S/SNSC 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

  • Subject:
  • Fifth Progress Report on NSC 104/22 “United States Policies and Programs in the Economic Field Which May Affect the War Potential of the Soviet Bloc”

NSC 104/2 was approved as Governmental policy on April 12, 1951. It is requested that this report (covering the period from March 1 to July 1, 1952) be circulated to the members of the Council for their information.


During the four-month period ending July 1, 1952, a great deal of effort was devoted to stock-taking for formulating and developing the basis for new programs in the economic defense field. Some of the economic security issues outstanding between the United States and its Western European Allies were sharpened to the extent that efforts began to be focused on resolving these issues, and, hopefully, paving the way for their solution. At the same time a number of substantial steps were taken both in the Executive Branch and abroad in this field.

The most difficult and important problem dealt with was that of the prior commitments of Western European governments for the export to Soviet bloc countries of strategic items included in Title I, Category B of the Battle Act. These prior commitments are of such a magnitude and composition that shipment of the total commitments would be serious from the standpoint of the security of the United States. The United States sought to reach an agreement whereby a so-called “hard core” of the items covered by these prior [Page 877] commitments (valued at about $6 million out of a total of $21 million) would be denied the Soviet bloc. This proposal was outlined by the Secretary of State in talks with the British and French Foreign Ministers, almost simultaneously with its discussion in the Consultative Group meeting of June 24–25. As of July 1 the Western European governments had promised to reconsider the matter, were doing so at cabinet levels, and were to inform us promptly of their decisions.

The Danish case, involving the export of a large tanker to the USSR pursuant to a 1948 trade agreement, served to dramatize the prior commitments issue during the latter part of June. The public and governmental reactions within Denmark and in other COCOM countries of the forceful representations of the United States illustrate the risk we run of jeopardizing the political and military cooperation of friendly countries over this issue when the threat—as these countries view it—of the termination of aid is used as a means of achieving compliance.

Particularly unfortunate and untimely were the press leaks on this case which greatly embarrassed our negotiations.

The United States should avoid generating a repetition of this type of crisis, although to do so appears almost impossible as a practical matter when we are confronted with Congressional action along the lines of the Kem Amendment to the Mutual Security Act of 1952, passed in the Senate on May 28.3

The subsequent Senate vote of 59–11 favoring passage of the Conference Report eliminating the Kem Amendment may not have reflected the true attitude of the Congress on the problem of security trade controls. There was every indication during the debate on the Conference Report that the Kem Amendment would have been passed in the Senate had it been able to vote on this issue alone.

Progress in obtaining international agreement in other areas of the economic defense program was not generally noteworthy. Nothing was accomplished in the field of shipping controls, particularly as regards multilateral measures directed at Communist China. Although no real multilateral progress was made towards closing the loopholes offered by the transit facilities in various countries of continental Europe, the problem has been under intensive study, and several developments occurred which may result in some remedial action in the period ahead. The Moscow Economic Conference proved worrisome, particularly from the standpoint of Soviet propaganda gains in under-developed areas and the arousing of [Page 878] mutual suspicions among business interests in various of the countries participating in COCOM.

Some hopeful signs were evident in Scandinavian successes in obtaining Polish coal at lower prices and without having to yield strategic goods to the same extent as formerly. How much of this success can be attributed to the hardened bargaining positions of these countries, buttressed by concrete United States support in the case of Denmark, and how much can be credited to the past mild winter are difficult to determine.

As anticipated, Japanese pressures for relaxing restrictions over trade with Communist China continued to grow after the effective date of the peace treaty on April 28.4 The need for Japanese membership in a multilateral security trade control body became more immediate thereafter, and the question of the precise form of such membership became a matter of differences not only within the United States Government, but also among the United States, Canada, the United Kingdom, and France.

A great deal of effort was devoted to organizational aspects of the economic defense program within the United States Government. United States representatives abroad have been given a substantial volume of background and policy information on the economic defense programs for the purpose of developing a distinct program approach to the East-West trade problem. A positive result of this effort has been some excellent reporting by field missions. This can be sustained and extended only by means of an adequate appraisal program, which it has not yet been possible to institute because of personnel limitations. Along this same line action has been taken to organize available United States personnel abroad in an effective manner to deal with Battle Act and related economic defense program matters.

An undesirable, but perhaps unavoidable, development has been the demands placed by EDAC committees and working groups on the limited staffs in the agencies charged with carrying out the programs and policies of NSC 104/2 and the Battle Act. Provisions have been made for additional staff assistance in several agencies, however, and the intensified and fully coordinated development of economic defense programs and activities has resulted in an operation which is more closely integrated within the Executive Branch than has previously been the case.

Battle Act

During the period from March 1 to July 1, there was a considerable acceleration in the pace of activity under the Battle Act. Because [Page 879] of the urgency of the questions involved, most particularly those concerned with exceptions, major attention was directed to problems which arose under Title I of the Act. However, some progress has also been made in implementing Titles II and III of the Act.

