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December 15, 2016
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April 8, 2004
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August 5, 1975
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STAT STAT OFFICIAL USE ONLY Approved For Release 2004/05/05 : CIA-RDP80-11/101133A000600020010,0 tri MEMORANDUM FOR: SUBJECT IC-75-2458 5 August 1975 : Economic Intelligence Report 1. This is the beginning of the first draft; the section on "The.Consumers" is not finished. You will recall that there is a following section on the management apparatus, which will include the EIC. Finally, there is to be a section on Collection and a Part III on areas of possible improvement. 2. Even though this report is a long way from being finished, it would benefit from your review. Also, I would appreciate any thoughts you have in points to be stressed in the parts yet to be written. 3. I will see you later this week whenever you can sandwich in a few minutes. Distribution: ' Orig --Addressee 1 -IC Registry --PRD Chrono 1--Subject File 1--ELA Chrono Thank you, Approved For Release 2004/05/05.: CIA-RD.P80M01133A000600020010-0 OFFICIAL USE ONLY ' rt,S3P,if j Approved For Release 2004/Outuu : %_,Im-RDP80M01133A000600020010-0 First Draft of Report Economic Intelligence--A Brief Survey of Production, Collection and Consumers Introductory Note This paper has been prepared for the use of White House staff members concerned with defining the role of economic intelligence in national security formulation and the priority to be accorded to the collection of sensitive economic data. What is economic intelligence? The must useful definition is that it is the product of economic intelligence analysts, the lion's share of which has been produce4 to support US national security policy formulation and execution. These concerns now embrace domestic policies as well as inter- national ones. To illustrate, the United States has been lagging far behind other leading exporting nations in investing in new manufacturing plants (private capital formation as a proportion of GNP); the serious consequences of this comparative aging of US production facilities has Approved For Release 2004/05/05 :-CIA-RDP80M01133A000600020010-0 SECRET Approved For Release 2004/05/eMDP80M01133A000600020010-0 led the Chairmen of the Economic Policy Board to point out the need to overhaul our domestic tax programs. The focus and emphasis of economic intelligence has changed radically over time, depending upon the needs of US ? policymakers. Economic intelligence embraces the traditional measures of a nation's output (GNP) and its allocation-- consumption of goods and services by the nation's people; investment in productive facilities, etc.; and the expen- ditures on governmental services, including military. From this level, strategic capabilities of foreign nations have ?been measured in the broad. Narrower studies focus on individual industries in key countries, transportation (air, land, and sea), foreign trade, balances of payments and reserves, international monetary developments, commodity production and other segments of a nation's or a region's economic makeup which impinge upon national security concerns. In the past, at times a very large share of total economic intelligence output has been military--economic in nature--measuring the output of the military industries, costing of strategic weapons systems and relating these data to estimates of capabilities, as well as highly focused analyses of individual transport routes, such as the Ho Chi Minh trail. .2 Approved For Release 2004/05/041AMPIDP80M01133A000600020010-0 mitt I Approved For Release 2004/05/05sE P,80M01133A000600020010-0 Today, as the United States becomes increasingly a have-not nation, dependence on overseas supplies of commodities such as oil and bauxite raises a host of new potential vul- nerabilities to US domestic production, employment, and national security. There is not only a vital need to import, but to export as well, so as to earn the necessary foreign exchange to balance our international accounts and protect the dollar. (One Commerce Department estimate places the 1985 export need at about $230 billion, compared to about $40 billion in 1970.) Hence, the agenda of economic analysts in 1955 bears little relationship to the work program of 1975, and subjects such as intelligence support to key trade negotiations, including those conducted under GATT auspices, and an early warning system on foreign government plans to impede the ability of US manufacturers to compete abroad, become matters of national security concern. This change in focus has raised questions of the relation of economic intelligence today to national security in some minds, who rightly recall that similar economic analysis traditionally has been concerned with private, domestic considerations, such as stock market investment. But our new (and rapidly growing) international economic dependence 4., 3 Approved For Release 2004/05/05 : CIA-RDP80M01133A000600020010-0 SHUT LUZ Approved For Release 2004/05/05 : t,IA-rcur 80M01133A000600020010-0 gives rise to threats to national security which are fun- damental, as the Arab oil embargo and the flood of petrodollars into the West, including the US, (to invest in what?) clearly shows today. In recognition of the heightened importance of economic affairs in national security, *the Murphy Commission recently concluded (Chapter 5, p. 68), "The need for effective