THE EFFECT OF THE VIETNAM WAR ON THE ECONOMIES OF THE COMMUNIST COUNTRIES ( ER

Created: 7/1/1968

OCR scan of the original document, errors are possible

OF INTELLIGENCE

Intelligence Report

The Effect of the Vietnam War on thef the Communist Countries

8

Copy N2 " ' 70

Contents

Pago

I.

II. Effect on tho Soviet Economy

III. Effect on tho Economies of Eastern

IV. Effect on the Economy of Communist

Equipment

and

Exchange

V. COCOM Effect and Effect on General Economic Relations with the

vi. Effect on the Economy of North

A. Military

li. Economic

VII. Effect on Communist Aid Programs

in the Free

Aid

Aid

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Page

VTII. Effect on the Economy of North

"

Impact on the

Rebuilding Costs

of Postwar Aid

IX. General Appraisal of These Costs

X. Costs in the First Half8

Tables

Countries: Aid to

North

Distribution of Military

Aid to North Vietnam, Total for

China: Volume and Value

of Military Aid Deliveries

to North

Vietnam: Imports from China,

Countries: Military Aid

Deliveries to

Countries: Extensions

of Economic Aid to Less Developed

Countries of the Free World,

Countries: Deliveries

of Economic Aid to Less Developed

Countries of the Free World and

to North

Exports of Complete Enter-

prises to Major Areas,

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CENTRAL INTELLIGENCE AGENCY Directorate of Intelligence July

INTELLIGENCE REPORT

The Effect of the Vietnam War on the Economies oi tlie Communist Countries

Summary

Byirect outlays by Communist countries in supportthe war in Vietnam, plus the cost of repairing damaged facilities in North Vietnam, probably exceeded the equivalent of US S3 billion. Indirect costsconsisting primarilyortion of rising Soviet military spending, but also costs associated with the denial of sophisticated Western technologyould have doubled these direct costs.

Fromhen the United States began bombing the North, untilhe USSR,China, and the East European Communist countries have furnished more thanillion in military aid to North Vietnam. Before the bombing, this aid was trifling. 5 tohe Communist countries sent SI billion in economic aid to North Vietnam (for data, see Table Additional direct: outlays by the Communist countriesor shipping costs, the stationing of military and civilian personnel in North Vietnam, and the maintenance of Northstudents totaled0 million. In North Vietnam itself, damage to economic facilities from the bombing is estimated to0 million.

Note; This report Was produced solely by CIA. It was prepared by the Office of Economic Research and was coordinated with the Office of Strategic Eeeearc

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Two major indirect costs of the Vietnam war are mainly applicable to the USSR, although the trade control restraints have also had an effect on the economies of the Communist countries of Eastern Europe: Heightened East-West tensions over Vietnam have strengthened the hand of the Soviet marshals and made it possible for them toarger allocation of resources than would otherwise have been the case. In the USSR, military spendingillion rubles greater than if it had been maintained at4 level. It is not possible to specify what share of this increased Soviet military spending was due tobut if the fraction were appreciable, then indirect military costs alone could be at least as large as the direct outlays made to North Vietnam by the Soviet Union. The Soviet and East European support for the Vietnamese insurgency has slowed* down the reduction of trade barriers with the Industrial West and particularly with the United States. This, in turn, has effectively denied access to some of the Western world's machinery embodying advanced technology as well as access to the technology itselffor example, in thecommunications, and electronics field. There has probablyidening in the technological gap between the advanced Communist countries and the Industrial West.

Communist military and economic assistance to North Vietnam apparently has not limited She scale of Communist aid programs in the Free World.-Deliveries of aid to the less developed countries of the Free World continued on the same general level as, despite sharply stopped up deliveries to North Vietnam. The massive Soviet resupply of the Arab states after the latter-'swar with Israel in7 illustrates the USSR's ability and willingness to sustainunplanned costs in its aid programs if the political gains are judged to be adequate.

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Table 1

Communist Countries: Aid to North Vietnam

Million US S

b/

Communist China Eastern Europe

egl.

egl.

egl.

egl.

egl.

380

Communist China Eastern Europe

bO lb

0

0

S

Figures nave been rounded to th lion and may not add to the totals

nearest hown.

Data show the value at Soviet foreign trade prioet of weapons, other military equipment, and ammunition. They exclude aid for tha oonetruction of militaryand defense-related facilities.

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L. Introduction

The measurement, of: the. effect of. thewar on the. economies of the: Communist countries presents several difficulties. In the: first place, information is not- complete- reat deal of effort has gone, into analyzing available information,nd. the data: presented fn this report may be regarded, aa reasonable approximations, to the real quantities;.

A second difficulty concerns the adoptionommon, unit for. valuing-widely varying items which originate in wholly different economic. Current US dollars is the standard used ia. this: report. The; chartering;reek freighter for: the;un may present no.iaut; thej dollar; valuation.

an obsolescent: Soviet, jet. fighter whose original: ruble, cost is- oven. in. doubt- or- the cost of shipping goods across? a, Chinay political turmoil present formidable: problems;.

Such problems, are; also related to: the question af: "opportunity cost!'that is, thef:he, best alternative use of resources shipped, to North Vietnam. In someommunist country may be forgoing, aneconomic- gain to. support North Vietnam; in otherhe. support may represent,inor burden- or-et advantage. For- example, in dispatching- antiaircraft artillery units to North Vietnam, the Chinese Communists would gain some advantagehe. alternative use of these, troopstraining within Chinapolishes their skills' much less, effectively than does service in a. combat, area. On the otherommunist: country that, charters Western shipsthe use of this hard currency for purchase of modern machinery in the Free World.

4. The direct economic costs underwritten by the Communist countries include the sending of men, equipment, and materials to Vietnam, for which no return is expected. For North Vietnam itself, the destruction of capital plant by bombing and the lowering of output are direct costs. The

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detailed discussion in this report focuses on these direct costs, which are more concrete and relatively easy to measure. The indirect costs to the Communist countries are harder to pin down. They may be the result of the soured international political atmospherefor example, access by the Communist countries to US technology has probably been delayed. Or they may be the result of the preoccupation of Communist leaders with the problems of supporting the war rather than with the problems of modernizing their domestic economies.

