PROCESSING AND MANUFACTURING

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP67-00059A000100060001-3
• Release Decision: RIFPUB
• Original Classification: K
• Document Page Count: 58
• Document Creation Date: November 17, 2016
• Document Release Date: August 11, 2000
• Sequence Number: 1
• Content Type: MISC

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E C R F T 168;,
February 9, 1951
Report to the President
on
U.S, Policies and Programs in the Economic
Field which may Affect the War Potential of
the Soviet Bloc
t OR fEst a(
DETARTM NT OF STATE
S E C
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S E C R E T
INDEX
Introduction . . . . . . . . . . . . . . . . . . . .
Part II: Recommendations . . . . . . . . . . . . . . . + 4
A - Recommendations on Substantive Measures . . . . 4-
B - Rocorsmondations as to Organization . . . . . . . . 10
Part III: Bases for Conclusions and Recommendations . . . . 11.
A Vu:inerab_lity of the Soviet Bloc to Existing
and Tightened Western Economic Controls . . . . . 11
B -- Economic and Political Aspects of Trade of
Non-Soviet Countries with the Soviet Bloc . . 15
C - Techniques for Denying Resources to the
Soviet Bloc . . . . . ? . . . . . . . . . . . . 19
1. Complete Embargo . . . . . . 4 ? . . . . ? . . 19
2. Export Controls . . ? . . ? .-o . . . . ? ? 22
3. Preclusive Operations e ? ? e. o r a ? 2
4. Financial. Measures . e . . 31
5. Blacklisting . . . . . . . . . . . . . . . 35
6. Control of Technology . . . . . . . . . . . . 35
7. Shipping Controls . . . . . . . . . . . . . . 37
? ? . . . . 3?"
D - Positive Programs for Economic Strength . . , . 39
SE CRET
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S E C R E T
,I]KTRO DUCT ION
As Soviet aggressive intentions have become more and more evident,
the United States, and under its l-?adership other important nations of
the free world, have progressively adopted stronger and stronger measures,
both positively to build up their own strength and negatively to reduce
the strength of the Soviet orbit. The establishment of the North Atlantic
Treaty Organization, the European Recovery Program, and improved inter-
national relationships in the fields of trade, finance and economic
development, have helped constructively to create strength in the free
world. Negative measures to impair the Soviet war potential began with
the imposition by the United States, in March 1948, of export restrictions
or prohibitions on the shipment of strategic goods to the Soviet Union and
the satellite countries of Eastern Europe. In the following months and
years these controls were progressively tightened, and, through inter-
national negotiation, were extended to cover exports of similar items
from astern European countries. Today, an important segment of the
free world's exports to Soviet-dominated areas has boon prohibited or
brought under control.
The invaaLon of South Korea by col.,munist forces served as an un-
mistakable warning to the free world that it must accelerate its efforts
to develop a preponderance of military and economic strength over that
of the Soviet bloc. The defense mobilization program of the United States,
Canada and Western Europe is a constructive response to this warning. It
has also been necessary -to step up our efforts to impair the strength
of tho Soviet world through the intensification or extension of controls
over its trade and financial relationships with outside areas.
The present report has boon prepared with a view to recommending
the measures which should now be adopted, or continued, to weaken the
war potential of the Soviet bloc consistently with the objective of
building greater economic end political strength in the free world.
As a basis for its conclusions (Part I) and recommendations (Part II),
the report in Part III surveys the vulnerability of the Soviet bloc to
western economic controls, analyzes the position of the free, world countries
in their trade with the Soviet bloc, and ex,:emincs the effectiveness and
practicability of various control techniques that are available.
As used in this paper, the term "Soviet bloc" includes the USSR,
Bi.Llgaria, Rumania, Hungary, Albnnia, Poland, Czechoslovakia, the Soviet
zone .of Germany end Coumunist China.
PART I
{
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S E C R E T
PART I
CONCLUSIONS
The following are the most important conclusions reached after
reviewing present policies and programs and appraising possible
additional lines of action:
1. The economy of the Soviet bloc is, to a large extent, free
from dependence on trading relationships with the non-Soviet world.
Segments of its economy, however, and particularly some closely related
to the war-making potential, are susceptible to external pressures
These vulnerable spots are, broadly speaking, in the fields of machinery
and equipment, precision tools, anti-friction bearings, electronics,
certain non-ferrous metals, rubber and certain grades of essential
minerals. Selective controls directed at these vulnerable spots can
achieve most of the results that could be achieved through a complete
embargo.
2. The volume of trade between Eastern and Western Europe is
today at about 1+0 percent of tho pre-war level; the strengthening of
controls proposed in this report will mean a further reduction in this
trade. A diminution of trade as'a result of this process of strengthening
international controls is. desirable, provided adequate provision is made
to assist the non-Soviet world to meet the resulting economic dislocations
and provided the shrinkage is effected through programs which maintain
the political unity of the West,
3, It is not at this time in the best interests of the free world
to pursue a policy of complete embargo against the USSR and its European
satellites. (The policy with respect to exports to China is dealt with
in recommendations 1 and 7). Without significantly increasing the not
economic advantage to the West, a complete embargo might well.. serve to
orient the European satellites, particularly Poland and Czechoslovakia,
even more rapidly and more deeply toward the USSR; it would make more
difficult the settlement of the problems of Germany and of Austria;
it would increase the risk of our having to resort again to the Berlin
airlift; and, if urged by us, it would raise major doubts in the minds
of the other free nations as to the sincerity of our objective of a
peaceful settlement of the existing differences with the USSR.
4. The offoctivonoss of external pressures on, the SLivict bloc,
to a large extent, depends upon the degree of cooperation of the members
of the non-Soviet world. There are, however, limitations on the degree
of control other governments can undertake. Many governments are limited
in the extent to which they can take political decisions against the
Soviet bloc,
SECRET
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Soviet bloc, some by the presence of large indigenous Communist parties,
some by public demand for an official policy of neutrality, and some
by the fear of direct military reprisals. In addition, many countries
of the free world are dependent in varying degrees on trade with the
Soviet bloc. Complete stoppage or a significant decrease in this trade
would result in serious economic dislocations, particularly among the
countries of Western Eur. ope.
