CFEP DRAFTING GROUP ECONOMIC DEFENSE POLICY REVIEW DIFFERENCES IN FREE WORLD CONTROLS OVER TRADE WITH THE EUROPEAN SOVIET BLOC AND COMMUNIST CHINA

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP63-00084A000100070002-7
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 38
• Document Creation Date: November 16, 2016
• Document Release Date: March 24, 2000
• Sequence Number: 2
• Publication Date: June 23, 1955
• Content Type: STUDY

i& c olle
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w,a
CFFP DRAFTING GROUP
ECONOMIC DEFENSE PO CY EVIEW
Staff Study No. 6
Draft of June 23, 1955
Differences in Free World Controls Over Trade with the
Europeanviet Bloc and Communist China
This draft of Staff Study No. 6, "Differences it Free
World Controls over Trade with the European Soviet Bloc and
Communist China", is transmitted for your use in connection with
the work of the CFEP Drafting Group on Economic Defense Policy
Review.
In compliance with the request of the Chairman of the
Drafting Group, the Executive Secretary, EDAC, is providing re-
production and distribution facilities as a service to further
the work of the CFEP.Drafting Group.
Distribution:
CFEP Drafting Group
Irving I. Kramer
Executive Secretary
State [ ,pp;o gpitgi (mo&d lA!1i#pis--Wm bgY@0070002-7
 there is at present a wide difference between the Western trade controls
,so lied to t ~.l and those applied to the .. E rropeau So iet Bloc. 'The
. ; . by M has resulted in a mob longer, list of ;. _ . ,,.., goods which are
e with ' A St 19~.t remotion i the level of trade controls against
f`t~2 export to eamumdot China than to the E repean Soviet- Bloe*, In.ad*i
the CAC Lists can be effectively denied to !oist.aima.
b shipping deserved for this purpose, while non bloc shipping can be uti-(
lined for the transportation of macontrolled gc d6- mss, o r those
goods
E pe. These goods can be i teed, by Red China via an Bloc
ports
derive that, country of goods which are not 0180 denied to Eossrim,ist
1. The longer list. applied to t Chiafs can sl w delivery but "I N
a g_ other thi`aga, unilateral Bg controls prohibit importation of goods
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t fre I r 'fie d f t gtr s. This
cost? is, estimatesd at $O , mi1imfthe y 1 uhf the
Awl.
m.'den d1~e~to the increased X"4t
,E3d' am 'the
1 1~ ae a epmseq e.. ec)aomie ad ,te is both t China and
its trading partners in the $i - niiet . loe
3. The dent. U' l in. Western export controls bas .t
effect Of losing for Cast 0.1 so= or -Its
pan. T141#9 ,tto pose use good.s , `brit 3 s..it
east, expert
usable er ,Chinese emits to Japan we, rebab1 million per
year below what they w?ui. be in the absence of the ditsre t .al. is
caatro]s. _ .
fe -most _1 tart single control applied, sgaiast... ouff iaist e___
the item on the iaaAWd' list or pr .de C wit$, fereiga e=banga
The loss of the US market Aerloms -tails
commudst Chiea's , abi13. y to J *port goods from all, ac es including the rest
of the Soviet_ Bloc.
the restricted sc~arcaa of r ttpply
The i ,act af/tbese various controls can be seen.,when cc a red with
the' fact that , Ce iet China's . i is f ram all Bowe" Smormted, to about
$1. 5 billion is 1 . Thus, the differen=tial iU controls applied by
tries o kher in the , US cuts , China's imparts at . 41, gem by at lit
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iaf tial r,1 t .af 23PP" tt . t :qtr?1s;, a; rB ' 1. s ed
It is estinated. that this costs C nisi Ch sa rougbly
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5, ee t,~ :At. 1 ty @,: Beat; a is" traded 'by. a ut1ate l
,
3 ~r
4 b Xf-t of $l ~~ iUi : ~~+sare 'seed "l td 1,
Since the C ?easure has been meting ng o allies
to reduce controls against t China. stc untries are motivated
either b'Y dints z is or by a feeling that increased, trade void,
went is the IK. Econc tc considerations
are wt large a;W_are
reduce internativoal_ tensit and therefore, the risk of warmed conflict.
