Memorandum by the Deputy Assistant Secretary of State for Far Eastern Affairs (Merchant) to the Secretary of State

It is recommended that you secure the approval of the President for the despatch to SCAP of the attached message95 and for the concomitant action outlined in paragraph 4 which is calculated to place pressure upon Chinese Communist authorities to release from detention of Consul General Ward and his staff, Smith and Bender, the U.S. Navy personnel detained incommunicado since October 1948.96 The following considerations support my recommendation.
On 8 November Consulate General Shanghai outlined to the Department97 and to SCAP Chinese Communist interest in importing 60,000 tons of steel rails and 10,000 tons of spikes, fishplates, etc. from Japan, probably for use in intra-mural China, for which payment would be made in coking coal, salt, iron, and soy beans. (Annex A95)
SCAP has indicated strong interest in the transaction and has requested policy guidance. (Annex B95).
The recommended reply to SCAP is at Annex C.95 No objection is offered to initiation of negotiations providing Washington is informed of details before firm commitment is given and providing SCAP can prolong negotiations while approaches are being made through Shanghai and Peking to indicate indirectly to Chinese Communist officials that so long as Ward and his staff, Smith and Bender are held prisoners in China, it would seem most improbable that these trade talks could come to a satisfactory conclusion.
The actions proposed in paragraph 4 would carry, at this time, only limited leverage. ConGen’s Shanghai and Peking would hint at the prospect of reprisals. Their hints would be supported by nothing explicit in SCAP’s action, but only by his inaction. An explicit threat is not being lodged because to render this threat meaningful, we should be fully prepared, if necessary, to go far beyond proposition involved in this case and carry through with a range of sweeping measures of economic warfare, including import and export embargoes and the blocking of Chinese funds in this country. The proposed course of [Page 997] action makes no final commitment that this step, though contemplated, will be taken.
Although it is legally within our power to apply drastic economic counter measures, it is only proper that we should assess their full implications. Action of this scope and severity, if applied to both Japanese and U.S. economic relations with China, would undoubtedly hurt Communist China, but in view of the alternative trade outlets available to the Chinese Communists with the United Kingdom and Western Europe and other parts of the world, it is unlikely that action by the U.S. Government and SCAP alone would represent a crippling blow at the Chinese Communist regime. It is of course clear that we could not expect the support of any other major Western nation for a program of economic warfare against China.
It is very difficult, if not impossible, to foresee whether such action would have any beneficial effects with respect to Ward, Smith and Bender, since the Chinese Communist reaction might well be one of increased enmity rather than conciliation. Once applied, it would be difficult, if not impossible, for the U.S. quickly to regain freedom of maneuver and U.S.-Chinese relations might be expected to develop on an increasingly hostile basis for a considerable period of time.
As General MacArthur himself has pointed out, consummation of this particular trade transaction could lead to important Sino-Japanese trade which would be very beneficial to the Japanese economy and would save a substantial outlay of appropriated U.S. dollars. Loss of these advantages, however, may be of less importance than the fact that the Japanese business community has come to believe that Japan’s self-support as an independent nation cannot be achieved without restoration of trade with China. They would regard U.S. intervention to deny them the prospect of that trade as arbitrary, and might see in it the disturbing suggestion that there is no true identity in the interests of the U.S. and Japan.
Despite these considerations, the issues underlying the Ward-Smith-Bender cases may prove to involve U.S. national interests of sufficient importance to justify the conclusion that overt pressure by the U.S. Government is necessary and that economic reprisals represent the only recourse open to us in the circumstances. The message to SCAP and the actions that it is proposed ConGen’s Shanghai and Peking should take are intended to indicate, without final commitment on our part or explicit threat to the Communists, that that possiblity is being seriously contemplated.
We are proceeding to explore in consultation with other interested departments of the Government the practical possibilities for instituting effective economic counter measures and the policy implications of such action both with regard to the China and Far Eastern situation [Page 998] and with respect to the general commercial and financial policies of this Government.

  1. Not printed.
  2. See footnote 31, vol. viii, “Political and military situation in China”, chapter V.
  3. In telegram No. 4715, November 8, 4 p. m., not printed.
  4. Not printed.
  5. Not printed.
  6. Not printed.