FE files, lot 55 D 480, “Korean Black Book, February 1–17, 1954”
Memorandum by the Deputy Director of the Office of Northeast Asian Affairs (McClurkin) to the Deputy Assistant Secretary of State for Far Eastern Affairs (Drumright)1
[Subject:]
- Background for Discussion of the Tungsten Purchase Agreement
Background
On March 28, 1952 the United States entered into a Tungsten Agreement with the Republic of Korea under which the United States undertook [Page 1743] to: (a) purchase all the tungsten offered by the ROK under terms specified in a separate purchase agreement, (b) furnish supplies, equipment and technical assistance on a reimbursable basis, (c) furnish on a grant basis motor transportation to and from the mines, (d) assist the ROK in the negotiation and administration of a management contract with a mutually acceptable company.
A Purchase Contract was entered into simultaneously to last five years or until 15,000 short ton of tungsten had been purchased. Under this contract the US agreed to pay $65 a ton for the first two years (April 1, 1952–March 31, 1954), with the price to be renegotiated to a level directly related to the world price level at the end of the two year period.
During the past two years two developments have led to the present Korean concern over the termination of the contract: (a) the world tungsten supply situation has eased markedly with the world price falling to about $18 a ton, (b) Korean tungsten production has exceeded all expectations, and deliveries of more than 13,000 tons have been made. It is expected that the full 15,000 tons will be delivered by April 1, 1954, at which point the contract will be terminated.
The ROK has sent a letter to the Secretary (Tab C)2 and to Wood (Tab D)3 requesting that the purchase contract be continued on the present terms, citing that tungsten is the most important export and that the industry will collapse without an assured market.
Discussion
Tungsten exports are undeniably the mainstay of Korean commodity exports. During the first nine months of 1953, tungsten exports accounted for 70% of commodity exports ($23 million out of $33 million).
The ROK has been advised of the probable termination of the Purchase Contract on at least two occasions in the past. A Department instruction on July 6, 1953 pointed out the fact that the ROK must endeavor to improve the competitive position of its tungsten mines in view of the falling world market price and the probable termination of the contract. On November 24, 1953, the ROK was advised by Wood that the US is not prepared to enter into new purchase commitments from Korea or elsewhere. At that time FOA urged the ROK to explore world markets immediately and offered to assist the ROK by furnishing a qualified marketing consultant. Apparently there was no reaction from the ROK until the recent requests to the US to continue tungsten purchases.
There appears to be no possibility for continued tungsten purchases by the US at the present contract price of $63 a ton or even at the [Page 1744] world market price of about $18 a ton. We are assured by the Emergency Procurement Service that no funds exist for additional purchases at any price. Even if contracts with other countries should be cancelled the funds would be employed for other purposes, since the tungsten stockpile objective is all under contract.
Seemingly, no one knows whether the Korean tungsten industry can compete at existing world market prices, in view of the purported lack of sound accounting and financial practices prevalent in the industry. However, as the producer of the most valuable export commodity the tungsten mining industry should be kept alive if at all possible. From the long run viewpoint, the sooner the industry is compelled to face up to world competition the better. During the two years of the Purchase Contract little capital improvements were made, but it seems obvious that a plan of capital improvement aimed at improving the competitive position should be developed. It may prove necessary to extend a temporary subsidy to the industry. This would be justifiable if a non-subsidized operation would be an attainable goal.
The purchase of tungsten in excess of market prices as a form of economic aid would be less effective than straight grant aid, even if funds for such purchases were available. It probably would result in reduced incentive for the industry to reduce costs so that world competition could ultimately be met. Rather than perpetuate a high-cost industry the funds would have more effective alternative uses.
Recommendation
It is recommended that Ambassador Yang be informed that:
- 1.
- Funds for the continuation of the purchase of Korean tungsten at the present contract price or even at a reduced price do not exist. Therefore, the Purchase Contract which probably will expire April 1, 1954 will not be renewed by the US, as stated by Mr. Wood in November 1953.
- 2.
- The tungsten industry must be preserved, however, and the United States wishes to extend such assistance as it can by furnishing qualified people to aid in marketing tungsten and, if necessary, to aid in improving the efficiency of the industry. It is important for the long-run health of the industry that it face world competition and embark upon a plan to reduce costs. This probably will involve capital improvements over a period of years. As a temporary measure, it is conceivable that a government subsidy may be necessary.
- 3.
- It is considered that the purchase of tungsten as a form of economic aid is a less effective use of aid funds than their use for imports of an investment nature since it probably would result in reduced incentive for the industry to reduce costs to meet world market prices.
A reply to Pyun’s letter to the Secretary along the above lines will be prepared when a copy of the letter is received.4
[Page 1745]A copy of the tungsten agreement and Purchase Contract and copies of the relevant telegrams are attached.5
- Drafted by Howard Smith of FE/NA.↩
- Not printed, but see telegram 720 from Seoul, Jan. 27, p. 1737.↩
- Tab D is not printed; reference was to telegram Tofoa 361. (FOA files, lot 55 A 374, box 27)↩
- Regarding the Secretary’s reply, see telegram 699 to Seoul, Feb. 25, p. 1751.↩
- These telegrams and the purchase agreement were not found attached to the source text.↩