493.419/3–2450

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

top secret

Subject: Policy Regarding Trade with Communist China

Problem

To determine the treatment to be accorded 1-B exports, particularly steel rails and other transportation equipment, to Communist China under the terms of existing NSC policy papers.

Background

1.
Attached for your signature is a draft letter (Tab A) to Secretary Johnson1 responsive to his letter to you of March 24, 1950 (Tab B).2 Also attached for your signature is a letter to Secretary Sawyer (Tab C)3 which would transmit for his information your letter to Secretary Johnson.
2.
The letter from Secretary Johnson recommends, in effect, that a previous authorization for export of 15,000 tons of steel rails from western Germany to Communist China be rescinded, that the, export from the United States to Communist China of all railway transportation equipment be embargoed, that SCAP be informed of the United States position in this regard and that strong pressure be brought to bear on western European governments for parallel action in controlling exports of ail strategic commodities to Communist areas of the Far East. These recommendations reflect Defense views regarding policy towards China which conflict, basically, with those of the Department and represent a challenge to the principles contained in NSC 48/2 (“The Position of the United States with Respect to Asia”).
3.
NSC 48/2. provides that “the United States should permit exports to China of 1–B items within quantitative limits of normal civilian use and under controls which can be applied restrictively if it becomes necessary to do so in the national interest …” (Tab D).4 Despite the President’s recent approval of this policy, the interpretation of this sentence has become an important issue between State and Defense. Defense has recently submitted to the NSC Staff a revision of NSC 41 (“United States Policy regarding Trade with China”), on which the China trade aspects of NSC 48/2 were based, designed to place an embargo on the export to China of a considerable number of 1–B goods, and to increase and subject to very tight restrictions those exports to China for which licenses are required. These [Page 629]Defense proposals would in effect prevent the export to China of a large number of goods that historically have moved in the China trade, and they would appear to represent a policy towards China even more severe than is now pursued towards the Soviet Union and its eastern European satellites. Defense representatives maintain that their proposals are consistent with the intent of NSC 48/2 by reference to the “national interest” clause cited above.
4.
The position taken by Defense representatives in the Interdepartmental Advisory Committee structure responsible for actual export licensing decisions has tended to subvert the intent of NSC 48/2. With a view to obtaining a flat embargo on the export of steel rails and other transportation equipment to China, Acting Secretary Early addressed a letter dated February 7, 1950 to Secretary Sawyer recommending strongly that such goods be upgraded from the 1–B to the 1–A list (Tab E).5 Secretary Sawyer replied on February 17 to this letter, indicating his willingness to have the Advisory Committee structure review the strategic rating of transportation items under control, but suggesting that the importance of multilateral action to effective restriction probably would limit the extent to which U.S. embargoes could be justified (Tab F).5 Secretary Sawyer’s response, while entirely correct, does not dispose of the difficulties created by the basic difference of view between State and Defense with respect to the China problem.
The general issue is most immediately related to the question of steel rail exports from western Germany to China, our treatment of which thus far has produced serious political repercussions in Germany. It is believed that a clear decision on the question of steel rails, the principle of which would apply to the treatment of transportation equipment generally as well as other 1–B exports to China, would go far to correct misapprehensions regarding the implementation of NSC China policy papers. The following analysis is therefore directed primarily to an examination of the steel rail problem.
5.
The export of steel rails as a 1–B list item is governed by the provision of NSC 48/2 which calls for licensing of such exports to China in accordance with the normal civilian requirements of that country. The Chinese economy has for decades made use of a few major trunk railway lines for passenger and freight transportation. Inadequacy of rail transport has been a major cause of China’s recurring famines. Military campaigns in China, particularly those of the Chinese Communists, have not been dependent primarily on rail transportation. It is unlikely, therefore, that China’s imports of railway equipment to meet normal civilian requirements would contribute appreciably to the Chinese Communist military potential. China’s imports [Page 630]of steel rails in the mid-thirties averaged approximately 80,000 tons, a quantity sufficient to lay approximately 590 miles of track. In view of the vast destruction of railways in China, annual exports to China of this magnitude would not appear excessive.
6.
No effective multilateral agreement has as yet been obtained for quantitative restrictions over exports of 1–B list items either to eastern Europe or to China. Information is exchanged, however, with the U.K. and certain other western European governments on 1–B exports to eastern Europe and such an exchange is in prospect for 1–B exports to China. We intend in the near future to renew our efforts for multilateral adoption of limitative controls over 1–B exports (including steel rails) to eastern Europe and would urge that such progress as is attained by these efforts be extended to trade with China.
7.
SCAP has been advised by Defense and State jointly of the principles deriving from NSC 48/2 that should govern Japanese exports to Communist China and was authorized to exercise his discretion in controlling 1–B list exports in accordance with these principles. SCAP was informed that he would be expected to apply as a minimum such export restrictions as were or might be adopted multilaterally. It was believed, however, that SCAP should not be expected to place Japan at a competitive disadvantage by imposing restrictions on exports for normal civilian use within Communist China more severe than are applied by the U.K. and major western European governments.
8.
The Chinese Communists have for several months been exploring in a number of countries the possibility of placing an order for about 87,000 tons of steel rails. We prevented Japan and Germany from accepting any such order until NSC 48/2 was approved by the President on December 30, 1949. The general policy guidance referred to above (para 7) was then sent to SCAP. With respect to western Germany, we authorized acceptance of Chinese Communist orders for steel rails but suggested that the quantity be limited to 15,000 tons for the time being. Defense concurred in this action. However, the previous denial and the current limitation of German steel rail exports, in the absence of any parallel action by Germany’s competitors, has aroused considerable resentment in Germany. High Commissioner McCloy has urged strongly either that multilateral agreement on steel rail quotas for China be obtained promptly or that western Germany be permitted to accept the entire order if it can be placed there.
9.
We believe that an attempt to obtain multilateral restrictions on any 1–B exports to China in advance of western European agreement to 1–A controls for China would seriously prejudice the joint approach we are now making with the British to this end. Moreover, it would clearly be unrealistic to expect that European governments would control 1–B exports to China prior to their institution of 1–B [Page 631]controls to eastern Europe. In the absence of multilateral quantitative limitations on exports of steel rails to China, the continued imposition of quotas on such exports from western Germany to China would not constitute an effective restriction since the orders would undoubtedly be placed elsewhere. The net effect of such action would be to add unnecessarily to the cost of U.S. financial assistance to western Germany and to create increasingly adverse political repercussions among the Germans. Unilaterally imposed quota restrictions on German exports to China might lead to imposition of similar restrictions on Japan for which the above observations would apply with equal validity but with greater significance in view of the very great importance to Japan of trade with China.
10.
It is believed that the Chinese Communists’ present extreme shortage of foreign exchange constitutes an effective limitation on their import of high cost capital goods. It is estimated, for example, that payment for the rail order in question would require use of 10 to 15% of the present foreign exchange resources of the Chinese Communists. Exchange of information by the principal western suppliers on actual exports of steel rails and other 1–B goods would reveal any movement of excessive quantities should it develop and thus provide a clearer basis for vigorous efforts to obtain multilateral restrictive action.