II. Effect on the Soviet Economy

direct economic costs of SovietNorth Vietnam include the cost of (a) and civilian goods sent to North the Soviet military and civilianin North Vietnam; and (c) theattending colleges and universitiesUSSR. The indirect burden on theincludes (a) the barriers to tradeUnited States that might be removed if notVietnam war; and (b) the increase inthe military leadership in the USSR in thefor scarce resources, ascribable toand political atmosphereVietnam war.

A. Direct Costs

Military Aid

value of military equipment andsent by the USSR to North Vietnam duringwas1 billion. Almostthis total represented ammunition (smallandbout one-fourthsurface-to-air missile (SAM) systems,remainder included artillery, aircraft,motor vehicles, and infantry

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Table 2

USSR: Distribution of Military Aid to North Vietnam Total6 7

Value

(Million ofS)a/ Distribution

9

SAM

Motorarms and infantry

In Soviet foreign trade prtoea expresaed in US dollars.

of the military equipment sentVietnam is obsolete by Soviet standardsdrawn from stockpiles that need no The fire control radar sent to Northexample, is patterned after US systems used

by the USSR during World War II and is no longer used in the USSR. Theight jet bomber, theet fighter, andet trainer are in storage in the USSR; they are not in current production and those that are sent to North Vietnam are not replaced. The antiaircraft artillery and much of the armor are similarly obsolete and no longer used by the USSR. It is not known whether ammunition is drawn from stockpiles or current production.

of the equipment sent to Northnot obsolete, however. Theelicopter,unSide Net radar are examples of Soviet equipment

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sent airectly from current production to North Vietnam. -All trucks and other motor vehicles as well as .replacement missiles for the SAM-systems apparently are drawn from current production. the quantities of such equipment sent to North Vietnam have been too smallraction of Soviet output to have any significant effect on the

et fighter, for example, the USSR produced annits; the number of such fighters sent to North Vietnam over the three-year period is estimatedrercent ot total production.

9. The dollar value of the military aid cited

r ^good measurP of the economicthe USSR because it is based on foreignexpressed an US dollars, on the basisthe total value of military

aid to-North Vietnammounts to about ^ne-hal* billion rubles . That part ofaid thatlaim on currentamounts toercent of Soviet production of military hardware.

niS"7 the USSR stationeditu -military personnel in North Vietnam,for training and support ourposes. The numberprpbabiy aarger during the first halfen Soviet technicians exercised^-'the SAM system, and inhen they.temponari-ly resumed control of the system U.' 'the^Soviet military personneln North Vietnam provide assistance and traininq in

and.'radar equipment, aircraft? anV communications equipment. The salaries of these

hth'J COSL ofenance, % 5 he 'USSR. Because of the small number

nGl inVolved- -claries andprobably amount to lessillion rubles annually. -Furthermore, thu benefit .from

l5at *rou nia* wel1 offset any net cost of their assignment to Vietnam.

Economic Aid

11. in addition to the distinctly military aid discussed above, the USSR also provides North VK-tnam with economic aid, mostly in the form of yrants for which repayment is not required. In

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the three-year, the USSRotal5 million of non-military goods to North Vietnam. mall portion ofillionwas offset by North Vietnamese exports to the USSR, sof net economic aid was involved. Of this total, in turn,0 million represented grants-in-aid, and the remainder was deliveredredit basis, subject to repayment in goods or hard currency. There is no evidence that North Vietnam made any payments on this trade deficit during the period under study.

The economic aid consists of such products as petroleum, trucks and other motor vehicles, and construction equipment as well as such consumer goods as cotton and silk textiles and bulk Although designated ashese goods oftenirect role in sustaining military operations.

Whereas much of the military aid is drawn from stockpiles that need no replenishment, the economic aid in general is drawn from current production and represents resources forgone in the civilian economy. In domestic prices, the economic aid probably amounted to at least one-quarterillion rubles. Some of the aid, moreover, consisted of products that could have been sold elsewhere for badly needed hard currency. The diesel fuel and wheat flour shipped, for example, could have been sold in the West forillion.

As in the case of military goods taken out of direct production, the civilian goods sent to Vietnam representiny fraction of Soviet output of these items. The Soviet planners almost certainly have not had to readjust their output goals for any major civilian item as the result

of the Vietnam war.

Other Aid

addition to the goods describedabove, the USSR underwrites threeof economic aid for North Vietnamthatcosts of (a) Soviet economicin North Vietnam, (b) North Vietnamese

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students attending Soviet colleges and universities, and (c) the shipment of goods from the OSSR to North Vietnam..

number of Soviet technicians inhas been minuscule, averaging onlyper year, and the total costservices probably was about one-half Part of this cost, moreover, may haveby North Vietnam. The number ofstudents in the USSR5 Theto the USSR, including plane fare fromwell as tuition, room, and board,illion in the three-year period In addition to these costs of trainingforeign students, there is aninvolved for the USSR because thesevacancies in colleges and universitiesotherwise be filled by Soviet students.

; Shipping Costs

for the shipping costs of militaryaid, the available price informationthe valuation of shipments by sea in terms

of dollars and shipments by land in terms of rubles. Shipping costs by sea for there estimated atillion, and shipping costs by land aboutillion rubles. If the official exchange rate is used for currency conversion, total shipping costs thus amountedillion, orillion rubles.

the USSR used its own shipsall seaborne shipments to Northdiversion of these ships made it necessaryWestern shipping in some of its otherships involved, moreover, could otherwiseusedharter basis to Free World Thus the costs of the North Vietnamesebest represented by the loss in hard currency

illion.

over land to North Vietnamthe use of the Trans-Siberian railsubsequent transshipment across China. egligible fraction of

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the overall capacity of the Trans-Siberian route, and thus constituted no particular burden to the Soviet domestic transportation system. Practically all of the overland shipping costs represent the costs of transshipment across China. The cost in resources to China of running the additional trains over its lines is quite small; thus the net cost of transshipment to the Communist countrieshole also is quite small.

