S/SNSC files, lot 63 D 351, NSC 146 Series

No. 150
Statement of Policy by the National Security Council 1

top secret
NSC 146/2

United States Objectives and Courses of Action with Respect to Formosa and the Chinese National Government

[Here follows a table of contents.]


1. Maintenance of the security of Formosa, independent of communism, as an essential element within the U.S. Far East defense position. (1–5, 24, 31)2

2. An increasingly efficient Chinese National Government, evolving toward responsible representative government and capable of attracting growing support and allegiance from the people of mainland China and Formosa. (2–15)

3. Increased effectiveness of the Chinese National armed forces for action in the defense of Formosa, for raids against the Communist mainland and seaborne commerce with Communist China, and for such offensive operations as may be in the U.S. interest. (25–30)

4. Use of Chinese National military potential, including the availability of Formosa for use of U.S. forces, in accordance with U.S. national security policies. (26–30)

5. Development of a strong and expanding Formosan economy. (42–47)

6. Improved relations between Chinese National Government and other non-Communist nations. (16–23)

7. Continued recognition and support of the Chinese National Government on Formosa as the Government of China and the representative of China in the United Nations and other international bodies, and continued efforts to persuade other nations to adopt similar positions. (22–23)

8. Increased support for the Chinese National Government by all non-Communist Chinese groups outside mainland China and Formosa, especially the overseas Chinese of Southeast Asia, consistent [Page 308] with their obligations and primary allegiance to their local government. (18–23)

courses of action


9. Effectively incorporate Formosa and the Pescadores within U.S. Far East defense positions by taking all necessary measures to prevent hostile forces from gaining control thereof, even at grave risk of general war, and by making it clear that the United States will so react to any attack. (24)

10. Without committing U.S. forces, unless Formosa or the Pescadores are attacked, encourage and assist the Chinese National Government to defend the Nationalist-held off-shore islands against communist attack and to raid Chinese Communist territory and commerce. (24–25)

11. Encourage and covertly assist the Chinese National Government to develop and extend logistical support of anti-communist guerrillas on the mainland of China, for purposes of resistance and intelligence. (24–25)

12. a. Continue military assistance beyond Fiscal Year 1954 to assure the completion of present programs designed to develop an army of approximately 350,000 capable of limited offensive operations; a small navy capable of conducting limited coastal patrol, anti-shipping, and commando operations; and an air force designed to provide limited air defense, troop support and interdiction capabilities. Such forces (1) without U.S. air, naval and logistic support, would be able to undertake more effective raids against the Communist mainland and seaborne commerce with Communist China; (2) without U.S. air, naval and logistic support, but to an even greater extent with such support, would continue to represent a threat to Communist China and add significantly to the strategic reserves potentially available to the free world in the Far East; (3) while not alone able successfully to defend Formosa or initiate large-scale amphibious operations against the mainland of China, would, with U.S. air, naval and logistic support, have an increased capability for the defense of Formosa and be able to initiate such large-scale amphibious operations.* (26–29, 34–41)

b. Keep U.S. military assistance to Formosa under continuing review in the light of the development of Japanese forces and possible political settlements in Korea and Indochina. (25)

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13. Continue coordinated military planning with the Chinese National Government designed to achieve maximum cooperation from the Nationalists in furtherance of over-all U.S. military strategy in the Far East, subject to the commitment taken by the Chinese National Government that its forces will not engage in offensive operations considered by the United States to be inimical to the best interest of the United States. (32–33)

14. Encourage and assist the Chinese National Government, through such means as off-shore procurement and technical advice, to construct and maintain on Formosa selected arsenals and other military support industries. (55)

15. Maintain the right to develop facilities on Formosa for use by U.S. forces and agencies in the event of need. (24, 31)


16. Strive to make clear to the Chinese National Government that its future depends primarily upon its own political and economic efforts and upon its ability to command the respect and support of the Chinese people. Meanwhile, continue efforts to show our continuing friendship for the Chinese National Government and the Chinese people, while avoiding any implication of U.S. obligation to underwrite the Government or to guarantee its return to power on the mainland. (2–15)

17. Continue to recognize and encourage other governments to recognize the Chinese National Government on Formosa as the Government of China and to support its right to represent China in the UN and other international bodies. (22–23)

18. Continue to encourage the Chinese National Government to take all possible steps to attract growing support and allegiance from the people of mainland China and Formosa. (10–15)

19. To the extent feasible, encourage the Chinese National Government to establish closer contact with the Chinese communities outside mainland China and Formosa and to take steps to win their sympathy and their support to the extent consistent with their obligations and primary allegiance to their local governments. Encourage the leaders of these communities to reciprocate by extending such sympathy and support to the Chinese National Government as a symbol of Chinese political resistance to communism and as a link in the defense against Communist expansion in Asia. (18–23)

20. While continuing to manifest U.S. confidence in and support of the Chinese National Government, permit U.S. officials as appropriate to maintain discreet contact with anti-Communist Chinese groups outside Formosa which continue to reject cooperation with the Chinese National Government, and without making commitments [Page 310] of U.S. support, encourage such groups actively to oppose communism. (2–3, 15)

21. Seek to enhance the Chinese National Government’s political appeal and to increase its administrative efficiency. (3–15)

22. Continue to press through diplomatic channels for the repatriation to Formosa of Chinese Nationalist personnel from Burma. If transportation is not available consider U.S. logistic support to repatriate such Chinese Nationalist personnel to Formosa. (18–21)


23. Continue to provide limited economic aid to Formosa in such a manner and of such a scope as to promote U.S. objectives in the area; but plan gradual reduction and eventual termination of such assistance, bearing in mind, however, that some economic aid will probably be required so long as the present military programs are continued. (6, 42–44)

24. Continue to assist the Chinese to plan the most productive use of their resources on the island and to make them available to the free world. (45–47)

