The U.S.-Soviet Trade Agreement: Overtaken By Events

Submitted Testimony by Frank J. Gaffney, Jr.

Director of the Center for Security Policy

before

the House Ways and Means Committee

23 September 1991

Introduction

Mr. Chairman, members of the Committee, I am grateful to you for permitting a dissenting voice to be heard on the U.S.-Soviet Trade Agreement now before you. You are to be commended for your willingness to consider — along with the chorus of testimony from those who negotiated the accord and its accompanying side letters, from trade organizations and from other, interested parties — the arguments against approval of the present agreement at this time.

In short, I will argue that there is a better way to go in effecting our common objective of the genuine transformation of the Soviet Union — namely through a decentralized, republic-by-republic trade strategy.

My views on the wisdom and utility of the Trade Agreement are informed by fifteen years of work on U.S.-Soviet relations, initially as a member of the staff of Senator Henry M. "Scoop" Jackson and subsequently as a professional staff member on the Senate Armed Services Committee and as a senior official in the Department of Defense. For the past three years, I have directed the Center for Security Policy, a Washington-based policy institute that has done an immense amount of work on U.S. economic, financial and technology security policy — particularly vis a vis the former Soviet Union.

Scoop Jackson’s Legacy

I often find myself pondering how Scoop Jackson would have viewed events in the erstwhile USSR in general and, against the backdrop of those events, the present Trade Agreement in particular. As you are well aware, his landmark amendment to the Trade Reform Act of 1974, cosponsored with Rep. Charles Vanik, profoundly shaped all subsequent U.S.-Soviet economic ties. It did so by linking the granting of Most Favored Nation status and official loans and credit guarantees to the Soviet Union (and other nations with non-market economies) to clear evidence of an institutionalized respect for the right to emigrate.

My guess is that Scoop would be actively opposing the present agreement. (Frankly, I suspect that, were he still alive and doing so, there is a better than even chance that it would not be under consideration today by you and your Senate counterparts — at least as currently configured.) I believe this to be the case for several reasons:

An Unmet Condition Precedent: In the first place, the right to emigrate has yet to be fully institutionalized in the Soviet Union — or what is left of it. You will recall that the Gorbachev regime promised for several years that legislation guaranteeing Soviet citizens the right to emigrate would shortly be enacted. Even though it has permitted substantial numbers of its citizens — principally Soviet Jews — to leave the USSR over the past two years, Moscow has yet to codify formally what Scoop used to call the "touchstone of human rights."

Instead, on 20 May 1991, the old Supreme Soviet engaged in a bit of legislative legerdemain: It adopted what Senator Bill Bradley once called "the equivalent of a sense of the Senate resolution." This legislation only granted the people of the then-Soviet Union the right to emigrate "in principle." What is more, that right would only become effective in January, 1993. In the meantime, and thereafter, certain restrictions would apply that made a mockery of the idea of truly free emigration. Indeed, the practical effect of the Supreme Soviet’s action was to make it more difficult to emigrate from the old USSR — not easier.

In the final analysis, as Sen. Jackson said on 11 October 1973, "The most abundant and positive source of much needed help for the Soviet economy should come, not from the United States, but through a reordering of Soviet priorities away from the military into the civilian sector." Unfortunately, the prospects for such a reordering are seriously degraded so long as the self-correcting mechanism of free emigration is not in place and the West nonetheless provides a new Moscow center with liberal access to its taxpayers’ resources.

Changed Circumstances: Second, I believe that Scoop Jackson would be appalled at the prospect that the United States government would press forward with a Trade Agreement signed over fifteen months ago with the ancien Soviet regime — as though nothing had happened in the intervening period. It goes without saying that the coup and its repercussions have substantially altered the political landscape on the Soviet side. At a minimum, Sen. Jackson’s sense of integrity and professionalism as a legislator would be offended by the idea of becoming party to a binding contract with a bankrupt entity (the former Soviet central government) now in some form of receivership — especially since its future prospects are so unclear.

Strengthen the Center? More importantly, I think Scoop would find repugnant in the extreme the idea that the United States would, through the vehicle of this Trade Agreement, align itself with the reconfigured, post-coup Soviet center over a policy of direct and differentiated relations with reformist republics.

And make no mistake about it, that is precisely what the effect of this agreement would be. The development of decentralized trade and credit relationships between the United States (and other G-7 nations) and the democratically elected reformist republics is virtually inevitable in the period ahead. Attempting to retard this positive evolutionary process by stop-gap measures such as the present trade agreement with a reconfigured union will probably only result in increased estrangement and desperation on the part of the most independent republics. If the United States provides a blanket MFN to the entire former USSR, we actually dilute our leverage to encourage reforms through a well-crafted incentive system — one that would be more conducive to U.S. trade and investment and that would offer real hope for the Soviet people.

It is important to note that the interests of the U.S. business community would be better served if we were, instead, to act in such a way as to accelerate "reform competition" amongst the republics. That is, Congress should hold out the carrot of normalized trade relations and other substantive inducements to those republics that move aggressively to liberalize prices, permit private ownership, massively privatize state-owned enterprises and generally create a workable legal and business framework for entrepreneurial competition — as well as allowing for the free movement of their people, goods and capital.

