CONTROLS ON TRADE WITH COMMUNIST CHINA

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP79R01012A006200030012-9
• Release Decision: RIFPUB
• Original Classification: S
• Document Page Count: 30
• Document Creation Date: December 27, 2016
• Document Release Date: August 6, 2013
• Sequence Number: 12
• Publication Date: January 11, 1955
• Content Type: NIE

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11 January 1955
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NATIONAL INTELLIGENCE ESTIMATE
NUMBER 100-55
CONTROLS ON TRADE WITH COMMUNIST
CHINA
r Submitted by the
DIRECTOR OF CENTRAL INTELLIGENCE
The following intelligence organizations participated in the
preparation of this estimate: The Central Intelligence Agency,
and the intelligence organizations of the Departments of
State, the Army, the Navy, the Air Force, and The Joint Staff.
Concurred in by the
INTELLIGENCE ADVISORY COMMITTEE
O n 11 January 1955. Concurring were the Special Assistant,
Intelligence, Department of State; the Assistant Chief of Staff,
G-2, Department of the Army; the Director of Naval Intelli-
gence; the Director of Intelligence, USAF; and the Deputy
Director for Intelligence, The Joint Staff. See, however, the
footnotes taken by various members to specific paragraphs.
The Atomic Energy Commission Representative to the MC
and the Assistant to the Director, Federal Bureau of Investiga-
tion, abstained, the subject being outside of their jurisdiction.
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COPY NO.
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CENTRAL INTELLIGENCE AGENCY
DISSEMINATION NOTICE
1. This estimate was disseminated by the Central Intelligence Agency. This copy
is for the information and use of the recipient indicated on the front cover and of per-
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a. Special Assistant to the Secretary for Intelligence, for the Department of
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c. Director of Naval Intelligence, for the Department of the Navy
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3. When an estimate is disseminated overseas, the overseas recipients may retain
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quested of the forwarding agency to retain it in accordarrce with IAC-D-69/2, 22
June 1953.
WARNING
This material contains information affecting
the National Defense of the United States
within the meaning of the espionage laws,
Title 18, USC, Secs. 793 and 794, the trans-
Mission or revelation of which in any manner
to an unauthorized person is prohibited by law.
DISTRIBUTION:
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TABLE OF CONTENTS
PROBLEM 1
CONCLUSIONS
INTRODUCTORY NOTE ON THE PRESENT SYSTEM OF CON-
TROLS 7
DISCUSSION 8
Effect of Present Controls on China 8
China's Foreign Trade
8
Table:- Estimated Value China's Total Foreign Trade, 1950-54. 8
Table: China's Recorded Imports from Non-Communist Coun-
tries, 1950-54 9
Table: China's Recorded Imports from Non-Communist Coun-
tries by Exporting Area 10
Table: Estimated Geographic Distribution China's Foreign
Trade, 1953 11
Effects of Controls on China's Power Potential 12
Effects on Sino-Soviet Relations 13
Probable Effects of Maintenance of Present Levels of Trade Con-
trols Against China 13
Effects on China's Economic and Military Development . . 13
Effects on Sino-Soviet Relations 13
Effects on China's Foreign Policy 14
Effects on Non-Communist Countries 14
Probable Effects of Multilateral Relaxation of Trade Controls
Against China to the Level Applied Against the European Bloc. 15
Effects on China's Economic and Military Development . . 15
Table: Estimated Potential Increase of China's Annual Foreign
Exchange Earnings 16
Effects on Sino-Soviet Relations 16
Effects on China's Foreign Policy 17
Effects on Non-Communist Countries 17
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11L0B430EMIT
Probable Effects of the US Unilaterally Maintaining Various Alter-
native Levels of Controls on Trade with China
18
Effects on China's Economic and Military Development. .
18
Other Effects on China and the USSR
18
Effects on Non-Communist Countries
18
Probable Effects of Raising the Level of Controls on Trade with
China
18
APPENDIX: JAPANESE TRADE WITH COMMUNIST CHINA . .
20
ova
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diidgeOPIM
CONTROLS ON TRADE WITH COMMUNIST CHINA1
THE PROBLEM
To estimate the political, economic, and strategic consequences to China, Sino-
Soviet relations, and the non-Communist world of each of the following courses of ac-
tion:
a. Maintenance of present levels of non-Communist controls on trade with
China and the European Bloc;2
.b. Multilateral relaxation of non-Communist controls on trade with China
to the level maintained on trade with the European Bloc;
c. Relaxation of non-Communist controls on trade with China to the level
maintained on trade with the European Bloc, but with the US unilaterally main-
taining various controls on trade with China.
d. Multilateral raising of non-Communist controls on trade with China.
'For general estimates on China and on the Bloc,
see NIE 13-54, "Communist China's Power Poten-
tial through 1957" (3 June 1954) ; NIE 10-7-54,
"Communist Courses of Action in Asia through
1957" (23 November 1954) ; and NIE 11-4-54,
"Soviet Capabilities and Probable Courses of Ac-
tion through Mid-1959" (14 September 1954) .
As used herein, the term "European Bloc" in-
cludes the USSR and the Soviet Satellites in Eu-
rope. The term "Bloc" alone is used to cover all
iron curtain countries including Communist
China. Unless otherwise specified, the terms
"China" and "Chinese" are used in lieu of "Com-
munist China" or "Chinese Communists."
Sonirrerr
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Ciaairr
CONCLUSIONS'
A. China's objective of creating an indus-
trialized and militarily powerful state
cannot be achieved without extensive im-
ports of capital goods and military equip-
ment. The rate of advance of China's
power potential thus depends to a large
degree on the volume of China's foreign
trade. Except to the extent that the
USSR extends grants or credits, China's
capabilities to import will be limited by
its capabilities to export. (paras 1, 19)
B. China has been able to import from
the European Bloc those commodities,
including transshipped Western goods,
required for a rapid expansion of military
strength and achievement of industrial
output somewhat higher than- previous
peaks. It is committed to a program in-
tegrating its economy with that of the
Bloc, in consonance with the Bloc policy
of autarky. Nevertheless, at present,
both Moscow and Peiping give every in-
dication that they regard it in their best
interest to increase somewhat their pres-
ent trade with-non-Communist countries
3 The Director of Naval Intelligence and the Dep-
uty Director for Intelligence, The Joint Staff, be-
lieve that any approach to the problem of relax-
ation of trade controls should be viewed in the
light of over-all Communist objectives, and spe-
cifically the attitude and actions of Communist
China toward the US and the other Free World
nations. They therefore consider it essential to
the broad view of the problem that the following
be inserted ahead of the present first Conclusion
of this estimate:
"There is no indication that the fundamental
hostility of the Communists toward the Free
World has abated, nor that, in pursuit of their
2
and are exerting efforts to undermine
trade controls. (paras 11, 12, 14, 18)
C. While trade controls have not signifi-
cantly hindered China in obtaining es-
sential commodities, they have reduced
the volume of China's imports by altering
its markets and by increasing its trans-
portation costs and procurement difficul-
ties. We estimate that these effects cur-
rently represent an annual loss to China
-of roughly $200 million. This amount
would be sufficient to enable China to in-
crease by 50 percent its imports of capital
goods, the scarcity of which is particular-
ly serious for the Chinese economy.
(paras 11, 12, 13, 15) -
Effect of Maintenance of Present Levels of
Trade Controls
D. Maintenance of present levels of trade
controls against China would continue
the present effects virtually unchanged
although China will be able to take ?ad-
vantage of the recent relaxation of con-
trols enforced against the European Bloc
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ultimate objectives, the Communist program of
attaining self-sufficiency within the Bloc at a
high level of military and industrial develop-
ment has changed. Moscow and Peiping al-
most certainly estimate that the qualitative
and quantitative gains, which would ensue
from increased trade with the Free World, will
accelerate this planned expansion of their
economies, as well as provide opportunities for
political gain through economic penetration.
We do not believe that any relaxation of con-
trols on trade with Communist China will less-
en this hostility, nor will it tend to change the
course of Communist China's foreign policy."
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416bildilarr
and import .additional CHINCOM 4 con-
trolled items via European Bloc countries.
While transshipment might add to the
total cost of Chinese imports, the addi-
tional goods procured would allow the
European Bloc greater flexibility in meet-
ing Chinese requirements. (para 19)
E. We do not believe that maintenance
of trade controls at present levels would
produce any significant changes in the
basic patterns of Sino-Soviet relation-
ships or of Chinese foreign policy. Chi-
nese propaganda would continue to hold
out to other countries the prospect of ad-
vantageous trade with China, in order to
arouse resentment toward the control
system and to encourage policy conflicts
with the US. Chinese efforts to achieve
political gains in Asia through economic
penetration would continue to be hinder-
ed by the maintenance of controls.
