THE ECONOMIC IMPORTANCE OF THE ABOLITION OF MULTILATERAL DIFFERENTIAL TRADE CON

Created: 6/17/1957

OCR scan of the original document, errors are possible

The Honorable C. Douglas Dillon

Deputy Under Secretary for Economic Affairs

Department of Slate

. C.

Dear Mr. Dillon:

In view of current interest in the subject of economicwith Communistm forwarding the attachedRhe Economic Importance of the Abolition of Multilateral Differential Trade Controls against Communist China.ecret/NOFORN.

report is forwarded with the compliments of Mr. Robert Amory, Jr.

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INTELLIGENCE MEMORANDUM

THE ECONOMIC IMPORTANCE OF THE ABOLITION OF MULTILATERAL DIFFERENTIAL TRADE CONTROLS AGAINST COMMUNIST CHINA

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THIS KAZEKIAL CONTAINS JJtFORKATIOH ATilKTLKO THE NATIONALOF THE UNITED STATEB MTJBDI THE HKAnutC OF THE ESPIOHACE LAWS,SC,, THE TRANSMISSION OP REVELATION OF WHICH Id AW MAUSER TO AN uBAuTHOtlZED PERSON IS FKOHISmD BY LAW.

CENTRAL INTELLIGENCE AGENCY Office of Research and Reports

T

Action by the

ofree World

r. - Trade with CHIHCCtt Countries

3* Prospects forree World

Availability of Foreign

leu tat Ion of

k. Effects or the Continuation of Unilateral Controls

by the

iqble

Recordedree World Trade,

2

(ORR)

KCOHOKIC IHTOBTAHCE OF THES

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The trade of Comunlst China with the Free World has grownapid rateeears. In view of Its export surplus In trade wlUi IM Free World and Its oubataatlal holdings of Free World currencies, China appears capable of continuing this grovtn.

Abolition or Multilateral differential trade controls against Coanurdst China would tend to facilitate the expansion or its trade with the Free World, without necessarily resultingubstantial reorientation of Its total foreign trade. It Is not presentlyto predict the lerel to which controls night rail. By asking various assumptions as to what the subsequent level or controls will be, however. It Is possible to esttaste the potential gains to China as follows:

The reduction or CHIontrols toevels could effect price and transport savings of about US %y,nnually.

The removal of ancillary shipping controls permitting the carriage of refined petrolou* products by Free World ring vessels could effect additional saringo or as muchillion.

3- The lowering by the UB of Its unilateral controls against Canaunlat China to those prevailing against the rest or the Soviet loc night open unique opportunities for markets and sight permit dollar realttenceeillion annually.

* The estimates and conclusions contained In this aottoranduathe best Judgment of ORB as or la* henber nations of the China Conedttee on Export Controla (CH3BCQH) and the Coordinating Conaltlee on Export Controls (COCCK) are Belglua, Canada, DeoemrR, France, West Ceraany, Greece, Italy, Japan, Iiowabourg, the Belherianda, Horway, Portugal, Turxey, the UK, and the US. Dollar values are given in teraa ofthroughout this

report

Ho relaxation of CBSXHt control* could prompt| China lo drop tmmt restrictive* on trade with Japan,ossible lurnui la Chinesebarge earning, froa trad* vlth that eo-xitry of oa such at fcc million annually.

Relaxation of CEDCOH controls could, therefore, result la anor Chinee Camunlut laportc rrotn the Tree World of between 4J5 aJlllon0 Billion annually. orta to the Free World would probably rloeraevhat emaller amount.

, pressures infor the modification of China trade control* have steadily Increased. Theseenerated in large pari by commercial trading Interest* and reflected Inpo.lllona, have cow primarily from the UK, Japan, prance, and Meet German,. our couotrleo and Horway, Deaamrk, and PWlusal have alao objected to tbe differential treatment of Communist China OB the baala of principle, holding that trade control, oa Coesjunlst Ch.nae treated under tbe same criteria a. the Diropeaa Soviet fl.oc. the US policy to date baa been an.nilateral total embargo oa trade with China and of participation In CH1HCOM to effect the beat possible nultllateral restrictions on such trade. conoalc defense policy loil Implicitly recognized these pressures aada USr action designed to aaintaln tha aoxlaun effective control structure.

a. CHIICOH Wcp.tintlong.

ranceroposal In the CHINCOM forum which would have had the effect Of eliminating the China differential in from i> aonUutear. On this came datearrying out ItB Current policy,evision of China trade control, whichargrf Heme froa control and slmultao.ou.ly called for tightened control, on the ran* Icing lions. Neitherreceivedunanimous aupport of CHIsCOM. During theoay, effort* vera Bade to negotiate an acceptable coapromiie vlthln CHiarXH, and onay, after severalteps by thelMreative proposal was offeredmall group or delegatac. (Thead the IK vera not In tel. group.) Taa US, Lb tbe Interest.

