Foreign Relations of the United States, 1949, The Far East: China, Volume IX

Executive Secretariat Files

Note by the Executive Secretary of the National Security Council (Souers), on United States Policy Regarding Trade With China

[ Washington ,] February 28, 1949.

NSC 41

The attached report by the Secretary of State on the subject is submitted herewith for consideration by the National Security Council and, at his request, is scheduled as Item 1 on the Agenda for the 35th Council meeting to be held on Thursday, March 3, 1949.

It is recommended that, if the Council adopts the enclosed report, it be forwarded to the President with the recommendation that he approve the conclusions contained therein and direct their implementation by all appropriate executive departments and agencies of the U. S. Government under the coordination of the Secretary of State.

Sidney W. Souers

[Annex]

Draft Report by the National Security Council on United States Policy Regarding Trade With China

The Problem

To Determine United States Policy Regarding Trade with China.

Analysis

The Chinese Communists now hold or have within their grasp the most important areas of China. They have it within their power in the near future to consolidate their control of these areas by military or political means and to expand through the same methods, eventually if not shortly, their control over all of China. United States policy regarding trade with China should, of course, logically derive from and contribute to the implementation of over-all United States political and strategic policy towards Communist-controlled areas of China. The following analysis is directed to the formulation of such an overall policy, with particular reference to the economic aspects of its implementation.

In the present world situation, the primary policy objective of the United States with respect to China should be, as concluded in NSC 34/1,¹⁶ “to prevent China from becoming an adjunct of Soviet power”. Circumstances in China do not provide the basis for a positive United States policy that could be pursued towards this objective with any assurance of success and without risk of danger in greater or less degree. We are forced to choose, rather, the least disadvantageous of alternative courses open to us.

There are various political and military considerations of a strategic character which bear on the formulation of a United States policy directed towards the primary policy objective regarding China. However, the economic aspects of the situation, with which this paper is primarily concerned, are of major strategic importance, and it is in the field of economic relations with China that the United States has available its most effective weapons vis-à-vis a Chinese Communist regime. The following economic considerations are basic to an analysis of the policy issues involved: (a) The direct economic importance of China to the United States is not great. Private American investments in China are small and United States–China trade is of relatively minor significance; (b) Trade with China is indirectly of significant importance to the United States in that the achievement of Japanese self-support, in which the United States has an important strategic interest and for which the United States has undertaken considerable financial burdens, is to a degree dependent on access to the export surpluses of north China and Manchuria; (c) The predominantly agrarian economy of China could continue to function, if necessary, on a relatively self-sufficient basis at traditionally marginal standards of living; (d) The historical pattern of Chinese foreign trade has been for the most part with Japan and the western world, and a Chinese Communist regime will be dependent largely on a resumption of this trade pattern if it is to rehabilitate and expand China’s existing industrial and transportation facilities; (e) The subsistence character of China’s economy, in combination with China’s serious shortages of managerial and technical personnel, will not permit rapid or large scale formation of domestic capital except at the price of a drastic reduction of already marginal standards of living.

In the absence of an effective instrument in China, United States support of which could bring about defeat or containment of Chinese Communism, the primary immediate United States policy objective—prevention of Soviet domination of China for strategic ends—might be sought initially through either of two essentially alternative policies. The basic concept of one policy would be mobilization of the political and economic power of the western world to combat openly, through intimidation or direct pressure, a Chinese Communist regime. The alternative policy would be to augment, through permitting restoration of ordinary economic relations with China, such forces as might operate to bring about serious rifts between Moscow and a Chinese Communist regime.

The first policy would be designed either (a) to force the Chinese Communists, by the threat or application of severe economic restrictions, to resist Kremlin pressure and adopt domestic and foreign policies acceptable to the United States, or (b) to isolate China completely from Japan and the western world in an attempt to bring about the overthrow or collapse of a Chinese Communist regime. Failing in this, it would be hoped that such a policy would handicap and delay consolidation of the Communists’ position in China and lessen their ideological drive into South Asia.

