TRADE WITH THE SOVIETS -- HON. HENRY J. HYDE (Extension of Remarks - June 29, 1989)

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in the House of Representatives


Our problem is that the Soviets so abuse their economic and other ties to the West in order to conduct technology theft, promote illegal trade diversions and practice espionage, as to render the interaction clearly not in NATO's interest. The East-Bloc trading relationships with the NATO business community serve as a key platform for these illicit activities. Soviet Bloc intelligence activities in the West, including those of the KGB, GRU and the East European services are on the rise across-the-board, with a top priority focus on covert acquisition of militarily-relevant technologies. To those who argue for expanded `non-strategic' trade, I ask what kind of modus vivendi can be constructed when, on the one hand Western businessmen are attempting to conduct business, while their Soviet Bloc counterparts are using the access provided by the business process to conduct covert operations targetting sensitive technologies and to promote trade diversion?

President Bush has said, `The competitive strategies approach to defense (stand-off weapons, remotely piloted vehicles, stealth systems, etc.) is designed to get us to think smart and to rely upon our advantages in new technologies. This initiative will help give us the conventional improvements we need without busting the budget'. Unfortunately, the realities of East-West trading and other relationships may prevent the full benefits of competitive strategies from being realized. How valuable will the development and procurement of these breakthrough technologies be to NATO if the Warsaw Pact acquires and develops the same technologies and fields similar weapons with a minimal lag? As Richard Perle has pointed out in Congressional testimony, virtually every major Soviet weapons system incorporates US, Japanese, German, French and British technology to various degrees--in many cases, decisively.

The Soviet Bloc has spent decades building their remarkably effective networks for trade diversions and theft by espionage. This, combined with the growth in Western industrial capacity has made it impossible to stop technology loss, but sharply reducing it must, once again, become our top priority if the President's words are to become a reality. What of NATO's efforts to plug the technology leaks? Despite the heroic efforts of my two colleagues on this panel, COCOM is hardly the panacea for protecting NATO's sensitive technologies that the trade proponents claim it to be.

Hundreds of businesses throughout North America, Europe, Japan and elsewhere, ignore COCOM restrictions and ship sensitive technologies to the East-Bloc, thereby undermining NATO's technological lead in weapons. The same mentality that engages in the selling of proscribed chemical, biological and nuclear weapons technologies to unstable Third World governments is behind illegal sales to Warsaw-Pact customers, arguably with more damaging result.

To answer the rhetorical question above concerning the cost of losing military technologies, a technology-loss estimate must take into account the discount factor against NATO defense spending (about $450 billion at the moment) commensurate with the relative degradation of NATO weapons due to resulting qualitative Soviet gains. I estimate the annual dollar cost to NATO of technology loss (exclusive of national security loss for which no measure exists except the outcome of war) to range from $15 billion to $40 billion, depending on the technologies and weapon systems compromised in any particular year.

With those numbers in mind, we might ask just how important is NATO's trade with the Soviet Union? Perhaps the export numbers are large enough to mitigate the financial costs of Soviet abuses. It also might explain the massive amount of press `ink' devoted to the subject, not to mention the preoccupation with East-West economics of NATO governments' trade promotion and foreign policy agencies.

In 1987, NATO's exports to the world totaled $1.32 trillion. 1

That same year NATO exports to the USSR totaled $12.9 billion or 0.9% of total NATO exports--a sufficiently small number that it could be considered statistically insignificant. 2

It gets worse: If we assume that the overall net profitability resulting from exporting to Moscow averages a reasonable twelve percent of sales for all of the NATO commercial interests concerned, it amounts to around $1.5 billion or one-tenth of my low estimate for the annual cost of technology loss and one twenty-sixth of the high estimate--hardly an impressive cost-benefit outcome for the national interest. 3

1 `Trade Patterns of the West, 1987,' IRR No. 194-December 6, 1988, U.S. Department of State, Bureau of Intelligence and Research.

2 Ibid.

3 Even if we assume significantly lower loss estimates it doesn't change the essential conclusion--that for the taxpayer, trade with the Soviets is a losing proposition.

In considering these remarkably high negatives associated with East-West economic interaction, we could ask: Cuibono, or who benefits other than the Soviets? The principal Western beneficiaries appear to be the few firms that comprise the tiny sliver of the Western business community involved in the trade. We are familiar with the names of those businessmen who are most heavily engaged in trade with the Soviets. They have been providing advice to key Executive and Congressional managers for years with respect to what is best for our national interest vis-a-vis the Soviets. Their views are taken very seriously and often are incorporated into US and NATO policies.

Can we trust the business community to distinguish between their personal financial gain and our security interests and to display objectivity? In a recent article, George F. Kennan writes: `Never were American relations with Russia at a lower ebb than in the first 16 years after the Bolshevik seizure of power in 1917. Americans were deeply shocked by the violence of the revolution, by the fanaticism and cruelty of the new rules, by their refusal to recognize the debts and claims arising [out of World War I], and above all by [their brazen] world-revolutionary propaganda . . . and [their efforts] to promote Communist seizures of power in other countries.' 4

It turns out that some Americans didn't share the revulsion and concern over Soviet behavior described by Kennan. In fact, Stalin's first Five-year Plan might have failed if not for the assistance of International General Electric, Ford, Radio Corporation of America, Standard Oil and other U.S. companies who were heavily involved in building the Soviet industrial base well before U.S. recognition of the Soviet Union in 1933. In 1930, roughly 25 percent of all Soviet imports were from the US and in 1931, U.S. manufacturers' short-term credit was the second largest credit source available to Moscow.

