How Regimes Matter: Western Control of East-West Trade Finance

An important exception is Paul Marer (ed.). US Financing of East-West Trade (Bloomington, IN: Indiana University. International Development Research Center, 1975).

For a full discussion of the institutional approach to international co-operation see Robert O. Keohane , After Hegemony: Cooperation and Discord in the World Political Economy (Princeton, NJ: Princeton University Press, 1984), pp. 7-10.

Robert Axelrod , The Evolution of Cooperation ( New York: Basic Books. 1984) and Robert Axelrod and Robert O. Keohane , 'Achieving Cooperation Under Anarchy: Strategies and Institutions', World Politics (Vol. 38, No. 1. October 1985), pp. 226-54.

On the role of knowledge in the creation and maintenance of international regimes see the recent work of Ernst B. Haas , in particular 'Why Collaborate? Issue-Linkage and International Regimes', World Politics (Vol. 32, No. 3, April 1980), pp. 357-405.

See Robert O. Keohane , 'Reciprocity in International Relations ', International Organization (Vol. 40, No. 1, Winter 1986), pp. 1-27.

See Beverly Crawford , Beyond Power and Profit: International Regimes and East-West Trade, forthcoming.

In 1977, the OCED Trade Committee established a separate Working Party on East-West Trade, which generated information on the relationship between trade with the East and the health of Western economies. In the same year, the OECD Ad Hoc Group on East-West Technology Transfer was formed; by 1982, the Group had become permanent. It produces information for members on the relationship between East-West technology transfer and the global competitiveness of Western industry. In 1983 the International Energy Agency produced reports on Western dependence on foreign sources of natural gas with a special focus on the Soviet Union. Concern with co-ordinating Western East-West trade finance policies began within the Berne Union in the 1950s and negotiations moved to the OECD in the 1970's.

Direct buyer and supplier credits are usually granted to the importer or exporting firm for long-term loans (over five years) and by some governments for medium- and short-term loans. Credit guarantees, insurance, and interest rate support are granted for medium-term and short-term loans. They are not granted directly to the buyer or supplier, but are usually granted through an intermediary, such as a bank. Short-term support is provided through insurance or guarantees only; no funding or interest rate support is offered.

See Hawthorn Arey , 'History of Operations and Policies of the Export-Import Bank of Washington ', in US Congress, Senate Committee on Banking and Currency, Study of Export-Import Bank and World Bank: Hearings ( Washington, DC: US Government Printing Office. 1964), pp. 86-132; and Mark Feer , `Export Financing Systems' in US Congress, House Committee on Banking and Currency, Hearings on a Bill to Enable the Export-Import Bank of the United States to Approve Extension of Certain Loans, Guarantees and Insurance (Washington, DC : USGovernment Printing Office, 1968).

Herbert Hoover mentions the importance of the Soviet market in his 1929 memoranda on US-Soviet relations, Box 343, Herbert Hoover Collection, Archives of the Hoover Institution on War, Revolution, and Peace, Stanford University. See also William A. Williams , American.Russian Relations 1781-1847 (New York: Reinhardt and Co., 1952). pp. 201-8 and pp. 215-30.

Herbert Hoover , letter to Senator Joseph 1. France. 10 February 1923, letter to C.V. Hibbad, 23 March 1923, and statement at press conference, 13 April 1926. Box 11, Herbert Hoover Collection, Archives of the Hoover Institution .

See Hawthorn Arey , op. cit.

This argument is presented in George N. Peek and Samuel Crowther , Why Quit Our Own (New York: D. Van Nostrand , 1936).

Cordell Hull , The Memoirs of Cordell Hull. Vol. I (New York: Macmillan , 1948). pp. 81-4, 296-300. See also Herbert Feis , 1933: Characters in Crisis (Boston, MA: Little Brown , 1966), p. 312.

Frederick C. Adams , Economic Diplomacy: The Export- Import Bank and American Foreign Policy, 1934-1939 (Columbia, MO: University of Missouri Press, 1976), pp. 106-18.

See Robert P. Browder , The Origins of Soviet-American Diplomacy (Princeton, NJ: Princeton University Press, 1952), pp. 49-79.

Frederick C. Adams , op. cit, p. 119.

Beatrice Farnsworth , William C. Bullit and the Soviet Union (Bloomington, IN: Indiana University Press , 1967). pp. 143-9: and Lloyd C. Gardner , Architects of Illusion (Chicago, IL: Quadrangle , 1970), p. 18.

