CFEP DRAFTING GROUP ECONOMIC DEFENSE POLICY REVIEW POLITICAL IMPACT OF THE FREE WORLD CONTROLS ON TRADE WITH THE SINO-SOVIET BLOC

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP63-00084A000100200011-2
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 42
• Document Creation Date: December 12, 2016
• Document Release Date: June 21, 2002
• Sequence Number: 11
• Publication Date: June 27, 1955
• Content Type: STUDY

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CFEF DRAFTING GROUP
ECONOMIC DEFENSE PO ICY REVIEW
Staff Study No. 20 (kevised)
Draft of June 27, 1955
Political Impact of Free World Controls on
Trade with the Sino-Soviet Bloc
This draft of Staff Study No. 20 (Revised), "Political
Impact of Free World Controls on Trade with the Sino-Soviet Bloc",
is transmitted for your use in connection with the work of the
CFEP Drafting Group on Economic Defense Policy Review.
In compliance with the request of the Chairman of the
Drafting Group, the Executive Secretary, EDAC, is providing re-
production and distribution facilities as a service to further
the work of the CFEP Drafting Group.
Irving I. Kramer
Executive Secretary
Distribution:
CF Drafting Group
State Dept., OSD reviews completed
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CFEP DRAFTING GROUP
ECONOMIC DEFENSE POLICY REVIEW
Staff Study No. 20
Draft of June 27 s 1955
Contributed by Defense
Political Impact of Free World Controls on
Trade with the Sino-Soviet Bloc
CONCLUSIONS
1, Examination of the indications from available intelligence
th the Sin el
provides strong support for the view that Free World controls on trade
major Free World bargaining points in negotiations with the Bloc;/ and
(d) at a lower level, particularly of CHINCOM controls)would be a
sign of Western weakness and might hamper future political discussions
and negotiations.
B.. UNDERLYING CONSIDERATIONS
2. In an examination at this time of the effects of Western trade
Bloc regimes., which however. could be considerably increased by total
embargo;
(c) at their present level or at a higher level controls constitute
(b) represent a lesser threat to the internal political stability of the
Trade controls as a diplomatic device contain sanctions which can be
applied entirely at the discretion of Free World governments both as
to timing and extent.
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odktr.s on countries of the Sino-Soviet Blocs, it is assumed that
despite apparent concessions recently made by the Soviet rulers,
(a) there is no convincing evidence that the ideological force of Com-
munism is abating, (b) the fundamental hostility of the Communist leaders
toward the Free World remains unchanged, and (c) the basic objective of
the Communist leaders is acontinued expansion of their own sphere of
power at'the expense of the Free World.
3. The political structure of the Sino-Soviet Bloc is vulnerable
to the impact of Free World economic measures because Marxist political
th4nking is conditioned by economic considerations.
`tl 4. The total political impact of Free World denial of goods and
services to the Sino-Soviet Bloc involves effects of economic and mili-
tary measures which are not here assessed. Although the political
significance of this impact may be greater or less at any given time,
the Free World controls constitute an effective overall bargaining
instrument in negotiations with the Sino-Soviet Bloc and produce dis-
ruptive intra-Bloc political effects of an ideological and psychological
character from which tactical advantages can be derived. For these
reasons the correct assessment of the political impact of trade controls
is a vital factor in the formulation or revision of an economic defense
program aimed at the preservation of Free World security.
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5. It in a premise of the Free World controls that they impose a
greater strata cost on the Sino-Soviet Bloc than on the Free World.?/
By parity of reasoning., any increase of the level of controls would
increase the relative strategic cost to the Sino-Soviet Bloc., and the
maximum possible strategic cost would be imposed by a total embargo.
6. Although the system of Free World controls has been based pri-
marily on the idea of selectivity, the trend in the recent past in the
main has been toward selecting items for decontrol rather than toward
selecting items which would have a major strategic impact if denied to
the Bloc. For example., in the context of current Soviet Bloc economic
conditions' it might be that agricultural commodities should be near
the top of the list from the point of view of strategic impact. Another
important area of direct vulnerability is the provision of shipping and
shipping services to the Bloc (shipbuilding and repairs for Bloc accounts
in Western yards)., chartering of ships in trade with the Bloc., etc* Y'
C < POLITICAL STABILITY OF THE SING-SOVIET BLOC
7. The system of Free World controls on trade with the Sino-.Soviet
Bloc represents a continuing challenge to the political stability of
25X1 the Bloc regimes. The controls
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(a) compel the Bloc to try to compensate by autarchic measures in
those particular areas where Free World denial of goods and services in
effective W
(b) disrupt Soviet state planningg 51
ry(c) contribute to the failure of the Bloc to.bensfit from Free World
advances in broad fields of science and technologyg
(d) restrict the flexibility and possibly iennoe the basis pattern
of the development of the Bloc as mobilization base and even infiwence
major strategic military decisions as in the case of Camunist Chin. f
~. As regards relationships between the various member stmt of the
Bloc,, lie World controls tend to
(a) saziwiae strai s,, stresses and consequent chances for disunity
copelliaeg the institution of priorities for the allocation of sear"
gobdi and services on the basis of a strategic requirements
1 4,
deci by Iosca wg
(b) cause the European satellites to be turned by Moscow from tra-
ditional Free World markets in order to satisfy overriding internal
ee Annex 11
See Annex III
61 See Annex IV
/ See Annex V
$ See Annez VI
See Annex ,VII
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retirements of the Bloc as a whole or of specific Bloc partnersg 1C
(c) require policing efforts among Bloc partners to insure carpliasss0
with intra-Bloc priority allocation systems made necessary by Free
`irl,d controls E 3.1/
(d) encourage satellite countries to reestablish normal relations
f 1 the Free World.l
i tATI?NAL RELATIONS BETWEEN SINO-SOVIET BIAC AND FRS WORID COUNTR33B
9e In international relations between Sino?Soviet Bloc countries and
;ya wee Worlds, strategic trade controls
(a) limit the Sine-Soviet Bloc a freedom of action under peacetime
Ui,ndttions and in preparation for warg
(b) constitute a major bargaining point for Free World negotiatorss,,
, icularly for negotiations involving * c requirements or the
olttiaal prestige of Communist China$ 1
(c) can attention to the advantages of 'a free exchange of goods and
.),orsons enjoyed by non-Communist countries (see 8, (d) 'Dove} g
(d) emphasise the decreasing dependence of Free World economies upon.
aw a with the Bloc.l /
Sao noses
See Annsz IX
See Annez X
See Annsz, II
See Annez XII
See Annex; 1(11
See- Annez XIV
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Comments on Soviet Bloc Vulnerabilities, Intentions, and
Autarchic Measures in the Electron Tube Industry.
