The enclosed letter by the Secretary of State and its attached report on
the subject, prepared in response to the President’s suggestion that NSC
41 be reviewed, is circulated herewith for the information of the
National Security Council.
As suggested by the Secretary of State the enclosure is being referred to
the NSC Staff for use in the preparation of a report as a matter of
urgent priority for consideration by the Council.
As further suggested by the Secretary of State the views of the
Department of Commerce are being sought in connection with the staff
study, and the Secretary of Commerce will be invited to participate in
any Council consideration of this report.
[Subenclosure]
Memorandum by the Department of State
Subject: Report on NSC 41—U.S. Policy Regarding
Trade with China.
1. Developments Within China. The general
pattern of developments in China since NSC 41 was approved on March
3, 1949, has been along the lines anticipated. The major outline of
the pattern has been the steady advance of the Chinese Communists
well into south-central and northwest China. Two unforeseen
developments, however, have
[Page 891]
had consequences of considerable significance. One development
has comprised a series of natural disasters—droughts, major floods
and typhoon damage—and the other has been the port closure of the
Chinese Government which has reduced Shanghai’s industrial and
commercial activity to a very low level. The cumulative effects of
the natural disasters combined with the economic repercussions of
the port closure, whether or not it is continued, will undoubtedly
mean very severe economic hardship in China for some time to come.
On the other hand, it appears that domestic supplies of food and of
coal for electric power have been forthcoming in sufficient
quantities to prevent economic collapse at Shanghai, and there is no
evidence that prospective economic difficulties will bring about the
overthrow or collapse of Chinese Communist authority.
The revolutionary turnover of authority, augmented by Chinese
Communist propaganda against propertied classes and foreigners, has
of itself placed all western, but particularly American, interests
in a critical position. Mass unemployment engendered by the
Nationalist port closure at Shanghai, which the Chinese Communists
attribute to United States policy, has intensified the critical
character of the situation. American business representatives at
Shanghai have been subjected to duress by Chinese labor for
continued employment or for ever increasing terminal wage payments
and bonuses. This coercion has had tacit if not active support of
Chinese Communist officials. Although labor difficulties appear to
have been alleviated somewhat in recent weeks, it remains to be seen
whether they can be surmounted and whether the Chinese Communists
will permit evacuation of those responsible officials of foreign
firms who wish to leave China. Americans and other foreigners in
China, whether official or private, are entirely at the mercy of
Chinese Communist authority which has no basis in established legal
codes and procedures. However, no Americans have thus far been
killed in Chinese Communist areas nor has any outright expropriation
of American property been reported.
The Chinese Communists have continued to treat United States and
other foreign consular officials as private citizens on the ground
that their governments do not recognize the authority of the new
regimes.72 While United States officials could not have
reciprocated if the Chinese Communists had wished to maintain an
official relationship, the Chinese Communists’ attitude has resulted
in a severe limitation of consular functions and rights universally
respected regardless of political circumstances. Refusal thus far to
permit the withdrawal of the Consulate General’s staff from Mukden,
and the arrest and beating by Chinese Communist police of a United
States vice-consul at Shanghai
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have constituted the most flagrant violations
of international comity. Most of our consular posts, however, have
been permitted to maintain their confidential communications with
Washington and, considering the circumstances, have on the whole not
fared badly.
Chinese Communist propaganda has continued to be hostile toward
western governments, particularly the United States, and has
recently placed increased emphasis on identity of interest between
China and Soviet Russia. While there has been some indication of
divergences within the Chinese Communist party regarding domestic
and foreign policy, the most reliable evidence suggests that the
dominant faction in the part[y] hierarchy is strongly
pro-Soviet.
2. Existing U.S. Control Over Exports to
China. We have been reluctant thus far to impose unilaterally
new controls over exports to China because of the possibility that
such action would handicap our negotiations with the British, and
because of the adverse effect it would have on United States
business interests without compensating gains vis-à-vis the Chinese
Communists. Nevertheless, the United States Government has meanwhile
employed such controls as already existed. The Department of
Commerce has for several months been screening applications for
export to China and adjacent areas of strategic goods on the
“Positive List”, and licenses for such goods have been granted only
when the evidence indicated that the export was destined for normal
civilian consumption within China. Arrangements have been in effect
with SCAP for several months, and have recently been instituted with
the Joint Export-Import Board for Western Germany and with ECA as
regards south Korea, for submission to Washington of any trade
proposals involving the export of 1A or 1B list goods* to China and adjacent
areas.
Shortly after the capture of Tientsin by the Chinese Communists, the
Department requested that the major American oil companies operating
in China limit their sales of petroleum to Communist China to normal
civilian requirements on a short-term basis, and suggested to the
United Kingdom that it make a similar request of British petroleum
interests. At the request of the Department, Northwest Air Lines
recently withdrew from negotiations with the Chinese Communists for
the joint establishment of a Chinese domestic air line, and we have
obtained agreement of the British, French, Norwegian and Dutch
Governments to take a similar position with respect to possible
participation of their nationals in such an enterprise.
[Page 893]
3. Negotiations with the British. NSC 41
stated that “British cooperation, with particular reference to the
entrepôt center of Hong Kong, would be essential to the
effectiveness of United States controls” over strategic exports to
China. British agreement to cooperate has been considered a
prerequisite to an approach for cooperation by any other government.
Negotiations with the British have been carried on actively since
February 1949, including the dispatch of a special mission to London
in late June. We have urged the British to impose export controls
for the following purposes: (a) to deny goods
of direct military utility to the Chinese Communists, (b) to prevent transshipment via China to the
USSR, eastern Europe and north Korea of goods of high military value
which are denied to those destinations by the United States and
western European governments (1A list goods)†, (c) to demonstrate western ability to control, and to restrict,
if necessary, strategic goods of key importance to the Chinese
economy (a highly selected group of 1B list goods†). We have stressed the
third purpose, pointing out that such controls would represent the
most important single instrument available for use vis-à-vis the
Chinese Communists in protecting vital western interests in China
and the Far East.
