Double Dealing

US companies are selling high-tech goods to the Soviet military…and weapons to the US government. No wonder they object to government control of strategic trade.


Unsuspecting Americans may have thought they had tuned in to a new episode of Star Wars, made more horrifying for mass consumption, when they heard in 1980 that the Soviets were developing a fantastic brand of laser weapons called killer satellites. The arms race having thereby escalated into the higher reaches of the stratosphere, US taxpayers soon learned that they would now have to foot an even more extravagant defense bill, required to meet the new Soviet challenge.

How could it have happened? A planned economy that cannot even deliver bread to its people seems hardly capable of outdoing the free world in strategic warfare. A few years earlier, when government officials were warned by General George Keegan that the Soviets were on the threshold of developing weapons capable of obliterating incoming missiles by throwing giant lightning bolts at them, the idea seemed altogether too unlikely. Met with skepticism bordering on ridicule, General Keegan had little choice but to resign from his post as head of Air Force Intelligence. Yet in 1980 Aviation Week & Space Technology published the news of the Soviets' killer satellites, essentially vindicating General Keegan. A new era in defense technology had thus begun, the price of initial complacency higher than even a seasoned spectator of galactic stunts could have anticipated.

But even with its more than $100-billion investment lead during the '70s, the Soviet military could never have achieved such success without help from the United States. Both illegally, and what is even more disturbing, legally—indeed, with government approval and aid—US companies have for years been supplying the Soviet war machine with sophisticated technology and equipment. Usually on credit—at times from the Export-Import Bank (Ex-Im Bank), the government agency originally set up specifically to help finance US trade with the USSR—the products of US research in high-technology areas have been flowing to the Communist bloc and helping to improve its strategic capability.

Since subsequently our taxpayers are asked to spend more to modernize the US defense system in response to the new Communist threat, a demand to end this vicious cycle is very much in order. After all, rather than continually raising the federal defense bill, it would seem much wiser to apply the proverbial ounce of prevention and simply monitor, intelligently and consistently, the sale of those items that demonstrably contribute to advancing the Soviet military. To cite William Simon's book A Time for Action, "We must stop building the Soviet war machine with critical infusions of our technology." As it is, we now find ourselves in "the lunatic posture of creating a balance of power against ourselves."

Whether to control strategic trade seems hardly worth debating when one considers the military significance of strategic items compared with their negligible impact on the US balance of trade: in 1979, for example, even before the Carter grain embargo in response to the Soviet invasion of Afghanistan, sales to the USSR by US firms amounted to no more than 2 percent of all US exports that year, and high-technology goods imported to the Soviet Union accounted for only 0.05 percent of all US exports. But figures aside, at bottom is a theoretical question that must be addressed: Does the government ever have a right to disrupt free trade?

A good many economists, even those who concede that the US defense budget might be lower if the Soviets were denied access to technology from the industrialized Western countries, are nevertheless opposed to any US embargoes. Free trade, they argue, is as a rule the most profitable policy. If we don't sell, our European competitors will, and we will lose a lucrative market. As we shall see, however, in many areas US firms do still have a monopoly.

The free-trade proponent, moreover, has to confront a few other facts. In the first place, many strategic goods are properly subject to government authority because they were developed with taxpayers' money. Another complicating factor involves the financing of sales to the Soviet Union and its satellites. Indeed, the question of skyrocketing Eastern bloc indebtedness—a large chunk to Western governments—is a matter of grave importance, with explosive implications for Western security.

Financial considerations aside, however, at bottom the crucial issue is national security. For, useful as economic calculations may be in this discussion, a more fundamental consideration is the government's quintessential duty to protect its citizens. Because of this duty, if the sale of high-technology goods poses a clear and present danger to its citizens, the government must see to it that such traffic is curtailed.

Is there really any point in discussing the financial advantages of helping our principal adversary destroy us? With characteristic directness, the father of the free market, Adam Smith, wrote in his Wealth of Nations in 1776: "Defense…is of much more importance than opulence." The statement appears to have impressed Smith as self-evident.

Smith understood well the economic implications of an embargo and was willing to admit that it could be, at least in the short run, unprofitable. He cited "the Navigation Laws" as an example of trade regulation that was deleterious to profit and efficiency. One effect of those laws, he told his countrymen, was that "[we] are thus likely not only to buy foreign goods dearer, but to sell our own cheaper, than if there was a more perfect freedom of trade." The reason he would nevertheless endorse such a policy: "As defense, however, is of much more importance than opulence, the Act of Navigation is, perhaps, the wisest of all the commercial regulations of England." No one can accuse Adam Smith of having advocated the pursuit of profit at any cost; on the contrary, that pursuit can only take place in an atmosphere free of threat, in a liberal society master of its own fate.

