Imbroglio over a Pipeline

By Frederick Painton

A transatlantic debate heats up as France and Italy defy the U.S.

"The spirit of commerce has a tendency to soften the manners of men, and to extinguish those inflammable humours which have so often kindled into war."

--Alexander Hamilton, 1787

Though spoken by one of America's founding fathers, that approving view of the benefits of commerce among rival powers seems to have few adherents in official Washington these days. Hamilton's thesis is regarded by President Reagan as a dangerous illusion that should have been shattered by the Soviet invasion of Afghanistan, Moscow's role in bringing repression to Poland and the steady build-up of the Soviet Union's nuclear arsenal. The Administration's approach has outraged Washington's European allies, who, like Hamilton, see trade as a lubricant that can ease international tensions.

The centerpiece of the U.S.-European dispute is an ambitious 3,000-mile, $10 billion pipeline through which the Soviet Union hopes to deliver up to 40 billion cubic meters of natural gas annually from its Siberian tundra, over the Urals, across the wheatfields of the Ukraine and through Czechoslovakia, all the way to the homes and factories of Western Europe. The line was scheduled to begin operating as early as 1984.

The transatlantic dispute reached a new pitch last week when France and then Italy openly defied the sanctions imposed by Washington on June 18 to prevent Western European companies from using technology acquired from the U.S. to build the pipeline. Initially, in reaction to the declaration of martial law in Poland last December, the Reagan Administration had only barred U.S. companies from supplying equipment for the Soviet project. But last month, right after his return from the Versailles summit, the President broadened the ban to include all equipment manufactured by Western European firms under license from U.S. companies. The Socialist government of President Francois Mitterrand, which has opposed the idea of sanctions from the start, ordered the state-owned engineering firm Alsthom-Atlantique to ignore the new U.S. sanctions and sell Moscow the sophisticated turbine rotors that are needed to pump the Soviet gas westward. Since the French company had acquired the right to produce these rotors under a licensing agreement from a U.S. company, General Electric, the French government was in effect telling Alsthom-Atlantique to violate the terms of the license. Said Premier Pierre Mauroy: "France cannot accept unilateral measures taken by the United States."

It was a bold departure on the part of the Mitterrand government, which since coming to office in May 1981 has studiously avoided open conflict with the Reagan Administration. Said French Foreign Minister Claude Cheysson: "We no longer speak the same language. There is a remarkable incomprehension between Europe and the U.S." A recent French decision to renew arms sales to Nicaragua, despite a quiet pledge to Washington not to do so, has been widely interpreted as a signal of growing French pique over the sanctions.

On Saturday, Italy also declared it would honor "signed agreements" to produce 59 turbines for the pipeline. Under a $600 million contract, the state-owned engineering company, Nuovo Pignone, is to build the turbines using technology supplied by General Electric. Rome called for "frank and fair discussions" between Washington and the ten-member European Community over the dispute.

Other European voices were also raised over the pipeline. During a private visit to the U.S., West German Chancellor Helmut Schmidt told businessmen in San Francisco that "by claiming the right to extend American law to other territories, [the U.S.] is affecting not only the interests of the European trading nations but also their sovereignty." Even British Prime Minister Margaret Thatcher, whose country will not be linked to the Soviet network, has publicly rejected the U.S. stance. Said she on a state visit to Italy earlier this month: "These contracts were made and completed in good faith. If a country wants to keep its trading reputation, it must keep its contracts."

Following the announcement from Paris, President Reagan ordered the Commerce Department to study the legal implications of the French move. But he went out of his way to play down the Euro-American feud. Reagan stressed to a television interviewer in St. Louis that Mitterrand had inherited the contract from his predecessor, Valery Giscard d'Estaing. Said Reagan: "Our allies pointed out to us that they had already gone forward to the point that they did not feel they could retreat." Washington could try to impose penalties, including fines and blacklisting in the U.S., if Alsthom-Atlantique and Nuovo Pignone go ahead with their plans. But in the end, most experts agree, there is little the U.S. will be able to do to stop the French and Italians from selling the equipment to the Soviet Union.

The increasingly bitter clash between Washington and its Western European allies over the pipeline is far more than a dispute over narrow commercial interests. It is a conceptual fissure that goes to the heart of the Atlantic Alliance's very reason for existence. It reveals sharp, perhaps irreconcilable differences in the answers to some of the most pressing security issues facing the West: What are its true interests in dealing with a Communist system that is spectacularly failing on a domestic level but has turned into a military power equal to the U.S.? Should the West lend a helping hand in the economic development of the Soviet bloc in hopes of influencing political reform behind the Iron Curtain, or should it, on the contrary, use its economic leverage to try to bring the Soviet system to its knees? Either way, is there any reason to believe that withholding trade and technology can have any influence on Soviet behavior?

