WEEKLY REVIEW

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001000070005-5
• Release Decision: RIPPUB
• Original Classification: T
• Document Page Count: 34
• Document Creation Date: December 27, 2016
• Document Release Date: May 6, 2010
• Sequence Number: 5
• Publication Date: June 28, 1974
• Content Type: REPORT

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Weekly Review
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t
Israelis ?vithdraw from al-
THE MIDDLE EAST
DISENGAGEMENT COMPLETED
Disengatjement of Syrian and Israeli forces
on the Golan Heights was completed without
significant problems by June 26, the date spe-
cified in the agreements signed early this month.
In the last stage, Israeli troops turned over to UN
forces the former Syrian administrative capital of
al-Qunaytirah, Ra fid village to the south, and
positions on the peak of Mount Hermon to the
north. In accordance with provisions of the disen-
gagement agreement, the UN then returned the
two towns to Syrian civil control, although both
will remain in the UN-patrolled neutral zone. The
Mount Hermon positions will continue under full
UN control.
JORDAN REACTS
In an effort to put pressure on the nego-
tiating parties before the next round of peace
talks, Jordan's King Husayn has publicly threat-
ened not to participate at Geneva unless a Jordan-
Israel disengagement accord is first worked out.
The King told a press interviewer on June 23 that
Israel would have to pull back a "reasonable
depth" from the Jordan River as a prerequisite
for Jordanian pttrticipation at Geneva. Husayn
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Israeli soldiers reinforcing border with Lebanon
indicated that Egypt and Syria would also have to
work out a common strategy with him before the
Geneva conference reconvenes. Husayn clearly
hopes to force Cairo and Damascus to support his
efforts to get the disengagement negotiations with
Israel rolling.
Although Israel is apparently still undecided
on how to proceed with Amman, it is unlikely to
agree to a withdrawal from the Jordan River as
quickly as Husayn would like. The government
has already committed itself to call national elec-
tions to ratify such a step, and Prime Minister
R a bi n 's Labor AI ignrien t, fearing electoral
setbacks, does not want to face the voters for a
while. Rabin also prefers to conclude an addi-
tional agreement with Egypt before talking with
Amman, although he may agree to start negotia-
tions with Jordan before an accord with Cairo is
actually signed.
In the interview, Husayn reiterated that he
had no objections to the Palestine Liberation
Organization attending the Geneva talks. Husayn
offered, as he has previously, to step aside in
favor of the fedayeen-controlled organization if
that was the wish of the other Arab states. Other-
wise, he said, the Palestinian group's mandate
should be limited to handling the still vaguely
defined question of "Palestinian rights," while
Jordan negotiated the return of the West Bank
and East Jerusalem to Arab hands.
FEDAYEEN TERRORISM...
For their part, the fedayeen kept up their
campaign of terrorist raids on Israeli population
centers. On June 25, three commandos raided an
apartment building in Nahariya, a seacoast rest)r t
near the Lebanese border, killing four Israelis
before they themselves died. Fatah, the largest
and most influential of the Palestinian groups,
claimed responsibility for the attack, which the
Israelis say was launched by sea from Lebanon.
This was the fourth attack by fedayeen terrorists
since mid-April. Altogether they claimed the lives
of 53 Israelis.
Fatah has not been involved in su-h an at-
tack for some time, but has always approved the
principle of direct strikes at Israel. The group
almost certainly acted at this time both to
counter fedayeen radicals who are criticizing
Arafat for his pro-negotiation policies and to
remind those already involved in direct negotia-
tions that even the relatively moderate fedayeen
groups will resort to terrorist tactics if the Pal-
estinians are not invited to participate in the
peace talks on acceptable terms.
...AND ISRAELI REPRISAL
Prime Minister Rabin told the Knesset
shortly after the Nahariya incident that Lebanon
bears full responsibility for terrorist operations
planned on or launched from its territory. In an
apparent initial reprisal, Israeli artillery shelled
several towns in southern Lebanon on June 25
and 27. The Israelis, who last week carried out
heavy air strikes on fedayeen bases in and around
refugee camps in Lebanon, are likely to continue
reprisals even though they seem to make the
fedayeen more determined to carry on their ter-
rorism,
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SUDAN: TERRORISTS RELEASED
President Numayri on June 24 com-
muted life sentences imposed that day on the
eight Palestinian terrorists who murdered two
US diplomats and a Belgian in the Saudi
embassy in Khartoum in March 1973. The
Palestinians were immediately flown out of
the country and transferred to the "custody"
of the Palestine Liberation Organization, a
move that virtually frees them.
The speed with which the case was sud-
denly wrapped up and with which the terror-
ists were dispatched from Sudanese jurisdic-
tion suggests the execution of a scenario
planned well in advance. Numayri was careful
not to tip his hand. Despite the political sensi-
tivity of the case, he had insisted on strict
observance of the judicial process and had *.ft
the impression with US officials and foreign
newsmen that he favored holding the terror-
ists to account. Cabinet ministers had indi-
cated, however, that the Sudanese found it
difficult to be the only Arab country ever to
have brought Palestinian terrorists to trial.
They implied, in effect, that the terrorists
would be given executive clemency.
Minister of State for Foreign Affairs
Ahmad?Foreign Minister Khalid initially
made himself unavailable?told the US ambas-
sador that Sudan did not want to take an
action that might increase tension and "set
back" progress in resolving the Arab-Israeli
conflict achieved by recent US diplomatic ef-
forts. Numayri, in weighing the risks involved,
apparently preferred to incur the displeasure
of the US than to face a political backlash
from the other Arabs and the threat from the
fedayeen to his own security and that of
Sudanese aircraft and diplomatic mis-
sions.
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EGYPT-USSR: REVIEWING TIES
Egyptian Foreign Minister Fahmi will go to
Moscow in mid-July fi a fundamental review of
Egyptian-Soviet rel tions. Although the visit
comes in a period of renewed surface friendliness,
strains are likely to re-emerge over such questions
as arms deliveries, a summit that Fahmi will at-
tempt to arrange, and the strategy and timing of
Arab-Israeli peace talks.
Uppermost in Fahmi's mind will be the arms
shipments that Moscow suspended in April. He
will reportedly insist that President Sadat must
know whether to count on a resumption of mili-
tary aid or to assume that he can expect none.
Fahmi will emphasize, as he and Sadat have done
in public, that Egypt is not seeking better rela-
tions with the US at Soviet expense.
Cairo's particular concern for the future of
the Egyptian-Soviet military relationship has both
a political and a practical motivation. Military aid
is the most ta:igible and only virtually irreplace-
able benefit that Egypt feels it derives from its
ties with the Soviets. In the Egyptian view, the
Sadat and Brezhnev in 1972
resumption of amicable relations will largely
depend on a resumption of arms shipments. More
than this, there is undoubtedly pressure from the
military in Egypt for some relief from a situation
that has left Cairo without a flow of spare parts
for over two months.