While this policy, if applied effectively, could undoubtedly be used to inflict considerable hardships on certain sectors of the Chinese economy, it is difficult to see how the necessary degree of concerted action could be obtained from all western nations so as to make effective the imposition of severe restrictions or embargoes on trade with China. Other western nations, particularly the United Kingdom, have investments in China much larger than those of the United States, and the economic position of Hong Kong is dependent on an active entrepôt trade with the Chinese mainland. British firms have expressed frequently their intention to continue doing business under a Chinese Communist regime, and the British Embassy has indicated to the Department of State its primary concern for the protection of British interests in China and for the position of Hong Kong.

The experience of Russia following the revolution indicates that a determined and ruthless leadership can survive and even consolidate itself in the face of extreme economic hardships aggravated by the imposition of external restrictions or embargoes. China’s relative economic self-sufficiency at traditionally low standards of consumption should enable a disciplined and militant Communist regime to make shift in the face of economic restrictions and embargoes. Indeed, by painting itself in the role of defending China against foreign persecution, the Communist leadership might turn our action to its advantage and win to itself greater internal support.

Severe restrictions on trade with China would make the reestablishment of Japanese trade with north China and Manchuria exceedingly difficult, if not impossible, thereby offering the prospect of indefinite support of the Japanese economy by the United States. Moreover, the threat or application of extreme measures by the United States would at once provoke and justify Communist expulsion and seizure of American business and mission interests and properties in China. While such consequences for American interests in China would not, in themselves, constitute an important strategic set-back to the United States, they would represent the loss of opportunities for maintaining a flow of useful information on China and for continuing American cultural influence in China.

Finally, and most important, the course of action described above probably would compel the Chinese Communists to eliminate any divergences of opinion within the party and tend to drive the regime into a position of complete subservience to the USSR, thus making; impossible of attainment the primary objective towards which it was directed. Such a policy would suffer from the serious strategical shortcoming of inflexibility. If, as would appear likely, it should fall short of its objective, the possibility of alternative courses probably would be foreclosed to the United States. The policy might be forced upon us, but should be adopted only after the failure of other courses had been clearly demonstrated.

As indicated above, the alternative policy for the immediate future would be designed to augment such forces as might operate to create serious rifts between Moscow and a Chinese Communist regime. Although the leaders of the Chinese Communist party are doctrinaire Marxists, politically hostile to the United States and other western nations, and predisposed to cooperate with the USSR, the germs of friction between a Chinese Communist regime and the Kremlin undoubtedly exist in the Chinese situation. The Soviet Union can be expected to make every effort to gain whatever material and political advantage it can from a Communist-controlled China. To this end, the USSR may attempt to alter the historical pattern of China’s foreign trade, and will undoubtedly exploit its special position in Manchuria, as provided by the Sino-Soviet Agreement of 1945.¹⁷ The USSR is likely to be confronted in this endeavor by a strong desire on the part of a Chinese Communist regime for improvement of China’s economy, and by the facts that the Chinese collectively have a deepseated resentment of foreign domination, that as individuals the Chinese are by nature highly acquisitive and opportunistic, and that the Chinese Communist party is not now dependent upon the USSR for maintenance and expansion of its military and political position in China.

The interests of the United States would be served if operation of factors such as those indicated above were to result in successful resistance by a Chinese Communist regime to Kremlin attempts at political and economic exploitation of China. A restoration of mutually beneficial trade relations between China on the one hand and Japan and the western world on the other, and the progressively increased importance to China of such relations, might bring about serious conflicts between Kremlin and Chinese Communist policy, and thereby tend to produce an independent Chinese Communist regime. The United States should contribute to such centrifugal forces as may develop by permitting, so far as the United States is concerned, restoration under appropriate security restrictions of ordinary economic relations with China. It can be assumed that China–USSR rifts, if they were to occur, would be occasioned by Kremlin policy and actions, and that there is little the United States could do initially, beyond adoption of the policy here proposed, to contribute to creation of a conflict. However, in the event that frictions arose, the United States should be able to exploit them through positive political, economic and propaganda measures.