The following statements on "vulnerabilities" and "intentions" appear in
the "Economic Intelligence Report, The Electron Tube Industry in the Soviet
Bloc, CIA/RR 7-S-1 (6 Sep 1954)" page 19:
B. Vulnerabilities.
In general, there is no change in the statement concerning
vulnerabilities presented in CIA/RR 7. Specifically, the electron tube industry
in the Soviet Bloc has been taking steps to provide domestic capacity for a
number of the specialized products formerly imported from the West. Complete
interdiction of such products would probably no longer reduce tube production
by as much as 50 percent. The procurement of nickel-cathode sleeves, tungsten
and molybdenum metal products, and diamond dies, tube material shortages, due
to a lack of exports from the West into East Germany, caused a drop in
production of some types of tubes.
C. Intentions. -
It appears certain that the intentions of the USSR are to expand
the electron tube industry in the Soviet Bloc as rapidly as feasible, to maintain
a high proportion of industrial effort devoted to military end items, and, to
equal or exceed in quantity the probable production of military electronics in
the US. In detail, a very high priority is assigned to the production of radar
counter-measures, probably followed by the production of technically adequate
microwave radar, and then by one or more basic systems of missile-guidance
controls.
It is also certain that it is the intention of the USSR to insure
that the Soviet Bloc is completely selfsufficient in its supply of electron
tubes. This goal appears to be nearly attained at this time.
It is believed that the situation described in the foregoing
paragraphs would not apply today if free world export controls over electronic
equipment had been more specific or tighter as a whole. Development and
production of many electronic tubes and components in the Sino-Soviet Bloc has
been based on Western prototypes. The effort on the part of the Bloc to copy
Western prototypes has virtually always been restricted to electonic tubes
and components which were capable of use in military equipment. The following
types of tubes might be cited as prominent examples:
1. Oscillograph tubes. Laboratory development and pilot production
from copies of US tubes.
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2. Kinescope tubes. Laboratory development and pilot production
from copies of US tubes.
3. Cathode ray tubes. Laboratory development and pilot production
from copies of US tubes.
4. Oscilloscope tubes:
a. 3-5 inch electrostatic-deflection tubes for radar.
Copied from British type ACR-1 and modified.
b. Dark-trace projection tubes for ground radar PPI repeaters.
Copied and improved version of a US tube.
c. Image orthicons. Patterned after U. S..design.
5. Klystrons:
a. 3000 mc/s reflex local oscillator. Copied and improved
from US type SK 28/707B.
6. Crystal diodes:
a. 3000 mc/s diode for radar mixers. Copied from US type
lN21.
7. Transmitting and Modulating Tubes:
a. Low to medium power glass oscillators for low frequency
radar.
These examples represent only a small fraction of the materials of direct
military usefulness which Western countries have made available to the Bloc in
the form of prototypes. The relaxation of controls following the. list revisions
of 1954 have made available to. the Bloc a wide variety of the newest types of
tubes, electronic components, and instruments which have primarily a civilian
applicability in the West but which, under Bloc. priorities apparently are used.
chiefly for military purposes. The recent control relaxation, for example,
now has made available tubes and components which the Bloc could use in its
early radar warning system, the most comprehensive and extensive radar system
in existence.
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ANNEX III -
Interference with Soviet Bloc Ply.
An example of how the denial of specific raw materials and manufactured
goods may not only affect a specific branch of industry but disrupt broader
planning, may be found in the following quotations from the Economic Intelli-
gence Report, The Heavy Electrical Machinery Industry in the Soviet Bloc, CIA/RR 9
(12 Sep 1952), pages 1 and 2:
The heavy electrical machinery industry plays a vital part in the
economy of the Soviet Bloc. The atomic energy program and most of the
basic industries depend on this industry in two ways; first, directly ,
for motors, generators, and transformers for use in their own facilities;
second, indirectly, because they are dependent on the general power system,
one of the main users of heavy electrical machinery.
Facilities probably are not in most cases the limiting factor in
over-all expansion plans. Occasionally it is not clear whether the impact
of the Bloc's military production program, the lack of raw materials, or
the inadequacy of the shysical capacity of the plant to contain all the
necessary operations causes deficient production in a given plant.
Although it probably is true that the employment of the inputs in the
heavy electrical machinery industry of the, Soviet Bloc results in markedly
better returns to the economy than would the employment of these inputs
in other industries, the number and types of inputs in this industry
cause a serious drain on some of the resources of both metals and,manpower
in the Bloc. The real shortage in the industry exists in the supply of
basic raw materials rather than in the facilities in which such raw materials
are used.
Notable shortages exist in these basic raw materials, primarily
copper, transformer sheet steel, and transformer oil.
The deficit of heavy electrical machinery in the Soviet Bloc would be
compounded if imports were reduced. The level of current imports of heavy
electrical machinery into the Bloc is estimated at a rate of 4,425,000
kilowatts a year, approximately one-quarter of the estimated production rate.
