Foreign Relations of the United States, 1949, Eastern Europe; The Soviet Union, Volume V

660H.119/7–2849

The Secretary of Defense (Johnson) to the Secretary of State ¹

top secret

Washington, 28 July 1949.

Dear Mr. Secretary: On learning that the approval of an application for export license of a steel blooming mill to Yugoslavia would receive favorable consideration in the Office of the Secretary of Commerce, I wrote Secretary Sawyer expressing my grave concern about this export.² He agreed to delay the granting of the export license for this steel mill until a meeting could be arranged with the Secretary of State.

I am familiar with the fact that the President approved in February this year NSC 18/2, Economic Relations Between the United States and Yugoslavia,³ in which U.S. export policies with respect to Yugoslavia were liberalized. However, I note particularly in paragraph 3 of the recommendations approved by the President the following statement:

“Shipments of goods in this category [1A]⁴, however, should be licensed by the Secretary of Commerce…, after consultation with the Secretary of Defense, when licensing serves U.S. national interests as outlined in this paper.”

Later in this same paragraph it is stated,

“In determining U.S. national interests in this matter, the Secretary of Commerce should be guided by the foreign policy considerations which will be set forth by the Secretary of State.”

Unless this latter statement is inconsistent with the previous quotation it can only mean that the Secretary of State will set forth “the foreign policy considerations”, and the Secretary of Defense will set forth other considerations of national security which should guide the Secretary of Commerce. The issue therefore is whether U.S. national interests are served by the export of this steel mill. I therefore desire to set forth the considerations which the Military Establishment regard as very important and, from one point of view, determinant of the present case.

The war potential of the steel blooming mill desired by Yugoslavia would be a permanent and militarily significant expansion of the basic steel industry of Yugoslavia, a Communist country still within the shadow of the Kremlin. The annual capacity of blooming mills of this size and type in the U.S. is as great as 1,050,000 tons; the average production of such mills is about 850,000 tons per year. A single unit of this type would represent about a 5% increase in the total estimated capacity of steel production in the USSR and its sphere of influence. Obviously such additional steel production in questionable hands does not enhance the security of Western Europe and the North Atlantic Community.

Although the intent of NSC 18/2 is to rehabilitate and maintain the Yugoslavia economy, attention is invited to the fact that the annual raw steel production already exceeds 1939 levels by about ten percent in that country.

It is understood that a Belgian coking plant and two Austrian blast furnaces are being considered for exportation to Yugoslavia. The combination of these three plants with the aforementioned blooming mill would permit a tremendous and strategically significant increase in the annual output of finished steel useable for military purposes. The recent CIA report “Estimate of the Yugoslavia Regimens Ability to Resist Soviet Pressure During 1949” (ORE 44–49, published 20 June 1949, with the substantial concurrence of the intelligence organization of the Department of State),⁵ arrived at the conclusions that the Soviet Bloc will not be able in 1949 to exert sufficient economic pressure to force the collapse of the Yugoslavia economy, and with less security risk the West could provide finished goods rather than production facilities.⁶

Based on the intent of NSC 18/2 and the authoritative CIA estimate, it is our belief that, in the interest of national security, it would be far preferable, to export finished goods, primarily consumer goods, to Yugoslavia rather than durable industrial facilities of high war potential. Moreover, we should not lose sight of the effect of our leadership and example to other countries in the matter of exporting strategically important items.

In order to prevent or carefully control future occurrences of this nature, and in order to strengthen the security aspects of U.S. export control policies, I have several positive proposals in which your concurrence is requested. These consist essentially of

(a) A recommendation that the NSC re-examine NSC 18/2 and revise it so that durable capital goods which are rated 1A will be embargoed and items of capital equipment on the 1B list which are capable of incorporation with other equipment into a facility of paramount strategic importance will not be exported to Yugoslavia without reference to the Secretary of Defense. In the latter case, if there is disagreement between the representatives of the Secretaries of State, Defense or Commerce, these Secretaries should meet and personally consider the matter before approval of the license is granted.

(b) Consideration should be given by the Secretary of Commerce to adding all Class 1A and 1B to the Positive List, thus precluding easy Soviet accessibility to such goods by way of transshipment through countries to which export licenses are not required.

(c) Further assistance to the ECA in its effort to secure effective cooperation in parallel export control in Marshall Plan countries. (Munitions Board is at present providing a group of technicians to work with negotiating teams in Europe.)

In conclusion then, the National Military Establishment considers that the export of this blooming mill to Yugoslavia at the present time would be inconsistent with “U.S. national interests” as required by NSC 18/2, approved by the President on 18 February 1949.

Sincerely yours,

Louis Johnson

1. A copy of this letter was also presumably sent to the Secretary of Commerce Many of the arguments presented in this letter were set forth in greater detail in a 15-page typewritten staff study setting forth the position of the National Military Establishment regarding the export of a steel blooming mill to Yugoslavia. A copy of the staff study was transmitted to the Secretary of State on July 28 by Maj. Gen. Leven C. Allen, Executive Secretary of the Office of the Secretary of Defense, on the instruction of Secretary Johnson. A copy of the staff study was also sent to the Secretary of Commerce. The principal points made in the staff study were as follows:
   • “I. A blooming mill is absolutely essential for the production of the munitions required to conduct modern warfare.
   • II. Potential effect of the blooming mill on the steel capacity of Yugoslavia will be to increase the finished production capacity 600%. The blooming mill potentially would increase ingot utilization capacity in the Soviet sphere of influence by 5.2%.
   • III. Location of the blooming mill renders it susceptible to Soviet control, either by direct conquest or indirect means.
   • IV. Strategic factors inhibit establishment of high war potential facilities in doubtful areas.
   • V. The most recent national intelligence survey concludes that assistance to Yugoslavia in the form of finished products rather than the means of production would be effective. [The survey referred to here is probably not a volume of the “National Intelligence Survey” (NIS) but the coordinated intelligence estimate, ORE 44–49, cited in the text of Secretary Johnson’s letter.]
   • VI. The export of this blooming mill to Yugoslavia by the United States will open the door and possibly lead the way to the export of many highly strategic facilities to Yugoslavia by Western European countries.
   • VII. Delay in delivery of the mill win reduce or prevent near term benefits of the export.
   • VIII. The psychological value of the export may be outweighed by adverse effect on public opinion in the U.S. and Western Europe.
   • IX. If in U.S. national interests the export of a long-life capital good in a realistic requirement, it is certainly not necessary to export one of such size, capacity and strategic importance as a steel blooming mill.”

   The staff study concluded as follows:

   “In calculating the risk to our national interests and the security of our allies in the North Atlantic Treaty the dangers and disadvantages predominate.

   The establishment of a steel blooming mill of large war potential in an area readily accessible to the Soviet Union is inimical to the national security of the United States and therefore its export should be denied.” (660H.119/7–2849)

2. According to the staff study identified in the previous footnote, the Secretary of Defense wrote the Secretary of Commerce on July 1 expressing his grave concern regarding the approval of the export of a blooming mill to Yugoslavia. Secretary Johnson requested that further action be deferred until a meeting could be arranged between himself and the Secretaries of State and Commerce.
3. Not printed; see editorial note, p. 868.
4. Brackets appear in the source text.
5. Not printed.
6. The estimate actually said (Summary, paragraph 7) that the West could provide military equipment “more easily and with greater assurance of effective utilization than it could the means for production of such equipment.”