The Impact of Governments on East-West Economic Relations

The chapters and commentaries in this volume are a part of history. That may sound like a particularly grandiloquent statement but it is true in a number of respects. In the most narrow sense, this volume represents the proceedings, an historical record, of the 12th international Workshop on East-West European Economic Interaction held at The University of Georgia, April 1–5, 1989.

There is nothing in the nature of a planned economy that should require autarchy or self-imposed isolation from the world economy. The Soviet Union’s long-term quest for maximum self-sufficiency was primarily dictated by political circumstances. These circumstances have changed.

On the surface, it seems foolish for an American to write about the changing attitude of the Soviet government toward integration into the world economy when other chapters here are written by leading advisers to the Soviet government on the question. It would be clearly ridioulous for an American to explore current Soviet attitudes on current questions such as membership in the GATT or promotion of a United Nations conference on world economic interests.

Since Mikhail Gorbachev took office there has been a great amount of uncertainty surrounding perestroika, particularly its possible effects on East-West economic relations. In 1985, the introduction of major economic reforms seemed to represent the main hope of seeing these relations improve in the long term.⁴ At the present time, despite the relative decline in East-West trade throughout the 1980s, a certain number of studies have attempted to determine whether this hope can be based on the reform of Soviet foreign trade.

Since 1917, U.S.-Soviet commercial policy has followed a cyclical pattern of high peaks of interchange alternating with deep troughs of mutual economic isolation. The variations in policy on each side have turned on the perceived need to balance the benefits of trade against the political costs — that is, the potential loss of security and diplomatic leverage. Although the United States and the Soviet Union have never been major trading partners, trade has become important to key sectors, particularly agriculture. Following a substantial upturn in commercial relations during the period of detente (1971–1974), U.S.-Soviet economic relations over the next decade shifted steadily from cooperation to confrontation. In particular, the Soviet invasion of Afghanistan in 1979 and the imposition of martial law in Poland in 1981 triggered economic reprisals from the United States, including the 1980 grain embargo, restrictive foreign policy controls on exports, and reductions in credit and bilateral exchange programs.

According to widespread American opinions²⁾, three basic factors have shaped U.S. policy toward Eastern Europe since World War II: first, the critical position of Eastern Europe in the global superpower confrontation, including its direct relationship to the security and political orientation of Western Europe; second, the influence of organized ethnic groups representing immigrants and their descendants from Eastern Europe; and third, the idealistic pursuit of the universal desiderata of national self determination and respect for human rights. The first is by far the most important.

Entering the last decade of the 20th century, both East and West face a choice which is no less momentous (if not more momentous) than that they were confronted with after the end of World War II. How should they conduct their economic relations in an interdependent world? What guidelines, principles and mechanisms will best serve their long-term national and international interests as the world economy burdened by the weight of global problems undergoes profound technological change? The solution of these problems would to a large extent define the world economic order of the next century and the prospects for military confrontation being superseded by the binding forces of the international division of labour.

This chapter has several purposes: to discuss the fundamental political, ideological, and systemic determinants of East Europe’s foreign economic policies and outcomes; to provide an overview of East Europe’s post-war economic relations with the West; to analyze developments in the CMEA and how they are linked with East-West economic relations; to call attention to major changes in East Europe’s external economic environments, East as well as West; and to speculate about the future of the East European economies and of East-West relations to the year 2000.

The fast and growing diversification of both political and economic institutions and legislation in the East and the membership or non-membership of Western countries in the EC makes it difficult to formulate a general recipe for both groups of countries today, and even more in the mid-1990s. With these two kinds of differentiations every government’s “first port of call” is, to a varying degree, different. Beyond this reality there is also a psychological factor. Just as every single person wishes to be treated as an individual, so does every nation wish to be treated as an individual, unique entity.

Had the liberal perspective of the early 1970s on international political economy proved right, we would now be witness to a world economic theatre in which “coalitions are formed transnationally and transgovernmentally, [and] the potential role of international institutions in political bargaining is greatly increased”.²⁾ Had the neo-realist perspective of the early 1980s come to predict correctly what we were facing, we would now be enmeshed in various kinds of economic warfare waged by desperately mercantilist states, small and large. Both perspectives were mistaken and yet, paradoxically, both of them were able to depict substantive parts and trends of the economic world which we are heading for towards the end of this century. It would be both commonplace and euphemistic to suggest that this will be one in which the relevant processes are contradictory and rarely unidirectional.

For many years we have been accustomed to governments having monopoly control over foreign economic relations in centrally planned economies. However, the rapid reforms sweeping Eastern Europe are eroding this monopolistic control there, and substituting more conventional, liberal forms of foreign economic policy making and conduct. The formal abolition of foreign trade monopolies is simply a matter of time, although this timing will vary from country to country depending on the state of the national economy, particularly the balance of trade and level of indebtedness. Poland’s reforms of foreign economic policy are typical of the reforms taking place all over Eastern Europe.

Government policies are a function of national interest, and their goals, scope, and effectiveness can only be measured using the yardstick of national interests. This is the same for all countries no matter their social systems.

As of early 1989, it was still debatable whether or not fundamental economic reform would be realized in Czechoslovakia. However, a number of steps were taken towards reform and as a result of the Institute for Forecasting’s report, “Czechoslovakia 2010”, the question of economic reform received serious attention by the country’s leading economic and political authorities. More than a prognosis, the report amounted to a program for economic reform.

