Policy Planning Staff Files: Lot 64 D 563
Paper Prepared by the Policy Planning Staff2
PPS 17
United States Exports to the U.S.S.R. and the Satellite States
Problem: To determine what position this Government should take at this time on trade with the U.S.S.R. and the Satellite States
background
- 1.
- On November 12, 1947, the Policy Planning Staff received from the Secretariat the paper entitled, “Immediate U.S. Economic Policy [Page 490] toward Eastern Europe”. This paper (EWP D–9/i) was prepared by a working group within the Department and is attached under Tab A. The comments of the Staff were requested.
- The gist of this paper lies in the recommendation that while we should continue to restrict shipments of military significance and shipments which are in short supply, goods not in short supply, including capital equipment, raw materials and consumer goods, should be permitted to flow freely.
- 2.
- On November 14, the Secretary of Commerce submitted to the
National Security Council a paper (Tab B) recommending (a) immediate termination of shipments from
the U.S. to the U.S.S.R. and satellites of all commodities
critically short in the U.S. or which would contribute to the Soviet
military potential; and (b) that all exports
to Europe should be placed under control and shipments should be
permitted to go forward only when:
- (a)
- the country furnishes adequate justification for its requirements,
- (b)
- European recovery and world peace are served thereby, and
- (c)
- the position of the U.S. is not adversely affected.
- 3.
- Both of the above papers have been referred to the Policy Planning Staff for comment and recommendations.
facts bearing on the problem
- 1.
- Although the U.S.S.R. does not exert complete economic domination over its satellites, Soviet control is sufficiently comprehensive to justify the U.S.S.R. and its orbit being regarded as an economic unit. The trend is in the direction of even closer integration.
- 2.
- U.S.S.R. economic policy is directed primarily at the increase of its military potential. Since the development of the European Recovery Program it has become evident that it is Soviet policy to do everything within its power to sabotage the ERP. In so far as circumstances permit the U.S.S.R. has sought to force its satellites to follow it in these two respects.
- 3.
- U.S. exports are not essential to the economic development of the U.S.S.R. and its satellites; they are important, however, to these countries. Critical items in this respect are Diesel and electric locomotives, precision instruments, cranes, some types of machine tools, electric generating equipment, blast furnaces, machinery for mines, and refineries.
- 4.
- U.S. imports from the U.S.S.R. and its satellites are neither vital nor of great importance to this country. The only important items are manganese ore, chromium, and iridium. Stoppage of manganese might diminish U.S. stockpiling; the loss of Soviet iridium might create a scarcity of that metal in the United States.
- 5.
- U.S. exports to the U.S.S.R. and its satellites during the first six months of 1947 totalled $125 million, constituting 1.5 percent of total U.S. exports. A large proportion of these exports were accounted for by the carry-over of lend-lease, pipeline, and UNRRA shipments. These residual items have lately fallen off. U.S. exports to the U.S.S.R. in September amounted to approximately $3 million and those to the satellites to about $14 million.
- 6.
- In general, the U.S. is committed by treaties and agreements with the U.S.S.R. and eastern European countries not to engage in discriminatory practices against them and to extend to them most-favored-nation treatment.
- 7.
- In the current context of abnormal conditions under which international trade is being conducted these undertakings have not been scrupulously observed by the U.S.S.R. and its satellites; provisions concerning restrictions and prohibitions have not been enforced. Special arrangements, including exchange controls and restrictions which discriminate against the trade of some countries in favor of others, have been prevalent. There has been a general recognition throughout Europe that such arrangements must be tolerated while abnormal conditions exist in international trade.
- 8.
- Article 94 of the ITO draft charter provides that: “Nothing in this Charter shall be construed … to prevent any Member from taking any action which it considers necessary for the protection of its essential security interests … taken in time of war or other emergency in international relations”.3
- 9.
- Under the provisions of the Second Decontrol Act of 1947, twelve percent of the items that enter into U.S. foreign trade are now under export control. This list does not include many items of machinery which the U.S.S.R. is continuing to purchase and which can contribute to the expansion of Soviet economic-military power. The Act is phrased with sufficient flexibility to permit virtually unlimited control over all shipments we may decide to place under license. Motivation for our action is not limited to the “short-supply” consideration. National interest may also be cited as grounds for holding up shipments.
discussion
- 1.
