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

S/S–NSC files, lot 63 D 351, NSC 152 Series

Report to the National Security Council by the NSC Planning Board¹

secret
NSC 152

Washington, May 25, 1953.

Review of Economic Defense Policy

the problem

1. Broadly stated, the problem is the extent and the degree of intensity with which the United States should apply, and seek from other countries, the restriction of trade with the Soviet Bloc and with China, in order to reduce their relative economic potential for war.

2. This report is addressed to a statement of four alternative courses of action in the economic defense field and the factors which should be weighed in consideration of the alternatives. The four alternatives are:

1. To maintain the present policy.

2. To abandon the trade control program.

3. To intensify the scope and force of the program.

4. To establish the program on a narrower basis by concentration on commodities and services of major importance to Soviet war potential.

Discussion of the four alternatives is preceded by a brief background statement and by a summary of the present control system.

background

3. A sound policy in this field of economic defense must rest on certain assumptions with respect to the imminence of war. One assumption is that war, while not immediately imminent, remains an ever present possibility. Among the other possible assumptions are war within five years; within ten to fifteen years; or not within the foreseeable future. U.S. policy in this field should be built also within the framework of related government policies, such as those affecting foreign aid, NATO, and the stimulation of trade within the free world. Finally, in measuring the validity of alternative courses of action, consideration should be given to the effects of the chosen policy on the European Soviet Bloc and China, on friendly countries, and on the United States itself.

4. There are many difficulties inherent in the attempt to measure the validity of policy against these yardsticks. With respect to the impact on the Soviet Bloc, our intelligence does not offer conclusive evidence. Considered judgment seems to indicate that over the long term, trade restrictions, though withholding a contribution, cannot seriously impair the over-all Soviet Bloc economy. However, over the short term and in selected areas there probably is a retardation of the growth of Soviet war potential. It is difficult also to assess the extent to which reductions in trade with the bloc are the result of Soviet unwillingness or inability to trade rather than of United States and Western European trade controls.

5. With respect to our allies, the economic problems posed by trade restrictions are greater for Western Europe than they are for the United States. The problem is partly one of maintaining sources of supply (particularly in non-dollar areas), as well as markets. Moreover, as political matter, Western European Governments shy away from measures which might be considered “economic warfare” as opposed to “economic defense”, partly out of concern as to Soviet reactions and partly for fear of building up strength of neutralist or pro-Communist parties within their borders. Many countries have been distressed about U.S. measures to increase the severity of trade controls against the Soviet Bloc. The fear of a downturn in economic activity and the fear of a protectionist commercial policy on the part of the United States heighten the pressures in Western Europe for more rather than less trade with the Bloc.

6. In the United States, the Congress, the business community and public opinion as a whole have been generally favorable to severe limitations on trade with the Soviet Bloc, both by the U.S. and by our Allies. Congress has repeatedly tried to use the withholding of foreign aid to compel other countries to adopt a very stringent trade control program. In this connection, Congress has several times sought to prescribe mandatory and inflexible standards both with respect to executive discretion and sanctions to be applied to other countries. While the business community has not shown much interest in direct trade with the Soviet Bloc, there is some concern about differences between the control levels applied by the U.S. and other competitive nations, particularly where such differences have led the U.S. Government to withhold exports to friendly countries in order to avoid certain shipments by the latter to the Soviet Bloc. In addition, the psychological impact of the pre-Pearl Harbor shipments to Japan of steel scrap and oil, and the public concern with the Communist menace have sometimes led to an emotional rather than a reasoned approach to this problem.

7. The selected course of action should be sufficiently clear so that in its administration it will be possible to minimize the development of major differences in interpretation. Finally, it must also be viewed in terms of over-all costs of this and closely related programs.

summary of present policy

US. Controls

8. With respect to Communist China and North Korea, the U.S. maintains a complete embargo on all exports and prohibits American vessels or aircraft from touching at Chinese Communist ports. In addition, the U.S. limits or denies bunker fuels to vessels of foreign registry plying in the China trade. Imports from Communist China are in effect prohibited through Treasury Department foreign assets control measures. Supplementing these controls is a severe screening of all proposed U.S. exports to Hong Kong and Macao, major transshipment points for goods moving into China.

