US Economic Statecraft for Survival 1933-1991 Part 4

The Kennedy Administration acknowledged the flaws and sought to refas.h.i.+on policy and make it relevant and meaningful to the Cold War circ.u.mstances of the 1960s. It wanted to liberalise the embargo, but only in the process of a flexible response strategy that would produce quid pro quos from the Soviets ranging from commitments to good (i.e. free-market) behaviour in trade to settlement of old debts. The result of these reflections, however, was a paradox. To take the first step and change embargo policy unilaterally might weaken the position of the USA through psychological losses that would not be recouped by gains from flexible response trade policies. In other words, if the Americans were to take the first step, the communists might interpret it as a sign of weakness. Right-wing allies might see it as a betrayal of US leaders.h.i.+p responsibilities, and Western Europeans and the j.a.panese as a sign of waning resolution to wage the war against communism. But, for the USA to reap maximum rewards from a continuation of embargo policy, it needed to change, to react flexibly to circ.u.mstances, and expand trade. Thus flexibility held out the prospect of substantial gains for the USA, but the Kennedy Administration was hoist on the petard of psychological warfare that its predecessor had championed and which the Kennedy team now also pursued with renewed vigour. As Kennedy commented on the Cuban Missile Crisis, appearances contribute to reality.18 And it was fear of these psychological factors that inhibited the Administration from adopting flexible response in the realm of economic defence policy. There was also a further complication in that even some of the strongest advocates of relaxing trade could never bring themselves to abandon the idea that a broad embargo, however ineffective, had to be kept going so long as it caused even minor problems for communism.

The Kennedy Administration thus engaged with flexible thinking, but failed to implement flexibility in embargo policy.

The Ball Report: the argument for flexible response.

On 31 December 1960 George Ball, Chairman of the Foreign Economic Policy Task Force set up by the President elect, sent the findings of his research group to Kennedy. Consultants for the report included John Kenneth Galbraith and Robert R.Bowie of Harvard and Walt Rostow of MIT, all of which were later to be influential members of the Administration. The report redrew the agenda for America's embargo policy.

The diagnosis was straightforward: the USA had been too pa.s.sive and had hidden behind its moral disapproval of trading with communists, erroneously believing both that the embargo could inhibit the growth of Soviet military power and that the USA could persuade its allies to share that belief and act accordingly. The previous Administration, in fact, did not labour under such delusions (or at least Eisenhower did not), but Ball did not have the benefit of access to a detailed historical reconstruction of previous policy. Ironically, Ball himself ultimately failed to break away entirely from the s.h.i.+bboleths about the military and economic damage that an embargo could inflict on the Soviet bloc. His paper observed that while the USA followed a fruitless policy of self-denial, its allies expanded their trade with the communist bloc and found it beneficial. The coercive arm of the Battle Act was ineffectual. Indeed, when allies traded in prohibited commodities the 'President...found it necessary to exercise his power of forgiveness'.19 Repeatedly, presidents waived the provisions of the Battle Act in favour of allies who traded in proscribed goods. The net result was the growth of trade largely on terms about which the USA had no say. In the 1950s the low trade potential of the Soviet bloc countries limited East-West trade, but now, Ball argued, they 'have the ability to export surpluses, which they are beginning to use in furthering their external commercial and political objectives'.20 Thus the strategic economic terrain had changed, and the USA needed to take this into account.

Current United States trade policy offers no adequate response to the Communist Bloc's world-wide trade and aid activities. The challenge of the Soviet economic offensive is no longer the narrow one of whether or not the United States should expand its commercial relations with Communist countries. It has begun to affect our economic and political relations with both industrialised and under-developed countries.21 The USA needed to act while the West still had a ma.s.sive economic lead, to devise policies that would protect the integrity of multilateral trade, and to force the communists to act in the world market like Western countries-pay their debts, observe the rules of the market, respect patent and royalty rights, and abjure politically inspired bilateral agreements. (The implication here was that free-market bilateral agreements were not underpinned by politics!) The West should extract trade advantages from the Soviet bloc, counter the advantages the Soviets had in economic warfare techniques, due to their command economies, and prevent their penetration of weaker less-developed countries (LDCs), where they sought political as well as economic benefits. Finally, the USA should work with the rest of the industrialised West to provide aid programmes for the Third World.

In order to achieve these goals, the Ball Report made several proposals. These amounted to: developing a common Western strategy by working through the Organisation for Economic Co-operation and Development (OECD; formed in 1961 as the successor to the OEEC); changing various pieces of US legislation, including the Battle Act, to give the US government more discretionary power to use carrot-and-stick methods to obtain concessions from the Soviets; and liberalising the embargo policy so that its provisions applied only to 'products likely to contribute to the Soviet military potential in an important, direct, and immediate way'.22 Cuba and China were left out of account. They were to be treated solely as political problems, and trade policy would only be changed when it was deemed politically right to do so.

The agenda was ambitious, and steps were taken to propel things along. Two weeks after his inauguration Kennedy sent a note to Secretary of State Dean Rusk suggesting amendments to the Battle Act, and as a result proposals were laid before Congress.23 The Administration reviewed the embargo criteria and decided to rea.s.sess items on the denial list. The State, Defence and Commerce departments agreed to 'move from the List of Presumption for Denial to the Presumption for Approval list only items which are no longer strategic as a result of the changing needs for material for military purposes'.24 This in fact did not amount to much progress. Neither the Commerce nor the Defense Department had their heart in the project of liberalisation, and Commerce became even more inhibited after an embarra.s.sing difference with Defense over the export of ball-bearing machinery: after Senate hearings, Commerce had to revoke export licences it had previously granted. Political sensitivity to its domestic const.i.tuency now made the Commerce Department even more reluctant to seek trade liberalisation, and the Defense Department still nurtured fond hopes that the embargo would negatively affect Soviet military potential, even though it was acknowledged that such effects would not be very substantial. Moves by the Defense and Commerce departments to review the criteria that governed exports thus only envisaged piecemeal and very modest changes by the exercise of executive discretion. The State Department, in contrast, had more ambitious ideas.

George Ball reworked his original task force report in a new paper ent.i.tled 'Review of United States Economic Relations with the Soviet Bloc'. In this paper, dated 25 May, there was a cla.s.sic version of economic flexible response.

