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they can be relegated to a footnote. 3) The conceivable combinations seem to me as following, and I have listed them roughly in ascending order of probability.

1. **A revival of the Sino-Soviet alliance** in order to contain Japanese economic power in Asia and oust Western influence from the area for good. Undoubtedly there have been advocates of this in high places in both capitals for the whole of the last ten years, crudely the ideologues in Moscow, the soldiers in Peking. But those who have studied the Sino-Soviet rift more deeply than I seem

3) They are (a) A working partnership between China and the United States at the expense of the American-Japanese and the Soviet-American relationships. Not only is there too much distrust between Washington and Peking to make this likely, but also it would have few advantages for either party; for the Americans it would impair the basis of super-power detente, and for the Chinese it would degrade the ideological integrity of the Peking regime. (b) An American-Japanese-Chinese entente. This is conceivable if the Soviet Union were to become actively belligerent as it becomes global in its interests: it might also ease Japan of some of its dilemmas. But it would expose both China and the United States to great risks as well as implying an almost total volte face in Chinese foreign policy. (c) An American-Chinese-Soviet entente to contain Japan. This is conceivable a generation hence if one accepts Herman Kahn's predictions about the growth of Japanese power and ambitions by the year 2000. It has no credibility in the immediate future. (d) A Japanese-Soviet-Chinese entente directed against the United States. I find this inconceivable in the circumstances as we know them. (e) A situation in which the American-Japanese relationship breaks down but is not succeeded by any fresh developments in the relations between either Japan or the United States with either of the mainland powers. - in other words one in which the four powers all stand at arms length from each other. This situation is supposed to have occurred for brief periods in the classic European power balance, but it's an unreal conception in East Asia of the late 20th century because it is inconceivable without a rapid Japanese decision to acquire at least a minimal nuclear capability which, in my view, would be almost certain to lead to new understanding among two or more of the other three powers. (f) A Concert of the great powers in Asia. This could conceivably occur in the wake of a disastrous conflict between them, but the usual motives for a Concert of power, the need to present a united front to a common adversary or to uphold some common principle of domestic order and legitimacy are absent and will remain so.

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largely of one mind that if Moscow should be prepared for such a
development Peking at present is not. It can not be ruled out,
especially if the pragmatic Chou-en-lai gathers the reins of power
after Mao's death; but it seems increasingly unlikely, not only
because of popular as well as governmental xenophobia in both
countries, but because "imperialism" no longer presents a sufficient
challenge to overcome national and ideological rivalries.

2. A <u>Soviet-American understanding</u> emerging out of SALT or other bilateral discussions to restrain their own competition in East Asia while maintaining strategic postures, which neutralise the effect of Chinese nuclear weapons and discourage Japan from contemplating going nuclear. Implicit in such an understanding would be an assumption of broadly parallel action on the part of the super-powers in the United Nations and elsewhere if conflict should occur among the local powers. The difficulty with this pattern is that it represents just the kind of collusion that Peking assumes is taking place; if it became more evident or more codified it would rouse Chinese howtility still further and justify in her eyes as active a policy of disruption in southern Asia and elsewhere in the Third World as she had the means to pursue. In the medium term it risks also arousing the hostility of Japan. At the same time experience in the Middle East has shown that, even where the two super-powers do have some common interests, they have only slight control over the actions of the local powers. Moreover, Soviet-American negotiations are primarily about their own survival and safety and are unlikely to take the form of a specific agreement about any particular area, with the possible exception of Europe.

3. An <u>American-Japanese-Soviet understanding or entente</u> to contain Chinese power and influence, and promote the common interests of major industrial powers. There is much to attract Japan to this outcome, since in many ways she would have the best of both worlds, a continuing American security guarantee and access to Soviet raw materials and markets. But as a political combination it

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suffers several of the defects of a purely bilateral Soviet-American entente, with the added disadvantage that it would not only lead to a further hardening of Chinese attitudes but, being a combination of powerful industrial states, would arouse the hostility of the rest of developing Asia.

4. A Sino-Japanese entente while the United States plays a muted role in East Asia and the Soviet Union concentrates on the containment of Chinese in Southern Asia and elsewhere. Such an outcome has certain attractions for Japan, the reuniting of the twin cultures, access to certain raw materials close at hand, the prospect of exploiting the continental shelf between Japan and China for oil, and the greater likelihood of agreement on the future of Taiwan and possibly Korea. But it would be very difficult for China to embrace in ideological terms despite the prospect of keeping Japanese military activity to a low level and gaining access to her technology. In the United States and Europe it would probably be felt that Japan was leaving the Western political and economic system, which would complicate her access to Western markets (without creating alternative mass markets for high technology goods in China), and it would probably jeopardise the continuation of the Japanese-American security treaty. For the Russians it would represent the resurrection of the Yellow Peril in its starkets form; and, since Japan is as vulnerable to Soviet as to Chinese strategic pressure, it would probably be seen in Tokyo to create as many risks as advantages for Japan.

5. A Russo-Japanese entente. This, in my judgement, has a fairly high degree of probability if strategic competition is stabilised and the Asian balance becomes more governed by economic considerations. On the one hand, Japanese could accelerate the exploitation of Siberia; on the other the consumer market of European Russia is ripe for cheap tv sets, cameras, and washing machines which the Chinese market is not. If the United States and Western Europe were to turn increasingly hostile to Japanese commercial penetration, this is a possibility that must be taken

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seriously, though, if it went beyond a shift in economic relationships to the possibility that Japan might become a political ally of the Soviet Union, it would represent such a decisive shift in the central balance as to cause second thoughts in the West.

6. A modified version of the status quo in which existing alignments hold but the major powers cease trying to pursue universalist policies in Asia, and tacitly acknowledge each other's spheres of primary interest. At the strategic level, the direct interest of the United States in the security and well being of Japan, the Philippines, Australia and New Zealand as an aspect of her own security would be accepted, as would that of the Soviet Union in the Indian sub-continent and South Asia. At the economic level the legitimate interest of Japan in the well being of Indonesia would be recognised. Encircled by these countries lie the small states of South East Asia - the Asian Balkans - which would be open to the political or economic penetration of the four partners in the Asian balance but not to the point of dominance: whoever sought dominance in Thailand or Malaysia must count on the hostility of the other three.

Such a pattern would have several advantages for the United States. First, her sphere of primary interest would not be contiguous with that of the Soviet Union so that the risks of super-power confrontation would be minimised. Since the US-Japanese security treaty would be maintained, it would not involve a crash programme of Japanese rearmament or Japanese nuclear weapons. The process of economic and political development in South East Asia would continue to elicit resources from Western Europe or its major individual powers who still have interests in the area. But equally it poses difficult decisions for the United States, by the necessity to turn China into a status quo power at least in her relations with the United States and Japan: this must mean the return of Taiwan to China, the eventual removal of all American military forces from Thailand and South Vietnam and the quiet burial of SEATO.

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But it poses equally difficult choices for the other three powers; Soviet acceptance of the legitimacy of Japan's interest in Korea and of China in North Vietnam; Japan's acceptance of the return of Taiwan to China, and, perhaps as difficult, of the principle of self-restraint and generosity in her economic relations with South East Asia; China's tacit recognition of the legitimacy of her partners' permanent interest in what she regards as her own continent, as well as adopting a tacit preference for exercising influence with small governments rather than working for their overthrow (a choice which the Soviet Union in effect made a decade or more ago).

Nevertheless, despite the difficulties it presents I believe this sixth pattern of the Asian balance is the most realistic outcome at which to aim, and the one which would be most likely to promote order without hegemony in Asia. True it implies the acceptance of similar rules of conduct by the leaders of four sholly dissimilar countries, rules which were difficult enough to maintain in pre-1914 Europe. But, since a multiple balance of power is in any case emerging in Asia, the leaders of all four countries are bound to give serious though to the conditions for its maintenance; in the process they can not fail to discover, whether by reflection or negotiation, that the maintenance of the principle of balance in any form depends as much on the development of broadly common attitudes and assumptions about the limits of competition, about the balance between initiative and self-restraint, about mutual rights of inter-penetration in areas of secondary importance to them all, as it does on any pattern of political alignment or military deployment.

This process may take time but fortunately our experience of the past ten or fifteen years has shown that modern communications, (aided now by the presence of all four partners in the United Nations), when combined with the awful consequences of a potential break down in modern balances of power, can bring leaders, who have been brought up in cultural isolation from each other, to a working consensus much more rapidly than in the past.

"ECONOMIC ISSUES BETWEEN INDUSTRIALIZED COUNTRIES
FOR THE SEVENTIES "

By

W. MICHAEL BLUMENTHAL

# I. BACKGROUND

Looking back over the two-and-a-half postwar decades, we can find cause for considerable satisfaction as regards our record of dealing constructively with the major economic issues that arose between the industrialized countries of the non-Communist world. The result has been a period of unprecedented growth and prosperity for all.

Postwar reconstruction of Western Europe and Japan, and reconversion from war to peace in the U.S. and elsewhere, was achieved more quickly and effectively than anyone dared hope in 1945. Each nation solved its own most urgent problems of reconstruction and peacetime development. In large measure, however, the individual tasks were much facilitated by enlightened cooperation among the various countries -- through the Marshall Plan, other ad hoc reconstruction organs, and in a whole host of new institutions through which international economic collaboration was channeled and coordinated. Most importantly, there developed for the first time in modern history the habit of working together multilaterally to solve common problems for the benefit of all.

From the mid-fifties through the latter sixties, the record of facing and solving economic issues between Western industrialized nations was equally gratifying. Learning from the mistakes of the interwar years, the habit of working together became more deeply ingrained and everyone benefited accordingly.

"Economic Issues Between Industrialized Countries For The Seventies"

By W. Michael Blumenthal

Europe embarked on a historic path of economic unity and integration, and the United States encouraged and assisted this effort. The wider institutional framework for economic collaboration -- IMF, IBRD, GATT, OEEC and its successor, OECD -- functioned well and was adequately suited to the task.

The Bretton Woods monetary system, with a convertible dollar at its center, and world trade rules newly developed at Havana, based on multilateralism and the Most-Favored Nation principle and firmly focused on progressive tariff reductions and non-discrimination as its main aim, were adequate to cope with our existing problems. As a result, by virtually every index of economic well-being, the Western industrialized world made impressive strides (per capita GNP, standards of living, economic growth, real income, volume of world trade and investment, flow of aid resources to less developed countries, etc.)

Equally important, success on the economic side facilitated the development of generally close and constructive political relationships among the industrialized countries of the West. A sense of common direction and community of purpose brought us a measure of success in dealing with our economic affairs. This did much to provide a firm foundation on which the Western Alliance could stand to face the political pressures of the Cold War.

The tremendous success of the Kennedy Round, resulting in a more fundamental and far-reaching reduction of tariff barriers than had ever seemed possible, was the most dramatic and -- as it turned out -- last great achievement of this period. Unforeseen by virtually everyone, the Kennedy Round became not the threshold leading to yet higher levels of economic cooperation and well-being, but rather

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By W. Michael Blumenthal

a turning point from an era of collaboration and success to a period of seeming
uncertainty and crisis.

Perhaps storm clouds had been gathering even before the end of the negotiations
in 1967. It certainly now appears that emerging trends had, to some degree,
been obscured by the great concentration of effort necessary to complete the
Kennedy Round undertaking successfully.

The fact is that during the last four or five years things have not gone well. The old formulae no longer seem to work. Protectionism has been on the rise in the U.S. and elsewhere. The monetary system, beset by recurrent crises, has broken down and a permanent new structure has yet to be evolved. Collaboration on economic policies toward others -- LDC's, Communist countries -- has become the exception rather than the rule. To many outsiders, and certainly in the prevailing U.S. view, the economic integration of Europe has increasingly appeared as a problem and a threat rather than as an opportunity and a benefit. Existing institutions and international rules in the monetary and trade fields have been under stress, ignored and violated more often than observed; in many places, their validity and viability is being seriously questioned.

Moving from problem to greater problem, and from uncertainty to confusion and
dissension, the situation culminated in the world monetary and trade crisis of
August '71. While the agreements on exchange rate parities at year-end defused
the most dangerous elements of this situation, no one can be sanguine about the
present state of affairs. Many fundamental problems remain unsolved. We are
still in trouble. Once again there is danger that our inability to deal construc-

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tively and with a modicum of common purpose with our monetary and trade problems will create disorder and hardship, that recession in one country will lead to depression in another and to world crisis for all.

And once again we have seen how completely economic and political affairs tend to interact, and how constructive and fruitful political relations depend on our ability to solve the economic questions confronting us. More than ever before, in our shrinking world, the interrelationship of our individual domestic fortunes with the international politico-economic state of affairs has been brought home to us.

## II. THE PROBLEMS AND THE ISSUES

What has happened? What is the cause of the present state of affairs? Are the formulae of the postwar period still valid for the next decade and beyond? Or do we face new conditions and problems, requiring different solutions and approaches? Are existing institutions up to the task or must they be reformed and restructured? What is the agenda of problems and issues which the non-Communist industrialized countries must now face, and what are the most urgent priorities in confronting this task?

This paper rests on the proposition that our economic agenda for the years ahead contains some urgent unresolved issues left over from the Sixties, while comprising to an important extent an entirely new and complex set of questions never previously at issue. These new questions arise from the altered circumstances in which the industrialized world finds itself at its present stage of development and

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By W. Michael Blumenthal

maturity.

While much that is useful can be learned from our postwar experience, we will also have to recognize that our changed circumstances underscore the need for pioneering and innovation as regards methods of economic cooperation and the reshaping of our common institutions for dealing with the most urgent problems of our technological age. But one requirement remains as essential today as it was in the Fifties and Sixties: No new institutions will work, and neither old nor new problems can be solved, if we do not recover our political will to work together; if we do not reject temptations of returning to a kind of neo-mercantilistic nationalism in our economic affairs; if the politics of competitive economic power blocs are allowed to replace the kind of cooperation that has served us well in the past and is indispensable in the interrelated world of today and tomorrow.

