Foreign Relations of the United States, 1955–1957, Foreign Aid and Economic Defense Policy, Volume X

43. National Intelligence Estimate¹

NIE 100–55

Washington, January 11, 1955.

CONTROLS ON TRADE WITH COMMUNIST CHINA²

The Problem

To estimate the political, economic, and strategic consequences to China, Sino-Soviet relations, and the non-Communist world of each of the following courses of action:

a. Maintenance of present levels of non-Communist controls on trade with China and the European Bloc;³

b. Multilateral relaxation of non-Communist controls on trade with China to the level maintained on trade with the European Bloc;

c. Relaxation of non-Communist controls on trade with China to the level maintained on trade with the European Bloc, but with the US unilaterally maintaining various controls on trade with China;

d. Multilateral raising of non-Communist controls on trade with China.

Conclusions⁴

A. China’s objective of creating an industrialized and militarily powerful state cannot be achieved without extensive imports of capital goods and military equipment. The rate of advance of China’s power potential thus depends to a large degree on the volume of China’s foreign trade. Except to the extent that the USSR extends grants or credits, China’s capabilities to import will be limited by its capabilities to export, (paras 1, 19)

B. China has been able to import from the European Bloc those commodities, including transshipped Western goods, required for a rapid expansion of military strength and achievement of industrial output somewhat higher than previous peaks. It is committed to a program integrating its economy with that of the Bloc, in consonance with the Bloc policy of autarky. Nevertheless, at present, both Moscow and Peiping give every indication that they regard it in their best interest to increase somewhat their present trade with non-Communist countries and are exerting efforts to undermine trade controls, (paras 11, 12, 14, 18)

C. While trade controls have not significantly hindered China in obtaining essential commodities, they have reduced the volume of China’s imports by altering its markets and by increasing its transportation costs and procurement difficulties. We estimate that these effects currently represent an annual loss to China of roughly $200 million. This amount would be sufficient to enable China to increase by 50 percent its imports of capital goods, the scarcity of which is particularly serious for the Chinese economy, (paras 11, 12, 13, 15)

Effect of Maintenance of Present Levels of Trade Controls

D. Maintenance of present levels of trade controls against China would continue the present effects virtually unchanged although China will be able to take advantage of the recent relaxation of controls enforced against the European Bloc and import additional CHINCOM⁵ controlled items via European Bloc countries. While transshipment might add to the total cost of Chinese imports, the additional goods procured would allow the European Bloc greater flexibility in meeting Chinese requirements, (para 19)

E. We do not believe that maintenance of trade controls at present levels would produce any significant changes in the basic patterns of Sino-Soviet relationships or of Chinese foreign policy. Chinese propaganda would continue to hold out to other countries the prospect of advantageous trade with China, in order to arouse resentment toward the control system and to encourage policy conflicts with the US. Chinese efforts to achieve political gains in Asia through economic penetration would continue to be hindered by the maintenance of controls, (paras 20, 21, 22)

F. If China refrains from provocative military or political actions, pressure would increase in most CHINCOM countries for a reduction of controls to the level applied against the European Bloc. The position of the UK, which plays a major role in influencing the attitude of CHINCOM countries, will continue to be governed more by political than by economic considerations. These countries probably would not override strong US objections to a major change in policy nor would they be likely to take unilateral action to reduce controls. Maintenance of present CHINCOM controls would, however, be a mounting source of irritation in US relations with other CHINCOM countries, (paras 25, 27)

Reduction of Controls on Trade with China (CHINCOM Controls) to the Level Maintained with the European Bloc (COCOM⁶ Controls)

G. In this situation, almost all the effects of present trade controls in increasing China’s import costs and reducing its export receipts would be removed. We estimate that within two years after controls were lowered China might add about $200 million to its annual earnings of foreign exchange, provided its leaders decided to export to the amount necessary to yield these earnings and provided markets were available. However, China would not be able to secure any commodities that it cannot now secure through transshipment, (paras 28, 32)

H. China’s foreign exchange earnings would almost certainly continue to be used primarily to procure imports of capital goods and other commodities essential to building the modern industrial sector of the economy, and to modernizing the armed forces. We believe that China in the foreseeable future will not be interested in substantial imports of consumer goods, (para 33)

I. We do not believe that a relaxation of trade controls would, at least for the next few years, have any significant effect upon China’s internal political situation, its foreign policies, or its basic relationship to the USSR.⁷ (paras 34, 35)

