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    "title": "National Security Council Progress Report by the Secretary of State and the Director for Mutual Security on the Implementation of United States Policies and Programs in the Economic Field Which May Affect the War Potential of the Soviet Bloc (NSC 104/2)",
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    "ocrText": "CLASSIFIED\nThe President\nquannity ATION\nCOPY NO. 1\nAuthority NLT- 87-2 (Nsc Memo 2/29/88)\nBy DEB NLT Date 5.17-88\nNATIONAL SECURITY COUNCIL\nPROGRESS REPORT\nby\nTHE SECRETARY OF STATE\nand\nTHE DIRECTOR FOR MUTUAL SECURITY\non the implementation of\nU. S. POLICIES AND PROGRAMS IN THE ECONOMIC FIELD WHICH\nMAY AFFECT THE WAR POTENTIAL OF THE SOVIET BLOC\n(NSC 104/2)\nARCHIVES \"NATIONAL RECORDS THOMAN AND LISTED\nU.S.\nBERVICE\nApril 23, 1952\nUNCLASSIFIED\nSEGRE!\nSECURITY INFORMATION\nWARNING\nTHIS DOCUMENT CONTAINS INFORMATION AFFECTING THE NATIONAL\nDEFENSE OF THE UNITED STATES WITHIN THE MEANING OF THE ESPIO-\nNAGE LAWS, TITLE 18, U.S. C., SECTION 793 AND 794, AS AMENDED. ITS\nTRANSMISSION OR THE REVELATION OF ITS CONTENTS IN ANY MANNER\nTO AN UNAUTHORIZED PERSON IS PROHIBITED BY LAW.\nCOPY\nUNSECRET\nSECURITY INFORMATION\nApril 23, 1952\nMEMORANDUM FOR MR. JAMES S. LAY, JR.,\nEXECUTIVE SECRETARY, NATIONAL SECURITY COUNCIL\nSubject:\nFourth Progress Report on NSC 104/2, \"U.S.\nPolicies and Programs in the Economic Field\nWhich May Affect the War Potential of the\nSoviet Bloc\"\nReferences: A. NSC 104/2\nB. Memorandum for NSC from Executive Secretary,\n\"Assignment of Responsibilities for Economic\nDefense,\" dated November 7, 1951, transmitting\nMemorandum by the President on this subject.\nC. Memorandum for NSC from Executive Secretary,\n\"Assignment of Responsibilities for Economic\nDefense,\" dated January 25, 1952 transmitting\nMemorandum of Agreement between the Secretary\nof State and the Administrator of the Mutual\nDefense Assistance Control Act.\nIn accordance with the President's directive\non the assignment of responsibilities for economic\ndefense under NSC 104/2 and the Memorandum of Agree-\nment between the Secretary of State and the Admin-\nistrator of the Mutual Defense Assistance Control\nAct, there is submitted herewith the fourth\nprogress report on NSC 104/2. It is requested that\nthis be circulated to the members of the Council\nfor their information.\nF BART ARGHIVED \"NATIONAL RECORDS TESMAN AND 1\n0.5.\nSERVICE\nGOVERNMENT\n/s/ DEAN ACHESON\n/s/ W. A. HARRIMAN\nSecretary of State\nDirector for Mutual\nSecurity\nUNCLASSIFIED SECRET\nUNCLASSIFIED\nCOPY\nSECRET\nSARAT ARCHIVES \"NATIONAL RECORDS TREMAN AND LIBRARY\nSECURITY INFORMATION\nE: SERVICE\"\nApril 23, 1952\nMEMORANDUM FOR MR. JAMES S. LAY, JR.,\nEXECUTIVE SECRETARY, NATIONAL SECURITY COUNCIL\nSubject:\nFourth Progress Report on NSC 104/2\n\"United State Policies and Programs in the Economic\nField Which May Affect the War Potential of the Soviet Bloc\"\nNSC 104/2 was approved as Governmental policy on April 12,\n1951. In approving NSC 104/2 the President directed its\nimplementation by all appropriate departments and agencies of\nthe United States Government under the coordination of the\nSecretary of State. By memorandum dated November 6, 1951 to\nthe Executive Secretary of the NSC concerning the assignment\nof responsibilities for economic defense, * the President\ndirected the Secretary of State to continue to carry out his\nresponsibilities under NSC 104/2 except as modified by the\nprovisions of the Mutual Defense Assistance Control Act. He\nfurther directed the Secretary of State, in carrying out his\nresponsibilities under NSC 104/2, and the Director of Mutual\nSecurity, in executing his responsibilities under theoMutual\nDefense Assistance Control Act, to establish and maintain\narrangements which would assure the effective accomplishment\nof their respective duties. These arrangements were estab-\nlished by memorandum of agreement dated January 23, 1952\nbetween the Secretary of State and the Administrator of the\nMutual Defense Assistance Control Act. **\nThis progress report is submitted jointly in accordance\nwith these arrangements. It is requested that this report\n(covering the period from November 15, 1951 to March 1, 1952)\nbe circulated to the members of the Council for their informa-\ntion.\nGENERAL\nThere are numerous indications that the denial of\ncommodities covered by the export control program of the Free\nWorld is affecting the European Soviet Bloc adversely.\n*See memo for NSC from Executive Secretary, subject,\n\"Assignment of Responsibilities for Economic Defense\", dated\nNovember 7, 1951.\n**See memo for NSC from Executive Secretary, subject,\n\"Assignment of Responsibilities for Economic Defense\", dated\nJanuary 25, 1952.\n- 1 -\nUNCLASSIFIED\nUNCLASSIFIED\nSECURITY INFORMATION\nDislocations in certain Soviet bloc production programs can\nbe partially attributed to the Western control effort. Inten-\nsified Soviet propaganda efforts, reaching a climax in the\nMoscow Economic Conference, April 3-10, to stimulate and\nexpand East-West trade in a manner favorable to the bloc's\ninterests are significant as an indication of the impact of\nthe controls.\nMore importantly, these propaganda efforts are concen-\ntrated on driving a wedge between the United States and Western\nEurope. They are calculated to derive the greatest possible\nadvantage out of the increased sacrifices required by the\nexpanded defense program, as well as from Western European\nresentment over the Battle Act. These efforts have not been\nwithout success judging from recent reports from the field.\nDespite the success of economic defense measures taken\nto date, several of them and certain aspects of economic\ndefense policies require further examination. Some of these\nare discussed individually and in considerable detail below.\nOthers requiring study but which have been under less active\nconsideration include limited pre-emptive operations; the\nfurther coordination of controls adopted for short supply\nreasons and for strategic reasons; and increasing the bargain-\ning strength of Western Europe in its trade negotiations with\ncountries in the Soviet bloc through the development of long\nterm plans for alternative sources of supply and markets and\nthrough coordinating the bargaining efforts of the Western\nEuropean countries.\nA decision has been made regarding the organizational\naspects of the economic defense program within the United\nStates Government. By memorandum of agreement dated\nJanuary 23, 1952 between the Secretary of State and the\nBIRTH ARCHIVES s. \"NATIONAL RECORD THEMAN AND THEMY\nAdministrator of the Battle Act, it was provided that the\nU.S.