25. Continue to emphasize and to implement examination and consultation with the Chinese concerning proper fiscal procedures and to curb tendencies toward excessive demands by the Chinese National military establishment on the economy of Formosa. (5556)

26. Continue to exert the influence of the U.S. Government to modify programs which run counter to prudent advice on economic and fiscal procedures offered to the Chinese by U.S. representatives. (42–47, 50–52)

27. Assist the Chinese National Government to develop a well-balanced foreign trade which will meet the needs of the Formosan economy after the termination of U.S. economic assistance. (44–47)

28. Encourage the Chinese National Government to adopt policies which will stimulate the investment of Chinese and other private capital and skills for the development of the Formosan economy. (43–47)


29. Develop Formosa as an effective base for psychological operations against the mainland, along lines which support U.S. policy objectives, and in collaboration with the Chinese National Government when appropriate. (2–5)

[Here follows a Financial Appendix showing in tabular form the amounts programmed for military and economic assistance to Formosa and the total value of the actual and projected assistance to Formosa during fiscal years 1951–1956; see footnotes 15 and 16, Document 147.]

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NSC Staff Study on United States Objectives and Courses of Action With Respect to Formosa and the Chinese National Government

political analysis


1. The central problem facing the United States in the Far East is the threat to U.S. and free world security resulting from the establishment of control over China by an aggressive and dynamic regime closely aligned with and supported by the Soviet Union as an effective instrument of Soviet policy. As the solution of the problem of Communist China is paramount to the restoration of security in Asia, U.S. policies and courses of action with respect to Formosa and the Chinese National Government must be formulated in such a way as to contribute to the solution of this problem. Politically, the Chinese National Government’s role as an instrumentality for the solution of the China problem is unique. It is unique because it is Chinese, and thus presents a political alternative to Chinese Communist rule which no foreign power, including the United States, can supply to the Chinese people.

The Chinese National Government as a Political Force

2. The United States shares with other free nations a stake in the development of a potent non-Communist Chinese political leadership. U.S. security interests are threatened not only by hostile military power on the China mainland but also by hostile and dynamic political power. Just as the aggressive threat of the Communist regime is by no means confined to military force, so too it cannot be successfully contested by military force alone. Nor should U.S. reliance be placed solely upon the development of non-Chinese political counterforce. Because ultimately the roots of Chinese Communist political power must be attacked by the Chinese themselves, it is essential to foster and support non-Communist Chinese political movements. This is the most effective way of preventing the Peiping regime from monopolizing the tremendous strength of Chinese nationalism and thus converting the Chinese people into enemies of the free world, as well as the only means of providing the Chinese with a positive alternative to Communist rule. U.S. interest in the Chinese National Government is, therefore, not confined to the strategic importance of Formosa and the potential usefulness of its armed forces, but extends also to its importance as an essential weapon in the continuing political struggle with the Communist world, especially the Chinese segment of it.

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3. Possessing a secure physical base, a well-developed organization, and a significant and slowly growing following, the Chinese National Government, together with its subordinate provincial and local organizations, represents the only effective non-communist Chinese political force in being. That it exists, and has in the past three years demonstrated a capacity to make progress, is more significant than that it has many defects.

4. While the Chinese National Government is at present the only Chinese political force which can qualify as an essential weapon in the political struggle against communism, and on that basis merits our primary support, it cannot be assumed that it will always remain the only (or even the most) effective Chinese force of this kind. The overthrow of the Peiping regime will hardly become a feasible proposition for the Chinese people until more positive and organized political, albeit covert, opposition to it on the mainland has developed than is now evidenced. Moreover, in view of the disparity of military capabilities between the mainland regime and the Chinese National Government, it is difficult to conceive of any successful movement against the Peiping regime without important defections from it. It cannot be determined now to what extent mainland underground political leadership and potential Communist defectors would support the present Chinese Government on Formosa. In any case, without their cooperation it is unlikely that the Government could successfully regain control of the mainland. In these circumstances it would be premature for the United States to commit itself irrevocably to this objective.

5. In the meantime, however, the Chinese National Government remains the only effective Chinese political force to which we can give support, and the advantage of its existence, especially if its political appeal and military capabilities continue to increase, in the political struggle with the Communists is sufficient justification for aiding it despite uncertainties as to its future on the mainland.

6. In providing military and economic assistance to the Chinese National Government, however, the United States faces a political dilemma which cannot be wholly solved as long as it is necessary to continue such assistance, but which can be mitigated. This is the dilemma of simultaneously ensuring that the aid is used in a manner consistent with U.S. objectives, which entails the exercise of a certain measure of supervision and control over important segments of the Chinese Government, while at the same time preserving a maximum degree of Chinese independence and self-reliance. Although this dilemma cannot be entirely resolved, it should not be ignored, for the manner in which it is dealt with affects significantly both our relations with the Chinese Government and that [Page 313] Government’s standing in the eyes of the Chinese and of the world at large.

7. The Chinese Government needs and welcomes U.S. aid, and probably to a considerably lesser degree it welcomes U.S. advice, but it merely tolerates controls and supervision by U.S. agencies as the price of receiving aid. Military and economic dependency upon a foreign power is most unpalatable to any people, especially to the Chinese who for centuries have regarded themselves as a superior race. The situation of dependency cannot help but breed resentment against the aid-giver. The more outward manifestations of this dependency there are, the greater the subsurface reaction of resentment, which manifests itself in ways inimical to U.S./Chinese Nationalist relations. Thus, the Chinese become particularly sensitive to any kind of advice or suggestion made on a high level, especially when this becomes public knowledge.

8. Another unfortunate psychological reaction provoked by prolonged dependency on aid programs is the tendency of the aid-receiver increasingly to shift responsibility (particularly blame) for difficult situations to the shoulders of the aid-giver. This tendency has been manifest on the part of the Chinese National Government and it undermines both the self-confidence and self-reliance of the Government. To the extent that it does this that Government is weakened and becomes less of an asset to the Chinese people and to the free world in the struggle against communism. Viewed in this light Chinese efforts toward greater self-reliance are advantageous not only to the American tax payer but also to the free world as a whole.

