Foreign Relations of the United States, 1952–1954, General: Economic and Political Matters, Volume I, Part 2

S/S–NSC files, lot 63 D 351, NSC 104 Series

Memorandum by the Secretary of State and the Director of Mutual Security (Harriman) to the Executive Secretary of the National Security Council (Lay)1

secret

Washington, April 23, 1952.

Subject:
Fourth Progress Report on NSC 104/2 “United States Policies and Programs in the Economic Field Which May Affect the War Potential of the Soviet Bloc”2

NSC 104/2 was approved as Governmental policy on April 12, 1951. In approving NSC 104/2 the President directed its implementation by all appropriate departments and agencies of the United States Government under the coordination of the Secretary of State. By memorandum dated November 6, 1951 to the Executive Secretary of the NSC concerning the assignment of responsibilities for economic defense,* the President directed the Secretary of State [Page 835] to continue to carry out his responsibilities under NSC 104/2 except as modified by the provisions of the Mutual Defense Assistance Control Act. He further directed the Secretary of State, in carrying out his responsibilities under NSC 104/2, and the Director of Mutual Security, in executing his responsibilities under the Mutual Defense Assistance Control Act, to establish and maintain arrangements which would assure the effective accomplishment of their respective duties. These arrangements were established by memorandum of agreement dated January 23, 1952 between the Secretary of State and the Administrator of the Mutual Defense Assistance Control Act.‡

This progress report is submitted jointly in accordance with these arrangements. It is requested that this report (covering the period from November 15, 1951 to March 1, 1952) be circulated to the members of the Council for their information.

General

There are numerous indications that the denial of commodities covered by the export control program of the Free World is affecting the European Soviet Bloc adversely. Dislocations in certain Soviet Bloc production programs can be partially attributed to the Western control effort. Intensified Soviet propaganda efforts, reaching a climax in the Moscow Economic Conference, April 3–10, to stimulate and expand East–West trade in a manner favorable to the Bloc’s interests are significant as an indication of the impact of the controls.

More importantly, these propaganda efforts are concentrated on driving a wedge between the United States and Western Europe. They are calculated to derive the greatest possible advantage out of the increased sacrifices required by the expanded defense program, as well as from Western European resentment over the Battle Act. These efforts have not been without success judging from recent reports from the field.

Despite the success of economic defense measures taken to date, several of them and certain aspects of economic defense policies require further examination. Some of these are discussed individually and in considerable detail below. Others requiring study but which have been under less active consideration include limited pre-emptive operations; the further coordination of controls adopted for short supply reasons and for strategic reasons; and increasing the bargaining strength of Western Europe in its trade negotiations with countries in the Soviet Bloc through the development of long [Page 836] term plans for alternative sources of supply and markets and through coordinating the bargaining efforts of the Western European countries.

A decision has been made regarding the organizational aspects of the economic defense program within the United States Government. By memorandum of agreement dated January 23, 1952 between the Secretary of State and the Administrator of the Battle Act, it was provided that the Mutual Trade Security Advisory Committee, established November 1, 1951 to advise the Administrator on Battle Act matters, should be utilized by the Secretary of State in carrying out his coordinating and consulting responsibilities under NSC 104/2. This arrangement is working well.

Battle Act

Since October, 1951 the economic defense activities of the United States Government have been heavily concentrated on problems directly related to the implementation of the Battle Act. At the suggestion of the Western European countries, a meeting of the Consultative Group was held in January to consider some of the problems. One of the primary United States objectives in the discussions was to ensure that other countries consult with us before undertaking commitments to ship embargo items (Battle Act, Title I, Category B). This was accomplished. The Group agreed to prior COCOM consultation not only on all International List I items, but also on proposed shipments of aluminum, heavy rails, general service locomotives and automatic signal equipment (the only International List II items included in Title I, Category B), but would not agree to placing these items on the International Embargo List.

No country agreed to the United States suggestion for a temporary suspension after January 24 of shipments of Category B items on which prior commitments had been made. Action of the Consultative Group on this proposal was limited to agreement to furnish COCOM with particulars of outstanding commitments on these items. The most numerous commitment problems will be with the United Kingdom, France, Germany and Italy. Arrangements have been made to obtain adequate information on which to judge these prior commitments on a case-by-case basis. Most of the countries have whole-heartedly entered into bilateral discussions with the United States country teams to amplify this information.

