/~. ‘5.“ ‘v- ’1! ABSIRACI‘ TRADE RELATIONS BETWEEN THE EEC AND ml'LEmN: IMPLICATIONS FOR U. S. AGRICULTURAL TRADE POLICY By Wayne Wi nston Sharp Since World War II East-West trade expansion has occurred primarily between two regional economic organizations--the European Economic Commnity (EEC) and the Council of Mutual Economic Assist- ance (comma). But the BBC is also a major airport market for the United States, accounting for almost one-third of total U.S. commercial exports of agricultural products. Therefore, the purpose of this study was to examine the impact of continued EEC-COMEQDN trade expan- sion on 0.3. agricultural eXports to the EEC. To accomplish this, two research objectives were undertaken: (l) to determine the sec. nomic and political factors affecting EEC-CDMECDN trade eXpansion and the underlying commodity composition of this trade; and (2) to develop projections of (DMECON's export supply in 1970 and 1975 of those comnodities which are important U.S. agricultural eXports to the EEC. Methodologically, the analysis of BEC-COMECON trade relations was diVided into two parts. The first presented an analysis of the effects of regionalization in the two groups on their external trade relations. Using partial equilibrium analysis, it was demonstrated that the formation of a customs union by wrist-oriented economies, such as the EEC, would have fewer adverse effects for COHEQDN than for an o A. ‘a ‘v Wayne Winston Sharp other market-oriented economies. The major impact of regionalization in the EEC on COMEOON was due to the EEC's East-West trade policies and the Common Agricultural Policy. Also the EEC member countries granted varying degrees of currency transferability to the COMEOON members, and employed quotas and other measures designed to discrim- inate against centrally-planned econondes. Unlike regionalization in market-oriented economies, region- alization in OOMECON was based on synchronization of the members' eco- nomic plans rather than market forces. Consequently, regionalization in OOMEODN was constrained by the ideological distinction between political and economic sovereignty and the adherence to a limited regret strategy of decision making, precluding the adoption of pol- icies that would improve the community's welfare but inflict short- run welfare losses on a member country. Next an East-West trade model was developed to analyze EEC- COMEOON trade for the period from 1954 to 1964. SUpply conditions were based on the Heckscher-Ohlin model and demand conditions on the Meade model. 'The Meade model was modified to show the effects of ddvergences between consumers' preferences and those of the central planners in COMEOON. Based on the East-West trade model, it was dem. onstrated that if the planners' demand for the product which used its scarce factor more intensively was greater than consumers’ demand, trade with a centrally-planned economy w'Ould be more profitable for a market-oriented economy relative to the existence of consumers' sov- ereignty in the centrally-planned economy. Analysis of EEC-COMEOON trade from.1954 to 1964 supported the propositions developed from Iv" wayne Winston Sharp the East-west trade model. COMEOON, which was shown to be relatively well endowed with natural resources, eXported agricultural products and raw materials to the BBC in exchange for technologically advanced industrial products, which used OOMEODN’s scarce factors (skilled labor and capital) more intensively. The final objective of this study was to estimate GOMEOON's eXport potential in 1970 and 1975 for selected agricultural products. These commodities were selected by determining the "revealed" compar- ative advantages of the U.S. and COHEOON in their trade with the EEC. The U.S.‘s greatest ”revealed” comparative advantage was in grains, whereas OOMEOON's was in livestock. Projections of COMEOON's domestic lupply of agricultural commodities were developed by the use of least- squares regression analysis, and demand projections by the use of food budgets, income elasticities, and United Nations' estimates of changes in population and income. Supply-demand balances were derived for four levels of consumption, reflecting alternative investment prior- ities of the central planners in COMEOON. Based on the analysis of past EEC-COMECON trade relations and the projections to 1970 and 1975, continued EEC-OOFEOON trade expan- sion will have a slight negative impact on U.S. grain eXportS to the EEC. Modifications of the U.S.‘s policy on East-West trade would lessen this negative effect on U.S. exports, however, and enable the U.S. to compete with other grain exporting nations when adverse \ weather conditions force OOMECON to become a net importer 0f grains. TRADE RELATIONS BETWEEN THE EEC AND OOMECON: IMPLICATIONS FOR U. S. AGRICULTURAL TRADE POLICY By wayne Winston Sharp A THESIS Submitted to Michigan State University in partial fulfillment of the requirements for the degree of DOCTOR OF PHILOSOPHY Department of Agricultural Economics 1968 ACKNOWLEDGEMENTS Especial appreciation is given to Professor Dale E. Hathaway for his guidance, inspiration, and encouragement throughout the author's doctoral program and the development of this thesis. Sincere appreciation is also expressed to the members of my graduate committee for their assistance and suggestions in the general development of this thesis and special problems relating to their areas of specialization: Professors Mordechai E. Kreinin in International Economics, Vernon L. Sbrenson in International Agricultural Trade, and Bruce L. Smith in Inter- national Relations. Gratitude is expressed to the Department of Agricultural Economics for their assistance and financial support during my doctoral program. The author also wishes to thank the Agri- cultural Development Council, Inc., New York, for their generous research grant, which eanbled the author to Conduct research in Eastern Europe and the Soviet Union for this thesis. My greatest debt is to my parents, who instilled in me a continuing desire to further my education, and to my wife, Linda, for her patience, understanding, and constant encourage- ment throughout my doctoral program. 11 TABLE CF CONTENTS ACKNOWLEDGEMENTS LISI‘ OF TABLES LIST OF FIGURES Chapter I. THE EEC: FOCAL POINT OF EAST-WEST TRADE Importance of the EEC to American Agriculture . the Importance of the EEC to Eastern Europe Soviet Union The Problem.and.0bjectives . . . Assumptions and Methodology . . II. REGIONAL INTEGRATION IN THE EEC . . The Theory of Customs Unions . . The Common Agricultural Policy of III. REGIONAL INTEGRATION IN COMECON The Evolution of COMEODN . Phase I--1949-1953 . . Phase II--1953-1957 Phase III--1957-l962 . Phase IV-‘1962'1964 e e e the EEC Trade Policies for Centrally-Planned Economies Projection of the EEC's Import Demand, 1970 and 1975 Problems of Economic Integrat on in EEC and PlannedEconOIUiCSeeeeeeeeeeeeea OOMEOON's Foreign Trade Policies OOMEOON Agricultural Policies . . . . . . . . . IV. AN ANALYSIS OF EEC-OOHECDN TRADE RdLATICNS: Centrally- 1954-1964 The Modern Theory of International Trade Consumers' Sovereignty Versus Planners'Sovereignty An EastAWest Trade Model Competition for the EEC's Product Market iii member Participation in EEC-GONECON Trade . . . . . . . Relative Factor Endowments in the BBC and OOHEOQN . EEC-COMEOON Trade Relations, 1954-1964 Commodity Composition of EEC-OOMEOON Trade Page 4 8 10 14 14 25 31 34 39 39 41 42 44 45 47 51 53 63 63 64 67 71 82 87 93 103 Chapter v. EEC AGRICULTURAL IMPORTS: CDI-fl-DDITY oowosmxom AND ORIGIN, 1958-1966 . . . . . . . . . . . . . Methodology.................. Trends in EEC Agricultural Imports . . . . . . ”Revealed" Comparative Advantage in the EEC’s Agricultural Market . . . . . . . . . . . . . VI. COMEOON: AGRICULTURAL EXPORT SUPPLY, PROJECTED 1970 AND 1975 I I I I I I I I I I I I I I I I I Methodology and Assumptions . . . . . . . . . . prOjQCtion Of CDI'IEmN Demand s e e e e e e e e prOjECtiona Of (DAIMIJN Silpply e e e e e e e e 0 Summary of COMEOON Agricultural Production, 1954- 1964, Projected 1970 and 1975 . . . . . . . . . . . . . . Alternative Goals of Policies of the Central Planners OOMEOON's Export Potential, 1970 and 1975 . . . . . . VII. IMPLICATIONS FOR U.S. AGRICULTURAL TRADE POLICY . Summeeaeeeeeeeeeeeseseee Developments in OOMEOON since 1964 . . . . . . Implications for U.S. Agricultural Trade Policy BlmJlokgRApI-IYIIIIIIOIIIIIIIIIIIIIII APPENDKESeeeeeeeeeeeeeeeeeeeeeee iv Page 109 109 113 116 125 125 127 135 164 173 178 189 189 196 203 205 216 Table 1 . 2. 3. 4. 5. 6. 7. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. LI 81' OF TABLES Instruments of the Common Agricultural Policy . . . . . EEC: Production, Consunmtion, and Import Demand, 1964 and Projected, 1970 and 1975 common: Socialization of Agriculture by Country, 1964 Indices of Gross Agricultural Output, USSR, 1954-1964 . Trends in Inputs and Incentives, USSR, 1953-1964 Endowments of Human Capital and Natural Resources in the EEC and mmmN' 1965 I I I I I I I I I I I I I I I I I Human Capital Densities of the EEC and (DMECDN, 1965 Relative Factor Endowments of the EEC, Eastern Europe, and the USSR EEC Imports from CDMECIJN and the United States EEC Exports to CXDMEmN and the United States Commodity Composition of BBC Imports from common and the United States a e e e e e e e e e e e s e e e e e . Commodity Composition of EEC Exports to (DI-TECON and the UHited Statea e e e e e e e e e e e e s e e e e e e e 0 Market Shares of Total EEC Imports and EXports, 195I.1964 s e e e e e e s e e e e e e e e e s s e s e a Value and Market Shares of EEC Imports of Industrial PrOduCtS’ 1954-1964 a e e s s e e s e s e e s s a g . . Value and Market &\ares of EEC Imports of Raw Materials . Value and Market Shares of EEC Imports of Agricultural Products EEC Imports from (DMEGJN, Origin and Destination as Percent Of TOtalg 1954-1964 e e e e e e e s a e e s 0 E80 Exports to mMECDN, Origin and Destination as PIICInt Of TOtal. 1954-1964 e e e e e a e a e e a g . V Page 29 36 57 59 61 74 78 79 84 86 89 92 95 9'7 99 100 104 106 Table 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. EEC Agricultural Imports, 1958-1966 (even numbered yar.) I I I I I I I I I I I I I I I I I I I I I I I Relative Share Indices and Market Shares for the U.S., COMEOON, and the EEC, 1958-1960 and 1964-1966 . . . . Ratios of Relative Share Indices and."Revea1ed" Compar- ative Advantage, EEC, U.S., and OOMEOON . . . . . . . Population of (DMECDN, 1962, 1965; projected 1970 and 1975 I I I I I I I I I I I I I I I I I I I I I I Total and Per Capita Net Material Product at constant ‘ Factor Cost for COMECON, 1962 and 1965, Projected 1970 and 1975 I I I I I I I I I I I I I I I I I I I I Per Capita Consumption and Demand Elasticities in COMECON, Grain and Livestock Products, 1959-1961, Ind1965,E3timat9d................. Per Capita Consumption in (DIEGDN, Grain and Livestock Products, PIOJeCted 1970 and 1975 s s e e s e e e s 0 Net and Gross Food Consumption in COMEOON, 1970 and 1975 I I I I I I I I I I I I I I I I I I I I I I I Q Total Grain Production in COMECON, Averages of 1948- 1952 and 1952-1956, Yearly from 1961-1965 . . . . . . Zemskii's Attainable Grain Production, USS? . . . . . . COMEODN Grain Area, Annual 1954 and 1964; Extrapolated 1970 and 1975; Projected 1970 and 1975 (area in 1,000 heCtIIGS)oeeeeseeeeeeeeeeesoeg. COMECON Grain Production, Projected 1970 and 1975 . . . Cattle Numbers, COMEOON, 1948-1966, Projected 1970 and 1975 I I I I I I I I I I I I I I I I I I I I I 0 Beef and Veal Production, 1948-1966, Projected 1970 and 1975 I I I I I I I I I I I I I I I I I I I I . . Pig Numbers, commu, 1948-1966, Projected 1970 and 197s Pork PIOdDCtion, COMEODN, 1943-1966, Projected 1970 and1975...................... Poultry Numbers, CDFECDN, 1948-1966. Projected 1970 and 1975 I I I I I I I I I I I I I I I I I I I I I I vi Page 114 118 120 129 131 132 134 136 138 144 147 149 152 154 156 157 159 Table 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. Production of Eggs, CDMEOON, 1948-1966, Projected 1970 and 1975 e e o o o e s e e e e e I e I e a I e I Poultry Meat Production, COMEOON, 1948-1966, Projected 1970 and 1975 a a e a e a a a e o a e o s a e a a I 0 Grain Production, COMECDN, 1954, 1959, 1964, Projected 1970 and 1975 o o s s e o a I e I s e s e e I e e e 0 Beef and Veal and Pork Production, OONEOON, 1954, 1959, 1964' prOjeCted 1970 and 1975 o s a a s e o s I e e I Poultry and Egg Production, COMEOON, 1954, 1959, 1964, Ind PrOjGCted 1970 IDd 1975 e e o e e e e e s e e s a Non Food Uses of Grains, OOMEOON, Average 1961-1963, PrOjeCted 1970 and 1975 s e o e s s o o o e e e s o 0 Aggregate Demand for Grains and Livestock Products, COMEOUN, Low and High Income, Projected 1970 and 1975 COMEOON Grain and Livestock Product Balances, Low and High Income, Projected 1970 and 1975 . . . . . . . . OOMEODN Grain and Livestock Product Balances, Unchanged Income. PrOjeCted 1970 and 1975 s e I e e e a e a o . ODMEOON Grain and Livestock Product Balances, 1975, Projected at BBC Level of Consumption in 1965 . . . . ODMEOCN Feed Grain Requirements, 1975 . . . . . . . . . vii Page 161 163 165 168 170 172 174 179 183 185 186 LIST OF FIGURES Figure Page 1. Effects of a CUStoms Union on Market and Centrally- PlannedEcOnOmj-esInc-onco-ooo-Ioouoo 17 2. Case I: Productivity Increasing in Customs Union RelativetONOn‘Memberscoo-000.00.00.00 20 3. Case II: Productivity Decreasing in Customs Union Relative to Non-Members . . . . . . . . . . . . . . . . 23 4. Model of Trade Between a Centrally-P1anned.and a thrket-Ol'iented EconOrny o o n I o a I o I o o O o o o I 68 viii CHAPTER I THE EEC: FOCAL POINT OF EAST-WEST TRADE Prior to World War II, the term "East-West trade" denoted the high level economic interaction among the nations of the European Con- tinent. After the var, however, the Soviet Union, under the leadership of Joseph Stalin, successfully brought the East European nations under its sphere of influence and established Conmunist governments in them. Henceforth, East-West trade was redefined in the "cold war" terminol- ogy as trade between the Free World and the Cmnist-dominated coun- tries, reflecting the political tensions between the United States and the Soviet Union; and East-West trade rapidly declined in an era of post-var recovery and expanding international trade. After Stalin's death in 1953 and the general relaxation of international political tensions, the declining trend in East-West trade was not only reversed but expanded at a rate greater than that for total world trade in spite of the trade restrictions imposed by the West. The West lacked a common policy toward the East, and some countries, particularly the United States, placed heavy restrictions on East-West trade. Consequently, East-West trade expanded primarily in Maps, and the U.S.‘s trade with the East has been insignificant. Mt the East's major western trading partner has become the European Boone-1c Co-Jnity, which is also a major trading partner of the United States, especially in agricultural products. And by July 1, 1968, the new Cannon Agricultural Policy will be fully implemnted, forcing the mbers of the EC to also establish a cannon policy on 1 East-Vest trade. The U.S. has also attempted to promote a cosmon policy for the west, but if the U.S. fails to take into account the econoaic importance of East-that trade to the EEC its policies will be ineffective. and the EEC will seem the leadership in establishing a common policy for the West. Import_a_ncg_of the_EE(Ltp_Amriga_n_ Agriculture Due to modifications of U.S. agricultural policy, agricultural exports have become an increasingly important source of income for the American farner. Basically, U.S. agricultural policy has changed from a system of high price supports and export subsidies to a system of direct payments with prices supported at or near world market prices, thereby enhancing the U.S.‘s competitiveness in international trade. According to the U.S. Secretary of Agriculture, Orville L. Freeman, the produce of one-fourth of U.S. harvested acreage (about 70 million acres) enters into world trade. ‘ The U.S. exports approx- imately two-thirds of its rice production, over one-half of its wheat, and more than a third of its soybeans and grain sorghums. Total 0.8. agricultural eXports increased from $13.5 billion in fiscal 1960 to $6.8 billion in fiscal 1967, representing an increase of 51 percent. Mid although agricultural exports are declining relative to total exports, they accounted for 22 percent of U.S. merchandise exports in 196?.1 A 110mg:Agriculture. 701. VI, lo. 11, March 11, 1968. 3 Not all of U.S. agricultural exports represent commercial trans- actions, however, although the value of nonconmercial sales, primarily under Public Law 1+80 or the Food for Peace program, have declined in relative importance. Accounting for 29 percent of total agricultural exports in fiscal 1960, noncomnercial sales declined to 21 percent of the total in fiscal 1967. Commercial sales, therefore, have increased from $3.2 billion in fiscal 1960 to $5.1; billion in fiscal. 1967, an increase of approximately 69 percent as compared to a 51 percent increase in total agricultural. exports . As commercial sales increase in imporatant, ~ developnents in major commercial markets represent important policy variables for developing domestic U.S. agricultural programs. Trade in temperate- ' zone products, which constitute the major type of U.S. agricultural exports, occurs primarily among the more industrialized countries. And the EEC is the largest single commercial market for U.S. agri- cultural products, annually purchasing almost one-third of U.S. agricultural exports. In the crop year 1965/66, U.S. agricultural exports to the EEC were valued at $1,593 million, and of this amount, feed grains alone accounted for $537 million or one-third of the total. Feed grains are, therefore, an important U.S. agricultural export to the EEC, the demand for which has expanded rapidly. the U.S. has experienced a strong competitive position in the sale of feed grains: the U.S. share of EC feed grain imports increased 2 iron approximately 35 percent in 1956 to over 60 percent in 1966. *— anonmv. Regior, Growth inDemmdforFeed Grains intheEEC, ERS Persia, 158, 0.8. Department of Agriculture, July 1 7. h Beeause of the importance of the EEC as a purchaser of U.S. agricultural exports, policy changes in a market of this size have major implications for U.S. agricultural. producers. The Common Agricultural Policy (CAP) of the EEC, which will be implemented in 1968, represents such a policy change. But in addition, adoption of the CAP will also force the EC to develop a common policy with re- spect to the East European countries. Consequently, the policy adopted by the EEC will have important implications for both American agriculture and future trends in East-West trade. importance of the EC to Eastern Europe and the Soviet Union For Eastern EuroPe and the Soviet Union, who are members of the Council of Mutual Economic Assistance-~C .M.E.A. or COMECON as it is referred to in the West--trsde is undertaken primarily for political reasons and secondly to compensate for deficits in planned material balances. But due to persistant deficits in planned material bal- ances, trade has become more important from an economic viewpoint, especially trade with the highly industrialized Western countries (members of the crop). Although common trade with the less developed countries is based, almost entirely, on promoting political objectives, trade with the West is relatively more important for economic reasons. Trade of the COMO]! countries is conducted by state-trading IonOpolies , and, therefore, the volume and directions of trade are deter- mined by political authorities, especially those in the Soviet Union. Since World War II two distinct eras of COMMON trade can be distin- wished: the Stalinist are (up to 1953) and the Khmhchev era (1951+. 5 19610. Autarky was the main characteristic of the Stalinist era: every effort was made to insure that COMECON did not become a dumping ground for the inevitable surpluses resulting from monopolistic con- centration in the West. Inability of the Western monopolists to secure markets for their surpluses, Stalin believed, would lead to the down- fall of capitalism in the West; meanwhile, the law of balance, propor- tional development in COMECON would establish the superiority of socialism and insure regional self-sufficiency.3 In promoting autarky, Stalin's policies were extremely effec- tive although his decisions were not entirely unilateral. COMECON's trade turnover with the OECD member countries declined to $1,193.? million by 1953, down from $1,808.8 million in 19148. Most of this decline was accounted for by Eastern Europe since the volume of the Soviet Union's trade was relatively small, amounting to $1183.? million in 19148 and $hh8.h million in 1953. Responding to the establishment of Communist regimes in Eastern Europe and the Korean War, the West adopted stringent controls on trade with the East, thereby assisting Stalin‘s efforts to promote autarky for COMECON. Consequently, Eastern Europe‘s trade turnover with the omen countries fell from $1,325.l million in 19h8 to $975.3 million in‘l953, a decrease of 26 percent as compared to only 7 percent for the Soviet Union.“ 3Joseph Stalin, Economic Problems of Socialism in the U.S.S.R., New York: International Publishers, 1952- hé?’ Last-West Trade: A Common Policy For the West, New York, May 1 5. Stalin's policies to promote regional self-sufficiency were less successful, however. The Stalinist strategy of economic develop- ment, emphasizing heavy industry over consumer goods and agriculture, was imposed on the East European satellite countries, regardless of their raw material and natural resource endowments. Consequently, serious misallocations of resources resulted: the East European nations were forced to import raw material inputs for heavy industries from the Soviet Union, while their own natural resources remained unexploited. Although at substantial cost, COMECON achieved an im- pressive rate of development, relative to the West, in heavy industry. COMECON eXperienced an industrial revolution; but, meanwhile, the West was also experiencing another revolution--what Robert Theobald has terned the "cybernetics revolution".5 Quite possible Stalin himself realized, shortly before his death in 1953, that COMECON was lagging far behind the West in technol- ogical research and development, as evidenced by his futile attempt to conduct a world trade conference in Moscow in 1952. But Stalin's death and the initiation of the "New Course" in COMECON injected new life into East-West trade. By 1957, only four years after Stalin's death, common trade turnover with the OECD countries reached $2,899 million, double the level in 1953. And from 1957-63, OECD trade with COMECON increased by 91$ percent, considerably faster than the expansion of total world trade . _ 5Robert Theobald, 'me Challenge of Abundance, New York: The New American Library of World Literature, Inc. , 1962. The striking feature of both the declining and expanding phases of East-West trade was the present EEC member countries' trade rela- tions with the COMECON countries, which differed substantially from the relations of all OECD countries. From 19118 to 1953 the EEC's trade with COMECON increased 11 percent, contrasted to the 21 percent decrease for all OECD countries, going fromu$h83.2 million to $536.5 million. The EEC's trade with the Soviet Union increased 72 percent, whereas trade with Eastern Europe fell almost 5 percent. Since 1953 the EEC‘s trade with COMECON has moved in the same direction as total OECD trade, but at a faster rate. Whereas OECD trade with COMECON doubled from 1953 to 1957, the EEC's trade increased 123 percent. And from 1957 to 1963, the EEC's trade with COMECON increased 105 percent compared to 94 percent for all OECD countries.6 Another feature of the EC '8 trade relations with the COMECON countries has been its tendency to regain its relative share of total OECD trade with Eastern Europe and increase its share with the Soviet Union relative to the pre-WW II period. In 1938, the EEC countries accounted for 61+ percent of OECD trade turnover with Eastern EurOpe and 28 percent of the total with the Soviet Union. Of the total OECD trade with COMECON, the EEC accounted for 55 percent. And by 1963, the EEC accounted for 1&5 percent of the OECD's trade with COMECON, to percent of the total OECD trade with the Soviet Union and 1+7 percent of the total with Eastern Eur0pe. Expressed in value, EEC's trade turnover with cormcon was $2,hh6.h million out of a total of $5,529.2 million for all OECD countries in 1963. k 603D, op.cit. , computed from Appendix Tables 3-5- Of its trade with the West, trade with the EEC is clearly important to the COMECON countries, and the comodity composition of sac-comm trade (discussed in detail in Chapter IV) indicates that this trading relationship will continue to expand in the future . Ba- sically, COMECON exports raw materials and agricultural products to the EEC, which is a deficit area in both commodity groups, in exchange for technologically advanced industrial products. What COMECON's demand for industrial products from the EEC and the West will be in the future is almost impossible to ascertain, but COMECON's capacity to earn the required foreign exchange to satisfy those demnds will be affected by the EEC's conmon agricultural policy and, consequently, the canon policy on East-West trade. The Problem and Objectives In the first session of the 90th Congress, possible modifi- cations of U.S. policies with respect to East-West trade were con- sidered. Since the early 1950's the U.S. has become increasingly isolated in its adherence to the strategic embargo and other re- strictions on trade with the East . This policy has promoted de- pendence of the East European nations on the Soviet Union, added ilpetus to the economic integration of 001E001! , and caused disunity in the West. East-West trade is of greater importance to the EC than to the U.S.; consequently, the economic interest of both the no and 900mm in East-West trade mist be taken into consideration if the U.S. is to develop a realistic East-West trade policy as leader of the free world. Although East-West trade is not important economically to the U.S., the EC is, especially as a market of U.S. agricultural products. But of all the external. suppliers to the EEC, trade from the members of COMECON has been increasing at the fastest rate. Although the present level of EEC-COMECON trade is low, COMECON may become a serious com- petitor in the future if existing rates of trade expansion are su- stained. Whether or not COMECON will be competitive with U.S. agricultural exports also depends on the commodity composition of EEC-COMECON trade, since one-third of the value of U.S. agricultural exports to the EEC are feed grains. And from a political viewpoint, the relative shares of Eastern EurOpe and the Soviet Union in EC- COMECON trade are important policy variables. For example , if trade expansion is occurring primarily between Eastern Europe and the EEC, this would correspond to the U.S.‘s goal of decreasing Eastern Europe's dependence upon the Soviet Union, but at the same time conflicting with the economic interests of U.S. agricultural producers. The purpose of this study, therefore, is to examine the long- run comdity composition of EEC-COLECON trade, emphasizing the intra- regional trading patterns that are evolving, in order to project future levels of EEC-COLECON trade and their implications for U.S. agricultural trade policy. To accomplish this, two research objectives are undertaken in the study. The first objective is to determine the economic and political factors affecting EEC—COMMON trade expansion and the underlying comedity composition of this trade. And the second objective is to develop projections of COMECOU's export supply in 1970 and 1975 of those commodities which are important U.S. agriculmu 10 exports to the EEC. Accomplishment of these objectives should contri- bute to a better understanding of the effect of the EEC's common agri-- cultural policy on future East-West trade relations and the economic interests of the major participants. Assumptions and heflmdolcgy EEC-COMES“ trade is a problem in international relations and can be conceptualised in terns of systems analysis.7 Both the EEG and COHECG are regional groupings of nations or distinguishable sub- system of the international system, who in order to sustain themselves, divert inward much of their resources and organisation. But since internally produced resources are limited, pursuit of national interest necessitates a certain amount of interaction with other sub-systems. Since this study is limited to the interrelations between two specific sub-systems, projections of their future relations must. be conducted within a framework of assumptions regarding the future state of the international syntax: in 1970 and 1975. These assmptions are: (l) The loose bipolar system existing today will be maintained, thereby precluding the possibility of a nejor war sufficient in scope to require realign-tents of mint”, alliances and a diversion of resources to military uses. (2) Population and gross national product of the EEC and cosmos will increase at the rates envisioned by the United Iations, which are presented in detail in this study. “fl # ———- 7 . Charles A. McClelland. Theory and The International S to The hacnillan Conny, 1'93. — h ye n, '9' York: ll (3) The structural autonomy of the EEG and couscon will remain intact; therefore, both sub-systems or nations are prevented from Joining with other sub-systems, such as the ETA countries with the EEC or the Asian Communist countries with COMECON, to form a larger sub-system. (R) No major transformations of the international monetary system will occur, neither will any major reserve currency, such as the dollar and the pound sterling, "be devalued, nor will the price of gold be increased. A maJor revision in the price of gold would substantially alter the cos-odity composition of the Soviet Union's exports. These assumptions specify the general nature of the future state of the international system for which the projections to be presented in Chapter VI are applicable . Other assumptions relating to the projection techniques are discussed in Chapter VI. ‘ihe base period selected for the projections is the years 195“ through 1961+ or the Khrushchev era. Several factors Justify utilization of this period. As was indicated earlier, administrative decisions determine the direction and volume of COMECON trade with the West, and relative to the Stalinist era, the Khrushchev era marks a distinctive structural change in East-West trade relations. Secondly, 131'th was distorted in the post-war years prior to 1951+ because of reconstruction, was reparations, etc. The third factor is one which constantly plagues scholars of the centrally-planned economies: COECOI statistics are produced with a greater time lag than Western statistics, and 196} was the latest year for which the data necessary for projections were available for the mor COMO! countries. Even (‘7 .L1 [4' DT1 then, sufficient data were not available to include Albania in the projections; but as will be shown in Chapter IV, the absence of Albania should not appreciable alter the results. And finally, sufficient data were available to indicate that inclusion of 1965 data would bias the proJections downward. Extreme weather variations substantially alter the trading patterns of the Soviet Union, and the occurrence of We unfavorable years so close together, as occurred in 1963 and 1965, is rare. Exclusion of 1965 data served to normalize the effects of weather variations since 1951+ and 196M were relatively normal years. For the base period each sub-system is analyzed separately with reference to its efforts to modify its intra-member relations in confomnce with the goals of the sub-system. Regional integration in the EC is discussed in Chapter II. Major emphasis is on the trade diverting effects of continued economic and political integration and the cannon agricultural policy. And finally, the projected import dam for 1970 and. 1975 , as determined in the first phase of this Pméect, will be presented. Chapter III presents an analysis of regional integration in COMECON. Major emphasis is on the differences in economic integration in centrally-planned economics as contrasted to market-type economies. The characteristics and problems of socialized agriculture are also lnflyzed, together with a discussion of the importance of agriculture 88 a mans of earning foreign exchange. hen in Chapter 17! the economic interrelations between the two sub-systems are examined. By means of an economic trade model, 13 various hypothesis are developed and tested against the actual trade patterns to explain the economic motivations for EEC-COMECON trade and the relative gains to be secured by each sub-system. In Chapter v, the commodity composition and trends in EC imports of agricultural commodities are analyzed for the period 1958- 1966. he purpose of this chapter is to determine the "revealed" cmarative advantages of the EEC, U.S. , and COMECON for the major categories of agricultural products. 'men in Chapter VI, projections of COMECON's export potential in 1970 and 1975 are developed for selected agricultural commodities. he projections of supply and demand are developed by least-squares regression analysis. Then the impact of alternative goals and policies of the central planners on COMECON's export potential are evaluated. Since the trade projections were based on the l95h-6h period, it is necessary to evaluate the agricultural policy changes that have occurred since that period which might alter the basic structure of EEC-COMEOON trading relations. This is the subject of Chapter VII. Because of the fragmentary nature of current data on COMCON, the data v11]. be supplemented by the personal observations of the author, based on a research trip to Czechoslovakia, Poland, and the Soviet Union during the summer of 1967. Any indicated structural changes will be examined as to their probable affects on the projections of EEC-cameos trade in 1970 and 1975 , and the implications for U.S. lgricultural trade policy. CHAPTER II REGIONAL INTEGRATION IN M EEC In 1957, six nations-Belgium, Luxembourg, the Netherlands, France, the Federal Republic of Germany, and Italy-~united to form the hropean Econcnic Commnity for the expressed purpose of forming an economic customs union and promoting greater political unity. World reaction to the EEG was mixed, but its impact on international economic relations, especially with respect to agriculture, has, without a doubt, been profound. {the purpose of this chapter is to examine the unilateral economic actions of the EC and the effects on centrally-planned economies. The Theog of Customs Unions Beginning in 1950 with Jacob Viner's work entitled The Customs Union Issue, economists have developed a comprehensive body of theory, known as the theory of customs unions, designed to explain the economic effects of regional integration. Most of the theoretical studies con- centrate on the effects of a customs union on world welfare, whereas this study is concerned primsrily with the interations between regional Npmgs of nations. For conceptual purposes, however, both the EC and CODECON are considered separately, analyzing their unilateral decisions in partial equilibrium terms, then their interactions are finelyzed in general equilibrium terms in Chapter IV. 11+ 15 A customs union is created by the unification of the tariff structures of at least two or more countries, thereby discriminating against identical imports depending on the country of origin. Tariffs are removed, usually over a transition period, on imports originating from countries within the region and some type of average tariff is applied to non-member countries. Imports originating from member countries are, therefore, given preference over imports from non- Ielbers. It should be noted, however, that averaging of tariffs may be detremntal to some non-members and beneficial to others, depend- ing on the trade patterns that existed prior to the formation of the customs union. This can be illustrated by a simple example. Assure four countries lie in a continum, A, B, C, and D, and that prior to union countries B and C are net importers, countries A and 1) net exporters of commodity X. Because of close social and cultural ties for example, country B imports from A and C from D. Also assume that B imposes a higher tariff on commodity X than does country C, and because of D's locational advantage A cannot export commodity X to C. Therefore , formtion of a customs union between B and C and averaging of tariffs results in raising the tariff against cal-odity I imported from country D and lowering the tariff on imports of X from country A. Emis example demonstrates the general effect of BBC tariff averaging on the COMECON countries, most of whom practice bilateral trade balancing with individual Western countries . lbst economists recognize three static effects on trade patterns due to the formation of a customs union: (I) trade creation, (2) trade l6 diversion, and (3) the terms of trade. The first two effects involve a shift in the national locus of production. If the formation of a customs union shifts production from a high-cost source to a lower cost source, trade is created. The reverse case is trade diversion. And the effects on specific non-member countries depends on their cost structures and supply elasticities relative to the member coun- tries. If the member countries import less from the non-member countries than before the union and the non-member export supply is less than perfectly elastic, import prices will decrease. And since the customs union supplies less to the non-member countries, export prices rise, yielding an improvement in the comodity terms of trade. Emcee static effects can be shown diagramatically as in Figure I. Entree market economies are represented by A, B, and D and C repre- sents a centrally-planned economy. Curve S A represents the domestic supply of connodity X in country A, which is the high-cost producer. 'me supply curves for B and D are export supply curves. Since country C is a centrally-planned econom, supply is not affected by price and is, therefore, perfectly inelastic. Other reasons for the centrally- planned economy's export supply curve being inelastic, or less elastic than the export supply curve of market economies, will be presented in Chapter III. Assume that country A imposes a 100 Percent ad valorem tariff on imports of conmndity X, represented by the subscript '1' in B and D. Total supply is shown by ST in country A. Prior to union, the equilibrium price is Po and country A pro- duces 0Q of causality x and imports cone, of which can is supplied by 1? Agnoom conga Abuoooofi $92.3; Iguanas Agoom 933V Q9238.” 