B. Indirect Costs

addition to the direct costs ofwar, the performance of the Sovietaffected indirectly by the war because of

(a) continuing restrictions on trade with the United States and (b) the increased preemption of scarce resources by the military establishment. These indirect costs cannot be assessed in terms of rubles and dollars, but they almost certainly are more important to the USSR than the small direct costs described above. For some years the USSR has been striving to buy Western machinery embodying advanced technology as well as theitself as part of its effort to modernize the Soviet economy. The United States has supplied very few of these importspartly because of trade barriers such as export controls and the USSR's inability to gain most-favored-nation treatment in its trade with the United States. More important, the USSR has had to rely on medium-term and long-term credits to finance its machinery imports, and these credits have not been available in the United States to the extent that they have been in other Western countries.

Soviet position in the Vietnamrestricted progress on reducing tradethe United States. Therefore, the USSReffect been denied an importantof machinery and technology. Ifwore conducted on the same basis as Westtrade with the USSR, the USSR would be able

to increase its total imports of machinery and, in some instances, would have access to machinery better suited to its needs.

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The United States hasell-publi-cized "technological gap" with Western Europe* the gap between overall us and Soviet technology is even wider. Computers and theireading example of US technological superiority. Access to this technology would appreciably benefit the Soviet economy even ifew hundred million dollars were involved each year. Such imports would be feasible only if existing US restrictions were considerably relaxed. Other fields in which the USSR would benefitfrom access to Western technology are communications and electronics.

The most significant cost of the Vietnamese war to the Soviet economy, however, may have been its role in bolstering military claims in the competition for economic resources. Soviet military expenditures, after ten years of relative stability, increased by aboutercent5espite urgent needs for more investment in industry and agriculture and growing difficulty in satisfying the demands of Soviet consumers.

Although much of the rise in defensehad its origin in decisions made much earlier to upgrade the strategic attack and strategic defense systems, the outbreak of conflicts in the Middle East and Vietnam has drawn the attention of the Soviet military to the need to devote more resources to general-purpose forcos capable of handling limited war situations. Moreover, the uncertainties and political atmosphere surrounding the Vietnam war undoubtedly strengthened the hand of the military leadership and its supporters in tlie Soviet leadership in the decisions made on resource allocation6

The total cost of economic and military aid to North Vietnamas lessillion rubles; Soviet military spending in this same periodillion rubles greater than if spending had been maintained at4 level. It is not possible to specify what share of this increased Soviet military spending was due to Vietnam, but if the fraction were appreciable, then indirect military costs could be at least as large as the directmade to North Vietnam by the Soviet Union. Furthermore, whereas the direct Soviet support of

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the Vietnamese waride range of resources in fairly adequate supply, the rise in Soviet military spending takes high-quality machinery and materials badly needed for theof the general economy.

III. Effect on the Economies of Eastern Europe

A. Direct Costs

direct economic costs of theto the East European Communist countries*totaled aboutmillion. Thesome economic aid, primarily in thetrade credits and shipping costs, and thetraining Vietnamese students. The totalwas shared fairly evenly among the sixcountries, with no single countrymore thanmillion. Easternprovided only token military aid to

Economic Aid

orth Vietnam importedthe East European Communist countries valued

at about5 million. These imports were offset in part by exports amounting tomillion,rade deficit of aboutmillion. Grants-in-aid amounted to aboutmillion, so that net economic aid was about million. The trade deficitwill be converted ultimately to grants-in-aid. There is no evidence of North Vietnamese repayments on credits, and trade credits in the past have been converted into grants-in-aid.

Machinery and other heavy equipment,transportation equipment, seems to dominate East European exports to North Vietnam. Other exports include cotton textiles, bulk foods, and medical supplies. As in the case of Soviet support to North Vietnam, the goods involved in economic aid oftenole in sustaining military operations.

Some of the consumer goods could have been marketed in the West for hard currency. The machinery would haveess ready market in the West. The economic aid to North Vietnam, in any case, was too small to have any significant impact

on rates of growth in any of the East European.

* Bulgaria, Csechoelovakia, East Germany, Hungary, Poland, and liumania-

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Other Aid

number of North Vietnamese studyingEuropean Communist countries wasnd probably The opportunity cost of thisis the training which could have been givensame number of native students. igure ofper head per year

ough figure used for like students in theasillion. The cost sometimes is handled through channels other than the state budget. In Czechoslovakia and East Germany, for example, contributions on behalf of the Northstudents are solicited from workers in factories and offices.

shipping costs of exports from theCommunist countries to North2 million. Although mostshipping is done by Polish ships, each ofpresumably pays its share of the These shipping costs, as in the caseoss in hard currency earningsextent that the ships involved could havefor hard currency. Unless the othercountries paid Poland in hard currencytheir aid to North Vietnam, Polandmost of this loss in potential hard

B. Indirect Costs

The indirect effects of the Vietnam war on the East European economies bear most heavily on the trade relations between the United States and the East European countries. East European trade with NATO countries other than the United States increased byear, and NATO countries provided the six East European countries with9 billion of new medium-term and long-term credits. During the same period, US trade with Eastern Europe has remained stable at0 million.

Eastern Europe has an urgent need for Western technology and capital goods, and its expanding trade with Western Europe reflects this need. The East Europeans would like to buy and sell more in the United States but the development of

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Eastern Europe's trade with the United States has been held back by difficulties (a) in finding markets in the United States for East European goods and (b) in obtaining medium-term and long-term credits in the United States on the same terms available in Western Europe. Even if US-East European trade could not be increased significantly/ the East Europeans would benefit by involving another powerful trading nation in the competition regarding prices of capital goods and the credit terms attached to purchases from the West. Because of the Vietnam war, the political atmosphere in the United States had not been favorable for theor administrative measures required to relax export controls, grant most-favored-nationor increase the availability of medium and long-term credit to Eastern Europe. Indeed, new legislation prohibits thexport-Import Bank from supporting sales to countries giving aid to North Vietnam and thus hamstrings new initiatives -the United States might make, for example, with regard to its economic relations with Czechoslovakia.

