged ground of a need to protect "defense essential" industries.

A recent amendment to the Trade Agreements Act requires the President
to withdraw or refrain from making tariff concessions which injure an industry
considered important to our national security. As interpreted, this amendment
has the same basic defect as the "peril point" provision, in that it requires the
President to base his judgment upon one item in the balance sheet of national
interests instead of the balance sheet considered as a whole. It requires him
in certain cases to take certain actions in the name of "defense" which ignore
the actual military alternatives for which we are currently preparing. The Act
should be amended to enable the President to take account of the effects of
tariff reduction upon the national security, but to do so in accordance with our
general national security policy and strategy. In this general national security
policy, as we have already pointed out, emphasis must be given to the maximum
use and growth of our economy as a whole, and to the vigor of our key indus-
trial allies.

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Machinery of Administration for Multilateral
Trade and Payments Policy.

The improvements in our trade policy should be accompanied and sup-
ported by improvements in the machinery for administration. To this end, we
recommend:

(1) Adherence by the United States to the Organization for Trade Co-operation.

A bill authorizing American participation in the Organization for Trade Cooperation is pending in Congress. We recommend that this bill be passed.

The establishment of such an organization will provide the machinery, now lacking but sorely needed, to increase the effectiveness and usefulness of the General Agreement on Trade and Tariffs.

(2) The establishment of cooperation between the Internal Monetary Fund in the financial field and the Organization for Trade Cooperation in the trade field.

Even in the narrowest terms, it seems clear to us that American interests
have gained and stand to gain much more from the existence of such international
machinery than any possible losses which their use might involve. In larger
terms, they represent additional means to give effect to the policy of economic
cooperation which corresponds, in economic terms, to our policies of collective
security and mutual support through international organizations and alliances.

European Regional Organization in
Relation to Multilateral Trade.

To date, there has been every reason to believe that developments such
as the European Coal and Steel Community, the European Common Market, and
Euratom are essentially in accord with American political and security purposes
and interests. A possible question could be raised as to whether these regional
developments might not turn into an attempt at a kind of European autarchy, in
which the European soft currency countries might be organized against the
dollar world. This question is in some respects comparable in economic terms
to a question which has sometimes been raised on the political side: whether a
regionally organized Europe might become a possible neutralist third force.

We do not believe this risk will be serious, if the United States of
America itself pursues sound policies of multilateral trade. If we should pursue
the wrong policies, if we should retreat into protectionism, we could frighten
the European countries into autarchic positions in a panicky effort to protect
themselves. On the other hand, if we pursue sound and far-sighted policies to
promote multilateral trade and investment, there is every reason to believe that
these European regional developments will go forward, economically as well
as politically, in accordance with the general interests of the free world and
the United States.

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CHAPTER VII. ECONOMIC DEVELOPMENT OF UNDERDEVELOPED AREAS

The term "underdeveloped areas" has entered into the contemporary vocabulary. In usage there has been a tendency to forget that it is a shorthand reference to many countries in many parts of the world, among which the range of variation of circumstances and conditions is immense. The term is applied to countries under heavy population pressure, like India and Indonesia, and to societies which have an actual shortage of manpower for agricultural and industrial development, such as certain countries of Latin America and Iraq. The term is applied to countries with potentially rich and largely undeveloped resources, like Brazil or Rhodesia, and also to countries with a meager potential, like Libya. It is applied to societies which have effective central governments commanding popular confidence and support, vigorous political leadership, and real resources of trained government personnel and established administrative organization, like India; and to countries in which the structure of government and administration is rudimentary and personnel with the skills required for modern government or economic development almost non-existent. It is applied to countries which take part in a political or defensive alliance to which the United States is a party, and to many which do not. It is applied to countries which have undertaken to maintain armed forces and to furnish bases for the military forces of the United States or of nations with which the United States may be allied, and those which do not. It would be an understatement to point out that the development of policies with respect to societies so widely

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dispersed and so varied in character must be developed on the basis of a
patient, comprehensive and perceptive consideration of the facts and circum-
stances of each society. The question might well be raised whether in view of
these variations it is practicable and useful to determine any general line of
policy for the United States with respect to the economic development of these
areas. In our view, the answer to any such question must be and should be
an emphatic yes.

