US-CHINA TRADE POTENTIAL

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001600030095-4
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 15
• Document Creation Date: December 22, 2016
• Document Release Date: October 18, 2011
• Sequence Number: 95
• Publication Date: July 1, 1970
• Content Type: IM

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DIRECTORATE .OP
INTELLIGENCE
Intelligence Memorandum
ER IM 70-95
July 1970
Copy No. 98
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CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
July 19 70
INTELLIGENCE MEMORANDUM
US-China Trade Potential
Introduction
Economic relations between the United States
and Communist China have been virtually nonexistent
since US unilateral controls were erected during
the Korean War. In the past year, however, the
United States has undertaken a limited relaxation
of these controls, in part as a signal to China
that improved relations are desired. The official
Chinese reaction has been negative, but Peking has
made some moves to take advantage of these limited
opportunities.
In the United States, academic and business re-
action has been favorable to the US policy action,
but there has been no surge in business inquiries
concerning the China market. However, the interest
in studying the problems and opportunities of
trading with China would be greatly stimulated if
significant further relaxations in these controls
were made.
This memorandum examines the status of US uni-
lateral controls, including the recent relaxations,
and other obstacles to economic relations between
the United States and China. It then assesses the
potential for US-China trade relations, in terms
of possible values and commodities in the two-way
trade, under (a) present conditions following the
recent relaxations, and (b) conditions where all US
unilateral controls were abolished (but COCOM con-
trols were maintained at the present level).
Note: This memorandum was produced solely by CIA.
It was prepared by the Office of Economic Research.
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Origin of US Trade Controls with Communist China
Unilateral Controls
1. In early 1949, as the Chinese Communists
began their drive toward south China, Pres:.dent
Truman imposed controls on trade with China that
became coextensive with controls on shipments to
the USSR and Eastern Europe. Following the out-
break of the Korean War, the US Government revoked
all outstanding licenses for export to China and
thus embargoed all US exports except for some non-
strategic products which could be shipped without
prior government approval.
2. In December 1950 the US Commerce Department
tightened these controls further by requiring writ-
ten permission for either the direct or indirect
export of any goods to China. Two weeks later the
US Treasury Department blocked all Chinese assets
in the United States and prohibited all imports
from and dealings with China. In addition, the
Commerce Department then issued transportation
orders which forbade aircraft or ships registered
in the United States from engaging in the transport
of any goods destined for China, and also prohibited
them from stopping at any Chinese-controlled areas.
Thus, by the end of 1950, the United States had im-
posed a total embargo on US trade and payment trans-
actions with Communist China. This embargo was to
remain relatively unchanged until 1969, when a .more
relaxed US attitude began to appear.
3. Since the embargo would have little effect
on China's economic and military potential if stra-
tegic materials embargoed by the United States
could be obtained from other Free World nations,
the United States pressed its COCOM partners in
1950 to extend the existing controls on the Soviet
Bloc to China. This was done by July 1950, and
after China entered the Korean War the United
States tried to extend and make more comprehensive
the COCOM controls against the Chinese. Late in
1953 a more: comprehensive list of items embargoed
for Communist China had been agreed upon, and the
so-called "China differential" came into being.
It existed from 1953 to 1957.
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4. In 1968 a review of the COCOM lists was
undertaken. Two major aspects of this review con-
cerned (a) more restrictive controls on China than
on Eastern Europe and the USSR, and (b) a signif-
icant reduction of the list for Eastern Europe and
the USSR. In general, the outcome of the list re-
view resulted in a lowering of controls against the
USSR and Eastern Europe, while the treatment of
China became more of a holding action aga' -,st re-
laxation of controls rather than a signif..cant in-
crease in the list of embargoed items. Thus, an
outcome of the 1968 list review was the re-
establishment of a "China differential."
Recent Relaxation of US Unilateral Controls
5. The first US move to liberalize the embargo
against China came on 23 July 1969, when the Treas-
ury Department changed its regulations governing
tourist purchases of Chinese goods. The new reg-
ulations permitted Americans travelling abroad to
purchase up to $100 worth of Chinese goods as long
as these goods were not intended for further com-
mercial use. While this action meant relatively
little on purely economic grounds, the political
significance of a crack in the embargo wall was
clear and it began to generate interest in US busi-
ness circles. On 23 December 1969 the $100 ceiling
on tourist purchases was removed, individuals and
tax-exempt organizations such as museums and uni-
versities were permitted to import Chinese items,
anti corporations organized abroad (including sub-
sidiaries of US firms) and Americans resident
abroad were allowed to trade with China and deal
in Chinese merchandise.
