US-CHINA TRADE REVISITED

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001700010028-9
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 14
• Document Creation Date: December 22, 2016
• Document Release Date: January 28, 2010
• Sequence Number: 28
• Publication Date: May 1, 1971
• Content Type: IM

Sanitized Copy Approved for Release 2010/02/02 : CIA-RDP85T00875R001700010028-9
Confidential
Sanitized Copy Approved for Release 2010/02/02 : CIA-RDP85T00875R001700010028-9
DIRECTORATE OF
 Sanitized Copy Approved for Release 2010/02/02 : CIA-RDP85T00875R001700010028-9
, WARNING
This document contains information affecting the national
defense of the United states, within the meaning of Title
18, sections 793 and 794, of the US Code, as amended.
Its transmission or revc!.ation of its contents to or re-
ceipt by an unauthorized person is prohibited by law.
GROup I
E+dud.d (torn nu,ornnlic
d o+.ngrading ont$
1.cInuitcutinn
Sanitized Copy Approved for Release 2010/02/02 : CIA-RDP85T00875R001700010028-9
 Sanitized Copy Approved for Release 2010/02/02 : CIA-RDP85T00875R001700010028-9
CONFIDENTIAL
CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
May 1971
INTELLIGENCE MEMORANDUM
US-CHINA TRADE REVISITED
Introduction
1. The President's announcement of changes in US trade policy
toward Communist China has been followed by optimistic estimates of the
trade potential possible under renewed commercial relations. The policy
shift, while it will result in the removal of some trade barriers and thereby
in renewed trade activity, has been made primarily for political reasons.
2. There are a number of key factors which limit the potential level
of US trade with Communist China, even in the longer run. First of all,
China's total trade of about $4 billion is small in relation to total output -
imports are less than 2% of GNP - which is a reflection of its basically
subsistence agriculture economy. Second, the overall level of Chinese foreign
trade is likely to grow only slowly, perhaps 3% to 5% annually, inhibited
by a policy of economic self-sufficiency, highly conservative financial
practices, and a limited range of export goods. Third, China already has
well-established trading relationships with low-cost suppliers of its major
import needs - grain from Canada and Australia, and capital goods, metals,
and fertilizers from Japan and Western Europe. Furthermore, Hong Kong
enjoys a unique trading relationship with China, absorbing over $300 million
annually of Chinese goods, largely foodstuffs, and perennially being China's
largest source of hard currency earnings. Finally, China's imports come
through state trading organizations. Priorities are not likely to include muc;l
for consumers except foodstuffs; the "one aspirin for each of the 850
million Chinamen" dream is most unlikely to be realized.
Note: This memorandum was prepared by the Office of Economic
Research.
CONFIDENTIAL
Sanitized Copy Approved for Release 2010/02/02 : CIA-RDP85T00875R001700010028-9
 Sanitized Copy Approved for Release 2010/02/02 : CIA-RDP85T00875R001700010028-9
CONFIDENTIAL
3. The potential for Sino-US trade clearly is limited by these existing
relationships. Nevertheless, there are obvious possibilities for commercial
relations because of a US competitive advantage in high-technology
industries such as aircraft and the existence of a high-income US market
capable of absorbing quantities of Chinese exports of luxury items, including
objets d'art.
Discussion
Relaxation of US Trade Controls
4. The United States, over the past two years, has gradually been
easing the absolute barriers to trade with China that were imposed during
1949-50. In July 1969, US tourists were authorized to import up to $100
worth of Chinese-origin goods. In December 1969, the importation of
non-commercial (not for resale) Chinese goods was further liberalized. At
the same time, restrictions were removed on sales to China of non-strategic
commodities by foreign subsidiaries of US corporations.
5. A further relaxation in April 1970 permitted the incorporation
of US-made parts and components in non-strategic products being sold to
Communist China. These steps stimulated small but positive reactions. Early
deals included the sale of 80 Italian-made dump trucks incorporating
US-produced engines and reported sales of some US earthmoving equipment
and pesticides. With US tourist outlays and sales of US-owned foreign
subsidiaries and licensees, including the incorporation of US-produced
components, total trade with China probably grew to at least a few million
dollars.