The Soviets, for their part, may be amenable
to requests for a restoration of the arms flow. At
this point in the peace negotiations and in the
US-Egyptian relationship they may see arms as
the only means of guaranteeing some continued
influence in Egypt.
A favorable Soviet response on the arms
question is probably an Egyptian requirement for
proceeding with arrangements for a summit be-
tween Sadat and the Soviet leadership, which
Fahmi has announced as the purpose of his visit.
The arrangements for such a meeting could in
themselves cause renewed wrangling. Each side
will press for its own capital as the venue, with
the Egyptians arguing that, in view of Sadat's four
trips to the USSR, it is the Soviets' turn to do the
visiting.
Although Moscow may accede on this ques-
tion as well, the Egyptians may be disappointed
in their expectation that Brezhnev would make
the call. Brezhnev, who has not been in the Mid-
dle East since becoming party chief, would find it
politically difficult to visit Cairo so closely on the
heels of President Nixon's successful visit. The
more likely candidate for the trip would be either
Kosygin or Podgorny.
Fahmi's Soviet hosts will undoubtedly also
raise the subject of the Geneva conference during
his visit, urging its quick reopening in order to
reinsert themselves as active participants in the
negotiations. Sadat, on the other hand, is pro-
ceeding more slowly. He wants to coordinate
divergent Arab positions before moving on to the
next stage and does not anticipate returning to
Geneva before September.
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RHODESIA: ELECTION SCHEDULED
Prime Minister Ian Smith dissolved Parlia-
ment last week and announced that a general
election will be held on July 30. Smith apparently
hopes that a fresh mandate from the predomi-
nantly white electorate wil strengthen his hand
for a new attempt to reach a constitutional agree-
ment with the leaders of Rhodesia's black ma-
jority----a prerequisite for British recognition of
Smith's government and termination of interna-
tional economic sanctions. Prospects for an early
agreement have dimmed, however, as a result of
the sudden arrest of a prominent spokesman for
the African National Council, the largest black
group in Rhodesia.
Smith's Rhodesian Front Party now holds
49 of the 50 white seats in the House of Assem-
bly. Africans hold 16 seats under a restricted
franchise. A general election is not legally re-
quired until April 1975, but Smith told Parlia-
ment he wants to dispel "the present state of
uncertainty" among white Rhodesians, which he
related to the African National Council's rejection
in early June of his latest constitutional proposal.
Smith had offered to increase the black seats to
22. but his formula for gradually broadening the
franchise would prevent Rhodesian blacks, who
outnumber whites 20 to 1, from gaining a ma-
jority in the assembly for at least 40 years. In
announcing the election, Smith said he will make
a new attempt to resolve the constitutional im-
passe by convening a "truly representative round-
table conference" after the election.
Smith probably sees an election campaign, in
part, as an opportunity to allay qualms among
Rhodesian whites concerning the coup in Lisbon
and its implications for southern Africa. A black
government in neighboring Mozambique is antici-
pated, and it is widely assumed that such a gov-
ernment will favor the Rhodesian guerrillas who
have been infiltrating through northwestern Mo-
zambique from bases in Zambia and Tanzania.
Although Smith now ridicules such fears, he no
doubt foresees that a new regime in Mozambique
may at least restrict Rhodesian trade outlets
through Mozambican seaports, unless interna-
tional sanctions are terminated.
Shortly after calling the election, Smith an-
nounced that Dr. Sithole, publicity chairman for
the African National Council, was being detained
without trial?the government's standard pro-
cedure for dealing with individuals suspected of
subversion. No reason was given for the action.
Smith has claimed, however, that some members
of the council are linked with the guerrillas who
have been activ?. in the northeast sector of the
country since late 1972.
Smith may hope that the detention of
Sithole, whom he apparently regards as a key
opponent of the proposed constitutional settle-
ment, will bring other council leaders around to
accepting the ten ns. Smith claims that Bishop
Muzorewa, the president of the council, had
approved the proposal but was overruled by a
militant faction in the leadership group. Mu-
zorewa has declared, however, that he will not
resume negotiations with Smith unless Sithole is
released.
Rhodesian whites probably realize that the
impasse between Smith and the African National
Council precludes an early settlement with Britain
and relief from economic sanctions. Most whites,
however, will probably vote for Smith's party
next month because they see no acceptable alter-
native. The moderate Rhodesian Party has failed
to countenct Smith's claims that it encourages
black militnts. The detention of Sithole may
serve to undercut the right-wing Rhodesian Na-
tional Party as vell as extremists in Smith'c nwn
party.
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NATO: AFTER THE MINISTERIALS
A rare degree of harmony prevailed during
the NATO ministerial meetings earlier this month.
The European members of the Alliance had many
of their fears assuaged and all of the allies seem
inclined to avoid airing their differences.
The eight defense ministers who compose
the Nuclear Planning Group reacted favorably to
Secretary Schlesinger's briefing on US plans for
strategic retargeting, many of them commenting
that the Alliance's deterrent capability had actu-
ally been enhanced. The result was a further
softening of the lingering West European concern
that the US-Soviet agreement on the prevention
of nuclear war places limits on what the US
would do to defend Europe.
The new declaration of Atlantic principles,
the major accomplishment of the foreign minis-
ters' session in Ottawa, was something of an
anticlimax after months of effort. In proclaiming
that the Alliance is the "indispensable basis" of
its members' security and that an attack on one
will be considered an attack on all, the declara-
tion merely reaffirms the principles on which
NATO has been based from the very beginning.
There are important new elements as well.
One of these is a pledge by the US to maintain its
European forces at a level sufficient to carry out
the strategy of deterrence and to defend the
North Atlantic area if deterrence should fail. This
pledge is designed to reassure the Europeans who
fear that the US will eventually make substantial
unilateral withdrawals, even while negotiations
for mutual troop reductions are continuing with
the East.
The declaration also smooths European
feathers by highlighting the security and political
importance of the European Community to an
extent unprecedented in such documents.
Progress toward unity of the EC states, the declar-
ation says, will eventually have a beneficial effect
on the common defense of the Alliance. The
declaration might have gone further on this point
had it not been for the British, who resisted any
outright reference to "European union." Foreign
Secretary Callaghan has made the point repeat-
edly that he cannot endorse "European union"
until someone can explain to hinr what it means.
