There are indications that a stage has been reached in East-West trade and payments relations1 when their development might be expected to accelerate. During the 1960’s most of the Eastern European countries began to implement economic reforms, and, despite difficulties and setbacks, on the whole the movements in this direction have continued to gather momentum. The reforms were introduced and have taken shape in response to broadly similar problems and have exhibited certain common features, such as increasing decentralization of economic decision making, a greater readiness to use prices as a basis for economic decisions, and, to some extent, the reinstatement of what is in effect a modified “profit motive.” A continuation of these tendencies seems likely to facilitate rather than to impede more extensive East-West economic relationships. At the same time some countries, both developed and developing, have a growing interest in the potentially large markets in the Eastern countries. In view of these trends, a selective survey of East-West trade and payments relations in recent years is of some interest; this is what the present paper provides. It also examines the role of bilateralism in East-West trade and, in particular, how some countries are able to trade with Eastern European countries without entering into bilateral trade and payments agreements and discusses the question whether their experience furnishes guidance for other countries.

Abstract

There are indications that a stage has been reached in East-West trade and payments relations1 when their development might be expected to accelerate. During the 1960’s most of the Eastern European countries began to implement economic reforms, and, despite difficulties and setbacks, on the whole the movements in this direction have continued to gather momentum. The reforms were introduced and have taken shape in response to broadly similar problems and have exhibited certain common features, such as increasing decentralization of economic decision making, a greater readiness to use prices as a basis for economic decisions, and, to some extent, the reinstatement of what is in effect a modified “profit motive.” A continuation of these tendencies seems likely to facilitate rather than to impede more extensive East-West economic relationships. At the same time some countries, both developed and developing, have a growing interest in the potentially large markets in the Eastern countries. In view of these trends, a selective survey of East-West trade and payments relations in recent years is of some interest; this is what the present paper provides. It also examines the role of bilateralism in East-West trade and, in particular, how some countries are able to trade with Eastern European countries without entering into bilateral trade and payments agreements and discusses the question whether their experience furnishes guidance for other countries.

There are indications that a stage has been reached in East-West trade and payments relations1 when their development might be expected to accelerate. During the 1960’s most of the Eastern European countries began to implement economic reforms, and, despite difficulties and setbacks, on the whole the movements in this direction have continued to gather momentum. The reforms were introduced and have taken shape in response to broadly similar problems and have exhibited certain common features, such as increasing decentralization of economic decision making, a greater readiness to use prices as a basis for economic decisions, and, to some extent, the reinstatement of what is in effect a modified “profit motive.” A continuation of these tendencies seems likely to facilitate rather than to impede more extensive East-West economic relationships. At the same time some countries, both developed and developing, have a growing interest in the potentially large markets in the Eastern countries. In view of these trends, a selective survey of East-West trade and payments relations in recent years is of some interest; this is what the present paper provides. It also examines the role of bilateralism in East-West trade and, in particular, how some countries are able to trade with Eastern European countries without entering into bilateral trade and payments agreements and discusses the question whether their experience furnishes guidance for other countries.

There is an extensive literature on East-West trade. In this respect particular reference should be made to studies prepared by the Economic Commission for Europe (ECE). Problems that arise in trade relations between countries having different economic and social systems are also under study in the United Nations Conference on Trade and Development (UNCTAD). As much as possible, this paper seeks to avoid unnecessary duplication of information readily available elsewhere but, where it seems appropriate to illustrate a point, the author has not hesitated to quote from documents prepared by persons with expertise in this subject.

I. A Brief Factual Background

A variety of other than economic factors has affected the growth, composition, and direction of the CMEA countries’ trade with each other and with the rest of the world. Historical, political, and cultural influences, geographical location, and transport and communications have each played a significant part, although in a manner and to an extent that cannot be assessed quantitatively. Thus, some CMEA countries comprise the traditional and most accessible markets (in terms of transport facilities) for particular exports of certain other countries. Afghanistan affords one example of such a country: one third of Afghanistan’s total exports and over four fifths of its exports of cotton are to the U.S.S.R. Other examples are afforded by Greece and Finland, which export about 18 per cent of their total exports to CMEA countries but considerably higher proportions for certain of their export commodities—citrus fruit from Greece and machinery and transport equipment from Finland.

In this paper the data in tables in the text and in the Appendix, which also include information about bilateral trade and bilateral payments agreements with the CMEA countries, are generally for 1960 and 1966. While this period is relevant for most purposes of the paper, the data do not fully bring out some aspects of the CMEA countries’ trade that are significant in any consideration of longer-run trends; to appreciate some changes that have occurred in the post-war period, longer-run comparisons with prewar years are helpful (see Table 12 in the Appendix). Thus, a comparison of prewar and postwar years indicates that exports of foodstuffs and raw materials now comprise a smaller proportion of the CMEA countries’ total exports, while exports of industrial and manufactured goods comprise a considerably larger one. On the import side an opposite relative shift has occurred. The CMEA countries, especially the U.S.S.R., are not only periodically major markets for such foodstuffs as wheat but also regular importers of substantial and, as Table 4 indicates, growing quantities of beverages and tobacco as well as some other primary products.

Over the period 1960–66 the foreign trade of the CMEA countries grew at about the same annual rate, approximately 8 per cent, as the trade of the rest of the world (see Table 1). Consequently, their share in total world trade did not alter appreciably: in 1966 their exports were equivalent to just over 10 per cent of world exports and their imports to a fraction under 10 per cent. However, since 1960 the geographical distribution of their trade has altered. Trade within the CMEA group has grown approximately at the same rate as the group’s total trade, and consequently the share of intra-CMEA trade has remained more or less unchanged at slightly over 60 per cent (see Table 2). However, the trade of CMEA countries with mainland China, etc., underwent a sharp absolute contraction, and its percentage share in the total trade of CMEA countries dropped from about 11 per cent to about 3–4 per cent; at the same time the CMEA countries’ trade with the rest of the world grew somewhat faster than their total trade and the rest of the world’s share rose from about one fourth to about one third of their total trade. Within this group, sharp gains were posted in the trade with developing countries, as imports from them more than doubled and exports to them nearly tripled in the six-year period. This substantial relative expansion is partly attributable to the comparatively small absolute level of trade between the CMEA countries and developing countries in 1960. In that year the developing countries supplied 7 per cent of the CMEA countries’ imports and took about 6 per cent of their exports. By 1966 these proportions had grown to 10 per cent and 11 per cent, respectively; in the same year, developing countries were supplying 22 per cent of the imports of the developed areas and were taking 21 per cent of their exports.

