U. S. Policy on Strategic Trade Controls

The economic and trading activities of the Soviet empire require close and continual study by free governments, but Soviet actions alone do not determine free-world policies.

Let us be perfectly clear on this point. The theme of the early chapters of this report has been the Soviet “trade offensive” and its background, just as the theme of the third semiannual Battle Act report was the enforcement of free-world strategic trade controls. The selection of the theme, however, should not be taken to mean that Soviet trading activities are the only factor that free-world nations must take into account when they consider what economic defense policies to maintain in the interest of their security.

In 1953 certain other considerations were demanding the careful attention of the agencies of the United States Government that are responsible for economic defense.

The Background

One of these considerations was the probability that the world faced a long period of tension short of general war, though with the ever-present risk of war. In such a period, no matter how long it might last, it would be essential for the free nations to remain strong and alert, to move together in whatever steps were necessary for military or economic defense, and at the same time to keep open the paths that might lead to a sounder basis for peace.

Another factor of historic significance was the massive upswing in the strength of the free world. Western Europe, especially, had moved into a far stronger position, both militarily and economically, than it had occupied a few years earlier. This gave the West greater bargaining power and it reduced the dangers of undue economic dependence on Soviet-bloc trading partners.

As Western Europe grew stronger the need for economic assistance from the United States declined. Although military aid continued in a big way, economic aid began to taper off.

Accompanying the increase in Western economic strength was a general shift in the free world from a “seller’s market,” in which goods were scarce and sellers had a relatively easy time finding buyers, to a “buyer’s market,” in which buyers generally could pick and choose. Some of the free countries had produced themselves into surpluses of some commodities—or had built up surplus capacity and needed additional markets in order to keep their industries prosperous.

This change brought more and more pressure from people in free countries to carry on increased trade with the Soviet bloc. Some groups had been clamoring for this all along, and had helped spread the time-worn Communist propaganda that a friendly and peace-loving “big brother” in Moscow was ready and waiting with an unlimited paradise of peaceful trade and that the only obstacle to its attainment was the strategic trade controls of the West. But now large numbers of anti-Communist businessmen, even though many of them were aware that the Communist propaganda was false and that Soviet policies had always been the prime deterrent to a large and peaceful commerce, felt that some increase in East-West trade would be beneficial as a supplement to their much greater trade in the free world. They recognized the limitations of the Soviet bloc as a stable, long-term trading partner, yet saw no reason why an expansion should not be sought.

This attitude was stimulated by the Korean truce of July 27, 1953. It was also stimulated by the gestures that the Soviet Union began making in the direction of livelier East-West trade.

Governments in the free world tended increasingly to the view that some revisions in Western controls might be made without sacrifice of security interests.

Basic Policy Reaffirmed

The new administration in Washington, taking account of such considerations as those, and wishing to be sure that United States policy was the most effective that could be devised, began a thorough review of the economic defense policy of the United States in the spring of 1953.

This policy review was completed around the beginning of August. The third semiannual Battle Act report, which was published last September 28 and which covered the first half of 1953, stated that the conclusions of the review “will be reflected in the economic defense actions of this Government during the months to come.” In the present report, which covers the second half of 1953, it is possible to give more information about those conclusions.

As a result of the policy review the basic economic defense policy of the United States was reaffirmed. There were, however, some shifts of emphasis—with respect to trade with the Soviet bloc in Europe—designed to make the basic policy more effective. We shall discuss those shifts presently, but first let’s summarize the basic policy as it has existed throughout the 6 months covered by this report.

This basic policy of the United States on East-West trade rested on the following principles:

1. Mutual security can best be advanced by continued increase in the political, economic and military strength and cohesion of the free nations relative to that of the Soviet bloc.
2. The free nations should not furnish a potential aggressor with goods which directly and materially aid its war industry and military buildup.
3. The free world may derive a net security advantage out of some East-West trade.
4. Security export controls should be applied on a selective basis, except in the case of military aggression, when a policy of complete embargo may be in order.

In accordance with those principles the United States has long been exercising certain controls over its own trade. Here is a short description of those controls:

United States exports to Soviet bloc in Europe: Not prohibited entirely, but limited to clearly nonstrategic goods.

United States imports from Soviet bloc in Europe: Not prohibited, except for certain types of furs.

United States shipping to Soviet bloc in Europe: Not prohibited, if carrying properly licensed goods.

United States exports to Communist China and North Korea: Prohibited.

United States imports from Communist China and North Korea: Prohibited. (Some licenses were issued, though not recently, for goods needed in United States military stockpiles and in special hardship cases.)

United States shipping to Communist China and North Korea: Prohibited.