J. A multilateral relaxation of controls on trade with China would probably be approved by most of the governments of Europe and Asia, some because of conviction that it was a desirable move, others out of indifference to the issue or willingness to follow the lead of the powers principally concerned. While Chinese trade with non-Communist countries would probably increase after the relaxation of controls, and in some areas would be exploited for political purposes, it is almost certain that the amount of trade increase would fall far short of expectation in many countries. These countries might, therefore, in the course of time, become somewhat less vulnerable to trade offers made by China for political reasons. Nevertheless, China would probably exert every effort to import such quantities of specialized materials from Western sources as its economy permits. We believe that once these controls were relaxed only open aggression by Peiping would bring about a reimposition of controls, (paras 36, 37)

K. We believe it unlikely that trade relations between China and Japan could regain their prewar significance under any foreseeable circumstances, because of the postwar economic and political changes which have occurred in the Far East. With trade controls at the COCOM level, we believe that by 1957 the value of Chinese exports to Japan might be raised from the present figure of about $40 million a year to about $100 million. The value might even reach $150 million, but we believe this would require some diversion of Chinese exports from Bloc markets. We believe that Sino-Japanese trade during the next few years will not in itself cause Japan to alter significantly its present orientation to the West barring a serious depression in the Free World accompanied by a drastic curtailment of Japanese trade opportunities.⁸ (para 39)

Effects of a Reduction of CHINCOM Controls to the COCOM Level but with the US Unilaterally Maintaining Various Alternative Levels of Controls

L. In this situation we believe that: (a) if the US maintained its present complete embargo on both imports and exports, the foreign exchange advantages which the Chinese might otherwise gain would be reduced by roughly one-half; (b) if the US maintained only a ban on imports from and remittances to China, the potential gains in foreign exchange to China would be reduced by about the same proportion; and (c) if the US maintained only a ban on exports to China, the Chinese could procure equivalent commodities elsewhere at only slightly increased costs, and could spend in other countries the dollars earned by exports to the US. (paras 40, 41, 42)

M. Although trading interests in CHINCOM and Far Eastern countries would welcome the continued absence of US competition in the Chinese market, their governments would be concerned at the divergence of their policies from those of the US. There would probably be apprehension that the failure of the US to participate in the general relaxation of controls would contribute to a continuation of tensions in the Far East. Moreover, difficulties and frictions would probably arise if the US attempted to prevent the re-export to China from third countries of goods imported from the US. (para 44)

Effects of Raising the Present Level of CHINCOM Controls

N. A further increase in controls on exports to China—without a corresponding increase in the level of COCOM controls—would probably have the effect of increasing the volume of transshipped goods, but it would probably not appreciably retard China’s internal development. If an embargo on imports from China, similar to that now applied by the US, were applied by all CHINCOM countries, China would lose export markets now taking about one-quarter of total exports (including Bloc re-exports of Chinese products). Since Bloc markets are not believed to be readily expansible, it is probable that China’s import capabilities would be reduced proportionately. Such a reduction in China’s imports would significantly retard China’s internal development, (paras 45, 46)

O. The Director of Central Intelligence and the Special Assistant, Intelligence, Department of State, believe that in the unlikely event that all non-Bloc shipping and shipping services were denied to the uses of Chinese commerce, the Chinese economy would in the short term be adversely affected, and transportation costs increased. Non-Bloc ocean-going vessels in 1953 carried about three-fourths of China’s seaborne foreign trade. Bloc flag shipping is inadequate to carry its own trade and no substantial building program is in progress. However, a substantial share of China’s seaborne trade now carried in non-Bloc vessels would be carried by the Trans-Siberian railroad and by Bloc flag vessels diverted to the China trade, provided non-Bloc flag vessels were chartered to replace the shipping so diverted. A considerable part of the trade probably would be curtailed, notably China’s exports of coal and iron ore which constitute 40 percent of seaborne export tonnage but less than 1 percent of the value of total exports. These adjustments would probably be made within a reasonable period. If denial affected only CHINCOM flag shipping and services, the Chinese could shift at least part of their seaborne commerce to non-CHINCOM flag vessels, thus mitigating still further the effects described above, (para 48)

