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

49. Memorandum From the Assistant Secretary of State for Economic Affairs (Waugh) to the Under Secretary of State (Hoover)¹

Washington, February 21, 1955

SUBJECT

• Exchange of Memoranda Between Mr. Dodge, CFEP, and Mr. Amory, CIA, on Implications of Changes in Soviet Government with Respect to U.S. East-West Trade Policy

Problem

The above correspondence is included as a note on the agenda for the ninth meeting of the Council on Foreign Economic Policy, February 23, 1955. The comments listed under “Recommendation” may be made if discussion is held on this correspondence.

Discussion

1. The burden of the subject memoranda is that the hardened domestic and foreign attitude of the present Kremlin leaders renders obsolete and futile the somewhat subtle distinction between “strategic” and “non-strategic” goods, as far as the free world denial program is concerned. Also, the differential in the levels of international security trade controls as between the European Soviet bloc and Communist China is now even more illogical than it has been. Policywise, as far as the U.S. is concerned, the implication seems to be that we should seek a uniform level of controls against both parts of the Soviet bloc at a point somewhere between the levels now in effect for the European Soviet bloc on the one hand and Communist China on the other.

2. Within a small circle of the Economic Defense Advisory Committee (EDAC) organization, thought is being given to a new approach to the problem of formulating an improved control list for the Communist bloc. The principle underlying this new approach, if it can be worked out over the next several months, would be control of those items, or categories of items, the denial of which would impose the greatest calculated cost to the Soviet bloc measured in economic resources. The proposal might not work a great change in the ultimate appearance of the actual control lists, but would support them with a sounder rationale than the existing “strategic” criteria which the COCOM countries accept but which prove to be subject to differing interpretations.

3. If and when some such proposal has been formulated and agreed upon within the U.S. Government, the remaining question would be whether the new approach could or should be negotiated in COCOM. Without prejudice to this question, we shall certainly have to keep in mind the fact that, even at the height of the Korean conflict, our European allies were not willing to accept measures aimed at the general economic well-being of the Soviet Union and its European satellites. They were unwilling, moreover, to levy a total embargo against Communist China, the declared aggressor, even though a number of them had troops on the Korean battlefield.

4. A case can be made that the Soviet bloc, including China, benefits more from East-West trade than does the West. If this is accepted, and the reasoning in the subject memoranda is carried to a logical conclusion, then the answer from a narrow economic security standpoint is simple and clear-cut: total embargo. From the broader standpoint of our national interests, and having in mind the health and vitality of our political and military alliances, the game would not be worth the candle, particularly since the “game” is not believed capable of weakening the bloc in any vital way.

Recommendation

The following comments of OIR may usefully be made in discussing the subject correspondence. E concurs in all of them.²

1. At no time during the Malenkov regime was it ever implied that consumers’ goods or agriculture had higher priority than heavy industry, nor was performance in light industries ever of a nature or on a scale to constitute a shift from the traditional concentration on heavy industry. The goals for heavy industry in this period were not scaled down, and investments in this sector continued high. Similarly, recently announced economic objectives indicate no sharp increase in effort in the heavy industry field—which was already being fostered to an extreme degree—at the expense of consumers’ goods—which as a matter of fact, offered little room for a squeezing operation.

2. As both Mr. Dodge and Mr. Amory suggest, it is extremely difficult, if not impossible, to assess the contribution of individual commodities to the Soviet bloc war or civilian economy. Our lists of so-called strategic goods, in the absence of satisfactory intelligence on the bloc economy, frequently have had to be based on analogy with Western economies. It is likely that the reasoning in many instances was inapplicable.

3. Yet, we know that trade benefits the bloc probably more than it benefits the West. Thus, we are forced to operate with the theory that outside of goods embodying advanced technology which we believe to be not available to the bloc, the importance of trade to the bloc is more a function of the quantity than the kind of goods exchanged.

4. We also agree with Mr. Amory’s statement that “it is hard to see how any control program can seriously impair Soviet might.” We accept this conclusion because of two factors: First, the fact that the Soviet bloc itself, following a policy of self-sufficiency, has severely limited the total volume of East-West trade, thereby reducing the potential scope and impact of any Western control program; second, over the long run, bloc planners can adjust their economy so that the slight impact of a Western denial program can be restricted to either the civilian or the military economies or shared between them.

5. We disagree with Mr. Amory’s statement that the differential in control levels between Red China and the European bloc has become less rational because of “Russian intransigence and vociferous support for China on the Formosa issue.” Export controls on trade to China have been rendered partially ineffective on those goods which the European bloc can (and does) transship to Communist China. We are less optimistic than Mr. Amory that it would be possible to get a “substantial tightening of COCOM controls” in exchange for “some modification” in CHINCOM controls, though this would, we agree, be an excellent bargain. On this subject it is important to note that it is only in the case of Communist China that unilateral U.S. embargo policy can have an important effect. By denying the U.S. market to China, the U.S. by itself has seriously impaired Communist China’s ability to earn foreign exchange and, therefore, to import goods from any country of the world including its Soviet partners.

1. Source: Department of State, Central Files, 460.509/2–2155. Secret. Drafted by John E. Mellor of ECD; concurred in by EE and RA.
2. These comments were contained in a memorandum from Henry Brodie, Adviser on Economic Research, DFI, to Mellor, February 21. The memorandum, not printed, was attached to the source text.