5, The economic dislocations could be mitigated to some extent
by gradual road justmcnts which would require the development of alterna-
tive sources of sapoly and the opening up of markets in the Wes"Gern
world for goods now manc~tod in the Soviet bloc, However, these readjust-
ments would require major alterations in some of the domestic policies
of the U.S. and other countries. Domestic policies such as those
relating to the export of products in short supply, the protection of :.e.
national maritime fleets and the1rotection of domestic industries would
have to be readjusted to fit the concept of a self--contained and
mutually re-.enforcing Western world,
6:,. Despite the cost, the principal nations of the non.Soviet
world are cooperating and can be expected to cooperate further in a
series of measures, short of full--scale economic warfare, which can
material l.y retard - the building of the Soviet war potential. It is
important, however, in order to increase the likelihood that other nations
will expand and. strengthen their existing controls, that the concept of
"economic defense:" as distinct from "economic warfare" be ma,inta,ined.
Certain neutral governments will not participate fully in any case, but
to some, extent their lack of cooperation can be offset by special measures.
7. Western Germany, although agreeing in principle to the, imposi-
tion of Bblective controls, is faced with formidable enforcement problems
in making such controls effective, Unless measures are devised for
enforcing controls on exports from Western Germany, particularly illegal
traffic and transshipments, the, effectiveness of Western controls
generally will be greatly impaired.,
8. As many of the measures employed in World War II to damage the
German war ocononiy are of limited. usefulness against the relatively
self-sufficient Soviet bloc y now techniques for exploiting the latter' s
weaknesses should be constantly sougrit, These techniques should be
designed not only to weaken the Soviet war-making potential, but also
to place an increasing strain on economic and political relations within
the Soviet bloc. Because of their security aspects, certain techniques
in this and related fields should be closely guarded and not dealt with
directly as part of the more traditional measures.
S E C R E T
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9 Plans should be formulated and made ready for implemonta,uion
to deal with a situation of full--scale economic warfare in the event
the Soviet bloc initiates such a poi.-.--y, or in the event that develop-
ments make it advisable for the non-Soviet world to adopt this course.
10. The economic strength and cohesiveness of the free world. will
dote;rrain(,,, in large measaros ita wi:IJ..ingnes and ability to take
adequate moasuros against the Soviet bloc. Accordingly, the various
aspects of our f.,)rcigri cconomLc pcl Lcy which arc aimed at the, positive
goal of buiJ.ding f'roo World s?reing rh 77,i,,ou:!.;? be adapted to the Ica event
situation and v.u.gz:.on ted , k l:::g the pr-,grams which lend ti:erna e lveo to
this objective, aid whicb an be uL 1.i ec to dovel.)p the a3.tcrrative
sources of supply, arc our var1ouas ori.1: and grant programo, Point Isi, and
the programs for trade barrier reduction in the free world.
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S,_ C R E_T
4
LAR,T TI
E_OMMENDATIONS
It is not possible to make final recommendations covering
the entire subject under review without further study and
consultation with other agencies of the Government. However,
the following recommendations are submitted with a view to
setting a pattern.for immediate action and establishing
machinery for carrying forward the consideration and develop-
ment of policies and programs. Because of the interests of
certain other departments and agencies of the Government in
this subject, and because some aspects of it have been before
the National Security Council, it is suggested that these
recommendations be referred-to the Council for review and
consideration by it and other appropriate departments and
agencies.
A - RECOMMENDATIONS ON SUBSTANTIVE MEASURES
Export Controls
1. The U. S. Government should, pending further
developments in the U.N., continue to prohibit all exports
to communist China, Manchuria and North Korea, but should
apply licensing controls so as to permit Hong Kong and
Macao to procure from U.S. sources imports for local uses
and for transshipment to non-communist destinations,
2. The U.S. Government should extend its present
export licensing system over trade with the Soviet Union
and its Eastern European satellites by requiring an export
license for all products proposed for shipment to these areas.
In licensing such exports, the U.S. should continue to
prohibit exports of all items of significance in the atomic
energy field, all arms, munitions and implements of war, all
items which are determined to be in short supply, and all
items which if exported would contribute directly to the
Soviet war potential (the so-called I and I-A lists). The
U.S. should normally deny the issuance of licenses for all
items which, if exported in significant quantities, would con-
tribute to the'Soviet"war potential (the so-called'I--B list).
All -other items should be kept under coi sta^tt survoill&nce throuf
the. comprehensive licensing system recommended above-, Specific
items should be added to the list of commodities which are --.
restricted
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restricted. or prohibited on a selective basis and in
accordance with established procedures and existing
criteria for control, whenever such action is justified
for short supply or security reasons.
3. The U,S, overall security objectives should be
controlling in the implementation of Section 117(d) of
the Economic Coo eration Act of 191+8 and of Public Law
843; Section l30& (the Cannon Amendment). Accordingly,
although the U.S. Government should prohibit or restrict
shipments of important strategic goods to friendly coun-
tries, in accordance with policies and procedures which
have been laid down by the National Security Council, if
necessary to prevent the frustration of U.S. security ex-
port controls or the misuse of U.S. economic or financial
assistance, action should be taken in such a way as not
to endanger other U.S. security objectives of equal or
greater importance.