The declaration explicitly mentions British
and French nuclear forces as capable of con-
tributing to the deterrence strategy of the Alli-
ance a3 a whole. While the mention of French
nuclear forces in the declaration is clearly made in
the Atlantic context, there have been some signs
that the Giscard government may be rethinking
the ways in which France cooperates with the
other West Europeans in the defense area. Both
French Gaullists and the left have denounced this
and other provisions of the declaration as exces-
sively "Atlanticist."
The most troublesome paragraph in the
declaration to agree upon--and as a result one of
the weakest?deals with US - West European con-
sultations. US irritation with EC positions, which
are nearly immutable because they already repre-
sent compromises among the Nine, has been
matched by Cie feeling of the EC that its interests
are often ignored by the US. Despite these serious
concerns on both sides, the declaration merely
contains language which notes that the common
aims of the Alliance can only be achieved through
close consultation. The French objected to any
wording that implied a legal obligadon on the
part of either the US or the Europeans to consult,
especially on their overall economic and political
relations and events outside the NATO context.
Several of the participants in the Ottawa
meeting stressed that the recommendation for
more consultations will have meanihg only if the
countries involved wish it. The West Europeans
consider the Nixon-Brezhnev summit a test. They
are concerned that concessions might be made on
the European security conference and the force
reduction talks. European interests are deeply
involved in both. As one observer put it, they will
be looking for the US to show that the logic of
the Western Alliance is at least as valid as the
special relationship between super powers.
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In agreeing upon the new declaration of
principles, the West Europeans have been re-
minded that there is no present defense alterna-
tive to an alliance with the US, and that it is
behind the shield of NATO that Europe can most
safely debate plans for defending itself in the
future. The basic problems between the US and
the West Europeans have not gone away, but the
change in the weather represented by the minis-
terials--if it lasts?may make some of them easier
to tackle.
ICELAND: VOTING ON KEFLAVIK
Iceland's major political parties have made
the future of the Keflavik base the number one
campaign issue in the election this Sunday. There
has been little mention in the campaign of the
economic crisis that brought down the center-left
government of Prime Minister Johannesson in
May. The outcome of the election, therefore, will
be interpreted as a referendum on the question of
whether to retlin the base in the defense agree-
ment to be renegotiated later this year between
the US and Iceland.
Although all of the parties have called for a
review of the defense agreement, the opposition
conservative Independence Party has heen the
most flexible. Party leaders issued a statement on
June 23 strongly endorsing retention of the base.
Voter discontent with the outgoing coali-
tion's handling of the base negotiations and the
defense issue generally has been a major factor in
the bright electoral prospects of the Independ-
ence Party. Leaders of the party were active in
promo ling the successful pro-base signature
campaign last February. In addition, the party
claims that it alone has a consistent policy for the
defense of Iceland.
As members of the outgoing coalition, the
Progressives, the Liberal Left Organization, and
the Communists will have a more difficult time
convincing voters that their policy toward the
base should be continued. In March, the govern-
ment tabled proposals for the withdrawal of all
forces from Keflavik by 1976. Negotiations began
shortly thereafter but were suspended when the
government fell in May.
Throughout the electoral campaign the three
parties have taken differing positions on the
base?the Communists, of course, vigorously op-
posing its continuation. The Progressives, who
claim that only they have taken a balanced posi-
tion between left and right extremes, have called
for continued membership in NATO but with the
proviso that no foreign troops be stationed in
Iceland during peacetime. The remaining coalition
partner, the Liberal Left Organization, has been
appealing .o non-Communists among anti-base
elements. The Social Democrats, who tc.gether
with the Independence Party comprise the op-
position, support retention of the base.
The municipal and local elections on May 26
were billed as a preview of the national contest,
but the outcome was inconclusive. The Independ-
ence Party captured more than 50 percent of the
votes, but the Communists also picked up strong
support. Parties of the center s,:ifered significant
losses.
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UK: WILSON ON THE DEFENSIVE
Britain faces the likelihood of elections this
fall as a result of the sudden flare-up of parlia-
mentary warfare last week that clearly revealed
the shaky position of the minority Labor govern-
ment.
Two significant parliamentary defeats
rankled Prime Minister Wilson, but they do not
pose an immediate threat to his government nor
are they likely to lead to elections in July or
August ?traditional summer holiday months for
Britons. Parliament rejected a Labor attempt to
allow the unions to reclaim the more than $20
million they forfeitea for failing to register under
the Industrial Relations Act. The opposition also
passed a motion deploring Labor's plans
extend nationalization of British industry.
Despite persistent speculation that Wilson
might call a snap election, all parties appear to
prefer more time to prepare. Labor is running
ahead in opinion polls, but the Tories have
narrowed the gap recently.
From Labor's point of view, the best time
for an election would appear to be September or
October. The party presumably would postpone
its annual conference, usually held in October,
until after the election. In the past, the confer-
ence has only served to publicize the deep divi-
sions within the party. For this reason, Wilson
would prefer to hold the election before the party
conference.
Wage controls are scheduled to end in early
November, and worker Lin-est and strikes are
likely to increase toward the end of the year. An
election in the fall would still enable Labor to
seek a new mandate while blaming the country's
continuing economic and other problems on the
previous Conservative government.
The Conservatives are gearing up for fall
elections, and party leader Edward Heath has
announced that he intends to increase the effec-
tiveness of the Tories as an opposition party. As a
first step, Heath reshuffled the shadow cabinet
last week and served public notice that the Tories
intend to continue their aggressive attacks on the
Labor government's policies in the weeks remain-
ing before Parliament's summer recess.
In reshuffling the shadow cabinet, Heath
promoted William Whitelaw to the Tories' num-
ber two slot. Whitelaw attained wide recognition
for his handling of the Ulster problem and is one
of the Conservatives' most popular figures.
The Liberals, too, are reworking their
strategy for the elections. In an about-face, the
party's parliamentary delegation declared that it
is prepared to join a coalition government after
elections are held. The shift comes barely four
months after the last general election, at which
time the party flatly rejected a coalition with the
Conservatives.
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The Liberal platform is broad enouah to
allow an alliance with either the Tories or Labor,
but Prime Minister Wilson has emphatically ruled
out the possibility of a coalition. The Liberal
move, therefore, will be read by many as a delib-
erate attempt to form an alliance with the Tories.
Before a coalition is possible, however, the Lib-
eral members of parliament will have their hands
full convincing the party rank and file of the
advantages of cooperating with the Tories.
The Liberals proved in the February elec-
tions that they have considerable appeal by
attracting many voters dissatisfied with the two
major parties. Liberal leaders apparently have
concluded that the only way they can influence
national policy is by directly rarticioatina in the
government
PORTUGAL: SPINOLA TIGHTENS CONTROL
President Spinola and the provisional govern-
ment are stiffening their resistance to the take-
over of local government bodies by the Commu-
nists and are moving to halt abuses of civil lib-
erties by extreme left-wing organizations, The
Portuguese Communist Party is anxiouf, to main-
tain its image of respectability while mobilizing
support for elections next year.