(paras 20, 21, 22)
F. If China refrains from provocative
military or political actions, pressure
would increase in most CHINCOM coun-
tries for a reduction of controls to the
level applied against the European Bloc.
The position of the UK, which plays a
major role in influencing the attitude of
CHINCOM countries, will continue to be
'Fifteen countries currently participate in the
China Committee (CHINCOM) of the Consulta-
tive Group of countries organized to deal with
problems arising from the control of trade with
Bloc countries. CHINCOM controls are those
controls presently applied by these countries
against China. Member countries are: Belgium,
Canada, Denmark, France, Greece, Germany,
Italy, Japan, Luxembourg, the Netherlands, Nor-
way, Portugal, Turkey, the UK, and the US.
5 COCOM controls are those applied against the
European Bloc (the USSR and the European
Satellites) by countries which are members of
the Coordinating Committee (COCOM) of the
Consultative Group. The membership of CO-
COM is identical with that of CHINCOM.
3
governed more by political than by eco-
nomic considerations. These countries
probably would not override strong US
objections to a major change in policy nor
would they be likely to take unilateral
action to reduce controls. Maintenance
of present CHINCOM controls would,
however, be a mounting source of irrita-
tion in US relations with other CHINCOM
countries. (paras 25, 27)
Reduction of Controls on Trade with China
(CHiNCOM Controls) to the Level
Maintained with the European Bloc
(COCOMs Controls)
G. In this situation, almost all the effects
of present trade controls in increasing
China's import costs and reducing its ex-
port receipts would be removed. We es-
timate that within two years after con-
trols were lowered China might add about
$200 million to its annual earnings of
foreign exchange, provided its leaders
decided to export to the amount necessary
to yield these earnings and provided mar-
kets were available. However, China
would not be able to secure any commodi-
ties that it cannot now secure through
transshipment. (paras 28, 32)
H. China's foreign exchange earnings
would almost certainly continue to be
used primarily to procure imports of cap-
ital goods and other cornniodities essen-
tial to building the modern industrial
sector of the economy, and to moderniz-
ing the armed forces. We believe that
China in the foreseeable future will not
be interested in substantial imports of
consumer goods. (para 33)
I. We do not believe that a relaxation of
trade controls would, at least for the next
few years, have any significant effect
aammir
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upon China's internal political situation,
its foreign policies, or its basic relation-
ship to the USSR.6 (paras 34, 35)
J. A multilateral relaxation of controls
on trade with China would probably be
approved by most of the governments of
Europe and Asia, some because of convic-
tion that it was a desirable move, others
out of indifference to the issue or willing-
ness to follow the lead of the powers prin-
cipally concerned. While Chinese trade
with non-Communist countries would
probably increase after the relaxation of
controls, and in some areas would be ex-
ploited for political purposes, it is almost
certain that the amount of trade increase
would fall far short of expectation in
many countries. These countries might,
therefore, in the Course of time, become
somewhat less vulnerable to trade offers
made by China for political reasons.
Nevertheless, China would probably exert
every effort to import such quantities
of specialized materials from Western
sources as its economy permits. We be-
lieve that once these controls were relaxed
only open aggression by Peiping would
bring about a reimposition of controls.
(paras 36, 37)
K. We believe it unlikely that trade rela-
tions beween China and Japan could re-
gain their prewar significance under any
foreseeable circumstances, because of the
The Deputy Director for Intelligence, The Joint
Staff, would add the following sentence (taken
-from para. 34) : "However, increased trade with
the West would reduce certain strains which
probably exist in the Sino-Soviet relationship."
The Deputy Director for Intelligence, The Joint
Staff, believes this sentence should be replaced
with the following:
"Nevertheless, China's need for capital goods and
its available or foreseeably available raw mate-
rials complement the present economic situation
of Japan ? productive capacity excess to its own
postwar economic and political changes
which have occurred in the Far East.
With trade controls at the COCOM level,
we believe that by 1957 the value of Chi-
nese exports to Japan might be raised
from the present figure of about $40
million a year to about $100 million.
The value might even reach $150 million,
but we believe this would require some di-
version of Chinese exports from Bloc mar-
kets. We believe that Sino-Japanese trade
during the _next few years will not in it-
self cause Japan to alter significantly its
present orientation to the West barring
a serious depression in the Free World
accompanied by a drastic curtailment of
Japanese trade opportunities.' (para 39)
Effects of a Reduct:on of CHINCOM
Controls to the COCOM Level, but
, with the US Unilaterally Maintaining
Various Alternative Levels of Controls
L. In this situation we believe that: (a)
if the US maintained its present complete
embargo on both imports and exports, the
foreign exchange advantages which the
Chinese might otherwise gain would be
reduced by roughly one-half; (b) if the
US maintained only a ban on imports
from and remittances to China, the po-
tential gains in foreign exchange to China
would be reduced by about the same pro-
portion; and (c) if the US maintained
needs, a diminished raw materials base, and an
unfavorable balance of trade without substantial
exports. It would be very much to Communist
advantage if Japanese heavy industry were to
supply much of the means for China's indus-
trialization, particularly if at the same time.
Japan were to become partially dependent on
China as a raw materials source and capital
goods market. Current trade overtures indicate
Communist awareness of this opportunity, and
Japanese willingness to participate in such a
pattern of trade."
.112011.11PIPP
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only a ban on exports to China, the Chi-
nese could procure equivalent commodi-
ties elsewhere at only slightly increased
costs, and could spend in other countries
the dollars earned by exports to the US.
(paras 40, 41, 42)
M. Although trading interests in CHIN-
COM and Far Eastern countries would
welcome the continued absence of US
competition in the Chinese market, their
governments would be concerned at the
divergence of their policies from those of
the US. There would probably be appre-
hension that the failure of the US to par-
ticipate in the general relaxation of con-
trols would contribute to a continuation
of tensions in the Far East. Moreover,'
difficulties and frictions would probably
arise if the US attempted to prevent the
re-export to China from third countries
of goods imported from the US. (para
44)
Effects of Raising the Present Level of
CHINCOM Controls
N. A further increase in controls on ex-
ports to China ? without a correspond-
ing increase in the level of COCOM con-
trols ? would probably have the effect of
increasing the volume of transshipped
goods, but it would probably not appre-
ciably retard China's internal develop-
ment. If an embargo on imports from
China, similar to that now applied by the
US, were applied by all CHINCOM coun-
tries, China would lose export markets
now taking about one-quarter of total
exports (including Bloc re-exports of
Chinese products) . Since Bloc markets
are not believed to be readily expansible,
it is probable that China's import capa-
bilities would be reduced proportionately.
Such a reduction in China's imports
5
would significantly retard China's inter-
nal development. (paras 45, 46)
0. The Director of Central Intelligence,
and the Special Assistant, Intelligence,
Department of State, believe that in the
unlikely event that all non-Bloc shipping
and shipping services were denied to the
uses of Chinese commerce, the Chinese
economy would in the short term be ad-
versely affected, and transportation costs
increased. Non-Bloc ocean-going vessels
in 1953 carried about three-fourths of
China's seaborne foreign trade. Bloc
flag shipping is inadequate to carry its
own trade and no substantial building
program is in progress. However, a sub-
stantial share of China's seaborne trade
now carried in non-Bloc vessels would be
carried by the Trans-Siberian railroad
and by Bloc flag vessels diverted to the
China trade, provided non-Bloc flag ves-
sels were chartered to replace the ship-
ping so diverted. A considerable part of
the trade probably would be curtailed,
notably China's exports of coal and iron
ore which constitute 40 percent of sea-
borne export tonnage but less than 1 per-
cent of the value of total exports. These
adjustments would probably be made
within a reasonable period. If denial
affected only CHINCOM flag shipping and
services, the Chinese could shift at least
part of their seaborne commerce to non-
CHINCOM flag vessels, thus mitigating
still further the effects described above.
(para 48)
P. The Director of Naval Intelligence; the
Deputy Director for Intelligence, The
Joint Staff; the Assistant Chief of Staff,
G-2; and the Director of Intelligence,
USAF, believe that in the unlikely event
that all non-Bloc shipping and shipping
services were denied to the uses of Chinese
xresnowir
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?itgalOM T? 6
commerce, the effects upon the Chinese
economy would be marked and adverse.
It is probable that only a small portion of
the tonnage now carried by non-Bloc
ships could be carried through an increase
or readjustment in the use of Bloc ship-
ping. Denial of all non-Bloc shipping
would result in considerable curtailment
of China's foreign trade, because the rail
transportation facilities within China
and those between China and the Euro-
pean Bloc probably are not adequate to
handle the additional tonnages involved.
