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:
  • Sixth 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 July 1 to November 1, 1952) be circulated to the members of the Council for their information.

Battle Act

Title I Activities

During the period under review one formal determination to continue aid despite shipment of an embargo item was made under the Battle Act. In July the President announced that aid would be continued to Denmark despite the fact that the Danes had knowingly permitted the shipment of a Title I, Category B tanker to the USSR. The exception was granted after consultation with all interested agencies and after Ambassador Draper, General Ridgway, and Ambassador Anderson all pointed out in strongest terms the very serious effects that termination of aid in this case might have on NATO and the Northern European Defense Program.

No other exceptions were formally granted during the period under review; however, the Economic Defense Advisory Committee (EDAC), in addition to the recommendation on prior commitments described below, has recommended that an exception be granted to Austria for the shipment of some $180,000 worth of bearings to Poland, but not for the shipment of $172,000 worth of additional bearings. … Efforts are also under way to put the Norwegian aluminum exception cases into final form—both the aluminum under the current trade agreements with the USSR and Poland in the total amount of 2,750 tons, and 500 tons of aluminum covered by a prior commitment to Czechoslovakia.

Prior Commitments.

[Page 914]

As a result of top-level bilateral approaches, as well as the June 24–25 Consultative Group Meeting, replies were received from other participating countries on the prior commitments issue. The net effect of these replies is outlined in some detail in Appendix I to this report. In general the responses were to the effect that portions of these countries’ total prior commitments would be eliminated. Taking into consideration the intensive and drawn-out efforts which have been made to eliminate or at least reduce the prior commitments, it was generally conceded that these responses from the various governments represented the maximum support we could get for our position. The EDAC therefore recommended that the Administrator advise the President to continue aid to the United Kingdom, France and Italy although these countries had knowingly permitted shipments of Title I, Category B prior commitments in the amount of approximately 2.5 million dollars since January 24, 1952. The EDAC made substantially the same recommendation with respect to approximately 7.4 million dollars worth of prior commitments which these countries had indicated they were absolutely unable to cancel; this latter recommendation, however, was to be reviewed, if necessary, in the light of circumstances at the time of actual shipment. The EDAC recommendation did not cover commitments for future delivery of the second $3,000,000 Danish tanker to the USSR nor certain of the Federal Republic’s commitments, these items still being under active negotiation.

The Administrator, having reviewed the EDAC recommendation, felt, however, that he would not be warranted in recommending to the President at this time an exception for any goods which had not already been shipped. He therefore determined to advise the President that assistance not be discontinued to the United Kingdom, France and Italy despite the shipment to the Soviet bloc by these countries of an aggregate amount of 2.5 million dollars worth of Title I, Category B goods; but he recommended that no exception be granted at this time with respect to the probable future shipments covered by prior commitments. As stated above, these are anticipated to amount to 7.4 million dollars, excluding items still being negotiated. This means that the basic issue of the prior commitments still remains to be dealt with in the light of the situation to be encountered in 1953. It is generally agreed, as indicated by the EDAC recommendation, that the best solution would be to dispose of the issue once and for all in a package exception as soon as it is feasible to do so. Further negotiations on this subject can only weaken our position generally in COCOM negotiations and prevent us from pressing other important matters.

Title II Activities

[Page 915]

Title II of the Battle Act is the area in which it is expected that the major part of future work under the Act will be done. In order to implement this Title, the Battle Act Administrator requested a survey of all items on the United States security lists in order to determine which items are problem commodities and therefore should be discussed with friendly countries in an attempt to obtain agreement to restrict shipments of such items to the Soviet bloc. (See fifth progress report3 for further background). In the months since July 1, more than 20 technical task groups centered in the Office of International Trade of the Department of Commerce have made an extensive study of a large portion of the United States security lists in order to make the necessary determinations. Since COCOM discussions were originally scheduled to be held in October to establish 1953 quotas for International List II items, the technical task groups gave priority to surveying the 96 items on this list. The task groups completed their preliminary assignments in mid-October, and, since that time their recommendations have been under review on a more formal interagency basis.

The discussions in COCOM will be conducted on the basis of one or more of the following possibilities:

change in definitions;
change in strategic ratings—i.e., complete or partial up-grading to List I, down-grading to List III, or removal from the Lists:
change in global quotas;
change in national quotas; and
change in type of List II control—from 3D (quid pro quo) to 3A (quota) or vice versa.

The United States has already indicated that it wishes to have 39 items reviewed in the course of the discussions, which were to begin November 12. This leaves 57 items respecting which the United States does not at present believe that COCOM review would result in a further tightening of quantitative controls. On all items for which the U.S. had not requested changes by November 12, we are willing to accept 1952 quotas for 1953, with the understanding that any participating country is able to propose changes on the basis of new justifications. Our requests for reconsideration of certain items are directed at revising 1952 quotas downward.

