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 152 Series

Report to the National Security Council by the Secretary of State and the Director of Foreign Operations (Stassen)¹

secret

Washington, August 30, 1954.

First Progress Report on “United States Policy on Economic Defense,” NSC 152/3²

preface

Prime Minister Churchill’s dramatic Parliamentary statement on February 25, 1954,³ stressing the value of healthy trade with the USSR and calling for a substantial relaxation of East-West trade controls, brought sharply into focus the conflicting views of participating countries concerning the nature and scope of a multilateral control program for the long pull ahead. These conflicting views and the pressures behind them account to a large extent for certain delays in implementing NSC 152/3.

Much time and effort were consumed within the United States Government, developing the United States machinery for implementation, seeking inter-agency agreement on United States positions, revising the attributes and standards for judging commodities and making a United States review of all commodity ratings. But even from the beginning, while all this reappraisal and reorganization was going on, it was apparent that a prime problem for the United States in implementing NSC 152/3 was to prevent the multilateral control effort from being relaxed too far.

The wide divergence in viewpoint between the United States and the United Kingdom, supported by strong public sentiment on either side, obviously could be damaging to Anglo-American relations and to the NATO coalition. The fact that continental views generally tended to correspond more closely with those of the United Kingdom than of the United States added to the difficulty of obtaining multilateral acceptance of the views of the United States in the economic defense field.

The pressure abroad for relaxation arises in large part from an increased interest in expanding exports, particularly in view of the revival of Germany and Japan in international trade, the emergence generally of a buyer’s market, plans for currency convertibility, the anticipated further reduction in United States aid programs in Europe, and the growing conviction that United States trade barriers to increased imports probably will not be substantially lowered in the near future. Domestic pressures in Western Europe for these countries to share in any increased trade with the Soviet bloc have become awkward to resist at governmental levels. Underlying these commercial interests is a deep-seated desire among the Western Europeans for a relaxation of present political tensions and a reluctance to be a party to any action which might appear to place obstacles in the way of this political relaxation. These pressures are further stimulated by the Soviet propaganda “peace offensive”, the appearance over the last half of 1953 of an increased Soviet interest in imports of some consumer goods, and the intimation of limitless markets in the east for a wide range of export items. Also, concern over the state of the United States economy and uncertainty regarding future United States economic foreign policy have affected the attitudes of western countries toward the question of East-West trade.

revision of united states economic defense policies

NSC 152/3 revised and superseded the policies which had been in effect in the economic defense field since April 12, 1951 and which needed to be reviewed in the light of changed circumstances since that time.

The change from the previous policy is principally one of emphasis. More account is to be taken of economic and political impacts of strategic trade controls and conditions in participating countries. At the same time we are pressing for better enforcement of agreed controls. We are concentrating on commodities and services of major importance to the Soviet war potential and will not press for control of items of marginal strategic significance.

The policy assumes that we are faced with a long period of tension short of war, and that, regardless of gestures made by the Soviet bloc, the motives of the Communist countries are to be viewed with suspicion and skepticism. It is recognized, however, that the free world may derive some advantage from some East-West trade during this period of tension and watchfulness. Accordingly, the new policy restates United States approval of non-strategic trade between the free world and the Soviet bloc, but takes cognizance of the risks of excessive dependence of free world countries on Soviet markets for non-strategic goods and on Soviet sources of supply for essential commodities. Finally, the policy calls for maintenance of the present levels of controls on transactions with Communist China and North Korea, pending a political settlement in Korea and a review of basic policies toward Communist China and North Korea.

A program to implement the revised policy was formulated in the EDAC Executive Committee in September 1953. The major elements in the program include review and revision of the existing security criteria and of the United States and International Control Lists; review and, where appropriate, revision of United States and international measures for enforcement and implementation of controls; and further review and implementation of the decreasing reliance program. Other elements of the program include seeking further cooperation from countries not participating in the CG/COCOM/CHINCOM, increased emphasis upon public relations and education relating to economic defense, both within the United States and abroad, continuing study of Soviet trade tactics and related information on trends and terms of East-West trade, and various organizational realignments within the inter-agency committee structure of the economic defense community.