6. Despite the liberalization of trade r:a:tric-
tions, most potential economic relations between the
United States and China are still severely restricted.
For example, no merchandise of US origin can be ex-
ported to China; no petroleum can be supplied to
Chinese vessels; no transactions involving US dollar
accounts are permitted; US vessels cannot call at
Chinese parts; most technical data are still em-
bargccd for China; and commercial imports of Chinese
pro0uc: -s are still forbidden. Thus, while the
changed regulations permit foreign businesses con-
trolled by US firms to deal in Chinese products,
direct commercial US-China trade is still barred.
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Obstacles to US-China Trade
7. The main stumbling block to US-China trade
is the state of political relations between the two
countries. On the US side, although trade with
China is legally prohibited, administrative action
by the President could remove these barriers rather
easily. On the Chinese side, political decisions
and foreign policy considerations currently inhibit
trade with the United States.
8. Another obstacle that would tend to inhibit
US trade with China is the lack of knowlege of the
China market. No contacts exist between American
businesses and Chinese trading organizations, and
these would have to be established before signif-
icant exchange could take place. In addition, the
experience of Western European and Japanese firms
trading with China demonstrates that China is
neither a reliable market nor a stable source of
supply. The yearly switch of Canada and Australia
as China's major wheat supplier, as well as current
Chinese inability or unwillingness to sell tradi-
tional exports of nonferrous metals, illustrates some
of the problems that can arise if China is relied
upon either as a market for Western goods or a sup-
plier for Western firms. Just as important is the
vigorous competition among Western firms for Chinese
business. The Chinese are able practitioners of
market strategy; consequently, dealing with the
Chinese involves confronting traders who are gen-
erally well versed in Western market conditions.
9. Aside from political difficulties, however,
these problems should not prove insurmountable to
US businessmen. Other Free World traders have suc-
cessfully overcome the same obstacles that US busi-
nessmen would encounter. If potential profits were
high enough, US businessmen would be induced to
trade with China.
Potential Level of US-China Trade
Background
10. The foreign trade of Communist China has
long reflected its international political position
as well as domestic economic conditions. China,
like many les_ developed countries seeking indus-
trialization, has looked to foreign trade as a
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source of plant and equipment for its industrial
and military development efforts. Since 1960, for-
eign trade has also served to supplement domestic
food production. Although the physical makeup of
imports and exports has generally reflected eco-
nomic goals, the geographical direction of China's
trade has been strongly influenced by political
considerations.
11. The volume of China's trade is small in
relation to total economic activity, and is a reflec-
tion of limited export capabilities. The size of
China's imports does not reflect the magnitude of
China's needs or the importance of imports to the
development of the economy and the military estab-
lishment. China's foreign trade grew steadily from
$1.2 billion in 1950 to $4.3 billion in 1959. The
pattern of trade was dominated by the exchange of
Chinese agricultural and mineral products and tex-
tiles for machinery and raw materials contributing
to the growth of the modern industrial sector.
Since 1959 the trend in total trade has been erratic,
and both the commodity and geographical patterns of
foreign trade have shifted dramatically (see Fig-
ures 1, 2, and 3). The primary reasons for these
changes are the Sino-Soviet dispute, a desire to
obtain the most advanced technology and equipment
available, and the need to obtain grain and ferti-
lizer'from the West.
12. Although US-China trade is forbidden, the
United States generally does permit'; the exchange
of printed matter, exposed motion picture film, and
phonograph records. In recent years, US imports
from China have consisted of less than $500,000 per
year of antiques, art objects, publications, and
other items for consumption. US exports to China
have been negligible.
US-China Trade Under Current Relaxations
13. Under current restrictions on trade with
Communist China, the potential level of US-China
trade is small. Aside from limited purchases of
Chinese products by American tourists and imports
of art objects and antiques by individuals and non-
profi t,organizations, there is little latitude for
commercial exchange. Under the current restric-
tions, such US imports might be some $10 million
per year in the near future. By definition,?US
exports to China would be zero.
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Figuro 1
Communist Chinas commodity composition of Imports
78673 7-70'
Industrial
Materials
050
1 230
Othe:'
In' 1959 and'1968..
Million US $
Fertilizer
Agricultural
Products
Agricultural
Products
Figure 2
1988: $1,890
. Comnll m ist China's commodity composition of exports
in 1959 and 1968...