IV. Effect on the Economy of Communist China

34. Communist China's total aid to Northin thes estimated5 million,0 million of military aid (military end items only) 5 million of economic aid (both war-support items and consumer goods) . Aid8 may increase somewhat above7 level. Since the start of the American bombing of North Vietnam, China's aid has increased sharply, as shown by the following tabulation!

US

Economi c

aid

455

50

75

80

35. , China has given North Vietnam more aid in monetary terms than any country except the USSR. In tonnage terms, China's contribution

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has far exceeded that of any other country. This support has been of great aid to North Vietnam, particularly in support of its subversive efforts in the South. Yet it has cost the Chinese economy very little.

China's greatest contributions have been in items that the Chinese can provide with the least strain on the economyrail and seasmall arms and ammunition, construction materials, light machinery and equipment,textiles, and other consumer goods. In addition, China has00 engineering, antiaircraft, and radar troops for use in the reconstruction and guarding oflines north of Hanoi.

China's aid to North Vietnam coulderceptible economic burden if Mao's great political rectification campaignthe Cultural Revolutioncontinues. The growth of the Chinese economy has already been ended by the physical violence and administrative dislocations of the Cultural Revolution, and any extension of these problems would intensify the already serious economic problems. Nevertheless, because of the small cost of Chinese aid to Northut in aid on economic grounds is unlikely in the near future.

A. Military Equipment

increasing supply of small armsto North Vietnam would be theaid having any real effect onand that effect would be These items representmallof the tonnage but more than half thematerial sent by China. can easily spare these materialsstocks or replace them byproduction. For most of these items, theof supply to North Vietnam is probablyercent of China's domestic Only under sharply increasedthe Cultural Revolution would anyin productionerious problem.

of the other military items supplied

by China have been in token amounts.hina supplied some4 medium tanks andome

Table 3

Communist China: Volume and Value of Military Aid Deliveries to North Vietnam a/

Continued)

Units us S

US S

Million US S

arms and other infantry weapons

Ammunition (metric tons!

Total value

33

GO

The data refer exclusively to combat materiel; tkey exclude aid designed for war-support purposes, Values refleot foreign trade prioee charged by the USSR for equipment delivered to the less developed oountries of the Free World.

Beoauee of rounding, components may not add to the total values shown, b. Estimates for vehicles assigned to the armed forces. Vehicles used for military-support purposes are not included.

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7 jet fightersumber.of artillery pieces. These items were eitheror excess equipment of-small value ton monetary or strategic terms.

has supplied Hanoi with most ofnaval combatant vesselsall patrolut the number in) has

not affected China's supply or production. hina could replace or increase the units in North Vietnam from its own operational units with no appreciable loss to its own order of battle.

fl. Military Manpower

The cost to China of maintaining00 troops it has in North Vietnam isatter of shipping costs for the necessary. and other supplies for these troops. China would have to maintain these troops if they were still. stationed in China; thus the real cost to Chinahipping cost of00 metric tons of supplies shipped each year. Even this amount may exceed theet cost, because these troops might otherwise beat distant posts in China that also entailed long-distance shipment of supplies.

An important offset to this cost for China is the combat training acquired by theseuring tours in North Vietnam. China has rotated the troops periodically to spread the benefit of. this training. The value of this experience has been particularly high for the antiaircraft and radar troops. The engineering troops probably would be of value to China for construction projects at home, but their loss is negligible in an economy where the labor supply is abundant.

C. Industrial Equipment and Materials

has shipped substantialconstruction materials such as steel,railroad construction equipment as wellspare parts, drugs and medicines, andand equipment. Coking coal has alsofor the Thai Nguyen steel works, whichby China for North Vietnam. Coalended after the bombing of Thai Nguyen in

nd the total shipped7 is estimated0ropons from each of the preceding two years.

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of these materials have accountedthan half the total tonnage of China'said8 million tons) butloss than one-half of the total value offor thisillion). Northpresumably will change with theof American bombing and the reducedrailroad reconstruction. The composition ofexpected to shift away from the bulk items in

the industrial category toward the restoration of plant and equipment.

D. Consumer Goods

consumer goods, China's mosthaa been foodstuffs. oretons of grain and other bulkidentified in shipments to North Viotnamby sea. Undoubtedly other foodamong theons ofcargo shipped by China via rail andthe total food shipments from China inwere more than one-third of thein tonnage and about one-half of thethe small volume of identified shipments

of food5he ratio was presumably in tho sane proportion for these years, although smaller in absolute numbers.

Chinaood harvestnd the shipments to North Vietnam representedmall fractionercent of total domestic food supply. Shipments are expected to increase again8 oven though China's domestic output of food probably will drop.

China also sends North Vietnam sizableof textiles, both cloth and finished clothing. The annual valuerobably ranged from

illionillion. More thanillion motors of cloth were shipped Shipments8 would normally be expected to increase; they would still remain lessercent of domestic production. Because of the Cultural Revolution, which has ledecline in textile production and to slashes in cloth rations, any additional supplies for North Vietnam would be at the expense of an already short-changed populace. Nonetheless, the amounts involved are small and tlie inconveniencing of additional consumers within China is not likely toecisive factor in Chinese policy.

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food and textile'shipments tohowever^may have been made, not atof domestic consumption, but at theexports to the Free World. This alternativebriefly under "Foreign Exchangebelow. Other consumer goods suppliedto North-Vietnam are minor in volume

E. Shipping Costs

The cost to China of transporting goods to North Vietnam is small in terms of both money and alternative opportunities. Costs ofof the'materials sent by rail from the USSR and the East: European Communist countries are borne by those countries. The Chinese rail system has more than enough unused capacity to handle the additional burden. The Culturalhowever, Aas placed' China's rail systemtrain and has caused delays, bottlenecks, and shortagesaw materials, such as coal. Special efforts have been necessary to expedite goods bound for North Vietnam, both shipments andhese efforts are not to beas an economic cost of the Vietnam war but rather as one attempt to straighten up the economic dislocations caused by the Cultural Revolution.