Without attempting a full and complete analysis of the entire range of outstanding issues before us, the following questions need to be considered:

1. What are the changes in the international economic environment confronting us in the '70s as against the preceding two decades?

2. What is the range of new problems arising from the new circumstances -- and of the old problems left over from the past -- which require solution?

3. To what extent are existing institutions suited to dealing with the task of solving our current set of economic problems? What institutional changes and innovations should be considered?

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### III. A CHANGED INTERNATIONAL ECONOMIC SCENE

One important change in the international economic scene relates to the position of the United States in a world context. Until the late Sixties, the fact of U.S. economic predominance stood out as the major element around which the West's economic relationships were structured and administered. The United States accounted for a towering share of the world's total GNP and was by far the major market and the largest of the world's trading nations in absolute terms. The dollar dominated the world's monetary system and provided liquidity to finance the growth of international commerce. As a result, U.S. leadership on the world economic scene was unquestioned and unchallenged.

That situation no longer prevails in the Seventies. The economic dominance of the United States has been reduced as the power of Europe and Japan has risen. America is unlikely again to be the only economic giant among the Western nations. A few statistics illustrate this point:

1. In 1950, the U.S. share of world GNP was almost 50%; today it is 30%. During the same two decades, the EEC's share of GNP has risen from 11% to 15% and will reach over 20% when the U.K., Denmark, Ireland and Norway are admitted. The Japanese total has quadrupled from 1.5% in 1950 to over 6% in 1970, and it is still rising.

2. In 1950, the U.S. accounted for 76% of total world production of motor vehicles and 46% of total world steel output. In 1970, these figures had

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By W. Michael Blumenthal

been reduced to 30% and 20%, respectively. Meanwhile, the EEC's
share of world motor vehicle production rose from 14% to 24%, while
remaining even at about 20% in the case of steel output. Japan,
producing almost no motor vehicles in 1950, now accounts for 17% of
the world's total. Japan's share of steel production has risen from 2%
to a staggering 16% in 1970.

3. World trade trends are equally revealing. Excluding trade among its own members, the EEC in 1970 accounted for 17% of world exports while the U.S. share -- once the largest of any -- had dropped to less than 16%. The enlarged Community would, in 1970, have accounted for 22% of the world's total. Meanwhile, the Japanese share of world exports increased by one-third in the period between 1967 and 1970 alone.

4. The international reserve position of the major Western countries has also shifted. The U.S. share of the world's total international reserves (gold, SDRs, reserves in IMF and foreign exchange) fell from 49.8% in 1950 to a little more than 10% in August 1971, while that of the EEC had risen from 6% to 32.9% during the same period. Japan's international reserves, insignificant in 1950, accounted for almost 11% in August 1971.

A second major element of change confronting us in the Seventies follows, at
least in part, the decline of U.S. economic predominance. The fact is that,
for some time to come, the U.S. can -- and perhaps should -- no longer be
counted on to provide alone the drive and leadership for the solution of common
problems. For a period, the U.S. capacity and will to do so are likely to be
impaired.

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There are many reasons for this. For one thing, since relative U.S. economic power has declined and been partially redistributed to Europe and Japan, the U.S. simply no longer has the power to play the role of leader in the launching of economic initiatives. This must now be a shared task, with the impetus for constructive resolution of our economic problems coming as often from Europe and Japan as from the United States. The declining U.S. share of world trade and the changed role of the dollar in themselves contribute to the reduced capacity of the U.S. to lead.

Beyond that, there is evidence that the U.S. will to play its old role has declined as much as the capacity to do so. The failure of U.S. policy in Vietnam has turned the country more inward, with accompanying tendencies toward greater nationalism and protectionism. This may neither be an irreversible trend, nor a permanent one. But to provide counterweights and to stimulate the most constructive possible U.S. responses and policies will require intelligent non-U.S. initiatives.

A third changed circumstance of the Seventies is that trade is no longer the dominant element in international economic relations. There can be little doubt that the dramatic increase in transnational investments is having a profound impact on the nature of our relationships, fundamentally altering the agenda of issues confronting us.

We must now deal not only with the problems of merchandise trade but with the role and treatment of a large volume of direct foreign investment and a greatly increased exchange of services of all kinds. The explosion in communication and travel has altered the economic scene. Many of the factors of production

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By W. Michael Blumenthal

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once considered as "fixed," have become quite mobile -- hence the heightened flow of technology, know-how and rapid capital movements across national boundaries.

We are badly in need of good data to quantify these new trends. A number of statistics are available, however. They demonstrate that a fundamental change has indeed been taking place.

For example, during the decade of the Sixties, U.S. direct investments in plant and equipment abroad more than doubled to a total of $78 billion. The share of these investments in Europe quadrupled from $6.7 billion in 1960 to $24.5 billion in 1970. These are merely book values; actual market values involved are probably much higher. Certainly the output associated with these investments exceeds many times the volume of imports or exports of any of the world's major trading nations.

The changing composition of the U.S. balance of payments provides another good illustration of how international economic relations have been altered. In 1970, gross income from U.S. private investment abroad was $8.7 billion; net U.S. investment income stood at over $6 billion. These figures are several times as large as those prevailing a decade or two ago.

U.S. income from royalties and fees, generally for technical services and know-how, has increased more than ten-fold -- from $200 million in 1950 to $2.3 billion in 1970. At the same time, while the overall volume of imports and exports rose significantly, the traditional U.S. trade surplus of $5 or $6 billion each year has, at least temporarily, dissolved into a deficit.

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There is nothing alarming about these changes. On the contrary, a broader
economic interchange among our countries, reflecting the advances of modern
technology, can well mean greater prosperity for all. But it is clear that this
change in the nature and content of our economic relations will bring with it
new problems and unaccustomed complexities. To deal with these matters
constructively will require changes in our focus and in our institutions.

A fourth important element of change for the Seventies relates to the rise in
importance of the Multinational Firm (MNF) -- the vehicle through which
international direct investments and the transfer of technology and know-how
has been effected. The MNF has put into question the adequacy and relevance
of many of our old ways of handling international economic problems. Few of
our rules and methods of operation, in the monetary or the trade fields, were
developed when the MNF was on the scene. Hence, some of our thinking and
many of our tools will require reevaluation and adjustment.

While largely an American phenomenon up to this point, there can be little
doubt that the growth of the MNF will become quite generalized in the years
to come. Increasingly European and Japanese firms will be investing abroad.
Most developed countries will be both investing and recipient nations and
thus share a common set of partially similar and partially conflicting interests.

International investments through MNF's are linking our countries more closely
than ever before and generally result in economic gain for all. At the same
time, they pose a number of vexing and dangerous new dilemmas and frustrations.
For, at the very time when we are becoming more economically interdependent,

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each nation is faced with serious internal pressures for domestic change and
social justice, for the preservation of the environment and for the protection
of its citizens from the dislocations which accompany rapid economic and
technological growth and change.

Each country wants to deal with these domestic pressures in its own way.
Yet each finds its freedom of action increasingly circumscribed in the face
of our increased economic interrelationships. Isolating one country from
another has become virtually impossible, except at enormous and unacceptable
cost. The implications of this new state of affairs will have to be faced by all
of us in the years to come.

The world of the Seventies differs from the earlier decades in yet another
important respect. New problems have arisen, and some old ones have taken
on new meaning, because major structural changes have occurred in the
developed world.

The first of these relates to the progress of economic integration within the EEC.
The situation now is fundamentally different from the period of the fifties and
early sixties. With the accession of the U.K. and others, a large European
regional grouping will be confronting the U.S. Moreover, the existence of
this economic bloc has brought into association with it a large number of limited
partners, developed as well as developing countries.

What types of relationships and rules have to be developed for that kind of world?
Certainly negotiations on trade, monetary and investment questions will have to
be conducted on a somewhat different basis than during the years when regional

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economic groupings were still relatively unimportant. Will the old
Most-Favored National Principle still be relevant to that kind of world?
Should the U.S. develop a bloc of full and limited partners of its own?

A second structural change on the world scene relates to the rise of Japan
as yet a third major economic force. Japan's role among the industrialized
countries will have to be redefined, both as regards her rights as well as her
obligations. The enormous complexities of this question require urgent
attention. Their political as well as economic importance is self-evident.

And, of course, the end of the Cold War and shifting power relationships
in Europe and Asia have given rise to yet further structural changes in world
economic relationships.

Included here are our policies toward the Communist countries of Europe and
Asia in the face of the efforts of these nations to deal more with the West
and bearing in mind the changes in policy toward the Eastern Europeans on
the part of many of our own countries. Do we still need a COCOM List?
Finally, we will have to face the many new problems arising from the
accelerating demands and deepening problems of a number of LDC's at
different stages of development, all of which are increasingly active politically
through UNCTAD and other means.

## IV. AN AGENDA

A variety of basic problems, some old and some new, arise from this new
situation. But a caveat is in order: while these problems can be stated as

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separate and distinct issues, there is, in fact, in today's world a much
closer interrelationship between them than ever before. Problems of trade
can no longer be seen as separate from questions of exchange rates or
investments; agricultural and industrial trade problems are closely entwined.
In other words, in an increasingly interrelated world, economic issues and
problems are equally more interdependent.

1. **Agricultural Trade.** This is an old problem which requires urgent attention. It is one which the industrialized nations have never adequately faced. In the absence of new understandings in this area, progress in other areas of trade relations will become increasingly difficult, if not impossible.

A prerequisite for progress on fundamental agricultural trade questions
is a political determination by the principal nations not to let this
relatively limited, though politically sensitive sector of economic
life frustrate across-the-board advances on trade matters. In the
best of circumstances, progress in liberalizing agricultural trade
barriers will be slow because of the complex interaction of domestic
politics, internal support programs and international trade considerations.

Temperate agricultural trade covers a wide range of commodities ranging
from basic raw materials such as wheat, feed grains, soybeans, to
transformed agricultural products, including meat, poultry, fruits and
vegetables, citrus, etc.

Each country has practiced excessive protectionism in this area,
basically for political reasons. It is true, however, that the EEC's

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Common Agricultural Policy with its particular system of supports, variable levies and export subsidies, has immensely complicated this problem for everyone.

Much of the frustration in the United States over the EEC is related to CAP's deep protectionist bias. For example, U.S. exports of soybeans to the EEC are not subject to the variable import levy and have increased more than 55% since 1956. U.S. grains exports are, however, subject to these levies and grain shipments to the EEC have declined 30-35% from their peak. Additionally, the preferential tariff treatment accorded 30 countries by the EEC has had a markedly discriminatory effect on not only U.S. citrus exports but also to the concept of a multilateral, open trading world.

This is not to say that the U.S. has no quantitative agricultural restrictions. Indeed, almost 22% of total U.S. agricultural imports with a 1970 value of $1.2 billion have been under some kind of quota. These restrictions are, however, less than half of the EEC restrictions on $2.6 billion of agricultural imports or applied to almost 34% of such imports. The U.S. also compares favorably to the Japanese application of restrictions to almost 28% of their agricultural imports or to the U.K.'s 24%.

How can the question of agricultural trade be dealt with? There can be no one basic formula. As a general proposition, the EEC's suggestion of negotiating total levels of protection and support constitutes the right approach. The problem is to find a means to measure these overall levels fairly and objectively to enable all countries to meet the domestic

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opposition which could be expected in relation to providing protection
for agriculture at home. At a minimum, negotiations on agriculture
should be directed toward placing limits on export subsidies. This is
obviously in the interest of all concerned. Whatever system of
agricultural trade is evolved, it would be highly desirable if it gives
cognizance -- at least in a general way -- to broad differences in
efficiency between countries.

One final point needs stressing: any major new initiative to deal with the
problems of agricultural trade and any major negotiations which might
ensue cannot be left to ministers of agriculture. The best way to frustrate
progress in this field is to ignore the broader political context of such an
issue by attempting to restrict its scope to functional specialists.

2. **Industrial Trade.** The Kennedy Round by no means disposed of all remaining problems regarding tariff protection on industrial trade. While average tariff levels are generally low, these global measures hide the high levels of protection, particularly on value added, in many significant sectors for most advanced industrial nations. Further, the fact that a tariff is low ignores its protective effect on trade potential.

Not surprisingly, those remaining areas of relatively high tariff protection
are precisely the most difficult cases with which past negotiations had no
marked success. Certainly the textile industry is one of these.

A new initiative is required regarding the remaining high tariff areas.
Perhaps the industrial nations should consider committing themselves to
the goal, within a decade or less, of eliminating all tariffs.

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It has been recognized for some time, however, that negotiations on tariffs alone will no longer work. As already mentioned, there must also be simultaneous progress on agricultural trade. More importantly, the whole question of non-tariff barriers will have to be confronted simultaneously for restrictions imposed on industrial trade are increasinly of a non-tariff nature.

The best approach might lie in sector negotiations. While this was tried in the later stages of the Kennedy Round, without notable success, it is, with time and careful preparation, the only way to enhance further progress on reducing protection in industrial goods. Sector negotiations among principal industrial countries would cover, in addition to tariffs, such non-tariff barriers as tax incentives, export subsidies, quantitative restrictions, sanitary, safety and ecological requirements and the like. Probably a coordination of domestic adjustment mechanisms will also have to be discussed.

3. The Case of Japan. Japan has become one of the most powerful and important industrial and trading nations in the world. The following statistics illustrate this point:

a. The growth in Japan's share of world GNP from 1.5% in 1950 to 6.2% in 1970.

b. Japan's index of real GNP growth (1960=100) at 287 dwarfs the 148 of the U.S., the 159 of West Germany or the 130 of the U.K.

c. The industrial production index in Japan of 370 in 1970 (1960=100)

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bears a similar relationship to the 161 of the U.S., the 176 of West Germany and the 131 of the U.K.

d. Total Japanese output has, in 20 years, passed the economies of West Germany, France and the U.K. and ranks behind only the U.S. and the U.S.S.R.

e. Japan's international reserve position has improved from $600 million in 1950, or 1.2% of total world reserves to $12.5 billion as of August 1971, for 10.9% of the total reserves.

f. Japanese exports which in 1950 amounted to 1% of total world exports had, by 1970, grown to 6% of the total. Manufactured goods exports from Japan increased by 400% in the single decade 1960-1970.