If denial affected only CHINCOM flag
shipping and services, the Chinese could
shift at least part of their seaborne com-
merce to non-CHINCOM vessels, thus
mitigating the effects described above.
We believe, however, that the extent of
this mitigation would not be significant,
since the denial of shipping services (re-
insurance, bunkering, repair, etc.) by the
largest maritime nations, in addition to
other pressures which could be brought to
bear, would make most non-CHINCOM
countries extremely reluctant to commit
their vessels to this trade, despite the
probability of premium charter rates be-
ing offered by the Bloc. Few non-CHIN-
COM countries have substantial addi-
tional tonnage suitable for the China
trade, and with few exceptions, the avail-
ability of any vessels would be limited by
the extent to which they could be replaced
on their regular runs by shipping char-
tered from CHINCOM countries. More-
over, of all non-CHINCOM countries, only
Sweden has a significant amount of ship-
ping which could be so used. (para 49)
Q. Without some new and considerable
provocation by China or possibly the
USSR, we believe that an appreciable in-
crease in the level of controls on trade
and shipping with China would almost
certainly not be agreed to by non-Com-
munist countries. (para 50)
S *ern
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SECRET
INTRODUCTORY NOTE ON THE PRESENT
SYSTEM OF CONTROLS
Although single countries, particularly
the US, had applied trade controls
against the European Bloc earlier, inter-
national agreement for such controls
came into effect with the establishment
by the major Western allies of the Co-
ordinating Committee (COCOM) in Jan-
uary 1950. The member states -8 agreed
to three lists of commodities, based on
the relative importance of the items
listed as a contribution to the military
potential of the Bloc. Goods on Interna-
tional List I (IL?I) are completely em-
bargoed; goods on IL?II are subject to
certain quantitative controls; and goods
on IL?III are subject to surveillance and
exchange of information between the
COCOM countries.
In June 1950 China and North Korea
were brought within the scope of the ex-
port controls exercised by the COCOM
countries. In December 1950, after the
Chinese aggression in Korea, the US ap-
plied a complete embargo to China. Fol-
lowing the UN embargo resolution of 18
May 1951, the COCOM countries tight-
ened their controls, and 30 other coun-
tries imposed restrictions on their exports
to China. By the fall of 1952, when a
China Committee (CHINCOM) ? was
formed by the COCOM members to con-
trol trade with China, all COCOM coun-
tries had agreed to embargo all three
COCOM categories as well as certain sup-
plementary items proposed by the UK
(China Special List). Some countries
have unilaterally embargoed additional
strategic items, but among the major,
trading nations only the US has a com-
plete embargo on all trade with China.
In addition, certain transshipment con-
trols are currently applied by the US and
UK, and are being adopted by certain
other COCOM countries. The US and
Greece have an embargo on imports from
China and North Korea; the US, Canada,
and the Netherlands have adopted con-
trols on financial transactions, and cer-
tain other COCOM countries including
the UK are adopting such controls. Prac-
tically all leading non-Communist mari-
time countries prohibit their merchant
ships from carrying strategic goods in
the China trade, and the US, UK, France,
and Japan have adopted bunkering con-
trols. However, these measures have
been too limited in scope to prevent the
Bloc from obtaining the use of a substan-
tial volume of Western shipping for
China's overseas and coastal trade. All
CHINCOM controls have been subject to
frequent circumvention and some viola-
tion.
As the result of continued pressure by
most non-Communist countries, major
adjustments, chiefly relaxations, were
made in August 1954 in the COCOM sys-
tem of controls over trade with the USSR
and its European Satellites (but not in
the CHINCOM system of controls over
trade with China). These adjustments
were generally in keeping with the objec-
tives, set by the Paris Consultative
8 Fifteen countries currently participate in CO-
COM: Belgium, Canada, Denmark, France,
Greece, Germany, Italy, Japan, Luxembourg, the
Netherlands, Norway, Portugal, Turkey, the UK,
and the US.
?Same 15 countries participating in COCOM.
SECRET
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SECRET
Group," of establishing the control lists
on a "long haul" basis and giving appro-
priate recognition to particular economic
and political pressures within individual
countries. The relaxation in controls
against the European Bloc took the form
of net reductions in the number of items
or categories in the embargo, quota, and
surveillance control lists by 37 percent,
77 percent, and 40 percent respectively,
and, even more important, a redefinition
and downgrading of many items from the
embargo list to the quota and surveillance
lists. These adjustments have widened
the differential between controls on trade
8
with the European Bloc and controls on
trade with China, and therefore increased
the opportunities for China to get
through other Bloc countries items it
could not get direct. However, in relax-
ing controls against the Bloc, the COCOM
countries agreed to consider measures
that would prevent or reduce such indi-
rect trade. A Transit Authorization Cer-
tificate (TAC) system has been agreed
upon whereby unrestricted use of the free
ports in COCOM countries for evasion by
transshipment would be precluded for
items on IL?I.
DISCUSSION
EFFECT OF PRESENT CONTROLS ON CHINA
China's Foreign Trade
1. Foreign trade is essential to China, so long
as its leaders have as an objective the creation
of an industrialized and militarily powerful
state. The heavy industry of China cannot
for a number of years produce more thati a
relatively small fraction of China's total re-
quirements for capital goods and military
equipment. These therefore must be im-
ported. The rate at which China's economy
and military forces are developed and
strengthened will therefore be determined
largely by China's ability to obtain imports
essential to its programs in return for the
agricultural products and mineral raw ma-
terials which it can export.
2. Since 1950 China has succeeded in increas-
ing its foreign trade and has concentrated on
1? The Consultative Group (CG) is composed of
representatives of countries participating in the
COCOM trade control system. Its permanent
working committee is the Coordinating Commit-
tee (COCOM). The main functions of CG are to
review the recommendations of COCOM, to con-
sider general policy matters arising in COCOM,
and to set the general frame of reference for
future COCOM activities.
importing military equipment, capital goods,
and industrial raw material. China's trade
has also been markedly redirected toward the
Bloc and away from non-Communist coun-
tries.
ESTIMATED VALUE OF CHINA'S TOTAL
FOREIGN TRADE, 1950-1954
(US $ millions)
Year
Total
Value
Soviet Bloc
Non-Bilk
Countries
1950
$1,082
$282
26%
$800
74%
1951
2,164
1,319
61%
845
39%
1952
1,780
1,280
72%
500
28%
1953
2,200
1,615
73%
585
27%
1954 (Prelim)
2,200
1,650
75%
550
25%
3. The delivery of Soviet military equipment
and supplies accounted in large part for the
sharp rise in China's trade with the Bloc be-
tween 1950 and 1951. Through 1953, these
deliveries probably accounted for nearly one-
half of China's imports from the European
Bloc. Not included in the trade figures are
the substantial quantities of military equip-
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ment which we believe the USSR gave to
China on a grant basis. Capital goods prob-
ably accounted for one-third of Chinese im-
ports from the European Bloc and included
equipment for the metallurgical, chemical,
and machine tools industries, power generat-
ing equipment, machinery, trucks, steel prod-
ucts, and metals. The remaining imports
consisted of raw materials, such as petroleum
and chemical products, and essential con-
sumer goods.
4. Except for the military equipment received
on a grant basis and Soviet credits of at least
$430 million ($300 million for the period 1950-
1954 and $130 million for the period 1955-
1959) China has apparently financed its im-
ports from the European Bloc with its own
exports: substantial quantities 'of agricultural
products (including soy beans, vegetable oils,
and grains) , mineral raw materials (including
tin, antimony, coal, iron ore, and wolfram) ,
and pig iron. Some of these exports have
been diverted or resold to Western nations, in
part for the European Bloc account.
5. China's trade with non-Communist coun-
tries since 1950 has been substantially in bal-
ance except in 1951 when foreign exchange
balances were liquidated. China has paid for
its imports (raw cotton, crude rubber, fertiliz-
ers and other chemicals, iron and steel, and
machinery) largely by exporting foodstuffs,
vegetable oils, and coal. There is evidence of
a deterioration in China's terms of trade with
non-Communist countries since 1950. A por-
tion of this deterioration apparently stems
from the fact that political rather than eco-
nomic considerations have influenced China's
trade with certain non-Communist Asian
countries. Commodity composition of China's
recorded 11 imports from non-Communist
countries since 1950 is estimated roughly as
follows:
CHINESE RECORDED IMPORTS FROM NON-COMMUNIST
COUNTRIES, 1950-1954
(US $ millions)
Year
Cotton
Rubber
Metals
Other Machinery
Drugs Chemicals Equipment
Other
Total
1950
$95
$61
$20
$35
$125
$78
$414
1951
41
110
25
65
110
93
444
1952
108
23
25
40
20
.34
250
1953
16
54
40
55
70
45
280
1st half 1953
4
28
30
30
40
32
164
2nd half 1953
12
26
10
25
30
13
116
1st half 1954
35
17
20
25
10
30
137
6. The principal sources of China's recorded
imports from non-Communist countries have
changed since 1952 in the direction of in-
creased trade with Western Europe. The 1953
four-fold increase over 1952 in direct Western
11 Recorded trade is that identified and reported
by the country of origin or shipment as des-
tined for China. China acquires additional im-
ports by transshipment and smuggling activi-
ties (see paragraph 7).