In rte $ mly for ce;rta n qapezese businessmen and political leaders. Eat
apace ee that 'heir country at a disadvantage vis-a-vis the
ftestera co retries in the indirect trade with. Commmist China. Portugal,\/
is coed. because ae 1Msu.
The eliom in the differential in export corals applied to
Coa mist Chin vo not, to repeat .ow that c
s ovmt y cbas ~ ~rhich f
ea'w
-_ -
,..?., W~ ti .~ purchased. :u the west. it Bald reduce the cost of
gueh purses and, increase
V01=0 of trade f - 3^~
eight rise game percent. Coat io art unilateral
f l aneial. controls would, Of course., deny Cc ,ist China an increase of Sam
ld- percent which it,could otherwise achieve through its receipts of dollars
f%,M the =,
The eliatnat en of the differential in c trols ean3d else be achieved
by waislag the level of controls against the.,Eur
Blue Such a POUC7 would
defy to C China those go es which can nor be transshipped through
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eonld -bye ted its investment
_ites ir?r ag ed i -,n+ 4-n , ock -
 s bs sur~t3~1. i 3~ . X3.5 agaii,=t the $
_mv m. a34
pot#i" bmatIlAtOXI~ e s a the part of the
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1. Die Iff AD TO
A. Historical Background
International agreement to apply unified trade controls against the
Lhvorpean Soviet Bloc became effective in January 1950 with the establishment
of a Coordinating Committee (corn 1sil~3ar re d t import -meta as,
h3l "ro" have i ed. its investment
is `tl1ese items ,by. , .fed 15 percent in 1952.
iminataiG3:
x.. a
since tbe-geneva Conference press re has been Ming among mw allies
either, -by neutralist sentiments or by a feeling that Increased. trade would.
to reduce: ls against a i st inn. Most e t es are. motivated
reduce - t1oi al, tensiam and, therefore.: the risk of aged conflict- The
utter is t in the UK. Econ is consideratiamre are not large and are
and political leaders. y
Inportant,mily for certai8 Japanese businessmen
Japanese also feeltbat their country is at a disadvantage vis-a-vis the
Western- opean a imtries in the indirect trade vith C mist China. Portugal
10 percent which it.amaA otherwise achieve through its receipts o
such purchases and. increase the country's export earnings so that the total
volume trade might rise by, sy 5 percent. ontisnatisn of i],ateral US
- _r
fiaaneial controls vquld j, of course, day. Cadet Chim an increas, pf some
is cold because of eau ,~O--L`'
T h e el m i a a t en i n t h e differential i n e x p o r t c o n t r o l s a
to pchase goods which
vou1A not, to repeat., a" that cow
it otherwise could not the West. It voo 4d. reduce the cost of
fry the
WD*
,e elimtastien of the erential. in Ofltrols alsobe__ ved.
by raising the level of contrala' sgainst the 1rG peas - Bloc Such a policy wouId
deny to , C :Lst: China those goad which can now be transshipped through
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Eastern W:
H suchacore: Fa
On,
c
now
m since it fo33x c3~ .,sue; - 3tee]s ` . ie4
"tIal. re,i
.,. ~ im.. _ cvstre3s t the man, al" amd., eaY3AUe
the., part md' tbe, W>M.
iv
SECE$T
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BIDS MUM
AIM THE
His b a7; B~u, ig ?~vg .
International agret to apply unified trade controls against the
European S viet Blue became effective In January 1954 With the establishment
of a Coordinating C ittee (CAC?x) by the major Western allies to direct and
coordinate trade control, policies of the countries concerned. The COCOM
countries, now numbering 15,1 agreed to control three lists of commodities for
the purpose of limiting the military potential of the Bloc. Goods on Inter-
national List I (ZL-T) are effibargoed.for shipment to the Bloc, goods on List II
(IL-II) are subjectto.''certa n quantitative export controls, and goods on
List III (IL-III) are subject to surveillance and exchange of information on
shipments to the Bloc by the CCCCM countries.
