Memorandum of Conversation, by the Chief of the Division of Chinese Affairs (Sprouse)

Participants: Mr. Hubert Graves, Counselor, British Embassy
Mr. Butterworth, FE7
Mr. Dort, E8
Mr. Whitman, ED9
Mr. Reed, SEA10
Mr. Magill, CA11
Mr. Sprouse, CA

Mr. Graves called at the Department today to continue the conversations, initiated in January, with respect to problems arising out of the developments in China. The discussion was largely devoted to the question of the attitude to be taken toward trade with Communist-occupied areas of China.

Mr. Butterworth explained that the recent changes in the Department had required attention to various other matters and that it had not been possible to resume the conversations with Mr. Graves until today. He pointed out that reports reaching the Department of the impending arrival of an American commercial ship at Tangku and other reports of trade going on between Hong Kong and North Korea, which probably flowed over into Manchuria, make it desirable to go into the question of trade with Communist-occupied areas in China.

Mr. Graves indicated that the British position on this subject was, in general, as set forth in the British Embassy’s memoranda previously presented to the Department. In reply to Mr. Dort’s query, he said that he had received no further information from London regarding the matter and that, while he knew that there was trade between Hong Kong and the north, he did not know what commodities were involved. Mr. Dort pointed out that consideration of trade policy should be with reference to all of China since no effective barriers exist on trade between Nationalist and Communist areas.

Mr. Butterworth gave a brief explanation of the President’s decision regarding the cessation of ECA12 aid to Communist areas of China,13 [Page 824] emphasizing that this information was to be treated as strictly confidential. He continued that this decision did not imply cessation of U.S. economic relations with Communist-controlled areas of China, but that such relations from now on should be through private channels on a quid-pro-quo basis, subject to minimum essential security safeguards.

Mr. Dort indicated that we were thinking of security safeguards in terms of export controls applied to guard against the possibility of trans-shipment via China to the European Soviet orbit of strategic commodities which we wished to prevent from moving to the latter area; that China’s low level of economic development and industrial potential suggested that it probably would not be necessary to be restrictive of such exports so long as it appeared that they would be used in China, although we would of course embargo exports of direct military utility in any event. Mr. Magill added that it would be difficult to determine with assurance that strategic commodities were not destined for re-export, but that our general knowledge of the historical pattern of Chinese imports and China’s rehabilitation needs, and information regarding end-use available to us from reliable foreign importing firms in China, might be used to arrive at reasonable estimates of Chinese import requirements.

Mr. Dort mentioned that the restoration of Sino-Japanese trade was an important consideration bearing on China trade policy.14 He said that while exact procedures had not been decided upon, it would appear that Japanese trade with the Chinese Communists should be on a quid-pro-quo basis and subject generally to the same security considerations as governed other trade with China. Mr. Butterworth pointed out that there was no reason why present “barter” arrangements between China and Japan could not be continued and expanded, but that it might be undesirable for too high a level of trade to develop which would place Japan in a position of preponderant dependence on Communist China. He indicated, however, that such a development would be unlikely in the near future.

Mr. Graves stated that the British were in agreement with us regarding the day-to-day necessity for ordinary commercial relations with Communist China, subject to minimum security restrictions on exports. He added, however, that this practical approach only touched the periphery of the central problem of how trade policy could be used to contain Communism. Mr. Butterworth responded that restoration of ordinary trade relations with Communist China was the most feasible means of maintaining contact between the Chinese Communists and the west, that the USSR did not appear to be in a position [Page 825] to provide China with very substantial imports, and that this approach might strengthen any resistance by indigenous forces in China to Soviet control. He agreed with Mr. Dort that the Chinese Communists might be capable of and sufficiently ruthless to forego trade with the west, but that it is unlikely that they would be willing to turn the J clock back to the nineteenth century.

Mr. Graves expressed the opinion that the Chinese Communists, like all Chinese, had a natural instinct for profitable trade; that it would seem desirable, in line with Mr. Butterworth’s thesis, to permit them to have ordinary items of trade in return for which the west and Japan could obtain valuable Chinese exports; that their need for petroleum and capital equipment provided us with significant economic leverage against them. Mr. Magill suggested that, although exports to China should not be controlled initially in a highly restrictive manner, the application of export controls over commodities important to the Chinese Communists would be desirable in that it would indicate our ability to adopt severe measures if necessary.

Messrs. Butterworth and Dort pointed out the need for multilateral action if effective security controls were to be exercised over exports to China. Mr. Graves indicated that the United Kingdom now controls all exports and could easily apply appropriate restrictions on exports to China, and that it should be possible to obtain the cooperation of the British Commonwealths in this regard. He referred to the possibility that the Philippines might be used as a point of trans-shipment to China. Mr. Butterworth responded that the Philippine Government now controls exports, that it probably could be counted on to prevent dissipation of Philippine foreign exchange through re-export to China, and that the U.S. would seek Philippine cooperation in its export control policy.

In response to Mr. Magill’s inquiry regarding available means for controlling trans-shipment at Hong Kong, Mr. Graves stated that the U.K. could, of course, control exports to Hong Kong, but that the island had no export controls of its own and that the imposition of controls at Hong Kong would be an extreme measure, although it might eventually be necessary. Mr. Butterworth stated that, if Hong Kong could not control its exports, the U.S. would, in his opinion, have to treat the island as part of the China area in applying U.S. export controls.

Mr. Magill suggested that, in addition to governmental controls, it might be necessary to obtain cooperation from private firms, particularly American and British, in a position to supply China with important commodities, such as petroleum,15 from sources other than the [Page 826] United States and the British Commonwealth. He added that, as an example, the Soviets were known to be very anxious to obtain lubricants. Mr. Butterworth stated that it probably would be desirable to permit the Chinese Communists initially to import lubricants and other petroleum products within normal Chinese requirements in order that they might develop a sense of dependence on the west.

Messrs. Butterworth and Dort emphasized the necessity for early preparation of some system for screening exports to China. Mr. Dort pointed out that there probably would be a trend in the United States towards relaxation of controls over commodities the supply of which was increasing. He continued that it would be desirable promptly to develop a more precise position on the application of controls, and stated that it would be very helpful to have an indication of further British thinking in this regard.

Mr. Graves stated that he would put the matter up to London immediately.

  1. W. Walton Butterworth, Director of the Office of Far Eastern Affairs.
  2. Dallas W. Dort, Special Assistant to the Assistant Secretary of State for Economic Affairs (Thorp).
  3. Roswell H. Whitman, of the Division of Investment and Economic Development.
  4. Charles S. Reed, 2d, Chief of the Division of Southeast Asian Affairs.
  5. Robert N. Magill, of the Division of Chinese Affairs.
  6. Economic Cooperation Administration.
  7. See pp. 599 ff.
  8. For correspondence on this subject, see pp. 973 ff.
  9. For further correspondence regarding petroleum, see pp. 1002 ff.