While the United States did not achieve its entire objective at the meeting, an improvement in relationships resulted from reassurances that the United States does not intend to undercut COCOM. As a result of the meeting also, the other participating countries were given a better understanding of the legislative requirements [Page 837] making necessary certain United States actions which previously had been misinterpreted.

The improved relationships which resulted from the meeting appear, however, to have been weakened subsequently by the United States statement late in January reserving its position with respect to the results of the review in COCOM of items on International List II.3 The statement pointed out inter alia that the Battle Act Administrator had not had the opportunity to review the Committee’s recommendations, and that in licensing exports to any country the United States retained the right to decide whether such exports would defeat the purposes of United States security controls. The statement, which was received initially without comment, later drew severe criticism, both for its tone and substance, and was characterized as paternal and authoritarian. The underlying NSC policy, NSC 91/14 as modified by 104/2, which relates to this problem is currently under inter-agency review in the light of the Battle Act and other developments since its adoption.

The most urgent problems under the Battle Act involve the need to consider whether exceptions should be granted for particular shipments of International List I commodities to the Soviet Bloc by Western European countries. Many such shipments result from commitments made prior to the inclusion of the items on embargo lists. Such shipments would be approved under COCOM principles. The inventory of outstanding commitments by COCOM countries to ship such items is now well under way.

Some cases, such as the commitment by the Netherlands to export oil well equipment to Poland, raise special problems. In addition, proposed new commitments for delivery of International List I items, such as the delivery of a tanker to Poland by Denmark, raise problems in terms of developing possible alternatives to completion of the transactions. In the latter case, the United States has made an offer to replace Polish coal and to meet the net dollar cost involved, estimated at from $16 to $18 million. This estimate was based on the assumption that no additional coal could be obtained from the United Kingdom and Western Germany. It now appears that extra coal receipts from these two sources are more likely.

Communist China

In the face of the general reluctance of other nations to adopt measures going beyond the General Assembly strategic embargo [Page 838] Resolution of May 18, 19515 while the Korean armistice negotiations are under way, the United States did not advance proposals in the Sixth Session of the General Assembly or in the Additional Measures Committee for additional controls against Communist China. The Department of State is reexamining the desirability of again opening AMC discussions with the aim of further implementing the May 18 Resolution through ancillary controls. This assumes a continued stalemate in the armistice negotiations. A further deterioration of the situation would indicate urgent and more severe economic sanctions.

Meanwhile COCOM consideration of the United Kingdom proposal to institute a China embargo list established that all participating countries had placed or were placing the whole of International Lists I and II under embargo for China. Discussions are continuing with regard to extending the embargo to include International List III and certain other items included in the United Kingdom proposal.

United States Import and Financial Controls

The Treasury Department has, after consultation with the Department of State, ruled that the prohibitions of the Foreign Assets Control Regulations apply to Tibet and the nationals thereof.

Considerable effort has been devoted by Treasury, with satisfactory results, to policing transactions through third countries where there is disguised Communist Chinese interest.

An extensive investigation of the Communist Chinese extortion racket involving remittances by Chinese residents of the United States for the protection of relatives in China was undertaken in the period under review. While it is not possible to cite an accurate estimate of the total dollars involved, this problem is not expected to be serious in the future, as the Chinese community in the United States has been made aware of the Treasury regulations.

(See sections on Shipping, Hong Kong, and Transit Trade and Transshipments for additional developments and problems affecting Communist China.)

Japanese Export Controls

SCAP has already turned over to the Japanese the responsibility for controlling less strategic exports. When the responsibility for controlling items on the United States security lists is relinquished to the Japanese (tentatively, March 17) they will operate the entire export control system. SCAP will, however, post-audit all export licenses covering security items for a limited time. The Japanese Government will be responsible for end use checking on these [Page 839] items through its Overseas Agencies where they have been established or through United States Missions. It is expected that Import Certificates and Delivery Verifications will be obtained for certain International List I and II shipments to COCOM countries. Japan will in turn issue such certificates covering imports from those countries.

In order to ensure that Japanese export policy is not altered substantively as a result of Japanese assumption of control, the Japanese Government has been advised of our understanding that Japan will maintain controls as close as possible to those now being applied as long as there is Communist aggression in the Far East.