Today, that is what hangs in the balance. Vladimir Bukovsky said it brilliantly in his article "The Peace Movement and the Soviet Union," published in Commentary magazine in May 1982: "The issue now is not 'peace versus war,' but rather 'freedom versus slavery.' Peace and freedom appear to be inseparable, and the old formula 'Better red than dead' is simply fatuous. Those who live by it will be both red and dead." The solution to the Soviet threat is not to keep increasing our own defense spending, but rather, not to make it easier for the Soviet Union to increase and improve its arsenal.

Several news events in the past few years have focused the spotlight on US firms or individuals conducting illegal trade with the Soviet Union. For example, according to a document obtained by the Los Angeles Times in early 1980, investigators for the Department of Commerce had discovered that several companies were illegally exporting to the USSR equipment of use to the Soviet military. Spawr Optical Research, Inc., of Corona, California, was convicted on December 13, 1980, of using a West German intermediary to sell the Soviets laser mirrors despite warnings that such equipment would be used in killer satellites. Two northern California companies pleaded guilty to the charge that they shipped semiconductor equipment to dummy firms in Canada, then had it reexported to Switzerland for eventual receipt by Moscow. NBC television exposed the "California connection" in a fair, if brief, three-part series on East-West trade broadcast on the nightly news in December 1980.

What is most interesting about the NBC report, however, is that it also featured Lawrence J. Brady, a man who has pointed to the main offender in transfer of strategic technology to the Eastern bloc: our own US government. Previous to the NBC report, Brady had not exactly captured the front-page headlines. 60 Minutes, for example, had scheduled an interview with him to be aired on March 2, 1980, but it never materialized. Yet Brady, former deputy director of the Office of Export Administration before he was unceremoniously (and illegally) fired for blowing the whistle on his superiors, had quite a story to tell.

In testimony before the House Armed Services Committee in May 1979, Brady explicitly charged the Commerce Department with failing to adequately protect the national security interests of the United States by neglecting to conduct full investigations of persistent reports of Soviet diversion of our technology to military uses. These charges came shortly after the appearance of a report from the Defense Intelligence Agency citing massive transfer of US and other Western technology to the Communists.

Brady's charges also corroborated testimony by a CIA official regarding the military use of the largest truck plant in the world, Kama River, built in the USSR largely by American companies (with the help, incidentally, of taxpayer-funded Ex-Im Bank credits). Astonishingly calm, then-Commerce Secretary Juanita Kreps responded to these charges by disclaiming responsibility on the ground that "military use of that plant would not constitute a diversion or violation of the law because the licenses contained no restrictions to the use of those trucks or engines."

There was evidence, however, indicating that US companies did specify in their contracts that the Kama plant would be used only for civilian purposes. When confronted with two such contracts, the Commerce Department then backed off a bit and countered that only 19 of the 150 licenses reviewed for the plant had "end-use" clauses. So it seems that the Nixon administration—which made the original decisions concerning the plant—had indeed contemplated the plant's military use but had decided to keep this quiet. The blame, evidently, went considerably beyond the Commerce Department.

But Brady wasn't through. He came up with another explosive item: an internal Carter administration memorandum dated February 3, 1977, involving a similar American-built Soviet truck plant, the ZiL factory. The memo, concerning the approval of a $6.1-million computer to be used by the factory, reads as follows:

Problem is that a quarter of the 200,000 trucks [the plant] produces annually goes to the military, including 100 missile launchers. State and Commerce support approval, on grounds that U.S. government, aware of [its] military production, has licensed exports to it several times during the 1970's, that [the number of missile launchers] is small, and that the remaining trucks for the military are basically no different from heavy duty civilian trucks.

The evidence is irrefutable: neither the Commerce nor the State department objected to the military use of the ZiL factory. And their willing accomplice was none other than Jimmy Carter, his noisy anti-Soviet rhetoric notwithstanding. For a full story of executive culpability we would have to have access to mostly classified documents. But one thing is clear: the White House knew it was helping to strengthen the Soviet war machine.

Strategic trade with the Soviet bloc virtually mushroomed during the Nixon era and continued to proliferate no less promiscuously during the Carter years. Shortly after the Republican victory of 1968, Congress had liberalized the Export Control Act, thus making it much easier to trade with the Soviets. By the time of the Soviet invasion of Afghanistan in late 1979, the list of strategic items sold to the Russians by US firms had become truly staggering. According to the testimony of Lawrence Brady, who had been working in the Commerce Department, the list includes "semi-conductors, array transform processors, computers, machine tools, chemical processes, and turnkey projects combining non-strategic and strategic technology."