The cont ol of local gov.3rnments is crucial
in the present ,Aruggie for political power. The US
embassy in Lisbon estimates that the Commu-
nist-dominated Democratic Electoral Commission
has gained control of a third of Portugal's 304
town councils since the coup last April. The com-
mission took over the councils by organizing
"public discussions" to nominate slates of com-
mission candidates, which were then selected in
similarly orchestrated "electioos."
The minister of internal administration,
Joaquim Magalhaes Mota, is now refusing to
verify the credentials of some of the officials
selected by this process. Mota is one of the foun-
ders of the recently formed centrist Popular
Democratic Party. The commission accused
him of misusing his authority for the benefit of
his party and has demanded his resignat ion.
The government has also moved to clamp
down on leftists who have gone too far.-?,- in taking
advantage of the new civil liberties in-a Portugal.
The open sympathy of the mass media .4oward the
left prompted the government, on Jul ne 14, to
take over the management of a Lisbon televit,ion
station, and I3st week the key adrn ztive posi-
tions in the radio rif ork were assumd by mili-
tary officers. I n adai0n, militant letists have
beeii arrested for a wide range of offenss, ranging
from trying to persuadF? soldiers to desert to
inciting labor unrest.
The Comr-nunist Party has avoicz3Ted direct
criticism because of its desire to clissoiate itself
from the actions of militant leftists and to project
the image of a responsible member of -the prk-ii-
sional government. Although Comrr-iunist in-
fluence in the government is heavily om_itweighed
by center and right-wing elements, th--e party is
content to consolidate its influence in Icey sectors
of Portuguese society in preparation fort- elections
next year. The party is, in fact, genu iii nely con-
cerned that irresponsible behavior by th e extreme
left will provide the righ:ists and centr ists in the
Portuguese power apparatus with a p_-relext for
placing repressive controls on election campaign
procedures.
There appears to be no significant challenge
to the supremacy of President spinol and the
junta in the Portuguese power structu re at this
time. The military leaders have shown that they
have The power to control the left an are pre-
pared to use it. As long as the Commu T.-list Party
stands to gain popular support from its associa-
tion with the provisional government, i-ec will con-
tinue to cooperate. A confrontation be-kween the
party and the government remains a possibility,
however, particularly if Spinola and his colleagues
take a tougher stance in their efforts t o prevent
the Communists from extending thir influ-
ence.
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Arias
SPAIN: MARKING TIME
Spanish authorities appear to be anxious to
limit the effects of the fall of Salazarism in Portu-
ga on the Spanish political scene. The slow pace
of social and political ch .e promised by Prime
Minister Arias, and the sudden dismissal of Gen-
eral Diez-Alegria are reflections of this caution.
After maintoining a low profile for some
weeks, Pi irite Minister Arias moved to center stage
this month with a five-day visit to Catalonia, a
principal area of regional discontent. Accom-
panied by seven of his ministers?each of whom
also talked to leaders in their respective fields--
Arias left the impression that his government
would continue toward its declaQd aim of in-
c' easing participation of citizens in public life,
improving conditions in the universities, main-
taining liberalization in the press, increasing its
involvument in social and labor matters, and
i Ill-
proving church-state relations.
In a nationally broadcast speech, Arias reit-
erated his intention to establish political associa-
tions in order to increase participatien in political
life, a key element of his government's program.
He weakened the proposal, however , by stressing
that the associations must function within the
framework of the National Movement, established
by Franco as Spain's sole political organization.
Arias stated that there is loom for diverslty of
opinion within the Movoment, but he clid not, as
some had hoped, set a timetable for establishing
associations.
The Prime Ministei 's per thus far
suggests that political reforms will come slowly.
Of the several liberalizing measures he announced
last February, only the bill providing for the
direct election o; mayors has been sent to the
parliament for action.
The hopes of Spanish liberals were also set
back this month when the relatively liberal chief
of the military staff, General Manuel Diez-Alegria,
was replaced by a conservative general. Some
Spanish officials have tried to portray the ouster
as a normal rotation, but it seems more likely that
he was remove' because of his identification with
civilian clonic: its who favor reform of the Spanish
political system. Diez-Alegria's public statements
have indicated that he was surprised by his
dismissal.
Diez-Alegria has made it clear in private con-
versations that he is outraged by allegations circu-
lating ill Madrid that he was fired because helld
established unauthorized contact with the exiled
secretary general of the Spanish Communist
Party. He is also upset because he was not ac-
corded customary honcrs and decorations that
usually accompany the departure of .71 military
figure of his stature.
Aithough Diez-Alegria has lost his place in
the military hierarchy, he could still play an im-
portant political role. He is considered by some
Spaniards as a potential leader who would take
Spain along the same path followed by General
Spinola in Portugal. These disgruntled Spaniards
may be encouraged by toe fact that after General
Spinola was fired, he returned to head a liberal
regime.
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FRENCH COMMUNISTS AND MOSCOW
The French Communist Party's attempt to
broaden its base, to put more distance between
itself and Moscow, and to become "a party like
all the others" may be creating significant strains
in its relationship with the Soviet Communist
Party. These strains appear to have prompted the
visit to Paris on June 19-24 of a Soviet delegation
led by Boris Ponomarev?the Central Committee's
chief of relations with free world communist
partes.
Ponomarev found the French party less
malleable than in the past. The communique
issued after the visit made it clear that there was
little meeting of minds on key issues, in par-
ticular, on reconciling the French party's views of
its interests with Soviet foreign policy.
French Conmunist leaders have become in-
creasingly comrr itted to participation in a "com-
mon program for governing" with the Socialists
and other left-wing parties that could e?;Gritually
lead to a common front government. Doing the
recent campaign, the Soviet Union sent Ambas-
sador Chervonenko to call on Giscard, thus under-
Georges Marchais
lining its displeasure with the Communists'
alliimce with Francois Mitterrand's Socialists.
French party leaders were furious over the
Soviet intervention in the campaign. This affront
resulted in the fir t direct public criticism of the
USSR by the French Communist Party since the
invasion of Czechoslovakia six years ago.
As the campaign went on, Georges Marchais,
general secretary of the French party, diverged
significantly from the Soviet line in an attempt to
appeal to a wider spectrum of leftist support.
Since then, according to a senior French jour-
nalist, the Communists have no longer endorsed
Moscow's opposition to the French nuclear force.
