SINO-SOVIET HLOC ECONOMIC ACTIVITIES RELATING TO ECONOMIC DEFENSE POLICY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP64-00014A000100130006-2
• Release Decision: RIFPUB
• Original Classification: S
• Document Page Count: 10
• Document Creation Date: December 9, 2016
• Document Release Date: January 26, 1999
• Sequence Number: 6
• Content Type: SUMMARY

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SING-SOVIET BLOC ECONOMIC ACTIVITIES REUTING TO
ECONOMIC Y
Summ
The Sino-Soviet bloc has been expanding its economic activities in
the Free World since 1953; enlarging trade relations with-both industrialized
and underdeveloped countries., providing long-term credits' and offering
technical assistance to the underdeveloped areas. With a few exceptions,
it appears that bloc- efforts under this expanded program have not been.
primarily directed toward securing strategic materials but have had broader
economic and political motivation. In most cases where the bloc has
sought strategic items as part of expanded trade the move has seemed to
be' influenced by -a desire to break down the control system or create
dissension within the Free World over trade controls. The bloc has also
sought-to .nerease its influence in underdeveloped countries through
exploiting desires for rapid economic growth and stable export markets,,
Al 'pare Of t;fds program the bloc has negotiated loan agreements providing
for repayment directly through exports from the underdeveloped countries
and has shown a willingness to take surpluses from countries experiencing
marketing difficulties. These efforts' also, do not appear to have been
primarily linked to a desire to secure strategic materials,
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Sino-Soviet Bloc Economic Activities Relating to
Economic Defense :o c
This report is intended to be a concise summary of Sino?Soviet bloc
economic activities in Free World countries with particular reference to
those aspects which have some important direct relation to economic defense
policyo. The terms of reference call for reviewing bloc activities as they
haver
a, Been used to obtain strategic goods, technology and services.,
either by purchase or barter, or by the extension. of capital assistance
repayable by exports of strategic goods to the blocs
be Taken advantage of outstanding commodity and trade problems in
Free World countries for the purpose of increasing bloc influence. Broader
questions of other economic motives and the political objectives being
pursued by the bloc-are not considered,., but this is not intended to detract
from their relevance for determining economic defense policy,
I. BACKGROUND
With the expansion of bloc foreign economic activities beginning in
1953,8 the Sino-Soviet bloc has been engaged in a worldwide.prograat-of
enlarging existing trade agreements and negotiating new agreements, providing
long-term credits to underdeveloped countries for economic development and
arms purchases, providing technical assistance, and'increasing participation
in*trade fairs. By August 1956 between $900.000,000 and $1,000,000,000 of
long-term credits offered by the bloc had been accepted --more'than 90
percent going to Egypt, Yugoslavia. Afghanistan and India. The number-of
trade and payments agreements between bloc and Free World countries rose
from 98 in December 1953 to 190 by the end of April 1956. In 1955 bloc
trade with the Free World reached nearly $4,5 billion as compared with only
$3 billion in 1953. The European bloc accounts for about $14 billion-of
the total increase. In the same period the level of intra-Bloc trade showed
little change. but still accounted for the bulk of the foreign trade of. the
member countries, Looked at from the other side of the coin, only a few
Free World countries conducted a significant proportion of their trade with
the bloc, In 1955 bloc trade represented less than 10 percent of the total
in all free world countries except Afghanistan, Egypt., Iceland, Finland.
Turkey, and Iran, Although Western Europe remains the principal bloc
trading partner, trade with underdeveloped countries has been making up an
increasing proportion of the bloc's total trade turnover. While still a
net importer of capital goods from the Free World as a whole, the bloc has
increased sharply exports of such goods to underdeveloped areas. Bloc
imports'from the underdeveloped areas, largely foodstuffs and raw materials?
have been rising steadily since 1953.