- There is general agreement that it is not desirable for U.S. merchandise or technology to go forward, directly or indirectly, to the Soviet Union or its satellites, where these shipments would increase Soviet military potential or operate to the detriment of the European recovery program.
- 2.
- There are, however, two main concepts of how this Government should proceed.
- The first, which is reflected in the paper prepared in the Department of State, envisages the establishment of no special controls applicable to the European area alone and of no controls at all on goods not in short supply going to Russia and the satellite area. It takes account of the recent decline in exports to the U.S.S.R. and its satellites and anticipates that the operation of the European recovery program will increase the number of commodities in short supply and thus enable us to bring about a further restriction of goods flowing to these countries within the limits of present Executive procedure. The proponents of this concept believe that in this way some further curtailment would be achieved of shipments to the Soviet and satellite areas, but by means which could not raise any question of the propriety of our action in the light of the principles of non-discrimination and trade freedom which we have stood for in our international trade policies.
- The second and more far-reaching concept, evolved in the Department of Commerce and in the staff of the National Security Council, calls for the screening of all exports to the entire European area, with the intention that only those shipments would be cleared which promote the purposes of European recovery and world peace, which do not affect adversely the position of this country, and which are adequately justified by stated requirements. Under this concept, there would be no appreciable loop-hole whereby any exports could flow to the Soviet Union or the satellite area unless they meet these requirements.
- 3.
- There is much to be said for each of these concepts. The first would undoubtedly be easier to reconcile with the letter of our stated position on international trade matters and of our international commercial engagements. It would not involve a new departure in U.S. policy and would not raise any new questions for international discussion. On the other hand, it would presumably leave without control a considerable body of U.S. exports to this area, including (particularly until passage of the new Munitions Control Bill) many items which would undoubtedly contribute to Soviet military potential and to the ability of the U.S.S.R. to sabotage the Marshall Plan. In most cases, it would not be practicable for us to institute controls of these items on grounds of short supply. If they were to be put on the controlled list, this would have to be done on straight grounds of military security and would raise strong considerations of political effect. In addition to this, it would establish a heavy contingent burden of screening these items for shipment to other parts of the world.
- The second concept really enables us to close the door to all undesirable shipments to Russia and the satellites and to reply with assurance to critics who allege that shipments are going forward which are contrary to the national interest or to the interest of European recovery. On the other hand, it does raise serious questions as to its compatibility with the principles we have so strongly espoused in matters of general international trade. And it might well lead to charges that this country is embarking on a policy of embargoes and economic warfare just at a time when it is urging other nations at Habana4 to accept the ITO Charter.
- 4.
- The opponents of this second concept also argue that its adoption would lead the countries of the Soviet area to curtail shipments to western Europe as a means of reprisal. The Planning Staff is not persuaded that this is a serious consideration. It feels that we must face the bitter fact that in present circumstances any increase in the economic strength of the Soviet Union and the satellite countries will be used to oppose, rather than to promote, the interests of real European recovery, unless some compulsion operates in the other direction. It believes that the chances for satellite cooperation with the European recovery program will be best if the satellite countries are pressed for trade with western Europe and are forced to seek it even at the price of making concessions to European recovery. To the extent that this Government supplies the U.S.S.R. and the satellite areas, without insisting on real quid pro quos from the standpoint of European recovery, it will be made easier for the Communists to oppose European recovery.
- 5.
- As for the reconciliation of a screening of exports to Europe with the ITO Charter and other U.S. treaty commitments, the Staff recognizes that this is a serious problem. It considers that such screening would be justified by a broad interpretation of the ITO draft charter. Real European recovery, conducted in the interest of the people themselves and not as part of the program of extending Communist political power, cannot fail to promote the objectives listed in Chapter 1, Article 1 of the Charter. Unless there is such recovery, it is hard to see how any of these objectives are to be achieved in the European area. If this is true, then it follows that we are not inconsistent in taking measures to assure that our shipments to the European area should not operate to the detriment of the recovery program.
