THE ECONOMIC IMPORTANCE OF THE ABOLITION OF MULTILATERAL DIFFERENTIAL TRADE CONTROLS AGAINST COMMUNIST CHINA

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP79T00935A000400290003-7
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 11
• Document Creation Date: November 9, 2016
• Document Release Date: August 25, 1998
• Sequence Number: 3
• Publication Date: June 17, 1957
• Content Type: IM

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NOT RELEASABLE TO
FOREIGN NATIONALS
INTELLIGENCE MEMORANDUM I*/
THE ECONOMIC IMPORTANCE OF THE ABOLITION
OF MULTILATERAL DIFFERENTIAL TRADE CONTROLS
AGAINST COMMUNIST CHINA
CIA/RR IM-452
17 June 1957
WARNING
THIS MATERIAL CONTAINS INFORMATION AFFECTING THE
NATIONAL DEFENSE OF THE UNITED STATES WITHIN THE
MEANING OF THE ESPIONAGE LAWS;, TITLE 18, USCI SECS.
793 AND 794, THE TRANSMISSION OR REVELATION OF
WHICH IN ANY MANNER TO AN UNAUTHORIZED PERSON IS
PROHIBITED BY LAW.
CENTRAL INTELLIGENCE AGENCY
Office of Research and Reports
NOT RELEASABLE TO
FOREIGN NATIONALS
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mom11?100111011011E4mmo
CONTENTS
Summary
Page
1
1.
Background
2
25X6A
a. CHINCOM Negotiations
2
3
2.
Levels of Sino - Free World Trade
3
a. General
3
b. Trade with CHINCOM Countries
4
3.
Prospects for Sino - Free World Trade
5
a. Availability of Foreign Exchange
5
b. Reorientation of Trade
6
4.
Effects of the Continuation of Unilateral Controls
by the US
Table
7
Recorded Sino - Free World Trade, 1954-56 4
? iii ?
4m11.11?11?11.01?11
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CIA/RR IM-452
(ORB Project 42.1969)
THE ECONOMIC IMPORTANCE OF THE ABOLITION
OF MULTILATERAL DIFFENENTIAL TRADE CONTROLS
AGAINST COMMUNIST CHINA*
Summary
The trade of Communist China with the Free World has grown at a
rapid rate over the past 3 years. In view of its export surplus in
trade with the Free World and its substantial holdings of Free World
currencies, China appears capable Of continuing this growth.
Abolition of multilateral differential trade controls against
Communist China would tend to facilitate the expansion of its trade
with the Free World, without necessarily resulting in a substantial
reorientation of its total foreign trade. It is not presently pos-
sible to predict the level to which controls might fall. By making
various assumptions as to what the subsequent level of controls will
be, however, it is possible to estimate the potential gains to China
as follows:
1. The reduction of CHINCOM** controls to COCOM** levels
could effect price and transport savings of about US $35 million***
annually.
2. The removal of ancillary shipping controls permitting
the carriage of refined petroleum products by Free World flag vessels
could effect additional savings of as much as $30 million.
3. The lowering by the US of its unilateral controls against
communist China to those prevailing against the rest of the Soviet
Bloc might open unique opportunities for markets and might permit
dollar remittances totaling $75 million annually.
* The estimates and conclusions contained in this memorandum repre-
sent the best judgment of OP as of 14 June 1957.
** Member nations of the China Committee on Export Controls (CHINCOM)
and the Coordinating Committee on Export Controls (COCOM) are Belgium,
Canada, Denmark, France, West Germany, Greece, Italy, Japan, Luxembourg,
the Netherlands, Norway, Portugal, Turkey, the UK, and the US.
*** Dollar values are given in terms of US dollars throughout this
report.
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4. The relaxation of CHINCOM controls could prompt Communist
China to drop present restrictions on trade with Japan, permitting a
possible increase in Chinese exchange earnings from trade with that
country of as much as $50 million annually.
Relaxation of CHINCOM controls could, therefore, result in an in-
crease of Chinese Communist imports from the Free World of between
$35 million and $190 million annually. Chinese exports to the Free
World would probably rise by a somewhat smaller amount.
1. Backqound.
Since 1954, pressures in CHINCOM for the modification of china
trade controls have steadily increased. These pressures, generated
in large part by commercial trading interests and reflected in govern-
ment positions, have come primarily from the UK, Japan, France, and
West Germany. These four countries and Norway, Denmark, and Portugal
have also objected to the differential treatment of Communist China
on the basis of principle, holding that trade controls on Communist
China should be treated under the same criteria as the EVropean Soviet
Bloc. The US policy to date has been one of a unilateral total embargo
on trade with China and of participation in CHINCOM to effect the best
possible multilateral restrictions on such trade. US economic defense
policy in March 1957 implicitly recognized these pressures and autho-
rized a US course of action designed to maintain the maximum effective
control structure.
a. CHINCOM Negotiations.