We can and should affirm a general objective and a general line of U. S.
policy with respect to the economic development of these areas which is valid,
realistic and important. The main elements of this general line of policy
derive from certain key factors. These facts must be recognized, kept in mind
and understood by the Government of the United States and its people.

In these societies economic development is in fact a primary political
and psychological goal. To put it simply, there is a widespread conviction
among the peoples of the world that what was good enough for grandfather is
not good enough for them. Rightly or wrongly, wisely or unwisely, they have
become convinced that modern science and technology and the whole apparatus
of modern industrial society are adequate to enable them to take a long step
forward toward meeting their age-old economic anxieties. This is one of the
central facts of our time. This surge of demand, these rising expectations will
mean instability and danger unless there is a sufficient prospect of economic
growth to give the people in these countries hope that their expectations will
in some reasonable degree be met.

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Economic development can be sought in different forms and in different degrees. The scale and kind of economic development for any one of these countries will be defined in terms of its own values and aspirations and its own estimate of what is achievable. Here again, we would emphasize that this is a fact which must be recognized and taken into account.

The intensity of the desire of these people for rapid development, compared with their poverty and the paucity of their resources of skill and experience, tend to make them susceptible to schemes to accomplish economic development through totalitarian methods. Soviet Russia and Communist China are by no means unaware of this susceptibility. As we pointed out in earlier parts of this report, the Soviet Union has embarked upon a consistent policy of utilizing its own economic resources to play upon this potential susceptibility, in order to seduce or pressure these countries into the Soviet Communist economic orbit.

As we pointed out in greater detail in Part II of this report, it is deeply in the national interest of the United States that these countries, in seeking economic development, should do so in terms which encompass a genuine national independence; peaceful international attitudes, institutions which in forms appropriate to the organic character of their own societies rest upon the authentic consent of their people; and respect for human personality. It need hardly be added that it is also profoundly in the interest of these countries themselves to pursue their goal of economic development in these terms. This harmony of interest, once understood and kept in mind and

III - Report

February 13, 1958

imaginatively and resourcefully applied through operating policies, is one of
the greatest sources of hope and strength for American and free world policy.

In many cases the difference between success and failure in the efforts
of these countries to achieve a sufficient measure of economic development to
hold the confidence of their people and to do so in the terms described above,
will be determined by appropriate amounts of capital assistance or technical
assistance from outside.

In consequence, we recommend that: _It should be the deliberate and consistent policy of the United States to seek to assist such countries toward achieving a sufficient measure of economic development, and a sufficient prospect of further economic growth, to give their people hope that their aspirations may be met in reasonable measure and confidence in the societies of which they form a part._ Such assistance should be subject to the following basic conditions:

(1) The countries' own purposes should be consistent with the objec-
tives of the United States. At a minimum this means that the country must
seek economic development within a framework that includes genuine national
independence, peaceful international attitudes, respect for human personality,
and institutions resting upon the genuine consent of their people through forms
appropriate to the nature of their society. It also implies the negative correla-
tive of these affirmative purposes, namely the rejection of any subscription to
the Soviet Communist bloc and the rejection of totalitarian dictatorship.

(2) The country in question must adopt a program of maximum self-help. In such a program it must commit its own resources of facilities, materials, manpower and governmental organization in the maximum degree practicable to the program of economic development. In this connection, we refer again to the pressure of rapid population growth in a number of these countries. In such countries it is vital that the production of goods and services should increase at a rate higher than the rate of increase of their population. Obviously, such an increase in the rate of production is a central purpose of a program of economic development. If the facts and circumstances of the recipient country are such that an improved per-capital production and consumption cannot be achieved without appropriate measures of population control, the adoption of such measures by the country in question would constitute part of an appropriate program of maximum self-help.

(3) The form of assistance given should be determined by the actual nature of the need and the actual deficiencies which appear in the program of self-help. If the program of self-help identifies critical bottlenecks in capital and technical skill which can be effectively utilized within the program and appropriately supplied from outside, the United States should undertake to help supply such capital or technical assistance.

(4) Within the foregoing limits, the amount of assistance given in the form of capital or skill, and the rate at which it should be supplied, should be determined largely on the basis of what the recipient country can effectively absorb. We wish to emphasize again that this capacity for effective absorption

refers to utilization within a program of maximum self-help for purposes con-
sistent with the objectives of the United States and by methods appropriate to
the purposes and values of societies which value human personality and human
freedom.

