Historical system characterized by the public ownership of the means of production and the elimination of private property. In communist states, foreign trade is controlled by highly centralized state monopolies.
Classical communist political thought speaks little on the subject of world trade. Neither Karl Marx nor Friedrich Engels overly concerned themselves with trade policies or with trade relations between communist and noncommunist states. What few lines they spared in their works on communism were too sparse from which to derive any real and practical application. While this may seem surprising, it is quite consistent with their rejection of “utopian blueprints” and the notion that such details of a future communist society could be planned.
In the wider camp of socialist political thought, other theorists such as Karl Kautsky believed that should the proletariat overthrow the capitalist world system, the socialist system that would be established afterward would soon invalidate the debate between protectionism and free trade, which at its core was the heart of communist concerns with trade and trade policy. Because of the lack of answers in the works of Marx and Engels, theorists such as Kautsky and Johann Gottlieb Fichte developed socialist doctrine on commercial policy on a country-by-country basis, reflecting the realities of the particular state under examination. Thus, doctrinal approaches to world trade and trade policy varied from state to state, preventing the development of a unified communist theory on trade and trade relations.
Modern Theory and Practice
In the twentieth century, the theory and practice of planned (communist) economies held that to be successful, trade between nationalized economies and open (capitalists) economies was dependent on the creation of appropriate institutional and organizational structures for centrally planned economies. Thus, from a communist perspective the emphasis of trade and trade relations came to fall not on the development of theory appropriate to the task at hand, but to the development of institutions that could carry out trade within the context of communist political, social, and economic structures. Understanding that the basic goals, economic mechanisms, and institutions of communist states are inherently different from those of capitalist systems, it is possible to examine the impact of communism on the practice of trade relations.
Theory at Work
In communist systems, the behavior and techniques that led to interaction with international markets were significantly different from those in capitalist systems. Many of the differences were a reflection of the implementation of Stalinist interpretations of communist ideology rather than Marxian tenets or any long-standing practices of trade control. Foreign trade monopolies, trade aversion, long-term trade agreements, export pricing and exchange rates, commercial policies, balance-of-payment concerns, and convertibility issues all affected communist participation in international trade.
Foreign Trade Monopolies
While in capitalist systems governments do take part in some trading operations besides their regulatory roles, the vast majority of foreign transactions are conducted by private concerns. In communist states, however, foreign trade was a highly centralized pursuit that was controlled by state monopolies that were highly centralized. Most trade issues were handled by ministries of foreign trade, which delegated responsibility to subministries, generally known as foreign trade organizations, that would then monitor imports and exports for particular economic sectors and subsectors. Foreign trade ministries were not usually operational bodies, but administrative units that transmitted information and data from the trade organizations to the state planning committees, which were responsible for determining import and export targets. These targets that were issued by the planning committees had the force of law, and the trade organizations were expected to negotiate imports and exports with other communist bloc countries or capitalist private enterprises accordingly. The significance of this lay in the fact that it was primarily the trade organizations that had contact with foreign entities and not the concerned enterprises themselves. The domestic enterprises in fact had little incentive to produce export-quality goods that met the needs of the buyers, as they were not familiar with the buyer. Moreover, profits were not generally dependent on exports because of state intervention, and manufactured commodities were not particularly valued domestically because of their inferior quality.
“Crush capitalism or be crushed by it!” reads the caption of this 1919 poster by Soviet graphic artist Deni Victor. Vladimir Lenin, the leader of the Soviet revolution, asserted that the growth of the global empire-based economy in the late nineteenth and early twentieth centuries represented the final stage of capitalism. (© Topham/The Image Works)
Further consequences of state foreign trade monopoly included reifying antimercantilist trade views, the tendency to barter over import/export exchanges, and rendering tariffs redundant. Exports were considered as a means of acquiring imported goods (in particular, difficult-to-acquire manufactured goods), not as a means of turning a profit, thus marketing and promotion of export goods was minimal. Only in the case of balance-of-payment difficulties were exports strongly touted. Furthermore, because exports were not valued, they were only seen as a balance to imports purchased. It was generally more important for exports to equal imports than it was to profit from the sale of exports exclusively. Finally, communist states did not benefit from import duties as foreign trade was controlled and limited by state monopolies, thus rendering tariffs unnecessary.