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The bloc has the capacity to double or even triple its trade with
the Free World over the next few years if it should consider such`a step
economically or politically advantageous* If bloc exports by'1960 were
double the 1955 .level they would still represent only about 1.5 percent of
anticipated bloc production. However, the prospects are that bloc trade
particularly that of the satellites- with the Free World will continue to
expand moderately in the next few years, While there-are economic incentives
to modify the traditional strict adherence to autarky, bloc plans still
indicate that most of the area's growing requirements are to be met from
internal bloc production, and while some increases in trade with the Free
World are anticipated, they are unlikely to be carried to a point where the
bloc would become avoidably dependent on the Free World for any significant
proportion of its critical supplies or even a large part of its consumption
of medium priority goods.
It is beyond the scope of the present paper to consider the extent
to which increased trade has a measurable counterpart in bloc ability to
exert greater influence on the foreign relations of the countries to which
its economic-offensive has been directed,- Increased economic relations will
no doubt have an impact on the recipients,. but increased trade has been
only. one element in the larger fabric of the now bloc diplomacy and its
1hiri of `the croclit .for 'recent S iviet gains in the political sphere cannot
satisfactoii ly be isolated. Cn the question of the vulnerability of un-er-
developed countries to the Sino-Soviet economic offensive, EIC-R-114 statess
"The economic problems of underdeveloped countries tend to make
these countries receptive to Sino-Soviet Bloc offers of closer economic
relations. This is not to say., however, that economic considerations
will in all cases be paramount in determining a country's response
to Bloc blandishments or that the acceptance of such offers necessarily
means that the Bloc will be able to exert ptessures successfully on
the country to-obtain political concessions. Vulnerability in
the latter-sense depends on a complex of political, strategic,
geographic., cultural, and other factors beyond the scope of this
report
II,,. THE BLOC ECC1 CMIC OFFENSIVE IN RELATION TO TRADE IN
STRAMJLU RUN=
The question to be considered at this point may be phrased as followsa'
To what extent and under what circumstances has the Sino-Soviet bloc been able
to obtain strategic goods, technology.,, and services, from the Free World as
a result of the expanded economic offensive?
With a few exceptions it is difficult to isolate bloc activities so as
to identify precisely those cases where strategic goods moved or may move to
the bloc as part of a deliberate effort to secure such goods as the price of
barter trade. Again with a few exceptions there is no evidence that the bloc
was badly in need of most of the strategic items secured and thus actively
negotiated purchases with that purpose in mind. The more relevant considerations
ruling appear to be deliberate efforts to create dissension over trade controls
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within the Free World - even on a small scale and largely for political
reasons -- and at times a coincident desire to secure access to some strategic
commodities. The lack of strategic goods in a Free World country, orthe-
adamant refusal to breach trade controls., has not effectively barred trade
arrangements in most cases. At the same time the bait'of'a larger volume of'
trade has been dangled before the Free World countries and"the price demanded
(again probably most importantly for political reasonsi) sometimes involves
violation of strategic control systems. Offers of substantially increased
trade with Western Europe and Japan have been multiplying, in almost all
cases including an attempt by the Bloc to secure strategic goods and
circumvent Free World controls. In offers to underdeveloped countries in
South and. Southeast Asia, the Far East,, the Middle East and-Latin America,
the bulk of items sought are not strategic list commodities, and the primary
reason for bloc offers lies in broader economic and political objectives.
The following listings of instances of where the Sino-Soviet bloc
has obtained strategic goods as part of its expanded economic activities is
not intended to cover every single transaction but merely to indicate the
general nature of such transactions.
A. Bloc Purchases of Strategic Goods from COCON Countries
Under COCON exceptions procedure the bloc has secured or definitely
arranged for purchase of strategic goods in a number of instanesse In the
1956 trade agreements with the USSR, Denmark has agreed to supply two fast
merchant-ships, nine refrigerator ships, and other items subject to CCCOM
controls. This trade agreement ended the hiatus in formal trade relations
between the USSR and Denmark which has existed since the lapse of the
previous-agreement in mid-1954. Negotiations had been protracted by Soviet
insistence that Danish tankers be included in the agreement, The Danes,
eager ta'resume formal trade relations with the USSR, eventually offered
fast merchant vessels instead of tankers.