90333 a hues—.50 o hungoo m 5.5550 4. masseuse G _a ac 0 H on 0 m an? 0 me «a s _ u s l _ . _ I o v I I at . "\ IL. \ . a. _ i\ l ~O/ _ . I V I. c o L l I ' I ' I I I l I. ’ lllllll \ .. ''''' A I ...... e m I I sum I I I o I 3 U m G W\ [.0 ._. m u m .r mm mm s o a m m ll gar-u OHEOGOOW Ughlbflflflhflflflo a 0.033- HO fiOflflD Eagle-.0 6 HO Gabog .H I 18 B, 0616 by C, and 0627 by D. Country C receives area P20Q6 in foreign exchange, the remainder of the area POOQ 6 is the tariff revenue paid to country A. Now assume that A and B form a customs union, imposing a 50 percent ad valorem on non-member countries. 'lhe appmpriate supply curve for D is now SDCU and 8B for B, C's remains unchanged. Total supply in A is SC". ‘me equilibrium price is Pl’ country A produces OQl and imports Q1Q3. Country A's imports more than B than before the union, replacing part of the high-cost production of comnodity x in A. Quantity 0626,13 still imported from country C, but C earns more foreign exchange than before. Country C receives area PhP2OQ6 more in foreign exchange. If the customs union discriminates against centrally-planned economies by requiring them to pay the preunion tariff rate, then the foreign exchange earnings of C will be reduced to the area P30Q6. Con- sequently, the major concern of the centrally-planned econonw is the level of the tariff and whether or not it is granted most favored nation treatnent. Creation of a customs union is not necessarily harmful. to a centrally-planned econonnr if the cannon external tariff is reduced, but discriminatory tariff treatment obviously is. Md or consumer responsiveness to price changes also affects the amunt of trade creation or trade diversion. Ihe affect of the customs union on consumption is the increase from 0Q2 to 0Q3. me Greater the demand elasticity, as shown by D'D' , the greater the increase in consumption and the smaller the trade diversion. But in the case of agricultural products, demand is relatively inelastic; 19 therefore, there should be greater trade diversion due to the EEC's cmon agricultural policy than for a similar policy for products with a higher demand elasticity. Furthermore, there is usually a time lag between the formation of a customs union and adoption of a common external tariff. Thus until a common tariff is adopted, supply curve EDT is the relevant one, resulting in an absolute decline in the volume of trade from country D. And once the common tariff is established, imports from D may still be absolutely lower unless the common tariff represents a substantial reduction from the preunion level. These static effects represent a reallocation of existing resources or the locus of production and the correSponding changes in the direction of trade. Dynamic effects, due to expanded markets, increased competitiveness, organizational economies, etc. , should result in a change in the rate of growth for the customs union. It 13 Generally assumed that creation of a customs union will increase the rate of growth in the union relative to non-members. This is not necessarily true for all commodities, however. If the customs union attempt; to expand production of commodities in which it has a com- Pa-rative disadvantage, growth rates may be less than for non-members. Therefore, two cases are distinguished: Case I, customs union's Growth rate greater than non-members; and Case II, customs union's growth rate less than non-union. m. In Figure 2 countries A and B are united in the customs union and the supply curve in country D represents D's export sup ply sabject to the cannon customs union tariff. Equilibrium in period 0 Assesses Assesses a asunwwwsgv Edna—.9553 . down: «3038 U o Ergo mamas < mauve—awn 0 G MG 0 Q We “fly mav JV 0 km. 00 l .0 \ \\ I! \ m a . \ 3 um 0 PM .3 v m m .m a a .o w skiing 0». 955ng does: gun—O a.“ 339.33 hvdarfiugg «H OQIOIIN Pun—3h .‘I. ll RI w! an n k! 5., 21 is at price P0: The union produces 091 of comodity X and consumes 0Q2 by importing an additional amount QlQe. Since the growth rate is relatively higher for the customs union, its supply curve will shift to the right in period 1 (8151), whereas the supply curves in countries C and D are the same in both periods. Actually all the supply curves will shift in the long run, but the relative shifts are shown graphically by shifting only the supply curve of the country with the highest growth rate. Depending on the magnitude of the income elasticity of demand for commodity x, the demand curve will also shift to the right (D1131) in period 1. It is assumed that commodity X is an agricultural commodity and its income elasticity is less than unity and greater than zero. Demand increases, therefore, but relatively less than income. As shown in Figure 2, equilibrium in period 1 is established at price Pl: the custom's unions consumes quantity OQ6 by producing 0625 and importing Q5Q6. In this case the customs union supplies a relatively greater share of the commodity X consumed than country C and D. Country C, the centrally-planned economy, supplies the same quantity as in per- 10d 0, but the amount supplied by D is absolutely less. Should the income elasticity be high enough to result in a price for X higher than Po, D's exports will increase. The greater the elasticity of D's export supply curve, the greater will be its exports for prices above Po. Prices lower than Po, however, will result in greater decreases in exports the higher the elasticity. Case II. If the rate of growth or efficiency in production of Mity X is lower.- in the union than for non-members, as would be eXpected if the union had a comparative disadvantage in the production 22 of X, then the supply curve will increase (shift to the right) in countries C and D relative to the union. This situation is shown in Figure 3. Equilibrium in period 0 is at price PB. The customs union consumes quantity 0Q.2 of X, of which 0Ql is domestically produced and qué imported. In period 1, however, productivity has improved in countries C and D relative to the CU, as shown by the supply curves with the subscript "one". Due to population growth and increased income in the CU, demand for X increases relatively faster than domestic supply, shifting to D D in period 1. Supply of X available to the l 1 CU CU shifts to S and the equilibrium price in period 1 is reestablished l at price Po. Now the CU is consuming a greater amount of X'(0Q5), but it also is supplying relatively less of the total. Both C and D have increased their market shares in the CU. Which one gains the larger increase depends on their relative increases in productivity, assumed to be the same in this example. Had the demand in the CU increased sufficiently to result in a price of X greater than Po, D's market share would still increase relative to the CU due to the combined effects of D's increase in pro- ductivity and greater supply elasticity. Since supply in C is perfectly inelastic, D would increase its market share relative to C. Whether or not C would.increase its market share relative to producers in the CU depends on C's increase in productivity relative to the increase in Price and supply elasticity in the CU. 23 Abaonoom “Seneca n hhvmwuwgv conga Enbnnsnpsoov Assad: «Boggy o hangoo m can < uowuagoo mu b0 *0 [I 0 W0 no 0 G M0 ‘0 +_0 \ .0 a. \ R. .m .. a an ohgtfloz On. gfifidflflfi COED aura CH gaaoa hpfieefiunufig «HH OECOIIM. gem 2h Of the two cases presented, FAD indices of per capita agri— cultural production indicate that a combination of the two more accurately describes the situation in the EEC. Using 1952-1956 as a base, the index of per capita agricultural production in Western Europe was 118 in 196%. All the EEC countries were below the average for Western Europe, however. The indicies of per capita agricultural production in 196h ranged from a low of 112 for Germany and the Netherlands, 11h for Belgium ..-Luxenbourg , to a high of 116 for France and Italy. For the COWCON countries, using the same base period, the index was 127 in 196E as compared to an index of 99 for the United States. In relative terms it appears that the COMECON countries have experienced the most rapid increase in per capita agricultural prochiction and the U.S. the slowest of the three areas.1 Based on.the above models and assuming no maJor increase in per capita consumption of all agricultural products, the EEC producers should increase their relative shares of the EEC what for agricultural products. And of the external suppliers, COMECON should increase its market share relative to the U.S. These propositions will be tested empirically in Chapter IV, but for this discussion of the unilateral actions of the EEC two major factors distinguishing the actual Operations of the EC from the postulates of the theory of customs unions require _— 1‘F'AO. Production Yearbook, 1966. United Nations. Vol. 20, Rome, 1967, Part Wicultural Production. However, it Should be noted that the FAO indices measure changes in the level of aUri-cultural Mction and not efficiency of production which takes the level of factor inputs into account. 25 elaboration. Rather than adopting a unified tariff system of fixed ad valoren rates, the EEC has adopted instead a system of variable-- import levies, which constitutes an integral part of its common agri- cultural policy. And with respect to the COMECON countries the EEC mailers have pursued various tariff and trade policies. Each of these factors are discussed in the following sections. The Common Agricultural Policy of the EEC The EC is more than a customs union. As envisaged by the Treaty of Bose, pursuit of commmity welfare dictated the need for national policy coordination at the community lavel. And for the agricultural sector, a Con-non Agricultural Policy (CAP) has been developed, the effects of which greatly transcend the boundaries of the Community. During the recently completed "Kennedy Round" of GATI‘ negotiations, the CAP held, together with the American selling price on chemicals, the unenvyable distinction of factors considered most likely to disrupt the proceedings. But the CAP is vital to the success of the EEC, for reasons couonly misunderstood by the major exporters of agricultural couodities. Three factors are cited by the EEC as Justification for the CAP.2 Although the member countries of the EEC are among the more industrialized nations of the world, agriculture is an important source of national 2mi- discussion of the CAP and relevant statistics are based primary on a European Conunity Informtion Service publication entitled _‘n_i_e_ Woulmral Policy. Calamity Topics, No. 28, July 1967. 26 income and employment. More than one-sixth of the Community's labor force is enployed in agriculture, which contributes 6 to 114.5 percent to the amber countries' national incomes. To exclude the agricultural sector from the cannon policies of the couunity would, therefore, lead to serious distortions of prices and s missllocation of resources. Secondly, trade in agricultural pro ducts is important both within the Co-inity and with the rest of the world. Of the Community's total track in 19611, agricultural products accounted for 17.5 percent of its imports and 10 percent of its exports. The an: provides a market for 16 percent of French exports, and 2b and 12 percent, respectively, for the Netherlands and Italy. is the world's largest importer of edible and non-edible agricultural products, the 838's agricultural policies have Isjor implications for international trade. And finally, the CAP was needed to help mochrnise the Conmnity's agricultural sector, in which workers' incones have lagged behind those in other sectors. Low productivity and s low producer response to price changes (inelastic supply) are mainly the result of mm agricultural structure. More than tee-think of the Comnity's form are less than wt acres and often fragmented, especially in Geruny. In spite of that were seemingly insurmuntsbls obstacles,3 the BC adopted a CAP based on three main principles: ‘M _ —-——— A —— .3ror an excellent analysis of the difficulties encountered in developing the CAP see: Leon l. Lindberg. II‘he Political Dynnics of Euro an Economic Into tion. Stanford: 3571?er University 5'5“, 153. I nc - yco n 5 threatened not only the development of the on but the future existence of the EEC. Also analysed by Lindberg: "Integration as a Source of Conflict on the European Community 513mm,“ International Minoan, Vol. XX, '0. 2, Spring 1966, pp. 232-265. 27 1. During a transitional period, which will, for most products , end between July 1, 1967, and July 1, 1968 , restrictions on trade in agricultural products between Commity members are to be eliminated. 2. Market support, the costs of modernizing agri- cultural, and the subsidizing of exports to non-member countries are to be financed by the Commnity' 8 Agricultural Guidance and Guarantee Fund. 3. A common trade policy is applied to agricultural imports from non-member countries. Having developed these principles after serious debates, com- pronises on national interests, and the threat of disolvmnt of the Commity itself, the EEC feels Justified in claiming that implementa- tion of the CAP is a domestic issue, not negotiable in international trade negotiations. Exporters, on the other hand, supported by the rules of GA‘H‘, feel that the CAP represents the ultimate in protec- tionism. Unfortunately for the latter, however, the EEC successfully defended the CAP in the "Kennedy Round" GATT negotiations, indicating that the CAP has been permanently added to already large lists of barriers to agricultural trade liberalization. 'me first principle of the CAP was discussed in the section on the theory of customs unions. Referring back to Figure 1, this is the equivalent of country A's gradual removal of its tariff on imports from country 3, while at the same time, maintaining its pro-union tariff on C and D. be second principle represents the Commity's attempt to 28 improve its productive efficiency relative to non-member countries. In Figure 2 this is represented by the shift of the Commity's supply curve from period 0 to period 1 (so to 51). But in addition, the Co-mity subsidized the export of surplus agricultural products, which, due to domestic price supports, are not competitive at world market prices. A number of instruments are employed to control the level of imports to Conqunity as constituent parts of the CAP. These instruments are shown in Table I for the major EEC imports. All of these instru- ments, except the variable import levy, are well-known components of the agricultural protectionists' tool-kit. Levies have been used before, but never for such major importers as the EEC. Variable import levies (hereafter referred to as "levy" or "levies") constitute a maj or departure from the postulates of the theory of customs unions previously discussed. Instead of imposing fixed tariffs on imports from non-member countries, the EEC imposes levies, the level of which can vary depending on several factors. he principal of this levy system is illustrated for grains in the following emmple. First the EEC determines the price at which grains are to be supported for domestic producers. This price is known as the target price (prix indicatif) and is set at, say, $2.00 per bushel domes- tically. Next, the EEC establishes a threshold price (prix de sevil) representing the entry price of imported grain of a standard quality, which would ensure its sale in the marketing center of the largest ri n-— d --. II< I I I Intuit-Aim U cd-q .I ‘D' III-IIIDI-II h uz-~ n I e S 3.... 29 .0 .a .no¢a Nana «Nuaaom amusuasuwum< aoaaoo ssh .wug>umm aowumahomsH huassaaoo sumaousm u GUM—Jom .wusonaoxsq was .mamuH .Namahmo nom.v0Huoa sowuwmsmuu ecu wswusn N .wmzummu ma wwmum umxuma oawafim mnu Hausa mosses Hanan: man NA possmsfim H N Hw>mu HmQOHusz um weapfimnsm Hoasmsou N N «manners: huou Immsmgaou Nufiasaaoo N mumusvonm ou eH< Nuassssoo uuwufin N HN N N N umxumz H mnu so coausm>uousH N N N N N N spasmwm N N N N>mq huwudmswammsm N moausn maoumso N N N N N mofi>mA N N N N N wafiosmswm sosaoo N N N N mmusmumso muwum wmufiafiflsb hHuHsom umummww Hmm> was mofim umms3 mswwuo .mwwm noun asusn huaaom unauasofihmd Goafiou mau mo muswafiuumsHIIH mHan 30 deficit area at the target price. Thus the threshold price is equal to the target price ($2.00) less the transportation cost ($0.20 per bushel) frm the port of entry to the deficit area, which in this example would be $1.80 per bushel. Then a variable levy is applied to all imports of grain, which is the difference between the c.i.f. (cost, insurance, and freight) import-price, which is, say, $1.50 per bushel, and the threshold price ($1.80). bus the variable levy would be $0.30 ($1.80 -- $1.50). But the levy is not a finned tariff on imports, however. First let us assume that the traget price, transportation cost, and the threshold price are given as above. Then the level of the levy depends on the c.i.f. import-price. Were an exporter to offer his grain to the EEC at a price below $1.50, say, $1.30, then the levy would be the difference between $1.30 and $1.80 (the threshold price), or $0.50 instead of $0.30 as in the previousexample. Therefore, the lower is the c.i.f. offer price of an eXporter the greater will be the levy. An increase in either the target price or transport cost (the threshold price represents the difference) will also increase the levy for a given c.i.f. import-price. Variations of this levy system for grains apply to other major agricultural imports into the EEC. Clearly the levy system is a dapar- ture from the fixed tariffs employed in the discussion of the theory of customs unions. And although these barriers to imports would seem more than adequate to regulate the level of EEG imports, additional barriers are placed on imports from the centrally-planned economies, which are discussed in the following section. 31 EC Trade Policies for Centrally-Planned Economies hiring the early post-war period, policies on East-West trade were heavily influenced by policies implemented by the U.S. Faced with the problems of reconstructing war-torn economies, restoring currency convertability and securing needed foreign exchange during the "dollar shortage", the EEC member countries, as recipients of Marshall Plan aid, were in no position to pursue a separate course of East-West trade. Economic recovery permitted them to do otherwise, however. Responding to Soviet expansionism following WW II, the U.S. Congress passed the Export Control Act of 1919. This Act gave to the Department of Commerce, basic authority for the denial or limitation of exports to Communist countries in the interest of national security. And the Act was also intended to protect the domestic economy in two ways: (1) to prevent an excessive drain on scarce materials, and (2) to reduce the inflationary impact of abnormal foreign demand. But the U.S. realized that unilateral actions to restrict the flow of strategic materials to the Commist countries would be ineffective unless Western Europe cooperated with the U.S. In order to develop a multilateral approach to East-West trade, the U.S. initiated discussions with other Western allies. mese dis- cussions led to the formation of a voluntary, informal organization for the exchange of views on a cannon policy for the West. This organiza- tion, formed in Paris in 1950, was called the Consultative Group and 32 its membership consisted of the NATO countries, excluding Iceland, and Japan. A working-level committee known as the Coordinating Committee (Cocom) was established to maintain and review periodically the lists of strategic items denied to the East. 0n basic policy questions and items to be included on the strategic embargo lists, unanimous agree- mnt by the Cocom membership was required. The controls adopted, however, represented a minimum level of control. Each nation could, and the U.S. did, adopt a more restrictive control system. During the Communist invasion of South Korea, the U.S. Congress passed the Mutual Defense Assistance Control Act of 1951 (the "Battle Act"). The Act stipulated that "any nation which knowingly permitted the export of these embargoed items (implements of war and other items of primary strategic significance for military purposes) to the bloc would be denied U.S. military, economic, or financial assistance". Economic dependence was sufficient, initially, to prevent any of the EEC countries from testing the U.S.'s resolve to carry out this policy. But in the somewhat relaxed atmosphere that prevailed following the death of Stalin, the Cocom control lists were drastically reduced for the first time in 1951}. Then in 1958 Cocom members agreed to abolish the quantative controls and the control list was replaced by a list of items to be kept under surveillance only. And in 19614 this surveillance list was revised again, resulting in the removal of many items no longer considered strategic. Although the U.S. is a member of Cocom, it has v—_ 11, Leon N. Herman, A MW Study on Eastjlest Trade. Prepared for the Committee on Foreign Relations, U.S . Senate. Washington: Govern- ment Printing Office, April 1965, p. 39. 33 consistently maintained a more restrictive export control policy. Con- sequently, the U.S. share of total free world exports to the Soviet bloc has steadily diminished. In l9h8 the U.S. share of this trade was 25.5 percent. By 1962 it had dropped to only 2.5 percent.5 In contrast to the U.S. , the EEC countries have adopted no Nor controls on exports to the COMECON countries other than those adapted by the Cocom members. In fact, the EEC countries have, with the possible exception of the United Kingdom, the least restricted export list of the Cocom countries. For this reason, the EEC consti- tutes an important source of Western imports for the COMECON countries. But the ability of the COMECON countries to obtain these imports depends on their access to Western markets to obtain foreign exchange or credit. And where they can Spend this foreign exchange is influ- enced by restrictions on currency transferability. The EC countries grant most favored nation (m) treatment to the COMECON countries, but also make fairly extensive use of import quotas negotiated in bilateral trade agreements. Achievement of common EEC commercial policies implies a common policy on trade with COMECON. Thus far little progress has been made toward developing such a policy, which is partially hampered by COMECON's refusal to recognize the existence of the EC and its authority to establish a comnon policy. Consequently, each EEC member adapts its own restriction on imports, fruit the COMECON countries. A detailed list of these restrictions, \Jl Ibid., p. he. 31+ prepared by the U.S. Department of State, is presented in Appendix Table 1. me EEC countries grant varying degrees of currency transfer- ability to the COMECON countries on their foreign exchange earnings. me East European countries enjoy unrestricted transferability of the currencies of all EEC members except France and quembourg. Only the Benelux countries dew m1 transferability of earning to the Soviet Union. However, the Benelux countries have bilateral clearing arrange- ments with the Soviet Union, providing for full settlement of annual balances in convertible currencies. In general, therefore, the EEC places less restrictions on East-West trade than other Western nations, and the EEC's wing share of COMECON's trade with the West supports this statemnt. But the future level of EEC-COMECON trade depends, in part, on an expanding EEC import demnd for the traditional exports of COMECON, which is the subject of the following section. Projections of the EEC's Import Demand, 1970 and 1915 Under the leadership of Professors Hathaway and Sorenson, studies of the EEC were undertaken with the objective of determining the impact of the CAP on the EEC's import-demud for grains and live- stock in 1970 and 1975. three sub-projects studied the domestic supply responses in the following areas of the EEC: Italy, France, and the Northern EEC (Germany and the Benelux countries). A fourth sub-project considered the impact of the CAP on changes in producer prices in the 35 EEG and developed estimates of the target prices to be established by 1970 and 1975. Changes in the transportation system were also evaluated in the fourth sub-project. Hathaway and Sorenson6 conducted studies on income and con- sumption in the EEC for the same period, enabling them to develop demand projections for 1970 and 1975. Then the domestic supply and demand projections were combined to estimate the EEC's import demand for grains and livestock in 1970 and 1975. The estimated production, consumption, and import demand for the major grain and livestock pro- ducts are sunnarized in Table 2. Table 2 reveals some of the major policy dilemmas that con- front EEC policy-makers.in the grain-livestock economy. Although the EEC is a net importer of agricultural products, surpluses are devel- oping in sou comedities as a result of policies to reduce dependence upon imports. Since most cattle in the EEC are of the dual purpose type (i.e. produce both meat and milk), efforts to increase self- sufficiency in beef and veal contribute to a worsening of the surpluses of milk. Milk and milk products are difficult to dispose of in world markets because similar developments are taking place in other West European countries. Also, expansion of domestic beef production increases the demnd for feed grain. Due to the structual problems of ‘ 6V. Sorenson, and D. Hathaway. Changes in the Grain-Livestock Economy of the EC and Their Effects on Foreiggi'l‘rade Patterns. Preliminary—— manuscript, Department of Agricultural Economics, Michigan State University, East Lansing, Michigan, 1967. 36 .maamsm uuoaxm .muamama A+v Mfl mvcmaop uuoaafi .muamamn Alv NH o UHU amm .kosmnumm pea somsouom "muusom .GOfiuassmcoo mnafie coauunpoum a H u .GOHuaabmaou u o n .fiOflUUfiUOHm n m m .mw: Hmwuumseafi mam .pmmm .pmom mopvaoaHN .%Gmahmo SH wk» mafia wofiuucaoo Ham SH roam paw umm£3H mma.HH- mm~.ew Non.ma owH.HH‘ emm.aa ema.ee Hmo.a- HH~.we oeH.He mam.m~- Hea.~e mom.em «Ho.m~- Hmm.mm aam.~m aae.afis emo.me mae.a~ noH.eH+ emm.H~ mma.mm emw.HH+ moo.- amm.mm mme.oe+ aHH.m~ mem.mm oem.me+ emo.N mee.aw NwH.HH+ NNm.mo eoa.ea wae.m+ mma.em He~.mo as- Nao.m mam.~ Nm- eme.~ ~wm.~ ma, amH.N mHH.~ amH- nwm.~ emm.~ mmN- Heo.~ mNm.H men- NH¢.H ae~.H mma+ mee.m moe.m ama+ omw.e ama.e an- emo.e aHo.e ~o~.H- mam.m emn.e was- mmm.e oom.e ems- «mm.m ome.m H u a H o a UH nu ma mama came ease .AmfiOH Ufiuumfi ooo.Hv mnmfl paw Onma .vmuomfioum tam coma .pcmamn uHOQEH paw .=Ofiuaasmcoo .GOfiuodpoum magnum Hmuoa Nmaamuu poem Hmsamuu moon “mafimuu xaflz wwwm umoz huuanom xuom moomlamo> "muunpoum xooumo>fia «UMWIIN DHQMH 37 are agriculture, feed grain supply is highly inelastic; therefore, increasing quantities of feed grains must be imported as inputs for the livestock sector. Difficult though these developments may be for the EEC, they are, of course, favorable from the viewpoint of mjor exporters of feed grains and beef. As the world's largest exporter of feed grains, the U.S. has, to date, enjoyed an expanding share of the EEC's imports of feed grains. Whether or not the U.S. will continue to increase its share of this market depends on how the EEC attempts to rectify its supply-m imbalances and the export potential of other mjor agri- cultural suppliers. ‘I'hree courses of EC action are possible. First, the EEC can offset its projected beef and veal deficit by importing feeder calves to be fattened in the EEC. Secondly, the EEC can allow relative prices to shift so as to increase the consumption of pork or poultry relative to beef and veal. Either of these alternatives would increase the demand for feed grains, however. A third alternative, which would decrease the demand for feed grains, is to increase imports of carcass beef and veal, thereby increasing world demand for beef. However, the U.S. is not the only supplier of agricultural products to the EEC. EEC agricultural imports from the COMECON coun- tries have, in fact, been increasing faster than from any other external supplier. But such developments need not be detreme‘ntal to U.S. econ- omic interests. For example, in recent years Italy has been importing feeder calves from am of the COMECON countries. Consequently, the demnd for feed grains has been strengthened.‘ 0n the other band, should 38 the COMECON countries supply either carcass beef and veal or feed grains to the EEC at competitive prices, the demand for U.S. feed grains would decrease. To examine the export potential of the COMECON countries is a major objective of this study. Obviously, the export potential for all calodities cannot be evaluated. Therefore, the projections to be developed in Chapter VI are limited to those commodities considered important to U.S. agricultural interests. Before doing so, however, two questions must be answered. First, what developments are taking place within COMECON that might reduce its agricultural exports to the EEC? Regional economic integration in OOMECON is such "a develop- ment, together with its agricultural policies. This is analyzed in the following chapter. And secondly, are there economic reasons for the rapid expansion of EEC-COMECON trade? This question is analyzed in Chapter IV, forming the theoretical basis for the projections that follow. CHAPllER III REGIONAL ETEGRATION IN COMECON 0n Janaury 25, 1919, the Council of Mututal Economic Assistance (W)1 was created by Bulgaria, Czechoslovakia, Hungary, Poland, Runania, and the Soviet Union, ostensibly for the purpose of creating greater economic unity. Albania and East Germany were accepted as masters in 19kg (March) and 1950, respectively.2 Economic unity has broader connotations for centrally-planned economies, where the tenuous borderline between politics and economics is nearly obliter- ated, than in market type economies. And the scope of these activities will greatly‘affect the future of East-West trade. The Evolution of COMECON When COMECON was organized, the signatories were responding to Post-W II economic and political circumstances both internal and ex- ternal to the Soviet bIOc. . And the manner in which they responded has influenced the nature and purpose of COMECON, the level and. scope of its activities, its prospects for continued economic integration, and the problems of Bast-West trade. A_.t 1 Other abbreviations found in the literature are CEMA and cm. zlkmgolia, in 1962, became» the only Asian Connmist country to become a full master of COMECON, but it is excluded from this study since it is of marginal importance in East-West trade. Yugoslavia, expelled from the Comnist camp by the June 19% Cominform (Comnist Infor- nation Harem) , has never actively participated in the activities of COMECOH, and is, therefore, also excluded from this study. 39 1+0 Owing to war devastation, the Soviet Union was unable to con- tribute to a post-war European rehabilitation program. But the U.S. was financially able and willing to contribute to such a program. Realizing the futility of antarkic attempts at reconstruction and the need for cooperative endeavors, the U.S. proposed the Marshall Plan, furnishing economic aid and technical assistance to those governments of Europe , both East and West , who would undertake rehabilitation by mans of cooperative action. Unable to hold its own in terms of econ- omic assistance, and fearful that, due to their weakened economies, the East European nations might become dependent upon the West, the Soviet Union sought a plan to prevent the East European nations from participating in the Marshall Plan. And when it became obvious that international cooperation under the aegis of the Mahall Plan was gain- ing momntun, a conference of the six countries of Eastern Europe was held in Moscow, establishing COMECON on January 25, 1919. As announced in the COMECON commique issued to the press, the participating countries, as a result of their refusal of American blan- dishnents, were being subjected to an economic boycott by the Marshallized group of the States. Consequently, COMECON "was formed in order to defend the economic independence of those countries which had. not sub- fitted to American economic dictatorship."3 The stated purpose of 001E001! was to provide an institutional framwork for economic cooper- ation, exchange of information, mutual technical and scientific aid, and. increased trade . *— a 31mm»: crzybaun, The Socialist Comflth or gations: 0r - zation and Institutions, new Haven: Yale University Press, 1 , p. 67. hl Regardless of the stated objectives of COMECON, Stalin used it, along with Conform, as an indirect means of insuring that Soviet bloc countries faithmlly followed the Soviet model. in almost every sphere of political, economic and social life. To add insult to injury Stalin extracted $20. billion of reparations from East Germany, Hungary, Bulgaria, Runnia and Poland. "Peering with envious eyes through the Iron Curtain the same countries could see that Western Europe instead received no less than $15 billion worth of gifts from‘the United States."h But it was through COMECON that they were prevailed upon not to become victims of the Marshall Plan. So in spite of the rhetoric to the contrary, it was obvious that the relationship among the members was not one of equity, but one which George Orwell might have described as: "all Communist countries are equal, but some are more equal than others". Since its beginning in 1919, common has gone through four dis- tinct phases of economic and institutional development. Each of these phases are discussed briefly to clarify the nature of COMECON and the scope of its activities. Phase I -- 1919-1953 COIECOK was not envisaged as an institution for all Commist countries, but was designed initially for the specific solution of East European problems . 'nie disruption of tradition trade patterns and the build-up of military supplies created greater strains on‘ the COMO! ushers than on the OEEC countries, for as Kaser observed, l‘J. Uilczynski, "CODECON-«Success or Failnre" , Australian Outlook, April 1%5: P' 51“. 1&2 "they were less developed and East-West had bulked much larger in their conerce" .5 COMECON initially served as an economic link between Moscow and its European satellites, supplementing the political link known as the Commist Information Bureau (Comiform). COMECON's major activity during the initial years of its existence was to coordinate the disposition of unplanned surpluses and deficits in the members' national plans, and more importantly, to over-see the collection of war reparations by the Soviet Union. But as Stalin strengthened his control over the satellites by the use of joint-holding companies and Soviet-trained party officials, formal multilateral controls were no longer needed. Consequently, when Stalin reached the apex of his power in 1950, both COMECON and Comiform became inactive. Korbonski6 attributes this to either Stalin's preference for informal means of control or desire to avoid accusations by the West that he was overtly trying to dominate East Central Europe. Phase II -- 1953-1957 Stalin's death and the initiation of the "New Course" and "Peaceful. Coexistence" in Soviet foreign policy marked the beginning of the second phase. Termination of intra-COMECON reparations and a phasing-out of the Soviet joint-holding companies ended some of the major sources of resentment toward the Soviet Union by the affected 5Michael Kaser, COMECOL Integration Problems of Planned Economies, London: Oxford University Press, 1965, p. 15. 6Andrzej Korbonski , "The Evolution of COMEOON" , in International Political Communities , An Anthology, New York: Doubleday and Company, 'f-Tc” 1966. #3 7 contends, the rise'of military power Embers. Also, as Wilczynski of West Germany, her entrance into NATO, and increasing economic development of Western Europe brought COMECON out of its dormant stage. COMECON's revival coincided with the formation of the Warsaw Treaty in 1955. Because of its close association with Stalin and the explusion of Yugoslavia, Comiform was allowed to disappear. Since COHECON was relatively untainted by the "cult of personality", and had the advantage of being on the books, it as retained as a less object- ionable institution. All members of COMECON had followed the Soviet model of dev- elopment (concentration on heavy industry) during the Stalinist era, consequently, the misallocation of resources became acute. therefore, at the fourth session of COMECON, held in Moscow in 1951;, Joint Planning was resumed. The plans of all members were rewritten to accord higher priority to consumption and increased trade with Western Mops. As reported by Kaser8, imports fral Western Europe regained their l9h9 level by the end of 1953, but by 1951; they were 2% percent above that level, and 32 percent above by 1955. Other developments during this period included discussions of international specialization, additional development of industry and agriculture on the basis of economic cmperation between the member 7Wilczynski, op. cit., p. 1&8. 8 mar, 02. Cite, Po 50. (0- f0: 1th states, and trade relations with non-member countries. Although each member state maintained full control over its national plan, this marked a change in that members consulted one another prior to, rather than after, completion of their plans. While the national plans were being formulated the members cooperated in the exchange of technical information. To facilitate this exchange, the institutional structure of COMECON was broadened, and in 1956, 12 standing Comissions were established to deal with specific economic sectors. lPhase Commissions were composed of tech- nical experts from the member states, and their function was to work out the technical details of the decisions reached by the higher authorities, the Council and the Executive Committee. From this time on, the number: of Standing Comissions grew rapidly, indicating the widening scope of economic activities of COMECON. Phase III -- 1957-1962 The third phase of development began with the adoption of the first mltilateral treaty embracing all COLECON members in 1957. In- cluded in this treaty were provisions for mltilateral clearing of the members' balance of payments, but was unused for lack of convertible currencies. It did serve, however, to emphasize the restrictive nature of bilateral balancing, which reduces trade to the lowest comn denom-l inator. 