European exports to China resulted largely
from the fact that Western Germany, the UK,
France, and Switzerland increased their ex-
ports to China of iron and steel, machinery ,
and instruments, chemicals, and wool. How-
ever, as a result of the imposition of controls
on the export of iron and steel to China (effec-
tive August 1953) , Western European exports
declined in the second half of 1953 and re-
mained at a lower level in 1954. Pakistan
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raw cotton exports to China declined from $95
million in 1952 to $4 million in 1953; but in-
creased again in 1954. Imports from Japan
have increased rapidly following the reduction
of Japanese export controls to the CHINCOM
level.
CHINA'S RECORDED IMPORTS FROM
NON-COMMUNIST COUNTRIES BY
EXPORTING AREAS
(US $ millions)
Exporting Area
1952
1953
19541
Western Europe
$23
$100
$71
Hong Kong
86
95
64
Japan
5
15
Pakistan
95
4
36
Ceylon
23
55
48
All Other Areas
22
21
34
Total
$250
$280
$268
'Annual rate based on nine months.
7. In addition to these recorded imports,
which were for the most part shipped direct
to China from the areas of origin, China ob-
tained substantial unrecorded imports from
non-Communist countries. In 1953, such im-
ports were estimated to be $93 million or about
one-third of total recorded imports from non-
Communist countries. Of this total, $65
million (including about $50 million in iron
and steel) was accounted for by goods diverted
to China after leaving Western European
countries of origin ostensibly for destinations
other than China. Most of these diverted
goods were transshipped to China-bound ves-
sels at Gdynia. In addition, an estimated $12
million unrecorded imports entered China
through Macao, an estimated $8 million in
strategic commodities (including copper, zinc,
aluminum, spare parts, transmitting tubes,
and other electronic materials) were smug-
gled in via Hong Kong, and an estimated $8
million unrecorded imports were received from
all other areas.
8. In summary, imports (including both re-
corded and unrecorded) from non-Communist
countries declined from 79 percent of total
imports in 1950 to 34 percent in 1953. This
primarily reflects a great increase in imports
10
from the European Bloc. At the same time,
total imports from non-Communist countries,
including recorded, unrecorded, and smug-
gled trade, amounted to approximately $373
million, or about 90 percent of the value of
such imports in 1950. Within the total of
these imports there has been an increase in
the proportion of goods important to the
expansion of the Chinese economy, such as
chemicals, metals, machinery and equipment.
9. We estimate that roughly one-half of the
volume of China's trade was carried by sea.
The- other half was carried overland, largely
over the Trans-Siberian railway.12 To carry
its overseas trade, China relies on the shipping
of? other flags, largely non-Bloc, for China
itself possesses practically no ocean-going
shipping 13 and that available from other Bloc
countries is inadequate. Thus in 1953, 85
percent of the ships calling at Chinese ports
were of non-Communist flag. Of these, 60
percent were of British registry. Most of the
ocean-going coastal trade of China in the area
between Hong Kong and Shanghai has been
carried by non-Communist shipping; under
conditions imposed by the Nationalist block-
ade, practically- all is so carried. North of
Shanghai, where the bulk of the Bloc shipping
is _concentrated, non-Communist vessels carry
part of the trade.
10. Both Moscow and Peiping apparently de-
sire some increase in East-West trade, and
believe that such an increase would contribute
to Bloc interests. However, if any such in-
crease took place, it would be carefully limited
by Communist leaders to trade in those com-
modities and through those channels which
would serve their foreign political and eco-
nomic objectives, and would hasten the ex-
pansion of their respective economies. It
would not be allowed to endanger the program
of Bloc autarky or to risk the development
of any appreciable economic dependence of
the Bloc on the non-Communist world.
i2 See footnote to the table on page 11 taken by
the Director of Naval Intelligence and the Dep-
uty Director for Intelligence, The Joint Staff.
is Ocean-going shipping includes only vessels 1,000
gross registered tons or over.
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ESTIMATED GEOGRAPHIC DISTRIBUTION OF CHINA'S FOREIGN TRADE, 1953**
11
Value
Volume
Principal Means
of Transport
Country Imports Exports
(US $ millions)
Imports Exports
(thousands metric tons)
Non-Bloc
Coastal, small vessels,
Hong Kong and Macao $115
$153
260
750
rail
Ceylon
55
40
70
300
Ocean vessels
Western Europe *
1001
4201
130
1,000
Ocean vessels
Other non-Bloc
38j
60f
Unrecorded imports transshipped
from Western Europe
65
? ? . ?
235
Ocean vessels
Subtotal
373
323
1,045
2,050
Bloc
Seaborne:
European Bloc
100
80
370
985
Ocean vessels
Soviet Far East
12
27
160
250
Ocean vessels
Overland:
615 ,
670
1,500-2,000
2,500-3,500
Rail
Subtotal
727
777
2,030-2,530
3,735-4,735
Grand total $1,100
, $1,100
3,075-3,575
5,785-6,785
* Including transshipments via Eastern European ports of recorded imports from Western countries
amounting to an estimated 80,000 tons valued at US $20 million.
** The Director of Naval Intelligence and the Deputy Director for Intelligence, The Joint Staff, believe
that the actual percentage of China's foreign trade carried by sea is considerably larger than expressed
in this Table, from which the corresponding estimate in paragraph 9 was derived. This belief is based
upon the following considerations:
a. Estimates of the capacity of the inland transportation systems serving Communist China are
predicated to a large extent upon incomplete and insufficiently corroborated evidence. For this rea-
son, these estimates should be regarded with reserve as being subject to a possible large margin of error.
? b. On the other hand, the minimum amount of seaborne tonnage entering and leaving Commu-
nist China is known from reliable information, including ship movements, visual observations, and
masters' reports. This seaborne tonnage derived as above represents a minimum. It excludes 139
arrivals in 1953 alone repreSenting about 620,000 gross registered tons of shipping on which no cargo
Information is available. It is believed therefore, that the figures are considerably larger, but the ex-
tent of the increase cannot be determined due to inability to ascertain cargo tonnage actually carried.
c. The known cargo figures actually represent only about 15% of the cargo capacity of the non-
Bloc shipping engaged in trade with China.
Therefore, in arriving at an estimate of the respective tonnages carried by sea and land transport, this
paper deals on the one hand with estimated rail capacity figures of questionable reliability and on the
other hand with firm minimum figures of known seaborne tonnage. It does not attempt to compare
estimated rail capacity with known shipping capacity, or to consider the fact that the apparently low
percentage utilization of this chartered capacity would be extremely costly and inefficient.
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Effects of Controls on China's Power
Potential
11. The effect of trade controls on China is
difficult to calculate exactly, for Bloc policies
of autarky, the repercussions of the Korean
War, and the Chinese program for industriali-
zation have also influenced the military and
economic development of China during this
period. Nevertheless, we estimate that trade
controls have (a) limited the availability to
China of certain commodities which would
assist military and industrial development,
and (b) have reduced the total volume of
China's imports through altering China's
markets and increasing transport costs and
procurement difficulties.
12. The first factor has been of limited im-
portance in retarding the development of
China's power potential since China has re-
ceived from the European Bloc sufficient con-
trolled commodities to make possible a rapid
expansion of military strength and achieve-
ment of industrial output somewhat higher
than previous peaks. It has also obtained
some controlled commodities through trans-
shipment and smuggling. However, the dif-
ficulties of obtaining replacement parts for
Western equipment and some specialized
commodities in short supply in the European
Bloc probably has created problems, particu-
larly in the fields of transport, communica-
tions, and electric power.
13. The second factor ? the effect of trade
controls in reducing China's total import
capabilities ? has been of greater importance.
The magnitude of the effect may be illus-
trated if it be assumed that controls had
been abolished during 1953, and that various
adjustments (which would in fact take a con-
siderable time) had been immediately made.
In such a case we estimate that China might
during that year have increased its total vol-
ume of imports by 20 percent or roughly $200
million since it would have been free from
the effects of: (a) the exclusion' of its exports
from the US market; (b) the US controls on
remittances to China; (c) China's restriction
of its exports to Japan as a result of Japan's
unwillingness to supply strategic commodities
in return; (d) the premium prices paid to
Western suppliers for controlled or "border-
line" goods; and (e) the additional transport
costs involved in transshipment or smuggling,
or in the transport of bulky materials ? such
as POL and grains ? via the Trans-Siberian
railroad. These losses represent a reduction
in the resources available to the government.