In June 1950 Cam ist China and north Korea were included in the scope
of the export controls exercised by COCOM countries. In December 1950, after
the Chinese Conuxiist aggression in Korea, the US completely embargoed its
trade and, shipping with mist China. In addition to trade controls main-
tained by other cooperating natiao against Communist China., the US has put
into effect the fgllmwing unilateral controls:
GMr, n
1. Tmnsactlon and import controls which effectively prohibit
s
Cr`'P Italy? Japan, Luxembourg, the Netherlands, Norway, Portugal, Turkey, the
UK, and the US*
Ccm ist Chi tiC andU& uses of US dollars in
transactions involving a Chinese Conmmnist interest.
der countries are:,Belgium, Canada$ Denmark, France
Greece Grarmany
SEC8ET
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Expert controls rich embargo all American goods to.
communist. Chhina.
The denial of permission to American flag ships to visit
Communist China and of their carrying any cargo intended
for that country.
The prohibition of bunkering in the US of any foreign
ships destined to call at Communist China within 120_ days
following, as well as the mandatory refusal by any American
Petroleum Caaapany of bkering overseas of foreign ships
carrying strategic cargoes to Conist China, either on
outgoing or returning voyages.
After the UN embargo resolution of May 18, 1951, the f OM countries.
expanded their controls on trade with Communist China, and 30 other countries
imposed restrictions on their emits to Communist China. By the fall of
1952 all. COCOM countries had agreed to embargo for shipment to C mnist
China all items on the three international lists as well as certain supple-
mentary items, and Organized the China Committee (CSu uOM) to coordinate these
controls. Although enforcement measures have not been uniform, various COCOM
countries have applied controls. on their own merchant hipp ns bunkering,
transshipment of goods,,
SAnv=dsl transacticans~ and have taken other measures
to reinforce their trade control policies.
Trade controls against Communist China have thus .becomae considerably
more comprehensive than those applied against the USM and. Eastern Europe,
and the gap between them was substantially increased in August 1954 when the
4
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B> countries.. agreed 8~ ivaj~r relaxation in trade. controls against the USSR
and pastern Euro pe ttrols' against C?mmxuni.st China were ' maintained
DL'~_1-O!-. f . e ti
Pf'r, and the COCOM countries agreed to consider
meaures to prevent or zed: the evasion of these controls by transshipment
of goods through other Soviet Bloc countries, the opportunities for which had
obviously been increased by.the relaxation of trade controls against the
European Soviet Bloc.
B. Gist ms's .:F eign Trade
During the past five years Communist. China's foreign trade has steadily
expanded. Following the unification of the Chinese mainland under Communist
cool there was rapid progress in reconstruction, and. Ccmnist Chinas
foreign trade more than doubled between 1950 and 1954, Ir hing the approximate
equivalent, in constant dQllarsi of the highest prewar levels. At the same time
Communist China has reoriented its trade toward the Soviet Bloc primarily
because of Commmi st' policies designed to isolate the econonies of Bloc countries
and to eliminate dependence on trade with. the Free World. Of course, Soviet
and satellite military and economic assistance has supported these policies,
which have been given further impetus by Free World trade controls.
Estimates of Communist China's total trade, and its division between
-the Sino-Soviet Bloc and non- Camaasuist areas, from 1950 to 1954 are presented
in Table 1. (see next page).
SECId!:T
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Table 1. C S2 CHINA'S ESTIMATED MAM WITH THE
SING-SCAT BLOC AND THE F WORLD, 1950-195.
