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

Participants: Mr. Graves, Counselor, British Embassy
Mr. Butterworth, FE
Mr. Sprouse, CA

Mr. Graves called today by appointment to present a memorandum prepared by the British Embassy under date of April 5, 1949, on the subject of measures in defense of British economic interests in China. Mr. Graves stated that this memorandum did not represent a reply to the Department’s recent request for British views regarding the action to be taken in implementation of a policy governing trade with Communist-held areas of China although it did contain general British views on the subject of trade policy.

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During the discussion of the memorandum Mr. Graves emphasized that it was the British view that British interests should be supported in their desire to keep their foot in the door in China as long as possible and that whatever economic weapons might be at the disposal of the British for the purpose of protecting their economic interests in China they should be held in reserve as long as the Communists were prepared to tolerate their functioning.

Mr. Butterworth informed Mr. Graves that he was at a loss to understand recent information reaching the Department from the French Foreign Office indicating that the latter had gained the impression from the British Foreign Office that the U.S. Government was contemplating economic sanctions against the Chinese Communists. Mr. Butterworth continued that the position of the U.S. Government had been made clear in previous discussions with him (Mr. Graves) and that there had been no indication that the U.S. Government was contemplating such measures. He reiterated the previously expressed view with respect to ensuring that trade with Chinese Communist areas did not vitiate the objectives of East-West trade in Europe and added that this did not mean that the U.S. Government desired to engage in economic warfare with the Chinese Communists at this stage, although it did desire to have machinery in hand which would ensure sufficient control to prevent military supplies or certain strategic materials from reaching the Chinese Communists and to guard against stock-piling or trans-shipment to the USSR. Mr. Graves indicated his understanding of the U.S. Government’s position and said that he had so explained it to his Government.

The conversation concluded with Mr. Graves’ statement that he would continue to press the Foreign Office for an early reply to the Department’s previous request for an expression of British views on the question of trade policy with Chinese Communist areas and its implementation.