Foreign Relations of the United States, 1958–1960, Foreign Economic Policy, Volume IV

331. Memorandum From the Assistant Secretary of Commerce (Kearns) to the Chairman of the Council on Foreign Economic Policy (Randall)⁰

CFEP 575/1

July 7, 1958.

SUBJECT

• Review of Foreign Assets Control Regulations and Their Effect on American-owned Subsidiaries and Other Foreign Firms

I. The Problem

At the present time foreign subsidiaries of U.S. corporations located in friendly countries are not permitted by U.S. Government regulations administered by the Treasury Department to engage in trade and related transactions with the Sino-Soviet Bloc on the same basis as other firms incorporated in these countries. In addition non-subsidiary foreign corporations which are subject to a degree of control by U. S. private interests, as for instance patent licensees, are also bound by these unilateral U.S. controls. At present the effect of the Treasury regulations is to prohibit all trade by such firms with Communist China. So far as the European Soviet Bloc is concerned, Treasury licensees are required only for the more highly strategic goods and such licenses are considered on a case by case basis. The question is raised as to the appropriateness of these controls in the light of changed circumstances, and specifically whether greater flexibility should be permitted by the Treasury.

II. Facts Bearing on the Problem

A. Background

The Treasury regulations that give rise to the stated problem are the foreign assets and transactions control regulations, which have been issued under the Trading With The Enemy Act of 1917, as amended. The regulations have been put into effect primarily to support the U.S. embargo policy toward Communist China and North Korea. In general these regulations prohibit U.S. persons and firms at home and abroad, as well as foreign agents, subsidiaries, licensees and others subject to their control, from engaging in exportation, importation, financing, servicing or making arrangements for any of these activities, in connection with trade with Communist China. The form of the regulations, however, is such that no absolute prohibition is stated but rather that specified transactions are prohibited unless licensed by the Treasury.

The transactions control regulations also require a license for persons and firms subject to the jurisdiction of the U.S. in order to trade with the European Soviet Bloc in certain strategic goods (specifically those designated with the symbol “A” in the Department of Commerce’s published Positive Lists). These “A” items are those that are agreed internationally for embargo to the entire Soviet Bloc or for limitation on a quantitative basis. The U.S. as a matter of policy permits neither category to be shipped to the Soviet Bloc directly from the U.S. under U.S. export controls. Treasury controls prohibit foreign firms controlled by U.S. interests from shipping these items to the Bloc without a Treasury license. Therefore respecting the controlled items, the U.S. Treasury controls go beyond the level of control imposed by the country in which the U.S. subsidiary firm is located. There have been very few cases in recent years, however, and in practice the Treasury has been willing to issue licenses if the U.S. has accepted a COCOM action or other exception.

B. Impact of Controls on Trade Activities Conducted Abroad

Foreign assets or transactions controls are applicable to trade activities when the following are involved:

1. Wholly-owned U.S. subsidiaries, including manufacturing and trading subsidiaries.

2. Foreign firms in which U.S. persons or firms own an interest sufficiently great to constitute de facto control, so far as operations affecting trade with the Sino-Soviet Bloc is concerned.

3. Licensees of U.S. corporations.

4. Foreign branches of U.S. firms.

5. U.S. banks, insurance companies, shipping lines, freight forwarders, brokers, etc., not trading on their own account.

6. Materials of mainland China origin entering into the production of companies in which there is a U.S. interest.

The FAC regulations impose an additional obligation on American owned or controlled firms, to use reasonable care to ascertain that the goods they are selling are not going to be shipped to Communist China.

From the above it is evident that the Treasury regulations are not limited to U.S. citizens or firms but have an impact on a wide variety of business interests in friendly foreign countries.

C. Recent Cases

There have been no recent cases respecting Treasury licenses for trade with the European Soviet Bloc.

Interest on the part of U.S. foreign subsidiaries and associated firms in trade with Communist China had been negligible until the spring of 1957. Following the wide publicity given to the decision at that time of most countries to trade with Communist China on the same basis as with the European Soviet Bloc interest in such trade has increased. This interest has centered in three countries, namely, Canada, Japan, and the United Kingdom.

The following list of cases or inquiries during the past year or so is illustrative and is not in any way meant to be complete:

1. Ford of Canada and Ford of England—passenger cars for Communist China. Ford of Canada was asked to bid on a sale for 1000 cars of the 1958 model.

2. Quaker Oats of Canada—sale of general line of products to Communist China.

3. American Cyanimid of Canada—sale of fertilizer to Communist China.

4. Joy Manufacturing Company’s Canadian subsidiary—mining bits and hoisting and lifting equipment for Communist China.

5. Robin Hood Flour Mills of Montreal (subsidiary of International Milling Co.)—trade with Communist China.

6. Square-D Company’s English subsidiary—sale of electrical transformer and switch equipment to Communist China.

7. Cargill Co. of Minneapolis—wheat for Communist China via Canada.

8. International Harvester Co. of Australia—trucks for Communist China.

9. U.S. firms having licensing agreements with foreign firms:

(a) Willys on behalf of Mitsubishi of Japan—jeeps for Communist China.

(b) Otis Elevator Co.—Japanese subsidiary to manufacture and export electric equipment to Communist China.