6. The April 1971 action, which required no new legislation or
negotiations with China, added the following liberalizing steps:
a. US currency controls were relaxed to permit China
to use dollars.
b. Restrictions are to be ended on US oil companies
to permit fuel to be provided for ships or aircraft proceeding
to and from China, except for Chinese owned or chartered
carriers bound to or from North Vietnam, North Korea, or
Cuba.
c. US vessels or aircraft may now carry Chinese
cargoes between non-Chinese ports, and US-owned foreign
flag carriers may now call at Chinese ports.
CONFIDENTIAL
Sanitized Copy Approved for Release 2010/02/02 : CIA-RDP85T00875R001700010028-9
 Sanitized Copy Approved for Release 2010/02/02 : CIA-RDP85T00875R001700010028-9
CONFIDENTIAL
d. A list of commodities which will be put under
general license for export to China is being drawn up.
7. The composition of the "shopping list" for China is probably
all-important to the short-term prospects for exports, not only from the
United States but also from US subsidiaries abroad. A few years ago, for
example, Ford Motors of Canada had an order for trucks from China, but
US trade controls blocked the transaction. If the shipping list includes trucks
and truck components, commercial aircraft, reasonably advanced computers,
scientific instruments, and other high-technology products, it would
stimulate the flow of US goods to China. Export of wheat and other grains
to China,.if placed on the permitted list, will he unlikely to take place
unless the current requirement that 50% of all such cargoes must move
in US vessels is waived.
8. Imports from Communist China will require licensing by 'the
Treasury Department. However, the basic limitation on imports is not this
administrative requirement, but rather the array of goods China has available
for export.
The Role of Trade
9. Total production of goods and ser%.res in Communist China in
rounded numbers was about $120 billion, or $145 per capita, in 1970. ]J
Overall output has been growing about 4% a year under the Communists,
with industry advancing at about 8% annually and agriculture about 2%.
No significant accel,ration of these rates is anticipated over the next few
years.
10. The Chinese regime has pursued a long-run policy of spurring
industrial development, relying heavily on imports of machinery and
equipment. Its industrial development has a distinctly military coloration,
with emphasis on the production of modern weapons, particularly advanced
nuclear weapons systems. In the late 1950s, most industrial equipment came
from the USSR, but imports from the Free World now completely
overshadow those from the Soviet Union.
11. A second feature of China's foreign trade has been the annual
import of about 4 million tons of grain from the Free World, starting in
1961. China is a net exporter of food on balance, largely because of the
volume supplying of meat, vegetables, and specialty products to Hong Kong
and to the Chinese communities in Southeast Asia.
CONFIDENTIAL
Sanitized Copy Approved for Release 2010/02/02 : CIA-RDP85T00875R001700010028-9
 Sanitized Copy Approved for Release 2010/02/02 : CIA-RDP85T00875R001700010028-9
CONFIDENTIAL
12. Foreign trade rose by 10% in 1970 to a total volume of $4.25
billion, as shown by the following tabulation on exports and imports, and
was about equal to the 1959 peak, as shown in Figures 1 and 2.
Billion US $
1966
1967
1968
1969
1970
Exports
2.17
1.92
1.89
2.02
2.15
Imports
2.03
1.94
1.82
1.84
2.10
Total
4.20
3.86
3.71
3.86
4.25
13. The most striking feature of China's foreign trade in 1970 was
the sharp increase with its number one trading partner, Japan - from a
volume of $654 million in 1969 to $840 million in 1970. This increase
was concentrated on the import side. Imports from Japan climbing from
$415 million to $605 million while exports were holding even at about
$240 million. Imports from Japan in 1970 were divided as follows:
Million
US $
Chemicals (mainly ferti-
lizer)
Manufactures (mainly
steel products)
Machinery and transport
equipment
Crude materials and
miscellaneous
Total
CONFIDENTIAL
Sanitized Copy Approved for Release 2010/02/02 : CIA-RDP85T00875R001700010028-9
 Sanitized Copy Approved for Release 2010/02/02 : CIA-RDP85T00875R001700010028-9
CONFIDENTIAL
Communist China's commodity composition of Imports
in 1959 and 1969....