Title I Activities

In the course of these four months the Western European countries’ “prior commitments” to ship embargo items became a major stumbling block in implementing Title I. They present also a major dilemma. On the one hand, the overall magnitude of the commitments ($21.5 million) proved to be such that shipment of the entire quantity would be detrimental to United States security interests and difficult to justify to the Congress and the American public. On the other hand, it became clear that pressing the Europeans bilaterally to eliminate all their prior commitments, or even the most important of them, would worsen relations without yielding any significant measure of success. The primary reason for the attitude of the Western European governments is that they regard the Battle Act as an ex post facto attempt by the United States to change the agreed COCOM rules which allow for exceptions to embargo treatment in order to fulfill prior commitments. In addition, several of the governments protest that they have at present no legal authority to revoke export licenses once they have been issued; moreover, there is a reluctance to break the government-to-government commitments providing for the issuance of licenses.

In view of this, it was decided that the United States should try to dispose of the “prior commitments” problem once and for all. A concerted effort was made by an appeal to the Consultative Group that the countries concerned re-examine the security problem involved, and make every effort to eliminate the “hard core” items consisting mostly of basic long-term capital equipment in the form of steel processing equipment and metal-working machine tools and related components, and two Danish tankers, and possibly to eliminate or reduce the shipments of the remaining prior commitment items.

A series of steps were taken to impress the European governments with the importance attached to this problem by the United States. Preliminary to the meeting of the Consultative Group, the Secretary of State called in the British, French, and Italian Ambassadors5 to explain our proposal and to stress the urgency of finding a solution for the prior commitments problem to help forestall enactment by the Congress of unworkable East-West trade legislation. On June 24 the Chairman of the United States Delegation6 presented [Page 880] the United States proposal to the Consultative Group, and requested that the governments concerned consider it on an urgent basis. Subsequently, in his talks with the British and French Foreign Ministers7 the Secretary of State brought this matter to their personal attention.

As a result of this concerted effort, all the governments with prior commitments to ship embargo items to the Soviet bloc agreed once more to review the problem at a high level. As of July 1, no formal responses had been received, although there were indications that the United Kingdom might find it possible to eliminate some of its commitments. Simultaneously, the problem of Denmark’s prior commitment to ship a tanker to the USSR came to a head. In this case, despite strong United States representations and the possibility of aid termination, the Danish Government felt compelled to honor the commitment.

While it is too early to tell whether the Danish action will set a precedent, it is possible that the United States will not be successful in securing elimination of all the “hard core” items. There is thus some prospect for continuing shipments of at least some of these “hard core” items in the future, as well as the bulk of non-hard core items. This brings to the fore the question of what attitude the United States should take under the Battle Act with regard to such shipments, once it has received formal replies from the United Kingdom, France, Italy, and the Federal Republic to our “hard core” proposal. Having made a strong effort to dispose of the prior commitments problem multilaterally, the only alternative courses of action left for the United States (depending to some extent on the nature of the replies), are (1) to continue to make bilateral representations as in the Danish case and to decide whether to grant an exception only after shipment is made, or (2) to inform the governments concerned in advance that the United States is prepared to grant exceptions for those prior commitments which they feel they must honor and to carry on any further bilateral discussions for the sole purpose of securing additional information upon which to base the exceptions. Further protracted negotiations with the United Kingdom, France, Italy, and the German Federal Republic on this issue may serve only to stiffen their resistance to pressure from the United States. On the other hand, it is evident that some of these items need not be shipped, and should not, in view of their strategic nature.

During this period, two exceptions were granted to permit continuation of aid despite shipments of embargo items. The first of these was issued on April 22 and involved the shipment by the [Page 881] Netherlands to Poland of a prior commitment item, three oil well drilling rigs valued at $240,000. The second exception was issued on June 24 and concerned the shipment from Italy to Rumania of a centerless grinding machine valued at $11,000 which had been licensed (by error) for export prior to January 24, 1952. In addition to these public exceptions, a decision was made, after interagency consultation, that an exception should be granted in the future to Norway when shipments totalling 3,250 tons of embargo-type aluminum eventually are made to Czechoslovakia, Poland and the USSR under new trade agreements with those countries. At the end of the period there was also a backlog of cases involving shipments under prior commitments of Title I, Category B items. In all these cases, preliminary information had been received that shipment had occurred, but insufficient information had been received from the government concerned upon which to judge whether United States security interests called for cessation of aid or the granting of an exception. One of these cases concerned partial shipment by Italy of a rolling mill, an item which the United States had included in the “hard core” list of items which it felt should be eliminated from the prior commitments inventory. The remainder were principally shipments on schedule of prior commitment items by France to Poland, mostly machine tools, some of which were also included in the “hard core” group.

Title II Activities

Title II is an important area in which a major part of the future work under the Battle Act will be done.

After considerable study, preliminary steps have been taken to develop a Title II export control program on a commodity and country basis. A survey of each item on the United States strategic control lists is being made with the aim of determining for each commodity on a technical basis (a) the amount which might be exported to the Soviet bloc without endangering the security objectives of the free world, and (b) whether there is a problem country (or countries) with which the United States should negotiate to reduce the amount of the particular commodity exported by that country to the bloc. This survey is being made by some twenty-six technical task groups centered in the Office of International Trade.