But even among those who find the situation deplorable, many come back to the old lament that if US companies don't sell someone else will and that embargoes are therefore useless. The flaws of that argument, however, especially when considered together with the reality of Communist countries' indebtedness, should give them pause.

In the first place, the data base for deciding foreign availability is, according to Lawrence Brady and other experts as well, often "weak to nonexistent." But it is certainly noteworthy that the US government rather than its Western allies has become the chief offender in seeking waivers of the CoCom (Coordinating Committee for Multilateral Export Controls) embargo against strategic traffic with Soviet bloc nations. In 1962, out of 124 requests for exceptions, the United States was responsible for only 1.6 percent; by 1978, that number had escalated to 62.5 percent of a total of 1,050. (A cutback since that time is a matter of too little too late.)

But these figures are merely indicative. And no system for determining foreign availability is currently available. A study by a private research group submitted to the Department of Commerce in 1980 concluded that "a system for making foreign availability assessments during the decade of the 1970's did not exist and such assessments were made on an ad-hoc basis." Moreover, the report said that interviews with government administrators and industry representatives indicated that determination of foreign availability was not a significant factor in reaching decisions on export licensing cases. As a matter of fact, US firms still have the competitive edge over other Western producers in several areas, such as computers, machine tools, radar components, jet engines, satellite reconnaissance systems, and myriad seismic tools used in oil exploration, of which underwater listening devices are the most sensitive.

Another interesting fact is that the Soviet government often prefers to do business with US giants like IBM and Control Data, sometimes even when a European competitor offers them a lower price. As Marshall Goldman pointed out in his 1975 study, Defense and Dollars: Doing Business with the Soviets, in such cases as the Kama River plant the Russians were set on having us help them build it. In Goldman's words, they "simply felt that American equipment and engineering were the best available and they wanted the best for their industry, regardless of the cost." Besides, "only the U.S. came close to matching the size of the Soviet market. Discussions with Soviet officials always leave one impressed with how preoccupied the Russians are with the importance of size."

The foreign availability argument is at times so thin as to raise serious suspicions about its validity when applied in other, less easily verifiable, instances. President Carter used it, for example, in the summer of 1978 to justify his approval of a controversial sale by Dresser Industries of a $144-million plant for the manufacture of deep-well oil-drilling equipment, even though a Defense Science Board task force headed by Texas Instruments president J. Fred Bucy had declared categorically that the technologies involved were "solely concentrated in the United States." Sen. Henry Jackson (D–Wash.) charged that the president, in ignoring the opposition of a National Security Council (NSC) task force, had succumbed to pressure from both the Commerce Department and Dresser Industries. The NSC opposition, by the way, was due partly to the fact that the Dresser sale included the transfer of a computerized electronic beam-welding machine that can be used to manufacture jet aircraft—to say nothing of its nuclear and even laser applications.

A good many corporate leaders appear quite ready to concede the shakiness of the foreign availability argument in many cases—computers, for example—but claim nonetheless that we should sell the Russians such sophisticated items because it will be profitable in the long run. After all, the Soviets, so the thinking goes, will need to buy maintenance equipment from us, and we will have a corner on that market for years to come.

The evidence, however, seems to point to an altogether different scenario. According to an article in the February 1980 issue of High Technology, for example, the Soviets had so far bought from US firms over 50 different models of computers, but most of them included the technological know-how enabling the Soviets to build their own. The amount of Western spare parts bought for those computers had been outright negligible. The reason is simply that the Soviets are, in fact, copying our machines. When some up-to-date integrated circuits exhibited by the Soviet Ministry of Electronics were examined closely a few years ago, they proved to be virtual copies of those made by Mostek Corp., an American pioneer in the business.

Nor are these computers insignificant to the Soviet military. The Eastern bloc's air defense system is believed to be built around IBM 360 and 370 computers. With an air traffic control system based on Western-manufactured radar devices and computers, the Soviets have air-defense control capabilities made possible by Western technology. We nevertheless go on supplying the Communist bloc with computers. Control Data alone has sold $50 million worth and is continuing to push vigorously for increased East-West trade.

Let not the idea of trade, however, obscure the highly singular character of commercial relations with the so-called nonmarket countries, whose ability to pay for the goods they need is, to put it mildly, very much wanting. Much of Eastern trade with Western firms, in fact, is subsidized by the taxpayers—this despite the already alarming debt of the Soviet bloc. It was alarming as far back as 1977 when its indebtedness to Western sources was only $40–$45 billion, as opposed to almost $90 billion today. The Wall Street Journal reported in February 1977 that many observers were becoming concerned about the possibility of Soviet blackmail. Today, the debt issue is clearly explosive.