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This major deficit between dor:.estic-production--and demand indicates an
unusually large dependence on imports. Even with a range of error which
cuts this import figure in half, the imports still :ould be enough to
satisfy completely the requirements of the Bloc's atomic energy program
for heavy electrical machinery. The strategic importance of the import
program cannot be overlooked in view of its sizable contribution to the
Bloc's potential for war.
hany of the Bloc's industries require heavy electrical machinery for
defense or defense-supporting production. The submarine program, the steel
industry, the atomic energy program, and the railroad equipment
industry are examples of strategic sectors of the Soviet Bloc economy
which are likely to have difficulties in fulfilling planned output if
either the supply of heavy electrical machinery or the output of other
basic industries which in turn depend on this supply is curtailed.
Another strategic sector to be affected would be the electric.power industry,
which consequently would probably be unable to relieve the chronic shortage
of electric power. Since all the industries of the Soviet Bloc which
consume heavy electrical machinery are of varying degrees of strategic
importance, the bloc is particularly vulnerable should Western countries
greatly reduce their exports to the Bloc of heavy electrical machinery or
should there be a curtailment of the Bloc's imports of the basic raw
materials used to produce such machinery. A continued excess of demand
for heavy electrical machinery over supply would in the long run adversely
affect the Bloc's economy and its war potential.
In a recent editorial comment on the Leipzig Fair, the influential
Cuesseldorf INDUSTRIEKURIER referred to, "Questions frequently raised by
Sovzoners #which have reportedly included such reproaches as, 'Why do you
Westerners help the Soviet Zone regime overcome its many bottlenecks and keep
its shaky economic system artificially alive by deliveries of raw materials
and consumer goods?"'
NIE.-22 (19 Feb 1951) assessed the likely impact of an economic warfare
program upon Soviet Bloc economic development as follows:
A program of economic warfare would add to the internal economic
problems of the USSR and its Satellites and would make it virtually impossible
to carry out the planned balanced development of their economies. Such
prospects as they now have for narrowing the present great gap between their
combined productive capacities and those of the West would be decidedly reduced.
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ANNEX IV
Scinece and Technology.
25X1
An example of technological advance in Western nations, and particularly
the U. S.., over the Soviet Bloc, which has recently been under scrutiny, is in the
field of rolling mill design and,construction:
The ability to coordinate and bring together all factors, including
design and production skills, necessary in the production of rolling mills
is not as advanced as in the Oyest. The degree of the technological ad-
vances in the West over the level of Bloc technology varies somewhat with
types of rolling mills. The USSR has designed and constructed since 1946
several blooming mills and rail-structural mills, and other types. They
have not produced continuous strip and sheet mills of high quality steel
sheet and strip although several of these types are under construction.
It is in this particular field of flat rolled products that the West holds
the greatest advantage in advanced technology. Because the. Bloc's machine
building plants capable of producing rolling mills probably have not ac-
quired all the production techniques available in the US, UK, and several
of the other Western countries, they have more difficulty in producing
rolling mills, components, and auxiliary equipment.*
The general organizational, technical, and political problems which face
the Bloc in any effort to advance scientific achievement or improved technology
have recently been discussed in public statements by prominent Soviet
functionaries. In a speech to the All-Union Conference of Workers in Industry,
N. A. Bulganin, Chairman of the USSR Council of Ministers, on 16 May 1955,
emphasized the importance of "measures to effect a further advance of industry
by an extensive introduction into production of achievements of science,
technology, and advanced experience." Bulganin's emphasis of the importance of
science and technology, if read against the background of Soviet Bloc efforts to
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procure prototype goods and achieve autarchy, are significant:
Bulganin said the question under discussion at the conference was of great
State importance. Only the introduction into production of the latest achieve-
ment of science and technology, which constitute the basis of technical
progress, can insure the rapid growth of labor productivity, which, according
to Lenin, is ultimately the most important and the main factor for the
victory of the new social order.
During the past 26 years, labor productivity in industry has increased in
our country by more than 6 times.. To insure the further development of
the national economy of the country it is essential to raise labor
productivity to a new high. This task can be solved only as a result
of an inexorable and decisive introduction into production of new
technique and modern technology, by modernizing existing machines and
equipment, and by radical. improvement in production management.
Machine builders have a particularly important role in introducing new
technique and in increasing labor productivity in the national exonomy.
The influence of machine builders on technical progress is felt in two
ways: the introduction of new technology and increased labor
productivity in the machine building works themselves, and the designing
and delivery of machines to insure technical progress in the whole of the
national economy.
Although during and immediately after the war, progressive methods such
as production lines, automatic and semiautomatic welding, high-speed
metal-cutting, heating by high frequency currents, and so forth were widely
introduced, we now hear little about new vast technological measures in
machine building. Our machine builders restrict themselves mainly to the
technological processes already mastered, whereas there are new progressive
technical processes capable of increasing labor productivity several times
over, sharply reducing costs of metal and material, and producing more
from the setae production space.
The engineering situation cannot be considered normal when, because of
inadequate output of special equipment, the proportion of highly
productive machine tools is falling off in the machine-tool reserves,
The production of forging and pressing equipment is lagging sharply.
Processes rendering production automatic are being incorporated too slowly.
Poor use is made of existing equipment at many engineering works. We have
works which still make machines inferior to those made by some works abroad.
Comrade Bulganin pointed out that metal workers and chemists should play
an important role in the matter of insuring technical progress of the-coun-
try and of raising labor productivity. In spite of certain metallurgical
and chemical achievements in introducing new technical equipment, both . ~.
fields are lagging behind the level of world technology in certain types
of production. In ferrous metallurgy not enough is being done to improve
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the quality of special steels and alloys,-especially of heat-resisting
,types.. The introduction of highly productive processes of blast furnace
is slow. The introduction of steel smelting production based on the use of
oxygen high top-gas pressure, neutralization (usrednenie) of iron ores, the
use of new highly refractory materials, and the complex automatization
of the control of metallurgical processes is also slow.