Politically and economically, it is vital for all of us to insure that Japan remain firmly integrated into the Western trading system. Recent developments in the Far East and U.S. policy changes in this area underline this necessity. This means that two sets of economic negotiations are required. On the one hand, Japan must end her policy of protectionism -- a policy which is unbecoming a great and powerful trading nation. On the other hand, the discrimination and protectionism practiced against Japan in one form or another by most industrialized countries must also be substantially reduced if not eliminated.

A possible approach would be to set a date by which no major country agrees to invoke, directly or indirectly, any special rules or regulations

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directed against Japan alone. In this way Japanese world trade, both ways, would be folded more completely into general worldwide arrangements, particularly the sector discussions on industrial trade mentioned above. The future of the textile agreements (LTA) could also be decided in this context.

4. **Investment Rules and the Multinational Firm.** In view of the increasing importance of transnational investments and the proliferation of multinational firms, ways and means must be found for resolving the problems created by these new circumstances.

In the first place, the relationship of direct investments to our trade and monetary problems will have to be established.

Second, consideration will have to be given to the establishment of international rules and mechanisms governing direct investment operations. This might include general rules of behavior for investors and, more importantly, deal also with norms regarding the way in which such investors will be treated in the host countries.

For example, the GATT, in establishing a body of trade rules, set up a framework limiting the degree of discrimination toward imports over domestic production. At the same time, a mechanism was provided for negotiation of reductions in the levels of discrimination, and a set of rights and obligations established for importing and exporting countries alike.

Perhaps a similar approach should be considered for international

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By W. Michael Blumenthal

investments. The limits on direct and indirect discrimination against
foreign investments should be discussed. A country's rights and
obligation when discrimination exceeds agreed levels should be spelled
out much as it was in the trade area. "Discrimination" should include
such questions as tax treatment, access to credit, government contracts,
and the like.

Recent studies have shown that an increasing volume of world trade
between advanced countries is accounted for by multinational firms.
If this is so, no trade negotiation which fails to recognize the growing
importance of this trend would make much sense.

5. Economic Policies Toward Communist Countries. During the height of the Cold War, there was a reasonable degree of unanimity of view and purpose regarding economic and trade policies toward Communist countries. There were understandings on the extension of credit, strategic goods limitations, and the like.

In recent years, however, any pretense of a common or coordinated
approach in these matters has become largely illusory. We need,
therefore, to reexamine the situation as it now exists and to determine
what approach the Western industrialized countries should adopt in their
dealings with the Communist world.

It is obvious that such a reexamination of policies toward the East must
take account of the vastly changed circumstances of the post-Cold War
period.

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By W. Michael Blumenthal

How far can and should Communist countries be encouraged to become
a part of the Western trading system? Should our trade relations be
governed by special GATT rules or by bilateralism? Is the COCOM List
still of relevance or should it be scrapped? Should there be a renewed
effort toward the coordination of credit policies or with regard to the
licensing of technology to the East? Or should each of our countries
simply follow its own policies in these areas?

Whatever the answers to these complex and highly political questions,
one thing is clear: In spite of many differences in interest and approach,
there remain certain common concerns among the Western countries. If
this is so, it would suggest the advisability of seeking to redefine in some
way a framework of agreed approaches for dealing with these problems in
the years ahead.

6. Economic Policies Toward Developing Countries. Most observers of the international economic scene are agreed that one of the most disturbing aspects of the present situation is the increasing disparity in levels of economic development and well-being between the world's rich and poor countries. There are many who believe that unless the rich nations can find means of assisting more effectively in the transfer of resources to speed development and raise living standards in the poor countries, the common goal of a reasonably peaceful world is likely to prove illusory.

As past experience has shown, to state the problem is one thing, but to
find effective solutions to the vexing problems of the world's poor countries
is quite another. Several points, however, are clear: First, this problem
is one that all industrialized countries share in common. Second, a

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[LC]

By W. Michael Blumenthal

coordinated approach is likely to prove superior to uncoordinated
efforts. Third, past achievements have left something to be desired.
Fourth, the success of the policies we adopt toward each other, and
the levels of economic prosperity we achieve ourselves, have a direct
bearing on the poor countries and on their own development efforts.
Our responsibility to consider the effects of our actions on the developing
world is therefore considerable.

The problems of the developing countries evolve around the transfer
of resources: through trade, aid, investments, technology and training.
While progress has been made in each of these areas, the agenda of the
industrialized countries for the Seventies must include with greater
urgency a consideration of new techniques to speed up progress in the
Seventies.

Future trade negotiations must include new steps to widen access for LDCs to developed country markets. This raises the question of whether this is best done through regional groupings or on an overall basis.

Consideration of investment rules must equally take into account the
problems of the developing world. Finally, a renewed set of under-
standing and commitments about direct transfers through economic
assistance programs would also be in order.

7. **Monetary Reform.** Recent events have shown clearly that the world monetary system remains badly in need of fundamental reform. August '71 was perhaps the inevitable culmination of a progressive breakdown of the old system under the pressure of changed world

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[LCO]

By W. Michael Blumenthal

realities and the increasing unwillingness of the world's principal
economic powers to play their part in needed reform.

Since Bretton Woods, world trade has grown manifold. Foreign
investments, accompanied by large and swift short and long term
capital movements have become a major factor in international
interchange. Communication and technology have changed the
international economic scene. The position of the dollar has been
altered. We should have realized some time ago that the old system
of the mid-Forties could no longer accommodate these changes. The
agreements reached at year-end represent, at best, an interim solution:
more fundamental reforms are yet to be developed.

There is an urgent need to get on with the task of fundamental reform,
so as to ensure that we will not end up with a divided monetary system
which restricts and looks inward. What we need is a viable system which,
instead, assures the free flow of money which provides adequate foreign
exchange reserves to accommodate steadily rising levels of trade and
investments. Furthermore, it is important that new agreements are reached,
so that the largest degree of convertibility of the dollar can be reestablished.
The new system must contain a better adjustment mechanism than in the past,
so that individual countries will no longer be forced to choose between
domestic stability and international disorder.

No doubt the details need to be debated and negotiated at length. What
is important now is that we seriously get on with this task.

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V. INSTITUTIONAL ARRANGEMENTS

The experience of the last few years has demonstrated that the rules and institutions created in the immediate postwar period, even though they served us well for over two decades, are no longer fully adequate to deal with the problems of the Seventies.

No set of institutions will work unless a community of purpose amongst the advanced industrial nations has been established -- unless the political will to work together and to compromise for the benefit of all is present. On the other hand, there is adequate historical evidence which indicates that the framework of institutional arrangements can have an important, if not critical, bearing on the ability of nations to face and resolve vital problems arising between them.

1. <u>GATT Reform.</u> Any review of existing rules and institutions requires awareness of the increasingly close interrelationship between trade, monetary and investment problems. This is one reason why a serious restructuring of the GATT is necessary. There can be little doubt that the rules of the GATT are no longer adequate to handle the problems of the future. These issues include:

a. The future of MFN, in view of the growth of major regional customs union groupings.

b. The adequacy of the GATT to deal with non-tariff as well as tariff barriers and to handle whole sector negotiations going beyond mere tariff concerns.

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c. The need to bring GATT rules into conformity with the changed world monetary situation.

d. Restructuring GATT rules to take into account the realities of agricultural trade. GATT has never sufficiently distinguished between industrial and agricultural trade. GATT rules have, therefore, been inoperative as regards agricultural trade. This needs to be rectified.

2. **An Investment "GATT."** Serious thought should be given to the establishment of a new institutional framework suitable for dealing with the new problems of transnational investments and the MNF.
No existing institution is presently chartered to deal with these increasingly important issues.

Possibly, the OECD could be charged with this responsibility, or perhaps a new, though related organization could be set up. In any case, it is necessary for the industrialized countries of the West to create some forum and some body of rules against which investment problems could be negotiated and resolved.

3. **Restructuring the IMF.** Given the changes in the world monetary system, a review of the IMF Articles is necessary. What is required is to consider the implications of a movement from fixed to more flexible exchange rates and from a reliance on gold and a convertible dollar to non-or limited convertibility and increasing reliance on SDR's.

4. **Institutional Coordination or Amalgamation.** There is a fundamental question of whether it will continue to make sense in the future to seek

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to resolve related problems in three separate organizations: the GATT,
IMF and OECD.

Given the interaction of trade, monetary and investment questions,
the establishment of a single forum with a coordinated set of rules
should be explored.

Whatever the decision, the institutional framework and the rules governing
the future of our economic relations will require careful consideration and
reform if we are to be successful in dealing with our major economic
problems.

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[LC]

# I. INTRODUCTION

1. The main points of this paper are:

a) *European security* is dependent on close relations between the United States and Western Europe, to which there is no alternative in the foreseeable future; and
the *international economic order* is dependent on joint leadership by the United States, Western Europe and Japan.

2) When we use the concept "Western Europe" in this paper, we are aware of the over-simplification of that expression. With the exception of the relatively limited field in which the nations of Western Europe have decided to operate as a unit, i.e. in the European Economic Community, there is no "Western Europe" which can influence or help to manage world affairs. There is no actor; there is only a group of European nations more or less closely organized in different types of international organizations.

3) To some this paper will seem very conventional. We do not, of course, deny that important changes have taken place in the international scene during the last decade.

- The Soviet Union has achieved military parity with the United States;

- What seems to be a fundamental situation of conflict has arisen between the two major Communist powers, one of the effects of which has been to bring the United States into a trinangular relationship with them;

- Japan has emerged as a major economic power and a potential political and military one;

- The status quo in Central Europe has been accepted by the West (no Western reaction to the crisis in Czechoslovakia in 1968, the German Ostpolitik, the Berlin arrangements, etc.);

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- The role of the United States as leader of the Western system has been reduced. Not only is the United States unable to lead the Western system alone as it did successfully in the first 20 post-war years, but it does not even seem willing to continue in that role, even if its resources and its comparative position were to enable it to do so.

- The UK and three other West-European countries are joining the EEC, thereby not only terminating a conflict which had been going on in the Community for more than 10 years, but also enlarging Western Europe's potential for playing an effective role in the world;

- There has been a profound change within society in the industrialized countries, which could be briefly described as a shift of emphasis from quantity to quality. One of the implications of this change is a tendency to become inward-looking.

Why, then, may our paper seem conventional? Because we do not think that these numerous changes made any fundamental difference to the situation. That things change does not necessarily imply that our assumptions of the post-war years have lost their validity. It would be absurd to deny the changes, but it is still necessary to stress the undiminished validity of the most important assumptions on which post-war policy was built.

4) In trying to analyze the situation of the Western world and to indicate solutions for the problems of the seventies, one is always in danger of confusing the feasible and the desirable. We should learn from the past; in many cases our policies were based on the desirable, neglecting the limitations imposed by the feasible.

At least in its timing, the concept held in the early sixties of Atlantic Partnership between two equals is a good example of such confusion. The nation-state in Europe proved to be a tougher animal than we hoped in earlier years. Ten years of

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Gaullist foreign policy and the Vietnam war have affected the course of history. On the other hand, policies based exclusively on an unduly restricted assessment of the feasible would lack the inventiveness and vision required by the situation in the seventies, as regards security and the maintenance of a minimum of economic order in the world.

## II. EUROPEAN SECURITY

5) European security cannot be detached from the pattern of global security. We will, however, concentrate on the security situation in Europe.

6) Here the basic facts are:

a) The Soviet Union has achieved military parity with the United States and has greater military capabilities than ever at its disposal.

b) Soviet tactics are changing, but there are no grounds for assuming that the Soviet Union's objectives have changed or will change considerably in this decade.

c) Nato has a dual function. Its forces must first deter the Soviet Union from military adventures and secondly be capable of dealing with possible situations involving armed conflict.

d) For the first function the American strategic nuclear force is indispensable; without a sizable conventional American presence, America's strategic nuclear force would lose its credibility in European and (even more dangerous!) in Soviet eyes.

e) There is in the foreseeable future no credible European substitute for the American strategic nuclear force.

f) Consequently the question whether the second function could be fulfilled without American conventional forces is not very relevant - as these forces are anyhow necessary in order to maintain the credibility of America's nuclear guarantee.

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g) The European contribution to the NATO effort is insufficient. It should be increased, if not through higher expenditure, in any case through better organization.

h) This is essential, not only in order to maintain NATO's capacity to cope with its two functions, but also for the maintenance of a political and psychological climate necessary to enable the US Administration to maintain its nuclear and conventional commitments.

7) Re 6a- Soviet military capabilities.

The Soviet Union has managed simultaneously: to build up a very considerable force at its Eastern borders; to become within 10 years an efficient and sophisticated global maritime power; to increase its military power on its European borders. The necessity to arm against a possible conflict with China has therefore in no way involved a reduction of Soviet capabilities on (and under) the high seas and in Europe.

In considering the Soviet capabilities we do not take account of the Warsaw Pact forces because it is speculative to assess their reliability from the Soviet Union's standpoint.

In this context, however, it is useful to remind ourselves of the fact that the organization of the Warsaw Pact cannot be compared to that of NATO.

The military organization of Eastern Europe is based on a network of bilateral agreements between the Soviet Union and the East-European countries. In the Czechoslovak conflict of 1968, the forces of the East-European countries were placed directly under the Soviet High Command and the Warsaw Pact structure did not come into operation.

Any negotiations between NATO and the Warsaw Pact should take into account the fundamental difference between the two systems.

8) Re 6b- Soviet intentions

Discussion of Soviet capabilities is on a factual basis.

