The Secretary of State to the Secretary of Commerce ( Sawyer )1
My Dear Mr. Secretary: Since early December when our embargo for Communist China was instituted, the British Government has been asking us to remedy the seriously damaging effects upon the internal situation at Hong Kong which were being produced by our China trade policy. These approaches, most of which were dealt with where possible on an ad hoc relief basis, were climaxed on February 1 when the British Embassy, accompanied by the Director of Trade and Industry of the Government of Hong Kong who came to Washington specifically for this purpose, left with us an Aide-Mémoire the terms [Page 1938] of which are known to representatives of your Department (Enclosure 1).2
On March 5 and March 15 the British Embassy again made representations to the Department for an answer to the Aide-Mémoire and I feel obliged to ask for your urgent consideration of and concurrence in our draft reply (Enclosure 2).3
The British Aide-Mémoire of February 1 recommended a method whereby Hong Kong’s needs for imports from the United States could be met without danger that the effectiveness of the United States embargo on exports for Communist China would be significantly impaired. In brief, their proposal consisted of three parts.
- Hong Kong Government Guarantees: The Government of Hong Kong has offered guarantees that the United States goods will not be transshipped to Communist China, before or after fabrication. Although some possibility of leakage would exist, these guarantees are the most that the Government of Hong Kong can offer, in good faith, within their capability to administer.
- Positive List Items: Recognizing the importance to us of absolute denial of strategic goods of United States origin to Communist China, the British acquiesce in a procedure whereby all United States exports to Hong Kong of goods which qualify for our Positive List should be subjected to case by case handling pending evolution of more satisfactory arrangements, e.g. agreement upon the precise conditions for prompt licensing within established programs of Positive List items most essential for the Hong Kong economy.
- Non-Positive Items: The British have suffered the paralyzing impact on normal commercial relationships between Hong Kong and the United States of item by item handling of all United States exports to Hong Kong. The British recommend that the Commerce Department automatically grant licenses for the export of non-Positive List items up to a volume of 75% of the volume—category by category—of 1949 United States exports to Hong Kong. British authorities believe that 75% represents the volume of imports which was consumed locally at Hong Kong or transhipped to other than Communist Far Eastern destinations.
We recognize as do the British that this modus operandi would entail risk of some marginal transshipment of non-strategic goods of United States origin to Communist China. Neither we nor they believe that the leakage would be large or strategically significant. Against the risk of that leakage are set far greater risks to the internal security and safety of Hong Kong to which the British and the free world generally must under present circumstances attach importance.
We believe that we should recognize in our policy the British contention that continuation of the present United States export restrictions [Page 1939] will result shortly in shutdown of industrial plant at Hong Kong, Communist exploitation of the mass of unemployed and spreading dislocation in the internal economy. We believe that Hong Kong finds itself in a precarious security position and that its loss, if it occurs, will come about as a result of military pressure in combination with internal subversion. For Hong Kong to be lost or to be placed in serious jeopardy in such a way that the United States would be held partly responsible by the official and business community in Great Britain and at Hong Kong would have serious divisive effects upon United States-United Kingdom relations not only with respect to Asia but also within the NATO structure. It would furthermore raise grave doubts in the minds of some of our other allies as to the maturity and sense of responsibility of United States leadership in this period of mounting world tensions. Such a spectacle, we believe, would lower the prestige of the free world in Asia and that of the United States throughout the free world. It would provide at the same time a rich harvest for Communist propagandists.
Of even greater importance is the direct interest of the United States in minimizing the risk that its policy towards Hong Kong will offer pretext to the Chinese Communists to launch offensive operations against Hong Kong, thereby presenting the necessity of a military decision to accept or ignore another challenge to the military position of the Western World in Asia. We feel, further, that if Hong Kong is lost or if conditions of serious unrest within the Colony develop, the United States would lose, not only its most fruitful remaining source of intelligence on the operations and intentions of the Chinese Communist regime but also a point of contact with mainland China, the exploitation of which, by ourselves or our allies, may contribute to the pursuit of our objectives.
We recognize that drastic treatment of the British at Hong Kong may eliminate some risks of leakage of American goods to Communist China, but to accomplish this at the political, psychological and military cost here suggested would show a lack of proportion and perspective in balancing and coordinating our foreign policy objectives.
These considerations have been discussed with representatives of the Commerce and Defense Departments most recently in connection with the National Security Council study of the State Department’s “Report to the President on U.S. Policies and Programs in the Economic Field which may Affect the War Potential of the Soviet Bloc.” Throughout working level discussions of the problem, one basic issue appears to divide the Department of State from the Departments of Commerce and Defense:
The controls imposed by the Government of Hong Kong represent [Page 1940] a more comprehensive effort to support United States export controls for China than is being undertaken by any other governmental authority excepting only Japan. The Government of Hong Kong applies an embargo on shipments to Communist China of petroleum, all items on International List I, all munitions, and a range of short supply items which are on the United States Positive List, but not on International List I; it has instituted procedures for policing trade in these items and in other items in which the United States Government has or will ask that they take an interest. It is true nevertheless that acceptance of the British proposal carries some risk that exports of United States goods to Hong Kong might result in the substitution of similar or identical non-American goods in the trade of the Colony with Communist China. For this possibility to be eliminated would require the imposition at Hong Kong of controls identical in scope and severity with those being applied by the United States. The Department of State takes the stand, hitherto unacceptable to your Department, that for foreign policy reasons we should not discriminate against Hong Kong unless and until we are prepared to insist that other friendly countries impose an embargo parallel to our own on all exports to China and severely penalize them if they do not do so. I need hardly add that in the interests of obtaining the continued cooperation of friendly countries in the broadest possible area of our relations with them, this Department is opposed to any such course of action under existing circumstances.
Our export controls for Communist China constitute an important technique for accomplishing the objectives of the United States in Asia and it goes without saying that we desire the cooperation of friendly countries in supporting our policy and program. However, where voluntary cooperation is not offered, we should resort to compulsion or punishment for non-cooperation only where it serves to guard against serious threats to vital United States foreign policy interests and objectives. We do not believe that trade leakages to Communist China through Hong Kong justify the damage to United States–United Kingdom amity which would result from an attempt to compel the cooperation necessary to eliminate it completely.
You will note in the annexed draft reply to the British Aide-Mémoire that we are not proposing that the British recommendations be accepted in full. So far as Positive List exports to Hong Kong are concerned, we indicate that the Commerce Department should handle each license application on a case by case basis and should feel free to require very full reports as to the end-use of exports of United States origin, but should not use its inquiries as a means to apply pressure to obtain controls, not already applied at Hong Kong, over movements [Page 1941] of commodities of a like kind from non-United States sources. So far as non-Positive List exports are concerned we are suggesting that the Commerce Department license automatically at a rate of 60% of the 1949 volume of United States exports to Hong Kong whereas the British suggested 75%. Further, we are warning the British that the operation of this formula should be kept under continuous review.
I am aware that our general policy on exports for Hong Kong is related to action by the National Security Council on the “Report to the President on U.S. Policies and Programs in the Economic Field which may Affect the War Potential of the Soviet Bloc.” I am writing this letter in the hope that your concurrence in the annexed draft Aide-Mémoire may make possible a prompt reply to the British Government and also will serve to clarify the details of the general issues upon which the National Security Council, in due course, will wish to act.
I am addressing a letter on this subject to Secretary Marshall asking for his concurrence as well as yours in our draft reply to the British Aide-Mémoire. In view of the urgency of the situation developing in Hong Kong, an early reply would be deeply appreciated.