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East-West Trade: The socialist countries of East Europe are increasingly interested in trade with both the West and the LDCs.

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
June 1973
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E. Amid-hozour and J. Somogyi

Faced with the need to reconstruct their economies after World War II, East European countries put great emphasis on the development of trade among themselves; trade with the rest of the world was considered as only supplementary. The 1960s saw a change in this situation; it became increasingly plain that economic cooperation between the East and the rest of the world could be mutually beneficial, and the role of foreign trade in Eastern Europe was adjusted accordingly.

During the 1960s trade became a part of domestic growth efforts, and its renewed importance reinforced links between East European economies and both developed countries and less developed countries. East-West trade expanded rapidly, and East European countries came to rely more and more on imports of manufactured goods from the developed countries. In order to finance these imports, East European countries sought to increase their exports to Western countries and cooperated with Western firms especially in the development of natural resources and the creation of industrial infrastructure. In addition, Western countries made credits available on an increasing scale in order to finance exports to East European countries.

East European countries together accounted for perhaps one third of total industrial output (East and West) in 1970, but for only some 10 per cent of total trade of the Eastern and Western countries (Table 1). The new decade accordingly opened with an awareness that there was room for a larger volume of trade with the West than then existed. In the last two years, this feeling has gained strength; recent economic changes in Eastern Europe seek, inter alia, to increase efficiency by encouraging exports, as well as to raise the share of consumption in national income—a move likely in itself to lead to higher imports.

Table 1.Indicators of World Population, Industrial Output, and Foreign Trade in 1970
Per Cent of TotalForeign Trade Turnover
PopulationIndustrial

output
Per cent

share
Per

capita US$
Developed countries21.555.069.3142
Less developed countries43.07.019.120
East European countries35.538.011.314
World100.0100.0100.043
Source: United Nations. Monthly Bulletin of Statistics, New York.
Source: United Nations. Monthly Bulletin of Statistics, New York.

Some characteristics

Foreign trade in the East and in the West differs significantly because of the two political systems.

A major determinant of trade flows in Western countries is relative prices which in turn reflect relative costs between countries. Within a Western economy, demand and supply are the most important factors determining prices. In East European countries, however, plans and planning requirements mainly determine trade flows, pricing policy does not necessarily reflect market conditions, and, moreover, domestic prices are largely insulated from external influences.

In an East European country trade is conducted by state organizations, whereas in Western countries trade is predominantly a matter for the private sector. Finally, since planners in Eastern Europe determine mainly what to produce and sell, competition does not play the same role in securing efficiency as it does in a Western economy.

Electrical goods for export from Romania: “during the 1960s trade became a part of domestic growth efforts.”

East European exports to the developed countries consist mainly of raw materials. Since East European countries are seeking to industrialize their economies rapidly, their demand for imports from developed countries is consistent and high. In contrast, difficulties can arise in connection with East European exports to developed countries. On the one hand, there is a limited market for primary goods in the developed countries (except for fuel and gas); on the other hand, the East European countries have not developed the kind or quality of manufactured goods that can be marketed easily in developed countries.

There is also a major difference in the role of services in East-West trade—particularly managerial services and tourism. Although management is often ignored in discussions of East-West trade, the reform-minded East European countries have long been interested in importing managerial as well as technical skills. A relatively less developed managerial ability is probably one of the most important comparative disadvantages of the Eastern countries compared with Western countries. Tourism from Western countries has been a rapidly growing industry in East European countries, notably in Hungary, Bulgaria, and Romania. It has been growing much faster than national income, and also faster than commodity exports.

Dimensions and geography

In 1970, the value of imports by the East European countries from all Western countries totaled US$8.7 billion, and the corresponding export total was US$7.6 billion (Tables 2 and 3). The East European countries’ imports from developed countries were US$7.0 billion, and their exports amounted to US$6.3 billion; the corresponding figures for the less developed countries were US$1.7 billion for imports and US$1.3 billion for exports. The largest trading country in Eastern Europe is the U.S.S.R. On the Western side, the largest trading country is the Federal Republic of Germany.

Table 2.Value of East European Countries’ Exports to the West in 1970(In millions of U. S. dollars)
To developed

countries
To less developed

countries
TotalPer cent

of total
(I)(II)(I + II)
Bulgaria249.166.6315.74.1
Czechoslovakia807.7167.5975.212.8
Eastern Germany443.589.0532.57.0
Hungary535.482.5617.98.1
Poland1,024.4184.61,209.015.8
Romania539.0140.2679.28.9
U. S. S. R.2,743.4557.13,300.543.3
Total6,342.51,287.57,630.0100.0
Source: IMF and World Bank Group, Direct/on of Trade, various issues.
Source: IMF and World Bank Group, Direct/on of Trade, various issues.
Table 3.Value of Western Countries’ Exports to East European Countries in 1970
In millions

of U.S. dollars
Per cent

of total
Developed countries
Austria368.44.2
Finland361.44.1
France647.07.4
Germany1,296.614.8
Italy701.88.0
Japan446.85.1
United Kingdom620.07.1
United States353.34.0
Yugoslavia538.56.1
Other1,663.219.0
Subtotal6,997.080.3
Less developed countries
Latin America318.33.6
Middle East646.27.4
Other Asian660.37.5
Africa (excl. South Africa)215.32.4
Other129.01.4
Subtotal1,711.119.6
Total8,708.1100.0
Source: IMF and World Bank Group, Direction of Trade, various issues.
Source: IMF and World Bank Group, Direction of Trade, various issues.