9. Our policy with respect to the European Soviet Bloc is based upon a denial of all U.S. goods of any strategic importance with administrative discretion to limit approvals of nonstrategic goods. The result of this policy (and the low level of requests for export licenses induced by it) has been a near embargo on shipments to the Bloc. U.S. exports to the European Soviet Bloc are now at a rate of less than one million dollars a year compared with $340 million in 1947.

10. Aside from the controls directed at the Bloc itself, the U.S. follows a policy of avoiding “frustration” of U.S. controls by endeavoring to prevent shipments of strategic goods to friendly countries which have less restrictive controls on these goods than the United States and are in fact shipping the same or similar types of goods to the Soviet Bloc. U.S. policy recognizes that other countries may sometimes have sound reasons for imposing less severe controls over particular commodities than does the U.S. However, we seek, in the absence of offsetting advantages, to avoid a significant contribution by the U.S. to the ability of other countries to ship goods to the Soviet Bloc which we would not ship ourselves. With some exceptions the application of this policy has been limited thus far to those commodities which the U.S. considers sufficiently important to warrant complete embargo.

11. The development of the U.S. security export control program, as well as the international negotiations for parallel controls, have been based on the strategic evaluation of the importance to Soviet war potential of specific commodities and services. Munitions items and atomic energy materials raise no policy problems since there is universal agreement on the necessity for maintaining a complete embargo for them. The determination of the relative strategic importance of other commodities is based upon the general principle of avoiding, on a selective basis, a significant contribution to Soviet war potential.

12. Two main classes of strategic commodities have been developed. First is the class of commodities considered to be of primary strategic importance and warranting complete embargo to the Bloc. There are two U.S. lists in this class. List I (260 listings) comprises those items for which international embargo agreement has been obtained in the Paris Coordinating Committee (COCOM); List IA (25 listings) covers items on which the COCOM countries have disagreed with the U.S. judgment and have been unwilling to embargo to the Bloc.

13. The second main class of strategic commodities consists of items considered to be of secondary strategic importance and warranting strict quantitative limits on shipments to the Bloc. There are two U.S. lists in this class. List II (85 listings) covers those items for which the COCOM countries have agreed to impose quantitative limits on shipments to the Soviet Bloc; List IIB (168 listings) covers items on which the COCOM countries have disagreed with the U.S. judgment and have been unwilling to limit shipments to the Bloc.

14. The Battle Act Administrator has established a list of items the shipment of which by other countries to the Soviet Bloc requires termination of aid unless the President determines otherwise. This list includes all of the items on U.S. List I and four of the items on U.S. List IA. Twenty-one of the IA listings are not included.

15. The distinction between the primary and secondary strategic items has become largely academic since in actual licensing practice, virtually no U.S. exports to the European Soviet Bloc are approved. This has come about from the general climate of American opinion from the reluctance of many exporters to trade with the Soviets, and through the exercise by the Secretary of Commerce, upon recommendation of his interagency Advisory Committee on Export Policy, of the discretion vested in him by NSC 104/2.² The significance of the distinction between the primary and secondary strategic items is now related principally to the degree of control which the United States seeks to have other countries adopt, and to the application of the nonfrustration policy regarding exports of U.S. goods to friendly countries.

16. Of major importance in determining the scope of the trade control program are the specific criteria governing the selection of commodities for the primary or secondary strategic classes. In accordance with the established criteria the primary strategic (embargo) category consists of (a) items designed or used principally for production of munitions; (b) items with prototype or advanced technology characteristics; and (c) items the embargo of which would create or maintain a critical deficiency in Soviet war potential. The secondary strategic (quantitative) criteria are not quite as specific but relate to items which meet the above standards to a lesser degree and for which a contribution to war potential is directly related to the volume of shipments.

17. In practice, the application of the criteria has varied at times from the literal wording. As written, the standards are directed primarily at the production base for a war build-up. They are concerned with items designed for the production of war material, not with items, used by military forces. The shortage criteria relates not simply to shortages as such, but to critical deficiences and those only in relation to Soviet war potential. However, the criteria have been interpreted at times to cover items used by the military rather than used for production of military items. Also, some efforts have been made to stretch the concept of shortage to cover all kinds of shortages on the theory that the USSR is so single-minded in purpose and so heavily concentrated on war preparation that any shortages, and in fact any import demands, make a commodity “strategic” and a proper subject for embargo or quantitative control.