Table 1.

CMEA Countries: Pattern of Trade, 1960 and 1966

(Value in billions of U.S. dollars)

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Source: United Nations, Statistical Office, Monthly Bulletin of Statistics, May 1968.

Imports of the CMEA countries except Hungary are valued f.o.b.

Excluding Albania, mainland China, Mongolia, North Korea, and North Viet-Nam.

Table 2.

CMEA Countries1: Trade by Regions, 1960–66

(In billions of U.S. dollars)

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Sources: United Nations, Statistical Office, Monthly Bulletin of Statistics, March 1966 and March 1968.

Including Albania. Trade between the Federal Republic of Germany and Eastern Germany is excluded.

Components may not add to totals owing to imperfect coverage of data and also to rounding.

Annual compound percentage rate of increase of trade value between 1960 and 1966.

As regards the commodity composition of the CMEA countries’ foreign trade with countries outside that group (see Table 3 and Tables 1316, in the Appendix), the growth of exports of industrial goods was appreciably faster than that of foodstuffs and raw materials and their proportion in total exports of CMEA countries rose from 43 per cent in 1960 to 51 per cent in 1966. This faster growth of industrial exports was attributable almost entirely to the shift in the composition of exports to developed areas as the relative proportions of foodstuffs plus raw materials and of industrial goods in the exports to developing countries remained unchanged. On the import side, the relative shares of industrial goods and of foodstuffs plus raw materials in total imports of CMEA countries changed only marginally in favor of the latter. However, the share of industrial goods in the imports from developing countries rose from 7 per cent in 1960 to 13 per cent in 1966, while in the imports from developed countries it dropped from 71 per cent to 69 per cent in the same period. Growth in CMEA countries’ imports of some important primary commodities is brought out in Table 4. The share of their imports in total world imports of all primary products included in that table, with the exception of wool, increased in the period 1960–65. Nevertheless, for commodities such as coffee, tea, and jute, their share continued to be relatively small.

Table 3.

CMEA Countries: Commodity Structure of Trade with the Rest of the World, 1960 and 1966 1

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Sources: Tables 13 and 15, in the Appendix.

Excluding mainland China, etc.

Annual compound percentage rate of increase from 1960 to 1966.

Table 4.

CMEA Countries: Imports of Certain Primary Products, 1960 and 1965

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Source: Compiled from Food and Agriculture Organization (FAO), Trade Yearbook, 1966. The data include FAO estimates.

Excludes Rumania.

Excludes Bulgaria.

Available data on some Fund member countries’ total exports and imports and the proportions of each accounted for by trade with the CMEA countries are set out in Table 19, in the Appendix. The data relate to 110 countries. As the summary in Table 5 indicates, for well over half this number trade with the CMEA countries accounted for a small proportion of their total trade in 1966.

Table 5.

Fund Member Countries: Proportions of Trade with the CMEA Countries, 1966

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Source: Table 19, in the Appendix.

There were 14 countries whose exports to the CMEA countries were equivalent to 10 per cent or more of their total exports in 1966: Afghanistan, Austria, Cyprus, Finland, Ghana, Greece, Iceland, India, Morocco, Sudan, the Syrian Arab Republic, Turkey, the United Arab Republic, and Yugoslavia. All these countries maintained bilateral trade and payments agreements with some or all of the CMEA countries. Among the countries in the “less than 5 per cent” group are all the industrialized countries as well as numerous developing countries. For many countries in both these categories the proportion of total exports that went to the CMEA countries was less than 1.0 per cent. Such a small proportion raises two obvious questions: what factors limit the value of trade with the CMEA countries? Would efforts to secure a larger proportion improve a country’s total exports and foreign trade position? These, of course, are important questions, and they are considered below.

II. CMEA Countries’ Trade Policies and Arrangements 2

The organization of foreign trade and its relation to economic plans

It is not possible to encompass all the features of each of the CMEA countries’ foreign trade and payments arrangements in a paper such as this, and the following section presents a selective survey of them.

A basic feature of the CMEA countries’ foreign trade is that it is an integral part of their national plans and is subject to centralized coordination and control. In the U.S.S.R., for example, the coordination and control of economic planning and its implementation is undertaken by the Supreme Economic Council, which is responsible to the Council of Ministers and coordinates the work of the various state committees including the All-Union Gosplan. Gosplan is the main planning organization and as such is concerned with wholesale and retail distribution, foreign trade and exchange, wholesale and retail prices, and the coordination of the U.S.S.R.’s economic plan with the plans of the other CMEA countries.

The foreign trade plan, which embraces imports and exports for the plan period, is designed to attain a long-term balance on goods and services account. It is drawn up by the Ministry of Foreign Trade on the basis of short-term plans prepared by the foreign trade organizations and the Gosbank and submitted to the Gosplan. In drawing up their import plans, the organizations take account of orders received from factories and distributive organizations, the national plans for production, investment, and consumption, conditions in foreign markets, and bilateral agreements. The import requirements, couched in physical terms and geared to the national plan, are the basic determinant of exports. The export plans are based on the volume and foreign value needed to balance imports; they also take into account obligations under bilateral and barter agreements. The final trade plan, as approved by Gosplan, allows for some degree of flexibility in its implementation in response to changing needs and subsequent policy adjustments.

The Ministry of Foreign Trade is also the central administrative agency in the trade field; in addition to preparing over-all foreign trade plans, it supervises the activity of trade missions abroad and is responsible for negotiating and for supervising the implementation of trade treaties as well as payments and other foreign economic agreements. It controls the quality of exports and imports, deals with currency, tariff, and transport questions, and issues import and export licenses. In the U.S.S.R., the Ministries of the Merchant Marine and of Internal Trade, in addition to the Ministry of Foreign Trade, are concerned with trade matters, and a State Committee for Foreign Economic Relations was established to handle the export of equipment for complete factories; this Committee also supervises the activity of some foreign trade organizations.