It is anticipated that the COCOM discussions will be lengthy and controversial, since most of the requests from other countries are directed at changing quotas upward or re-allocating country quotas. Germany, for example, has requested an increase in its national quotas for approximately 35 items, largely on the basis of increased production in Germany.

[Page 916]

The German request brings out sharply the difference between the U.S. and Western European approaches to questions of export control policy. On the one hand, the United States has continuously proposed tighter controls (e.g., the United States will endeavor to have about 20 List II items raised to embargo status during the course of the COCOM discussions). On the other hand, the Western European countries have repeatedly asserted that while they concur in embargoing certain selected items to the Soviet bloc, items for general industrial uses, even though of strategic importance, should be permitted to be exported to the bloc in limited amounts. This view, based in part on the necessity to obtain certain essential commodities from Eastern European countries, is highlighted by the fact that increased quotas have been requested for a total of about 55 of the 96 International List II items by the Western European countries. In this latter connection it is interesting to note that by and large the 1952 quotas will probably not have been fully utilized.

The COCOM List II discussions should prove instructive by way of demonstrating how much further the United States can press successfully for tighter security trade controls. A careful review of these discussions upon their completion will be advisable in order to determine what possible new tactics and approaches the United States should adopt in future Title II (of the Battle Act) negotiations to achieve certain objectives without lessening the degree and extent of security controls already attained.

The general commodity problem of natural rubber, which is not involved in the International List II quota discussions, remains a serious one. Despite continued efforts, the United States has not been successful in achieving UK agreement to a further reduction of Sterling area rubber shipments to the Soviet Union below the limits previously established by the UK as defensible on strategic grounds, i.e., 80,000 tons a year, estimated as the civilian consumption requirements of the USSR. The rubber problem is further complicated by the action of the Government of Ceylon in October in purchasing 80,000 tons of rice from Communist China and ensuring the Chinese free use of the resulting funds for the purchase and export of rubber and/or other Ceylonese products. In addition a long term rice-rubber agreement with the Chinese has been approved “in principle” by the Ceylonese cabinet. A Ceylonese mission in Peking is attempting to negotiate a better rice price in the long term agreement. In the agreement as it now stands the Communist Chinese have agreed to sell 200,000 tons of rice to Ceylon and to purchase 50,000 tons of sheet rubber each year for five years beginning in 1953. China has agreed to pay a price in 1953 about 40 percent above the average Singapore f.o.b. price.

[Page 917]

Throughout the negotiations leading to the conclusion of this contract, U. S. officials sought to convince Ceylon that a contract of this kind would threaten the independence of Ceylon and would impair the efforts of the Free World to resist Communist aggression. On more than one occasion it was pointed out to Ceylonese officials that the contract would lead to Ceylon’s becoming increasingly dependent upon Communist China as a source of Ceylon’s vital food supplies and an outlet for one of Ceylon’s principal exports. The U.S. offered Ceylon alternative opportunities to sell rubber and to buy rice, but in strict financial terms these offers were not considered by Ceylon to be as attractive as the politically-inspired offer of Communist China.

Reactions to this development in other parts of Southern Asia and the Far East might be unfortunate from the standpoint of U.S. security interests. We have received a report to the effect that Indonesia has within recent weeks shipped 8,000 tons of rubber to the USSR. This is in addition to reports that Indonesia plans to send a trade mission to Communist China and possibly the Soviet Union.

Title III Activities

. . . . . . .

Technical Advice and Assistance.

The Technical Advice and Assistance Working Group established under the EDAC has completed studies of the export controls and their enforcement in certain COCOM countries as well as in several non-COCOM countries. (See last progress report for further background.) The working group has decided that invitations should be extended to the COCOM countries before inviting non-COCOM countries. Accordingly, it has recommended that invitations be extended to Italy, France, Belgium, Luxembourg, the Netherlands, Norway, Denmark, and Portugal to send a group of technicians to the United States or to exchange technicians with us for the purpose of studying the export controls of each country to acquire a knowledge and understanding of each other’s control policies, licensing procedures, enforcement techniques, and inspection methods. The UK Government already has accepted our proposed exchange and a British team was to visit the United States the last week in November. A similar invitation will probably be extended to Italy next.

The regular semi-annual discussions with the Canadians in the field of export controls were to take place in Washington on November 6 and 7. Among the items to be discussed were International List II matters, Japanese export controls, and informally, the question of transaction controls.

[Page 918]

Japanese Participation in International Trade Controls

Meetings were held in Washington July 28 through August 2 with representatives of the United Kingdom, France, Canada, and Japan to consider proposals for establishing multilateral coordination on economic security problems in the Far East.4 It was obvious at the outset that the United States proposal for a Far Eastern export control mechanism separate from COCOM was completely unacceptable to the other four powers. It was agreed, accordingly, that Japan should be invited immediately to join the CG and COCOM and that a permanent semi-autonomous China Committee would be set up within the CGCOCOM framework. The China Committee, would be responsible for the development of the detailed aspects of security export controls relating to Communist China under the policy guidance of the Consultative Group.

