Report by the Ad Hoc Subcommittee of the Advisory Committee of the Secretary of Commerce1


Ad. Hoc/Doc. 31 (Final)

At your request, the Ad Hoc Subcommittee set up an Economic Working Group to formulate recommendations with respect to the various economic instruments which could be used, as required, for implementing U.S. foreign policy. Control of trade is an effective instrument for this purpose. In view of the urgency of clarifying export control policy with respect to Eastern Europe, the Working Group has concentrated its attention on this problem thus far. This report of the Ad Hoc Subcommittee is based on Working Group studies. It will be followed by subsequent reports on other economic instruments.

In the judgment of the Subcommittee, U.S. policy on trade with Eastern Europe has three major objectives:

To assist Western European countries in obtaining necessary imports from Eastern Europe.
To prevent or delay further increase in the war potential of Eastern European economies.
To insure an adequate flow of manganese, chrome, and to a lesser extent, the platinum group of metals, and other essential commodities, from Eastern Europe to the U.S.

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It must be recognized frankly that full pursuit of the first and third objectives is not compatible with the second. Yet, in the judgment of the Subcommittee, it is possible to make some progress toward all three goals simultaneously.

It is obvious, however, that choices must be made. Consequently, it is necessary to evaluate the relative importance of the three objectives.

1. East-West Trade in Europe

During the four years of the ERP, it is estimated that Western European countries will require between $5 and $6 billion of imports from Eastern Europe. They expect to export about the same amount in terms of value to Eastern European destinations. The major raw material items supplied by Eastern Europe are: grain, timber, coal, and potash. They are essential for Western European recovery. Insofar as this trade is choked off, the ultimate burden on the U.S. would be increased, both in terms of dollars and commodity exports. This added burden might require further control measures in the United States, and there would be less assurance that the material requirements of the ERP countries could be met.

2. Imports into the U.S. from the U.S.S.R. and Satellites

The U.S. needs manganese, chrome, and platinum group metals from the U.S.S.R. Other imports from the Soviet bloc are important to certain industries, but not to the strength of the economy as a whole. It appears possible that these imports of manganese, chrome, and platinum might be replaced sometime in 1949 if all suitable measures are promptly taken and actively pursued. This prediction is based on favorable assumptions with respect to political stability in countries where new supplies are expected to be available. Several million dollars worth of scarce equipment may have to be diverted from domestic and other foreign programs in order to boost imports from alternative sources rapidly.

If supplies of manganese and chrome from the U.S.S.R. are cut off before imports from other sources are increased by an equivalent amount, maintenance of present steel output would reduce privately owned stocks to a seriously low level within one year. Strenuous and unpopular conservation measures may be required.

The U.S.S.R. can probably be replaced with relative ease as a source of platinum and related metals, but presently available data do not indicate the time and cost involved.

3. Strategic Value of Trade With Eastern Europe

The Soviet bloc obtained goods valued at about $425 million in 1947 from the U.S., less than 3% of our exports. Over two-thirds of the $150 million exports to the U.S.S.R. were machinery and vehicles. [Page 538] During the last half of the year, this percentage rose to about three-fourths. Including UNRRA shipments, between ½ and ⅔ of shipments to other Eastern European countries in 1947 were foodstuffs, textiles, and miscellaneous.

Several of the Eastern European countries, including the U.S.S.R., strongly desire complex equipment from the United States. In part this equipment is for the purpose of initiating or expanding industrial output and services in certain lines; in part it is to serve as prototypes for production of similar equipment there. It is probable that at the present time much of this equipment cannot be obtained elsewhere in the desired qualities and quantities, if at all.

The effects of restrictions on exports to the Soviet bloc would be more severe for some of the industrialized satellite countries Which have a considerable volume of trade with the West—especially Czechoslovakia and Poland—than for the U.S.S.R. proper, or for the less developed countries whose trade is largely within the Soviet sphere (for example, Bulgaria and Albania). However, the effects on the satellite countries would be in general to retard their further industrialization and to restrict their future contributions to Soviet war potential. As to the Soviet Union proper, it is likely that certain dislocations in Soviet industrialization plans would be accentuated by restrictions on trade, both because of the loss of goods and the loss of new techniques and know-how, for which the Soviet bloc has to look to the U.S. to a large extent in certain industries. To what degree this would affect the Soviet war potential is difficult to forecast.