Turkey shipped about 17,9000 metric tons of boracite to the bloc in
1955, about half of total Turkish boracite exports. Turkish officials
claimed that because of foreign exchange difficulties they cannot cut off
bor?acite exports to the bloc unless Free World markets are available. On
assurance that the US would help -- even to the extent of cutting back US
exports -- Turkey agreed in July 1956 to take steps to curtail boracite
exports to the bloc.
.The 1956 Netherlands-USSR trade protocol included three cargo vessels
on COCOM lists,, and the matter is under COCCM review. Western Germany has
shipped nickel alloy steel to East Germany, supposedly because of necessity
to insure adequate deliveries of brown coal from East Germany. The 1956
Netherlands-Hungary agreement calls for Dutch exports of roller bearings.
Norway has been shipping aluminum to the USSR for some time, and this usual
trade has been provided for in recent now agreements,. The-Soviet Union
has also been seeking assdic (sounding) devices from Norway, and the
Norwegians have indicated that they are considering supplying a small
number.
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Extensive and increasing use of exceptions procedures have been used
by many of the COCCJ+i countries to license shipments to Communist China, a
reflection of the desire to exploit a trade potential but also, 'and importantly,
an indication of Western E ropean and Japanese dissatisfaction jitb the
COCCI-CHINCM differential. In-the first six months of 1956 requests-for
exceptions on shipments-to'Comrmuniat China presented-to CHINCCK were valued
at $160.4 million compared with $10.2 million in all of 1955 and $3.1 million
in all of 1954,
Japan has adhered strictly to COCOMMCHINCOM controls in its trade
relations with the bloc, -About 80 percent of Japan's trade with bloc
countries is with Communist China. If the CHINCOM differential were to be
removed, the potential for trade with Communist China would rise sharply.
The Communist Chinese government has in its last four annual trade agreements
with private Japanese trading groups tried to create dissatisfaction in
Japan with CHINCOM controls, In these agreements goods on control lists
have been" sought in return for specific materials of greatest interest to
the Japanese, The .agreements establish three categories of goods, with trade
within each category being matched against certain classes-of goods by each
country.:-Thus under one category Chinese Communist exports of iron ore,
manganese, pig iron and coal are matched against Japanese exports of-such
controlled items'as copper ingots, aluminium, steel plates and tubes,
galvanized iron sheets, etc, Such agreements provide pressure on the
Japanese to seek reductions in controls in return for necessary imports,
although as yet-there have been no exports of strategic materials to
Communist China, outside of those under normal exceptions procedure.
The Soviet Union has made offers of large increases in overall trade
with the UK,, 'rance, and Japan -m but included in the offers to purchase
were a wide range and large-quantity of,strategic goods. These offers are
in early negotiating stages, but there will undoubtedly be increasing
pressure on the Free World countries to modify controls to meet avowed
desires to increase the level of trade. The large volume of shipments of
copper wire from the -Free World to the bloc follovdng the 195 COCC?+! list
revisions is well-knownp The readiness of the bloc to-make these purchases
was matched by the. eagerness of Free World suppliers to exploit the situation,
Be The Role of Strategic Materials in Bloc Trade with Underdeveloped Areas
of the ee World
The most important shipments of rubber to Communist China were a result
of the five-year agreement entered into. i.n, 1952 calling for the annual exchange
of 50,000 tons of Ceylonese rubber for 270,000 tons of Communist China's rice.