research, analysis, and intelligence in the foreign economic field can hardly be overemphasized." While stated in other words, the gist of this conclusion also appears in the findings of the President's Foreign Intelligence Advisory Board (PFIAB). The economic analyst's agenda of key intelligence questions raised by national security policymakers almost certainly will be much different in 1985 than in 1975. Hence, the attempt to sharply define "economic intelligence" is pretty much a will o' the wisp. More important is to realize that since World War II, economic intelligence has made important and at times crucial contributions to the formulation and execution of foreign policy, and almost certainly it will continue to do so. 4 Approved For Release 2004/05/05MR ILTP80M01133A000600020010-0 2rua Approved For Release 2004/05/01w.1AP.80M01133A000600020010-0 PART I A BRIEF HISTORICAL BACKGROUND A. The Early Postwar Years The expectation that the successful conclusion of World War II would bring "peace in our time" proved to be very short-lived. Within months, growing communist intransigence in Europe had laid the foundations for the cold war, an East-West confrontation of utmost seriousness. In 1948, Soviet military forces barred the surface movement of goods (including U.S. military supplies), between Berlin and West Germany. Hungary and Czechoslovakia were taken over by communist regimes. Consequently, it became necessary for the U.S. Govern- ment to reconstitute some of the wartime intelligence apparatus that had been dismantled; it did this in part through the formation of the Central Intelligence Agency in 1947. Requests by policy and action officials for economic intelligence support were not long in coming. The Commerce Department requested aid, for example, in drawing up a list of strategic commodities to be embargoed for shipment to the Soviet Bloc, as the USSR and its allies were then identified. This was the start of a widespread interagency effort on intelligence support of trade controls. Approved For Release 2004/05/SEGVIDP80M01133A000600020010-0 Approved For Release 2004/ itcoljA-RDP80M01133A000600020010-0 Perhaps as as an indication of its importance, the first postwar directive on economic intelligence was issued directly by the National Security Council, rather than by the Director of Central Intelligence (NSCID No. 4, 13 January 1948). This directive did not attempt to assign dominant production responsibility to a single agency, but instead recognized the need of many agencies to produce economic intelligence in support of their departmental needs. When the Korean War broke out in 1950, it brought with it not only direct U.S. military participation, but also the prospect of a broad US conflict with the Soviet Bloc. In 1950, the National Security Council directed the CIA to make a study of foreign intelligence requirements and facilities, and to make plans and arrangements for meeting these requirements ? ('SC Action 282). The NSC directiVe'expahded ix NSCID 1'5'; led to the establishment of a major new economic intelligence production unit in the CIA to operate as a service of common concern. In order to meet the dominant national policy needs the new research effort was directed to the economics of the USSR and its allies. Since the availability of reliable data needed to measure Soviet capabilities and vulnerabilities was very limited the research manpower requirements were not only very large, but were also beyond 2 SEET Approved For Release 2004/05/05: CIA-RDP80M01133A000600020010-0 Approved For Release 2004/05/0E4JftfP80M01133A000600020010-0 the resources then available research manpower requirements were not only very large, but were also beyond the resources then available to the intelligence agencies. At the same time, the Economic Intelligence Committee was formed (NSCID 151 13 June 1951) and given a coordinating role within the intelligence community. It was not long before the vital contribution that economic intelligence can make to national security policy formulation was proven. The case arose in 1951, when President Truman and Prime Minister Churchill became in- volved in a controversy over China trade and transport, which was crucial to deciding the effectiveness of a possible naval blockade of the China coast. The economic research .performed at that time included the sources, types and tonnages of goods being imported into China, the routes used, and the capabilities of the Trans-Siberian Railroad to supply a blockaded China with essential imports. The results of this research was embodied in various National Intelligence Estimates and in the detailed series. It proved to be a major factor in settling the US-UK policy dispute--the blockade was not carried out. This brief review of the early contributions of economic intelligence to national policy is not intended to be exhaustive. Approved For Release 2004/05/05 : CIA-RDP80M01133A000600020010-0 3 SFINFT prr_r rr Approved For Release 2004/05/M?Ualg-FDPBOM01133A000600020010-0 Nevertheless, it is helpful to recall some of those papers which had a significant influence on important policy officials in Washington. While many of these were initiated by CIA, they frequently could be classified as community projects. Example: MIM NIE-59, Probable Effect's of the Severance of East-West Trade, April 1953, the gist of which was that the Soviet Bloc could adjust to the loss of Western exports, although at some increased costs. This analysis, a community effort under CIA leadership, probably