\nSERVICE\nMutual Trade Security Advisory Committee, established\nNOVERNMENT\nNovember 1, 1951 to advise the Administrator on Battle Act\nmatters, should be utilized by the Secretary of State in\ncarrying out his coordinating and consulting responsibilities\nunder NSC 104/2. This arrangement is working well.\nBATTLE ACT\nSince October, 1951 the economic defense activities of\nthe United States Government have been heavily concentrated\non problems directly related to the implementation of the\nBattle Act. At the suggestion of the Western European\ncountries, a meeting of the Consultative Group was held in\n- 2 -\nCLASSIFIED\nUNCLARD SECRET\nSECURITY INFORMATION\nJanuary to consider some of the problems. One of the primary\nUnited States objectives in the discussions was to ensure\nthat other countries consult with us before undertaking\ncommitments to ship embargo items (Battle Act, Title I,\nCategory B). This was accomplished. The Group agreed to\nprior COCOM consultation not only on all International List I\nitems, but also on proposed shipments of aluminum, heavy rails,\ngeneral service locomotives and automatic signal equipment\n(the only International List II items included in Title I,\nCategory B), but would not agree to placing these items on\nthe International Embargo List.\nNo country agreed to the United States suggestion for a\ntemporary suspension after January 24 of shipments of Category\nB items on which prior commitments had been made. Action of\nthe Consultative Group on this proposal was limited to\nagreement to furnish COCOM with particulars of outstanding\ncommitments on these items. The most numerous commitment\nproblems will be with the United Kingdom, France, Germany\nand Italy. Arrangements have been made to obtain adequate\ninformation on which to judge these prior commitments on a\ncase-by-case basis. Most of the countries have whole-heartedly\nentered into bilateral discussions with the United States\ncountry teams to amplify this information.\nWhile the United States did not achieve its entire\n\" AROMIVED \"NATIONAL RECORDS THOMAN AND LIVEN\nobjective at the meeting, an improvement in relationships\n8.3.\nSERVICE\"\nresulted from reassurances that the United States does not\nROVERNMENT\nintend to undercut COCOM. As a result of the meeting also,\nthe other participating countries were given a better under-\nstanding of the legislative requirements making necessary\ncertain United States actions which previously had been misin-\nterpreted.\nThe improved relationships which resulted from the meet-\ning appear, however, to have been weakened subsequently by the\nUnited States statement late in January reserving its position\nwith respect to the results of the review in COCOM of items on\nInternational List II. The statement pointed out inter alia\nthat the Battle Act Administrator had not had the opportunity\nto review the Committee's recommendations, and that in\nlicensing exports to any country the United States retained the\nright to decide whether such exports would defeat the purposes\nof United States security controls. The statement, which was\nreceived initially without comment, later drew severe criticism,\nboth for its tone and substance, and was characterized as\npaternal and authoritarian. The underlying NSC policy,\n- 3 -\nUNCL SECRET ASSIFIED\nUNCLASSIFIED\nSECURITY INFORMATION\nNSC 91/1 as modified by 104/2, which relates to this problem\nis currently under inter-agency review in the light of the\nBattle Act and other developments since its adoption.\nThe most urgent problems under the Battle Act involve:\nthe need to consider whether exceptions should be granted for\nparticular shipments of International List I commodities to the\nSoviet bloc by Western European countries. Many such shipments\nresult from commitments made prior to the inclusion of the\nitems on embargo lists. Such shipments would be approved\nunder COCOM principles. The inventory of outstanding commit-\nments by COCOM countries to ship such items is now well under\nway.\nSome cases, such as the commitment by the Netherlands to\nexport oil well equipment to Poland, raise special problems.\nIn addition, proposed new commitments for delivery of\nInternational List I items, such as the delivery of a tanker\nto Poland by Denmark, raise problems in terms of developing\npossible alternatives to completion of the transactions. In\nthe latter case, the United States has made an offer to replace\nPolish coal and to meet the net dollar cost involved, estimated\nat from $16 to $18 million. This estimate was based on the\nassumption that no additional coal could be obtained from the\nUnited Kingdom and Western Germany. It now appears that extra\ncoal receipts from these two sources are more likely.\nУПЛИДИ\nCOMMUNIST CHINA\nAND\n\"RATIONAL\nARGHIVED AND\nRECORDIT\nSERVICE\nIn the face of the general reluctance of other nations to\nADVERTMENT\nadopt measures going beyond the General Assembly strategic\nembargo Resolution of May 18, 1951 while the Korean armistice\nnegotiations are under way, the United States did not advance\nproposals in the Sixth Session of the General Assembly or in\nthe Additional Measures Committee for additional controls\nagainst Communist China. The Department of State is re-\nexamining the desirability of again opening AMC discussions\nwith the aim of further implementing the May 18 Resolution\nthrough ancillary controls. This assumes a continued stale-\nmate in the armistice negotiations. A further deterioration\nof the situation would indicate urgent and more severe\neconomic sanctions.\nMeanwhile COCOM consideration of the United Kingdom\nproposal to institute a China embargo list established that\nall participating countries had placed or were placing the\nwhole of International Lists I and II under embargo for China.\nDiscussions are continuing with regard to extending the embargo\nto include International List III and certain other items in-\ncluded in the United Kingdom proposal.\n- 4 -\nUNCLASSIFIED\nUNCLASSIFIED\nSECRET\nSECURITY INFORMATION\nUnited States Import and Financial Controls\nThe Treasury Department has, after consultation with the\nDepartment of State, ruled that the prohibitions of the\nForeign Assets Control Regulations apply to Tibet and the\nnationals thereof.\nConsiderable effort has been devoted by Treasury, with\nsatisfactory results, to policing transactions through third\ncountries where there is disguised Communist Chinese interest.