Cordell Hull , The Memoirs of Cordell Hull, Vol. 1 (New York: Macmillan , 1949), p. 301. See also Chal Vinson , 'War Debts and Peace Legislation: The Johnson Act of 1934', Mid-America (Vol. 50. July 1968), pp. 215-16.

These percentages were calculated from trade figures cited in Werner Beitel and Jeurgen Neotzold , 'Technologictransfer und Wirtschaftliche Entwicklung: zur Conzeption der Sowjetunion in der Zcit der Neuen Dekonomischen Politik und des ersten Fuenfjahrplanes', Berlin, 1979 (mimeo), pp. 129-33.

Harold F. Linden , 'Supplemental Statement on the Berne Union' in US Congress, Senate Committee on Foreign Relations, East-West Trade: Hearings Part (Washington, DC: US Government Printing Office, 1964), p. 186.

Nathaniel Mekilterick and B. Jenkins Middleton , The Bankers of the Rich and the Bankers of the Poor: The Role of Export Credit in Development Finance ( Washington DC: Overseas Development Council, 1972). See also George D. Holliday , 'A History of the Export-Import Bank of the United States', in Paul Marer (ed.), op. cit, p. 344.

Between 1963 and 1970, only 3 per cent of French exports were destined for CMEA countries, but those same countries received 29 per cent of total French credits and guarantees. During the same period 5 per cent of Italy's exports went to CMEA countries, but they received 13 per cent of all export credits. CMEA countries took 3 per cent of Great Britain's exports and 11 per cent of Britain's official credit support. Thomas A. Wolf , 'East-West Trade Credit Policy: A Comparative Analysis' in Paul Marer (ed.), op. cit., p. 179.

The growth of the Eurodollar market opened new options for East European borrowers by allowing commercial banks to become involved in a major expansion of long-term lending. They did this by transforming short-term deposits into longer-term loans by offering the borrower a series of short-term advances automatically renewable at intervals, typically every six months. This became standard practice in the Euromarkets, not simply with Eastern Europe.

Quoted in Samuel Pisai , Coexistence and Commerce ( New York: McGraw-Hill, 1970), p. 122.

Thomas A. Wolf , 'East-West Trade Credit Policy: A Comparative Analysis' in Paul Marer (ed.), op. cit., p. 157.

Samuel Pisar , op. cit, p. 110.

Robert W. Dean , West German Trade with the East: The Political Dimension (New York: Praeger, 1974), Chapters 3-5.

Thomas A. Wolf , 'East-West Trade Credit Policy: A Comparative Analysis' in Paul Marer (ed.), op. cit., p. 173.

See US Congress, Committee on Banking, Housing and Urban Affairs, Subcommittee on International Finance , Export-Import Bank of the United States Hearings on Bill S. 1890 ( Washington, DC: USGovernment Printing Office. 1973).

The following discussion is based on interviews with European officials at the European Commission in Brussels, 14 and 15 June 1983.

W. Allen Wallis , Undersecretary of State for Economic Affairs, 'East-West Economic Issues, Sanctions Policy, and the Formulation of International Economic Poticy', Hearings before the House Committee on Foreign Affairs, March 29, 1984 (Washington, DC: US Government Printing Office, 1984), p. 7.

Interviews with both US and European Consensus officials revealed that the United States, with most of its official credit support in loans with long-term maturities, pressed for higher interest rates on short- and medium-term loans, in order to make its own long-term loans more competitive. West Europeans, on the other hand, wished to maintain a low floor on interest rates, but to obtain an agreement on shortening loan maturities. Each country pressed for its most valued trading partners to be placed in favourable categories.

The Wall Street Journal, 8 January 1980, pp. 3 and 11 January 1980, p. 20.