As for the trade of the rest of the free world with the Soviet bloc, the policy of the United States was set forth in the Battle Act (the text of which is at the end of this report) and in certain executive directives. The policy was not to prevent all East-West trade but to cooperate with other free-world countries in a system of selective and flexible controls. The aim was to prevent Soviet-bloc countries from obtaining items that would contribute significantly to their warmaking power, and to insure that the trade which did go on served the real economic and security interests of the West.

Ever since the Communist aggression in Korea in 1950, the Far East has presented a policy problem different from the problem of controlling shipments to the bloc in Europe. The official position of the United States Government—both before and after the 1953 policy review—was that the current levels of controls by the United States and free world over shipments to Communist China and North Korea should be maintained. Later on in this chapter we shall report on what happened in the China trade during the last half of 1953.

The New Direction of Policy

So much for the basic policy. Now for the shifts in emphasis that took place in United States economic defense policy toward the Soviet bloc in Europe during the 6 months covered by this report.

It was determined that the system of the free-world controls that had been developed during the last 4 years substantially satisfied the objectives of retarding the buildup of Soviet warmaking power and strengthening the free world relative to the Soviet bloc. The effort to extend the control lists appeared to be reaching the point of diminishing returns. It was decided not to pursue an extension of the lists to many other items—though items would always be added occasionally because of changed conditions or new information.

On the other hand the Government recognized a need for simplifying the lists and removing or downgrading items, which, in the light of current information, were no longer deemed to be so important. The Government believed that much could be done in the months to come, if done carefully and with due regard for security, to adjust the controls to a “long-haul” basis. (Developments in the first half of 1954 will be reported in the next Battle Act report.)

In general, it was decided to concentrate on seeking more effective control of those items which, if shipped, would make a significant contribution to Soviet warmaking power.

The main thrust from the United States toward improvement of the control system, it was decided, would be in the field of implementation and enforcement of controls. Notable deficiencies existed in that field. To overcome them the free nations would need to keep improving their techniques, and would need closer international collaboration and pooling of information.

The new direction also took into account, even more than ever, the economic and political problems of free-world countries. Free-world unity was so vital, and the economic health of free nations so important to the defense of free institutions, that problems of our allies deserved to be given great weight in determining the actions of this Government in the East-West trade field. This was not a new concept, but this Government felt that such problems needed to be discussed among the free countries more than in the past.

In setting the new direction the Government recognized:

• (1) that maintaining commercial ties between the free world and the Soviet bloc—compatible with the security requirements of the free world—may have positive advantages during the present period of tension;
• (2) that there are, however, risks that trade may in some cases lead to undue reliance on the Soviet bloc as a trading partner;
• (3) that it is important to encourage trade within the free world, including the entry of commodities into the United States, by reducing trade barriers, especially when the effect of such action would be to decrease the reliance of the free world on the Soviet bloc.

Those were among the highlights of the new direction. As explained before, the basic economic defense policy was not altered.

Reviewing the Control Lists

In the light of this basic policy, and its new direction, the Government agencies responsible for economic defense were engaged in certain projects during the period covered by this report.

One of the most important of these projects was the review of the control lists. This review was a complex and time-consuming operation, which continued into 1954.

It is easy for the public to become confused about control lists, not only because of their necessarily secret nature, but also because there are so many lists, serving different purposes.

The United States has had three main lists for its own exports:

The munitions list, compiled and administered by the Department of State; the atomic energy list, compiled and administered by the Atomic Energy Commission; and a much longer list, covering all other controlled items, which is compiled and administered by the Department of Commerce.

In addition there are the Battle Act lists. They relate to potential exports from other countries to the Soviet bloc. They include those primary strategic items which we believe the other free-world countries should embargo in the interest of mutual security.

Then there are lists consisting of those items—at varying levels of control—which the cooperating free-world nations have accepted as a part of their informal coordination of controls.

All of these lists are subject to a continual process of review. But as a part of the new direction in United States policy, this continuing review process was broadened into an intensive reappraisal. Specialists from several Government agencies were reevaluating all our listings in terms of sharper and more meaningful criteria, and in the light of all the new relevant technical and intelligence information that could be assembled.

This review would furnish the basis for appropriate adjustments and for United States discussions with other governments in 1954 concerning the coverage of export controls.

East-West Trade: Road to Peace

It is a part of the economic defense policy of the United States never to lose sight of the vital need to keep open all paths that might lead to a sounder basis for peace in the world.

We not only recognize the economic benefits that free-world nations can get from an expanding East-West trade in peaceful goods; we also bear in mind the possibility that trade contacts can help to improve relations among peoples.

But in hoping for and working toward that end, we are not thereby accepting the belief that international trade inevitably and automatically leads toward peace. Hitler’s Germany expanded its foreign trade right up to the outbreak of World War II. We must view with skepticism the Communist propaganda line on trade and peace, for we know what their trading objectives and methods are. East-West trade as now constituted is carried on not with private individuals in the Soviet bloc but with agencies of Soviet-bloc governments.

