[Annex]
Memorandum by Mr. Robert N. Magill of the
Division of Chinese Affairs
The manner in which an economic program for China is formulated is
likely to determine whether or not the Department will have to meet
openly in the near future the issue of direct military assistance to
China. It can be anticipated that Congress will draw that issue
squarely if it finds that the economic aid program does not make it
possible for China to purchase substantial imports of munitions
without exhausting its official foreign exchange reserves. It might,
of course, be logical for the Department to support direct military
aid if the amount required to accomplish agreed upon objectives were
subject to approximate measurement, and if the U. S. were willing to
bear the magnitude of aid required and to accept the consequences
which might accompany or follow the success or failure of the
endeavor. However, none of these assumptions are given, and it is
therefore important that the U. S. not become committed to a program
of military assistance for China. It is also important, for reasons
of domestic and foreign policy, that neither the Department or the
U. S. Government openly repudiate the possibility of military
aid.
Considerations which should determine the issue of military
assistance should also apply, at least in part, to policy decisions
regarding the extension of economic aid to China. However, the
question of economic aid for a limited period has already been
decided. Fortunately, the political consequences of extending
economic aid are not likely to be so serious as those which might
accompany a policy of military involvement, particularly since a
program of economic aid can be presented in such a manner that
responsibility for its success and justification for its continuance
or renewal lies primarily in the degree to which the Chinese
Government rises to the requirements of the situation.
It is apparent that an economic aid program, the size of which is
measured in terms of China’s ability to meet essential civilian
imports out of its export proceeds, will not satisfy those elements
of Congress which are concerned with China’s military requirements.
Moreover, insofar as there are possibilities for holding the
economic line and initiating economic reform measures within China,
such possibilities [Page 449] may
well be denied if the military position of the National Government
continues to deteriorate rapidly or if panic results from the
exhaustion of the Government’s foreign exchange holdings. It appears
essential, therefore, that an economic aid program be devised which
takes account of these considerations, although its public
presentation should minimize any implied commitment by the U. S. to
underwriting China’s military requirements.
A program which undertakes to provide a cushion for military imports
by using admittedly generous estimates of China’s foreign exchange
expenditures and receipts probably would be labeled a fraud and
slashed by Congress, in which case the Department would be held to
blame. Use by the Department of an estimate of Chinese military
imports, to be procured with current Chinese foreign exchange
earnings, would require its justification before Congress and thus
imply that the Department is committed to making its realization
possible.
The only alternative appears to be the adoption of an approach which
would result in an aid figure substantially larger than that thus
far proposed, and which might be difficult to put through Congress.
Essentially, the presentation of this alternative would recognize
that the Chinese Government inevitably will apply its export
proceeds to certain major expenditures for which it is undesirable
that the U. S. assume responsibility by including them in a balance
of payments projection underlying an estimate of American financial
aid. These expenditures fall into two categories. The first consists
of such items as maintenance of diplomatic and consular functions,
foreign debt service and banknote imports, all of which Congress
would be delighted to ignore. The second consists of direct military
imports, requirements for which are not subject to approximate
estimate. It could then be pointed out that, while the low level of
Chinese exports could not be expected to cover both Government and
commercial transactions, nevertheless their proceeds would be
adequate for expenditures in the first category and should be
sufficient to permit China to purchase such military imports as it
would and could procure.
More important, however, it could be argued that China would thus
have entirely within its own power of exertion and decision the
possibility of increasing, through promotion of exports, its
purchases of munitions or, alternatively, of civilian imports
necessary to combat inflation and to aid reconstruction, provision
of which under the U.S. aid program is admittedly on the basis of
austerity requirements. A variant to this argument might be that any
surplus acquired from increased exports could be used in building up
China’s foreign exchange reserves for eventual currency
stabilization, although such a proposal might not fare so well with
a Congress concerned with eliminating surpluses. It would be
recognized, of course, that prospects [Page 450] are poor for an increase in China’s exports
and that only by strenuous efforts and effective use of American aid
could progress be made.
This approach would call for an aid program to cover all of China’s
essential civilian imports calculated on an austerity basis, which
would bring the total amount of aid for 18 months to about $700
million, plus whatever funds are included for reconstruction
projects—possibly $75 million. This program could be justified
publicly entirely in terms of its economic assistance to the Chinese
Government and people as affording them a respite from immediate
crises during which they might initiate the measures necessary to
lay the basis for eventual recovery. It would be held that
responsibility for these measures, for normal foreign transactions
of the Chinese Government, and for military procurement abroad and
the course of the civil war rests entirely with the Chinese.
The program would have the added advantage of skirting altogether in
its presentation a balance of payments analysis, thus avoiding the
implication that the U.S. is committed to meet continuously China’s
deficit in its international transactions. The magnitude of aid
proposed would represent a realistic appraisal of what is required
merely to give some assurance of preventing further economic
retrogression in China. This would have desirable educational
effects in Congress and elsewhere, and responsibility for any
failure to provide the funds required would then lie clearly with
Congress.