Detailed implementation of the foreign trade plan is left to special foreign trade organizations under the control of the Ministry of Foreign Trade. The organizations generally act as juridically independent intermediaries between domestic agencies and enterprises and foreign firms. On the export side they submit requests for exportable goods to Regional Economic Councils or other appropriate agencies; on the import side they function as purchasing agents of domestic enterprises, which submit import requisitions after having received the necessary authorization. As a rule they are established to handle specific commodities or services and do not compete among themselves. In the U.S.S.R. there are 32 such organizations, each headed by a chairman assisted by several deputies who are in charge of operational offices that handle the lists of commodities or equipment for which the organization is responsible.3 Another form of trade organization is the establishment abroad of a corporation to act as an agent for the foreign trade organizations, for example, the Amtorg Trading Corporation set up by the U.S.S.R. in New York. Yet another is the establishment of a company abroad in association with foreign firms, for example, the Russian Wood Agency in which V/O “Exportles” and a U.K. firm participate; the agency handles the sale of U.S.S.R. timber to the U.K. market.

Trade missions are integral parts of the diplomatic representation of the CMEA countries and in addition to trade promotion activities are responsible for trade operations in the host country, including the preparation of contracts and the issuance of certificates of origin and of transit permits. Many of the foreign trade organizations also have their own foreign distributors. The national chambers of commerce of the CMEA countries are primarily interested in foreign rather than domestic trade and provide another avenue for trade contacts. However, some have established joint chambers of commerce with their counterparts in other countries, and representatives of the Chambers of Commerce in Bulgaria, Czechoslovakia, and Hungary have cooperated with Chamber of Commerce leaders from other countries in efforts to settle various technical trade questions, such as the definition of trade terminology and the arbitration of contract disputes.

A useful discussion of the impact on the planning, organization, and operation of foreign trade of economic reforms being initiated in the CMEA countries is contained in an UNCTAD secretariat report on trade relations among countries having different economic and social systems.4 The measures taken have led to some decentralization in decision making, greater scope for producing enterprises to participate directly in foreign trade, and an increase in the number of enterprises and agencies operating in foreign markets. In some CMEA countries the central authorities have moved away from detailed foreign trade planning and are leaving it to enterprises to operate freely within over-all export targets or import quotas. In Hungary, for instance, there is some experimentation with the discontinuation of the separation of enterprise operations into those in national and foreign markets in favor of the incorporation of export earnings and import costs into the over-all accounts of the enterprise. As a part of the trend to loosen the foreign trade operations, in some countries authorization to engage in foreign trade is increasingly being given to industrial and agricultural enterprises, cooperatives, retail trade firms, research organizations, and design bureaus. In 1968 the number of such enterprises more than doubled in Hungary and tripled in Czechoslovakia. Even in those countries where foreign trade organizations are still mainly responsible for foreign trade operations, exporting industries are increasingly being given a greater role in decisions concerning their foreign trade operations.

Trade policies

The first point to be made about the CMEA countries’ policies on trade with countries outside their group is that the policies are not uniform, rigid, or static; they have been particularly in flux in recent years, partly as a consequence of the general trend toward a reform of economic institutions as well as operating principles and practices. Compared with the prewar years, one of the main changes in the trade policy and practices of the CMEA countries has been the shift from buying commodities on international markets to purchasing directly from producing countries. The process has been gradual and, it has been argued,5 did not yield significant economic gains as long as the producing countries required payment for their exports in convertible currencies. However, the inclusion of such puchases within the framework of bilateral payments agreements enabled the CMEA countries gradually to link their purchases with payment in kind, i.e., to deliveries of manufactured goods.

The preference of CMEA countries for bilateral trade based on agreements that may or may not contain bilateral payments provisions reflects several factors directly related to their systems of economic planning and management, but it is also probably attributable to the constraint imposed by their earnings and holdings of convertible currencies.6 The preference may be illustrated by the fact that at the end of 1967 the 7 CMEA countries maintained 184 bilateral trade and payments agreements with 42 Fund member countries; they were also parties to more than 200 trade agreements with Fund members. The first of the factors underlying the reliance of CMEA countries on bilateralism is that, although some flexibility has been introduced into the CMEA countries’ foreign trade with the recent changes in economic management, foreign trade remains an integral part of their national economic plans and is subject to centralized coordination and control. The reasons for central control—in addition to political considerations—are primarily to ensure that the minimum amounts of imports needed for the “material balance” are made, and that sufficient exports are made to balance imports. Bilateral trading is considered to reduce uncertainty about achieving the “material balance” and about attaining the import and export aims. A related reason is that state control allows the authorities to adjust relatively quickly the composition, geographical distribution, and total of imports to changing circumstances.

In recent years the CMEA countries in varying degrees have introduced measures designed to increase their participation in international trade and to improve their capacity to export for payment in convertible currencies. To some extent these efforts are a part of the over-all economic reform programs designed to raise productive efficiency and to make production more responsive to the requirements of the final buyer, whether domestic or foreign. They are also partly related to the dissatisfaction of some CMEA countries with the operation and results of intra-CMEA trade. The export promotion efforts have taken several forms. According to UNCTAD,

30. The U.S.S.R. has been giving special attention to some export-oriented industries, especially in respect of quality controls and after-sales servicing. Branch “export councils” consisting of production and foreign trade managers were created with a view to ensuring continuous contact in export matters. Also, deputy ministers for exports were appointed for some industries heavily involved in foreign trade.

31. In Poland, enterprises producing goods for export have obtained special facilities and priorities in respect of materials allocation, investment credit, foreign exchange apportionment, easing of the wage fund and employment regulations.

32. Czechoslovakia has been experimenting with competitive bidding for the allocation of foreign exchange to projects promising the greatest and quickest return, and more particularly, to those which were to increase export earnings. . . .

40. In one way or another, bonuses for export performance are being applied. In some cases the sharing in the export earnings [by enterprises concerned] has been the best incentive. In the U.S.S.R. foreign exchange premia are being given to producers for extra-plan exports. Fifty per cent of the foreign exchange return from exports of licenses and know-how may be retained in order to be used for imports of technology by the institution concerned and the supervising ministry.