International Controls

18. In the international field the primary reliance has been on multilateral negotiations to achieve controls by the major industrial countries on shipments to the Eastern European Soviet Bloc. The principal vehicle for these negotiations has been the informal and secret thirteen-nation Paris Coordinating Committee (COCOM). The international approach has been marked by a recognition that some differences in stringency of controls exercised by countries other than the U.S. may be warranted by economic or political considerations. The objectives have been to obtain embargo agreements on primary strategic items and quantitative controls on secondary strategic items at a level which does not represent a significant contribution to Soviet war potential. There is also an exchange of information on other selected items included on an International List III. The major areas of disagreement with respect to the embargo listings are in the fields of transportation, mining and construction equipment. The electrical power and generating equipment field currently being negotiated may also fall in this group.

19. With respect to China, international controls agreed in COCOM, though short of the total embargo imposed by the U.S., provide for an embargo of items on International Lists I, II and III, and a supplemental list based upon (a) the military action in the Far East, and (b) the different circumstances affecting the strategic importance of commodities and services to Communist China and Korea.

20. Both with respect to China and to the European Soviet Bloc, the approach taken in the multilateral forum, as in the execution of U.S. nonfrustration policy, includes the concept of net security advantage, i.e. building the strength of the West relative to that of the Soviet Bloc. This approach has meant continued discussion of East-West trade agreements in which the objective has been to attempt to maximize the advantages to the free world resulting from such trade, balancing against inclusion of strategic materials, consideration of what is received from the East and what goods difficult to market in the West are enabled to be exported. As a result there have been some exceptions from agreed levels of control in the case of individual trade agreements or specific commodity exchanges.

21. Supplementing the efforts directed at control of commodities are efforts to achieve effective ancillary controls to make the commodity controls more effective. These ancillary controls deal with such things as shipping, ship repairs, transshipment, transit trade and transaction controls. Although the principal reliance in international negotiations has been on the multilateral approach, the provisions of the Battle Act relating to possible termination of aid and such devices as the withholding of U.S. exports under the non-frustration policy have on a limited scale had the effect of applying unilateral pressure on other countries to achieve the objectives of the control program.

22. … The U.N. China Embargo Resolution also has provided a useful basis for approaches to non-COCOM countries with respect to restrictions on strategic trade with Communist China.

23. Finally, study is being given and some sporadic efforts are being made to deal with the problem of decreasing the reliance of the Western nations on the Soviet Bloc for needed commodities. Although this program may have long-range importance in building a pattern of trade within the free world independent of the Soviet Bloc nations, little progress has been made beyond the study stage.

alternative one—maintain present policies

24. The main lines of the present policies have been summarized above.

Effects on the Soviet Bloc

25. As noted, the program is probably causing at least a short-term retardation of the growth of war potential particularly in selected areas involving advanced technology and advanced mass production techniques. It is probable also that over a long-term period the effects on the Soviet of the trade restrictions can be overcome. Since the program of trade control was instituted in 1948, trade between the free world and the Soviet Bloc, excluding China, has declined only slightly. This small downward trend takes on sharper significance, however, in view of the substantial increase in the availability of goods for exchange which has come about through the economic recovery in Europe since 1948. Moreover, it is safe to assume that, apart from absolute quantities, the composition of the trade has altered in a direction away from the more strategic items. The existence of the trade control program has been used by the Soviets in their propaganda with emphasis on the allegation that the West is standing in the way of a resumption of normal economic relations which might be conducive to a relaxation of East-West tension and an easing of the balance of payments problem of Western Europe.

Effects on Friendly Countries

26. The objectives agreed to in our present international program are probably as far as our Allies and other friendly countries are willing to go in the field of security controls. New proposals by the United States are meeting increasing resistance as representing an approach into full-scale economic warfare. However, the improvement of transit controls, transshipment controls, and controls over shipping services could bring present performance measurably closer to present agreed objectives; so far, progress in the field has been slow.