The disproportionate share of West German bank claims on Poland can be attributed to the trade promotion strategy of the FRG government. In early 1980, Poland approached HERMES with a request for additional guarantees in order to obtain additional market financing. The decision to comply with that request was most certainly reached at the highest levels of government on political grounds. Economics Minister Otto Lambsdorff announced on 16 March 1980 that the West German government had authorised HERMES to guarantee loans of DM 500 million to pay for Polish imports of West German steel, chemicals and textiles. More lenient than usual repayment terms were provided. Again in July, West German banks announced that they had raised DM 1.5 billion credit package for the Polish central bank; one-thifd of that credit was to be guaranteed by the West German government. Clearly the West German state, through its control over institutions for trade promotion, pushed the banks into lending to Poland, at limits beyond those that commercial prudence would allow. In contrast, between 1976 and 1978, US banks had begun to restrict new credit to Poland, allowing claims to rise only $9 million. West European banks, on the other hand, had allowed their claims to rise to $12.9 billion. Thus, of the total Polish debt which had accumulated by 1981, US banks held only $1.3 billion, while the US government held $1.9 billion. See David D. Driscoll , 'East European Hard Currency Debt to the West' (Washington, DC: Congressional Research Service, 1982), p. 5. and J. Andrew Spindler , The Potitics of International Credit (Washington, DC: Brookings, 1984), pp. 83-6.

Nicholas Cumming-Bruce , 'Jan Woloszyn's Struggle for Poland', Euromoney (October 1980), pp. 100-2 cited in J. Andrew 5pindler , op. cit , p. 86.

David D. Driscoll , op. cit, p. 5.

New York Times, 6 February 1982, p. 38.

Interviews, Department of State officials, Washington, DC, May 1985. See also John Hardt and Donna L. Gold , 'Soviet Gas Pipeline: US Options' (Washington, DC: Congressional Research Service, 1983), p. 4.

David Driscoll , op. cit, p. 7.

Karen Lissakers , 'Dateline Wall Street: Faustian Finance', Foreign Policy (No. 51, Summer 1983 ), p. 27.

W. Allen Wallis , op. cit, pp. 5-6, 17.

Interview material, 14and 15 June 1983, Brussels, see note 31.

In negotiating new loans, however, Poland appeared to have the upper hand. Part of a 1984 rescheduling agreement with 500 creditor banks allowed Poland a grace period on interest payments on $200 million owed those banks. Usually banks only allow a grace period on the repayment of principal in rescheduling agreements. See Editorial, Christian Science Monitor , 18 December 1984, p. 15.

The Institutional Investor, September 1983 , p. 293.

This was a touchy situation, because legally, the Commodity Credit Corporation (CCC) was supposed to require a forma! declaration of default before it could make good on its guarantees. Private banks, too hesitated to take up the administration's offer, because the CCC would only pay 6 per cent interest on the debt, which was 10 percentage points below what the banks had negotiated. Furthermore, the offer would tie the banks' hands in future negotiations because they would have to relinquish their rights to negotiate with Poland on rescheduling outstanding debts. Only one bank, the Bank of Boston International in New York accepted payment from the CCC. David Driscoll , op. cit, pp. 5-8; see note 49. See also Benjamin J. Cohen , 'International Debt and Linkage Strategies: Some Foreign-Policy Implications for the United States', Internarional Organization (Vol. 39, No. 4, Autumn 1985), pp. 699-727.

M.S. Mendelsohn , Commercial Banks and the Restructuring of Cross-Border Debt (New York: Group of Thirty , 1983), p. 4.

See David D. Driscoll , 'Sovereign Debt: The Polish Example ' (Washington, DC: Congressional Research Service, 1982), pp. 18-20, The Economist, 14 November 1981, p. 87, and The Economist, 7 January 1984, p. 64.

Frederick Kempe , 'US Decides to Soon Lift Polish Sanctions ', The Wall Street Journal, 18 February 1987 , p. 30.

OCED , 'The Arrangement on Export Credits' (Paris: OECD , 7June 1982).

Financial Times, 7 June 1982, p. 7 and 8 June 1982, p. 1.

The CMEA countries were moving away from official financing anyway. In the mid-1960s, 80 per cent of all short and medium-term credits extended to CMEA countries were in the form of official direct credits or backed by official credit guarantees. In 1970, 50-60 per cent of the debt was held or guaranteed by Western governments. By 1980, official credits and credit guarantees accounted for only 30 per cent of !he total gross CMEA debt of $77 billion. Based on this evidence, one might argue that as the credit regime waxed, its influence waned because Eastern Europe was turning away from government and even government-supported financing. The percentages are calculated from country trade and debt figures in US Congress, Joint Economic Committee , East-West Trade: The Prospects to 1985 (Washington, DC: US Government Printing Office, 1982), pp. 41, 94, 154, 173, 227. 264, and 300.

The Wall Street Journal II I May 1983.