Conclusion With Respect to Trade Between U.S.S.R. and U.S.

Prior to March 1, 1948, the U.S. was exporting goods to Eastern Europe which, in the aggregate, had greater strategic value to the recipients than the imports received from that source had for the United States. In the judgment of the Subcomittee such an imbalance should not be permitted to continue.

A selective control over exports from the U.S. should be maintained in order to deny the Soviet bloc certain key commodities which affect vital segments of the Eastern European economy. In general such controls should have as their objective the prevention of a net transfer, directly or indirectly, of war potential from this country and Western Europe to Eastern Europe.

The Munitions Control Board, acting through the State Department, consistently refuses licenses for shipments of arms, ammunition, and implements of war to the Soviet bloc. A new and expanded definition of such items is included in the Presidential Proclamation of March 26, 1948.

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Many items other than munitions should not be exported at all to Eastern Europe, because they have too great military or strategic value. On the other hand, it is worthwhile exporting some relatively plentiful items, including some with strategic value, on a quid pro quo basis, to ensure the availability to the U.S. of manganese, and chrome. It is even more important that we not take such drastic measures as to force the U.S.S.R. to interrupt East-West trade in Europe in retaliation. In addition it is desirable to ship certain types of equipment to Eastern Europe which will increase output of items badly needed in the ERP, provided there is reasonable assurance that increased output will in fact be available to the ERP countries.

5. Recommendations

This report concentrates on the short-run problem of trade relations with Eastern Europe. Long-run policies can be worked out only on the basis of developments during the initial months ahead.

At present there is a virtual embargo on exports to Eastern Europe. Practically no licenses are being approved. The Cabinet has already decided that trade must proceed under appropriate restrictions. The U.S. and the ERP countries are in danger of a counter embargo, for example, on chrome and manganese. There is urgent need to approve some license applications for Eastern European destinations immediately pending development of quid pro quo policies. Those which cannot be approved immediately should be denied as rapidly as possible or held specifically for quid pro quo bargaining purposes.

The following recommendations are directed at the objective of getting some export licenses approved in May. Policy and procedure for subsequent months can be developed later.

A. The Subcommittee proposes that a program determination be approved which would define four priority classes into which all commodities should tentatively be divided:

Class 1 is defined as commodities which, by their nature, or because they can readily be converted, are of direct military significance or important in the manufacture of munitions; or commodities of the highest significance the denial of which would affect strategic sectors of the economy of the Soviet bloc. Whether or not an item is in short supply in the U.S. should have no influence on its inclusion in or exclusion from Class 1. (Note: Class 1 items should not be shipped from the U.S., to any Eastern European destination except in extraordinary circumstances. See B below.)
Class 1A is defined as military and semi-military items which should ultimately be controlled as munitions but which do not fall within the definition of munitions now in use. These items should be regarded as in Class 1.
Class 2 is defined as commodities of important though indirect military significance or of considerable importance to the industrial potential of Eastern European countries.
Class 3 is defined as items which do not have any particular military significance in either peace or war but are of some importance in maintaining the basic economy of Eastern European countries.
Class 4 is defined as commodities of no particular significance either from a military point of view or to the maintenance of the economies of Eastern Europe; the so-called “non-essential items”.

The program determination should list commodities and materials according to priority category. Illustrative lists are attached to this memorandum.3 (As soon as these lists can be established, the OIT should define the items on it further by code number.)

3. Special consideration should be given to granting licenses which otherwise might not be granted where:

The items will contribute directly and substantially to the availability to ERP countries of items essential to them and difficult to procure in adequate quantities from other sources, or
The granting of a license can be used to procure a substantial quid pro quo for the U.S. or the nations associated with it.

In addition, account should be taken of any undue hardship on a U.S. manufacturer or exporter who has made commitments in good faith prior to any public knowledge of the institution of present export controls.

In general the granting of licenses for goods in categories 2 and 3 will depend largely on the extent to which each individual Eastern European country agrees to make political or economical concessions, including provision of exports of needed goods to the U.S. and to Eastern European countries. It may be expected that licenses will be granted less freely if the pattern of a country’s requests for licenses is heavily weighted with strategic items. Pending the possible establishment of more formalized quid pro quo bargaining arrangements, strict caution should be used in granting licenses for Class 2 commodities, and unusual shipments of particular items in Classes 3 and 4, or an excessive overall volume of exports should not be licensed. Requests considered to be excessive should in general not be denied, but action should be withheld pending an opportunity to arrange for adequate compensation.