0n the other hand, multilateral clearing allows a member state to use its surpluses obtained from one country to finance its debts with a third. Additional Standing Commissions were established, and provisions for more regular mitilateral action, such as the Joint construction of 1+5 a nsJor oil pipeline (the "Friendship Pipeline") and an international electricity grid, were made in 1958. A formal charter for COMECON was finally adopted in 1960, which stated that no member was required to surrender any of his pelitical or economic sovereignty. Decisions require unanimous approval and each country has only one vote. Any member can declare himself "uninterested" in a particular proposal, and, consequently, cannot veto actions approved by the others, nor is be subject to the proposal adopted. Although little is known about the actual decision- making process within COMECON, the Charter established a Commission, which is the supreme organ, an Executive Committee , a Secretariat, and Standing Commissions? Phase IV -- 1962-19614 thushchev's "Basic Principles of International Socialist Div- sion of Labor" were adopted in June of 1962, the beginning of the fourth phase of COMECON‘s development. He also endeavored to vest supra- national powers in the Executive Committee of COMECON, but this attempt was vetoed by the other members, stating that such a development would interfer with their economic sovereignty-«the same argument the Soviet Union had employed against the Marshall Plan. Rumania was the most adalnnt in her protestations against Khrushchev's proposals, and declared that, rather than become a supplier of raw materials under _* ——— 91mm lations, "Charter of common", new SerieS- Vol. 368 (1960), New York, 1961, pp. 2610—285. 1+6 the proposed division of labor, she would pursue an independent course of industrialization, emphasizing heavy industry. After the Rumanian crisis, the approach was shifted to coordin- ation of long-term plans between "interested" members. Also the practice of national plans being first drafted and approved by the member countries was modified in that COMECON was to work out broad projections first. By 1962, COMECON accounted for ll percent of total world trade, but almost two-thirds was accounted for by intra-member transactions. So in October 1963, COMECON adopted an agreement on "Multilateral Payments and Clearing in Convertible Rubles" and provided for the establishment of an International Bank for Economic Cooperation. Each country was to contribute shares based on their GNP and volume of trade, for a total fund of 300 million rubles. Basically, the bank was to serve as a clearing-house for mltilateral transactions among manners and to provide special credits for the financing of temporary deficits incurred in intra-COMECON trade. Actually, the bank had little effect on mltilateralization of trade mainly because ”the net balances expressed in terms of transferable rubles could not, in fact, be used for purchases in other CMEA (COMECON) countries without additional bilateral agreements".10 Eme economic reasons for the ineffectiveness of multilateral clearing in centrally-planned economics will be discussed in the following section. -—_ loUnited lations, world Economic Survey, 1961+. New York, 1965, p. 325. —————- 1+7 The absence of market-determined prices and the existence of arbitrary exchange rates mahes it extremely difficult for members to negotiate trade agreements. Work on the reform of COMECON foreign trade prices at the 1963 meeting of the Executive Comittee led to the adoption of adjusted, 1957 world market prices for intra-member trade. Acceptance of "capitalist" market prices as the basis of trade is a recOgnition that criteria must be found outside the socialistic system. Hove relates their acceptance of this fact in an interview with an Eastern official, who Jokingly said that "after the world revolution it would be necessary to preserve one capitalist country: otherwise how would we know at what prices to trade?"ll Thus, although COMECOH has developed rapidly since the death of Stalin, many economic problems remain unsolved. me nature of these problems and efforts to resolve them affect the continued expansion of both intra-member trade and trade with the West. Problems of Economic Integration in Centrally-Planned Economies As early as 191m, Professor Viner 12 observed that the task of integrating centrally-planned economies would be more difficult than 'uAlec love , “me Soviet Economy: An Introduction, Revised Edition, New Iork: Frederick A. Praeger, 1965, Po 198- 12 Jacob Viner , "International Relations Between State-Controlled National Economics, in Readings in the Theory of International Trade, Illinois: Richard D. Irwin, Inc, 1950, pp- 337456. h8 in the case of free enterprise economies because greater inroads into national sovereignty would be essential under the former, untila supra-national body took over the function of economic planning. The reasons for this lie in the nature of centrally-planned economies and their beliefs about political and economic sovereignty. Once initiated, economic integration in market economies develops a momentum of its own, almost requiring direct combined action to stop or slow down the process. Removal of tariffs and other barriers to intra-member transactions subjects firms in the member countries to competitive forces within the customs union. Monetary and fiscal policy and social welfare policies must be sycronized, otherwise there will be a major redistribution of capital and. labor within the union. In effect, economic actions in one sector "spill-over" into other sectors, requiring concerted action by the comunity. This is not to imply that ' commit}; decision-making is an effortless process--quite the contrary is true. But the important point is that, due to working of economic forces, problems arise which require commity action for their sol- ution. Such forces are almost completely absent in centrally-planned economies, however. Tariffs are practically meaningless in centrally-planned econ- omies where prices are determined by the relative bargaining strenghts of state-trading lnonOpolies. And removal of tariffs does not subject domestic producers to competitive forces within the bloc. Inefficient producers in the Soviet Union, for example , need not fear competition from more efficient producers in, say, Czechoslovakia, for in order for the latter to export to the farmer, bilateral negotations must be 1+9 conducted between their respective state-trading organisations. Such negotiations may well reveal that the only products which the Soviet Union is willing to exchange are not those desired by the Csechs, or he terms of trade would be considered unfavorshly to them. Such practices also hamper trade multilaterialisstion is centrally- planned economies. Isrs the Czechs to accept tables for their exports to the Soviet Union in the above example without bilateral negotiations, the value of the rubles so acquired would be indeterminate. Rubles are not convertible into a specific oo-nodity, such as gold, at a fixed exchange rate. The value of the rubles held by Czechoslovakia can only be atomined, therefore. when they are exchanged for the comedities offered by the Soviet foreign trade organisation. In like manner, Poland would be unwilling to accept rubles from Czechoslovakia because the term of trade would also depend on what Poland could pursue in the Soviet Union. Consequently, bilaterialisn is necessary to enable. the COIIECON countries to minimise the risks of obtaining mother's currency, the value of which depends on the outcome of future trade negotiations. Integration is also hampered in centrally-planned economies by their beliefs about political and economic sovereignty. Each country believes that they, and they alone, can determine domestic economic decisions. Since the allocation of goods and services are planned by the state, purchases of these resources by other countries without paraission of the state would disrupt donsstic "plans”, and constitute 50 an infringemnt upon their "economic sovereignty". It is for this reason that intro-member convertibility of currency is almost impossible to attain. Czechoslovakia cannot, for example, use the rubles acquired from the Soviet Union to purchase whatever she desires, unless the pro- ducts desired coincide with what the Soviet foreign trade organization has available for sale . . Economic integration of centrally-planned economies is possible, therefore, only by coordination of the plans of the member countries, which conflicts with their beliefs about economic sovereignty. Accord- ing to the Charter of COMECON, unanimity of "interested" parties is required for all decisions. merefore, any action which might improve the welfare of the commnity, but result in welfare losses for any particular lumber, cannot be undertaken, for the member who might be adversely affected would either vote against the action or be con- sidered "uninterested". This behavior was described by Neubergerla as a limited regret strategy (maxim gains. minimm losses). whereby heaters participate only in decisions which assure them of individual gains. Consequently, the number of decisions that would increase commity welfare is limited. Although intra-member trade has increased rapidly in COMECON, Nuance of a limited regret strategy limits future trade eXpansion. Actions of Soviet officials indicate that this situation has, in fact, existed since the early 60's. As part of his plan for an "International —— _. 333. Neuborger, "International Division of Labor in card: Limited Regret Strugegy", American Economic Review, Vol. 511., No. 3, my 1961+, pp’ 506-5150 51 Socialist Division of Labor" in 1962, Khrushchev wanted to vest suprae national powers in the Executive Comittee, requiring all members to participate in all decisions adopted by the majority. The outcome of this attempt was predictable: opposition to Khrushcehv's proposal was strong, so strong, in fact, that Rumania ceased to participate in COMEOOI sessions and.has threatened to pursue an independent course of development. But even if the rate of increase in intra-COMECON trade as a percent of total COMECON trade is reduced, or even diminished, trade will not necessarily be expanded with the EEC or the West in general. In addition to the trade policies pursued.by the EEC (previously dis- cussed in Chapter 11), trade policies adopted by common affect EEC- CEMECON trade. And the export capacity of COMECON depends on its pro- duction and consumption policies with respect to its major export commodities, which are mostly agricultural products. COMECON's trade and agricultural policies are the subjects of the following sections. COMECDN's Foreign Trade Policies Trade policies of COMECON members are, in general, patterned after those of the Soviet Union. During the Stalinist era, the Soviet Union's trade policy was antarky with reapect to the west and self- sufficiency for the COMECON countries. Basically, this reflected Stalin's theory of "parallel markets", which, simply stated, implied that the denial of the west of so large a market as common would surely result in the collapse or the "capitalist" economies, clearly demonstrating the superiority of the 8~'sociali.ss‘t"lsystem. 52 Khrushchev was more pragmatic and he realized that, far. from collapsing from its inherent contradicitions, the capitalist countries were not only prospering, but making some spectacular technological advances. Trade with the West was to Khrushchev a matter of practical necessity: only from the West could the COMECON countries obtain the technology and know-how to revive their own heavy industry. Trade within the bloc was still to be accorded the highest priority whenever possible, but COMECON members were well aware that their mutual efforts had produced little in the way of technological improvements, and they could be obtained only from the West. The actual conduct of COMECON' s trade with the West is influ- enced by its institutional structure, and the policy of permitting only the Poreign Trade Enterprises (FTE) to engage in international trans- actions with the West. F'I'E are state controlled organizations, whose function is to export surplus goods accumulated by the state and to import goods that the state cannot procure domestically. However, a different HE is established for exports and another for imports. Each export FTE is allocated a fixed quantity of goods for each planning period, and. these goods must be disposed of during the planning period. 'merefore, during the planning period (usually one year) the quantities 01’ goods the PE can export are fixed, and invariate with world prices. It is for this reason, that the airport supply of a centrally-planned scam is more inelastic than that of a market type econom, as was 53 assmd to be the case in Chapter 11. Other characteristics of the HE and the mechanics of centrally-planned foreign trade, too numerious to discuss in this study, are adequately discussed by Pryor.“ final the Khrushchev era was mrkedly distinguished from the Stalinist one in that major efforts were made to expand trade with the West. As was discussed in the previous Chapter, this trade expansion was limited by the West's export restrictions. But the East's ability to purchase the goods made available was also limited by its foreign- exchange earning capacity. Agricultural products constituted a major source of foreign exchange. Agricultural policies pursued by COMECOH are, therefore, important variables affecting the level of EEC-00mm: trade . COMECON Agricultural Policies Agriculture in centrally-planned economies has been described as the unwanted step-child of socialism or the Achilles heal of the Cool-mist system. bees are hardly exaggerations for agriculture has shown a remarkable resistance to the dictates of central planners. hiring a discussion with Prime Minister Churchill, Stalin remarked that the most difficult battle of his career had been the collec- tivization of Soviet agriculture from 1928-1932. Many of the agri- cultural problems confronting Soviet planners today, and. the East Euronaan planners as well, owe much (if their existence to the period of collectivization . ll”Frederic Z. Pryor, The Cmmist Foreiggrade System, Massachusetts: The 14.1.T. Press, 196? L’“ 0, 5' 61 er. Sh In a hierarchial plannedeeconomy, however, some sector must occupy' last place, and this has been shared in varying degrees by agriculture and consumer goods in general. no sector of an economy stands alone, and.nowhere is this more true than in a centrally-planned economy. All other sectors must contribute to the sector accorded the highest priority, which in the COMECON countries is heavy industry. To this and, agriculture contributed in two ways. First, by differec- tial pricing to producers and consumers, agriculture constituted an important source of capital for the development of industry. And secondly, agricultural products were needed to sustain the labor force required for industrial development. Thus Stalin's policy was to minimize the commitment of resources to agriculture necessary to pro- vide the required inputs for other higher-priority sectors. Whether or not Khrushchev's goals differed from Stalin's is difficult, if not impossible, to ascertains'but the means be employed were clearly different. And nowhere were these changes more pronounced than in the areas of foreign trade and agricultural policy. The con- trasts between Khrushchev‘s and Stalin‘s foreign trade policies have already'been discussed, but changes in agriculture under Khrushchev were closely related to foreign trade policies. unlike Stalin, Khrushchev sought expanded trade relations with the west as aumeans of overcoming the technological gap that had.dev- eloped. But in order to Obtain industrialized.products from.the West, exPart industries had.to be eXpanded in the COMECOR'countries. The export potential of their own industries, with the possible exception 55 of Czechoslovakia, was limited, however. The COMECON countries could not compete in the West's industrial markets, not only because of the technological inferiority of their products, but also due to their inability to provide a dependable source of replacements, spare parts and other services desired by the West. And the West was in no mood to become dependent upon the COMECON countries as suppliers of raw materials, especially since the main supplier would be the Soviet Union. 80, almost by default, agriculture was to become the major earner of foreign exchange. Western EurOpe was a deficit area in the traditional agricultural products of the COMECON countries and was, of course, the source of "hard" currencies. Apparently, imports of agri- cultural products from COMECON were acceptable to Western Europe, pos- sibly because they believed such imports would only be needed tempo- rarily. Having suffered food shortages and rationing during two World Wars, and fearful of the consequences of a third, practically all West European nations were pursuing policies designed to increase their self-sufficiency in agricultural products. Until these objectives were attained, however, the West European countries could profitably satisfy their import demand for agricultural products by trading with COMECON, owing to the latters high densmd for Western industrial products. Although COMECON has not produced a comon agricultural policy, the lumber countries, with the notable exception of Poland, have followed relative similar agricultural policies. Therefore, the 56 agricultural policies of the Soviet Union are discussed in more detail for the period l95h-l96h, indicating how the other common countries have deviated from them; Two factors must be distinguished when evaluating trends in apicultural production policies in the COMECON countries: the insti- tutional structure of agriculture and governmental policies on supplies of factor inputs to the agricultural. sector. With the exception of Poland after 1956, COMECON countries have consistently sought to "socialize" agriculture by collectivization, Le. replacing individually owned farms with collective farms, state farms, agricultural circles, cooperatives, etc. Collectivization began in the Soviet Union during Stalin's first 5-year plan (1928-1932), but did not begin in the other Cos-mist countries until about 1918-50. Collectivization has steadily increased in all East European COMECON countries except Poland, who ceased, but onhr temporarily, all efforts to force the stubborn Polish Peasant to join the socialized sectors in 1956. The degree of social- ization of agriculture attained by 196%, the end of the period under Study, is shown in Table 3 for the COMECON members, except Albania, for which camped-able data are not available. 01’ the total agricultural resources for each country in 1961+, Table 3 indicates the percentage accounted for by the socialized sectoruthe residuals indicate resources of the private sector. 'me degree of socialization is obviously the lowest in Poland, but the contrast in degree of mechanization between the socialized and private sectprs is great. With only 1h percent of the arable land and 8 percent C 1“}.- Ins—TJUNHV 57 .mm .d eoomH noun: [III nnm uoon.m.o .mausm nonao hHHmsvH>HpoH poUMHaou o>mn muHo: Show mo women :umHHmHoom: soHss ou ucouxm oSu momma :ououHooHuw< «0 aOHunuHHmHoom:H .m.: O H NH Hm me RN mmwm .s.s HH me ea or ea mm stz .s.o NH on Om OO mo mm use: Hm n on Hm Nu no on moououom ma NH Hm we HO «O mm msHmuO .s.s a .nis .s.s me me so Hohoe "undone HonouHaoHuw¢ we ea mm am me me me aoosm OO OH mm Ho On no me wwom mm OH mm me On mo Om msoo noan mo mo NH Nm om mm mm Hm oHuumu "Mooumo>HH OOH mm mm OOH OOH OOH OOH wows: Hmonhna .muouomua mm O OO mm mm om OO mouom uonmg mm «H no em ma ow um oHnnH< 3 3 3 em mm mm mm Housings? ”puma .udMuHuN hodaumu vsmHom MHomadm mummcsm stw>on MHmmesm Mmma moousomom HMHSuHsoHuwd umnm nonooNU H.eomH .muussoo an .ouauHsoHuw4 mo soHumNfiHoHoom “zoomZOUIim oHnoe 58 of the agricultural labor force, the socialized sector possesses 88 percent of the tractors, but only accounts for 7 percent of total agricultural output . Therefore, the private sector in Poland is highly labor intensive, yet accounts for 93 percent of total agri- cultural output. In the other COMECON countries, the socialized sector possesses almost 100 percent of the tractors (and other type of agricultural, mhinery), from 86 to 97 percent of the arable land, and from 80 to 98 percent of the agricultural labor force. With all the resources at its comand, the socialized sector accounts for less than 80 per- cent of total agricultural output. In general, the socialized sector produces the more land and capital intensive products, such as grains, whereas the private sectors produces more labor intensive products, such as fruits, vegetables, potatoes, and livestock products. Given the limited quantities of resources available to the private sector, its high share of total output is truely remarkable. But in spite of the performance of the private sector, ideology has dictated its con- tinued elimination, and all public policy has been designed to increase the Performance of the socialist sector. Agricultural policy in the Soviet Union, for the period 195h- 196”, ms largely the product of one individu --Khrushchev. Perhaps due to his rural, peasant upbringing. Khrushchev was, more than any other leader in Russian history, deeply engrossed in agricultural Pmblems and functioned as the chief architect of agricultural policy until his removal in 1961+. Nonetheless, his major policy for increas- ing agricultural production was the traditional Russian one-~land, land, 59 and more land. But since his "New Lands" program involved opening up nev areas, mainly in Kazkahstan, capital inputs that were complementary to land also had to be increased. Consequently, even though capital supplied to agriculture increased, Russian agriculture remained highly land intensive. Accompanied by very favorable weather, Khrushchev's "New Lands" program achieved impressive results up to 1958, as evidenced by the increase of the official Soviet index of gross agricultural output (1950 a 100) from no in 1951+ to 158 by 1958 (Table 1+). But after 1958, agricultural output virtually stagnated, increasing to an index of 171+ in 1961; or only 10 percent above the level in 1958. The weather was admittedly less kind to Khrushchev after 1958; actually, only 1961+ produced favorable weather conditions. But 1958 also ranked a distinct change in Khrushchev's agricultural policies. Table ll Index of Gross Agricultural Output, USSR, 1951:4961}. 1950 = 100 1950 = 100 Year Soviet Index Year Soviet Index 1950 100 1959 158 195k 110 1960 163 1955 122 1961 168 1956 138 1962 169 1957 1&2 1963 156 1958 158 1961} 171+ Source: Harry E. Walters and Richard W. Judy, "Soviet Agricultural Output by 197 " in Jerzy r. Karcz, (ed.), Soviet and East European Agriculture. Berkeley and Los Angeles: University of California Press, 1967, computed from Tables 1 and 2, pp. 307, 308. 60 The cmitment of resources to agriculture decreased substan- tially after 1958 as shown in Table 5. This table shows that during the period 1958-1961+ trends in supply of agricultural inputs--capital, labor, land, machinery, and fertilizer-were decellerated relative to the period 1953-1958. Incentives also declined as evidenced by the decreased trend in procurement prices and the money incomes of collec- tive farms. Production costs also increased substantially on the collective farms as a result of transferring the machine-tractor stations (MS) to the collectives in 1958 and a sharp increase in prices of spare parts. Although procurement prices had almost doubled since 1953, this was not a sufficient increase for the collectives to offset the added costs of acquiring the MIPS. Studies by Karcz15 indicated that in spite of the higher procurement prices in 1958, prices did not cover production costs on many collective farms, and furthermre, for livestock products they were below production costs on most farms. Although the performance of Khrushchev's agriculture was less spectacular in the latter half of his reign relative to the first half, the overall Khrushchev era was one of productivity greater than any comparable period in Soviet history. But the performance of the other COMECON countries combined exceed that of the Soviet Union, since the FAO agricultural per capita production index for all COMECON countries 15Jerzy P. Karcz, "'nle Nev Soviet Agricultural Programme", Soviet Studies, Vol. he, No. 2, October 1965, pp. 135-1146. .ONm .Q aedfldluH .hfififi vfim mH0UHW3 61 "mousom .m.a HNH mHH mOH HOH QOH OON maumm o>HuooHHoo mo waoooH Omaoz .m.n .m.n NHH OOH HOH HOH NOH mooHum unoaousooum .m.n .m.s OHH mHH HHH eOH mMH amnion: uom usauso .m.c .m.: HO mO mO NO NHH mmmvldmz dH uddEOOHaam .m.n nNH HNH NHH HHH ONH OON manna o>HuooHHoo .s.c qu qu HmH wOH Ow OON Manon durum unwaumo>aH o>Huospoum .m.d MNH NNH OOH mm. NO me moaHnaou :Hmuo .w.d so Hm we no we OqH mxosua .m.o NmH HOH OHH OOH NO HON muouonua . .. auooHnonz mo huo>HHon NON OQH ONH OHH NOH mOH OmH uoNHHHuuom HmoHaoso OOH NHH OHH mOH «OH OOH «NH wont csom «OOH MOOH NOOH HOOH OOOH OmOH meH OOH u meH OOH I mmOH .QOOHImmOH .MMmD .mo>HuQmUaH paw muDQGH SH mtamuHIIn anmH 62 inde faster than for the Soviet Union. Whereas Khrushchev' s policies achieved results mainly in production of grains, East European policies promoted improvements in the product ion of live stock and livestock products. ihese production trends indicate the general. nature of COMECON agricultural policies for ESL-1961+. To sumarize the analysis at this point, Chapters 11 and III have been concerned with the unilateral policies of the EEG and COMECON with respect to regional integration, East-West trade policies, and agricultural policies. In the Chapter that follows, the economic inter- relations between the two sub-systems are analyzed in order to deter- mine why their trade relations have expanded so rapidly. And the results of Chapter IV constitute the theoretical basis for the projections to be developed in Chapter VI. CHAPTER IV AN ANALYSIS OF EEC-CONECON TRADE REIATIONS: l9Sh-l96h In this Chapter, an economic model of international. trade between a centrally-planned and a market-oriented economy is pre- sented. Based on hypothesis derived from the economic model, the actual EEC-COLECON trade patterns that have occurred from 1951!» to 1961; are evaluated to explain the commodity composition and trends in East-West trade. The Modern T11er of International Trade Contemporary trade theory focuses on the role of relative factor endowmnts, as developed by Heckscher and Ohlin, in determining the patterns of production and international trade. 'file model devel- oped by Heckscher and Ohlin, known as the Heekscher-Ohlin model (Ii-0 mdel) , is based on the proposition that a country exports those com- modities containing relatively more of its abundant factors and imports those containing larger quantities of its scarce factors. The H-O model is only a partial-equilibrium model, however, which assumes that simi- lar demand conditions exist in the different countries. But as was shown in Chapter III, demand for advanced technology represents a major reason why COMECON has been willing to engage in trade with the West. merefore, both supply, developed by the H-0 model, and demand 63 6h conditions are combined by employing the general-equilibrium model developed by made} he bade node]. indicates that demnd conditions may either reinforce the trade patterns postulated by the H-0 model or serve to reverse then in the extreme case. However, the greater are the differencesdn relative factor endowments, the greater the diver- genes in demand conditions (favoring the product using the abundant factor) will have to be to reverse the patterns of trade. ‘merefore, in order to develop hypothesis as to the patterns of trade between the EC and COMECON, it is necessary to determine the relative factor _ emnts and relative product demands. However, the Meade model bases dennd conditions on consumer preferences or the concept of consumrs' sovereignty, which is not necessarily the case for centrally-planned economies . Consumers Sovereignty versus Planners' Sovereignty Unlike the market-oriented economies, where production is guided primarily by consumers (consumers' sovereignty), and their elected representatives, production in glided mainly by the orders of a central planning board or planners' sovereignty in the centrally- planned economies . Also, all productive factors other than labor are in state or c00perative ownership, and the price structure is not a reflection of "relative scarcities" but is an instrumnt by k J'Boaders who are notacquaintod with the Heckscher-Ohlin and Meade nodels are referred to It. 0. Giant, et. a1. theoretical Issues in International E__c______onun1us. Boston: Walton mm Cmpaw, 1967. _ 65 which the planners attain specific objectives, mainly that of rapid industrialization. {Die concept of planners' sovereignty raises serious questions, not only about the concept of a conmunity indiffer- ence cum in centrally-planned economies, but also the concept of the production possibilities curve as well. All societies, regardless of political or economic ideologies, are subject to the same problems of scarcity and resource allocation. he production possibilities curve represents the static minim levels of production of various products for a given supply of resources. In order to produce along the production possibilities curve, factor inputs mat be utilized in the various products so as to equalize their mar- ginal rates of technical substitution. Thus a movement along the production possibilities curve represents the allocative efficiency of a society. Even for market economies, where allocation is guided by the pricing mechanism, Ieiben steinz indicates that the‘problem of allocative efficiency is trivial since most firms are, in fact, Operating below their production possibilities curves. Greater gains are derived by a movement toward the production possibilities curve, which Leibenstein called "it-efficiency“ . As employed in this study, the production possibilities curve is a conceptual device, not an analytical one to be estimated empir- ically. For conceptual purposes, relative relationships are more inportant than absolute relationships . In the absence of empirical 2Harvey Ieibenstein, "Allocative Efficiency vs. 'X—Efficiency' ." hymen Economic Review, Vol. 56, No. 3, June 1966, pp. 392-185. r5 FII 66 evidence to the contrary, it will be assured that the actions of central planners in COMEOON and the effects of government policies, nonopolies, cartels, tariffs, etc. in the me do not alter the rela- tive relationships between the production possibilities curves of the two blocs. But the ability of central planners in COMECON to determine the product mix is clearly greater than for the governments of the EEC. Governments in the EEC can exert an indirect influence on the patterns of production, but their influence is restricted in that naJor divergences between the desires of the planners and consumers can lead to a removal of the former by the latter. In the centrally- planned economies, however, planners are sovereign regarding pro- duction decisions for two reasons: state ownership of productive resources and state control over the pricing mechanism. Conse- quently, greater divergences between the desires of central planners and consumrs can exist in centrally-planned economies relative to market-oriented economies. The reasons for such divergences owe much of their existence to the differences in planners' and consumers' planning horizons. ‘Bieoratically , the state exists in perpetuity and planners promote the long-run interests of the state, even at the expense of the short-run adverse effects on consumers. Quite naturally, consumers' Planning horizons are much shorter, and consequently, expect to receive some of the benefits of development during their lifetime. were is no available evidence to indicate that the basic demands of consumers in COLECON differ substantially from consumers in the £80, or in any other developed country. ‘nzerefore, it will be 6? assumed that consumer demand patterns are esentially the same in the two blocs. But the Meade model must be modified so as to indicate .the effects of divergences between consumers and planners on the patterns of sac-cameos trade . An East-West Trade Model A modified version of the Meade model developed by Jones3 is presented in Figure h: country I is assumed to be a market-oriented econm and country II is a centrally-planned economy that does not follow a policy of autarky. The two products are industrial products (a) and agricultural products (b), and the centrally-planned econonr,r has a comparative advantage in the latter owing to a greater endowment of natural resources relative to human resources than possessed by the market-oriented economy. Natural resources are used more inten- sively in the production of agricultural products and human resources more intensively in industrial products. Consumers' preferences for agricultural and industrial products are assumed to be the sane in both economies, as represented by the solid-line commnity indifference curves (CIC) . When consumers' sovereignty prevails in both economies, country I's offer curve is DC: and country II's is OCH. The free trade equilibrium is at point T. 3am Jonas, A Critigue of Sovietoiggg: The gloom a; A Centraggl- Planned Economic §ystem. Unpublished Pn. D. Thesis, Columbia University, 1 . 68 Figure 4--Moda1 of Trade Between a Centrally-Planned and a )‘arket-Oriented Ewnomy A (industrial products) .9511“:le Centrally-Planned -. Economy $0196} I l I ---— I I I "" 1 I I ' | i i I ocn 0C3: i oc: I I -__.. ' 1. T l I I I I I 2 B E 1 IL (agricultural products) s “B CIC' (It; Cit: ClCl‘ Country I Market -0ri sated Room PL ha "r by DC fc tc rs: We 9’" 69 For the centrally-planned economy , however, production is determined, not by consumers' sovereignty, but by planners' sovereignty. Planners , promoting the long-run industrialization goals of the state , have a greater preference for industrial goods than the consumers . Therefore, the planners' indifference curves (PIC) can be indicated by the broken-line indifference mines (A, B, c, and D). when planners' sovereignty prevails, the centrally-planned economy‘s offer curve is OCII’ instead of OCH. Free trade is now established at point 2. rather than at T when consumers‘ sovereignty existed. At the new trade equilibrium, the terms of trade have improved for country I. lllierefore, it is more profitable for a market economy to trade with a centrally-planned economy than with a market economy that has the same resource endowment. The reason is due to the planners' demand for the export product of the market economy, which is greater than the demand by the consumers. Although free trade is beneficial to the market economy and the central planners, consumers in the centrally-planned economy may be worse off as a result. In the absence of trade, equilibrium in the centrally-planned economy is at point D, where the PIC is tangent to the production possibilities curve. Consumers would prefer point E on 0103: but by differential pricing consumers can only reach CIC When trade is 2. established, equilibrium is at point F, indicating that the planners are of a higher PIC. On the other hand, consumers can only attain 0101. merefore, although trade allows the planners to attain a higher PIC, consumers are forced to a lower CIC, from CIC2 to CICl. TO Understandably, consumers in centrally-planned economies may favor a policy of mtarky since trade takes place at their expense. And from a Western viewpoint, they may well be hurtirgthe very people they hope to assist if they engage in trade with the East. At this point one may well ask how far the consumers' welfare can be reduced if the planners engage in trade. Jonasu analyzed this question and concluded that trade was limited by point 3 in Figure h, which represents the amount of agricultural products required to sus- tain the labor force at a subsistence level of existence. Thus the shape of the production possibilities curve would be altered from the one presented in Figure h. Rather than industrial production being at a maximum when agricultural output is zero as indicated in Figure h, it would instead also be zero for the labor force would starve. Jonas indicates that the production possibilities curve assumes the shape shown by the broken line segment in Figure 1;. As consumption is reduced to point S, industrial production falls, and below point S , it drops rapidly to zero. There is some evidence to indicate that this did in fact occur during the Stalin era. Rather than submit to collectivization in the early 1930's, many peasants, believing that Stalin would not let them starve, reduced. their plantings and burned their crops. 