It is recognized, however, that maintaining controls after the cessation of the Korean hostilities is a long run problem necessitating serious consideration. There are growing internal and external pressures on the Japanese authorities to resume trade with China. These pressures are expected to increase after the Peace Treaty becomes effective, and particularly after an armistice in Korea, if agreement can be reached. In view of this, the United States is proposing multilateral discussions to consider the desirability of establishing some kind of organizational arrangement to assist in determining and carrying our mutual security objectives in the Far East in the post-aggression period. We have suggested that the United States and Japan meet initially with the United Kingdom, France and Canada, and possibly with others having a major interest in trade with Far Eastern Communist areas to discuss the post-aggression trade security problems.

Hong Kong

NSC 1226 providing for anew United States licensing policy for Hong Kong (and Macao) was approved on February 7. It provides generally that items on the United States security lists may be supplied to Hong Kong for local consumption or transshipment to non-Soviet bloc destinations as long as the Hong Kong Government imposes an embargo on these or identical items to Communist China, North Korea and the Soviet Far East.

Depending on the extent and effectiveness of Hong Kong controls, United States licenses can be approved for minimum short term essential requirements and legitimate transshipments. No exports are allowed for stockpiling, important industrial expansion or other questionable security risks. Short supply positive list items may be approved to meet minimum essential short term requirements. [Page 840] Residual items may be licensed for short term requirements or legitimate transshipment.

This policy is undeniably a strict one, but it is made necessary because of Hong Kong’s position as a transit point for trade with China. It is considered by the United States Government to be flexible enough to permit exports for the maintenance of the Hong Kong economy, notwithstanding that Hong Kong may be continuing some trade with China in goods of low strategic significance.

Germany

Progress continues to be made by the German Federal Government in developing and improving the structure and operation of the German export control system. This progress is attested to by reports from the Office of the United States High Commissioner for Germany, from the United States Technical Mission which completed its assignment as consultant to the Federal Republic on security export controls on December 1, 1951, and from a Senate investigator who was in Germany recently.

Despite this progress and a serious intent on the part of the German Government to solve the remaining important problems, real opportunities still exist for the shipment of strategic commodities out of Germany in violation or evasion of export controls. Although there is no way to estimate reliably the volume of illegal trade, most intelligence indicates a considerable reduction in the total quantity of such trade in the last nine months. This can be attributed in part to the virtual stoppage of interzonal trade.

Administrative action on an interim basis by the High Commissioner’s office against German firms suspected of engaging in illegal transactions is continuing. The Federal Government, however, has not yet established an effective system for prosecuting or taking final administrative action against such firms on the basis of its own investigations. This problem is being pursued with the Federal Government at the highest level.

The system of end use checking thus far established by the Federal Government, in particular as regards non-COCOM countries, is not yet satisfactory. The Import Certificate and Delivery Verification (ICDV) system has been in use by the Germans since June 1951 for checking exports to COCOM countries, although as yet to an insufficient extent.

Efforts are also under way to make further progress with the difficult Berlin control problems, where there is still considerable room for improvement in the direction of an effective export control system.

(See p. 10 for brief discussion of the transit trade and customs problems.)

[Page 841]

Controls Over Transit Trade and Transshipments

Import Certificate and Delivery Verification (ICDV) System

On February 24, 1952, the Department of Commerce announced the implementation by the United States Government of the requirement that exports of certain strategic commodities to COCOM countries be covered in all cases by import certificates and, upon the request of OIT in special cases, by delivery verifications.

COCOM agreed upon this system in May, 1951. On July 19 Commerce announced the phase of the system whereby United States importers could provide the official assurances required by their Western European exporters’ governments. Other COCOM countries had implemented the full procedure by that date, and have actually been requesting as well as issuing ICDV’s since then.

Our delegation in COCOM feels that the seven months delay in installing the complete ICDV system has placed the United States in a difficult position, on which other delegations may capitalize in the future in resisting measures proposed by us. This has been one of the few cases where a COCOM agreement necessitated new measures by the United States. Internal administrative difficulties that caused the delay have often been considered by the United States inadequate reason for other participating countries’ unwillingness to take steps urged by us.

The effectiveness of the ICDV system in reducing diversions is largely dependent on the extent to which certifications are requested. Accordingly, the United States has requested COCOM reaction to making exports of all International List I goods dependent on the receipt of import certificates.