The United States should not allow such a course to be construed by the Chinese Communists as a soft policy. They should be made aware of the potential power of the United States, in collaboration with other western powers and SCAP,¹⁸ to impose severe restrictions on trade if a Chinese Communist regime were to demonstrate its determination to follow policies inimical to United States strategic interests. The immediate imposition of a system of controls on United States exports to China, although applied initially to effect a minimum of essential security restrictions, would serve to indicate United States ability and intention to deal drastically with China’s foreign trade if necessary.

Thus, this policy would retain for the United States the degree of flexibility necessary to cope with the uncertain situation that lies ahead. At worst, if the Chinese Communists were to make this policy untenable by demonstrating their determination to follow policies inimical to United States strategic interests, thereby necessitating adoption of a program of political-economic warfare against them, the United States would not have suffered a significant set-back by virtue of having followed this policy initially. The successful rehabilitation of China’s existing industrial and transportation facilities will be a long-term undertaking, even though the most favorable assumptions were made regarding the capabilities of the Chinese Communists. Similarly, China is at such a low level of economic development that it is not likely that a Chinese Communist regime could, within the next generation or more, create an industrial base which, as an adjunct of Soviet power, would represent a security threat to the United States.

If a serious rift between Moscow and the Chinese Communists were not to develop, this policy might result, at least over the short run, in certain practical advantages to the western world—namely, the acquisition from China of commodities important to Japanese self-support and of considerable value to the world market, and some continued operation in China of private American and other foreign interests. There are indications that, in order to facilitate the resumption of production and foreign trade, the Chinese Communists may, during the early stages of their control, adopt a policy to permit some continued operation of private foreign enterprises. However, this is by no means certain, and the duration or effective application of such a policy would be much less so. It should be assumed that, after a possible initial period, the Chinese Communists will move either gradually or swiftly to curtail private foreign business in China.

SCAP represents, in effect, an “amtorg”¹⁹ in its control over Japanese trade, and the need of a Communist China for Japanese capital goods should give SCAP considerable latent bargaining strength vis-à-vis the Chinese Communists. On the other hand, Japan’s natural dependence on China for food and industrial raw materials would provide the Communists with a potentially powerful leverage over Japan after the United States occupation and financial support had been withdrawn. This is a disadvantage, however, that must be incurred as a calculated risk unless the United States is willing to underwrite the Japanese economy indefinitely. The problem of how Japanese trade with China should be handled after the occupation is not dealt with at this time, but the tendency of a post-occupation Japan will certainly be to re-establish its natural trade relations with the Northeast Asia mainland. Meanwhile, SCAP should encourage trade with China on a quid-pro-quo basis, but should avoid preponderant dependence on Chinese sources for Japan’s critical food and raw material requirements. Every effort should be made to develop alternative sources on an economic basis, particularly in areas such as southern Asia where a need exists for Japanese exports.

The details of this course obviously cannot be outlined in advance. Security safeguards would require a system of controls to embargo all exports to China of direct military utility, and to screen carefully exports of a highly selected schedule of important industrial, transportation and communications equipment and supplies on the basis of end use. Whether controls should be effected by extension to China of the R procedure for Europe,²⁰ or by an expansion of the “positive list” of items in short supply, would depend on considerations of administrative feasibility. The screening of selected exports would be primarily to guard against the possibility that items of strategic value would become available to the USSR, eastern Europe or north Korea through direct export or re-export from China. Non-military items, the export of which to the European Soviet orbit if prohibited or restricted severely on security grounds, might well be permitted for export to China provided there were reasonable evidence or presumption of intention to use them for purposes related to the Chinese civilian economy. Beyond the control of exports for these purposes, and the usual restrictions on exports of commodities in short supply, private traders would be expected to handle with a minimum of restriction the non-strategic commodities that make up the bulk of China’s normal foreign commerce.