9. A further important political consideration in connection with the problem of the Chinese Government’s dependency upon the United States is the effect upon the former’s prestige, and thus its political appeal. The concept of Formosa as a U.S. base does not hold any political appeal for the Chinese people, necessary as the base may be for stemming the tide of Communist aggression; but the concept of Formosa as the seat of an independent and self-reliant Chinese Government could exercise a powerful political appeal. Moreover, the prestige of the Chinese Government on Formosa is compromised in the eyes of many free world countries due to their belief that it is incompetent and unable to conduct its own affairs. Thus any progress which can be made towards increasing the manifestations of the Chinese National Government’s ability to run its own affairs tends to increase its prestige in the eyes of the world and its political appeal to the Chinese people.

10. While the strength of the political leadership of the Chinese National Government depends primarily on its own efforts, and its achievements in this respect will be the principal factor determining [Page 314] its future role on the mainland, the United States is in a position to give the Government guidance and assistance in the political field in order to increase its confidence and enhance its prestige and political appeal. However, it is important to recognize the limitations of the U.S. role in promoting political reform.

11. These considerations are pertinent: (1) whatever the merits of the present leadership there is no practical alternative to it, in the short run at least, and therefore political reform projects must be planned accordingly; (2) presentation of a blanket political reform program would arouse the deep suspicions of the leadership and could not be implemented without obvious and large-scale U.S. intervention; such intervention would tend to nullify the advantages of any reform it might achieve by giving Formosa the appearance of a U.S. colony rather than the seat of a regenerate Chinese Government.

12. Political reform, as military and economic reform have been, can be approached on an empirical basis, involving careful selection of individual problems based on an analysis of the importance of the solution of the problem to increasing both the efficiency of the Government and its political appeal to the Chinese people. The chances of receiving the leadership’s cooperation by presenting reform projects in terms of Chinese self-interest are probably much better than if this end is sought by threats to reduce our aid programs in case our advice is not taken, although the political leverage afforded the United States by such programs should not be overlooked. However, any assumption that the Chinese Government will consent to any given U.S. request, especially in the political field, as a result of U.S. pressure, even if aid is greatly expanded, is unwarranted.

13. The present leadership of the Chinese National Government is composed largely of men who led the successful Chinese Revolution of the 20’s, and of their political scions. To meet the political challenge of today, many of these men are still calling on political ideas and following political practices which failed them yesterday. This rigidity of political outlook is fostered by the one-party character of the Government. Unfortunately, many of these young leaders who are now gradually succeeding the old are cast in the same political mold and are little more suited to inject the Government with political vitality than their elders in the Party. There are encouraging exceptions, however, and the situation has slowly improved, especially during the last two years.

14. The political appeal of the Chinese National Government would be enhanced and its ability to deal with political problems on the mainland would be increased if an environment which stimulates rather than stifles new political growth could be created on [Page 315] Formosa. Thus, the Chinese Government should adopt policies which will permit greater freedom of action for anti-Communist, non-Kuomintang political groups. Leaders of such groups in Hong Kong and among overseas Chinese should be encouraged and be enabled to come to Formosa to indulge in constructive political activities. If such policies were adopted, these leaders might be inclined to offer their support and cooperation to the National Government as a means of achieving a stronger and more united Chinese opposition to communism.

15. On the other hand, while non-Kuomintang Chinese groups should by all means be discouraged from efforts to undermine the Chinese Government, undue pressure should not be placed on such groups to adhere to the Chinese Government, in recognition of the fact that in some instances they may be able to maintain contacts with anti-Communist opposition groups on the mainland more readily than if they were aligned with the Chinese National Government. Thus, it would appear advantageous for the United States to permit its officials, as appropriate, to maintain discreet contact with such individuals and groups, and where it appears that some potential exists for effective anti-Communist activity, to encourage them.

The Foreign Relations of the Chinese National Government

16. Formosa is important not only to U.S. off-shore defense but also to the security of other Pacific countries, particularly Japan, the Philippines and Hong Kong. It is thus to their interest that it remain in friendly hands. Open support for the U.S. policy of denying Formosa to the Communists may be expected to continue from some Pacific powers which recognize the Chinese National Government, such as the Philippines, Japan and Thailand, and tacit support from others, including some recognizing the Chinese Communist regime; e.g., Great Britain.

17. Nevertheless, the inclusion of Formosa in a regional defense arrangement does not at present appear practicable due (1) to the non-recognition of the Government by some Pacific countries; (2) to the serious doubts both as to its present and potential effectiveness by some which do recognize it, e.g., Australia and New Zealand; and (3) to reluctance on the part of other countries to make formal military commitments to the Chinese National Government, given that Government’s ultimate objective with respect to China. While there are advantages of a coordinated defense arrangement among the non-communist countries of the Far East, particularly if we are willing to underwrite it, and while such an arrangement might well represent an ultimate objective of the United States in the area, certain political developments must take place to improve relations [Page 316] of the Far Eastern nations before it can become a practical immediate objective.

18. The posture and conduct of the Peiping regime probably have a more decisive effect on Chinese Nationalist relations with other countries than has Chinese Nationalist or U.S. policy. Nevertheless, the Chinese National Government and the United States can also influence these relations through their own policies. Many free world countries are still ignorant of the salutary changes in the Chinese National Government since it was driven from the mainland and of the improvements which have taken place on Formosa. The most important of these improvements have been in the direction of fiscal honesty, sounder budgetary practice, fewer evidences of nepotism, freer self-criticism, more participation in government on local levels (including native Formosans) and land reform geared to return of some government-owned industries to private ownership, in addition to the more tangible improvements in the potential of the military establishment. The combined result has been an appreciable heightening of morale and an increased readiness to assume responsibility on the part of the Government—in other words, a diminution of the “pawn complex”, which was so apparent from late 1949 to about the middle of 1951. Recognition of these improvements, coupled with evidence of further progress, particularly to the extent that it comes about through Chinese rather than U.S. efforts, would go far toward increasing the Chinese Government’s prestige in the eyes of other non-Communist governments and would have a favorable effect upon its relations with such governments.