Total shipping costs for both economic and military aid are minor for^railillionince the cost is internal and does not involve hard, currency. Cost for seaborne shipments for the entire period are estimatedillion, but again most of the costs do not involve hard currency. The small hard currency costs involved are discussed below.

costs are estimated frominMiscellaneous and otherbeen estimated according to theknown to be supplied by China. been assigned according to the latest Shipping points have beento the type of commodity. Methodwhere unknown, has beento fit the total tonnage estimated for The resulting shipping costs are

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good estimates for costs which in any case are not subject to normal economic valuation in the marketplace.

Table 4

North Vietnam: Imports from

(Thousand Metric Tons!

Total (pounded)

sea

b/

By rail

US

aid c/

aid

economic d/

transshipment of Soviet POh.

volume carried by ChineseVietnamese ships, most of whichcame from China.

of military hardware andthe value of military troopsand their support,

of North Vietnamese imports paidexports.

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F. Foreign Exchange Implications

52. The most important foreign exchangefor China is the presumed loss of potential hard currency earningsestimatedillionesult of Increased shipments of food and cloth to North Vietnam. The amounts of cloth being sent to North Vietnam, however, are far lesa than the amounts formerly shipped to the USSR and Indonesia before those markets were lost. China has had trouble finding alternative markets, and these shipments represent leasardloss than it seems at first glance. In the same way, the largest item of food sent to North Vietnam is riceatonsorthillionand the increase represented here is much less than the decrease in sales to Japan. China probably could improve ita hard currency position by sales of these materials to the Free World, but not by as much as the total possible value. In.effect, this judgment means that the food and cloth shipments to North Vietnam are partly at the .expense of the domesticwhere theyrop in the bucketand partly at the expense of foreign exchangehere they could be uaud to expand imports of machinery and materials from the Free World.

53. Another potential hard currency cost to China is the cost of chartering Free World vessels to ship materials to North Vietnam. Almost all of the Free World shipping going to North Vietnam in recent years has been chartered by China, but usually from firms in Hong Kong that are believed to be controlled by China. In essence, China has been chartering ships from itself; thus the real hard currency costs would be in opportunity costs. Here, again, China's lack of an adequate nerchant fleet to handle its own foreign trado means that the alternative use of those ships would have been in China's own trade with the Free World. The real hard currency cost, then, is the increased shipping costs to China in its Free World trade because these ships were not available. These costs have probably beenillion for thoased on anear carried by these ships and using an average freight rate for the types of cargoes carried.

V. COCOM Effect and Effect on General Economic Relations with the West

The war in Vietnam is one, but only one, of the factors that are reviving the issueChina differential" in economic defense arrangements. China's support of North Vietnam probably has not made an appreciable difference in China's ability to import modern equipment and technology from-non-Communist industrialized nations. China's general attitude toward trade with the West and toward admission of Western technicians has been more important in determining changes in its economic relations with the West than has the Vietnam war.

In any case, China is already receiving from Japan and Western Europe substantialof machinery and equipment directlyrelated to its military effort. Through various means China already is getting technology related to advanced weapons from the West> and China's support or lack of support.of North .Vietnam does not seem to affect this situation.hereas the USSR could profit from fuller access to US technology. Communist China is not able to absorb all the opportunities now available for technical support from the Free World.

VI. Effect on the Economy of North Korea

Korean shipments of material aidVietnam apparently have been only in Accordingly, the cost is smallthe absence of detailed information, iswith any precision.

A. Military Aid

Korea has shipped an unknownlightmmautomatic AK rifles, but also some North Korean ground forces innumber only several hundred men, andemployed mainly in the capacityorth Korean pilots have served5otational basis,missions in MIG jet fighters. pilots, however, have probably gainedcombat experience than they have contributedwar effort.

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B. Economic Aid

58. Economic aid agreements were signed Wifen Horth Vietnam inanuary andnd No details oh amountsid and commodities were publicized. Materia. Is* shipped under these agreements probably include small amounts of" fish, steel products, farmrailroad equipment, diesel engines/ cemtihty fertilizer (ammoniumextiles, industrial products, and medical supplies. Barges and lighters have also been shipped in recent years, includingo7n the first quarter

VII. Effect on Communist Aid Programs.rfie-florld A. Military Aid; Programs

USSB

There is no indication that Soviet-military and1 economic assistance' to North- vietiWB1 has; limited: the scatfe of Soviet- military'eliveries, to less developed countries of' fifttf Free" World or to: Cuba>. Notwithstanding the; increased1 amount of aid; channelled to North. Vietnam sirice;f start of the US bombing; im-, tlie- USSR has consistently/ bean able to- carry, out itee rirogsamr military- aid- cb&igsrfiionsthe- less-ountries; and; swear, expand'lost Of douiJtfrUeV participating- in; the program. rastic increase in. the- dimensions of the- Soviet aid'in. North: Vietnam, the USSR will bo able- to' continue fulfilling^ its other military aid"ents for the-foreseeable future.

60. The- less developed countries receiving" Soviet arms aid: have been provided with practically ail of the magor items of Soviet military equipment' supplied'to the NOrth Vietnamese, includinget fighters,urface-to-air- missiles,aircraft artillery, and infantry weapons. In'the. USSR has supplied-the less developed" countries withet medium bombers,ightorrbombers, Xonar-classa-class missile patrol boats, and coastal defense cruise' missiles, items not yet identified in the North Vietnamese inventory.

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61. Theercent decline in Soviet military aid deliveriesompared with the annual averagesee Tables largely explained by the curtailment of the program in Indonesia after the abortive Communist coup of ndonesia receivedillion worth of military0 percent decline from0 million average of annual deliveries.