On 7 May 1957, France made a proposal in the CHINCOM forum
which would have had the effect of eliminating the China differential
in from 6 months to 1 year. On this same date the US, caring oUt
its current policy, proposed a revision of China trade controls which
eliminated a large number of items from control and simultaneously
called for tightened controls on the remaining items. Neither pro-
posal received the unanimous support of CHINCOM. During the period
7 to 27 May, efforts were made to negotiate an acceptable compromise
within CHINCOM, and on 21 May, after several compromise steps by the
US, an alternative proposal was offered by a small group of delegates.
(The US and the UK were not in this group.) The US, ?n the interests
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of reaching a unanimous agreement, supported the compromise proposal
on 23 May as did a majority of the participating countries. The UK,
Denmark, Norway, and Portugal rejected the compromise but did not
withdraw from further negotiations. (Japan and Canada "reserved"
25X8A1r positions.)
2. Levels of Sino - Free World Trade.
a. General.
The trade of Communist China with the Free World has steadily
increased over the past 3 years. Preliminary estimates based on Free
World sources place the value of total Sino - Free World trade in
1956 at nearly $1 billion compared with $621 million in 1954. Data
on recorded Sino - Free World trade, which account for about 90 to
95 percent of the estimated total of such trade, indicate that the
greater-Part of the increase in total trade in 1956 was caused by
an increase of $112 million in Chineseexports to the Free World.
Over the same period, Chinese imports from the Free World increased
by '3Tmillion. Recorded Sino - Free World trade in 1954.-56 is shown
in the table.*
As in 1955, Communist China once again in 1956 had a marked
surplus in its balance of recorded trade with the Free World. The
addition of estimated unrecorded imports from the Free World of $50
million, $76 million, and $50 million for 1954, 1955, and 1956,. re-
?
spectiVely, wiped out the apparent export surplus of China for 1954
and.consider4b1y reduced that for 1955. The actual export surplus -
of China for 1956 remained large -- its exports to the Free World.
exceeded imports about 17 percent.
* ?The table follows on p. 4.
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Table
Recorded Sino - Free World Trade 2/
1954-56
Million US t
1954.,
195 1956 12/
Imports from
Free World
273
321
408
GHINCOM countries
80
110
202
Exports to
Free World
298
423
535
CHINCOM Countries
113
175
208
a. Data adjusted according to established
EIC methodology to reflect c.i.f. values
for imports and f.o.b. values for exports.
b. Preliminary estimates.
b. Trade with CHINCOM Countries.
The recorded trade of Communist China with the 15 CHINCOM
countries accounted for less than 45 percent of Sino - Free World
trade during .the past 3 years (see the table). Trade with European
CHINCOM nations amounted to less'6than 30 percent of the total. In
1956, however, the CHINCOM countries more than accounted for the
entire increase in Chinese imports from the Free World. This situa-
tion was due to a more liberal interpretation and a greatly increased
utilization of the exceptions procedures* in the latter half of the
* Document No, 471 exceptions procedures apply to IL-I, IL-III and
most IL-III items and require prior consultation and an adequate quid
pro. quo justification for any export of these items.
Document No. 782 exceptions procedures apply to a small number of
IL-Ill items and the China Special List and require only ex poste facto
notification. These were the procedures most freely used during the
latter half of 1956, when exceptions rose sharply.
:For:furtherAetails on exceptions procedures, see COCOM Document
No. .11.71 of 28 January 1952 and COCOM Document No. 782 of 10 JUne 1952.
-
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year) with the result that exceptions totaled $79 million for the
year. The most notable effect of the increased use of the exceptions
procedures was that the value of the recorded Chinese imports of metals
25mAnach1nery doubled, reaching an estimated value of $4o million.
In each of the past 3 years, the recorded imports of CHINCOM
countries from Communist China have exceeded their exports to that
country. Because the major portion of the unrecorded Chinese imports
from the Free World is believed to have originated in CHINCOM coun-
tries) however, it seems probable that Sino-CHINCOM trade has fluc-
tuated between a near balance and a deficit on the side of China.
Japan, the major Free World outlet for Chinese products, maintained
her imports in 1956 at somewhat over 0.million. The most notable
change was the $10 million increase in imports by Germany) which
boosted that country's Chinese imports above the $55 million level.
3. Prospects for Sino - Free World Trade.
a. Availability of Foreign ,Exchane.
It is estimated that accumulated surpluses in its balance
of trade with the Free World plus estimated annual remittances from
overseas Chinese of $50 million may have left Communist China at the
beginning of 1957 with Free World currency holdings worth roughly
$300 million, of which nearly half is believed to be in transferable
sterling. Chinese sterling balances, which were estimated at ?100
million at the end of 1955, were cut in half during 1956. This was
partly because of a shift to currencies of countries not involved
in the Suez crisis (notably to Swiss francs) and apparently also be-
cause of an increased use of sterling in trade with the Soviet Bloc.