4. The U .S. Government should continue to provide
vigorous leadership in the strengthening of the security
export controls of the Western European countries, recog-
nizing, however, that considerations of political feasi-
bility, military risk and economic cost make it undesirable
to press for European controls completely parallel to
those exercised by the UGSO The U.S. should continue to
press for (a) embargo to the Soviet bloc of scarce
materials or equipment needed for'Western defense pro-
grams, (b) international agreement to embargo or limit
shipments of additional goods which are not yet fully
controlled but have already been recognized by most of
the Western European countries in the Coordinating Com-
mittee in Paris (COCOM)l/ to be of strategic importance,
(c) more effective international controls over trans-
shipments and illegal trade, (d) maximum cooperation by
countries, such as Sweden and Switzerland, which do not
at present participate in multilateral export control
arrangements, (e) measures to minimize past and future
l/YInadditiono the United States and Canada, the Con-
sultative Group and its Coordinating Committee include
the German Federal Republic and the following NATO coun--
tries: the United Kingdom, France, Italy, Belgium,
Netherlands, Luxembourg, Norway and Denmark.
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trade agreement commitments to supply gods of strategic
importance, (2) measures to promote coordination among
the Western European countries in their trade agreement
negotiations with the East, and (g) improved organizational
arrangements in COCOM and in the NATO to further these
objectives.
5. The U.S. Government in association with the
British and French Governments should request further
action by the Federal German Republic to ensure more
effective control over the illegal trade and transshipment
of goods agreed for control in COCOM.
6. The U.S. Government should seek the further co-
operation of the American Republics and where necessary
that of other countries in applying export controls to
direct shipments and transshipments to the Soviet bloc
of items of strategic significance or in short supply,
7. The UOS. Government, in view of the Chinese
Communist aggression in Korea, should press for the
application of effective controls on exports to China.
Its efforts through the United Nations should be directed
at achieving agreement on economic sanctions by the maxi-
mum number of countries; if necessary to achieve a wide
measure of agreement, such sanctions may be confined to a
list of goods including atomic energy materials, arms,
ammunition and implements of war, petroleum, and industrial
equipment useful in producing war materials,
8. Multilateral arrangements among free world coun-
tries for the equitable distribution of materials in short
supply should be used by the U.S., to the greatest practi-
cable extent, to deny or limit shipment to the Soviet bloc,
Preclusive 0 erations
9. Arrangements for governmental procurement of
commodities in short supply, including government-
to-government purchase agreements, should be designed in
such a way as to deny or limit shipments to the Soviet
bloc, to the extent that this would not interfere with
the primary procurement purpose of the arrangement.
10. To the extent
S E C R E T
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S E C R E T
10, To the extent that export controls, allocation
and normal purchase mechanisms do not sufficiently limit
the export to the Soviet bloc of materials in which the
bloc is vulnerable, the U.S., after consultation with its
major allies, should engage unilaterally or jointly in
preclusive buying and the preemption of productive
facilities to achieve this objective, Preclusive buying
operations should concentrate in the first instance on
such items as industrial diamonds, jewel bearings and
mica, rather than bulk items, Efforts to preempt indus-
trial capacity should be directed primarily at capacity
capable of producing critical manufactured products,
particularly those requiring large amounts of skilled
labor, in countries which do not voluntarily prohibit the
movement of these products to the Soviet bloc.
Financial Measures
11., The Strategy Board referred to under Section B
of these recommendations should determine the point at
which export controls have become so restrictive and other
economic and political relations so curtailed that block-
ing of the dollars and dollar transactions of the USSR
and its satellites would be appropriate,.
12, Continued study should be given to the subject
of gold with a view to evaluating measures of interna-
tional cooperation which might prove fruitful in reducing
the ability of the Soviet bloc to utilize gold.
B_l.a,cklisting
13. It would be undesirable at this time to publish
a "blacklist" or "proclaimed list". However, to assist
in tightening the enforcement of existing export and other
controls and as a preliminary step in preparing a more
formal "blacklist'', arrangements should be made to develop
a central file of information on individuals, firms and
corporations suspected of evading U.S. or international
controls.
14. The determination
S' C R E T
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S E C R E T
14. The determination whether to publish a "blacklist"
at a later date should be made after careful consideration
by the Strategy Board referred to under Section B of these
recommendations,,
Tec lnolo y
15.. The U.S. should sponsor measures to strengthen
security controls of plants.and factories employing ad-
vanced technological processes.
16. The U.S. should press for more effective action
by COCOM countries to implement their agreement that "the
object of the embargo or quantitative controls should not
be defeated by the export of technical assistance, design
data, manufacturing technique, and specialized tools for
making any controlled items."
17. The U.S. should develop further programs to
prevent the export of advanced technological information
to the Soviet bloc, including export achieved through
the movement of persons, and should enlist the coopera-
tion of other countries in this effort. These programs
should be devised in such a way as to create the least
possible impediment to the exchange of such information
among the nations of the free world,,
Shipbiriz
18. The U,,Sa should seek coordinated action on the
part of the important maritime powers to prohibit the
carriage to Soviet bloc destinations of all goods which
are the subject of embargo,
19. The U.S. should explore the feasibility and
desirability of instituting, in cooperation with other
major maritime powers, a system of ship warrants and of
control over the issuance of ship stores in aid of our
controls on the movement of prohibited goods.
Decreasin Reliance on Trade with the Soviet Bloc
20u The UOS., with the aid of friendly countries,
should pursue vigorously programs for increasing production
of those
S E C RE T
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SEC..RET
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of those basic materials that are now exported by the
Soviet bloc, These programs should be carried out as
part of our general program of procurement and develop-
ment
21. The bargaining position of friendly countries
which now rely on the Soviet bloc for essential materials
should be strengthened by making alternative sources for
these materials in the free world more readily available,
To this end, policies governing U0S. export controls on
short supply items should be so designed as not to fore-
close a shift to U.S. sources by friendly countries,, In
addition, a fund should be established, possibly out of
ECA appropriations, to make possible the extension of
financial aid to friendly countries to offset partially
any increases in cost involved in a shift from Soviet
bloc to free world sources, whenever such a shift would
carry net advantages for the West. Pending further con-
sideration, it is estimated that aid for these purposes
would involve something less than $100 million annually,
22. A more comprehensive analysis than has so far
been possible should be made to determine what specific
products or services now being offered by the free world
to the Soviet bloc couid be diverted to other countries
of the free world. This analysis should point out (a)
how productive capacity might be reoriented to provide
materials needed by the free world and (b) to what extent
the diversion will require the reduction of such obstacles
as high tariffs, quotas, and shipping discrimination,
Further study should also be given to the need for govern-
ment purchasing of goods abroad now marketed in the Soviet
bloc wMch can only be disposed of in the free world at a
loss.
