CONTROLS ON TRADE WITH COMMUNIST CHINA

Document Type: 
Collection: 
Document Number (FOIA) /ESDN (CREST): 
CIA-RDP98-00979R000300640001-8
Release Decision: 
RIFPUB
Original Classification: 
S
Document Page Count: 
31
Document Creation Date: 
December 23, 2016
Document Release Date: 
May 7, 2014
Sequence Number: 
1
Case Number: 
Publication Date: 
January 11, 1955
Content Type: 
NIE
File: 
AttachmentSize
PDF icon CIA-RDP98-00979R000300640001-8.pdf2.01 MB
Body: 
Declassified and Approved For Release @ 50-Yr 2014/05/08: CIA-RDP98-00979R000300640001-8 - IN "ORIS" VIEW/OBTAIN FROM NARA + = PG. COUNT CONFIRMED (SAN) = SANITIZED Declassified and Approved For Release @ 50-Yr 2014/05/08: CIA-RDP98-00979R000300640001-8 Declassified and Approved For Release @ 50-Yr 2014/05/08: CIA-RDP98-00979R000300640001-8 44. ' NIE 1 0 0 ? 5 5 1 " _ 11 January 1955 L SE 74(; C 1/V e i2-11/k NATIONAL INTELLIGENCE ESTIMATE/zc;7i , tqUMBER 100-55 CONTROLS ON TRADE WITH COMMUNIST CHINA 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 on 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 IAC and the Assistant to the Director, Federal Bureau of Investiga- tion, abstained, the subject.being outside of their Jurisdiction. COPY XO 20 ASSISTANT DIRECTOR, ONE ET Declassified and Approved For Release @ 50-Yr 2014/05/08: CIA-RDP98-00979R000300640001-8 Declassified and Approved For Release @ 50-Yr 2014/05/08: CIA-RDP98-00979R000300640001-8 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- sons under his jurisdiction on a need to know basis. Additional essential dissemination may be authorized by the following officials within their respective departments: a. Special Assistant to the Secretary for Intelligence, for the Department of State b. Assistant Chief of Staff, G-2, for the Department of the Army c. Director of Naval Intelligence, for the Department of the Navy d. Director of Intelligence, USAF, for the Department of the Air Force e. Deputy Director for Intelligence, Joint Staff, for the Joint Staff f. Director of Intelligence, AEC, for the Atomic Energy Commission g. Assistant to the Director, FBI, for the Federal Bureau of Investigation h. Assistant Director for Collection and Dissemination, CIA, for any other De- partment or Agency 2. This copy may be retained, or destroyed by burning in accordance with appli- cable security regulations, or returned to the Central Intelligence Agency by arrange- ment with the Office of Collection and Dissemination, CIA. 3. When an estimate is disseminated overseas, the overseas recipients may retain it for a period not in excess of one year. At the end of this period, the estimate should either be destroyed, returned to the forwarding agency, or permission should be re- quested of the forwarding agency to retain it in accordance 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: White House National Security Council Department of State Department of Defense Foreign Operations Administration Operations Coordinating Board Atomic Energy Commission Federal Bureau of Investigation Declassified and Approved For Release @ 50-Yr 2014/05/08: CIA-RDP98-00979R000300640001-8 Declassified and Approved For Release @ 50-Yr 2014/05/08: CIA-RDP98-00979R000300640001-8 SECRET TABLE OF CONTENTS PROBLEM 1 CONCLUSIONS 2 INTRODUCTORY NOTE ON THE PRESENT SYSTEM OF CON- TROLS 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 SECRET Declassified and Approved For Release @ 50-Yr 2014/05/08: CIA-RDP98-00979R000300640001-8 Declassified and Approved For Release @ 50-Yr 2014/05/08: CIA-RDP98-00979R000300640001-8 SECRET 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 SECRET Declassified and Approved For Release @ 50-Yr 2014/05/08: CIA-RDP98-00979R000300640001-8 Declassified and Approved For Release @ 50-Yr 2014/05/08: CIA-RDP98-00979R000300640001-8 SECRET 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." SECRET Declassified and Approved For Release @ 50-Yr 2014/05/08: CIA-RDP98-00979R000300640001-8 Declassified and Approved For Release @ 50-Yr 2014/05/08: CIA-RDP98-00979R000300640001-8 SECRET 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 8 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 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 SECRET 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." Declassified and Approved For Release @ 50-Yr 2014/05/08: CIA-RDP98-00979R000300640001-8 Declassified and Approved For Release @ 50-Yr 2014/05/08: CIA-RDP98-00979R000300640001-8 SECRET and import additional CHINCOM 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. 