S/S Files: Lot 63 D 351: NSC 104 Series

Memorandum by the Executive Secretary of the National Security Council ( Lay ) to the National Security Council


Subject: U.S. Policies and Programs in the Economic Field Which May Affect the War Potential of the Soviet Bloc

Reference: NSC 1041

The enclosed copies of an analysis of the “Vulnerability of the Soviet Bloc to Existing and Tightened Western Economic Controls”, prepared in the Department of State (Appendix A),2 and of an analysis of the “Trade of the Free World With the Soviet Bloc”, prepared by the Economic Cooperation Administration (Appendix B), are transmitted herewith for the information of the National Security Council in connection with its consideration of NSC 104 on the subject.

Both the enclosures are referred to in the second paragraph of the letter from the Secretary of State to the President contained in NSC 104.

James S. Lay, Jr.

Appendix B


Report Prepared by the Economic Cooperation Administration

Trade of the Free World With the Soviet Bloc

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summary part ii: china

Because of the difference in the military situation and because of the peculiarities of the Chinese economy, the US has adopted a policy of trade controls towards China which differs substantially from our trade controls towards the European Soviet Bloc. In contrast with our policy of selective controls towards exports to the European Soviet Bloc, we have placed a virtual embargo on all trade (export and import) and financial transactions with China.

Western Europe and the United Kingdom have gone along with us only a short way in this policy, and the raw material producing areas of the world have done little or nothing. The Western industrial world is, however, a major factor in China’s import position and our policy has therefore already had measurable effects on China’s imports.

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In adopting this policy we should recognize clearly that we can do relatively little economic damage to the great Chinese area through general trade controls. China is one of the most self-sufficient areas in the world in the purely technical sense that it imports only a minute part of its aggregate requirements. The real meaning of this technical definition is that China normally has relatively little to sell to the outside world for the purpose of financing needed import supplies, and it therefore follows that it would be difficult to disrupt the internal economy by diverting the import stream. Furthermore, the great resources of China are manpower, animal power and land. The employment of these resources cannot generally be disturbed by the denial of outside supplies.

To the extent, however, that China can be hurt through the blocking of certain imports, she is today vulnerable and, in the event of a formal blockade, would be in a critical position in respect to these important imports. Most of China’s imports are recorded or smuggled through her own, British and Portuguese ports along the coast of the Yellow Sea and the China Sea. Internal Asiastic lines of communication are bad and the goods available along these lines are not the type most needed by China. Furthermore, China obtains most or practically all of its machinery, steel, oil and other items essential to the modern sector of its economy from the US, Canada, Western Europe and Japan, or, as in the case of oil, through supplies controlled by US and British companies. These supplying areas are the ones most responsive to US policy objectives. In the balance of the free world only South Asia and Southeast Asia are important as suppliers to China. While many of the supplies China receives from these areas are “essential” in a technical sense, they could in a pinch be done without.

In examining the vulnerability of China, certain facts stand out clearly:

China normally obtains most of its petroleum products from the non-Soviet Bloc. The British and American oil embargo against China has to date been effective in curtailing China’s oil supplies, but we must recognize that the Chinese economy and even the Chinese military establishment are not greatly dependent upon petroleum products.
A major bottleneck in China is likely to be the railway system particularly if the scene of Asiatic military action should shift to the south. In that event the necessity of moving oil and heavy equipment (particularly from Manchuria) would probably place a serious burden on China’s rail system and, perhaps, an intolerable burden if the coaster traffic were disrupted. Chinese purchasing agents have been aggressively seeking rail supplies throughout the world and, while [Page 1909] Soviet Russia may be in a better position to help in this respect than it can with certain other kinds of capital equipment, China clearly needs as much material for its communications system as it can possibly get.
The technological sector of China, while unimportant in aggregate terms in the area’s massive economy, is important for political and psychological reasons as well as for longer-range economic reasons. Backed by a slim reserve of replacements, spare parts and technical know-how, this sector is heavily dependent upon a sustained inflow of new equipment. Worthy of note in this connection is the fact that selective export controls against the Chinese technological sector are less meaningful than the same selective type of controls against the Soviet Bloc in Europe because of the wide range and general character of the machinery required by China. As normally the largest supplier of this equipment to China, our unilateral embargo has become effective, but shipments from other industrial areas of the free world appear to be moving towards postwar peak levels.
Rubber and cotton: These items are usually rated as “essential” in any analysis of China’s import program. China has, however, recently made such abnormally large purchases of crude rubber that it can probably continue for a long time without additional supplies and, in any event, crude rubber can be done without in China, assuming that tires continue to come from outside sources. Cotton imports are important primarily in their essentiality in keeping the country’s big textile industry in operation. This commodity can, however, be procured from so many sources throughout the world that we would have to embark on a major political and economic program if we seriously attempted to seal China off from the cotton production of the world.