The Title II Working Group, established early in February under the EDAC, will review the findings of the technical task groups together with the data assembled by geographical area task groups. The latter groups are to develop the other factors to be considered in determining a level of trade in International List II and other strategic items to be negotiated with particular countries. The recommendations of the Title II Working Group will ultimately be reviewed on a more formal interagency basis, after which the United [Page 882] States will attempt to negotiate the levels of trade determined as being appropriate under Title II.

This survey is a formidable task which will take at least four months to complete. It will take into account the political and economic as well as the strategic factors involved, and cover all free world countries, not only the Western European.

Meanwhile, a review of the main accomplishments of the International List II negotiations shows on balance that substantial results have been obtained thus far. First, a more precise and effective structure has been established for the operation of quantitative controls. Secondly, specific maximum quotas have been fixed for 64 of the 88 items included in International List II; while certain of the quota limits (which total 27 million dollars) are not viewed by the United States as fully defensible on strategic grounds, they are generally defensible as the best obtainable from the recently concluded negotiations. Third, quid pro quo controls have been established for 24 items (of which 5 are subject to modified quid pro quo control) for which defensible quotas could not be agreed upon or where the quota approach was impractical.

Notwithstanding these accomplishments, it appears possible that List II exports in 1952 might exceed those reported for 1951. There are, however, serious shortcomings in attempting to evaluate progress in the quantitative control field through a simple statistical approach. Apart from technical difficulties, it might be tactically unwise to measure such progress by picturing steadily declining List II exports. One reason is that such a picture would lead to the expectation of further decreases in total value. This might not occur, even though the strategic significance of the quantities exported were reduced as a whole. Second, the logical extension of a progressively declining level of such exports is zero. This implication would make it difficult to convince other participating countries that the United States’ approach is still selective. Finally, to compare total value figures for different periods may be misleading as an index to progress because the totals (assuming adjustments for price increases) are heavily affected by high value items such as ships. It does not follow that a 2-million-dollar vessel is four times more important from the strategic viewpoint than 500,000 dollars worth of bearings.

Title III Activities

There has been a good deal of concern in the United States Government over the question of how effectively the security trade controls agreed in COCOM are actually being implemented. When the head of the COCOM delegation was in Washington on consultation in late April and early May he expressed the opinion that the Canadian, British, Norwegian, Belgian, Danish and Dutch controls [Page 883] were implemented quite effectively. But since some COCOM countries regard discussion of individual countries’ control mechanisms as being outside the Committee’s competence, there has been little information on the laxity or failures of governments in operating their control systems. (Some excellent Foreign Service reporting has, however, been received and more is expected, in response to Economic Reporting Circular 34 of March 28, 1952,8 which represented many months of intensive effort by several agencies.)

At a COCOM meeting on May 9 all delegates stated that their governments would welcome visits from the export control services of other participating countries to observe control methods. This is a hopeful sign.

A group from the Government of the Federal Republic of Germany, headed by the Director of the East-West Trade Group of the Ministry of Economics, arrived in the United States on July 1 for a month’s study of United States export control operations, techniques and procedures.9 This mission is the third of its kind, the first and second having been United States technical missions to the Federal Republic and Japan last fall and this April, respectively.

A working group has been set up under the EDAC to study export control techniques in order (1) to determine in which countries technical advice and assistance would be desirable; (2) to recommend appropriate programs for such advice and assistance; (3) to consider United States participation in an international exchange of key administrative export control personnel; and (4) to review what the United States could do to assist such an undertaking. This group’s study should enable the United States to initiate discussion and action in COCOM on a program involving wider participation of member countries.

Implementation of NSC 91/1 10

Agreement has been reached within the United States Government which will enable the Department of Commerce to follow the provisions of NSC 91/1, particularly with respect to International List II and United States List II–B commodities, with a minimum of inconsistency with control programs to be developed for Title II commodities under the Battle Act. On June 16 the Secretary of [Page 884] Commerce directed the issuance of Department of Commerce Program Determination No. 810,* which accomplishes the following:

Extends the security export control program to all friendly foreign countries in addition to COCOM countries, Sweden and Switzerland;
covers items on United States Lists II and II–B, as well as those on Lists I and I–A;
establishes the framework for treatment of capital equipment and production materials of both embargo and quantitative control classifications;
clarifies the practice and methods of obtaining information and assurances;
provides coordination with Battle Act activities;
codifies all outstanding program determinations and notices of action on the subject; and
permits a flexible and selective approach to the problem, particularly for United States List II and II–B items and capital equipment.

Under these arrangements, unless a country exceeds agreed Title II (or COCOM) export quotas, United States export licenses for identical items shall generally be granted. Specific problem cases, involving, for example, an important contribution by the United States to the ability of a country to fill its agreed quota, will be brought to the attention of the appropriate agencies and be dealt with by the Department of Commerce in the light of the general security interest of the United States.