\nAn extensive investigation of the Communist Chinese\nextortion racket involving remittances by Chinese residents\nof the United States for the protection of relatives in China\nwas undertaken in the period under review. While it is not\npossible to cite an accurate estimate of the total dollars\ninvolved, this problem is not expected to be serious in the\nfuture, as the Chinese community in the United States has\nbeen made aware of the Treasury regulations.\n(See sections on Shipping, Hong Kong, and Transit Trade\nand Transshipments for additional developments and problems\naffecting Communist China.)\nHEAL ARCHIVES NATIONAL RECORDS YASHAN AND LIBERTY\nJAPANESE EXPORT CONTROLS\n0.8.\nSERVICE\nREVERNMENT\nSCAP has already turned over to the Japanese the\nresponsibility for controlling less strategic exports. When\nthe responsibility for controlling items on the United States\nsecurity lists is relinquished to the Japanese (tentatively,\nMarch 17.) they will operate the entire export control system.\nSCAP will, however, post-audit all export licenses covering\nsecurity items for a limited time. The Japanese Government\nwill be responsible for end use checking on these items through\nits Overseas Agencies where they have been established or\nthrough United States Missions. It is expected that Import\nCertificates and Delivery Verifications will be obtained for\ncertain International List I and II shipments to COCOM\ncountries. Japan will in turn issue such certificates cover-\ning imports from those countries.\nIn order to ensure that Japanese export policy is not\naltered substantively as a result of Japanese assumption of\ncontrol, the Japanese Government has been advised of our under-\nstanding that Japan will maintain controls as close as possible\nto those now being applied as long as there is Communist\naggression in the Far East.\nUNCLASSIFIED\n- 5 -\nSECRET\nHEART . ARCHIVES AND RECORDS TROMAN INDUST\nUNCLASSIFIED\nSECRET\nSERVICE\nSECURITY INFORMATION\n8.5.\nIt is recognized, however, that maintaining controls after\nthe cessation of the Korean hostilities is a long run problem\nnecessitating serious consideration. There are growing inter-\nnal and external pressures on the Japanese authorities to\nresume trade with China. These pressures are expected to\nincrease after the Peace Treaty becomes effective, and\nparticularly after an armistice in Korea, if agreement can be\nreached. In view of this, the United States is proposing\nmultilateral discussions to consider the desirability of\nestablishing some kind of organizational arrangement to assist\nin determining and carrying our mutual security objectives\nin the Far East in the post-aggression period. We have\nsuggested that the United States and Japan meet initially\nwith the United Kingdom, France and Canada, and possibly\nwith others having a major interest in trade with Far Eastern\nCommunist areas to discuss the post-aggression trade security\nproblems.\nHONG KONG\nNSC 122 providing for a new United States licensing policy\nfor Hong Kong (and Macao) was approved on February 7. It\nprovides generally that items on the United States security\nlists may be supplied to Hong Kong for local consumption or\ntransshipment to non-Soviet bloc destinations as long as the\nHong Kong Government imposes an embargo on these or identical\nitems to Communist China, North Korea and the Soviet Far East.\nDepending on the extent and effectiveness of Hong Kong\ncontrols, United States licenses can be approved for minimum\nshort term essential requirements and legitimate transshipments,\nNo exports are allowed for stockpiling, important industrial\nexpansion or other questionable security risks. Short supply\npositive list items may be approved to meet minimum essential\nshort term requirements. Residual items may be licensed for\nshort term requirements or legitimate transshipment.\nThis policy is undeniably a strict one, but it is made\nnecessary because of Hong Kong's position as a transit point\nfor trade with China. It is considered by the United States\nGovernment to be flexible enough to permit exports for the\nmaintenance of the Hong Kong economy, notwithstanding that\nHong Kong may be continuing some trade with China in goods\nof low strategic significance.\nGERMANY\nProgress continues to be made by the German Federal\nGovernment in developing and improving the structure and\nUNCLASSIFIED\n- 6 -\nSECRET\nUNCLASSIFIED\nTHOMAN\nSECRET\nS.\nLISBARY\nSECURITY INFORMATION\nARCHIVES \"NATIONAL AND\nRECORDS\nSERVICE\"\noperation of the German export control system. This progress\nis attested to by reports from the Office of the United States\nHigh Commissioner for Germany, from the United States\nTechnical Mission which completed its assignment as consultant\nto the Federal Republic on security export controls on\nDecember 1, 1951, and from a Senate investigator who was in\nGermany recently.\nDespite this progress and a serious intent on the part\nof the German Government to solve the remaining important\nproblems, real opportunities still exist for the shipment\nof strategic commodities out of Germany in violation or\nevasion of export controls. Although there is no way to esti-\nmate reliably the volume of illegal trade, most intelligence\nindicates a considerable reduction in the total quantity of\nsuch trade in the last nine months. This can be attributed\nin part to the virtual stoppage of interzonal trade.\nAdministrative action on an interim basis by the High\nCommissioner's office against German firms suspected of\nengaging in illegal transactions is continuing. The Federal\nGovernment, however, has not yet established an effective\nsystem for prosecuting or taking final administrative action\nagainst such firms on the basis of its own investigations.\nThis problem is being pursued with the Federal Government at\nthe highest level.\nThe system of end use checking thus far eastablished by\nthe Federal Government, in particular as regards non-COCOM\ncountries, is not yet satisfactory. The import Certificate\nand Delivery Verification (ICDV) system has been in use by\nthe Germans since June 1951 for Checking exports to COCOM\ncountries, although as yet to an insufficient extent.\nEfforts are also under way to make further progress with\nthe difficult Berlin control problems, where there is still\nconsiderable room for improvement in the direction of an\neffective export control system.\n(See P. for brief discussion of the transit trade and\ncustoms problems.)