The basic objective of US policy and actions in East-West economic relations should be to enable the US to use economic tools to make more effective our direct relations with the USSR and other Bloc countries, and to cope with the growing compet.i.tion from the Soviet Bloc economic power. Effective use of economic relations with the Bloc requires flexible power and authority in the hands of the President, particularly in dealings with the European satellites. Increasing Executive Branch flexibility means improving our freedom of maneuver by getting rid of current rigidities which prevent exploitation of opportunities to further US interests.25 This lengthy paper took, or at least appeared to take, the arguments of the Task Force Report a step further down the road of liberalisation. On closer inspec-tion, however, we shall see that the position advocated was not quite so straightforward.

The theme of flexibility to promote US interests was still there, and strongly. Goals included cultivating a more positive image of the USA and help for LDCs. The hope of using trade to increase the centrifugal forces within the Eastern bloc also reappeared. This had been an idea long nurtured by Eisenhower, even though intelligence a.s.sessments had been pessimistic about success. Still, the situation had changed, and the Khrushchev regime was now perceived as being more vulnerable to this tactic than it, or its predecessors, had been. The USA should thus: use our economic policy with respect to the dominated countries of Eastern Europe to support US objectives of strengthening their capabilities for independent national determination, increasing US ties with these countries, and affording them an opportunity to loosen their dependence on the USSR.26 A number of specific proposals were made to enhance executive power and enable the Administration to engage in active negotiations with the Soviets. There should be Presidential discretion for the granting of MFN status; PL 480 should be amended to allow subsidised farm surpluses to be bartered with the Soviets;27 and the Johnson Act should be amended to allow the granting of credits on a case by case basis, though the Battle Act was not to be amended further than the proposals presently before the Congress. Notes of caution appeared frequently with regard to this expansion of trade, particularly over the need to safeguard copyright, preventing dependency on the Eastern bloc, and the disruption of markets by dumping or other non-market behaviour. Most importantly of all, the State Department worried about how best to protect LDCs from communist trade penetration. This was a rather difficult problem: almost as if the USA wanted expanded trade without accepting the expansion of Soviet influence into the Free World. If it had to happen, then the USA would try to ensure that the USSR abided, as far as possible, by free-market rules.

Clearly the State Department was not viewing this issue through liberal, rose-tinted spectacles. But a serious ambivalence arose in the paper between, on the one hand, what appeared to be a most radical recommendation, namely that the USA should come into line with the COCOM lists, and, on the other, both the insistence that some ad hoc way be found multilaterally to embargo exceptional non-COCOM items, and recommendations about how to counter the expansion of Soviet civil aviation.

The paper suggested that the US embargo list 'should be made identical with the international COCOM embargo list'. This would liberalise US policy and help solve a series of problems that had arisen because of the differential between the two lists. The existing policy was causing friction with America's allies, creating de facto discrimination against US companies vis-a-vis other Western countries, which traded in goods denied to US exporters, gave scope to the Soviets to exacerbate the divisions within the West, and created uncertainty about what could and could not be exported from the USA. However, having said all that, the paper reintroduced a justification of controls by another route. There would now be a general rule of approval for licensing exports: except in those special cases covering equipment or technology closely related to military items or to the production thereof where denial by the US would effectively prevent Soviet bloc acquisition from any free world source of that equipment or technology subst.i.tutable therefore. For those commodities which do not meet the COCOM strategic criteria, but whose export would const.i.tute so significant a contribution to Soviet economic development and to Soviet potential for economic penetration as to be damaging to broad consideration of Western defense planning, the United States might propose that NATO consider such special situations and, if it agrees that multilateral control action is or might be desirable, request COCOM to develop a program for the inst.i.tution of controls when judged necessary.28 In other words, notwithstanding the Task Force report's identification of the erroneous a.s.sumption about the embargo being able to limit Soviet military development, the State Department continued to offer the criterion of limiting economic growth and denying military equipment and technology as relevant to the embargo, even though this was to be effected now in an ad hoc way. How it thought it could persuade the Europeans to embargo in this ad hoc manner items that were not seen as suitable permanent candidates for the COCOM list is rather baffling. The tactic of going via NATO would add clout to the US case among COCOM members-but when this route was actually tried, in the 19623 wide-diameter steel pipe crisis, it failed.29 There is a tone of desperation in American policy-making here, fathered by fear of, and determination to counter, Soviet economic potential to penetrate the Free World.

A more specific matter taken up in the State Department paper concerned the expansion of Soviet civil aviation. Just how dangerous Soviet commercial activity was conceived to be is amply demonstrated in judgements about aviation.

Civil aviation provides a useful means for the Soviet Union and other Bloc countries to extend their influence in distant countries.... It a.s.sists Bloc countries to appear 'respectable' and tends to dispel the concept of an Iron Curtain. It helps demonstrate Soviet technological prowess to Free World countries; it contributes to Bloc capabilities for espionage, sabotage, and subversion; and it facilitates control over the travel of Bloc citizens.30 Once again, the way to handle this problem was to persuade the Soviets to abide by free-market rules, but, because LDCs were so vulnerable to political demands, the USA should also try to ensure that Soviet air transport agreements 'are kept to a minimum.'31 Quite clearly the State Department, which was well disposed towards liberalising the embargo, did not favour such a policy primarily because of trade and the balance of payments, or because of the cost and ineffectiveness of the existing regime. These factors had some impact, but the main thrust of the argument for relaxing the embargo was to do with developing a flexible response capability, which would enable the USA to wage the Cold War more effectively. The danger was inaction. The Soviets were taking the initiative and, in particular, were making inroads in the Third World, and that was exacerbating problems with both industrialised countries and LDCs. The State Department wanted to use the lure of expanding trade to help it bargain with and extract concessions from the Soviets, regain the initiative in the Cold War, and move in a constructive process towards detente.

Overall, this policy offered many advantages: more trade to help the balance of payments; better relations among the Western allies by bringing US embargo lists into line with COCOM's; the elimination of de facto discrimination for US exporters; the blunting of Soviet political penetration of LDCs; the protection of the free market by getting the Soviets to abide by a code of good conduct; the weaning away of satellites from the USSR; greater exposure to Western technological achievements and consumer goods in the Soviet bloc; and a gradual easing of tensions through detente. At the same time the Administration wanted to capture the initiative and win more Cold War battles, continue the embargo, and include within its scope, on an ad hoc basis, items that they knew would not be agreeable to their allies without extreme persuasion. And, finally, it wanted to continue to wage a form of cold economic warfare to prevent legitimate Soviet commercial expansion, such as in international civil aviation. It hardly needs to be pointed out that this overall policy was not entirely coherent: political gains through trade were sought by the USA, but were to be denied to the Soviets. In addition, the Administration would have to square the liberalisation of trade with the conservatives in Congress and with public opinion, especially in those areas where legislative reform was needed for liberalisation. It was from these latter two sources that the State Department proposals received their initial setbacks.