S E C RE T
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B. RECOTM!.ENDATIONS AS TO ORGANIZATION
1. Pending further consideration within the
Executive Branch, the operating responsibility- for
carrying out approved policies should rest with the de-
partments or agencies normally having responsibility in
the particular field of action in question. Iii connec-
tion with its operating responsibilities, it is expected
that each agency will provide the necessary staff work
for the development of suggested operating programs
within its assigned field.
2. To formulate overall operating programs, central
staff work and analysis will be required for the purpose
of coordinating and evaluating individual agency proposals
as to the most promising course of action, This analysis
must take into account the probable effects of proposed.
economic defense measures on the economies of friendly
and neutral countries whose cooperation is necessary to
make them effective. It should also consider the possibi-
lities of using foreign assistance and other positive
foreign economic programs to reinforce economic defense
objectives. This centralized staff work should be organized
and directed by the Chairman of the Board referred to in
paragraph 3 below, who, for completed staff work, should
make maximum use of the facilities of the departments and
agencies having responsibilities in these fields.
3, The operating programs in this field must be
carried on in terms of and in a manner consistent with our
foreign policy objectives. The operations in this field
must be coordinated with other programs and efforts in
the field of foreign policy. It is therefore recommended
that an Economic Defense Strategy Board be established
under the Chairmanship of the Department of State. Other
agencies to be represented on the Board should include the
Departments of Treasury, Defense, Commerce, Agriculture
and Interior and the Economic Cooperation Administration,
the Central Intelligence Agency, and the Office of Defense
Mobilization. This Board should consider proposed econ?-mic
defense programs and their relationship to foreign policy
objectives and-other foreign operations; should aid in'
coordinating the operations of the various agencies; should
assist in evaluating the effectiveness of operating programs;
and should stimulate the development of effective policies
and programs, The Board should recommend policies to govern
operations in this field.
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S E C R E T
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BASES FOR CQNCLUSI ONS AND RECO11YIENDAT IONS
A - VULNERABILITY OF THE SOVIET BLOC TO EXISTING AND TIGHTENED
WESTERN ECONOMIC CONTROLS - ~-`
In reassessing the vulnerability of the Soviet bloc, the
Depaz-tm.cnt of State has had access to the intelligence reports
of the Defense Establishment and other relevant sources, It is
believed that the resulting esrtimate, set forth in summary form
below and in greater detail in Appendix Ay represents the best
judgment of the United States Government.
The Soviet Policy of Self-Sufficiency
The Soviet bloc has always pursued a deliberate policy of
reducing to a minimum its vulnerability to outside economic
pressures.
Not only does the Soviet Union have extensive natural
resources but each of the Five-Year Plans has had as a principal
objective the building up of Soviet productive capacity in
deficient areas, even at the cost of great wastage of resources
and energies. The USSR is today capable of meeting within its
own boundaries the bulk of its operating requirements in every
major area of production. Where shortages of particular com-
modities continue to exist, a systematic attempt has been made
to provide a cushion against an interruption of outside supplies
through extensive stockpiling.
Soviet emphasis on self-sufficiency has been extended to
the satellite countries; although the dependence of these countries
on the West remains substantially greater than that of the USSR
itself, this dependence has boon greatly reduced as compared with
pre-war.
The Chinese Communists have, given every indication that they
too will follow a policy of enforced economic isolation from the
Western world, However, factors of geography and economic
structure seriously restrict the degree to which China can be
integrated with the rest of the Soviet bloc,
The Nature
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The, Nature and Extent of Soviet Sphere Vulnerability
Despite strenuous efforts to develop self-sufficiency., the
Soviet bloc is still dependent to an important degree on the West
for the rate at which it can sustain its long-term growth. The
Soviet Union itself, most of the European satellites, and China,
are in relatively early stages of industrialization. All of
them need from abroad industrial equipment, especially high
quality machines and instrumonts, some vital raw materials and
semi-finished goods, "pilot p.l..ants", and technological
i.nf ormati.on.
The Soviet Union and its satellites are also short of a
number of co,nmodities that are nuce ysary for the operation of
their economies at the cur. rent level. While substantial stock-
piles of these commodities have been build up (probably in most
cases at least a year's requirements), the relief that these
would offer in case of sn interruption of imports would b e
temporary.
Th.e entire bloc constantly needs replacement parts for the
vast amount of foreign equipment acquired in former years. It
is Estimated that approximately 35 percent of the machine tools
in operation in the USSR are western built,. The bulk of this
equipment is now over five years old and is already beginning
to present serious maintenance problems because of lack of spare
parts. Tho probl.eem is further complicated because most of this
equipment is of an especially complex type, obtained from abroad
bocatuse of Soviet inability to produce it domestically, For
example, it is estimated that 75 percent of Soviet specialized
machine tools are of foreign make. The constantly growing spare
parts problem is therefore concentrated in the weakest and most
important sector of the Soviet-orbit industrial establishment.
The importance that the USSR and its satellites attach to
the continuation of supplies from abroad is directly evidenced in
a number of ways. It is estimated that in 1950 the USSR and its
satellites, including China, imported roughly 01-7 billion worth
of goods from the outside world. This amount is little more than
1 percent of the aggregate output of the Soviet bloc. However,
except for the China trade, these:. imports consisted vary largely
of items essential for military preparedness -.nd for the expansion
of the industrial base of the eastern cou.ntrlcs. They included,
in particular, prototypes which embody Western technical_ improve-
ment.
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Another indication of the importance of supplies from the
West is the fact that the USSR and its satellites have shown
great official sensitivity to western export control policies.