The five powers had no authority to discuss at the July 28–August 2 meetings the future level of Japanese controls in the multilateral framework, but secret bilateral conversations took place between the United States and Japan on this subject simultaneously with and after the five power discussions. These conversations ultimately resulted in a secret understanding between Japan and the United States which was initialled on September 5, subject to final approval by both governments. In accordance with this understanding, the Japanese have indicated a willingness to continue controls respecting Communist China which are more strict than those of all other COCOM countries except Canada and the United States. Japan has agreed to embargo to Communist China: (1) all items on any International Control List, (2) all items on the United States Security Lists, and (3) additional items to be mutually agreed on by the US and Japan. In the course of the bilateral talks the United States representatives submitted to the Japanese a list of 400 items as a tentative basis for negotiations on additional items to be embargoed under the third category.

The Japanese have indicated acceptance of about 280 of these 400 items for embargo. The United States Government has been conducting a technical review of the remaining 120 items. It is expected that we shall press for the retention of some of these in the embargo category, and that we shall accept the Japanese suggestions respecting their relaxation of controls on others. Under the terms of the bilateral agreement, Japan will exercise licensing controls over those items on the list which it is agreed need not be embargoed. For items agreed (for purposes of Japanese controls) to be of some strategic importance to Communist China, strict quantitative controls would be exercised and exports permitted only if examination [Page 919] of the individual transaction showed it to be advantageous to Japan.

Throughout the August bilateral discussions with the Japanese they repeatedly emphasized their view that any bilateral agreement reached with the United States would be meaningful only in relation to the intent that both governments should seek comparable action in COCOM and that the bilateral agreement would be directly affected by such multilateral agreement as is reached. There is now some reason to believe that the Japanese are prepared to relax their insistence on this point.

The Consultative Group met in Paris on September 18 and 19 in order formally to welcome Japan to CGCOCOM membership, and drew up the directive to the Coordinating Committee to establish the permanent China Committee.

Controls Over Transit Trade and Transshipments

The transit trade and transshipments problem remains a significant loophole in the international security trade control effort. This problem has been highlighted by the estimate of our Embassy in Santiago that between 10,000 and 20,000 tons of Chilean manufactured and semi-manufactured copper found their way into the Soviet bloc in the year ended May 1, 1952.5 The problem in the case of Chile has been primarily that of the Chilean Government’s passivity in permitting diversions to take place in free ports of Europe, principally Antwerp and Rotterdam. It appears that certain highplaced Chilean Government officials were aware of this traffic and took no effective measures to control it. These officials are no longer connected with the Chilean Government.

Other reports have been received and confirmed of strategic materials finding their way into the Soviet bloc via transshipment points. Lead and copper from Yugoslavia and scrap iron and copper originating in the Middle East were reported to be some of the commodities involved, although the problem is by no means confined to the commodities mentioned above. The reports on diversions of strategic commodities originating in Yugoslavia have led to considerable concern over the effectiveness of that country’s controls.

During the technical discussions on proposals for transshipments controls in COCOM held from September 9 to September 13, it was noted that there were still wide variations in the extent to which the ICDV system was used. It appeared that the unevenness in the uses of the scheme was still largely due to the fact that the French and Italian Governments were using it on a highly selective basis. [Page 920] The French delegate agreed that his Government had been somewhat backward in the use of the scheme because of the inflexible administrative system in France. The Italian delegate stated that his Government had in recent months greatly intensified the use of the system. It was apparently agreed finally that not only import certificates but delivery verifications as well should automatically be required for all exports of items on the International Munitions List, International List I, and selected items on International List II, except where exporting Governments were completely satisfied as to the end use of the items in question. The extent to which this agreement has been implemented is yet to be ascertained.

The fifth progress report on NSC 104/2 outlined the Belgian proposal introduced in COCOM for transshipment licensing of a selected list of strategic non-ferrous metals. Action on the proposal has been deferred by further consideration by the United States and the United Kingdom of the Netherlands proposal for transaction controls. The Dutch have persistently argued that the transit country should not be expected to interfere with shipments which have been financed in another country and thereby directly or indirectly authorized for movement to the Bloc by that country. They state that such shipments should be controlled on security grounds at the financial source in order to reduce the possibility of diversions to the bloc occurring intransit. The Dutch have indicated that they could justify the institution of physical transshipment controls in the Netherlands only when adequate safeguards at the source have been agreed to by all participating countries. The Dutch have further contended that since the responsibility for the sale of strategic goods to the Soviet bloc is clearly that of the Government authorizing the transaction, the Government of the transit country or transshipment point should not accept the complications which would arise from interference with otherwise legal transactions. Further, the Dutch aver that the institution of transshipment controls would be in violation of several international agreements providing for the freedom of transit, including the Convention of Barcelona, the Treaty of Mannheim, and the GATT. Nevertheless, the Dutch stated that they would be prepared to attempt to find a legal basis and a technique for transshipment controls if the PC’s would (1) institute and execute effective controls on the financial transactions between their residents and Soviet bloc countries involving strategic goods; (2) make a wider use of the ICDV system; and (3) institute transshipment controls over strategic goods within their own territories. Action on the Dutch proposals, which were considered preliminarily in COCOM and its sub-committee on Transit Trade in September 1952, has been postponed to give the Governments [Page 921] of the United States and the United Kingdom an opportunity to consider further the desirability of transactions controls.