The Ministry of Ferrous Metallurgy is not paying due attention to the
production of more economic. rolled steel parts, which are in
particularly short supply, which results in difficulties in the industry
and excessive use of metal.
There are many unexploited reserves in our mettallurgical industry.
Substantiating this, Comrade Bulganin lists a number of examples.
The Ministry of the Chemical Industry is not mastering with sufficient
speed the production of concentrated fertilizers, new organic materials,
plastic masses, non-ferrous metals substitutes, and dyes, and is lagging in
the organization of the chemical refining of oil and natural gases.
In speaking about the oil industry, Comrade Bulganin pointed out that
individual drilling brigades had reached high speeds in drilling. For
example, the drilling brigade of foreman Mugalim Minyazevich Gimazov--
Tatneft- had drilled about 16,000 meters, or more than 1,300 meters
permachine tool a month in 1954. In individual drilling, this brigade
reached a drilling spped of approximately 2,500 to 3,000 meters per machine
tool per month.
However, the oil industry as a whole is lagging in the speed of drilling
and in oil-refining,*
*FBIS, Daily. Report: Foreign Radio Broadcasts, No. 96 (1955), USSR and
Eastern Europe, pp. CC2 CC4.
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Z -VII , P
Allocation of Suvvly Prig.o itiee in the Sing-Soviet Bloc,
In the'Sino-Soviet Bloc, Communist China continues to retain
impor#-ant priorities for supply of materials either produced in
other parts of the Bloc or procured by European Bloc countries
from the Free world under relaxed controls.
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REORIENTATION OF SATELLITE
FOREIGN TRADE
The reorientation of satellite foreign trade within the Sino-
Soviet Bloc has taken both the form of specific bilateral arrangements
(East German reparations, trade arrangements with the USSR, China-trade
commitments - see also Annex X) and multilateral arrangements. A
prominent example of the latter is the Cegncil of Mutual Sconomic
Assistance (EOMEKON), which was established by the USSR and the European
satellites in Moscow on 18 January 1949. A few pertinent articles from
the protocol establishing the organization, are quoted below.
Article 2. The purposes of this organization are:
(a To coordinate the economies of the signatory
countries within a general economic plan developed by the Council,
(b) To supervise the consolodation and development in
each country of the industries and resources of epch of,the re-
spective countries in such a manner that the indh,stries,of all
the signatory countries will no longer be competitive but will
compose a homogeneous whole, complementing one another.
(c) To add in the economic reconstruction of each country
individually, bearing in mind for this purpose the possibilities
of providing each country with raw materials.
(d) To increase the capacity of each country fcap toe pro-
duetion'ot raw, processed or semi-processed materialsesa-
tablishing mixed companies or associations for expleraction and
exploitation of surface and sub-soil resources,
,(e) To arrange t!o~r exchanges of experience.
I;(f) To standardize and increase the quantity as well as the
quality of industrial products of the signatory countries.
(g) To assure the sale of the products of 1 member countries.
(h) To accord assistance by loaps,or arranging investments
for the purpppe of strengthening the econos of each signatory
country.
Article I. The Council will be convened whenever it may be
necessary, each time in a different country under the presidency
of the delagate of the host country but not less frequently than
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once every three months.
At these meetings the economic situation of each country
individually will be discusged and analyzed.
Arti9le5 Beginning ?ith the year 1950 the economic plans
of'all member countrie's v~17, be drawn up in conformity with the
advice.of the Council, but for the present year each signatory
country Mill endeea'vor to adept its own economic plan to the pro-
visions of the present protocol and the advice of the-Secretariat
General in so far as any investment of funds in the execution of
redetermined parts of the gconomic plans of each member country
has taken place up to the ai;gning of the present protocol.
4 6. The presenj protocol neither excludes, annuls, or
alters inany way commercial agreements already signed by any of
the parties to this agreement and which are communicated to the
Secretariat General within + period of thirty days
Artier cl eS. Each signatory country is obligated to make
available to the Council a].l infor#atign aAd documentary material
necessary to permit and fac1,litati the task of the observers which
the Council may find necessary to sand intp any of the signatory
countries upon the proposal"of the Secretariat General, which has
agthoritylto make any decipions, subject to their ratification
by the Council at its first'meeting.
Each` signatory country is also obligated 'to accept and follow
the advice of any counselors and technicians,which the Council may
find necessary to send, directly or upon request, to any of the
signatory countries.
Article 9., The Governments of the signatory countries obligate
themselves to send`to?the Secretariat General within the first five
days of each.month a detailed statistical situation report concerning
production and any other documentary material pertinent to the
economic and financial situation of the country concerned for the
next month.*
*SIC-P.1, Appendix A.
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The significance of KOMEKON activities for the free world was re-
emphasized by a Western European observer who visited Poland in 1954:
e * * All the new commercial agreements reached by Warsaw
with Western countries are part of a vast plan of Soviet
commercial expansion-worked out by the KOMEKON, and they
must fit into it. A careful, study of the agreements shows
clearly that this offensive of expansion is chiefly aimed at
France, Great Britain, Italy and South.-A-erica and East-
Asiatic countries. Apart from financial gains the. aim is
clear---it is to foster on that basis diffjCnlties between
these countries and the USA. It is needless to say that
the part played in these proceedings by the Poles is.prac
tidally nil, the right of decision resting in the hands of
Walentin Jozefowics SOLOWIOW -- the official representative
of the KOMEKON in Warsaw.*
The Communist view of "trade as a political weapon" was elaborated
in one of the papers reportedly presented at the Sochi economic conference
(5-9 July 1954). At this meeting, attended by representatives of all
Sino-Soviet Bloc countries, Norih Korea, Viet Minh and observers from
Japan, Indonesia, and France.