The Communists are now arguing that, although
land-based missiles should be eliminated?since
they could only be targeted against the Soviet
Union?the nuclear submarine force should be
retained.
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Marchais has been sharply and openly critical of
the lack of Soviet support for the left's election
campaign against Giscard. The Communist news-
parer, L'Ilumanite, has also begun to temper its
uno: alified support for Soviet policies.
Mar-hais is trying to overcome the fact that
iie appeal of the Communist Party in France,
especially among the young, is limited by its past
subservience to Mcscow. Immensely buoyed by
the closeness of the election results, the French
Communists are anxious to create an appearance
of independence from the Soviets.
ITALY'S AUSTERITY PROGRAM
The austerity program devised by the Rumor
government last week should improve Italy's
credit standing and trim at least $1 bill, )n from
the 1974 import bill.
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The proposed fiscal and monetary measures
repiesent a compromise between the Christian
Democrats who favored draconian measures to
curb imports and inflation, and the Socialists,
who wished to maintain employment and increase
welfare spending. The patchwork program aims to
boost tax revenues by $4.7 billion annually, while
reducing the income tax bite on low-income
groups. As a concession to the Socialists, the
Christian Democrats agreed to ease credit slightly.
Failure to obtain approval of the program in
parliament and in labor union councils would
bring down the government. The coalition parties
probably can exercise enough self-discipline to get
the measures through parliament, but labor union
cooperation is less certain. The unions may go
along for the time being, but if prices contin to
rise rapidly as taxes cut more deeply into income,
their cooperation almost certainly will evaporate.
Because Italians are past masters at income
tax evasion, the government is relying most
heavily on increases in value added and other
indirect taxes. While some of the tax measures?
such as a hike of 25 cents per gallon in the
gasoline tax?have the particular aim of cutting
the trade deficit, most are designed to reduce
over-all consumer demand.
A key aspect of the Christian Democrats'
agreement to ease credit will be long-term loans
to small- and medium-sized companies and loans
to finance economic development in the South.
These loans are to be covered by a $3-billion sale
of special bonds to commercial banks. Minister of
the Treasury Emilio Colombo reaffirmed Italy's
commitment to IMF credit ceilings.
The tax package is expected to trim domes-
tic demand by aboui 3 percent over 12 months.
GNP growth probably will slow to 3-4 percent in
1974, compared with 5.4 percent in 1973. The
growth rate will be even lower in 1975 when the
full impact of the austerity program is felt.
The anticipated drop in domestic demand
will reduce imports by about 10 percent, after a
lag of a few months. Many import orders already
have been placed, and time is needed for the
direct tax measures to have their full impact.
Together with some small effects from the import
deposit scheme, the austerity program should
hold Italy's trade deficit to about $10.5 billion in
1974, instead of the $12 billion implied by trade
flows so far this year.
Even after adjusting the trade account for
the favorable impact of the austerity program, the
current account for 1974 will bp about $7.5
billion in deficit. Italy's tr.iditionally large surplus
on net services and transfer payments has been
decreasing in recent years, largely because of
hidden capital flight and increased interest
payments. Heavy net capital outflows could boost
the balance-of-payments deficit to an estimated
$10 billion.
The balance-of-payments deficit expected in
the second half of 1974 will require additional
foreign borrowing. Rome has a meager $2.2
billion in available foreign exchange, and support
of the lira has been costing $1 billion monthly.
Italy still has large reserves of gold, but it would
sell substantial quantities only as a last resort. The
gold could be used as collateral for loans if the
parties could agree on price and terms. The $4
billion that the Bank of Italy lined up under
short-term swap arrangements with other central
banks cannot be drawn because the banks fear,
justifiably, that they would not be repaid.
In coming weeks, . zaly will have to let the
vaiue plummet, impose additional import
controls, or obtain new foreign loans. The gov?- n-
ment will try to avoid the first two option A
plunge of the lira would be opposed by the
Socialists and trade unions because of its infla-
tionary effects.
Further import controls would be objection-
able to the EC and GATT and would violate the
terms of Italy's IMF standby credit. By giving
some assurance that Italy is finally starting to put
its house in order, the austerity program should
help Rome find new funds abroad, especially if
gold is offered as collateral.
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USSR
SPACE STATION IN ORBIT
The Soviets placed a large Salyut space sta-
tion in orbit this week. The spacecraft, an-
nounced by TASS as Salyut 3, was launched from
Tyuratam on June 24 using an SL-13 booster.
The space station's systems appear to be opera-
ting normally.
The Soviets will probably orbit a Soyuz
spacecraft with two cosmonauts aboard to ren-
dezvous and dock with the Salyut. Soviet space
support ships are en route to monitoring stations
in the Pacific, and others are already in position
in the Atlantic to support 3 manned mission. The
launch could occur within less than a week and, if
so, would coincide with the President's visit to
Moscow.
The only previous Soyuz-Salyut mission oc-
curred in June 1971 when Soyuz 11, carrying
three cosmonauts, docked with Salyut 1. The
cosmonauts remained aboard the space station for
nearly 23 days, performing a wide variety of
experiments in biomedicine, earth observation,
astronomy, and astronavigation. They perished
when a leak developed in their Soyuz spacecraft
while re-entering the earth's atmosphere.
Four Salyut space stations have been
launched since 1971. Two of these, Salyut 2 and
Cosmos 557, developed malfunctions while in or-
bit and were never visited by cosmonauts. A third
failed to achieve orbit. The Salyut 3 is another
step toward the development of large space sta-
tions in earth orbit that can be manned by succes-
sive crews for long periods of time.
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CEMA: SOFIA MINISTERIAL ENDS
Soviet Premier Kosygin and government
leaders from the USSR's eight full CEMA partners
and from Yugoslavia met in Sofia from June 18
to 21 for the 28th ministerial session of the
Council of Mutual Economic Assistance.
As expected, the participants focused on the
development of energy and raw material re-
sources. The European members of CEMA gave
final approval to the multilateral exploitation of
Soviet natural gas deposits at Orenburg and con-
struction of a pipeline from there to Eastern
CEMA session in Sofia
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Europe. They also agreed "in principle" to de-
velop Cuban nickel mines.
Earlier preliminary agreements on the ex-
ploitation of Soviet iron ore resources at Kursk
and the construction of a new power line to
Eastern Europe were mentioned only briefly, sug-
gesting that further details have yet to be worked
out. Hungarian Premier Fock said the session
heard a proposal to build two more major power
lines connecting the USSR and Eastern Europe.
His Czechoslovak counterpart said that the
Soviets had "clarified" the amount of raw ma-
terials and fuel they would deliver, and the terms
of delivery, for the next five-year period.