Marking time.

Between the summers of 1961 and 1963 little happened on the embargo front. The crises over Berlin in 1961 and Soviet missiles in Cuba in October 1962 both interrupted the Administration's plans to tackle the problem of how best to trade with the Soviets. Its initial inclination to liberalise trade only produced an opening of the crabmeat market and an announcement by the Commerce Department in June 1961 that it would sell subsidised agricultural produce to the Eastern bloc. Even then the effect of this modest gesture was tempered by an 'expression of the sense of Congress' in the Agriculture Act of 1961, which opposed the sale of subsidised agricultural commodities to 'unfriendly nations'.32 And this was not the only problem that emerged from the Congress. The attempt to amend the Battle Act pa.s.sed in the Senate, but after being referred to the House on 15 May 1961 it was left to languish unattended. The House failed to take action on it. Just over a year later, the three-year extension of the Export Control Act pa.s.sed in July 1962 included amendments, which the Administration eventually felt obliged to act on and tighten the embargo criteria. And the pa.s.sage of the Trade Expansion Act, which came into effect in October 1962, denied the use of MFN for Yugoslavia and Poland despite Administration pleas that the hard-liners should relent on their determination to deny the President this tool of statecraft. There were also hearings and investigations by Congress, the tone of which was sometimes interpreted differently by those in favour and those opposed to liberalising trade, but on the whole an impartial observer would have to conclude that the overall gist was critical and generally directed towards a tightening of the trade embargo.33 But it was not domestic pressures that halted the (admittedly sluggish) momentum towards reforming trade policy with the Soviet bloc: it was the impact of foreign developments. In July 1961 the Berlin problem came to a head with the building of the Wall. In effect the Wall solved the crisis, but it was not widely perceived like that at the time, and tensions mounted. In August the Soviets also resumed atmospheric nuclear tests and two months later detonated a ma.s.sive 50-megaton atomic bomb. The reaction to all this in Was.h.i.+ngton was very negative. On 15 August an unofficial meeting of the ECRB consisting of Kennedy's NSA, McGeorge Bundy, Agriculture Secretary Orville Freeman, Defense Secretary McNamara, and Hodges 'decided not to license the export of subsidized agricultural commodities to the Soviet bloc and not to announce the decision. They also decided to exercise extreme care in granting licenses for exports to the Soviet bloc in order to be certain that exports would be clearly non-strategic.'34 This was just what Hodges and his department needed. It cut back on licences 'with the knowledge and approval of the President' and looked to 'keep on being very critical of export licenses unless and until the international situation greatly improves, or the Review Board and the President decide otherwise'.35 In fact, Commerce went further than the President had intended.

With public opinion and the Congress highly critical of the Soviets, and with major priorities such as pa.s.sage of the TEA seizing the attention of senior officers of government, the drive for trade liberalisation with the Soviets faltered. Jack Behrman, a.s.sistant Secretary of Commerce for International Affairs, spoke in January 1962 of the dangers for East-West trade liberalisation from a 'whiplash of an ignorant public and a vacillating Administration'.36 Just how vacillating and divided the Administration was is evident from the Interdepartmental Committee of Under Secretaries, which met on 10 January. The key players at the meeting were Behrman, a.s.sistant Secretary of State for Economic Affairs Martin, the Under Secretary of State George Ball, and Under Secretary of the Treasury Henry Fowler. There was a clear division between the Treasury and Commerce on one hand and the State Department on the other: it also has to be said that neither side's position was entirely consistent or clear.

Behrman began by expressing his department's aim of trying to get agreed Western rules for East-West trade, trying to get the Soviets to comply with them, and trying to maximise agreement in COCOM. The State Department officials thought that this was unrealistic and that Commerce's other objectives appeared contradictory, namely, extending controls 'across the board' and hoping to 'trade more with the bloc'. Behrman clarified this by saying that he had not meant an 'across-the-board' expansion of controls, but only an expansion to some items not 'directly related to strategic uses' and a tightening up on 'technological data': trade in consumer goods could be expanded. Commerce thought that the Soviets had no interest in commercial trade as such, but only in plant, machinery and technology that they could pirate and use to enhance both their own manufacturing base and their offerings to LDCs. Fowler's position was even more hard-line: When we sell Russia packaged know-how in a non-military area, Russia will pull its people off this research and put them to work on missiles. Moreover, our trade enables the bloc to penetrate the LDCs more successfully. They use our prototypes to manufacture plants which they can offer to the LDCs.37 The contrast between the position of the Commerce and Treasury officials and Martin and Ball from the State Department was substantial. Ball argued that Soviet trade policy had a variety of components: the Soviets had commercial objectives: they wanted to build up their war machine; they had economic warfare aims; and they wanted to penetrate the LDCs. What the USA should do was to counter the non-commercial components of Soviet policy and encourage the expansion of the commercial. He declared: 'Unilateral action by the US is hopeless.'38 And both he and Martin explained that the position of the West Europeans was very different from that of the USA, and that there was no hope of obviating the problems of de facto trade discrimination for US firms, or of reducing friction with the allies by getting them to tighten the embargo as Commerce and the Treasury seemed to favour. Behrman, seeing that his department's views were at odds with those of the State Department, later sent the minutes of the meeting to Hodges with the observation that he might 'be interested in the comments of Ball and others'.39 With such differences between the departments it was little wonder that no progress was forthcoming. By mid-January Rusk and Under Secretary Ball felt that Hodges had gone too far in tightening up the embargo, and that he had gone beyond what the President had intended when he authorised more stringent controls in response to the Berlin Crisis. On 23 January the ECRB went along with this view, and three days later the NSC requested Rusk to review US economic defence policy as set out in NSC 5704/3. Some irritable exchanges followed between Hodges and Ball. The Commerce Secretary claimed that Ball had put an unreasonable construction on a meeting with the President in order to justify State's desire to ease the embargo to pre-Berlin Crisis levels. Hodges reprovingly commented to Ball: 'George, you know this meeting, which was not over one minute's duration, did not lay any facts before the President.'40 State Department officials were exasperated with Hodges and fearful of serious ructions in the alliance if America did not at least make some gesture towards liberalisation. Late in February it became clear that the British wanted to press for a 50 per cent reduction in the COCOM strategic embargo list.41 There was also a bureaucratic problem in March 1962, because Hodges, fed up with the whole business of export controls and preoccupied with nursing the TEA through Congress, tried to off-load responsibility for the politically sensitive embargo issue onto the Treasury. The proposal to transfer authority was opposed by Douglas Dillon and others in the Administration, but the decision to leave responsibility with the Commerce Department was not finalised until 30 April. In the meantime policy development languished, as State and Commerce continued to disagree about how it should be conducted. It was not until the three-year extension of the Export Control Act was pa.s.sed in July that further debate took place, which substantially changed things.