27. The use of unilateral pressures by the United States, epitomized in their view by the penalty provision of the Battle Act, has been frequently resented by other friendly countries. To some degree, they have come to recognize that the drastic measure of cutting off all aid to a major cooperating country is not likely to be taken by the United States. They are aware that the losses to the security of the free world if the United States were to cut off aid to any of its major partners in the North Atlantic community and elsewhere would be so great that the action would probably not be taken; the security interest of the United States itself would ordinarily compel the continuance of such aid unless a country absolutely refused to cooperate and flagrantly violated Western security interests. In such a case, it is likely that this lack of cooperation would extend to other mutual security programs, and it would be academic whether aid were discontinued under the Battle Act or other action. Unilateral action provokes resentment not only because of the normal sensitivity of countries to measures which they construe as coercive, but also because they feel that the East-West trade problem, being one in which they have relatively a much larger economic and political stake than the United States, should be dealt with in a multilateral forum where the interests of all the principal countries can be reflected.

Effects on the United States

28. The United States Congress, business community, and public generally approve the program as far as the U.S. controls themselves are concerned, although business may object to the program if economic activity declines and foreign competitors continue to have some access to Soviet Bloc markets. There is dissatisfaction with respect to the less restrictive controls which other countries are maintaining to the Soviet Bloc as a whole and particularly to Communist China. Moreover, U.S. exporters are concerned where the “non-frustration” policy curtails or threatens to curtail exports to friendly areas. In some instances, a full implementation of this policy might mean a severe economic blow to the producing industry.

29. In implementation of present policy, the current difficulties arise out of differences between the U.S. (Commerce) security lists and the Battle Act lists; differences in interpretation of basic policy, particularly with respect to the concept of strategic [sic], with some agencies striving for broader interpretation and stricter controls and some adhering to a more selective approach than has been followed in the recent past; and differences of view with respect to methods and the degree of pressure which should be brought on other countries to achieve a greater degree of parallelism with U.S. controls.

Appraisal

30. The present policy has some impact on the Soviet Bloc war potential. Whatever the extent of this impact may be, the U.S. public and the Congress are likely to insist upon the continuation, if not the extension, of existing controls as long as Soviet aggression in the Far East and the threat of world-wide aggression continue.

31. On the other hand, certain aspects of the present program are a source of constant irritation in our international relations. Moreover, the “stretch out” of the NATO program and the threat of protectionism in U.S. trade policies may increase the resistance of other free world nations to the present level of controls and may increase their vulnerability to Soviet trade tactics. Finally, the present program has not succeeded in satisfying all of the demands of the U.S. public and Congress for stricter security trade controls by other countries, and there is little likelihood that such demands would be satisfied by any feasible extension of such controls within the limits of present policy.

alternative two—abandonment of entire trade control program

32. Except for munitions and AEC items, no export controls would be applied by the United States or other Free World countries.

Effect on the Soviet Bloc

33. Such a program could result in an important contribution to Soviet economic as well as war potential. We have, however, no sound basis for judging the extent to which the Soviets would be willing or able to resume trade on a large scale or what the result in volume and composition of trade would be. It is reasonable to assume that any Soviet imports would increase in the heavy industry and “bottleneck” sectors of the Soviet economy. There would be no assurance that the Soviets would export greater quantities of the types of goods most needed by the Western nations; but if they did not, the contribution of the West to the Bloc would be less.

Effect on the Free World

34. The abandonment of trade controls—a reversal of U.S. policy since 1948—might be welcomed in some quarters as a major move toward peace. It could significantly affect the Western European economic situation. On the one hand, it might open new markets for Western goods if the Soviets are willing and able to trade, thus paving the way for more earnings by the West. This gain could be offset to some extent by the competition of the United States in Soviet Bloc markets which has been absent since 1948.

35. The adoption of this policy would not necessarily increase the range of Western commercial contacts behind the iron curtain, but would undoubtedly increase the flow from the West of technology.

Effect on the United States

36. In the United States the abandonment of the trade control program would require a major re-orientation of attitudes. Legislative action would be required such as the repeal of the Battle Act. The legislative history of the past few years does not suggest that this can be done easily. U.S. exporters themselves might be somewhat reluctant to trade with the Communists unless the climate of opinion in the United States is substantially changed. However, over a longer term, removal of the export controls would provide new markets for some types of American goods and such markets might have importance in the future.