'L'ney were wrong: And Stalin exported Russian wheat at extremly low prices during the world depression. in. 71 Fortunately, such extreme policies as those of Stalin are a relic of the past. And during the Khrushchev era, the COMECON coun- tries have increased both the comittment of resources to agriculture and the availability of such goods to their pOpulations. It is, therefore, logical to assume that per capita consumption of agri- cultural products will be allowed to increase absolutely over time. Consequently, the future levels of COMECON agricultural exports depends upon the degree to which increases in agricultural produc- tivity exceeds the rising levels of per capita consumption. Like any economic model, the one developed here is only a partial description of reality and therefore incomplete. But combined with the analysis of the trade and agricultural policies of the EEC and COMECOII presented in Chapters II and III, it provides a conceptual frmwork by which their actual trade relationships can be evaluated. As the model has demonstrated, demand conditions may reinforce or reverse the patterns of trade to be expected on the basis of relative factor endowmnts alone . Therefore, prior to examining the actual sac-cameos trade patterns, it is necessary to verify what was assumed to be the relative factor endowments in the two regional groups. RelativelactOr Endowments in the EEC and COMECON Although factor endowments are the crux of the H-0 model, little account exists as to what constitutes a productive factor, whether it should be measured in physical or monetary terms , or how such a factor can b. leaningfully quantified for an empirical analysis. what 72 constitutes a product is an equally difficult question, especially since the trade models are concerned with trade in final products rather than intermediate products or factor inputs. The prOblem.is farther compli- cated in that the goods one country exports as final products, such as chemical fertilizer, machines, etc., another country imports as factor inputs for its own export industries. Any classification is, therefore, somewhat arbitrary and depends on the purpose of the study. Since this study is concerned.with internationally traded commodities, the Standard International Trade Classification (SITC), developed by the United Nations and used by most member nations, will be employed. In order to correspond with the East-west trade model, however, the ten maJor comedity divisions of the one-digit SITC must be aggre- gated into two categories based on factor intensities. Thus the commodity classification employed depends on the division of factor inputs. Since the maJor concern of this study is trade in agricultural comdities relative to total merchandise trade, natural resources are the mador factor input. Other factor inputs, mainly labor and capital, are classified as human capital. This classification of factors of production corresponds to that employed by Vaneks to analyze the natural resource content of U.S. foreign trade. Next it is necessary to classify the commodities as to their relative intensities of natural resources and.human capital. ‘— 5Jaroslav Vanek. The Natural Resource Content of united States Fore Dede: 1870-1955. Cambridge: The MIT Press, 1963. ’(3 hi C“ '- (_ e 73 Relative to industrial products, agricultural products require greater inputs of natural resources than human capital, and.the same is true of raw materials derived from the land which are inputs for industrial products. In order to convert raw materials to industrial products, additional human capital must be employed, thereby reducing the relative amount of natural resources in the value of the final product. This has‘been verified empirically by Vanekfi who calculated the gross natural resource requirements per dollar of final output for 192 industries. Therefore, Vanek‘s data are utilized in this study for the two commodity classification. Machinery, manufactured goods, chemicals and transport equipment (snc 5-8) are classified as industrial products, which use human capital more intensively than natural resources. All other commodities in the SITC classification system (except SITC 9, commodities and ' transaction not classified according to kind) are classified as natural resource intensive commodities. However, natural resources are of two types: renewable and nonrenewable. Renewable resources are those which, with proper management and conservation, provide a flow of inputs. Nonrenewable resources are relatively fixed in quantity repre- senting a stock of inputs rather than a continuous flow. In general, agricultural products use renewable resources, such as soil fertility, rainfall, etc., more intensively than nonrenewable resources. On the other hand, industrial raw materials use nonrenewable resources, such Ibid., p. 8h, Table 7.2. 0“! O 7-. v” Vin-La in lulu-s. I Q‘s/u nuns! luau-.neou§ I.-\:n. .hulor 7h .asma "deem .om .Ho> .ooma .xoonumow Goauosponm .otm “condom oom.~sm.m own.ssa.m ows.o~a.m~ as mo~.asa mas.smm zoumzoo oom.onH omm.mas ows.mao.a as mmo.om mam.ooa maossm .m . . ”HouOH omm.s oao m msa.w~ mm cam mow.H sadsna< oso.ma oma.sm omo mm Hm oma.s wsH.oH assassm osa.ms om5.aoa oom.amm mm mmw.OH aNo.mH sussssm oom.NH ems.ma Nam OHH as mms.a oo~.w sauswasm oma.as o~m.mm mow.a~H on ohm.s ama.sa suasposmosUdsu oss.~s omm.smH o~m.~am Na omm.aa sms.am sanded osm.sa omm.as Hoa.aoa as mas.a ooo.sa asssudo .m ooo.-~.m ooo.am~.~ oo~.~oa.- mm o~a.maa oom.om~ ammo "zoomzoo ommumsu omm.msa mmm.~sH.H ma omm.ma sma.maa Hausa cam NH oms.m Nas.mm a osa.H NaN.NH mussaumsssz oss cos smm.~ an mma Hmm adsosaoxsa comma omm.a mam.om s oms.m ass.a asamasm omm.Hn omo.mmH m-.Hom am mom.o~ sam.am sauna omo.mm osm.~m mam.sa~ Ha oma.sm mmw.sm asssuuu cam NmH om~.mo~ so~.asm ma oao.o~ «Na.ms sedans some Nasev Niaav xwasmv “NV Aooo.av Aooo.av assumed vanamouu \4mwu< musuasofiuw< venom coaumHsdom a ascend: puma Hmuoa cH muuom some; U.S.“..H HNHQUHQUHHM< H033 MO N .momH .ZOUMEOU was 0mm mSu CH mwuusommm Hmudumz was HMufiamo Steam mo mquEBOpnmIIo MHamH 75 as coal, iron ore, metal, and petroleum deposits, more intensively. Therefore, the general category of natural resource intensive com- Iodities is divided into two sub-categories: agricultural products (SITC categories 0, food and live animals; 1, beverages and tobacco; and h, animal and vegetable oils and fats) and raw materials (smc 2, crude materials except fuels and 3, mineral fuels, lubicants and related materials). In order for a country to sustain a high rate of industrial develOp-ent, it must have a highly skilled, technically advanced labor force or what has come to be known in economic literature as human capital. This is evidenced by the plight of many of the under- developed countries, rich in natural resources but poor in human resources. And also by the spectacular success of the Marshall Plan, which infused U.S. capital into West EurOpean countries that were rich in human capital. A country's population is an indication of its potential supply of human capital. As shown in Table 6, the total population of COMECON is almost twice as large as the EEC's. But the actual supply of human capital depends upon the quality of the labor force or the amount of education, training and other types of capital investments in a country's human resources. Unfortunately, the actual endowment of human capital can only be determined indirectly. Countries that are well-endowed with capital, however, exhibit two characteristics. First the labor force is a small percent of the total population. As shown in Table 6, 51 percent of the total population in cameos are in the 76 labor force as contrasted to only hl percent in the EEC. This would indicate that the EEC has a relatively greater endowment of capital than COIECOH and a smaller proportion of the population is required in the production process. A second indication of the supply of human capital is the pro- portion of the labor force required in the agricultural sector. As a country develops and capital becomes more abundant, it is employed in other sectors of the economy rather than being concentrated in the industrial sector. But when applied to the agricultural sector, capital tends to replace labor, which is released for employment in industry or services in a mass-consumption society. In the U.S., for example, the application of capital to agriculture has reduced the percent of the population employed in agriculture to less than five percent. In COMECON, 3&0 percent of the labor force is employed in agriculture, whereas only 13 percent are so employed in the EEC. Therefore, even though the population of the EC is only 511» percent as large as COMECON‘s, the EEC industrial labor force is 63 percent as large as COMECON's. If natural resources were evenly distributed through the world, then land could be used as an indicator of a country's natural resource endowment. file land area of COMECON is almost 20 times that of the EEC. Land is not a homogeneous factor, however. For agricultural mrposes the amount of crapland, meadows and pasture land is a more Swapriau comparison. Whereas the EEC has only about 5 percent as web land as COBBCON, it has 17 percent as much cropland and 6 percent as Inch meadows and pasture land. 77 For this study, a country's relative endowment of human capital and natural resources are measured by the size of the industrial labor force and the quantities of various types of land. And the ratio of human capital to natural resources is referred to as the human capital density. Computations of the EEC's and COMECON's human capital density with respect to different types of land are presented in Table 7. Clearly, the human capital density with(' respect to all types of land resources in the sec is much greater than that of COMECON, although the differ- ences are less between the EC and Eastern Europe. Specific natural resources required for production of raw materials cannot be accurately measured by relative quantities of different types of land. For the particular countries included in this study, however, the land area is closely correlated with the amount of specific natural resources, such as iron ore, coal, petroleum deposits, etc., possessed by the EC and COMECON. And any biases that exist by using land as an index would simply understate the already large absolute quantities Possessed by COMECON, but would not change the relative factor endow- ments. 'llle computed relative factor endowments are shown in Table 8. With respect to total land area,the EEC's relative endowment of human capital is 12.7 times that of COMECON's. COMECON's relative endowment of cropland. is only 3.7 times that of the EEC, but the formers' endow- ment of meadows and pastures is 9.3 times that of the latter. This indicctes that the EEC has a substantially greater relative endowment of human capital for industrial production. And COWCON has a 78 .o oHeoH Boom pounaaou "monoom .pomH mo max ooo.a and monom Honda Hafiuumspaa may oH Hoeeoze cH~.c~ nmc.cm omm.e zoomzou NmH.cmH mea.~c mme.m~ oaonsm .m “ashes «Ne.me ame.oh me~.~H nuances emm.oo~ mam.oo rom.cm anemone NNH.mOH Hme.me Hem.ma «flotsam som.eee New.am Hem.ca menswear eow.aom Hmm.mm new.He ofixm>oamonoono Neo.mo~ ce~.mm eos.aN scenes Nem.mme soa.e~e eec.em measure .m Hme.H~ mow.em aom.m ammo "zoomzoo ems.~e~ mma.oma sew.sm Hence ch.moe meN.emH emm.mm stereoscooz oom.nma mam.m~a moe.oe wusoeaoxoq mow.are emm.ecm ewc.mas essence c-.Hom mee.eos omm.en aaenH mae.e~e eem.mem one.ae essence sen.m~a mee.we mwe.m~ oceans comm ouoummm pom arouse: pomamouo mou< para HouoH ”cu uooammm nuas «mowufimooa Hmuwamu steam .mcea .zoomzoo can use can no nonsensoo essence ccssmnua mecca Unw s - s-II 79 .n oHemH aoum pou=a800 “mouoom an as .moouoomou amassed mo nocesopso acumen» aao>auoaou a mo: Azoumzoov nouosweosop can as u 00 emu no Houfiamo does: «0 unmasopom noumouw mao>auoaou o no: AommV noumuosos men s« handsoo sou mesa e.NH u emm.e a. cem.em u sons some zoomzoo sons some one oonon noose senescence zoomZoo.m oonou nocsa Hansonsnse new a zoomzoo\umm "msoaaom mm poudafioo mum mmHuHmGop Hmuwamu amass o>HumHou onaa H.o w.H H.w N.H N.N m.H m.HH m.m «.ma m.m n.m m.NH monoummm was mesons: paramouo smut pong "ou nooamom sows moaufimsoa Houfiaoo swarm o>fiuoaom .MmmD mnu flaw .oaouom Ghoummm .Umm mnu mo muamEBOUGm Houooh 0>HuMHoMIIm Mmms\oaousm opossum odousm snoummm\umm emm=\omm zoumzou\umm pouoaaou mofinuosoo muons 80 substantially greater relative endowment of all natural resources for production of raw materials and agricultural products. For agri- cultural production, COMECON's relative endowment of agricultural resources favors the more extensive types of grain and livestock production. When the EC is compared to the Soviet Union, the relative factor endowments are practically the same as for COMECON. Relative to the East European countries, however, the EEC's relative endowment of human capital is only 1.9 times as large. Therefore, Eastern Europe's pro- duction patterns should be more similar to the EEC's than would be that of the Soviet Union. With respect to agricultural resources, Eastern Europe has a relatively greater endowment of cropland than meadows and pastures, favoring the more intensive types of grain and livestock production. Comparing Eastern Europe to the Soviet Union indicates that the forner's relative endowment of human capital is 8.1 times that of the latter. And since the Soviet Union's endowment of meadows and pastures is 9.1 times as large as Eastern Europe's, and 1.8 times as large for cropland, the Soviet Union should produce relatively more extensive types of agricultural products and Eastern Europe the more intensive types. These relative endowments of human capital and natural resources correspond, therefore, to. what was assumed to be the relative factor endowments in the development of the East-West trade model. As was “mad, the EC is a human capital abundant economy whereas comma is relatively natural resource abundant. Based on the H-0 model, 81 the EEC should export industrial products using relatively more of its abundant factor (human capital) to COMECON in exchange for raw materials and agricultural products, which use COMECON's abundant factor (natural resources) more intensively. And since COMECON has a relatively higher demand for industrial products, which use its scarce factor (human capital) more intensively, the trade patterns expected on the basis of the H-0 model are reinforced, as was demon- strated by the East-West trade model. Relative endowments of capital could not be determined directly, but by indirect methods it can be concluded that capital is more abundant in the EEC. This would also reinforce the expected trade patterns, however, since capital is employed more intensively relative to land and labor in industrial products, which COMECON is expected to import from the EEC. COMECON intra-member trade patterns, which were discussed in Chapter III, indicate that the USSR has a greater endowment of raw material land resources relative to agricultural land resources than the East European countries. Therefore, as political tensions are eased, somewhat, between East and West, a greater proportion of the Soviet Union's land intensive exports to the EEC will be raw materials instead of agricultural products. Relative to the Soviet Union, a greater prOportion of the land intensive exports to the EEC from Eastern Europe should be agricultural products . To summarize, the actual relative factor endowments correspond to those assumed in the develoment of the East-West trade model. And although the model contained only two products and two factors, the 82 addition of other products and factors do not indicate any changes in the expected trade patterns--the EEC should export a greater proportion of industrial products, which are labor and capital intensive, to COMECOR in exchange for agricultural products and raw materials, which are natural resource intensive. Based on the propositions developed from the East-Vest trade model, the actual EEC-COMECON trade patterns are examined in the following section, and, following the methodology employed by Travis ,7 deviations from the expected trade patterns will be analyzed in terms of the specific trade and agricultural policies that were discussed in Chapters II and III. EEC-COMECON Trade Relations, lgilL-l96h As was indicated in Chapter I, EEC-COMECON trade relations have expanded rapidly during the Khrushchev era. And although this trade was initially low in value, it has expanded at a faster rate than world trade. In this section, the value of EEC-COMECON trade is discussed together with EEC-U.S. trade to indicate the relative value of the W's trade with COMECON. Next the commodity composition of EEC-CODECON trade is analyzed to test the trade patterns postulated by the East-West trade model. In order to determine the relative competitive positions of COMECON and the U.S. in their trade relations with the EEC, their market shares are examined for the major conmodity 7W1Jlaim Renfield Travis. The Theory of Trade and Protection, Harvard University Press, Cambridge: 1963. 83 groups. And finally, the participation of the individual EEG and 001600! member countries in East-West trade are analyzed. Since the EEC numbers have varying degrees of political power, the common policy on trade with COMECON will be influenced by the relative impor- tance of such trade to the member countries. . The value of EEC imports during the Khrushchev are from COMECON and the U.S. are shown in Table 9. Fran all sources (world), the EEC's . imports increased 171 percent, from $16,561 million in 1951+ to $M,928 million in 1961». Intra-member trade has increased faster than non- member trade. Although non-member imports increased only 126 percent, imports from both COMECON and the U.S. have increased faster, by 373 and 201;percent, respectively. Of the EEC's imports from COMECON, those from Eastern Europe increased 181 percent, whereas those from the Soviet Union increasedby 297 percent. The value of the EEC's imports from COMECON, although growing rapidly, were lower in 1961; than the EEC's imports from the U.S. in 1951;. It is difficult to determine the impact of the formation of the EEC on either member trade or trade with nonmembers because of the circumstances that surrounded its formation. 'me EEC was but one of a series of steps toward economic cooPeration, preceeded by the forma- tion of the Benelux Union in l9h8, the Organization for European Economic Cooperation, also establish in 19148 and replaced by the OECD in 1961, and the European Coal and Steel Commity in 1952, which provided for a connon market in steel, coal, and scrap metal among the 811 countries that formd the EC in 1957. Thus menher trade was increasing rapidly before the EEC became a reality. And imports from 81+ .0 mofiumm .kufitoeaou an momma m.nomo Tau aoum one nomalmmma scum use .moHumHumum ovmuH mufissaeoo «a mowumm .meHumz wooden ago Scum out wmmaiemma you mumn "moasom amo.m ass.o moo.o oam.m ~mm.m mom.~ Hom.m osm.m ~wo.m onm.~ now.H .<.m.o mom Hon amo ooo com mos Nos mom mom omN can choose .m com mmm mmm moo Hmo can oa~ Ham mam mos ama ammo moo.H mmm.fl omH.H aao.a mam ems oao oHo Hon Non mam zoomzco omH.- Hmm.o~ oom.- oao.om “no.aa aoN.oH Hoo.oa ooa.afl mmm.ma omo.ma noo.~H nooaoauooz «ma.as are.mn wo~.mH Nom.HH nos.oa wmo.m mma.o, omo.~. mam.o mmn.m omm.o 0mm mum.oo one.oo aso.mm oH~.~m Hmo.m~ na~.o~ sam.- oa~.s~ mmm.- omm.ma Hon.oH canoe eons moms Noon Hons coma amen some hood ones moms ohms nooonaH mo mousom .Anunaaoo .m.: mo nnoeaaaav noooom tones: oeo non zoomzoo sons nononeH ommunm manna 85 non-member countries were probably higher than the trend just before the EEC was created for two reasons. Many countries feared the possible deliterious effects of the EC on their exports. Accordingly, therefore, they probably attempted to export more than in antici- pation of limited access to the EEC's market in the future. And the Suez crisis in late 1956 also served to stimlate imports into the EEC. It is interesting to note, however, that while total EEC imports decreased in 1958 and 1959, imports from COMECON continued to increase, but imports from the U.S. decreased absolutely. Aside from these minor deviations, two trends are evident: EEC intra-member trade is increasing faster than total trade, and both the U.S. and COMECON are increasing their shares of non-nember trade. EEC eXports to COMECON and the U.S. are shown in Table 10. From 1951+ to 1961+, total EEC imports (world) increased from $15,765 million to $142,591; million, an increase of 170 percent. Exports to member countries increased faster than exports to non-members. How- ever, exports to the U.S. and common increased faster than total exports and exports to all non-member countries. It should be noted that the U.S. is relatively more important to the EEC as a source of its imports than as a market for its exports. In 19634 the EEC’s mports from the U.S. were $5,187 and its exports were $2,852 million. EEC exports to COMECON have also increased faster than EEC total “ports and exports to non-member countries. By 1962, EC exports to the Soviet Union increased 300 percent as computed to a 181 percent 86 .o noanom .aoaooaaou no sense n.aomo are none one codenamed scum use .mUHumfiumum swank mnemoaaoo .Q mwfiumm .mdoaumz mamas: one Soum who wmmalwmma you some ”mousOm Now.“ mom.~ ous.~ mH~.N Hm~.~ sem.~ ooo.a Hom.H oHs.H amH.H omm «so owe Boo one can Noe ans com rem mam emm mam can men use see mam new can see HHH owe omm.H oeo.H HBH.H are.e are Han eNo Nam Nam ems mom aaa.em soo.a~ oas.o~ was.wa osm.eH soo.~a mow.ma me~.ma rso.ma nao.~a moa.HH see.ma omo.mH oes.mH mom.ma CNN.OH maH.e eon.o eee.a mme.e mso.m amo.s asm.~e som.em om~.sm mmm.~m ooe.o~ xm~.mN was.- ooe.- owo.o~ om~.me moa.na some moms Nome Hoes some ewes some amen ones moss some .<.w.D wmousm .m MmmD zoumzoo HmnawEInoz 0mm vauoz muuoaxm mo oofiumsauoon .AnanHHoc .m.= mo nsoHHHeav possum panes: one one zoumzoo on noaoaxm ommnuoa manna 87 increase to Eastern Europe. For the period as a whole, however, EEC exports to Eastern Europe .increased faster than those to the Soviet Union. This difference was due to the large decrease in EC exports to the Soviet Union in 1963 and 196%. Owing to a major crop failure in 1963, the Soviet Union was forced to use its foreign exchange to purchase wheat, mainly from Canada, rather than industrial products from the EEC. Soviet exports to the EC in 1963 and l96h were greater than in 1962, however, which indicates the importance of the EEC to the USSR as a source of foreign exchange. This would also indicate that the USSR maintains a low reserve of foreign exchange, since the USSR had to divert the use of its annual foreign earnings from indus- trial imports to agricultural imports. As was hypothesized in Chapter II, internal trade has increased faster than external trade as a result of continued economic integra- tion in the EEC. And similar developments have taken place in COMECON, which were discussed in Chapter III. However, EEC non-member trade increased absolutely, and both the U.S. and COMEJCON have increased their shares of this trade relative to all other EEC external trading partners. And whether or not COMECON will become a major competitor with the U.S. depends upon the commodity composition of EEC-COMECON trade, which is analyzed in the following section. Commodity Comgition of EEC-COMECON Trade Based on the East-West trade model, hypothesis were developed 88 to the expected comodity composition of EEC-COMECON trade. All condities have been divided into three categories: agricultural 88 products (SITC o, l, h); raw materials (SITC 2, 3) ; and industrial products (SITC 5, 6, 7, 8). The first two categories are considered natural resource intensive products and the last category as human capital intensive. To determine the commodity composition of EC trade with a given country or group of countries, the percent of the total value of that trade accounted for by each of the three major categories was computed. For the EEC's imports, or the exports of the country or origin, these calculations are shown in Table ll. The commodity composition of EC imports from all sources (world) has steadily changed from 1951+ to 1961+. In 1951;, agricultural products and raw materials accounted for 66 percent of the total value of EC imports, and almost 31+ percent were industrial products. By 1966, more than 50 percent of the EEC's imports were industrial pro- ducts. Of the natural resource intensive products, the greatest relative decline has been in raw materials. Although the relative value of agricultural imports has decreased from 25 percent of total EEC imports in 1951; to 18 percent in 1961+, their absolute value has increased from $h,217 million to $8,272 million over the same period. The commodity composition of EC imports from the U.S., and the changes in commodity composition over time, are similar to EC world imports. his relative value of agricultural products to total U.S. exports to the me has shown a slight, but uneven, decline. In absolute value, however, U.S. agricultural exports to the EEC increased from $371 million in 1951: to $1,010 million in 1961;. Therefore, the EC continues to be an important commercial market for U.S. agricultural Products. I 1:. .mrsoasow «auasossmeulnllzla one ass .moapeapspm edema apasossoo .n sofisom .ssoapsz copes: on» sore sass so owes” wmwmw o.pwwo GHSO ,0 . 89 . 830m .doUSHoxo mauuvoHMHmmmHo pom msowposmssup one no a A N H II. oBHm sundown flooa on one was on macaw mono you manpoa m r em em oaHmm .m N QBHmN .: .wawmsmmmmd 111/. . m m~.:m Hm.mm :mno: ~:.:m HH.H: aposoOHm dmaspms mm.mN o:.mm mm.0m ww.®m H:.m: wa.wm madaaoegz WWW Nmowfl NJoHN :moWH NO PH NmeNN mmoON w#OSUOhm HdePH50HHM< ” .<. m. D . NQ.NN mw.Hm :m.wN NP.Hm H>.~N maudfl0hm downwardsH mm. mm Hm. mm :m. Nm. mm. mm mm. mm mm. mm madam“?! #wm mm.mm ma.mm ao.:m om.am am.mm Hw.mm assessed asuspasofisw< ”seesaw poem Hm.hd mh.NN mm.ba mm.NN mm.om md.mH opedfionm HdwhvmdvsH wdohh #:omw HmoON mwoflh Ofloww NHoJW uddflflflpdz kfim m .m me.aa mm.aa mm.m mm.oa mo.mm oposoosm asuspasoasw< J "mmmb . . mm.mm mo.om mm.am mo.am eposeosa guessesesH mu.mm mam an? 2.8 Home amen eposeossswmmwdmww . . . . N N . N Hm.mm aw mm mm am mo mm mm m ”zoomzoo es 3 .5 mm mm Mm.” éfihfifi . . mw.mm : . . m“.mm Mm.mm ma.om ma.mm m:.mm ma mm Assessonm Hansoasoeswwuaso: some Now: some was RS saw 400.3. node 80.“ Q3? 30» Mo autonomy novdvm clued odnsa coeds: on» use zoomzoo.aoah upuoasH can no soapauoasoo assesses 90 Of the total EEC imports from COMECON in 1951+, almost 79 p8rcent were natural resource intensive products, and by 1961;, 71+ percent were natural resource intensive. As was postulated by the East-West trade model, the majority of COMECON exports are natural resource intensive products. And of the total EEC imports from COMECON; a greater pro- portion of those from the USSR are natural resource intensive than from Eastern Europe. In l95h, 88 percent of EC imports from the Soviet Union were natural resource intensive as compared to 72 percent from Eastern Europe. And by 1961+, these percentages were 83 and 69, respectively. These data support the hypothesis that the East European countries would export a greater percent of their total exports in the form of human capital intensive products to the EEC than the Soviet Union, but COMECON as a whole would export relatively more natural resource intensive products. Although one cannot be certain that COMECON's trade is due to conventional market forces, it appears that COMECON's trade with the EC is what would be expected on the basis of comparative advantage . As shown in Table ll, the relative importance of agricultural products in the total EEC imports from COMECON has decreased from approximately 29 percent in 1951+ to 2k percent in 196k. “D318 is not true for all COMECON countries, however. Agriculture products as a percent of EEG imports from the USSR decreased from about 21+ percent in 1994 to 5 percent, whereas from Eastern Europe, agricultural pro- ducts accounted for 32 and 31+ precent, respectively. in 19511 and 196k. Consequently, the importance of raw material exports increased for the 91 Soviet Union relative to agricultural products, while the reverse was true for Eastern Eur0pe. Adaption of a protectionist trade policy by the EEC on agricultural products would, therefore, be more detrimental to the East European countries than to the Soviet Union, especially since tariff rates are already the lowest on raw material imports. But as was noted earlier, industrial products constitute a greater proportion of East EurOpean exports than of the Soviet Union's. Thus the East European countries may be able to expand their industrial exports if the agricultural market is adversely affected. In Table 12, calculations of the commodity composition of EEC exports are presented. Industrial products (human capital intensive) constitute an increasing proportion of total EEC exports (world) relative to agri— cultural products and raw materials (natural resource intensive). Industrial products increased from 70 percent of the total in 1954 to 78 percent in 1964. EEC intra—member trade has shown a similar pattern, but raw materials trade has decreased faster than agricultural product trade. An even greater proportion of the EEC's eXports to the U.S. are industrial products, increasing from 76 percent of the total in 1954 to 88 percent in 1964. In relative terms, therefore, a greater proportion of EEC exports to the U.S. are industrial products, whereas a greater proportion of U.S. exports to the EEC are agricultural products and raw materials. The EEC's exports to COMECON are also predominately industrial products, but a much higher proportion of the USSR's imports are industrial products than are those of the East European countries. Of the USSR's imports from the EEC, 73 percent were industrial products in 1954 and .1: . H A»; X . H C. Kwfi If: u. (93. u. s~ 33.9. 0A I'All...l ut.‘l‘lli lizt VI!- I I!) QtVUI-(h. yin: :5.Ih|nu.l|.i..! V II‘. §:.I;.n unlinoIc-n .uanu vlonl. ‘..a .1 .. . . . v .. fl III 0 .o museum .spfisoaaoo an Quays a.nom . n: uncapdz dopfiub onu_aonm «and no woman uncapmdsoado .mo om cameos» can moan“ om «N OHM—”mm oz» can .moavmfipmpm moose hmwdosaoolan moahom . .dmdsaoxo mHoquflmHmmdAo poo mnowp .m .s .w .m oeHmm_ doBEOOIIm UBHm 0+— KH ”0 Dam-H omduoon ROOM on dds #0: ad macaw some now madvoa 3.5 3.8 8.5 8.3 miss «3» Basset assuage mo.s mm.s mm.» ss.m mm.m mm.ma upossogm Hunspasua ..<.m.n :s.ms so.mw mm.mw mm.mm m .:m mo.:m moossopm HuanpmsuqH Hm.ma ms.oa am.m ss.m mm.mm om.mm upossogm Hanspasofihw< “omousm aqua mmnmm mm.am mm.mm ma.mm ms.om am.ms nauseonm aafiupmssaH sm.: sm.: mm.m mo.: am.m ms.s masauoauz sum mm m :H.: mm.a mm.m mo.s mm.am mpossoum ausspasoanw< mm "mm smnws so.mm as.mw am.mw mm.me ms.ow aposcoum ”saunasaaH mm.ma mmum mo.m ms.m Hm.a mo.:H nasauosuz sum :m cm s as.m :s.: :w.wa mm.sm apossonm awaspasoanw< "zoomzoo 0a.:s sm.Hs om.mm mm.mm mm.mw ma.am uposeonm auaupuseaa . momma manna mm.sa m:.ma mo.am mm.mm «assumes: sum : Ha mm NH :0.ma mm.ma m:.:a mw.:a muosaoum Huhspasoauw< “cam w:.ms mm.se om.ms sm.ws m.ms oa.os m 0:60pm : “Mum“ mmnma smuaa mm.aa mm.ma a:.ma m » «naumwwmnm mum m mm as oa.aa ma.ma sm.ma Huposeonm Hausnasuanm< .IIIIII. "demos PGQONOMHFI is $3 89 was an in 8%:28 .Aooan none on osau> adage no uncoummv noeasm doped: on» and zoomzoo 0» upuomxm omm_ho soasamomaoo heavoaaoonamd usage n..- his (1' '(J (*1 (.J q a I“ K.‘ 93 increased to 91 percent in 1962. Because of a bad crop year in 1963, the USSR decreased its imports of industrial products relative to agricultural products in 1964. The commodity composition of EEC-COMECON trade from 1954-1964 supports the pr0positions of the East-West trade model. A greater proportion of the EEC's exports to COMECON are human capital intensive industrial products. And a greater prOportion of COMECON's exports to the EEC are natural resource intensive agricultural products and raw materials. But of the COMECON eXports to the EEC, those of the East European countries are more human capital intensive relative to the exports of the Soviet Union. And since a greater preportion of COMECON's exports are agricultural products (24 percent) than are those from the U.S. (19 percent), COMECON may become more competitive with the U.S. in the EEC's agricultural market. But commodity composition is not a sufficient indication of competitiveness, and the relative value of commodity trade must also be considered. Competition For the EEC's Product Market Exports to the EEC from both the U.S. and COMECON have increased faster than total for all external suppliers to the EEC. But for the EEC, intra-member trade has increased faster than world trade. It is possible, therefore, that internal EEC trade has displaced exports from both the U.S. and COMECON, and, perhaps, more for one than the other. Several types of trade diversion were discussed in Chapter 11, result— ing from economic integration in the EEC. These effects can be analyzed by calculating the import market shares (EEC imports from a specific n1— s.»- 94 country divided by total EEC imports) for the various countries, and comparing their relative changes for the Observation period. And from the viewpoint of the EEC, the relative importance of various countries can be determined by computing their market shares of the EEC's exports. The computed market shares for total EEC imports and exports are shown in Table 13. In Table 13 both exports and imports are divided to show total EEC trade and EEC trade with non-member countries (i.e. EEC external trade). From 1954 to.1964 intra-member EEC trade went from 27 percent of total imports to 40 percent, thus the Share Of intra-member trade increased 44 percent. But the market shares of the COMECON countries increased faster than those of the EEC member countries. Most of the increase was accounted for by the East European countries, whose market share increased 94 percent as contrasted to 46 percent for the Soviet Union. The U.S.‘s market share has increased only 11 percent. But the U.S.‘s market share increased from 11 percent in 1954 to 15 percent by 1957. However, this increase was probably due to the Suez crisis and U.S. exporters' anticipation of future discrimination by the EEC. Economic integration has clearly resulted in greater intra- member trade in the EEC; however, COMECON, and especially the East European members, increased their market shares faster than the EEC member countries and the U.S. But both COMECON and the U.S. have increased their market shares, which is evident from their shares of EEC imports from non-member countries. 0f the EEC external imports, COMECON accounted for 2.6 perCent and the U.S. 15 percent in 1954. By 1964, the U.S.‘s market share increased to 20 percent and COMECON‘S to AUI. noon-V It.i .~.a I\~l~ 95 .o mmaumm..sufieossoo an means m.nomo was sunny hufiwoaaoo .Q mmfiumm .mdoaumz woman: mnu Eonm dump so comma mefiumHSono was .mofiumfiumum "mouaom ow.HH ew.HH ~0.HH mn.HH N¢.HH Hm.ma oq.oa Nw.m mm.oa wa.m nm.w .<.m.: om.m mm.m Hm.m Hq.m mm.~ qu.m No.~ mm.~ «m.~ mm.~ «H.N mmoudm .m om.H HN.H ~¢.N wm.~ mo.~ mq.a. Hm.H m~.H wN.H ww.o mH.H Mmmb o¢.m mo.m mo.m on.m mo.n ma.q mm.m Hw.m Nw.m H<.m nm.m zoumzoo “undue Hmauouxm mo & o~.o mm.o mo.m mw.c on.“ Hq.m om.“ wo.o mo.n qm.o om.m .¢.m.D Hm.u mm.H qm.a mm.a mm.H mw.H qw.a NN.H m~.a cm.a mm.a mmouam .m mm.o wo.o wq.a mm.H om.H mm.o Hm.o mm.o nw.o Ho.o wn.o Mmmm oa.m om.~ ~¢.m om.m. Hm.m Nw.~ mn.~ mm.~ oo.~ mm.~ om.~ zoomzou mm.m¢ om.Nq em.mm mm.a¢ qm.¢m mm.~m wa.om mm.Hm mo.mm am.om em.mN 0mm "moam> Hmuoa mo N muuomxm 0mm mo.om qw.~a HH.wH Hm.wH no.0a Hw.ma oq.na om.HN 5N.ma wm.na mo.mH .<.m.: mm.m qa.m Hm.~ na.m Hm.N mu.~ om.~ mm.a qa.~ Nn.H om.H maouam .m om.~ HN.N mm.m mH.N HN.N em.m on.a mm.a mm.H N~.H «H.H Mmm: mm.m mm.m m~.m Nu.m No.m mo.m om.c mq.m Hm.m qm.~ co.~ zoomzoo “ovmua Hmaumuxm mo N OH.~H Ho.HH H¢.HH «H.~H qm.~H mm.oH «N.~H oq.mH Hw.MH om.~H om.oa .<.m.D NH.N mm.a mw.a mm.a mm.H mm.H mn.H mm.H Hm.H NN.H ao.a maousm .m H~.H mm.H oq.a mm.H mq.a om.H 0N.H OH.H oo.H mm.o mw.o Mmm: mm.m om.m mm.m mm.m om.m mm.m mm.~ ¢¢.~ Hm.~ mo.~ Nm.H zoomzoo oo.mm mm.mm mm.om mm.mm m~.¢m Gu.mm mo.m~ mm.m~ mm.m~ om.w~ om.- 0mm nonam> Hmuoa no N unmoumm manomSH 0mm #ooa mama mama Homa coma mmma mmma nmma coma mnma «mod .qomauqmma .muuodxm new muuoasH 0mm Hence no mmumsm umxumzuuma «Hams .NV .d ‘\ V 96 5.5 percent. Consequently, COMECON has improved its competitive position relative to the U.S. Whereas COMECON's market share was only 18 percent as large as the U.S.‘s in 1954, it increased to 28 perCent by 1964. Similar trends haVe deve10ped with respect to the market shares of EEC exports.“ However, EEC exports to member countries have increased faster than to COMECON, but both the U.S. and COMECON has increased their market shares of EEC exports relative to other non-member countries. And by 1964 the U.S. purchased approximately 12 percent of the EEC's exports to non-member countries and COMECON purchased 5.5 percent. Therefore, COMECON represents a market for EEC exports that is 46 percent as large as the U.S.‘s and COMECON's share of EEC exports is increasing at a faster rate. The calculated market shares of the EEC's total export and imports indicate the Over—all competitive trends exhibited by the various coun- tries. More important for this study, however, is the performance of the various countries in the EEC's product market for the three major commodity categOries. Each of the product categories will be discussed, beginning with industrial products, then raw materials and agricultural products. The value of EEC imports of industrial products and the calculated market shares are shown in Table 14. From 1954 to 1964, EEC imports of industrial products increased to $22,820 million, an increase of 307 percent. Internal trade in industrial products was very high before the EEC was established, with the member countries accounting for nearly 50 percent of EEC industrial product imports." And by 1964, the member countries' market shares increased to Z. I . — I413-.. F ”Vail-Erwin we: a. i. a: \AL P .nlevln 1 “Ave F mvxuka. 97 .o mmfismm £93058 3 «8% abuse on» and .moflpmdvmpm Quake Hwfidoaaoo .Q moauom .mGOfipdz panama can scan spam no woman mCOHHdeoHdo "condom m- oo.ma mm.aa sm.sa mm.ma ma.ma mm.ma .«.m.: we mm.a mo.a sm.a mm.a sm.a mm.o mmossm.m em as.o mm.o mm.o mm.o mm.o om.o mama o: sm.a ms.a mm.a sm.a Hm.a ma.a zoomzoo ea sm.mm mm.:m oa.am ao.om. ma.m: 0:.ms 0mm Amy «madam passe: mom som.mms.m wao.:wo.m :mm.mmo.m sme.mma.a onetmoota oss.ass .<.m.= we: moo.mmm ssm.mma mam.msa was.saa mew.moa - mmm.m: vacuum .m so: mom.sm wao.maa mmm.:s mso.ao sme.ms mmm.ma mam: ms: mam.mmm mmm.wom :ma.ssm www.msa omw.:ma mmm.wm zooazco ham mam.mmmrma mm:.m::.m smo.mmm.m mma.mms.s ommrmsm.m mms.mos.m can «scan npuomaH Pom mes.maw.mm mam.wam.sa sm:.mmm.ma mom.oam.m Hmm.mmo.m mom.mmm.m apnogsH dupes Aooo.asv usaa> semanswma same mwmw omma mwma mnma sums omdosond m .zwmausmma Ruposeonm doaspmsusH mo upsomsH 0mm.mo possum amass: ecu osau>:u:s nears .J—————l—_I:-—_—_:'——l _ 98 57 percent. COMECON's market shares increased at a faster rate, but its market share is still relatively insignificant. In 1964 COMECON's market share was only 1.7 percent. The U.S.'s market share is substantially higher than COMECON's, but has shown a slight decrease, down from 13 percent in 1954 to 12 percent in 1964. It should be recalled, however, that the U.S. was a major source of industrial products during the post-war recovery period, so the U.S. market share would be biased upward during the early 1950's. Nevertheless, the EEC has shown a spectacular rate of increase in internal industrial product trade, especially considering its high level initially. Contrasted to a 307 percent increase in total imports of indus- trial imports, EEC imports of raw materials (Table 15) increased only 92 percent and the member countries share of this trade increased only 5 percent. On the other hand, raw material imports from COMECON increased 373 percent, and its market share increased 146 percent. Therefore, by 1964, COMECON supplied approximately one-third as much raw materials to the EEC as the EEC member countries, whose market shares were 6 and 18 percent, respectively. The U.S.'s market share has remained at approximately 10 percent. Consequently, whereas COMECON's market share of EEC raw material imports was only 23 percent that of the U.S.'s in 1954, it was 58 percent as large by 1964. As indicated in Table 16, EEC imports of agricultural products increased only 96 percent as compared to a 307 percent increase in industrial product imports. Intra-member trade increased 221 percent, BuCCrVLLC—H. a or . . y k. a F. H “(CH OmVAan mwmmvlfi mvflmwfl. :NRHA. 99 and .moapmapapm means spaeoasoo m.o- ma.oa mo.m ms.aa mm.ma InIu:1:I1uxa1:1:1s::::::::::::::::::::::: sm.:a . mad om.m mo.m ms.a mw.a mm.H MM.MH ow< .m .D ossm .m mas mm.m sm.m mo.m mm.m mm.m. am.a mam: was mm.m mm.m Hm.: mm.m mo.m mm.m zoomzoo m sm.sa ms.ma oo.ma om.mH mm.ma oo.sa one Amy magnum snags: a 8.3%; .863 «883 means; 2.983 1368 .< .w 5 pom mam.mmm :o».omm :om.osa mom.:sa mmw.oma mam.as vacuum .m E 08.8.. 