41. Polish producers can benefit from the betterment of foreign trade results by outperforming the average index of export profitability.

42. In Eastern Germany, an enterprise which exceeds its export target acquires a claim to foreign currency for additional imports of goods or services or to conversion into national currency at a premium rate. Also, Eastern Germany has been trying to link together the import interests and export performance of enterprises which are engaged on both sides of foreign trade. In cases where imports cannot be curtailed because of binding international commitments, the enterprise incurs a debt in the so-called “Valuta Mark” and pays interest on it.7

The export promotion efforts have also meant a greater readiness to trade on a multilateral basis and, for several CMEA countries, to participate actively in UNCTAD and in the General Agreement on Tariffs and Trade (GATT). Czechoslovakia is an original contracting party to the GATT, while Poland acceded to the General Agreement in 1967. Rumania and Hungary have applied for GATT membership, and Bulgaria has observer status.

Customs tariffs

In the past, tariffs have not been used as instruments for providing protection to domestic industry in the CMEA countries but have been important in their external trade, insofar as they tend to influence the importing organizations’ choice of foreign suppliers. The CMEA countries are critical of what they consider to be discriminatory treatment against them, especially by the European Economic Community (EEC) and the European Free Trade Association (EFTA), and the U.S.S.R. argues that the countries with which it has trade agreements that include the most-favored-nation (MFN) clause violate the agreements when they participate in free trade arrangements and do not extend the same advantages to the U.S.S.R. Accordingly, the U.S.S.R. administers its double-column tariff to make the higher rate applicable to imports from those countries that it considers do not grant it MFN treatment. The report of the GATT Working Party established to examine Poland’s application to accede to the General Agreement noted that “the Foreign Trade Plan rather than the customs tariff was the effective instrument of Poland’s commercial policy.”8 The Working Party agreed that Poland’s main concession in the negotiations for its accession would be commitments relating to an annual increase in the value of its imports from contracting parties. In the Protocol for Poland’s accession to the GATT, provision accordingly was made for an annual consultation with the Contracting Parties “with a view to reaching agreement on Polish targets for imports from the territories of the contracting parties as a whole in the following year.” 9

However, the reorientation in recent years in the CMEA countries with respect to economic policy tools has involved tariffs, too. A dual customs tariff was introduced by Hungary in 1961 and was designed both to help establish a more realistic relationship between domestic wholesale prices and foreign trade prices and to enable Hungary to retaliate against discriminatory duties imposed on Hungarian goods.10 As part of the economic reform, a three-column tariff has entered into force comprising preferential duties (payable on products of developing countries under international agreements), MFN duties, and maximum duties. The latter are applicable to countries that discriminate against Hungary. The ad valorem MFN duties range from 0–5 per cent (raw materials) to 10–50 per cent (finished goods). Czechoslovakia is also modernizing its customs tariff so that it may become an element in determining import costs and, as such, influence economic decisions governing the choice between producing domestically and buying abroad.

The exchange and payments system and external assistance

Exchange rates and payments

As already noted, the Eastern European countries conduct their foreign trade within the framework of bilateral agreements and the volume is strictly controlled; with few exceptions it is not influenced directly, especially in the shorter run, by changes in the level of their domestic prices. Moreover, as it is conducted on the basis of world market prices denominated in convertible currencies, official exchange rates are not as important in determining the volume and composition of trade flows as they are in market economy countries. These rates, together with rates applicable to certain transactions such as tourist expenditures in the individual countries or remittances to support resident nationals, are set out in Table 6.11

Table 6.

CMEA Countries: Exchange Rates of Currencies

(March 1970)

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These rates also apply to the exchange by nonresidents of convertible currencies for support payments to residents and for diplomatic expenditures in the country.

Valuta-mark.

Transactions with most Western European and other countries with which bilateral payments agreements are not maintained are settled mainly by cash payments in convertible currencies, usually sterling or U.S. dollars, although other methods may also be used, i.e., credit or parallel trade and/or switch deals.12 In the area of cash settlements, the London-based Moscow Narodny Bank and the Paris-based Banque Commerciale pour 1’Europe du Nord play major roles. In October 1966 a new U.S.S.R. bank, Wozchad Handelsbank, was opened in Zurich. Both the London and Paris banks specialize in the financing of East-West trade. Judging from the trade data contained in Table 2, it would seem that approximately two thirds of the CMEA countries’ total trade with other countries outside that group is conducted on the basis of convertible currencies and about one third within the framework of bilateral payments arrangements. Of that third, the trade of Austria, Finland, Greece, India, the United Arab Republic, and Yugoslavia accounts for the major share. To the extent that transactions between the CMEA countries and other countries are not bilaterally balanced over a given period, the settlement of balances in excess of swing limits may entail either deliveries of goods or the payment of convertible currency. In the absence of complete data on the CMEA countries’ holdings of gold and foreign exchange, and on their balance of payments situations, it is not possible to judge whether they hold adequate reserves and are accumulating or losing reserves. However, the periodic sales of gold by the U.S.S.R., the package deals involving the provision of credit by Western European countries, special credit arrangements, and the recourse to special compensation arrangements strongly suggest that the CMEA countries, or some of them, are under periodic reserve pressure.

The problems arising from the accumulation of bilateral clearing balances have sometimes been mitigated through switch deals and through multilateral compensation procedures. Thus, the partner countries may agree to permit the creditor to utilize the balance to make payments for deliveries from a third country or to transfer the balance to its clearing account with a third country. Bilateral balances may sometimes be turned into convertible currency through a switching operation after deduction of a certain discount. Most of the CMEA countries have also on occasion participated in the multilateral compensation procedures organized under the auspices of the ECE. These procedures began in July 1957 and up until April 1968, 91 compensation circuits, comprising 348 links, with a total value equivalent to $134.2 million, had been arranged.13 Other countries that have participated are Argentina, Austria, Brazil, Cuba, Denmark, Finland, France, Ghana, Greece, Iceland, Israel, Mali, Morocco, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, the Syrian Arab Republic, Tunisia, Turkey, the United Arab Republic, Uruguay, and Yugoslavia.

