SUMMARY REPORT AND RECOMMENDATIONS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP64-00014A000100030012-6
• Release Decision: RIFPUB
• Original Classification: S
• Document Page Count: 15
• Document Creation Date: December 9, 2016
• Document Release Date: April 27, 2000
• Sequence Number: 12
• Publication Date: March 16, 1956
• Content Type: REPORT

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March 16, 1956
I. General Conclusions on Communist Chinese Trade From Previous CFEP Payers
A. The continued posture of aggression deliberately assumed by Communist
China warrants the continued application against that regime of all
feasible economic and political pressures by the Free World,
B. The differential controls exert significant pressures against Communist
China. Economic pressures include the denial to the regime of Free
World goods and services except to the extent that diversion and trans-
shipment of Free World goods occur, and additional transportation and
other costs to Communist China involved in the procurement of such goods.
Political. pressures comprise those flowing from enhanced cohesion of
Free World nations in their opposition to Communist Chinese aggression
and subversion, impairment of Communist Chinese prestige and political
capacities, and probable stresses and strains on the ties between Communist
China and its Soviet partners.
C. Reduction of the differential controls under conditions prevailing today
would be untimely and especially damaging to Free World interests. It
would significantly impair the position and prestige of the U.S. in the
Far East, as well as the .prestige of SEATO and similar organizations.
It would adversely affect U.S. public opinion, including congressional
opinion.
Reduction of the differential controls under conditions prevailing today
might have an adverse effect upon the position and prestige of the U.S.
in the Far East, as ve'll as the prestige of SEATO and similar organization4
and might adversely affect U.S. public opinion, including congressional
1/
opifion.7
Dee erase recommends inclusion- of-the brae e -eU paragrap r in place
of the paragraph preceding it.
dimi6job
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D. The military potential of Communist China is severely limited by its
primitive industrial economy and by serious deficiencies in transport
and other services essential to both economic growth and military
expansion. The Communist regime can meet its ambitious plans and
programs only by substantially increasing its imports, either from the
Bloc or from the Free World. /The Communist regime can meet its
ambitious plans and programs only by maintaining its present level of
imports from the Bloc or by increasing its present level of imports
1/
from the Free World.?'rhe European Bloc is the principal source of
essential imports, in keeping with the basic Sino-Soviet Bloc policy
of self-sufficiency.
E. The inability of Communist China further to increase its exports sig-
nificantly, together with the trade and financial controls of the
free World, greatly limit the regime's ability to acquire imports from
the Free World.
IT, United Kingdom Proposals
The United Kingdom, both in their Aide Memoire of January 3, 1956 and in the
Eden Eisenhower discussions, presented a priority list of items which they
nominated for progressive decontrol over a six months period. It was made
clear in the Aide Memoire that their basic objective remains the elimination of
the entire differential within one year. They also have included in their
priority lists 21 'COCOM List II and List III items, but it is not clear whether
they propose completely to decontrol these items or to retain them on the
CHTNCOM lists for control identical to that applied on the COCOM list.
I recommends He inc us~oi o he bracketed portion in place o? he
sentence preceding it.
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Careful analysis of the United Kingdom proposals demonstrates that even their
minimum proposal constitutes a sweeping revision and reduction in substance of
the CHTNCOM controls. Tt is probable that agreement to that priority list would,
in fact, eliminate important parts of the functional groups of commodities and
would so weaken the remaining items that their retention for an extended period
would be unlikely.
The United Kingdom indicated at one time that they would go forward uni-
laterally to decontrol the differential items if the United States would not
support them in CHINCOM in a substantial relaxation. It is not clear, however,
that they would, in fact, take this unilateral and extreme step.
III. Japanese Proposals
The Japanese have made three proposals for deletion. last October, they
submitted a list of 111 items which they wished the United States to consider
bilaterally for decontrol. After informal discussion between the two governments.,
the Japanese submitted in November a list of 11 items (actually eight item
listings) which they considered urgent., and for shipments of which they wished.,
with United States support, immediately to request specific exceptions by the
China Committee. In further discussions with the Japanese., we indicated that we
could not agree to immediate action on their request but were still considering
their lists and would appreciate additional justification by them for their
proposals. Late in February, they substituted, for their October list, a third
list (with accompanying justification), totalling approximately 130 items,
divided between those which they considered first priority and second priority.
26 of these items appear on IL-II and IL-III.
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Except for the short list of 11, the Japanese proposals were sufficiently
broad as to have a large impact on the differential lists and to weaken the con-
trols in nearly every sector.