Moreover., they have made strenuous efforts to obtain controlled
items. Irregular and covert eastward shipments have assumed
large proportions and range from complicated third country deals,
frequently utilizing the facilities of free ports, to smuggling
in knapsacks. Such imports are necessarily expensive because of
circuitous hauls, price gouging, and middleman commissions and
therefore strongly indicate pressing Soviet and satellite needs.
Specific Vulnerability Targets
Existing controls over exports to the Soviet bloc are aimed
at curtailing current production and development prospects. The
most recent vulnerability studios, which in the. main confirm the
accuracy of the decisions on which existing controls are based,
indicate that the Soviet bloc is most vulnerable from this view-
point in the following commodities: Swedish iron ore, on which
satellite steel output depends unless and until reconversion to
Soviet ores aan be effected; alloy steel, and alloy metals includ-
ing nickel but not including manganese and chrome; tin; copper;
industrial diamonds and gems; piezo-electric quartz; sulphur,
pyrites, and sulphuric acid; special types of graphite, mica,
asbestos and their manufactures; natural rubber, ball and
roller bearings, including high-grade bearing steels and parts;
electronic equipment, including materials and component parts;
abrasives, especially critical grain sizes; all typos of re-
placement parts for equipment previously acquired by the Soviet
bloc in the West.
In addition to the foregoing, the continuation, or
institution where necessary of an embargo on the export of the
following commodities to the Soviet bloc would substantially
impair ability to raise production above existing levels. equipment
for petroleum explora ion, drilling, and refining, especially
certain crucial components, such as drills; power generating
equipment; anti-friction bearing producing equipment; machine
tools (principally complex) specialized and automatic types);
precision instruments and testing equipment; complete plants of
all types, but especially chemical plants, steel and aluminum
mills, and building materials plants; blast furnace equipment and
electric furnaces; laboratory equipment, and vessels and chart-
ering services.
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Soviet Bloc Adjustment to an IYnbargo
In part, the USSR and its satellites can counter a western
embargo of those commodities. A widespread net of more or less
covert trade channels has been developed in recent years through
which the Soviet bloc continues to obtain products on Western
control lists, However, the volume could be reduced to a
significant extent if full cooperation of the major non-Soviet
producers were secured.
In those cases where it becomes impossible for the Soviet
bloc to n.rocure vitally needed imports some compensating internal
adjustments can be made. Labor, fabricating facilities, and
materials can be reallocated and synthetics and substitutes can
be utilized; but such measures could only partially offset the
damage resulting from Western trade restrictions. Since Soviet
plans in allocating resources already give top priority to the
development of capacity for military production and heavy industry
as opposed to consumersT goods, reallocation of priorities can
only take place within an already narrowed area. Furthermore,
scarcity is so general throughout the Soviet sphere that there
i but a small cushion for adjustment, particularly if a number
of commodities are involved simul.tanoeusly.
Despite Soviet counter-measures, a control program cncam-
passin.g the commodities listed above and receiving the support
of at least the major producers impairs current production and
makes difficult the fulfillment of existing plans. In the USSR
and the European satellites, especially the latter, it forces a
lower standard of living on the people. Soviet domination of its
Eastern European satellites, however, permits the USSR to assign
itself priority on critical items of mutual interest without
weakening Soviet control.
With respect to China, elimination of a substantial part
of the 5 300 - 050 million of imports received in 1950 would
have relatively little over-all economic impact. While such a
move would severely affect the "modern sector" of they economy, the
Chinese Communists do not depend vitally on this sector for maintenance
of. an operating administration or 2 or support of their military
and police establishment.
Without key imports the USSR, and even more the European
satellites and China, would find it difficult to carry out their
plans for rapid, balanced development of their economies. The
Soviet bloc's potential to wage a prolonged war of attrition would
be considerably impaired but the capability of the Soviet Union to
conduct a general war of limited duration would not be materially
affected.
$ ECONOMIC
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- ECONOMIC AND POLITICAL ASPECTS OF TRADE OF NON-SOVIET
tJHN EITR S WITH THE SOVIET BLOC - ` -
The problems of the individual non-Soviet countries in
curtailing or embargoing trade with the Soviet bloc vary
widely, Some of these problems are essentially economic;
some essentially political. Their magnitude depends in good
part on how heavily the country relies on the bloc as a market
for its goods or as a source for the materials it needs. Much
depends also on the internal political complexion of the country;
a strong indigenous Communist party, a tradition of successful
neutrality, or a distrust of colonial powers can be controlling
considerations.
The summary that follows indicates simply the range of these
problems. Ther'degree of interdependence between the Soviet and
non-Soviet worlds is considered in more detail in the analysis
(attached as Appendix B) prepared by the Economic Cooperation
Administration in close cooperation with the Departments of
State and Commerce and other agencies.
Economic Aspects
For the United States, the economic problems of terminating
trade with the Soviet bloc are almost insignificant; our trade
with the entire bloc, never very large, has already dwindled
as a result of export and funds controls, to a peint where.'It
no longer has much importance to either side. Our strategic
imports consist of some manganese and tungsten, for which
alternative sources would have to be found. Canada's position
is much like the United States; her chief problem would be the
loss of the Chinese market for a range of products which, for
the most party could easily be absorbed in the West. Latin
America's problems also would be marginal; she would have tc+
forego moderate amounts of Czech. manufactured products which
she might have some difficulty replacing from Western sources.
The central problems of East-West trade lie largely in
Western Europe from which the Soviet bloc derives the largest
part of its imported fabricated products. For Western Europe
the sudden loss of all East-West trade would be a serious blow
to economic recovery.- This area would lose important food and
raw material
1. For a detailed analysis of the economic problems associated
with a termination of East-West trade, see Appendix B, particu-
larly Parts III and IV.