Percent of Total Tradel
Total trade
Chinese Communist
By estimated origin and
In billions of
trade data
final destination
Year
US dollars
Bloc N
bloc
Bloc
Nonbioc
1950
1.1
26
7l
26
74
1951
2.2
61
39
61
39
1952
1.8
72
28
67
33
1953
2.2
75
25
68
32
1954
2.5
80
20
75
25
1. Analysis of free world trade data and other intelligence indicates that
Chinese Communist trade announcements since 1952, have exaggerated the extent
of its reorientation toward the Sino-Soviet Bloc. This distortion is be-
1i~to reflect the "middleman role" played by European Soviet Bloc
countries, which are bell to market Chinese Communist exports in Western
Europe and to purchase controlled goods for transshipment to Communist China.
Although this trade is with the free world, the Chinese Communists may record
it as trade with the Sino-Soviet Bloc.
 I-
I10 ECONOMIC'.. IMPACT. OF PRESENT DIFFERENTtM'>;IN' CONTROL
A. On Communist'. China
The differential in the trade controls applied to Communist China above
those.applied to the European-Soviet Bloc has retarded the Chinese economic
program by decreasing foreign exchange receipts and increasing import costs,
-The differential export controls have not denied to Qommunist China any goods
which are available to the European Soviet Bloc though deliveries were delayed.
These goods have been available to China after being transshipped from European
Bloc ports. However, Communist China could have increased its -total imports in
1954 by at least $195, million or over 15 percent in the absence of differential
trade controls. Of this $65 million is due to the differential in export con-
trols; the remaining $l30imillion flows from the unilateral US controls over
dollar payments to Communist China.
exports in 1950, The US market was almost unigde'in its demand for such
important Chinese exports as tung oil, bristles, feathers, embroideries, and
handicrafts. These products could find only limited alternative markets and
the resources used in their production being largely marginal in character were
not easily diverted to other types of production. Although the US has found
substitutes for some of these products and alternative sources of supply for
others,. Communist China could have increased its exports to the US in 1954 by
an estimated $100 million in the absence of unilateral' import controls.
Furthermore, US financial controls cost the Chinese Communists an estimated
$30-50 million in foreign exchange annually by prohibiting dollar remittances
SECRET
The US, which has been alone in closing its markets to Communist China's
lj VY exports, took ne..rly $150 million or over one-quarter-of Communist Chinals
5
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from overseas: hineee~ ;The denial of these dollar funds from exports and
remittances has annually reduoea by 4130-150 million Communist Chinao s foreign
exohahge receipts Which could be used to
purchase imports not
whether or not the US reduced its export controls,
The Japanese market for Chinese Communist exports
404vtlt "44
sive bwt tend
to be competitive with that of the Soviet Union, which is now absorbing commodities
that Japan formerly imported from China, such as coal, iron ore,, salt, soybeans,
hides, textile fibers, and other foodstuffs and raw materials, It is estimated
that Japan could have absorbed a .maximum, of $300 million of Communist China's
exports in 1953, but this level of imports-would have required a considerable
reorientation of Communist China's trade, Given the absence of Japan's export
controls and Communist China's relaxation of its political warfare campaign
against Japan, Communist China could export to Japan $75-100 million of goods
annually (compared to $40 million~.in 1954) without altering substantially its
commitments-to othef markets and without foregoing the advantage of the higher
prices prevailing in the Japanese market,
The Chinese Communists have been burdened with increased imports costs
amounting to very roughly $30 million in 19540 These added costs consisted of
a premium of $20 million above world market prices paid by the Chinese Communists
to secure rubber from Ceylon, and at least $10 million for other costs imposed
by differential controls. Free World goods transshipped via the Eastern
European Bloc in 1954 totaled 110,000 tons, Through direct shipments of these
goods the Chinese Communists might have saved as much as $3 million in transport
costs aloe, Moreover, through wider access to world markets or such as the US
market and the Japanese market em Communist China could have purchased more
SECRET
on the COCOM lists
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:Savings would have been'"espeally
,significant in the cases:ofg a) the controlled commodities of,
Western European
China through circuitous channels, and b) petroleum shipments which constitute
_a considerable strain on'the rail transport facilities of both the USSR and
Communist China and which in the absence of CHINCi3M controls could be seoured
by direct shipments at considerable savings.