And the USSR knows exactly what it is doing. The Soviet news agency TASS, on February 2, 1982, suggested that the Soviet bloc and the USSR had both the United States and Western Europe over a barrel on the debt repayment issue. Wrote TASS, "It should be recalled that Western Europe's business circles have long been at the existing situation from a notably more realistic viewpoint than Washington was until recently. The Times of London called on December 17 for displaying realism dictated by the West's own interests, for banks were 'hostages' to their debtors."

These Western credits, of course, are not simply private. Even when they are not explicitly guaranteed by the government, when crisis threatens the government steps in with taxpayers' funds. In the wake of the US government's bailout of banks over the Polish debt crisis in January 1982, it would be worth considering American investment specialist Felix G. Rohatyn's suggestion:

We should put the economic burden of the satellite states squarely back on the Soviet Union and point up the bankruptcy of the Communist system by declaring bankrupt one of its units. When the economic burden grows sufficiently heavy, the Soviet Union may become more accommodating and, together with the United States, may find it in its self-interest to reduce drastically defense budgets neither can really afford.

For surely it is bizarre for us to help the USSR in its aggressive designs—with obvious implications for our own safety, let alone our freedom.

The Soviet government, of course, is acting in a manner altogether sensible. Who, after all, can blame them for preferring not to pay if they don't have to? Even less can we object to their accepting with alacrity our generously offered gifts. US firms, for example, have trained hundreds of Soviet technicians in the United States. Teams of Soviet specialists—ostensibly looking into possible purchases—have been allowed to tour defense-related US plants. A member of one such group, which closely inspected the Boeing, Lockheed, and McDonnell-Douglas factories in 1973 and 1974, admitted privately to a Boeing official that purchases had never been contemplated—meaning, of course, that the group's real purpose had been industrial spying. Need we mention, too, those so-called student exchanges? In the words of a recent Office of Technology Assessment report, Technology and East-West Trade, "Since 1972, Soviet 'students,' who are usually experienced engineers, scientists, and managers of R&D establishments, have concentrated on study programs in the U.S. in semiconductor technology, computers, and other fields of applied research."

But if Soviet behavior is readily explicable, the same cannot be said for ours. Why do Western businesses and governments seem so anxious to overlook the cost of strategic trade with the Communist bloc? Part of the answer is that not quite everyone is losing—not, at least, losing equally—in this game. To be sure, the higher defense budget prompted by more sophisticated Soviet technology is borne by every taxpayer, individual and corporate, but companies like Control Data and Dresser Industries still appear to come out ahead, at least in the short run. As for government help with financing, many an American business owner has been known to overlook the source of his income. Should it surprise anyone that the US Chamber of Commerce is warmly in favor of increasing the budget of Ex-Im Bank?

What is less clear is why taxpayers are putting up with all of this. The most likely explanation is that they are not really aware of what is going on. An NBC news spot on East-West trade, for example, could hardly be expected to provide sufficient impetus for a revolt. The media, moreover, will now have even less information on this issue, thanks largely to the efforts of Congress.

In 1980, Congress carried off a maneuver to keep the lid on data concerning East-West trade. The National Journalism Center had attempted to obtain precise information—collected by the Commerce Department—on who is selling what to the Russians. When the Commerce Department balked, the center, invoking the Freedom of Information Act, took the case to court. Consistently enough, the courts declared that, absent legislation to the contrary, the Commerce Department had to open its files. Not unexpectedly, Congress obliged and came up with the required cover-up legislation. The bill, touted as a "compromise," permits access to only the most general data about what is being shipped East and allows shippers to conceal their identity by requesting confidential treatment. US firms do not have to worry now about irksome protests from mere taxpayers nosy about their national security.

Notwithstanding their legitimate quest for profit, one might think that business owners would be no less concerned than anyone else about contributing to the growing power of a nation whose leader announced less than a decade ago that by 1985 "the Soviet bloc countries will have achieved most of their objectives in Western Europe and reached a decisive shift in the correlation of forces so that they will be able to exert their will wherever they need to." But it seems that US business executives do not believe such statements of Soviet goals.