P. The Director of Naval Intelligence; the Deputy Director for Intelligence, The Joint Staff; the Assistant Chief of Staff, G–2; and the Director of Intelligence, USAF, believe that in the unlikely event that all non-Bloc shipping and shipping services were denied to the uses of Chinese commerce, the effects upon the Chinese economy would be marked and adverse. It is probable that only a small portion of the tonnage now carried by non-Bloc ships could be carried through an increase or readjustment in the use of Bloc shipping. Denial of all non-Bloc shipping would result in considerable curtailment of China’s foreign trade, because the rail transportation facilities within China and those between China and the European Bloc probably are not adequate to handle the additional tonnages involved. If denial affected only CHINCOM flag shipping and services, the Chinese could shift at least part of their seaborne commerce to non-CHINCOM vessels, thus mitigating the effects described above. We believe, however, that the extent of this mitigation would not be significant, since the denial of shipping services (re-insurance, bunkering, repair, etc.) by the largest maritime nations, in addition to other pressures which could be brought to bear, would make most non-CHINCOM countries extremely reluctant to commit their vessels to this trade, despite the probability of premium charter rates being offered by the Bloc. Few non-CHINCOM countries have substantial additional tonnage suitable for the China trade, and with few exceptions, the availability of any vessels would be limited by the extent to which they could be replaced on their regular runs by shipping chartered from CHINCOM countries. Moreover, of all non-CHINCOM countries, only Sweden has a significant amount of shipping which could be so used, (para 49)

Q. Without some new and considerable provocation by China or possibly the USSR, we believe that an appreciable increase in the level of controls on trade and shipping with China would almost certainly not be agreed to by non-Communist countries, (para 50)

Introductory Note on the Present System of Controls

Although single countries, particularly the US, had applied trade controls against the European Bloc earlier, international agreement for such controls came into effect with the establishment by the major Western allies of the Coordinating Committee (COCOM) in January 1950. The member states⁹ agreed to three lists of commodities, based on the relative importance of the items listed as a contribution to the military potential of the Bloc. Goods on International List I (IL—I) are completely embargoed; goods on IL—II are subject to certain quantitative controls; and goods on IL—III are subject to surveillance and exchange of information between the COCOM countries.

In June 1950 China and North Korea were brought within the scope of the export controls exercised by the COCOM countries. In December 1950, after the Chinese aggression in Korea, the US applied a complete embargo to China. Following the UN embargo resolution of 18 May 1951,¹⁰ the COCOM countries tightened their controls, and 30 other countries imposed restrictions on their exports to China. By the fall of 1952, when a China Committee (CHINCOM)¹¹ was formed by the COCOM members to control trade with China, all COCOM countries had agreed to embargo all three COCOM categories as well as certain supplementary items proposed by the UK (China Special List). Some countries have unilaterally embargoed additional strategic items, but among the major trading nations only the US has a complete embargo on all trade with China. In addition, certain transshipment controls are currently applied by the US and UK, and are being adopted by certain other COCOM countries. The US and Greece have an embargo on imports from China and North Korea; the US, Canada, and the Netherlands have adopted controls on financial transactions, and certain other COCOM countries including the UK are adopting such controls. Practically all leading non-Communist maritime countries prohibit their merchant ships from carrying strategic goods in the China trade, and the US, UK, France, and Japan have adopted bunkering controls. However, these measures have been too limited in scope to prevent the Bloc from obtaining the use of a substantial volume of Western shipping for China’s overseas and coastal trade. All CHINCOM controls have been subject to frequent circumvention and some violation.

As the result of continued pressure by most non-Communist countries, major adjustments, chiefly relaxations, were made in August 1954 in the COCOM system of controls over trade with the USSR and its European Satellites (but not in the CHINCOM system of controls over trade with China). These adjustments were generally in keeping with the objectives, set by the Paris Consultative Group,¹² of establishing the control lists on a “long haul” basis and giving appropriate recognition to particular economic and political pressures within individual countries. The relaxation in controls against the European Bloc took the form of net reductions in the number of items or categories in the embargo, quota, and surveillance control lists by 37 percent, 77 percent, and 40 percent respectively, and, even more important, a redefinition and downgrading of many items from the embargo list to the quota and surveillance lists. These adjustments have widened the differential between controls on trade with the European Bloc and controls on trade with China, and therefore increased the opportunities for China to get through other Bloc countries items it could not get direct. However, in relaxing controls against the Bloc, the COCOM countries agreed to consider measures that would prevent or reduce such indirect trade. A Transit Authorization Certificate (TAC) system has been agreed upon whereby unrestricted use of the free ports in COCOM countries for evasion by transshipment would be precluded for items on IL–I.

[Here follow a detailed discussion of these conclusions in numbered paragraphs 1–50 and an appendix on Japanese trade with Communist China.]

1. Source: Department of State, INR–NIE Files. Secret. National Intelligence Estimates were high-level interdepartmental reports appraising foreign policy problems. NIEs were drafted by officers from those agencies represented on the Intelligence Advisory Committee (IAC), discussed and revised by interdepartmental working groups coordinated by the Office of National Estimates of the CIA, approved by the IAC, and circulated under the aegis of the President, appropriate officers of cabinet level, and the members of the National Security Council (NSC). The Department of State provided all political and some economic sections of NIEs.