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raw material items. The industries of Sweden, Austria and
Denmark would be crippled if they could not replace the coal
they now receive from Poland and Czechoslovakia; Sweden and
Austria would lose 15 percent of their total energy supply,
Denmark 22 percent. Sweden would also have to replace its
entire potash supply, now obtained from Eastern Germany. The
United Kingdom would be hard-hit; it receives 30 percent of
its coarse grain imports from the Soviet Union, 20 percent of
its timber from the Soviet bloc and an added 35 percent from
Finland., and a significant amount of its acutely inadequate
meat supplies from Poland and the USSR.
`4estern Germany's losses in being out off from the bloc
would be particularly heavy, partly because of her close ties
with Eastern Germany, The artificial separation of these two
areas by the present boundaries, if completed by an embargo,
would compel painful adjustments in trade relations of all
kinds. West Berlin is a, particularly difficult aspect of the
problem confronting all of Western Germany.
Western Europe's reliance on the Soviet bloc as a market
is a less important problem than its reliance on the bloc for
raw materials. Nevertheless, some segments of Western Europe'.s
export industry would have difficulty in finding alternative
markets. The Icelandic fishing industry, for example, which
now relies on the Soviet bloc as a major market, would have
little chance to sell its product in the highly protected
markets of the Western world; and some segments of Western
Europe's agriculture would suffer for the same reason. Even
where the products involved were marketable in the Western
world, it would take time time to establish new channels of
distribution. In addition, machinery producers of the West
who have orders in process being produced to Soviet specifica-
tions would have a difficult. transitional problem of limiting
their losses on these products. During this transitional
period of adjustment, there would be a considerable strain on
Western Europe's balance-of-payment position.
Outside Western Europe, the principal economic problems
are in those countries of the Near and Far East which border
on the Soviet bloc. Iran, which supplies the bloc with insigni-
ficant amounts of some strategic items such as wool, relies
heavily on the Soviet Union to absorb the otherwise unmarketable
agricultural surpluses of its northern provinces. Afghanistan,
which also contributes to. the Soviet wool supply, depends on
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the Soviet bloc to supply it with its vital gasoline require-
ments. A large part of Hong Kong's population is employed in
its entropot and. processing trade with Communist China. Japan
obtains part of its vital coal needs from China and, historically,
the viability of Japan's economy has been based upon access to
large volumes of coal, iron, salt, soy bean and other raw material
imports from the China mainland in exchange for exports of capital
and processed consumers goods. The assumption that this tra-
ditional pattern of trade will and must be resumed by Japan is,
despite present obstacles, deeply implanted in the mind of the
Japanese business man. In each of these cases, the problem is
insignificant in dollar terms but important when measured by
its effect on the economic life of the non-Soviet country it
affects.
Political Aspects
The extent of the political problems of any country in cur-
tailing or terminating trade with the Soviet bloc depends in part
on the scope of the economic problems that such a move would
create. In the United States, Canada and Latin America, where
no significant economic interests are involved in a termination
of East-West trade, public opinion is no obstacle to its termina-
tion. In Western Europe, where each successive step in export
control has been paralleled by a shrinkage in the volume of es-
sential commodities received from the Soviet bloc, there is wide-
spread concern over steps which will cut further into these sup-
plies.
But the economic impact alone does not determine political
reactions and in some countries it is of secondary importance.
In some Western European countries, such as France and Italy,
there are large indigenous communist parties strongly represented
in the parliaments and vociferous in their opposition to any move
directed against the Soviet Union. In Sweden and Switzerland
a policy of successful neutrality during World War II is deeply
imbedded in the. public mind. To a greater or less degree through-
out 'Western Europe, there is a widespread reluctance to weaken
further the few remaining ties with the satellite countries,
particularly Poland and Czechoslovakia. And throughout the areas
the realization that a war would turn 'estern Europe once more
into a battleground pervades all political decisions. These are
important limiting factors on the degree to which the Vestern
European countries will go in curtailing trade, and it is there-
fore not practical for the United States to seek full parallel
action.
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Outside Western Europe and the Western Hemisphere, bLc
political problems associated with curtailing Soviet trade
have, in some instances, an even deeper significance and impose
even greater limitations. The people of the Arab countries and
of India, Indonesia and Ceylon are unwilling to be identified
too closely with the Western world. This basic attitude results
in part from a reaction against the earlier political domination
of these areas by the ' yestern powers and reflects the recent
growth of strong nationalism throughout the area. In India,
Pakistan, Indonesia and other countries of the Far East, it re-
flects also the strong attraction exercised over the peoples by
their communist neighbors.
C . T:CC.iM
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C - TECHNIQUES FOR DENYING RESOURCES TO THE SOVIET BLOC
Whenever the Soviet bloc attempts to obtain resources from
the free world, it is vulnerable at three steps in its efforts:
it must find a source'of the goods; it must pay for them; and
it must arrange transportation. to move them to the Soviet bloc.
Most measures intended to control or to deny goods to the Soviet
bloc are directed at one or another of these three critical.
points. Accordingly, the summary- and appraisal of these measures
which follow discuss the controls at each of these points.
The principal types of action which. can be taken to deny goods
at the source are: complete embargo, selective export controls,
and preclusive operations, including intergovernmental purchase
arrangements and allocation schemes. These are considered sepa-
rately below. Following them, measures to control funds are dis-
cussed, and then measures directed at the transport of goods.
The question of control of technology is also considered, since
by this device it is possible to accentuate what is already the
greatest single strategic shortage in the Soviet bloc.,, skilled
manpower.
l.. Complete Embargo
The basic question in this entire field is whether the United
States stands to gain more by advocating a complete severance of
economic relations between the Soviet and non-Soviet worlds than
it does by pursuing and, advocating a policy of selective controls.
In deciding between the two courses, a number of questions have
to be answered. First, if a complete embargo were rapidly achieved,
what would be the cost to the Soviet bloc as'compared with a gradual
and selective approach. Second, if a virtually complete embargo
were in fact rapidly achieved, what would be the cost to the Western
World as compared with a gradual and selective approach. Finally,
if a complete embargo were announced as the United States objective
for the free world, what effect would such an announcement have..o
the degree of cooperation of other countries in restricting trade
to the Soviet bloc.