Appraisal

37. The adoption of this policy is feasible only if we can safely assume that a war is not likely in the foreseeable future. It offers some possibility of use as part of an American peace offensive, perhaps coupled with the offer made in the President’s ASNE speech³ for some economic aid out of savings which might result from the adoption of a world disarmament program. It would be an approach in the psychological and economic field which could probably be taken as a “calculated risk” coupled with other proposals which would, upon acceptance, significantly diminish the threat of war with the Soviet Bloc.

38. In the absence of a major reorientation of U.S. policy vis-à-vis the Soviets, and parallel revision or realignment of relative strength of the Free World and the Soviet Bloc, little would be accomplished by abandonment of the trade control program. Any psychological gain that might be achieved by such a broad move could probably be achieved equally well by a less sweeping curtailment of the present program.

alternative three—to intensify the scope and force of the program

39. Intensification would consist of driving toward complete parallelism within the Free World with U.S. security export controls, and perhaps ultimately a total embargo. For its achievement, it would require the maximum use of diplomatic pressure and threats of sanction, such as withholding financial and military aid, withholding some or all U.S. exports, or discriminating with respect to imports from uncooperative countries. Existing restraints on the use of these pressures, which are incorporated in present laws and directives, would have to be relaxed or removed. The program might be accompanied by new U.S. undertakings to provide cooperating countries with additional aid and new markets.

Effect on the Soviet Bloc

40. If the rest of the Free World went along with the program there would be some adverse impact on the Soviet Bloc. The impact might be greater in the psychological and political field than in the economic and strategic field. It is possible that in the short term a complete or more complete, curtailment of trade would accentuate some of the economic problems within the Soviet Bloc and might impede the military buildup. After a short period (4–5 years) the Soviet economy would be able to replace the denied imports. It might also, however, intensify their program of self-sufficiency and war preparation.

41. However, if many countries refuse to join in the program, the level of Free World controls as a whole might actually decline. Furthermore, the program might have the effect of strengthening pro-Soviet or neutralist sentiment in the Free World.

Effect on the Free World

42. The effect of an intensified trade control program on Western Europe and on the NATO might be very grave since it is reasonable to assume from the present attitudes that the NATO countries would resist such a program. The cutting off of financial and military aid to a major participant might result in a complete or partial breakup of NATO. A large-scale program of economic and military aid would perhaps be the only way of bringing the NATO countries within such a framework and perhaps then only if their intelligence estimates supported the assumption of more or less immediate Soviet aggressive intent.

Effect on the United States

43. In the United States, a more intensified trade control program would attract considerable support from some segments of Congress and the public. It might be opposed by those who believe that it might increase the risk of war. If the result was an increase in the differential between U.S. controls and those of other countries, trade pressures against such a program might increase.

44. Public and Congressional resistance would be substantial to an increased aid program or opening of U.S. markets tied to this objective.

Appraisal

45. This program would be more feasible and desirable if war were generally considered as imminent. There is a real risk that the proposal might lead to a reduction of the overall level of controls. To reduce this risk, there would have to be a change both in the attitudes of our Allies and in the attitudes of our Congress. The first would have to be far more amenable to added controls than they now are. The second would have to be more willing to provide the added funds and the added market opportunities which might represent the inducement to our Allies to go along with this approach.

46. The intensification of controls, if adopted, would have some slight adverse effect both on the Soviet Bloc and on our Allies. However, added aid and added market opportunities might mitigate the difficulties for our Allies somewhat.

alternative four—to establish the program on a narrower basis by concentration on commodities and services of major importance to soviet war potential

47. Such a program would essentially be a modification of the present one. In the first instance, it could be accomplished through a limitation of the concept of “strategic” to items directly related to the mass production of war materials in the Soviet Bloc, and to equipment with highly advanced technical characteristics whose application would be primarily military. It might extend in a limited way to selected items of direct military application and in sectors of industry in which strategic and industrial interests are closely mingled and where the items concerned could easily and quickly be turned from peaceful uses to the manufacture of war equipment or other direct military application.

