Memorandum by the Assistant Secretary of State for Economic Affairs (Thorp) to the Deputy Under Secretary of State (Matthews)
Subject: United Kingdom Aide-Mémoire1 Concerning United States Licensing Policy for Exports to Hong Kong
The British Embassy has presented an aide-mémoire to the Department in which it is recommended that the United States give urgent consideration to a licensing policy proposed by the British for United States exports to Hong Kong. Assurances have been given by the British that the Government of Hong Kong has instituted all measures of export control and supervision of domestic uses of commodities that it considers feasible to guard against the transshipment of United States exports through Hong Kong to Communist China either before or after fabrication in Hong Kong. The aide-mémoire points out, however, that this control cannot be made completely water-tight due to the peculiar economy of Hong Kong. The problem is to determine whether, in the light of the assurances given by the British and in view of the importance attached by the British to the continued existence of Hong Kong without undue economic dislocation as part of the Free World, the Department’s policy should be to establish a liberal, automatic licensing procedure which would assure the fulfillment of Hong Kong’s legitimate needs from the United States.
On December 16, 1950, the United States Government announced extensive controls over the economic relationships between the United States and Communist China. These controls are intended to deprive Communst China of access to United States goods and to financial resources within United States jurisdiction in view of the commitment of Chinese resources in the unprovoked aggressive activities in Korea of the Chinese Communist regime.
Because of the geographic position of Hong Kong and Macao it was felt necessary to include these two Governments within the regulations established for control of trade to China. These regulations required that licenses be obtained for all shipments to these areas. The administrative decision to deny all license applications, however, was not applied to Hong Kong and Macao. When the system of controls was announced it immediately caused concern in Hong Kong since the British Crown colony felt that its normal supply of materials [Page 1900] from the United States might be endangered. The Government of Hong Kong immediately informed the United States Consul General2 and the Colonial Office in London of this concern.
Immediately thereafter several discussions were held in the Advisory Committee on Export Policy concerning the licensing policy which should be applied to United States exports to Hong Kong. Under the interim licensing policy (attached as Annex A) which was established January 5, Department of Commerce has been approving a very limited number of licenses for the export of commodities from this country to Hong Kong.3 It was recognized, in a meeting of State Department and Commerce Department officials with representatives of the British Embassy, that an attempt should be made to obtain import requirements data and such assurances of effective controls over transshipments from the Governments of the United Kingdom and Hong Kong as would permit a liberal and largely automatic licensing policy to be pursued by the Department of Commerce.
Further discussions have been carried on between officers of the Department and representatives of the British Embassy, including a representative of the Hong Kong Government, in order to ascertain the most feasible export licensing policy to be pursued in the case of Hong Kong. On February 1, 1951, representatives of the British Embassy submitted an aide-mémoire (attached as Annex B) which proposed that a substantially automatic licensing policy should be followed. In order to achieve such an automatic policy, the British and the Hong Kong Governments have given assurances to the United States that goods imported from the United States into Hong Kong will not be exported to China either in their original form or as the sole or substantial constituent of goods fabricated in Hong Kong. The British have proposed that all Positive List commodities for export to Hong Kong should be considered on a case by case basis by the Department of Commerce and that non-Positive List commodities should be automatically licensed up to 75 percent of overall imports by Hong Kong in 1949. This is roughly equal to the overall percentage of Hong Kong imports in 1949 which was consumed locally or shipped to destinations other than Communist China.
The British have openly and frankly stated in their aide-mémoire that the procedure which they have suggested will not be a watertight control which will completely prevent U.S. imports into Hong Kong from reaching China in one form or another. They have stated, however, that it is their belief that the proposed procedure will prevent transshipment and minimize exports to China from Hong Kong of fabricated goods containing United States materials.[Page 1901]
It has been generally agreed by the several interested agencies of the United States Government that it is necessary to maintain an effective control over all exports to China from the United States. Since the Department of Commerce is charged with the responsibility of administering such controls, it is particularly sensitive to Congressional and public criticism of any shipment of materials directly or indirectly to China from the United States. It may be anticipated, therefore, that the Department of Commerce will be concerned over the possibility that any U.S. goods will be transshipped, directly or indirectly, from Hong Kong. It might be further anticipated that the Department of Commerce will tend to reject any proposal, such as that made by the British, which admits of such a possibility.
However, it would appear that the Department of State should be prepared to support the British proposal in the interest of good relations with our chief ally and in the general interest of the United States. Since the British have indicated that they are very concerned about the economic repercussions which would be caused by the drying up of essential imports into Hong Kong from the United States, it would seem necessary for the United States, in the interest of the security of Hong Kong, to take the risk that some small amount of U.S. exports will be transshipped to China or enter into the fabrication of materials which are shipped to China.
Hong Kong is important to both the United States and the United Kingdom since it is a symbol of the strength and the stability of the British Empire throughout all Asia. The loss of Hong Kong would remove one of our most important sources of intelligence in the Far East. Its loss to Communist arms would have a psychological effect not unlike the reverses of the United Nations military forces in North Korea. Its loss to the Communists from internal subversion resulting from economic dislocations known to have been produced by United States export controls would be taken in Asia and probably in Europe as an indication of the dissension among the friendly members of the Free World.
It is recommended that the Department of State take the following steps in order to achieve prompt resolution of the differing views of the United States Government and the Government of the United Kingdom and the Hong Kong Government as to procedures for control of United States exports which can contribute towards meeting the legitimate requirements of the Hong Kong economy without subversion of the United States embargo on exports to Communist China:
- Thorp, Mr. Rusk, Mr. Perkins or one of their Deputies, should make available immediately the British aide-mémoire to appropriate officers of the Commerce Department, who should be notified [Page 1902] that the Department of State accepts, in principle, the view of the British Government that license applications for exports to Hong Kong should be acted upon as it recommends;
- The Department of State should encourage and participate in technical discussions to be held by representatives of the Commerce Department, the British Embassy, and the Government of Hong Kong during which points of detail in the British aide-mémoire should be fully discussed;
- Departmental representatives in such discussions should be prepared to agree to a modification of the British proposals, if requested by the Commerce Department, to the extent of reducing from 75 percent of overall Hong Kong 1949 imports to 60 percent of 1949 exports from the United States to Hong Kong, the volume of exports of non-Positive List goods which would be approved automatically by United States licensing officers;
- Departmental representatives should accept, and should insist that the Department of Commerce accept the assurances provided by the Government of Hong Kong in the aide-mémoire as being the maximum assurances which, in good faith, that Government can give in the present circumstances;
- That the United States Government should reply to the British aide-mémoire, if at all possible, prior to February 15, 1951.
FE and EUR concur in this recommendation. If it meets with your approval as Department policy, we will initiate discussions with the Department of Commerce immediately.4