Trade Aversion
In general, and as a function of Marxist ideology, many communist countries attempted to minimize external trade. The primary reason for such aversion was most likely the desire on the part of state planning committees to minimize disturbances that could be created in the material balances of commodities. For much of their existence, communist states’ foreign trade balances were significantly below those of capitalist systems. Foreign trade was seen as risky, as it was thought to lead to the development of dependency of foreign goods, a thought to which most communist states’ leaders were extremely adverse.
Profitably was not the motivating factor in promulgating foreign trade, rather, it was of necessity that communist states did business with the capitalist West. Moreover, the understanding that internal pricing mechanisms were inherently irrational (a function of Marxist ideology and the rejection of capitalist market mechanisms) further discouraged foreign trade, as state planners were essentially clueless as to how to price goods for export.
Export Pricing and Exchange Rates
Internal prices of commodities in communist systems failed to reflect, for reasons that will be described, the accurate market prices of goods, both exportable and domestic. By ignoring supply and demand mechanisms and instituting excise taxes and sectoral subsidies, state planning committees were unable to determine rational prices for their commodities. This affected the exchange of currency (or currency equivalents) because prices in communist states on tradable goods could not reflect the purchasing power of the local currency in relation to tradable goods. Setting aside quotas, tariffs, exchange controls, and the like, prices in capitalist states reflected the value of a states’ currency relative to other states as prices generally found an equilibrium through foreign trade. Communist states lacked this equilibrium factor as prices were determined by committee rather than by market mechanisms.
Understandably, the most difficult question for state planning committees was: At what price should internationally tradable goods be set? In general, the response to this conundrum was to simply set prices that reflected current trading values in capitalist states, regardless of the true value of the commodity in real terms. This was easily achieved because foreign trade, in particular East-West trade, usually amounted to such an insignificant part of the economy of any given communist state, that any income earned, or any loses made, from foreign trade was easily absorbed into the system.
Essentially, the purposes for setting exchange rates based on random pricing were twofold. First, to maintain a balance in payments or trade in local currencies, some common unit of accounting was required. As trade was conducted in Western terms, an exchange rate was necessary to record balances in “own” currencies, rather than in Western currencies. Economically, there was no purpose in this as foreign trade was such a small part of the total economic volume of communist states. Politically, however, reporting trade balances in the currency of that state was a matter of pride and demonstrated, no matter how falsely, that communist states could compete in the international market. Second, for the purposes of allowing tourists, limited as they may have been, embassy and consular employees, and members of press services to freely purchase goods and services, foreign currencies needed to be exchangeable.
Long-Term Trade Agreements
Given the extensive nature of central planning in communist states, most foreign trade was conducted under the auspices of long-term trade agreements, usually lasting up to five years. The intent behind such agreements was to reduce the risks of foreign trade by bringing certainty to the trading markets of communist states. By specifying minimum levels of trade and flows of goods, state planning committees intended to set up norms of trade that could be used in the annual calculations that established the distribution of resources and commodities internally for the coming year.
Commercial Policies
For many of the communist states, trading with foreign countries, particularly in the West, presented certain concerns requiring resolution. One such situation was the idea of establishing tariffs on traded goods, not for the purpose of protecting domestic markets, but to be used as tools in negotiations with foreign business enterprises. State ownership of the means of production, a basic tenet of communist systems, meant that tariffs were unnecessary. State planning committees decided what was produced, how much was produced, where and when it was distributed, and at what price. Importation of commodities was part of this calculation and was implicitly understood as a quota on foreign goods. Foreign enterprises could never compete with domestic industries as planning committees could always reduce the prices of commodities. In particular, with the growing number of most-favored-nation (MFN) trading states, communist systems needed some bargaining tool with which to negotiate the assignation of such status. As MFN status required the reduction of impediments to trade, and as communist systems had no inherent impediments, effectively a trade barrier needed to be created so as to replicate the bargaining process that normally occurred between two Western states negotiating MFN status.
A second issue that arose out of communist commercial policies regarded the “dumping” of commodities on the international market (selling goods at values below their domestic production costs). Communist states had been accused of this on many occasions in the twentieth century. The issue of dumping was difficult to deal with because at its source was the fact that the irrationality of the pricing systems of communist states, with the randomness of exchange rates, usually made it impossible for foreign agencies to determine if dumping truly had occurred. Furthermore, the existence of foreign trade monopolies, where exports and imports were not independent of each other, prevented an accurate assessment of the ability of a state enterprise to actually produce such a number of goods for export that could be considered dumping, that would be allowed to be sold abroad in the first place, or that would be sold at a price that reflected differences in international and domestic markets.