In discussing Soviet intentions we are on less solid ground.

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It seems to us, however, that four strategic policy aims can
be clearly discerned in Soviet policy toward Western Europe.
The Soviet Union intends:

I) to avoid a military confrontation with the United States;

II) to consolidate and legitimize its power in Eastern Europe;

III) to weaken the Atlantic Alliance, primarily by the removal of the American presence on the European Continent; and thus

IV) to become the dominant power in Europe.

Needless to say, both the tactics used in the pursuit of these
objectives and the priorities given to each of them change
with the times. There are periods in which the consolidation
of its power in Eastern Europe is accorded priority even to
the point of giving up temporarily attempts to dissolve the
Western Alliance. It is hard to predict what priorities will
prevail in which period. For that reason Max Frankel's
statement (New York Times, December 22, 1971) that "Whatever
long-term advantage they seek from a divided Europe and
declining American power there, it is thought to be secondary
to the desire to protect what they have, while the West
seems willing to concede it" must be qualified by pointing out
that tactics change but political objectives remain constant.
There is no indication that these objectives are likely to
change in a future relevant to decisions in the seventies.

9) Re 6c- NATO's military role

Nato's strategic concept is difficult to understand and even
more difficult to explain to parliamentary and public opinion.
This stems partly from the intrinsic complexity of a concept
which aims both at deterrence (that is, avoiding conflict)
and at survival in a military conflict should deterrence fail.
"Massive retaliation" was not a particularly attractive
concept, but it had at least the advantage of being clear.
"Flexible response" is now the only acceptable military
doctrine, but it has the disadvantage of great complexity
compounded by being couched in a military jargon compared to

- 6 -

which the language of the theological disputes of the Middle Ages is a model of simplicity. It nevertheless remains very important that Nato's military role and its implications should be explained in a way understandable to the average citizen. This is not primarily a task for Nato, but for national governments - and here the record of performance is a bad one. This is a serious weakness because defence efforts are by definition not the most wildly acclaimed functions of government. In the long run no meaningful defence effort can be maintained without a broad basis of popular understanding. Flexible response requires a major nuclear strategic and tactical arsenal plus a major conventional element. A substantial change in the total force of NATO and in the relative strength of its components would create unrest not only within the alliance but also, strangely enough, in the Soviet Union, because although the Soviet Union wants to weaken and therefore to change the Western military posture, major changes on our side tend to make it uneasy and nervous. Military postures should not be rigid but adaptable to the development of military and political circumstances.

However, one should not lightheartedly change a posture that has thus far preserved peace in Europe.

The desire to reduce defence budgets is universal in Western Europe. It is dangerous to rationalize this desire by the introduction of new strategic concepts, invented not because the situation has basically changed but because these concepts provide an excellent pretext for reducing expenditure. The most recent and fashionable of such new concepts is labelled "crisis management".

10) Re 6d- The American military role in Europe.

Clichés cannot always be lightly dismissed. It is a truism that 25 years after World War II, the security of Europe is dependent on the American nuclear umbrella and on a conventional force of now approximately 300 000 troops. It is just as much of a truism that the domination of Western Europe's

[LC]

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industrial and human resources by the Soviet Union would be
fatal to the security of the United States.

However, this does not provide Europe with an automatic
safeguard. In a democracy the translation of a fundamental
security interest into an adequate defence posture involves
a difficult political process. Most countries, including the
United States, do not need to go far back in their history
to find examples of fundamental security interests *not*
translated into defence realities. The existing fundamental
interests of the United States can not, therefore, be viewed
in isolation from the European defence effort. A feeling -
rightly or wrongly - that the burden of defence is unequally
shared could result in such strong political pressures for
the United States to reduce its commitments that this idea
would prevail over what is and will remain a basic American
interest.

Western Europe and the United States are faced with the
following rather paradoxal situation:

On the one hand, the American nuclear commitment to Western
Europe is not seriously questioned in the US. However, in
the light of US/Soviet parity, the credibility of this
commitment *is* being questioned in Europe.

On the other hand, the necessity for a sizable US conventional
presence on the Continent is not seriously questioned in
Western Europe. However, the necessity for this force *is*
seriously questioned in the US.

In order to understand our complicated situation, the following
points must be underlined:

I) The danger for Western Europe (and the United States!)  
today is not open Soviet military aggression but the  
opportunities which a weakening of the Alliance would  
give the Soviet Union to impose its will on Western Europe  
by hook and by crook.

II) As John W. Tuthill put it in a paper prepared for the
Atlantic Institute, "a substantial reduction in NATO
conventional forces would induce a reversion to reliance

[LC]

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on almost automatic use of tactical nuclear weapons in
the event of a military action which was interpreted as
an act of aggression".

III) American conventional forces differ from their European counterparts in the fact that they are composed of troops belonging to the only power in the West which the Soviet Union considers as really relevant. These forces demonstrate to the Soviet Union that aggression in Europe means war with the United States. Favourable results from the German Ostpolitik and of future East/West negotiations depend on their presence.

IV) There is no magic in the figure of 300 000. However, NATO has preserved peace in Europe *because those men were there*. To quote Tuthill again: "it would seem reasonable to put the burden of proof on those arguing - with such persistence - for a substantially lower figure. The issue is simply whether the credibility......... of the US overall deterrence would remain unchanged after a further substantial reduction of US conventional forces".
That, then, is the American "quid".
What about the European "quo"?

11) Re 6e,f and g - The European role.

I) In the nuclear field

Under point 6d and 6e we stated our conviction that
a) there can be no substitute for the American strategic
nuclear force in the foreseeable future and b) the
credibility of this force cannot be dissociated from the
presence on the Continent of sizable US conventional forces.
We do not expect much difference of opinion as to the
irreplaceable nature of the US nuclear guarantee. From a
strictly technological or/and economic point of view, the
possibility of creating a European substitute may be
arguable.

From the political point of view this seems hardly the

- 9 -

case. Without a strong central authority, empowered to act immediately if circumstances require action, a nuclear force is useless because it is devoid of credibility. During the period that concerns us here - this decade - Western Europe will not have such a central authority. Furthermore, a European nuclear capability could not be built on the basis of discrimination - neither the German Federal Republic nor its Western neighbours, however, could accept German cooperation in these matters on a non-discriminatory basis.

Even if by magic this problem could be solved, the present political climate in Europe rules out the immense economic effort which would be involved in building a nuclear strategic deterrent. The idea itself would be extremely divisive and would split public opinion in our countries right down the middle, making progress in European integration almost impossible. Again, this long-range effort would postulate a continuation of the US guarantee - or Soviet aquiescence - while the effort was being made. Both are unlikely.

However, this leaves open the question whether there should be any nuclear role in addition to the American one, either for the nations of Western Europe collectively or for France and Britain, the two countries that at present possess nuclear capabilities.

These two forces differ, as regards composition and political motivations and consequently also as regards deployment and relationship to the Nato command structure. It seems highly improbable that either the French or the British nuclear force will disappear - at least during the period under consideration. Recognizing that they cannot replace the US nuclear guarantee, there exist many alternatives for their relationships to the Alliance, between themselves and with their European allies.

We do not believe that the complicated problems inherent in each of these possible relationships will be solved

[LC]

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easily or quickly.

The differences between French and UK relations with Nato, the US involvement in the construction of the UK nuclear capability and the hitherto insoluble problem of decision-making in cases of emergency rule out the possibility of an integrated, joint Anglo-French force - whatever one may think about its desirability.

However, there may be possibilities for less far-reaching cooperation between the two forces. Such cooperation would still pre-suppose the solution of the problems just mentioned, with the exception of that of final decision-making.

In addition, the very awkward problem of discrimination vis-à-vis the other West-European nations, and especially the German Federal Republic and Italy, would require solutions which have yet to be found.

The only way in the near future seems to be careful nurturing of the procedures which have been successfully initiated in the Nato Nuclear Planning Group, aiming at better coordination of development and targeting and better information of the non-nuclear Nato members.

All the rest requires time and prudence; no options, however, should be foreclosed in this slow process.

We therefore share Ian Smart's conclusion (Adelphi Paper No 78) concerning the prospects of Anglo-French nuclear cooperation:

> "Caught between the inadequate, the impossible and the incredible, the idea of Anglo-French nuclear cooperation will still offer obvious attractions. To regard it as a logical step towards the ultimate creation of a new Europe may not be unreasonable. But to regard it as an immediate contribution to the cohesion of the West or as a sure escape from the internal problems of alliance or community would be obtuse".

For the foreseeable future, the European contribution to

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Nato and the European share in the Western defence burden will have to be made primarily in the field of conventional forces.

## II) In the conventional field

Current force levels in Europe are already at a dangerously low point, creating serious security risks. Will it at least be possible to maintain our forces at this level? The present political climate, a wrong interpretation of the character of the present détente, the priorities given to domestic requirements and a general lack of potential will-power make it unlikely that this question will be answered in the affirmative. In order to avoid a further weakening of the Alliance, this trend **must** be reversed.

It is a dangerous illusion to assume that an increased US defence budget and the maintenance of the present American commitment to Nato can be combined with a general tendency on this side of the Atlantic to reduce our efforts - even if such reductions are more or less intelligently rationalized through the formulation of new strategic concepts.

The only way to reverse the present trend and to revitalize the European effort is through greater "Europeanization" of our present contribution.

For the maintenance of a meaningful European contribution this is a matter of to be or not to be.

At present, each country performs a national effort as regards land, air and naval forces. On this basis it is unlikely to maintain our present capabilities during the seventies, and impossible during the eighties.

Looking at the situation today and trying to cut through the smoke screen formed by a really unbelievable multitude of committees, working parties and other forms of national and international bureaucracies, one cannot help being

[L]

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appalled by the inefficiency and duplication, and the near-total failure of substantiating the concept of "balanced collective forces" adopted 20 years ago. What is presented as a joint NATO effort generally turns out to be a shaky array of national efforts, often inefficient and inadequate in themselves.

This situation *must* be improved, even though this will require a great deal of focussed political will-power, inventiveness and energy.

The obstacles are daunting. Institutional vested interests, traditions and national industrial policies *must* be patiently and stubbornly overcome and changed. Defence support is the obvious field - training, logistics, and procurement of arms, leading to what François Duchêne has described as a European Defence Support Organization ("Foreign Affairs", October 1971). Complicated multilateral arrangements with a maximum of countries participating are certainly not the only road to greater effectiveness and efficiency in the European defence effort. Sensible arrangements between two or three countries might in themselves contribute to the solution of some of the most burning problems.

Only quick and forceful action in this field can prevent a serious weakening of the European defence effort. This effort is indispensable as part of the total NATO defence effort and in order to create a climate in which the American contribution, for which there is no substitute, will be maintained.

Closer European cooperation in defence is indispensable to European security. It is therefore essential that in future East/West negotiations the way for such cooperation remains entirely open. If our intention to move in this direction is not stated clearly now, the Soviet Union may well try to block future developments of this kind, on the erroneous grounds that European defence cooperation would endanger détente.

[L.C]

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However, European security, involving as it does the maintenance of a credible American military presence in Europe, is not only determined by the politico-military situation. The problems inherent in our security are closely linked to the state of economic relations between Western Europe and the United States and to the related but wider problem of reshaping the international economic order.

### III Economic relations between Western Europe and America and their joint role in reshaping the international economic order.

12) 1971 was a year of tensions in economic relations between Western Europe and the United States. In all likelihood these tensions will be with us for some time. Hard bargaining is going to take place over a wide field, ranging from oranges to dollar convertibility. It is important that these battles - which promise to be Homeric - are seen in the right perspective. A discussion of the following points may be of use in determining this perspective:

a) The way in which Western Europe and the US handle their economic relations will have a considerable impact, not only on their respective economies, but also on their security and on the kind of international economic order (or disorder) that will take shape during the seventies.

b) The economic difficulties affecting the two sides of the Atlantic are the result of many-faceted changes that have occurred since the institutions, rules and practices of the post-war international economic system were elaborated.

c) As a consequence of these changes the leading industrial powers - the US, the European Community and Japan - must accept joint responsibility for the direction and development together certain forms of "joint management", of the international economic system.

d) Western Europe's future is dependent to an exceptional extent on the kind of economic order that will crystallize during

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the years ahead. At the same time "joint management" poses difficult institutional problems for the Member States of the EEC. Unless they make substantial progress in solving them, no "joint management" is possible - and the likelihood of growing economic restrictionism with all its political consequences is considerable.

13) Re 12a: The impact of European-United States economic relations.

No doubt, the growth of the economies of Western Europe and the United States has been favourably influenced by the increasing freedom with which goods, capital and services have moved between them since the war. Nevertheless, exports represent only 4,4% of US GNP. For the Member States of the European Economic Community after enlargement, the figure will be 9,7% (before enlargement 9,3%), excluding intra-Community traffic. Trade with the EEC represents 17% of US international trade; trade with the US 18% of the Community's international trade. (1)

Certainly these figures do not give a complete picture of the economic importance of US-European commercial relations.

Industrial imports from the US contain goods with a high-technology content of considerable importance to the European economy; for the US, Western Europe is an area with which an appreciable trade surplus is earned. Nevertheless, in purely economic terms, increased protectionism between the two might not be terribly costly. But "chicken wars" do not always and necessarily remain limited. Commercial conflicts, whether over oranges and preferential associations or over the American Selling Price System and cheese, have a tendency to spread and, if handled poorly, are liable to spill over into other fields of importance to the economy, such as the flow of services and capital.

Furthermore, as pointed out in the first part of this paper, the

(1) on the basis of 1970

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security of both Western Europe and the United States depends
on their continuing close relations. Protectionist measures can
very easily give rise to a state of mind. And that state of mind
is *not* conducive, to say the least, to the kind of relations
that our common security requires. Last but not least, if the
two giants of international trade really get into each other's
hair, then the chances for the maintenance of a relatively open
international economic system are very slim indeed.