83% 3.3% 833 was: +3.5 88 mam $88.3. 0mm.mmm sumo; 18.19% omimmm midfimma zoomzoo mos amm.som.m smm.msmra ms:.mms.a ms:.mmm.a mmm.mmm.a www.mma.a can “earn mahogas mm mmm.mom.ma 4:4.smm.oa Hmm.aom.m Hmm.osm.m mmm.som.m sm:.mos.m apnogsn Happy 3843 «3.; ”NMMnmuudel seas moms coma mama mama dams .5th 30.68 duos-.6: 36% Mo nuhomn—H 9mm. MO mfinm Pound: find 05d; .nlg 1.35..-. L: n .x. :. x... n 3. .3... OOOs Shad 0.5an :Ahd 100 1:. .o mofisam pfieoasoo £353st mesa. 33988 .n 328 .3332: m mm Hm.ma ma.ma sm.oa mo.m sm.ma Hm.m ems mm.m :m.m ma.m mm.m ma.m mm.a Mm... Wmoo mwoO dwoO Hmoo goo too mm mm.s ma.s sm.m sm.m sm.m ma.m 4m sm.mm m:.mm mm.wm ms.sa ww.sa mm.ma was Oms.moo.a 0mm.msm omo.:mm m:a.ws: mm».sos wa:.asm mm: mms.smm smm.asm mma.mma :aa.mma sam.oaa mso.wm m- www.mm mwmram smm~0m omm.ma :wm.mm ao:.mm Ham moo.:mm wmm.mom mmsrmmm smm.mma mm:.:ma mssrom Hmm mmm.momrm :4s.mmm.a m:m.msm.a mam.a:m mw4.mmm mmm.mwm mm mam.asm.m mmm.smm.s mam.omm.m 0mm.mmm.m sam.mmm.m mmm mam s 1r, mmma smma oummmwummm seas «was coma mama mmmb zoomzoo CNN $3 3825 void: .< .m .D unease .m mmmb zoom—Zoo "sou.“ canons—H apnogsn Hangs Aooo.aav oqau> 33>!IWH. QHQUH 3 HO Guzman—H 0a .HO 90an 903.»! .030 H .nQOQUOhM 39.—.50 101 but the major expansion took place after the EEC was established. During the period 1954-1958, intra-member trade in agricultural pro- ducts increased 37 percent. Then in 1959, the transitional period for the elimination_of internal tariffs and quotas on agricultural products began. And for the period from 1960-1964, intra-member trade in agricultural products increased 64 percent. The member countries' market shares also increased substantially after 1959. Before the elimination of the barriers on intra-member trade, the member countries' market shares increased from 16 percent in 1954 to less than 18 perCent in 1958. Afterwards, however, their market shares increased to almost 23 percent in 1960 and 27 percent in 1964. Nevertheless, in spite of the preferences given to member countries' agricultural products, COMECON's market share increased faster than the EEC member countries' share. Most of COMECON's in- crease was, however, accounted for by the East European member coun- tries.‘ Their market share increased 184 percent, while the Soviet Union's decreased 53 percent. Therefore, in 1964 the East EurOpean countries accounted for almost 4 percent of the EEC's agricultural imports. During the same period, the U. S.'s market share increased only 39 percent, which was less than the increase for the EEC member countries and Eastern Europe. In 1964, the U.S.'s market share was 12 percent. Consequently, the East European countries market share of EEC agricultural imports was one-third as large as the U.S.'s share in 1964. In summary, the EEC member countries have increased their intra- member trade in agricultural products at a faster rate for industrial 102 products and raw materials. Whereas trade in the latter two product categOries increased steadily over the period 1954 to 1964, most of the increased agricultural trade occurred after the EEC began to lower internal trade barriers in 1959. Since there were substantial cost differences and levels of protection between the member countries, agri— cultural trade increased rapidly as internal trade barriers were removed. Nevertheless, agricultural imports from Eastern Europe increased faster than internal trade, indicating that Eastern EurOpe has a comparative advantage in the production of agricultural products. The USSR increaSed its relative market share in raw materials, which increased faster than the EEC member countries and Eastern Europe. The Soviet Union's market share declined for agricultural products and did not increase significantly for industrial products. Therefore, as was indicated by the commodity composition of EEC-USSR trade, the Soviet Union has a comparative advantage in raw materials. For industrial products and raw materials, the U.S.'s market share has remained about the same or slightly decreased. Only in agri- cultural products did the U.S. increase its market share, but at a slower rate than the EEC member countries and the East EurOpean coun- tries. If the past rates of increase in market shares are maintained, the East European countries' market share of EEC agricultural imports will almost equal the U.S.'s share by about 1980 or 1985. For this to occur, however, the COMECON countries must continue to expand their exPort supply of agricultural products, whiCh will be examined in more detail in Chapter VI. Before doing so, hoWever, the participation of 103 the individual countries in EEC-COMECON trade should be evaluated. The economic importance of such trade to the member countries, especially in the EEC, constitutes a major determining factor that will influence the type of common EEC-COMECON trade policy the EEC will adopt. Member Participation in EEC—COMECON Trade Individual member participation in EEC-COMECON trade is important in that the members haVe varying degrees of political influence within their respective regional groups. Many interests other than economic ones will influence the EEC's common policy on trade with COMECON, but because of the importance of trade to the EEC countries, economic interests will not be ignored. The "flag" may not always follow "trade", but it usually is not far behind. The origin and destination of total EEC imports from COMECON, eXpressed as the percent of total EEC-COMECON trade for each country, is shown in Table 17. Of the EEC imports from COMECON in 1954, the Benelux Union imported 32 percent of the total, followed by Germany (27 percent) and France (21 percent). Italy accounted for only 20 percent of the total. By 1964, however, the relative positions changed such that the Benelux Union accounted for the lowest share (18 percent) of EEC imports from COMECON. France's share remained about the same, but by 1964 Germany and Italy accounted for 36 and 26 percent, respec- tively. It should be pointed out, moreover, that Germany's share of EEC imports from COMECON are underestimated. International trade statistics do not report trade between East and West Germany . ..._..,._. _ Ins-v NIB-r 0%! FE, I'-OII.II Ibu- -.'IIII.I-III€I C! F cue F fi'II .'|'IC 19". a»: ' III‘. I..Av .I‘.‘ f l. 'u‘!’ l ‘1‘ I. lc'll.‘ \‘xl‘ ' '6 Invlllriu .I:V| .I.I .l w .mnwoasmw smeanossoumwn mcnpeua.aumo on» not» one case mga.npwnwnnmpw. .oHPmHmmpa Po: who: noahagoo goaobxm comm Hwnbw>wo5 on» non 3mm asp .nowvnsmém 104 tom one .1 .. cease hostage .: nowsom .2533. 003:5 2.3 ion.“ «93 no woman one mmmanammfl no.“ soapSsano «sebum o~.o ma.o mH.o no.0 00.0 oa.o escapaq mm.s sm.m so.a 40.: aa.a mm.m «sausage 3.3 3.2 8.2 3.2 was «we mags 8x as s: 8; as :2 bags cm.aa mm.HH os.ma a~.ma. mo.ma mc.ma .goouu 2.3 3.2 :4: «8:? RAH 3.3 sumac.“ csnm mo.m oo.s Hw.o ss.m mo.m ae.stouuu 2.3 ass as... as as... 8.: as... as“ 8.3 as as... .82 m on on as.aa mm.ss em.as no.4; mm.ms 04.0; so.a; sm.mm He.aa ca.ms mmma zeomzoo .EEE emnom wouam mm.®m ew.mw am.s~ am.ma om.sa mm.sa o~.ma we.ca om.aa saaan mm.ma ~o.ma mk.©fl mm.ma mm.ma os.ma ce.mm as.a~ om.0m co.ca sc.aw occurs exam was we“? we: r3: Sam was as: as an: as“ is oo.s mo.s Hm.c amns mm.s ca.ma ss.aa mm.- mm.eH «0.~H mo.oa accuasospoz we a mm a we c as a ma.» wo.m cs.c sm.oa sc.~a mc.ma ma.ma .xag-.maom can .uoapazHammn 1; nwnooupm u, .33 83 83 SS 83 $2 $3 $3 33 mm: lama 1.3... no scour—om nu sewage-on ecu 53.8 .28sz IPE Stone—H can}: manna ‘9 n I, III u ’.. ti .4 \.J 1.. .l. I. w... p ‘ v I. F I W (I: ‘b’ 10‘ . u ’G' n 105 separately, and since East-West German trade is relatively high, this is a major omission. Nevertheless, Germany and Italy are the major EEC importers of COMECON exports to the EEC. In 1954, 43 percent of EEC imports from COMECON originated in the Soviet Union. The relative positions of the Soviet Union and Eastern Europe were reverSed by 1964, however, and the East EurOpean countries accounted for 64 percent of COMECON's exports to the EEC. nonetheless,the USSR is still the largest single exporter to the EEC, accounting for 36 percent of the total in 1964. Poland and Czecho— slavakia are the second major exporters, but Rumania's share has increased rapidly. East Germany's share is underestimated for the reasons discussed previously. Albania's share is marginal, accounting for only 0.2 perCent in 1964. Similar developments have occurred with respect to the origin and destination of EEC exports to COMECON as shown in Table 18. In 1954 the Benelux Union accounted for 42 percent of EEC eXports to COMECON, followed by Germany, France and Italy. In 1964, the Benelux Union accounted for the lowest share—only 12 percent. Germany became the major exporter, accounting for 44 percent of the total. Italy, with 22 percent, was second, but only slightly higher than France with 21.5 percent. Of the total COMECON imports from the EEC, the USSR accounted for 29 percent in 1964, down from 35 percent in 1954. Whereas Poland was the second largest eXporter of the COMECON countries, Rumania 106 .0 03.801. .0 .0 m>¢ o: 0.33 00.0.3550 smooch. oeuup_0uaeosaoo 0.0000om .aeaapaz engage one I‘ 3084.028 0.0 00mm 30000 on... :80 0.8 300 m 000m Hasowbwccw 0:» you dump v Eon.“ menu :0 083 0.3 QuaylammH you weapon—5:00 noohaom 00.0 40.0 04.0 00.0 04.0 00.0 00.0 00.0 «0.4 00.4 0H.m 00.0H 00.0“ H0.04 00.0H 00.0“ 00.0 04.0 ~0.HH 00.0H 0H.0H HH.0H 0H.HH 00.HH 4m.- 00.HH Hm.ma 00.0H 04.0H mm.ma 0H.mH 40.0H 44.HH 00.~H 00.4H H~.0H H0.4 00.0 00.4 H4.m 40.4 00.4 mm.~0 00.00 00.00 40.00 ~0.0m «0.00 00.00 00.00 00.00 ma.40 00.00 00.00 00.00 00.m4 00.44 0m.H4 00.40 00.00 00.00 04.00 00.00 00.40 00.00 00.00 00.00 00.0H 00.0H H0.0H 00.4a «0.50 m~.m4 00.0H 00.00 40.4w 00.00 00.00 0m.- 04.00 00.00 00.00 00.00 40.00 H4.0~ 04.00 00.04 00.04 40.04 H0.m4 00.44 0H.44 «4.44 00.04 00.04 04.00 00.00 40.0 00.0 00.0 00.0 04.0 HN.0 00.0 04.0H 00.0 00.m~ 0mum~ 04.0 00.0 04.0 00.0 00.0 44.0 00.0 mm.H~ 00.44 00.4H 00 0a 1 4000293 400A 002 ~03 H000 000a 000a 000a R0” 000d 00% 400a as E :0 .uoaaoapuam «000040 «dramasm .0055 human .noosu 05000 55258. M wnopsm.m 000: 1 200880 u 20H 95m” HQ; 3...: cough hgoc afiahocvoz v g-H- OmHom 0mm u IHOHGC .0300. Mo £893.“ a on 53.30.0009 and 53.5 .zoomzoo 0» canes omuuuma 030.0 107 became the second largest importer from the EEC in 1964, followed in relative importance by Poland and Czechoslovakia. Both as an exporter and an importer, Albania is of marginal importance in EEC-COMECON trade. Although it is not the purpose of this study to speculate as to the nature of the common trade policy the EEC will adopt, a summary of this Chapter will indicate some of the underlying economic motiva- tions that may influence such a policy. Although the EEC has rapidly increased its share of COMECON trade with the West, trade with COMECON accounted for only 3.2 percent of the EEC's total trade in 1964. And the commodity composition of EEC-COMECON trade indicates that such trade is more important to COMECON than to the EEC. As was hypoth- esized from the East-West trade model, the EEC imports raw materials and agricultural products from COMECON in exchange for industrial products. The EEC has ample alternative sources of supply for agri— cultural products and raw materials. But COMCON has few alternative sources of supply for industrial products. Also, alternative markets for COMECON's eXports which provide convertible currencies are limited. Agricultural exports are more important to the East European COMECON countries than to the Soviet Union. This fact should encourage the EEC countries, if they earnestly desire to decrease the East EurOpean countries' dependence on the Soviet Union, to adopt a more liberalized agricultural trade policy. But as a major agricultural exporter, France, the major political power in the EEC, may oppose such a policy, owing to the strength of various French farm organizations. Germany and Italy 108 are agricultural importers, and since trade with COMECON is more important to them than to France, their interests conflict with those of France.‘ Even if the EEC adepts a more liberal agricultural trade policy, moreover, the East EurOpean countries may not benefit substantially. First, the East European countries export supply of agricultural pro- ducts may not expand as rapidly in the future as it has in the past. And secondly, even if their eXport supply continues to expand, they may face increasing competition with U.S. agricultural exports. Therefore, the purpose of the next chapter is to analyze the com— parative advantage of the various countries in the production of the major agricultural commodities. Then in Chapter VI, projections of COMECON's eXport supply in 1970 and 1975 are developed. CHAPTER V EEC AGRICULTURAL IMPORTS COMMODITY COMPOSITION AND ORIGIN, 1958-1966 In the previous chapter, the analysis of EEC-COMECON commodity trade indicated that, based on three broad categories of commodities, COMECON has steadily increased its market share of EEC agricultural import from.about 2 percent in 195k to almost h percent in l96h. For policy purposes, however, the commodity composition of EEG agricultural imports must be evaluated in more detail. Thus the purpose of this Chapter is to provide such an analysis, and to evaluate the relative competitive performance of COMECON and the U.S. for the EEC's agricultural market. Methodology The model developed in the previous Chapter was useful in analyzing trade patterns for broad categories of commodities which exhibited rather well-defined factor intensities. Such differences are easily obscured within a single category, hOVBVGP, 639601311? with respect to agriculture. As was discussed in Chapter II, the EEC has pursued commercial policies, designed to protect domestic farmers, that attempt to off-set comparative advantage as influenced by factor endowments. Consequently, another technique is employed to analyze the EEC's trade in agricultural products-~that of "revealed" comparative advantage. In the real world where protectionist commercial policies cause trade patterns to diverge from those postulated by trade theory 109 110 it is exceedingly difficult, if not impossible, to explicitly take into account all factors affecting actual trade patterns. But a recent study by Balassa1 indicates that it is not necessary to do so. Balassa proposes that "revealed" comparative advantage can be ascertained by the observed trade performance of an individual country (or countries) for specific commodities, since actual trade patterns reflect, in addition to relative costs, nonprice factors as well. Given the large number of nonprice factors influencing the commodity composition of the EEC's agricultural imports, the concept of "revealed” comparative advantage appears useful in evaluating the competitive position of the U.S. and COMECON as suppliers of agricultural products to the EEC, and is employed for this analysis. Since this study is concerned only with trade of the U.S. and COME- CON with the EEC, let us assume that the EEC represents the only market for agricultural exports. Therefore, total EEC imports rep- resent total exports of all suppliers of agricultural products to the EEC. The major suppliers are the U.S. and COMECON. However, an increasingly important share of EEC agricultural imports are supplied.by'the members themselves; i.e., intra-member trade. And due to the EEC's Common Agricultural Policy, imports from members are given preferential treatment relative to non-members. Therefore, the major suppliers are assumed to be the U.S., COMECON, and the EEC member countries. "~- .dqv‘... h‘ 1361a Balassa, Trade Liberalization Among Industrial Countries: Obgectives and rna ves. ew or : c rawb i o ompany, 111 The Specific formulas required to determine a country's as follows: "revealed" comparative advantage, as developed by Balassaz, are ‘01: I xoit _ x013 5.1 1033 x0nt x0i x11, xlit “113 5.2 2': :1: ‘11:} £13 5.3 :lz; x113 1113 ‘01; S.h lg where X - exports (or total EEC agricultural imports) relative share of exports superscripts: 0 average for the base years 1 0 average for the terminal years supplying country i all supplying countries subscripts: i»- n u 3 u t . agricultural product j all agricultural products ‘— 2 Ibid. Appendix to Chapter Four, 1). 205. 112 Equation 5.1 represents the relative share of'country i's exports of commodity'j in the base years and 5.2 for the terminal years compared to its share of all agricultural exports (t). These two equations yield an index of a country's relative share. If for example, a country's relative share index for a particular commodity is, say, 90, this means that the country's share in the total exports of this commodity is 10 percent lower than its share cf total agri- cultural exports. Equation S.3 represents the changes in a country's share over time, or between the base years and the terminal years. However, equation 5.3 is not sufficient to indicate trade per- formance, or may be misleading if a country's volume of exports are low in the base period. On the other hand, a measure of relative growth is needed to indicate the trend factor. Balassa indicated that it would be possible to project the trends in relative shares by multiplying equations 5.2 and 5.3, as shown by equation 5.h. To do so, however, would imply that the trend in relative shares takes the form of a geometrical progression. Therefore, as proposed.by Balassa, the procedure employed to determine "revealed" comparative advantage in this study is to calculate the arithmetical average of equations 5.3 and 5.1.. This procedure implies that past trends in relative shares will continue in the future, but at a declining rate. Before determining the relative performance of the various countries exports to the EEC, let us first examine the commodity composition of the EEC's agricultural imports and the trends for the major product categories. 113 Trends in EEG Agriculturgl Imports In the previous Chapter, commodities in S.I.T.C. categories 0, 1 and h were classified as agricultural products. However, since food and live animals (S.I.T.C. O) are the major exports of the temperate zone countries. S.I.T.C. categories 1 and h are excluded from this analysis. Only category 0 is considered, and it is divided into 10 product cate- gories based on the 2-digit S.I.T.C. classification system. Data on EEC agricultural imports on these products are presented in Table 19. By 1966 EEC imports of agricultural products doubled in value, ping from $11.2 billion in 1958 to $8.5 billion in 1966. Imports of several categories more than doubled, however. The major increases in imports were for feeding stuffs for animals (08), which increased 3h? percent, and meat products (01), which increased 23h percent. These products were followed by live animals (00) and fish (03), imports of which increased 130 and 15h percent, respectively. As was indicated in Chapter II, the EEC is trying to meet the rising de- mand for meat products in two wayez (l) by importing finished meat products (01 and 03) and (2) the importation of live animals (00) to be finished domestically. Grains are the major U.S. export to the EEC, and in 1966 the two major categories of grain products (Oh and 08) accounted for 82 prcent of U.S. exports to the EEC. In 1958, grains accounted for 68 percent of U.S. agricultural exports to the EEC. Therefore, it is quite apparent that the U.S. is becoming increasingly specialized in its exports to the EEC, and changes in demand for grains will, .. A II.III|.')I C's-.. illall Ila) II V I-.." I . :c- I u'. lavhllltl I‘ICIU.QI.VII:< 11h .00:mm« Assess n=o«ns> ..oonl.csn m magnum .n:00wom can: an munhasc< oomph haucoaaoo .QUNO ”oowsom . . 0.0000 0.00 0 . . 00 000 0 0000 0 0 0000 0 0000 00000 00.00” 0.00 0.00 «.mv 0.0N 0.NN maouusasaoan cock naoousanoonux “mo 00.000 0.000 0.000 0.000 0.000 0.000 0001000 000 000000 0000000 "00 00.00 0.0000 0.000 0.000 0.000 0.000 000000 .sOH .oouuoo "to 00.00 0.000 0.000 0.000 0.000 0.000 0000: 000 0.000 "00 00.00 0.0000 0.0000 0.0000 0.0000 0.0000 ooaaoeoeo> Ufll uvdah «no 0.000 0.0000 0.0000 4.0000 H.000 H.000 0000000 “00 00.000 0.000 0.000 0.000 0.000 0.000 0000 ”00 00.00 0.000 0.000 0.000 0.000 0.000 0000 000 00000000 00000 "00 00.000 0.0000 0.000 0.000 0.000 0.000 use: “He 00.000 0.000 0.000 0.000 0.000 0.000 000:000 oeea "00 “0000000 .0.0 00000000 0000:0000 000-00 a 0000 000a 000a 000a 000a aeoeoero 0000 .AanOh touonlua u0>0v momulmnwn .naaoasu «wasaasoeau< omuuuma ensue 115 of course, have a major impact on U. S. agricultural trade with the EEC. Moreover, per capita consumption of grain products in the BBC is low and declining, so the demand for grains depends on the demand for meat products, for which grains are a factor input. As was mentioned earlier, the EEC can meet its deficit in meat products in one of two ways, with different effects on the demand for grains. Increasing the imports of meat products will decrease the demand for grains in the EEC, and as indicated in Table 19, imports of meat products have increased faster than imports of live animals. If the EEC increased its imports of live animals relative to finished meat products, the demand for grains would be strenthened. It should be emphasized, however, that whichever way the sec tries to meet its deficit in meat products it will not change the total demand for grains, but only the locus of demand. For example, if the EEC imports finished neat products, the demand for grains will be decreased in the EEC, but increased in the country of origin of the imported meat products. Consequently, U.S. agricultural pol- icy should be sufficiently flexible to shift the destination of its grain exports. Live animals and meat products are the major exports of the COMECON countries. In 1966 these two categories accounted for almost 60 percent of COPIEON's agricultural exports to the EEC. COMECCH's ability to continue these experts, and relative amounts of live ani- mals or finished meat products supplied, depends upon its internal EPain supply. As was revealed in the previous Chapter, the East European countries are the major source of EEG agricultural exports from COMECON, and are increasing: ' in importance relative to the Soviet 116 Union. But the East European countries are net importers of grains, obtained mainly from the Soviet Union, which are used to produce livestock products for export to the EEC. When the Soviet Union is not in a position to supply the East European countries with grains, as occurred in 1963 and again in 1965, they must obtain their grain requirements from other suppliers. However, trends in the export supply of the COMECON countries and the implications for U.S. agricultural policy will be examined in detail in the follow- ing Chapter. Owing to differential growth rates of EC imports of various agricultural products, the commodity composition of EEC imports is also changing. In 1958 fruits and vegetables (OS) and coffee, tea, and spices (07) were the two most important imports, followed by cereals (Oh), dairy products (02) and seat (01). But by 1966, fruits' and vegetables were still the major import. However, cereals (Oh) and meat (01) moved up to second and third place, respective- ly, followed by coffee, tea, and spices (07) and feeding stuffs for animls (08). It appears, therefore, that the najor exports of both the U.S. and COMECOI are increasing as major EEC imports. But whether or not both the U.S. and COMECOI increase their share of those imports depends mainly on the effectiveness of the import- substitution policies envisaged in the EFIJ's Common Agricultural Policy. This is the subject of the following section. "fivesled'flomparative Advantag ii the EECLs Agricultural Market The CAP is designed to give preferential treatment to the agricultural producers in the EEC. The effectiveness of the CAP 117 for individual commodities depends on the specific policies applied to that commodity and the relative costs of domestic producers as compared to external suppliers. Rather than attempt to separate out the various price and nonprice factors, the concept of "revealed" comparative advantage is employed to determine the competitive posi- tion of the 033., COMECON, and the EEC, subject to the existing trade constraints. Because of the seasonal variability of agri- cultural production and imports, three-year averages are employed. Thus the 1958-1966 period is subdivided into two periods: 1958- 1960 and 19611-1966. The calculated relative share indices, based on equations 5.1 and 5.2 for 1958-60 and l96h-66, respectively, are presented in Table 20. Also included in Table 20 are the market shares for the various countries, which are required for the cal- culation of the relative share indices, and indicates the absolute level of imports from a particular country. First. let us examine the market shares of EEC agricultural imports. Of the total EEC agricultural imports, intra-menber trade accounted for 29 percent in the second.period as compared to 22.5 percent in the first. Both the U.S. and COMECON increased their market shares of total EEC agricultural imports with the U.S. increasing its share relative to COMECON. It should be recalled, however, that, as was shown in the previous Chapter, the U.S.'s share of all agricultural commodities (SITC O, l, and h) was 13.5 Percent in 1956 as compared to 2.9 for COMECON. For the major import to the EEC, fruits and vegetables (05), the EEC member countries increased their market share from 32 to 36 percent and COMECON increased its market share from 2.2 to h percent. . 111 mom mmmm .modmmH Addams mSOHpc>_q.och new am mloom «uaoH . H50 an mHanea< cease apHeoeaco .noeo acne equmeepm euHHepoe no eoeep aeoHooHeoHeo .0» m .0H GHQWB ad ad 118 ofiom one one pop .ooomu obhomQOo op coppaeso one moHHomopee oBHm one Mo mcoHpmHhomom .opoz em.: mm.mH mm.mm H. oe.w mm.mm em.m mm.HH mm.mw mm.m mm.mH om.H: mo mm.o em.mm em.wH mm.m mm.m mm.HN mo mm.o Hm.o mm.w HH.o em.o Hm.: >0 mans we.H me.mm Om.“ ee.H- em.:H .mo 00 : Hm.a am.mm om.m mm.m, oa.mm mo oe.m mm.mm mm.mm me.: mm.mm m:.HH so mmnm eo.m mm.mm eo.m mm.o we.mm mo so : ee.e em.me mm.e me.H. Hi.ai No mH.m mH.e mm.wm mH.w mm.m mm.mm Ho m:.mm No.0 :w.mm mw.wH Hw.o m>.mH oo "“0 chasm women: m we m Hm H emm w mm m mH m mmH mo MH MH m HmH m mo m om. : mm m mm mo m :M 0H m OH mm OH m a 3 OH mH e0 m Wm M m N a M me i. a . e M. :NH m m He : izH. o e mm H mom > me a mHH H mmm m Hm so w e eH m me o ea m 0H m HOH mo w . Hm m mm m eHm m emH m om H mHm mo H me : em : mmH m mmH m mm m weH Ho mmm m e m mp H mm: 0H m e mm 00 xcwm soch MQdm xoqu Mcom xoUGH Manx xoUcH chm xoddH Adam KocCH "ho opwnm obapdaom zooHEoo .m .3 Home 20828 .m 5 0mm mmeugmmH ommHnmme so . . wwuamma one omummmH a0mm one o zoomzoo .m .D on» you mousse soaks: one mooeecH cacao o>eeueomnuom oHnoe 119 The U.S.'s market share declined, however, from 5.3 to h.8 percent. In the second major category, cereals (Oh), both the EEG and the U;S. increased their market shares, whereas COMECON's declined. The same was true for the other major grain category--feeding stuffs for animals (08). However, COMECON increased its share of the grain consuming livestock products (00 and.01). These trends would indicate that grain production has not improved as fast as live- stock production in COMECON, but these trends will be examined in greater detail in Chapter VI. low let us examine the relative share indices. for the two periods. In the first period, the major EEC imports from member countries were dairy products (02) followed by miscellaneous food preparations (09). But in the second period, the relative positions of these two categories were reversed. The major U. S. agricultural export in both periods was cereals (Oh). In rank, the EEC's rel- ative share of cereals increased from 9th to 7th, whereas COMECON's relative share decreased from hth to 7th. COMECON's major export in both periods was live animals (00). The EEC's rank in relative share.in this category increased from 7th to 5th and the U.S.'s from 10th to 9th. However, changes in competitive trade performance can be seen more clearly by comparing the ratios of relative shares in the two periods and calculating their "revealed" comparative advantages. These calculations are shown in Table 21. The ratio of relative share indices were calculated by the use of equation 5.3. The 'revealedfi comparative advantages of the various countries were .ON vcm mH mmHQMB EOHM UQHSQEOU u mUHgom OH m N xcmm m.OON h.NOV m.OMH w.mmm OH h w H.mmN b.0N w.mmH v.mm @.OON m m v.mmH . O.VOH m.vm h mm OH mH m mm v mHH h mm m mm v OOH N Ohm OH mm H mOm L0 m mNH mCOHumummoum pOOM .UmHa m mHmEHc¢ HOH mmwsum mcHwoom mmH moonm woe .oowwoo mmH mocoz Ucm umvsm mm moHoouomo> one mquam emH mHoouoo on . cmHm mm mmmm 0cm muoSUon huHmo om ummfl HOH mHmEHC¢ m>HA XoocH xcmm Kopch xccm xmch zoommou wmmucm>c¢ o>HumHmmEOU =©meo>om: two: one (o[ .mmmucm>®¢ ¢>HUMHMQEOU :mUme mm>wm= acme xoeCH zoom ZQUmLOU OmOD xech Mama mecH "00 "mo "ho «00 "mo 23 ”mo uNO «H0 “00 muomouoo oeHm mooHch wumgm c>HuwHom mo oHumm ZUUMPOU muCHw 0cm mmeHmvCH mHMSm w>HUMme "HO mOHumm-u! HN OHQMB ..m.a .omm 121 determined by ranking the export performance indices, calculated as the arithmetical average of equations 5.3 and 5.1:. From the first period to the second, the EEC improved its relative share index by the largest amount in cereals (Oh), the U.S. in live animals (00), and COMECON in coffee, tea, and spices (07). The EEC's improvement in cereals is quite obviously due to the protection given to domestic producers by the CAP, for other studies have shown that the grain supply function in the EC is higily inelastic. The U.S.'s improvement in live animals was due primarily to its low initial level. As shown in Table 21, the U.S.'s relative share index was 2 in the first period and 7 in the second period, but the U.S.'s market share of EC live animal im- ports was less than 1 percent in both periods. The same was true for COMECON's exports of coffee, tea, and spices (07). The export performance indices take the base level of exports into account, however, and are more representative of a country's "revealed" comparative advantage. Based on the rankings of the export performance indices, the EEC has a "revealed" comparative advantage in miscellaneous food preparations (09), followed by dairy products (02) and cereals (Oh). The EEC's advantage in cereals is mostly for food grains, however, as indicated by the fact that the EEC has the greatest "revealed" comparative dis- advantage in feeding stuffs for animals (08). The EC is also at a disadvantage in the production of fish (03) and live animals (00). The 0.8. has its greatest "revealed" comparative advantage in the production of feeding stuffs for animals (08), and the U.8.'s market share in this category increased from 9 to 2!; percent. 122 Other major improvements in export performance were exhibited by the 0.3. in dairy products and eggs (O2) and.cerea1s (Oh). It appears that the UkS. has a greater "revealed" comparative advan- tage in the export of feed grains (08) relative to food grains (Oh). The U.S.'s greatest "revealed" comparative disadvantage was in the export of coffee, tea, and spices (O7), and sugar and honey (06), followed by miscellaneous food preparations (O9) and live animals (00). In fact, the U.S. is a net importer of all these products. COMECON's greatest "revealed" comparative advantage was in the export of sugar and honey (08). It is quite likely, however, that much of these exports were re-exports, owing the Soviet Union's large purchases of sugar to help underwrite Castro's Cuba. Thus of the I'non--political" exports, COHECOI has its greatest "revealed" comparative advantage in live animals (00) and accounted for 25 percent of the EEC's imports of this commodity; COMECON's greatest ”revealed" comparative disadvantage was in feeding stuffs for ani- mals (08), cereals (Oh), and dairy products (02). In the grain sector, COMECON has a comparative advantage in the prodmtion of food grains.relative to feed grains, and in live animals (00) relative to meat products (01) in the livestock sector. As was pointed out in the beginning of this Chapter, "revealed" comparative adVantage does not represent a country‘s "true" compar. ative advantage. It does, however, indicate the existing comparative advantage subject to the constraints imposed by the EEC's CAP. And the CAP is an economic fact of life which must be accounted for in developing realistic agricultural trade policies. Given the existing 123 barriers to more liberalized trade in agricultural products, a more "rational" pattern of trade can be envisioned for the grain and livestock sectors. Briefly, a more "rational" pattern of trade would be char- acterized as follows. The U.S. should increase its exports of feed grains (08) relative to cereals (Oh) to the EEC, and ideally, even export feed grains to COMECON. COMECON should increase its exports of live animals relative to meat (01) and dairy products (02), and import feed grains (08). If COMECON insists on exporting grains, it should increase its exports of food grains relative to feed grains. The EEC should expand its relative production of processed livestock products, such as dairy products (02) and meats (01), based on greater imports of feed grains. Also, the EEC should specialize more in the production of food grains (Oh) rel- ative to feed grains (08). Based on the analysis of the various country's "revealed" comparative advantages and assuming that the observed trends contin- us, the EEC will apparently attempt to solve its projected meat deficit in 1970 and 1975 by importing live animals to be finished domestically. This policy would strengthenthe demand for feed grains, the major export of the U.S. But in order to pursue this policy there must be available to the EEC an increasing supply of live animals. Since 25 percent of the EEC's live animal imports were obtained from COMECON during the l96h-66 period (32 percent were imported from common in 1966), comcow'a export supply in 1970 and 1975 will affect the commodity composition of EEG imports, and the EEC's demand for U.S. feed grains. Therefore, the purpose of 12h the following Chapter is to evaluate the effects of COMECOI's export supply in 1970 and 1975 on U.S. agricultural exports. CHAPTER VI COMECON: AGRICULTURAL EXPORT SUPPLY, PROJECTED 1970 and 1975 In this Chapter, projections of COMECON's agricultural export supply in 1970 and 1975 for those commodities which are major U.S. ex- ports to the EEC are developed. Combined with the estimates of the EEC's import demand, presented in Chapter II, these projections will indicate future leVEls of EEC-COMECON trade as influenced by alternative policies of COMECON's central planners. Methodology and Assumptions Projections, unlike forecasts, are not intended to represent a future state in time as it will, in fact, develop. Projections are a reflection of specific assumptions as to trends and policies pursued by Various countries. Therefore, projections are an indication of im. balances or undesirable future situations which may arise if the assump- tions are fulfilled. Their purpose is to aid policy-makers in evaluating the impact of changes in policies, should they desire to prevent the projected situation from materializing. Since projections are a reflec- tion.of specific assumptions, it is necessary to specify as explicitly as possible the assumptions upon which they are based. General assumptions as to the future state of the international system were presented inIChapser I. Specific assumptions in this Chapter are concerned with the trends and policies of the COMECON countries with respect to production and demand for certain agricultural colnodities. Obviously, not all agricultural commodities can be included. Instead, 125 126 projections will be developed for the temperate-zone basic foodstuffs, mainly grains and livestock products, which account for the bulk of EEC- COIECON trade in agricultural commodities. The specific commodities are those for which the EEC's import demand has been projected, as shown in Table 2 of Chapter II. .The projections cover the period extending from 196% to 1975, and are divided into two subperiods: 1964-1970, and 1970-1975. The base period for the projections is the Khrushchev era, considered to be from l95h to l96h. Actual data are used for the base period whenever pos- sible, otherwise projections are developed on the basis of data as close to the base period as possible. The Soviet Union and all the East European COMECON members, except Albania, are included in the projections. Sufficient data on demand and production.conditions in Albania were not available. Its omission should not alter the projections for COMECON, however, As revealed in Chapter IV, Albania accounts for less than 0.5 percent of EEC-COMECON trade. Therefore, the countries included in the projections account for more than 99 percent of EEC-COMECON trade. Demand and supply for the specific commodities are developed sepa- rately for each country. Then the projection of supply and demand are aggregated for the COMECON countries to determine the commodity balances for COMECON. The differences between demand and production are not projections of net trade, however, but are indications of potential export supply. Trade projections must also be based on past trends in EEC-COMECON trade in the selected commodities, which was analyzed in the Previous Chapter. Relating the potential export supply to the projected trends will indicate whether or not past trends in EEC-COMECON trade can 127 be sustained or will decrease if the rate of growth in the potential export supply is slower than in the past. Other assumptions necessary for this analysis will be presented in the following sections. Demand projections, based on population growth rates and income elasticities, are set forth in the next section. Then supply projections, based on trends in yields and factor inputs, are presented. In the remaining section of this Chapter, commodity bal- ances, alternative COMECON consumption policies, and trade projections for 1970 and 1975 are developed. Projections of COMECON Demand Aggregate demand for food products is a function of changes in consumers' incomes and population growth. But due to the low income elasticity of demand for food products, at least in the more developed economies, relative to other consumer goods, changes in aggregate demand are influenced primarily by population growth. Population projections for the CQmCON countries are based on a comprehensive United Nations' study conducted in 1961; on world population projections, and revised by no in 1966.1 Taking into account changes in basic demographic variables, the U! developed high, medium and low projections to the year 2000. How- ever, projections for individual countries up to 1980 were developed w 1United Nations, United Nations Provisional Report on World Population ingots as Assessed in 126;, New York 196% final report published in and Foreign Agricultural Organization, micultural Commdities» muons for lg75 and 1985, Vol. I and II, Rose, 1 7. The latter 1. hereafter referred to as the FAO Comdity Projections. 