In summary, the differential in trade and financial cont
ols
1
d
es
r
;
)
o
not deny Communist china any specific goods, 2) decreases the availability o
5
forei
n exchange to Co
ist C
i
g
mmun
h
na by $165-210 million per years, and 3)
increases the cost of Chinese imports by at least $30 million per year, This
minimum total of roughly $195 million amounted to over 15 percent of Communist
.China's imports from all sources in 1954. The out is especially significant
when one notes'that imported metals, machinery and equipment, estimated at over
$700 million in 1954, constituted over one-half,of the total investment in such
.items budgeted by the Chinese Communists in 1954, Thus, an added $195 mi11i~on
could have increased such investment by over 15 percent.
The initial impact of the differential in trade controls on Communist
China appears to have subsided,, probably as.a consequence of economic adjust-
meats in both Communist China and its trading partners in the Siro-Soviet Bloo,
Immediately after controls Were imposed, the Chinese Communists offered high
prices for strategic goods in Hong Kong, However, this situation changed after
1951, and by 1954 reports from Hong Kong indicated only sporadic interest on '.the
part of Communist China to obtain strategic goods through illegal channels in
Hong Kong, Exports of strategic goods from Macau,- which had been.a major
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in part, to action by the Portuguese Government to enforce controls
-goods through Hong.'Kong and Macau, both of which were high cost intermediaries
npartto alackaofrm offers from the Chinese Communists, Trade in strategic
for obtaining these materials, was ( apparent ly displaced in part by purchases from
West European "sources in 1953 most of which were transshipped to Communist China
through European ` SovietBloc ports. These transshipments increased substantially
during that year compared to 1952. However, the decrease in these diversions
from non-Communist Europe during 1954 suggests that the Chinese Communists 1)
have found Alternative sources of supply in other countries of the Sino=Soviet
Bloc, 2) have increased their domestic output sufficiently to satisfy more
completely their'needs for strategic goods, or 3) have been forced to reduce
purchases because of shortages of foreign currencies and unfavorable barter trade
balances given impetus by agricultural production shortfalls and saturation of
decrease in diversions
foreign markets with typical mainland Chinese products, Combinations of all the
factors, and other minor influences, are of course possible explanations of this
Differenti:#'l. trade controls provide Comminist China with an issue in
their effort to isolate the US from its allies, Although controls hinder their
efforts to achieve economic penetration of other Asian countries,, the Chinese
Communists continue to hold out the prospect of advantageous trade to these
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conflicts with the US, ?'`"` ,, . r -
The impact of the differential in export controls ha& been sligh on the
countries of .Communist Europe, Some of these countries, notably Poland, have
engaged in & .profitable transshipment trade, Others have undoubtedly supplied
Bo On Communist Europe
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Communist China with goods which it ordinarily received directly from the West,
Since these exchanges have been on a commerical basis,, there has been no net
cost and some economic gain to the countries'of the European Soviet Bloc,
There is no evidence that the necessity for closer economic relations in
the Sino-Soviet Bloc has had any marked impact on their political relationshipso
C. On Non-Communist Countries
With a few exceptions, the non-Communist countries have been economically
little affected by the differential in trade controls. The exceptions are
Hong Kong, Japan, and perhaps Macau, although the latter area has continued a
limited trade in embargoed goods with mainland China.
Hong Kong has been an exception because of its geographical loo&tion and
traditional role in the mainland China trade, It is largely dependent on
mainland China for its food supply and many raw materials, and has in the past
supplied many of mainland China's needs for manufactures.