United States Export Licensing Policy

As to the security export licensing policies of the United States itself, NSC 152/3 provides for some liberalization towards the European Soviet bloc, with due regard to pace and timing and with the aim of furthering certain economic defense objectives, such as decreasing the political and economic unity of the bloc (paragraph 19e of NSC 152/3). Within the framework of this policy, the Department of Commerce, in issuing its 25th and 26th quarterly reports to Congress on Export Control, highlighted the following: that it is, and has been for several years, the United States policy to approve the export of non-strategic goods to the Soviet bloc in Europe, except for transactions which would adversely affect the security interest of the free world. (Considerations of quantity and other special circumstances of particular transactions would determine how the security interest might be affected.)

As regards United States security export licensing policies and practices under NSC 152/3, the period under review may be characterized essentially as one of watchful waiting accompanied by a degree of uncertainty as to how best to exploit Soviet trade tactics and related developments within the bloc.

During the same period of time, the Randall Commission published its report, and, in the majority recommendations on East-West trade policy, suggested that the United States acquiesce in more trade in peaceful goods between Western Europe and the Soviet bloc.

It was also during this same general period that wide publicity occurred concerning proposals to sell to European Soviet bloc countries large quantities of surplus butter and cottonseed oil from United States Government stocks at world prices. The reaction from the consuming public in the United States to the proposed sale of butter to the bloc at a price below that paid by the American housewife was prompt and vigorous in opposition, judging from the correspondence received in the Executive and Legislative branches. Upon cabinet-level consideration, it was decided on February 10 “to deny commercial export license applications for the export for cash of United States Government-owned surplus agricultural or vegetable fiber products to Russia or her satellites”.

After consideration of the security aspects of the disposal abroad of Government-owned agricultural surpluses, the National Security Council approved NSC 5415/1 on April 1.⁴ It concludes that there would be a security advantage to the United States in receiving needed strategic materials from the bloc in barter for non-strategic agricultural surpluses; but in the event of disposal other than by barter, there must be a clear advantage to the United States and no material injury to the trade of friendly countries.

On March 2, in accordance with a recent decision of the Cabinet, the State Department informed Soviet representatives that the United States was prepared to give consideration to any offer the Soviet Government might wish to make for the purchase of United States Government-owned surplus agricultural commodities in return for certain minerals such as manganese, chrome or nickel. On April 1, the Soviet representatives replied that the USSR is prepared to enter into negotiations with United States representatives for such exchanges but wishes to include consideration of trade in other goods.

As of the cut-off date for this report State, Agriculture and other interested agencies were exploring the possibilities of developing a proposal to the Soviets which would be advantageous to the United States, whereby perishable agricultural surpluses would be bartered for strategic materials desired by the Office of Defense Mobilization.

A comprehensive review of United States licensing policy and procedures applied to shipments to Hong Kong indicated that a considerable number of commodities had little or no importance to the Communist Chinese economy and were not sought by the Chinese or, if in demand, were being procured from sources other than Hong Kong. Accordingly, a substantial relaxation in licensing shipments to Hong Kong was effected during the period under review. Approximately 35% of schedule B Listings have been placed on the General License List.

strategic list review

NSC 152/3 provides that “United States efforts should be devoted to establishing the control system on a narrower and more flexible basis by tightening the criteria so as to concentrate on commodities and services which contribute significantly to the war potential of the Soviet bloc.” The work program which was approved by the joint EDAC–ACEP Committee provided for the review of criteria for listing strategic commodities. An interdepartmental working group developed a set of attributes and standards to serve as the basis for listing strategic commodities. These attributes and standards were approved by the joint EDAC–ACEP Committee on October 29, 1953. (See EDAC D–61/1 of November 18, 1953⁵) On December 14, 1953, the joint EDAC–ACEP Committee agreed to the establishment of an ad hoc Security List Working Group for the purpose of achieving a relatively rapid review of items on International Lists I (Embargo), II (Quantitative Control), and III (Surveillance) in terms of the attributes and standards, in order to determine:

• “(a) The appropriate placement of each item on the new United States Master Export Security List;
• (b) What related changes if any would be required in Battle Act Listings;
• (c) The United States position with reference to each item on the International Lists relating to retention of present control, down-rating, uprating, or decontrol. (In the event that deletion from International Lists is proposed, it is essential that the recommendation also indicate whether or not the deleted item is proposed for addition to the Special China List).”