The administration of control over foreign exchange transactions

In the CMEA countries all foreign exchange transactions are controlled by the State Banks (and in some instances also by the Foreign Trade Banks and the state-owned commercial banks). The management of foreign exchange holdings from the establishment of foreign exchange budgets to decisions on the distribution of exchange balances among various currencies and depositories involves close cooperation between the State Banks and the Ministries of Finance.

Resident nationals of the CMEA countries may receive foreign exchange remittances for their support or as payment for services (such as royalties), but in most countries they must convert them to the national currency or spend the foreign exchange in special stores.14

With the growth of travel among the CMEA countries and the greater contact of their nationals with other countries, the rules governing currency exchanges have gradually been relaxed, and the facilities for such exchanges have been expanded. However, the export and import of currency is prohibited in order to prevent the development of black markets in the banknotes of the countries.

Funds for travel to other CMEA countries are usually provided in the form of travelers checks denominated in the currency of the country the tourist plans to visit. These checks were introduced in 1955 and are issued by each State Bank for sale by all the other State Banks. For example, U.S.S.R. tourists going to Rumania pay rubles to the State Bank of the U.S.S.R. for the purchase of travelers checks issued in lei by the State Bank of Rumania.

In most countries foreigners may open two kinds of account in foreign currencies: one (called “Account A” in the U.S.S.R.) may be used only for domestic payments after conversion into the local currency; the other (“Account B”) may also be used for payments abroad.

Development assistance and export credits

Assistance from the CMEA countries to developing countries takes the form of grants, state credits, commercial credits, and state commercial credits; of these, the state credits are the most significant. Institutional arrangements and credit terms pertaining to the different types of credit, briefly, are as follows:

State credits. State credits are usually granted on a government-to-government basis within the framework of bilateral economic cooperation agreements, under which the creditor country agrees to provide machinery and equipment for certain projects together with engineering services, while the recipients agree to provide labor and locally produced materials. These are financed directly from the budgets.

The credits are essentially for economic “assistance” and are closely related to the development programs of recipient countries. The main stress is laid on the establishment of industrial complexes and branches of industry rather than on the construction of single plants. They are usually granted at an interest rate of 2.5 per cent to 3 per cent per annum and are repayable over a period of 8 to 13 years (Table 7), starting one year after the delivery or installation of the equipment. Repayment may be carried out in traditional export commodities or locally produced goods, including goods manufactured with the equipment purchased with the credit.

Table 7.

CMEA Countries: Terms and Conditions of State Credits 1

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Source: Prepared from United Nations, Department of Economic and Social Affairs, Export Credits and Development Financing: Part II, National Export Credit Systems (New York, 1967).

In mid-1966.

Commercial credits. Commercial credits are granted in connection with a particular transaction or contract by foreign trade organizations of the Eastern European countries that are authorized to trade in specific lines. In certain countries (Hungary and Poland), some industrial enterprises may also grant export credits directly. The foreign trade organizations and the industrial enterprises are autonomous entities that make decisions as to individual export credits, subject to the general guidance and supervision of the Ministry of Foreign Trade, the central bank, or other authorities. The central bank or other credit institutions in some countries may, if necessary, refinance the credits that the foreign trade organizations or industrial enterprises have extended (Czechoslovakia, Hungary, Poland, Rumania, and the U.S.S.R.).

Commercial credits are usually granted at an interest rate of 4 per cent to 6 per cent per annum and are repayable over a period of 1 to 8 years (Table 8). A downpayment averaging 10 per cent of the contract value at the time of signature and a similar payment upon delivery of goods are normally required. Each of these payments may be reduced to 5 per cent or increased to as much as 30 per cent, depending on the type of equipment and on various economic circumstances. The guarantee of the government of the buyer’s country or of a reliable credit institution in that country is often a condition. Repayment may be carried out through deliveries of traditional export commodities or locally manufactured goods, including goods manufactured with equipment purchased with the credit or in convertible currencies. A gold clause is sometimes inserted in the credit contract.

Table 8.

CMEA Countries: Terms and Conditions of Commercial Credits 1

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Source: Prepared from United Nations, Department of Economic and Social Affairs, Export Credits and Development Financing: Part II, National Export Credit Systems (New York, 1967).

In mid-1966.

State commercial credits. State commercial credits constitute a facility that has been developed since 1964. They are granted on a government-to-government basis but are not tied to specific projects, being available for any transactions that are arranged between trading organizations in the supplying and buying countries. In those developing countries where development efforts are concentrated mainly in the private sector, the state commercial credits appear to offer greater flexibility than the state credits. The interest cost of state commercial credits is close to that of commercial credits, but the terms of repayment are close to that of state credits.

Comprehensive information about the composition, geographical distribution, and actual disbursements of economic assistance by the CMEA countries is not available. According to an UNCTAD study, estimates of new disbursements from these countries (and mainland China) “place them at about $320 million per year on average during 1960–63 and at about $350 million per year on average during 1964–67. In addition, there have been contributions to United Nations technical assistance and relief programmes of about $10 million annually.” 15 Table 9 indicates that the net annual commitments of bilateral assistance to developing countries fluctuate widely from year to year and are well in excess of average annual disbursements.

Table 9.

CMEA Countries: New Commitments of Bilateral Economic Assistance to Developing Countries, 1960–66 1

(In millions of U. S. dollars)

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Source: Based on UNCTAD report, External Development Finance: Present and Future (TD/B/C.3/61, December 11, 1968), Table 6.

Data refer only to credits and grants reported in announcements relating to specific countries.

Bilateral trade and trade between CMEA countries and developing countries

Earlier it was mentioned that for several reasons the CMEA countries prefer to trade with other countries on the basis of trade agreements that in a significant number of cases also entail bilateral payments arrangements. After World War II most Western European countries signed both bilateral payments agreements and bilateral trade agreements with the CMEA countries. The trade agreements usually covered all the trade between the partner countries and contained quota lists, which constituted binding licensing commitments and, in principle, forecast the entire bilateral exchanges during the ensuing year. These bilateral trade agreements, which were renegotiated annually, gradually acquired a less rigid character when the Western European countries relaxed their import restrictions and liberalized a considerable proportion of their imports from other Western countries. With the elimination of bilateral payments agreements between Western countries and Eastern European countries (see Table 22), the former found it necessary to maintain bilateral trade agreements because of the CMEA countries’ foreign trade arrangements, although the character of these agreements changed. They contained much shorter commodity lists in view of the degree of liberalization reached by the Western European countries and included more clauses of a general nature concerning the degree of access that the partner countries would accord to each other’s market. There was also a growing tendency for these agreements to be negotiated for periods longer than 12 months. In recent years, trade agreements have been supplemented in some instances by arrangements involving large investment projects in CMEA countries and the extension of credit to those countries.