The US and Western Europe, although accounting for a large part of China’s total exports, are not critically dependent upon China for supplies. Lists of “essential” items which we receive from China are “essential” to us only in the sense that the Chinese product will do a better job than a satisfactory substitute. Tungsten is the major exception to this rule, and it would be highly important to us if Chinese supplies should continue to arrive.

In over-all economic terms our trade policies of today are not costing China a great deal. In this report we have made a rough guess that the cost to China of obtaining substitute material and the cost in terms of resources rendered idle by our embargo might be of the magnitude of $75 million a year. A part of this cost stems from the fact that certain by-products of the Chinese farming operation, such as duck feathers, lose some or most of their value in the absence of an American market. In judging the aggregate economic cost to China we must bear in mind that, because of the nature of our embargo, the cost is spread thinly over a major part of the population. About the [Page 1910] best that can be said for our policy in striking an Economic balance is that the free world, and the US in particular, do not suffer in a measurable sense.

The one major geographic exception to this general rule of invulnerability of the non-Communist world to an embargo on China is Japan. We have made an estimate that, because of the loss of Chinese sources for vital imports (primarily soy beans, coking coal and iron ore) the economic cost to Japan of obtaining alternative supplies will run about $10 million per annum. These alternative supplies must, however, come primarily from the US and, unless Japan’s normal exports to China can be diverted to this country with the possible aid of a liberalization of our trade policy, the cost to Japan of the loss of Chinese supplies may be several times greater than the calculated incremental cost of substituted imports. The realignment of Japan’s trade relations is a problem of the first magnitude.

In the final analysis, however, the real criteria for judging the balance of advantages and disadvantages in our trade war on China are not economic. They are military, psychological and, above all, political. Because of the way the Chinese army fights, we should not be too optimistic about the military effects of our policy, but if China plans to become aggressive in more than one spot around its periphery, its complicated transportation and oil problem will have to be taken into account. Politically it is also important that we have in effect announced to the free world and to the Chinese people that we are imposing a quarantine against them in their contact with a large part of the modern technological world. Since the effects of this announcement are not economic, they have not been analyzed in this report.

Because our operations against the Chinese have gone so far, we have wound up the Chinese section of this report with a set of six specific recommendations as follows:

In considering the wisdom of pressing for general economic sanctions against China throughout the free world, we should weigh carefully the advantages and disadvantages of pressing for a wide range of global controls on trade items for China which have little or no economic, political or military meaning. Emphasis on a few trade categories would probably yield better results in our negotiations with other friendly governments.
We should continue the oil embargo with added pressure on the companies to investigate any questionable f.o.b. sales.
We should make a serious attempt to seal off China from supplies needed for railroad maintenance and construction. It would also be desirable, if the political costs are not too great, to gain the cooperation of other nations in a position to supply China with machinery, capital equipment and steel mill products.
How to handle cotton is obscure but the advantage to us of a curtailment of supplies to China is probably not sufficient to justify a major political effort to insulate China from the cotton supplies of [Page 1911] the world. A better solution would be possible if there were a system of global allocations of cotton in which the inducements offered to the cotton-producing areas would consist partly of access to other needed materials rather than political or financial offers.
The blocking of dollar assets and the general program of stopping financial transactions in which Red China has an interest should be continued. One important exception to this policy might be our willingness to release blocked dollars to permit tungsten imports.
Since China’s trade is so vulnerable to the disruption of its sea communications, careful consideration should be given to an informal merchant shipping embargo of Chinese ports by ships flying the flags of free countries. Much might be accomplished through intensified negotiations among the free maritime governments, who always maintain close policy contact with their shipowners, and it is also important that the US Government is in a good position to invoke sanctions against recalcitrant foreign shipowners.

In setting forth these recommendations, which would make the situation of China somewhat more difficult, we have not attempted to estimate the priority for our negotiating a full economic quarantine with other friendly nations. The military-economic effect of successful negotiations with respect to China would not be large. It is far more important from a military-economic point of view to tighten controls against Eastern Europe than against China. Furthermore, the wisdom of embarking upon negotiations of this kind is a question that should be carefully weighed in any broad analysis and goes beyond purely economic considerations.

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  1. Supra.
  2. Not printed here. For text, see vol. i, p. 1035.