Table 5

Communist Countries: Military Aid Deliveries to Less Developed

Million OS S

Donor

6 6

6 7

Europe

China

62. 7 the value of Soviet military deliveries to less developed countries rose0 million, or the average annual level of deliveries. This increase was principally the result of large-scale deliveries to India5 million worth of equipment.

6 3. The massive Soviet resupply of the Arab states after thear with Israelthe USSR's ability and willingness to sustain substantial unplanned costs in its arms aid .program. Sincehe USSR has supplied the UAR, Syria, Algeria, and Iraq with an0 million worth of military equipmentmost of which has been earmarked for restoring Arab military inventories to pre-war levels.

64. In addition to its substantial deliveries of military aid to the Free World, the USSR provided increased amounts of military aid to Cuba. Soviet military aid deliveries to Cuba grew

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from6 to7 to the highest level since the period prior to the missile crisis of During this recent period the:OSSR-'

shipped0 tons of military cargo

largely replacements for worn-out or obsolete equip ment. Among the items delivered were at leastighters, six Komar-class guided missile patrol boats, sevenlass subchasers,umberm multiple rocket launchers.

Eaetern Europe

European (mostlydeliveries to the less developednot been perceptibly affected by demands ofVietnam war. The Eastern Europeananillion into those countriesimes the total amount delivered in the five year period.

Communist China

of information precludes anyon the effect of the Vietnam war onChinese Communist military aid program indeveloped countries. The absence of anyChinese military aid deliveriesubstantial deliveries to Pakistan inhave been the result of the disruptivetlie Cultural Revolution on China's Given the small size and scope ofaid program in the less developedis difficult to soe how China's support ofwar would rule this program out on In any case, Chinese Communistcountries have

B - Economic Aid Programs

General

. unisl

. ' Communist assistance to North Vietnam has had no discernible effect on the scope or characterCommunist economic aid programs in the less developed countries of the Free World or on the willingness of Communist countries to implement aid previously committed to these nations.

countries have continued to extend ad-ic to less developed countries where

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opportunities exist, in spite of their commitments to the war offort in Vietnam. Both programs in the aggregateiny fraction of Communistand, moreover, they represent demand that is "spread out"road area of the donor economies.

Bxfnaione

68. 5ommunist commitments of economic assistance to the less developed countries rose to record levels at the same time that support of the war offort of North Vietnam was expanding (see Although new economic aidto less developed countries droppedyear low, the decline is nothange in Communist aid policy or to theof supplies to North Vietnam. Instead, it reflects the reduced opportunitiesor extending additional aid to these countries,three years of record-high extensions. Recent Soviet aid overtures to less developed countries demonstrate the high priority that the USSR continues to assign to economic aid where it may contribute to the containment or reduction of Western influence or provide long-run economic benefits to the USSR. ommunist extensions of economic aid to less developed countries are expected to rise again and,inimum, will exceed annual average extensions.

Table 6

Communist Countries: Extensions of Economic Aid to Less Developed Countries of tlie Free World

_Million US $

Eastern Communist

SI!

Total

5

35

-

Deliveries

69. In: addition to gap porting- theevelopment efforts of less developed countries, the Communist countries also have continued to deliver equipment and to provide technical services for current aid programs- It is deliveries, rather thanhat would indicate. anympact off the Vietnam War. he East European,ncE Communist China increased deliveries of economic aid. to the less developed countries under* previous commitments. Although Soviet deliveries declined:67 (see Tablehie decline1 was not caused by the diversion- of -resources to North Vietnam; as the- two- programs do not compete for the: same resources. TheSoviet economic assistance to- Horth Vietnam consists of commodities1 and-iqJrt frff-ftystrJaNP. ag^TTcirrtttiralnd Norths Vietnam's share of Scwxart escorts of complete plants has changed: very little from1 the prehostilities peactod: fisee Table 83 Ohvlifcevhand, commodity; assistance has acuouirted; fearercent of total Soroiet aid! to the?countries while- appxoximately 7Qi percentthe total value of Soviet aid! to. the less developed countries has been allocated; for industrial use, mostly for heavy industry.

. The decline in Soviet deliveries of economic aid to less developed: caunitriias sinceis. attributable chiefly to domestic: problems in the recipient countries- which: have limited! their/ ability to- provide adequate local resources to-oviet aid. For example, the inability of India's depressed economy to absorb scheduled Soviet aid shipments fox the construction of heavy industrial plants: resultedercent drop' in deliveries7 compared. Recent declines in Soviet aid deliveries also, axe related to thecycle for largehere major equipment deliveries are concentratedhort period.

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Table 7

Communist Countries: Deliveries of Economic Aid to Less Developed Countries of the Free World and to North

Million US $

5 6 7

North Vietnam

-

Europe

China

Developed Countries

Europe

China

8

USSR: Exports of Complete Enterprises to Major

.0

.0

.6

3

4

5

All Other Countries

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Economic Technicians

number of Communist technicians indeveloped countries declinedsprojects, such as the Aswan Dam, nearedand as political differences eruptedcountriesfor example, the Chinesewith Burma. There is no evidencewere withdrawn from lessbecause their services wereat home or in North Vietnam.

VIII. Effect on the Economy of North Vietnam

effect of the war on the economyVietnam itself is the compounded resultin the war in the South andbombing attacks at home. The war in the has drained off many of Northfit young males and has requiredthrough North Vietnam of weapons,medical supplies, and the like thatfrom other Communist countries. in the North has caused the diversionnumbers of workers to the repair ofto civil defense tasks, and to and has also increased the requirementof construction materials, transportconsumer goods, and the weapons andair defense. The economy of North Vietnam,has been mobilized to act bothourcefor the battlefields in-the South and as

a funnel through which arms and supplies can reach these battlefields. The remainder of this section addresses the damage inflicted by the bombing attacks on the North.

inflicted by the bombing ofhas caused substantial loss of outputreduced potential economic growth. At theincreased aid from other Communistpermitted the North Vietnamese to prosecuteeffort without serious deterioration ofof living despite major disruptionsactivities. Cumulatives estimated at more thantho rate of damageeak inshown in the tabulation below. In additionmeasurable losses, there are other losseseconomy and the military establishmentbe measured but would be valued in themillions of dollars.