19. The Chinese Government’s relations with Far Eastern countries having large Chinese minorities could also be improved by a more cooperative approach to the problem of these minorities on the part of both the Chinese National Government and the other governments concerned. The traditional position of the Chinese minorities in these countries has been changed greatly by two major post-war events: (a) the emergence of independent governments in most of the Southeast Asian countries—Philippines, Indonesia, Burma, Vietnam, and (b) the seizure of the China mainland by the communists. Both of these developments have greatly increased the urgency of integrating the Chinese minorities more effectively into the foreign societies in which they dwell.

20. While the pre-war Western colonial empires could tolerate large unassimilated Chinese minorities in their Asian colonies, the small and insecure Asian Governments which have now succeeded to power in these colonial areas cannot tolerate them. Moreover, the Chinese minorities themselves have been for the first time to a large extent cut off from their homeland as a result of the “bamboo [Page 317] curtain” which has been rung down by the Communist regime. Meanwhile that regime is attempting to convert them into fifth columns against the governments of the countries in which they dwell.

21. The Chinese National Government can play an effective role as a political counterweight to Chinese Communist influence in the overseas Chinese communities, but it can also do considerable harm if it fails to take into account the changed position of the Chinese minorities which has resulted from the two developments mentioned above. The Chinese National Government must play its role, therefore, in close cooperation with the other governments concerned if it is to be effective. By playing its role in this manner the Chinese National Government can realize substantial benefits by way of political and financial support from these important overseas Chinese groups, while simultaneously lessening the Communist capability of utilizing the overseas Chinese for subversive purposes. U.S. objectives would thus be fostered by encouraging the Chinese National Government to take an active, though discreet, interest in overseas Chinese affairs.

22. Despite the best efforts of the Soviet Union and its satellites, the Chinese National Government has retained its seat as the rightful representative of China in all UN bodies in which China is represented and it has continued to be recognized by the majority of the world’s nations. The vigorous support of the United States has been an important factor in this record and its continuance is essential. The continued seating of the Chinese National Government in UN bodies is necessary not only to counteract the increase of Communist influence in international councils, but also to preserve and enhance the Chinese National Government’s prestige in the eyes of the Chinese people.

23. While continuing to support the seating of the Chinese National Government in the UN, that Government should be encouraged to meet its obligations to the UN as fully as its straitened circumstances will permit, and to evince at every opportunity its sincere belief in UN principles and objectives and in the advantages of international cooperation, thus posing the maximum favorable contrast to the hostile and uncooperative attitude of the Peiping regime.

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military analysis

Strategic Importance of Formosa

24. Geographically, Formosa and the Pescadores are a portion of our off-shore defense positions. Their retention in friendly hands is essential to the conduct of air and naval operations in the defense of these positions. Mere neutralization of these islands would not meet U.S. military strategic needs, because it would: (1) considerably improve the Chinese Communist strategic position by permitting the release of some of their defense forces for build-up elsewhere and at the same time; and (2) substantially reduce our own strategic position in the area by restricting freedom of action in the event the military situation requires an attack against the Chinese Communists on the mainland. Military developments may at a later date necessitate the use of these islands by the United States or the Chinese National Government as a base for the conduct of offensive operations against the Chinese Communists. For these reasons it would be in the U.S. interest to incorporate Formosa and the Pescadores within U.S. Far East defense positions by taking all necessary measures to prevent hostile forces from gaining control thereof, even at grave risk of general war.

Importance of Developing the Capabilities of the Chinese National Armed Forces

25. From a military standpoint there are valid reasons for the development of the capabilities of the Chinese National Armed Forces. The National forces on Formosa constitute the only visible source of manpower for extensive guerrilla operations in China and for possible invasion of the mainland, should developments such as overt Chinese Communist intervention in Indochina, or a renewed aggression in Korea, make large-scale U.S. action against China necessary. The maximum feasible development of the National Forces would constitute a sorely needed general military reserve in an area where Western Allied manpower is at present greatly outnumbered by Communist forces. Such a development would further an important objective of NSC 162/1,3 which seeks to develop indigenous ground forces to counter local aggression. The existence of an indigenous force on the order of half a million men, maintained at a minute fraction of the cost of an equivalent number of U.S. divisions and trained and equipped for operations against Chinese [Page 319] Communist held territory (especially when considered in the light of U.S. capabilities to transport, supply and support these forces) would pose a threat to communist security and compel the Communists to deploy sizable forces to cope with it. Such deployment would be at the expense of Chinese Communist capabilities elsewhere and be a factor in their consideration of possible future aggression in Asia. Furthermore, the development of the Chinese National Forces represents a logical and necessary step in the reduction of the relative power position of Communist China in Asia through the development of the military strength of non-Communist Asian countries as envisaged in NSC 166.

Limitations on the Maximum Development of the Chinese National Military Potential

26. The problems inherent in any plan to develop substantial military forces on Formosa are numerous and involved. They touch upon the matter of leadership and command, troop replacement, priorities for MDAP assistance, magnitude of U.S. aid programs (both economic and military), ability of the National soldier, sailor and airman to absorb training and physical limitations of training facilities.

27. The requirement for a replacement system is a serious problem and, if an adequate solution is not found, will in the future become increasingly serious. There are perhaps 150,000 available former mainland Chinese civilians now on Formosa who could meet the physical requirements for military service. Alone this constitutes an inadequate source of recruitment. For the long term, the most logical source of military manpower is the native population of Formosa. If assured of fair treatment, and if Formosans were adequately represented in the officer corps, the Formosan people would probably not resist conscription and could furnish between 450,000 and 650,000 able-bodied males in the 15–29 year age groups. However, the effective and extensive use of Formosan manpower, particularly for operations outside Formosa, could be assured only after a further dissipation of the native antipathy to the Nationalists. Directly related to this problem is the reluctance of the National Government to arming substantial numbers of Formosans and to giving them equality of opportunity within the officer corps. Some progress is being made toward a solution of this problem. Its final solution is ultimately connected with steps now being taken to improve relations between the Nationalist regime and the Formosan people.