14) Re 12b: The origins of the present economic difficulties.

Since the Second World War, the economic order of the free
market world has been guided by the United States in the general
direction of a relatively liberal "one world" perspective; US
leadership was based on the country's economic strength and on
its monetary reserves - both far greater than those of any of
its trading partners. A number of well-known factors have
changed this situation drastically:

- In a very short space of time Japan has become a major economic power. Its steep rise would not have been possible without strong emphasis on exports, made possible by the US-led international economic order. Now that Japan has become an industrial power, adjustment in this emphasis on production for export as opposed to production for domestic needs in necessary. Adjustments, however, are never easy to make (even if they are in the long-term interest of the country's own citizens!) and always come about with a considerable time-lag. The more governments are involved in these adjustments, the greater the time-lag usually is.

- The nations of Western Europe have risen from their ashes and - with a time-lag of thirty to fifty years - are applying the lessons Keynes taught as early as 1919 in his "Economic Consequences of the Peace".

- A whole range of interacting factors - from the telephone and

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aircraft to the Multi-National Corporation - have formidably increased the rapidity of movement of important factors of production: capital, know-how and management techniques. (This rapidity of movement has, alas, only rarely found expression in the flow of management techniques from the private to the public sector.)

-Movements of capital and know-how, leading to further division of labour, necessitate adjustments. Rising standards of living, however, have decreased mobility of labour. Quite rightly, labour refuses to be simply a factor of production, and as such made to bear a large part of the adjustment costs.

As governments have taken few positive measures to ease adjustments (the labour-readaptation provisions of the American Trade Expansion Act, for example, have not been implemented), there is a growing tendency among trade unions to "outlaw the law of comparative advantage". In the US, for instance, CIO - AF of L are now in the protectionist camp.

-Finally, increased wealth is leading to much greater emphasis on what is called the "quality of life". It does not seem too daring to predict that we will see soon new definitions of GNP, expressed in such a way as to include in that yardstick all those social burdens (pollution, noise, human adjustments, etc.) that were excluded as long as full emphasis was laid on the production of more goods, more efficiently produced.

This change of emphasis is all to the good. But it will create new problems in international economic relations.

In Europe, for example, a progressive internationalist recently stated that Europe should impose a 100% tariff on imports of goods produced with polluting production methods. The effect of such measures on world trade would appear to be more predictable than the effects on the world pollution level.

15) Re 12c-Joint U.S.-European Economic Community - Japan responsibility for the international economic order.

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In reshaping the international economic order the two following
points must be taken into account.

First, the changes in relative power between the United States
and its partners make it impossible for the United States to
continue to lead the system single-handed. In the future,
therefore, joint leadership will be the only possible way.

However, leadership exercised jointly by equals is in general
more difficult and less effective than that exercised by one
leader who happens to be considerably stronger than his junior
partners.

Secondly, leadership of the international economic order will
today have to take into account the new emphasis on the "quality
of life" within our nations and will have to cope with the
political pressures resulting from this new emphasis. The most
important rule of the trade game as played over the last
25 years was in a way a negative rule, limiting the freedom of
the players - the rule of non-discriminatory and most-favoured-
nation treatment.

Progress towards trade liberalization was based on this rule and
progress was achieved through an exchange of measurable tariff
concessions.

In monetary matters the main rule was: fixed exchange rates,
adjusted only when the balance-of-payments position became
desperate.

It was an order managed by the implementation of relatively
simple rules. The requirements were (a) a certain amount of
faithful observance of those rules by the players, and (b) a
leader, relatively law-abiding himself and strong enough to coax
and push the others in the right direction.

The pressure resulting from the present "quality of life"
emphasis, however, will often lead to action on the national
level - action that cannot and will not be subordinated to the
implementation of those relatively simple international rules
which have hitherto formed the basis of the system. The growing
number of so-called voluntary restraint-of-export agreements are
attempts to deal "hors-de-la-loi" with real problems that cannot

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be settled within the framework of officially accepted rules.
The growing reluctance to accept the social costs of adjustment
in a world where increased mobility of all the factors of
production, with the exception of labour, increases the need for
adjustment will in all probability lead to more, and not less,
discretionary (and discriminatory) action by national governments.
Greater flexibility of exchange rates between the US, Japan and
the EEC (taken as a group) seems now to be generally accepted as
necessary. Even if we assume that this greater flexibility will
be partly guided by a new set of rules of behaviour, such
flexibility will probably necessitate more, and not less,
discretionary action on the part of the governments concerned
than the fixed-rate system of the past.

Today's situation therefore compels us to abandon the relatively
simple implementation of a set of rules in favour of the much
more difficult task of continuously harmonising diverging
interests in fluid frequently changing and rather unpredictable
situations. If this analysis of the present international
economic situation is correct, then our choice is between some
form of joint management of the international economic order and
growing international economic disorder with all its likely
political consequences.

To talk about management in a group in which both private
enterprise and public administration are represented is to invite
confusion.

For private enterprise, management is a difficult science but one
that must be mastered if one wants to survive. For public
administrators (public administration being to business
administration what astrology is to astronomy), the word
"management" does not mean much more than the ability to muddle
through, to deal sensibly with critical situations. In the
present context, therefore, "joint management" must certainly
not be interpreted as implying something neat, logical and
coherent. We will certainly not see in this decade proper
coordination of monetary policy, or of pollution adjustment and
employment policies. We in the European Community know enough

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of the difficulties of achieving this among our own nations not
to be over-optimistic about what can be accomplished in the
next years between the three leading economic powers of the
"free market" economy.

But in a world where the conventional distinction between
internal and external economic policy is becoming more and more
meaningless there will be a vital need for a great deal of
intelligent and far-sighted "ad-hocery", (1) to be carried out
by governments well aware of the importance of their joint
interests and of the price their nations will have to pay for
the failure to muddle through: that is, growing international
disorder and a real threat to the political climate of
communication and comprehension, essential to the maintenance of
our security and to our chances of moving forward towards a
world in which people will be "free", however vague that term
may be.

16) Re 12d - The enlarged European Community's stake in reshaping the international economic order.

The enlarged European Community has a vital stake in the
maintenance of international economic order. Certainly, the
Community as a whole is much less dependent on international
trade than its members are individually. Nevertheless, its
dependence on international trade remains considerably greater
than that of the United States (not to speak of the Soviet Union)
and is only slightly less than that of Japan. (2) Its share in
world trade is greater than that of any one country, (3) its
leverage is therefore considerable.

But there are at least as important extra-economic reasons for
which international economic order is vital to Western Europe.
Whatever progress Western Europe will achieve towards unity,
whatever efforts it may make in defence matters, in sheer power

(1) A term borrowed from Sir Alec Cairncross

(2) U.S. 4.4% of GNP, Soviet Union 2.6%, enlarged Community 9.7%
Japan 9.8%

(3) 18% of world trade for EEC as present, ± 25% for enlarged EEC.

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terms it will always remain highly vulnerable not only because
of its geographic situation, but also because diversity is of
Europe's essence - and diversity is a poor basis on which to
build a closed power block.

Its geo-political vulnerability; its "identity", inseparable
from diversity; the aspirations of its peoples; all these are
factors which prompt a Community of Western European nations to
use its influence in favour of the labourious shaping of a world
of "contractual relations" (1) as opposed to a world of "force
relations" - be these forces economic or military.

Thus not only Western Europe's economic interests are at stake
in the reshaping and the maintenance of an international economic
order but also its conception of civilisation itself.

Outside necessities and this conception are driving its
constituent nations towards forming, slowly and with difficulty,
a Community where diversity is maintained, but where the right -
as old as the world - of a nation to be judge in its own cause
is gradually relinquished.

The defence of their own interests, in the widest sense of that
term, oblige the nations of Western Europe to pursue these same
objectives in their joint external relations.

17) Re 12d - Western Europe's special problems in contributing to "joint management".

However, a sense of history and an understanding of their own
interests will certainly not in themselves endow the nations of
Western Europe with influence in the world. They can only take
an active part in reshaping and maintaining the international
economic order if they manage to speak with one voice. "Unless
Western European countries act in unity, the EEC will be a
stultifying rather than a creative element in the reorganization
of the international economic order" 2).

(1) François Duchêne's term

(2) "Reshaping the international economic order", a tripartite report by twelve economists from North America, the European Community and Japan, The Brookings Institution, 1972.

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Certainly the EEC's present "ill-tempered-confederalism" 1) is
not good enough for the task ahead. This paper is not the place
to discuss the institutional problems of the enlarged Community.
But the tripartite report just quoted is certainly right in
underlining "the extent to which the effective management of
international economic affairs depends on internal developments
in Western Europe".

Continuing inability to speak with one voice to its most
important trading partners, would not only be a threat to the
internal cohesion of the EEC but would severely limit Western
Europe's influence in the world, as well as its chances to
reshape and maintain an international economic order conducive
to its vital interests.

18) What should Western Europe and the United States do?

If the enlarged EEC makes progress in solving its formidable
institutional problems, what should the Community and the US
then actually do?

On both sides the list of complaints is a long one: undue
protectionism in agriculture, disregard for the MFN clause on one
side of the Atlantic, monetary policy and a growing range of
protectionist measures on the other side - to name only a few of
the most important of these complaints.

We are certainly not capable of putting forward solutions for
all these problems. For the really important ones we do even not
believe that there are ready-made solutions. They can only
gradually, and through common effort, be discovered. Here, as in
most important matters, it is the procedures that count.
A few final words, therefore, on these procedures.

-We do not believe that the problems of today can be solved by

1) Again François Duchêne's term

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applying certain absolute principles such as: "non-discrimination",
or "free-trade in agricultural products". The need will in many
cases be for joint discretionary action that takes account of
general objectives and of the context in which international
economic problems arise today, a context that will often make
internal adjustment measures a sine qua non for liberal trade
policies. In the future, therefore, more and more internal
measures will have to be influenced by international discussion.

-Certainly, when and wherever possible, rules of conduct should be established, because without accepted general objectives and a minimum of ground rules "joint management" becomes impossible.

-But a great deal of not-so-neat "ad-hocery" will be required.
In such a situation continuous consultation plus readiness to
state one's own interests bluntly, but also to make sensible
adjustments to meet the interests of the other party, will be
vital elements in "joint management".

-These consultations and negotiations, however, have no chance of
success if conducted within the framework of a narrow mandate.
For the really difficult problems, solutions cannot simply be
negotiated but must be jointly discovered. This presupposes free-
ranging discussions and the ability to search for various
possible solutions together: something ruled out by detailed and
limited instructions.

-This brings us back to the institutional problem. For Washington
as well as for Brussels, it will not be enough to lay down a
mandate for negotiators. The coherence and thus the security of
the West during the next decade will to a large extent depend on
the capacity and the willingness of the US Government (including
Congress) and the institutions of the enlarged European Economic
Community to delegate the task of reshaping and managing the
international economic order to people able to speak with

[LC]

For more than two decades the Atlantic nations -- North America and Western Europe -- have concentrated on assuring that the power balance was not suddenly shifted toward the East by a Soviet lunge across the Iron Curtain. But in the past few years tensions have gradually diminished as the leaders of the Kremlin have lowered their voices and polished their manners, while at the same time the geographical focus of conflict has tended to broaden and shift.

Today world attention is diffused. Europe is no longer the center of anxiety as men speak glibly of normalization and "detente", while in Asia new arrangements of power are taking shape almost imperceptibly.

It is the purpose of this paper to examine briefly what is happening in Europe and more extensively what is occurring in the Far East. If the analysis seems to err on the side of caution and pessimistic inferences that is quite deliberate. For this is a time of distraction when it is easy to misread the entrails -- a particularly dangerous time when euphoria can overcome logic and hope be confused with reality.

# I

## THE NEW SITUATION IN EUROPE

Every analysis of Europe for the past twenty years has begun with a postulate regarding Soviet intentions, and this paper is no exception. Though the Soviet Union is no more immune to change than any other nation, I think it only prudent to assume that its leaders have not abandoned their long held ambition to dominate Europe in spite of the fact that they have drastically changed their tactics and methods.

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Deeply preoccupied with their strident quarrel with China and aware that they have gained nothing by their frontal drive against Western Europe, they seek, as their immediate objective, to consolidate their Eastern European Empire by the _de facto_ recognition of existing boundaries. At the same time, they have found a new route for expansion along a line of less resistance; by exploiting Middle Eastern chaos they are circumnavigating Europe's Southern flank, pushing into the Mediterranean, and establishing a substantial beachhead in Egypt.

With an intensive build-up of naval strength, they are freeing themselves from the inherent limitations of land-based power, inviting the suspicion that, once the Suez Canal is reopened, they will further strengthen their presence at the mouth of the Red Sea and begin to build up leverage in the superheated politics of the Persian Gulf. In due course they may establish a naval force in the Indian Ocean to serve as an instrument for mischief in Africa and the subcontinent and create a nexus between their Atlantic and Pacific fleets which would provide Moscow with a cordon around the whole underbelly of the Eurasian land mass. On this hypothesis one can explain the Soviet's costly championship of Delhi in the United States and elsewhere -- the hope of forward bases, either in India or Bangladesh.

To be sure, such an analysis is incomplete, since Soviet policy is no doubt shaped by complex and inarticulate factors. But what seems beyond cavil is that the Soviet tactic toward Europe is currently aimed at two central objectives. The first is to create pressures that will stimulate America to pull out of Europe, withdrawing both its

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presence and influence. The second is to block progress toward
European unity by encouraging the forces of nationalism and frag-
mentation that lie just under the surface of the European experience.

Whether this tactic will succeed is uncertain. It depends on
responses from both sides of the Atlantic. That America's imbroglio
in Vietnam has given new life to a latent isolationism no one can deny,
and, barring a more ample European response, it seems only a matter of
time until Washington will be forced to thin down and ultimately de-
ploy American troops from the Eastern Hemisphere. All that prevented
the United States Senate from voting the precipitate withdrawal of
troops last May were Mr. Brezhnev's comments about negotiating a mutual
force withdrawal and that kind of cooperation cannot be expected a
second time.