Japanese Export Controls

During the period April 12–30 a United States technical mission composed of State and Commerce representatives was in Japan to discuss with SCAP, United States Embassy, and Japanese officials the problems of export controls and related matters. These discussions were a part of the turning over to the Japanese (on March 17) of the full responsibility for administering security trade controls. The mission obtained first-hand reactions of Japanese Government and business circles regarding continued restrictions on trade with Communist China.

The broad findings of the mission as set forth in its report of May 28 were as follows:

As a matter of national pride and an affirmation of its regained sovereignty, Japan will insist on equality of treatment with other nations in the field of security export controls; difficulties will be encountered in trying to maintain stricter controls than those of Japan’s principal competitors. Therefore, Japanese participation in an international organization to deal with these problems is essential to the maintenance of controls on trade with China.
Japan considers that on the basis of its first-hand knowledge of China it could trade successfully with that country without any threat to Japanese security. What little security consciousness exists in Japan is directed towards the Soviet Union rather than Communist China.
Trade with China is an important political and psychological issue. Controls over this trade will be blamed for many of Japan’s economic ills regardless of the justification for such a contention.
Technical assistance to the Japanese in the field of export controls is not necessary at this time, as export procedures are well developed and implemented.

As expected, and even before the effective date of the Peace Treaty (April 28), pressures on the Japanese authorities to resume trade with China were translated into action. The United States technical mission was presented with an informal request for agreement on relaxation of controls over five commodity categories (wool knitted goods, textile machinery, paper products, dyestuffs and galvanized iron sheets), which were not considered strategic by the Japanese Government. This request was later followed by a formal aide-mémoire to our Tokyo Embassy. After lengthy consideration of this request within the United States Government, the Japanese were informed that we could not formally concur in the relaxation of controls over the first four of these items, and that we preferred that an adjustment in controls be deferred until multilateral discussions are held. Recognizing, however, that because of domestic considerations the Japanese might feel compelled to allow the export of these items, we urged that minimum shipments only be made in exchange for important commodities, such as coal, iron ore and soybeans, and that publicity be avoided if possible. We noted that problems might conceivably develop in the future with regard to United States export policy to the extent that United States goods were involved in Japanese production and exports. We indicated that if the Japanese felt compelled to relax controls on these categories, we would strongly urge them to maintain controls over the galvanized iron sheets and certain other specific items within the four other general categories. As of July 1, the Japanese Government had not taken action to relax controls on any of these items.

Plans are in progress as of the date of this report for holding the multilateral discussions mentioned above on July 28 in Washington.11 [Page 886] The participants will be the United States, United Kingdom, France, Canada and Japan.

Although the Japanese at first professed open-mindedness as to the exact form of their membership in an international security trade control body, they have recently come out strongly for participation in COCOM. An aide-mémoire stating this preference was delivered to the United States, and it is understood that similar communications were received by the United Kingdom and France. This desire is based on the similarity of Japan’s control problems to those of the COCOM countries. Moreover, the Japanese Government believes it unlikely that other oriental countries would be brought into a separate Far Eastern group. COCOM is the only existing organization, and political pressures in Japan appear to require speedy adherence to an international group. The Japanese also fear that a separate organization would result in the perpetuation of stricter controls than those agreed unanimously in COCOM.

At the recent Consultative Group meeting June 24–25, information regarding the United States technical mission to Tokyo was transmitted to the participating countries. In accordance with previous discussions with the United Kingdom, France and Canada, the question of Japanese membership in COCOM was not raised substantively; rather, brief mention was made of the plan to hold exploratory meetings with the Japanese. It was also stated that the results would be reported to COCOM, and that no decision would be reached without consulting that body. All participating countries expressed agreement with this procedure.

Controls Over Transit Trade and Transshipments

Import Certificate and Delivery Verification (ICDV) System

It has been revealed that not until April 5, 1952 did the French Government introduce the ICDV system. (The last progress report12 was in error in stating that all COCOM countries except the United States had implemented the full procedure by July 1951.) This was discovered through difficulties experienced by United States exporters in securing import certificates from French importers. The French system as introduced had many defects. Similar problems were reported for Italy, Norway, and the United Kingdom, although officials of these governments stated that certificates were being issued promptly and that they consider their systems are working effectively.

As a result, on May 29 the Commerce Department announced that under certain conditions exporters applying for licenses to ship strategic goods to the participating countries could submit foreign [Page 887] consignee statements in lieu of import certificates required under the ICDV system. It was emphasized that this modification of the import certificate requirement was for a limited period only and that exporters should continue to make every effort to obtain import certificates. (See Appendix for a further discussion of this and other transit-trade problems.)

Belgian Proposal

For several months, it has been known that the Belgians planned to introduce into COCOM a proposal for the control of transit trade which would involve transshipment licensing over a selected list of strategic non-ferrous metals. The proposal was discussed in detail with the Dutch who evidently rejected it on the same grounds that they have consistently opposed physical controls over transit trade: namely, that financial controls should be used as a substitute for physical controls so that the burden of policing responsibility would not fall exclusively on the government of the transshipment point.