Million us $
1959: $2,060
1969: $1,535
Machinery and
Equipment
70 Fertilize
ISO
lti10 Agricultural
Communist China's commodity composition of exports
In 1959 and 1969...
1959: $2,205
1969: $2,020
CONFIDENTIAL
Sanitized Copy Approved for Release 2010/02/02 : CIA-RDP85T00875R001700010028-9
 Sanitized Copy Approved for Release 2010/02/02 : CIA-RDP85T00875R001700010028-9
CONFIDENTIAL
14. The increase in trade with Japan illustrates China's fundamental
dependence on Japan and Western Europe for modern plant and equipment,
advanced industrial products (such as alloy steels), and industrial technology.
Sino-Soviet trade, which once aggregated $2 billion, was about $50 million
in both 1969 and 1970. China's imports from the Communist world consist
largely of ordinary industrial materials, equipment, and spare parts. Thus
China now depends very little on other Communist countries for support
in economic modernization. 2)
Trade and Credits
15. Communist China has practiced extreme conservatism in its
international financial dealings. In contrast to the other major
underdeveloped nations - many of which have accumulated crushing
external debts -? China has been a net exporter of capital. China's moderate
indebtedness to the Soviet Union in the 1950s was rapidly paid off through
export surpluses in the early 1960s in Spite of grave internal economic
problems. The wheat imports of the 1960s have been financed on ordinary
18-month commercial credits which have been paid off on schedule or even
in advance.
16. In the period 1966-70, China's foreign aid deliveries have averaged
nearly $400 million annually, as follows:
Million
US $
To Free World countries 87
Economic 65
Military 22
To Communist countries
1
Economic 185
Military 106
Total to all countries 378
a. Of -the economic aid to Communist countries in
1966-70, roughly half has been to North Vietnam
and a one-fourth each to Cuba and Albania. All
the military aid to Communist countries has been
to North Vietnam; the small shipments of military
goods to North Korea in this per4.od probably were
paid for in cash.
2. As shown in Figure 3, China's trade with the Communist world -as
70% of its total trade in 1959 but only 20% in 1970.
CONFIDENTIAL
Sanitized Copy Approved for Release 2010/02/02 : CIA-RDP85T00875R001700010028-9
 Sanitized Copy Approved for Release 2010/02/02 : CIA-RDP85T00875R001700010028-9
CONFIDENTIAL
Comparison of trade by Communist China
with the Free World and Communist countries
Million US $ in 1959-70...
1960 1960 1961 1982 106.*. 1964 1065 1068 1967 1908 1969 1970
(PnNmin.ry)
17. Conservative financial practices have been reflected in increased
Chinese holdings of gold and foreign exchange, which were estimated at
about $800 million at the 1970 yearend. Imports from the industrial Free
World increased sharply in 1970 compared to exports, resulting in a deficit
in this sector of China's trade balance. However, net earnings from Hong
Kong and the less developed countries probably enabled China to settle
its international accounts with little reduction in its carefully accumulated
reserves.
18. Although China's excellent reputation for scrupulous financial
dealing undoubtedly would enable it to obtain long-term credits from Free
World countries interested in expanding their exports to China, China almost
certainly would not accept them. The volume of imports, therefore, is
largely limited by ability to export. At the same time, because of its
large net export earnings from Hong Kong, China need not balance its trade
on a bilateral basis with major Free World partners such as Japan.
CONFIDENTTLAL
Sanitized Copy Approved for Release 2010/02/02 : CIA-RDP85T00875R001700010028-9
 Sanitized Copy Approved for Release 2010/02/02 : CIA-RDP85T00875R001700010028-9
CONFIDENTIAL
Potential Chinese Exports to the US
19. In 1950, more than one-third of China's $15^ million of exports
to the United States were made up of bristles, tung oil, and feathers -
commodities that the United States no longer imports in large quantities.