International trade in general can be a broad highway toward better living standards and more peaceful relations. It has served humanity well. There should be more of it. But it takes two to trade, and trade is not necessarily a road to peace unless both parties wish to make it so.

Trade Within the Free World

Toward the close of the 6-month period under review, the President’s Commission on Foreign Economic Policy (Randall Commission) was hard at work. There was a great amount of public discussion, continuing into 1954, concerning ways in which the United States and other free-world countries could eliminate or reduce the obstacles that hinder the international exchange of goods.

The Commission, issuing its report in January, had much to say on the reduction of trade obstacles.

The Commission also included a section on East-West trade, recommending that the United States not object to more trade in peaceful goods between Western Europe and the European bloc.

These two subjects, trade liberalization and East-West trade, are connected with each other. When businessmen in free-world countries are hindered—either by trade barriers or other artificial causes—from selling products in other free-world countries, they are more prone to seek markets in the Soviet bloc.

To a certain extent this aggravates the problem of maintaining adequate strategic trade controls and the problem that some free-world countries have of avoiding undue dependence on the Soviet bloc.

It would be impractical to seek the elimination of all trade restrictions within the free world but it is important to reduce unjustifiable barriers and it is also important to take whatever other steps are possible to develop new markets and new sources of supply.

To bring alternative markets and supplies into being is not an overnight task but it must be done. It means the reduction of many restrictions in the United States, thus allowing more goods to come in from our friends and allies. It means a similar loosening of restrictions by other free nations. It means more and better economic integration among the European countries. It means steady advancement in the economic development of the underdeveloped areas of the world.

All those things are important for many reasons. East-West trade is one aspect of the matter. The United States Government recognizes that hindrances to the exchange of goods within the free world do have a definite relationship to the international system of strategic trade controls.

This report so far has concerned itself almost entirely with trade between the free world and the Soviet bloc in Europe. Now it is time to shift our attention to the China trade.

During the 6 months under review, free-world trade with Communist China fell far below the first half of the year. Free-world exports to Communist China from July through December are estimated to have been $111.1 million, as compared with $158.9 million in the first half of 1953. This meant that shipments in the report-period fell below even the extremely low level of the first half of 1952.

The result of this decline in shipments to Communist China was that the estimated total for all of 1953 was $270 million, only a slight rise in value from the 1952 exports of $256.5 million 1. A larger rise had been foreseen. The last Battle Act report to Congress, World-Wide Enforcement of Strategic Trade Controls, pointed out: “If free-world exports continued at the same rate as that of the first 3 or 4 months of the year—and that is not at all certain—the 1953 total would be around $375 million.” It actually seems to have been about $100 million short of that.

Free-world imports from Communist China also dropped in the second half of 1953, though not so sharply as exports. They amounted to $198.4 million in the second half, according to a preliminary estimate, compared with $226.6 million in the first half of the year. This brought the estimated annual total of imports to $425 million in 1953, as compared with $365.8 million in 1952.

It was true that in spite of the decline in the latter part of the year, some countries were able to sell more goods to the Chinese Communists in 1953 than they had in 1952. For example, exports of Western Germany rose from $2.8 million in 1952 to $25 million in 1953, in line with the general rebirth of German foreign trade. Exports of France rose from $3.3 million to $12.4 million, and Japan from half a million dollars to $4.5 million. Exports from the United Kingdom rose from $12.8 million to $17.5 million. On the other hand exports from the British Colony of Hong Kong, the traditional gateway of commerce to and from the mainland of China, fell so drastically in the second half of 1953 that the Hong Kong total for all of 1953 was only $94.6 million, or little more than the $91 million of the previous year. And the Communists slashed their buying of Pakistan cotton, which had come to about $84 million in 1952, down to about $7 million in 1953.

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1 These 1952 and 1953 figures are adjusted to exclude Swiss watches, which appear in Swiss official statistics as exports to China, but which actually went to the British Crown Colony of Hong Kong and were reexported to other free-world countries. Switzerland, in reporting its “China” trade, lumps together its trade with Communist China, Nationalist China, and Hong Kong. The watches in question are believed to amount to approximately $1 million a month, on the average.

They Play by Their Own Rules

Clearly the glittering prospect of a vast and lucrative trade with the Chinese Communists which had captured the imagination of many Western traders was not materializing.

The China Association, a British trade organization, said in December: “There is no doubt but that the potentialities have been greatly exaggerated in the public mind, partly as a result of the superficial successes of the various unofficial trade missions which have paid visits to Peking this year. This overeagerness has unfortunately been reflected in an increasing severity of the terms which China now demands.”