The act was pa.s.sed, with amendments, in a context of considerable hostility towards trade with the Eastern bloc that had been voiced in several congressional committees and hearings. The act raised three issues: the problem of multilateral Western action; the development of a co-ordinated set of trading rules to be applied to East-West trade; and the demand that a.s.sessment of the economic significance of export items should be taken into account in licensing policy. The att.i.tude of the Commerce and State Departments to these matters and the policy implications that they drew from them once again highlighted the problem of trying to reach an agreement on how to develop policy in this area.

From a letter to Kennedy on 10 July, it is evident that Luther Hodges believed that the Act urged 'maximum agreement on expanded controls by the Allies'.42 Even though he presented the problem and its solution in a rather confused form of conditional either/or options, everyone involved knew that the Secretary of Commerce did not want to trade with the Soviets. Hodges a.s.serted that the central questions had to do with US national security and how the export control system could contribute to that. His conclusion was that present policy fell between two stools: it neither maximised negative impact on the Soviet bloc, nor garnered maximum benefit from trade for the USA. Furthermore, it left allies, Congress and much of the American public with grounds for dissatisfaction and complaint. If trade enhanced the Soviet ability to threaten the West, either through increased penetration of LDCs or through a more rapid expansion of its military capability, then the 'objective should be the maximum delay of growth of the Soviet bloc at the least cost to other objectives'.43 The West should clamp down on anything that could transfer technology and the ability to increase Soviet production, and only expand trade in consumer goods. Hodges acknowledged this would cause difficulties with allies, but he believed that the West European business community was not enthusiastic about 'uncontrolled expansion of trade'. He suggested: 'We need considerably better intelligence than we have to determine the type and weight of tactics needed to persuade our Allies to become more restric-tive.'44 The alternative put by Hodges depended upon a determination that 'controls by the United States which are not concurred in by its Allies and which are over and above the current military-oriented controls have no appreciable adverse impact on the economic potential of the Bloc, [in this case] balance of payments and other considerations would suggest we abandon all controls other than those imposed under multilateral arrangements (COCOM)'. This would then be followed by a vigorous export drive that would put the USA compet.i.tively on a par with Western European countries. Hodges felt that until one of these basic approaches had been adopted, and the ineffective present policy abandoned, cases requiring export licence decisions should not be taken.45 The State Department's position was expressed to the NSC by Rusk, who read the congressional runes in a more favourable light than the Commerce Department: he did not think that there was a ground-swell of opinion in favour of tightening controls. In any case, he explained that there was little point in embargoing material that the Soviets could easily acquire from other Western sources, and he felt that there should be 'no illusions' about the fact that the Allies were 'entirely opposed to an increase in the severity of existing controls at this time'.46 Rusk believed that the decisive point was to use trade to influence the Soviets to be 'more peaceful and responsible'.47 That objective would be compromised if they were now to tighten export controls. It would send the wrong message to the Soviets at a time when there was some easing of tension after the Berlin crisis. He described this as a decisive point. Furthermore, he felt that it was important to recognise that the trade with the Soviets was minute. This presently gave the USA little leverage to influence the character of that trade, but nevertheless, the Soviets placed a psychological importance on it out of all proportion to its size-this was something to exploit. Thus the main thrust of the State Department's argument was to concentrate both on embargoing items of direct military use to the Soviet Union and on r.e.t.a.r.ding its war-making potential. Trade should be expanded as a means of increasing US influence and as a tactic for encouraging fragmentation in the bloc. The USA should strive to coordinate policy as far as possible with the allies by only embargoing items of 'reasonably clear and direct military significance.... This fact rules out economic warfare except at a time of high crisis.'48 The overall message was clear: the State Department wanted to relax controls and expand trade. It did not get its way.

Hodges agreed with Rusk that US trade was not quant.i.tatively important, but that made it all the more vital to a.s.sess its qualitative impact. In other words the USA was not getting much dollar benefit because the trade was so limited, but the Soviets were able to pirate its technology and gain disproportionately. (A quip Kennedy made to Khrushchev in Vienna illuminates this danger. When Khrushchev asked if he would sell him a new American tractor Kennedy responded: 'I won't sell you one, Mr Chairman, but I will think seriously about selling you 1,000.'49) Hodges declared that: 'The evidence available to me is overwhelming that the Soviet bloc is interested primarily in obtaining machinery, technical data and technically advanced commodities'.50 However, he agreed with Rusk about trying to influence the Soviets, although such trade should be solely in consumer goods. Even goods falling into the grey area between consumer and strategic should only be exported on the basis of a 'reasonable possibility' of influencing the Soviets to more peaceful and responsible behaviour, and not on the basis of a 'mere expression of hope on our part'.51 While he recognised that this would create problems, he was against setting 'our export controls at the lowest level represented by our allies'.52 Hodges described the above arguments as the substance of the issue: by this he meant the position that he felt the USA should adopt on its merits, before taking political considerations into account. These considerations were the att.i.tude of the Congress and public opinion and the requirements of the Export Control Act, all of which he believed strengthened his arguments about the substance of the issue. Finally, he feared a congressional backlash that would undermine other objectives of the Administration. Most notably, the TEA had not yet gone through the Congress.