The Ad Hoc Working Group commenced its operations in December with the knowledge that the bilateral discussions between the United States and the United Kingdom in November 1953 had indicated that the British were thinking in terms of a drastically shortened International Embargo List and were considering the elimination of the quantitative control and watch lists. It was recognized that negotiations with the United Kingdom would be resumed whenever the British Government had completed its review of economic defense policy, including the proposal for drastically reduced international control lists foreshadowed in the November discussions. It was estimated that the negotiations with the British would be resumed in March 1954. The long-range objective of the United States security list review was to complete a comprehensive review of all items on the international lists and the United States security lists in order to produce a definitive United States Master Export Security List covering all security items. It was hoped that a sufficient number of items would be reviewed by the time negotiations were resumed with the British that the United States would be able to indicate to the British on an illustrative basis the manner in which the revised attributes and standards would apply to specific strategic commodities. The agencies participating in the list review made a quick estimate of the items on the international lists placing them in three categories: First, items which clearly would meet the new attributes and standards; secondly, items that probably would not meet the attributes and standards; and thirdly, items on which there might be some questions as to the applicability of the attributes and standards. The purpose of this estimate was to establish priorities for the list review. In this preliminary estimate the previous negotiating history in the Coordinating Committee was taken into account in addition to the strategic significance of the items in question.

A new element was introduced into the United States review when the British submitted a specific and detailed short list proposal to the United States on March 1. This gave added urgency to a higher priority review of the International Lists, particularly List I and List II. As of that date the product of the United States’ list review was still based on the concept of a gradual and moderate reduction in the lists; as such it was not very useful in discussing the rapid and substantial reductions proposed by the British.

In the trilateral discussions in London in March the United States presented to the British and French a proposed basis for list review to be undertaken by the Coordinating Committee. This basis was essentially the United States attributes and standards in a somewhat simplified form. This paper was agreed with the British and French. The principal difference in interpretation arose in connection with criterion (c) in the agreed paper on which the United Kingdom placed a much narrower construction than the United States had applied to the corresponding criterion in the United States attributes and standards. Criterion (c) stated that items eligible for international listing should include “material and equipment (by types and grades) in which the Soviet Bloc has a deficiency which is critical in relation to its military capabilities and which it could not overcome within a short period.” In the Consultative Group meeting, April 13 and 14, the United States made clear an important amendment to criterion (c) as it was agreed in London. This amendment stated that the term “military capabilities” is intended to include both present and future capabilities. The paper as agreed in the Consultative Group is attached as Appendix I. It was agreed in London that there would be trilateral consultations on successive categories of the international lists prior to COCOM review of individual categories and that this review was to be kept secret from the other participating countries.

The United States list review pursuant to the London agreement and the Consultative Group decision was scheduled in accordance with the new program for review of the lists on a category by category basis. The trilateral consultation on the first category, metal-working machinery, in fact commenced prior to the Consultative Group meeting. It was understood in the Consultative Group that the Coordinating Committee review of the various categories would be completed by July at which time the Consultative Group would review the results of the Coordinating Committee operation.

An important issue in the Consultative Group discussions as well as in the prior trilateral negotiations in London was whether or not the participating countries should feel free to decontrol items as soon as agreement had been reached on an individual category in the Coordinating Committee review. Most of the participating countries favored a delay in decontrol of items until the entire list review had been completed in July. However, the British introduced a reservation to the effect that they would be free in specific cases to raise the question of immediate decontrol following agreement in COCOM. As a result of commitments given the British in the London trilateral discussions, the United States undertook to support the British in such proposals for prompt decontrol in the Coordinating Committee.

A second major issue which was not resolved at the Consultative Group meeting was whether or not a quantitative control concept should be continued in the international control program. The assignment made to the Coordinating Committee was without prejudice as to whether or not there would continue to be three international lists, i.e., embargo, quantitative control and surveillance.