Balance of Payments
Strict control by the state over foreign trade operations generally resulted in communist countries showing a balance in trade accounts. It was generally understood, however, that should trade be freed, deficits would be quickly built unless trade terms could be altered through such mechanisms as currency devaluation or import substitution. Taut planning, repressed inflation, industrialization, and limited import/export targets resulted in unsatisfied demands for imported goods, while domestic goods remained unpopular and out of demand. This, of course, created serious balance-of-payment issues for communist countries, as it was difficult to establish equilibrium in import-export exchanges. State planning committees relied on equilibrium because of the highly centralized nature of the planning system. Currency devaluation was also not an option to achieve equilibrium as pricing in communist systems was irrational and any reduction in prices had no effect on the real exchange value of currency. Thus, it was better to minimize foreign trade than risk severe systemic disequilibria in payment balances that were potentially catastrophic.
Resource Inconvertibility
One prominent feature of communist systems was the lack of currency convertibility on the international market. This was a result of the taut planning policies, the irrational pricing systems, and the hidden balance-of-payment issues that were inherent to centrally planned economies. In particular, if the balance of payments were out of equilibrium, then currencies could not be traded or used to purchase imported goods. By controlling imports, communist states attempted to avoid imbalance and the devaluation of their own currencies, which also prevented citizens from converting domestic currencies into foreign monies or gold. Conversion of currency was allowed only to the extent necessary for acquiring foreign commodities and never more than the earnings from foreign trade. The most obvious way of addressing this problem was to limit foreign trade (to minimize the possibilities of imbalances) and to establish bilateral trade agreements, which could be sustained reliably over time. In this way, communist states were not overly susceptible to the vagaries of the international trade system.
Besides currency inconvertibility, communist systems were subject to the more serious problem of “commodity inconvertibility,” a feature unique to centrally planned systems. Foreigners shopping in communist countries were restricted from purchasing goods that were obtained through importation. Commodities, especially those in heavily subsidized sectors, were often lower in cost than importers could obtain in their own countries, even with transportation costs factored into the price. Only commodities offered by foreign trade associations were available, as established by state planning committees. Furthermore, these goods could only be purchased using foreign currencies as the carefully balanced system of equilibrium could be thrown out of balance if there were unplanned and disruptive purchases.
Practical Application of Communism and the Impact on World Trade
In practice, the influence of communism on trade issues in the twentieth century was most obviously evident in the institutional structures of the states of Eastern Europe. The communist systems in place for much of the century developed comprehensive economic features, distinctive from those of capitalist systems, which as a whole affected their participation in global trade and influenced their trade policies. Utilizing these features with an understanding of the general theoretical practices described earlier completed the communist version of foreign trade participation. Ownership rights, planning issues, employment, incentive factors, and price controls were all manifestations of the practical application of contemporary communist thought to issues of trade and trade relations.
Ownership
With few exceptions, economic sectors in these countries (aside from agriculture), where nation alized and centralized, reflected one of the primary tenets of contemporary communist political ideology: the public ownership of the means of production. Agriculture, the exception to the rule, was primarily a collectivized and more localized concern. However, the state was able to maintain significant influence as the principal supplier of goods such as fertilizer and machinery and as the agency that determined prices and purchased most agricultural products. While competition did exist among and between different economic sectors, the fact that all properties were commonly held prevented economic battles that were often seen in capitalist societies as competitors vying for market share. Furthermore, monopolies were a given as it was the state that in fact exercised the ownership rights of the proletariat, and the lines between different agencies in the same sector were often blurred.
Central Planning
Working in conjunction with central ownership of state industries to define and organize the communist system was the practice of employing central planning to determine economic output. While not a prerequisite feature of communist systems, central planning played an important role in the great majority of twentieth-century communist states. State planning could fall along a spectrum of action, ranging from planning boards exercising authority over every transaction that occurred, to reliance on both internal and external market mechanisms to settle planning issues. In the larger proportion of states, planning decisions usually fell somewhere in between the two extremes, those only being reached in times of great urgency, such as actions taken by the Soviet Union during World War II to prevent total economic ruin.