Surely, as other republics see that their market access and hard currency revenues are enhanced with these actions, others will follow suit. Through such a process of offering rewards for achieving specific milestones of structural change along democratic and free-market lines, the United States can help fashion a trading relationship with the emerging independent republics of the former USSR that will be far more beneficial both to this country and to those who were previously subjects of the Soviet empire.

Deficient Details: Finally, I believe Senator Jackson would have found unacceptable some of the terms and conditions embodied in this agreement and its accompanying side letters. For example, one of the side letters signed by U.S. Trade Representative Carla Hills and then-Deputy Minister of Foreign Economic Relations Yuri N. Chumakov states that upon the extension of MFN to the Soviet Union, the USSR will begin to repay the $674 million owed to the United States through the Lend Lease program. You will recall that the Soviet Union ceased payments on this debt in 1974 after the Jackson-Vanik amendment was enacted.

Under the terms of this side letter, however, the United States agrees not to collect on the Lend-Lease debt until the U.S. government makes available to the Soviet Union export credits, guarantees and insurance through the U.S. Export-Import Bank and other government credit facilities! This amounts to little more than a means of bilking the American taxpayer in order to liquidate an outstanding, long-overdue debt to the U.S. Treasury. It is scandalous that what amounts to taxpayer bribes are to be used to induce the new Moscow center to honor its past debt obligations to the United States government.

New Negotiations With Qualifying Republics Are In Order

The simple truth of the matter is that the United States is today in a very strong position to work out far more attractive and constructive trade agreements with the emerging, reformist independent republics of the former Soviet Union. I believe the present accord should be returned to the President with a request that new negotiations be immediately initiated with those former Soviet republics engaged in urgent democratic and free-market institution building.

For starters, such agreements could be devised to provide much better protection of U.S. intellectual property and high-technology products than the existing accords do. This is particularly important insofar as the central apparatuses of the old Soviet Union — notably, the VPK (Soviet Military Industrial Commission) and the KGB — have not ceased their relentless technology theft operations. In this connection, it is worth remembering what the Defense Technology Security Administration reported in July 1991:

Soviet efforts to acquire Western technology, by both legal and illegal means, continue unabated. While public attention is focused on attempts to improve conditions in the civilian sector, the Soviets are currently increasing — not diminishing — their efforts to acquire embargoed technology for the military.

 

Similarly, the United States would be well advised to require in such new negotiations a demand that the former Soviet republics substantially increase their disclosure of vital economic and financial data. Transparency, after all, is essential to the sort of private enterprise and sound sovereign lending that will determine the future economic viability of these new entities.

An Overall Policy of Differentiation

In my view, these trade negotiations should be just one element of a policy designed to differentiate between such "qualifying" republics and those that remain authoritarian, attached to the command economic model or otherwise unreformed. Other facets of this carrot-and-stick approach recently recommended by the Center for Security Policy include:

• Any energy-related assistance should be directed to qualifying republics where the West can verify that the vast majority of newly generated hard currency revenues (stemming from enhanced oil and gas production and exports) would be strictly earmarked for civilian economic development within the republic.

 

• A division of ownership and management responsibilities among the republics for operation of the Soviet Bank for Foreign Economic Affairs and its branches, Gosbank and, in particular, Soviet subsidiary banks located in the West should be encouraged. Without such a fundamental restructuring of these institutions dealing with the Western financial community, the most threatening aspects of central authority could be maintained — and perhaps strengthened.

 

• Bilateral negotiations should immediately be opened between the U.S. and qualifying republics with a view to terminating promptly any contributions by the republics to Soviet client state support, strategic modernization, disinformation, hostile foreign espionage and other activities harmful to Western security interests.

 

• Negotiations should also be initiated with qualifying republics leading to credit agreements and membership in key international trade, financial and political organizations (e.g., the IMF, UN, CSCE, etc.)

 

• Technical support should be offered to republics wishing to obtain a "dual-key" or "multiple-key" veto over the use of Soviet nuclear forces on their territory. This support should extend to the disarming and destruction of such weapons in place, should the republics choose to adopt a nuclear-free status.

 

• The United States should make it clear that it will cooperate in organizing and facilitating genuine defense conversion in qualifying republics only where a complete privatization process has been implemented and the facilities to be converted are completely withdrawn from any vestige of the Soviet military-industrial complex.

Devolution, Not Central Control Is Required

The reason for insisting upon such sweeping structural changes is simple: It is the only hope for economic viability and long-term political stability in the erstwhile Soviet Union. Even the most optimistic projections of government aid from Western nations fall woefully short of what would be required to resuscitate the economies of the former Soviet republics.

Unless official assistance is accompanied by far greater private investment and enterprise, this herculean task will remain unachievable. Obviously, therefore, a climate conducive to such private sector activities is essential if the necessary, synergistic approach is to be utilized. Unfortunately, history has shown that it is only by getting the republics out from under the thumb of the traditional, reflexively authoritarian center that such a climate can come about. Accordingly, promoting and accelerating wholesale devolution of power from even the new central authorities to reformist republics must be the objective of American policy.

