Soviets on the Verge of a New Era in Trade Relations With East, West

WASHINGTON — While President Ronald Reagan and General Secretary Mikhail S. Gorbachev contradicted each other on the substance of the Iceland summit, expelled each other’s diplomats and resumed the pattern of insults that so often characterizes superpower relations, more promising events were under way in Moscow.

A group of U.S. businessmen from four Fortune 500 firms met with Soviet policy-makers on the best way to structure foreign investment in the Soviet Union. The American panel set forth case studies of joint ventures operated by the four U.S. companies and local partners in more than 15 countries, and there were preliminary proposals for such jointly owned production facilities in the Soviet Union.

The Soviets’ willingness to open their economy to foreign business investment and participation is no small step forward. Further, it is only part of a larger package of economic reforms that both the Communist Party and the Soviet Council of Ministers have approved for decentralizing the troubled Soviet economy and stimulating growth.

For international trade, the thrust of the reforms is to make the Soviet Union a full participant in the world trading system and to increase both the import of advanced technology and the export of manufactured goods. To this end, the Soviets are seeking to join the General Agreement on Tariffs and Trade (GATT), the International Monetary Fund and the World Bank and to define a new relationship with members of the European Community. The Soviets are also reorganizing their foreign-trade system by giving direct export and import authority to some local enterprises and ministries.

The foreign-trade reforms most dramatically reshape relations with Soviet-dominated East European nations. Soviet factories will receive broad authority to arrange their own economic relations in these countries: They will be able to select partners, define the form and nature of production cooperation and negotiate prices and other contractual terms.

The more limited liberalization of trade with capitalist countries remains promising, nonetheless. The first phase, beginning in January, will involve the grant of direct-trading authority to a group of 20 ministries and 67 enterprises. The newly independent ministries include, among others, Gosagroprom (the super-agency responsible for agriculture and food processing) and those dealing with fisheries, heavy-machine building, chemicals, medical and biological industries and automobiles. Major car- and tractor-producing plants and a variety of factories in chemical, petrochemical and machine-tool industries will gain trading rights, access to state bank credits and the right to retain some hard-currency earnings. They will also be authorized to enter into joint ventures with foreign partners--in the Soviet Union or overseas.

While Soviet policy-makers have as yet published no standards or regulations for new foreign trade or joint ventures, the Soviets have nonetheless made it clear that joint ventures will permit at least 49% foreign ownership and those ventures will be able to choose their own suppliers and customers, repatriate profits, set prices and export independently. Management decisions will be shared and Western quality-control will be encouraged. The Soviets also promise favorable tax treatment for foreign investors.

Soviet encouragement of foreign investment parallels domestic reforms announced last week, under which private manufacturing--including clothing, shoes, furniture and toys--and some private services will be allowed.

The announced reforms will be extraordinarily difficult and delicate to implement and, until they are embodied in specific laws and regulations, we cannot know how they will fare. The joint ventures could prove as ephemeral as were American and other Western ventures that were licensed to operate in the Soviet Union during the 1930s. Skeptics--including many in the Western diplomatic community--claim it can’t be done, because of the corruption, inertia, maldesign or bureaucratic muddle of the Soviet economic system.

But that’s what they said about China in 1978. The Moscow reforms, if Soviet leadership stays the course after its first tentative steps, could be as dramatic and widespread in effect as those undertaken by China in the last five years.

On the American side, it remains to be seen whether the U.S. government is wise enough to encourage such trade initiatives. U.S. policy-makers should realize that, once begun, a process of Soviet decentralization and introduction of performance incentives into what has been a tightly controlled, planned economy may be difficult to stop. More important, as the Chinese experience suggests, what happens in the economic sphere inevitably spills over into political affairs. It will be in our own best interests to abandon the discriminatory policies the United States now adheres to in regard to trade with the world’s second-largest economy.