Conclusions

1.
The export to China of all 1–B list goods, including steel rails and other transportation equipment, should, in accordance with NSC 48/2 and NSC 41, be permitted from the U.S., Japan and western Germany for normal civilian use within China unless they are upgraded by the U.S. Government to the 1–A list.
2.
Continuing efforts should be made to obtain effective multilateral agreement for limitative controls over the export of 1–B goods (including steel rails) to eastern Europe, with the understanding that we would urge that such agreement, if achieved, be extended to cover such 1–B exports to China within the terms of NSC China policy.
3.
U.S. authorities in western Germany should be subject to the same policy and procedural guidance regarding exports to China as is applied to SCAP for Japan. Thus, pending multilateral agreement on 1-B controls for China, the U.S. High Commissioner for western Germany should be permitted discretion in determining permissible exports of steel rails and other 1–B goods for normal civilian use within China, subject to such decisions by the U.S. Government as may be indicated in the light of information exchanged among major western suppliers on actual exports. The Department would, of course, provide such advice and information as may be helpful to the High Commissioner, particularly in determining China’s normal civilian requirements.
[Page 632]

Recommendation

It is recommended that, in accordance with your responsibility for coordination of NSC 48/2 and NSC 41, you sign the attached letter to Secretary Johnson, which interprets these policies in the sense of the Conclusions above, and the accompanying letter of transmittal to Secretary Sawyer.

If the Department of Defense does not accept this interpretation, it would be necessary, in accordance with NSC procedure, for the issues to be considered by the Council and, if they cannot be resolved there, for the matter to be submitted to the President for his decision.

Concurrences

EE, RA, GEA, E, EE, G (Mr. Rusk), and U (Mr. Webb) concur in this memorandum and the draft letter to Secretary Johnson.

  1. For the text of the letter as sent by Mr. Acheson to Mr. Johnson on April 28 see infra.
  2. Ante, p. 625.
  3. See footnote 5 to the letter to Mr. Johnson, infra.
  4. For the text of NSC 48/2, see Foreign Relations, 1949, vol. vii, Part 2, p. 1215.
  5. Not printed.
  6. Not printed.