- A more serious problem exists in the most-favored-nation provisions embodied in our agreements with Russia and other European [Page 494] countries. The 1937 agreement with the Soviet Union,5 still in effect, contains, for example, the provision that products exported from the United States to the U.S.S.R. shall in no case be subject to any rules or formalities other than or more burdensome than those to which the like products may be subject when consigned to the territory of any third country. If, therefore, restrictions were to be placed on shipments to the Soviet Union, even in the form of export controls, the Soviet Government could claim that technically these restrictions constituted formalities more burdensome than those applying to countries not in the European area.
- We would have to be prepared to meet this charge. We could do this by taking a broad view of the purposes of these agreements and by holding that our action was motivated by the overall considerations of achieving European recovery. It could be pointed out that the very necessity of an aid program of these dimensions makes it clear that the situation we are dealing with is not a normal one from the standpoint of international trade; that it might well be classified as the sort of emergency in international relations which is envisaged by Article 94 of the draft ITO charter; that it has been recognized many times in the past that in abnormal circumstances of this nature governments have been warranted in departing temporarily from the strict interpretation of the most-favored-nation principle; and that our overall purpose is to restore in Europe and throughout the world a state of affairs in which the needs of all nations could be adequately met by freely-flowing commercial exchanges.
- 6.
- It has been suggested, as an alternative to the plans discussed above, that it be required that exports from the United States to countries maintaining a complete state monopoly of foreign trade be carried out only through a United States Government agency, under such procedure as it may require in order to assure itself of the justification of the requirement and of the commercial nature of the considerations leading to the transaction.
- In principle, the Staff welcomes this suggestion. It does not consider that the interests of U.S. economy in dealing with state foreign trade monopolies are adequately protected by the ITO principle that governments having such monopolies should promise to be motivated solely by commercial considerations in their foreign trade activities. It believes that in the long run some form of counter control will be necessary on the part of this Government to prevent unfavorable consequences to U.S. interests from the operations of foreign trade monopolies in the American market.
- However, the adoption of such a policy would represent a fundamental change in U.S. economic policy. It is complicated by a number of factors. There are various degrees and types of state trading, which would require a differentiated treatment on the part of this Government. Any system of restriction wide enough to blanket immediately the whole satellite area would also blanket a number of countries outside that area. It would involve serious questions of relationship to other features of our trade policy. It would involve, no less than the Commerce plan, a departure from the most-favored-nation principle. It would mean that we would have to find some way of departing from the present provisions of the draft ITO Charter. For these reasons, no approach along these lines to the problem of trade with Russia and the satellite area could be evolved without long study and preparation.
- For this reason the Staff considers that, while the question of our relations with state trade monopolies should be given further study at once with a view to finding more adequate protection for U.S. interests than that implicit in the present ITO conception, this suggestion cannot be an answer to the immediate problem of trade with Russia and the satellite area.
- 7.
- The immediate question therefore narrows down to one of whether, in the face of the fact that shipments to the Soviet and satellite areas are rapidly declining and have already reached a point where they are not of great monetary importance, we wish to proceed to the unusual measure of the establishment of a system of special screening for shipments to the European area, or whether we should carry on with present procedures at the risk of leaving a gap in our system of controls and of permitting goods, however small in value, to flow to the debatable areas for purposes probably contrary to our interests.
- 8.
- Officials of the Department of Commerce estimate that to achieve the effective screening of our exports to Russia and the satellite area by taking more items under general control for the world at large would call for an outlay 100 to 150% greater than to establish a system of screening of all shipments going to Europe. To support this estimate they cite the fact that whereas a large part of the items now on the control list are raw materials which are fairly simple in nomenclature, those which would have to go onto the list in order to cover most shipments to Russia would be, for the most part, manufactured goods of which the nomenclature is elaborate and complicated. Hundreds of items would have to be added to the existing list. This would raise many questions of interpretation as to whether items were or were not covered by the list, and would impose a considerably greater work load on the Government and burden on the business community than if blanket controls were set up over shipments to Europe.
- There is the further consideration that a relatively high proportion of European orders are placed by state trading organizations, thus making it possible for large amounts to be covered by a single license. This is much less the case in other areas. If, therefore, items are to be placed on the list for world-wide control merely in order to make possible screening for the Soviet sphere, a disproportionate burden arises, in the necessary screening for other areas.
- In addition to this, it must be noted that a fairly large percentage of the shipments to Europe in the coming period will probably be covered by the recovery program allocations. Those shipments would be automatically cleared and would require no processing.