In view of the possibilities for trans-shipment between Nationalist and Communist-controlled areas of China, controls would have to cover exports for the country as a whole, although it might be necessary to differentiate somewhat in treatment accorded the two areas. Japanese exports to China would be generally subject to the same considerations as governed the application of United States export controls. Similarly, British cooperation, with particular reference to the entrepôt center of Hong Kong, would be essential to the effectiveness of United States controls, as would also the cooperation of various other governments and of private firms, chiefly United States and British, in a position to supply China with important commodities from sources other than areas under the effective control of cooperating governments.

Conclusions

A. Under present circumstances, the primary policy objective of the United States with respect to China should be, as concluded in NSC 34/1,²¹ “to prevent China from becoming an adjunct of Soviet power”.

B. A policy designed to combat openly, through intimidation or direct economic pressure, a Chinese Communist regime would be impractical of application, prolong the burden of United States expenditures in Japan, and involve the grave danger of driving the Chinese Communists into a position of complete subservience to the USSR. It might be forced upon us, but should be adopted only after the failure of other courses has been clearly demonstrated.

C. The United States Government should maintain its freedom of action by following initially a policy designed to augment such forces as might operate to create serious rifts between Moscow and a Chinese Communist regime. This policy would permit, so far as the United States is concerned, restoration, under essential security safeguards, of ordinary economic relations between China on the one hand and Japan and the western world on the other. It might enable, at least over the short run, the acquisition from China of commodities important to Japanese self-support, and some continued operation in China of private American interests. If the Communists should not by their actions make this policy untenable, the importance to the Chinese Communists of trade relations with Japan and the west might foster serious conflicts between Kremlin and Chinese Communist policy and thereby tend to produce an independent Chinese Communist regime. This policy would make it possible for the United States to exploit frictions between a Chinese Communist regime and the USSR should they arise, or to adopt a restrictive trade policy if the Chinese Communists were to demonstrate their determination to follow a course inimical to United States strategic interests.

D. Trade between Japan and China should be encouraged on a quid-pro-quo basis, but preponderant dependence on Chinese sources for Japan’s food and critical raw material requirements should be avoided, and efforts should be made to develop alternative sources on an economic basis.

E. The United States Government should take the following steps in implementation of the policy set forth in paragraphs C and D above:

1. A system of controls should be established on United States exports to all China.

2. The system of export controls should include an embargo on all exports to Communist China of items of direct military utility, and should be used to screen carefully exports to all China of a highly selected schedule of important industrial, transportation and communications supplies and equipment on the basis of end use. Such screening should be primarily for the purpose of guarding against the export or re-export from China to the USSR, eastern Europe and northern Korea of commodities which the United States wishes to prevent from moving to such areas. Initially, in addition to items on the State Department’s munitions list, the prohibited list should not be broader than the 1A list under the R procedure, and might be somewhat narrower. Careful quantitative control might be instituted over the remaining parts of the 1A list and possibly certain items on the 1B list. All other exports to China should be permitted to move in accordance with normal commercial considerations.

3. Japanese exports to China should be made generally subject to the above considerations, and close liaison should be worked out within the United States Government to insure coordination of operations in this regard with SCAP.

4. The effective cooperation of other friendly governments should be sought wherever necessary to carry out this policy. Cooperation should also be sought from private American firms in a position to supply China with important commodities from sources other than areas under the effective control of cooperating governments, and other governments should be requested to do likewise with respect to private firms under their jurisdiction.

5. This policy should be reviewed constantly, in the light of Chinese Communist policies and actions, and the United States Government should make use of its economic position, whenever it appears feasible and appropriate, to intensify any conflicts that may appear between the Chinese Communists and the USSR and to increase the importance to China of trade with Japan and the west.

16. January 11, p. 474.
17. Signed at Moscow, August 14, 1945, United Nations Treaty Series, vol. x, p. 300.
18. Supreme Commander, Allied Powers in Japan (MacArthur).
19. Reference to the Amtorg Trading Corporation, official purchasing and sales agency in the United States of the Soviet Union, at New York.
20. See also memorandum of March 22, p. 834.
21. January 11, p. 474.