The Japanese have indicated that they, like the British, have as their ob-
jective the complete elimination of the differential. However, they also
appreciate the U. S. attitude and problems and are willing not to press for
realization of this objective at this time, provided they can obtain substantial
reductions in the differential to accommodate their internal political and
commercial pressures. The delay in obtaining these reductions has been such
that they have recently renewed their request for support of exceptions involving
the eleven items as interim relief with special emphasis on wooden fishing
vessels and hulls therefor, and automotive replacement parts. Through agree-
ment in the EDAC structure, the Secretary of State has been authorized to
inform the Japanese, at a time calculated to obtain the best return to the
U. S., that the U. S. would be sympathetic to a Japanese exception request in
CHINCOM regarding the wooden fishing vessels, subject, of course, to quantities,
quid pro quo, etc.
IV. Analysis of Trade Prospects and Strategic-Economic Effects
Annex B (Revised) estimates that the increase in Free World exports result.Lng
from elimination of the China differential would be very slight in the aggregate,
and would be distributed so that no one country would benefit significantly with
the exception of Japan, which might increase its total exports by approximately
three percent. The gain to the Communist Chinese economy would be by a resultant
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reduction in the cost of her imports and by the wider range of goods available
from which she would select imports most advantageous to improving her industrial
situation. There might well be a change in the pattern of imports in that
Communist China would concentrate on items now on the CHINCOM Control Lists and
reduce imports which she now obtains from the Free World.
Notwithstanding the conclusion that the elimination of the China differential
would be to the net disadvantage of the Free World, it is evident that there
is,, and will continue to be, substantial pressure by the CG governments on the
U. S. to agree to a substantial reduction in the control lists affecting Communist
China. This pressure appears to stem largely from internal political factors
rather than from any illusion by governments as to the large amount of trade
which might develop.
V. Basic Considerations
The following basic considerations have been agreed as background for
dealing with the current issue.
1. The maintenance of meaningful CHINCQM controls is important to current
U. S. foreign policy.
2. From the strategic and the U. S. domestic political points of view, no
substantial reduction in CHINCOM controls should occur at this time.
3. From an economic standpoint, it is only with respect to Japan @- and
then only to a moderate degree -- that it can be estimated that a
relaxation of CHINCOM controls would result in an expansion of a Free
World country?s foreign trade significant in proportion to the present
total of such trade.
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L Both political and commercial pressures are nevertheless being exerted
on participating governments to achieve relaxation of CHINCOM controls;
in light of these pressures, the U.. S. would be warranted in concurring
in some relaxation in CI-TINCOM controls provided that
(a) a substantial CHINCOM differential control is retained,
(b) the CHINCOM control system is increased in effectiveness, and
(c) the over-all CG/COCOM/CHINCOM.activity is materially strengthened
to the extent determined by the U. S. Government to be practicable.
5. Negotiations, both bilateral and CG/CHINCOM, should be conducted in such
manner as to assure a reasonable degree of relief for Japan and some
participation in trade by the other PC9s without appearing to show any
obvious preference for any participating country. Other bilaterals
should be scheduled so as not to emphasize the U. S,-U. K. bilaterals.
VI. U. S. Negotiating Objectives
At a forthcoming CG meeting at which a review of the CHINCOM controls will
be scheduled, the United States should have the following objectives in minds
A. With respect to the China differential controls.-
1. To retain substantial control in terms of the coverage of listed
items;
2. To continue to apply effective bunkering and voyage licensing con-
trols to the differential area;
3. To tighten the CHINCOM exceptions procedures and practices (including
implementation of procedures already agreed);
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To achieve a clearer and firmer undertaking through COCOM to deny
or strictly control to Eastern Europe items which
(a) are being obtained by Eastern Europe from the Free World and
then diverted to Communist China, or
gb) are being exported by Eastern Europe to China from indigenous
production which are then replaced by imports from the west.7
((b) to obtain agreement for multilateral consideration of measures
that might be undertaken to avoid frustration of the China
controls through the replacement by import from the Free World
of controlled items exported to Communist China out of indigenous
production within the Soviet Bloc,) 17
/ Explore the possibility of obtaining agreement by CG to deny certain
materials to the Sino-Soviet Bloc where it is apparent that the Sino?
Soviet Bloc is using such materials, equivalent items or materials
produced therefrom for economic penetration of Free World countries;
whether or not the goods are classified as strategic.7`2
B. With respect to COCOM controls:
1. To oppose any relaxation of COCOM controls;
2. To achieve embargo of copper wire;
1/ Bracketed material is supported by Commerce, Defense and Treasury.
Parenthetical language is suggested by State, MT&C and ICA as a sub-
stitution for the bracketed material.
2/ Recommended for inclusion by Defense and Commerce.