Million US $
"
1959: 82:080
1959::.$2,205
Industrial
Materials,.
TAxtllea
Other
Agricultural
Products
Industrial
Materials
t3tf0 '.
,Textiles
Industrial
Materials
700
'Agricultural
Products`...
Other
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14. The Chinese, however, hove responded to the
recent lowering of restrictions in several ways.
After American tourists were permitted to purchase
products of Chinese origin, Chinesc, Communist re-
tail outlets in Hong Kong advertizeL1 for English-
speaking clerks, put up window displays of luxury
merchandise, placed advertisements in the English-
language South China Morning Post, and offered mail
order service. The implication of these activities
is an overt but oblique reaction to the cutback in
US trade restrictions. Such activities indicate
Chinese willingness to sell goods to US citizens.
15. So far, however, China has not shown a
desire to trade with US subsidiaries. Two US-
affiliated Japanese firms, Asahi-Dow Ltd. aid
Ishikawagima-Koehring Co., reportedly attempted to
get invitations to the Spring Canton Trade Fair,
but they were turned down by the Chinese, In addi-
tion, Chou En-lai told a group of Japanese on
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19 April 1970 that China does not intend to trade
with US enterprises in Japan. If this statement
reflects actual Chinese policy, the possibility for
business between China and foreign subsidiaries of
US firms would be severely limited.
US-China Trade Under No US Unilateral Controls
Potential US Export Commodities
16. The experience of recent years has provided
no evidence that China's increased reliance on Free
World trade has altered China's unwillingness to
trade with the United States. If the United States
were to relax its unilateral controls, however,
China would probably be quick to purchase a small
volume of certain types of industrial goods em-
bodying advanced technology unavailable from other
Western sources. It should be noted, however, that
for most non-COCOM goods, the technological levels
in Western Europe and Japan are on a par with those
in the United States. And these countries have the
advantage of several years' experience in serving
the Chinese market. In addition, China's trade
with Eastern Europe and the USSR, which has de-
clined greatly, continues to provide China with
some machinery and equipment and metals. Much of
the machinery installed in China is of East European
or Soviet design and generally requires spare parts
from the same source or from domestic production.
17. US firms would also face heavy competition
in attempting to sell grain and fertilizer to China.
Japan and Western Europe are able to satisfy China's
requirements for fertiliser, and Canada and Aus-
tralia can easily fill China's grain. requirements.
Thus in the first years after dropping unilateral
controls, China's imports from the United States
would probably grow at a slower pace than its ex-
ports to the United States.
Potential Chinese Export Commodities
18. The US market for Chinese goods has changed
drastically since 1950 when the United States ac-
counted.for almost $150 million, or about one-
fourth, of China's total exports. In 1950, more
than. one-third of China's exports to the United
States were composed of bristles, tung oil, and
feathers -- commodities that the United States
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no longer imports in large quantities. For Chinese
luxury products, however, the US market would be
much larger than in 1950 because of the great rise
in disposable income. In some cases, these products
would be unique and face little competition from
domestic or foreign sources. Typical of potential
luxury exports would be rugs, embroideries, antiques,
art objects, and curios. China might find it diffi-
cult to take full advantage of increased US demand
for luxury-type goods, however, because it no longer
enjoys most-favored-nation tariff treatment in trade
with the United States.
19. China would have difficulty achieving large-
scale penetration of US markets with its major ex-
ports of textiles and staple foodstuffs. In view
of longstanding opposition to textile imports, the
United States would probably be unwilling to permit
large-scale imports of Chinese textiles. While
staple foodstuffs would not enjoy a large market
in the United States, China could probably sell
substantial quantities of specialty foods to Amer-
ican consumers. There would be some market for Chi-
nese exports of consumer products such as tea, silks,
and light manufactures. Also, if China were to make
available greater quantities of tungsten, tin, and
other metals, US firms probably would place orders
for these items.
Some Estimates of Potential Trade Levels
20. Two methods have been used to provide some
notion of potential levels of US-China trade fol-
lowing an elimination of US unilateral controls.*
These levels would take a few years to be reached
even under relatively favorable political condi-
tions. The first approach uses a similar trading
partner approach. For US exports, West Germany has
been chosen as a similar exporting nation. The
US export potential is assumed to equal average
West German exports for the years 1966-68 plus an
allowance of $100 million for sales of grain. This
approach results in expected exports of about $270
million, composed of grain, $100 million; chemicals,
$30 million; semi-finished manufactures (chiefly
The growth factor in total trade of each country
is assumed to, cause no significant changes in esti-
mates of potential trade; thus, a downward bias to
the estimates is introduced, one which is believed
to be too small to be of concern.
