Memorandum of Conversation, by Mr. Stephen C. Brown of the Division of Commercial Policy

Subject: Export Control Policy for China.

Participants: Mr. Graves, Counselor of British Embassy
Mr. Sprouse, Chief, CA
Mr. Magill, CA
Mr. Martin, ITP22
Mr. Brown, CP
[Page 835]

Mr. Graves called at the Department at 5 p. m. on March 21, 1949, at the invitation of Mr. Sprouse, to discuss the above subject.

Mr. Sprouse began the interview by inquiring whether Mr. Graves had yet obtained a reaction from the Foreign Office to the Department’s views as discussed in a recent conversation. Mr. Graves said that he had heard nothing yet.

Mr. Sprouse then said that we had done a good deal more thinking about the problem and had reached a somewhat firmer outline of our policy with respect to the question of trade with China as affected by Communist control of North China and Manchuria. We had prepared two brief memoranda23 for him, outlining our thinking, which he would probably want to transmit to the Foreign Office. In substance, we envisaged imposing on exports to China a form of control which we felt would insure against adverse results from the continuation of the trade, and would restrict it as little as possible. He suggested that Mr. Martin outline to Mr. Graves the nature of the controls we were considering.

Mr. Martin said that in essence we had in mind subjecting exports to China to the so-called “R–procedure” export controls which now apply only to Europe. We would, at the time of imposing the controls, issue a public statement explaining the reason for the step, in order to avoid the drawing of conclusions either by the Communists or by businessmen that we were restricting trade severely. He explained that the R–procedure was not in itself an export control policy, but merely a device to insure that all export shipments to a given area would require licenses. Under this system, all exports to Europe (and prospectively, to China) had to be covered by export licenses issued by the Department of Commerce; this gave Commerce a chance to approve or deny issuance on the basis of criteria which were determined by strategic considerations. In the European case, items on the 1–A list were usually denied to the Soviets and satellite countries, while items on the 1–B list were permitted to go only after careful scrutiny, and after satisfying ourselves that they were for normal peace-time uses. For the purposes of the R–procedure we had defined Europe in a rather broad sense, to include not only continental Europe but also Turkey both in Europe and Asia, and the whole of the Soviet Union, clear through to Vladivostok. We had not as yet decided definitely on the geographical extent of the proposed application of the R–procedure, since there was involved the question of the degree of cooperation we might expect from countries on the perimeter of China.

There was, for example, the problem of Hong Kong, which historically has served China as an entrepôt. It would not do much good to require licenses for China unless we could be assured that similar [Page 836] controls would be applied to exports from Hong Kong to China, and this was a question on which we would very much like the views of the British Government.

Mr. Graves, pointing out that it would be useless to close up the loophole of Hong Kong so long as other nearby available transshipment points were available, asked what we proposed to do in the case of Japan and the Philippines, as well as Formosa. It was pointed out to him that Formosa would be included under the R–procedure as part of China. With respect to Japan, we were confident that SCAP would conform Japanese policy to ours; the procedure would no doubt be different, and in view of Japan’s need for Chinese exports a considerable volume of trade would no doubt occur, but SCAP would, we felt, undertake to prevent shipment of strategic items to Manchuria or North China. The trade for some time to come would most likely be on a government-to-government, barter basis, and the Communists would simply find that Japan did not have available for delivery items of this kind. As for the Philippines, we recognized the possibility there and thought we might eventually have to ask the Philippine Government to impose similar restrictions, or alternatively to control our own exports to the Philippines on the same basis. Macao, which Mr. Graves also mentioned, we believed would be of relatively little importance, since it had not a deep water harbor and normally received most of its imports via Hong Kong.

With reference to the policy under which the export control would be administered, it was intended that it should restrict the trade with China as little as possible; a relatively short list of items of direct military significance (mostly 1–A items) was expected to be prohibited, while the trade in 1–B items would be watched carefully merely with the intention of preventing stockpiling or re-export to the Soviets or Soviet satellites in Europe or Asia. In general, it was proposed that shipments to China should be permitted so long as we were satisfied that they were destined for normal peace-time uses in China, and within reasonable quantitative limitations. Commodities not on the 1–A or 1–B lists would move without any restrictions. In this connection, it was pointed out that in practice probably the chief criteria would be consignee reliability and end-use; in their application it might be found that we would be able to oppose the expulsion of reliable western firms from China. This was not a primary objective of the proposed policy, but we would probably find that in order to obtain the necessary information concerning final destinations and end-use we would desire if possible to keep such firms in the China market.

Mr. Graves asked whether we had consulted any other Government concerning the matter. Mr. Sprouse replied that we had consulted none [Page 837] except the British Government; we felt it necessary to coordinate policy with it before we could go further. Messrs. Martin and Magill said we were actively working on a concrete list of commodities to discuss with them very shortly, and hoped Mr. Graves would request an early reply from the Foreign Office.

Mr. Graves said he would pass on to the Foreign Office the substance of the interview and ask for a prompt reply.

  1. Edwin M. Martin, Acting Director of the Office of International Trade Policy.
  2. Not found in Department of State files.