THE ECONOMIC IMPACT OF DIFFERENTIAL INTERNATIONAL TRADE CONTROLS ON COMMUNIST CHINA: A SUMMARY OF INTELLIGENCE CONCLUSIONS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP64-00014A000100170011-2
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 7
• Document Creation Date: December 9, 2016
• Document Release Date: September 28, 1998
• Sequence Number: 11
• Publication Date: December 27, 1955
• Content Type: REPORT

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THE ECONOMIC IMPACT OF DIFFERENTIAL INTERNATIONAL TRADE CONTROLS
OF INTELLIGENCE CONCLUSIONS
CENTRAL INTELLIGENCE AGENC!
Office of Research and Reports
27 December 1955
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The Economic Impact of Differential International Trade Controls
on Communist China* A Suttmaty of Irate 1Wenc Conclusions
The differential list applied to China does not deny controlled goods
of Western origin to Communist China, because such commodities not denied
the Soviet Bloc can be transshipped to China. It does, however,, result in
increased costs in obtaining these goods. Since the control system
pr:,aibits the use of Western shipping for the transport of such goods even
when of Bloc origin, and because Bloc shipping is limited, a large volume
of such goods must move overland at significantly increased transport
costs. The cost of international differential controls to Communist China
(including both foreign exchange and internal costs) during 1955 is
estimated at $37-43 million, as indicated in Table 1 below.*
Estimated Cost to Communist China of Differential International
Trade Controls During 1 S5
(millions of $ UQS?)
Increased Transport costs $2935
Premium Payments gm 8
M-
Moreover, the Soviet Bloc incurs an additional $53?76 million of increased
freight costs resulting from the differential control system,',
It is estimated that, in the long run, neither the annual nor the
cumulative cost of differential controls will significantly retard the
development of the Chinese econoii
* This estimate does not include potential foreign exchange earning which
might accrue to Communie, China from increased exports to Japan, following
the removal of differential controls (see p, 4 below); nor does it include
foreign exchange losses resulting from U.& unilateral controls.
** See Annex A.
S~E>C-R E~T
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1. Denial Effect of Differential :lultilateral Trade Controls*
Notwithstanding the large differential between the list of goods em-
bargoed for export to Communist China and that embargoed to the Soviet
Bloc, goods not denied to the Soviet Bloc cannot effectively be denied
to Conmzunist China. Such goods can be and are being sent to China via
the Soviet Bloc. For example, over 100,000 tons of controlled goods of
Western origin in 1954 was shipped to China through European Bloc ports.
This included over one-quarter of China's imports of iron and steel
drying 1954? In spite of the embargo these products reached China via
rol..1sh ports,,
2:, Economic Costs of Differential Multilateral Controls
Even though the differential embargo does not effectively deny listed
goods to China, it does result in increased costs and delays in the pro-
curement of such goods. The most important increased costs involve
transport costs and premium prices paid in order to obtain embargoed
items.
A. Increased Transport? Costs
Present controls prohibit the use of Western shipping for the
delivery to Communist China of items on the differential list, whether
obtained from the Free World or the rest of the Bloc. Thus, such goods
must be sent overland or transshipped. The most significant effect
on Communist China stems from the resulting higher freight costs.
* It should be noted that the CHINCOM differential controls also apply
to trade with North Korea and North Vietnam. The coats to North Korea
and North Vietnam are, however, not estimated in this paper.
By far the largest single item shipped overland is POL. If all controls
against the use of tankers were dropped, a saving to the Bloc of about
$90 million in POL transport costa,, based on 1955 estimates, would result.
However, discussion in this paper is limited to those savings which would
result from the removal, not of all controls,, but only of differential
controls. In this category, relief to POL movements would be restricted to
crude oil, which-is now embargoed to Communist China but not to the Soviet
Bloc, and consequently cannot be carried to China on Western ships even if
obtained from within the Bloc,, The estimated savings to the Bloc which would
result from the removal of the embargo on shipping crude oil have been included
in Table 2 below:.
S~FR T
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In the absence of controls, Communist Chinese trade in the
commodities concerned could move by more expeditious routes at more
advantageous rates. It is estimated that during 1955, as a result of the
differential controls, transport costs (on both imports and exports) will
be greater by $29-35 million than they otherwise would be. Of these
increased costs, approximately $10 million represents external expenditures
and the rer.ainder, internal costs,,' Overland routings induced by the
differential controls, which account for most of the additional freight
costs, involve primarily shipments originating west of the Urals. Most
shipments originating east of the Urals are generally moved overland in
any case.