1‘ 128 only for the medium variant by the UN, and 1962 population data were the latest available. Using 1965 population data, EAO revised the projections as presented in Table 22. COMECON population is projected to increase from 333 million in 1965 to 352 million by 1970 and 372 million by 1975. Since the UN study and others indicate that changes in demographic variables will.not have a major impact on population levels during the next two decades, the UN median variant is selected as representative of COMECON population in 1970 and 1975. In centrally-planned economies, consumption levels are controlled by the central planning authorities. To avoid intense internal pressures and the loss of international prestige, however, it is unlikely that they will allow per capita consumption (of normal goods) to decline absolutely, as was frequently done in the past. As a minimum, therefore, total con- sumption'will increase proportionately with pOpulation increases (i.e. per capita consumption constant). Per capita consumption varies with changes in per capita income, which is also controlled by the central planners. Therefbre, total con- sumer income may increase at a rate equal to or less than the increase in national income, depending on the policies of the central planners. Rates of increase in total consumer income equal to the rate of increase in national income is accepted as the maximum for this study. There- fOre, per capita income will increase at a lower rate due to population growth. The EAO Commodity Projections developed estimates of Net Material Product (NIP) for the COHECON countries covering the period 1950-1963, and projections to 1985. Although RMP differs from Gross Domestic Prod- act, it is employed in this study to indicate relative changes in per Olpita incomes. o .N. sen-i. IVs-ssh. fiv\.\vhne mic; Pdencaad.m. u 31V\u,~- Q ...w-.w\u-u. u ZR vn.vu.E°HU .Hc FuC‘QIiJNiaH- A6. NI. INN.‘ I'd adll.~. 129 0N a“ «HH 0H0> Smam $0.8 $0.3 $9.3 msm.mm 0am.mm mom.am :mm.om oa:.oa mam.oa w:a.oa Hmo.oa mam.aa oom.aa cmo.aa moa.sa mom.ma moe.:a mma.:a ocwrma 035 8nd dm£ 39w cow.m mom.m mmm.a HH».H mme.aaa o:m.moa smo.moa mma.mm 03.0mm mmmaam 390mm $4.8m mmmélm mmmfimm lawn? Smem amnesmsonp an moeuaapmm nsoawwav mama came meme meme copoofiosm cmpuafipmm smcofipoonOhm‘Npadoaaoo Hdhdpddoanw< «04m "condom naenasm condom hhomnsm g8 .m mfixo>oauosoouo cancwasm canonH< moonsm.m mmmb zoomzco hupqooo .mama use osma copooqonm “meme .mmma .zoomzoo no coapwasmom--mw manna 130 Based on regression analysis, FAO estimated that during the period 1950-1963. NM? at constant factor prices increased at compounded annual rates of 9.2 and 7.7 percent, respectively. for the USSR and Eastern Europe or 8.8 percent for COMECON. These growth rates were adjusted on the basis of national plans and a high and a low rate, 6.2 and b.7 respectively; were used for the projections to 1975. Using these same growth rates, there are two levels of RH? for the two periods in this study, which are designated as 1970H (high growth rate), 1970L (low growth rate), 1975" and 1975L. The calculations are shown in Table 23. The per capita NM? calculations are based on the projected population data presented in Table 22. These data will serve as indicator varia- bles for changes in consumer's incomes. Changes in consumers' incomes times the income elasticity of demand in the change in aggregate demand for food products. The absolute lev- el of aggregate demand also depends upon the initial levels of consump- tion. Consumption levels in the COMECON countries for 1959-1961 and income elasticities for various food products have been determined by the F10 and the U.S. Department of Agriculture.2 The per capita consumption of the major grain and livestock products considered in this study are shown in Table 2h for the base period (1959-61) and for 1965. Also included in Table 2h are estimates of the income elasticities of’demand for the various products. These elasticities can be combined with the per capita IMP projections in Table 19 to obtain estimates of per capita food consumptions in 1970 and 1975- 2USDA, The'Wbrld Food Bud at 1970, Economic Research Service, Foreign Agriculture! Economic Report No. I9, October 196h. .1‘.e:tnntuv.il I...\.t\..‘. .Fwaa‘ L1.b\,.m \7-.JHJfl-.~w.‘a..o. v .m. w.- .. .u... .o~.. . - -\..‘.uu. .. t . ., u-‘- 131 .Ha.m .HH .Hop .meoapuonoamnwueeoeeoo Hanspasonswe .oee "cannon .39 one 2.3 denounces Roma eds meme £08200 nos Pmoo Hovodh vgmcoo HI paddock Hdflhovdz 902 .33..me anm U5» HdpDulimN OHDQE o.m 0.: m.m mso.a wed 0am or» can 0mm m.e m.m m.m :oo.a mam «mm mm» ope smm >.m m.: m.m mam.a me.H oao.~ med was smm m.e :.m m.w oao m H:>.H Ham.a as:.H Hmm.a mwo.n m.: s.m m.m mem.a meo.a woo.a mmm bum cm» s.m m.e v.0 smH.H wsm one as» Hmm mmm m.: m.m m.m mem.a moa.a mom :mm so» mam m.m m.m m.» mmm.a mem.a emm.a m:H.H Hmm owe H.m m.m m.» mme.a mm~.a smH.H owo.a :om mm» Awesome mm-HmmH as e .m .:V o.m o.m m.m m.am m.ma «.ma :. m H.mH m.0H m.m m.: m.» H.mm w.mm o.wm a. mu :.Hm o.wa o.m m.: m.m m.ma s.HH :.OH e. m m.» m.w o.m m.m a.» m.em m.mm w.>m m. mm m.Hm m.ma o.m m.m m.m >.ma m.ma o.ea 0. ma m.HH :.oa m.m o.m m.m H.0H m.w a.» m. w m.« :.e m.m «.4 s.» m.:ma o.mHH e.moa m. em e.m> m.wm m.m o.m m.m m.aae >.mmm o.Hom :. owm e.mam s.HwH m.m v.4 m.m m.m:m m.m~: p.40: m. ppm H.mmm m.m:m Nueuunomql fineness mm-HmmH were .m .o eoeaaemv m n me up mm -mmma-mmma-0mma ovum apnoea m a m q engageoo dengue mama meme came oema meme meme emanaum unsaom gwnfim humaueo .m swxseoamoneeao sanewasm omonom Poem mme zoomzoo mzz dengue sum sasussm eeuaom hhdqum acnshoo .m naxmboamoneewo sfinuwaem snooze seam mama zoomzou mzz HdPOB IVE .8 llEdv‘Ilv \..A.~\.- F...‘ a u Assiu la..t..\.i~, kl- VstIJF..U-u!-. val-Xv-- stfiv. \Dwvu lal“Ia- t’.so.tu.->Ls. . III I-..‘ Oll'I tl|'.|l..e a..allllll1.- Illsl u-.l U.Iau||olllnu. a It Ind]! 1 Il‘\. I‘ll urxivfillv. J J . O I I D c . V . . v I V a v . . u . U . . . . u o O . a O v . . c e u v \ ‘ . r I A 0 ~ - . a a q a Table 2h—-Per Capita. Consumption and Demand Elutieities in COMECON, Grain and. Livestock Products, 1959-1961, and 1965. estimated. Rumania Poland. E. Ger- dungary Bulgaria Cseeho- USSR many (Kilogramsgr year) slovakia Per Captia Consumption 1959-61) mmomwm O O O O 0 m (no-1mm 8 H InOb-Oxlnm conned—1b- b-\O seeree ONONHI‘CD m :‘N \o N.r.-ICOU\\Q O O O O O Salem-4.3m Inn-4m M-d’ztd; “\O émdem NthNde \Omd'm—‘f’d‘ ln-d’ N—‘d'\0 [T gssdmw Feed Grains Beef and. Veal Pork Poultry Eggs Wheat 132 .3030!an e a o o s .I!\ «ix-+0 80TH COCO China) 0 H: O\O HQ) F0 mourn-no: O O O 0 4H0: mm 301 Hm 9Q“??? grammo :HM H (Kilograms per year) O\lf\N MHM NW4; fill-“(D (Om Hm \oou—Hnmcn Sammm: (OH 00 H3? CKSHJM-fl'l; gdHH Per Ca ita Consumption 5965) Bee! and Veal Feed Grains Pork Poultry Essa Wheat Elasticity Income Wheat HNI‘:\DOI* OOOOHO o:l~.mom OOOOHO NNWMGJN 00.... 990000 NA'anOM OOOOHO 0mm.:t N.m hfivdsom m.mn H.mm m.em H.sm e.em m.HH «.ma mood ad.” :.NH m.m.n wé...“ 06H 0.» v.5” doc» .05 Nvom e.mm m.mm m.ma m.>m w.Hm a.mH m.em meadow econ :.:HH m.me H.mm m.Hm m.ms m.aea m.m0H neon: m mama o.w w.w H.0H m.aa >.w m.m m.w meme m.m m.m «.ma a.» o.m o.s m.: sneezed o.ma w.mm m.wm m.mm H.mm N.HH m.mH snow moHH w.: thH ®.WH ¢.m.n m.m 5.04” 10.? dead Mvvm >.mm :.wm m.ma m.oe m.mm m.om m.om meeoso.eoom 9.9:” {Mb m.mm 0.0m tom m.mm.n N50,.” pong A mama so.m. e>.m mo.0H mH.HH m>.w sm.: m.» some ma.m mm.m ma.ma ma.» mm.m aw.» m.: enhance mm.mH mm.mm Hm.em mb.mm sm.mm sm.m w.mH enom mw.am. mo.NH om.ma :>.ma mH.mH mm.m m.:a Hem» ens «com om.ow Hw.mm mw.ma sm.as we.mm om.ma :m.wm meadow eons mm.mma w.ae mm.em mm.am m.mw m:.sma mm.moa poem: m oama ea.» mm.w mw.m mw.oH He.m mw.; men» ammo Ha.m mm.m e:.HH mm.m ew.m me.m FH.: mundane mmfia Cumm mmém .533” mm.mm mw.m Sum.” xuom mat—H mmJH mo.NH 00.9” mm.m.n ANXA. NJ." due» 6nd heem W415 wmém 8.0m 8.9.. «Jim 2.0m. $.Fm 8..”th doom ma.saa m.a~ mm.mm m4.0m m.mw me.>ma m>.HHH some: beech Hum mamhwoduC! momma Juana 3&5,ch «finesse equaom anemone -noo .m -oeooao senswasm mam: .msma one came ensconced ampedoOHM Moovmobaq pad GHGHU «zoomzoo ca sowvmafiuqoo dvflmdo hymnumm OHDGB 135 conversion efficiency. Projected food consumption in COMECON for 1970 and 1975 is presented in Table 26. Net figures for grains indicate the amounts consumed, whereas the gross figures indicate the quantities of unprocessed grain required to produce the amount consumed. Consumption of grains is projected to decrease in each period for the high income assumption relative to the low income assumption, owing to the negative income elasticities for grains. Grain consumption in- creases from.l970 to 1975, however, due to the increase in population. Income elasticities for all livestock products are positive; therefore, total consumption increases as income increases in both periods, and population increases reinforce the demands for livestock products. Additional consumption of livestock products requires increasing quan- tities of grains, however. The effects of livestock production on the demand for grains will be considered in the section on supply projections. Therefore, the consumption levels indicated in Table 26 will rep- resent the consumption levels that the central planners desire to main- tain in 1970 and 1975. Production in excess of domestic consumption.will be available for export. Should domestic production be insufficient to meet domestic consumption requirements, the necessary amounts will be imported. In the section that follows, projections of the supply of stain and livestock products in COMECON are developed for 1970 and 1975, Projections of COMECON Supply In market economies, supply is a function of producers' price expectations and relative prices of factor inputs. In centrally-planned economies, however, production is a function of the desires of the cen- tral planners, implemented by the selective allocation of resources to n.\ \v I Flnil a UK \p... | Z! in uu~IZain II n. on! v d .uslw--.l!-n uuw Iixvavuuh litAUI-Qw Ilh‘ JV OVZII IapVAUI Pi- .ul‘uhi 136 .sm.:e vacuum .m “mm.mm mama .eme secede .m mm mm mmmp .mm and 4m moanma Bonn Umpsmaoo "meadow "mesh soapodupxmw “opus noapomupxma :mm mew ammum moans mmmum mop”: :aeuma mmeum mom.m 4mm.a mam : mom : cam oa «mm m oma mm mm: em mmm.m eao.m me:.e who.m mmp.ma www.ma gem.me mmm.mm mmm owe mea.m mmm.~ wmw.m mem.e mMm.mH mmm.m Hmamm mem.a mmo.: mem.e mmw.oa mm:.m omm.:m mm:.mm oma m mmm.a mom.» use.m em:.ea Hem.:a mme.m: mmm.em 3m. 06 30;” mm; lame a; 80.3 8.1m o:w.a omo.a m®m.m mem.m emm.oa :wm.w owm.mm www.mm Hme.m oem.a oee.w wem.: Hmm.ma mem.ma wee.ee meo.mm mom. men. maonm omm.a mm:.m emm.: wma.ma aam.m mmw a mmo a mem m eme.m www.0H wem.m :mo.mm mae.em eme.m mom.a mam.m :ee.e H:H.ea owo.ea «ma.m: mmm.mm Redo» oedema ooo.av is, «$0.6 pdz H398 pea emwm savaged seem see noon deeded econ econ: .meH .93 Ohm.” «zoom—‘00 G.“ flOfiPQHSm—HOU 80h mmOHU “.8 ¢0ZIImN 39.09 machsm .m mam: zoomzoo «sauna swam mama mmohsm .m mmm: zoomzco uaoonH sou whoa mmousm .m mmm: zoomzoo msoosH swam chad omonsm .m mmm: zoomzoo mBOonH boa Chad 137 the various sectors of the economy, and enforced by the issuance of pro- duction quotas. Prices, rather than serving as incentives, are employed as a means of allocating income, based on the ideological principle of equalizing the "differential land rents”. In other words, higher pro- curement prices are paid to farms in areas of low productivity than those in areas of high productivity. As was discussed in Chapter III, the main policy of securing increased agricultural production in Common during the Khrushchev era was by increas- ing the land input, the relatively abundant factor. Other factor inputs, such as fertilizers, tractors, and other agricultural inputs, were stead- ily increased so as to offset the declining productivity of the marginal land areas sufficiently to increase total product at the rates necessary to maintain an increasing population. In the East European countries, as contrasted to the Soviet Union, factor inputs other than land had to be allocated to agriculture in that they are relatively less well-endowed with land, Consequently, changes in grain supply in the Soviet Union are related primarily to variations in the land input, whereas in Eastern Europe changes in grain supply are related to variations in yields per unit of land. Therefore, variations in the supply of grains in COMECON can be separated into changes in the surface devoted to grains and variations in yields. Data on grain surface, yields and production of all cereals from l9h8 to 1965 in COMECON are presented in Table 27. First consider the changes from the 1916-52 to the 1952-56 averages. Total COMECON production increased 19 percent, due to a 12 percent increase in surface drea and a 6 percent increase in yields. Expansion in surface occurred only in the Soviet Union, increasing by 25 percent, whereas in Eastern 138 fih "GUHSOM [III s , . ,.+ - 3 con. 0 .5 me .maom .om .e0> .eooe «xooeumo> COHuLSr m ‘. . 1 0|” .eecuomg Hem meanneso ea woe .% m comm .zCOp oeeuee ooo.e me COeHUSr m U es fl .mmemuooe ooo.e Ce mom- a a -a 30 o . puma . . smug” mmVHmHW “.mm me.me mm.om uu.m ee.me an he as we o.ee eeewwd mmo.mm eoeouseoue w.me mmm.me mee.em wee.me mee.me muo.ee woe we m.m omn.3m mmmewm done m.sn mem.em eeo.mm mmm.mm one.um mom.em emm em e m: met a omoesu.1 J 0 01 l O O mwnfimflw o.me me.oe mm.m o .ee mm.m mm.0e we oe a e omim- mo m _ v.5m e0m.mme 0mm.mee mos.oee omm.mm www.mme mem.ome n.em waffle mmeHme coeuosmmmm o.» emm.0me emo.eme msm.mme mom.mee mmm.eme emm.aee m.ee eem Nee mee em “ammo N.om ms.we oe.ee mn.me ee.oe se.me mo.me m.o ma.o me.m moeeew e.mm emm.ese mma.eee sem.mme mmm.see mme.mee eea.eee m.me mmm.ame eve.mee Necemusooem e.e emm wee moo.aee mos.mee emm.eee mmm.eee mem.eee m.me mmm.oee esm.mme emcee "zooeeou See l2 :5 E E E e3 48 e3 34 Amvouemy meueeme meme eeme meme meme emme “my on eev emnmmme mmnmeme mmcosut womnw>4 amazed mmcwnu K wwmum>¢ mmmuw>¢ s . omwlawmfl EOHM %HHQ®N mmlemH ficm lemva M0 mGWMHTDm ~ZOUW§OU CH COHHUSUOHQ CHMHU HMUOBIibN wHQMB 139 Europe, the grain surface declined slightly more than 2 percent. And yields in the Soviet Union increased only about 7 percent as compared to 11 percent in Eastern Europe. Similar changes occurred from the 1952-56 to the 1961-65 average. CQIECON grain surface continued to expand, but at a. slower rate than in the previous period. The same was true for total production. Yields increased at a faster rate, however, averaging about a 2.2 percent in- crease per year in the latter period as opposed to a 1.5 percent increase per year in the first period. While the grain surface has been increas- ing at a decreasing rate in the USSR, it has been decreasing at about 0.7 percent per year in Eastern Europe. Owing to the relatively lower endowment of land, the East European countries have been shifting from land-intensive grain crops to higher yielding crops, such as sugar beets, forage crops, vegetables, etc. The Soviet Union, on the other hand, is increasing its production of land-intensive grain crops. Whereas the Soviet Union accounted for an average of 67 percent of COMECON grain production in the 191+8-52 period, it was producing 71 percent of the total 1961-65 period. For the projections of COMECON grain supply in 1970 and 1975, the grain surface is considered as one of the variables to be explained instead of being treated as a factor input. Grain surface is the variable most easily controlled by the central planning authorities, and it appears reasonable to assume that in any given year, the grain surface ill an indication of the planners' intended supply. Since during the Krushchev era ( 19514-19615), central planners have, with a fair degree of consistency, adjusted the surface area in various grain crops to attain the desired levels of production, the grain surface can be expressed as: 11w as = f(T,U) 5.1 where 88 is the total surface area devoted to food and feed grains. T is a trend variable representing production expectations of the central planners. U is a stochastic disturbance termnhaving the standard statistical prOperties (i.e. normal- ity, zero mean, and serial independence). Least squares regression estimates of the grain surface, based on equation 5.1, of the major food and feed grains for the COMECON countries reflect two decisions of the central planners. First, the acreage devoted to various grain crops is an indication of their relative importance to the central planners. .And secondly, the total area in grains indicates the opportunity cost of land in grain production as opposed to other agricultural commodities. But surface only explains part of the varia- tionsin grain supply, and must be considered in conjunction with yields, the other variable to be explained. Given the trends in grain surface, yields are the source of yearly variations in the supply of grains. In the short-run, yield variations are due to climatic conditions, which in the Long-run can be considered as randomly distributed. Care must be taken in the selection of the observation period, however, or extreme weather conditions will bias the yield estimates. In general, weather variability is greater in the Soviet Union than in Eastern Europe. The Soviet Union experienced two periods of severe weather conditions, separated by only one year, in 1963 and 1965. .As indicated in Table 27, Russian grain production fell.22 percent fromy1962 to 1963 and 13 percent from.l96h to 1965. Political and economic reasons for limiting the observation period to the years lhl 195h-l96h (the Khrushchev era) were discussed in Chapter I. Statis- tically, inclusion of data for 1965, known to be an unfavorable crop year, would give a downward bias to the regression estimates. Therefore, 1965 data are excluded for statistical, in addition to theoretical, rea- sons to normalize the effects of weather variations. In the long-run, increases in yields are due to the application of additional factor inputs to land, improvements in plant varieties, and organizational efficiencies. Unfortunately, COMECON statistics do not contain sufficient information to allocate the total resources supplied to agriculture to the various crop enterprises. Therefore, yields are assumed to be a proxy variable indicating the effects of combining other factors with land, and can be expressed as: Y3 = r(w, r, U) 5.2 where Y8 is the yields of food and feed grains. W' is a variable representing weather variations. T is a trend to account for variations in factor inputs other than land. ‘U is a stochastic disturbance term having the standard statistical properties. However, since the effects of weather have been normalized by the selection of the observation period, W is excluded from the estimating equations and, therefore, included in the disturbance term. Total grain supply is the product of the regression estimates based on equations 5.1 and 5.2: lh2 :3 a 88* o Yg‘l’ 5.3 where is the total supply of grains in year n. ”more B is the year projected (1970 and 1975). m t is the estimated grain surface. an (RN ‘1! is the estimated grain yield. Because of the large number of regressions, it is difficult to specify the functional forn.in advance for each one, but two principal functional forms are employed-~linear and logarithmic. Linear equations imply a constant absolute increase or decrease in the dependent variable, which, in most instances is applicable to changes in grain surface. When the grain surface is approaching the climatic limits, however, it can only increase at a decreasing rate, and a logarithmic equation is appli- cable. .Application of additional quantities of factor inputs to land increases yields over time, but at a diminishing rate with constant technology. In such cases, logarithmic equations should yield a better fit to the data. If technology or agronomic practices are improving, however, yields may continue to increase absolutely and a linear equa- tion is more appropriate. Consequently, all regressions are computed in both linear and Log- arithmic flora. Selection of the appropriate functional form is based on statistical and economic considerations, and other empirical studies. Statistically, the estimation equations are evaluated on their explanatory Power as indicated by the multiple correlation coefficients (R2), which indicates the percent of variation in the dependent variable explained by the independent variables, and the significance of the coefficients of the explanatory variables. The equations are evaluated economically on 1&3 their consistency with the economic policies of the COMECON countries, and when available, indications of their future economic plans (i.e. Sayear plans). Finally, the equations can be checked against other empirical studies, primarily by the FAO, which has developed commdity projections for almost all countries in the current decade. Future production of grain in the Soviet Union. is the crucial variable in accessing COMECON's grain supply in 1970 and 1975, since the SOViet Union produces approximately 70 percent of the total. Varia- tions in Soviet production, as occurred in 1963 and 1965, can quickly cause C(MECON to change from a net exporter to a net importer of grains. Therefore, projections of the Soviet Union‘s grain supply are adjusted in accordance with a study of Soviet agricultural production possibilities conducted by P.M. ZemskiiB, a Ukrainian soil scientist. Zemskii's study was carefully analyzed by a group of American agricultural specialists” on the basis of climatic analogs (i.e. areas with comparable soil and climatic conditions). Zemskii's estimates of the attainable levels of Brain area and yields are presented in Table 28. A 3Presented in Halters and Judy, 22:. g_i_t. I‘U.S.l>.A., Future Crop Yields and Fertilizer in the Soviet Union, Washington, EXIT: February, 196”, mimeographed. Cited in Walters and Judy, gp. 533., p. 327. lhh Table 28--Zemskii's Attainable Grain Production, USSR Crop Area Yields Production (million hcts.) (quintals/hct.) (million metric tons) Wheat 61.1 13.8 8h.3 Rye 19.9 18.“ 36.6 Barley 10.1 15.5 15.7 Oats 21.1 18.0 38.0 Corn, grain 1h.l 30.2 h2.6 motel Grains 136.0 16.3 221.7 Source: Halters and Judy, 22. 335., p. 3hh. Zemskii’s estimates provide additional information with which to Judge the feasibility of the grain projections for the Soviet Union. However, these estimates cannot be used mechanically as constraints on equations 5.1, 5.2 and 5.3 for two reasons. First, area and yields are interrelated, but the exact relationship is not known for the Soviet union. And secondly, the composition of the grain supply is changing. Consumers are substituting wheat for rye in their diets and less cats will be needed as the number of draft animals declines. Nevertheless, the Zemskii es- timates provide another criteria by which to Judge the projections. Regression analysis was employed to estimate equations 5.1 and 5.2 for the food (wheat) and feed grain (rye, barley, oats, and maize) crops separately for each COMECON country. Three distinct steps were required. First, linear and curvilinear (i.e. logarithmetic transformation) func- tional forms were used as first approximations of equations 5.1 and 5.2. lh5 These equations were examined on the basis of the statistical properties previously discussed. In addition, simple correlations of the dependent variables (in natural numbers and logarithms) with the independent var» iables (also in natural numbers and logarithms) were calculated to indi- cate the feasibility of using other functional forms. Also, the residuals were examined for indications of changes in the basic structural rela- tionships during the observation period. Based on these considerations, three additional functional forms were selected. Thus a total of five functional forms were employed, which are shown as follows: I I a + bx 5.h log! - eebiogx 5.5 Y - a + b log I 5.6 log I - a + bX 5.7 log! - a-2 5.8 where I is the dgpendent variable expressed in natural numbers log I is the logarithmic transformation of the dependent variable X " \ is the independent variable expressed in natural numbers log x is the logarithmic transformation of the independent variable a is the intercept coefficient b is the slope coefficient Functions 5.h and 5.5 were the ones used in developing the first approximations of equations 5.1 and 5.2 and were discussed previously. Functions 5.6 yields a rapid initial increase (or decrease if b is less than zero) in the dependent variable as the value of the independent Variable increases, then.allows the rate of increase of the dependent 111-6 variable to level off. This phenomenon occurs, for example, when new plant varieties or hybrids are adopted: crop»yie1ds increase rapidly tor a short period and then taper off unless other isproved agronomic practices are adapted. Function 5.7 indicates that the dependent varia- ble is increasing at an increasing rate (or decreasing at a decreasing rate if b is less than zero) for increases in the value of the indepen- dent variable. In general, this would occur when planners are attempting to increase the production of a given crop by rapidly increasing the crop land devoted to that crop at the expense of other crops. Function 5.8 allows the value of the dependent variable to asyuotically approach a maximum value (a, the intercept value) as the value of the independent variable increases. This occurs when crop yields are approaching their biological maximum.or crop acreage is approaching the limit of available arable land. Thus the second step was to re-estimate equations 5.1 and 5.2, as required, based on these three additional functional forms. Prior to developing crop production projections, however, a third step was necessary: adjustment of the total cropland area in each coun- try (equation 5.1) and adjustment of yields for each crop (equation 5.2). As shown in Table 29, the cropland in grains increased by h.28 percent in the Soviet union fnan 195k to 196%, whereas the cr0p1and in grains de- creased in all the East European countries for a total of 7.2h percent. Based on equation 5.1 the cropland in grains was extrapolated to 1970 and 1975 for each country. Then the extrapolated grain area was adjusted based on the annual rate of increase (or decrease) from 195h to 196%, which was assumed to continue until 1970. From 1970 to 1975, the grain area was projected to change at the rates based on the extrapolations free 1970 to 1975. The adjusted grain area is indicated as projections for 1970 and 1975 in Table 29. .t’I’IAl-I 147 .m manua.xfiunomm< ad mmudaagmm scammonmoh no woman mmsaa> umpaaomanpxm .wona mmma use :mma pom «mood ~uaom szw-m:mw ”mofipmfipopm mono cage: ~o- moo.mm mmo.pm :wdaw mwm.m m:.a- mow.m mo>.m mm.o- mm.m- :mm«m mmw.m www.~ o»0«w No.m- mam.» :mo.m mm.o- ma.w- mmmqw mom.m mmm«m amm.m mm.a- oma.m mmfl.m No.a- om.aa- mpafim mum.m mo».a mm».a cm.a- mmw~a mmm«a Fm.a- mm.wa- :Hoam po:.m ~mm~m mm4~m om.:- oom.m Hamqm ma.o- mm.a- -:“m mam.m mma«m »:m~m mw.:- maa.m :mm.m mo.H- :m.HH- mam.m Ha~.m mmm.oma paa~maa mm.a m:w~maa :mo.:aa mm.o mm.: mmH.~Ha mmm«maa mHmH owma m»- mma mpma cpma «gum :mumwma :mma :wmw: uopomnonm mmquno m copuaogwnpxm aasun< quano u Huzuq< Amogapooa ooo.a a“ dmnuv mbma and chad uopoononm mmvma and chad copuaomcupxm mxmmd and :mmH auscn< .amn< nacho zoomzouunmm vague zuomzoo «gonna .m manuasm dnuaom hummusm humanoo .m waxu>oaaonuouo aaaawaum mmmb lh8 Since the grain area was adjusted, it was necessary to adjust the area allocated to specific crops. This was accomplished by determining the percent of the grain area accounted for by each crop, based on the extrapolated values, and adjusting the area in each crop to correspond to that sale percent of the projected grain area. The adjusted area in each crop was used as the estimates for equation 5.1. And finally, the yield estimates, based on equation 5.2, were also adjusted. For some crops in the COMECON'countries, the regressions in- dicated that yields did not improve significantly from 195“ to l96h. However, since one cannot be completely sure that weather and all other factors influencing yields were randomdy distributed, regression coef- ficients that were significant up to the 0.20 level were, in general, accepted as estimates of the population parameters. Where the trend coefficient was significant only at a level greater than 0.20, yields were projected at their mean values (i.e. no improvement in yields). An additional adjustment was necessary in the case of the Soviet Union. Soviet statistics report grain yields on a barn yield basis, which are not adjusted for moisture content, fioreign matter, etc. Therefbre, crop yields flor the Soviet Union were adjusted to biological yields based on adjustments employed by staticians in the U.S. Department oangriculture. The adjusted yields and grain area estimates were used as estimates of the parameters fbr equations 5.1 and 5.2. ‘And grain PTOdUCtion pro- Jections to 1970 and 1975 are the product of these two equations (equation 5.3). ProJections of COMECON grain production and grain area are shown in Table 30 flor each crop. Estimating equations for individual crops by country are included in Appendix Table B. The levels of grain produc- tion.proJected for 1970 and 1975 appear more than ample to meet the \ e nyl- i is am‘if w! 149 \ r n merAerHc VAH MUG mood Ca Umucmmouo mmumEHumo cofimmwumwu CO meMQ mhma Ohma Hme.eeH mmm.am Hfimue hemum HHe.mm eoo,aa .mme.ma zooaeoo www.mm www.ms mam.m He~.m mmm.m mmm.m mmv.a moonsq.a mom.omH moo.mm mmo m wmo m wmfl.~m Hoa.HH mom.me emmu Amenmuoe; oco.Hv mmmm mme.meH Ham.am anH.0m emeum mom.ee www.ma vmm.aa zooauou mem.om eme.mm mae.ea mma.m amm.a umm.m mov.mamoonss.u mom.mHH aao.wm moa.m man v emm.mm Hma.m mam.mo xmma Amcou Canada ooo.av ccfiuontcnm aaH.meH oma.es ensue umm.m Hme.mm oae.ma mme.ma zouu43 oeo.em mee.eH mam m Noe.m Hao.m vfia.m mae.a eeossq.a aHH.mHH eam.om mmm.m moH.a cme.mm mma.ma mem.mo ammo Audumuumc COO.HV rwanfl. amm.mma acm.dm www.cm nee,m mam.mm mmo.o~ www.ma 2901590 0mm.mv mom.em maa.ms HmH.e mma.» mmm.m mmm.eamo0nsa.q aeo.ema mos.mm oao.a uae.m oem.mm oHa.oH Hem.ao mmm: chou Danna? ooo.Hv cosupscomm «eschew wchHw Used Hmpcrfi wNfim. ... WUMU >QHHQ...... .nwxflvsa ummfll, quHSOm 150 projected levels of’consumption. waever, a major use of grains, and especially feed grains, is in the production of livestock and livestock products. Thus the quantity of these products that are produced will inversely effect the quantity of grains available fer human consumption. Consequently, it is necessary to estimate the production of livestock and livestock products for 1970 and 1975. Estimates are developed for the fiollowing products: beef and veal, pork meat, poultry meat and eggs. ‘Hith respect to beef and veal, most COMECON countries face the same dilemma that confronts the EEC, namely structural problems and the use of dual-purpose cattle. As was discussed in Chapter III, the private sector produces a major share of the meat and other livestock products on the tiny garden plots, whereas grains are produced primarily in the state and collective farms. As a result, livestock production has in- creased at a slower rate than crop production, but this situation is gradually being remedied. As larger proportions of livestock are pro- duced on state and collective farms output can be expanded more readily, owing to the greater resources available to them as opposed to the private sector. Meat production is also limited in that duel-purpose cattle are relied on to produce both meat and milk. This is particularly true on the private plots, but the state and collective farms, mainly in Eastern Europe, are becoming more specialized in livestock production. Neverthe- less, many of’the-stste and collective farms visited in the summer of 1967 were dependent on.internally produced feed suppdies, owing to the self- sufficiency phobia of’the central planners. The results, as indicated by several state farm directors, can be catastrophic. Many indicated that they were fbrced to liquidate large proportions of their breeding k nu 151 rds or dairy stock in times of drought, even though feed supplies were rple in other parts of the country. Meat production has long bedeviled the central planners. In fact, .ther than submit to collectivization during Stalin's first five-year .an, the Soviet peasants slaughtered so many livestock that the pre- .ve year plan level was not attained until the early 1950's. And, as e would suspect, per capita meat consumption in COMECON is considerably :low the level of most developed countries and some less developed [88. Consequently, little detailed statistical information is avail- Ile on livestock production in the C(MECON countries. And the pro- rctions are limited by the nature of the data available. Accordingly, longer time period was used for the estimates of livestock production man for craps, owing to periodic omissions of data for livestock. Data on cattle numbers in the COMECON countries are shown in Table .. Since livestock numbers are known to exhibit a cyclical behavior er time, data on cattle numbers were obtained for the period 19% to 66. The trend in cattle numbers for each country was determined as llows : cs . fir, U) 5.9 where C] is total cattle numbers T is a time trend where the average 196-52:1. U is a stochastic disturbance term with standard statistical properties. Projected cattle numbers, based on regression estimates of equation 9. are also included in Table 31, and the specific estimating equations ! functional forms employed are presented in Appendix C. But cattle nbers are not the only'determinants of beef and veal production even 5.r.r»...¢-=»r~ cot-fir.» rm— ‘VC-IE-ann rsc'Frcnfl \Ilrmlharaupbm [vulture I. 'C—‘CtNC 'Hchlauing-Fm Etunxu '. \\,I I..s.l| A.\I I sails!.1|l:1.t.‘ U n...‘ I shea‘ I n!.-..1..»ea.l.... III.I.D‘.sl’v.. Illa e tl.‘ . .II ‘1'. 152 xwdoomm< :H dopmvaHQ mewvmnvo doapemnOHm .mOH .a .mmHa men 3.6 . s wmmH you owes .uommuH Hashes ssOHnsp .ueom .soopuso» eOHeuseona o mmaw W m. m we...m mas.e mem.m mem.H mHe.m mH.e m::.H mea.ee mmaH H mm 4mm :m 000 H: mmm.w QNH.N o bsm : .: mmmaa 44:.Hw bmaa --- Hemnmm 0mm 4 «Ha.» mmH.m mma.m a.22 mom.H mae.mm emmH ammumm www.mm “WW : Mmmna meo.~ mma.m mmm.u %MN.M -- ammH a m a mu. . . -- ammH m N mmm m m::s: mmmsa :mmawm mama Heaqe< eHn.Ho maH.em New.a mHe.e . . 80.2. a New . 3H m as m 2m; mm; m m. .. m Sm a name was News 83 8e; amtm mmmmmm hm.ooo.Hv gag dfixdcrOHm I o hug 153 ough COMECON statistics include all meat from cattle in the category ' beef and veal. Seasonal variations and long-term improvements in ref and veal production also depend on the rate of conversion of live timls into meat products. COEDCON beef and veal production data are presented in Table 32. I shown in the table, data are incomplete, primarily during the 1950's. pm the period 1943-1952 to 1965, beef and veal production increased by 2 percent in the Soviet Union and 88 percent in Eastern Europe. It Jpears, however, that beef and veal productivity increased faster in Lstern Europe than in the Soviet: Union. Cattle numbers increased 56 arcent in the Soviet Union during this same period. In Eastern Europe, bwever, cattle numbers increased only 22 percent, and beef and veal pduction increased almost as fast as in the Soviet Union. Therefore, ref and veal production is projected by multiplying the estimated cattle lmbers (equation 5.9) by the trends in beef and veal productivity, which I estimated as follows: BUR = f(T, U) 5.10 where BUR is the conversion rate of live animals into beef and veal. T is a time trend where the average 1948-52—11. U is a stochastic disturbance term with standard statistical properties. Based on regression estimates of equations 5.9 and 5.10, beef and I1 production was projected for 1970 and 1975. The results of these >Jections are shown in Table 32, and the detailed estimating equations r presented in Appendix C. ZhunanE CC EGINN rnmn Viva! (Hum ‘ficgrm “Vi-H'IHOAW ESL—Hawk .:\| I '--Illlls.-“|I I: \Inn 'lfiflvu» Owl IOEvvoNrU dwfivnsawlfiédwm I‘l‘)" DA.‘ \I. i a a .o xfiocmmgd CH Umpsomoam mcoHpmddo cowpoonoam .mOH .m «mwam smmm 0Hm J. nmr,-ul 155 Pork is another major source of animal protein, the consumpt: liCh is almost equa1.to that of beef and veal in.councon. Larger .ties of feed grains and other feed stuffs are required for pork 1 action relative to beef production since cattle are more efficiem :rters of range and crop forage. Therefore, increases in pig numk acrease the demand for feed grains for livestock. Pig numbers frc 9143-1952 average to 1966 are shown in Table 33. Pig numbers have increased by 130 percent from the average 19 > 1965 in COMECON, compared to an increase of 1&6 percent in cattle mbers for the same period. The major expansion in pig numbers oc I the Soviet Union, in which pig numbers in 1966 were three times :vel in 1916-52. During the same period, pig numbers almst doubl Lstern Europe. Trends in pig numbers can be expressed as follows: Pan = f(T, U) 5.11 where P61! is the total number of pigs. T is a trend variable where the 1948-52 average = U is a stochastic disturbance term with standard statistical properties. Projected pig numbers for 1970 and 1975 are presented in Tabl 1d the separate estimating equations are included in Appendix C. Pork production is a function of the number of pigs and the c. [on rate of live animals into pork products. Data on pork product 1 CWO! are shown in Table 3h for the period 1958-1952 to 1966. IS the case with beef and veal production, data are not available 10 late 1950’s in all countries. Comparison of data in Tables 33 t indicate that pork productivity has increased for the indicated ZfMEL IEIE E ""l'fl (1"r‘fl i'-‘llz II“: E lcx"'c "I’Ih’l'fl “QUINH 0|.Nt s Fun... ..\\ I I.nl-slllla¢nnlfl I.aru|..s stunt I v1.1. pin-in... 9||I|.u|IIII,. v‘l.‘ I I 'II.I'I. l56 Immm «d mm: a mmmH homo xHeawa dad «comm SH co m“. P30 m Hansen Mme chH O dhd>_WM“W0 COH m a use MOO fiOHm 0.st A e ”W GOWMWH 09 Km 5 Al: « Qfih "0.0”de m mmm.omH MHWaH HH mam.as magma mmwam ddfiaa Nmmam mom. MMHAFOH OQJAWH Ahmabm omNaJJ m :Omam mm a was.a0H MmH.H“ emm.m maO.OH 0mm. a was. s m m.: mHm.mH ama.m m m.m m :w NO “0: wmq NH m a mm a mm. m mm 00 z mqu mm w wk « m N Hqu WHMaOQ OQNam OOMad NHWaHH mmMQW Ommnm Om «MP emm.ma omm. m m.: em:.mH mme.m mas m mam. : we nmfi Nh:.Wm moo.: mamama madam mzmam mMH.m mbmH NNN. 0mm. m Foam mmmaHH mmmqm w m bmwam Omam OO wmmmlfllll N0 wzHamm 0mm“: mmmaHH mNNa mamqw mmwam N.moam m mqmm 0 Ohm me.mm cam. H «H mmm.m mm.m m m wmo.m :wamm mm moo.e mwm.HH mmm.m men.» ammnm Hmm.m www.os mmmH em .3 .OH on .4 mm. m mam. emm.m m ohm. m m mm». o w mmm.m mom. N no». w mmH mm _:m oma.m mHm.m mm m mms.m mam.m ea we semH Nam: .QOW .0 :m:« N qu QWMAm NquN wmmqmm mmmfl . «mm NP a: mm“ m m mama mamm mm emm.m« o m : mom.m mm.m we: H owe. H mH 0mm~m 00..H am .CL. a: ma rm mmm and 0mm.” HHqN MNHQ m dfiflad WHJHH ddmadd OWQH mmquH mea wmm H 000a mmfl F mONam : FMMHH lldm WMGH moo.s mam. H -- mmMH Am 0 mmMaw moms mm H [amen m.m «Hm.H mum“ mom Ohbq Hdan< dwxdbo :thom Hm mH mmmHINm NmmHIQJMM mmmmmmm HL f; vb; C ECIFFE IE u..