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SKC

Million US s

Military

7

8

Total

A. Economic Damage

Industrial Facilities

74. arge part of North Vietnam's- small-industrial sector is out of operation because of direct bomb damagehortage of electric power. Cumulative measurable damage to industrial facilities is estimatedillion, as shown in the following tabulation:

8 (Million OS $)

Electric

Manufacturingsupplies and

The bombing of large plants has forced the North Vietnamese toolicy ofand to emphasize development of localumber of small manufacturing plants have been built, and some larger plants in areas subjected to bombing have been dispersed. Industry has notsubstantially to North Vietnam's military capabilities, however, and the damage apparently has had little direct influence on the war effort.

Most of the damage to industry was inflicted during the first half. ecrease in the level of strikes during the latter part7 and the first part8 allowed the North Vietnamese to restore some capacity to operation. For example, at the end of, aboutercent of the

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national electric generating capacity was operational, compared with aboutercent from June Repairs and an increase in-the electric power output have also permitted operations to resume at several manufacturing plants, including parts of the Viet Tri Chemical Complex and much of the coal-rocessing facilities at Cam Pha and Hon Gai. -An extensive system of dispersed POL sites has-offset the destruction of fixed petroleum storage facilities Damage to shipyards has not significantly hindered the production of boats or the fabrication of barges.

Transport Facilities and Equipment

77. Heavy damage to the transport system has increased the cost of moving goods and has. forced the use of less efficient alternative facilities and methods. The flow of imports and domestic supplies, however, has not been seriously restricted, becausextensive and rapid repair .thecons truc-tion of new rail lines, roads, and the infusion of substantial amounts ofid. Both transport capacity and equipment inventories have been maintained or increased. Cumulative damage to transport facilities and equipment is as follows:

8 (Million US S)

Transport

Railroad yards and

(including road and

rail cuts

Indirect Losses

78. In addition to the direct physical damage, che economy has suffered considerable indirect loss. Mthough agriculture and fishing have not been targeted for attacks, their output has beenbecause of the air and naval bombardment.production has suffered from (a) of work routines resulting indirectly from the bombing, (b) disruptions to the supply and

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economic administration in rural areas. The fish catch has decreased because of the threat of air and naval attacks against watercraft and theofnfluence bombs* in waterways. The cumulative loss in rice production, including an -unknown share of lossesesult of adverse weather, and in the fish catch is estimated as follows:

8 (Million US S)

production' Fish catch

79. Both of the'rice cropsre believed to have been below average, but the shortfalls probably did not cause more than localized food shortages. Some of the decrease in rice output has been offset by increased production of subsidiary crops. Increased imports of bulk food78 have been greater than the estimated decrease in rice production.

80. Exports of bulk products that make up aboutercent of the value of North Vietnam's exports also have been disrupted by bomb damage and by increased costs of domestic transport. Cement output was cut off iny bombing of the Haiphong Cement Plant. Coal output was curtailed drastically by damage to electric power and processing facilities inutput of pig iron at Thai Nguyen was halted innd exports by sea of apatite were cut off inhen interdiction of the Lao Cai rail line raised transport costs. The cumulative measurable loss in North Vietnam's seaborne exports attributable to the bombing is shown in the following tabulation:

" Theodified bomb that is mechanioally armedinutes after delivery and is detonated by any magnetio disturbance generated by ferrous material or objects.

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8 (Million US S)

Pig

substantial in terms ofexport losses each year haveercent of the value of annual exportsthe bombing, and have been minor comparedof economic aid from other

B. Military Damage Fixed Facilities

cumulative value of damage tofacilities is estimated atas shown in the following tabulation:

8 (Million US $)

Ammunition, supply,vehicle

Air defense systemanda/ SAM,radar

Other (includingdispersedtruck parks,

al Including equipment.

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Heavy damage to the military establishment throughout the air campaign has forced the North Vietnamese to disperse military facilities for men and supplies but has had little effect on North Vietnam's economy. Attacks against JCS-targeted barracks, the most important barracks complexes existing before the air campaign, destroyed aboutercent of the national barracks capacity and forced the abandonment of anercent. The North Vietnamese have not attempted to repair this damage, and the men have been dispersed to temporary shelters or civilian housing. Dispersal of ammunition, supply, and vehicle depots haslogistic requirements, causing temporary local shortages but not seriously restricting the general movement of military or economic goods. Destruction of supplies has been offset by increased imports.

The cost of damage to air-defense-related facilities such as airfields and antiaircraft artillery, SAM, and radar sites has*had little effect on the North Vietnamese economy. Most of thematerial is obtained locally, and equipment is imported from Communist countries, probably as grants. The air defense system has been gradually expandedS despite the heavy damage Communist China has contributed to this expansion by furnishing antiaircraft units and engineering construction battalions. Theand SAM systems presently operatearge number of temporary as well as fixed sites. Mobility is stressed and equipment is being made less vulnerable to attack.

Military Equipment

air campaign has destroyed aof military equipment which was providedUSSR and Communist China. Most of the valueestimated atillion,destruction of MIG's and helicopters as shown

in the tabulation bolow. (Estimates of antiaircraft and SAM equipment destroyed and damaged have been included with the value of fixed facilities.)

8 (Million US S)

Naval

North Vietnamese have lost aboutfighters since the beginning of the airwhichere lost Replacementsfrom the USSR ands from Chinamore than sufficient to replace theseVietnam's small navy has beenreplacements from China, and modemfor the early-warning andsystems has been provided infrom both China and the USSR.

C. General Impact on the Economy

The war and the bombing have eroded the North Vietnamese economy, making the countrydependent on foreign aid. However, because the country isomparativelystage of development and because the bombing has been carried out under important restrictions, damage to the economy has been small. The basic needs of the people are largely satisfied locally. Imports from Communist countries have enabled!.North Vietnam to make up for losses in industrial production and to take care of new needs created by the war.