14. Trade controls, aside from munitions con-
trols, have rendered the task of building up
the strength of the Chinese armed forces
somewhat more difficult than it might other-
wise have been. However, owing to the pri-
ority assigned to the military program, the
Chinese military build-up was largely insu-
lated from the adverse effects of trade con-
trols. The USSR has provided China With
tanks, trucks, artillery, aircraft, ammunition,
modern engineering equipment, and petro-
leum. China has produced infantry weapons,
ammunition, crude engineer supplies, cloth-
ing, and food for its armed forces. The avail-
ability of military supplies from foreign and
domestic sources has been sufficient to pro-
duce a formidable increase in the combat
potential of the Chinese forces. This increase
in combat potential is not backed by an ade-
quate industrial base, nor by adequate reserve
munition stocks. To the extent that trade
controls have slowed China's industrial ex-
pansion they have retarded the growth of its
military potential.
15. The burden imposed by trade controls on
China falls primarily on the Chinese economic
program. Through the imposition of strin-
gent internal controls, the regime has been
able to mobilize a large volume of resources
for investment, and, largely through the re-
habilitation and maximum operation of exist-
ing facilities, has been able to expand indus-
trial output at a rapid rate. However, the
estimated losses attributable to trade controls
in 1953 were equivalent to at least five percent
of China's total investment. To a consider-
able degree, moreover, activation of China's
investment resources requires the importation
of machinery, equipment, and other goods not
produced in China's rudimentary industrial
economy. Limited capital goods imports are
believed to have been a serious problem in
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China's investment program and have been
cited several times by the regime as a major
cause for failing to meet certain investment
goals. Thus, if the entire $200 million in re-
sources estimated to have been lost in 1953
as a result of trade controls had been available
for capital goods imports, it would have rep-
resented an increase of about 50 percent in
such imports and would have enabled? the
regime to utilize its total investment resources
with greater effectiveness.
Effects on Sino-Soviet Relations ,
16. Non-Communist trade controls have rein-
forced the deliberate policies of China and
the USSR, manifested since 1949, to seek closer
political and economic accommodation. The
trade of China had begun to be directed
towards the Soviet Bloc and away from non-
Communist countries even before the imposi-
tion of trade controls. This redirection was
accelerated and the scope of Chinese trade
with the Bloc increased by non-Communist
trade controls, but over a period of time these
developments would almost certainly have
occurred to a considerable degree because of
the general drive in the Bloc to reduce de-
pendence on trade with non-Communist
countries.
13
17. The increased level of trade between China
and the Bloc probably has required consider-
able economic adjustments in both China and
the European Bloc, although there is scope
for mutually advantageous trade between the
two areas. Such evidence as there is suggests
that China's terms of trade with the European
Bloc have not been generally disadvantageous,
indicating that the economic adjustments in-
volved in this trade have probably been made
by both sides. However, to some extent the
commodities and products that China needs
to expand its economy are the same as those
required to expand the economies of the USSR
and its Satellites. In the process of close
economic collaboration, China probably has
pressed for greater economic assistance than
the USSR -has been willing to provide.
18. It is probable therefore that non-Commu-
nist trade controls have caused some stresses
and strains within the Bloc. These strains
are probably reflected in the present interest
of both Peiping and Moscow in increasing
China's trade with non-Communist countries.
However, such strains are probably only a
minor factor working for or against perpetu-
ation of the Sino-Soviet alliance.
PROBABLE EFFECTS OF MAINTENANCE OF PRESENT LEVELS
OF TRADE CONTROLS AGAINST CHINA
Effects on China's Economic and Military
Development
19. The maintenance of present levels of non-
Communist trade controls would result in
little further change in the present pattern
and direction of China's foreign trade. The
direct effects of non-Communist trade con-
trols ? the expenses of transshipments, pre-
mium prices for certain goods, denial of for-
eign markets, and restrictions on remittances
from abroad ? would continue to operate
adversely on China's import capabilities. The
recent widening of the differential between
controls against the European Bloc and con-
trols against China provides the European
Bloc with greater flexibility in meeting China's
needs, particularly those items in short sup-
ply within the Bloc. In the long run, how-
ever, China's total capability to import will
continue to be limited by its ability to export.
Effects on Sino-Soviet Relations
20. Since the Sino-Soviet alliance continues
to be governed by more fundamental consider-
ations than the amount of trade between
China and the non-Communist world, it is
unlikely that continuance of controls would
produce any additional strains or difficulties
in this alliance.
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Effects on China's Foreign Policy
21. China, while developing its subversive
capabilities in neighboring countries, is seek-
ing both international acceptance as a world
power and leadership in Asia. Recognizing
the US as the chief obstacle to the achieve-
ment of its objectives, it seeks to isolate the
US on Asian issues by contrasting US "in-
transigeance" with its own "peaceable and
reasonable" attitude.
22. The Chinese consider trade controls an
affront to their international prestige. Chi-
nese efforts to achieve political gain through
economic penetration of other Asian countries,
and especially of Japan, will be hindered by
maintenance of non-Communist controls on
trade. At the same time they recognize that
these controls provide them with an especially
useful issue in their effort to isolate the US
from its allies. They will continue to hold out
to other countries the prospect of advanta-
geous trade with China in order to arouse re-
sentment toward the control system and
policy conflicts with the US. 14
Effects on Non-Communist Countries
23. The attitudes of most non-Communist
countries toward controls on trade with China
are presently more a reflection of their re-
spective views on China policy in general than
of any vital necessities arising from their trade
situation. Trade with China does not now
constitute a significant portion of the foreign
trade of any area other than Ceylon and Hong
Kong.
24. Since the Korean armistice, and particu-
larly Once the recent relaxation of trade con-
trols against the European Bloc, political and
commerical pressures have mounted within
various CHINCOM countries for a similar re-
laxation of trade controls against China. In
part these pressures are based on the belief
" The Deputy Director for Intelligence, The Joint
Staff, also believes that Communist freedom of
action will continue to be limited to a degree
by the threat of imposition of more stringent
multilateral controls, so long as the control sys-
tem as a framework for collective action exists.
that any increase in peaceful intercourse be-
tween China and the Free World would tend
to reduce both the danger of armed conflict
and the dependence of China on the USSR;
and that with the end of hostilities in Korea
and Indochina, China should be treated in the
same manner as the rest of the Bloc. In part
they are based on the belief that with the re-
duction of COCOM controls, CHINCOM con-
trols can readily be circumvented by trans-
shipments through the European Bloc, with
the consequence that their principal adverse
effect is felt, not by China, but by non-Corn-
munist interests related to direct trade with
mainland China, notably in Hong Kong and
Japan. In addition certain business and
labor groups favor a relaxation of trade con-
trols primarily in the interest of increased
trade. Other groups are not impressed by the
above arguments and believe that a relaxation
of trade controls would not in fact result in
any appreciable increase in trade and would
advance the cause of Communism. On bal-
ance, we believe that many governments, par-
ticularly among CHINCOM countries, tend to
favor some relaxation in controls on trade
with China. However, we believe that none
of these governments favors abolition of con-
trols.
25. Among the CHINCOM countries other
than the US, the position of the UK is of
major importance in influencing the attitude
of the group as a whole. Interested business
groups and political elements in both the con-
servative and labor parties have placed the
British Government under increasing pressure
to sponsor or support a relaxation of controls
against China. Political rather than eco-
nomic considerations probably will continue
to govern British policy in dealing with this
question, which is viewed as subordinate to
the complex of issues affecting British rela-
tions with both the US and China.
26. In Asia the issue of trade controls against
China is of importance to Ceylon, Burma,
Indonesia, and Japan, in addition to Hong
Kong and Macao. Especially in Japan, there
has been considerable agitation for increased
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trade with China in the expectation that such
trade would help solve a variety of national
economic problems (some of which stem from
loss of control of North China, Manchuria,
and Korea) and would contribute to the re-
laxation of international tensions. In these
countries opposition to the trade control sys-
tem would become even stronger if free-world
markets for their commodities became less
favorable. Ceylon, which exports large
amounts of rubber to China, is a member of
neither CHINCOM nor the UN.
27. If China refrains from provocative mili-
tary or political actions, pressure would in-
crease in most CHINCOM countries for a re-
duction of controls to the level applied against
the European Bloc. These countries probably
would not override strong US objections to a
major change in policy nor would they be
likely to take unilateral action to reduce con-
trols. Maintenance of present CHINCOM
controls would, however, be a mounting source
of irritation in US relations with other CHIN-
COM countries.