Mr. Brosio's mission has so far been rebuffed and we shall prob-
ably not know whether the Soviet Union is ready for serious talk about
the issue until President Nixon's visit to Moscow in May. But the
United States Congress will not hold still much longer. If the President's
Moscow travels develop no clear evidence that prompt progress toward
agreed force reductions is possible, unilateral withdrawals on the
American side seem foreordained.

Nor will that be the end of it. Once the Senate tastes blood,
pressures will mount for the thinning out, and ultimate removal from
the Mediterranean, of the American Sixth Fleet. Given the mood of the
country, the fact such action could set in motion unpredictable forces
is no guarantee of Congressional restraint. Yet that prospect is real.

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Without the visible deterrent of the Sixth Fleet reinforced by the presence in Europe of American ground forces, the Soviet Union might well be tempted to pursue an adventurous Mediterranean policy -- re-opening the Canal unilaterally, isolating Israel, and driving toward hegemony over the Southern littoral of the Mediterranean.

But let us turn to the Kremlin's second objective -- to slow down Europe's efforts to pull itself together and stop talking with its traditional babble of tongues. Were Britain not about to enter Europe the prognosis would seem clearly discouraging, but in America, at least, the prospect of an enlarged Community has raised man's hopes. Many Americans take it as an article of faith that, once membership in the Community becomes an accomplished fact, the British will apply their pragmatic political genius to the building of institutions that give reality to Europe.

If that occurs, it will be none too soon, for, as seen from America, the ties of common purpose among the Atlantic nations are beginning to unravel. Many of my countrymen seriously doubt that East and West can be reconciled by a tangled web of bilateral agreements between individual nation-states on the opposite sides of the Iron Curtain; instead they fear that the net effect may be to weaken the fabric of Western unity.

Nor do they see in Soviet agitation for a European Security Conference anything more than a tactical effort to breed further dis-sension, since it is now clear that the seductions of beckoning <u>detente</u> operate with unequal degrees of force on the individual nations of

- 5 -

the West. Thus, from the Kremlin's point of view, it is easy to understand why the Conference gambit might seem attractive. Even talk of such a Conference has already generated disarray on the Western side, with individual Atlantic nations making pilgrimages to Helsinki in advance of any full meeting of the minds as to just how the Conference should be set up, what should constitute the agenda, and when and at what level the first meeting should be held. As a result, once the Conference gets under way, it is not hard to imagine the untidiness of an unravelled West confronted with the disciplined representatives of Eastern Europe kept rigorously in line by their Soviet masters.

Thus, many in the United States view the evolution of events in Europe as a race against time, with the issue unresolved as to whether the drive toward unity will gain sufficient momentum to offset the forces of fragmentation that have plagued Europe for centuries. For unless Europe achieves a sense of common purpose -- and builds the institutions to make it effective -- resistance to the Kremlin's tactics may not long survive the withdrawal of the American presence. No longer is the hovering spectre that of a Soviet military push but rather the danger that will and perspective would give way to political defeatism if the USSR should emerge as the most powerful organized and cohesive force on the European land mass. It takes little imagination to envisage one Western European nation after another accommodating to the "new reality" -- making its separate peace with Moscow on conditions that might, in the long-run, undercut the freedom of the West and tip the balance of power dangerously against the values we hold in common.

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To point to such dangers in Europe is not to exonerate America from its proper share of responsibility. Unquestionably the United States has made serious mistakes at more than one point in the world, yet we are all past the stage where trying to assess blame is fruitful. The question we now face is a pragmatic one: How can the Atlantic nations avoid giving the game to the other side, taking account of domestic currents and cross-currents in every country -- including America -- that may frustrate realistic policy?

## II

### THE NEW SITUATION IN THE FAR EAST

While paying sedulous attention to the European theater, we dare not ignore the emerging power arrangements in the Far East. What the precise configuration of power may be is a subject on which the political geometricians disagree. Some specialists speak of a power triangle, consisting of the United States, Japan and China -- while others insist on a second overlapping nuclear triangle, comprising the United States, China and the Soviet Union.

To my mind, the most appropriate geometric figure is a trapezium (or, in British terminology, a "trapezoid") -- a quadrilateral, no two sides of which are parallel. Such a figure takes account of all the major powers involved: Japan, the Soviet Union, China and the Atlantic nations of North America and Western Europe.

I include the Atlantic nations as a common factor, since the days are long since past when there are likely to be major differences of view or policy with regard to the Pacific area.

[LC]

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## The Measurement of Power

To compare the power of each of the four sides of the trapezium, one must first resolve the philosophical question as to what the term means.

There is, of course, a vocal school of thought -- or what passes for thought -- that would regard the question as irrelevant. "Power," so the exponents of this school assert, "is an outmoded concept." But there should be a low threshold of tolerance for nonsense of that kind.

For our purposes, the power of a nation may be properly regarded as its ability to influence the conduct of other nations. Traditionally, it has been thought of primarily in military and economic terms, but there are also less tangible elements. Thus, France under General DeGaulle exercised, for a time, what was at least a negative influence over Europe and the Atlantic area far in excess of its relative military and industrial competence, while India enjoyed a brief season of moral leadership among the so-called non-aligned nations until it slipped on the banana peel of its own inconsistencies.

The problem gains special complexities when one approaches the four members of the trapezium.

### SIDE ONE -- CHINA

Let us begin with China, whose spectacular distinction, in addition to its rich and ancient civilization, is a huge, gifted, and diligent population -- perhaps as many as 800 million people, or nearly one-fourth

- 8 -

the human race -- homogeneous in culture and social behavior, if not fully in ethnology. About ninety percent of its population -- or close to seven hundred million people -- are jammed into the Eastern one-third of the country -- or, in other words, into a land space little larger than Argentina. In the Szechwan Basin and in the areas surrounding Chengtu and Chunking there are agricultural areas with six or more persons per acre.

## China's Economic Power

As a result of such extreme overcrowding, the country has suffered chronic food shortages, while the poverty of the countryside makes capital formation and industrial development slow and painful. Rather than being an economic asset, the excess population of China is a formidable drag on economic progress, so it is hardly surprising that China has achieved only a relatively slow growth rate.

Though China's economic contours cannot be accurately measured -- statistics are little more than informed guesses -- its Gross National Product is probably about $100 billion -- or roughly the same as that of Italy -- of which a considerable part represents subsistence farming that creates no surpluses. Thus, in spite -- and, to some extent, because -- of its overgrown population, China's Gross National Product places it no higher than seventh among the nations in economic power.

In view of recent events Americans are today quite fascinated by China but that is merely the reprise of an old theme; early in the century the so-called "Open Door" policy toward China was about the

- 9 -

only foreign policy Washington had. Its source was an economic error -- the fanciful vision of China as a vast expanding market that would absorb what was then accepted by the experts as the inevitable over-production of capitalistic nations -- a vision that persists even today as many otherwise knowledgeable men exaggerate China's potential as a customer. Illogical as it may be, the prospect of 800 million customers holds indisputable allure, in disregard of the mundane fact that 800 million people with a per capita income of $100 a year will consume far fewer Western manufactures than 80 million with an income of $1,000 each.

So, in spite of these overblown expectations, China will not, for many years to come, be a world power in international economic affairs -- or even the most important economic power in the Far East. China's present role in world trade is something less than that of Finland or Hungary, with a total of imports and exports estimated for 1970 at $4.2 billion; in other words, its imports and exports in 1970 were each little more than two percent of its Gross National Product.

Nor, given the Peking Government's passionate commitment to self-reliance, is China likely to build up substantial external debt -- which would appear essential if its pace of industrialization were to be speeded up. China is not only driven but constrained by ideology and history. In view of the fact that their country was torn apart by the rapacity of other nations scrambling for markets, the present Chinese leadership is pathologically adverse to any measures that might increase China's dependency on untrustworthy foreigners.

- 10 -

China As A Nuclear Power

How much China adds to its political strength by the possession
of a rudimentary nuclear capability is difficult to appraise. Though
the planners in the Pentagon have justified American anti-ballistic
development in part on a lurid estimate of ultimate Chinese capabilities,
there is reason to doubt that China's membership in the nuclear club
will significantly increase its political position outside of East
Asia and the Pacific area.

Why China opted to divert so many resources into nuclear weaponry
is, therefore, not totally clear. The fact that nuclear armament was
originally undertaken with Moscow's active cooperation negates the
view that it was conceived primarily to deter the Soviet Union. In
practical terms, Chinese nuclear development would seem more likely to
inspire Soviet attack than to deter it.

Thus, it might be more plausible to assume that the Chinese
consider their nuclear weapons a needed defense against the menace
of a remilitarized Japan -- a menace that would seem to be nearly as
frightening to the Chinese hierarchy as that of an aggressive Soviet
Union. But if that were the motive, the project is again self-defeating,
since China's nuclear competence could, in the long-run, provide the
necessary stimulus to impel Japan to go down the nuclear road.

Thus, by elimination, one is led to conclude that the Chinese
nuclear arsenal represents little more than an instinct for protection
against whatever aggressive power might appear, since, after all,
China has been raped and dismembered by the so-called "great powers"

[LC]

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several times in the last hundred years. And to this should probably be added a vague -- perhaps even unformulated -- desire for great power status. Though Prime Minister Chou En-lai is fond of repeating that China is not, nor does it intend to become, a "super power," that seems merely a forensic expression, intended more to rebuke the alleged imperialism of the United States and the Soviet Union than to suggest a truly modest assessment of Chinese ambitions or self-esteem. Given the atavistic awareness of the Middle Kingdom's unique qualities, one can only presume that China's motive for diverting scarce resources to nuclear weapons was little different from that which led General DeGaulle to build the *force de frappe* -- the ambition for prestige and the *cachet* that comes from membership in the nuclear club. Though, like the *force de frappe*, its nuclear strength is minor compared with that of the United States or the Soviet Union, it holds special awesome appeal when coupled with China's vast manpower reserves.

## Size As A Power Factor

Those reserves are, in fact, an important but elusive factor in assessing China's power position. Given its exiguous economic resources and the limits of its military competence, one would expect -- all other things being equal -- that it would command only a minor voice in the councils of the world. But in politics all other things are not always equal. Whether rational or not in the quantitative terms that are so often misleading, a number of circumstances -- history,

- 12 -

culture and population -- combine to give special importance to China.
One can never ignore the Chinese -- there are simply too many of them --
so the fact that such a substantial fraction of mankind lives in that
vast country adds a measure of importance to whatever China says or
does that is difficult to assess.

Undoubtedly, China has a special fascination -- the magnetic
attraction of mass -- and, in view of the industry, discipline and
undeniable intellectual capacity of its people, the great teeming nation
is bound to cast a spell. Quite likely its influence will be greater
among the less developed peoples than among those in the industrially
advanced countries, since China is a poor land for whom other poor
nations must feel kinship and to whom they are likely to look for
leadership. But, beyond that, China is no longer the sick man of Asia.
No matter how much one may deplore the authoritarian character of the
Peking Government, it has succeeded in replacing a corrupt and anti-
quated social and economic structure with a structure that appears to
work. Public health has been notably improved; people are adequately
fed and, within the limits of the available resources, reasonably well
provided for. Admittedly, this has been achieved through methods and
within a system that tends to transform the people into ants, but at
least flies and beggars no longer clutter the landscape, as American
television made clear during President Nixon's recent visit.

From the point of view of Western man there is much that is
obnoxious in a theocratic state where a thoroughly indoctrinated -- one
might say "brain-washed" -- people wield the platitudes of a senescent

[LC]

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Chairman Mao as an all-purpose incantation. In fact, such achievements seem to echo Western systems that made the trains run on time, while pictures of vast ceremonial gatherings instinctively recall similar pictures of Nuremberg rallies. Yet, in spite of traditional xenophobia and the bellicose and strident tone of Chinese propaganda, one has the feeling that the people are not being prepared for foreign adventures but that almost the total national effort is being concentrated on improving -- and defending -- the domestic scene.

## The Implications of United Nations Membership

Among other items in China's claim for recognition as a superpower, one cannot ignore its newly-acquired status as a permanent member of the United Nations Security Council. Though the possession of a permanent seat does not automatically confer status or authority (no one, for example, paid serious attention to Nationalist China while it occupied the chair), there is no doubt that Peking has greatly increased its claim to world attention by acquiring the power to veto Security Council actions.

It matters little that China's inclusion in the Charter as a permanent member resulted from little more than a whim of President Roosevelt's, or even that, were the decision to be made *ab initio* today, Japan might have a more logical claim; the fact of possession is more than nine points of the law at a time when further Charter revision has become a political impossibility. Thus, for better or worse, China's ability to throw its weight about in the world arena has been considerably enhanced by its United Nations membership.

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## China's Role Within the Communist World

In the special logic of world politics, it seems clear that China's position in the calculus of Far Eastern -- and, indeed, of world -- power does not rest so much on quantifiable factors as on intangibles, and, for the time being at least, perhaps the most important of these intangibles is Peking's position as the rival Eastern capital of the Communist Church, which, combined with its military threat to the Soviets' Siberian territories, gives China special importance as a constraint on Soviet freedom of action. Some years ago China's principal claim to attention resulted from its capacity for mischief as the principal source of support and encouragement for "wars of national liberation;" but the fear of such insurgencies is no longer in vogue. Now China is treated as a major nation because, through its capacity to keep the Soviets off balance, it has become a significant factor in determining the power equilibrium. That such a role greatly improves its bargaining position with the West was dramatically shown by President Nixon's visit to Peking.

### SIDE TWO -- JAPAN

If China's claim to a superpower role depends primarily on the intangibles of size, United Nations membership, and the leadership of a rival Communist faction, Japan's claim rests solidly on its economic and industrial achievement as the third industrial power in the world. With a clear chance to overtake the Soviet Union by the end of this decade, Japan today is indisputably a major factor in world trade and

[LC]

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monetary affairs.