Various estimates have been made of the amounts of aid which would
be involved by computation on such a basis. Inevitably, there is a wide margin
of error in such calculations, and any estimates made would have to be modified
by decisions on the actual facts in the course of the actual administration of a
program. We are speaking in general terms and with due allowance for this
margin of error. We are in accord with the estimates that suggest that the
volume of aid, computed on such a basis, would not exceed $2 billion a year.

In this connection, we point out that, contrary to popular impressions,
we are currently investing only modest amounts of private and public capital
and economic aid in the underdeveloped areas. For example, it is estimated
that the total amount of our gross annual private investments (including re-
invested earnings) in the underdeveloped areas as a whole is still not more
than $1 billion. Since this is a gross figure, it has not been adjusted by the
deduction of a return flow of earnings and repayment.

Furthermore, upwards of half of this private investment is concentrated
in a single industry - the production of oil. This very fact carries with it
another of equal significance: upwards of half this private investment is concen-
trated in a few oil-producing areas.

(These figures should be checked.)

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As to our expenditures in the form of economic aid, some three-fourths has taken the form of direct military or defense support assistance to our allies. It has been estimated that the amount of aid annually supplied for actual economic development in the underdeveloped areas is of the order of magnitude of $500 million - say, $400 million to $600 million.

(5) There should be stability in our programs of assistance in the form of capital or technical aid. This means that there should be reasonable assurance of continuing assistance over a sufficient time to give the country's program a reasonable prospect of success.

(6) Assistance given by the United States should be within the limits and of a kind which the United States can effectively supply. To put this in another way, w the amount and kind of assistance given should be appropriate not only to the capacity of the recipient nation to utilize it, but to the capacity of the donor nation to give it. In this connection, it must be borne in mind that the United States has a far greater capacity to supply certain kinds of aid - e.g. machine tools or refineries - than other kinds of aid, e.g. personnel who possess not only important technical skills but who are gifted in teaching, able and willing to accommodate themselves to the conditions of life in the tropics, able to master the difficulties of an unfamiliar language and culture, and capable of sensitive understanding of peoples whose background and temperament are very different from their own.

(7) Both we and the underdeveloped country with which we may work should avoid the confusion generated by the phrase "aid without strings". We recommend that the phrase be put quietly to rest. While the concept obviously does have an element of validity, it can turn into a shibboleth which, if blindly applied, can degenerate into a program of aid without a real policy. Within the kind of framework which has been discussed above, we believe the phrase to be entirely superfluous. Where a program has been adopted which has agreed purposes and a commitment of resources on both sides, it is reasonable - indeed it follows as a matter of course - that any aid or assistance given should be conditioned upon adherence to the agreed objective, the agreed program of self-help and economic and administrative ways and means necessary to get the job done. This sort of condition is entirely valid from the point of view of the recipient as well as the donor. It comports with the dignity of both. It reflects their common determination to get the job done, to accomplish their common ends.

On the other hand, we must bear in mind that it would be all-defeating to confuse the kind of program of economic development and assistance which we have been discussing with the achievement of short-run, tactical, diplomatic objectives. As long as the main outlines and conditions of the program remain valid, along the lines discussed above, we should not modify their actions or decisions on the basis of whether the recipient country may take this or that diplomatic position in this or that situation.

PART III to be completed by the addition of the following:

On Chapter 7, additional sections on

(a) The forms of public capital aid - i.e. loans and grants.

(b) The importance of the development of quality personnel in both the United States and the recipient nations. In this connection, discuss the attitudes necessary, including the sense of high adventure in the execution of these policies of the United States.

(c) National and international administration.

(d) The role of private investment.

On **Chapter 8 (RAW MATERIALS)**. This will largely have been covered indirectly in Chapters 6 and 7. We need a reaffirmation of the importance of public investment, private investment, economic aid and multilateral trade in the particular terms specifically relevant to raw materials.

**Chapter 9.** The setting for action - the political process and the course of public opinion - the role of leadership - the establishment of a perspective for national understanding.

**Chapter 11.** Policies with respect to the Soviet Communist bloc itself - cf. MK's outline of July 18, 1957, p. 30???