A large part of Hong Kong's export market on the mainland was lost as a
consequence of its imposition of CHINCOM controls, It expanded markets in other
areas of Asia, however, for products.which it manufactures as well as items of
entrepot trade, As the Chinese Communists have also shown a reluctance to use
Hong Kong in its traditional role as a trading center, preferring to trade
directly with the countries involved, it is unlikely that maintaining the present
controls or relaxing them to the COCOM level would substantially change
Hong Kong's over-all economic position,
Japan is in a somewhat different situation because a relaxation of
controls would permit it to export machinery, equipment, rolling stock, and
other capital goods to Communist China, Although this circumstance would help
to alleviate Japan's trade problems., it would fall far short of closing Japan's
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_
trade gap in the next few years, Two major factors militate.agailist, a
reintegration of the economies of Japan and the Chinese mainlands a Communist
China is now firmly committed to a program. of industrializationnand integration 1, 1 of its economy`w th that of the Sinb-Soviet Bloc; and b) Japan no longer
possesses the political control over Manchuria which permitted it to develop
that area as an integral part of its own economy and to make mainland China its
most important trading partner.
ilIo ELIMINATION OF THE DIFFEBENTIAL IN TRADE CQNTRCLS
A. Pressures for the Elimination of the Differential
There is continuing pressure for the elimination of the differential.
Most foreign countries are opposed to applying a higher level of controls
against Communist China than against
Communist countries are motivated by
A._.
the rest of the Communist Bloc, The non
neutralist sentiments and a desire to
reduce international tension.
The attitudes of most non-Communist countries reflect primarily their
views on Free World policies toward Communist China rather than any
respective
vital necessities arising from their trade situation. Since the Korean
armistices and particularly since the relaxation of trade controls against the
European Soviet Bloc, political and commercial pressures have mounted within
the various CHINCOM countries for a similar relaxation of trade controls against
Communist China, These pressures stem in part from the belief that with the
end of hostilities in Korea and. Indochina, world tensions could be reduced and
the chance for peace could be further improved by treating Communist China in
the same manner as the rest of the Sino-Soviet Bloc. They also result from
some feeling. that.espe.cially since the reduction in C0COM controls, CHINCH
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controls can be frustrated by transshipment through the European Soviet Bloc,,
with the consequence that such controls can have only minor adverse effects on
Communist China's trade. Moreover, in some Asian countries, principally Japan,,
there is the feeling that differential controls give the Western European
countries an advantage in the indirect trade with Communist China.
Economic pressures for lowering the level of controls against Communist
China are important only in the case of Japan, the UK, and Portugal (because
of Macau). In all countries including these, however, the attitude on the
problem of China trade controls is considered only one aspect of the country's
relations with the US. No major country would over-ride a firm US determination
to hold the present policy. Maintaining present CHINCOM controls would, however,
continue to be a minor source of irritation in US relations with certain other
members of CHINCOM.
B. Economic Impact of Reduction of Trade Controls to COC0M Levels
If multilateral controls against Communist China were reduced to COCOM
levels, the major impact would be to reduce the cost to Communist China of
imports by $30 million and since Japan would be in a position to negotiate
further barter deals, Communist China could increase its exports to that country
by another $35-65 million a year. Another $130-150 million in foreign exchange
receipts would be available to Communist China, if the US were to eliminate its
unilaterally imposed import and financial controls. No change would be made in
the ability of Communist China to import any specific good not on the COCOM
lists.
The economic impact on non-Communist countries of the reduction in trade t
controls to the COC c level would be insignificant except for Japan where it
would have, however, some slight effect.
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C. Raising Controls on the Sino-Soviet Bloc to CHINCOM Levels
The elimination of the differential in controls could also be achieved
by raising the level of controls against the European Soviet Bloc. Such a
policy would deny to Communist China some goods which can now be transshipped
through Eastern European ports, assuming that all COCOM members would agree to
and enforce the changed control lists. The economic cost to Communist China
would, therefore, be somewhat greater than the cost of the present differential.
However, such a course of action does not now appear feasible, especially since
it follows closely on the heels of a substantial reduction in C'CCOM controls
against the European Soviet Bloc and since the USSR has not only been unprovo-
oative of late but has made various positive conciliatory moves.
SECRET State ? FD, Wash., D.C.