The participants announced that the "first
stage" in coordinating national economic plans
for 1976-1980 was completed, but gave no indica-
tion of progress on the thorny problems of de-
tailed coordination of plans and revision of intra-
CEMA foreign trade prices. Similarly, there was
no evidence of movement on financial reform
issues. After the session, CEMA Secretary General
Fadeyev rejected any quick movement toward
intra-CEMA convertibility of the transferable
ruble, CEMA's accounting unit.
The conferees may have decided what moves
CEMA will make to establish a dialogue with the
EC. Although the communique ignored the
matter, Fadeyev did say after the session that
"regular contacts" between the two organizations
would be a "great contribution to larl.ing inter-
national detente."
The Romanians apparently restated their
views on economic integration and, judging by
their rhetoric before the meeting, pushed for
more generous treatment from their developed
CEMA partners. Bucharest's case was no doubt
poorly received. A Hungarian statement during
the session noted icily that it was time to move
from general principles to specific deeds. The
Romanians signed all but one of the agreements
concluded at the session, abstaining from an
agreement on standardization.
Bucharest will not fully partici-
pate in the construction of the Omni gas
line.
CSCE: PLODDING THROUGH
The European Security Conference has
plodded through another indecisive week, ending
whatever faltering hopes the Soviets and others
had that the concluding phase could be held in
July. The Soviets now seem reconciled to holding
the final stage later this year.
The conference is still stalemated over the
issues of "freer movement" and military-telated
"confidence-building" measures. Two weeks ago
the Soviets made three concessions in these areas
to demonstrate that th !y are still negotiating in
good faith. They accepted a reference to "sub-
scriptions" in the text on access to printed infor-
mation, and they also agreed to increase from 50
to 100 km the depth of the frontier zone re-
quiring notification of military moven-.ents, and
the time of advance notification from seven to
ten days.
The Soviets have shown little inclination to
compromise on other aspects of the "freer move-
ment" issue. They continue to call for specific
references to respect for national laws and cus-
toms?the formula they I,uve used to oppose
Western efforts to increase non-governmental
human contacts.
The net result is that the two sides are still
far apart. The West European participants will be
reluctant to let the conference conclude at all
without significant Soviet concessions on the
freer movement issue. Some Western delegates are
already considering adjourni ig the conference for
an indefinite period.
The Soviets may now be hoping that some
sort of breakthrough on CSCE will occur during
President Nixon's visit. The key question is what
Moscow will do if the summit fails to give new
impetus to CSCE.
The Soviet desire for a top-level meeting in
the near future is still strong and was endorsed by
most nf the leaders in a series of Supreme Soviet
election speeches earlier this month. Moscow is
aware, however, that the West has sought nego-
tiating leverage from the Soviet interest in an
early and successful CSCE, and it will give ground
grudgingly on the unresolved icsuel_
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Ert44,:!,
DEMILITARIZED ZONE
VIETNAM
THE FIGHTING GOES ON
Military activity this week reached a high
point for the year in the northern provinces,
particularly in Thua Thien and Quang Tin. The
communists also increased their sapper attacks
against fuel and ammunition depots and the shell-
ing of government positions on a countrywide
basis.
Combat in the central provinces picked up
slightly during the week but still remains rela-
tively low. The Military Region 2 commander
recently suspended the stalled government cam-
paign against the major communist supply area at
Vo Dinh north of Kontum City. He also shifted
many of his combat units in the highland prov-
inces. the new division commander in Kontum is
now applyi ig new tactics against the effectively
dispersed North Vietnamese artillery sites and
defenses and hopes to regain the initiative.
The government operation to recapture two
psychologically important outposts north of Sai-
gon in Binh Duong Province has been temporarily
halted in order to rotate forces and rebuild
ammunition stocks. East of Saigon, government
troops have been unsuccessful in easing pressure
on national Route 1. Although this key artery
between the coastal provinces and Saigon is again
open, traffic is increasingly harassed.
The number of incidents in the delta prov-
inces returned to a fairly low level this week?in
keeping with the monthly cyclical pattern of
communist activity there. The major battlefront
in the delta?along the Cambodian border?
remained relatively quiet.
IMAGE POLISHING
Hanoi has been trying to polish the image of
the Viet Cong's Provisional Revolutionary
Government as a legitimate governm,-mt ever since
the cease-fire. More than 40 countries?principally
the communist states and some left-leaning Afri-
can nations?now recognize the Provisional Rev-
olutionary Government, but Hanoi has failed to
crack the ranks of either the industrialized non-
communist states or Vietnam's immediate neigh-
bors in Southeast Asia. The Vietnamese commu-
nists have had to settle for token gestures of
recognition to salvage any gains at all.
The Vietnamese communists hoped that the
recent French decision to upgrade the Provisional
Revolutionary Government's information office
in Paris to mission level would serge as a catalyst
to entice other Western nations to follow suit
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their gesture was a minimal one, required by
France's un'que position as the host to the Viet-
nam peace negotiations, and not a pi ecedent for
others to follow. Specific dernarches to Canada,
Belgium, and the Netherlands appear to have
failed, and even Sweden, long sympathetic to the
cause of the Vietnamese communists, has turned
down, at least for the immediate future, personal
appeals by Hanoi's Premier Pham Van Dong to
recognize the Provisional Revolutionary Gov-
ernment.
The Vietnamese communists have not fared
any better in extended negotiations with Japan
over the exchange of ambassadors between Hanoi
and Tokyo. The talks have been hung up on two
issues: Japanese economic aid for North Vietnam
and recognition of the Provisional Revolutionary
Government. As Hanoi's need for foreign aid has
increased, its determination io advance the Pro-
visional Revolutionary Government's diplomatic
interests appears to have waned. Japanese nego-
tiators are now confident that Hanoi is prepared
to jettison the recognition issue and settle for a
compromise on aid levels.
Hanoi's efforts on behalf of the Provisional
Revolutionary Government, however, may get a
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more sympathetic hearing elsewhere in Asia. The
new deputy prime minister of Australia, Jim
Cairns, is a long-time sympathizer who argues that
the provisional government, under the Paris agree-
ment, is entitled to equal status with the Saigon
government. So far, Australia's Labor government
continues to deny formal recognition, but some
gesture?probably support for seating at interna-
tional conferences?may eventually be made.
Hanoi has been turning the screws hardest?
and most effectively?closer to home in Laos.
Initially, Prime Minister Souvanna succeeded in
tabling a communist demand for recognition at a
cabinet meeting on June 12 and reportedly re-
ceived the King's blessing f or a continuation of
Vientiane's policy of recognizing Saigon and
ignoring the Viet Cong. Following subsequent
backstage maneuvering, however, he is now pri-
vately discussing the possibility of reducing Sai-
gon's representation to charge status and granting
some?perhaps informal?reprer,entation to the
Provisional Revolutionary Government and also
to Sihanouk's exile "government." With con-
tinued communist pressure on this issue certain,
at least some bow in this direction annPnrc ikely.