At the invitation of the Belgian Government the United States informally suggested a list of additional items for control. These were rejected on the basis that they did not meet the Belgian criteria for their listing, which listing evidently is based on raw and semifinished materials originating in non-participating countries. The Belgians formally introduced their proposal at the CG meeting of June 24–25 after the subject of transit controls was raised, as prearranged, by the United States Delegate. The proposal was referred to COCOM without comment.

From the United States standpoint, it would be desirable for the transshipment licensing controls to cover all International List I and II commodities. However, if the United States were to press for such comprehensive controls at this time, the initial but selective approach which has been proposed, and which holds some measure of promise from the practical standpoint of its possible acceptability in COCOM, might be jeopardized. The difficulties with the ICDV system and the numerous reports of continued diversions of significant quantities of copper, aluminum, lead and other highly strategic goods, including even bearings, render the Belgian initiative particularly important at this time. How speedily the proposal will be agreed in COCOM and then implemented is problematical.

Shipping Controls

During the period under review, no changes were made in the status of shipping controls applied by countries of the free world against the Soviet bloc, including Communist China. General dissatisfaction (see Appendix I to last progress report13) within the [Page 888] United States Government concerning the level of existing COCOM controls led to the establishment on May 5 of an interdepartmental working group under the Economic Defense Advisory Committee charged with the responsibility of reexamining United States shipping control policies. The next progress report will probably record the recommendations of this group.

Lack of agreement in COCOM as to the strategic importance of merchant vessels has kept these items under quantitative control, (quid pro quo treatment) but recent Western European deliveries to the Soviet bloc and planned construction appear to do violence to the International List II criterion that strategic importance is directly related to quantities exported to the bloc. COCOM country deliveries have shown the following pattern: 3 units in 1949 totalling 6,500 GRT; 7 units in 1950 totalling 17,000 GRT; 12 units in 1951 totalling 40,500 GRT; 4 units during January–May 1952 totalling 9,000 GRT; existing contracts for 18 units totalling 45,000 GRT. (These figures exclude, of course, a 13,000 GRT tanker (International List I) recently delivered to the USSR and a similar one committed for future delivery.) In 1951 these deliveries of vessels amounted to 50 percent of the value of total List II exports.

The United States believes that current Soviet acquisition of additional merchant vessels is of quite considerable importance to the Soviet bloc war potential. The increasing part played by Soviet flag vessels in supplying Communist China is a most important factor in this connection. Also nine-tenths of the vessels in the Soviet merchant fleet have speeds under 12 knots; two-thirds of them are over 20 years old; three-fourths are below 5,000 GRT; and three-fifths are coal burners. It is estimated that 96 percent of Soviet shipbuilding capacity is devoted to naval construction. In view of these data the continued availability of vessels in Western Europe not only supports an inadequate transport system, but may be an important factor enabling Soviet planners to continue to concentrate on naval construction, as well as resulting in Soviet acquisition of bigger, better, faster, and more specialized craft than might otherwise be available to the bloc.

One problem which is likely to become more important in the future in connection with United States efforts to reduce vessel deliveries to the bloc is the willingness of the bloc to pay substantial prices for obsolete vessels unsaleable in the West. The high level of ship construction in Western Europe since the end of World War II has largely compensated for wartime losses. It is likely that the problem of disposing of pre-war built vessels will present severe pressures on Western European governments to permit increased sales to the bloc.

[Page 889]

No progress was made during the period under review on a series of United States proposals for controls over Western vessels engaged in trade with Communist China (see last progress report) …

Decreasing Reliance on Trade With the Soviet Bloc

In the four-month period ended July 1, 1952 the MSA substantially completed its series of studies on important commodities in East-West trade, issuing papers on chrome, manganese, tin and tungsten, and fish and fish products. Thus a rather comprehensive factual basis has been established for further work towards developing action programs to strengthen the bargaining position of friendly nations as against the Soviet bloc.

This work has been given a start, albeit a slow one, through the mechanism of an interagency Studies Coordination Working Group established early in May under the EDAC structure. (Three meetings of the Group were held in May, but none in June because of the pressure of several of the members’ work on the Berlin Economic Countermeasures Group. See page 17 for an outline report on the work of this latter group.)

The Studies Coordination Working Group began its activities by considering in detail the situations of a number of Western European countries whose reliance on East-West trade appears to be significant. Such reliance was, from the Group’s standpoint, agreed to be mainly a function of economic and security factors. In the light of these factors the Group turned to a consideration of the most effective means through which a lessening of the West’s dependence on the bloc could be achieved practically. Exploration was initiated of the possibility of (1) increasing production in the free world of the main imports received from the Soviet bloc; of (2) systematically coordinating Western European countries’ trade negotiations with the bloc countries, thereby minimizing—or extracting the greatest net advantage from—the inclusion of strategically important items in the trade agreements; and (3) providing alternative markets for Western European goods, particularly “soft” goods, now sold in the bloc.