PROBABLE EFFECTS OF MULTILATERAL RELAXATION OF TRADE CONTROLS
AGAINST CHINA TO THE _LEVEL APPLIED AGAINST THE EUROPEAN BLOC 15 16
Effects on China's Economic and
Military Development
28. If present trade controls applied against
China by non-Communist countries were re-
duced to the level applied against the Euro-
pean Bloc, China would not be able to secure
any additional commodities that it cannot
now secure through transshipment. Almost
all of the effects of present trade controls in
increasing China's import costs and reducing
its export receipts would be removed. It
would greatly facilitate the movement of sea-
borne cargo to China by enabling the Com-
munists to use normal Western shipping
channels rather than transloading and re-
shipping via Bloc or chartered bottoms.
29. The US formerly provided an almost
unique market for many of China's important
exports, such as tung oil, bristles, feathers,
'5 Since there are no quotas presently applicable
to China trade, it is assumed that if controls on
trade with China were reduced to levels apply-
ing to the European Bloc, appropriate quotas
under International List II would be agreed to by
CHINCOM. It is also assumed that under any
relaxation of controls, enforcement would be at
least as effective as that which has thus far been
achieved for present controls.
leThe argument in the following paragraphs is
based on the assumption that CHINCOM con-
trols are reduced to the present COCOM levels.
and handicrafts. Some of these items repre-
sent by-products and the resources required
for their production is not great. Reduction
of US controls from complete embargo to
COCOM levels would enable China to: (a) se-
cure a net increase in its total export volume
through exporting to the US commodities that
it cannot export elsewhere, and (b) secure
better prices for other export products owing
to the increase in world market demand.
China would probably have difficulty regain-
ing its markets in the US and in any case
this process would require time. We estimate
that within two years China could increase
its net export earnings by $60 to $80 million
if it had free access to the US market.
30. US financial controls have also deprived
China of overseas remittances, which before
the imposition of restrictions provided China
with a substantial amount of foreign ex-
It might be possible, however, to add selected
items to the present COCOM lists primarily to
prevent their transshipment to China. We do
not attempt in the present estimate to determine
which particular goods might most usefully be
put on the COCOM lists for this purpose, or
whether it would be feasible to negotiate such an
enlargement of the lists with the other countries
concerned. It seems clear that the effects of
such a course of action on China would lie some-
were between those described in the preceding
section and those described in this section.
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change. We estimate that if the prohibition
on such remittances were removed China
might acquire as much as $30 to $50 million
annually in foreign exchange.
31. With respect to Japan,', the other nation
principally to be affected by a relaxation of
trade controls against China, we believe that
the value of Chinese exports to Japan might
be raised by 1957 from the present figure of
about $40 million a year to about $100 million.
The value of these exports might even reach
$150 million, but we believe this would require
some diversion of Chinese exports from Bloc
-markets.18
32. The estimated additional increments of
foreign exchange which China might acquire
after a relaxation of present trade controls to
the COCOM level are summarized in the fol-
lowing table:
ESTIMATED POTENTIAL INCREASE OF CHINA'S ANNUAL
FOREIGN EXCHANGE EARNINGS* AS A RESULT OF MULTI-
LATERAL RELAXATION OF TRADE CONTROLS AGAINST CHINA
TO THE LEVEL APPLIED AGAINST THE EUROPEAN BLOC
(US $ MILLIONS)
Increased
Reduced
Source
Receipts of
Costs in
Total
Foreign
Foreign
. Exchange
Exchange
US Markets * *
$60- 80
$60- 80
Overseas
Remittances
30- 50
30 - 50
Reduced Trans-
port Costs
15-20
- 15- 20
Price Differ-
entials
25 - 30
25- 30
Japanese
Trade ? ?
35- 50
35- 50
$125 - 180
$40 - 50
$165 - 230
? Does not include consideration of about $100
million of Chinese assets blocked in US.
5* Total increases in earnings would be in excess
of these amounts but not all of the increase
could be attributed to relaxation of trade con-
trols.
Assuming that the Chinese decided to ex-
port to the extent necessary to yield the for-
eign exchange in the above table, we estimate
that within about two years they could in-
crease their imports by about 20 percent over
the 1954 estimated level. The value of the
additional goods imported would be equal to
about 10 percent of the total amount current-
ly allocated to industrial and transportation
investment in the Chinese budget. It is im-
portant to note that this available foreign
exchange, together with additional sources of
supply for goods, would permit a considerably
more flexible and efficient employment of total
investment resources.
33. We do not believe that China in the fore-
seeable future will be interested in substantial
imports of consumer goods from Japan or
from any other country. This estimate rests
largely on our belief that China will continue
to place overriding emphasis on imports of
commodities essential to building its modern
industrial sector, particularly heavy industry
and transportation, and in modernizing its
armed forces.
Effects on Sino-Soviet Relations
34. Multilateral relaxation of controls against
China would not significantly affect Peiping's
relations with Moscow. However, increased
trade with the West would reduce certain
strains which probably exist in the Sino-Soviet
relationship. Although there appears to be
no likelihood of China's dissociating itself
from the USSR, broader and more regular
contact by China with the non-Communist
world and greater ease in procuring needed
imports might in the very long run permit
Peiping to move toward a position of greater
independence within the Bloc.
" See the Appendix for a brief analysis of the
prospects for Japanese trade with China.
18 The Deputy Director for Intelligence, The Joint
Staff, would add: "The Soviet delegate to the UN
trade conference at Hong Kong estimates Japan
could earn another $300 million in 1956 if trade
embargoes were lifted, which highlights the con-
sequences of even a partial reintegration of the
economies of Japan and of China. China is com-
mitted to a sustained effort to build an indus-
trial economy. Trade with Japan is to its ad-
vantage only so long as it contributes to the
growth of this economy or can assist in achieving
Communist political goals. If and when Japan
becomes markedly dependent on the Asian Com-
munist Bloc as a source of raw materials and as
a market for its heavy industry, it will be vul-
nerable to Communist economic pressures.
SECRET
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SECRET 17
Effects on China's Foreign Policy
35. Multilateral relaxation of controls on
trade with China would not lead to any altera-
tion in Communist objectives in Asia, nor
probably to any substantial changes in China's
foreign policy. One of Peiping's propaganda
weapons against the US would be lost, but
others would remain, and the relaxation of
controls would probably be exploited as a con-
siderable victory. Given the totalitarian na-
ture of the Chinese regime, its leadership
would find no difficulty in limiting any "liber-
alizing" effects on Chinese public opinion
which might arise from increased trade and
contacts with the West.
Effects on Non-Communist Countries
36. A multilateral relaxation of controls on
trade with China would probably be approved
by most of the governments of Europe and
Asia, some because of conviction that it was
a desirable move, others out of indifference to
the issue or willingness to follow the lead of
powers principally concerned. The policy
would probably arouse major criticism only
in Taiwan and South Korea, both of whose
governments would almost certainly continue
to observe their present restrictions. In the
rest of Asia, US relaxation of trade controls
against China would probably be viewed with
some disquiet, despite the official approval
given the policy by governments. It would
probably arouse apprehension among some
anti-Communist groups that the US might
fail to give active resistance to the further ex-
pansion of Communism in Asia. The intensi-
ty of such feelings would depend largely on
the manner in which the US adopted such a
relaxation of controls and on other indications
of US policy which were available at the same
time.
" See the Appendix for a brief analysis of the pros-
pects for Japanese trade with China.
2? The Deputy Director? for Intelligence, The Joint
Staff, would replace the last two sentences with
the following:
"Nevertheless, China's need for capital goods and
its available or foreseeably available raw mate-
rials complement the present economic situation
of Japan ? productive capacity excess to its own
needs, a diminished raw materials base, and an
37. While Chinese trade with non-Communist
countries would probably increase after the
relaxation of controls, and in some areas
would be exploited for political purpose, it is
almost certain that the amount of trade in-
crease would fall far short of expectation in
many countries. It would not prove to be the
panacea for economic ills that some of their
peoples have hoped for. These countries
might, therefore, in the course of time, become
somewhat less vulnerable to trade offers made
by China for political reasons.
38. We believe that once these controls were
relaxed, only open aggression by Peiping
would bring about a reimposition of controls.
39. We believe it unlikely that trade relations
between China and Japan can regain their
prewar significance under any forseeable cir-
cumstance. 19 There has been a fundamen-
tal change in the Chinese economic situation
since the establishment of the Communist
regime. China is now firmly committed to
a program of industrialization and of inte-
grating its economy with that of the Bloc.
As for Japan, it no longer possesses the po-
litical control over Manchuria which per-
mitted it to develop that area as an integral
part of its own economy and to make China
by far its most important trading partner.