Time For Realism and Responsibility

I hope that this Committee and the Congress are under no illusions: Under the best of circumstances, experts agree that it is unlikely that the successors to the Soviet Union are going to emerge in the near term as a vast export market for U.S. goods and services. Some, like former Commerce Secretary William Verity, have predictably gone so far as to suggest it could be a near-term bonanza for American trading partners, with total annual sales as high as $16 billion.

I suspect that our trading relationship with the former Soviet Union is more likely to resemble that which has developed since relations were normalized with the Peoples Republic of China. Despite similar expectations early on that our exports to a market of over one billion people would rapidly increase, we are now experiencing a $10 billion deficit in trade with the PRC. To an even greater degree than Beijing, the new Moscow center and probably even most of the independence-bound republics simply will not have, over the next five to ten years, the hard currency revenue streams necessary to boost substantially the import of goods and services from the United States — unless the U.S. taxpayer takes virtually all of the draconian credit risks associated with such sales.

Playing Fast and Loose with U.S. Taxpayer Funds

That brings me to a final point. As you know, the Bush Administration is — in parallel with the Trade Agreement — pushing for immediate repeal of the Stevenson and Byrd amendments. Those amendments, which were passed in conjunction with the Jackson-Vanik amendment, provide important taxpayer protections related to the lending policies of the U.S. Export-Import Bank toward the Soviet Union by limiting Eximbank’s total exposure there to $300 million.

Although you and your colleagues may take up this initiative separately, I would strongly encourage members of this Committee not to repeal the Stevenson and Byrd amendments under present circumstances. There are several reasons for this recommendation:

First and foremost, the Soviet Union should not have its current Eximbank restrictions lifted until its creditworthiness is restored. Anyone in the international banking community today will tell you that a Soviet default on at least a substantial portion of their external debt — now ranging between $70-75 billion — is imminent. New lending to Moscow center in this context is worse than throwing money down a black hole. It actually would amount to giving the reconfigured Soviet central authorities the wherewithal to reward some of their principal creditors in the West for helping to underwrite the oppressive old order.

This is, naturally, just what such creditors — especially those in Germany — are seeking. In fact, the Germans hold some $22 billion and probably more in Soviet paper (nearly one-third of Moscow’s total foreign debt) and are far and away the former Soviet Union’s largest creditor. They are, not surprisingly, desperately urging their allies in the West to inject new taxpayer-underwritten credits to the new Union now so that German firms and banks can be at least partially paid out before the balloon goes up on a formal debt rescheduling.

Our response to such appeals should be straightforward and firm: Those profligate Western governments and banks (especially in Germany, Italy and France) which showered credit guarantees and direct loans on the now-discredited central authorities in the Kremlin must shoulder most — if not all — of the burden and costs of Soviet debt rescheduling and forgiveness. Conversely, those governments and banks that demonstrated commercial and political restraint in lending to an unreformed, militarized Soviet economy should be rewarded with far more favorable terms and conditions for future lending arrangements.

Were we now to engage in new, undisciplined lending to the Soviet center, irresponsible Western profit-seekers and political appeasement artists who previously supported the bankrupt Soviet leadership may realize a wholly undeserved windfall — massive "new money" from the West, including from multilateral lending institutions. This windfall could ultimately make them whole on loan repayments and cleaned up arrearages that would otherwise have to be partially, if not totally, written off.

Second, in a sense the pre-coup Soviet Union already had defaulted on its past debt obligations by simply not paying for its day-to-day bills with Western suppliers. Soviet arrearages to Western companies of six months or more for goods and services already delivered are estimated to reach as high as $15 billion by the end of the year. Total arrearages to American firms alone are estimated to be in the range of $150-200 million. Many American firms are facing serious financial losses, if not bankruptcy, because of the failure of the Soviet government to pay their bills to American suppliers. At a minimum, no additional U.S. government loans or guarantees should be extended to the former Soviet Union until these arrearages are cleaned up. After all, the arrearages of companies and banks of more than one European nation were settled via earmarked government credits in 1990 and 1991.

Third, concerning the Soviet Union’s external debt, the Congress should await the conclusion of orderly arrangements and mechanisms which traditionally accompany a foreign debt rescheduling before it increases Moscow center’s borrowing limits. The U.S. budget cannot afford any more "feel good" exercises using hard-earned taxpayer funds nor, I would respectfully suggest, can members of Congress afford to put themselves once again in the cross-hairs of shared responsibility for another financial scandal potentially in the same league as the S&L, BCCI, and BNL fiascos.

Mr. Chairman, thank you again for the opportunity to contribute to your deliberations on the U.S.-Soviet Trade Agreement and related matters. I strongly encourage you to use the power of this Committee to advance the structural transformation of the former USSR — rather than retard it — by declining to approve the present Trade Agreement and by directing that a new, differentiated policy approach toward qualifying republics of the former USSR, along the lines I have described, be adopted in its stead.