The United States is now prepared to state in COCOM its willingness to institute a regulation prohibiting United States traders from engaging in controlled trade transactions with the Soviet bloc except pursuant to license. Banks, insurance companies, and carriers which participate in controlled trade transactions only in their normal capacity would be excluded. Attempts are now under way to get the British and Dutch to agree on some limited form of financial control so that progress can be made on the extremely important question of transshipment controls as soon as possible.

Shipping Controls

On July 25, the EDAC Cargo Transport Controls Working Group presented a series of shipping control recommendations to the Steering Group for negotiation in COCOM and bilaterally with other important maritime nations not represented in COCOM. The working group’s report reflects the dissatisfaction within the United States Government concerning the level of existing COCOM shipping restrictions (see fourth and fifth Progress Reports). The report focuses attention on the value to the Soviet bloc of shipping services performed by the West, and recommends that COCOM countries (1) embargo the sale to Soviet bloc countries of all merchant vessels above 1,000 gross tons; (2) prohibit all repairs to Soviet bloc ships except emergency or voyage repairs; and (3) prohibit all chartering of vessels to the Soviet bloc.

The Department of State was unable to endorse the working group report, and requested the Steering Group of the EDAC to reexamine the proposals in the light of comments and objections concerning (1) the criteria used by the working group, (2) the indicated judgment as to the vulnerability of the Soviet bloc to shipping restrictions, (3) the economic impact of the proposed restrictions on Western European countries, and (4) negotiability of the proposals. Consideration of this problem is still pending in the Steering Group.

. . . . . . .

Additional United Nations Sanctions Against Communist China

In the period under review continuing exhaustive consideration has been given the problem of the advisability and timeliness of the United States pressing for additional economic sanctions against Communist China in Seventh Session of the United Nations General Assembly. The critical point at issue in these deliberations had been the judgment of what degree of success or failure might be expected to result from such action by the United States.

[Page 922]

On August 14, 1952 copies of a “working paper” were handed to the Washington representatives of the United Kingdom, France, Canada, Australia, New Zealand, and South Africa, on a secret basis, proposing that the Additional Measures Committee recommend to the General Assembly at its Seventh Session that the latter formally call for a total embargo against Communist China and North Korea in the event of continued inconclusive armistice negotiations and if an appeal by the General Assembly to the Communists to conclude an armistice should fail. The US further proposed that the suggested UN total embargo be supported by certain shipping, transit trade, insurance and assets controls.

The response of these six countries was strongly negative. The chief objections raised by them were: (1) a total embargo would be ineffective in producing an armistice, our primary objective; (2) it might be provocative, substituting “a new drift towards the worst” for the “present relative stabilization”; (3) since it would be futile without a naval blockade, it might ultimately entail recourse to one; (4) it would split the majority upholding the UN action, fail to gain Arab-Asian support, and heighten neutralist sentiment in the UN General Assembly; (5) it would mean the ruin of Hong Kong, whose position is of great importance to the Free World. These replies were made between August 22 and September 8, 1952.

A detailed re-examination of all aspects of the question was undertaken in the light of these responses to determine what steps should be taken to persuade the British and others to support further economic measures by the General Assembly if it should fail to obtain Communist agreement to an armistice.

Of interest in this connection (and even more directly related to the subject of China controls in COCOM) is a recent State Department intelligence estimate (Intelligence Report No. 6051 of October 27, 19526) of the capacity of the Trans-Siberian Railway available for traffic to China. It appears that all United States intelligence agencies, … are prepared to accept a substantially higher estimate of this capacity than previously, i.e., 5.1 million long tons per year versus 2 million. In addition, Intelligence Report 6051 makes the following observations. Apart from its great importance for assessing the USSR’s war potential, Trans-Siberian capacity has a distinct bearing on the effectiveness of any new restrictions on Western shipping services to the Soviet bloc. As regards military items moving to China from the USSR they are probably carried for the most part overland via the Trans-Siberian Railway. Insofar as China imports non-military and other non-strategic goods by sea, the explanation would appear to be the conventional cheapness of [Page 923] this form of transport rather than the lack of adequate land transport links with the European Soviet bloc.