A National Intelligence Estimate of the economic, strategic and political consequences of relaxing free world controls on trade with the Soviet bloc was done immediately after the United Kingdom put forward its short list on March 1. (See NIE 100–3–54, approved March 16, 1954.⁶) The estimate was done on a crash basis to assess the general consequences of a program on the order of the British proposal for a short embargo list and elimination of quantitative controls. It assumed that present controls on Communist China would be continued and that the United States would not impose more stringent controls on trade with the European bloc than its allies did.

It was roughly estimated that relaxation to the extent proposed by the British would probably produce an increase in Soviet bloc imports of decontrolled items on the order of one-half billion dollars annually. It concluded that this development would not significantly increase the bloc’s economic capabilities or military potential over the long term. However, certain strategic gains would accrue to the bloc in the short period immediately following decontrol. The estimated increase in bloc imports would be small relative to the output in those countries; the need for categories of goods which would be decontrolled has almost certainly been reduced by bloc adjustments to trade controls and general progress toward self-sufficiency.

Increased trade with the bloc consequent upon relaxing controls would have no significant direct economic effect on the United States and only a modest overall long run economic effect on the non-Communist world. It is improbable that such trade as is likely to result would have any significant effect upon the military potential of the non-Communist world. The relaxation of controls on trade with the European Soviet bloc, including the Soviet Far East, would considerably reduce the effectiveness of existing controls on trade with Communist China.

This estimate necessarily concerned itself largely with the quantitative aspects of the problem of relaxed controls, and did not on the whole attempt to evaluate the importance of individual commodities to the bloc. Qualitatively the increase resulting from a relaxation of controls could provide significantly important additions to bloc military capabilities.

This assessment of the problem of Communist-Free World trade, took into consideration the conclusions of recent National Intelligence Estimates, namely, there is no sign the ideological dynamism of the Communist regime is abating; the fundamental hostility of the Communist rulers toward the free world remains unchanged; and their basic objectives continue to be an expansion of their own sphere of power and the eventual domination of the non-Communist world. (See NIE 59 and SNIE 11–54.⁷)

The Fourth Battle Act report, issued May 17, deals with Soviet trade policy and tactics. It demonstrates in essence that, in spite of recent bloc overtures for increased trade with the free world, there is no really basic or fundamental change in Soviet economic policy, which is intent upon self-sufficiency within the bloc.

enforcement of strategic trade controls

In the implementation of NSC 152/3, the highest priority has been accorded to improved enforcement of strategic trade controls. During the period under review considerable progress was made in “tooling up” the diversions control operation within the United States Government, and it is hoped that the next several months will see a greatly accelerated rate of progress through COCOM in concrete multilateral steps to improve the enforcement of international controls.

United States Measures—In the process of tightening up enforcement arrangements within this government, ancillary measures employed by the United States were critically reviewed with a view to improving those found to be inadequate and to eliminating or reducing the scope of those found to be of limited usefulness. This review covered controls over the carriage of strategic goods in United States ships and aircraft, controls over the bunkering of vessels engaged in trade with Communist China, and transactions controls. In addition, steps were taken to place the Administrative Action Program on an agreed inter-agency basis. Under this program violators of strategic trade controls are denied export licensing or other privileges by the United States Government. A Diversion Control Network was also established to insure full intelligence support and timely coordinated action in cases of suspected or actual diversion of strategic goods to the Soviet bloc. (See EDAC D–89 of May 14, 1954 for a description of the Network.⁸) This interdepartmental machinery has concentrated attention on transactions involving significant amounts of International List I commodities, in which there appear to be a substantial chance of preventing an impending diversion or in which development of the facts in the case, even if the diversion cannot be prevented, may yield enough information to assist in persuading or enabling a COCOM country to plug a loophole in its enforcement machinery so that future diversions of this sort may be prevented.