Information about the increasing severity of the trade requirements which Communist China was trying to impose upon the free world came from all sides in the last half of 1953. Those terms would hardly suggest a genuine interest in normal and expanding trade relations.

When the Chinese Communists sell, they demand a confirmed letter of credit in the hands of their own bank before they will ship the goods. They collect payment as soon as they have loaded the goods on a ship. They present a Communist Chinese Government certificate of inspection against which the buyer has no recourse if he finds—weeks or months later—that the quality of the goods is below specification.

One who sells to Communist China is asked to follow a very different set of rules. He ships his goods and waits until they have arrived in Communist China, have been inspected by Communist Chinese Government inspectors, and are in the hands of the buyers, before he can collect his money. In the meantime he extends credit without interest, immobilizing the capital he had invested in the cargo, freight, and insurance, and is forced to accept claims resulting from inspection of his goods in Communist China.

No doubt exceptions to these rules are still being granted to some Western traders, for the rules are so remote from long-recognized international trading practices that many firms would naturally balk at them. But there is no doubt that the unconventional and frustrating practices of the Chinese Communists have interfered seriously with the amount of commerce and have disillusioned many who saw an almost unlimited market in China’s multitudes.

United States Policy on the China Trade

As mentioned before, the policy of the United States throughout the 6 months under review was to continue its total embargo on all exports—strategic or nonstrategic—to Communist China and North Korea, which were aggressors, and labeled as such by the United Nations. Rumors heard from time to time in various countries, to the effect that the United States had decided to relax its embargo or was under irresistible pressure to do so, and that American cars were reaching the Chinese mainland by way of Japan, were completely untrue.

The position of the United States throughout the review period was also that the free-world embargo on strategic goods to Communist China—an embargo much more sweeping than that applying to the European bloc—should be maintained. Other free governments took the same position, and the embargo continued in force. Such relaxations as took place in controls were changes that did not affect the multilateral embargo. One example was the change in the control of antibiotics and sulfonamides. The nations which carry on trade with Communist China had been controlling those drugs, while hostilities continued in Korea, by limiting the quantities shipped; the quotas assumed by the various nations were scheduled to expire on December 31, 1953, and were permitted to expire on schedule. Another example was the relaxation by Japan on certain items that had been under embargo by that country—but these were items that the other countries were not embargoing. The same was true of the United Kingdom’s decision to permit the shipment of light passenger automobiles.

Though the policies of other major free governments regarding trade with Communist China have not been identical with our own, the United States has not attempted—and will not attempt—to bring about conformity through coercion.

This is true of all of our relations with other countries, not merely our relations with them on the issue of Communist China.

Leaders of this Government forcefully reaffirmed that principle during the period we are reviewing.

Secretary of State John Foster Dulles said in a statement on December 1:

“The tide of events has made our Nation more powerful but I believe that it should not make us less loyal to our great American traditions; and that it should not blur our dedication to the truths, expressed in our Declaration of Independence, that we owe a respect to the opinions of others.

“Today it is to our interest to assist certain countries. But that does not give us the right to try to take them over, to dictate their trade policies and to make them our satellites.

“Indeed, we do not want weak or subservient allies. Our friends and allies are dependable just because they are unwilling to be anyone’s satellites. They will freely sacrifice much in a common effort. But they will no more be subservient to the United States than they will be subservient to Soviet Russia.

“Let us be thankful that they are that way, and that there still survives so much rugged determination to be free.”

On December 2, President Eisenhower endorsed the declaration of the Secretary of State and said this:

“The easiest thing to do with great power is to abuse it—to use it to excess. This most powerful of the free nations must not permit itself to grow weary of the processes of negotiation and adjustment that are fundamental to freedom. If it should turn impatiently to coercion of other free nations, our brand of coercion, so far as our friends are concerned, would be a mark of the imperialist rather than of the leader.

“What America is doing abroad in the way of military and economic assistance is as much a part of our own security program as our military efforts at home. We hope to be able to maintain these overseas elements of our security program as long as our enlightened self-interest requires, even though we may, and probably we always will, have various differences of opinion with the nations receiving our aid.”

On that same day, Admiral Arthur Radford, Chairman of the Joint Chiefs of Staff, speaking in general of America’s leadership role in the world, said in a speech at West Point:

“Relationships between members of coalitions are never simple, particularly in coalitions as large as ours of the free world. The smaller nations expect, and are entitled, to exercise their sovereignty and independence. Our leadership therefore involves self-restraint if our objectives are to be achieved by consent, rather than through the pressure techniques imposed by the Soviet on her satellites.”

There is one commodity that is not on any list but is more important than all others, and that is the cement that binds the free world together.

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