Of the $29-35 million increased transport costs incurred by C:vmnunist
China, all but ~2 million is the result of the use of expensive overland
transport facilities rather than ocean shipping which is prevented by the
ban on the use of Western ships for carrying goods under differential
controls. The remaining 32 million results from increased handling costs for
goods on the differential control list which were shipped from ,:'ester, sources
to European Bloc ports and'unloaded and reloaded on to Bloc-flag or chartered
vessels destined for Chinas,
The costs indicated above relate to increased transport costs
incurred by Communist China, Actually,, the effect of the differential control
system is to impose greater transport costs on the Soviet Bloc than on
Communist China, It is estimated that during 1955 the Soviet Bloc will incur
additional overland freight charges amounting to $53-76 million.
In summary, the increased transport cost incurred by the entire
Blcc, as a result of the differential multilateral controls, are as indicated
in Table 2 below,
Table 2
Increased Transport Costs to Sino-Soviet Bloc as Result
(millions of $ U,,S,)
Communist China
$29 - 35
USSR
48- 67
Satellites
5? 9
192 -M
* Although both external expenditures and internal costs are expressed in
dollar equivalents, it should be noted that only the external expenditures
involve a foreign exchange drain,
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B. Premium Payments
wa.r
In order to obtain commodities on the differential list from
suppliers outside the Soviet Bloc, the Communist Chinese must sometimes pay
premium prices. The increased costs involved during 1955 are estimated
at $8 minion.,'
C,. Delays in Obtainer Communist Chinese Imports and Loss
of Export Earnings
In addition to the costs indicated above, differential controls
create delays and difficulties to the Communist Chinese in their obtaining
of imports. In the case of hivh-priority goods these delays and difficulties
have unquestionably had some negative impact on Chinese production? The
effects of this impact cannot be estimated, but they are tho!.ght to be
minor.
Furthermore, Communist Chinese export earnings may be reduced
as a result of the operation of CHIMCOOi controlsa** The main trading
partner where this would be of some quantitative importance is Japan,, It
is estimated that during 1955 Chinese exports to Japan could have been
from *25.-35 million greater without a significant diversion of resources
from other commitments if Japan had been permitted to export to China goods
presently embargoed. This limitation on Communist Chinese exports to Japan,
however, apparently results primarily from a Chinese political decision to
limit exports to Japan because of Japanese adherence to the CHL{COI4 control
system, and is not a necessary consequence of that system. Therefore, this
reduction of Co~.vnunist Chinese export earnings is not a direct cost imposed
on China by the differential control system, although it is in a sense an
effect of that system. Because it is not a direct cost, it is not included
in the total of costs summarized in Table 1 above=,
3 Long Run Economic Impact of Trade Controls
The Communist Chinese economy, over a period of time, can make adjust=,
meats which will negate much of the effect of differential trade controls,
The rielays involved in present procurement can be reduced through the use
of alternative Bloc sources, improved procurement scheduling, and mcx,i
of This is considerably less than the estimate for 1954 of 320-25 million?
This is the result in part of a smaller volume of smuggling, but to a larger
extent of the discontinuance during the first half of 1955 of premium prices
paid to Ceylon for rubber,
** The United States unilaterally prohibits the import of all goods from
Communist China. The loss of Chinese export earn ngs resulting froxa United
States import controls is estimated at approximately $60 million in 1955
Also, the U.S. limitation on the transfer of remittances will result in a
further loss of foreign exchange estimated at $40 million during 1955?, No
country other than the United States maintains such controls;,
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effective shipping and handling methods. Even though the Communist
Chinese may continue to obtain embargoed goods of Western origin indirectly
through Bloc intermediaries,, in the long run the additional costs involved
will undoubtedly decline. As more Bloc shipping (flag and charter) bedomes
available, the delaysgadditional demurrage charges, etc. will diminish,
More importantly, uneconomical rail hauls involving shipments originating
west of the Urals will become unnecessary,
It is estimated that, in the long run, the adjustments indicated plus
the development of new Far Eastern markets will minimize the impact, of
differential controls, and that the cumulative costs will not constitute
an appreciable deterrent to Corununist Chinese industrialization plans,
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ESTIMATED COSTS OF INTERNATIONAL DIFFERENTIAL
CONTROLS ON COMMUNIST CHINA
55
(millions of $ UaS?)
To China
Increased Transport Costs
On imports 24 ? 28
On exports 5
29-35
Premium Payments 8
Total China 37 d 43
To USSR
Increased Transport Costs 48 y 67
To European Satellites
Increased Transport Costs 5 d 9
TOTAL 90 -3.19
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S-E R F,-T
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