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 (CH1NCOM Controls) to the Level Maintained with the European Bloc (COCOM5 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 commodities 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 SECRET Declassified and Approved For Release @ 50-Yr 2014/05/08: CIA-RDP98-00979R000300640001-8 Declassified and Approved For Release @ 50-Yr 2014/05/08: CIA-RDP98-00979R000300640001-8 SECRET upon China's internal political situation, its foreign policies, or its basic relation- ship to the USSR.' (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 Reduction 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." SECRET Declassified and Approved For Release @ 50-Yr 2014/05/08: CIA-RDP98-00979R000300640001-8 Declassified and Approved For Release @ 50-Yr 2014/05/08: CIA-RDP98-00979R000300640001-8 SECRET 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 SECRET Declassified and Approved For Release @ 50-Yr 2014/05/08: CIA-RDP98-00979R000300640001-8 Declassified and Approved For Release @ 50-Yr 2014/05/08: CIA-RDP98-00979R000300640001-8 SECRET 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) SECRET Declassified and Approved For Release @ 50-Yr 2014/05/08: CIA-RDP98-00979R000300640001-8 Declassified and Approved For Release @ 50-Yr 2014/05/08: CIA-RDP98-00979R000300640001-8 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) 9 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- 7 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 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 Declassified and Approved For Release @ 50-Yr 2014/05/08: CIA-RDP98-00979R000300640001-8 Declassified and Approved For Release @ 50-Yr 2014/05/08: CIA-RDP98-00979R000300640001-8 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 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 than 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 " 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-Bloc 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- SECRET Declassified and Approved For Release @ 50-Yr 2014/05/08: CIA-RDP98-00979R000300640001-8 Declassified and Approved For Release @ 50-Yr 2014/05/08: CIA-RDP98-00979R000300640001-8 SECRET 9 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 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 " 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 SECRET_ Declassified and Approved For Release @ 50-Yr 2014/05/08: CIA-RDP98-00979R000300640001-8 Declassified and Approved For Release @ 50-Yr 2014/05/08: CIA-RDP98-00979R000300640001-8 SECRET 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 1954 Western Europe $23 $100 $71 Hong Kong 86 95 64 Japan 1- 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. "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. Ocean-going shipping includes only vessels 1,000 gross registered tons or over. SECRET Declassified and Approved For Release @ 50-Yr 2014/05/08: CIA-RDP98-00979R000300640001-8 Declassified and Approved For Release @ 50-Yr 2014/05/08: CIA-RDP98-00979R000300640001-8 SECRET 11 ESTIMATED GEOGRAPHIC DISTRIBUTION OF CHINA'S FOREIGN TRADE, 1953** 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 381 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. ** SECRET Declassified and Approved For Release @ 50-Yr 2014/05/08: CIA-RDP98-00979R000300640001-8 Declassified and Approved For Release @ 50-Yr 2014/05/08: CIA-RDP98-00979R000300640001-8 SECRET 12 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 SECRET Declassified and Approved For Release @ 50-Yr 2014/05/08: CIA-RDP98-00979R000300640001-8 Declassified and Approved For Release @ 50-Yr 2014/05/08: CIA-RDP98-00979R000300640001-8 SECRET 13 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. 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. SECRET Declassified and Approved For Release @ 50-Yr 2014/05/08: CIA-RDP98-00979R000300640001-8 Declassified and Approved For Release @ 50-Yr 2014/05/08: CIA-RDP98-00979R000300640001-8 SECRET 14 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 since 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 14 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-Com- 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 SECRET Declassified and Approved For Release @ 50-Yr 2014/05/08: CIA-RDP98-00979R000300640001-8 Declassified and Approved For Release @ 50-Yr 2014/05/08: CIA-RDP98-00979R000300640001-8 SECRET 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. 