Another recent development in respect of the trade agreements has been the gradual extension of a considerable degree of liberalization by most of the Western European countries to their imports from the CMEA countries; at the same time various safeguards against dumping and other market disruption have been incorporated in the agreements.

At present the typical agreement maintained between two countries that are not linked by a payments agreement usually fixes a target for the expected volume of trade in each direction for each year of the agreement, and contains a few import quotas on the Fund member country’s side and a lengthier list of import quotas on the CMEA country’s side. The main reason for a specific target is the wish of the CMEA country to be assured of both a given volume of trade and a balance between its imports and exports. The agreement also contains clauses on financing, MFN treatment, and arbitration. Sales under these agreements are sometimes combined with the extension of export credit facilities. In recent years the granting of export credit and the coverage of export credit insurance on Western countries’ exports to the CMEA countries has frequently been the subject of negotiation and is at present covered in many, if not most, of the bilateral trade agreements.

In its 1966 Economic Survey of Europe, the ECE has a lengthy section on developments in Western European countries’ trade with the CMEA countries and makes the point that the proportions of trade of each group with the other have grown very little over the past ten years. Trade with the CMEA countries represents about 5 per cent of Western European countries’ total trade and has expanded no faster than their total trade. The Survey argues that the necessity of repaying long-term credits will enhance the need for the CMEA countries to secure wider acceptance of their export commodities in Western markets and also to adjust their composition. The CMEA countries have already taken steps in the commercial policy field to develop trade with Western Europe. There have been exchanges of trade agreements and industrial cooperation that take a variety of forms. These may include joint ventures, licensing agreements, service agreements, deliveries of special machines, subcontracting arrangements for the supply of semimanufactured goods by an Eastern European producer to a Western European concern, and sales agreements in respect of third markets.

The experience of the industrialized countries in Europe does not necessarily furnish firm guidelines for developing countries interested in trading with the CMEA countries. Apart from historical, political, and geographical considerations, the character of the trade and of the trading relationships is likely to be different. The sale of a complex industrial plant on credit in response to the initiative of a trading organization in a CMEA country obviously presents a markedly different case from the efforts by a developing country, which produces a narrow range of exportable commodities, to find new markets for a primary product the supply of which may exceed the demand in traditional markets.

In contrast to the developed, market economy countries, a number of developing countries have entered into bilateral payments agreements with the CMEA countries over the past decade, and at the end of 1967 more Fund member countries maintained more bilateral payments agreements with CMEA countries than in the mid-1950’s, as indicated in Table 10.

Table 10.

CMEA Countries: Number of Bilateral Payments Agreements with Fund Member Countries

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Among the Fund member countries that had terminated a total of 68 agreements between April 1955 and the end of 1967 were some that had terminated all agreements (Argentina, France, Germany, Italy, and Paraguay) and some that had terminated all but one of their seven agreements, such as Belgium-Luxembourg, Denmark, the Netherlands, Norway, and Sweden.

The agreements entered into since April 1955 (117 altogether) were spread among 29 member countries, about half of which had become Fund members after 1954.

Fund member countries that maintained a bilateral trade and payments agreement with each of the Eastern European countries at the end of 1967 were Austria, Ceylon, Cyprus, Finland, Greece, Guinea, India, Mali, Tunisia, Turkey, the United Arab Republic, and Yugoslavia. Several other member countries maintained four or more agreements.

The data mentioned above should not be allowed to obscure one point of relevance to a consideration of trade between the CMEA countries and developing countries, namely, that a significant number of countries do not maintain either trade agreements or bilateral payments agreements with any of the CMEA countries, while some others maintain just one or two trade agreements.

The attitude toward bilateralism of the largest of the CMEA countries was explained by the head of the U.S.S.R. delegation to the first UNCTAD session:

  • The trade of the Soviet Union with an increasing number of the developing countries is carried out on the sound basis of bilateral trade agreements providing for a steady growth of mutual deliveries of goods. We shall in the future seek to conclude such agreements also since we feel that the wider use of long-term agreements and contracts which ensure permanent marketing of the products of the developing countries will contribute to the stabilization of markets and prices.

  • Developing bilateral trade and economic relations with other countries we at the same time do not exclude multilateral agreements when they are considered economically expedient for all partners in trade. The opportunities for the realization of the multilateral forms of trade and payments relations with other countries will grow alongside with the process of further normalization and expansion of international trade.16

III. Some Problems in East-West Trade

There are various problems of an economic character in trading with the CMEA countries, some of which are common to most countries outside that group and some which are of particular concern to developing countries.

The payments position of the CMEA countries is one of the major constraints regarding their imports from the industrialized countries. The available information indicates that the CMEA countries are limited in expanding their imports that require payment in convertible currencies by their capacity to increase their exports—their aim of balancing trade bilaterally reflects not only planning considerations but also their reserve situations. Their efforts to expand exports and thus their earnings of convertible currencies have been facilitated in recent years by the (mainly) unilateral quota liberalization measures taken by the EEC member countries, by measures of open general licensing or quota liberalization by the United Kingdom and other EFTA members, and by a few agreements concerning convertible currency settlement in some bilateral clearing relations. According to the ECE, “Quota liberalization or open general licensing extends, as a rule, to 50–90 per cent of imports entering from the Soviet Union and eastern Europe into most of the major trading countries of western Europe . . . .”17 However, it is also pointed out that the remaining licensing and quota arrangements have a considerable effect in restricting trade, as they frequently limit imports of commodities that the CMEA countries can readily provide.