Decreasing Reliance on Trade With the Soviet Bloc

The Decreasing Reliance Working Group continues to study the problems and possibilities of (1) developing alternative sources of the principal imports from the Soviet bloc; (2) developing alternative markets for commodities now sold in the bloc and (3) systematically coordinating Western European countries’ trade negotiations with the bloc countries. MSA, Commerce and State, respectively, are in the process of completing papers suggesting specific action programs on these three fronts. (Preliminary MSA papers containing action recommendations on alternative sources have already been reviewed by the working group. Commodity specialists on coal, grains, timber and high-protein feeds have already been assigned to develop these recommendations further in the light of various existing internal and international economic programs.)

At this stage in the effort to develop decreasing reliance action programs, it may be useful to outline certain facts and considerations that will shape the action programs as presently envisaged, and will determine the nature and intensity of future United States efforts to lessen the strategic risk inherent in the Free World’s economic dependence on the Soviet bloc.

  • First, the economic problems involved in a program of decreasing reliance are extremely complex. In present circumstances, the dependence of Western Europe upon imports of basic supplies from the Soviet bloc probably cannot be eliminated entirely. This statement is elaborated below. Individual cases can, however, be helped, and the United States will continue to provide appropriate support (as in the Danish-Polish case early in 1952) to strengthen Western European countries’ bargaining positions as against the Soviet bloc.
  • Second, and this tends to be overlooked in some European quarters, the forced expansion of heavy industry in the Soviet bloc involves a shift of emphasis from agriculture to industry, and from production of goods of the kind wanted in the West (and Japan) to those useful in the Soviet drive towards industrialization and self-sufficiency. This shift of emphasis, affecting labor as well as other resources, has the effect of greatly diminishing or eliminating such surpluses of primary materials as the individual nations of the Free World were accustomed to import from what is now the Soviet bloc. It is therefore incorrect to assume or hope for anything like the pre-war flow of food, feed, fuel and timber from the USSR and the now Sovietized countries of Eastern Europe and Communist China. Nor is it correct to assume that marketing possibilities [Page 924] for consumer goods in these areas will even distantly approach prewar levels.
  • Finally, the persistence of an extremely complex dollar deficit problem must be faced. One of the most important single aspects of this problem is the greatly increased dependence, as compared with the pre-war period, of the rest of the Free World upon the United States as a source of supply. The two major explanations for this increased dependence are the expanded world demand for imported goods and the failure of sources of essential goods other than the United States and Canada to expand output proportionately with demand. This confronts us with a dilemma, which can be illustrated by considering two commodities—grain and coal.

In pre-war years world exports of grains, exclusive of rice, totaled 32 million tons on average, with the United States and Canada accounting for 7 million tons of this total. In fiscal year 1952 world exports of grains were an estimated 40 million tons, with the United States and Canada accounting for 25 million tons. The 18 million ton increase in North American grain exports has been required to meet increased needs of 8 million tons and to make up the decline of 10 million tons previously coming from other sources. Western Europe, the world’s chief importer of grains, also the area most affected by the dollar gap problem, now relies on the Soviet bloc (which has been supplying about one million tons annually) for only about 2 percent of its consumption of bread grains and on the Free World for 25 percent of its consumption. The corresponding figures for coarse grains are a 3 percent dependence on the Soviet bloc (which has been supplying about one million tons annually) and a 15 percent dependence on the Free World. (These broad percentages obscure the much greater reliance of certain countries, e.g., Norway and the UK, on Soviet grain supplies.) In present circumstances it would seem that any increased Free World availabilities of grain in non-dollar areas should supplant imports from the United States and Canada rather than imports from the Soviet bloc.

In the case of coal, in 1951 the Soviet bloc supplied barely more than one percent of the total consumption of Western Europe, but a considerably greater percentage of the coal supplies of Sweden, Norway, Denmark, Austria and Italy. In fiscal year 1953 total Western European imports from the Soviet bloc are expected to amount to some 10 million tons, and imports from the United States to about 16 million tons. Austria, Denmark, and Sweden absorb almost three-fourths of the total supplied to the West by the East.

Imports of Eastern coal are very unlikely to be eliminated as long as large purchases in the U.S. are required in order to meet [Page 925] Western Europe’s growing needs. Additional factors relate to the adjustments that would be required in switching to other sources. Other reasons involve the matter of marketing outlets in the Soviet bloc. The broad problem with respect to coal is to gain acceptance of the principle that Polish coal should have as little place in Western Europe as U.S. coal. Even as a principle, it would be extremely difficult at present, if not impossible, to gain Western European acceptance of this view.