Throughout the 1960s, the percentage of world trade accounted for by developed countries grew from 65 per cent in 1961 to 69 per cent in 1970, but the share of East European countries remained unchanged at about 10 per cent.

Relative importance of East-West trade

East-West trade is of far greater importance to the East European countries, representing some 30 per cent of their total trade, whereas it represents only about 3.5 per cent of the total trade of the West. However, the relative importance of East-West trade differs markedly among individual countries. In 1970 the share of exports of East European countries with the West ranged from 23 per cent to 45 per cent (Table 4). It is highest for Romania and Poland, and lowest for the U.S.S.R. and Bulgaria. Similar patterns exist with regard to the share of imports of East European countries from Western countries, which range from 27 per cent for Bulgaria to 48 per cent for Romania.

Table 4.Share of East European Countries’ Exports and Imports to and from the West in 1970(In per cent of total)
Exports toImports from
Developed

countries
Less

developed

countries
Developed

countries
Less

developed

countries
(I)(II)(I + II)(IV)(V)(IV + V)
Bulgaria16.07.723.720.16.726.8
Czechoslovakia24.49.834.227.47.735.1
Eastern Germany23.85.629.427.85.032.8
Hungary31.06.037.031.66.337.9
Poland30.37.838.127.55.733.2
Romania34.510.545.040.97.448.3
U.S.S.R.18.94.423.323.87.831.6
Source: General Agreement on Tariffs and Trade, International Trade, Geneva.
Source: General Agreement on Tariffs and Trade, International Trade, Geneva.

Among the Western countries, Yugoslavia, Finland, and Austria have a considerably greater proportion of their trade with Eastern Europe than other Western countries. The shares of their exports to this area amounted to 32 per cent, 16 per cent, and 13 per cent, respectively, in 1970 (Table 5). The share of other West European countries averaged approximately 4 per cent. The United States, in contrast, sold less than 1 per cent of its total exports to Eastern Europe. A number of factors have contributed to the relatively high volume of trade between Western Europe and Eastern Europe: the geographic closeness, traditional trade connections, and structures of export industries and import demands that have favored intra-European trade.

Table 5.Share of Western Countries’ Exports and Imports to and from East European Countries in 1970(In per cent of total)
Share of exportsShare of imports
Developed countries
Austria13.05.1
Finland15.716.1
France3.62.4
Germany3.83.7
Italy5.35.5
Sweden5.04.7
Switzerland4.12.1
United Kingdom3.24.0
United States0.80.5
Yugoslavia32.020.5
Less developed countries
Latin America2.21.0
Middle East5.66.8
Asia (excl. Japan)5.02.8
Africa (excl. South Africa)1.92.4
Source: IMF and World Bank Group, Direction of Trade, various issues.
Source: IMF and World Bank Group, Direction of Trade, various issues.

The share of exports of less developed countries to Eastern Europe in 1970 represented slightly more than 3 per cent of their total exports. Although the trade of less developed countries is overwhelmingly with developed countries, even the small proportion of their exports going to East European countries is important to their overall growth effort.

What is East-West Trade?

East-West trade is defined as the trade of East European countries with developed and less developed countries as defined in Direction of Trade, a monthly published jointly by the Fund and the World Bank Group. East European countries comprise Bulgaria, Czechoslovakia, Eastern Germany, Hungary, Poland, Romania, and the U.S.S.R.

Developed countries comprise the industrial countries (Austria, Belgium, Canada, Denmark, France, the Federal Republic of Germany, Italy, Japan, Netherlands, Norway, Sweden, Switzerland, the United Kingdom, and the United States), and other developed areas (Australia, Finland, Greece, Iceland, Ireland, Malta, New Zealand, Portugal, Spain, South Africa, Turkey, and Yugoslavia).

Less developed countries comprise the other countries listed in Direction of Trade. The following countries are excluded from this study: Albania, mainland China, Cuba, Mongolia, North Korea, and North Vietnam. These exclusions amount to about 20 per cent of the value of East-West trade. Furthermore, trade between the Federal Republic of Germany and Eastern Germany is not included in the national foreign trade statistics and, therefore, is not treated as part of East-West trade. The value of this trade amounts to about 6 per cent of the value of East-West trade.

Commodity structure

Two thirds of total world trade, including trade between East European countries, is in manufactures and one third in raw materials (Table 6). The pattern of the total trade of East European countries, including trade between themselves, is divided in this way in almost exactly the same proportions. But in their trade with the West, East European countries are much more dependent on raw materials, which account for 45 per cent of exports and 39 per cent of their imports. The commodity structure of the trade of Eastern Europe with the West is far from uniform. Trade with developed countries consists of a small proportion of exports of manufactures from Eastern Europe, and a large proportion of imports of manufactures from the developed West. In trade with the less developed countries, the reverse applies: East European exports to the latter are dominated by manufactures, while East European imports from these countries are primarily raw materials.

