336. Memorandum From the President’s Special Assistant (Rostow) to President Johnson1
SUBJECT
- Recommended Change in Treasury Regulations on the Trade of U.S. Subsidiaries Abroad with China
Attached is Secretary Rusk’s memorandum2 recommending you approve a change in Treasury regulations to permit U.S. subsidiaries abroad to sell a limited range of non-strategic goods to China. The change would enable these subsidiaries to engage in non-strategic trade with China as do other firms in the countries in which they are located—but on a more restricted basis.
The change would be made subject to soundings with the incoming Administration and with Congressional leaders. It can be put into effect administratively—without Congressional action—through publication of licensing authority in the Federal Register.
Secretaries Clifford, Barr, and Smith concur in the recommendation.
Under current Treasury regulations a U.S. subsidiary abroad is prohibited from selling any product it manufactures abroad to China without specific Treasury approval. This is part of our complete embargo on exports to China. The host countries in which these subsidiaries are located have long charged that this regulation is an inappropriate extension of U.S. jurisdiction and therefore an infringement of their sovereignty. Their position is that a U.S. subsidiary in their country, since it is subject to their jurisdiction, should operate under the same regulations as any other firm doing business in their country. They object to the “extraterritorial” aspect of our trade controls, which prohibit companies under their jurisdiction from trading with China without the express approval, on a case-by-case basis, of the U.S. Treasury.
The recommended change in our regulations would go part way toward meeting their objections. It would permit U.S. subsidiaries to sell to China those non-strategic products that can be shipped freely from the U.S. to the USSR and Eastern Europe. For all other products, the U.S. subsidiaries abroad would still have to obtain specific Treasury authorization.
[Page 730]The proposed change would serve two purposes:
- —It would reduce an irritant in our relations with friendly countries—principally Canada, the UK, and France.
- —It might serve as a modest response to the faint signals from Peking suggesting possible changes in their position. Although we would describe the change as merely a technical adjustment in our regulations designed to remove frictions with our Allies, Peking might interpret it as a sign of flexibility in our own position.
Secretary Rusk believes that it makes good sense to act on this now—as a useful move prior to our scheduled meeting with the Chinese Communists in Warsaw on February 20.
In addition, there is a tactical reason for making the change at this time. It would set a modest precedent which your successor could either follow up by extending the list of commodities or ignore. On the other hand, if he initiated the change at the outset of his Administration, too much significance would be read into it.
The main issue here is not substantive but psychological. Everyone agrees that this change has no strategic significance since:
- —It does not apply to strategic goods; and
- —The Chinese can and do buy these non-strategic products from other companies in the countries concerned.
Therefore, the change could in no way improve China’s strategic position. Furthermore, the embargo on shipments to China from the U.S. would remain unchanged. Nevertheless there will be some in Congress who will ignore these facts and argue against any change in our regulations affecting China on the grounds that it could lead to a deterioration of the system of strategic trade controls and help China.
On the other hand there is sentiment on the Hill in favor of probing Chinese intentions. (If you approve this action, Secretary Rusk asks your advice on which Members of Congress to consult from the list he attaches at Tab C of his memo.)
This is a modest move which I believe is worth making at this time. It does not commit your successor but it could give him additional room to maneuver should opportunities present themselves.
- Source: Johnson Library, National Security File, Country File—Addendum, China. Secret; Nodis. A notation in unidentified handwriting at the bottom of the page reads as follows: “Walt—I don’t want to rush these and do them in the last two weeks.” Another handwritten notation states that Rostow had informed NSC staff member Edward Fried of the above.↩
- Rusk’s January 4 memorandum is not printed.↩
- This option is checked on the source text.↩