There has recently been assigned to the Decreasing Reliance Working Group (see ED/SG OM–13/2, October 15, 19527) the task of preparing a program of possible United States actions to counteract the security implications of Finland’s expanded trade with the Soviet Union and to mitigate the strategic risk of Finland’s increased economic dependence on the bloc in general. For several reasons the Finnish problem is one of the most difficult cases in point in the decreasing reliance field. After considerable discussion and study, the working group has determined that the only action now under way that is likely to bring results in the near future is the possible purchase of Finnish cobalt. This purchase, if consummated, would serve the dual objective of increasing the U.S. cobalt stockpile, while precluding the possibility of Finnish cobalt moving to the Soviet bloc.

United States Economic Defense and Trade Policy

A special working group has been given the task of conducting a full-scale, objective analysis of the legislative situation in relation to operations undertaken or planned in the EDAC framework. This review must take account of certain important factors, such as (1) the forthcoming report to the House Foreign Affairs Committee of Congressman Battle after his contact with elements of the program; (2) the expectation that the statistical picture, however misleading it might be, of control of primary strategic items may indicate a relatively large increase of shipments to the Soviet bloc over 1951; (3) the likelihood that we shall continue to be faced with the secrecy restrictions concerning the scope and operations of the COCOM security trade control effort; and (4) the existence of dissatisfaction in various quarters of the United States Government with what is considered to be a lack of real progress towards wholly satisfactory solutions of the problems surrounding transit trade controls, shipping controls, decreasing reliance, shipments of natural rubber to the European Soviet bloc, prior commitments, etc.

[Page 926]

A related activity now being carried forward is the study of the Public Advisory Board (for Mutual Security) of the foreign trade policies of the United States, particularly as they affect United States efforts in the Mutual Security Program. This investigation was requested by the President on July 13, 1952 because of the possibility that recent developments affecting United States trade policy work at cross purposes with basic objectives of the Mutual Security Program. It is expected that the recommendations from this investigation will be available sometime after January 1, 1953.

Another related and equally difficult aspect of United States policy in the economic defense field is the matter of our official attitude towards friendly countries’ maintaining and promoting non-strategic trade with the Soviet bloc.

There have been recurring indications in recent months of the desire of Western European Governments to expand non-strategic trade with the Soviet bloc. Two important instances were the German Bundestag resolution of May 6, 1952 calling for an expansion of East-West trade to the greatest extent possible and a statement of Ambassador Franks at about the same time to the Secretary of State on the subject of East-West trade.8

Occurrences of this kind present the United States with the issue of whether we should reaffirm in a positive manner our previously expressed position that we favor, or at least will not discourage, the expansion of non-strategic trade with the European Soviet bloc; and that U.S. efforts to control strategic items should in no way be construed as reflecting a policy trend towards total termination of the trade.

We are not concerned with non-strategic trade itself. We are concerned, however, that increased reliance by Western European countries on Soviet bloc markets may place them in a position in which they could not easily resist Soviet demands for strategic goods or Soviet demands for political concessions. Accordingly, any statement which the U.S. makes on non-strategic trade will necessarily have to be guarded; it will have to try to avoid the propaganda pitfall of arguing against peaceful trade, while at the same time pointing out the strategic risks which accompany expanded trade of that sort with the Soviet bloc.

The COCOM Secrecy Issue

In August, a number of newspapers abroad carried an AP despatch “revealing” the existence of COCOM. This despatch was the culmination of a number of references, some authorized by COCOM, and others information leaks, to the existence, name and [Page 927] objectives of the Paris Coordinating Committee. These developments served to bring to a head the problem of more widely publicizing the COCOM activities. The Italians and the Germans, as well as the United States, have for some time favored more publicity concerning COCOM.

The problem was discussed inconclusively at the September 18-19 meeting of the Consultative Group. Discussions at this meeting made it clear that most countries are now far more sympathetic than before to the need for releasing more information about COCOM. The French, however, took a firm stand against modifying the present agreements on COCOM secrecy.

On October 17, the French Ambassador to the United States was handed an aide-mémoire requesting that the French re-examine their position.9 Depending on the reaction to the aide-mémoire, the issue may require discussions between the Secretary of State and the French Foreign Minister. Meanwhile a COCOM subcommittee on secrecy is analyzing what has already been made public in official statements on East-West trade controls.

The secrecy problem was further highlighted by the issuance of the first semi-annual report to Congress on the operations of the Battle Act, and also by the six-week tour in Europe during August and September of Congressman Battle to observe the operations of the legislation he sponsored.

The six-month report of the Battle Act Administrator was submitted to COCOM in draft form for comment. Several suggestions were made by other participating countries, and some of these suggestions adopted. There was no great difficulty in this connection, and the report, when issued, was received favorably for the most part in Western Europe.

In his visit to COCOM countries, Congressman Battle stressed, among other things, the need for greater Congressional and public information and awareness of the actions taken and progress made by Western Europe in the field of trade controls. The general reaction on the part of Western Europeans was a greater appreciation of the United States concern for easing the secrecy limitations. In general, it is felt that Mr. Battle made a good impression on foreign officials with whom he conversed, and his visit appears to have been worthwhile.