The $300 million is equivalent to about 70 percent of the value of
the recorded imports of China in 1956 from the Free World.
During 1957' there may be a reduction in the exchange earnings
of Communist China from trade with the Free WOrld because of reduced
export capabilities resulting from poor harvests, reduced government
procurement of agricultural products, and planning deficiencies.
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Recently granted deferments in required exports to the USSR the magni-
tude of which is as yet unknown) should, however, modify: the itmediate
effects on Sino - Free World trade.
b. Reorientation of Trade.
If all CHINCOM nations except the US were to reduce the China
differential trade controls to the level of the COCOM Controls against
the rest of the Soviet Bloc, it is most likely that these nations
would increase both their export and import trade with Communist China,
but not to an extent sufficient to result in a substantial reorienta-
tion in Chinese trade. Such a relaxation of trade controls, even if
it included those of the US, would not greatly increase the ability
of CommUnist China to secure commodities not now available through
transshipment, but would permit an increase in exports to markets not
now open and would reduce import costs on certain items.
It is estimated that savings in transport costs and premium
payments resulting from a reduction of controls to the COCOM level
by all but the US could amount to as much as $35. million, thus per-
mitting an increase of this amount in imports from the Free World.
The transport savings would result from the use of Free World flag
vessels for the carriage of formerly embargoed items (principally
crude petroleum), thus avoiding the necessity of using more costly
overland transport. Premium payments result from two factors:
(1) additional costs incurred in clandestine procurement of restricted
goods and (2) the decision of China to purchase rubber in higher-cost
markets not controlled by CHINCOM as a means of exerting some counter
pressure. If, in addition, ancillary shipping controls were abolished,
permitting the carriage of refined POI, products in Free World tankers,
further savings of $30, million annually might result. Should the US
follow the other CHINCOM nations in reducing trade controls, Communist
China might gain $25 million annually in remittances from overseas
Chinese as well as $50 million a year from sales in the US,* Exchange
earnings totaling $50 million in addition might be derived from trade
with Japan should China choose to drop present restrictions on trade,
with that country. China has been using the denial of coal and iron
ore as a lever with which to pressure Japan into dropping the CHINCOM
controls,
See 14. p. 7, below, for a detailed analysis.
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It is therefore estimated that as a consequence of the relaxa-
tion of the multilateral China differential trade controls, the capa-
bility of Communist China for importing from the Free World might be
increased (depending upon the degree of relaxation) by between $35
million and $190 million. Because much of this increase in import
capability would be caused by factors other than export earnings and
because China already has a substantial export surplus in her balance
of trade with the Free World, it is estimated that (barring signifi-
cant reorientation of trade) concomitant increases in Chinese exports
to the Free World would be sbmewhat smaller than this amount -- pos-
sibly no more than half as large.
4. Effects of the Continuation of Unilateral Controls 17 the US,
Until December 1950 the US was the major Free World trading partner
of China. The imposition of US controls drastically reduced this trade,
which fell from $191 million in 1950 to $47 million in 1951 and $25
million in 1952 and has been negligible since. Thus US controls which
impose a complete embargo on trade and financial activities with Com-
munist China have caused a virtual cessation of commercial exchange
between the two countries.
Because Communist China can obtain from other countries virtually
all products produced in the US, the major effect of the continuation
of the US embargo is the denial of a large market for Chinese handi-
craft and industrial raw materials. US imports of these goods from
China amounted to $120 million in 1948 and $150 million in 1950. A
substantial part of these goods included byproducts or utilized under-
employed resources in their production, and the denial of markets
represents a substantial net loss to the Chinese economy. On the
other hand, the US has succeeded to some extent in finding substitutes
or alternative sources of supply for such traditional Chinese exports
as tung oil and hog bristles. Considering the reorientation of the
exports of Communist China, the diversion of resources to the growing
industrial sector, and the altered character of the US market, it is
estimated that exports from China to the US as a unique market would
probably be little more than $50 million annually if controls were
relaxed.
Overseas remittances to China may have exceeded $100 million
annually during the period before World War II, with perhaps more
than half of this coning from the US. Price levels and incomes are
now substantially higher than those of the 1930's, and it is possible
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"
amieriaili01011"?"
that remittances might, in the absence of controls, reach or even
exceed those of prewar years. It is probable, however, that Americans
of Chinese ancestry and American religious organizations are no longer
interested in investing in. mainland China properties. In addition,
because of emigration and severance of family ties, the necessity for
remittances to relatives has declined. Consequently, it is believed
that if US controls were relaxed, US remittances would not greatly
exceed $25 million annually.
Thus it is estimated that the continuation of US unilateral con-
trols is denying to Comnalrlist China approximately $75 million annually
in potential foreign exchange earnings. As an additional consequence
of US controls, about $100 million of Chinese assets in the US are
blocked by the US Government.
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