Besides the limitations imposed by the CMEA countries’ objective of ensuring a broad bilateral balance and by the remaining restrictions of the industrialized countries, exports by the former to the latter are impeded by deficiencies in marketing techniques. In this connection the following statement by Premier Alexei Kosygin in his report on the U.S.S.R.’s 1966–70 plan is of interest:

  • The time has come to reappraise the role of foreign trade. The staff of foreign trade organizations frequently secludes itself in its own sphere failing to consider that its entire activity ought to be subordinated to the task of raising the efficiency of the national economy as a whole. The long-term plan of foreign trade obviously cannot foresee all possible contingencies and changes that may occur in the world market. This makes it the more important for the foreign trade staff to acquire a thorough knowledge of the requirements of the national economy, and to display initiative in suggesting the most advantageous purchases and sales. The industrial staff, contrariwise, often regards foreign trade as something secondary. This completely wrong view must be changed radically and business-like contacts must be strengthened between industry and foreign trade.18

Other difficulties, which are mitigated by long-term trade agreements, are related to uncertainties as to whether trade in a particular commodity will not be abruptly changed and to the difficulties for export firms in industrialized countries of identifying market possibilities in an Eastern European country by applying market analysis techniques; generally the firms must deal with intermediaries, i.e., foreign trade organizations, rather than final users, a process that can be time consuming and perhaps disappointing in its results. Furthermore, the negotiation of a trade agreement and the publicizing of its features may not suffice to dispel businessmen’s doubts and misconceptions about trading with a state organization whose decisions may be subject to unforeseen changes as a result of shifts in government policy. A difficulty on the other side is that an importer of goods from a CMEA country may help to develop a market for them only to find that owing to adjustments to the country’s foreign trade plan, or difficulties in local production, results yielded are not proportionate to the market development efforts. The CMEA countries’ pricing systems also severely complicate trade relations in connection with dumping charges made by domestic industries in other countries against CMEA imports.

As regards trade between developing countries and the CMEA countries, other difficulties also arise. As noted in a study by the UNCTAD secretariat,19 the growth of such trade is relatively recent and, so far, few countries have participated in its expansion. The study also refers to the fact that the necessary institutional arrangements for such trade are still limited to only a few developing countries. The fact that comparatively few of them have a substantial trade with the CMEA countries does not necessarily mean that more of these countries are not interested in such trade. However, a major obstacle, noted in the Final Act of the first session of UNCTAD, is “the paucity of knowledge among public and private organizations of trade partners in some developing countries, about the products and the trade policies and practices of the centrally planned economies.” 20 Even where lack of detailed knowledge is not a major factor, difficulties in establishing necessary contact between trading organizations and enterprises and in arranging for financial services and transport can constitute serious obstacles. In a report, Latin America and International Trade Policy, the Economic Commission for Latin America (ECLA) pointed out:

  • Experience shows that the greatest problems for the expansion of this trade occur in connexion with payments, from the creation on both sides of surpluses in currencies which can be used only slowly or with difficulty. This has often given rise to triangular or switch operations which subsequently resulted in a loss of import capacity.21

In the Charter of Algiers adopted by the Group of Seventy-Seven in November 1967 prior to the second UNCTAD session held early in 1968, the developing countries maintained that the CMEA countries (referred to in the Charter as the socialist countries) should grant concessions to the developing countries whose advantages would be at least equivalent to the effects of preferences that would be granted by the developed countries with market economies; also, that they should:

  • (a) Adopt and implement measures designed to increase the rate of growth of the imports of manufactures and semi-manufactures from developing countries, and to diversify such imports in consonance with the latter’s trade and development requirements;

  • (b) Undertake to contribute to the maintenance of remunerative and stable prices for the exports of developing countries by the inclusion of suitable provisions in their trade agreements with these countries;

  • (c) In drawing up their national and regional development plans take due account of the production and export potential in developing countries;

  • (d) Abolish customs duties and other trade restrictions on goods imported from and originating in developing countries;

  • (e) Eliminate the margin between the import price and the domestic selling price of the goods imported from developing countries;

  • (f) Refrain from re-exporting the goods purchased from developing countries, unless it is with the consent of the developing countries concerned;

  • (g) Encourage conclusion of industrial branch agreements for the supply of plant and equipment on credit to the developing countries, accepting repayment of such credits in particular with the goods manufactured by such plant in the developing countries concerned;

  • (h) Multilateralize, to the extent possible, among the socialist countries of Eastern Europe, payments arrangements with developing countries to facilitate increase of imports from the latter;

  • (i) Grant preferential access conditions for products originating from developing countries. These conditions should include the establishment, in their international purchasing policies, of margins of tolerance in favour of the developing countries with regard to prices and delivery terms;

  • (j) Within the framework of UNCTAD to set up permanent consultative machinery through which socialist countries and developing countries may promote mutual trade and economic co-operation, and solve the problems and obstacles which may arise.22

Among the numerous suggestions for fostering trade between the CMEA countries and the rest of the world that have been made in international forums and elsewhere are the following:

1. Continued efforts to unify and codify commercial terms, practices, and usages.

2. Measures to encourage direct contact between users (i.e., buyers) and sellers.

3. The suspension of quota and import licensing requirements.

4. The negotiation of trade agreements for three-year to five-year periods, subject to annual renewal.

5. Trading on the basis of settlements in convertible currency or, if this is not immediately practicable, the implementation of further steps to widen the scope for the transfer of clearing account balances.

6. The organization of or participation in commercial or industrial fairs by countries that have decided to take the initiative in seeking to develop trade with the CMEA countries—a technique that has been used by some industrialized countries in Western Europe.

