Part 5

Complete embargo would be the conventional answer in military conflict. But to urge complete embargo in the present situation is to ignore the fact that the present trade situation offers opportunities to the free world. The free world, with its enormous production, can benefit from trade; the test is what goods are traded and on what terms. The free nations are stronger economically than they have ever been. Collectively they are far stronger than the Soviet bloc. They possess tremendous resources. On the whole they have solid and healthy competitive systems. Their businessmen have behind them centuries of experience in bargaining, merchandising, and servicing. With these factors creating for the free world a currently strong trading position, the free-world nations should be able to take advantage of the needs of the Soviet bloc and by hard bargaining gain benefits from East-West trade.

Completely normal and unrestricted commercial relations with the bloc seem to be equally unsuitable as a course of action.

If the free world should abandon the controls it has imposed in the interest of national security, drop its guard and permit unrestricted trade in _all_ its raw materials, industrial goods, and advanced technology--the free world would be the loser. In view of the Communist objectives and methods, unrestricted trade would permit the bloc to increase its war potential--and specifically the all-important economic base of its war potential--faster than it otherwise could. The goods received by the free world would bring no commensurate return.

If such trade encouraged a general relaxation of the free world military defense, it would be that much more damaging to the free world. In any event, unrestricted trade would permit the Soviet traders to compete freely in Western markets for important strategic goods needed for Western military defense, thus making that defense more costly and difficult for many free-world nations.

Employing the monopoly power of the Soviet states, individually or collectively, the bloc would be able to extract economic advantages and unwarranted concessions from the weaker individual traders and nations to the net detriment of the free world.

Finally, unrestricted commercial relations, in which commercial gain is the overriding criterion, would weaken the free world insofar as they increased the economic reliance of certain free areas upon the bloc. This could be harmful by increasing the vulnerability of these areas to Soviet pressure. It could also have the effect of diverting the attention of the free world from its compelling general economic tasks such as developing bigger, better, and more accessible markets and making international financial and trade arrangements that will diminish the difficulties of sharing the free world's vast resources and production among the nations.

=The Challenge=

Thus, the problem and the challenge is to find and to steer a course midstream--to trade with the Soviet bloc on terms which bring to the free world a net advantage. This is no simple matter.

There are two sharp dangers for the free-world nations.

One is the danger of being divided in purpose, split apart on policies requiring concerted action, and forced into competing among themselves in circumstances which call for unified action.

The other is the danger of being deceived about what is going on in East-West trade and what's behind it. This danger grows partly out of the complexity of economic relations and the fact that the Soviet system and approaches to economic relations and peace in general are so different from ours. It grows partly out of the fact that deception is intentionally practiced by the Soviet Communists.

On the other hand, the Soviet-bloc governments have limitations in trying to accomplish their purposes. The free world, aware of its own strengths, can meet a great part of the challenge by working together not only to understand the Soviet bloc's general objectives and goals, but also to identify the specific actions which the bloc chooses at any given time to accomplish them. In this way the free world has the opportunity of segregating the harmful from the helpful.

We of the free world will neither be deceived nor divided if we keep ourselves armed with facts and work as a team.

_CHAPTER V_

=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.

=The China Trade Falls Off=

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.

[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.