Since the 1969 relaxation on China trade, there have been some imports
of resin from China.
20. Of some $2 billion of total Chinese exports in 1969, more than
$600 million was foodstuffs and an equal amount consisted of textile fibers,
yarn, fabric, and cloth. China would have difficulty in achieving large-scale
penetration of US markets with its major exports 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 such
Chinese products. While staple foodstuffs would not enjoy a large market
in the United States, China could probably sell substantial quantities of
specialty foods to American consumers. There would be some market for
Chinese 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.
21. For Chinese luxury products, however, the US market would be
much larger than in 1950 because of the great rise in disposable income.
In somo.. 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 no longer
enjoys most-favored-nation tariff treatment in trade with the United States,
and its exports of luxury-type goods would have to face this added barrier.
22. Even under normalized relations with Communist China, under
which US unilateral controls were dismantled and a shopping list of US
exports satisfactory to China agreed to, at least a few years would be
necessary for exports to the United States to develop. In the short-run,
consumer acceptance probably would be limited because of China's
assistance to the North Vietnamese military effort.
23. One estimate of the possible level of Chinese exports to the United
States would be to assume that they would reach a per capita level equal
to Canadian per capita imports. If this came about, the result would be
a flow of Chinese goods of about $200 million annually. Based on relative
per capita GNPs ($3,400 in Canada compared with $4,600 in the United
States), this total might seem low. Two-thirds of Canada's imports from
China consist of textile products, and the import of some of these items
would be strongly resisted by US manufacturers. Foodstuffs, crude
CONFIDENTIAL
Sanitized Copy Approved for Release 2010/02/02 : CIA-RDP85T00875R001700010028-9
 Sanitized Copy Approved for Release 2010/02/02 : CIA-RDP85T00875R001700010028-9
CONFIDENTIAL
materials, some chemicals, silks, objets d'art, and other luxury goods
together with tourist earnings could total as much as $200 million after
a period of years for trade relations to be established. Clearly, considerable
uncertainty surrounds the estimate of $200 million.
24. There undoubtedly would be some tourist earnings accruing to
China from American visitors. However, US tourist experience has shown
that such expenditures take time to reach meaningful amounts. In the
1960.65 period, US tourists accounted for about $5 million of Soviet
revenue annually; by 1969 these revenues increased to $14 million. For
several years, at least, the volume of US visitors to China would probably
be less than the range of error in the estimate of total US imports.
Potential Chinese Imports from the United States
25. Exports of US grain to China hinge very largely on the waiver
of the current requirement that 50% of such shipments be transported in
US vessels. Since US freight charges are much higher than other Free World
rates, China would not purchase grain from the United States except in
an extreme emergency. On the other hand, if the US vessel requirement
no longer applied and China continues to import grain in large tonnages,
it is possible that the United States could gain perhaps a third of China's
annual grain imports - or $100 million out of an annual total of $300
million.
26. A second possibility is fertilizers, another very large Chinese
import, amounting to about 5 million tons in 1970, valued at $240 million.
These were divided roughly 50-50 between Japan and the West European
group (NITREX). Because of their competitive advantage, it is probable
that the Japanese will normally supply a larger share of China's imports
of fertilizer. If the United States, because of lower shipping costs, could
capture a portion of current West European fertilizer deliveries to China,
these sales could amount to $25-$50 million. Since worldwide fertilizer
capacity is several million tons above current demand, the entrance of the
United States as a third major supplier would enable the Chinese to further
exploit their position as a major customer for a surplus commodity; by
intensifying price competition.
27. There are already indications of serious Chinese interest in US
manufactures. Trucks and large commercial aircraft have already been
mentioned.
28. The Chinese have also been purchasing chemical plants abroad;
in this general area there is a large body of unique US technology. However,
most of this US-designed equipment can be purchased abroad at lower prices
CONFIDENTIAL
Sanitized Copy Approved for Release 2010/02/02 : CIA-RDP85T00875R001700010028-9
 Sanitized Copy Approved for Release 2010/02/02 : CIA-RDP85T00875R001700010028-9
CONFIDENTIAL
from US licensees, which is the standard practice of East European
:;ountries. In these transactions, royalties accrue to the parent US company,
but they are a small fraction of the total selling price. For example, M.W.
