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America Gets the Shaft

By Mark J. Penn

The 1972 U.S.-Soviet grain deal was an economic Bay of Pigs for the Nixon administration. Henry A. Kissinger '50 led the ill-planned and uncoordinated foray into Soviet economic policy which resulted in disastrous consequences for U.S. markets and international prestige.

The formulation of the grain deal is a good example of how separate U.S. economic and political interests can interact to produce a plan beneficial to none of these interests. Through Soviet trade, the U.S. Department of Agriculture (USDA) wanted to reduce domestic grain stockpiles and mildly bolster farm incomes; Kissinger hoped to further cement the U.S.-Soviet political detente. The prospect of establishing Soviet dependence on the U.S. for food probably outweighed, in Kissinger's mind, the seemingly minor economic advantages of a poorly negotiated deal.

In December 1972, in the midst of a severe Siberian winter which decimated the Soviet winter wheat crop, the USSR spoke to USDA officials about grain trade. The Soviets wanted a one-year deal with long-term credit. The U.S. responded with an offer of a long-term deal with no credit.

The proposals clashed at the negotiating table and on July 8, 1972, Kissinger announced the United States and the Soviet Union had just signed the largest trade agreement ever made between the two countries. The Soviets agreed, with the aid of $500 million of short-term U.S. credit, to purchase $750 million of grain during the next three years. The U.S. required the Soviet Union to purchase at least $200 million of grain within the first year.

The inclusion of the $200 million provision as a minimum rather than a maximum is a tribute to the skill of the Russian negotiators. By grossly misrepresenting their requirements, the Russians were able to "accede" to this clause and thereby achieve one of their original aims--the de facto securing of a one-year trade accord.

Unlike the previous U.S.-Soviet grain deals which limited the sale to grain store in governments elevators, the 1972 deal gave the USSR direct entry into domestic markets. In August the Russians sent a group of traders who, working with large American grain exporters and holding secret hotel-room meetings in Chicago and New York, were able to make huge grain purchases for future delivery without disturbing the general market.

One month later, USDA experts discovered the Soviet Union had purchased its full three-year $750 million grain allotment. The USSR had bought one-fourth of the 1972-73 wheat crop and large quantities of corn and soybeans, the nation's chief feed grains. The quantity of their purchase surprised USDA officials who had miscalculated Soviet needs.

When news of the Soviet purchases spread through the grain world and domestic shortages began to appear, wheat prices doubled. Because the Soviets bought early and at low prices, the American consumer rather than the Russian government had to pay high prices. About one-half the beef inflation and $200 million in higher bread costs can be traced to the market effects of the Soviet grain deal.

Farm income, which the USDA had hoped to "mildly bolster," shot up 17 per cent in the first quarter of 1973. The USDA, in an emergency move, emptied government grain elevators and moved all its stockpiles to market. A mid-season USDA directive completely reversed the intended supply-control programs for 1973--rather than contract supply to raise farm income, the 1973 program was altered so as to abandon all supply controls. This succession of emergency moves and a domestic situation characterized by severe and unanticipated inflation are the compound effects American stupidity and Soviet duplicity in the grain deal.

This is an era of relative peace between the two major powers. During such a time, economic interests and profit maximization are the major goals of Nixon and Brezhnev. The recently disclosed resale of U.S. grain by the Russians is the logical economic consequence of having given the Russians inordinately favorable terms of trade. Kissinger's hope for a friendly Soviet attitude towards the U.S. was shattered by the economic realities of a one-sided trade agreement. In an attempt to further the detente, Kissinger played havoc with large segments of the economy. The American consumer is now paying the price.

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