Despite our request for reconsideration at the highest level, the
British have maintained consistently that they were not prepared to
impose controls over 1B exports to China, and this position was
reaffirmed in the course of the recent discussions between their
Foreign Minister and Secretary of State. The British stated that
they did not believe such controls would accomplish the desired
results; that they would be regarded by the Chinese Communists as a
threat to impose economic sanctions and might thereby jeopardize the
position of Hong Kong and substantial British investments in and
trade with China. They have expressed their willingness, however, to
control 1A list exports to China from the United Kingdom, Hong Kong
and Singapore, provided prior assurances can be obtained regarding
similar action by the French, Dutch, Belgian and Philippine
Governments and SCAP. They also proposed that the United States,
United Kingdom and Dutch Governments collaborate in persuading the
major oil companies to refrain from petroleum sales to China on a
long-term contract basis and in excess of normal civilian
requirements. Finally, they have offered to observe and to exchange
information with the United States on the movement of 1B goods to
China with a view to joint consultation
[Page 894]
regarding corrective measures if it appeared
that the flow was excessive or injurious to our common
interests.
We have accepted the above British offers, although expressing our
hope that they would at a later date be able to reconsider the
matter of 1B controls. It was agreed that cooperation would be
sought by the United Kingdom from Commonwealth governments, that the
United States and United Kingdom would make parallel approaches to
the French, Dutch and Belgian Governments, and that the United
States would undertake to obtain Philippine agreement. We assured
the British that SCAP was already controlling strategic Japanese
exports to China, and that we would take such steps as were
necessary to control transshipments of strategic goods in south
Korea.
4. Proposed United States Action, The
Department of State will proceed to obtain the cooperation of other
governments along the lines agreed with the British. Meanwhile, in
order to guard against transshipment via China of exports that the
United States otherwise denies to eastern Europe and the USSR, the R
procedure should be promptly extended to cover China and adjacent
areas.
The R procedure requires export licenses for a wide range of goods,
including those on the 1A and 1B lists, and therefore represents a
much more comprehensive system of export controls for China than the
British and other governments have now or are expected to create.
Only a very limited number of 1A list goods, if any, would be
related to normal civilian uses within China. In view of their high
security character, it is believed that 1A goods should be subject
to presumptive denial, although exceptions might be made on a case
by case basis where it would serve United States interests to do
so.
Restrictive licensing of United States exports in the 1B and lower
categories under the R procedure should be undertaken primarily to
guard against transshipment via China to the USSR and eastern Europe
of goods that are otherwise denied those areas. North Korea, which
is subject to complete Soviet control, should be treated in the same
manner as an eastern European satellite. Since the USSR is in a
position to control major rail shipments in Manchuria, and could
thereby readily effect transshipments to the Soviet Union or north
Korea, 1B exports for Manchuria should be licensed very
conservatively. Exports of 1B and lower categories of goods for use
within China proper should be licensed in accordance with normal
civilian requirements, subject to appropriate screening to guard
against their transshipment or use for direct military purposes by
the Chinese Communists.
Although the effect of recent developments in China on American
nationals has been a cause of much concern, it has not been such as
to alter the basic assumptions and concept of NSC 41. It is not
believed
[Page 895]
that strategic
and practical considerations now warrant the imposition by the
United States Government and SCAP of greater restrictions on exports
for normal civilian use within China than can be applied effectively
through multilateral action. So long as the Chinese Government port
closure continues to be relatively effective, there will be very
little trade with China to restrict, and for some time to come the
Chinese Communists are not likely to acquire sufficient foreign
exchange to import more than a very moderate volume of goods. It is
clear from the outcome of our negotiations with the British that the
Chinese Communists would frequently be able to find a ready
substitute in the markets of western Europe for such American or
Japanese exports as might be denied. The effectiveness of unilateral
United States restrictions would therefore be only marginal at
best.
The net effect of such action would be to penalize American exporters
and to demonstrate the impotence and disunity rather than the power
and solidarity of western governments in the field of economic
relations with the Chinese Communist regime. Over the long run,
maintenance of severe restrictions on Japanese exports to China
would pose a serious obstacle to achievement of Japanese
self-support and would require a major reprojection of the future
magnitude and duration of United States financial support for the
Japanese economy.
The policy outlined by NSC 41 is sufficiently broad in scope,
however, to provide a basis for the imposition of severe
restrictions on ordinary trade with China if Chinese Communist
actions inimical to United States strategic interests should make it
necessary to do so. The present critical situation in China must be
followed closely with a view to taking such action in the economic
field as may be required and as can be taken effectively in new
circumstances.
5. Recommendations. It is recommended that:
-
a)
- Since NSC 41 provides a sufficiently broad scope for a
flexible policy, it not be revised at this time;
-
b)
- The R procedure be extended promptly to China and adjacent
areas;
-
c)
- Exports of 1A goods be subject to presumptive denial, with
possible exceptions on a case by case basis where United
States interests would be served thereby;
-
d)
- Exports to China in the 1B and lower categories of the R
procedure be licensed in accordance with normal civilian
requirements, subject to appropriate safeguards against
their use for direct military purposes by the Chinese
Communists and against transshipment to the USSR, eastern
Europe and north Korea of goods that are otherwise denied to
those destinations; exports to north Korea be licensed in
the same manner as for eastern European satellites;
-
e)
- Arrangements be made to ensure control of exports to China
from Japan and western Germany in accordance with the above
criteria;
-
f)
- This position be subject to continuous review in the light
of future developments.