The strongest possible emphasis was placed on the 1 bn-
cept that trade with the western democracies was a weapon
in the political fight, raj,ner than a means to obtain scarce
goods or commodities except in certain cases of materials not
produced within the Soviet'Bloo.**
In relations with Latin America, the Bloc has used trade as an
economic weapon with a strong political tinge:
*Radio Free Europe report, 13 February 1954, quoted in AMCONGEN
MUNICH Dispatch 349, 25 March 1954.
**EDAC, "A Soviet Trade Warfare Conference, K"EDAC D-36/59, 29
October 1954
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* * * The USSR and its hatellites have shown a growing
.Interest in trade with Latin America since early 1953. Past
Latin American trade with the Soviet bloc has been on a small
scale,and until recently was declining. Currently some,Latin
American countries are vulnerable to bloc approaches. As a
result of unsold export surpluses, Argentine, Uruguay, Chile,
and Brazil have been having balance-of-payments problems. Some
countries may welcome these approaches a a a means of increasing
bargaining power or demonstrating political independence or
neutralism.
* * * Communist propaganda in Latin America has stressed
the role of trade with the bloc in aiding economic development
and ending "domination" by US !'monopolies." On occasion bloc
trade moves have been directed' toward aggravation of US semi-
strategic goods -- e.g., Brazilian iron ore, Chilean and Mexican
copper, and Bolivian tin and lead -- represents, with varying
degrees of seriousness, a mixture of political and economic
motives.*
Traditional Hungarian, Polish and Czech trade connections have been
subverted to serve the political as well as economic aims of the bloc.
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SIECIISIET US0FICIALS AM=. I
Promotion of tTitoisare in Satellites.
Staff Study No. 4 in this Economic Defense Poiicy.R view
:,eries deals with the n2ro otion of Soviet Bloc Disunity through
flexible Ipplication of Strategic Trade Controls. In addition
siderattions presented in the draft of that study, however9 the
t recent results of Titoiw should be examined.
In the ?BDeclarati on of the Governments of the Free Peoplmsa
Republic of Yugoslavia and the US3U ' summarizing the Belgrade
-and Brioni discussions of 27 May to 2 June 19559 the following
paragraph appears&
The furtherance of itual and international economic
cooperation, and the removal of all those factors in
economic relations which impede the exchange of goods
and hamper the development of productive forces both in
the world and within the national ecconomles.*
Subsequent official Tcgoslav co ent9 furnished to the U.
ambassador on the foregoing passage, contained the foLlowing
interesting observations &
iilhen questioned about the reference to the removal
of all those factors in economic relations which impede
the exchange of soodsw (reference telegram paragraph 11),
he replied main purpose t is paragraph was to break down
controls on shipments of strategic materials (Embassy
telegram 1066, paragraph 5) but implied agreement sight
have this result. He said they had in load the more
general purpose of increasing East4fest trade and remarked
that even the US was seeking new solutions of this
problem. He added that insofar as Yugoslav exports
curtain countries concerned, question of COCOM controls
e co ng fa-re-gran,, Belgrade,, No. 1058, June 2, 1955,
Unclassified. J
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3 E C IR IE T us c ' o s owzy
had scarcely arisen in the past since Yugoslavs have not
had enough exports but he implied thet If Yugoslav exports
to curtain countries should become a factor of economic
importance, Yugoal-ass -would not be board .by'.-cos rals.
He said that Yugoslavs had not'expected to be able
force Soviets to agree acknowledge separate roads to
socialism (Embassy telegram 1058 paragt?aph 10) and they
considered this passage one of most important in cogue
for its possible longterm results. They doubted it would
have immediate effects of importance In satellites, though
it was sure to be painful to Bakosi at al, but they had
hopes that it would eventually help to weaken Soviet
control over satellites and contribute to retraction
area Soviet domination**
The U. S. ambassadors a evaluation of the general results of
the Huaso-Tugoslar talks also is of interests
In spite of unsatisfactory character of declaration,
there is good reason to believe atmosphere of conference
widened rather than narrowed gap between Soviets and
Yugoslavs. Tito who was optimistic about visit is
reported from good sources to have been clearly dis-
illusioned re real Soviet attitude and is not so co
winced as formerly of Soviet peaceful intentions.
Tito also reportedly shocked at gone of coaeversations
at Brioni where soviet boasted World War I bad brought
communism to 2assia, World War II had added Eastern
Europe and China and World War III would see it spread
throughout world. This shocked Tito who above all
wants avoid World War III. Tito also reported as shaken
by frank statements of continuation of Stalinat line inside
ti89ElR.. Other high Yugoslav leaders regard Soviet is adore
=,ae-.Le and have doubts about their capacity to
41eesdeet?-negotiations with West. From me excellent
source I learn Tito apparently defended West most vigor-
ously at Brioni. Another high Yugoslavs offilial told me
o tae co g e egram, Belgrade, No. 1070, June 4, 1955,
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Tugoslavs read" tip lam their - e>ontion of Formosa
but finally gave in -beeauoe it eenef ent vrith their
general positj.on on China. Another source said Yugoslav
Government had no desire to see NATO 4islocated.s
Free-World controls -on trade with the Bloc and relstad *.ct,1ia y
control measures can have- coneiderablepelitieai impact when
proaptly and specifically applied in aae rgeemy 5ituatigns. The
Berlin Blockade of 19h8 i:s - a ease in..point9 and a somewhat sir 4.lar
situation arose last year in conneetien with increased road toss
for Western-use of autobahn roads leading to Berliao For the latter
case, the effective less of imposing free world restrictions on
(German) interzonal;trade was evaluated by HICOG in the attached
cable.
* e Incoming e egrana Belgrade9 No. 10669 June 39 19559
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State Incoming Telegram, Bonn., No. 2915,
April 6, 1955, Confidential.
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-2?
A recent New York Time article stated that., as regards Communist
Chin*,
* * * it is possible to envisage cgmpromise interim
settlements and it is to be hoped that the Eisenhower
Administration will use this lull to work out a coordi-
nated program in association with ,our Allies on these
points:
(1) Trade. The relaxation of the United Nations
embargo on exports of strategic materials, together
with a modification of the complete embargo on trade
between the United States and Communist China, is the
least difficult concession that the united States earald
offer.