\\s ' VC'EIF— f l..| ...fl.n ruf- l Fca t'hflcIr»~ .IOFCC INN .o afloavmm< a“ ovpnomvnn macavddvu soapoowOHm .mOH .m «mmah ummm _ «osom xoonnso» sowpenooam Q.qosom «moonhoo» cowvosoOAm aooam I-.. -1- 160 n Eastern EurOpe, where poultry numbers increased 138 percent as comp 0 only 23 percent in the Soviet Union. Poultry numbers in 1970 and l ere estimated as follows: PLs' a f(T, U) 5.13 where PLN is the number of poultry T is a trend variable where the l9h8-52 average as l. U is a stochastic disturbance term with standard statistical properties. Whereas poultry numbers have increased only 55 percent from 19148 952 to 1965 in CQKECON, egg production has increased 11+? percent, as hown in Table 36. The greatest improvement in egg productivity occur :1 the Soviet Union, where egg production increased 152 percent and sultry numbers increased only 23 percent. On the other hand, a 138 1: ent increase in poultry numbers in Eastern Europe yielded only a 139 ercent increase in egg production. Given the projected poultry numbe gg production in 1970 and 1975 was estimated by multiplying the proje umber of poultry by the improvements in yields, estimated as follows: so = f(T, U) 5.1h where E6 is the yield of eggs per poultry unit. T is a trend variable where the 19h8-52 average - l. U is a stochastic disturbance term with stan- dard statistical properties. The detailed estimating equations are included in Appendix C, an be resulting projections are presented in Table 36. 7a» or .u.—r..~fi .PM If! leF u up; I — C‘E~—V~ F. .L .I — . t1— >L¢hnh-_ ~ leave“ ‘J 6*IHuVaIN~—wu .o Nfidmomm< ma popcomohm msoapmduo coapooqohm .m .m a ummm s0He 162 Unfortunately, less information was available on poultry meat reduction in COMECON, but the data that were available are included i able 37. Data for East Germny and Rumania were available only for t sriod 1962 to 1966. They are, therefore, excluded from the following tatements as to changes in productivity in Eastern Europe. Poultry umbers increased 168 percent from l9'+8-l952 to 1965 in Eastern Europe at poultry meat production increased only 10h percent. On the other and, a 23 percent increase in poultry numbers in the Soviet Union yie i a 152 percent increase in poultry meat production. Clearly, produc by increased greater in the Soviet Union than in Eastern Europe. For no CGIECOI countries, except East Germany and Rumania, poultry meat roductivity was estimted as follows: Pm . rm, U) 5.15 where PLM is the conversion rate of live poultry into poultry meat. T is a trend variable where the 1948-52 average = l. U is a stochastic disturbance term with standard statistical properties. Projections of poultry “meat production in 1970 and 1975 are incl n Table 37 and the estimating equations are presented in Appendix C. rojections for East Germany and Rumania were developed by assuming tl he average conversion rates from live poultry to poultry meat exhibi uring the 1962 to 1966 period would remain unchanged through 1975. nese conversion rates were than multiplied by the projected poultry are (equation 5.13) to obtain projections of poultry meat productior 970 and 1975 for East Germany and Rumania. .".\')1"’\z II‘I'!‘ E l‘ll'1:.||: ‘|.l "‘ ‘lll'l‘l‘l.l 1"\ ILV ‘J|'ll "ll|r-'p Duck. 163 .o Kwdcomg¢ ma dopmomohm encapmawo moHpoofioum I. 4 K K wmmt V.oaom .Mooohmow coaponoopm .moH .o|.mmHa a000 0m0.H Ode mmm was 000.» momH 1.034 ..d 03 0H0 HR; 0% 9... H0: 000.0 43H eam.mH 20m.: 00m mm» mme.H 0:0 m m m 000.0 mmmH II :bmlz OmoaH Omh mbm«H own MN“ :Wm 000.0 Nwmd .. 2. H 02. mom; .. Hm... Hmm 000.0 HmmH .. -- -- mum mHm.H .. mm: mom 000.0 ommH .. .. 0mm 0am.H .. mm: 0am 0Hm. mmmH -- -- H” men n- -- .. Ham 000.m 0mmH .. -- -- 0m: -- u- -- .. 0:0.m smmH -: g- a- u- u- n- u- u- u- mmmH II II II ”I II II II II II mmmfl -- u- n- -- -- u- u- u- .. :mmH - -- -- -- -- -- mam. .. Heeeqe -- -- H” 0mm mom -- eom sum mma.e mmmH-mmmH m e mam -- mmm moH 00a.m mmmH.wemH “33 338 00.3 a ‘NWdai onm>0Ho 1. L: 161+ This completes the basic grain and livestock projections for mom. However, since alternative policies and growth rates will nsidered, it is necessary to normalize the effects of seasonal va one so that the results will not be biased by the selection of th .se year. Summarygf COEICON Agricultural Production, 19512614. Projected 1970 and 1975 In order to evaluate the perfornmnce of COMECON agriculture 1’ 1e base period, and to compare alternative growth rates, the effec :asonal variations were resoved by re-estimating the annual values Le regression estimates for the years l95h, 1959, and 19614. Then Ljusted annual values were used to compute the growth rates observ tring the base period and the rates of growth projected to 1970 an >75. Data on COMECON grain production are summrized in Table 38. In Table 38 the data are divided into the two major grain cat vries: wheat, which is the basic food grain, and feed grains. Fr Bit-61¢, production of wheat increased 32 percent in COMMON as com . 21+ percent for feed grains. However, yields increased more for sins-~36 percent as compared to 214 percent for wheat. Part of th .fference in yields can be accounted for by the 8.5 percent decree I feed grain surface, which increased the average product of land, 6 percent increase in the wheat surface, which decreases the aver oduct of land as smrginal land is brought. into production. ' Grain production increased substantially during the period 19 tt little improvement occurred in the second period, 1959-614. In red grain production actually declined 2 percent during the latter 165 HH.0 00.0 0H.00 00.0- 00.00 000.H0H 000.00 000.00 000.00 000.00 00.0 00.0 00.4H 0H.0 00.0 404.00 000.40 000.00 000.H0 040.00 40.0 H0.0H 00.00 00.0- 0H.H4 H00.00 004.H0 0H4.40 000.00 000.H4 40.4 00.0 00.00 00.0 00.00 00.4H 00.4H 00.0H 00.0H 40.0 04.0 40.0 00.00 H0.0H 00.00 00.00 H0.00 H0.0H 04.0H 44.4H 00.4 0H.0 00.H4 04.0 00.00 00.0H 00.0H 00.HH 40.HH 0H.0 H0.H 0H.0 00.0- 00.0- 00.H-- 000.00 000.00 000.40 040.00 000.00 0H.0- H0.0- H0.0- 00.4- H0.0- 000.0H 044.0H 004.0H 000.0H 440.00 44.0 04.0 04.0- 00.0- 00.0 000.00 400.00 000.04 040.H0 004.00 04.H 00.0 00.H0 00.0 00.00 400.00 000.00 0H0.00 000.00 000.40 .00.0 0H.0 00.H4 00.0 0H.00 004.0H 000.40 400.4H 040.0H H00.0 00.0 00.0 00.00 00.0 00.00 0H0.00 H00.H0 00H.00 000.00 0H0.44 04.H 0H.0 04.40 00.0 0H.0H 0H.0H 40.00 00.0 00.0 00.0 00.0 00.0 00.44 40.HH 04.00 00.00 04.0H 00.0H H0.0H 00.0H 00.0 00.0 04.0H 00.0 00.0H 00.0 00.0 00.0 00.0 H0.0 40.0 0H.4 00.0 H0.0 00.4 004.00 004.00 004.00 000.00 000.00 40.H- 00.0- H0.0- 00.H- 0H.0- 004.0 0H0.0 000.0 000.0 040.0 H0.0 04.0 00.0 00.0 H0.0 000.00 040.00 000.00 000.40 0H0.H0 00-00 00-40 40-40 40-00, 00-40 000H 000H 400w 0w0H 400w zoomzoo om0h5m_.m mmm: «ooapommonm 200980 vacuum . m mmmD u 33% 2000200 omonsm_.m mmmb ”moH4 030.5 doom 2000200 000000 .0 0000 “ooHpoeooaa 2000200 omensm_.m 0000 .eHoH» 208300 sac-3m .m mmmb “mend econ: 166 period due to a 6.8 percent decrease in the Soviet Union. This decrease in the Soviet Union points out their difficulty in increasing production of a crop for which they have a comparative disadvantage, in part due to unfavorable climatic conditions. Also, the first period was an era of experimentation with new crop varieties and initiation of the New Lands program. Thus the gains in the first period were due heavy investments by the state. as was discussed in Chapter III, but the rate of investment decreased in the second period. The East European countries have substantially decreased the land area devoted to grains. This was eSpecially true for feed grain, the area of which decreased 9.6 percent from 195h-6h, compared to a 2 per- cent decrease in wheat acreage. Even though the grain surface devoted to feed grains decreased faster than the wheat surface, yields increased LS percent for the latter as compared to a 33 percent increase in the former. Thus the East European countries have also had less success in increasing feed grain production relative to wheat. From 196k to 1970 the Soviet union is projected to increase feed grain production by 12.7 percent and wheat production by 6.6 percent. The greater increase in feed grain production is due to a greater in- crease in land area and a shift toward higher yielding crops. The major shift is to barley production at the expense of rye, oats, and maize. On the other hand, the East European countries are projected to increase wheat production by'S percent and feed grains by only 2.6 percent. R1- though grain yields are projected to increase by about 8.8 percent, the surface in feed-grains is projected to decrease by 5.8 percent and wheat surface by 3.h percent. 167 From 1970 to 1975 grain production is projected to increase at a acreasing rate relative to the l96h-70 period. Feed grains are projected 0 increase by 5.8 percent and.wheat by 1.5 percent. The smaller increase n wheat is due to the slower rate of increase in.wheat area in the Soviet nion, which is approaching the estimated limits of land suitable for heat production. ‘Data on beef and veal and pork production are presented in.Iable L9. From l9Sh-6h. beef’and veal production increased 63 percent in COHE- :0] and pork production increased 63 percent in COMECOI and pork produc- ;ion increased by SO percent. The increase in pork production was due entirely to the increase in pig numbers since the conversion rates ac- ;ually declined. However, the increase in.heef and veal production was iue to a 38 percent increase in cattle numbers and an 18 percent impreve- nent in the conversion rate. Greater quantities of feed grains are re- luired for pork production than for beef and veal, and cattle are more efficient converters of range and.pasture forages, which are relatively ubundant in COMECON, than pigs. Therefore, pork production is more :losely related to the feed grain supply than beef and veal production. From 195h-S9. production of both types of meat products increased about ‘0 Percent. However, since feed grain production {decreased during the :econd period, pork production? increased only 16 percent compared to '5 percent for beef and veal. Hbat production is clearly more efficient in Eastern Europe than n the Soviet Union. Pork conversion rates declined 1.2 percent from 9Sh-6h in the Soviet Union, but increased by h.3 percent in Eastern urope. And whereas the cattle conversion rates increased 1h percent 1 the Soviet union, they increased 3h percent in Eastern Europe. For :th classes of seat, total production rose faster in the Soviet Union, fitccrAL 5“ sap- w ,»[!.t ”\‘+l.\l.“: (& | Iran v. l....lI.Ih. I. v r sklvnfiusupv Tnl\ aulva Ivnnvli Il\nl\l 168 .0 canes Keenan? ca oopsomopm moanpgoo descafiesfi no.“ escapades wsfipgpeo no women "condom .meop campus ooo.a ea eoaaoeeoaa ecu .paes engage has meop causes ea aspen nonmam>eoo .e.oo.a ea newness finesse ”opoz ae.w mo.ma me.ma mm.ma mm.mm amen» mmeue eamnm mmwum omm.m omzoomzwm m:_e mm.e Ho.mm ee.aa we.om mem.m oem.m emm. m .m mme.a onsmwmn oo.oa mm.ea mo.me He.om om.o: Heb m mm: m H m a z : "soapoeeonm . . - . - o.o m.o- eamoeo. aaooeo. «meoeo. eosoeo. weeoeo. zoomzoo mm.“ mw.m- mm.” mm.a wm.m mamawo. memmmo. mmmmwm. ummwmw. muwmmm. oaoaemwmw 0 0 Is 0 8 0 8 I“ o. H o. O O O 00.0 mm 0 ma H mm o :w 0 com oow "mesa scanncanoo . . em.0m om.ma mo.om mem.oma mam.aaa mom.wm 00:.mm mwm.mm zoomzoo MW.“ www.ma m:.mm mm.m 36H enemas: Mann: 8min: mmmawm gmamm smog .m "m..oz dang asuxhsncm mo.ma em.mm ma.me ma.mm om.om moe.m mmwmm _ ass”: mmm.m eme.m zoomzoo as.ma mm.mm :a.mm Ha.am me.mm :mmna emm a memaa maa.a mam scones .m 40.8 See ale 8.8 Rem we. a was 80 m 8am 3e; meme ”soaposuonm m . oe.m m:.ma eo.w mm.m omemso. mmmmso. mmmmmo. mammmo. awmmmo. zc mm.wa Hm.:a em.mm mm.ma mm.ea deemeo. meaemo. mmOOmo. mammso. mememo. macawmwwm me. n m3. 8. i one No. a. sense. 888. heme. ammo. $58. mam: “seen sowunm>eoo me.aa :m.ea me.em sw.ma mm.ma emm.esa mmo.ama om:.mea mmo.em m .H me.m me.» em.ma mm.e mm.m mmeuom mmmnwm msm.em emm.mm :ww.mw oaumwmwmm Am.ma mm.ma mm.e: mm.ma Hw.mm emm mad emo moa mmm.mm «mead» mmm.~m ..mmmb uhoz gall 113‘ 37.30 101% imimn mmiim MHWH Ofimfl éfl WWmH immflj 30> fig hwvm 169 .ut the increase was due to increased animal numbers rather than improved :onversion efficiency. Production of both classes of mat are projected ;o increase in 1970 and 1975, but at a decreasing rate relative to the L9Sh-6h period. Beef and veal production is projected to continue to anrease relative to pork production, owing to the lower supply of feed grains relative to pig numbers. Poultry meat and eggs are the other major grain consuming enter- .- >rises, the data for which are presented in Table ho. From 19513-6); , [ aoultry meat production increased 59 percent and egg production by 68 H nercent. Production of poultry meat increased by about the sane rate Ln both the Soviet Union and Eastern Europe, but for different reasons: “SJW’ML‘” . MAJ—o :he Soviet Union achieved these gains by improving the conversion rate mere the gains by Eastern Europe were obtained by increases in poultry numbers. The same phenomena occurred with regard to egg production. By 1979. poultry meat production is projected to increase 16 per- :ent relative to the 196h level, and egg production by 22 percent. Thus ;he rate of increase in production is expected to decline relative to the 19511-61: period. The reason is that both poultry numbers and conversion efficiency is projected to increase at a decreasing rate. Although multry meat and eggs are complements in production in COMECON, some substitution is possible. However, sufficient data are not available to letermine the marginal rate of transfomation between neat and eggs. A were likely development is the utilisation of special poultry types for 'ach product, such as laying hens and broilers. Utilization of different .ypes of poultry would permit a major change in relative production of eat and eggs. To date, however, most COMECON countries still rely on firing hens for both meat and eggs. s lit-I ni-I-I In‘ I x-‘s«.I s I siuv\:n II‘I‘I‘1I‘IE I I e\-.\ c I I z: I. vnpul.‘4 i. v v f ‘il‘lllv 1‘ \ yvnnlrlylyl (‘1‘..l I‘D-Ii .» , e 'll':nt...-. it}- . F‘IC‘II< \fl. V.‘ ll-Iiri I but... III\ III utl\v~y 170 .o magma Nancemg< ca deucemoum mmwupcsoo assea>adcfi pom meowpdsvo mcapdaapwc no pecan "OOHSOW cs cosposeonc ecu .pscs aspasoc use assesses assume as each» mmo use «can eonmcm>coo doo.a cfi.mwwmamwmmwmammw .ocoz e e e e a a a A III... “mum Wmm WWW mm mm...“ mum “mm we... mwm “mew. age we.wa ew.:m ew.me mo.mm oa.mm oo:.:m mmw.om :me.ma www.ma ome.m mmmm "doavogohm mm.m ew.ma om.om ma.ma mo.ma mswozo. memmmo. mammmo. mmmmmo. mommmo. me.a emnm scum mmua msna Hemmmon mammmou wmmamo. moaamo. mmmomo. wdmmmmwmm om.ma cm ma ea w: a: ma mo :m eommzo msaoso sawmmo. mmawmo. memwmo. mew: seams» «mum em... mum we we mm. we“. we me”. new as... we.m Hm.:a :m.mm Ho.ma mm.mm esm.m mem.m New.» sem.w mmm.: mmmw "cosposeopm we.m He.m we.mm Hm.e mm.:a meaeao. ammmao. mammao. awssao. axmmao. . mono lawn. flaw ewe mmno 888” omens. odes. 8&3. emmms. figmm . "seen couuno>aoo mm.m Hm.m ma.mm em.m m:.ea mae.mwm emm.omm eaw.aam Ham.mme a» . . . . . . m awe zeomzco mm.m mm.sa ms.mm me.ea eo.mm mamnsmm emsuomm www.mam cm:.wmm ase.aom accuse .m w z s m ea mm m m: ca 000 mmm 00m own mmH.mm: awe.ae: emm.mm: mmme an..03 tpgom d 0 she. ale elm 6% Rim 3% can ems was san p m: mm»? m 171 In sum. production of livestock and livestock products has increased more rapidly than grain production. Although COHECOI has been a net ex- porter of grains, pressures are developing that may reduce their grain export potential and the commodity composition of those exports. Even though feed grain production is projected to increase relative to wheat production. internal demands are increasing faster for the former. In- creased livestock production increases the demand for feed grains. Al- though increased neat consumption decreases the demand for grains in human consumption, this decrease is not sufficient to offset the increased grain required for livestock production. Since less wheat is used in livestock production thanother grains, the total demand for feed grains increases relative to wheat as incomes rise. Therefore, even though feed grain production is projected to increase relative to wheat pro- duction, exports of the latter can be expected to increase relative to the former as incomes rise. And should incomes rise substantially, 'JOMECOII may become a net importer of feed grains while still exporting wheat. The demand projections developed in a pmvious section of this lhapter related only to 1...... consumption of grains. But grains are also ztilized for non-food uses. mainly industrial uses and as feed for live- stock. Ideally, it would be desirable to base the demand for grains as .ivestock feed on the estimtes of livestock numbers for 1970 and 1975. '0 do so, however, would require information on the feeding rates for rarious types of livestock, which, unfortunately, are not readily avail- Lble. The ease applies to industrial mes. However, no has developed stiletes. of non-food use of grains in COMECOI, based on residual im- utation methods, for 1975. These estimates are shown in Table bl. .otv- vital! Any..- u-l\ a trill... Inst.- ul.-,‘l\ I |l\- I\ I 91.: v. v..-vl-« u; v I (Is. I l‘ae v .l'll! ll}. I'lun til: I... [I'll n {Fiann- nn- .a:-‘ it h old}... 172 .mema op menamma_eonm moose so eoooo.oousaocnopea m ono cams you oosao> .ooospoononmnwoflooseoo Honspasosowe .oem . mama one enema cos “oonoom mem.em was.mm www.mm mma.mm so».mm ensue some oceans .m ooe.mm 0mm.mm mas.am mem.w: mmo.mm cases some mummme ¢ mem.mm mem.am mew.mw oea.mw mw~.me shone some zoomzoo Hum.» 306 memo memo 000K peep: gonna .m see.am ooa.mm :mw.ma Hmm.ma me.ma soon: mmm: weo.mm Mao.mm msm.mm mem.em Has.am goons zeomzoo meson canvas 000.35 enema enema edema seems me-aema assoc oon< own.“ 23. 173 Data for 1970 were developed by interpolation, assuming that the annual percentage increases are constant from 1961-63 to 1975. Given the non-food uses of grains in 1970 and 1975 and the projected food uses, the aggregate demand for grains can be estimated. Projections- of food uses from Table 26 and.non-food uses from.Table hl are combined in Table he. Included in Table hz are the projections of demand for livestock products. Although demand projections have been developed for two different rates of increase in consumers' incomes, other rates are possible depend- ing on the decisions of the central planners. And only one estimate of supply has been developed, which could change should the central planners decide to devote more resources to the agricultural sector. Therefore, before determining COHECON‘s export potential in 1970 and 1975, let us consider some of the alternative objectives and policies that the cen- tral planners in COMECON might pursue. lglternatige Goals and Egliciesggf the Central_Plgnners As was discussed in Chapter IV, the main goal of the central planners in COHECON is to achieve a greater rate of growth in industry relative to agriculture. A variety of policies may be pursued to attain this goal, however. These policies can be considered under two major categories: (I) trade with non-member countries and (2) autarky for COMECON with respect to non-member countries. However. as was shown in Chapter IV, the COMECON countries are moving away from the autarkic policies of the Stalinist era, and relying more on agricultural exports to pay for the industrial imports needed to Iodsmise their own industries. Domestically, the supply or agricultural Products depends on the quantity and quality of resources allocated to r— flukkflfi ”so... fivkvi..~| "Viv vutfiafivinfifl. \c.=co.. n .~.l—- lane- ’-1. .v... ~.....;-.... ile-ii-ue...:ll.l .au...onlr.\>e.~ u...‘ ll..ul.\ ... (no.5 -.. vl...f...~ .r.nll..\'--.\..\I\I¢»ltuu! [.ml ‘ n l .I n , 1.1} . n \ .I i- to ‘I! E.|. Ill. .I..blyt7 17A emm mew Hum.m mes.a -mnb.m: www.ma momum nmm.a mam.: mom.s omw.me nnm.:m mmm m nao.m men.n weo.m www.maa maw.ee and owe mea.m mom.a mmo.m4 Hmn.ma Hmanm manna mmo.: msm.: mow.mw omm.mm own m mow.a mom.» m:~.m www.moa Ham.me Hmm cam mmo.m mmm.a mma.o: mam.ma osw.a omo.a mmm.m mom.m m:n.aw sno.mm Hme.m o:m.a one.m enm.s :mm.aoa mwm.on mom mom «Ho.m omm.a :nm.mm moe.ma mmm.H mmo.a mem.m ems.m nmm.mm mwmnmm eme.m wmm.a mom.m :nn.: Hom.mm mom a» hmeoo ontooe ooo.av doe» 25.95 nwmm anpasom atom one ovum eooe anon: mnma one oema cocoononm .osoocH swam one son .eoomzoo .oposoonm soopoobaq ecu oceans non caused ooomonwm<--ms canoe 13 0.3.08 one mm canon. Scum 69.25500 "vendom 0905 o W mmmb 20 03.5 o m mbma 0903 . M «5m: 20 830 0 .H mhma smog . m mmmb EC 085 o m orma vacuum . m mmmD 20 omzo 0 .H onma 175 the agricultural sector by the central planners. Domestic consumption depends on the level of real income, which is also determined by the central planners who control wages, prices, and the quantities of goods ra¢ available in the state stores. Therefore, given the supply of agricultural products, the central planners can change their export supply by regulating donestic consumption. There are constraints on the degree to which the central planners can vary domestic consumption, however. Since consumption in the COMECOI countries is already at about the lowest level among the developed countries, an absolute decline in the level of consumption is unlikely for political reasons. To allow con- sumption to increase at a very rapid rate would require a relatively greater allocation of resources to agriculture and diminish foreign exchange earnings unless production increases sufficiently to offset the rise in consumption. But given the central planners' reluctance to make any drastic alterations in the relative allocation‘of resources to agriculture versus industry, the export supply will be determined mainly by adjustments in the level of domestic consumption. Therefore, in order to ascertain the effects of various policies the central planners night conceivably pursue on COMECON's export supply, alternative levels of consumption will be assumed to reflect allocative decisions. In the previous sections. two projected levels of cbmand and one level of supply were developed, based on the best information currently available. But, given the nature of that data and the uncertainty as to what level of consumption the planners will permit, two additional con- Intion levels areconsidered. The highest! low incone projections for 1970 and 1975 ny be considered as sliQItly above or below the median of 176 the range of conceivable consumption levels. At the low end of the scale, consumption (per capita) will be assumed to remain unchanged from its lev- el in 1965; therefore, total consumption depends only on population growth. This is equivalent to assuming that consumers' real incomes do not change and that they do not suffer from a money illusion with respect either to prices or wages. A less obvious choice is available for the maximum level of con- F sumption. In view of Khrushchev's claim in 1958 that the Soviet Union would catch up with the U.S. by the 1960's in per-capita consumption, the U.S. level in a given period could be so employed. This chOice is u—-‘ rejected for two reasons. First, the current gap is so large, even though ten years have passed since Khrushchev's statement, that either productivity in COMECON would have to be practically doubled or sub- stantial quantities of food products would have to be imported. And secondly, owing to cultural and social differences between the two countries, some differences in tastes and preferences can be expected to persist. A more realistic choice wuld be the West European countries, where the differences in consumption levels are not nearly so great and consumer tastes and preferences are more similar. For these reasons, the level of consumption in the ER countries for 1965 is selected as max- imum consumption level for COMECOI. Also, establishment of the relation- ship between consumption levels in COMECOII and the EEC would be useful from a policy viewpoint. In smnmary, four levels of consumption are considered. The first two, which have alreacb' been developed on the basis of high-and low in- come ass’mwptions. represent median consumption levels. The third, which is equivalent to no change in real insane, represents the absolute minim. 177 And the fourth, a level equal to the EEC in 1965, is considered as a real- istic maximum. For the year 1970, only the first three will be evaluated. But for 1975. all four levels will be evaluated. This is consistent with the fact that the range of possibilities increases as the length of the period of adjustment increases. Domestic supply is the other component of COMECOl's export supply, and only a single estimate of domestic supply has been developed. This level of production is considered to be the most probable one if past policies as to the allocation of resources to agriculture relative to in- dmtry are continued. Other levels of supply are evaluated in the follow- ing manner. First, for a given period and level of consumption, supply- denand balances are derived on the basis of the single supply estimate. If the balances for all comedities are positive (i.e. supply exceeds demand). than the surplus represents the export supply. Secondly, should the balance be negative, two alternatives are considered. The first is to (htermine by how much domestic productivity would have to be increased to remve the deficit, without having to rely on increased imports from non-COMECOI countries. And the second is to fitsrnine how the trade pat- terns would be altered if the deficits were met by increased imports. In all cases, it is assured that relative world prices of grains and livestock remain constant. Otherwise, the COIECOI countries night sub- stitute wheat for feed grains ratbr than continue to export wheat-ma major source of hard currency for the Soviet tion. Following these Procedures, the final task of this Chapter ‘is to evaluate COIECOI's ex. port potential for 1970 and 1975 as influenced by the policies of. the central planners . 178 cogcoms wpomnhggkmm and 1975 COIECOI grain and livestock product balances for 1970 and 1975, with incomes assumed to increase at the low and big; rates, respectively, are presented in Table ha. mom income levels, common would have a deficit in feed grains and poultry meat, and a surplus in all other con- nodities in 1970. As in the past, Eastern Europe has a deficit in both wheat and feed grains. These countries are also projected to have a small deficit in poultry mat, which could easily be met by a sligat increase in domestic production. For the low income assumption, poultry production in Eastern Europe would have to increase 0.59 percent above the projected level. and only 1.3 percent above the projected level at the high income level. The Soviet Union is also projected to have a deficit in poultry neat, which would require a 15 percent increase in projected supply for the low income assumption, and a 16 percent increase for the high assump- tion. Part of this could probably be accomplished by increasing the pro- duction of meat relative to eggs, but meat production would have to in- crease at an annual average rate of 5.29 percent instead of the projected rate of 2.38 percent. The average annual rate for the 19511-61; period '18 5.9 percent, but decreased to 3.6 percent from 1959.613. Assuming that the average level of production accomplished during the l9Sh-6h period could be sustained, the deficit in poultry meat production would be eliminated. The projected wheat deficit in the East European countries can be met, as it has been in the past, by the surplus of the Soviet Union, and COMECON will continue to be a net exporter of wheat. However, feed grain mficits in Eastern Europe have also been not by the Soviet Union, but the AFNVH. dung «(Add EUDUUTCLL - B‘shlirvwe - aaiu um IVFa harshl- l entitlflde nib-n .. .ee.-VAbt.-.‘H Vane. v.u-h at) - \~ uwfle FNAWGPINV ZAVHVquEAUU‘IIIMH 9N MVJHIAfl-lflp.“ \. m I .I! r r I: ". ll! all .‘ 1.! n.3, I a : e Kiri . 179 .o: ecu .mm .mm .mm moaned acne eovanodoo "oohsom Fem mm- mom we: Hem.aa- mmm.e- mea.:- med mam- .a::. and moo.: mmm.m- wmm.e mm: Ame- mma- ewe mom.e- pom.oa- mam.m mem ma Hem Hem ame.oa- mmw.m- meo.:- mam Ham- new- ma: New.m was- maa.m Hem 00m- we com emm.e- oaa.e- maa.m hem mm- mmm mam Fem.m- www.mu omo.:- 0mm med- me em: msm.m sew- emm.m was $7 mam ma. :8- 806. 8% wow m- mom hem mma.m- mem.m- mam.m- mmm . ems- mm was amm.oa Ham.a mmm.m omm mma- mmm mmm oae.a wo:.m- maa.m mlheeop canoes ooo.av dog undone 3.3.5 meme encased anon ecu seem deuce ease econ: mama ens oema soundness among . m mmma 200830 enema smog . m mmm: zoomzoo q mama smog .m mmm: 2003200 edema 0903 .m mmm: zoomzoo edema oeoecH swam ecc_3cg .uooeedsm pounced scopeo>aq one cause zoomzoogume edema 180 Soviet Union, as projected, could only fulfill part of Eastern Europe's feed grain deficit in 1970. COMECOI feed grain production would have to be 3.6 percent above the projected supply to not domestic demands with- out reducing the level of livestock production. Production in Eastern Europe would have to be 9.9 percent higher than projected to attain the desired consumption levels without resorting to imports from non-member countries. If Eastern Europe's grain surface remained at its 1961; level, instead of decreasing 5.8 percent as projected, COHECOl's feed grain deficit would be reduced from 3,1108 to 1,290 thousand mtric tons. Then only a 2.1 percent increase in the Soviet Union would be required to supply Eastern Europe's remaining deficit. Were the Soviet Union required to meet the entire deficit, production would have to be increased 5.5 percent. This would require an average annual growth rate of 3.2 percent instead of the projected rate of 2.2 percent. Thus, for the Soviet Union to supply the entire deficit, the 195b-6h rate, which was 3.3 percent annually. would have to be sustained. With the high inccne assumption in 1970, COMECON's feed grain deficit will almost double, even though the Soviet Union will still be a slight net exporter. To eliminate this deficit, COMECON production would have to be 6.3 percent higher than projected, as contrasted to the 3.6 percent increase required on the low income assumption. The major change was the 87 percent decrease in the Soviet Union's export supply relative to the low income assumption. Production would have to be 5.5 percent higher than projected for the Soviet Union and 16.7 percent higher for EasternEurope to eliminate the projected deficit. Given the difficulty with which the deficit on the low income assumption, which was only half as large. could be met, the deficit on the high income assumption would ‘-__.___ t ..I.. Ivir “II: Ifts. I. I. l' a: .I... lo'oi 181 require annual increases in production substantially greater than COMECON achieved from l9Sh-l96h, requiring a substantially greater relative a1- locatien of resources to agriculture. If COMECON were unwilling to al- locate more resources to agriculture, the composition of exports would have to be modified, or even reduced. The shift would be away from livestock exports using grains intensively toward exports of livestock for fattening elsewhere. By 1975, the feed grain and poultry deficits for COMECON on the low income assumption become more acute. But in addition to a deficit in poultry, the Soviet Union is also projected to have deficits in pork and feed grains. The pork deficit could be met by imports from Eastern Europe. However, poultry production would have to increase 32 percent relative to the projected level in the Soviet Union, or at an average annual rate of 5.8 percent. From l9Sh-6h, poultry production increased at an annual rate of about 6 percent. This rate would have to be sus- tained, or more likely, the rate of meat production increased relative to egg production, for the deficit to be eliminated. The projected feed grain deficit is a more difficult problem, howa ever. Unlike the situation in 1970, the Soviet Union is unable to supply feed grains to Eastern Europe in 1973, and, in fact, the Soviet Union is projected to be a net importer. But the Soviet Union could become self- sufficient by increasing grain production by less than 1 percent (0.73). However. Eastern Europe would have to increase production by 18.7 percent relative to the projected level, or 2.3 percent annually. From 195h-6h, feed grain production increased by only 1.5 percent. Should this rate be sustained up to 1975, East Europe's deficit would be reduced to 2,987 thousand metric tons. The Soviet Union could supply this amount if 182 production was 5.2 percent above the projected level for 1975, requiring an average annual increase of 2.6 percent. Since the average annual rate of increase from l95h-6h was 3.3, a rate of 2.6 percent could probably be sustained. However, feed grain production actually declined in the Soviet Union from 1959-6h, so a major revision in investment policies would be required to attain a rate as high as 2.6 percent annually. Therefore, for the low income projection for 1975, COMECON will not be able to sustain past trends in livestock exports without recourse to feed grain imports from non-member countries. COMECON will continue to be a net exporter of wheat, but less will be available than in 1970. however, more wheat is available for export in both periods with higher income levels, but the feed grain deficit increases with the level of income. At the high income level in 1975, COMECON feed grain production would have to be 10.7 percent higher than the projected supply, and as we have seen. an increase of 7.0, which was required on the low income assumption. would be rather difficult to achieve. But before we arrive at any conclusions as to outcomes considered most probable, let us ex- amine the other two levels of consumption that lie at the extreme of consumption possibilities. At the lower extreme, consumption is affected only by population growth, and.the projected supply-demand balances for 1970 and 1975 are presented in Table Us. For both years, COMECON is projected to have a surplus in all commodities, except for a minor deficit in poultry meat in 1970. Just as in the previous two cases, Eastern Europe has a deficit in both wheat and feed grains which is offset by imports from the Soviet Union. But unlike the other cases, the Soviet Union is able to both sup- ply the feed grain needs of the East European countries and export feed muFAwH Hen-aw Chad Umvdnvew- «when .'-IAvuv..w ”piles-"0:: .IIvuvl-Idsvai dullvflvowtn vanvfivdtavxr aid Uni-w auw‘rwnv lbflxvv-ivll" -Wnaneh. 183 .ov one an .wm .vN moaaah loam wouaaso~so "wousom new avg new one omm.au «Hm.mu m~e.vu new no”: one was.” ooa.e~ mes.«~ neo.u eve mm «mm ehm.a omo.- who.» eao.m can. one Hem.~ mas.s mac.wn mv~.en emv.ms use.” see.” Hen.m eve.n eem.moa omn.nm ome.mm has a hen." ~mv.e mam.v mee.aes mas.me avm.va «an ace vsv «an moo.p nsm.nu om~.n- new as”- am new emu.o~ evo.sH mee.m new as- com eno.s mme.ns new.» nmm.n one «so oma.« nnH.H www.mm wom.um Hmo.mn nsm.s ooo.~ emm.m ane.n www.mes omv.on «Hu.nm ~mo.u new." amH.o ohm.v Hmm.mmfl who.mw nnm.oe Aesop cannon ooo.~v Hso> usuwuo nausea swan hwuasom neon one «son asuoh posh «sent .oléosn veuswaosb when one ohms cocoonoua .uooesnsm «oaooua secuno>ss use awake aoomaoouuvv oases snousm .m mam: ZGOHIDO "oossuem enchsu .M mam: ZOOMIOO "sauna-snsoo new“ season .m mam: ZOOflIQU "oossawn snows” .n «mm: ,ZOOMIDO “scape-Basoo chad 18% grains to other areas as well. More likely, however, given the rising world prices of meat products relative to grains, the surplus of feed grains would be used to produce more livestock products for export. Such a development would, of course, affect the U.S.'s export position in the sec. COHECOH would not only hurt the U.S.'s grain exports to the EEC by direct feed grain exports, but also by exporting finished livestock, thereby depressing the EEC's demand for feed grains. Finally, let us consider the other extreme level of consumption-- that of the per capita level existing in the EC in 1965, considered a reasonable goal for COMECOI in 1975. The grain and livestock product balances are shown in Table 16. As indicated, COMECm would be deficit in all types of livestock products, but the East European countries would be deficit only in beef and veal. This is because the level of consumption of livestock products in Eastern Europe is higher than in the Soviet Union. With respect to grains, COMECON is projected to be a major exporter of wheat due to the substantial reduction in domestic consumption. However, COMECON is also projected to be a net exporter of feed grains, but this would only be true should COMECON import livestock products in sufficient quantities to meet the deficit. This would, however, be unlikely. There- fore, let us consider the possibility that the livestock'product deficit can be met by increased domestic production. Expansion of livestock production will increase the demand for feed grains. Although data are not available on feed grain use by type of livestock in COMECON, it is reasonable to assume that, at the margin, the requirements for CONECOI in 1975 should be at least equal to the EC in the 1960's. Feed requirements per 1,000 metric tons of livestock products and total feed grain requirements for COMECON are as follows: piecieflfinriwalflnhfljvu . -. . I. 185 .mm vague one cofimeSmeoe defines hem 0mm so demon aeoaeoHSoHso “meadow .zaa .9 .mcoseucnonm epseoseoo .oH4.m mam.m owe.em mww.>m www.mfl mma.m eme.e awe.