COCOM Measures—The United States has become increasingly concerned by the magnitude and extent of diversions, and has pressed hard over the last year for increased emphasis upon enforcement of agreed COCOM controls, in particular controls over transit shipments, i.e., the Transit Authorization Certificate (TAC) scheme, and transactions or financial controls over strategic shipments. It has been estimated on the basis of proven diversions that as much as $200 million of illicit trade in strategic commodities may have taken place in 1953. (Total legal exports (actual and/or licensed) of International List I items by the 15 COCOM countries amounted to $2.8 million in 1953; the figure for International List II items was $36.6 million.) More than 5,000 firms or individuals were involved in one way or another in business transactions in violation of export controls.

During the period covered by this report, a good deal of attention was given to the ancillary measures already agreed in COCOM or proposed for multilateral adoption to control the transshipment and illegal diversion of strategic items. A major review of experience to date under the Import Certificate-Delivery Verification (IC/DV) scheme was held in COCOM and resulted in agreement on several needed improvements to clarify and strengthen this operation. The coverage of the system has recently been extended to include all items on International Lists I and II.

As a consequence of bilateral approaches by United States representatives to other participating countries, agreement was reached at the April meeting of the Consultative Group on the principle that responsibility for preventing diversions is a cooperative one and that there should be a full exchange of information and cooperation among enforcement services as well as full resort to other means for the detection, stopping and subsequent investigation of illegal shipments. This recognition of responsibility by the participating countries is a significant step and makes possible maximum practical action in dealing with diversions until such time as a more complete system of transshipment licensing is established. The stalemate over the United Kingdom delay in adopting transaction controls, which has been the stumbling block to full participation by all COCOM countries in the TAC scheme, is expected to be broken during the current international list review. The transit trade and transshipment problem, is discussed in some detail in the 6th Progress Report on NSC 104/2.⁹

decreasing reliance on trade with the soviet bloc

Paragraphs 13, 15, 19(c) and 32 through 36 of NSC 152/3 reflect the concern of the United States over the problem of minimizing free world countries’ economic dependence on the Soviet bloc. This problem was studied intensively in the EDAC agencies during the two years ending July 1953. The product of this study has been widely circulated within the executive agencies which have economic defense responsibilities and interests.

The major conclusions of this study were as follows:

1. Without exception, the dependence of free world countries, collectively or individually, on Soviet bloc sources of supply for basic commodities is no longer very important, in the sense that coal, wheat, timber, and other essential goods are physically available in ample supply in the free world at prices equal to or lower than, Soviet bloc prices. However, other aspects of the problem remain, primarily the balance of payments problem.

2. With only a few exceptions, notably Finland, there has been no very heavy reliance on Soviet bloc markets. However, this aspect of the dependence problem has rapidly assumed larger proportions, particularly as competition for markets has increased in the free world, and as the fear of an economic depression in the West, especially in the United States, became evident.

3. In the long run the major returns toward achieving a position in which the free world countries will view their trade with the bloc as marginal, or as not affecting their economic well-being or political stability in any vital way, are apt to accrue from progress in solving some of the more basic economic problems of the free world. The solution of problems of economic dependence on the Soviet bloc is not unconnected with such existing United States programs and policies in the economic field as improving the dollar position of the free world, better conservation and increased production of essential materials, increasing productivity, lowering free world trade barriers, particularly those of the United States, and economic development and international commodity stabilization.

4. In addition to the numerous economic motivations, at the national and local or private levels, underlying the free world’s trade with the bloc, there are a host of political and psychological pressures to trade with the bloc. To the extent that the Soviet bloc exploits these pressures to the detriment of the free world—for example, in subverting western security trade controls, or fostering suspicions or irritations which strain free world unity in the political and military fields—a greater measure of coordination of free countries’ economic relations with the bloc might be useful, specifically in combatting the divisive aims of Soviet psychological and economic warfare. In addition, a carefully planned and executed educational program by Western governments would be helpful in exposing the myth of the Soviet bloc as an important and reliable trade partner.

Among the foregoing, only paragraph 4 calls for efforts having a distinct economic defense origin or emphasis. At the April 13–14, 1954 CG meeting, there was substantive discussion of Soviet trade tactics. This of itself was an encouraging, although modest, move in the right direction, since previously the subject had been considered beyond the CG’s terms of reference. However, the United Kingdom, which submitted a very brief memorandum on Soviet trade tactics as the basis for discussion at the CG meeting, still considers that COCOM should be concerned only with security controls in a narrow sense, and that discussion of related matters should be coordinated outside COCOM. This position would perpetuate the present situation, in which questions having to do with general East-West trade policy are ruled out of order in CG/COCOM unless they bear directly on specific security trade control problems, and yet are not considered in the NATO or the OEEC because of the existence of CG/COCOM.