helped to erase exaggerated ideas of the effectiveness of trade controls as an economic warfare device against the USSR. Various NIEs and research papers dealing with Soviet capabilities (an annual general overview plus others addressed to specific subject) which explained how the USSR could be such a formidable military challenge to the United States, even though the Soviet economy was less than half the size of the American one. 4 crcrr Approved For Release 2004/05/05:-CTAARDP80M01133A000600020010-0 Approved For Release 2004/05/05 : CIA-RDP00M01133A000600020010-0 HMI An EIC community series of reports on Soviet economic activities in the developing world, which had become a significant weapon of Soviet foreign policy. B. Economic Intelligence and Vietnam For at least the first ten post World War II years, the economic intelligence community was focused very largely on basic research of the communist countries, particularly the u$SR....The overriding reason for,this.effort was .(and is). that the strengL and vigor of their economies are basic determinants of communist military posture and the conse- quent threat to US security interests. After the initial decade, increasing and urgent demands for intelligence support on other geographic regions required the diversion of economists from in-depth assessment of communist economic strengths and weaknesses. Extensive computerization of data and the application of computer-based analysis was one major technique which allowed in-depth research to continue at 5 Approved For Release 2004/050;SI,A;RDP80M01133A000600020010-0 25X1 Approved For Release 2004/05/E:ME-fDP80M01133A000600020010-0 respectable levels in the USSR and China despite growing demands for coverage elsewhere. Nowhere were these demands more insistent than in the wake of US involvement in Vietnam, or more broadly, in the Indochina War. However, the agenda of reports on Indochina grew rapidly to include the full gamut of military-economic studies-- 6 Approved For Release 2004/05/0SEgiRp80M01133A000600020010-0 Approved For Release 2004/05/0kmxmpp80m01l33A000600020010-0 vulnerability analysis of North Vietnam's economic sectors and the economy as a whole to blockade, estimates of civilian casualties resulting from US air strikes against North Vietnam, and the probing of the Viet Cong economy and its vulnerabilities (to what extent and how was it meeting its logistic and manpower needs in the South through elaborate tax, conscription, and requisition systems?). With DIA economic analysts fully occupied with the war and State Department capabilities quite limited, the increasing burden of military and military-related studies fell on CIA economic research shops. Some of their studies, such as, bomb damage ? :; : ? ? ? assessment, were joint CIA/DIA products. Others, such as order of battle assessments of communist strengths, were . often independently produced by CIA. Why studies? problems were the economists called upon to In retrospect, associated with to the economic The former were the appropriate analysts it would seem that turn many out these intelligence the Vietnam war fell more logically than to the military weapons experts. sufficiently flexible to develop analytical used earlier for assessing pabilities of Iron Curtain good stead. techniques. Research strengths, weaknesses and apply methods and ca- countries stood the analysts in 7 Approved For Release 2004/05/0SEteRRP80M01133A000600020010-0 Approved For Release 2004/05/0ZBZ8P80M01133A000600020010-0 A major requestor early (1965) in the war had been the Interdepartmental Vietnam Coordinating Committee, chaired by the State Department's Ambassador Unger. Later, requests came from the Secretaries of Defense, and most prominently, from the President himself. In the first half of 1967, there were seven Presidential requests which came to CIA's economic shop, which produced, for all requestors, a total of 84 reports in this time period, absorbing about 25 percent of available research manhours. A perennial question raised by consumers was that of North Vietnam's vulnerability to blockade. The answer, given with increased sophistication over a ten year period, was that North Vietnam's economy consisted of a thin layer of industry spread over a thick base of subsistence agriculture, ebsentia iMpOrtS o military gO0d8 absotbing-on y a fraction of available land route capacity, North Vietnam was relatively invulnerable to blockade. This response was never received with pleasure at senior policymaking levels, since there were always vocal advocates of interdiction. Indeed, negative findings on proposed economic warfare measures (such as sanctions against Allende's Chile) were generally the rule, and the subsequent policy response was equally flat. 8 Approved For Release 2004/05/05 EP80M01133A000600020010-0 SEpirr., Approved For Release 2004/05/05-: ak-i4oPpomoi133A000600020010-0 During 1970 and 1971, the Vietnamese Special Study Group in CIA prepared a series of special reports (the NSSM 99 series) at the request of Dr. Kissinger, who later revealed that this series was used by President Nixon as his Vietnamese policy proceeded. There were parallel responses by the Departments of State and Defense. The demands on economic research shops continued after the cease-fire in Vietnam. CIA was tasked with producing a weekly series of logistic and manpower development reports, and in conjunction with DIA analysts, comprehensive studies of North Vietnamese order of battle. C. Research Manpower-A Declining Resource