Under communist systems, the distribution of goods was similar to that of capitalist countries. The significant difference, however, was that under communism it was the state that determined output and pricing policies rather than private owners or liberal market mechanisms. In general, prices in communist systems were much more rigid than in capitalist countries and output changes were less responsive to market demands or consumer needs. This was a result of the inherent complexity of planning for the supply and production of thousands of commodities by tens of thousands of business enterprises and the general lack of responsiveness on the part of the state to its citizens. While business interests were allowed to buy freely of common and sundry consumer goods, important products (defined through some obscure bureaucratic procedure) were tightly regulated. Outputs, sales targets, delivery dates, buyers, and sellers were all directly controlled by state planning committees. In effect, planning committees acted as substitutes for the “invisible hand” of Adam Smith, replacing the market mechanisms of supply and demand with bureaucracy.
The practice of establishing “material balances,” whereby sources of commodities were listed opposite usage of commodities, effectively tied up the system of distribution and production if the supply and demand of a product did not balance, skewing the entire system because of the complex issues of resource allocation involved in the interindustry relations that were byproducts of most communist models. In short, if one industry required more or less of a commodity, the spillover in other industries was significant as it was the central planning committees that determined the most efficient way of resolving the imbalance, generally without input from the industries thus affected.
Employment
Related to the issues of both nationalized industries and state planning is the matter of employment. Unlike in capitalist countries, communist countries guaranteed the maintenance of full employment (although it was generally guaranteed as a function of taut planning). One method of achieving this involved state planning committees setting output targets for production well above the realistic availability of resources and growth rates. As there were higher targets to meet, more work was required, thus necessitating more employees. However, this skewed the system by leading to an excessive demand for consumer goods (the source commodities of which may have been diverted by planning committees to economic sectors requiring greater commitments of resources) and labor, much like in capitalist wartime economies. Important commodities were hoarded, enterprise managers underreported production capabilities so as to be able to meet production quotas, and enterprises began using “expediters,” individuals with the right connections on the black market who could arrange for the illegal purchase of needed commodities above and beyond those provided by the state.
The overall effect of maintaining full employment was a significant impact on the purchasing, distribution, production, and consumption of resources and commodities. In terms of trade, the effect was also negative as the quality of the commodity produced declined (a result of planning schemes meant to retain maximal employment that created a seller’s market), thereby reducing its desirability in both domestic and international markets.
Pricing
In communist states, prices were relatively inflexible, changed infrequently, and remained insulated from the market mechanisms of supply and demand. This was a direct result of the system of central planning and the ability of planning committees to set the prices on both wholesale and retail commodities. Thus, prices of commodities, and in particular consumer goods, did not reflect the real value of the goods had price indexes been allowed to float with supply and demand. Price-fixing decisions by planning committees were generally influenced by the Marxian concept of labor theory of value (tying wages to price), which undermined both the accurate reporting of costs and its reflection on prices for such commodities as land, rent, interest, and profit. As these were not seen as labor-produced commodities, their values was severely underrepresented in the market and spilled over into related industries such as petroleum, natural gas, banking, and small-scale enterprises that existed in the heavily rent-dependent societies.
The disequilibria of prices to value were further irrationalized by the introduction of excise taxes and enterprise subsidies. These taxes generally served both social and economic purposes in communist systems. Alcohol and cigarettes were taxed at higher rates to discourage their consumption, while books and musical instruments, for example, had virtually no taxes, so as to encourage their purchase. Economically, goods that were in greater demand had higher taxes placed on them, while commodities that were more abundant (those few goods that could be produced at set targets) had lower taxes assigned. This was a function of attempts by many of the communist countries’ planning committees to compensate for imbalances in supply and demand, which led to decreased revenue. Subsidies were introduced not as positive rewards systems, but to compensate for the costs of operations of enterprises that had negative earnings, or to cover losses in sectors where wages had risen faster than productivity levels.
The overall impact of price irrationality in communist economic systems, whether from taxes, subsidies, or imbalances in the supply and demand mechanism, was keenly felt in communist bloc trade as raw resources and manufactured commodities were most often exchanged at severe imbalances to their true market values. Internationally, manufacturers happily purchased certain commodities, generally raw resources, as the true value of the good was generally well underpriced when compared to the same commodity in capitalist countries.