Kellogg will receive less than $5 million in technology royalties from a
$70 million Japanese sale of ammonia plants to the USSR. There are a
few important areas, such as advanced computers, where US licensees do
i. r)t exist abroad. The immediate US sales to China, therefore, may be
limited to industrial goods embodyi,ig advanced technology and not
available from other sources. The key question now is whether or not such
goods will be included on the US shopping list currently being drafted.
If the shopping list is limited to standard industrial products, where the
technological levels in Western Europe and Japan are on a par with those
in the United States, there will be little incentive for the Chinese to break
out of existing commercial relationships.
China
imported an average of about $300 million annually in machinery and
equipment from all sources in 1967-69; the United States could perhaps
get 100 of this, including royalty payments, by 1975.
29. China has also been a major importer of certain ferrous and
nonferrous metals and metal products. Japan, with one of the largest steel
industries in the world and certainly the lowest cost producer, has an
obvious competitive advantage in the steel trade. Recently, Peking signed
a long-term trade agreement with Chile, whereby the latter will ship copper
(and nitrates) direct to China in exchange for Chinese-produced goods. The
1971 agreement bypasses the London Metal Exchange for the first time
in selling Chilean copper to China. Some US specialty steels and nonferrous
products probably will sell in China, but the amounts are unlikely to be
large.
30. In summary, it would appear that if the US vessel requirement
on grain shipments is relaxed, and, if the US general license list is attractive
to China, US exports could grow to a level exceeding probable imports.
However, the level of exports is likely to be low enough so that annual
trade will be "lumpy" - that is, the sale of a few large items, such as
aircraft, in a single year, could boost exports sharply, but this experience
would not be repeated each year.
Long Run Prospects
31. There has been an academic study which estimates possible levels
of Sino-US trade in 1980. J This study, largely the product of Professor
3. See J.A. Cohen. R.F. Dernberger and J.A. Gasson, China Trade
Prospects and United States Policy, National Committee on United States
China Relations, 1970.
- 10 -
CONFIDENTIAL
Sanitized Copy Approved for Release 2010/02/02 : CIA-RDP85T00875R001700010028-9
 Sanitized Copy Approved for Release 2010/02/02 : CIA-RDP85T00875R001700010028-9
CONFIDENTIAL
Dernberger, contains an optimistic and a pessimistic projection. The
optimistic projection envisions tots? Sino-US trade of about $900 million
in 1980, including $t50 million of US exports (minerals, industrial
equipment, and machinery) and $250 million of US imports from China
(largely agricultural products and textiles). Without attempting any detailed
critique of the academic study, it should be noted that relatively small
changes in assumed rates of development lead to very large differences at
the end of a decade of compc4-nding. For example, a growth rate )f 5%
annually means an increase of 63% in 10 years, whereas a 7-1/250' rate leads
to 106% of compounded growth in the same period. The academic
projection also rests on a series of assumptions of doubtful validity, such
as a US willingness to take large quantities of Chinese textiles. Even so,
the optimistic projection would place Sino-US trade at less than one-half
of 1% of total US foreign trade expected in 1980.
32. There are other factors which could change the picture. One of
these, which has been mentioned, is Chinese :?1 exports. China produced
an estimated 18 million metric tons of crude in 1970, and output could
rise to 40 million tons by 1975. If so, China will almost certainly be in
the export market, perhaps for 10 million tons, which could bring an
additional $120-$1 SO million in hard currency earnings, or a boost of 5%-6%
in export earnings. China's petroleum reserve position is not well enough
known to make even a rough estimate of 1980 exports, but clearly oil
is a significant potential earner of foreign exchange for the future.
CONFIDENTIAL
Sanitized Copy Approved for Release 2010/02/02 : CIA-RDP85T00875R001700010028-9