Memorandum by the Officer in Charge of Economic Affairs, Office of Chinese Affairs (Hope) to the Director of That Office (McConaughy)

  • Subject:
  • Ambassador Kennan’s Views on East-West Trade

The attached circular airgram of August 4 (control number 305, 5:30 p.m.1), contains a very interesting statement of a complicated and difficult policy problem with which the Department generally, and CA particularly, has been wrestling for several years.

In his usual authoritative and persuasive way, Mr. Kennan has made the case (1) that Communist regimes do not trade for trade’s sake but only to obtain materials of benefit to their own purposes, which include importantly the military buildup and the achievement of autarchy within the Bloc; (2) that the Soviet leaders never hesitate to exploit politically any economic ties with private interests in the Free World which can be employed to bring pressures to bear on non-Communist governments; (3) that unless the United States is able to pick up the check and supply to Western Governments materials which they lose through cutting off trade with the Bloc, we are not in a very good position to force our friends to terminate economic relationships with the Bloc; (4) that there does not appear any important problem in the increase of Soviet Bloc industrial and military power which the Communists will not be able to solve even though cut off from the Free World, but the denial of high quality capital goods could slow up the Soviet timetable of achievement; and (5) that the morale and economic soundness of the non-Communist world is our “safest and most hopeful objective”. Mr. Kennan is prepared, if necessary, for us to pay the price to achieve this objective in the form of a certain amount of carefully restricted and guarded trade with Communist areas.

Mr. Kennan’s views have, I believe, a substantial following among the Department officers working on these problems. A somewhat deplorable sequel has been the tendency to accept as optimum the general level of controls which presently exists in the COCOM countries. This tendency has grown, abroad and at home, as the stalemate in Korea continues.

The ground swell of public opinion which led to the NSC decision in December 1950 to terminate all economic relationships with Communist China2 has subsided to some extent, and the agencies [Page 867] of the Government which have been peculiarly responsive to public opinion in this field seem no longer quite as zealous as formerly in competition to strike the hardest economic blows at the Chinese Communists through sanctions on trade. This is no reflection on their patriotism but simply reflects discouragement at the reluctance of Western European countries to extend their controls.

As regards trade between Eastern and Western Europe, the Kennan conclusion is probably a sound one. I have read many arguments about the absolute requirements of Western Europe from Eastern European sources, and although in at least a few cases I suspect that the dependence is more psychological than real, I am not prepared to counter the assertion that Western Europe must obtain certain materials from Eastern Europe in order to keep healthy.

When we look at China as a supplier, Japan, however, appears as the one friendly nation about which it may be said that raw materials from China actually may be necessary to her continued economic life. The British have certainly tried eloquently to persuade us that the economic health, and perhaps the very existence, of Hong Kong depend upon its continuance as an entrepot. Therefore, some special treatment is accorded Japan and Hong Kong.

As far as the rest of the Free World is concerned, it appears clear that China, if it has a real desire for industrial expansion, needs the products of Western skill more than the rest of the world needs Chinese agricultural raw materials. Undoubtedly, Chinese vegetable oils, bristles, soybeans, casings, goat skins, and other traditional exports are attractive to foreign countries, but it is chiefly as a market for foreign manufactures that China has interested the trading nations of Western Europe and North America.

If this conclusion is valid, there is good justification for the continuation and advancement of the United States policy of treating China much more harshly than we treat other Soviet satellites. It is apparent that there has not been sufficient pressure on the Chinese Communists to cause them to desire ardently a truce in Korea. It is apparent that our area of maneuver is limited by the feelings of our Western European allies, and perhaps only in the field of economic sanctions can greater pressure be applied against the Chinese Communists without risk of taking actions which would seem so provocative to our allies as to jeopardize their support in the effort in Korea or in NATO.

Over many months, CA has labored to make clear to other areas of the Department the desirability of continuing the pressure of economic sanctions against the Chinese Communists by continuing our effort to have our allies in the United Nations move toward a sterner rather than a softer policy on security trade controls. We [Page 868] have received many setbacks. We sympathize with the practical difficulties of area desks which are dealing with intractable or reluctant countries. We do not like to belabor small or dependent countries, simply because we have the necessary power. We also realize that it is neat and logical to have a single policy which applies to all areas and all countries, but we do not think the situation allows this tidiness at the expense of possible real gains in bringing the Chinese Communists to terms, in delaying their timetable of industrial achievement, or in slowing up their possible aggressive intentions in areas in the Far East other than Korea.

Therefore to Kennan’s statement that the answer to East-West trade questions depends “primarily on basic policy determination which I gather has not yet been made in a manner commanding support of our Government as a whole”, I would comment that:

The United States Government has a clear policy, codified by the NSC in December 1950, of ceasing virtually all economic relationships with Communist China so long as the aggressive intentions of the Communist regime continue. An essential corollary of this policy appears to me to be continued pressure, multilaterally and bilaterally, on all friendly nations to extend and expand their level of controls until they reach the nearest point to the level of United States controls which is feasible in view of their peculiar problems (e.g., Great Britain faces a special problem at Hong Kong). If we do not exert our utmost endeavors in this direction, we shall probably never know whether this policy is a right one or a wrong one, since by being apathetic to the trade of other countries with Communist China, even though it be concerned with “non-strategic” goods, we compromise our own total embargo while discriminating against United States commercial interests in favor of those who continue to trade.
The Kennan statement is worded with sufficient care so that there appears nothing very inconsistent between his views and what I understand to be United States policy toward trade between Eastern and Western Europe. At the present time, we do pay the price for economic soundness in Western Europe of a “certain amount of carefully restricted and guarded trade” between Western Europe and the Soviet Bloc, and with fairness to the efforts of our people in the Department backstopping COCOM, I believe that we do “concentrate on making sure that the price we may is not too high”.
What we seem to require, therefore, is not a new policy or statement of policy, but rather fuller implementation of the existing economic policy towards Communist China (in the UNAMC, in COCOM, and by other arrangements as necessary) and clear recognition within the Department and with the other agencies having responsibilities in this field that there is, and should be, different treatment towards Communist China by the Free World than that accorded the European satellites who are important economically to Western Europe and who are not at the moment engaged in open aggression.

  1. Supra .
  2. For documentation on the decision to place an embargo on all shipments to the People’s Republic of China, see Foreign Relations, 1950, vol. vi, pp. 619 ff.