- Another very real consideration has arisen in connection with the export controls to be exercised at the request of the Atomic Energy Commission. The Commission is anxious to avoid the necessity of publishing a list of the items which it does not wish to see shipped to the Soviet sphere. The Commission is not much worried about such shipments going to countries outside of Europe. If there is no blanket screening arrangement for shipments to Europe, the Department of Commerce will be obliged to publish the list of these items. This would be undesirable from the standpoint of military security. If there is a blanket screening arrangement for Europe, this will not be necessary, and the national security will be protected to that extent.
- One more consideration speaks for the establishment of a blanket control over shipments to Europe. During the period of operation of the recovery program, we will wish to be able to exercise some pressure on countries receiving our aid, to make sure that their purchases in this country outside the aid program do not run counter to the requirements of the program. A blanket control would give us the means for exercising this influence.
conclusions and recommendations
The Staff’s findings are as follows:
- 1.
- Present arrangements governing trade between the United States and the Soviet sphere do not give adequate protection, in principle, to United States interests. A certain proportion of the shipments now going to this area may well be undesirable from the standpoint of United States security or of the ERP. However, the total amount of trade between the U.S. and this area at the present time is so small that this loophole does not now have serious significance. Thus it cannot be stated that the direct detriment to national interest arising at this particular moment out of the exchanges of goods from this area is great enough to warrant, of itself, extreme corrective measures which might embarrass our policy in other fields. On the other hand, [Page 497] we have no assurance that this situation will not change for the worse at any time.
- 2.
- If, despite the small amount of trade now involved, the NSC nevertheless feels that some action is necessary at this time, to enable us to control shipments to Russia and the satellites, the best course would be to establish in connection with the European aid program, at such time as the President may see fit, arrangements permitting this Government to exercise control over shipments to all European countries, including the U.S.S.R.
- 3.
- The problem would not be adequately or usefully met just by increasing the number of items under export control for the world at large.
- 4.
- It would also be unfeasible to attempt to work out on short notice any sound solution of the problem along the lines of restrictions on purchases by foreign state trading organizations.
- Existing arrangements for operations of state trading organizations in the United States market are admittedly inadequate, as are the arrangements outlined in the draft ITO charter. Our position in this respect calls for thorough review and it should be our aim to see that such operations by state trading organizations can be effectively controlled by this Government.
- This is a matter, however, which will require careful and many-sided study, and on which no abrupt action could be taken now without serious prejudice to the ITO negotiations now in progress in Habana.
- The economic offices of the Department of State should accordingly be requested to undertake at once a thorough review of our position in this matter and to formulate recommendations as to our future line of procedure. This review should include an examination of the adequacy of existing commercial agreements with eastern European countries and of the relative desirability of terminating or permitting to remain in effect the individual agreements concerned.
- 5.
- Any announcement of the establishment of general export controls over shipments to Europe should be framed along the lines of the statement attached hereto as Tab C. Should we at any time be pressed as to how these controls can be reconciled with the most-favored-nation provisions of our agreements with countries in the European area, we should explain that we feel this action to be justified by the broad purpose of the ITO concept, and that the implementation of a recovery program of these dimensions naturally overshadows normal trading operations with the general area concerned and creates temporarily a situation to which provisions defining normal trading conditions would obviously not be applicable.
- 6.
- If a general control is estatblished over shipments to Europe, administration of this control should be exercised technically by the Department [Page 498] of Commerce, but all decisions involving policy should be taken conjointly with the Department of State. The two Departments should be guided, in the exercise of this control, by the national interest and by the interests of the ERP. They should have authority to require justification of requirements; but this should not be made mandatory upon them.
- 7.
- If approved, this paper should be submitted immediately to the National Security Council for its information and as a basis of further discussion with relation to the paper (Tab B) presented by the Department of Commerce. An appropriate communication to the Executive Secretary of the NSC is attached.6
- 8.
- Except in so far as it may be modified by action taken by the NSC, the paper prepared in this Department entitled “Immediate U.S. Economic Policy Toward the Soviet Sphere” and attached as Tab A should be approved and referred to the Assistant Secretary of State for Economic Affairs for further elaboration and implementation.