Meanwhile, a Coal Action Program Working Group, established in late March, has been reviewing East-West trade agreements involving coal which are coming up for renewal in the near future. This is being done with the aim of anticipating the demands that will be made on the various Western European countries and the pressures to which they will be subjected and, wherever possible, recommending means of strengthening their bargaining power.

This plan of operation was decided upon after the Coal Action Program Working Group decided against the proposal of urging the [Page 890] Western European countries to import large quantities of United States coal, say five million tons, this spring for stockpiling purposes. The idea underlying this proposal was to take advantage of declining freight rates and the easing demand for vessels. The reasons for rejecting this proposal are contained in the Working Group’s report of May 12 to the Steering Group of the EDAC. The Working Group recommended instead that the MSA, through its representatives abroad and in conjunction with foreign government officials, attempt to determine desirable levels of stocks for each month of the year below which they should not be permitted to fall. This is in the process of being done.

An encouraging shift has taken place in recent months towards an improved Western bargaining position as far as Polish coal is concerned. A Polish-Swedish coal contract signed on May 30, after six weeks of hard bargaining, provides for a substantial reduction in prices (although they are still higher than average prices of British coal) and large deliveries prior to October 31. The Danish Government, moreover, was able to conclude an agreement on June 9 which will provide 750,000 tons of coal at prices based upon those fixed between Sweden and Poland and approximately 20 percent below those agreed last November between Denmark and Poland. This was accomplished without making a commitment to deliver a large second-hand tanker. The United States’ liability resulting from its earlier undertaking to cover the net dollar cost of any shortfall in Polish deliveries below 1.17 million tons has thus been reduced from about 16 million dollars to 5 or 6 million.

The mild winter of 1951–52, extraordinary United States deliveries to Western Europe of 28 millions tons during 1951, and the hardened bargaining attitudes of Western European countries, together with timely exchanges of information among Sweden, Denmark and Norway, are the principal factors in this favorable shift of the terms of trade as regards one basic commodity received from the bloc. Whether this advantage will be retained remains to be seen. But apart from the important weather factor, this encouraging development points up the opportunities that should be actively pursued by way of strengthening Western European countries’ bargaining positions.

This encouragement must be tempered with the realization that in some cases, notably the French, it is difficult to calculate the marginal significance of a fairly wide range of basic commodities received from the bloc for which the counterpart includes highly strategic goods. Commercial rivalries also continue to render even a small degree of coordinated bargaining difficult of attainment. The practice of Soviet bloc “shopping around”, as exemplified by recent Soviet efforts to obtain four strategic cargo vessels in the [Page 891] Netherlands—orders which the French, Belgians and Italians claim to have declined earlier—could undoubtedly be turned more to the advantage of the West given acceptance of the coordinated bargaining principle by all COCOM countries.

International Black List

United States agreement to provide advance notice to participating countries regarding administrative proceedings against their nationals resulted in withdrawal of the Netherlands reservation on the establishment of the Black List (see last progress report). However, considerable concern on the part of the other participating countries developed regarding the implications of a Black List when the codified version of the proposal was cleared on a high level within governments. Earlier agreements by them evidently had not had adequate intragovernmental clearance.

The United Kingdom, France and Italy particularly indicated their reluctance to accept the Black List concept, primarily because of the absence or limitation of legal authority to withhold export licenses and the resultant political repercussions if nationals or foreigners were to challenge governmental authority to deny export facilities. There was also a general hesitancy to employ a war-time measure such as a Black List during peace-time. Certain participating countries indicated a preference for a control list which would not make it mandatory to deny licenses, but which could be operated on a case-by-case basis by administrative rather than legal action. The question was therefore referred to the June meeting of the Consultative Group.

The meeting resulted in a decision to replace the Black List with a Watch List, the criteria for which are to be developed in COCOM. The main difference between this and the previously agreed Black List lies in the penalties to be applied. A Watch List would not make it compulsory to deny exports, but would oblige participating countries to make thorough checks before making security goods available to listed firms. In some instances this might result in outright denial of strategic goods to those firms. Other differences between this and the earlier proposal are that there is a greater leeway for inclusion of names on the Watch List, non-participating countries would normally be consulted before severe action is taken against their nationals, and the high degree of secrecy specified in the Black List agreement need not be maintained under this plan.

Preclusive Buying

The subject of pre-emptive operations has been given additional study. On February 28 the NSC Senior Staff asked the Economic Defense Advisory Committee (EDAC) for an evaluation of the [Page 892] NSRB study, “Analysis of Possible U.S. Objectives and Course of Action with Respect to the Initiation of an Organized and Coordinated Program of Covert Preclusive Buying.” An interdepartmental working group was set up to review the NSRB paper.

In its report the working group pointed out the many limitations on the use of preclusive buying as an effective instrument to promote economic defense objectives. It recognized, however, that in special cases preclusive purchase operations may be justified, and emphasized that all agencies should be alert to such special cases. These conclusions were subsequently noted by the NSC. EDAC is ensuring the continuous review of current intelligence in order to identify spot cases warranting preclusive treatment and to reach agreement as soon as possible of fiscal and administrative arrangements that would permit the United States to move quickly in specific cases.