28. The size and scope of U.S. military aid programs have a direct bearing on the rate and degree of the Chinese National military development. In FY 1951–1953 the U.S. programmed some [Page 320] 382.9 million dollars for the military development of Formosa. About 284 million dollars of economic aid was programmed. To date these programs have made possible the development of a reorganized 21-division army (about 10,000 men per division) with an estimated combat effective rating of about 40% (by U.S. standards), a small navy about 40% effective, and a small air force about 35% effective. The program proposed for FY ’54 should materially increase the combat capability of these forces. If a program on the order of 300 million dollars is provided in the FY ’55 appropriations, the financial support for a combat ready force of about 21 divisions with a 90-day reserve supply of ammunition and equipment will have been provided. These funds will also provide for the completion of an air force program calling for 8 2/3 wings of aircraft of which 4 1/3 wings will be jet equipped, and a navy materially strengthened in the destroyer category, giving the latter an increased capability for blockade operations. It is estimated the annual cost to the United States of supporting these forces (exclusive of economic aid) beginning in FY 1956 will be about 140 million dollars (including 30 million for common use items).

29. Formosa at present ranks below Korea, Indo-China and D-day NATO forces on a priority basis. Assuming a continuation of the armistice or a political settlement in Korea, the build-up provided for in the suggested programs through FY 1955 for Formosa will probably be attained well before the original estimate made [of attainment?] in the spring of 1956. Upon completion of this program, the Chinese National Government should have an army of approximately 350,000 capable of limited offensive operations and possessing a 90-day reserve of ammunition, a small navy capable of conducting limited coastal patrol, anti-shipping and commando operations and an air force designed to provide limited air defense, troop support and interdiction capabilities. Such forces would not enable the Chinese National forces to successfully defend Formosa or initiate large-scale amphibious operations against the mainland of China without U.S. air, naval and logistic support. However, these forces would be able to undertake sustained brigade-size amphibious operations§ against Communist-held territory and raids against communist seaborne commerce utilizing their own forces. Theoretically these forces will be equipped and ready for unopposed [Page 321] amphibious operations of perhaps two-division size. In actuality, however, logistic inadequacies will reduce these capabilities to brigade-size operations. If the United States were to undertake to support the landing operations with landing craft now in Korean waters, and supply them for as long as necessary while providing adequate air, and naval support, perhaps as many as 3 divisions of about 12,000 men each could be utilized at one time. Additional lift brought in from other areas would further increase their capabilities. Such an operation might be profitable in the event the Korean or Indo-chinese war expands beyond present limits. It is anticipated these forces would be at their best if used against the Chinese mainland, for the strong desire of the Nationalists to return to the mainland would be reinforcing their efforts.

30. The rate at which the Chinese soldier, sailor or airman can absorb modern technological training has also been a limiting factor in the development of the military potential of the National forces. This has been especially true of the navy where the rate of flow in general of MDAP items has been adequate to fully utilize the capabilities of the Chinese Navy to receive, identify, allocate and utilize the material. At present U.S. Naval instructors are emphasizing both underway and school type training. In the air force both Zone of the Interior and on-the-job training programs have been quite successful in raising the general level of proficiency of technicians and air crews. The transition from piston to jet fighters is being made in an orderly manner. In the army, steady and continuing improvement is being made with some deficiencies still noted in the professional capabilities of officers and key non-commissioned officers. The relinquishment to junior officers of some of the centralized control now held by senior officers, would improve the situation materially. Very marked improvement has been noted in the past year in the field artillery. The Combined Service Forces, whose mission is to support the armed forces logistically, has retained limited capabilities (about 20% effective by U.S. standards at present), due to the fact that technical training has been a slow process. Their ability to sustain combat operations is very limited and probably will continue limited for some time to come despite U.S. training efforts.

Present Vulnerability of Formosa

31. The arrival of jet aircraft this year has improved the capabilities of the Nationalist Air Force to defend Formosa. Nevertheless U.S. air support is still necessary to insure the defense of Formosa against large-scale Communist attacks. At the present time no U.S. jet fighters are based on Formosa to carry out our announced intention to defend it. Furthermore, the Chinese National anti-air-craft [Page 322] units have a very limited capability at the present time, although recent measures to speed up the delivery of anti-aircraft material should improve the situation. Aircraft carriers now in Korean or Japanese waters would probably have to be rushed to Formosa in the event of sustained communist jet air attacks. For this reason it appears desirable to maintain the right to develop facilities on Formosa for the use of U.S. forces in the event of need. Such facilities include, among other things, POL storage and spare parts supply depots for the use of U.S. air and naval forces which might be engaged in the defense of the island at a later date.

Coordinated Military Planning

32. The increasing development of the military potential on Formosa raises the question of the proper utilization of this potential in the political and military struggle now going on in the Far East. Until recently the United States had exacted no assurances from the National Government of China that these forces would not be used in a manner inimical to the best interests of the United States. While Chiang has agreed to clear all plans for sizable operations against the Communists with the United States, the larger problem of the use of these forces in operations which the U.S. may wish to undertake at some future date still remains unsettled.

33. Without minimizing the difficulty of getting any military commitments out of Chiang, it seems clear that the United States should seek to insure the maximum cooperation of the Nationalists in the furtherance of over-all U.S. military strategy in the Far East.