\nCONTROLS OVER TRANSIT TRADE AND TRANSSHIPMENTS\nImport Certificate and Delivery Verification (ICDV) System\nOn February 24, 1952, the Department of Commerce announced\nthe implementation by the United States Government of the\nrequirement that exports of certain strategic commodities to\n- 7 -\nUNCERSIFIED\nUNCLASSIFIED\nSECRET\nSECURITY INFORMATION\nCOCOM countries be covered in all cases by import certificates\nand, upon the request of OIT in special cases, by delivery\nverifications.\nCOCOM agreed upon this system in May, 1951. On July 19\nCommerce announced the phase of the system whereby United\nStates importers could provide the official assurances required\nby their Western European exporters' governments. Other\nCOCOM countries had implemented the full procedure by that\ndate, and have actually been requesting as well as issuing\nICDV's since then.\nOur delegation in COCOM feels that the seven months\ndelay in installing the complete ICDV system has placed the\nUnited States in a difficult position, on which other\ndelegations may capitalize in the future in resisting\nmeasures proposed by us. This has been one of the few cases\nwhere a COCOM agreement necessitated new measures by the United\nStates. Internal administrative difficulties that caused the\ndelay have often been considered by the United States inadequ-\nate reason for other participating countries' unwillingness\nto take steps urged by us.\nThe effectiveness of the ICDV system in reducing\nHARRY ARCHIVER AND RECORDS TROMAN TIMES\ndiversions is largely dependent on the extent to which\nStated\nU.S.\ncertifications are requested. Accordingly, the United\nhas requested COCOM reaction to making exports of all\nInternational List I goods dependent on the receipt of import\ncertificates.\nMacao\nShipments through Macao to Communist China have con-\nstituted a serious leak in the international control system.\nThe Portuguese Government announced early in February that it\nwas about to implement the ICDV system in Macao, Goa and all\nother Portuguese overseas territories. Application of this\nsystem to Macao provides means for reducing the possibility\nof illegal shipments reaching Communist China. The effective-\nness of this measure will depend on the integrity and ability\nof the administering authorities.\nIn addition the Macao Government introduced legislation\non January 23 prohibiting the export of strategic materials to\nCommunist China. It is noted that our Consulate General in\nHong Kong views this measure, coming as it does after a long\nperiod of resistance to controls and apparent indifference to\nthe colony being used as a smuggling base, as an indication\nUNCLASSIFIED\n- 8 -\nSECRET\nUNCLASSIFIED\nSECRET\nSECURITY INFORMATION\nmerely that the Chinese withdrawal from buying in Macao last\nNovember was intended to be permanent. This appraisal should\nbe tempered by recognition that the Macao Government was acting\nin response to United States persuasive efforts culminating\nin the Battle Act. In addition, the many reports that the\nChinese Communists consider the Macao prohibitions as provoca-\ntive indicate that they may be of some value in hampering\nCommunist Chinese trading activities in the colony.\nFinally, the revised United States licensing policy for\nHong Kong and Macao, approved February 7, provides that\nsecurity and short supply items may be approved for Macao\nonly when they are for the fulfillment of minimum short term\nlocal requirements, and are supported by formal request of the\nPortuguese Government documented by a statement of requirements\nand supported by an investigation of end use. The United\nStates will regard shipments of security and short supply\nitems from Hong Kong to Macao as shipments to Communist China\nunless they are determined as necessary to meet minimum\nTRUNAM\nessential short term consumption requirements in Macao.\nLEEVE\nARCHIVES \"NATIONAL AND\nLIBRARY\nRECORDS\nFree Port Problem\n1.5.\nBERVICE\nNumerous reports have been received on the transshipment\nto the Soviet bloc of Chilean copper, and a few reports on\nMexican copper, consigned to Western Europe. Some of the\nreports on diversions or attempted diversions have been\nverified. Our Embassies in Santiago and Mexico City report\nthat the local governments exert little effort to ensure\nagainst these diversions. The Chilean Government has made\nlittle use of the end use checking service offered by the\nUnited States.\nThe majority of these reported transshipments involve\nthe free port of Antwerp. To plug these and other free port\nleaks the United States has strongly supported in COCOM the\nadoption of transshipment licensing, but no coordinated\narrangement has been agreed. Action is expected in the near\nfuture on the pending United States proposal (see last\nProgress Report) * for a selective extension of the ICDV\nsystem to Latin America. Approval is anticipated, after which\nthe United States will request immediate implementation by\nthe Latin American Governments.\n*See Progress Report dated December 26, 1952 by the Under\nSecretary of State on NSC 104/2.\n- 9 -\nUNCLASSIFIED\nUNCLASSIFIED\nSECURITY INFORMATION\nAll COCOM countries except France, Belgium and the\nNetherlands have instituted physical controls over transit\nshipments. The United States has recently been informed\nconfidentially that the latter two Governments have worked out\nsome plan for instituting such controls which is awaiting high\nlevel approval.\nThe German Government has made some progress in the\ntroublesome free port of Hamburg, but much ground remains to\nbe covered in the task of training customs officials and\nindoctrinating them with the proper attitude of vigilance.\nThe progress is reflected in the German claim of proper\ncontrol over reconsignments within the free port of strategic\ngoods originating in COCOM countries. The High Commission is\ninvestigating the extent to which this control is in fact\nenforced.\nSHIPPING\nLittle progress was made in the field of shipping con-\ntrols during the period under review. Several major problems\nhave come into fairly sharp focus, however, in the time since\nNSC 104/2 was approved. The nature of these problems, dis-\ncussed in some detail in Appendix I, points to a need for\nre-examination of our policies in the shipping field. In\nsummary, these problems may be stated as:\n1. lack of coordinated intelligence;\n2. complications arising from the Korean war;\nTRUMAN\n3. circumvention of existing shipping controls; and\n4. the legal aspects of the controls.\nBARRY\n\"NATIONAL\nARCHIVES AND\nLIBRARY\nRECORDS\nU.S.