(a) Costs of an embargo to the Soviet bloc.
It is clear that a complete embargo would have a greater
impact on the Soviet bloc than any loss sweeping type of restric-
tive program. However, an effectively enforced program of selective
controls directed at vulnerable spots can achieve most of the gamic
results. Beyond that, it is difficult to generalize.
(b) Costs
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(b) Costs of an ybaro to the Western World.
Some aspects of the cost of an embargo to the Western
World are subject to a rough kind of measurement; others can
only be appraised in qualitative terms. If trade were abruptly
terminated with the Soviet bloc, the first job confronting the
Western World would be to achieve a reshuffling of its trade
patterns; necessary goods denied to the Western World by this
action would have to be found elsewhere, while markets would
have to be found for a variety of Western products now absorbed
in the Soviet bloc.
The goods from the Soviet bloc for which alternative sources
would have to be found are, principally, coal, wheat, timber,
coarse grains, potash, meat and sugar. Price considerations
aside, alternative sources might be found: in the United States
for coal; in the United States, Canada and possibly other coun-
tries for wheat; in Argentina and the United States for coarse
grains; in Argentina for meat; in Cuba for sugar. Although part
of the timber could bemade up from the United States and Canada
the world supply shortage would make alternative sources for the
full amount difficult to find. Any undertaking to supply these
products from the Western Hemisphere, to be meaningful, would
need to be accompanied by firm commitments that Western Europe's
needs would not be subordinated to United States domestic needs
in any domestic allocation scheme. Moreover, the coarse grain
demand could only be met if the United States were prepared to
prevent any significant expansion in the use of animal feeding-
stuffs horn, and hence in domestic meat supplies.
Since the products Western Europe would need are, for the
most part, already in short supply, the effect of imposing Western
Europe's added requirements on the Western Hemisphere's strained
supplies would be either to drive prices up, precipitate the need
for more drastic price controls and rationing here, or both. The
total cost of the principal goods Western Europe needs from Eastern
Europe is about 1600,000,000 a year. Assuming it were possible to
redirect trade with a minimum of dislocation, the amounts which
Western Europe would have to pay in replacing the essential supplies
now obtained from the Soviet bloc would be on the order of $150
millions more than they are now paying for these goods. However, a
shift of these proportions would probably result in Western Europe
having to pay higher prices for all of its importod supplies of
those products, not merely those formerly obtained from the Soviet
bloc. These added costs cannot be accurately estimated.
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Another element of then cost involved in a quick embargo
arises out of the free world's loss of markets. For many pro-
ducts, no problem exists, The $400 million spent by the Soviet
bloc for rubber, cotton and wool in 1950 would presumably
readily be paid by the United States. The problem of providing
markets for the type of product typified by Icelandic f: rah, that
is, products not in acute short :supply which are produced by
highly protected indu;,?trios is far more difficult to solve.
One added. aspect of the costs of an embargo which is subject
to rough measurement is the transitional problem of disposing of
partially fabricated machinery being produced in the Western World
to Soviet bloc specifications. While no figures are available to
indicate the value of these products, a first approximation can
be derived from that fact that annual ,ales of these products to
the Soviet bloc have run at about $200 million.
The non-monetary economic costs of an embargo are probably
more important than the actual dollars involved. Direct controls
would have to be established. in fields in which they are not now
needed; European cooperation would have to be channeled for a time
into dealing with difficulties of our own making; a supplementary
economic aid program would have to be devised and divided, absorb-
ing some of the energies required to mount, the defense program and
the rearmament, effort,
Certain other non-monetary costs must be added to the total,
A complete embargo would serve to orient the European satellites,
particularly Poland and Czechoslovakia, even more rapidly and more
deeply toward the USSR; it would make more difficult the settle-
ment of the problems of Germany and of. Austria; and it would increase
the risk of our having to resort again to the Perlin airlift.
Lastly the danger that a complete embargo may precipitate new
or intensified military action by the Soviet bloc in arc,a:as such as
Indochina and the Malay States in order to secure supplies denied
the bloc by the embargo is a risk which is difficult to appraise
but one which must be weighed heavily in the balance.
(c) Free world reaction to complete embaro.
The answer to this question can be made unequivocally. A
United. States announcement thu.t its objective was a complete embargo
of the Soviet bloc would materially impair our efforts to obtain
the cooperation of the rest of the free world on measures aimed at
limiting
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limiting the strength of t ho Soviet bloc. The roryasons for this
conclusion have been indicated In earlier suctions of this report.
The root of the Western World has very much more to loso than we
in any sevoranco of economic ties. Many countries are much more
immodiatoly faced with the prospect of attack and invasion; some,
though hostile to or fc,arfui of the Soviet bloc, are publicly com-
mitted to a policy of formal neutrality. Many countries of the
Western World who would agroe to specific measures directed at
rotarding the build-up of tho war potential of the, Soviet bloc,
if those moasuros wore prosentoci on theAr ma-:rits, would rojk ct
the same measures if they were oxpross].y labelled as steps in the
d.iroction of completc; embargo.
If the Uni_tod. Stator woo unilatorally* to launch a complete
embargo, without parallel. action on the part of the rest of the:
:['rocs world, it would have no significant effect on the Soviet bloc.
United State exports to the ontiro Soviet bloc now run at the rato
of 1e,3s than 1,000,000 monthly and provide little of real signifi-
cance to the Soviet war potential.. Imports might be rcducod, in
order to cut off a source of dollars usable to purchase: strategic
comnaoditio s in other parts of the world, or for subvorsi ro purposes,
but such an operation would be ineffective without an affective
program to sterll.izc: Soviot gold, holdings, about which thero is
1i i tJ..o the, Uni.teid. Statc5 can do uniiatorall.y. Any- bencfi,t to be
gainod from completing tho Amorica.n embargo on exports at -this time,
in terms of satisfying a public demand for action in time of crisis,.,
would almost certainly bo offset by an increased Amorican dissati-.~-~
faction in the early future with the; failure of our al-3, :i_os to take,
similar action and a resulting strain on our relations with them.