- This paper was submitted to Under Secretary
of State Robert Lovett by George F. Kennan, Director, Policy
Planning Staff, under cover of a memorandum of December 2, 1947
which in the main read as follows:
“The paper represents the views of the Staff alone, and I have the impression that Mr. Thorp [Willard L. Thorp, Assistant Secretary of State for Economic Affairs] would not agree with all of its conclusions. You may therefore wish to get his views before acting on it.
“You will see that we have thought it best to leave to the National Security Council the basic decision as to whether action along these lines should be taken at all at this time. This is a decision of importance to several other departments of the Government and one which has a definite national security angle. I think it should be taken after further discussion within the Security Council. I have therefore suggested that our paper be transmitted to the Council for the information of the other members and as a basis for further discussion.”
A marginal notation on the source text indicates that this paper was not approved by Under Secretary Lovett.
The Policy Planning Staff was established in May 1947 for the purpose of assuring the development of long-range policy. The purpose, functions, and organization of the Policy Planning Staff were described in a Department of State press release, Department of State Bulletin, May 18, 1947, p. 1007.
The National Security Council (NSC) was established by the National Security Act of July 26, 1947 (PL 253, 80th Congress; 61 Stat. 495). It met for the first time on September 26, 1947. Council membership included the President, the Secretaries of State, Defense, Army, Navy, and Air Force, and the Chairman of the National Security Resources Board. The Director of the Central Intelligence Agency participated as an adviser. The duties of the National Security Council included the consideration of policies on matters of common interest to the departments and agencies of the Government concerned with the national security and the making of recommendations to the President in connection therewith.
↩ - For the text of the Draft Charter of the International Trade Organization of the United Nations, prepared by the Department of State, see Department of State Publication 2927, Commercial Policy Series 106.↩
- For documentation concerning the participation by the United States in the World Conference on Trade and Employment, held in Havana, November 1947–March 1948, see volume i .↩
- For the text of the commercial agreement between the United States and the Soviet Union, effected by an exchange of notes of August 4, 1937, see Department of State Executive Agreement Series 105 or 50 Stat (pt, 2) 1619.↩
- This paper was not approved. The communication under reference here was not attached to the source text. For the text of the letter eventually sent to the Executive Secretary of the National Security Council on December 11, 1947, see footnote 1, p. 508.↩
-
This paper was prepared by officers of the Department of State comprising the Eastern Europe Economic Working Party (EWP). Following the decision of the National Security Council on December 17, 1947 (see the Report of the National Security Council, p. 511), this paper was revised and redesignated EWP D–9/j. Changes in Part I are indicated in footnotes at the appropriate places. Part II was very extensively revised, but those changes are not indicated here. The revised paper was transmitted to Under Secretary Lovett by Assistant Secretary of State Thorp under cover of a memorandum dated February 9, 1948, which concluded as follows:
“It would be of considerable assistance to us to have a definite formulation of the Department’s policy respecting economic relations with Eastern Europe. I should like to inquire, therefore, whether we may regard the attached document, which has been revised in accordance with the National Security Council decision, as having the Department’s approval.” (611.6131/2–948)
- At a conference held at Wiliza Gora, Poland, September 22–23, 1947, the Communist Parties of Yugoslavia, Bulgaria, Romania, Hungary, Poland, the Soviet Union, France, Czechoslovakia, and Italy, agreed to establish the Communist Information Bureau (Cominform). For documentation on the conference, including a very lengthy extract from a speech by Audrey Aleksandrovich Zhdanov, member of the Political Bureau of the Communist Party of the Soviet Union, see Documents on International Affairs 1947–1948, selected and edited by Margaret Carlyle under the auspices of the Royal Institute of International Affairs (London, New York, Toronto: Oxford University Press, 1052), pp. 122 ff.↩
- Brackets appear in the source text; not printed.↩
- Circumstances at present are not considered politically appropriate to permit such loans to any Class II countries. [Footnote in the source text.]↩
- This paper was considered by the National Security Council at its Second Meeting, November 14, 1947, but action was deferred pending the formulation of views on the matter by the Department of State. The paper was considered again by the Council at its Fourth Meeting, December 17; for the action taken at that time, see the Report of the National Security Council, p. 511, and footnote 1, thereto.↩