\nSERVICE\n(See Appendix I)\nREVERNMENT\nRESEARCH AND INTELLIGENCE BACKSTOPPING FOR ECONOMIC DEFENSE\nACTIVITIES\nAs experience has been acquired in economic defense work,\nit has become increasingly evident that a major weakness in\nthe United States effort is the general inadequacy of\nintelligence-research pertaining to East-West economic rela-\ntions, particularly in what can be termed basic research of\nfact finding. Three major economic areas require continuing\nresearch in connection with the development and support of\nthe United State security control effort: trade, finance, and\nshipping. In addition, the continuing evaluation of Soviet\nbloc vulnerabilities is essential. These aspects of research\nand intelligence for economic defense are discussed in\nAppendix II.\nUNCLASSIFIED\n- 10 -\nSECRET\nUNCLASSIFIED\nSECRET\nSECURITY INFORMATION\nThe deficiences in this field are attributable to a\ncombination of factors, including scarcity of trained\npersonnel, sometimes ineffective organization of personnel\nengaged in this field, inadequate coordination of the efforts\nof various agencies, and the low priorities accorded economic\ndefense assignments among the multiple demands on small\ngeneral economic research staffs. Steps are being taken to\ncentralize a small group of analysts within the research\narea of the Department of State to work exclusively on economic\ndefense problems, particularly trade, as one measure towards\nmeeting the most urgent needs in this field. This group will\nbe heavily dependent on the basic intelligence and research\nefforts of other areas engaged in this work.\nA significant step has also been taken to improve the\nfactual basis for analysis, by centralizing the compilation\nof statistics on East-West trade. In the past, statistical\nwork has been undertaken by various agencies, with little\ncoordination and incomplete exchange of data. An inter-agency\nworking group has now completed a project outline to be used\nas a guide for the Department of Commerce in initiating and\nmaintaining the compilation of extensive East-West trade stat-\nistics on a regular basis for all interested agencies.\nTRUMAN\nDECREASING RELIANCE ON TRADE WITH THE SOVIET BLOC\n\"NATIONAL\nARCHIVES AND\nRECORDS\nLIBEARY\nIn addition to the studies which the\nAdministration had submitted on the three most\ncommodities in East-West trade (coal, lumber and grains),\nthe papers on machinery, vehicles and transportation equip-\nment, prime movers, merchant ship building, pulp and paper,\nand potash have been completed by the Mutual Security Agency.\nThese have been circulated among the agencies concerned, and\nrecommendations and comments are being forwarded for final\nrevision. Additional papers are being developed on tin,\ntungsten, manganese, bearings and fish. This series of studies\nshould provide the factual basis for further work directed\ntowards developing action programs to strengthen the bargain-\ning position of friendly nations vis-a-vis the Soviet bloc\nand to lessen their vulnerability to a sudden complete or\npartial cessation of imports from the bloc.\nThe general study entitled \"Trade with the Soviet Bloc:\nCurrent Problems and Policies\" has been completed and circu-\nlated. Extensive comments were received, and it is now in the\nprocess of final revision. This paper contains a general\nsurvey of the problems of East-West trade and an evaluation\nof the dollar costs of the cessation of such trade. Consider-\nation has been given to the importance of certain imports to\n- 11 -\nASSIED\nΓA3MAH\n\"NATIONAL\nARCHIVES AND\nLIDRARY\nRECORDS\nUNCI\nSECRET\nU.S.\nSERVICE\nSECURITY INFORMATION\nWestern Europe and the possibilities of locating alternative\nsources of supply and of developing new markets in the free\nworld for Western European exports now sold in the Soviet bloc.\nAnother paper has been developed by the Mutual Security\nAgency surveying Western European coal needs and the possi-\nbility of alleviating attendant East-West trade problems by ex-\namining coal replacement possibilities in the programming of\nMutual Security funds. Since shipping and supply problems\nare no longer of major importance, increased attention is\nbeing given to the financing problem so as to alleviate the\ncrises which develop as the Soviet bloc countries demand\nincreasing amounts of strategic goods for shipments of coal.\nA survey of the present and future bearings requirements\nof Western Europe has been made, including the potentialities\nand capabilities of those Western European plants most heavily\ninvolved in East-West trade in bearings. Preliminary indica-\ntions are that in view of the present bearing vacuum in NATO\ncountries and of future defense requirements, those firms\nwhich have been previously unable to enter Western markets\nbecause of their cost structure and the lack of sufficient\ndemand might now redirect most exports to that area.\nINTERNATIONAL BLACK LIST\nThe establishment of an International Black List is still\nan unresolved issue in COCOM, The Netherlands Government has\nreserved its position on the entire Black List question,\nunless all participating countries, notably the United States,\nagree (1) to previous consultation with the government of the\noffender before instituting administrative proceedings\nagainst that individual, and (2) to limit the withholding of\nexports of Munitions List and International List I and II\nitems, except in the case of the country whose controls have\nbeen violated, which is free to take whatever action is con-\nsidered necessary. All COCOM delegations have agreed in\nprinciple to the Dutch proposal, except the United States,\nwhich has concurred in the latter point only. We have agreed,\nhowever, to provide advance notice of temporary suspensions\nthrough United States Missions to the firms involved and to\nthe foreign government, with an invitation to submit whatever\ninformation it considers pertinent. Such advance notice would\nalso be given when compliance proceedings result in final with-\nholding of export privileges. Our delegation has recently\nreported that it will endeavor bilaterally to obtain\nNetherlands acceptance of the United States position.\nUNCLASSIFIED\n- 12 -\nSECRET\nUNCLASSIFIEDCRET\nSECURITY INFORMATION\nWe have agreed to the Belgian proposal that it would also\nbe desirable to establish a Grey List of suspected violators\nof controls to whom shipment of strategic items should be\ncarefully checked.\nUNITED NATIONS COLLECTIVE MEASURES COMMITTEE (CMC)\nOn January 12, 1952 the UN General Assembly adopted a\nresolution noting the first report of the CMC and continuing\nthe CMC for a second year. This report is a considerable\naccomplishment in terms of a statement of principles and\nmethods relating to international cooperation against a future\naggressor.\nAs it did, last year, the United States expects to take\na leading role in carrying forward the work of the CMC.