C. The foregoing categories of goods, classified primarily for reasons of security, must be considered in proper relationship to the positive list of items in short supply. Insofar as administrative considerations permit, the positive list should include those items which are not available for export from the U.S. in quantities sufficient to meet the total requirements of all countries upon the U.S. Shipments of positive list items to the Soviet bloc should take place only if there is a direct connection between such shipments and the ERP program, or another compensating quid pro quo.

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The question of the basis for denial of a license in the case of items on the list based on security considerations, and also on the list of items prohibited by reason of short supply and need under ERP, requires further study.

D. The Subcommittee also recommends, pending the development of a long-term policy, a program determination to the effect that;

No item in Class 1 or Class 1A should be approved for export from the U.S. to destinations in Eastern Europe* except in (extraordinary) circumstances as defined in B above and after review by the Subcommittee.
No item in Class 2 should be approved for export to Eastern Europe until it has been reviewed individually, or in a group of cases, by the Subcommittee;
Items in Class 3 should be licensed by OIT within the policy framework, except for special cases which OIT may wish to bring to the attention of the Ad Hoc Subcommittee;
Items in Class 4 should be licensed relatively freely;
Items on the positive list which may be available for shipment to the Soviet bloc, in accordance with standards set forth in B, shall not be licensed except after review by the Ad Hoc Subcommittee.
Further Recommendations

The Subcommittee recognizes that the foregoing recommendations can be made effective only if other corollary actions are carried out.

Control of Re-Exports. Eastern European countries may try to buy through third parties the commodities that they cannot obtain direct. This problem requires further study. Meanwhile the OIT should watch diligently the volume of applications in each commodity group for each country to detect and deny unusual requests, not adequately justified and explained, which might indicate re-exporting or other activities which should be discouraged.
Inspection. As export controls are tightened on items which Eastern Europe urgently requires, there may be a sharp increase in well-organized efforts to evade the law. The Subcommittee considers it desirable that provision be made for adequate inspection of all licensed exports and parcel post shipments to Eastern Europe, as well as explored. All ships leaving for Eastern Europe should be checked with especial thoroughness.
Control of Other Sources. The Subcommittee recognizes that Eastern Europe will try to buy from Western Europe any imports they cannot obtain here. However, there will be inevitably a lag involved in any such shift of procurement. Western Europe is already selling [Page 542] all that it can produce currently. It cannot increase exports of complex equipment rapidly.
In order to make policy with respect to Eastern Europe effective in the long run, it will be necessary, through the ECA and diplomatic channels, to arrange that Western European countries pursue export policies which are more or less consistent with those of the U.S. The Subcommittee recommends that the ECA and the State Department explore the possibilities along these lines.
The appropriate agencies should review Western European exports of Class 1 and Class 2 items to Eastern Europe on a continuing basis to determine whether or not adequate caution is used by Western European countries in limiting such exports.
A few items in Class 1 and Class 2, especially raw materials, are available in South American and other countries, Soviet bloc imports from these sources should be the subject of early examination and action. This subject will be explored in a subsequent memorandum.
Other recommendations are being prepared with respect to:
Hardship cases in which owners are unable to secure licenses for goods produced or in the process of production for Eastern European buyers;
Increasing imports of manganese and chrome from sources outside the U.S.S.R.; and
Various other measures of economic warfare.
  1. This Report was addressed by the Chairman of the Ad Hoc Subcommittee to the Chairman of the Advisory Committee.

    A copy of this Report was sent to the Ambassador in the United Kingdom, Lewis W. Douglas, under cover of a letter from Edwin M. Martin, Chief of the Division of Occupied Areas Economic Affairs. Martin explained that the Report was submitted to the Secretary of Commerce on May 6 for presentation to the Cabinet on May 7. Ambassador Douglas was to use the Report in connection with his discussions in London with British, French and Benelux officials of the question of reparations deliveries to the satellite nations (London Embassy Files, 1948, File—850 Reparations).

  2. The lists under reference here are not printed.
  3. In this memorandum “Eastern Europe” includes: Finland, USSR, Eastern Zone of Germany, Czechoslovakia, Poland, Rumania, Bulgaria, Albania, Yugoslavia and Hungary. [Footnote in the source text.]