The Communists were undoubtedly motivated by the desire to drive a wedge in
the effective coverage of Western controls as well as by their desire to secure
rubbers. When the agreement was negotiated, Ceylon urgently needed rice and
found the Communist offer of premium prices for rubber attractive at a tj.me
of declining rubber prices,
Rubber was also shipped from Burma to Communist China in 19539 in 1955
and in 1956. With the extended use of previous exceptions procedures under
CHINCOM controls permitting liberalized shipment of rubber from other Asian'
producers to Communist China. there has been no evidence of a rush to purchase.,
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Communist China has always been able to get Indonesian-and Malayan rubber
via the European bloc., to which controls did not apply, but it is believed
that the bulk of requirements are being secured from Ceylon. From time to
time Communist China's supplies of rubber have been sufficient to allow
some reexport to the European bloc countries, However, the provisionfor
extending exceptions procedures to permit "reasonable" shipments of rubber
has opened the way for progressive whittling away of the remaining restrictions
on rubber. Malayan rubber merchants, anxious to open up a market in
Communist-China at time when rubber prices are slipping., are actively
seeking to increase their exports. This places the-Communists in a position
to exploit dissension between the US'and its allies, who have different
attitudes toward the trade, and to work for further reduction of controls
on the full range of the CHINCCM differential,
Strategic goods as-defined in control lists have not been moving from
the Middle East or'Africa., Although unconfirmed reports indicate-.that
strategic materials are being transhipped from Tangier and Bierut, the
quantities are insignificant. It is believed that no overt shipments from
Latin America have been in violation of Battle Act lists. Rather the Latin
American countries appear to have maintained careful legal conformity with
control lists. The bloc countries appear to realize the special nature of
US-Latin American relations and trade offers have not been based on a
shopping list of strategic materials, although bloc propaganda belabors
Western controls as being against the best interest of the Latin American
countries,
Large scale trade and credit agreements between the bloc-and other
countries in the world, e.g. Afghanistan, Egypt, India, Iceland, and more
recently Indonesia, have been negotiated, But as yet there is no indication
of significant movement of strategic materials to the bloc as a result,
Egypt and Iceland have little to offer along this line, Widespread Soviet
activities in Afghanistan involve, among other things, exploitation of
sulphur deposits. A.contract was negotiated in 1955 providing for a six-year
Soviet monopoly for development of sulphur deposits with the aim of providing
30,000 tons of sulphur-bearing ore for export to the Soviet Union. The
project is believed to have passed beyond the technical survey stage and
active development may have begun. The development credits granted. to India
include planned shipment of goods in repayments and may involve such an itm
as industrial diamonds. The Indonesian agreements with the bloc have
included rubber. Bloc offers to assist in developing petroleum resources
have been made to India, Israel., and Indonesia; Czechoslavakia has bid on
a refinery for Syriak and the bloc has expressed interest in oil developments
in Latin America and elsewhere. Since the bloc is a net exporter of
petroleum, there is little likelihood that the bloc would seek compensation
in petroleum products. Outside of the credits to Yugoslavia discussed
below, it appears that the major credits offered by the bloc (plus a grant
to Cambodia) have not been tied to securing strategic materials,
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Bloc Arrangements with Yugoslavia and Finland
lin bloc efforts to woo Yugoslavia have included major
The post$ta
economic program with important strategic commodity aspects. Although
not a COCOM participant., Yugoslavia has refrained from shipping strategic
goods because of its interest in maintaining US assistance, However9 more
recently the bloc has been extending large scale credits and entering into
a wide range of trade agreements with Yugoslavia. Yugoslavia recently took
a significant step toward closer economic and political relations with the
bloc by signing an inter governmental agreement providing for a joint
Soviet Union m East German credit of $175 million to develop the Yugoslav
aluminum., induetry. Along with all the significant political and general
economic ramifications, this agreement cosamits Yugoslavia to future deliveries
of significant quantities of aluminum to the bloc -'possibly as much as
5O,000 tons annually under the initial credit terms,
The Soviet Union is reported to have offered to finance the
development of Yugoslav copper deposits a project for which Western
financing has been under negotiation, Although the Yugoslavs announced
Soviet willingness to accept repayment in products other than copper' there
is no assurance that this would be the eventual result. The reconstruction
of two lead a zinc mines. and the construction of a mercury smelting mill,
all under terms of a Yugoslav USSR credit agreement are also reportedly
underway, but there is no specific information as to provisions for
repayment from their output,,
The bloc has been receiving a number of strategic list items from
Finland,, but this trade cannot be presumed a result of the post-Stalin
economic offensive. Finland0a dependence on trade with the bloc grew out
of the reparations required by the Finnish-Soviet peace treaty. These
reparations were not only large but required the production of strategic
items to bloc order, When the reparations were completed,, the industries
established were dependent upon the bloc market and the export to the'bloc
of such goods as ships, power station equipment,, and cobalt continued. The
Soviet Union pursued its policy of fostering Finnish exports to the Bloc
by arranging tri=lateral payments involving other bloc countries and later
by offering gold loans, and making some payments for goods in convertible
currencies.,
III. BLOC EXPLOITATION OF CC1,7NiODITY AND TRADE PROELE'1S
WCULD
The bloc economic offensive has been able to exploit the desire in
underdeveloped countries for rapid economic growth and stable export markets.