\nIn the field of economic and financial measures (Chapter\n3 of the CMC report) the preliminary decision has been made\nthat further study should be given in the CMC primarily to\n(1) a survey by member states of the adequacy of their\nlegislation to permit full and prompt support of UN action\nagainst aggression; (2) the formulation of a basic initial\nlist of items which in every case of aggression would be\nimmediately embargoed; and (3) legal and constitutional\nfactors affecting the ability of UN bodies, mainly specialised\nagencies, to assist in a collective measures program. In\naddition, the advisability of promoting CMC study of\nmultilateral conventions which might inhibit prompt and\neffective action by states is under consideration in the\nDepartment of State.\nOTHER DEVELOPMENTS AND PROBLEMS\nLuxembourg Trade with the Bloc\nIt has been admitted by an official of the Luxembourg\nMinistry of Foreign Affairs that considerable laxity existed\npreviously in the application and enforcement of COCOM\ndecisions, but it is claimed that elaborate precautions are\nnow being taken to ensure that steel shipments to the bloc\nare properly controlled. Our Legation believes that this\nclaim does not extend in fact beyond the letter of COCOM\nagreements.\nCzechoslovak Steel Mill\nOn January 18 the Treasury Department announced the\nissuance of an order prohibiting the sale or other disposition\nof the strip rolling mill located in the United States\n- 13 -\nUNCLASSIFIED\nSECRET\nUNCLASSIFIED\nSECRET\nSECURITY INFORMATION\npurchased (and paid for) by Czechoslovak interests at the\nprice of about $17 million. This blocks the largest single\nasset of the Czechoslovak Government in the United States.\nDollar Earnings of Soviet Bloc\nA few reports have been received to the effect that\nCzechoslovakia is experiencing a shortage of dollar exchange.\nThis situation has resulted partly from the current inability\nof Czechoslovakia to obtain consular invoices for exports\nto the United States, brought about by the Oatis case and\nrelated matters. The suspension of United States tariff con-\ncessions on November 1, 1951 will undoubtedly further contribute\nto Czechoslovakia's dollar shortage.\nOn the other hand, the bloc is obtaining additional dollars\nby the sale of gift certificates in the United States and by\nimposing heavy duties on relief parcels which in some cases\nmust be prepaid.\nГЛОМАН\nNATIONAL\nARCHIVES AND\nRECORDS\nLIBRARY\nU.S.\nSERVICE\"\nESVERNMENT\n- 14 -\nUNCLASSIFIED\nSECRET\nSECURITY INFORMATION\nUNCLASSIFIED\nAPPENDIX I - SHIPPING\nTHOMAN\nNATIONAL\nARCHIVES AND\nRECORDS\nLIBRARY\nI. CONTROLS DIRECTED AGAINST THE SOVIET BLOC IN EUROPE\n1.3.\nSERVICE\"\nBOYERN WENT\nCOCOM Action\nIn a series of highly controversial shipping control\ndiscussions held between November 27 and December 5, 1951,\nCOCOM accepted certain United States proposals and rejected\nothers. The participating countries agreed to make exports\nof all List II vessels subject to quid pro quo treatment; the\nlargest merchant vessels and certain fishing vessels remain\nsubject to preconsultation in COCOM before being exported\n(agreement could not be reached to raise these vessels to\nList I); preconsultation regarding exports of other vessels\nis optional but advisable when they have special military\ncharacteristics.\nOnly limited progress was achieved with respect to a\nseries of United States proposals for control of shipping\nservices performed for the Soviet Bloc by Western European\ncountries. The United States attaches considerable importance\nto the adoption of controls over chartering of vessels to\nthe Soviet Bloc; most participating countries do not agree\nwith the United States' contention that chartering frustrates\ncontrols over sales of vessels and that there is a security\nproblem in long-term chartering. The most that could be\nachieved was agreement that the participating countries should\n\"take such steps as may be possible\" to prevent bare-boat\nchartering of List I vessels and similar chartering of List II\nvessels \"to an extent which would defeat the List II controls\"\non sales of such vessels. Only France and Belgium supported\nthe United States proposal for control of long-term (defined\narbitrarily as over six months) chartering of both List I\nand List II vessels.\nAgreement was reached in COCOM with respect to a number\nof principles to govern repairs to Soviet Bloc ships: instal-\nlation or replacement of List I or Munitions List items should\nbe prohibited; installation of List II items should be charged\nagainst List II quotas; and no special structural changes\nshould be made which would adapt Soviet Bloc vessels for\nmilitary use. It was further agreed that when constructing\nList II vessels for the Soviet Bloc, participating countries\nshould avoid to the maximum extent the fitting of a number\nof specified strategic items, such as radar, as well as pro-\nhibiting the installation of Munitions List items.\nThe United States proposal for a cooperative investigation\nof certain manifests of ships leaving Western European ports\n- 15 -\nSECRET\nUNCLASSIFIED\nUNCLASSIFIED\nSECRET\nSECURITY INFORMATION\nfor the Soviet Bloc received no support. This proposal was\ndirected to the problem of determining the extent to which\nparticipating country vessels are being used to facilitate\nthe movement of embargoed goods to the Soviet Bloc. All the\nparticipating countries were opposed to controls over the\ncarriage of strategic goods on the grounds that such measures\nare administratively, economically and politically undesirable\nand not feasible, and are unnecessary since other methods would\nbe more effective in solving whatever problem may exist. Fur-\nther attention is being given to this problem.\nII. SHIPPING CONTROLS DIRECTED AGAINST COMMUNIST CHINA\nTHOMAM\nCOCOM Action\nHARRY\nARCHIVENAL\nRECORDS\nSERVICE\n8.5.\nIn the shipping discussions outlined above, the partici\npating countries recognized that China presented a particular\nproblem requiring separate discussion. These discussions have\nprogressed very slowly. Thus far, the only agreement reached\nis on the principle that participating countries will prohibit\nbare-boat chartering of any vessel to Communist China. The\nUnited States has proposed (1) that long-term chartering of\nList I and List II vessels to China or for use in Chinese waters\nbe prohibited; (2) the transportation of strategic items to\nChina in participating country vessels be prohibited; and (3)\nconsideration be given to additional controls to ensure that\nstrategic items consigned to Hong Kong and Macao actually reach\nthat destination. One of the principal reasons for the reluc-\ntance of COCOM to take action in this field is the contention\nthat the problem is no longer of sufficient magnitude to\nwarrant the measures advocated by the United States. At the\nclose of February British and American intelligence officials\nwere attempting to measure the volume and significance of\nnon-Communist shipping still reaching Communist Chinese ports.