15 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 1516 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, 15 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. "The 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. SECRET Declassified and Approved For Release @ 50-Yr 2014/05/08: CIA-RDP98-00979R000300640001-8 Declassified and Approved For Release @ 50-Yr 2014/05/08: CIA-RDP98-00979R000300640001-8 SECRET 16 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. ** 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. is 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 Declassified and Approved For Release @ 50-Yr 2014/05/08: CIA-RDP98-00979R000300640001-8 Declassified and Approved For Release @ 50-Yr 2014/05/08: CIA-RDP98-00979R000300640001-8 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 intenst- 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. " 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. (iTe believe it unlikely that trade relations between China and Japan can regain their prewar significance under any forseeable cir- cumstance39 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.t e believe that Sino-Japanese trade during t 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." SECRET Declassified and Approved For Release @ 50-Yr 2014/05/08: CIA-RDP98-00979R000300640001-8 Declassified and Approved For Release @ 50-Yr 2014/05/08: CIA-RDP98-00979R000300640001-8 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 n 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 Declassified and Approved For Release @ 50-Yr 2014/05/08: CIA-RDP98-00979R000300640001-8 Declassified and Approved For Release @ 50-Yr 2014/05/08: CIA-RDP98-00979R000300640001-8 SECRET 19 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- 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. SECRET Declassified and Approved For Release @ 50-Yr 2014/05/08: CIA-RDP98-00979R000300640001-8 Declassified and Approved For Release @ 50-Yr 2014/05/08: CIA-RDP98-00979R000300640001-8 SECRET 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, soy beans, 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 '2 Unless otherwise specified, the terms "China" and "Chinese," are used in lieu of "Communist China" or "Chinese Communists." SECRET Declassified and Approved For Release @ 50-Yr 2014/05/08: CIA-RDP98-00979R000300640001-8 Declassified and Approved For Release @ 50-Yr 2014/05/08: CIA-RDP98-00979R000300640001-8 SECRET 21 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 2 1/2 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 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- '3 Attention is invited to footnote by the Deputy Director for Intelligence, The Joint Staff, to par- agraph 39, text. SECRET Declassified and Approved For Release @ 50-Yr 2014/05/08: CIA-RDP98-00979R000300640001-8 Declassified and Approved For Release @ 50-Yr 2014/05/08: CIA-RDP98-00979R000300640001-8 SECRET 22 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 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." " Attention is invited to footnote by the Deputy Director for Intelligence, The Joint Staff, to paragraph 31 text. SECRET Declassified and Approved For Release @ 50-Yr 2014/05/08: CIA-RDP98-00979R000300640001-8 Declassified and Approved For Release @ 50-Yr 2014/05/08: CIA-RDP98-00979R000300640001-8 SECRET 23 TABLE I JAPANESE TRADE WITH MAINLAND CHINA AS PERCENT OF TOTAL TRADE * EXPORTS AS c7o OF TOTAL EXPORTS IMPORTS AS % OF 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. SECRET Declassified and Approved For Release @ 50-Yr 2014/05/08: CIA-RDP98-00979R000300640001-8 Declassified and Approved For Release @ 50-Yr 2014/05/08: CIA-RDP98-00979R000300640001-8 SECRET 24 TABLE II RELATIVE IMPORTANCE OF CHINA IN JAPAN'S IMPORTS IN SELECTED COMMODITIES, 1936 AND 1940 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 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. ?SECRET Declassified and Approved For Release @ 50-Yr 2014/05/08: CIA-RDP98-00979R000300640001-8 Declassified and Approved For Release @ 50-Yr 2014/05/08: CIA-RDP98-00979R000300640001-8 SECRET TABLE III JAPANESE POSTWAR TRADE Japanese Japanese Exports to Imports from Total Mainland Total Mainland Year Exports China including % Total Imports China including % Total 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. SECRET 25 Declassified and Approved For Release @ 50-Yr 2014/05/08: CIA-RDP98-00979R000300640001-8 Declassified and Approved For Release @ 50-Yr 2014/05/08: CIA-RDP98-00979R000300640001-8 SECRET SECRET Declassified and Approved For Release @ 50-Yr 2014/05/08: CIA-RDP98-00979R000300640001-8