East-Bloc Changes Spark New Look at Trade Issues

Reforms in East Germany could slow Europe's march toward `1992'

ECONOMISTS around the world are only starting to sort out the more important implications of the opening of the East German border and other results of Soviet leader Mikhail Gorbachev's political and economic reforms. Observers offer all sorts of long-term geopolitical speculation about the eventual unification of the two Germanys (the Soviets have ruled out political unity or the withdrawal of East Germany from the Warsaw Pact at this time), the drawing together of Eastern and Western Europe, and even the eventual integration of the Soviet Union into the noncommunist international economic system.

One expert termed these subjects ``imponderables.''

Of more immediate interest are these questions:

Will the European Community's drive for economic integration by 1992 be slowed down as West Germany's attention shifts eastward?

J. Paul Horne, the Paris-based economist of Smith Barney, Harris & Co., says he suspects that an altered relationship between the two Germanys could be ``a major distraction'' to European market unification.

Finance ministers of the 12 EC nations discussed such issues in Brussels on Monday in preparation for an EC summit Dec. 7.

Will the smell of peace invite Congress in Washington and governments of other NATO nations to trim military spending more deeply, even before the conclusion of troop reduction agreements now under negotiation with the Warsaw Pact?

Defense spending as a proportion of national output in the NATO nations as a group peaked at 5.18 percent in 1985. It was down to an average 4.54 percent in 1988 in the Western alliance. In the United States, defense spending now runs about 5.8 percent of gross national product, down from a peak of nearly 7 percent during the Reagan administration's massive military buildup.

Gordon Adams, director of Defense Budget Project, a small Washington think tank, says he suspects that there will be a 2 to 5 percent reduction in the US defense budget per year over the next five years, after accounting for inflation. That would bring the defense budget down from about $300 billion at the present to around $250 billion in constant-dollar terms.

By the year 2000, defense spending could be halved - ``if perestroika [restructuring] sticks,'' he says.

Already, Mr. Adams notes, the political and public-opinion shifts in East Germany, Poland, and Hungary have reduced the Soviet Union's ability to rely on its allies' military forces and has raised questions about supply lines to its own huge armies in these nations.

In addition, the level of military spending in the Soviet Union will decline in real terms this year, according to US government analysts.

Adams complains that the US defense establishment is not yet planning for ``careful changes'' in US armed forces to reflect the changed military balance in Europe.

Will East Germany make the drastic internal economic and political reforms necessary for stanching a continuous flow of its citizens, many of them talented, to the West? Will it open its borders for the West German investment that could induce its people to stay home by providing a rapidly improving standard of living?

Jan Vanous, a specialist on Soviet and East European economic affairs, comments: ``East German reform cannot go wrong. This is Germany. You are going to be working with human material that is easier to shape. The productivity ... the work ethic is better.''

If East Germany allows joint ventures from the West, it will ``get as much capital as it wants,'' says Mr. Vanous, the research director of PlanEcon Inc. ``There could be quite a boom'' in the German Democratic Republic.

When will the US give the Soviet Union a massive reduction in tariffs on its exports?

Under the Jackson-Vanik amendment to the Trade Act of 1974, the Soviet Union must allow free emigration of its Jewish citizens before it becomes eligible for the ``most-favored-nation'' tariffs granted by the US to nearly all its trading partners. Currently, Soviet manufactured goods entering the US face duties at the much higher levels imposed by the Smoot-Hawley bill of the Great Depression.

The Soviet government has already greatly increased the number of citizens, including Jews and German ethnics, it allows to leave the country.

The Supreme Soviet is expected to pass legislation, possibly before the end of the month, that would codify the right of Soviet citizens to emigrate.

When this is accomplished, the Bush administration could come under pressure in Congress to grant the Soviets a waiver to the Jackson-Vanik amendment.

US Secretary of State James Baker III last month told the Senate Finance Committee that this could happen within a year. Critics in Washington and elsewhere charge that President Bush and his Cabinet have been slow and reluctant to welcome and support Soviet liberalization measures.

``There is, no doubt, a psychological softening in the administration toward the Soviet Union,'' says Richard Feinberg, director of studies at the Overseas Development Council, another Washington think tank. ``But they are always a couple of months behind the curve.''

Some speculate that a trade move could be discussed at the Bush-Gorbachev Malta summit early next month.

Senator Lloyd Bentsen (D) of Texas has suggested that the US should also begin thinking of negotiating a bilateral trade pact with the Soviet Union, something already under way between the European Community and Moscow.

However, even if trade barriers between the two superpowers were lifted, the level of trade is unlikely to increase enormously anytime soon.

``The Russians are not in a position to offer a great deal of manufactures that are of a quality that will sell in the United States,'' notes Abram Bergson, a Harvard University professor emeritus who specializes in Soviet economic affairs.

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