No cases were acted upon in the period under review, although a number are being investigated.

Berlin Economic Countermeasures

Upon the approval of NSC 132/1 on June 12, 1952,14 a Working Group was set up under the EDAC to develop plans for economic countermeasures to possible Soviet action against Berlin. The Working Group has completed a draft report assessing the various economic measures which the United States alone or in concert with its Western European Allies might take to bring pressure on the USSR in the event of another Soviet blockade of Berlin or some other form of intensified action against the city. The final cleared version of this report should be ready for transmittal to the NSC in the near future. The report is essentially a survey of the economic weapons available to the Allies in situations short of war. The main weapons are in the field of trade; others are in the related fields of finance, transport, and communications. The report will contain estimates of the economic, political and psychological impacts in both the East and West of the various measures dealt with.15

The main problem at this point is that of consultation with our principal allies, including the Federal Republic. This consultation was about to be put underway as of the date of this report. In preparing for it the Working Group has emphasized the danger of arousing Western European suspicions that United States proposals [Page 893] are in the making for bringing about further long-run restrictions on East-West trade rather than developing a program of countermeasures of a temporary and reversible character which could be lifted when our particular objectives in Berlin might be obtained.

United States Financial and Import Controls

Foreign Assets Control Regulations

Portions of dollar accounts in the United States of eleven European banks have been blocked by Treasury under the Foreign Assets Control Regulations respecting Communist China and North Korea since their issuance December 17, 1950.

During the period under review strong protests were made by the Netherlands Government over the blocking (in March) of N. V. Slavenburg’s Bank dollar accounts in the amount of over one million dollars. As a result of this case the Dutch have proposed certain bilateral procedures for any future blocking actions against their banks. Pending consideration of these proposals, Treasury has extended until mid-July an arrangement reached in May whereby the Dutch will be given at least 24 hours notice before further blocking action is taken against any Dutch nationals.

Swiss bankers also are exploring with Treasury the possibility of bilateral cooperation in preventing dollar transactions in violation of the Foreign Assets Control Regulations. The Swiss banking secrecy laws have been an obstacle to compliance with Treasury requests for information on suspect transactions.

The United States is considering the advisability of approaching other Western European countries bilaterally to obtain their cooperation in preventing violations of the Regulations, thereby minimizing the necessity of our taking blocking action against their banks.

In April, to close a developing loophole, the Foreign Assets Control further tightened its import restrictions prohibiting the importation into the United States of Communist Chinese goods. This was done by instructing collectors of customs to apply the restrictions applicable to Chinese goods to all importations of certain merchandise. This action was taken as a result of evidence that attempts were being made to circumvent the Regulations by sending Chinese goods into this country described as originating in countries other than China.

In June, Foreign Assets Control elaborated its April instructions by issuing two lists of specific commodities presumed to be of Chinese origin. One list sets forth commodities which, subject to certain exceptions, are presumed to be Chinese regardless of the country from which shipped. The other list sets forth additional [Page 894] commodities presumed to be of Chinese origin if imported through Hong Kong, Macao, or any Soviet bloc country.

Dollar Earnings of European Soviet Bloc

In April, in response to questions raised in COCOM, the United States furnished data on its total 1951 payments balance with the European Soviet bloc which amounted to a United States deficit of about 68 million dollars. (1952 imports from the European Soviet bloc will be much less than in 1951; first quarter imports were only 10 million dollars in 1952.) Several COCOM delegations had stated the belief that the United States dollar is one of the most “strategic” items, and that failure to control it is a significant loophole in the control system. Some of the dollar exchange available to the Soviet bloc (mainly Poland, Czechoslovakia and the USSR) is undoubtedly used for financing illegal trade, but there is no conclusive evidence on how much of the total might be used thus. In any event, it is the United States position that existing security trade controls prevent or limit Soviet bloc purchases of strategic items with United States dollars or any other currency, and that the effectiveness of these controls would be enhanced by physical controls over transit trade and transshipments in certain parts of continental Europe.

There have been reports of attempts to ship goods of Czechoslovak origin to the United States through third countries. This would be an attempt to evade the effects of the current inability of Czechoslovakia to obtain consular invoices for direct exports to the United States, and as such could be an indication of a pinching shortage of dollar exchange.

The Moscow Economic Conference

There has been general agreement among the United States and Allied Governments as to the purposes of the Moscow Economic Conference, April 3–12. Its consequences and after-effects have been primarily in the political and propaganda fields. In general the Conference has had four principal results:

The development of some irritation and suspicion among government and business elements in Western Europe, based on the fear of losing present and future marketing opportunities in Eastern Europe to competitors. The relative size and importance of the British delegation to the Conference played no small part in generating these suspicions, particularly on the part of the Western Germans.
The agitation of sensitive issues in various countries, such as unemployment in the British, French and Japanese textile industries and the Italian shipbuilding industries, and the unsatisfied demand for capital equipment in underdeveloped countries.
The establishment of a new Communist front organization, a Permanent Committee for International Trade, to further the propaganda objectives of the Conference.
A small amount of trade. Out of a reported total of 500 million dollars worth of deals negotiated during the Conference, only three, involving an aggregate of 10 million and which could easily have been made in the absence of such a conference, had reached the completion stage by mid-June. It is not improbable, however, that the USSR or Communist China will complete one or two substantial deals involving the import of non-strategic goods in the near future to encourage Western participation in a second conference.