The overall level of economic activity probably did not change much5ut went down Agricultural production dropped6 and againartly because of poor weather. Most of the important industrial plants and powerplants were not made targets of. Loss of industrial output,has been incurred largely sinceome consumer goods have been in short supply, and the price of some of them has risen beyond the reach of the average consumer. The official rice ration has been maintained, but imported foodstuffs are being substituted to an increasing degree in the urban ration.

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89, Significant losses to North Vietnam's economy that are not entirely offset by outside aid are (a) the almost complete hiatus (b) the actual losses in manpower, and (c) the loss of man-hours of workers diverted to defense, to repair of bomb damage, and to the movement of goods. The disruption of normal work routines, the separation of families, and the physical anguish from the repeated bombings have taken an immeasurable toll in productivity. Bombings have required the diversion of uporkers to full-time repair of lines of communication and to transport tasks* ave been taken frequently from their normal work to perform parttime tasks related to the bombing. Several hundred thousand young and old have been evacuated from urban areas,

he bombing has resulted in casualties over the past three years totalingf whom one-third may have been killed. roops have been tied up in air and coastal defense. For the past throe years, increased military manpower requirements have taken most of thehysically fit males reaching draft age annually.

D. Postwar Rebuilding Costs

91, The direct costs of restoring North Vietnam's damaged economy will be borne primarily by Communist aid donors. 0 million in foreign economic assistance will be required to reactivate industrial capacity and to repair damage in the non-industrial sectors* In addition, aid in the form of consumer goods and raw materials will be required for several years until output of industry and agriculture can more nearly meetneeds- Foreign technical assistance will be needed in almost every sector of the economy. The present general level of economic assistance probably will be maintained during the immediate reconstruction years. The following tabulationossible distribution of directcosts among economic sectors:

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Million US $

Fuels and

North Vietnamese almost certainlya concerted effort to restore theto the state that existed before This could be accomplished in two to High priority will be given totransportation network, particularlyparts of the electric power industry. Repair

of severely damaged equipment in the electric power industry may be deferred in favor of completing work on the Thac Ba Hydroelectric Powerplant which was being built with Soviet aid. Under anconstruction schedule and with an investmentillionabout one-half the cost ofall damaged power facilitiesthis power-plant could be put into service withinonths, thus making available more generating capacity than has been damaged by the bombing.

Essential industries to be rebuilt will include chemicals, construction materials, and textiles. Amongarge effort will be needed to restore the Haiphong Cement Plant and the Nam Dinh Textile Plant. Concurrently with restoration, relocation of some dispersed industries will take place and production lines will be reoriented from wartime requirements. Earnings of foreign exchange could rapidly regain prewar levels. Even now, coal exports are approaching normal levels, and exports of handicrafts have been generally sustained during the past three years. Seaborne shipments of apatite could be resumed as soon as through rail service from Lao Cai to Haiphong is resumed. Exports of pig iron cannot be resumed until the Thai Nguyen Iron and Steel Complex is repaired, probably with Chinese Communist assistance.

The amount of commodity credits required" in the postwar period will depend largely onin agriculture. Substantial imports of food and of fertilizer probably will continue in

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the immediate postwar years. Although agriculture has notarget of the bombing program, it has been disruptedombination of unfavorable weather and indirect effects of the bombing.

Vietnam probably will notof new basic industries inpostwar period since much of thecapacity had barely been assimilatedeconomy when the bombing began. Severalfor example, the Phu Tho PhosphatePlant, the Thai Nguyen Iron and Steelthe Bac Giang Chemical Fertilizer Plantjust begun partial operation or were not yet North Vietnam had already negotiated

umber of small specialized plants which probably will be constructed in the immediateyears to increase regional self-sufficiency. Nonetheless, the postwar effort will consistof restoration of existing facilities.

E. Sources of Postwar Aid

the basis of past economicis estimated that the directwill be distributed as follows:

0

ISO

Million US S

USSR

Communist China Eastern Europe

Total

The USSR probably willreater portion of the commodity aid. Communist China willey role in reconstruction because many of the major industrial installations in North Vietnam were Chinese aid projects. China also provided electric power equipment for several of the large powerplants including those at Thai Nguyen, Bac Giang, and Viet Tri. In addition, the heavy assistance byChina in construction, particularly of roads and rail lines, probably will be continued in the immediate postwar years. Among the Europeancountries, the principal postwar donor for reconstruction probably will be Poland, with Rumania and Hungary following in that order.

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appraisal of These Costs

short-term costs of supportingwaras described in theare .small, especially inthe vast political and military issuesthe start of the US bombing, military aidCommunist countries has amounted to morebillion and economic aid to aboutillion.

A portion of these sums does notet loss, either because the best alternative use of the resources is unimportant or because the aid brings with it some offsetting advantages, such as the training of antiaircraft units under combat.

The typo of support furnished by each of the Communist countries usually has represented areas of economic strength. For example, China can readily furnish manpower and basic construction materials and the USSR can make use of its large stockpiles of obsolescing weapons. urther factor in easing the.burden on the Communist economies is that shipments are "spread out"ariety of fairly standard items. Thus the aid apparently created no severe bottlenecks for any majoror transportation line, nor has it required any major changes in overall economic plans.

The indirect costs are pertinent especially to the USSR, although they also have had an effect on the economies of Eastern Europe. The strained political atmosphere has postponed the lowering of barriors in US-USSR trade and has thus delayed Soviet access to the world's foremost source of advanced technology. Furthermore, if the riseillion rubles in the Soviet military budgetan be partly attributed to the Vietnam war, this wouldanother reduction in high-quality resources available to modernize Soviet industry over the long run.

in the First Half8

Information on Communist military aid to North Vietnam in the first half8 suggests that it is continuing at about the same rate as Information on economic aidate for the first half8 aboutercent higher

than Thus, in Tablef the first half8 were added to the, the total figure for military "aid would be increased fromillion toillion and the total figure for economic aid would be raised5 million0 billion.

Original document.

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