International Watch List (Formerly International Black List)

At the Consultative Group meeting of June 24–25, it was decided that the International Black List, previously agreed to in COCOM, should be replaced by an International Watch List. COCOM was instructed [Page 928] to work out a procedure through which the list would be established on the basis of the new terms of reference agreed in the CG (see fifth progress report).

In recent COCOM discussions of the International Watch List it has been revealed that there is still disagreement in principle as to the desirability of establishing any secret list which might form a basis for denial of export licenses to domestic or foreign firms. France, Germany, and Italy have expressed reluctance to propose any names for the list, and in effect have listed the same objections to the Watch List as were previously directed to the Black List. This despite the fact that the present concept of the Watch List is designed to meet the difficulties inherent in the Black List. In effect the French have withdrawn their earlier agreement in the CG on the principle of establishing the Watch List. Other participating countries continue to support the Watch List, although they question its usefulness if some countries will be unable to submit names for inclusion on it.

The French have countered with an alternative proposal that participating countries exchange information on National Watch List, and apply more stringent use of the Import Certificate and Delivery Verification system to listed individuals. The Germans also have advanced a similarly vague proposal regarding exchange of information on National Watch List.

The entire matter is in abeyance pending final confirmation of the positions of the three objecting countries. If the French persist in their refusal to accept the Watch List proposal it is likely that the question will be referred again to the Consultative Group.

Research and Intelligence Backstopping for Economic Defense Activities

At this juncture it should be useful to review the research and intelligence work that has been done not only in the period covered in this report but during the entire past year as well. As stated in the fourth progress report on NSC 104/2 dated April 23, 1952, three major areas of Soviet bloc foreign economic relations (trade, finance, and shipping) require continuing research in connection with the development and support of the United States economic defense effort. An additional important area of study is the capabilities and vulnerabilities of the Soviet bloc and the Free World under present and prospective circumstances. It is beyond the scope of this report to comment upon all the research work which is being done in the various intelligence agencies and which contributes to operations in the economic defense field. However, the work being done and the progress being made are summarized in [Page 929] Appendix II together with the outstanding needs and deficiencies as they exist as of the date of this report.

Implementation of NSC 91/110

The Fifth Progress Report on NSC 104/2 outlined the provisions of Department of Commerce Program Determination No. 810, issued on June 16, 1952.

During the period in which Program Determination 810 has been in effect, the major emphasis has continued to be placed on obtaining assurances on U.S. List I and List IA items, mainly, with respect to the COCOM countries. … This focus has been maintained because of the embargo status of the items, and for the reason that the countries cited are the leading industrial nations of the world and are affected in the greatest degree by United States security export policy governing strategic commodities. Under PD 810 and the licensing directives which preceded it, the United States has been successful either in obtaining embargo commitments from friendly foreign countries, or in making reasonable findings of de facto embargo control, in roughly 90 percent of the cases in which we have sought assurances on List I and List IA items.

With respect to List II and IIB items, the implementation of Program Determination 810 will depend upon the determinations (as to safe quantities which can be permitted to flow to the Soviet bloc) to be made on the basis of the current work of the OIT technical task groups. (See Title II Activities) Until the task groups complete their detailed analyses, no across-the-board action can be taken to seek assurances on U.S. List II and IIB items from friendly countries. This delay applies also to certain capital equipment and production materials for which the United States will seek appropriate levels of control depending upon the relationship of such equipment and production materials to items on the United States security lists. Problem cases, however, are being treated selectively as they arise.

Organizational Arrangements Within U.S. Government

Considerable attention has been given in the EDAC Steering Group to the reorganization of the EDAC working group structure. This has been for the purpose of consolidating the numerous existing groups into fewer groups with wider frames of reference, so that as many as possible of the problems that arise can be channeled into existing working groups. The proposed reorganization is also designed to correct deficiencies which have become apparent in the last six months. The structure has become complex and has involved the creation of perhaps too many formal groups. This development [Page 930] has unduly burdened the limited economic defense staffs of the several participating agencies.

The Steering Group has tentatively come up with a proposed structure consisting of the present Advisory Committee, and Executive Committee corresponding to the existing Steering Group, and six reconstituted working groups. The six working groups are Export Control Programs, Application and Enforcement, Cargo Transport Controls, Transit Trade, Economic Defense Programs and Policy, and Decreasing Reliance. By way of illustration, the working group on Export Control Programs would in general advise the Steering Group on policy and procedures for Title I—Category B, Title II and International List III controls; extension of controls to non-COCOM countries; developing and recommending general policies and criteria to be followed in developing U.S. positions on controlled items; etc. The working group on Application and Enforcement would advise and assist on such matters as the termination and resumption of aid, technical advice and assistance, the Administrative Action Program, preclusive buying, etc.