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metals manufactures), $85 million; machinery and
equipment, $40 million'; and miscellaneous manufac-
tures, $10 million. A level of $270 million in US
exports implies some 'diversion of Chinese purchases
from Japan and/or Western Europe to US business
firms.
21. For China's exports to the United States,
per capita US imports are assumed to equal Canadian
imports from China on a per capita basis. This
results in US imports of about $200 million, com-
posed of foodstuffs, $30 million; crude materials,
$30 million; chemicals, $5 million; semi-finished
manufactures (chiefly textile yarns and fabrics),
$65 million; and miscellaneous manufactures (mainly
clothing), $75 million. Because about two-thirds
of Canada's imports are composed of textile prod-
ucts, and the import of many of these items would
be strongly resisted by US manufacturers, this
approach almost certainly overstates US import
potential.
22. The second approach is a modification,
which attempts to make direct estimates of the
likely value of the commodities entering any future
trade. Thus, as compared with the first approach,
the value of US textile imports is scaled down
sharply for reasons noted above. Likewise, the
value of US metals exports is cut back on the
judgment that these exports would face heavy com-
petition from China's current Free World suppliers.
This suggests that, after several years of develop-
ment, possible US-China trade may be as follows:
Million
US $
China's exports.
Foodstuffs
Bristles and other crude
animal.materials
Tung oil, other oils,
and chemicals
20-25
Nonferrous metals
10-25
Textiles and clothing
20-25
Antiques, art objects,
and pottery .
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Million
as $
US exports
Grain 100
Fertilizer and other
chemicals 25
Machinery and equipment 15-40
Metals and other
manufactures 35
Total 176 _^00
23. US sales of grain under this method are
assumed to be $100 million. This would give to
the United States the equivalent of one-third to
one-fourth of China's current grain market. While
this is not unreasonable on economic grounds, the
Chinese could easily satisfy their grain needs
from Canada and Australia, so actual US sales might
well be far below the $100 million estimate.
24. Other alternative Chinese import policies
are of course possible. For example, China might
not permit importation of goods from the United
States, yet allow the export of goods to the United
States. Or, China might insist on balanc-,d trade.
Any of these policy actions would affect the level
of trade between the two countries.
Conclusions
25. The relaxations of the past year in the US
unilateral embargo on trade with China now permit
US tourists and individuals and nonprofit institu-
tions to purchase Chinese goods and would allow US
subsidiaries abroad to trade with China. While
these US policy actions have considerable political
significance, they have little economic importance.
No direct trade transactions between US business
and China are permitted. Purchases by US citizens
should continue to rise, but will never be large --
perhaps becoming some $10 million in a year or two.
And the Chinese reaction thus far suggests that US
subsidiaries abroad may have to wait some time to
reap significant benefits from being permitted to
trade with China.
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26. if the United States were to remove all uni-
lateral controls on trade with China, however, the
economic significance of the policy action could b.D
much greater. How much this would stimulate US-
China trade lies primarily in the Chinese reaction,
basically a political decision. Other obstacles on
the Chinese side, such as difficulties in doing
business with state trading corporations, would
probably be only of a temporary nature. Finding
goods marketable in the United States and the
existence of established trading relationships with
other Free World countries would be additional
factors influencing the two-way trade. China is
not a major world trading nation, and its trade is
likely to increase rather slowly in the next decade.
This consideration, plus the factors noted earlier,
suggests that US-China trade is unlikely to be large
on a commercial basis, even with good state relations.
27. Various estimates have been made on the basis
of analogy with other countries currently trading with
China and of assumptions concerning US-Chinese polit-
ical relations. These estimates yield a range of
potential two-way trade of $100 million to $470 mil-
lion ($100 million-$200 million in Chinese exports
and $0-$270 million in US exports). Unless political
relations between the two countries suddenly improved
sharply, US-Chinese trade would likely take several
years to build up to even the lower end of this range.
While China would move as it has already in its Hong
Kong stores to sell more to US citizens and would
purchase some US goods where technology and/or price
make them a superior buy, China would be slow to per-
mit direct transactions between its state trading
corporations and US business. China probably would
consider indirect means for handling such trade more
acceptable politically.
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