The trade of Connunlet China with the Free World has steadily Increased over theears. Preliminary estimates based on Free World sources place the value of totalree World trade6 at nearlyillion compared1 aillion Data on reeordedree World trade, which account for aboutoercent of tne eetlaated total Of such trade, Indicate that the greater part of the Increase In total trade6 waa caused by an Increase2 adlllon in Chinese exports to the Free World. Over the sane period, Chinese lnporle from the Free World Increased by Jfl7 Billion. Uncordedree World trade6 Is shown In the table.*

Asunaunlst China once again6arhed surplus In Its balance of recorded trade with tho Free World. The addition of estimated unrecorded Imports froa tho Free Worldillion,illionb,wiped out the apparent export surplus of China* and considerably reduced that The actual export surplus of China6 remained large ltc exports to the Free World exceeded Imports aboutercent.

* The table follow* on p. *.

UtA* IDEAS

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Tabic

Recordedree World Trade a/

Hllllon US <

6

Imports fron

Free lW)8

CBINCOH countries 60

Exports to

Free 3

CKDJCOM countries

adjusted according tomethodology tomports. values for exports.

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b. Trade with CHINCOM

The recorded trade of Conmunlnt China vltb theKUfcOM countries accounted for lessercent ofree World trade during theeers {see the table}. Trade with European CHINCOM nations amounted to less, thanercent of tbe total. owever, the CaTNCQK countries acre than accounted for the entire Increase In Chlneae Imports from tha Free World. Thiswas dueore liberal interpretationreatly Increased atlIllation of the exceptions procedures* In tbe Utter half of tbe

* Documentxceptions procedures apply ta LVI, IL-II, and moat IL-XXI Items and require prior consultation and an adequate quid pro cu"r amy export af UMm LtmaB,

xceptions procedures applyumberItems aad the China Special List and require only ex pos'-p These were the procedures most freely used duringhalfexceptions rose sharply.

For further details on exceptions procedures, see COCQX Document No. Vri of2 end COCOH EOCUnentf

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year, vita the result that exceptionsillloo Tor the year. The noet notable efrect of trie increased use of the exceptions procedures was that the value of the recorded Chinese inports of netaU and machinery doubled, reaching an estimated value or ptO aillion.

Japan6 Increaaed its exports to Conawnlattoillion, an amount more than twice as large as that from any Other Free World nation. Germany and the UK were the other major CHJKCOM exporters to Chinaach exporting goods worthillion.

In each or theears, tho recorded imports or CHIlfCOy. countries froa COBRuniat China have exceeded their exports to that country. Because the major portion of the unrecorded Chinese Inporte from the Free World in believed to hiTc originated in CUIHCOMhowever, it aeens probable that Slno-CnXPCOM tradeear balanceeficit on the side of China. Japan, the major Free World outlet for Chinese products, maintained her imports& at sonewbatillion. The most notable change wasillion Increase in iaporta by Oenwny, which boosted that country's Chinese Imports abovelllion level.

3- Prospects forree World Trade.

a. Availability of Foreign Exchange.

It la estimated that accumulated surpluses In its balance of trade with the Free World plus estimated annual remittances froa overoeno Chineseillion nay have lert Comaunlat China at the beginning7 with Free World currency holdings worth0 mlLlion, of which nearly half is believed to be in transferable sterling. Chinese sterling balances, which were estimated atmillion at the endere cut in half This was partly becausehift to currencies Of countries not Involved In the Sues crisis (notably to Swiss francs) and apparently alsoof en increased use or sterling In trade with the Soviet Bloo.0 million la equivalent to aboutercent of the value of the recorded Imports or China$ from the Free World.