Embargo List
The General Assembly could not repeal or modify
the embargo before its autumn sessions but individual
members could take practically everything except gars
and gasoline off the embargo list without waiting
until then.
Although the details are still top secret Zo-i-c7
the Itrshall Plan-countries of Europe, in fact; re-
lamed the application of the strategic embargo more than
a year ago. This was worked out in the secret Landon
Committee J5OCOMJ that draws up the lists of strategic
equip?ent and materials barred to the Soviet bloc.
There is a wide-spread demand for increased trade
with China, Communist or otherwise, not only in Britain,
Japan and West Germany, but also among certain business
groups in the United States. The State Department has
gone so far as to concede that trade concessions might
be a useful bargaining card.*
* Thomas J. Hamilton, "'Summit' Talks Awaited for Light on
Far East," New York Times, 12 June 1955, Sec. IV, p. 3.
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Senator Walter F. George has expressed similar thoughts recent1'
when he called for a change in the US stand against Japan's trading
with Communist China:
"Japan ought to be allowed and should not be discouraged
from reopening her markets in the great trading area of
China," Senator George said, adding that only goods with a
strict military application should be withheld from Red
China by the Japanese.*
That the USSR and the Bloc as a whole are receptive to the idea of
restoring normal trade relations, is evident from recent speeches and
comments by Soviet leaders. The following remarks were made by Krushchev:
"First, the prerequisite for improvement of relations
is to establish normal trade relations."
joncerning non-interference in the affairs of other
countrie,7 "This and normal trade which is mutually
profitable are essential."
"What we need is trade. Butter for manganese is black-
mail. We need real normal trade; that's the way to begin."
"Well, our heavy industry is sufficient but our economy
is developing and therefore our requirements are developing.
Our requirements in metals are developing. That branch of
heavy industry should develop in advance of others. Our
requirements are greater, particularly for metals. Of
course, this is for defense but mainly it is for peaceful
industry."**
*--Charles E. Egan, "East-West Trade Bid Rises; George Asks
Japan Outlet," New York Times, 12 June 1955, p. 1.
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ANNEX XIII
In his Message to the Congress in January, 1954, President
The national interest in the field of foreign economic
policy is clear. It is to obtain, in a manner that is
consistent with our national security and profitable and
equitable for all, the highest possible level of trade
and the most efficient use of capital and resources.
That this would also strengthen our military allies adds
urgency. Their strength is of critical importance to
the security of our country.
Great mutual advantages to buyer and seller, to pro-
ducer and consumer, to investor and to the community
where investment is made, accrue from high levels of trade
and investment. They accrue no less in trade from nation
to nation than in trade from community to community within
a single country. The internal strength of the American
economy has evolved from such a system of mutual advantage.*
iE _Ciarence B. Randall, A Foreign Economic Policy for the
United States, Chicago: University of Chicago Press,
197, page.
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ANNF,X XTV
Decreasing free ,%'orld Dependence on East-West T 4a
. ~ I I w? A ITI I I I I 11
Part
t~ae:nent of i enneth it. Hansen, Assistant Deputy Director for Mutual
Defense, -ssistar.Lce Control, Ioreigh Operations Administration, jin "East-
on Foreign 'Lffairs. house of 3epresentptives, 83rd Cong., 2d Session
,II II I I1~ }
on mast-'est.T'ra.de, 16 February 1954, pp. 8-12, Charts Nos. 2-5, cgpy
attached.
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Part 2
Excerpt from "Conclusions" of Economic Intelligence Report,, Long-Run
Soviet Economic Growth, CIA//RR 53, 23 December 1954. pp. 56-58:
A basic assumption of this report is that international trade will
increase only slightly and will not contribute to the growth of the USSR
any more than it currently does. Ifs however, the Soviet policy makers
decide to supplement the agricultural output of the USSR by imports to a
significant extent, it is possible that the rate of growth of the Soviet
gross national product could be considerably higher. The level to which
it would grow depends on the extent of the imports and on the terms of
trade involved. It is, however,, important that the intelligence community
be alert to significant increases in Soviet imports, especially of agri-
cultural commodities.
Another basic assumption of this report (that the cold war will
continue at about the present level of intensity) is translated into the
proposition that expenditures for defense will increase during this period
at the rate of 2.75 percent per year. These expenditures would be
primarily for the maintenance of the current military strength in an
up-to-date condition. If. however, defense expenditures are kept at the
current level or reduced., it is possible that total production in 1975
would be higher than estimated, How much higher would depend on the
extent of the out in defense expenditures.
It should also be pointed out that the contributions to the
growth of /he USSR made by the Satellites have not been explicitly
considered. These effects have., however, been considered implicitly
to the extent that they have affected Soviet growth in the past.
Finally, it should be noted that the projections of Soviet output
in 1975 are limited to the extent that all economic projections over a
long period of time are limited. They are based on what is known about
the past developments and present conditions and what can be deduced
from this information and reasonable assumptions about the future.
They are limited to the extent that currently unknown future events
affect the quantities which this study attempts to estimate.
A rough comparison of the projected gross national product of the
USSR with that of the US is helpful in assessing the meaning of estimates
developed in this study, This comparison cannot be precise, because it
involves not only all the inaccuracies of projecting both the Soviet and
the US data but also the inaccuracies of international comparison.