Nevertheless, up to now, Japan has been content to pursue a policy of "low posture" in political and military matters. But this is likely to change, for events of the past twelve months have severely shaken Japanese complacency and precipitated the country into a period of national soul-searching. At the moment, it seems safe to predict that, as a postwar generation takes over more and more of the levers of power, Japan, the economic giant, will cease to be a political dwarf.

There are several reasons why this was probably inevitable, even apart from the cumulative shocks of a series of abrupt American actions. The thinning out of America's presence in the Far East implicit in the Nixon Doctrine, the withdrawal of Great Britain from areas east of Suez, the emergence of China from years of self-imposed isolation, and, finally -- in part a reaction to the other three -- the stepping up of Soviet political activity throughout the Far East -- all these developments were bound to generate second thoughts in Tokyo. Nor does one dare ignore the fact that Japan is a nation with quite fragile moorings and that the direction in which it finally sets sail will go far to determine the future shape of Far Eastern and -- ultimately -- of world politics.

SIDES THREE AND FOUR -- THE SOVIET UNION AND THE ATLANTIC POWERS

As the archetypal superpowers in political and military terms, the United States and the Soviet Union have long occupied center stage;

- 16 -

[LC]

yet, though regionally dominant as the leader of the Comecon, the Soviet Union makes little impact on the world trading and monetary system, nor is it likely to do so in the foreseeable future. Controlling the resources of a great continental system and exhibiting a strong <u>penchant</u> for autarky, its economic power is only a fraction of that of the Atlantic nations.

Until recently America's economic dominance was not questioned. But the coming into being of the European Economic Community and the rapid growth of the Japanese economy is forcing some overdue readjustments. Thus the expansion of the Community to include Great Britain and other EFTA countries should consolidate Europe's role as an economic superpower, but in the military and political sphere, the situation is not nearly so clear. With the completion of Britain's withdrawal east of Suez, the European nations will become, in military terms, little more than a regional power factor concentrating almost entirely on the defense of their own territories. Until they move farther toward political unity, their voice in the shaping of Far Eastern politics will continue muted.

### III

#### RELATIONS WITH OTHER NATIONS IN THE TRAPEZIUM

##### Relations Between China and the Soviet Union

Dominating world politics today is the reality of the great schism within the Communist church; yet fear and antipathy between

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Moscow and Peking are more than ideological, they are compounded of history, geography and population.

Between Russia and China stretches a land boundary of 4,600 miles, interrupted toward its eastern end by Outer Mongolia, a juridically independent country about half the size of Europe, inhabited by only about a million people and controlled by the Soviet Union. Its land boundary with Siberia extends for an additional 2,400 miles.

What preoccupies the Kremlin is that, though China is a hopelessly crowded country, Siberia, to the north, is an empty continent large parts of which it took from China in the nineteenth century. Thus, in the whole of the Soviet Union east of the Urals -- an area almost twice as large as the United States -- there are only fifty-eight million people, of whom thirty-seven million -- or roughly two-thirds -- are non-Slavic.

It is here that one finds the clue to Soviet anxieties, for the Soviet leadership has long been obsessed with the fear of successful separatist movements in the non-Slavic states. Periodically over recent years there have been uprisings in one non-Slavic state or another and, as recently as 1968, there were large-scale revolutionary movements in Soviet Central Asia, just as there were earlier outbreaks in the Ukraine and Azerbaijan. In view of the character of the terrain and the inadequacy of transport and communications, disaffection of this kind is difficult to put down, and some of these outbreaks have been stopped only with the expenditure of considerable blood and treasure. Thus, it is hardly surprising that the Soviets are alarmed not only by

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China's angry claims to large areas of Siberia taken from it during periods of weakness in the nineteenth century, but also by insistent Chinese propaganda broadcasts in the Uighur, Uzbek and Kazakh languages, beamed to the Soviet republics of Central Asia -- broadcasts aimed at encouraging separatist sentiments with a hard, scurrilous line that has recently been increasing in intensity.

Where all this may ultimately end is hard to say. The Soviet Union now has perhaps a half-million men along the border, and close to another half-million -- counting land, sea and air forces -- guarding the Maritime Provinces -- that strip of land stretching south along the coast and separated from the rich industrial areas of Manchuria by the Ussuri River, where the shooting occurred in 1969. These provinces are strategically vital to the Soviets; at their southern tip is Vladivostock, the port city at the end of the railroad, and possession of the Provinces is essential for easy Soviet access to the Pacific.

The maintenance of nearly a million men to protect vast empty Siberia against China is such a critical drain on Soviet resources that the reasons for the Kremlin's decision to continue this massive deployment deserve careful scrutiny. The most persuasive hypothesis is that the Soviets believe that, before the task becomes too costly and difficult, they may find it necessary to destroy China's growing nuclear installations by a strike based presumably on conventional weapons -- missiles and man-based aircraft -- aimed not merely at reducing the nuclear menace but also at teaching the Chinese a lesson. This would explain the enormous array of force along the border: the soldiers are there

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to check a massive Chinese northward surge that might follow a Soviet airstrike.

Unquestionably Peking fears such a strike; it is that fear more than anything else that has led it to open communications with the United States in the hope that visible Sino-American communications might serve to deter the Soviet Union from a reckless move.

Yet even if fear and antipathy do not lead to a Sino-Soviet clash, they still poison relations between the two countries, and are likely to continue to do so as they struggle for dominance of the Communist party system around the world.

## Relations Between China and Japan

If one searches for the seeds of future international conflict in China's present line of policy one must look not only at the Soviet Union but at the future possibility of a remilitarized Japan. Remembering the brutal character of the Japanese occupation of China, one can well understand the deep fear and hatred of Japan that exists in the minds of many Chinese. To be sure the incessant bluster on this subject is not without its political purpose. Yet, though it may recall the Soviet fears of German *revanchism*, there is, in relative power terms, a critical difference. West Germany after the war and occupation was far less powerful than the Soviet Union; Japan is potentially more powerful than China.

Precisely how relations between China and Japan are likely to develop is by no means clear. Here again the problem is complex because

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[LC]

it involves an intermixture of politics and economics.

Now that the United States has opened direct communications between Washington and Peking and the President has made his well-advertised visit, American policy is no longer a constraint on Sino-Japanese trade; in fact, immediately following the August 15 announcement of the President's contemplated trip, Tokyo took immediate steps to expand trade with China. The Japanese shipping lines serving Taiwan were promptly reduced from five to two; while Japan geared for the aggressive penetration of the Chinese market. To a considerable extent that process had already started, since Japan's trade with China had amounted in 1970 to about $800 million in both directions -- approximately equal to its trade with the Soviet Union.

Yet the shift of Japan's interest from Taipei to Peking will not be a simple exercise. Partly as a result of American urging and partly for defense reasons, Japan has, directly or indirectly, invested roughly $200 million in Formosa and in 1970, the volume of its exports to, and imports from, Taiwan exceeded its trade with Mainland China. Nor will Peking submit to Tokyo's embraces without exacting a high cost. Already it has made clear that, as a condition to any formal relations, Japan must repudiate the San Francisco Peace Treaty to which Nationalist China was a signatory and conclude a new peace treaty with the Peoples' Republic. Not only would this pose serious problems in Japan's relations with Taiwan but it would require Tokyo to face new demands for reparations which Chiang Kai-shek had been gracious enough to waive.

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The magnitude of those claims was indicated in 1950 when the *People's Daily* of Peking computed them at $50 billion, and, though it is probable that a substantial part might be satisfied through public apologies rather than money or goods, it is evident from the experience of the normalization negotiations with Seoul seven years ago that this would generate almost intolerable tensions and controversy in the emotionally overwrought environment of Japanese politics.

Political problems of this kind do not, however, preclude doing business, and Japanese businessmen have already indicated from the humiliations they have accepted each year in connection with China's so-called "Memorandum Trade" that they will not let sentiment interfere with profitable commercial relations. Without question, of all the nations of the trapezium, Japan would seem to have the greatest interest in, and capacity for, developing substantial trading relations with China. With 80 to 85 percent of its population engaged in agriculture, largely for domestic requirements, China's only substantial exports -- actual or potential -- are its raw materials -- primarily coal, iron ore and other minerals, and, ultimately offshore oil -- while Japan is, in raw material terms, a deficit country. Yet politics cares little for economic logic, and it is by no means clear how far China will go in accepting Japan's financial and technological help in developing its resources. That Japan is ready to provide some credits has already been indicated by the Government's action in repudiating an earlier self-denying commitment given Generalissimo Chiang Kai-shek, but how far China will go in becoming indebted to Japan remains to be seen. To the extent possible, the Chinese will almost

[LC]

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certainly opt for autarky, seeking to build their economy with minimum
dependence on any other nation, while China's past treatment at Japa-
nese hands can be expected to make Peking especially cautious not to
become economically dependent on Tokyo. Thus, there is reason to
expect the Chinese to spread the risks by encouraging at least modest
economic and technological relations with the Atlantic nations.

This does not mean that China will invite firms from other
nations to build factories or help develop her industrial potential,
as the Soviet Union did in the 1920s. Nor will there likely be much
opportunity for Japan and other nations to use China as a base for
component manufacture, as they now use Korea, Taiwan and Singapore.

One should not, of course, ignore Japan's deep historical
and cultural ties with China. Unquestionably, the Japanese feel an
emotional pull that, absent strong counter-forces, would draw them
closer to the Chinese mainland. But, though prediction is premature
and foolhardy, the weight of the evidence would seem to suggest that
Japan and China will sooner or later become active rivals for the
dominance of East Asia. Already through peaceful economic means
Japan has gone far toward gaining control of those raw material
sources that formed the principal target for her East Asian Co-Pros-
perity Sphere, leaving China very far behind as an Asian economic power.
But, in political terms, China has assets to redress the balance. One
such asset, of course, is the existence of twenty-one million overseas
Chinese scattered throughout Asia and the Pacific. In the past there has

- 23 -

[LC]

been concern that these displaced Chinese might serve as a commercial
and political fifth column for Peking. No doubt these fears
were often exaggerated, since, except in Singapore where the
Chinese form the majority of the population, the Chinese as an ethnic
group are often excluded from the national life of Asian countries and
are feared and hated for their commercial acumen. Yet there is some
evidence that Peking's enhanced standing resulting from the accolade
of the Nixon visit will mean for many overseas Chinese a new sense of
community with the homeland, and in the game of power politics, it is
not a factor one should overlook.

For the time being, in political relations with the rest of
East Asia, China may well hold an advantage over Japan, since the
nations of the Far East are still haunted by memories of the brutal
practices of Japanese occupation. Some, particularly in Southeast Asia,
may also have long memories of an earlier Chinese dominance. But
except possibly on its northern boundaries, China today does not appear
in an expansionist mood; and unless and until it begins to rattle its
nuclear weapons, the nations of the area are not likely to stand in
much fear of it.

Thus far, what has kept Japan from a more assertive political
role has been largely its dependence on America and the consciousness
of regional resentments resulting from the Second World War. But with
the advent of a new generation and a growing anxiety as to the durability
of its relations with the United States, a more assertive policy is
inevitable. It is at this point that Sino-Japanese political rivalry

[LC]

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could become acute, particularly if Japan should be led by inept American policy and Chinese bellicosity to build a substantial military establishment and even start down the nuclear road.

Thus, if one tries to predict the shape of Asian power relationships over the decades ahead, Sino-Japanese rivalry appears a more likely prospect than Sino-Japanese cooperation.

## Relations Between China and the Atlantic Powers

That the security of the world is better served by having China once again looking outward across its borders rather than seeking neurotically to shut itself off from the world is, one would hope, now generally agreed. Yet the resumption of communications by no means assures that China's role will be invariably constructive in terms of Western desiderata.

Peking did not decide to receive President Nixon out of admiration for the beautiful blue eyes of Americans; on the contrary its welcome was a tactical maneuver designed to put the Kremlin off balance by generating doubts that the United States would remain a passive bystander if the Soviets were to launch a prophylactic strike against China's nuclear installations. In addition it is reasonable to assume that -- beyond all the bombast and overstatement -- China's loud talk about a remilitarized Japan reflects a genuine fear. In view of the Nixon doctrine and -- even more -- of America's declarations and actions regarding the

[LC]

- 25 -

withdrawal of force from Southeast Asia it is unlikely that China
any longer fears American encirclement, so that if it can now, by
adroit tactics, alienate Washington's affections and thus lead to a
loosening of America's bonds with Japan, it will certainly try to do
so.

But that does not mean that, outside a narrow common interest
in balance of power politics, China and the West are likely to develop
common interests or to establish close political or even economic re-
lations. Certainly, so far as the United States is concerned, de jure
political relations are likely to remain in limbo until there is some
deal between Peking and Taipei -- that is the way American diplomacy
has left the matter -- and, though other Atlantic countries may gain
ambassadors in Peking, diplomatic life in China's capital is likely
to be neither gay nor very substantive.

Much the same can probably be said with regard to economic relations
In view of the fact that the Atlantic nations are farther from China
than is Japan, and, for the most part, have less need for China's
natural resources, the possibility that China's trade with the West
will reach substantial proportions seems highly doubtful. In bad
crop years there will be continued sales of agricultural products
(principally wheat) and quite likely we could all sell substantial
amounts of capital goods -- and even consumer goods -- to China if
the Western countries were willing to extend soft credits, but, at
least for the foreseeable future, that seems improbable. Unhappily, since
trade with Communist countries largely involves non-convertible currencies,

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it must necessarily be arranged on a bilateral basis or through cumber-
some barter deals -- a severely restrictive framework for extensive
commerce. Thus, though the old slogan "oil for the lamps of China"
still holds a place in the Western -- and particularly the American --
imagination, and the mention of the number of potential consumers in the
Chinese market can excite the imagination of even the most hardnosed
industrialist, the hard fact remains that consumers who earn little
more than $100 per capita each year are not likely to swell the
Christmas trade.