\nPanama\nDuring the period under review, a number of Panamanian\nvessels have applied for British and Portuguese registry at\nHong Kong and Macao. Since neither Portugal nor the United\nKingdom impose any restriction on their flag vessels calling\nat Chinese ports, easy transfer to these flags could seriously\nundermine the effectiveness of Panama's decree of August 18,\n1951, which prohibits Panamanian vessels from calling at\nChinese Communist ports. Panama has asked the United Kingdom\n(with United States support) not to re-register vessels whose\nPanamanian registry has been cancelled for violating the decree\nand not to register vessels seeking British registry merely to\nevade the Panamanian decree. The United States has made a\nsimilar statement to Portugal.\n- 16 -\nSACRASSIFIED\nUNCLASSIFIED\nSECURITY INFORMATION\nA number of Panamanian flag vessels continue to be engaged\nin trade with Communist China despite Panama's decree. Nearly\nall of these, however, are owned by Chinese Communists, are\nengaged in coastal trade and do not appear in ports where\nPanamanian representatives can seize their papers. During\nOctober and November 1951, 20 Panamanian vessels were still\nTHUMAN\nin this trade; in the preceding three months there were 56,\nMATIONAL\nand between July 1950 - June 1951 there were 85.\nLIBRARY\nORDO\nBunkering\nDuring the period under review United States oil companies\nhaving bunkering facilities in the Far East have continued to\ndeny bunkers to Soviet and satellite vessels proceeding to and\nfrom Chinese Communist ports and to deny bunkers to other\nvessels when requested to do so on an ad hoc basis. In indi-\nvidual cases oil companies have been advised that the Foreign\nAssets Control Regulations prohibit their subsidiaries from\nsupplying petroleum products to China-bound vessels. These\ninstructions have been given ad hoc, since the overall pro-\ncedure to be followed in dealing with this problem has not been\nfully worked out.\nThe bunkering policy followed by United States companies\nin the Far East would be made more effective given the coopera-\ntion of British companies in the area. Accordingly, an attempt\nwas made to obtain clarification of current British company\npolicy in that area, and to secure British Government coopera-\ntion in developing a common bunkering policy. The British\nreplied that (1) the Government is opposed in principle to\ninterference with normal shipping services because it would\nbe appropriate only under conditions of economic warfare; (2)\nsuch interference would conflict with agreements concerning non-\ndiscrimination, and (3) the United Kingdom is particularly\nvulnerable to retaliation in the field of services to shipping.\nThe United Kingdom noted, however, that the present policy of\nBritish oil companies is to withhold bunkers on the grounds of\ngeneral shortage of fuel oil from vessels east of Suez with\nwhose owners they do not have bunkering contracts. This in-\nformal denial applies to Polish vessels which account for the\nmajority of objectionable traffic to Communist China.\nUnited States and United Kingdom efforts to control\nbunkering in the Far East have been substantially nullified.\nThe chief target was Soviet Bloc vessels proceeding to China;\nthese vessels no longer stop for bunkers in the Far East.\n- 17 -\nSECRET\nUNCLASSIFIED\nIROMAN\nANNYA\nARCHIVES AND\nLIBRARY\nRECORDS\n8.5.\nSERVICE BOYERNMENT\nUNCLASSIFIED\nSECRET\nSECURITY INFORMATION\nIII. MAJOR PROBLEMS IN THE FIELD OF SHIPPING CONTROLS\n1. Lack of Coordinated Intelligence -\nThe development of a practical program of shipping\ncontrols against the Soviet Bloc and negotiations with other\ncountries regarding such controls have been severely hampered\nby a lack of coordinated intelligence. For a considerable\ntime there has been a need for an appraisal of the strategic\nimportance of denying ships and shipping services to the Soviet\nBloc. As indicated above, progress has been slow, and United\nStates suggestions have met with opposition. The absence of\nintelligence support in this field is clearly demonstrated in\nthe case of United States efforts to persuade Western European\ncountries of the need to prevent the carriage of embargoed goods\nto the Soviet Bloc in Western vessels. Considerable intelligence\nhas been available to the United States Government for over six\nmonths which, if analyzed and correlated into usable form, might\nconvince other countries of the need for additional controls.\nThe requisite analysis, however, has not been completed.\nIt should be noted, however, that intelligence material\nwhich would support certain aspects of shipping controls is\nnot available.\n2. Shipping Control Complications arising from the War\nin Korea -\nProblems arising from the disparity between controls\napplied against the Bloc in Europe and controls against\nCommunist China are particularly acute in the field of shipping.\nWestern European countries are unwilling to accept the war in\nKorea as a reason for extending shipping controls against the\nBloc in Europe. Yet deliveries of ships are of greatly in-\ncreased significance because of the Far Eastern hostilities.\nSix merchant vessels acquired by Poland from Western Europe\nsince the start of hostilities in Korea are all engaged in\ntrade between Poland and China. The same is true of charter-\ning; chartering of Western vessels to the Bloc in Europe would\nbe a much less significant security problem if this chartering\ndid not release Soviet Bloc vessels for trade with China. In\nsome cases Western vessels directly engage in trade with China\nwhile under charter to the Soviet Bloc.\n3. Possibility of Easy Circumvention of Shipping Controls\nagainst the Soviet Bloc -\nWhile new construction for the Soviet Bloc can be\neffectively controlled by the cooperation of Western Europe,\nthe Bloc appears to be capable of acquiring merchant vessels\n- 18 -\nUNCLASSIFIED\nTRUNAM\nNARRY\n\"NATIONAL\nLIRRARY\nSECRES\nARCHIVES AND\nRECORDS\nSECURITY INFORMATION\n1.5.