To finance the pipeline, which is the biggest East-West trade deal in history, Moscow has lined up $5 billion in cheap credits (just under 8%, vs. going commercial loan rates of about 15%) from the four major Western European countries involved in the project: West Germany, France, Italy and Britain. In exchange, industries in these countries are being rewarded with huge contracts to supply everything from 56-in. steel pipe to computerized monitoring systems.

In the U.S. view, the pipeline would not only expose Western Europeans to potential Soviet blackmail in the form of a cutoff of vital energy supplies, but would increase the Continent's dependence on an expanding web of economic ties with the East bloc. The Administration also argues that the gas deal will give the Soviets additional resources with which to pursue their military buildup. Claimed Reagan last week: "They do not have the cash for those purposes the way they once did. [The gas deal] will give them $10 billion to $20 billion a year in cold, hard cash."

The Western Europeans respond that although Soviet natural gas will account for an average of 30% of their total gas needs by 1990, the Continent's overall energy dependence on Moscow will rise to only 5%. Moreover, the Soviet gas will lessen Europe's overdependence on oil from the volatile Middle East and gas from Algeria and Libya. Leading importers of Soviet gas like West Germany and France dismiss the risk of possible Soviet blackmail because, as one French official explains, "Moscow needs the hard currency more than we need the gas."

Even if the Soviets cut off all gas exports, the Western Europeans insist, stand-by arrangements exist to enable deprived customers to swap gas supplies originating from other countries such as The Netherlands and Norway. As for the development of a wider economic dependence, the European Community's trade with the Soviet bloc has remained surprisingly small. West Germany, Moscow's largest trading partner in the West, sends only 5% of its exports east.

Beyond the deep division over policy toward the Soviet bloc, Western European leaders are bluntly resentful of Washington's attempt to force sacrifices on European industry at a time when unemployment throughout Europe is nearly 10% of the labor force, the highest since the end of World War II, while the U.S. has sold $3.2 billion worth of grain to the Soviets in the past year alone. Washington's response is that grain sales force a drain on the Soviet Union's hard currency reserves. That proposition is seriously questioned by experts who believe that the Soviets would have to make even greater hard currency expenditures to grow an amount of grain equivalent to what they buy each year from the U.S.

When Washington imposed the first set of sanctions, President Reagan specifically promised to reconsider his decision if martial law were lifted in Poland. But the Administration was not impressed with the measures announced by Polish General Wojciech Jaruzelski last week. Said a top Reagan aide: "Unless the Poles recognize Solidarity, free [Lech] Walesa and end martial law, I don't think you'll see the President act." Yet even hard-liners in Washington now concede that it is inconsistent to link the pipeline issue to Poland while arguing that the pipeline poses a long-term security threat to Western Europe.

If anti-Soviet sanctions are to be at all effective, they must have the support of all important suppliers, particularly the Western Europeans. One reason the Reagan Administration failed to persuade its allies to join its commercial crusade against Moscow may be that former Secretary of State Alexander Haig sympathized with the Western European view that economic sanctions against the Soviet Union were unnecessarily provocative and, in any event, virtually impossible to enforce. During his confirmation hearings two weeks ago, George Shultz, Haig's successor as Secretary of State, expressed skepticism about economic sanctions in general. But Shultz also made it clear at the Senate hearings that he, unlike Haig, was a team player who intended to support Reagan's tough anti-Soviet line. "The President is boss," he said.

In Moscow, the U.S. sanctions have inspired a patriotic propaganda campaign dramatizing official Soviet determination to finish the project by the 1984 deadline, with or without the GE-designed turbines. Soviet television recently showed workers at the Nevsky Engineering Factory in Leningrad massed beneath a banner proclaiming OUR WORKING ANSWER TO REAGAN. The Nevsky plant is one of the sites where the Soviets intend to build their own 25-megawatt turbine; a prototype, they claim, has already passed "rigorous testing." The confidence shown by the Soviets is shared by Western businessmen based in Moscow, who note that the history of Soviet technology shows the capacity of a command economy to respond to specific challenges. Notes Sovietologist Alain Besanc,on of the Ecole des Hautes Etudes in Paris: "If the West stops giving credit, the Soviets will simply reduce the standard of living in Poland and in the other satellites until it matches that in the Soviet Union."

Whatever the differences among the Western allies, there is an urgent need today for a coordinated policy toward the Soviet bloc. Only the Soviets are benefiting from the disarray and bitterness that is now weakening Western ranks. The vague outlines of compromise do exist. Western European governments have found that the policy of extending cheap credits to the East has backfired; they are increasingly ready to trade with the Soviet bloc on straight commercial terms. It should not be beyond the powers of Western diplomacy to prevent the pipeline from continuing to poison the Atlantic Alliance. --By Frederick Painton.

Reported by Gisela Bolte/Washington and Jordan Bonfante/Paris, with other bureaus

With reporting by Gisela Bolte, Jordan Bonfante

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