In the light of these arguments the State Department had to give way. There was no liberalisation. Existing policy was brought more into line with the amended Export Control Act, particularly with regard to the 'economic potential concept'. As a result, a fourth criterion was added to US licensing policy, in addition to those covering arms, war material, military industrial technology and military-industrial capabilities. Now there was also to be consideration of: 'Materials, equipment and particularly technical data making a significant contribution to Soviet bloc activities which disrupt essential free world economic arrangements in such a way as to prove detrimental to the national security and welfare of the United States.'53 Among other things this would cover widediam-eter steel pipes, which were soon to cause such controversy with Britain and expose the difficulty of trying to craft a more co-operative Western embargo policy. In the NSC, after further extensive discussion of policy, the President summarized matters by 'directing that the existing Economic Defense Policy paper be revised to the extent necessary to reflect recent changes in the law made by the Congress'. However, no major review of the 1957 policy paper NSC 5704/3 was necessary, and nothing further should be done until the situation with regard to Berlin had become clearer.54 Hodges was not content even with this, and tried to prompt new efforts to persuade America's allies to increase the COCOM embargo lists. Rusk responded vigorously: 'I realize that the National Security Council on July 17 discussed the idea of a determined effort to get our Allies to agree to a higher level of multilateral export controls, but I am not aware of any agreement having been reached that a special attempt along those lines should be made, nor does NSC action 2455 [from the 17 July meeting] record any such agreement.'55 Rather than pus.h.i.+ng forward with liberalisation, the Kennedy Administration might best be characterised by saying that it was engulfed in departmental battles over what to do between 1961 and 1962, and that the liber-alisers ended up fighting a fierce rear-guard action to try to salvage what they could of East-West trade in the face of a determined effort to extinguish it by the Commerce Department and its allies in the military establishment.56 After the Kennedy Administration had been eighteen months in office the COCOM lists were getting longer; the implementation of the regulations was being tightened, particularly with regard to technology transfers; the Americans were on the verge of a major row with Britain over wide-diameter steel pipes; the Congress, with the collusion of the Commerce Department, had pushed the Administration into adopting new criteria for controlling any exports that could help the Soviet bloc penetrate the LDCs; and trade with the communist world had diminished. In the autumn of 1962, hopes for liberalisation were frustrated further. The House and Senate, in June and September respectively, pa.s.sed the TEA, and Section 231(a) directed the government to suspend 'as soon as practicable' MFN treatment for communist states. At this time only Yugoslavia and Poland were so treated, and the executive branch contrived to continue with that practice, but any further use of MFN was prohibited.57 Where in all this was the capacity for flexible response? Kennedy so far had failed lamentably to realise that goal in the realm of economic defence policy. Hopes for a new initiative were quashed by the Cuban Missile Crisis of October 1962, but in its aftermath came the shoots of detente, most notably the Partial Test Ban Treaty agreed in Moscow in July 1963. The thaw in East-West relations moved Kennedy to request another review of East-West trade policy.

Kennedy's last chance.

By early 1963 changes in international circ.u.mstances meant that a relaxation of the embargo was both more desirable and feasible. After Kennedy's strong performance in the Cuban missile crisis he had less to fear from conservative critics. The thaw in East-West relations offered an opportunity for promoting US political interests through trade.

And, as well as yielding political benefits, more trade would help the balance of payments and possibly open new markets for huge US agricultural surpluses. This was becoming an ever more acute problem. It explains the decision to authorise sales of subsidised agricultural products to the Soviet bloc and was one of the reasons why the USA supported the British attempt to enter the EEC. It hoped that Britain would move the Community, America's main foreign food market, towards freer trade and away from the protectionism of the Common Agricultural Policy, which threatened to exclude US farm exports. On 14 January 1963 de Gaulle vetoed Britain's application and dashed American hopes. A concerned Kennedy asked Rusk about West European agricultural exports to Eastern Europe and the potential market there for the USA. Rusk's reply highlighted difficulties created by credit and other existing embargo restrictions.58 These factors, combined with Kennedy's moderate liberalism (which had favoured some relaxation of the embargo right from the start of his Administration), now produced a more positive drive for change. But, ironically, the final prompt for a policy review appears to have come from Hodges. On 8 May Hodges wrote to Kennedy yet again about embargo policy, expressing fears about Soviet intentions and the need to abide by the strictures, as he saw them, of the 1962 Export Control Act. On 16 May Kennedy replied. He explained that American businessmen were fully conscious of the dangers of Soviet technological piracy, and if they were prepared to strike deals he saw few grounds upon which to base opposition to such transactions. Nevertheless, he had requested that the ECRB review the situation with specific reference to the two questions that Hodges had raised: Was the USA receiving adequate compensation for her technology sales when the Soviets disregarded patents and copyright? And, should the USA reconsider its embargo policy in the light of West European trade with the Soviet bloc?59 In the meantime, he favoured construing the 'economic potential' clause of the 1962 Export Control Act 'as narrowly as possible'. For Kennedy it was the potential political pay-offs from a more flexible trade policy that really counted, though undoubtedly commercial benefits were not entirely discounted by him. He explained his position to Hodges in no uncertain terms.

It is not my judgement that the gains to our national security which can be achieved by denying the Soviets access to American machines and factories of the kind we are discussing, many of which they can get in Europe in any event, balance the cost to our national security of making it more difficult to deal with the Soviets on vital military and political issues.60 The tone and substance of Kennedy's request for a report from the ECRB within ninety days tipped the balance in favour of action to relax controls. He wanted to know 'How much possibility is there for a significant broadening of trade that is consistent with our security interests?' And was it significant enough to warrant general trade talks with the Soviets?61 The debate that this generated within the Administration provides a fascinating insight into the type of thinking that had developed about the embargo. The position of the hardliners in the Commerce and Defense departments (but, it should be noted that Secretary McNamara was not a hard-liner on this)62 had largely been pre-empted by the way that the President had formulated his request for a review. However, strong notes of caution were sounded on two grounds. The first, reflecting reasoning long evident in the Commerce Department (the USA should not s.h.i.+ft its position until the Soviets had), was loudly sounded by Walt Rostow. The second concerned problems with Congressional and public opinion, if changes to US control legislation were sought; this was sounded by McGeorge Bundy's aide David Klein, the senior member for European affairs on the NSC, who had previously been on the State Department Soviet desk.