In the report referred to above, ECLA stated that, in examining the prospects for an expansion of East-West trade and the recent experience of certain Latin American countries in this connection, aspects such as the following should be considered:

  • (a) more flexible use of the credits and trade surpluses created, by the provision of a multilateral payments system, operating at least among the countries belonging to the COMECON;

  • (b) improvement of the sales prospects in the private sector of products from the socialist countries, taking advantage of the new patterns which could result from alterations which these countries may make in their foreign trade policy (decentralization of the management of exporting enterprises);

  • (c) study of investment prospects for the purchase of complete industrial plants paid for on credit, whose amortization would be related wholely or partly to the purchase by the supplying countries of processed and semi-processed products made in the plants;

  • (d) inclusion in the socialist countries’ annual purchasing programmes of concrete provisions for the import of Latin American processed and semi-processed products, which may or may not be related to a definite percentage of their sales of industrial products to the Latin American countries.23

IV. Conclusions

1. One question raised in the introduction was how some countries found it possible to trade with Eastern European countries without entering into bilateral trade and payments agreements and whether their experience furnished lessons or guidance for other Fund member countries. A related question is whether bilateral payments agreements are essential for developing countries that wish to trade with the East. Categorical answers to these questions are not possible, largely for the reason that the individual circumstances of countries in either the East or the West differ so widely. As explained earlier, the trade relations between an industrialized Western European country and a CMEA country do not necessarily offer adequate guidance to a developing country seeking new outlets in Eastern Europe for one or two products on which it is heavily dependent for foreign exchange earnings. Examination of cases shows, however, that (with some exceptions) the termination of bilateral payments arrangements has not generally adversely affected the trade between the countries concerned; it also suggests that it might not be accurate to conclude that the remaining agreements maintained by some Western European countries reflect solely the reluctance of their CMEA partners to settle transactions in convertible currencies.

2. With few exceptions the Fund member countries that maintain bilateral payments agreements with one or more of the CMEA countries are developing countries: many of the agreements are comparatively new and it is thus too soon to assess whether they have been conducive to generating additional trade and to the economic development of the members concerned.

3. Inherent in bilateral payments arrangements is the risk of the accumulation of inconvertible credit balances and the consequent creation of pressures for the distortion of trade and payments flows into uneconomic channels. While the willingness of many developing countries to resort to bilateralism in dealing with the CMEA countries is attributable to their desire to ease the marketing of their primary commodity exports that face weak world markets, this consideration needs to be balanced against the potential difficulties arising from bilateralism.

4. The value and volume of East-West trade has grown substantially in recent years, but the proportion of such trade to most participants’ total trade has not changed markedly. For many Fund member countries, trade with the CMEA countries is insignificant or is a small fraction of their total trade. This trade may, however, constitute a considerable proportion for particular export industries or firms.

5. There is evidence that attitudes toward trade with the CMEA countries are under review in many countries. On their part, the CMEA countries are experimenting with economic reforms that seem likely to widen opportunities in their markets and are displaying interest in many discussions and studies, in UNCTAD, the GATT, and the UN regional commissions, concerned with the expansion of East-West trade. An important obstacle to a substantial growth in such trade is the capacity of the CMEA countries steadily to raise their earnings of convertible currencies. Apart from difficulties of market access attributable to quotas or discriminatory tariffs, there are also difficulties associated with the type of available goods, limitations of supply, marketing techniques, and the preferences of consumers for products more familiar to them. As a consequence of the pattern of their industrialization in the past, the CMEA countries are capable of exporting machinery and equipment, but their exports are faced with stiff competition from technologically dynamic producers in advanced industrial countries. Other obstacles are the lack of knowledge in some countries about trading with the CMEA countries (if not in official circles, then in business and other groups), the difficulty of identifying market possibilities in them, delays occasioned by negotiations with state organizations, a reluctance to commit substantial resources in industries geared to CMEA trade because of the uncertainty engendered by insufficient direct contacts with end-users in the CMEA countries, and the possibility that the access to their markets might be curtailed or otherwise adversely affected by actions of the authorities for reasons that could not be foreseen by the enterprises concerned.

APPENDIX

Table 11.

CMEA Countries1: Exports and World Exports, 1960 and 1966

(Value in billions of U.S. dollars, f.o.b.)

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Sources: United Nations, Statistical Office, Monthly Bulletin of Statistics, March 1966 and March 1968.

Including Albania.

Components may not add to totals owing to imperfect coverage of data and also to rounding.

Annual compound percentage rate of increase of export value between 1960 and 1966.

Excluding mainland China, etc.

Table 12.

CMEA Countries: Prewar and Postwar Commodity Composition of Trade

(In per cent)

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Sources: Based on data from League of Nations, Economic Intelligence Service, International Trade Statistics, 1938, and United Nations, Department of Economic and Social Affairs, Yearbook of International Trade Statistics, 1965.
Table 13.

CMEA Countries1: Exports by Areas of Destination and Commodities, 1960 and 19662

(In millions of US. dollars, f.o.b.)

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Sources: United Nations, Statistical Office, Monthly Bulletin of Statistics, March 1966, March 1967, and March 1968.

Including Albania.

Totals do not necessarily add to the sum of the items.

Table 14.

CMEA Countries: Exports by Areas of Destination and Commodities

(Percentage increases between 1960 and 1966)

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Source: Table 13.
Table 15.

CMEA Countries1: Imports by Areas of Origin and Commodities, 1960 and 1966 2

(In millions of U.S. dollars, f.o.b.)

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Sources: United Nations, Statistical Office, Monthly Bulletin of Statistics, March 1966, March 1967, and March 1968.

Including Albania.

Totals do not necessarily add to the sum of the items.

Table 16.

CMEA Countries: Imports by Areas of Origin and Commodities

(Percentage increases between 1960 and 1966)

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Source: Table 15.
Table 17.

Individual CMEA Countries: Exports by Destination, 1960 and 1966

(In percentages)

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Sources: United Nations, Economic Commission for Europe, Economic Bulletin for Europe (Geneva), Vol. 18 (November 1966), and Vol. 19 (November 1967).

Including Albania.

Table 18.

Individual CMEA Countries: Imports by Source, 1960 and 1966

(In percentages)

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Sources: United Nations, Economic Commission for Europe, Economic Bulletin for Europe (Geneva), Vol. 18 (November 1966), and Vol. 19 (November 1967).

Including Albania.

Table 19.

Fund Member Countries: Total Trade and Trade with CMEA Countries, 1966

(Value in millions of U.S. dollars)

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Source: International Monetary Fund and International Bank for Reconstruction and Development, Direction of Trade Annual, 1962–66.

Botswana joined the Fund on July 24, 1968; The Gambia joined on September 21, 1967; Indonesia resumed membership on February 21, 1967; Lesotho joined on July 25, 1968; Malta joined on September 11, 1968; and Mauritius joined on September 23, 1968.

Excluding trade with Eastern Germany.