Table 6.Composition and Direction of Exports in 1970(In billions of U. S. dollars)
TODeveloped

countries 1
Less

developed

countries
East

European

countries
All

countries
FROM
Developed countries
Nonmanufactures42.07.11.450.5
Manufactures128.033.55.5167.0
Total170.040.66.9217.5
Less developed countries
Nonmanufactures30.87.32.340.4
Manufactures8.93.30.412.6
Total39.710.62.753.0
East European countries
Nonmanufactures3.50.74.78.9
Manufactures2.82.312.717.8
Total6.33.017.426.7
All countries
Nonmanufactures76.315.18.499.8
Manufactures139.739.118.6197.4
Total216.054.227.0297.2
Source: UN, Monthly Bulletin of Statistics, July 1972.

Definitions of areas differ from that of Direction of Trade.

Source: UN, Monthly Bulletin of Statistics, July 1972.

Definitions of areas differ from that of Direction of Trade.

Eighty per cent of East European imports from the developed countries in 1970 were manufactured goods, mainly machinery and equipment (Table 7). The raw materials imported from the developed countries include cereals and wool. In the East European exports to the developed countries, raw materials have a large share (56 per cent); they consist of agricultural products, minerals, metals, and natural gas. Exports of manufactured products comprise mostly less sophisticated consumer goods and semifinished products.

Table 7.Composition of Trade of East European Countries(In per cent of total)
19601970
ExportsImportsExportsImports
With developed countries1
Nonmanufactures68285620
Manufactures32724480
Total100100100100
With less developed countries1
Nonmanufactures25902385
Manufactures75107715
Total100100100100
Source: UN, Monthly Bulletin of Statistics, Direction of Trade, various issues.

Definition of areas differs from that of Direction of Trade.

Source: UN, Monthly Bulletin of Statistics, Direction of Trade, various issues.

Definition of areas differs from that of Direction of Trade.

The structure of the trade with the less developed countries is—not surprisingly—very different. The share of manufactures in the East European countries’ exports to the less developed countries was 77 per cent in 1970, only slightly higher than in 1960 (Table 7). The manufactured exports to the less developed countries consist of machinery and industrial goods, such as tractors, textile machinery, sugar refineries, and military equipment. The East European imports from the less developed countries are dominated by raw materials (85 per cent of total). The reasons for this difference in the commodity structure of trade with less developed countries are obvious enough, being based on the demand and supply situation in the respective areas.

Development of East-West trade

(1) 1960-70.—During the 1960s, imports by East European countries from developed countries not only grew faster than East European industrial production but also faster than the area’s imports from all Western countries. Industrial production in the 1960s rose at an average annual rate of 8 per cent in the East European countries and at 7 per cent in developed countries. In the same period, East European imports from the developed countries rose at an average annual rate of 12 per cent, while their total imports rose at an average annual rate of only 6.5 per cent. During 1960-69, East European countries’ exports to the developed countries increased at an average annual rate of 10 per cent.

Among the West European countries, Germany, Italy, and France experienced export surpluses with the East European countries while the United Kingdom had a deficit. Average rates of growth of East European countries’ exports varied between 7.5 per cent and 15 per cent. Romania and Bulgaria, with low starting bases, achieved the highest rate of export growth, whereas the rates of growth for Poland and Eastern Germany were much lower. In the last few years, Hungary, Poland, and Czechoslovakia were able to accelerate the rate of growth of their exports to developed countries, while the rate of growth of exports of the U.S.S.R. and Eastern Germany slowed down markedly. Imports by East European countries from less developed countries grew at an annual rate of 10 per cent in the 1960s, whereas exports of East European countries to less developed countries rose at an annual rate of 12 per cent.

(2) 1970-71.—The most recently completed Five-Year Plans of the East European countries covered the years 1966–70. In 1970, there was an acceleration of imports from developed countries, particularly in the first half of the year, as import allocations that had not been taken up earlier were utilized while they were still available. Romania, Poland, and Bulgaria achieved the fastest rates of export growth to developed countries in 1970, with increases of more than 20 per cent. The exports of other East European countries to the West rose by between 12 per cent and 15 per cent.

In 1970-71 practically all developed countries increased their imports from Eastern Europe in about the same proportion as their total import growth. This marks a departure from the pattern during the 1960s. Another feature of recent East-West trade developments has been an increase in the import surplus of East European countries coupled with a corresponding increase in trade credit to these countries.

The pattern and structure of East-West trade are complex and changing. They depend in part upon the economies of the East and of the West and in part upon political attitudes to trade. Moreover, the situation of individual countries within each of the two broad groupings differs significantly. The evidence of the 1960s is that both Eastern and Western countries have become increasingly aware that a growing volume of trade can be mutually beneficial.

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