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AUSTRALIA: MODERATION FOR NOW
The moderate tone of Deputy Prime Minis-
ter Cairns' public comments since his elevation to
the number two government post two weeks ago
suggests that his broader responsibilities have in-
fluenced him to mute his criticism of the US for
the time being.
Cairns has been in the forefront of Austra-
lian leftists agitating for the early removal of US
defense and scientific installations in Australia,
but he now implies that he will not in the near
future use his new position toward that end. He
has reiterated his opposition to the presence of
these facilities over the long term, but expects
improvements in technology to eliminate the US
need for them before too long.
In the past, Cairns focused his most vehe-
ment criticism on US Vietnam policy. Last week
he told the press that this issue had lost its impor-
tance to him and that in his new government role
he would now concentrate on Australia's internal
problems. Cairns will, in addition to the deputy
prime ministership, again hold the international
trade portfolio in the cabinet, and he may wish to
expand his influence in domestic economic
policy. Now almost 60, Cairns may still harbor
the ambition to become party leader and prime
minister.
Cairns has tried, since becoming deputy
prime minister, to give the impression that he is
selective rather than automatic in embracing
leftist aims. He has, for example, advocated rec-
ognition of the Viet Cong provisional government
and Cambodia's Sihanouk?but not the Lao or
Cambodian Communists. He professes to be as
opposed to Chinese nuclear testing as to French
testing in the Pacific and says he will raise the
issue when he visits Peking later this year. In
expressing his foreign policy views, Cairns mod-
estly says he is speaking for himself, not the
government, but his new position tends to give his
views greater weight.
Cairns may calculate that since there are no
foreign policy issues of strong interest to him at
this time, he can afford to adopt a responsible
pose in keeping with his higher government posi-
tion. Considering his strong sense of nationalism,
however, he will be likely to resume criticism of
US policies any time they strike him as inimical
to Australian interests. In particular, should he
conclude over the next few months that the US is
giving no thought to the eventual removal of its
bases from Australia, he may well renew his aqita-
tion against them
CHINA
POSTER POLITICS
The walls in one section of Peking were
freshly papered this week with new political
posters. Unlike their predecessors, the new tracts
consist largely of personal grudges and graphic
accounts of alleged physical abuse suffered by the
authors. The focus is definitely local. In keeping
with a Central Committee directive issued last
month, representatives from several provinces
have come to Peking to air their grievances in
posters.
Two Politburo members attacked in the
initial round of posters earlier this month?one by
name and the other by thinly veiled innuendo?
made public appearances this week. The posters
have apparently had little or no effect on their
political standing. Moreover, an article in the cur-
rent issue of Red Flag, the party theoretical jour-
nal, strongly suggests that at least some of the
officials criticized in posters are wrongfully at-
tacked. The article warns against mistaking
"friends" for "enemies" and "hurting our com-
rades."
The same article encourages the expression
of "correct criticism," and there seems little
doubt that the party Central Committee?not the
poster critics?will ultimately decide the fate of
provincial officials currently under attack. Recent
Central Committee directives have in fact taken a
stand on some of the provincial leaders named in
posters. One directive supports the first party
secretary in Szechwan Province and another criti-
cizes the top official in Kiangsu Province.
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1973 TRADE BOOM TO CONTINUE
Pushed by soaring world prices, currency
revaluations, and a rising volume of imports and
exports, the dollar value of China's foreign trade
in 1973 increased by 60 percent to approximately
$9.4 billion. This year, trade will probably in-
crease another 30-40 percent, approaching $13
billion.
China's trade deficit last year with the non-
communist world was $425 million, and it is
expecterl to reach $1 billion in 1974. To help
cover these deficits, Peking has relaxed its con-
servative financial policy and greatly expanded
the use of short- and medium-term credit. At the
same time, China has stepped up efforts to boost
hard currency earnings from commodity exports
and services. Petroleum exports, on:y $35 million
in 1973, will probably exceed $300 million this
year and could earn $1 billion annually within the
next few years.
? China's recent surge in imports is aimed at
overcoming agricultural shortfalls and boosting
industrial development. Imports of grain, sugar,
cotton, and vegetable oils will probably increase
from a record $1.3 billion in 1973 to about $2
billion this year. Roughly half of China's agricul-
tural imports will come from the United States.
Machinery and equipment orders from the
West in 1973 totaled almost $2.5 billion, in-
cluding $1.2 billion-worth of complete industrial
plants from Japan, Western Europe, and the
United States. New orders for machinery and
equipment are strong, despite a growing debate in
China over the dangers of reliance on foreign
equipment and technology.
Trade with the non-communist world will
continue to account for 80 percent or more of
China's total trade. Japan will remain the leading
partner with two-way trade reaching about $3
billion. The US, now China's number two trading
partner, will run up a surplus that is likely to
exceed $1 billion on a total trade of $1.2 billion.
Trade surpluses with Hong Kong and the less
developed countries will help offset China's lame
deficit with the d- - .ped West.
7
6
5
4
3
2
1
0
1969 70
China: Balance of Trade
1
n
PI
P
114
Billion US Dollars
t..,40 1
Pl." 1
Deficit ,t7 ; ,
, .
,, ,
,, I
ti I
Ii F' ?
'-nr-'''.11?"
r ,
t ,
I. ,
, ,
TOTAL,, ,
,
I I
Surplus
I
,
nr ?
,.,ICI
NON-COMMUNIST
COMMUNIST
1 1
1........1
666( 6.74
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72
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Preliminary
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ARGENTINA: PERON ILL AGAIN
Pii-ddrint Prirotr's int dpit
hIll t of I i i rrjes 1, thilt 11c,
IIitllillllilljtlIIiitOcicIiittI.
Arthimill (rib( iil iii ?, hive let, iii the
"inr1(1" ,i rid Ii let tIlit the Piesi(Itint
!kindle if 1,11y, from
dpodointIN., Ti Ill' thin (joy-
eminent wen ire yvIIIII1(1 Ii di Till I. St iii ii's
Ill Pt!1(111.', 11111(.'1 I 11 (.1( told the US
th,d Pet (ills condition ii, not (Jilt-
thiiiii hive 1.rtieti Ti)SphidttliyttililpitiiINiT1SIili1
P ion si iii idtjtl hi mdintim leclui.t(1 'A11(.1(11.111:1
Iii ,111 ill It' hut to )1 1(}(1.