Macao

Shipments through Macao to Communist China have constituted a serious leak in the international control system. The Portuguese Government announced early in February that it was about to implement the ICDV system in Macao, Goa and all other Portuguese overseas territories. Application of this system to Macao provides means for reducing the possibility of illegal shipments reaching Communist China. The effectiveness of this measure will depend on the integrity and ability of the administering authorities.

In addition the Macao Government introduced legislation on January 23 prohibiting the export of strategic materials to Communist China. It is noted that our Consulate General in Hong Kong views this measure, coming as it does after a long period of resistance to controls and apparent indifference to the colony being used as a smuggling base, as an indication merely that the Chinese withdrawal from buying in Macao last November was intended to be permanent. This appraisal should be tempered by recognition that [Page 842] the Macao Government was acting in response to United States persuasive efforts culminating in the Battle Act. In addition, the many reports that the Chinese Communists consider the Macao prohibitions as provocative indicate that they may be of some value in hampering Communist Chinese trading activities in the colony.

Finally, the revised United States licensing policy for Hong Kong and Macao, approved February 7, provides that security and short supply items may be approved for Macao only when they are for the fulfillment of minimum short term local requirements, and are supported by formal request of the Portuguese Government documented by a statement of requirements and supported by an investigation of end use. The United States will regard shipments of security and short supply items from Hong Kong to Macao as shipments to Communist China unless they are determined as necessary to meet minimum essential short term consumption requirements in Macao.

Free Port Problem

Numerous reports have been received on the transshipment to the Soviet bloc of Chilean copper, and a few reports on Mexican copper, consigned to Western Europe. Some of the reports on diversions or attempted diversions have been verified. Our Embassies in Santiago and Mexico City report that the local governments exert little effort to ensure against these diversions. The Chilean Government has made little use of the end use checking service offered by the United States.

The majority of these reported transshipments involve the free port of Antwerp. To plug these and other free port leaks the United States has strongly supported in COCOM the adoption of transshipment licensing, but no coordinated arrangement has been agreed. Action is expected in the near future on the pending United States proposal (see last Progress Report)‡ for a selective extension of the ICDV system to Latin America. Approval is anticipated, after which the United States will request immediate implementation by the Latin American Governments.

All COCOM countries except France, Belgium and the Netherlands have instituted physical controls over transit shipments. The United States has recently been informed confidentially that the latter two Governments have worked out some plan for instituting such controls which is awaiting high level approval.

The German Government has made some progress in the troublesome free port of Hamburg, but much ground remains to be covered [Page 843] in the task of training customs officials and indoctrinating them with the proper attitude of vigilance. The progress is reflected in the German claim of proper control over reconsignments within the free port of strategic goods originating in COCOM countries. The High Commission is investigating the extent to which this control is in fact enforced.

Shipping

Little progress was made in the field of shipping controls during the period under review. Several major problems have come into fairly sharp focus, however, in the time since NSC 104/2 was approved. The nature of these problems, discussed in some detail in Appendix I, points to a need for re-examination of our policies in the shipping field. In summary, these problems may be stated as:

1.: lack of coordinated intelligence;
2.: complications arising from the Korean war;
3.: circumvention of existing shipping controls; and
4.: the legal aspects of the controls.

(See Appendix I)

Research and Intelligence Backstopping for Economic Defense Activities7

As experience has been acquired in economic defense work, it has become increasingly evident that a major weakness in the United States effort is the general inadequacy of intelligence-research pertaining to East-West economic relations, particularly in what can be termed basic research of fact finding. Three major economic areas require continuing research in connection with the development and support of the United States security control effort: trade, finance, and shipping. In addition, the continuing evaluation of Soviet bloc vulnerabilities is essential. These aspects of research and intelligence for economic defense are discussed in Appendix II.

The deficiencies in this field are attributable to a combination of factors, including scarcity of trained personnel, sometimes ineffective organization of personnel engaged in this field, inadequate coordination of the efforts of various agencies, and the low priorities accorded economic defense assignments among the multiple demands on small general economic research staffs. Steps are being taken to centralize a small group of analysts within the research area of the Department of State to work exclusively on economic defense problems, particularly trade, as one measure towards meeting [Page 844] the most urgent needs in this field. This group will be heavily dependent on the basic intelligence and research efforts of other areas engaged in this work.