The report requested by the President was eventually produced in the form of a paper prepared by Rostow and his PPS in liaison with others, dated 26 July and ent.i.tled 'US Policy on Trade with the European Soviet Bloc'. ECRB recommendations for action came later, on 15 August. The Rostow paper was a veritable intellectual tour de force and deserves to be quoted at length. For Rostow, the essential problem was how to use trade policy most effectively in the conduct of US affairs with the Soviet bloc. To maximise effectiveness, context had to be appreciated.

For a number of years now, we have attempted to maintain, virtually in isolation, a posture tantamount to economic warfare. A change in this stance would therefore carry considerable meaning.... The major issues in our trade control policy are political not strategic, economic or commercial. Neither full access to, nor complete denial of, trade with the US can affect Soviet capabilities to wage war-either hot or cold war. Nor can either trade situation affect in any meaningful sense the performance or potentialities of the Soviet economy. And from the US side, the economic and commercial significance of trade with the USSR, whether free or restricted, is negligible.63 The key for Rostow was the psychological fall-out that might occur if changes were not timed carefully, because the system 'has become intricately interwoven into our overall strategic thinking'.64 In a static Cold War situation, which is what Rostow believed the USA to be in, 'there can be no question of giving quarter, psychological or otherwise, to the enemy'.65 But in a fluid situation he believed that the USA could move to a position where only the strategic items on the COCOM list would be controlled. Everything else could be bargained away for concessions from the USSR. These bargaining chips, Rostow explained, were largely psychological in nature.

Trade denial has come to be an important symbol of our cold war resolve and purpose and of our moral disapproval of the USSR. The trade controls issue has an important place in our continuing efforts to arouse the free world to common action and policies against the Communist threat. We have sought to induce non-communist states to hold trade to a minimum, not only on grounds of denying help to the Communists to build their power, but on the grounds that increased trade would carry real and immediate dangers to free world partic.i.p.ants in that trade.66 For their part the Soviets had also invested the trade issue with significant psychological importance. They saw trade with the USA as important out of all proportion to its actual volume, because the embargo was a symbol of the USA's refusal to treat the USSR as a legitimate and equal nation state and evidence of America's audacity in discriminating against it. Among East Europeans the embargo was perceived differently, but there were gains for the USA here as well, because it was seen as an obstacle 'to creating new alternatives to total economic reliance on the USSR.'67 Thus the prevailing conditions provided many opportunities for the USA to exchange intangibles for solid gains from the Soviets, but this process could not begin until the Soviets raised the trade question in the course of serious negotiations, and until they made concessions as proof of their good intent. Any s.h.i.+ft in policy by the USA under static Cold War conditions would 'impair US ability to hold up its end in the Cold War', and it would be difficult to justify such moves to the Congress and American people.68 The appearance of Rostow's paper did not end the debate about what was to be done. This continued for over a month and drew in the White House staff, namely Klein and McGeorge Bundy. The latter favoured a more immediate pro-activist line than Rostow, but he also had some reservations about the ECRB recommendations. The recommendations of 15 August, by Hodges, McNamara and Rusk, were not surprisingly a compromise between Commerce, Defense and State department positions-indeed, the a.n.a.lysis accompanying the proposals acknowledged that there was still 'a clear disagreement within the Executive Branch' about what policy to adopt, because the data available could not conclusively indicate a right course of action. Nevertheless, the report recommended a more positive policy, in line with Kennedy's clearly expressed preference. It made seven proposals: 1 'as a matter of urgency', a review of the compensation for US technological exports; 2 the Commerce Department should keep existing licensing policy under review so as not to weaken the USA's future negotiating position; 3 guidelines for trade with Eastern Europe should be revised within the existing legal framework in order to expand trade; 4 possibilities of a bilateral trade deal with the Soviets should be explored 'on an urgent basis'; 5 the best means of exploiting an expansion of commercial relations.h.i.+ps either on a step by step or bilateral agreements basis, including the possible creation of a commercial corporation, should be explored; 6 a study of a new legislative basis for East-West trade that would give the Executive more discretionary power should be conducted; and 7 the State Department should explore with allies the feasibility of modifying the COCOM regime without endangering 'the substance of mutual security'.69 The a.n.a.lysis that accompanied the proposals acknowledged the difficulties of a.s.sessing the impact of policies on US interests: 'a precise a.s.sessment of what was not done is always difficult'.70 Also Rostow's argument, about waiting for the Soviets to demonstrate their good faith before any moves on trade policy by the USA, was addressed, but essentially the a.n.a.lysis took the line, later to be argued by Klein in a memorandum to McGeorge Bundy, that the USA should move now to accelerate what were already perceived as moves in the right direction by the Soviets. Klein was particularly keen to exploit what he saw as opportunities in the East European bloc.71 During the next month discussion continued. In particular, Klein produced comment on both the report and the recommendations for McGeorge Bundy. In those commentaries he exposed some of the problems that might arise if either Rostow's ideas or the ECRB's recommendations were implemented. Klein thought that Rostow's position was fatally flawed because it was 'unrealistic' to expect the Soviets to move and make concessions first: 'it is in the give and take process that the intention of the other side can be ascertained.'72 So far as the ECRB recommendations were concerned, Klein judged that the time was not politically right to alter the legal framework of controls in the USA. On the other hand, the thaw he detected in US-Soviet relations, while amounting to something well short of detente, warranted the use of executive discretion to increase trade. Attorney General, Robert Kennedy had recently expanded presidential discretionary power by conveniently ruling that the Johnson Act did not prevent the extension of short-term credits to the Soviet Union. It was this kind of discretion that Klein wanted the President to wield to expand trade through hard bargaining. His a.n.a.lysis of the ECRB recommendations for McGeorge Bundy took a similar line. Thus he recommended acceptance of proposals 13 and 5, but suggested that 4, 6 and 7 should be shelved because they involved political dangers with Congress and the public that would 'get in the way of domestic politics, [and] get in the way of negotiations with the Soviets'.73 In short, Rostow wanted to be adventurous in pursuing a new trade policy, but only after the Soviets had made a clear demonstration of intent to improve their ways. The ECRB proposals were less radical in that they only recommended action within the existing legal framework and studies to explore the possibility of legislative changes. Klein thought it was unrealistic to expect the kind of s.h.i.+ft in policy from the Soviets that Rostow had set as a precondition for change, but he was unhappy with the ECRB's proposals because he felt that they would occasion political repercussions that might negate any attempts at liberalisation. He favoured using the discretion that the Executive already had to engage the Soviets in trade talks and exchange liberal licensing decisions for Soviet concessions.