ihadthce economic intelligence is that, in the face of an increasing burden of consumer demands, professional resources declined sharply. ?As Table I below shows, between 1953 and 1973, economic research strength within the intelligence community was cut sharply--roughly 50 percent between 1953 and 1973. These data are based upon surveys taken by the Economic Intelli- gence Committee. The 1973 data unfortunately are incomplete. Because of the growing diversion of analyst resources to 9 Approved For Release 2004/0WIRRDP80M01133A000600020010-0 25X1 Approved For Release 2004/05/05 : CIA-RDP80M01133A000600020010-0 Next 19 Page(s) In Document Exempt Approved For Release 2004/05/05 : CIA-RDP80M01133A000600020010-0 Approved For Release 2004/05/05 : CIA-RDP80M01133A000600020010-0 The National Security Council, (NSC), chaired by the President, on which the Vice-President and the Secretaries of State and Defense sit, has been the top advisory group to the President on the integration of domestic, foreign and military policy since 1947. Its largely military and political rather than economic. The NSC is served by the National Security Council Intelligence Committee, which has an Economic Intelligence Subcommittee (EIS), chaired by the A.s61stant'Secretary of the Treasury for International Affairs. The EIS is essentially a committee of senior customers whose needs for economic intelligence support it . . . . . considers. The composition of the EIS is very broad. In addition to Treasury, State, Commerce, Agriculture, Defense, ERDA, the Ex-Im Bank, CEA, OSTR, and the NSC staff attend meetings, as does the Chairman of the USIB Economic Intelligence Committee. The network of key officials concerned with international economic policy, most of whom are .not members of. the USB, is briefed daily by a combined Treasury-CIA team. This includes senior officials of the White House staff (CEA, OSTR, CIEP and Presidential Assistants), the Department cf Commerce, Federal Reserve Board and the Federal Energy 30 %aPa Approved For Release 2004/05/05 80M01133A000600020010-0 RICPUT Approved For Release 2004/05/0Y!-81AiMP80M01133A000600020010-0 ;ministration. Briefings cover current economic develop- ,o4its of national policy interest as a rule, rather than the waings of in-depth studies. This briefing practice has great value of feedback to the intelligence producer, t,.let only questions on the subject matter presented, but aormation on which specific policy matters will be coming for decison in the near future. It is a major step in :vercoming one of the major difficuluties in providing ..telligence support, that of determining the senior policy fficials hear-term agenda.- Or as has been remarked, what lakes the perfect policymaker is what makes the perfect grl--accesiibility. Support from the economic intelligence producers, ?articularly from CIA/OER, can come in the form of a report oral briefing direct to a senior policy official, or as a *pecialiay to a'gt:aff offibei, who then-IncorporateS it Arith his own material to produce the product desired by, lay, a Cabinet officer. Since CIA/OER serves as an office . common concern, and since its staff is relatively large, lion's share of requests for intelligence support falls ln that shop. (See table below for the volume .of such quests.) This is not to say that the economic research 116ps in Treasury and Commerce, in particular, do not field V large volume of monetary and trade-related requests from 14.14ir own resources. Approved For Release 2004/05/053c1A-RDP80M01133A000600020010-0 SECPET 25X1 Approved For Release 2004/05/05 : CIA-RDP80M01133A000600020010-0 Approved For Release 2004/05/05 : CIA-RDP80M01133A000600020010-0 1???'. Approved For Release 2004/05/05 : CIA-RDP80M01133A000600020010-0 The preparation of Key Intelligence Questions (KIQs) has been a major forward step in specifying the likely needs of policy officials for intelligence support over the coming year. KIQs are prepared by the Director of Central Intelli- gence in consultation with senior policy officers of the principal executive departments. They are ratified by the National Security Council Intelligence Committee, which is chaired by Secretary Kissinger. By definition, all KIQs are ofiriiipPftanbe-. They 'deive' mit only to kovide colleCtiOn guidance, but also are valuable as guides to economic research: Under IC guidelines, the .ielevant KIQs have been refined into specific economic questions. Another channel for the furnishing of intelligence support is the National Intelligence Officer for Economics hd-tnetgy (NIO/E): genibr-6taf f'? )'Cer representative for economic intelligence affairs, both with respect to production and collection. He can call upon CIA QoPPoneAts for cpntributions to studies on economic subjects ? by national policy importance, as well as the other members and associate members of the Economic Intelligence Committee, on which 24 departments and agencies are now represented. Other National Intelligence Officers with supervisory 33 Approved For Release 2004/05/0 NRUP8OM01133A000600020010-0 - Approved For Release 2004/05/051'C1A-RDP80M01133A000600020010-0 responsibilities for geographic areas, such as Western Europe or Southeast Asia, can also tap CIA's or the Corn- rnunity's intelligence production resources for contributions. The NIO structure usually is used for high-level support-- preparation of briefings for the President, the Secretary of State, etc. ? ', 7 34 Approved For Release 2004/05/05 : CIA-RDP80M01133A000600020010-0 SECRET