Japanese prospects for maintaining an ex-
panding economy will depend far more on its
trade with the non-Communist world than
on any foreseeable growth in its trade with
China. We believe that Sino-Japanese trade
during the next few years will not in itself
cause Japan to alter significantly its present
orientation to the West barring a serious de-
pression in the Free World accompanied by a
drastic curtailment of Japanese trade oppor-
tunities.2?
unfavorable balance of trade without substantial
exports. It would be very much to Communist
advantage if Japanese heavy industry were to
supply much of the means for China's indus-
trialization, particularly if at the same time
Japan were to become partially dependent on
China as a raw materials source and capital
goods market. Current trade overtures indicate
Communist awareness of this opportunity, and
Japanese willingness to participate in such a
pattern of trade."
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SECRET 18
PROBABLE EFFECTS OF THE US UNILATERALLY MAINTAINING VARIOUS
ALTERNATIVE LEVELS OF CONTROLS ON TRADE WITH CHINA
Effects on China's. Economic and Military
Development
40. If the US unilaterally maintained present
controls 21 against China while other non-
Communist countries relaxed controls to the
level now applied against the European Bloc,
the advantages which the Chinese would
otherwise gain from a general relaxation of
present trade controls would be considerably
reduced.
41. If the US maintained only a ban on im-
ports from and remittances to China, the po-
tential gains in foreign exchange available to
China from a general relaxation of present
trade controls would be reduced by roughly
one-half.
42. A unilateral US ban affecting only exports
to China would not deny any commodities to
China which could not be purchased else-
where, and would have only minor effects in
raising China's import costs through prevent-
ing the purchase of certain imports in the US
market. China would use elsewhere the
dollars acquired by exports to the US.
Other Effects on China and the USSR
43. We do not believe that unilateral mainte-
nance of controls by the US would lead to any
significant change in Chinese or Soviet courses
of action.
Effects on Non-Communist Countries
44. Although trading interests in CHINCOM
and Far Eastern countries would welcome the
continued absence of US competition in the
Chinese market, their governments would be
concerned at the divergence of their policies
from those of the US. There would probably
be apprehension that the failure of the US to
participate in the general relaxation of con-
trols would contribute to a continuation of
tensions in the Far East. Moreover, difficul-
ties and frictions would probably arise if the
US attempted to prevent the re-export to
China from third countries of goods imported
from the US.
PROBABLE EFFECTS OF RAISING THE LEVEL OF CONTROLS
ON TRADE WITH CHINA
45. We have already .estimated that controls
on exports to China can be only partially
effective at a level higher than controls on
exports to the European Bloc, because China
can procure goods by transshipment via the
European Bloc, as long as sufficient shipping
or other transport facilities are available.
Such transshipment is more costly and time-
consuming than direct procurement, but the
adverse effect on the over-all Chinese military
and economic buildup is relatively small. A
further increase in controls on exports to
China ? without a corresponding increase in
the level of COCOM controls ? would prob-
ably have the effect of increasing the volume
2i Including Foreign Assets Controls.
of transshipped goods, but it would probably
not appreciably retard China's internal devel-
opment.
46. If an embargo on imports from China,
similar to that now applied by the US, were
applied by all CHINCOM countries, China
would lose export markets now taking about
one-quarter of total exports (including Bloc
re-exports of Chinese products). Since Bloc
markets are not believed to be readily ex-
pansible, it is probable that China's import
capabilities would be reduced proportionately.
Such a reduction in China's imports would
significantly retard China's internal develop-
ment.
SECRET
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47. The increased levels of trade control might
give rise to added disagreements and frictions
in the relations between China and the re-
mainder of the Bloc, but we do not believe
that the basic Sino-Soviet relationship would
be seriously disturbed.
48. The Director of Central Intelligence, and
the Special Assistant, Intelligence, Depart-
ment of State, believe that in the unlikely
event that all non-Bloc shipping and shipping
services were denied to the uses of Chinese
commerce, the Chinese economy would in the
short term be adversely affected and trans-
portation costs increased. Non-Bloc ocean-
going vessels in 1953 carried about three-
fourths of China's seaborne foreign trade.
Bloc flag shipping is inadequate to carry its
own trade and no substantial building pro-
gram is in progress. However, a substantial
share of China's seaborne trade now carried
in non-Bloc vessels would be carried by the
Trans-Siberian railroad and by Bloc flag ves-
sels diverted to the China trade, provided non-
Bloc vessels were chartered to replace the ship-
ping so diverted. A considerable part of the
trade probably would be curtailed, notably
China's exports of coal and iron ore which con-
stitute 40 percent of seaborne export tonnage
but less than 1 percent of the value of total ex-
ports. These adjustments would probably be
made within a reasonable period. If denial
affected only CHINCOM flag shipping and
services, the Chinese could shift at least part
of their seaborne commerce to non-CHINCOM
flag vessels, thus mitigating still further the
effects described above.
49. The Director of Naval Intelligence; the
Deputy Director for Intelligence, The Joint
Staff; the Assistant Chief of Staff, G-2; and
the Director of Intelligence, USAF, believe
that in the unlikely event that all non-Bloc
shipping and shipping services were denied to
the uses of Chinese commerce, the effects upon
the Chinese economy would be marked and ad-
19
verse. Non-Bloc ocean-going vessels in 1953
carried about three-quarters of China's sea-
borne foreign trade. Since Bloc flag shipping
is now inadequate to carry its own trade and
no substantial building program is in prog-
ress, it is probable that only a small portion
of this traffic could be carried through an in-
crease or readjustment in the use of Bloc
shipping. Denial of all non-Bloc shipping
would result in considerable curtailment of
China's foreign trade, because the rail trans-
portation facilities within China and those be-
tween China and the European Bloc probably
are not adequate to handle the additional
tonnages involved. If denial affected only
CHINCOM flag shipping and services the Chi-
nese could shift at least part of their seaborne
commerce to non-CHINCOM vessels, thus mit-
igating the effects described above. We be-
lieve, however, that the extent of this mitiga-
tion would not be significant, since the denial
of shipping services (re-insurance, bunkering,
repair, etc.) by the largest maritime nations,
in addition to other pressures which could be
brought to bear, would make most non-CHIN-
COM countries extremely reluctant to commit
their vessels to this trade, despite the proba-
bility of premium charter rates being offered
by the Bloc. Few non-CHINCOM countries
have substantial additional tonnage suitable
for the China trade, and with few exceptions,
the availability of any vessels would be limited
by the extent to which they could be replaced
on their regular runs by shipping chartered
from CHINCOM countries. Moreover, of all
non-CHINCOM countries, only Sweden has a
significant amount of shipping which could
be so used.
50. Without some new and considerable pro-
vocation by China, or possibly by the USSR,
we believe that an appreciable increase in the
level of controls on trade and shipping with
China would almost certainly not be agreed
to by non-Communist countries.
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?POINGET- 20
APPENDIX
JAPANESE TRADE WITH COMMUNIST CHINA
1. The Japanese had already developed a
substantial trade with mainland China dur-
ing the 1920's and early 1930's. By 1939,
eight years after the seizure of Manchuria,
mainland China had become Japan's most
important trading area (See Table I, page 23) .
Manchuria and subsequently much of China
became protected Japanese markets. By de-
veloping Chinese and particularly Manchurian
economic resources the Japanese provided
themselves with an outlet for capital goods
exports and a market for consumer goods.
In addition they obtained a secure source for
many of Japan's essential raw material re-
quirements, particularly coal, pig iron, iron
ore, salt, soy beans, and oil cake (See Table
II, page 24) .
2. Until the war years 1941-1945, when Japan
was largely cut off from other sources of sup-
ply, mainland China was more important to
Japan as a market than as a source of im-
ports. Japanese exports to mainland China
of textiles, steel, and capital equipment were
only partially paid for by purchases of essen-
tial raw materials and foodstuffs. This export
surplus was balanced primarily by Japanese
investment in Manchuria and in other areas
of China.
3. Japanese postwar trade with mainland
China has been relatively insignificant (See
Table III, page 25). Although it had revived
somewhat by 1950, Sino-Japanese trade was
almost completely stopped by the restrictions
following the outbreak of the Korean War.
Following the armistice in 1953 it began to re-
vive as controls were slightly relaxed. Unlike
the prewar period, recent Japanese trade with
mainland China has shown an import surplus
4. The future level of Sino-Japanese trade will
be determined primarily by political factors,
and secondarily by economic factors. The
principal political factors will be: (a) the ex-
tent to which China,22 in conjunction with the
USSR, continues to pursue a policy of Bloc
autarky, deliberately minimizing trade with
non-Communist areas; (b) the extent to which
trade will be used by the Bloc as a weapon of
economic and political warfare; and (c) the
extent to which the non-Communist countries
will maintain controls on trade with China.