On the contrary, it appears that some of our own weapons manufacturers are eager, even impatient, to do business with the Soviet government. According to John Markoff, writing in Inquiry magazine in July 1980, "Some of the corporations at the very heart of the defense establishment" were angry at Jimmy Carter's embargo on strategic goods to the USSR because they found themselves "having to forgo lucrative trade opportunities in the name of national defense." Lucrative indeed, when the United States in turn must improve its own defense capabilities to catch up with the Soviets who—with our help—keep updating their war machine. The full picture apparently escaped Markoff, who saw a paradox where none exists. Puzzled, he continued: "The development of socialist high-technology markets has given rise to wonderful ironies: Major U.S. multinationals have set up pro-trade, pro-detente groups like the US-USSR Trade Council and the American Committee for East-West Accord, while at the same time retaining their charter memberships in anti-Communist defense spending organizations." What may seem ironic is by no means incomprehensible from a myopic pecuniary perspective.

The problem is actually of enormous proportions. According to a Washington-based confidential source, for example, one of the largest transnational corporations (for which he works) has been engaged in direct sales of electronic equipment to anti-West regimes. In one case, transmitting equipment was supplied to the Soviet puppet government in Afghanistan. It is no exaggeration to claim that the dimensions of this explosive item of information are immense.

If the evidence is presented to them, most taxpayers will readily see that they are, to put it politely, being had. But there are signs that the public, once its consciousness has been raised, is willing to stand up for its own safety and for its defense dollars. According to the Washington-based Investor Responsibility Research Center, shareholders in a number of companies have been asked in the last few years to vote on resolutions to terminate business and trade relations with Communist countries. One California group, Stockholders for World Freedom, proposed that Occidental Petroleum report the extent of its trade with the Communist bloc. A member of the group submitted a shareholder resolution asking Rockwell International (the Defense Department's 15th-largest military contractor) to cease all trade with Communist nations. The resolution reads in part:

Rockwell, as a prime defense contractor, ought not to be helping [Communist] threats to world peace and free societies. We should instead direct our resources toward our own economy and our Free World Allies. If you are considering voting against this proposal merely out of an abstract sense of political tolerance, consider further that you would be voting against the best long-run interests of yourself, your family, your corporation, and your free country.

All well and good. Yet the resolution contains a fatal flaw. In the words of Rockwell's board of directors:

To the extent that foreign trade with a particular country or countries is considered to be inconsistent with United States Government policy objectives, controls or embargoes are imposed. Decisions on these matters are properly in the domain of the Government and not, in our view, in the domain of corporations.

Without a doubt. Stockholders are entitled to expect a company to invest their money as profitably as possible. The business of business is surely business rather than foreign policy. This is not to say that Rockwell, any more than the rest of us, should be oblivious to the security of the United States. But the evaluation and implementation of national defense policy is the quintessential job of government.

It was John Locke who stated most plainly and eloquently, before this country was born, the principal reason why people form governments. "The great and chief end of men uniting into commonwealths and putting themselves under government, is the preservation of their property"—meaning, specifically, their "lives, liberties, and estates, which I call by the general name—property." Life, evidently, came first.

In truth, a great number of people would undoubtedly go along with the principle of an embargo on the sale of high-technology goods to the Communist countries were it possible to demonstrate beyond refutation that such a move would be absolutely effective in protecting our national security at a reasonable cost. Such rigid demonstration, of course, is impossible. All the evidence already adduced to illustrate the US contribution to the Soviet military cannot possibly provide proof of what would happen in the absence of that contribution. Yet to dismiss the evidence as irrelevant would be to abandon rationality altogether.

Opting for an embargo, however, is still a long way from imposing it effectively. The first problem is to determine with some degree of accuracy what items qualify as strategically significant enough to warrant controls. It has been argued, for example, that everything we sell, including wheat, contributes to the growth of the Soviet military insofar as assistance from us frees up funds for the Soviet war machine. While that argument is not without some merit, particularly if the wheat sales, for example, are subsidized, it is possible to make distinctions. Some items are clearly useful to the Soviets solely for military purposes (laser mirrors, for example). Others have a combined military and civilian usefulness (a truck plant, for example), and the strategic element must be carefully weighed. Still others contribute to the well-being of the Soviet population but are not of strategic significance.

It is high time we broke the vicious cycle of contributing to the Soviets' defense buildup and boosting our own defense spending to meet the challenge; of allowing, even encouraging, US firms to profit with the left hand from selling strategic technology to the Soviet government and with the right hand from building weapons for the US government. As American taxpayers face yet another grossly imbalanced federal budget in which defense appropriations are held sacred, the issue of strategic trade with the Soviet bloc cannot be ignored.

Juliana Geran Pilon is a policy analyst at the Heritage Foundation. She has a doctorate in philosophy from the University of Chicago.