McGeorge Bundy did not take Klein's advice to shelve the politically sensitive recommendations. He forwarded them all to Kennedy. The President endorsed the ECRB's proposals, but wanted to give an even more positive gloss to them. This becomes very apparent when one compares the draft memorandum with the final version he sent back to the ECRB. In the draft of 12 September Kennedy approved the further studies recommended by proposals 1, 4, 5 and 6. He also approved the second and third recommendations, though he broadened the spirit of the third recommendation so that a less restrictive licensing policy could be applied immediately to the satellites, and not just after new guidelines had been drawn up. All these decisions remained in the final note from the President to the ECRB, but he added a sense of urgency for liberalisation, and there is circ.u.mstantial evidence that this derived not just from his own inclinations on East-West trade policy but also from pressure from Rusk and the State Department. The President said that he was: strongly in favor of pressing forward more energetically than this report and its recommendations imply, in our trade with the Soviet and Eastern bloc. The course of events of the last two months, including particularly the test ban agreement and the evidence of greater trade by our allies..., persuade me that we must not be left behind. I believe also that one person within the Government should have central responsibility for setting this program into action.74 The State Department was given the authority to direct the new studies, and eventually the person designated to be in charge of co-ordination was George Ball.75 In early October an announcement of intent was made to sell US wheat to the Soviet Union, though the details still had to be finalised. The announcement prompted a widespread public debate about East-West trade, and to the surprise of some it was generally even tempered and well disposed to trade expansion. Both public and congressional opinion had s.h.i.+fted to a more favourable view of this issue. Now at last there appeared to be real opportunities for change and for developing economic flexible response. Driven by the prospect of positive gains, developing detente and the 'fear of being left behind' by its allies, the Kennedy Administration was now poised to negotiate a relaxation of the embargo. It is interesting that, as in the Eisenhower years, alliance consid-erations encouraged US embargo liberalisation: they were not as powerful as in the 1950s, but still had some effect, and they were to count even more in the near future, as consideration of West Germany's position helped to mobilise Johnson's 'bridge-building' policy.

Tragically, shortly after announcing the intention to expand East-West trade, John Kennedy was a.s.sa.s.sinated in Dallas. After a thousand days the Kennedy Administration had only meagre results to show for all the reports and papers it had commissioned on the problem of East-West trade, and for its attempt to translate the commitment to flexible response into practice in the field of economic defence policy. It remained to be seen what its successor could do to carry forward the intellectual framework that had been constructed, and whether it would have more success with the translation of ideas into practical policies.

Lyndon Johnson and the Cold War.

our guard is up, but our hand is out Llewellyn Thompson.

the whole question of trade with the Soviet Union has become a focal point for political and emotional hesitations George Kennan The East-West trade bill became a victim of the war in Vietnam Lyndon Johnson76 These three quotes capture much of the tone, feel and frustration of the Johnson Administration's approach to, and problems with, East-West trade.

When Lyndon Baines Johnson succeeded to the presidency in November 1963 there was discernible momentum towards a relaxation of US East-West trade. An official history later claimed: 'By the time of the change of Administration...the debate on East-West trade policy within the Executive Branch had finally been resolved in terms of a definite action program. The major thrust of the program was towards increased nonstrategic trade and towards greater flexibility of trade control policy.'77 Not only was this evident with the prospect of wheat sales, but there were also moves to extend credits through the Export-Import Bank to several East European countries. In 1963 the Kennedy Administration had persuaded Congress to relent over denying MFN trade for Yugoslavia and Poland.78 The power to negotiate under those terms was granted by the 1963 Foreign a.s.sistance Act, and Johnson managed to keep MFN treatment for Yugoslavia and Poland despite some later opposition from Congress. More innovatively, the USA exploited the rift between Moscow and Bucharest: in the summer of 1964 a commercial accord was signed, Export-Import Bank guarantees were authorised for non-agricultural sales, and export licensing was liberalised.

However, Johnson's position on East-West trade on entering the White House is not entirely clear. George Ball recalls that, as Vice President, Johnson declared that the 'wheat deal was the worst political mistake we made in the foreign policy of this Administration', and other sources corroborate this.79 In April 1964 there was much controversy within the Administration about East-West trade, and in particular about advanced-technology beet harvesters and fertilisers. It was in this context that McGeorge Bundy advised the President to 'approve industrial licenses much more broadly than Commerce wishes to...I do not agree that we can or should try to negotiate political cases in return for straight commercial deals...I think our restrictive policies hurt us without hurting the Soviet Union. I have heard you speak of your general support for peaceful trade, and I think these are cases in which that principle can safely be allowed to govern.'80 Despite this forthright advice, Johnson was not persuaded. At an NSC meeting he 'expressed the view that at this time and under present circ.u.mstances we would preserve our self respect more effectively by requiring some quid pro quo before issuing further licences to the bloc in this field of advanced agricultural equipment and technology'. Johnson also thought that 'broad trade negotiations with the USSR should be deferred at this time'.81 The politics of an election year were on his mind, and that deterred him from pus.h.i.+ng ahead immediately with trade liberalisation; however, he did not abandon the issue entirely.

On 23 May 1964 the President flew to Lexington Virginia, where he pledged himself 'to "build bridges"-bridges of trade, travel, and humanitarian a.s.sistance-across the gulf that divided us from Eastern Europe'.82 By June Commerce was prepared to step onto the bridge and sell beet harvesters to the Soviets without a specific quid pro quo over and above their normal price.83 These developments seem somewhat at odds with the President's att.i.tude about the wheat trade and his early caution about trade with the Soviets, but three factors persuaded him to pursue bridge-building and expand trade, at least, after the election.

The first factor was a change of public and congressional mood in favour of expanding trade. Evidence of this came from hearings on East-West trade by the Fulbright, Senate Foreign Relations Committee in the spring of 1964 and again in February 1965. An a.s.sessment of the hearings in March 1965 claimed that: Although opinions and recommendations ranged widely, they found a common meeting ground in the general view that the Soviet Union and countries of Eastern Europe should be considered separately, with a marked preference for trade expansion with the latter balancing a reluctance to trade with the former.' A preference for expanding trade was also expressed at the annual meeting of the US Chamber of Commerce in April 1964.84 Johnson's understanding of foreign policy was superficial, but he registered public and congressional opinion like a sophisticated barometer.