III. Discussion

The embargo character of the FAC regulations as far as Communist China is concerned was determined as a matter of policy during the Korean hostilities. At the time the United Nations branded Communist China as an aggressor many countries joined the U.S. in the fighting in Korea, and therefore gave support to these policies in the trade field. At the present time, however, no important trading country joins the U.S. in the embargo policy and most countries find the U.S. regulations running counter to their policies so far as trade with Communist China is concerned.

The FAC regulations respecting the European Soviet Bloc were introduced at a later date and were designed to help implement the agreed COCOM controls and the more stringent U.S. unilateral controls. Inasmuch as the items agreed for embargo control by the COCOM and other countries with which we have mutual aid/Battle Act treaties are already effectively controlled, the Treasury regulations have a potential impact only with respect to the so-called quantitatively controlled items. These items for many years have been licensed to the European Soviet Bloc by all the COCOM countries except the U.S. In general the Treasury operates its controls toward the European Soviet Bloc so as to parallel Department of Commerce controls over commodities, or to permit U.S. firms to engage in transactions authorized through COCOM or through special exceptions procedures. It is difficult to assess the actual impact of the Treasury regulations in the absence of recent cases, but the existence of the regulations probably has some deterrent effect.

From the above it is evident that conditions have changed materially with respect to Red China and non-China aspects of the Treasury regulations. In both cases, our friends and allies have passed from an initial period of active cooperation to acquiescence or actual resistance to our off-shore regulations. At the same time the U.S. has had to modify its attitude toward such trade by friendly countries, and at present our position is emerging as a neutral one of not strongly objecting to trade carried on in accordance with the agreed rules.

Opposition to the FAC regulations is most pronounced in Canada, Japan and the United Kingdom. These countries have for some time been critical of the U.S. embargo policy, but so long as only U.S. trade was involved they could have no basis for objection to our policy. However, following the Paris meetings of the strategic controls committee in the spring of 1957 it was determined by all the participating countries other than the U.S. to reduce the level of controls toward Communist China to that applied to the rest of the Soviet Bloc.¹ Since that time, therefore, the U.S. controls have served to deny business to firms incorporated in and doing business in these countries—contrary to the trade policies of these countries and to the presumed deteriment of their economies. In other words, U.S. Government actions tend to negate the policies of these countries in a field of trade that they consider normal and desirable. This is particularly the case in Canada, where U.S. financial interest in Canadian corporations is of such great importance.

In the case of Canada this subject has direct consequences beyond the trade question. The business recession in Canada has caused labor and business interests to view the Chinese market with perhaps greater hope than the facts justify. In addition the subject has come to occupy a place of some importance in Canadian politics under the general heading of “U.S. interference in Canadian affairs.”

An additional important consideration is the adverse effect of present policies respecting private foreign investment. This aspect was most succinctly stated last fall in a despatch from the U.S. Embassy in Japan as follows: “As a final note, the Embassy wishes to indicate its concern over the possible adverse reaction of the Japanese if a distorted impression is obtained that the United States is attempting to use American investment in Japanese firms to further United States Governmental policies which may not fully coincide with those of the Japanese Government.”

In the light of the developments and considerations discussed above it appears desirable to consider whether some degree of flexibility can appropriately be introduced into the foreign aspect of the Treasury regulations. In this connection, the following basic questions must be considered:

1. Are our relations with friendly countries being so seriously adversely affected by our controls over their corporate citizens that changes in these controls are warranted on foreign policy grounds? What would be the over-all foreign policy impact of a changed U.S. position?

2. Can the U.S. maintain its embargo policy on direct U.S. transactions with Communist China and at the same time permit a significant amelioration of the impact of controls respecting foreign corporations subject to control by U.S. private interests?

3. How serious a problem of discrimination would arise if U.S.-controlled firms off-shore were permitted to engage in trade but this privilege were denied to firms operating in the U.S.?

4. Would our economic defense position be strengthened or weakened by adopting a more conciliatory approach respecting off-shore operations of firms controlled totally or partially by U.S. private interests?

5. Is there a domestic political problem to be considered?

IV. Conclusion

From the above the Department of Commerce has drawn the following conclusions:

1. U.S. foreign transactions controls as applied to foreign firms controlled by U.S. interests are becoming an irritant in our government-to-government commercial relations with a number of countries.

2. These controls, except as applied to strategic goods, are difficult to justify on economic defense grounds.

3. U.S. private firms in their relations with friendly foreign governments are subject to embarrassment as a result of these regulations.

4. Private U.S. investment abroad, directly and through licensing agreements, may be adversely affected.

5. Our relations with friendly countries respecting the China embargo have undergone a fundamental change since the adoption of the Treasury regulations, and therefore these regulations should be evaluated in the context of other U.S. commercial policy objectives, particularly that of expanded trade and investment in friendly countries.

V. Recommendation

The Department of Commerce believes that it would be in the national interest for the U.S. to reexamine its position on the question of trade with the Sino-Soviet Bloc by foreign-based U.S. subsidiaries and affiliated firms. In such a review the relative importance of the basic factors involved must be evaluated, particularly the threat to future private investment abroad, the over-all effect on our foreign relations, the economic defense consequences, and the political implications.

0. Source: Department of State, E/CFEP Files: Lot 61 D 282A, CFEP 575, U.S. Foreign Assets Control Regulation. Confidential. Distributed to the members of the Council on Foreign Economic Policy under cover of a memorandum by Cullen, July 14.
1. In 1957 preliminary figures indicate that Free-world exports to Communist China totalled $511 million and imports were $618 million. [Footnote in the source text.]