It might be noted that on numerous past occasions the Turks, French, Italians, Belgians and Germans and possibly others have expressed views nearer to ours on this issue. In any event, future United States attention and efforts should be directed to it, with a view, specifically, to effectuating full and timely exchanges in COCOM of information on Soviet bloc trade tactics.

Closely related to the problem of expanded terms of reference for the CG is the question of relating economic defense to NATO and the proper division of functions between the CG structure and NATO in this field. The Washington view is that NATO should undertake a periodic review of the broad trends of the economic defense effort and of its basic assumptions in relation to the cold war strategy. It is thought, however, that the CG organs should continue to be the day-to-day forum for discussing economic defense matters but with broader terms of reference so as to bring under consideration the pertinent economic and political factors and to place greater emphasis on better enforcement of existing controls.

controls on trade with communist china

Paragraphs 16 and 19 of NSC 152/3 cover the special circumstances governing United States policy toward Communist China which differ from those pertinent to the rest of the Soviet bloc. In the light of the Korean armistice, and pending a political settlement in Korea and a review of basic policies toward Communist China and North Korea, United States policy calls for maintenance of the present levels of controls on transactions with Communist China and intensified efforts to persuade our allies to refrain from relaxing their controls on trade with Communist China.

Since the Korean truce, pressure from other countries has mounted for relaxation of trade controls toward Communist China. Several Western European countries have informally suggested the desirability of reviewing the controls on China trade with a view toward eventual reduction of their scope. European businessmen are eager to preserve competitive opportunities in China. The pressure brought to bear in the British Parliament with respect to antibiotics, on which the China Committee removed restrictions last December, seems to reflect the motivation of trade even though the arguments stressed the unique humanitarian reasons for decontrol. Free world Asian countries have also shown new interest in expanding trade, particularly in their major export items. The depressed level of prices on commodities such as rubber and tin has brought increased demands within producing countries for trade with Communist China. There have been indications recently of a desire that the UN consider revoking the resolution on Communist China, which has served as the principal restraint on some nations from trading in strategic goods with the Chinese Communists. Public opinion in Japan has been very strong for relaxation of China controls concurrently with any relaxation of controls applicable to the European Soviet bloc. This opinion has recently intensified. The Japanese are concerned over the possibility of transshipment via the European Soviet bloc of items removed from the international lists but retained for China embargo. Japan would be placed at a competitive disadvantage in such trade. Economic necessity is a real factor in the Japanese attitude, in view of Japan’s critical balance of payments position, the realization that United States expenditures in Japan, are of a temporary nature and the pre-war reliance upon the China mainland as a market for roughly 15% of her exports.

The United States embargo policy toward Communist China has had wide public and congressional support in this country and, in the absence of a clear political settlement, probably will continue to have this support. Relaxation of controls in advance of progress toward an acceptable political settlement with the Chinese Communists might create such public dissatisfaction in the United States as to impede the government’s participation in a sound international economic defense program.

Taking into consideration the changed circumstances in the last half of 1953, the National Security Council has given consideration to the question of the levels and stringency of United States trade controls vis-à-vis Communist China in the period short of a satisfactory settlement of the Korean problem and during a period of no open armed conflict. As a result of this consideration, the NSC agreed to release Japan, gradually, as appropriate, from its obligation under the US-Japanese bilateral agreement to maintain export controls at a higher level than the COCOM China Committee levels. Substantive review of United States policy on China trade controls was postponed, however, pending the outcome of the then forthcoming Geneva Conference.