The principal economic factors are: (a) the
availabilities for export of Chinese coal, iron
ore, salt, soybeans, rice, and other grains; (b)
the availability for export of Japanese capital
equipment within the framework of existing
controls at competitive prices; and (c) the
extent to which the non-Communist world
offers increasing trade opportunities to Japan.
5. In attempting to determine the possible
magnitude of Sino-Japanese trade expansion
within existing controls, the Japanese, assum-
ing Chinese agreement, estimate that this
trade could probably be raised to some $70
million each way per year by 1957. The Jap-
anese Ministry of International Trade and
Industry has estimated that Japan, at this
level of trade, might by 1957, import from
China the quantities of certain essential com-
modities listed below:
Quantities Estimated
Commodity Imported in Imports for
1953 1957
(Metric Tons)
Rice
(none)
100,000
Soy Beans
16,000
100,000
Coal
137,000
800,000
Iron Ore
38,000
500,000
Salt
197,000
300,000
nUnless otherwise specified, the terms "China"
and "Chinese," are used in lieu of "Communist
China" or "Chinese Communists."
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gokiligeleerk
6. We believe that Sino-Japanese trade might
reach a figure of $70 million each way per
year by 1957. However, Chinese exports to
Japan of this magnitude might conflict with
increasing domestic requirements and with
export commitments to the European Bloc, al-
though these conflicts would not necessarily
preclude this level of export if China so de-
sired. In any case, Japanese imports from
China at this projected level of trade, although
almost 21/2 times the value of 1953 imports
from mainland China, would be less than 3
percent of the projected total of Japanese im-
ports in 1957.
7. If controls on Chinese trade were lowered
to the level now applied against other Bloc
countries and if China desired to increase
substantially trade with Japan, we believe that
by 1957 Sino-Japanese trade could probably
be raised to at least $100 million each Way.
It might even reach $150 million each way,
but we believe this would require some diver-
sion of Chinese trade from other export
markets.
8. The estimate that the $100 million level
could be reached is based primarily upon the
Chinese capability to export coal and iron ore
in greatly increased quantities ? a capability
which we believe they can exercise without
significantly modifying their present trade
commitments to the Bloc or their present
domestic program. It is probable that the
large iron ore deposits on the island of Hainan
could be exploited without great expenditure
on the part of the Chinese. The iron ore
presently produced from Hainan is probably
? not included in China's internal steel pro-
gram, but is earmarked for export. In these
circumstances, we believe that China could
probably increase its production on Hainan
alone sufficiently to provide for the export of
about 1.5 million tons of iron ore to Japan, a
quantity equal to about one-third of Japan's
1953 total iron ore imports of 4.3 million tons.
We believe that China could supply a major
portion of the coking coal imported by Japan
(3.7 million tons in 1953) with relatively small
investment. There is some evidence that
China produces pig iron in excess of the needs
of its own steel industry and may continue to
21
do so for some time. The extent to which
there is or will be an exportable surplus is
unknown, but there is a possibility that some
export of pig iron to Japan could occur.
9. We believe that if controls on trade with
China were removed, Japanese exports of ma-
chinery, equipment, rolling stock, and other
capital goods to China could be considerably
increased. Such exports would be significant
in contributing to an alleviation of Japan's
trade problem, but barring a far-reaching
reorientation of China's foreign trade pattern
they would fall short of closing Japan's trade
gap in the next few years. Moreover, even if
all controls on trade with China were elim-
inated, we believe it very unlikely that trade
relations between mainland China and Japan
would regain their prewar significance in per-
centage terms of Japan's total trade. There
has been a fundamental change in the Chi-
nese economic situation since the establish-
ment of the Communist regime. China is
now firmly committed to a program of indus-
trialization and of integrating its economy
with that of the Bloc. As for Japan, it 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 China by far its most important
trading partner.'
10. Trade with China is important to Japan
because in the foreseeable future China is the
only major market, other than Southeast -
Asia, with which Japan can hope to achieve
a significant increase in trade. The goods in
demand by China, i.e., machinery, transport
equipment, and other capital goods, are those
which Japan has the capacity to produce.
Although we cannot determine whether Japan
could compete in specific items, Japan could
provide a major share of any total increase in
Chinese imports from non-Communist coun-
tries. If this trade proceeded satisfactorily,
any efforts by the Japanese Government to
discourage further expansion would meet with
political opposition. China could intensify
the political effects of an increase in Sino-
"Attention is invited to footnote by the Deputy
Director for Intelligence, The Joint Staff, to par-
agraph 39, text.
-4e=TfEti
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Japanese trade if it were willing to accept Jap-
anese goods even at prices above the world
market, or if it made trade offers at a time
when Japan was having difficulties exporting
to other markets. -
11. The extent to which Japan will seek to
exploit China as a source of raw materials will
depend on the quality and price of these goods
as well as Japan's balance of payments posi-
tion in other currencies, particularly dollars
and sterling. If China offered its raw mate-
rials at prices lower than world prices and at
the same time offered to buy Japanese goods,
Japan would probably seek to increase its vol-
ume of imports from China. On the other
:ara
-22
hand, Japan under existing circumstances
would probably be somewhat reluctant to be-
come dependent on China as the major source
for any one of its essential imports. In any
event, we believe that Sino-Japanese trade
during the next few years will not in itself
cause Japan to significantly alter its present
orientation to the West barring a serious de-
pression in the Free World accompanied by
a drastic curtailment of Japanese trade oppor-
tunities."
24 Attention is invited to footnote by the Deputy
Director for Intelligence, The Joint Staff, to
paragraph 31 text.
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z
.41PP-%
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4111PRRIPIPr 23
TABLE I
JAPANESE TRADE WITH MAINLAND CHINA AS PERCENT
OF TOTAL TRADE *
EXPORTS AS % OF IMPORTS AS % OF
TOTAL EXPORTS TOTAL IMPORTS
YEAR
ALL CHINA
INCLUDING
MANCHURIA
AND
KWANTUNG
MANCHURIA
AND
KWANTUNG * *
ALL CHINA
INCLUDING
MANCHURIA
AND
KWANTUNG
MANCHURIA
AND
KWANTUNG * *
1926
1930
22
19
14
14
1936
18 ?
14
11
7
1937
- 19
15
9
6
1938
30
22
15
11
1939
34
25
? 16
. 12
1940
35
22
16
9
1941
38
24
21
10
1942 * *
43
28,
42.
18
1943 * * ?
43
26
45
13
* Total trade includes Japanese trade with Korea and Taiwan.
** Trade recorded for Kwantung for the most part originated in or was destined
for Manchuria and North China.
*** World War II years.
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jgriaarrir
TABLE II
RELATIVE IMPORTANCE OF CHINA IN JAPAN'S IMPORTS IN
SELECTED COMMODITIES, 1936 AND 1940
24
Commodity
1936
1940
Total
Japanese
Imports *
(1,000 metric
tons)
Total
Imports *
from
Mainland
China
(1,000 metric
tons)
Imports from
Mainland
China as %
Total Japanese
Commodity
Imports
Total
Japanese
Imports *
(1,000 metric
tons)
Total
Imports *
from
Mainland
China
(1,000 metric
tons)
Imports from
Mainland
China as %
Total Japanese
Commodity
Imports
Soy beans
& other
pulses 917
698
76, 607
491
81
Oil-bearing
seeds 317
273
86 . 153
74
48
Rice 1,962
0
0 1,687
54
3
Salt (1939) 1,416
627
42 1,967
820
42
Coal * * 6,360
3,411
54 9,896
4,210
42
Iron ore 4,023
1,252
31 5,129
1,222
24
Pig iron 1,095
271
25 854
431
50
Hides &
leather 33
13
39 31
12
39
Iron & steel
scrap 1,515
61
4 1,393
77
6
Raw cotton 925
28
3 618
64
10
* Japanese trade with Korea and Taiwan is included in total Japanese imports but excluded from the
figures used for mainland China.
** Virtually all of Japan's coking coal came from mainland China.
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4tiM!M T 25
TABLE III
JAPANESE POSTWAR TRADE
Japanese
Japanese
Exports to
Imports
from
Total Mainland
Total Mainland
Year
Exports China
% Total
Imports China
% Total
Including
Including
Manchuria
Manchuria
(US $ million)
(US $ million)
1950
$ 820
$ 20.
2.4%
$ 974
$40
4.1%,
1951
1,355
6.
0.4
2,047
22
1.1
1952
1,273
0.6
neg
2,028
15
0.7
1953
1,275
4.5
0.4
2,410
30
1.2
1954 *
1,570
18.
1.1
2,360
42
1.8
* Estimated totals.
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APeor
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