The second factor was the relations.h.i.+p between East and West Europe. The most difficult issue that Americans had to deal with during the 1960s was Vietnam, but there were also ma.s.sive problems in Europe. The early 1960s was a worrying transition period in West Germany, as Chancellor Adenauer finally stood down and was replaced by Ludwig Erhard in October 1963. With its self-respect renewed and its economy flouris.h.i.+ng, West Germany became more a.s.sertive. Among the worries that this occasioned were the possibility of unilateral moves to close the gap with Eastern Germany and fears that it might want to follow in the path of Britain and France and develop its own nuclear capability. To counter the latter danger, and also bring French and British nuclear weapons under US control, Was.h.i.+ngton proposed a NATO Multilateral Nuclear Force. As Johnson explained to the British Prime Minister, Harold Wilson, in December 1964, this would 'keep the Germans with us and keep their hand off the trigger.'85 In the end the idea fizzled out, as neither the French nor the British were prepared to give up control over their national deterrents, and the possibility that the Germans might demand a nuclear capability of their own never materialised. The other problem, West German desire to close the gap with East Germany with an eye to eventual reunification, was much more substantial. In any circ.u.mstances, the position of West Germany in the Cold War confrontation was of vital importance, because of its geographical position, its economy, and potential military power. But the circ.u.mstances in the early 1960s were not just any circ.u.mstances. The integrity of the Western Alliance was under pressure-the Campaign for Nuclear Disarmament, America's growing preoccupation and involvement in Vietnam, and French unilateralism (culminating in the announcement of the French withdrawal from NATO's military structure in March 1966, and de Gaulle's independent overture of friends.h.i.+p to the Kremlin three months later) all threatened it-and the USA did not want cohesion further undermined by West German overtures to the Soviets for a rapprochement in order to improve relations with East Germany. Was.h.i.+ngton realised that it could not quash West Germany's legitimate aspirations for closer links with East Germany: it was a matter of keeping them under control. Bridge-building was seen as a means of meeting West German aspirations and keeping them in line. The Johnson Administration's main contribution to the development of the embargo policy was to emphasise the role that trade could play in breaking down barriers between East and West Europe, and how those barriers might be bargained away for concessions that would enhance the chances of success for detente.86 A third factor which explains Johnson's pursuit of liberalising trade was the very fact that the Kennedy Administration had finally come out in favour of relaxing the embargo and that some momentum had developed, in particular for cultivating trade relations with Eastern Europe. He relied much on his foreign policy advisers for, by all accounts, he had little knowledge of foreign affairs. One scholar describes his appreciation of foreign affairs as 'shallow, circ.u.mstantial, and dominated by the personalities of heads of state he had met.' Johnson fully and uncritically shared the a.s.sumptions, axioms, dogmas, and doctrines that composed the American Cold War mindset.'87 But, by October 1963 that mindset believed that the initiative in the Cold War could be retaken, at least partially, via a flexible-response economic defence policy. He may have refused to take Bundy's counsel in May, but after the election, as the weight of opinion grew, Johnson swung behind the idea of relaxing trade controls.

In late November the Task Force on Foreign Economic Policy88 was referred to him by McGeorge Bundy. Members of the Task Force included Robert Roosa, Under Secretary of the Treasury for Monetary Affairs, Philip Trezise, Deputy a.s.sistant Secretary of State for Economic Affairs, and Francis Bator, Deputy Special a.s.sistant to the President, who was an influential White House insider. The Task Force's brief was wide, and, while its most dramatic proposals concerned foreign aid, the President's advisers suggested that he should give attention to the section on East-West trade as well. The Task Force found that 'experience has shown that we, and even the west as a whole, have little capacity to affect the viability of communist countries by denying trade', and unified western action had been difficult to achieve except in crises.89 In the light of these considerations and more optimistic a.s.sessments of the likely volume of US trade with Eastern Europe and the Soviet Union-possibly $500700 million by 1970-the Task Force recommended three positive steps. Trade should be actively encouraged; the government should offer export credit guarantees; and an East-West trade act should be pa.s.sed to give the President power to negotiate trade agreements whenever he found them to be in 'the public interest'.90 Encouraged by this, Johnson reaffirmed the commitment to bridge-building. In his 4 January 1965 State of the Union Message he said: 'In Eastern Europe restless nations are slowly beginning to a.s.sert their ident.i.ty. Your Government, a.s.sisted by leaders in labor and business, is exploring ways to increase peaceful trade with these countries and the Soviet Union.'91 In February Johnson announced that he would appoint a Special Committee on US Trade and Relations with Eastern European Countries and the Soviet Union. This became known as the Miller Committee after its chairman, J.Irwin Miller of the c.u.mmins Engine Company.

The Miller Committee.

In retrospect it is tempting to dismiss the Miller Committee as little more than a consensus-building operation. However, that would undervalue the importance of achieving a consensus in this fraught area of policy-making and overlook an important result of the committee's work. Although the Johnson Administration never achieved the substantial changes that were recommended, because of congressional opposition, the underlying goal proposed by the committee of making US trade policy more flexible was not lost completely. Executive action did moderate existing policy. More importantly, something approaching a consensus on a number of previously highly contentious issues can be detected in the papers, reports and discussions that the Miller Committee occasioned. This consensus had several components. There was a broad acceptance that US embargo policy was ineffective both in r.e.t.a.r.ding the Soviets' military capabilities and in slowing down its economic growth. It was agreed that Soviet trade policy with the LDCs and the industrialised West had not produced major political pay-offs, and certainly not ones that could have been prevented by the embargo policy. Also, trade had not given the Soviets significant political leverage except in one or two cases.92 There was little evidence of Soviet malpractice in terms of abusing the market, except over patents and copyrights, and hence expanding trade could help improve relations and ease tensions. The USA could not create a united front on a Western embargo beyond a strict military end-use criteria, which made a nonsense of embargoing items that Western Europe and j.a.pan freely exported to communist states. Most significantly of all, East European countries should be targeted for trade expansion through a flexible-response strategy in order to encourage their disengagement from the Soviet Union.93 The core position of the CIA, the State and Defense departments was that the USA was no longer reaping relative gains from its embargo policy. It was thus nonsense to pursue it as presently const.i.tuted.

The CIA thought: 'Freer industrial tra