Foreign Trade under the Centrally Planned Economic System
Centrally planned economies mainly differ from capitalist markets in that the means of production are nationalized and thus owned by the Government. Furthermore the economy is centrally planned by the State. Industrial Enterprises, owned by the state, are operated by state appointed mangers and the revenues flow into the state-owned accounts. All sectors of the industry are centralized. Foreign trade is one of these sectors. Strict trade plans are established that determine the types of goods and the amount of goods traded.
Communist nations tended to take an entirely different look upon foreign trade than most Western Nations do. According to Communist theory the primary purpose for trade is the acquisition of essential imports. Exports are only useful to finance imports. Actually exports are viewed as a loss of resources and the money received for them is not much valued. Certain Communist countries only started intensive export programs to equilibrate their balance of payments. Furthermore, many centrally planned countries took a barter-type approach to trade. They believed that exports and imports are interdependent. Transactions were not viewed as separate entities, but the entire trade and the gains from all goods traded annually are taken into consideration.
Once a year the Communist Government came up with a trade plan for the year which it specified the trading interests of the nation. In this plan the Government decides which and what quantities of imports and exports should be traded with which country. The Ministry of Foreign Trade assured the implementation of the annual trade plan by setting general trading policies. The Ministry used mainly direct trade restrictions rather than the indirect tools used by Western Governments. Tariffs were rarely used, instead implicit import and export quotas control trade.
Trade was further channeled through State-owned Foreign Trade Enterprises. These FTES were broken down into certain product categories. One FTE, for example, only dealt with agricultural products, whereas the other traded textiles. The individual FTES were responsible to fulfill their part of the trade plan. The FTES operated by selling domestic goods to foreign FTES or ministries and buying goods from foreign FTES and distributing them to the domestic ministries.
But not only were the Foreign Trade Enterprises divided into different groups, the Eastern European countries were broken down into blocs as well. In 1953-4 many nations began to make "Industrial Treaties". These treaties specified the products in which each country would specialize its export. Three main blocs were introduced: the agricultural sector, the raw material sector and the manufacturing sector. These bloc economies were based on the idea of economies of scale. The nations believed that by specializing in certain products and increasing their productions of these goods will lower costs due to economies of scale.
The Bloc economies, however, did not have the hoped effect. Many countries had formerly invested in steel and iron production plants or penicillin factories and it was difficult to redirect investment funds into new industries. Furthermore, even though countries have been assigned to sectors, many parallel investments occurred or investments into extremely uneconomic industries occurred. As a result great shortages of certain major products like minerals and raw materials occurred.
A further reason for the large shortages was the relative autarky of the nations. Central planners tried to avoid strong dependence on foreign economies. All nations wanted to maintain a certain degree of self-sufficiency for military purposes and to avoid economic warfare. Thus no real specialization could ever occur that would have allowed nations to experience the gains from trade.
Most trade between nations was conducted according to five-year bilateral agreements, which specified the products traded between the nations. These bilateral agreements also existed between Hungary and the Soviet Union. The agreements stayed stable for a long period of time due to the stability in the constant interest of trade of the two nations. Trade mainly consisted of Soviet material imports to Hungary and Hungarian finished product exports to the Soviet Union. Trade with the Soviet Union was one of Hungarys major sources of trade.
However, Hungarys trade with the European Community accounted for a larger share of Hungarian trade. Negotiation between the EEC and Hungary resulted in several sectoral agreements that specified the extent of Hungarys exports of textile, steel and agricultural products. Trade was made difficult for a long time by the EECs unwillingness to issue a general trade agreement Hungary. The reason for this was Hungarys demand to be treated like other non-EEC GATT partners. The EEC, however, insisted that Hungarys economic system was not free of non-tariff barriers and thus the country has to be treated differently. In 1988 finally the two sides settled and the EEC finally recognized Hungary as a country whose economic system coincides with the GATT regulations.
The case of Hungary, where trade was mainly focused on the West, was very rare for the other Eastern European countries. They mostly traded among each other and conducted a barter kind of trade, which was closely monitored by the Government agencies. In conclusion, trade, like all other sectors, of the economy was under tight control of the Government.