Recent discussions in international academic circles on the problems of perestroika and reforms have undoubtedly highlighted a great interdependence between these reforms and overall East-West relations with a special emphasis on economic relations. This was clearly seen at the 12th international Workshop on East-West European Economic Interaction whose principal subject was “The Impact of Governments on East-West Economic Relations”.

This chapter points to the movement of the EC towards a unified market in 1992 and the creation of a European Economic Space covering Western Europe, and, against the background of increased economic cooperation in Western Europe, it summarizes the present state of economic relations between the EC and the East European countries.

Mikhail Gorbachev’s arrival has given a new impetus to East-West economic relations. The Soviet Union and the entire Eastern bloc have developed a new attitude towards international economic organizations and in particular towards the European Community (EC). The EC, on the other hand, has elaborated a unified European market which will necessarily affect the nature of the economic and political exchange within Europe. How will the European unified market affect the relationship between the countries of the EC and the rest of Europe? This question preoccupies the countries of the Eastern bloc. They are asking: what does the Single European Act imply; what are the economic realities of the CMEA and the EC; and what are the prospects for intensifying the relations between the CMEA and the EC in order to help overcome the division of the European continent?

Because of its geographical position, its industrial strength, and its traditions, the Federal Republic of Germany (FRG) has always had a well-developed East-West trade. However, it should be borne in mind, that this trade has never been economically essential in the overall picture of the FRG’s foreign trade. The volume of trade with all CMEA states, excluding the GDR, has amounted to only 5 per cent of all foreign trade for quite some time. This is about the size of FRG trade with Belgium. The share of trade with the Soviet Union, the biggest CMEA state, amounts to about Denmark’s share.

The history of East-West relations (the term used to embrace all aspects of contacts and interchange among countries having very different social, political, and economic systems) has shown that relations in one area have never expanded or shrunk independently from relations in other areas. This is not a matter of theory but the reality of international politics. In the present international environment hopes for an expansion of East-West economic relations are growing because talks on arms reduction and control are being conducted between the East and West, particularly between the United States and the Soviet Union, and their political relations are shifting from confrontation to dialogue. At the same time, East-West economic relations have ceased to be totally dependent on East-West political relations and have become more independent and important. In such a context, the development of East-West economic relations would contribute to the long-term stability of East-West relations in general.

The political organization of the world, which is the result of the conventions adopted within the framework of the United Nations since 1945, has given some reality to the idealistic principle “one country, one vote”. Given a high degree of political culture, such as has been achieved by certain regions of the world, this principle enables small countries such as Austria to develop enough self-assurance to pursue active and sovereign policies. This may account for the fact that Austria’s voice is heard in the concert of nations even though its territory represents only 0.05 per cent of the land mass, and its inhabitants make up no more than 0.15 per cent of the world population. And it explains why Austria, and the Austrian people, are masters in their own house even though the country finds itself in a highly complex and, as has again been demonstrated recently, most unstable geopolitical situation.

One of the major changes occurring in the global political economy relates to the reintegration of the socialist countries. The importance of this topic has increased dramatically in the 1980s. Rapid changes in Soviet foreign economic policy confront the Western countries with a significantly altered situation that can be neither ignored nor wished away. These developments clearly call for an attempt to come to grips with the question of how East-West economic integration will proceed. As a contribution towards addressing this issue, this chapter focuses on the subject of participation by East European countries in the post-war international trade institution, the General Agreement on Tariffs and Trade (GATT).

It is widely believed that East-West economic relations have always been heavily influenced by political factors. However, Western governments, even those following otherwise liberal and non-interventionist foreign economic policy, have tried to control the sphere of economic contacts with socialist countries, using various economic and non-economic tools. This tendency has been particularly visible in the case of the United States, although other Western countries have closely followed American political guidelines.

A series of very large trade deficits have rapidly transformed the United States from the world’s largest creditor nation to the world’s largest debtor. While these large deficits and the complementary surpluses of some trading partners may continue for some time, global imbalances of recent magnitudes are unsustainable distortions in global capital flows and trading patterns. Both political and economic forces will dictate a narrowing of these imbalances. But doing so while maintaining good global economic growth rates will be a slow and difficult process, with many opportunities for things to go awry along the way. Intense competition for world markets for manufactured goods will risk rising protectionism that could lead to severe global and national economic disruptions.

Politics has dominated East-West commerce in the past and government intervention has been mainly restrictive. That seems less likely to be true in the future. A clarification of the future interrelationship of politics and economics in East-West commercial behaviour is essential in order to improve the accuracy of Western forecasts of East-West commerce and for assessing the government role in this area.

In outlining the prospects for East-West economic relations in the 1990s it is necessary to begin with an appraisal of the general political climate. This is important because the new emerging forms of economic cooperation are more complicated than traditional forms of simple commodity exchange and require a far more favourable political and security climate. Their expansion demands a higher degree of trust, mutual accountability in behaviour, and stability in political relations.

The development of international economic relations has been significantly shaped by the policy of governments. Acute debates between proponents of free trade and protectionism dating back to the past century burst out from time to time today. These conflicting approaches to foreign trade express the true interests of industrial and agricultural groups in the countries concerned. They, of course, affect world trade and can be illustrated by numerous examples.