These results of the Conference were of sufficient importance to have constituted the initial principal reason for convening the Consultative Group meeting of June 24–25. While no significant conclusions came out of the meeting, all delegations did reaffirm adherence to the security controls developed in COCOM, and none suggested that they be relaxed. At the same time several delegations emphasized the desire to expand East-West trade to the maximum compatible with the mutual security interest. In general, the discussion helped to dispel the irritations which had arisen as a result of the Conference.

Meanwhile the Psychological Strategy Board has underway project “Plumage”,16 one of the objectives of which is to increase the degree of acceptance in the free world of United States economic security objectives vis-à-vis the Soviet orbit. One of the tasks under this objective would be an attempt to wrest the trade propaganda initiative from the Soviets.

Intelligence for Economic Defense

On April 25, in coordinated letters to the Director of Central Intelligence, the Director for Mutual Security and the Under Secretary of State, stressed the need for more complete and timely economic intelligence support for the effective implementation of their respective economic defense responsibilities and proposed the establishment of an Intelligence Working Group within the EDAC structure. This working group would develop closer continuous relationships among the operational, policy formulation and intelligence-research elements concerned with economic defense. In his reply the Director of Central Intelligence concurred in the proposals, including the chairmanship of the Group by CIA.

The Intelligence Working Group (IWG) held three preliminary meetings during the latter part of June which were concerned primarily with the drafting of its terms of reference.

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Commodity and intelligence specialists of several agencies are participating in the overall survey of the items on the United States strategic control lists (see Title II Activities, page 5). It is hoped that within this process the bulk of the International List II commodities of priority importance can be thoroughly reviewed, and new analyses completed before the Paris discussions, scheduled for October and November, on 1953 quotas.

The Office of Intelligence and Research in the State Department has initiated a series of analyses of bilateral trade and trade agreement relations of East-West European trading partners. It is hoped that personnel in other agencies will also be assigned to this project in order to make it possible to complete a number of these analyses for use in connection with the forthcoming trade agreement negotiations.

Considerable attention has been given during the period under review to developing intelligence on shipping problems within the economic defense field.

The most ambitious project underway during the period under review was NIE 59: “Relative Strategic Importance of East-West Trade to the Soviet Bloc and to the Rest of the World.”17

  1. The progress report was transmitted to Lay under cover of an attached memorandum of Sept. 22 from Secretary Acheson and Harriman, not printed. Also attached to the source text, but not printed, was an appendix entitled “Problems of the Import Certificate and Delivery Verification System and other Transit Trade Problems.”
  2. For text of NSC 104/2, see Foreign Relations, 1951, vol. i, p. 1059.
  3. Regarding the Kem Amendment, see the letter from Secretary Acheson to Senator Connally, June 9, p. 847.
  4. For documentation concerning the conclusion of the Peace Treaty with Japan, see volume xiv .
  5. Sir Oliver Franks, Henri Bonnet, and Alberto Tarchiani, respectively.
  6. Assistant Secretary Linder.
  7. Sir Anthony Eden and Robert Schuman, respectively.
  8. The document under reference has not been further identified.
  9. A memorandum of conversation between the Head of the German Delegation, Dr. Hans Kroll, and several officials in the Bureau of German Affairs, July 7, 1952, is in file 460.509/7–752.
  10. For text of NSC 91/1, “East-West Trade,” Nov. 17, 1950, see Foreign Relations, 1950, vol. iv, p. 227.
  11. See Progress Report dated June 16, 1952 by the Secretary of Commerce on NSC 91/1, “East-West Trade”, as amended by NSC 104/2. [Footnote in the source text. The Progress Report under reference, not printed, provided administrative guidelines by which the Office of International Trade was to be governed in making determinations of and recommendations concerning violations of the International Lists and the Battle Act lists. The Progress Report is in the S/PNSC files, lot 61 D 167, NSC 91 Series.]
  12. For additional documentation concerning these discussions, see volume xiv.
  13. Dated Apr. 23, 1952, p. 834.
  14. Appendix I is not printed; see footnote 1, p. 834.
  15. See memo for NSC from Executive Secretary, subject “Organized and Coordinated Program of Covert Preclusive Buying,” dated June 12, 1952 and NSC Action No. 652. [Footnote in the source text. For the memorandum under reference, see p. 854.]
  16. For text of NSC 132/1, see volume vii .
  17. The “Report of the Economic Countermeasures Working Group,” ED/SG D–12, Sept. 12, 1952, not printed, is in file 460.509/9–1252.
  18. Concerning this project, see the progress report on PSB D–28, Jan 14, 1953, p. 910.
  19. Dated Apr. 16, 1953, p. 949.