The factor inputs projections of Soviet gross national product and an
estimate of US gross national product are compared in Table 16* and
Table 16 o ows on p. 58 /,47
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Figure 7?* i,hile the US estivate grows from 0350 billion in 1953 to
$735 billion (3.4 p,,rcent per year), the best estimate for Soviet gross
national product grows from :'103 billion in 1953 to 4'290 billion
(4.2 1: rcent per year), assurmin ; low cansumption, and 4P'250 billion
(4.2 percent per year), assuming high consumi_tion,for 1975. The
difference between t_`33 two gross national products grows from 4247
pillion in 1953 to 4'422 billion (low consumption) and to X482 billion
(high consumption), while the soviet gross national product expressed
as a percentage of the US increases from. 29 percent in 1953 to 39 percent,
assuming low consumption, and 34 percent, assuming=, high co nsumptirn, 2n
1975. It is also interesting, to note that during this period the
average annual increase in the difference between the US and Soviet
gross national products is growing much faster (between 2.7 percent
and 3.1 percent) than the percentage relationship between the two
(between 0.7 percent and 1.3 percent). In summary, the gap (in
absolute terms) between the US and Soviet gross national products is
expected to increase, even though the Soviet gross national product is
expected to become a larger percentage of the corresponding US
value by 1975.
%, Follo: ing p. 58 LOmitte7d
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Coraparisori of the Gross Lational I roducts
of the USSR and the US
1953 and 1975
USSR
US
Difference USSR as
(Billion
(Billion
(Billion Fro7_-ortion
1951
1951
1951
of US
Year
Dollars) a/
Dollars
Dollars
Percent
.
103
350
247
29
1975
313
735
422
43
USSR, lo:: con, ;ur ption 253
735
482
34
USSR, hi h corcu;-, tion
iJJR, los. cor: tior ,
most probable 290
735
445
39
i,i3n, Li h corInu.rnlaior:,
o.ct probable 250
735
485
34
a. i)ollar v..lues for Llic ' rosy national r rouuct of the U;3 R are
(mriveo on the basis of 10 rubles equal one dollar.
b. USSR esti ates for 1;'75 are factor ini uts estirates. US estir ate
for 1;75 is bored on ciicculentiful. There was a marked increase in the number of trade
agreements between the Soviet bloc and Free World countries.
Soviet bloc missions were active in establishing new contacts
in various parts of the Free World, and numerous missions from
the outside were admitted into Soviet bloc countries. The U.S.S.R.
participation at trade fairs increased sharply in 1954, although
participation of the satellites decreased slightly. The trade
fair activity seemed to have been aided less at increasing sales
than at entiancing the prestige of tho Soviet bloc in Free World
countries.
To a greater extent than previously, Soviet bloc nations appear
to be increasing their efforts to develop economic relations with
underdeveloped Free World countries in Asia -- and to a lesser
degree, in Latin Amcrica and Africa. The trade of the Soviet bloc
is still predominantly r,r_ti? Western Europe, and will probably con-
tin~te to be in the future, but these developments in areas outside
Europe are significant. In addition to expanding its trade with
these areas, the Soviet bloc has been making numerous offers of
technical aid. Of course, many of there countries are sources of
food and raw materials, but the increased attention shown them is
probably due as much to political as to economic considerations.
The recent Soviet reemphasi s of the primacy of heavy industry
has been conpied with reports of some cutbacks in U.S.S.R. import
orders in Western countries, primarily in the consumer goods field.
The reported cuts could well be attributed to the pa ,dents problem
.':Mich the U.S.S.R. has, having expanded its imports much more
rapidly than its e:,-ports, and not necessarily to any change in
Soviet foreign trade policy or internal economic policy.
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Part 4
"The Implications of East-West Trade Controls," from Staff Papers,
Presented to the Commission on Foreign Economic Policy, February 1954,
pages 1+47-1+50:
EFFECTS IN THE EUROPEAN SOVIET BLOC. In trying to measure what
effects our existing security trade controls have had upon the
European Soviet bloc, a few general facts must be taken into
account. Foreign trade plays a relatively minor role in the
build-up of Soviet bloc strength. Foreign trade accounts for about
one percent of the bloc's gross national product. 11oreover, as
long as the Soviet bloc maintains its present political orientation
and totalitarian organization it will not allow itself to become
very dependent on trade with the free world. The Soviet bloc's
objective is to achieve invulnerability to outside pressure. Accord-
ingly, by and large, its military and industrial machine will be
built and maintained on its own resources. It can achieve this
aim without great cost because it has abundant natural resources,
and it is able to shift its productive facilities and manpower
without the inhibitions which exist in a private enterprise economy.
On the other hand, the low total level of the Soviet bloc's
imports from the West tends to understate the relative importance
of the products which the bloc has obtained. The ingredient for
industrial growth which the Soviet bloc seems most to have lacked
in the past has been mechanical and engineering skills. These
skills are embodied in the goods the Soviet bloc has been most
anxious to obtain -- machinery, machine tools and the like. The
Soviet bloc also has lacked copper, natural rubber and industrial
diamonds. Limitations on the export of these tools and materials
probably have slowed up the industrial growth of the Soviet bloc
to a modest extent during the past few years. But it would be
too much to say that these measures have, or ever could, really
hurt the over-all Soviet bloc economy in any vital way.
One more effect which our restrictions have had deserves a
brief co,-.lent. With self-sufficiency as their goal, the Soviet
bloc has needed no encouragement to try to detect the points of
vulnerability in its own industrial machine. Hovwever, it most
be presumed that our controls have assisted the bloc somewhat in
the process and have led to its placing even higher priorities on
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repairing vulnerable points in its economy. This is an unavoidable
adverse by-product of any control system.
Effects on Communist China, Communist China is a more primi-
tive society than the rest of the Soviet bloc. At this stage in
its development, it is more impervious to outside economic pressure;
its demands for industrial goods are lower and its reliance on
foreign trade to maintain its existing economy is less. Nevertheless,
our trade controls have forced Communist China to draw more heavily
on the Soviet Union for its industrial needs, and have probably
immobilized some Western industrial equipment useful to the Chinese.
Communist China's projected industrial growth will steadily
increase its demand for products available in the West. Accordingly,
this growth probably would be retarded somewhat by the retention
of existing controls over trade with that area. If the present
high level of restrictions on exports to Communist China were
changed to a total embargo, this of course would affect Communist
China slightly more than the existing level of controls and'would
increase further her dependence on the European Soviet bloc.