A significant step has also been taken to improve the factual basis for analysis, by centralizing the compilation of statistics on East-West trade. In the past, statistical work has been undertaken by various agencies, with little coordination and incomplete exchange of data. An inter-agency working group has now completed a project outline to be used as a guide for the Department of Commerce in initiating and maintaining the compilation of extensive East-West trade statistics on a regular basis for all interested agencies.

Decreasing Reliance on Trade With the Soviet Bloc

In addition to the studies which the Economic Cooperation Administration had submitted on the three most important commodities in East-West trade (coal, lumber and grains), the papers on machinery, vehicles and transportation equipment, prime movers, merchant ship building, pulp and paper, and potash have been completed by the Mutual Security Agency. These have been circulated among the agencies concerned, and recommendations and comments are being forwarded for final revision. Additional papers are being developed on tin, tungsten, manganese, bearings and fish. This series of studies should provide the factual basis for further work directed towards developing action programs to strengthen the bargaining position of friendly nations vis-à-vis the Soviet bloc and to lessen their vulnerability to a sudden complete or partial cessation of imports from the bloc.

The general study entitled “Trade with the Soviet Bloc: Current Problems and Policies” has been completed and circulated. Extensive comments were received, and it is now in the process of final revision. This paper contains a general survey of the problems of East-West trade and an evaluation of the dollar costs of the cessation of such trade. Consideration has been given to the importance of certain imports to Western Europe and the possibilities of locating alternative sources of supply and of developing new markets in the free world for Western European exports now sold in the Soviet bloc.

Another paper has been developed by the Mutual Security Agency surveying Western European coal needs and the possibility of alleviating attendant East-West trade problems by examining coal replacement possibilities in the programming of Mutual Security funds. Since shipping and supply problems are no longer of major importance, increased attention is being given to the financing problem so as to alleviate the crises which develop as the [Page 845] Soviet bloc countries demand increasing amounts of strategic goods for shipments of coal.

A survey of the present and future bearings requirements of Western Europe has been made, including the potentialities and capabilities of those Western European plants most heavily involved in East-West trade in bearings. Preliminary indications are that in view of the present bearing vacuum in NATO countries and of future defense requirements, those firms which have been previously unable to enter Western markets because of their cost structure and the lack of sufficient demand might now redirect most exports to that area.

International Black List

The establishment of an International Black List is still an unresolved issue in COCOM. The Netherlands Government has reserved its position on the entire Black List question, unless all participating countries, notably the United States, agree (1) to previous consultation with the government of the offender before instituting administrative proceedings against that individual, and (2) to limit the withholding of exports of Munitions List and International List I and II items, except in the case of the country whose controls have been violated, which is free to take whatever action is considered necessary. All COCOM delegations have agreed in principle to the Dutch proposal, except the United States, which has concurred in the latter point only. We have agreed, however, to provide advance notice of temporary suspensions through United States Missions to the firms involved and to the foreign government, with an invitation to submit whatever information it considers pertinent. Such advance notice would also be given when compliance proceedings result in final withholding of export privileges. Our delegation has recently reported that it will endeavor bilaterally to obtain Netherlands acceptance of the United States position.

We have agreed to the Belgian proposal that it would also be desirable to establish a Grey List of suspected violators of controls to whom shipment of strategic items should be carefully checked.

United Nations Collective Measures Committee (CMC)

On January 12, 1952 the UN General Assembly adopted a resolution noting the first report of the CMC and continuing the CMC for a second year. This report is a considerable accomplishment in terms of a statement of principles and methods relating to international cooperation against a future aggressor.

As it did last year, the United States expects to take a leading role in carrying forward the work of the CMC.

In the field of economic and financial measures (Chapter 3 of the CMC report) the preliminary decision has been made that further [Page 846] study should be given in the CMC primarily to (1) a survey by member states of the adequacy of their legislation to permit full and prompt support of UN action against aggression; (2) the formulation of a basic initial list of items which in every case of aggression would be immediately embargoed; and (3) legal and constitutional factors affecting the ability of UN bodies, mainly specialized agencies, to assist in a collective measures program. In addition, the advisability of promoting CMC study of multilateral conventions which might inhibit prompt and effective action by states is under consideration in the Department of State.