   According to a note on the cover sheet, the following intelligence organizations participated in the preparation of this estimate: the CIA and the intelligence organizations of the Departments of State, the Army, the Navy, the Air Force, and the Joint Staff. All members of the IAC concurred with the estimate on January 11 with the exception of the representatives of the Atomic Energy Commission and the Federal Bureau of Investigation, who abstained on the grounds that the subject was outside their jurisdiction.

2. For general estimates on China and on the Bloc, see NIE 13–54, “Communist China’s Power Potential through 1957” (3 June 1954); NIE 10–7–54, “Communist Courses of Action in Asia through 1957” (23 November 1954); and NIE 11–4–54, “Soviet Capabilities and Probable Courses of Action through Mid-1959” (14 September 1954). [Footnote in the source text. NIE 13–54 and NIE 10–7–54 are in Foreign Relations, 1952–1954, vol. XIV, Part 1, pp. 445 and 930. NIE 11–4–54 is printed ibid., vol. VIII, p. 1248.]
3. As used herein, the term “European Bloc” includes the USSR and the Soviet Satellites in Europe. The term “Bloc” alone is used to cover all iron curtain countries including Communist China. Unless otherwise specified, the terms “China” and “Chinese” are used in lieu of “Communist China” or “Chinese Communists.” [Footnote in the source text.]

4. The Director of Naval Intelligence and the Deputy Director for Intelligence, The Joint Staff, believe that any approach to the problem of relaxation of trade controls should be viewed in the light of over-all Communist objectives, and specifically the attitude and actions of Communist China toward the US and the other Free World nations. They therefore consider it essential to the broad view of the problem that the following be inserted ahead of the present first Conclusion of this estimate:

   “There is no indication that the fundamental hostility of the Communists toward the Free World has abated, nor that, in pursuit of their ultimate objectives, the Communist program of attaining self-sufficiency within the Bloc at a high level of military and industrial development has changed. Moscow and Peiping almost certainly estimate that the qualitative and quantitative gains, which would ensue from increased trade with the Free World, will accelerate this planned expansion of their economies, as well as provide opportunities for political gain through economic penetration. We do not believe that any relaxation of controls on trade with Communist China will lessen this hostility, nor will it tend to change the course of Communist China’s foreign policy.” [Footnote in the source text.]

5. Fifteen countries currently participate in the China Committee (CHINCOM) of the Consultative Group of countries organized to deal with problems arising from the control of trade with Bloc countries. CHINCOM controls are those controls presently applied by these countries against China. Member countries are: Belgium, Canada, Denmark, France, Greece, Germany, Italy, Japan, Luxembourg, the Netherlands, Norway, Portugal, Turkey, the UK, and the US. [Footnote in the source text.]
6. COCOM controls are those applied against the European Bloc (the USSR and the European Satellites) by countries which are members of the Coordinating Committee (COCOM) of the Consultative Group. The membership of COCOM is identical with that of CHINCOM. [Footnote in the source text.]
7. The Deputy Director for Intelligence, The Joint Staff, would add the following sentence (taken from para. 34): “However, increased trade with the West would reduce certain strains which probably exist in the Sino-Soviet relationship.” [Footnote in the source text.]

8. The Deputy Director for Intelligence, The Joint Staff, believes this sentence should be replaced with the following:

   “Nevertheless, China’s need for capital goods and its available or foreseeably available raw materials complement the present economic situation of Japan—productive capacity excess to its own needs, a diminished raw materials base, and an unfavorable balance of trade without substantial exports. It would be very much to Communist advantage if Japanese heavy industry were to supply much of the means for China’s industrialization, particularly if at the same time Japan were to become partially dependent on China as a raw materials source and capital goods market. Current trade overtures indicate Communist awareness of this opportunity, and Japanese willingness to participate in such a pattern of trade.” [Footnote in the source text.]

9. Fifteen countries currently participate in COCOM: Belgium, Canada, Denmark, France, Greece, Germany, Italy, Japan, Luxembourg, the Netherlands, Norway, Portugal, Turkey, the UK, and the US. [Footnote in the source text.]
10. On May 18, 1951, the U.N. General Assembly adopted Resolution 500(V), recommending an embargo of shipments to North Korea and Communist China of arms, ammunition, implements of war, atomic energy materials, petroleum, and materials of strategic value.
11. Same 15 countries participating in COCOM. [Footnote in the source text.]
12. The Consultative Group (CG) is composed of representatives of countries participating in the COCOM trade control system. Its permanent working committee is the Coordinating Committee (COCOM). The main functions of CG are to review the recommendations of COCOM, to consider general policy matters arising in COCOM, and to set the general frame of reference for future COCOM activities. [Footnote in the source text.]