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To obtain acceptance of improved controls over the sale, transfer
and repair of merchant vessels;
To achieve improved quantitative control (specific proposals would
be prepared in.advance of the CG meeting);
ment of "peril"points"'or other similar techniques for IL-III itemst
To seek improvement of reporting procedures and possible establish.-
With: respect to. general CG/COCOM/CHINCOM considerationss
1. .To work towards ,a closer alignment with NA 70;
2. To achieve agreement for periodic consideration of the trade trends
and tactics of the Bino-Soviet Bloc,, particularly in light of recent.
economic penetration efforts by the Bloc,
Analysis of the Relativew"Strategic-EcohOmic Importance of the -Differential L1Ea
Annex D arranges all the China control items, plus those items on IL-II and
IL-III which had,been nominated by the U. K %'. or 'Japanese for deletion,. in three
lists. List Acomprises items considered to be of'least relative strategic-
economic importance. List B ,comprises items considered`to be of average, relative
economic-strategic importance and List C: comprises items of greatest relative
economic-strategic importance 1. In general, the bases for rating these groups
were.the supply. position within theSino-Soviet bloc, the, complexity of the pro-
duct or:the equipment necessary to produce it, the relationship of an item to
other items orgroups?of items and the relationship of military application,
These methods. were developed solely for this purpose and are not likely to be
T7 '91th ew exceptions, items un er. erential controls are availableto
Communist China, either from ctkar; c ?' ources or by transshipment from the
Free World. The 37 items identi VInb;f.:~41A are those for which the continuation
of control has a most probable adverse effect on the industrial growth off
Communist China.
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accepted as a basic rationale in negotiations with other countries. However,
this grouping should constitute one element of negotiating guidance in any
international discussions.
Annex D also arranges the items within Lists A and B in several groups.
These groupings represent evaluations in addition to the strategic judgments
described above. They reflect the current availability of items in the Free
World, the priority for trade attached to items by Japan, and the likelihood of
significant trade developing with China within the over-all estimate of probable
increases in Communist China's imports from the Free World.
From the standpoint of negotiations, Defense is of the opinion that the
distinction between List A and B items is of major significance, since the
former could be conceded without materially affecting the aggregate impact of
the China controls. The distinction between List B and C items is considered
less significant since any material concessions in these areas significantly
erode the controls, the only difference being one of degree.
VITT. E 'vial Problem of Rubber
In view of the importance which the U.K., upon political considerations
related to Malaya, has attached to special treatment for rubber, as well as
the obvious problems, both political and economic, which face the Free World
with respect to this commodity, especially in South and Southeast Asia, it
would appear that, in conjunction with any reduction that might now be made
of the China differential, the net interests of the Free World would be served
by a reduction in the control over natural rubber. In the light of the
rubber shipments which are being made to Communist China by Ceylon, as well
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as shipments in prospect by Burma and Indonesia, and in view of the fact
that Communist 'China has been reliably reported to be re-exporting a sub-
stantial part of the rubber which it is presently purchasing from Ceylon
alone, it would appear that application of a quantitative control technique
to rubber would be of no practical utility. Furthermore, aside from the
fact that efforts to negotiate quotas are likely to engender controversy,
the employment of quantitative controls under these circumstances might
subsequently prove politically embarrassing to the United States Government
having been in some way consciously deceptive. It appears, rather., that
Free World security interests would be better served by maintaining a close
surveillance over the movement of natural rubber. This could be achieved
by multilateral agreement in CHINCOM to give surveillance treatment to exports
of rubber to the entire Sino-Soviet bloc and by bilateral negotiations by
the United States with exporting countries where necessary to obtain their
agreement to special reporting of rubber exports to the bloc. The U.K.,
of course, is the only CG/CHINCOM country interested in rubber exports,
and therefore special negotiations concerning reporting might be necessary
only mr th the U.K. and those countries in South or Southeast Asia who might
engage in this trade.
IX. Future Reviews
With respect to the publicized U. S.U. K. agreement to review the China
controls "periodically," the U. S. position should be that the current review
has been made on the basis of prevailing conditions and that it is not appro-
priate to schedule a further review at this time. However, the U. S, recognizes
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that conditions may change, thereby making necessary a reconsideration of the
China controls; in this connection, the principle should be recognized that the
review might well result in an upward. revision of controls should there be a
new threat of deterioration of the Fa`r Eastern political and/or military
situation.
