61. Memorandum From the Deputy Assistant Secretary of State for Economic Affairs (Kalijarvi) to the Under Secretary of State (Hoover)1


  • Transmittal to the Dodge Council of Draft Report on Economic Defense Policy

Since early spring an inter-agency Task Force, created by the Council on Foreign Economic Policy, has been engaged in the comprehensive review of economic defense policy which the NSC instructed the CFEP to undertake. The Task Force has now completed a Report (Tab A)2 and a draft proposed revised Statement of Economic Defense Policy (Tab B),3 based on voluminous staff studies prepared as part of the review and to be forwarded in an Appendix to the Report. With very minor exceptions, the Report and Statement of Policy have been agreed upon between the agencies in the Task Force.

The subject of economic defense policy has been placed on the CFEP agenda for the meeting of July 19, and the Steering Committee of the Task Force plans to transmit the Report to the CFEP the middle of this week. Although the Report and Policy Statement will remain entirely open for discussion and change while it is under consideration in the CFEP (and subsequently, too, in the NSC), we should like, if time permits, to be assured, when the Report is submitted to the Dodge Council, that it meets with your approval in its general tenor and direction.

The principal findings and recommendations of the Report may be summarized as follows:

Principal findings:

Beyond the range of munitions, atomic energy items and prototypes of advanced technology, security trade controls against the Communist bloc, whatever the Free World’s intent in withholding an export, will not necessarily assure that the Soviets will lack an item of the type embargoed, but will impose a cost upon the Soviet economy.
The relative economic advantage of any East-West trade is greater for the Soviet bloc than for the Free World. Thus, leaving aside all considerations other than the economic, the cost of trade controls upon the Soviet bloc could be maximized by maximizing the curtailment of East-West trade.
For purposes of an economic defense program, this finding must be modified by a realistic appraisal of the impact of whatever trade controls are under consideration, weighed in terms of U.S. political objectives, both with respect to the Communist bloc and with respect to our relationships with our allies.
Even if maximized, the potential impact of trade controls on Sino-Soviet economic capabilities for war would be small; nonetheless, this impact is of value to the security interests of the Free World. The special higher level of controls now maintained against Communist China impose on that regime an aggregate additional cost estimated from 155 to 245 million dollars annually, the largest portion of which results from U.S. import and financial blocking controls.
In general, the effectiveness of the economic defense systems depends upon multilateral cooperation. Unilateral U.S. measures can be effective only under special circumstances.
Our major partners in East-West trade controls have always been most reluctant to adopt measures which they would regard as being in the nature of economic warfare against the peoples of the Communist bloc. Under present conditions, these other governments are unwilling to extend the scope and severity of multilateral trade controls. They are eager to reduce the levels of controls now applied against Communist China, and although they agreed last summer that the present narrowed scope of the control lists for Eastern Europe would be required for the “long haul”, they would welcome some further relaxation in these controls also.
Except in the case of Japan, the objections of other friendly governments to the trade controls now are based primarily on political, rather than economic, reasons. Should world tensions increase, a stiffening of multilateral East-West trade controls might become negotiable. Should such tensions decrease, the pressures for relaxation of the multilateral China controls would become, as a practical matter, irresistible, and pressures would increase for further relaxation toward the European Soviet bloc as well.
Should downward adjustment in the multilateral China controls become necessary or desirable in the near future, the U.S. is not well prepared, in terms of criteria and listing techniques, to retain a level of export controls for Communist China, or for the whole Communist bloc, which would be higher than the present level for Eastern Europe.

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Principal recommendations:

So long as current conditions of world tension prevail:
Trade control systems of the existing magnitudes should be maintained, without either substantial extension or substantial reduction, both with respect to the European Soviet bloc and with respect to Communist China.
The U.S. should refrain from officially encouraging “non-strategic” trade with the European Soviet bloc, but should approve shipments from the U.S. to Eastern Europe of such commodities (including agricultural products) when U.S. unilateral controls would not be effective.
If U.S. policy calling for maintenance multilaterally of the present differential controls against Communist China should become unduly divisive between ourselves and our allies, the Secretary of State should immediately ask the NSC to consider what adjustments or solutions would be appropriate.
Intensive work should continue on technical improvements in the economic defense program, such as study and development of more effective criteria and listing techniques, more effective enforcement of agreed controls and strengthening of the multilateral trade control organization.
In the event of a reduction in world tensions which would accompany a finding by the President that Communist China should no longer be regarded as an actual, rather than a potential, aggressor:
The U.S. should undertake, with its allies, the establishment of multilateral trade controls on a long-haul basis of general uniformity, and of maximum economic impact consistent with U.S. political objectives, towards the whole Communist bloc.
Consideration should be given at the same time to undertaking a progressive accommodation of U.S. trade controls, with a minimum of necessary exceptions, to those applied multilaterally.

In the event world tensions should significantly worsen:

The U.S. should press for a stiffening of economic defense measures, to the fullest extent of the negotiating opportunities then presented.

Recommendation: That you approve in general transmittal of the Report on Economic Defense Policy from the inter-agency Task Force to the Council on Foreign Economic Policy.4

  1. Source: Department of State, Central Files, 411.0041/11–2155. Secret. Drafted by Goodkind; concurred in by Robertson and Merchant.
  2. Not printed. This report, CFEP 501/6, was not attached to the source text; it is ibid., 460.509/7–1355.
  3. Not printed. This draft statement of policy was not attached to the source text; it is enclosure 2 to CFEP 501/6, ibid.
  4. The report was transmitted to the CFEP on July 13, under cover of a memorandum from Cullen. Transmitted along with the Steering Committee Report were the following enclosures: Steering Committee Proposed Policy Statement; Summary of Steering Committee Recommendations; CFEP Staff Proposed Policy Statement; Appendix to Steering Committee Report. (Ibid.)