Relations Between Japan and the Soviet Union

If Japan seems destined to compete with China for hegemony in
Asia what are likely to be its relations with the Soviet Union? The
answer to that question depends on a number of imponderables, of which
the most important is probably the durability of American influence
in Tokyo. Almost by reflex the Japanese responded to the shocks
accorded them by American diplomacy this past ten months by rolling
their diplomatic eyes toward Moscow, and the Russians have been quick
to respond. Not only did a smiling Mr. Gromyko promptly arrive in
Tokyo but in the talks that followed the Soviets for the first time
were apparently prepared to discuss the four little islands that lie
off Hokkaido, to which the Japanese lay claim. Though worthless
economically these islands are regarded by the Soviets as having some
military utility, but what is of most significance is that any dis-
cussion of returning these islands to Japan had heretofore been

[LC]

- 27 -

abruptly rejected since it might seem to set a precedent for the Soviets to take cognizance of other bits of real estate in which the Chinese claim an interest.

Whether these talks progress to the point where a formal peace treaty might finally be signed between Tokyo and Moscow is for the future to decide, but substantial progress on the commercial and economic fronts seems more assured. Thus it is another sign of growing interest between the two capitals that the Japanese have now dispatched a technical mission to examine further the possibilities of a pipeline from oil and gas fields in the Soviet north that would give Japan access to a source of energy other than by the long water haul from the Persian Gulf through which it now obtains eighty to ninety percent of its oil.

Here again there is no assurance that a deal will be made. In spite of an obvious Japanese interest in supplying the wide-diameter pipe and pumping stations for such a venture, they are reluctant to take payment for such a large capital investment in the form of oil that must come through a pipeline stretching so far across Siberia (and paralleling so closely the unquiet Chinese border) when that pipeline would be under Soviet control and thus capable of being shut off on Moscow's order.

The fact that the Japanese neither like nor trust the Russians is no new development; it is an antipathy that goes back to the 1905 war, nor can Japan forget what it regards as the Soviet stab in the back in 1945. Thus -- provided the Atlantic nations are not so stupid as to shut off commercial outlets for Japanese goods -- no one should expect Japan to take any action that might jeopardize its position in the vast markets of the West for limited advantage of Siberian raw materials. After all

- 28 -

[LC]

Tokyo has little respect for the Soviet economic system and
its achievements.

Yet, though the Japanese are certainly wary of the Kremlin,
fearing increased Soviet activity in the Pacific as foreshadowing a
future military threat, their political strategists still toy with
the potential of improved Soviet relations as a counter balance against
China, a warning to Washington, and a hedge against the loss of American
support. If, as a result of insensitive American policy, Japan should
be led to play an independent political -- and ultimately, perhaps,
military -- role, it could hardly avoid thinking in a classical balance
of power pattern.

## Relations of Japan With the Atlantic Nations

Up to this point, the Atlantic nations have tended to regard
Japan primarily as a industrial and economic rival that exploits the
advantage of lower cost labor and does not always live by the trading
rules followed by other nations. Unfortunately, we have dealt with this
problem through methods that have been both abrasive and self-defeating.

The Western European nations have interposed -- or failed to remove
-- a considerable number of discriminatory provisions against imports
of Japanese products, while the United States, feeling the sharp inroad
of Japanese goods in certain narrowly targeted sectors, has improvised
a whole series of so-called "voluntary agreements" and other quantitative
devices. Meanwhile, on their part, the Japanese have been dilatory

[LC]

- 29 -

in moving toward the liberalization of their restrictions, both on trade and investment.

The result of this uncoordinated approach on the Western side has been not only to embitter relations with Japan but to create serious distortions in trade patterns. Thus, while the United States has been accepting at least thirty percent of Japan's exports, the share going to the nations of the European Community has been not much more than six percent.

Here is a situation that sorely calls for multilateral diplomacy, since, unless the problem is approached through a concerted effort of the Atlantic nations, mounting pressures in the United States are likely to lead to the closing of the American market to first one and then another sector of Japanese production, thus diverting substantial surpluses to be dumped in the markets of Europe and the other nations of the world.

What must be carefully borne in mind is that the Japanese are only a hundred years away from a feudal system, and their economic structure, institutions, ways of doing business and habits of thought differ far more than meets the eye from the structure, institutions, methods and habits of thought of the Western nations. Thus, to bring Japan into an accommodation with trading and monetary systems devised largely in response to Western experience and requirements will be subtle and difficult task -- not a task to be undertaken by one country, but by the whole Western community of

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- 30 -

industrialized nations. Only in this way will it be possible to
develop a means of absorbing Japanese exports under conditions where
all of the industrialized nations face similar competition and no
nation profits unduly by competitive protectionism.

Up to this point the response to this dilemma has, on both sides
of the Atlantic, been quite inadequate. The nations of Europe have
either tended to dismiss the problems posed by Japan's economic ascen-
dency out of confidence in their ability to protect their own markets or
have dismissed the whole question on the ground that Japan is a
special problem to be dealt with by the United States. Unfortunately,
one cannot wholly absolve Washington from encouraging this reaction,
for, ever since the war and occupation, Americans have tended to think
of Japan as their special responsibility and almost absent-mindedly
have gone about negotiating Japanese-American trade and investment
problems in a bilateral setting.

Such a procedure is, however, finally and definitively bankrupt
and it is long past the time when the Atlantic nations should face that
fact honestly. If, as was pointed out in the beginning of this paper,
the Western European nations have not yet progressed sufficiently toward
unity to play a world political role, they have certainly gone far
enough to play a major role in trying to make sense out of our system
of world trade and investment.

What the solution may be even with a common approach is by no
means yet clear. In America today there is learned and solemn talk
about the Japanese system being capable of sustaining a consistently

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[L.C.]

higher rate of growth in terms both of GNP and productivity than can other industrial countries, but we should certainly not take such pontification for granted. In the late 1940s quite as many economists were pulling long faces about the "structural dollar gap" as a permanent feature of the world economy, and history has established it almost as an axiom that when so many learned doctors agree on long-term trends they are almost invariably wrong.

Already one can see several developments that may tend to mitigate the current imbalance. In part because America's abrupt actions during the past few months have not only brought them face to face with some hard facts but have generated some genuine doubts, the Japanese are embarked on a period of national rethinking in which they are beginning to question the assumptions of the past. They are beginning to question whether their mercantilist instinct to pile up increasing reserves by forcing their exports on other markets any longer makes sense. Should they not, after all, divert more of their resources and productive energy to elevating the quality of Japanese life, improving the infrastructure, building houses, roads, bridges, adequate sewage facilities -- and, at long last, making a frontal attack on their pollution problem which is the worst in the world? In addition, they are growing more sensitive to the backlash they create by single-mindedly penetrating markets with no attention to the attendant disruption. They are, in other words, beginning to take account of the requirements imposed by the world's increasing interdependence.

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[LC]

To what extent this line of questioning may result in altering
the emphasis and direction of the Japanese economic drive no one can
yet say. But there are other limiting factors. One is the size of
the labor reservoir. To be sure, there are still too many people
on the farms and the lack of labor mobility implicit in a paternalis-
tic system does not make for optimum utilization; yet, even though
these inefficiencies are corrected, industry will, before many years,
face the constrictions of a labor shortage. In a less insular, less
racist, country the problem might be largely met by the importation
of foreign workers on the European pattern, but that could not be
reconciled with national attitudes and prejudices.

What is most likely to occur, therefore, is a massive
flow of investment into the labor-intensive industries of the less
developed countries to develop sources of production not only for
industrial components but simple manufactures, leaving Japanese
domestic industry to concentrate progressively on increasingly
sophisticated products.

Imponderables such as these cannot be quantified, yet
they cast doubt on the easy assumption that Japan will continue
ad infinitum to increase its productivity far faster than the
West; indeed, no one can yet precisely measure the degree of competitive
advantage Japanese goods may have lost as a result of the recent adjust-
ment in currency parities. Still, assuming the Cassandras are right,

- 33 -

what can we do about it? To resort, as certain Western European countries are still doing, to the maintenance of discriminatory trade restrictions against Japanese products cannot help but have the most corrosive political consequences; nor does it improve the situation in third markets which the Japanese will more and more preempt for themselves.

This is a problem for which no ready solution is available. If it is to be solved with a minimum of political damage we may have to consider unorthodox measures that could result in fundamental changes in our whole world trading system. One can be sure, however, that, whatever the solution may be, it will never be found in the unhealthy environment that now persists in which American industry becomes increasingly obsessed with a sense of impotence and injustice while the Europeans wash their hands of what they regard as an American problem.

Since the nations of Europe are making their weight increasingly felt in questions of international trade and finance -- and there is every reason why they should -- then they can no longer logically turn their backs on the problem of Japanese exports, which is the most critical problem confronting our trading system today. By the same token the United States will have to abandon the stupid practice of trying to resolve that problem through bilateral restraint arrangements of one kind or another.

But, if it is imperative that economic relations with Japan be multilateralized, the United States will probably need, for the foreseeable future, to continue its special responsibilities in military

- 34 -

and political affairs. America does have a Mutual Security Treaty with Tokyo on which the Japanese rely for their defense and, if they should ever lose confidence in that commitment, remilitarization would become not a choice but a necessity.

To be sure, there are those who dispute this, pointing out that the Japanese people are instinctively opposed to rebuilding a strong military establishment and neurotically abhor nuclear weapons. But there is no more dangerous fallacy than the belief that one can gauge the future conduct of a nation by the transitory mood of its people. Generations come and go, the international environment changes, and the public view can be easily reshaped by new feelings of fear and resentment -- or alternatively of self-esteem and self-confidence -- that result from the evolution of objective facts.

Almost certainly, as Japan becomes increasingly conscious of its own burgeoning economic strength, a new generation will demand that it cease playing a diffident and self-effacing role in the political affairs of the Far East. And since, in the simple lexicon of history, political stature has traditionally derived from military competence, it is hardly reasonable to suppose -- particularly if Japanese-American commercial relations continue to follow an abrasive pattern -- that Japan will be content to rest its security solely on an American promise.

How Japan shapes its own destiny and what kind of military establishment it may build will, for years to come, remain the most important issue in the Far East. It is easy to be sanguine about the situation as it now exists, but no one is wise enough to predict what

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[LLC]

effect the process of remilitarization might have on the psyche of the
Japanese people and the tranquility of Asia. There is scarcely a
country in that vast continent and its surrounding waters that has
not known conquest and occupation by the forces of the Rising Sun, and,
if Japan should start building another big army with nuclear weapons,
the shock to the whole area would be seismic -- with consequences beyond
present power of human appraisal.

## IV

### THE BASIC REQUIREMENTS OF A FAR EASTERN POLICY

The position of Japan as potentially the most powerful Asian-based
nation is thus central to a safe and effective Far Eastern policy for
the Atlantic powers. Yet this point has not always been appreciated.

The unspoken assumption underlying President Nixon's decision to
go to China was the belief that traditional balance of power politics
are not only possible but necessary in a multipolar world. Thus,
by publicly associating with the leaders of China, the President appeared
to be giving American support to the weaker of the two nations in the
Communist power constellation with the hope of deterring the more power-
ful from a policy of adventure and providing a further inducement for
it to come to terms with the West.

Behind this sensational maneuver, reflecting as it did a drastic
departure from the continuity of postwar policy, was the President's
concept of a balance between five superpowers. "We must remember," he
has said, that "the only time in the history of the world that we have
had extended periods of peace is when there has been a balance of power."

- 36 -

Thus "it will be a safer world and a better world if we have a strong, healthy United States, Europe, Soviet Union, China, Japan -- each balancing the other, not playing one against the other, an even balance."

In an age when American statesmen normally proclaim that balance of power politics is an outmoded relic of an earlier time and piously call for reliance on a modern variant of Wilsonian universalism -- what it is now the fad to call "charter diplomacy" -- it is both novel and refreshing to read the President's frank recognition of realpolitik. Yet the concept of an "even balance" among five powers needs considerable qualification, since it is perfectly clear that the five powers are not equal, nor are the relations among the powers at all the same.

This latter point is particularly important, since it distinguishes the practical working of a power balance in the limited area of the Far East from the situation faced by those metropolitan powers in the nineteenth century who kept an uneasy peace through the Concert of Europe. Those powers, after all, were united both in their determination not to let Europe be dominated by a single power or coalition and also their zeal to support and maintain a dynastic system in which each had a stake.

The game of balance of power politics in the Far East today presents quite different problems. It cannot be successfully played by the United States alone. Already the President's trip to China has created great uneasiness in Tokyo, and since, as has been emphasized in this paper, the binding of Japan to the Western side is essential if we are to have peace in Asia, it should be the objective of both the United States and Europe to assure that Japan is a full party to the strategy.

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[LC]

Thus, the elements that would seem to me essential to an
effective policy for the Far East are the following:

(1) The Atlantic powers should strive together to solve the problems presented by Japan's extraordinary economic competence, developing through multilateral discussions with Tokyo the accommodations necessary to bring Japan into a full and equal participation in the world trading and financial system.

(2) As Western Europe moves toward unity, it should once again broaden its horizons, breaking free from its current preoccupation with the regional problems of Europe so that it can again play a role in the evolving problems of Asia.

(3) The Atlantic nations and Japan must develop an effective coalition in order to pursue common policies in dealing with the two Communist capitals. Thus, if we are to play balance of power politics in the Far East -- and I agree that we should -- we must endeavor to do so in a manner that does not detach Japan from the West but, on the contrary, provides it a full and equal role in the shaping and execution of a common strategy.

This prescription for action will be difficult to follow, because nations find it easy to go their own ways, while coalitions are slow and cumbersome; but if one accepts the thesis -- which is the central theme of this paper -- that the gravest danger to the stability of the Far East is the reemergence of an alienated and nationalist Japan, the lines of policy that are indicated should not prove too much of a burden.