X. Recommendations for Negotiation
With respect to the forthcoming bilateral negotiations on the level of
controls against Communist China, the 'Departments of State, ICA, ICA/MDAC and
Commerce make the following recommendations;
1. U. S. Position:
The United States is preparedr
a. To negotiate, as an area of concession, a downrating from the
CHINCCM embargo list to a surveillance list (or, to the extent it
becomes necessary, to decontrol) of the 73 items in List A and List
B of Annex D, plus such portions of the items presently classified
in List C as may, through a process of redefinition, be agreed for
placement in Lists A or B. and natural rubber (with a special
bilateral agreement on reporting with the U. K.); and to agree a
special bilateral exceptions arrangement with Japan on wooden
fishing vessels.
b. To review CHINCOM controls whenever a change in the international
situation occurs which in the view of any PC is deemed sufficient
to warrant a review either for further relaxation or strengthening
of controls to Communist China.
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2. At the same time, the United States should seek agreement to and support
for the objectives set forth in Part VI of this report. Of particular
importance therein are the desired improvements set forth in /ubpara..
graphs A 1, 2 and 3 and B 1 and 27 (subparagraphs A 1, 3 and 4; B 1, 2
and 4; and C).1/ /The extent to which U. S. negotiators are authorized
to indicate tentative agreement in bilateral negotiations will in each
case depend upon the extent to which the PC. concerned accepts and under-
takes to support in the CG the U. S. objectives stated above. Agreement
of a PC not to exceed the down-ratings or deletions which the U. S.
negotiators are authorized above is alone not sufficient to warrant
U. S. acceptance of the arrangements; the COCOM/CHINCOM control system
must be strengthened in return for U. S. concurrence in relaxation of
CHINCOM controls. These judgments will be made initially by the nego-
tiators, subject to inter-agency review in Washington when the results
of the several bilaterals become available.? ?/
3, Negotiating Procedure:
Full bilateral di-seussions -should be undertaken by the United States
with the various participating countries. A bilateral with Japan should
occur first and be followed by a bilateral with the United Kingdom.
Bilaterals with the other participating countries should promptly follow
to assure a fuller understanding by them of the United States view, to
1 Bracketed material s proposed by State, ICA and ICA/MDAC; parenthetical
material is proposed by Commerce.
2/ The Department of Commerce recommends the inclusion of the bracketed
material.
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gain support for that view and to avoid increasing present resentment
regarding extensive U. S.-U. K. discussions. The results of individual
bilaterals should be reported oromptly. Before a final U. S. position
is established for presentation to the Consultative Group,, full account
should be taken of such bilaterals as have been completed.
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A. Recom ?ndations for Tlo ;atiations
0. With respect to the forthcoming negotiations on the level cf
international controls against Communist China, the Department of
Defense makes the following recommendations*
U. S. Position
The U.S. is prepared to offer, as an area of concession, the
removal from the CItfy-ICC Embargo List of the ~,5 items in the A List
of Annex D, plus rubber# wooden fishing vessels, certain iron and
ote 1. products and possibly parts of two or three items of special
interest to Japan which are an the D list.
Negvtietin ; Procedure
1. As an initial step, President Eisenhower should address a
letter to Prime Minister Edens, stating in substances that U.S. Govern.
ment has reviewed the U.K. proposal to eliminate over a period of a
year the differential between the COCOM and CIIf JCOM Control Lists
and finds it impossible to go that fax. The U.S. soon no basis
change in the Communist position in the Far East; it considers any
substantial reduction of tho China controls would provide only
slight advent ago to the free world economic position add would be
of great disadvantage to the security position of the free world.
Nevet theless, the U. S. is prepared to make certain concessions
(the A List items, plus rubber) in the effort to arrive at an agreed
position with the U.K.
2. With the Japaane se, the U. S. should o cntinue discussions at
the Foreign Office (technical) level, offering concessions on the
A List items, plus certain parts of the iron and steel group (List C),
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wooden f ohing ves sels,# and a fow other pnrts of it ems of
special Utams Japanese Interest,
3. lf? as a result of these negotiaations# it does not appear
that the 'C. S. position can be sera in tained, then cht U. should move
toe consideration of items on the .B Liat# but only if the CS+K.
and Japan comhit themselves to stronal.y support the 11.8o in the
CO on a proposal to gradually narrow the China differential, by the
process of transferring sore items from the CHI iCOM List to the COCCH
Ltbt,, and by dropping others entirely. In the initial stages of
this process* only fl List items would be considered. Certain items p
such as coppor wire and whips? should be xeatorod to the effective
COCO 1 control at once by virtue of their special importancr. It
should be agreed that the ultimate result vould be a unified control
program? substantially narrower in sloops than the present CHINCt
*ontrolss but substantially broader then the present COCOM controls#
the entire control to be effectively :implemented.7
NOTES The foregoing bracketed material is recommended by the Department
of Defense in substitution for Section Xp page 11$
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