The study presented to the NSC takes cognizance of a significant difference in current United States policy objectives toward Communist China and the European Soviet bloc. Communist China trade controls are armed at impeding the industrialization of China in addition to its direct war potential, while the European Soviet bloc controls are aimed at impeding only the development of that area’s war potential. It would follow from this and other considerations that, until there is a basic change in the Chinese situation, the trade controls directed against Communist China should be broader and more extensive than those against the European Soviet bloc. The study also set forth the arguments in favor of substantive relaxation of United States controls towards Communist China and the arguments in favor of retaining present United States controls.

A major factor in the decision to cancel the secret understanding with Japan concerning China controls was the desire to assist the Japanese Government to meet political pressures for reduction of controls to the multilateral level. However, we indicated to the Japanese that their handling of decontrol ought to be so timed that it could not be regarded by the Chinese Communists as evidence of inability of the free world countries to maintain the present high level of multilateral controls on strategic trade with Communist China. In notifying the Japanese of the decision to cancel this agreement, we requested assurances that reduction of the controls to the multilateral level in the China Committee would take place on a gradual basis and in such way as to prevent serious harmful effect on our negotiating position at the Geneva Conference. We cautioned the Japanese that in the event the Far Eastern situation deteriorates further, the United States would depend upon Japan and other free world countries to cooperate in the imposition of tighter controls on trade with Communist China. The Japanese agreed that controls would be relaxed at a rate no faster than 30 items per week from the list of approximately 400 items which Japan had been controlling over and above those items agreed for embargo multilaterally. An initial list of 25 items was to be relaxed about April 24.

Agreement on a modus vivendi regarding the standards of trade controls applied to the Portuguese Colony of Macao is under study by the governments of the United States and Portugal. Negotiations were carried out in Lisbon in March–April 1954 looking to the improved enforcement of Communist China trade controls at Macao by the Portuguese in return for assistance in acquiring goods needed for Macao’s “legitimate requirements”.

other developments

International Controls Over Shipping

Two broad developments in the shipping field merged during the period under review with the result that, by the end of the period, Soviet ship orders with Western European yards were on their way to record heights, even though no formal change had been made in COCOM controls over ships. During 1952, ships accounted for about one-half the total value of licenses issued by COCOM countries for secondary strategic (International List II) items, or $23 million out of a total of $47 million. In 1953, they accounted for about one-third, or $12 million out of a total of $36 million. However, on the basis of orders already in hand or in prospect as of April 1, 1954 the value will increase sharply during each of the next several years.

The first of these developments was the tapering off of the postwar ship construction boom. Whereas several years ago the order books of most Western European yards were filled for the next four to five years, by the end of 1953 the backlog had shrunk to two years or even less. Competition for new orders among the Western yards was correspondingly greater, and this commercial rivalry among the Western ship-building countries was reflected in government positions in COCOM.

The second development, which was clearly related to the first in the minds of Soviet planners, was a drive by the USSR to procure ships from the West, particularly fishing vessels and dry-cargo ships. While the Soviet Union had tried with some success since 1948 to obtain ships in its trade negotiations with Western European countries, simultaneously with the truce in Korea and the new interest on the part of Western countries in obtaining Soviet orders, the Soviet Union was able not only to place orders for larger numbers of ships in connection with trade agreement renewals but also to place orders for the first time on a cash payment basis.

During this period the United States attempted, through bilateral negotiations and multilaterally in COCOM, to obtain agreement on a more meaningful system of controls over ships sales and ship services (i.e., repairs and chartering). Although good progress was made in the direction of delineating the types and characteristics of ships that should be embargoed to the Soviet bloc, very little progress was made toward reaching agreement on the control of non-embargo ships. As the period ended, it appeared doubtful that the Western European countries would agree to limit annual deliveries of ships to the Soviet bloc to anything like the level which the United States believed necessary in the interest of security. A summary of these negotiations is attached as Appendix II.

Battle Act Exceptions

As anticipated, a major portion of the prior commitment deliveries to the Soviet bloc materialized during the period under review. The value of shipments involved in Battle Act exceptions cases more than doubled that of 1952. Presidential determinations in August 1953 and March 1954 to continue aid to recipient countries, despite the shipment of embargo items to the Soviet bloc, involved commodities valued at $10.25 million. Approximately 61% consisted of shipments resulting from commitments made prior to the effective date of the Battle Act. All of these shipments went to Eastern Europe with the exception of one small shipment to Communist China—$32 worth of gauges intended for a sugar-processing plant.