Consequences of and Reactions to the Proposed Military Program

34. Present Chinese Communist reaction. The Chinese Communists are certainly already aware, through their intelligence operations on Formosa and elsewhere, of the general scope of U.S. military assistance to the Chinese Nationalists. They have not evidenced any serious concern over this build-up, but they have been gradually strengthening their defenses in the East China coast area. Defensive installations are being built along the coast, antiaircraft artillery is being installed around key centers, and the recent rotation of combat-seasoned troops into East China from Korea, with at least some of their modern and heavy weapons, has improved the quality of the forces in the coastal area.

35. Probable Chinese Communist reactions. Shanghai and Canton are the only substantial strategic targets along or within ready striking distance of the East China coast. Hence, the direct military results of Nationalist ground operations would almost certainly be limited, even should the Nationalists secure temporary lodgments. Furthermore, the Chinese Communists probably rate Nationalist [Page 323] capabilities as fairly low at present; Peiping probably believes that the Chinese National Government desires to conserve its limited military manpower until such time as circumstances offer assurances of U.S. support for an invasion of the mainland, in which neither objectives or support are limited. The Chinese Communists would not, therefore, be seriously concerned about the direct military threat of Chinese Nationalist raids or temporary lodgments. They would be sensitive however, of U.S. intent to provide large-scale support of these forces in such operations.

36. The possible political effects of large-scale Nationalist raids would cause Peiping some concern. Although mainland guerrilla strength is currently estimated at 50,000 or less (on the basis of scanty evidence), there is undoubtedly substantial latent unrest in South and East China, the areas directly threatened, and if internal Communist stability were to deteriorate over the next two years (now estimated as unlikely) successful Nationalist operations, gaining even a temporary lodgment, might set off a wave of defection, at least in the immediate area. Moreover, the fact that the Chinese Nationalists on Formosa retained sufficient strength to secure temporary lodgments on the mainland would belie Peiping’s propaganda on the “weakness” of the “Kuomintang remnants” and possibly stiffen passive resistance to the regime throughout mainland China.

37. As Nationalist strength increased, therefore, there probably would be a step-up in Communist defensive measures along the East China coast, including the deployment of additional troops. Unless the Nationalist raids actually induced considerable defection, it is doubtful if the redeployment would affect the strength of Communist forces in other key areas such as Korea or along the border of Indochina, since there are large numbers of troops in central China that could be moved towards the coast. Such measures would tend to increase the strains on the Chinese Communist economy, but would not be of major importance in this respect. To meet the air threat from Formosa, the Chinese Communists would probably deploy additional MIG–15’s, TU–2 piston light bombers and perhaps IL–28 light jet bombers into the area between Shanghai and Canton. Ample air reinforcements, including IL–28’s, will almost certainly be readily available without reducing present strength in Manchuria and Korea.

38. Effect of an impression of U.S. assistance. The Chinese Communists may believe, on the basis of past and current U.S. official statements and activities on Formosa, that the United States is attempting to develop forces and bases on Formosa in preparation for future combined US–Nationalist operations against the mainland. Their current activities do not indicate, however, that they regard [Page 324] such operations as an imminent threat, and their future reactions are likely to depend on estimates, which would probably be quite realistic, of the capabilities of the forces on and about Formosa. If, as a result of a significant build-up of U.S. naval and air forces at bases in or near Formosa and other indications, the Chinese Communists became convinced that the United States was prepared to support directly with such naval and air forces the Nationalist force in an invasion of the mainland, the Chinese Communists would almost certainly affect major redeployments of their ground and air forces in order to counter the threat. Such a redeployment probably would not cause a reduction in the number of troops in Korea. If this situation coincided with a period in which large replacements were required in Korea, however, serious strains might be placed on available trained military manpower and on the transportation system.

39. Summary. In the absence of large-scale defection or a belief in imminent U.S. air and naval support, the implementation of the program for strengthening Nationalist China’s military capabilities would not compel the Chinese Communists to materially weaken their forces in Korea and would probably not, by itself, induce the Chinese Communists to seek a settlement of Korean or other issues with the United States. However, the development of a trained force of 350,000 on Formosa, along with an increased Nationalist air and naval capability, would represent a threat to the East China area which the Chinese Communists would have to counter by the commitment of strong ground and air forces in the area. Peiping’s calculations with respect to present and future military operations would then be affected by the necessity of maintaining such a defensive military posture along their threatened coastal border.

40. Soviet reaction. U.S. assistance to the Nationalist forces on Formosa has produced no important reaction from the USSR thus far, although consideration of the potential threat may well be a factor influencing the extent of Soviet material and advisory assistance to the Chinese Communist air, ground, and naval forces. The USSR will undoubtedly watch developments on Formosa closely, especially for indications of a U.S. intent to provide air and naval support for Nationalist attacks on the mainland. The USSR would probably attempt to provide Communist China with the necessary military material to counter such combined operations.

41. Non-Communist reaction. Non-Communist reaction to the U.S. effort to develop Nationalist military capabilities has generally been unfavorable. Western European nations have been sensitive to any U.S. policy which involved the possibility of extended hostilities in the Far East or a diversion of U.S. resources to Asia. [Page 325] There has been a widespread belief in Western Europe, the Middle East, South Asia, and Southeast Asia that Chiang Kai-shek and his government are vestiges of the past which few mainland Chinese would be willing to support if they attempted to return to the mainland. Important Southeast Asian opinion, in addition to believing that Chiang has no future on the mainland, fears that Nationalist operations might develop into general war in the Far East which might envelop Southeast Asia. Japan, while desiring to split Communist China off from the USSR, or otherwise reduce the power of Far Eastern communism, has been apprehensive lest U.S. support to the Nationalists result in a serious reduction of U.S. strength available to defend Japan. These various attitudes may change if the Nationalist Government can increase its prestige through effective administration of Formosa, if the Communists persist in refusing to make a settlement in Korea or if they expand their military pressures, and if non-Communist governments come to believe that Chiang’s forces can perform a valuable service merely by their existence as a threat on Formosa.

economic analysis

Current Situation

42. Formosa had a population in 1949 of over 7.0 million, which has increased to approximately 9.2 million by natural growth plus the arrival of the Chinese National Government, armed forces, dependents and other refugees from China.