Effects on Western Europe, The place of East-West trade in
Western Europe's economic life has gone through a number of stages
since the end of the war. Immediately after the war, there were
absolute shortages in the free world for some critically important
commodities, such as raheat and coarse grains. As far as Western
Europe was concerned, this absolute shortage was aggravated by
the fact that, even when the goods were available in dollar areas,
Western Europe's lace- of dollars prevented their buying the products
in sufficient quantities. In this early postwar period, therefore,
the wheat, coarse grains, coal, timber, and other necessities which
came from the Soviet bloc -- marginal amounts in some cases --
assumed great importance in the eyes of Western Europe's govern-
ments.
For some countries, the critical commodities supplied by the
Soviet bloc were especially important. Norway, for example, imported
and still imports from the Soviet bloc about one-fifth of the bread
grains consumed in the country. Sweden imported and still imports
about one-third of its coal from Poland. The United Kingdom still
imports about one-tenth of its timber from the bloc.
However, the problem now has changed. Coal, wheat, timber
and other basic commodities are now physically available in ample
supply in the free world and at prices which are equal to or lower
than Soviet bloc offers. But other aspects of the problem remain,
or have been intensified.
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One of the remaining problems has to do-with--the balance-of-
payments position of the Western European countries. East-West
trade controls have somewhat aggravated the balance-of-payments
problem of Western Europe-by discouraging larger exports from the
Soviet bloc and forcing Western Europe -to buy more from--dollar
sources. But this impact can be exaggerated. In the first place,
it is not clear how much more Eastern Europe would have been willing
to ship even under the most favorable circumstances. In thee-second
place, as long as the production facilities of Western Europe are
operating at full capacity, Western Europe would have paid for
what it bought, in effect, largely with machjr~ery;wand industrial
materials, that is, with products and resources which earned or
saved dollars for them-when they remained in Western Europe. The
net dollar cost to Western Europe of East-West trade controls,
therefore, must be calculated modeatl,y, probably representing on
the order of one hundred ortier-hundred millions a year. As idle
capacity. develops in Western Europe, the adverse balance-of-pay,
ments effect may be greater. In any case, until the balance-of-
payments position of Western Europe is reasonably secure, this
factor will have to be taken into account.
Another factor in the minds of Western European countries has
been their dependence upon the markets supplied by the Soviet bloc.
To be sure, no Western European nation has a very heavy over-all
reliance on Soviet bloc markets. The highest relative'dependence is
registered by Finland and Austria which in ]95 sold 20"and 11
percent respectively of their total exporteffto the bloc. But the
importance of the problem is much more acute in individual industries.
Norway relies heavily on the Soviet bloc to dispose of the product
of two major interdependent industries, fishing and--fats and oils;
Finland, Austria, Sweden and Italy would have a difficult problem
in finding alternative markets for their machinery, wince in 1952
they marketed 78,.35., 18, and 10 percent respectively of their.
exports of that product in the Soviet bloc. A number of cottitries
outside Western Europe are in the same position.
The present dependence of Western European countries on the
Soviet bloc markets is aggravated by two fears -- the fear that
trade barriers will rise among the nations of the Western world,
particularly the United States, and the fear of a depression in
the Western *prld. Each country, while recognizing the essential
undependability of the Soviet bloc as a future buy0l%p also takes
into consideration the risk that the markets of its Western trading
partners may shrink.
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Closely related to this problem is that of the political
security of the governments in power in Western Europe. Each nation
of Western Europe has a pro-Communist -- or at any rate a neutralist --
group within its borders. Each government must take into account the
possibility that if unemployment develops within its boundaries while
East-West-trade controls are being imposed, the opposition may threaten
its position. The threat varies from country to country but is present
in some degree in virtually all of ther.
The political aspect of East- W ast trade controls has become
especially important in a number of countries as pressures from the
United States have become more evident. With the passage of the
Kern Amendment, forerunner of the Battle Act, Western Europe felt
that the United States was attempting to Lu' stitute coercion for
cooperative agreement among sovereign nations. This issue tended to
submerge the real merits GIf the East- West trade question. Virtually-
every foreign government, no matter how predisposed to the maintenance
of controls over East-West trade, tends to resist any United States
pressures which seem undu4y coercive, even when they agree with, and
are cooperating in the achievement of, the objective which the United
States is seeking.
Effects on non-C.9Mni st Far Eastern Countrid The effects of
East-West trade controls in the Far Baet have fallen largely on Hong
Kong and Japan. Hong Kong's entrepot tirade hae fallen substantially
with the application of strict export controls, Unemployment has
become something of a problem in the colony and its foreign exchange
earnings have declined.
The impact of the controls on Japan,_is,more problematical. Japan's
trade with the Chinese mainland before the war -- at a time when Japan
controlled Manchuria -- had been about one-fifth of.its total trade,
and had provided.it with cheap sources of raw materials and a ready
market for manufactured goods. These advantages would have been
greatly reduced in any case. on the initiative of the Chinese Communist
government; it is likely, however, that Japan's severe controls
somewhat heightened the degree of the trade decline and somewhat
aggravated Japan's acute payments problem.
The net effects -- free world vg,; bloc, To provide a judgment
as to the net effect of existing East-West trade controls is largely
to compare noncomparable factors. In military and industrial terms,
both sides are slightly hurt by the controls and the Soviet bloc
is probably hurt more than the free world.
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 Approved For Release 2002/08/20 : CIA-RDP63-00084A000100200011-2
SECRET
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However, the cost of maintaining these controls in the free world
riust also be measured in other terms as well. The controls clearly
strain somewhat the political ties among free-world countries and
contribute slightly to balance-of-payments and employment difficulties
on our side. Our problem is to ensure that this strain does not, in
the end, affect the strength of the free world's military and economic
position.
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