2. Export Controls
Given the varying vulnerability of the Soviet bloc from sector
to sector and tho known limitations on multilateral action, export
control measures applied, sel,octivoiy appear to offer the; best
method for curbing the growth of the Soviet war potential. This
technique is al o one in which most progros s h s boon mado both
domestically and internationally.
(a) U.S.
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(a) U.S. Contralti The ;riitE d States imposes an absolute
embargo on shipments to the entire Soviet bloc-of arms, munitions
and L:pler:rcnts of :Jar, atomic energy .atorials, a broad range of
indiistrial machinery, equipment and r.1atorials of highest strategic
L::.pc v ance for the development of Soviet war potential and an in-
crcasin[: number of t-.oods }1iclr are in short supl:)ly in this country.
S(-,ve.ral hundred additional ite ~is cannot be deported to the Soviet
bloc vribhout a license, and licenses are customarily denied. A
de facto embargo thus extends to all c::ireet siriprr.orrts of goods of
reeo,,nized strategic s:i::nificance. Careful -,craenin5, urid-use
chec._s and a orocerduro for r~cnalizinr; tWos(3 .rho violate export con-
trol rel,.>;ulations have also been ii-sti tinted in an attempt to control
t-re indirect shipments tliro~s_;h other non-Soviet countries.
In the case of Cori:unist China, I;anchuria and I 'orth Korea, the
C.S. f .bar ;o extends to all coml,:oditios, and controls almost as
severe are exercised i-rith respect to adjacent entropot points,
es ,)ecially Hong tong and :aeao.
A proposal for a further oxtcnsion of U.S. export controls,
short of complete crnbarl,o, is ev._,:r:.;ntiy before the National '
Security Council. It :roulu.be a L,seful precaution at this time to
rcciuire e;cport licenses for all shipments to bile entire Soviet bloc,
in or,-r to keep thorn under close scrutiny and to enable imp-i.ediate
cut-off if proposed s',lipments of particular items seem excessive.
On the other hand, it .could appear to be unnecessary and un ise to
chan-c the existin standards' of control or substantially to ,riden
tine area of de facto embargo, althou;;h i is clearly desirable to
prev:;nt or 1ir^it the export of specific items additional to those
now controlled ,Jhenevcr r1 eessax7 for security reasons or to pro-
tect stocks of ;oodsin ,]sort sup,,.)1y. Adequate procedures already
exist for extending controls in these cases,
(b) destern_I.;uro;:.e. Al] of the major industrial and
trading; :rations of WJesterri i;uro:e, except SZrudun and i;,itzcrland,
participate ,Jith the United w fates anc: Canada in a secret Coordinat-
ing Corlmittec (COCCI.::) ,thick :Teets in l aris, for she purpose of
develo,;in agreed interna bona] ex')ort controls. A large :,easure
of a ;reei?ent haste e on reached a:,ion ,; these countries, much of it in
very recent months. S,reden and S..itzerland cooperate to a more
limited extent outside of the COCOL.
The i:;uropean countries in CQCQ1I embargo to the Soviet bloc,
inclut ink; China and "orth Korea., all shipme; nts of antis and munitions,
atomic energy materials, and. also about 85 percent of the present
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U.S. list of embargoed iterrrs and 25 percent of the U.S. list of
quanti.tativoll controlled itrx.rs. i:ost of the remaining items on the
t S. control lists are currently ',cing considered by C0001 1,, to
determine vrhat ru asure s of control should be imposed.
In addition to the selective eribargo and limitative controls
imposed on trade with China, te principal oil-producing companies
o seratirr outsido of ~cstt-.rn Uo ,)a and I:iorth kr:rerica have agreed
to see t~iat ahipr;tints of jet;~ol(jt~ari are not made to China, from
sources outside the .:.stern i uropean and l`orth American areas. A
number of 4Jestern Luropean countries also embargo all trade with
North Korea?
;then the agree teams so far rQ,ache through COCOI:i are, com:pared
with the conclusions on Soviet vulnerability sun riarized earlier, it
is clear that impressive pro?rosy has a'ireadzr been made in agreeing
to deny or to limit to the Soviet 'bloc the goods in which the bloc
is s ~r:cially vulnerable. VJiicre ~,a )s exist in tho agreed COCOI:: con-
trols, they are due principslltj to two factors, One of these is the
fact that the principal procaucors of some strategic goods such as
tin, rubber and iron ore, are not in COCOIi and are unlikely to par-
ticipate in coordinated controls in the foreseeable future. The
other factor is that, thus .far, the COCOi. countries have not agr:ed
to extend the scope of their control activities to items which con-
tribute to the, -encral c;cor~or?ic base of the Soviet bloc, but have
conce ntrat.;d instead on i atorials more directly r4latod to its war-
mal:inxj potential,. This lattr factor explains COCOI:i's limited
acrion to date on such items as construction and conveying equipment,
transportation equipment, coal mining equ1)i!lent and electric generating installations.
Any proposal to extend ap;arociably the existing system of agreed
international controls iill encounter real resiLtance from the other
participants in COCOI~:.1/ There arc thrc:o prerequisites for any
auccoSSfu1
1 During; recent ne ;otiat:ions .,it h the British and French and subse-
quently Frith the other COCO::: countries, it eras understood that
there could be no ' further veholes4:.le extension of export controls
unless chanced international conditions demanded a drastic shift
in policy in this field. This und.orstan.ling was last confimed
at a rnieeting of the' Consultative Group on November. 29, 1950, the
day before the Communist ahiirrosc aggression began in forth i orea.
The understanding; has rafercncc to the loyal of international
controls and not to those of any inc.ividual country.
SECRT' T
Approved For Release 2000/08/28 : CIA-RDP67-00059AO00100060001-3
 Approved For Release 2000/08/28 : CIA-RDP67-00059AO00100060001-3
SE, CRLT
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