“ mao.m mnm.oaa omm.mw www.me mm:.: :mm.m mma.m omm.m mms.mwa mem.ooa mew.ew Aesop assess ooo.Hv o.mH :.m m.mm H.mm m.:m m.on w.:m H0 OF nGHdHO mfifldhw wwwm hupasom Much a Hoom H6909 doom when: mmmfl ca souvmaumcoo ho Hubuu omondm .m mmmb acomzoo neossasm vnHOHDm . m mmmp zoomzoo “cowmeSueoo .mawMV eoapmasueoe HA dawne- hom 0mm 0mm #6 doveofiOHM amhmfl «noondfldm SOvaSUOHR moovnvbfiq one nfide ZOUWZOOIIWJ oHndE 186 Table h6--COHECON Feed Grain Requirements, 1975 Product Feed Grain Requirements: ger Animal Unit Total (1,000 metric tons) Beef and Veal 900 1,6h5 Pork 3.1110 3.117 Poultry 2.610 2,005 358' 3.110 2,1119 Total Livestock 8,916 ——‘— Source: Regier, op. cit., p. 9. Data are averages for the EEC Iron 1961-63 and 'a—n'imal units are measured in 1,000 metric tons. 18 shown in the above table, COMECON would need 8,916,000 metric tons of feed grains, assuming for the moment that livestock production could be expanded sufficiently, in order to elimina‘b its projected deficit. This wuld require an additional mmetic production of 7,736,000 metric tone of feed grains or 7.6 percent greater than the level projected for 1975. To accomplish this, grain production would have to increase at an average annual rate of 2.23 percent, almost twice the projected rate of 1.1;? percent. From l95h-6b, COMECON grain produc- tion increased at an average annual rate of 2.5 percent, but during the latter half of that period (1959-6h) grain production actually declined. It is unlikely, therefore, that the required growth rate of 2.23 percent per year could be achieved without a substantial allocation of resources to the agricultural sectora, But even if the additional grain could he produced dometically, donatic livestock numbers nay not be adequate. To elininate the deficit in heat and veal, cbleetic production would have to increase 91.8 pacent from 1961; to 1975 as compared to the 187 projected increase of 50.7 percent. Such an increase would require an average annual growth rate of 8.35 percent, whereas the rate fron;l95h96h was only 6.3 percent. Therefore, the beef and veal deficit would most likely have to be not by increased imports. If the 19Sh-6h growth rate could be sustained until 1975, common would still have to import 1,001,000 metric tons of beef and veal. ‘Domestic production of pork would‘have to be 12.5 percent greater than projected.to eliminate COMECON's deficit in 1975. To accomplish this, the annual average growth rate would have to be 3.h percent instead of the projected rate of 2.0 percent. Since the growth rate from l9Sh-6h was almost 5 percent per year this could probably be achieved, but COMBO! would no longer be a net exporter of pork. COMECON poultry meat production would.hava to increase at an av- erage annual rate of h.h percent instead of the projected rate of 2.h percent to eliminate the projected deficit in 1975. Only a slight in- crease would be required to elininate the eggs deficit: the growth rate would have to be 1.68 percent per year instead of the projected rate of l.h percent. If the l9Sh-6h growth rate of 5.9 percent per year could be sustained until 1975, COMECON's deficit in poultry meat could be eliminated. In conclusion, COMECON could achieve by 1975 the level of consump— tion existing in the EEC in 1965 if the average annual growth rates achieved from l95h to 196k could be sustained. This would require a much greater rate of investment in agriculture than existed during the period from 1959 to l96h. Accomplishment of this objective would, however, change COMECON's trade patterns with non-member countries. Rather than being a net exporter of beef and veal, pork and eggs, COMECON would barely . , v» ’ -ut"\'. ‘f‘ A A6777“ M- - - h 188 be self-sufficient in these commodities. But because of the major shift from plants to animals as the major source of protein, COMECON would be able to export approximately 10,000,000 metric tons of wheat. COMECON would also be unable to export feed grains, and,in fact, would have to increase domestic production substantially to be self-sufficient. And a slightly below normal crop year would force COMECON to import feed grains. ‘Hithout additional information it is difficult to predict which of the alternative policies evaluated that the central planners in COMECON will pursue. But since the projections were based on the 19Sh to l96h period, consideration of developments from 196E to the present will aid in evaluating those alternatives and their implications for U.S. agricultural trade policy. This is the subject of the final Chapter of this study. Ir - 3’.‘ - .. CHAPTER VII IMPLICATIONS FOR U.S. AGRICULTURAL TRADE POLICY This final Chapter provides a summary of the analysis of EEG- couscon trade relations for the period 195k to 1961; and the projections of COMECON's export supply in 1970 and 1975. Then deve10pments that have occurred since l96h are discussed, based on the author's research trip to three COMECON countries during the summer of 1967 and the most recent data available, in order to determine if any structural changes have occurred in EEC-COMECON trade relations. These current develop- ments should aid in evaluating which of the policies evaluated in Chapter VI the COMECON central planners are pursuing and their implications for U.S. agricultural trade policy. M Trade between the U.S. and COMECON is of marginal importance compared to their trade relations with the EEC. For the U.S., the EEC is much more important as a.market for U.S. exports than as a supplier of U.S. imports. This is especially true with respect to U.S. agricul- tural exports. Annually purchasing almost one-third of total U.S. comp mercial agricultural exports, the EEC represents the largest single market for the U.S. But trade with the EEC is also important to COME- CON. Of COMECON's trade with the OECD countries, slightly less than half is with the EEC. The EEC is important to COMECON for two reasons. First, the EEC is COMECON's medor supplier of technically-advanced indus- trial products needed to develop their own economies. And secondly, the EEC is a under source of foreign exchange for COMECON, primarily due to 189 190 the EEC's more liberal East-West trade policies and their need for agricultural and raw material imports. nus the EC is important to both the U.S. and COMECON as a market for their agicultural eXports. And since COMECON's exports had been expanding faster than any other external supplier to the EEC, the question was raised. as to the impact of continued EEC-COMECON trade expansion on U.S. agricultural exports. Thus this study was undertaken to examine the economic factors and policies responsible for EEC-COMECON trade expansion in order to estimate COMECON's export supply in 1970 and 1975, years for which data were available on the EEC's import demand for grain and livestock products. Wolcgiculy) the analysis of EEC-COMECON trade relations was divided into two parts. The first presented an analysis of the effects of regionalization in the two groups on their external trade relations. Using partial equilibrium analysis, it was demonstrated that the formation of a customs union by market-oriented economies, such as the EEC, would have fewer adverse effects for COMECON than for other market-oriented economies. This was due to the lower export supply elasticities for centrally-planned economies relative to market oriented economies. The elasticity of a country's export supply depends on its domestic supply and demand elasticities. But in centrally-planned economies, demand is controlled by the state by its control over wages and prices; therefore, domestic demand has less influence on the smart supply in centrally- planned economies than in market-oriented economies. The major impact of regionalization in the EEC on COMECON was due to the EEC's East-West trade policies and the Cannon Agricultural Policy (CAP). Unlike the other Western economics, the EEC has pursued a more Irmmvmv 7mm ) 191 liberal East-West trade policy. Consequently, the EEC's share of East- West trade has risen rapidly since the early 1950's. Although the EEC plans to develop common commercial policies, a common policy has not been developed for the centrally—planned economies. Therefore, the trade policies of the individual member countries were discussed, emphasizing their policies on the degree of currency transferibility granted to the COMECON members, and the use of quotas and other measures designed to discriminate against centrally-planned economies. Unlike regionalization in market-oriented economies, region- alization in COMECON was based on synchronization of the members' economic plans rather than market forces. Consequently, regionalization in COMECON was constrained by the ideological distinction betwaen polit- ical and economic sovereignty and the adherence to a limited regret strategy of decision making, which prevented the adoption of policies that would improve the commnity's welfare but inflict short-run welfare losses on a member country. Unlike Stalin, Khrushchev sought to expand COMECON's trade rela- tions with the West. Although first priority was given to trade with ‘member countries, every effort was made to expand trade with the West. Owing to the technological gap between East and West that had resulted from Stalin's autarkic policy, COMECON was unable to compete in indus- trial products. Since the West was initially reluctant to become depend- ent on COMECON for essential raw materials, COMECCN attempted to expand agricultural production. And from 1951+ to about 1959 , agricultural production expanded rapidly in COMECON. But due to policy changes in the Soviet Union, agricultural production virtually stagnated after 1958. Overly optimistic as a result of the gains made in agricultural 192 production up to 1958, Khrushchev sought to expand the efforts to socialize agriculture and diminish the importance of the private plots and collective farms. ‘me collective farms were further burdened by having to purchase the machine tractor stations and pay higher prices for spare parts. These policy changes, and a period of unfavorable 'weather, slowed down the rate of growth of agricultural production in the Soviet Union from.l958-l96h. Next an East-West trade model was developed to analyze EEC-COMECON trade for the period from.l95h to 196R, the Khrushchev era. Supply conditions were based.cn the Heckscher-Ohlin model and demand conditions on the Meade model. The Meade model was modified to show the effects of divergences between consumers' preferences and.those of the central planners in COMECON. Based on the East-west trade model, it was demon- strated that if the planners' demand for the product which used its scarce factor more intensively was greater than the consumers' demand, trade with a centrally-planned economy would be more profitable for a market-oriented economy relative to the existance of consumers' sov- relgnty in the centrally-planned.economy. . Analysis of the EEC's and COMECON's relative factor endowments showed that COMECON was relatively well-endowed with natural resources and the EEC with human capital, which was considered as a composite factor composed of capital and.skilled industrial labor. And.analysis of COMECON development strategies indicated that the central planners' demands for technologically advanced industrial products, which used concave scarce factor (human capital) more intensively, were greater than consumers' demand for these products. Therefore, the hypothesis 'was advanced that COMECON would export natural resource intensive 193 agricultural products and raw materials to the EEC in exchange for human capital intensive industrial products. Also, owing to the greater endow- mnt of nonrenewable natural resources in the Soviet Union relative to renewable natural resources, it was hypothesised that the Soviet Union would export more raw materials than agricultural products. And for the opposite reasons, s greater proportion of Eastern Europe's exports would be agricultural products relative to the Soviet Union. 4 These hypothesises were confirmed by an analysis of sec-coma! trade for the period fron 195h-196h. The U.S. trade with the we use also included for comparative purposes. In 1951:, natural resources intensive products accounted for about 79 percent of COMECON's exports ‘tunil‘rti’lu m '.-4".-: ’Ahe¥‘fl‘ ' I my; a”! to the EC and 61 percent of COMECON' s imports were industrial promote. By 1961:. 7b of COMECON's orports were natural resource intensive products and 79 percent of their inports were industrial products. Agricultural products accounted for 211 percent of the Soviet Union's exports to the EC in 1951: and raw materials accounted for 6!; percent. By l96h, these per- centages were 5 end 77. respectively. Agricultural products accounted for 32 percent of Eastern Europe's exports to the EC in 19511 and 3h percent in 1961;. Raw materials decreased from to to 35 percent from 1951: to 19614. Next the value and narket shares of COMECON's and the U.S.'s trade with the rec was analysed. Iron 1951} to 1961;, the value of the EEC's industrial imports increase 307 percent, whereas agricultural incl-ts increased 96 percent and raw materials only 92 percent. Inporte tron COMECON increased faster in all product categories then total rec imports and EC imports from umber countries. On the other hand, imports fro- the U.S. increased faster than the total only in agricultural pro- ducts, but this was less than the increase in imports from m: member 191+ countries. Consequently, the U.S.'s share of total EEC imports only increased from 10.9 in 19Sh to 12.1 percent by 1961+. On the other hand, COMECON's share increased from 1.9 percent in 19514 to 3.3 in 1961+. 'me EEC umber countries increased their share from 27.5 percent in l95h to 29.7 percent in 1958. After the EEC was established, their share con- tinued to increase and was 39.6 percent by 1961+. The EEC's agricultural imports increased. only 96 percent from 1951} to 1961+, but imports from member countries increased 221 percent. Most of this increase took place after the EEC was established, however. By 1958, the member countries accounted for 17.8 percent of the EEC agricultural imports, up slightly from 16.3 percent in 1951+. But by 196%, the member countries accounted for 26.7 percent. Imports from Eastern Europe increased 169 percent, whereas imports from the Soviet Union were less in 1961+ than in 1951+. This was due to a bad crop year, however, for imports from the Soviet Union in 1962 were 90 percent above the level in 1951+. Imports from the U.S. increased 172 percent, which was less than the increase for the EEC member countries and COMECON, but greater than the increase in total imports. Thus the East European countries increased their market share of EC agricultural imports relative to the U.S., whereas the Soviet Union's share was less than 1 percent for the entire period. Eastern Europe's share increased from 1.1+ percent in 1951+ to 3.9 percent in 196% The U.S.’s share increased from 8.8 percent in 1951; to 12.2 percent in 1961+, but was rather unstable. The U.S.'s share reached its peak with 13.5 Percent in 1956, but was only 9 percent in 1958. But since considerable variation can occur within such broad comedity categories, the W's imports of food and live animals Ia". —.-v;. v. — IE4— 195 (SITC 0) were examined in detail to determine the various countries "revealed" comparative advantage. "Revealed" comparative advantage provides an estimate of a country‘s competitive trade position based on its actual trade performance. Thus it takes into account both rela- tive costs and nonprice factors as well. Given the nmltitude of price and nonprice barriers to trade in agricultural products, especially the EEC's CAP, this concept provides an estimate of a country's compet- itive position subject to these constraints, which is more important for policy purposes. Analysis of EC agricultural imports for 10 major commodity groups from 1958 to 1966 revealed that the U.S. had its greatest revealed com- parative advantage in the export of feeding stuffs for animals (SITC 08). Also, the U.S. had a greater "revealed" comparative advantage in the ex- port of feed grains relative to food grains. Excluding COMECON's "polit- ical" exports (i.e. sugar imported from Cuba and re-exported), its greatest "revealed" comparative advantage was in the export of live animals (SITC 00). COMECON accounted for 36 percent of the EEC's imports of live animals in 1966. COMECON's greatest "revealed" comparative disadvantage was in feeding stuffs for animals. In the grain sector, COMECON's great- est advantage was in food grains relative to feed grains, and in live animals relative to meat products in the livestock sector. The final objective of this study was to estimate COMECON export potential in 1970 and 1975 for grain and livestock products. Because of the existence of planners' sovereignty in COMECON, a single estimate could not be developed. Therefore, four possible policy decisions of the central planners with respect to domestic consumption were consid- ered, ranging from unchanged per capita consumption to the attainment by 196 1975 of the per capita consumption level of the EC in 1965. Only a single estimate of domestic supply, based on least-squares regression analysis, was developed. Then the data for the base period, 1951+ to 196k, were adjusted for seasonal variations with the aid of the regres- sion analysis, was develoPed. These adjusted data were assumed to rep- resent the maximum attainable growth rates without requiring a major revision in agricultural and industrial investment priorities. 'Ilien for each consumption alternative, two trade policies were considered. First it was assumed that COMECON pursued a policy of autarlq with respect to agricultural imports from non-member countries. 'lhen the production growth rates required to attain each level of con- sumption were evaluated as to the likelihood of their being achieved, based on the growth rates calculated for the 1951+ to 1964 period. Sec- ondly, COMECON was assumed to vary the level of its past imports from non-member countries to achieve the desired levels of consumption. For each trade policy and level of consumption, changes in the commodity composition of COMECON's exports were evaluated. In order to evaluate COMECON's export potential more accurately, it was necessary to consider what changes have occurred since the obser- vation period (1951+ to 1963+), upon which the projections were developed. This is the topic of the next section, based on the most recent data available and the author's research trip to Eastern EurOpe. Developments in COMECON Since 1961; When Leonid Brezhnev and Alexei Kosygin rose to power in the fall of 1961*, their public pronouncements indicated that Soviet agriculture would be revitalized from its declining performance recorded during the 197 latter years of the Khrushchev era (1959-610. And their comitment to a "better life" for the Soviet citizens was in evidence by their reaction tot-he poor crop harvest in 1963 and again in 1965. Rather than allow domestic consumption to decline to drastically low levels, they imported more than.20 mdllion metric tons of wheat from.the West from 196% to 1966. This development was significant for two reasons. First, even at the risk.of losing prestige by becoming a net tnporter of a tradi- tional eXport crop, the new Soviet leaders preferred this alternative to the politically unpalatible one of depressing domestic consumption. Having Soviet consumers eating "capitalistic" bread.during the 503g anniversary celebrations was apparently preferable to a celebration of 50 years of Soviet economic "achievements" without bread. But the second reaction to the Soviets having to become net importers of grains affected the other COMECON countries as well. Traditionally, Eastern.Eur0pe has depended on the Soviet Union as their major supplier of wheat and feed grains. Inability to Obtain these commodities from the Soviet Union forced them.to also seek.imports from the west. Consequently, all the COMECON countries have since allocated a larger proportion of their grain area to wheat relative to other grains. But since the poor wheat cr0ps were due to seasonal fluctuations, the net effect of this change will.be to expand wheat production in COMECON above the levels projected in the previous chapter during "normal" crop years. Also, the levels of feed grain production will be overestimated ‘by the amount of feed grain acreage shifted to wheat, thereby inten- sifying COMECON's livestock.production problems. As was pointed out in Chapter III, the private plots account for 40 to 60 percent of the livestock products produced in COMECON. But the I} 198 severity of restrictions on the private producers tends to vary inversely with the general level of agricultural production, but with a time lag. Like Khrushchev, who inherited a low level of agricultural production from Stalin, the first act of Brezhnev and Kbsygin was limiting the restrictions on the private plots and privately owned livestock. Also, loans were extended to encourage the purchase of improved breeding stock, and additional quantities of livestock feeds were made available to pri- vate producers. But given the limited land resources available to the private producers, a.major eXpansion of livestock.production is doubtful. Nevertheless, Brezhnev and Kosygin are more pragmatic than Khrush- chev as evidenced by their S-year plan(l966-70) presented to the 233.3 Party Congress in 1966. Cereal production is to increase at a priority rate and compared with the preceding S-year plan(l96l-65), the average annual grain output is to go up by 30 percent, to 167 million tons. Also, compared to the previous 5-year plan, production of other major agricul- tural products are to increase as follows: meat, to ll million tons, as contrasted to 9.3 million tons; eggs, to 3h,000 million, as compared to 29,000 million; potatoes, to 100 million tons, as against 81 million tons.1 These goals are more realistic in that the rates of growth envisaged for some commodities are actually'below the rates achieved during 1960-6h. To accomplish these goals, prices and other incentives are being increased. As reported by Brownz, procurement prices for wheat and rye —__ 1 —_359 Congress of the Communist Party of the Soviet union. Moscow: Novosti Press Agency Publishing House, 1956} 2 G. Stanley Brown, "Soviet Agriculture After Khrushchev--A Brief Survey" Foreign Agriculture, Vol. v, No. 11, March 13, 1967- 41.552 4‘. :5 I AW“;me _ .e , It". -. a- -. 199 were raised.substantially--by 12 and 23 percent respectively. Meat prices were increased 10 to 70 percent, and in some areas, by as much as 100 percent. Also, real farm incomes were increased'by abolishing the price differential'between urban and rural areas which discrimina- ted against the latter. And in 1966, the Central Party Committee "ad- vised? all collective farms to convert to a wage system comparable to that used.on state farms. This is significant in that collective farm members will no longer be residual claimants to collective farm income. Farms unable to meet these claims are to be extended credits from.the state for up to five years. However, based on my personal observations in the Soviet Union in the summer of 1967 and recent press reports, it appears that Brezhnev and Kbsygin are following a policy similar to Khrushchev‘s--that of initially increasing agricultural production relative to their pred- ecessor so as to impress the population, than diverting resources to other sectors. Because of the existing dual leadership, however, a split has developed over inyestment in agriculture. At the 23rd Party Congress, Brezhnev promoted a plan for state investment of hl‘billion rubles ($15.5 billion at the official exchange rate) in the agricultural sector during the current five-year plan (1966-1970). Hewever, in October of 1967, the Soviet planning chief, Nikolai K. Baibakov, disclosed that the farm.investment funds had been slashed by one fourth at the request Of Kbsygin.3 Also, other resources are not being directed to the agri- cultural sector. While many of the managers of the state and collective _ —— 3Ray-ond H. Anderson, 'm-erlin is Split Over Farm Funds", New York Times, October 29, 1967. 200 farms visited in 1967 indicated they were short of fertilizer, for example, the soviet Union continued to export approximately 20 percent of its fer- tilizer production. It appears, therefore, that no major changes have occurred that ‘would.substantially alter the supply projections developed in the pre- vious chapter, except for a short-run shift in grain area to wheat rel- ative to feed grains. And for the Soviet Union, consumption can be expected to increase at about the level projected for the low income assumption for two reasons. First, this rate was attained during the SQEQ anniversary period (1967) to impress the pOpulation with Soviet economic achievements. And secondly, having attained this rate, the central planners could only decrease it at the risk of domestic pol- itical unrest as has occurred in Eastern EurOpe. Production in Eastern EurOpe has also continued at about the projected rates, except for the relative shift to wheat. The major changes that have occurred inEastern Europe are their relations with COMECON; In developing COMECON's export potential, it was assumed that member trade was given priority over non-member trade. Because of the high level of intra-member trade, however, a shift in the geographic movement of trade for major COMECON countries would alter COMECON's projected export supply. In varying degrees, such deve10pments have occurred in three countries. As was discussed in Chapter III, Rumania has gradually decreased ‘its participation in COMECON since Khrushchev‘s attempt in 1962 to vest supra-national powers in COMECON. Since that time, Rumania's relations ‘with.the Soviet'Union have slowly deteriorated. Conversations with trade and agricultural officials in 1967 revealed that the Soviet Union is still 201 trying to increase its control over COMECON. They indicated that the various economic subcommittees of COMECON, located in the capitals of the lumber countries, are to be consolidated and re-located in Moscow. Since Rimania is a major exporter of maize and cattle, a continued deterioration of its relation with COMECON will divert these products to the West, primarily to the EEC. fixerefore, Rumania's exports of maize and calves for fattening in Italy that have been increasing since about 1964 can be expected to continue. Althom this will decrease the EEC's demand for feed grains, it will increase the demand in those COMECON countries who obtained part of their feed grain imports from Rumania. By a decree effective January 1, 1968, Hungary began permitting selected enterprises to deal directly with foreign importing firms, rather than the state foreign trade enterprises. To date, however, no information is available as to which enterprises will be allowed to deal directly with foreign firms. And in September 1967, Poland became a full member of GATI‘. Thus. the East European countries are adopting more con- ventional methods of conducting foreign trade than the Soviet Union, which can be expected to further increase their share of East-West trade. A major transformation is taking place in Czechoslovakia, which began in January 1968 with the replacement of the Stalinist-oriented leaders by the more liberal elements of the party. This transformation was preceded by a revolution of rising expectations of the consumers, which was evident during my visit to Czechoslovakia in 1967. The availability and consumption of consumer goods was higher there than in any other COMECON countries. However, several sociologists expressed concern over the consumers' rising expectations and the growing number 202 of family members who were seeking employment to help fulfill their rising demands. As a result of new personal contacts, many families were being broken up and Czechoslovakia's divorce rate had become one one of the highest in Europe. Czechoslovakia is a highly urbanized society, and due to the village structure there is no farm or rural population as it is known in the West. And because of the highly developed public transportation system, occupational nobility is very high. Therefore, Czechoslovakian central planners were forced to rely more on economic incentives than in other COMECON countries and were more responsive to consumer demand. Although it is still too early to tell what will be the effect of increased liberalization in Czechoslovakia, the U.S.'s agricultural trade with the EEC should not be directly affected in any event. Czech- oslovakia is a net importer of agricultural products, mainly grains. However, since almost 60 percent of Czechoslovakia's grain imports are obtained from the Soviet Union, deteriation of their political rela- tions would force Czechoslovakia to import grains from the West. In late April (1968) rumors reached the West that the Soviets had in fact stopped eXPOrting grain to Czechoslovakia. Then on May 3, as reported by Binderh, Czechoslovakian officials claimed that the Soviet grain shipments had only been delayed, and that they were negotiating with the Soviet Union for a hard-currency loan of $100 million. Dr. Silhan, head of Czecho- slovakia's Institute of Industrial Economic Research, said that part of this loan would be used to purchase manufacturing licenses from the U.S. and other Western countries for improvement of domestic industries. -— —— h V David Binder "Prague W Use Soviet Loan for U.S. Industrial Licenses" New York Times, May 3, 1% ’ 203 In summary, recent developments in COMECON indicate that grain production will continue at about the rates projected on the basis of the 195lt-6h period, except that wheat acreage will be increased relative to feed grains until reserves are built up to acceptable levels. Although consumption in the Soviet Union will remain at about the level projected. for the low income assumption, political unrest in Eastern Europe will necessitate a somewhat higher level, probably between the low and high income asstmption. Only under extreme conditions would consumption be allowed to increase in Eastern Europe by 1975 to the level of consump- u,. .7... ¢ .- an. — _ tion existing in the EC in 1965. For to do so would require a drastic reallocation of resources to agriculture and thereby diminish their foreign exchange earnings. Implications For U.S. Agricultural Trade Policy Although one cannot predict with certainty what COMECON's export supply will be in 1970 and 1975, it is useful for policy purposes to consider what situations will develop if the assumptions underlying the projections are realized, and what course of action the U.S. should take to met these situations. This final section considers some of the implications of continued EEC-COMECON trade eXpansion on U.S. agricul- tural trade with the EEC. With the exception of unfavorable crOp years, such as occurred in 1963 and 1965, COMECON will continue to be a major exporter of wheat, the quantity of which will increase as consumers' incomes increase. This will affect the U.S. in two ways. First, it will be more difficult to maintain world wheat prices as envisaged in the International Grains Agreement , adopted at the Kennedy Round of GATT negotiation, but yet to \} Iilp’\x |}!f 20h be approved by all the member governments. In fact, some ecOnomists, notably D. Gale Johnsons, are recomending that the U.S. Senate should not adopt the grain agreement because of the difficulty of maintaining world wheat prices, and that most of the burden for doing so would be upon the U.S. And secondly, lower wheat prices relative to grain prices will encourage the EC to denature an increasingly large part of its wheat . surplus for use as livestock feed, thereby reducing their demand for U.S. feed grains. Currently the EEC uses from 5 to 6 million metric tons of wheat annually as feed for livestock. Also the latest grain price reforms in the EEC, which increased the price of feed grains -.—.~ A- relative to wheat, encourages domestic producers to substitute dena- tured wheat for imported feed grains. Thus in normal crop years COMECON will be directly competitive with U.S. wheat exports, and indirectly with U.S. feed grain exports. Since Eastern Europe is dependent upon the Soviet Union for its wheat imports, a bad crop year in the Soviet Union will cause COMECON to import wheat temporarily. In order to participate in this market, however, the U.S. would have to change its policies on trade with COMECON. Currently, wheat and feed grain exports to COMECON by U.S. exporters require export licenses because of the requirement that 50 percent of the grains shipped to COMECON be carried on U.S. vessels, which charge higher transport rates than other vessels. Because of SD. Gale Johnson, "Statement by D. Gale Johnson Before a Subcomittee of the Senate Comittee on Foreign Relations, " Memographed Copy, University of Chicago, April l51968. 205» this requirement, COMECON's wheat imports in the past have been supplied mainly by Canada, Argentina, and France. If incomes in Eastern Europe remain at the high projected level, their feed grain deficit will be about 5.7’mdllion metric tons in 1970 and about 7.3 million.metric tons in 1975. And even if incomes remain at the low projected level in the Soviet Union, COMECON would still hare a deficit in feed grains, which will be greater than projected in the short-run due to the shift to wheat production. Three alternatives are possible. First, the relative proportion of live animals in COMECON's livestock.exports to the EEC will increase, thereby strengthening the EEC's demand for feed grains. Secondly, COMECON could continue to export meat products but would.have to import feed grains to do so . Even though COMECON's increased demand for feed grains would partially offset the decrease in the EEC, the U.S. would be unable to divert its feed grain exports without removing its restrictions on trade with COMECON, or, COMECON could substitute some wheat for feed grains, but this would decrease their foreign exchange earnings and strengthen the demand for wheat. In conclusion, it appears that EEC-COMECON trade expansion will have a slight negative impact on U.S. grain exports to the EEC. This need not be so, however. If the U.S. would modify its policy on trade with COMECON, the U.S. would be able to direct its exports of grains to the deficit areas, be they in the EEC or COMECON. The added flexibility ‘would also improve the U.S.'s bargaining position relative to the EEC in future trade negotiations, and enable the U.S. to take advantage of seasonal deficits in grains in COMECON. 206 Currently, two Subcommittees in the U.S. Congress (Foreign Relations in the Senate and the House Ways and Means Conmittee) are reviewing all aspects of U.S. foreign trade policy, including the U.S.'s East-West trade policy. Using the U.S.'s persistent balance of payments problems as support, many businessmen are pressing for a more liberalized East- West trade policy. From an economic standpoint, U.S. agricultural pro- ducers could also benefit from such a policy. On the other hand, with- -4K" --I out such a change the U.S.'s agricultural trade policy will have to be developed in reaction to the Comon Agricultural Policies of the EC, and its flexibility and range of alternatives will be limited accordingly. 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A Criti us of Sovietolo : The Theo of a Centrall - Planned Economic 325m, UnpuBfLHea 15.5. Thesis, Colt-rifle vers y, . ’ 215 Sorenson, V. and D. Hathaway. Guanggs in the Grain-Livestock Econo¥ of the EEC and'rhgir Effec s on one gn re a ms. ‘ irTsry Hinuscrfpt‘, Department of Igacultural Economics, Michigan State University, East Lansing, Michigan, 1967. APPENDIX A EEC Trade Policies 216 Table A-1 EEC Import Restrictions Specifically Applicable To COMECON Countries In the official treatment of imports from Comnist state trading countries, there is one prevailing contrast between U. S. practice and the general practice of other free world trading countries. The United States denies most favored nation (MFR) tariff treatment to such imports (except in the cases of Yugoslavia and Poland), but does not apply quantitative restrictions specifically to such imports. In general, the principal free world trading partners of the Commist countries do grant MFN tariff treatment, but make fairly extensive use of quantitative import controls associated with the bilateral agree- ments under which they conduct their trade with Communist countries. These import quotes are discriminatory to the extent that they apply only to Communist countries (usually identified in import regulations as "state trading" or "Eastern countries). - “ as . .. . .a-. . The EEC.-Eventual achievment of a common EEC commercial policy 3.. implies a common policy among the six for trading with state-trading countries. So far, little progress has been made toward achieving such a policy, and each of the six countries continues to new its bilat- eral trade agreements with Communist countries. Eventually, however, the six may insist on dealing as a group with Communist countries, applying a uniform policy on import quotas. Evolution in this direc- tion is being hampered, inter alia, by the Soviet bloc's refusal to accept juridically the existence of the EEC and its coma external tariff, or to accept the so-called EEC clause (regarding eventual substitution of a single agreement with the EEC) when proposed in negotiations for current bilateral agreements with EC countries. Federal Republic of Geneany.--West Germany requires specific licenses for all imports from Communist areas, including East Germany. Import licenses are issued only in accordance with quotes negotiated in bilateral agreements, and somtimes subject to actual trade per- formance by the Communist partners to such agreements. Imports from East Germany are subject to controls under separate procedures, de- signed to differentiate "intersonal" trade from foreign trade and to treat it as a special form of domestic comrce; nevertheless, these controls are rigid. France.--According to the latest information available, French import regulations divide the world into four groups of countries. The fourth list includes the Comunsit countries and certain others, and provides the lowest of four‘levels of liberalization. Almost all French trade with Communist countries is conducted under bilateral agreements with quota lists, and a substantial proportion of actual French imports is covered by quotas. 217 218 Italy.--Under current Italian regulations on import licensing, almost all countries of the world are covered in either of two tables. Table B applies to the Communist countries, and is considerably more extensive than table A. Like the United Kingdom, Italy permits entry without quantitative restriction of a sizable list of items (1. e., those not covered by table B). However, the agricultural and primary materials (including petroleum) which make up the bulk of Eastern European exports to Italy are covered by quotas. Benelux.--All imports into the Benelux countries from Communist countries are subject to licensing. Benelux trade agreemnts with Communist countries contain "price clauses" which give both sides the right to prohibit imports if prices of such imports are "abnormal." Abnormality of prices is determined unilaterally. Source: Leon N. herman, A Back round Stu of East-West Trade. U. S. Senate. Washington: government EFB‘CEg Office, Ipril 1965. APPENDIX B Estimating Equations for Grains 219 '9‘. ‘.‘h n- 220 mom.a mom.a eme.a moexa .eonm 38.8 A * v em.mm ::.mm em.mm ::.mm eommo.o Hmeme.a ammm.o m cause Ame:.ov A * v emm 0mm as: mm: mm.a so: owmo.o a sen< manhood mmam mmom snow same .eonm 88.3 A * V mm.em m:.em mm.em m:.mm mmmma.o_ mmomm.a poem.o m ease» Ammm.ov A a v as» me» mm» ewe em.o woe emoo.o a «one «.nooso mmmra Ono.m memes mmo.m .eonm A993 A a. v me.ma oo.ma we.ma oo.ma sowma.o memwo.a Heew.o m ease» Amoo.ov A a v wmm meo.a mam mmo.a mo.:m- mesa mowm.o a soa< . 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