Incentive Factors
As profit was not the primary motive for production in communist states, it was difficult to create incentives for lowering overall costs and raising product quality. Factor in the often-unrealistic production targets, and the motivation to produce high-quality goods at low costs was magnified. In particular, enterprise managers were faced with few incentives to encourage the development of efficient and cost-effective production values. In communist systems, targets were more numerous and ordered differently than under capitalism. Reduced unit costs, reduced wage expenditures, maximized output, increased capital productivity, and increased labor productivity were just a handful of the targets that managers were faced with, a number of which clashed with one another. For much of the communist era, output targets were the primary concern, overshadowing all other tar gets and providing the largest managerial bonuses (the only incentive given for performance). Over time, managers let all other targets slide in favor of the quantitative targets geared toward measuring output. This lack of concern in other target areas contributed to the deterioration of product quality (especially as economies grew and became more sophisticated and diversified) and lowered market demand, setting off the material balances characteristic of centrally planned economies. In the mid-1970s, reforms were introduced to stem the tide of problems by shifting bonuses away from output targets to sales numbers, but in general it was too little too late as the problems of demand and overproduction persisted.
Economic Goals
Internally, the structures of communist states prevented the development of economic systems that were efficient and accessible to external markets. From the 1950s through to the early 1980s, decline in economic productivity was directly tied to the policies of the Soviet Union (epitomized by Leonid Brezhnev’s twenty-year-plus reign as leader of the Soviets) and its influence on the Soviet satellite states of Eastern Europe. While Brezhnev’s death in 1981 led to several years of political uncertainty, by 1985 and the accession of Mikhail Gorbachev to the top post in the Soviet Union, economic concerns had taken on a new importance and new initiatives for economic reform were explored. Before the Gorbachev period, the economic goals of the communist states of Eastern Europe, primarily related to industrialization, were determined by political policies influenced by both Marxist-Leninist ideology and the desire to outperform capitalist systems.
Explicitly, communist countries defined particular goals, such as full employment and stable prices, which would contribute to the strengthening of their political systems. Policies that promoted these goals were implemented administratively and fell in the areas of pricing and market control, as they generally worked best to bring about gradual change to the system. By the 1980s, however, a number of reforms had been implemented to make communist markets more competitive internationally. The biggest reforms came in the area of nonlabor-valued goods, such as rents, interest, and land. While land still remained state owned, attempts were made to give value to the use of land for economic purposes. Similar attempts were made in the areas of rent and rent collection, and the use of interest, primarily in banking concerns. In short, the communist systems were slowly conforming to accepted economic practices of capitalist states. By converging their economic systems with those of capitalist states, communist countries were able to create interest in foreign trade, as long as production quality increased and prices remained somewhat stable.
Trade between Blocs
For communist states, there were realistically only two alternatives in foreign trade, both of which tended to be mutually exclusive. In terms of ease, intrabloc trade, that is, trade between communist states, was relatively simple as trade systems were harmonized (in fact, usually patterned after some basic Stalinist model) and dictated by the Soviet Union through its domination of the Council for Mutual Economic Assistance (CMEA). Participation in CMEA trade was often a lifeline of trade for communist countries if relations with noncommunist states soured. Trade taken at the intrabloc level was often understood in terms of balances of economic and political power within the bloc, as a mechanism for economic integration, and, in the case that one state may step out of line from the appropriate behavior, as economic coercion. This last was a tool used significantly by the Soviet Union to keep its satellite states in order.
The other primary trade alternative was trade with the West (or capitalist states). Foreign trade of this variety was significantly more difficult as there were stronger political factors than economic factors impinging on trade issues, and trade with the West was often seen as a sign of weakness among communist countries. Much of the type of trade between East and West could be defined by economic warfare. The goal of many Western states, in particular the United States, was to prevent the military and economic development of communist countries. By denying communist states strategic goods, the West hoped to impede their growth and eventually cause their collapse (a strategy that, it could be argued, was successfully demonstrated with the collapse of communism from 1989 to 1991).
Conversely, communist states were loath to allow the West to gain the upper hand and were willing to fight not in terms of besting the West through economic development, but by making themselves invulnerable to the economic warfare of the West. In this case, the East had a distinct advantage, as Western states needed to work together by way of consensus and concession; the Eastern forces could be marshaled by the Soviet Union, usually in the form of developing inter-locking economies that were difficult to penetrate, because of many of the features outlined earlier, from the outside.
In the end, the adversarial political and economic ideologies of the two blocs had a significant impact on international trade, at least at a truly global level, an impact that for the most part was not resolved until the collapse of communism in the late twentieth century.
Sean Michael Cox
See also: Capitalism; Communism; Council for Mutual Economic Assistance.
Bibliography
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Holzman, Franklyn D. Foreign Trade Under Central Planning. Cambridge, MA: Harvard University Press, 1974.
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Pryor, Frederic. The Communist Foreign Trade System. Cambridge: Massachusetts Institute of Technology Press, 1963.