7 there mayeduction la the exchange earnings Of Coamunlst China from trade with the Free World because Of reduced export capabilities resulting from poor harvests, reduced government procurement of agricultural products, and planning deficiencies.

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Recently granted dcferovnta In required exports to the USSR (the Bagnl-tude of which is OS yet unknown) should, however, modify the itaoediatc effects Onree World trade.

b. Reorientation of Trade-

If all CETJ9COM nations except the US were to reduce the China differential trade controls to the level of the COCOH controls against the rest or the Soviet Bloc, it is most likely that these nations would Increase both their export and Import trade with Communist China, but not to an extent sufficient to resultubstantialIn Chinese trade. elaxation of trade controls, even if it Included those of the US, would not greatly Increase the ability Of Comnunlst China to secure comnodltles not now available through transshipment, but would permit an increase in exports to narkets notopen and would reduce import costs on certain items.

It is estimated that savings in transport costs and premium payments resultingeduction of controls to the COCOM level by all but the US could amount to as muchillion, thusan increase of this amount in Imports froa the Free World. Tho transport savings would result from the use of Free World flag vessels for the carriage of formerly embargoed items (principally crudehus avoiding the necessity of using nore costly overland transport. Premium payments result from two factors: (l) additional costs incurred in clandestine procurement of restricted goodshe decision of China to purchase rubber in higher-cost markets not controlled by CBIBCOMeans of exerting 6one counter pressure. If, in addition, ancillary shipping controls were abolished, permitting the carriage of refined POL products In Free World tankers, further savingsillion annually might result. Should the US follow the other CHDKOM nations in reducing trade controla. Communist China mightillion annually in remittances from overseas Chinese as wellear from sales in the US." Exchange earningsillion In addition might be derived from trade with Japan should China choose to drop present restrictions on trade with that country. China has been using the denial of coal and iron oreover with which to pressure Japan into dropping the CHTNCCM controls.

* See a, p.elow,etailed analysis

It Is thereforeatonsequence of theof thelateral China differential tradeheof Communist China for Importing froa the Free World night be Increased (depending upon the degree of relaxation) by between $J5 ailllon0 Billion. Because cxich of this Increase In laport capability would be caused by rectors other than export earnings and because China alreadyubstantial export surplus in her balance of trade with the Free World, It Is estimated that (barringreorientation of trade) conceal loot Increases in Chinese exports to tbe Free World would be sOnevbat eaaller than this amountno rare than half as large.

Kffeete of the Continuation of Unllatmal Controls by

Until0 the US was the aajor Free World trading partner of China. The imposition of US controls drastically reduced this trade, which fell1 million0 to |A7 millionillion2 and has been negligible since. Thus US controls whichonpletv embargo on trade and financial activities with Con-munlst China haveirtual cessation of conacrclal exchange between the two countries.

Because Communist China can obtainother countries virtually all products produced in the US, the aajor effect of the continuation of the US embargo Is tbe denialarge narket for Chineseand industrial raw materials. US Imports of these goods from China amounted0 million80 millionubetantial part of these goods Included byproducts or utilisedresourcee In their production, and tbe denial of narketaubstantial net loaa to the Chinese economy. On tho Other hand, the US has succondnd to some extent in finding substitutes or alternative sources of supply for such traditional Chinese exports as tung oil and hog bristles. Considering the reorientation of the exports of Communist China, the divers lea of resources to tbe growing industrial sector, aad tbe altered character Of the U> market, it Is estimated that exports from China to tha USnique narket would probably be little moreillion annually If controls were relaxed.

Overseas reedttances to China may have0 million annually during tbe period before World War II, with perhaps more than half of this cosing froa the US. Price levels and Incomes are now substantially higher than those offl, and It is possible

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that remittances might. In tho abscnco of controls, roach or even exceed thoac or prewar yearn. It is probable, however, that Americana of Chlooae anceatry and American religious or&ar.lialtoni axe no longer interested in Investing in mainland China properties. In addition, because of emigration and severance of family ties, toe necessity for remittances to relatives haa declined. Coooequcntly, it la believed that if US controls were relaxed, US remittances would not greatlyillion annually.

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Thus it is estimated that the continuation of US unilateralis denying to ConnuniBt Chinaillion annually In potential foreign exchange earnings. As an additional consequence or IB controls,0 million of Chinese assets in the UH are blocked by the US Government.

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Original document.

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