Eight countries were involved in exceptions cases, including Austria, Denmark, France, Iran, Israel, Norway, the United Kingdom, and West Germany. (See EDAC D–38/1 of July 31, 1954 and EDAC D–38/6 of March 5, 1954.¹⁰) Two determinations were made for Austria, France, Norway and the United Kingdom during the period under review. All of the shipments from France and the Federal Republic of Germany and nearly all those from the United Kingdom were made in accordance with prior commitments. A summary table is attached indicating the value of the shipments involved in Presidential determinations under the Battle Act. (See Appendix III.)

Austria, Iran and Israel are the only countries involved in Battle Act determinations to date, which are not openly associated with the United States and other western nations in the North Atlantic defense effort. Nonetheless their cooperation and friendly relations are important to the security of the free world. On the recommendation of EDAC, no public disclosure was made in these three cases for overriding political reasons. The shipments amounted to $587,581 of Title I, Category B commodities, 59% of which were prior commitments.

About $4.5 million worth of prior commitment orders are still outstanding. This includes approximately $3 million committed by France and $977 thousand by the United Kingdom in addition to $333 thousand worth of United Kingdom and Italian bearings and machine tool shipments, which had not yet been reported to Congress. France has agreed to withhold delivery of $2.7 million in prior commitment items, and our Embassy is of the impression that only a small volume of the remaining outstanding orders will be shipped. It is possible that revision of the International Lists now underway may wipe out a substantial portion of the residual prior commitments and could materially change the British and French schedules. Since deliveries have now been made on the bulk of the prior commitments, this type of exceptions case is expected to decline sharply in the future.

One of the problems to be faced is how far to go in adjusting the Battle Act listings to take account of changes in the International Lists made during the COCOM list review. However, such changes will not take place until after the CG meeting in July, and will be based upon the action taken on COCOM recommendations. Some public and Congressional criticism is to be expected if extensive adjustments are made. It is expected that minimum shipments, consisting principally of spare parts and replacement items, will constitute a troublesome aspect of the exceptions problem in the future. Procedures under the Battle Act are now being revised to conform more closely with determinations made in COCOM concerning minimum shipments.

Cooperation of Non-COCOM Countries

. . . . . . .

As a whole Latin American cooperation with Western controls on shipments of strategic commodities to the bloc countries improved during the period under review. While these countries have not been requested to adopt export controls parallel to those agreed in COCOM, they have, upon United States representation, refrained from accepting Soviet bloc proposals to buy such commodities as Chilean copper and Bolivian lead. The Latin American countries are not large exporters of strategic commodities. Metals and minerals, particularly copper, have been the principal source of concern as regards Latin American exports. In this regard, the concern has been less about direct shipments to the Soviet bloc than in regard to exports which went to Free World ports and then were diverted to the Soviet bloc. The principal difficulty has been with Chilean copper, particularly after the break in world prices. During the negotiations for United States stockpile purchase, Chile agreed to institute tighter controls including IC/DV procedures. These measures have been kept secret because of possible political repercussions.

1. Attached to the source text, but not printed, were a cover sheet, a memorandum by Secretary Dulles and Governor Stassen to Lay requesting that the report be circulated to the members of the NSC, a table of contents, and three appendixes. Appendix I contained instructions by the CG to COCOM on the review of the International Lists. Appendix II was a brief narrative describing the negotiations on shipping controls. Appendix III listed the presidential determinations under the Battle Act.
2. Dated June 18, p. 1207.
3. Concerning this speech, see footnote 2, p. 1081.
4. For text of NSC 5415, Mar. 23, 1954, see p. 175. It was approved, as revised, on Apr. 1 by the NSC at its meeting of that date; see the memorandum of discussion, p. 189.
5. Not printed.
6. Ante,p. 1121.
7. For text of NIE–59, Apr. 16, 1953, see p. 949; SNIE–11–54, “Likelihood of General War Through 1957,” Feb. 15, 1954, is not printed.
8. Not printed.
9. Dated Jan. 19, 1953, p. 913.
10. Neither printed.