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efforts by the East Germans to upgrade their production have resulted in modest success, especially since 1970, in gaining export markets in the West for particular lines of machinery and equipment, notably office and textile machines, machine tools, and ships.

Despite these recent gains, East Germany still trades at somewhat of a disadvantage with most countries of Western Europe, paying prices that are substantially higher than world market prices for its imports and receiving prices that are much less than world market prices for its exports. With West Germany, East Germany has enjoyed more favorable terms of trade. East German terms of trade with Communist countries are on the whole favorable—the higher prices of many imports are fully offset by the relatively high prices received for its exports.

Membership in CEMA had little effect on foreign trade prior to the 1970's because of East German preference for bilateral integration with the U.S.S.R., coupled with the weakness of the organization due to its unwillingness to tackle the key problems of bilateral trade, lack of specialization, and nonconvertible currencies. The establishment of the much-heralded International Bank for Economic Cooperation (IBEC) in 1964, while facilitating the clearing of accounts, did little to encourage multilateral trade. In 1969-70, however, the East Germans changed course and grudgingly accepted the goal of integration within CEMA, in part as a consequence of Soviet refusal to support Ulbricht's program of bilateral integration, but also because of the apparent willingness of the CEMA membership at that time to foster modernization through specialization and coordination.

As one result of the new attitude towards CEMA, East Germany signed a CEMA agreement in January 1972 for specialization in the production of metal cutting lathes and products made of glass and ceramics. East Germany has also been granted project funding by CEMA's new International Investment Bank (IIB) for expansion of a machine building enterprise (1971) and for a factory to produce chemical equipment (1972). Despite its acceptance of an increased role in CEMA integration and specialization, East Germany remains a conservative within the organization and opposes Hungarian and Polish proposals for decentralized trade and convertible currencies.

Trade between East Germany and non-Communist countries has been strongly influenced by the political aims of the regime. Trade with the less developed countries has grown rapidly since 1963, as the East Germans have increased their economic assistance to encourage recognition by nonaligned governments. The first breakthrough was recognition by Iraq in April 1969, followed in quick succession by several other Middle Eastern and Afro-Asian countries. Trade with the industrialized countries of the West has been allowed to grow rapidly during periods of comparative political relaxation such as the mid-1960's, but it has been restricted during periods of strain. Throughout the entire postwar period, there has been an erratic policy of attempting to reduce economic dependence on West Germany by shifting trade to other industrialized countries, but this policy has had little long-term success.

The interrelationship between economic and political motives are most visible in internal trade with West Germany. For West Germany, political considerations have been the overriding factor in its involvement with interzonal trade even though a number of individual West German firms derive considerable financial benefit from the trade. In the early 1960's interzonal trade was viewed by the West Germans as a means of keeping access to West Berlin open while now it represents a part of its Ostpolitik. East Germany has also experienced the conflict between political and economic considerations associated with interzonal trade. In the early 1960's trade fell as East Germany tried to reduce its economic dependence on interzonal trade. From 1963 to 1966 the value of trade grew steadily, but its composition changed to reflect East Germany's policy of reducing its economic dependence on West Germany and to bring pressure on the West German Government to make political concessions to encourage further increases. In December 1968, a new interzonal trade agreement was signed, embodying a number of features East Germany wanted, including an interest-free "swing" credit amounting to 25% of the value of East German exports to West Germany in the previous year. In recent years interzonal trade has become an important factor in the economic growth of the GDR.

East Germany was able to bring interzonal trade nearly into balance in 1971, but could do so only by incurring a large deficit with other industrial countries. Another large deficit in 1972 brought East Germany's interzonal trade debt to more than $550 million by the end of 1972.

The future of interzonal trade in the short run seems assured since West Germany had pledged a continuation of the special "innerdeutsche" trade, and the other Common Market countries have at present accepted this special relationship. In the

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APPROVED FOR RELEASE: 2009/06/16: CIA-RDP01-00707R000200110021-0