Organizational arrangements in the field are similarly undergoing changes designed to bring to bear on particular problems all the best information and judgment available at the posts.

Effective November 1, the U.S. delegation to COCOM was transferred from Embassy Paris to the office of the Special Representative in Europe (SRE). The staff of the delegation has been increased to fourteen individuals from an inadequate staff of seven. This was accomplished through the strong recommendations of Ambassador Draper and EDAC agencies. A special assistant to the Deputy for Political Affairs in SRE has been designated resident U.S. delegate to the Consultative Group. The present U.S. delegate to COCOM will continue in that capacity under the new arrangement.

The transfer to SRE of responsibility for CGCOCOM affairs is logical in view of their multilateral nature, as distinguished from the responsibilities of Embassy Paris for the bilateral relations between the U.S. and France. It is logical also that the representative in Europe of the Director of Mutual Security should assume a role in the international security export control program commensurate with the latter’s direct responsibilities under the Battle Act.

Other Developments

Many other developments worth mentioning in this progress report took place during the period under review. As in the case of all of the major subjects treated topically above, the background of these developments, together with the record of policy decisions taken and their implementation, are contained in the documentation of the EDAC organization’s activities and in correspondence [Page 931] among U.S. Government agencies in Washington and with the field and with other Governments. The following developments are mentioned for the purpose of calling attention to them as relatively significant occurrences in the broad field of economic defense.

The Administrative Action Program of the United States against East-West trade control violators which has operated notably in Western Germany is being studied and plans being made to extend the program to other areas and to lines of activity that may be undertaken by operating agencies.

A recent report from the Consulate General in Hong Kong assessing the effects of export controls upon Communist China suggests that there are growing pressures on the Chinese resulting from these controls. According to the report there appears to be a definite shortage on the mainland of industrial raw materials, capital goods, and replacement parts. Smuggling, however, results in an estimated 5,000 tons of goods from Hong Kong finding their way into Macau and the mainland each month. Meanwhile, COCOM has accepted codification of the China Embargo List, comprising the Munitions List, International Lists I, II, and III and about 12 supplementary items.

In a letter to the Director for Mutual Security,11 Congressman Battle, following his recent European inspection tour, has made the general point that he is not satisfied with what he found on his trip. He has expressed the view that the Executive Branch gives a lower priority than he thinks desirable to the controls of exports to the Soviet bloc as a device for gaining an advantage over the Soviets in the present world conflict.

Certain interesting points are noted in recent trade agreement negotiations between Western countries and countries of the Soviet bloc. These points may be significant as an indication of the type of Soviet tactics to be expected in the Kremlin’s efforts to disrupt the cooperative relationships between Western countries and also as an indication of pressing commodity needs in the Soviet bloc. In recent French-Czechoslovak trade agreement negotiations the initial Czechoslovak shopping list was composed almost exclusively of strategic items. It is the feeling of the French Government that this maneuver might be the beginning of a political move to break the solidarity of Western export control efforts, since the Soviet bloc is well aware that it cannot obtain most of the items requested of the French, and since most of these items have not normally been exported from France to Czechoslovakia. Recently concluded trade agreements of Poland with Greece and Brazil provide for the import into Poland of 50,000 tons of high-grade iron ore from [Page 932] Greece and 100,000 tons from Brazil. In the case of Greece, an important consideration leading to the conclusion of the trade agreement is the willingness of Poland to take some 850,000 dollars worth of tobacco. In the Brazilian case, Polish coal appeared to be the loss-leader making the overall deal attractive to the Brazilians. (Subsequent to the cut-off date of this report (November 1) we have received assurances that the Brazilian company which contracted to deliver the iron ore will make no shipments to Poland.)

  1. The progress report was transmitted to Lay under a covering memorandum by Secretary Acheson and Harriman, dated Jan. 19, not printed. Also attached to the source text, but not printed, were two appendixes, the first summarizing the replies from the COCOM countries on the prior commitments issue, the second designating the fields of economic intelligence currently being explored by various intelligence agencies. For a discussion of the contents of this progress report, see the NSC memorandum of discussion, Mar. 18, 1953, p. 939.
  2. For text of NSC 104/2, see Foreign Relations, 1951, vol. i, p. 1059.
  3. Dated Sept. 22, 1952, p. 876.
  4. For documentation on the meetings under reference, see volume xiv.
  5. For documentation on this subject, see vol. iv, pp. 666 ff.
  6. Not found in Department of State files.
  7. Not found in Department of State flies.
  8. For the substance of the statement under reference here, see the memorandum of conversation by Assistant Secretary Linder, June 12, 1952, p. 851.
  9. Regarding the aide-mémoire under reference here, see the memorandum of conversation by Camp, Oct. 24, 1952, p. 900.
  10. For text of NSC 91/1, see Foreign Relations, 1950, vol. iv, p. 227.
  11. Dated Sept. 29, 1952, p. 896.