43. The economy of Formosa suffered severely from war damage and the disruption of traditional trade patterns; but the combination of its rich resources and the vigor of recent efforts at economic rehabilitation would by now have sufficed to make the island self-supporting and relatively prosperous were it not for the burden of the Chinese National Government and its armed forces. The imposition of these two million mainland Chinese and the necessity of maintaining a military establishment of half a million men severely strain Formosa’s domestic and foreign exchange resources and periodically threaten dangerous inflation. In 1950 alone, retail prices rose 58% and from mid-1949 to the end of 1951 wholesale prices rose 400%, with a consequent hoarding of crops, investment for speculation rather than for production, and disorderly government processes of taxation and budgeting. At present military costs constitute 80% of the national budget and approximately 50% of the consolidated national, provincial and local budgets. So long as the present military burden must be carried, it is evident that the Formosan economy cannot be sustained without external assistance for at least three or four years. While present aid planning is [Page 326] based upon the concept of progressively diminishing economic (as distinct from military) assistance, if military activity is substantially increased, self support for the Formosan economy may become a more distant goal.

44. The U.S. economic aid program (including common-use items) for Formosa totaled $98 million for fiscal year 1951, $81.5 million for fiscal year 1952 and $105.5 million for fiscal year 1953. The objectives of the economic aid program are to: (a) maintain economic stability, (b) lend economic support to the U.S. military assistance program, (c) develop industry and agriculture so that Formosa can become more nearly self-supporting.

45. Significant progress has been made over the past few years to expand trade, and to increase agricultural yields and industrial production:

The value of total exports in 1952 was 29% higher than the 1950 and 1951 level. Trade with Japan, traditionally Formosa’s chief trading partner, has been substantially revived by an agreement signed in September 1950. In 1952 Japan took one-half of the Formosan exports (mostly rice, salt, and sugar) while supplying nearly the same proportion of Formosan imports (mostly textiles, fertilizers and machinery).
Trade with other Asian countries, particularly Hong Kong and Malaya, is beginning to reach significant levels.
Imports into Formosa financed by the Mutual Security Agency during the period from July 1, 1950 through January 1953 totalled $164 million. These imports have consisted of raw materials for industries, chemical fertilizers, necessary consumers goods and industrial equipment otherwise not available from the limited amounts of Chinese foreign exchange.
Industrial production in some industries greatly exceeds prewar Japanese levels.
Although agricultural production and general living standards are below pre-war levels, an island-wide effort is well under way to improve the lot of the farmers, 60% of the total population, through such means as: fixed land rentals and sale of land to tenants, control of animal and plant diseases, livestock upbreeding, better irrigation and chemical fertilizers. Rice production is already somewhat higher than pre-war, and higher (on an annual yield per acre basis) than any country in the Far East.

46. As against these evidences of progress, economic weaknesses are still apparent. Public sensitivity to commodity shortages tends to produce radical fluctuations of prices and interest rates; gold and foreign exchange reserves are precariously small; the danger of a crippling inflation is accordingly ever-present, currently stimulated by Chinese military pressures to expand defense projects, training, raise pay scales and to stockpile rice. All of the arable land is now under cultivation, yet the birth rate is more than 42 per 1000 as opposed to a death rate of 11 per 1000. Continuation of this rate [Page 327] would double the population in about 20 years and convert the island into a net food importer.

47. When viewed in the longer perspective, however, Formosa has many of the physical prerequisites and potentialities for becoming one of the most stable and attractive societies in the Far East. Its relatively advanced state of material development, industrialization and literacy, its high agricultural productivity, its knowledge and application of modern methods could make it, with proper guidance, assistance, encouragement and opportunity for trade, a splendid “show window” of the free world in Asia.

Analysis of Cost Trends Resulting from Intensified Military Activity in Formosa

48. The current cost of economic aid is analyzed below for purposes of comparison with the foreseeable cost trends arising from an intensified military build-up and possible offensive action.

49. For purposes of this study, the costs of economic aid are divided into two components, “Developmental” and “Stabilizing”. Of the two, the stabilizing component is predominant, although funds have been increasingly devoted to expanding industrial developments designed to achieve eventual self support.

50. The core of the economic aid program is the stabilizing component. The funds spent for stabilization are dual purpose funds in the sense that they (a) generate local currency counterpart to cover local FOA costs and to finance National Government of the Republic of China (NGRC) budget deficits (as discussed below), and (b) finance imports of essential commodities. The former is considered the more important purpose.

51. Formosa has a substantial demand back-log for imports since the current level of imports is only about 60% of the pre-war level on a per-capita basis (exclusive of military end item imports). More imports are desirable from the standpoint of normal Formosan living standards (except in rural areas). The actual magnitude of the stabilizing component of the aid program is determined, therefore, not on the basis of what imports are desirable to meet consumer demands, but rather on the basis of how much must be spent for imported commodities to generate counterpart which in turn is needed to finance Chinese National Government deficits. Only if the deficits are reduced to manageable proportions can inflation be curbed.

52. Experience in Formosa indicates that inflation control is a prerequisite to progress in all other fields. Once out of control, inflation tends to reduce investment for production, leads to hoarding, disrupts orderly processes of budgeting, and weakens political control. Not until April 1952 was inflation brought fully under control, [Page 328] principally through a combination of strict expenditure limitations administered by the Mutual Security Agency and the Military Assistance Advisory Group, plus sizable stabilization imports. Supplementary measures to offset inflation have included production increases, credit controls, technical assistance in taxation, budgeting, and foreign trade. It is generally recognized that the National Government of China is making a determined effort to maximize Government reserves. By Far Eastern standards the results are considered excellent, and are markedly superior, for example, to results in the Philippines and Thailand. In some fields tax collections are excessive with a consequent adverse effect on incentive and capital formation.