48. In greater detail such a program might encompass all or some of the following specific policies:

a. Embargo or quantitative control of only such goods the strategic importance of which is accepted on an international multilateral basis.

b. Change in U.S. export policy of virtual embargo to the European Soviet Bloc to one of licensing, largely without restriction, of non-strategic goods and of licensing limited quantities of “secondary strategic” items. A corollary would be U.S. participation in quotas established by COCOM for shipments to the Soviet Bloc.

c. Change in U.S. export policy to permit shipments of non-strategic goods to Communist China.

d. Modification or abandonment of the non-frustration policy on U.S. exports to friendly countries.

e. Negotiations with other governments primarily on a multilateral basis and largely discarding the possible use of sanctions.

f. Agreement (a) to reduce to a narrow basis the present international embargo list, or alternatively (b) to maintain this list in its current status; and abandonment in either case of U.S. efforts to obtain major extensions of the list except where clearly justified by new technology, intelligence or strategic evaluations.

g. (a) Reduction to a narrower basis of International List II or alternatively, (b) abandonment or slowdown of efforts to obtain further reductions in quotas for items quantitatively controlled and of U.S. efforts to make further additions to International List II.

h. Concentration of effort on obtaining agreement on ancillary controls in order to assure the most effective implementation of the more limited field of commodity coverage.

i. Adoption of a more flexible attitude, both with respect to U.S. controls and international controls, so that exceptions to general rules can be readily made, thus removing some of the minor irritants now causing friction.

Effect on the Soviet Bloc

49. The change to this narrower program would not significantly alter the impact of the present program on Soviet war potential. There are now no real obstacles to the Soviets obtaining those materials which are not restricted by COCOM agreed levels. A tightening of the ancillary controls on the narrower base might cut down on the illicit movement of the highly strategic goods. To the extent that the Soviets are willing and able to trade, the level of trade in non-strategic goods might be increased.

Effects on the Free World

50. The Western European nations would undoubtedly welcome such a change in the U.S. approach to the economic defense problem. With some of the coercive elements of the present policy removed, they might join more willingly in related defense programs. If this new approach actually stimulates greater East-West trade, the economic base of Western Europe might be strengthened over the short run, and the need for U.S. economic aid and decreasing reliance programs might be reduced. On the other hand, a greater degree of U.S. participation on non-strategic and secondary strategic trade would increase competition for Soviet orders. The change in U.S. policy could be used as an entering wedge by Western European countries towards further relaxation of controls. Moreover, because the United States has pressed for such stringent controls in the past, a change in U.S. policy might affect relations with several countries, notably Japan, which has gone much farther than other countries in stringent controls.

Effects on the United States

51. This policy would in effect reduce U.S. controls to the internationally agreed COCOM levels. It also would open up the opportunity to American business to compete for markets in the Soviet Bloc. This would remove the basis for the present objection by the business community to the differential control levels. Congress and the general public would resist this apparent relaxation and intensify criticism of the program. This could, however, be done without changes in legislation such as the Battle Act.

Appraisal

52. The relaxation of controls, or stated in reverse, a U.S. willingness to trade with the Soviets on a selective basis, might be used as part of an American psychological effort in the direction of world peace along the lines of the President’s ASNE speech. As compared with the alternative of the complete abandonment of the trade control program (Alternative 2) the psychological benefits would be appraised in a more receptive atmosphere by Congress and American public opinion. No doubt a relaxation in the control program to the narrower base suggested by this alternative would be opposed by some elements of the Congress and the public. Until there is peace in Korea, the resistance to changes in the current embargo to Communist China would be considerable.

53. There may be corollary advantages in the field of intelligence and knowledge of the Soviet Bloc if trade could be resumed even on a limited basis, since such trade would certainly involve a greater degree of intercourse than is now possible. The advantages of such additional intelligence should be weighed against the possible security disadvantages which increased trade might bring. Consideration of this alternative should also take into account, as an important factor, the timing of the various steps which would be taken to effect a relaxation of controls.

1. In addition to the report printed here, NSC 152 consists of a cover sheet, a table of contents, and a note from Executive Secretary Lay to the members of the NSC stating that the report was prepared by the NSC Planning Board pursuant to NSC Action No. 738–c. That action was the third directive issued by the Council at its meeting of Mar. 18; see the memorandum of discussion, p. 939. Lay’s note also stated that the original draft of this report was prepared by the Acting Chairman of the Economic Defense Advisory Committee.
2. For text of NSC 104/2, see Foreign Relations, 1951, vol. i, p. 1059.
3. On Apr. 16, 1953, the President spoke before the American Society of Newspaper Editors; for the text of his speech, see Department of State Bulletin, Apr. 27, 1953, pp. 599–603.