Bloc loan terms usually provide for repayment directly through the exports
of underdeveloped countries., and in some cases the bloc has agreed to take
surpluses that have been difficult for the underdeveloped country to. dispose
of in normal markets, in an even broader sense., increased Soviet interest
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in world trade - following the years of traditional autarky and coming at a
time when competition for markets within the West was growing - opened up
visions of high levels of profitable trade for both highly developed and
underdeveloped countries in the Free World. Even though this is doubtful,
it has influence on the minds'of business men and has created strong
pressures on many governments.
In some cases the bloc has attempted to woo underdeveloped-countries
by offering to purchase their exports at premium prices. Hawever,'the goods
which the bloc offers in exchange sometimes also carry high prices. Thus
the Burmese have claimed that'the terms of exchange on-their barter deals
with the USSR put them at a 10-30 percent disadvantage. Moreover, there is
some evidence that bloc purchases of commodities from underdeveloped countries
may be accompanied by increased bloc offers to export the same commodities,
In such cases the underdeveloped country may not really increase its total
exports by the amount sold to the bloc and may in the process lose part of
its preferred free world markets,
The most striking. examples of bloc exploitation of commodity problems
in the Free World are the Burmese rice agreements and the Egyptian cotton-
arms deal, Other instances bf opportunities pursued by the bloc include
the aforementioned Ceylon-Communist China rice-rubber agreement$ the bloc
purchases of fish from Iceland, the increasing role of the bloc as a market
for Turkeyts staple exports, large bloc purchases of Uruguayan wool and
meat, and bloc willingness to increase purchases from Argentina at a time
when traditional Argentina exports were experiencing market problems.
Bloc purchases of rice from Burma in the course of this campaign
from an insignificant rice
exports is under some form of commitment to the bloc. Burma's economy is
heavily rice-oriented and these agreements were negotiated at-a time when
Burma was burdened with a seemingly overwhelming rice surplus* The recent
improvement in the rice market, and a measure of Burmese disillusionment
with the so-called benefits of barter trade, have reduced the opportunity
for further bloc exploitation, but the situation remains serious for
Western interests.
The general features of the Egyptian cotton-arms deal are well-known,
and the results are still unfolding. In view of world cotton market problems,
the great dependence of Egypt on cotton as an earner of foreign exchange, and
Egypt's military aspirations, the willingness of the bloc to engage in
assuring a market for about 30 percent of Egypt's cotton exports has improved
the fishing in troubled waters.
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The general interest of one crop economies and countries experiencing
balance of payments difficulties in trade with the bloc has opened up
channels for increasing bloc influence. The quantities taken by the bloc -
though small compared to the large economic base of the bloc represent
prf the
important 'quantities to the exporting countries. The receptivity
underdeveloped countries to bloc overtures is heightened by bloc willingness
to offer capital goods, technicians, favorable credit terms; and arms to
meet national military aspirations. Moreover, bloc offers are appealing as
a device for improving bargaining power of underdeveloped countries with
the developed countries of the West - particularly the US. There is no
doubt, also, that blob overtures have been able to capitalize on the
discontent in some cowatriee with trade, tariff, and surplus disposal
policies of the developed countries.
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