53. Since the costs of U.S. economic aid are directly related to the local currency budget, the 1952 budget is shown below for purposes of illustration:

Budget for Calendar Year 1952 All Levels of Government

(Expressed in Millions of US$. Local currency has been converted at the counterpart rate of NT$11.6 to $1 U.S.)

Budget Item Amount Percentage of Total
National Defense $119.8 45.7
Reconstruction 48.3 18.4
Education 27.3 10.4
Loans, etc 17.2 6.6
Police 14.6 5.6
Debt Service 12.5 4.8
Health 6.7 2.5
Foreign Affairs 3.6 1.4
Legislative/Judicial 3.6 1.4
Administrative, etc 8.6 3.2
Total $262.2 100.0

54. The predominant item is national defense which requires nearly half of all funds (available to the Central, Provincial and local governments). The National Defense Budget for 1952 was as follows:

[Here follows a list of the various components of the Chinese defense budget and the amounts allocated to them.]

55. Although it is impossible accurately to estimate costs arising from intensified military build-up, certain trends can be assessed. A downward influence on cost trends will result from the continued [Page 329] exercise of Foreign Operations Administration and Military Assistance Advisory Group controls over spending by the Chinese National Government. At the same time, however, an upward influence will result from increased military activity.

A policy of encouraging raids on the mainland could well increase the “Operations” item of the budget (see fifth item in National Defense Budget above). The total expenditures for “Operations” were $13.3 million during 1952, when raiding activity was conducted on a limited scale. A policy of increasing logistical support of guerrillas could well increase the budget items of “Food”, for example, as well as “Administration” and “Ship Repair” (see National Defense Budget above). This would at the same time result in the loss of earnings from rice exports.
Further costs appear possible as the result of accelerated military preparedness. In a desire to ready themselves for military operations on the mainland, the Chinese military authorities would probably continue their practice of demanding services and goods without cost or at a discount. Experience in 1952 showed hidden or unadmitted deficits of this nature amounting to the equivalent of U.S. $11.5 million. Costs of greater magnitude may occur in subsequent years.
A number of consequences, difficult to quantify, but none the less real, are foreseeable if retaliatory military action by the Communist Air Force takes place. In the event of air attacks, it can be assumed that imports and exports will be at least temporarily suspended as vessels seek safehaven in accordance with their insurance or union contracts. Other consequences of communist military action would include reduction of export earnings; sharp price rises as commodities, particularly rice, are hoarded; and decrease in both domestic and foreign capital investment for production. The Chinese National Government would find it necessary to raise emergency revenues and undoubtedly U.S. assistance would be sought, as in the past, in order to import such items as flour, textiles, canned goods, etc., which can be readily sold on the local market and turned into cash for the Government. An emergency import program, costing the United States about $29 million in the fiscal year 1951, was undertaken when it became apparent that the local costs of roads, airfields and supplies had to be defrayed. These expenditures were necessary in order to prepare the way for the arrival of end-items and the initiation in 1951 of the training programs sponsored by the Military Assistance Advisory Group. Communist raids on Formosa would warrant similar expenditures for commodity imports. The magnitude of such an import program would vary with U.S. military intentions at the time, and the extent to which the United States is prepared to curtail other objectives.
Funds under the “Common Use” program are used to finance the importation of commodities not furnished under the Mutual Defense Assistance Program which are required by the forces of the Chinese National Government. These commodity imports include aviation gasoline, lubricating oils, soya beans, flour, as well as raw materials used for the construction of barracks, airfields, [Page 330] repair shops, harbor facilities and raw materials used to manufacture small arms, ammunition, uniforms, etc. The influence of an intensified military build-up on the common use program is difficult to assess in view of some current developments which will exert downward pressure on cost trends. For example, the textile industry in Formosa has expanded to a point where fewer dollar imports of cloth are required, off-shore procurement contracts are being concluded which will help finance the raw material costs in the arsenals, plans are being made for the refining of aviation gasoline and the manufacture of lubes. Greater military activity may, however, result in certain increased costs. For example, more imports may be needed for the accelerated construction of harbor facilities and repair shops, and for the supply of troops, both in Formosa and possibly in the mainland, now underequipped for offensive action.

56. In summary, there appears to be little doubt that accelerated military activity, including intensified offensive operations, will result in rising costs. The chief increase will result in the cost of commodities required to cushion the impact of heavy military expenditures by the Chinese National Government and possible disruption of local production and distribution. Additional costs may also arise in terms of a larger volume of imports under the common use program.

  1. A covering note of Nov. 6 from Lay to the National Security Council stated that the President had approved the statement of policy, which superseded paragraph 11 of NSC 48/5. It also noted that an NSC staff study (see enclosure, below) was enclosed for the Council’s information.
  2. A note on the source text states that parenthetical references are to paragraphs in the staff study.
  3. This subparagraph is subject to review in the light of recommendations by the Department of Defense regarding Chinese Nationalist force levels and the rate of military assistance to be provided the Chinese National Government beyond Fiscal Year 1954. [Footnote in the source text.]
  4. Japan, Ryukyus, Formosa, Philippines, Australia and New Zealand. [Footnote in the source text.]
  5. NSC 162/1, “Review of Basic National Security Policy,” Oct. 19, 1953, had been amended and adopted by the National Security Council and approved by the President as NSC 162/2 “Basic National Security Policy,” Oct. 30, 1953; for documentation on the NSC 162 Series, see vol. ii, Part 1, pp. 489 ff.
  6. Smaller appropriations for FY 1955 would delay but not necessarily disrupt the described build-up. The program could be stretched out to provide for completion at a later date if circumstances required. [Footnote in the source text.]
  7. Combat consumption of ammunition and supplies would rapidly deplete the 90-day reserve of any unit engaged in such operations necessitating a diversion of replacement supplies from other units and subsequent resupply from the U.S. [Footnote in the source text.]