\nSERVICE\nNOVERTHENT\nfrom other sources if it so desires. It does not appear to\nbe very difficult for the Bloc to acquire vessels from Pana-\nmanian and other registry despite the willingness of Panama\nto cooperate to prevent it. Transfers through dummy corpora-\ntions and outright sale to the Soviet Bloc have occurred.\nPoland and Communist China have acquired nine vessels totalling\nover 50,000 gross tons from Panamanian registry since Novem-\nber 1950. Transfer through third countries is a further\npotential loophole.\nEffective chartering controls would be even more\ndifficult to enforce. Only a few COCOM countries other than\nthe United States have specific legislative authority at the\npresent time to control chartering. Even assuming a willing-\nness on the part of all COCOM countries to institute controls,\nthe potential loophole presented by Greece and Panama might\nrender other countries' controls ineffective.\n4. Legal Problems of Shipping Controls -\nEffective shipping controls against the Soviet Bloc\npresent unusual legal problems. Aside from the absence of\ngovernmental authority to control chartering, for example -\nwhich could be overcome - a case such as the following hypo-\nthetical one would not be unusual: a Panamanian flag vessel\nowned by a Panamanian corporation owned in turn by a Greek\ncitizen resident in London is chartered to an Italian company\nwhich carries cargo \"for the account of\" Poland; this vessel\ncould pick up cargo (including illegally diverted embargo items)\nin the free ports of Western Europe for delivery to Poland. A\nsecond chartered Western vessel could carry this cargo to India\nwhere the cargo would be loaded on a Polish vessel trading\nbetween China and India. There is some evidence that compli-\ncated transactions of this type are taking place. Shipping\ncontrols clearly cannot prevent this type of activity even\ngiven a willingness on the part of all Western countries con-\ncerned. As this example demonstrates, shipping controls should\nbe a supplement to and not a substitute for export controls.\nIV. NEED FOR RE-EXAMINATION OF PARAGRAPHS 19 AND 20 OF\nNSC 104/2\nThe above NSC directive confines itself to controls over\ncarriage of goods and denial of port and bunkering facilities.\nExperience has shown that the former is a complicated matter\nwith numerous loopholes and a measure which the major maritime\ncountries are reluctant to consider. Should future intelli-\ngence analysis indicate that the problem envisaged in para-\ngraph 19 of NSC 104/2 is a substantial one, more complete con-\ntrols over transit trade and transshipment licensing might be\n- 19 -\nUNCLASSIFIED\nSECRET\nUNCLASSIFIED\nSECRET\nSECURITY INFORMATION\nmore appropriate than shipping controls along the lines of\nUnited States Transportation Order T-1.\nThere is a need for re-examination of policies in the\nshipping field which may affect the war potential of the\nSoviet Bloc. Such a re-examination should distinguish between\nthe problem of ships and the problem of shipping services and\nshould indicate specific control measures which would be de-\nsirable for security reasons, and which would be feasible of\nnegotiation and practicable of enforcement.\nTHEY to ARCHIVES NATIONAL RECORDS AND LETTER\nE.S.\nUNCLASSIFIED\n- 20 -\nSECRET\nUNCLASSIFIED\nSECRET\nSECURITY INFORMATION\nAPPENDIX II - PROBLEMS OF INTELLIGENCE-RESEARCH\nTrade\nIn the implementation of the Kem Amendment, the Battle\nAct, and various aspects of NSC 104/2, the need for detailed\ncurrent analysis, as well as background information, concern-\ning East-West trade agreements has become increasingly clear.\nYet, because of the lack of adequate research facilities,\nimportant policy positions concerning aspects of the agreements\nconcluded between the Free World countries and the Soviet bloc\nare still necessarily formulated on a crisis basis. We are\npressed by deadlines and the absence of effective analysis to\nacquiese in deals unfavorable to the total interest of the\nWest in instances where earlier, continuing attention might\npossibly have permitted the mobilization of Western resources\nto achieve more favorable agreements.\nConstant study is necessary, not only of the trade\nagreements, but of the volume, value, nature, mechanisms and\nother significant aspects of the flow and financing of East-\nWest trade. To illustrate: if, as may be possible, a coordi-\nnation of Western European trade bargaining with the Soviet\nbloc is to be attempted, it can be successfully carried out\nonly with more complete information and more effective analysis.\nIt is well to point out that despite these glaring\ndeficiencies, intelligence-research on the subject of trade\nhas been far more extensive and effective, and the fund of\nknowledge far greater, than in the fields of either finance\nshipping.\nANOVN\nARCHIVES AND\nLIBRARY\nFinance\nRECORDS\nU.S.\nBERVICE\nAlthough trade and financial operations are closely\ninterwoven, the financial aspects of East-West economic rela-\ntions, particularly as related to economic defense, are an\nunexplored field of inquiry except in the case of Communist\nChinese trade. Yet, it is important that the extent and nature\nof Soviet financial operations be known, whether or not present\npolicies provide for specific action in this field. For ex-\nample, it is evident that illegal trade is financed in dollars\nand in the currencies and through the banks of friendly Western\ncountries. Little if anything has been done to establish the\npattern of such financing which might be suggestive of an\nadditional effort to reinforce the physical controls.\nSoviet Bloc Vulnerabilities\nMost of the major appraisals of Soviet Bloc vulnerabilities\nare now being made as joint projects involving several agencies.\n- 21 -\nSECRET LASSIFIED\nUNCLASSIFIED\nSECURITY INFORMATION\nThis should provide increased opportunities for evaluations\nof greater scope and depth than previously possible.\nA thorough, detailed, and comprehensive re-evaluation\nof Soviet bloc vulnerabilities is overdue. Projects currently\nunderway may meet some of the needs, provided the studies, in\naddition to setting forth general conclusions on capabilities\nand vulnerabilities, yield basic data on various aspects of the\nSoviet bloc economies, on the industries, production goals and\nfulfillment, trade, and on the relative vulnerability of\ndifferent areas within the economies.\nShipping\nThe intelligence difficulties in this area are covered\nin Appendix I p. 4.\nTHE & ARCHIVE2 NATIONAL RECORDS IROMAH AND LIBERTY\nU.S.\nSERVICE\"\nUNCLASSIFIED\n- 22 -\nSECRET\nUNCLASSIFIED\nSECRET\nSECURITY INFORMATION\nU.S. GOVERNMENT PRINTING OFFICE\n4173-STATE-1949\n≡ 2"
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