840.50 Recovery/6–1248: Telegram

The Secretary of State to the Ambassador in China (Stuart)

892. [For] Lapham from ECA. Dept and ECA have been in full agreement necessity greatest practicable detailed supervision and control by Mission of utilization aid goods in China (Toeca 31, June 11 and Embtel 1074 June 12). Art. IV was drafted with a view to ensuring such role for ECA Mission and designed give widest discretion Mission in this regard without specifying conditions which cannot be fully determined in advance. Language employed believed appropriate bilateral agreement this character, in particular avoiding such a phrase as “direct supervision and control” which, in context Embtel 850, May 11,4 implied that US Govt itself would be fully responsible for distribution goods (Deptel 815, May 29.)

However, in circumstances Dept is quite prepared to accept Mr. Lapham’s recommendations as proposed Toeca 31, June 11. ECA also agreeable subject its comments below to which Dept interposes no objection.

Recent hearings5 before appropriation committees have served to re-emphasize ECA’s responsibility for strict supervision of distribution and end use of all supplies financed by ECA. Bilateral agreement is of course only one step in control; even more important steps will be setting up of systems for joint review and control of each stage of use of American aid supplies, and the system of inspection and follow through by representatives of Mission.

ECA makes following suggestions re language proposed Toeca 31:

Art. IV, para 2—Original draft intended [to] subject price policies and processing (in terms physical alteration goods) as well as distribution channels of all aid goods to joint control Mission and Chinese Government. Language Toeca 31 appears to limit US control to expendable commodities, and thus fails to provide that there will be any joint agreement or distribution supervision in regard to replacement parts for existing capital equipment. Language suggested also limits US concern to distribution and does not include processing. Suggest more comprehensive wording would be preferable, substantially as follows:

“All commodities provided by Govt of USA pursuant this Agreement shall be processed and distributed by commercial enterprises or by private or ChiGovt agencies, and in accordance with terms and conditions, [Page 553] agreed upon from time to time between Govt of USA and the Govt of China. Representatives of the Govt of USA may exercise direct supervision and control over processing and distribution of such commodities.”

Art. IV, para 3—Last clause first sentence appears garbled. Dept assumes it is intended to be identical original draft which reads “and of similar commodities imported into China with other funds or produced locally.” This sentence ok.
Art IV para 3. Second sentence in present form raises several difficult questions. First we question whether this point is necessary in view of more general coverage in your revision Article IV para 2. Secondly, as worded, your sentence about distribution and price control system in urban centers seems to put the accent on programs for benefit of urban consumers who will be important but not sole users of ECA supplies. Implication of sentence is, for example, that kerosene, textiles, and other supplies which probably should be distributed partly or primarily in rural areas would nevertheless be handled only through distribution and price control system in urban centers. Suggest you reconsider second and third sentences in your draft of para 3. If you feel it imperative they should go in, suggest they be made separate paragraph, and that second sentence be revised to read as follows: “To the extent that circumstances and supply availabilities permit, a distribution and price control system shall be inaugurated or maintained in urban centers of China with the intent of insuring that all classes of the population shall receive a fair share of imported or indigenously produced essential civilian supplies.”
If you decide second sentence para 3 should be eliminated, third sentence might be deleted, or revised to read “In permitting US commodities made available under this agreement to be utilized in support of Chinese programs to improve consumption and price controls, it is understood that the US Govt takes no responsibility for the success of such programs.”
Art IV para 4 first sentence in original draft, term “price policies” was used advisedly rather than “prices” because of doubt that Mission could attempt detailed task indicate exact prices of all grades and qualities of all goods at each processing and sales level. Therefore, suggest this sentence be revised to read as follows: “The price policies to be followed for the sale within China of each commodity provided by the Govt of USA pursuant to this Agreement shall be agreed upon between the Govt of USA and the Govt of China.”
Art IV para 4 second sentence. Object to inclusion second sentence in bilateral agreement for two reasons, (a) In practice, price policy will probably vary somewhat by commodities. This sentence [Page 554] seems to tie our hands to a; price policy which, while probably generally correct, might not apply to all commodities for both urban and rural distribution. Believe this is question of specific policy for joint determination by two governments under agreement, and therefore unnecessary attempt formulate generalized price policy applicable all commodities. (b) Regarding substance of sentence we question advisability of any reference to “balancing internal budget” since sales proceeds of aid goods cannot be expected to approach this goal even on assumption large portion of special account funds are withheld from use. (Maximization Government receipts from sales of aid goods should, however, be of considerable importance as offset to Government spending.) It is inevitable that two different policies will need to be considered in each price determination—on one hand to favor highest prices obtainable in order to maximize government receipts, and on other hand to consider possibility setting prices below free market level in order to facilitate distribution aid goods to all classes irrespective purchasing power and retard rate of general price increase, as under CRM Program. Seems unwise to rule in advance that either one of these considerations should be over-riding in all cases. [ECA.]

  1. Not printed.
  2. See Foreign Aid Appropriation Bill for 1949: Hearings before the Sub-Committee of the House Committee on Appropriations, 80th Cong., 2d sess., and Economic Cooperation Administration: Hearings before the Senate Committee on Appropriations, 80th Cong., 2d sess.