4 `After the Cold War,' The New York Times magazine, Sunday, February 5, 1989.

In the decades since then, a small core of business interests scattered throughout the industrial West have maintained close (and presumably profitable) dealings with the Soviets irrespective of the East-West political temperature--in some cases to the detriment of Western security. On the other side of the ledger, the high costs of East-West economic interaction are borne by each and every NATO taxpayer, who de facto underwrite the activities and profits accruing to those few Western businesses involved, by shouldering the tens-of-billions of dollars in additional taxes for defense.

In sum, we have shown that NATO trade with the Soviet Union is statistically insignificant as a share of our global trade and yet because of Soviet Bloc abuse of the East-West trading relationship, it represents a huge financial and security burden to NATO taxpayers while benefiting a mere handful of businessmen--some of whom are honest but dangerously apolitical and some who are not even honest. It is imperative that NATO begin to reverse the high negatives in the East-West relationship. Soviet compliance with the longstanding human rights demands of the West--while of vital importance--is not sufficient to serve as a fulcrum for NATO decisions regarding expansion of East-West economic relations; nor should the Soviet withdrawal from Afghanistan affect our technology control regime.

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It is, indeed, unfortunate that the gulf between public perceptions and East-West realities is such that pursuit of sound policies in the areas described above would likely be seen by many as a return to `Cold-War' measures, and thus, unpopular. Skepticism among the press and the effects of long-term Soviet disinformation programs and Gorbachev's appeal, particularly on European public opinion, allow for little chance of implementing such policies. That said, I would nonetheless recommend the following steps to begin to rationalize our relations with the Soviet Bloc:

Because the strength and cohesion of the NATO economies is a vital element in the preservation of Western security, and based on the concerns I have raised earlier, we must not take the passive stance that so-called `non-strategic trade' and other forms of intensified economic interaction with the East Bloc can proceed at random. Nor do we need to undertake economic warfare and press our leverage in attempts to `extract' concessions from Moscow. There is a middle road. Before we move further in introducing Moscow into the fabric of the Western economic system, the NATO governments should demand a meeting with their East-Bloc counterparts, and after carefully explaining why the present modus vivendi for economic interaction is unacceptable, the NATO reps should make it clear that we cannot in good conscience continue to do business with the East under the present rules; either we change the rules or we don't do business. We should tell Moscow that we are prepared to wait patiently, putting all projects and technology transfers on hold, until we observe movement toward the reduction and eventual elimination of Soviet activities that are harmful to our security. Simply put, the Soviets can--at their initiative--develop `transparent mileposts' of structural and behavioral change that we can confirm as irreversible (sharply reduce the numbers of KGB and GRU agents in the West engaged in technology theft and other harmful activities, reduce aggressive microwave intercept programs, silence the disinformation and anti-NATO propaganda and halt the huge, destabilizing Active Measures assault on Western societies). The rationale for this approach is simple: if Moscow wants the same trading relationship with the US as that enjoyed by France or the UK, for example, than its overall relationship to Washington should likewise parallel the benign, friendly nature of our Western partners. Economically embracing someone intent on your destruction or on undermining your effectiveness is a recipe for disaster (or at least higher defense spending). After all, it would be far cheaper for NATO taxpayers to compensate every firm for profits foregone from suspended trade with the East than to continue to subsidize the trickle of business done under present rules through taxes for higher defense spending.

Regarding technology controls, the COCOM members need to rethink the basis for the technology protection regime, and agree on a more aggressive system for protecting the new conventional technologies that are the wave of the future. The hundreds of firms now violating the accord must be stopped!

With regard to untied lending to Soviet Bloc borrowers, NATO governments need to develop sound, all-source estimates of the hard currency costs to Moscow of funding its `empire', with the focus on those activities inimical to NATO interests. Such analysis does not presently exist. This information will enhance policy judgments concerning the efficacy of assisting the Soviets in their drive toward rouble convertibility and lending untied funds to Comecon borrowers and their impact on the cost/benefit equation (which, I presume, would only enlarge the negatives).

Perhaps a somewhat uniquely-U.S. priority should be to keep the policymaking activities concerning East-West economic security matters within the confines of the overt Cabinet structure. Over the past eighteen months, there has been a tendency for US policy in this area to be made by a small group of individuals without full participation of the Security Community. The broadest possible Cabinet participation and full adherence to process is needed to develop balanced East-West policy, truly reflective of the national interest.

The East-West trade policy portfolio should not be overly concentrated in the foreign policy/trade promotion agencies where it tends to be used to score short-term portfolio successes--and particularly as a `sweetener' in connection with Western diplomatic pursuits. The Security Community should have an equal voice. In this regard, NATO taxpayers might logically expect their trade and trade promotion agencies to spend an amount of public time and resources on promoting and facilitating East-West trade that is commensurate with its contribution to our economies (by last count, statistically insignificant at best).

Finally, the business community should be challenged to justify the overall cost to NATO taxpayers of their relatively marginal business dealings with the Soviet Bloc, the existence of which provides the East the platform from which to acquire sensitive NATO technologies. From the public interest viewpoint, in these days of `no new taxes,' tight budgets and a squeeze on Defense, trade with the Soviet Bloc under present rules is not a paying proposition.