1 he iiiiiimistir)ss iii 'Clon's (..on(lition was
pointed up 1)v the sudden return to Ai gentind ii
povito sei,letity?lose Lopt Regd. 'ilio
iiiI been ..h.J ompa Iry in() VR:e Pi es iden t POI mil cm)
ii till) ti Liii ipii. MI`,. Pet on also leportedly
interirlii to chit stout af lei stops in 'lily,
S,.../11..ei kind, ,ind Spurn. US einl)asi;\,, sohio.es
this d pm(autiondr v hiove and tf),It the
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Ali of those demands on Peton's rineigies
hive (indoul)te(Ilv tiiken then lid!, The
Pie,,Rfent hid hoped to !liver to Spill) foi
ii let (luting tile vic)it if
Bur2rirr, Am."; viintel, hut politftal prussuies and
ptoblems dt home hive !nide him oilwitint Iii
led \./e.
Peron's Idlest illness ohdhly fuel re-
newed discussion oil successii in.
exploritor y ti-111?.') hive
twen wide! taken 1)\,, civilidir,
tit cit Lies It foroiuldle politic:ill plans rot the
post-Pr2irill et, Solo" ,dined for( es s?2ctois favoi
in expanded inilitir?; i(rle in the _jovernriient suc-
Lecicling Pel on, hut most m:tive duty of ficeis are
reskting the effol Is tl d few retiled offic:ets lii
gain conmlihrlents of support.
Because of then strong reluctance to assume
the responsibility of siweining, the maim itv of
the armed forces favois a strict constitutional
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succession, with the military backing Vice Presi-
dent Maria Estela Martinez de Peron or Senate
President Jose Allende. Although officers are con-
cerned with the course of the Argentine economy
and Peron's lack of progress against the teirorists,
they would be reluctant to take the reins again
unless widespread violence broke out after
Peron's death.
PERU: A SHIFT TO THE LEFT
The rising tensions caused by the forced
retirement of Navy Minister Vargas last month
appear to have subsided, but the six-year-old mili-
tary regime now is likely to shift further leftward.
The initial round of resignations by navy
officers who shared Vargas' moderate views
appears over; Navy Minister Arce reportedly has
convinced other officers to retract their resigna-
tions. President Velasco has demonstrated his
considerable military support, but tensions below
the surface will continue to have an unsettling
effect on the regime.
It is the more radical government leaders
who are likely to profit most from the recent
military split, even though Velasco probably did
not specifically intend this. The new navy minis-
ter has taken a line in strong support of the
President and is unlikely to oppose the radicals as
did Vargas. The radicals also are likely to be
encouraged by two recent government actions:
the closing of a leading non-leftist magazine and
the outlawing of a major non-leftist political
party. Further moves against the non-leftist news
media appear certain. In addition, Velasco seems
more determined than ever to implement the
social property system, which will significantly
increase government control of industry. Radicals
have hotly defended this program.
The succession problem is likely to be af-
fected by the outcome of the military split. In
January, Army Chief of Staff Morales Bermudez
is scheduled to become prime minister, a likely
post from which to succeed Velasco, who may
leave the presidency next year for health reasons.
Morales Bermudez appears to be in no
danger of being ousted as was Vargas, since his
base of support is more widespread. Radicals in
the cabinet and in the army, however, are likely
to persist in their efforts to reduce his influence.
In the past, Velasco has felt that Morales Bei-
mudez is the best qualified to provide stability
and durability to the revolution. Recent events,
however, suggest that the President places more
importance on instituting further revolutionary
change than on maintaining military unity and
achieving the highest degree of political stability.
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Igen Lattgertid
GUATEMALA: MORE OF THE SAME
On July 1, the rightist, two-party coalition
that has governed since 1970 will receive another
four-year lease on power when Kjell Laugerud, a
4/1 ,year-old retiied general, fierce anti-communist,
and friend of the US is inaugurated as president.
Despite campaign promises to bring about modest
social and economic change and to deal with
political dissent legally, his government's policies,
direction, and methocis are not likely to be much
different from those of his predecessor.
The new cabinet, announced on Monday, is
basically conservative. Laugerud chose close
friends to head the key defense and government
ministries and technically competent, respected
men for most of the other positions.
Laugerud achieved his victory in the election
last March through blatant vote ripging?excessive
even by Guatemalan standards. Protests of the
fraud by the defeated Christian Democratic Party
have been to no avail, and it seems resigned to
Laugerud's accession. The defeated candidate,
now military attache to Spain, is all but for-
gotten. The army was initially dissatisfied with
the government's conduct, but now appears fully
united behind the president-elect. The govern-
ment itself has eased its harassment of opposition
leaders, although political assassinations have con-
tinued in the interior.
Nevertheless, Laugerud will start from a
weak position. The Christian Democrats are still
angered at having victory stolen from them, and
their disgruntlement is likely to smolder for some
time. The party believes that the violence directed
against it in the countryside is part of a govern-
ment effort to cripple if not eliminate it as a
viable opposition group. Its leaders plan to or-
ganize against government attacks and hope over
time to generate pub!ic resistance to the Laugerud
government. Moderation is a scarce commodity in
Guatemalan politics, however, and the conser-
vative Laugerud is likely to react with strong
countermeasures when confronted with dissent.
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Laugerud will have to grapple with serious
economic and social problems inherited from the
out administration of President Carlos
Arana. Although the middle class is expanding,
wealth and power still belong to only a small
segment of society. Many in the lower class live
on the borderline of poveCy and starvation. In-
creasing inflation is wors-.2ning the economic
picture. Tax law revisions?periodically proposed,
but invariably defeated or watered down by busi-
ness interests?are essential to raise badly needed
revenues for the government.
Laugerud will also have to devote consid-
erable time and energy to blunting the influence
of his vice-president, Mio Sandoval. Sandoval,
an extreme rightist, an advocate of political re-
pression and violence, and an ambitious leader of
one half of the governing coalition, will attempt
to have a hand in most policy decisions. In deal-
ing with him, Laugerud will be hampered by the
knowledge that he owes his election to Sandovai's
skill in engineering the vote rigging. To Lau-
gerucl's advantage is his support from the army,
which is almost unanimous in wanting to mini-
mize Sandoval's influence. Laugerud has already
won an important bout with Sandoval over the
choice for president of Congress, but this struggle
is likely to be only one of many, as both men try
to assert their will.
The new president's relationship with Arana,
who will be the only ex-president in recent times
to remain in the country after his term in office,
could be delicate. Some observer.; believe Arana
will try to maintain a position of power by pie-
serving the loyalty of senior army commanders. If
Arana is successful in this, Laugerud will be deal-
ing with more than just a consultant on policy
ma Eters.
Laugerud's main concern in external affairs
will be the perplexing problem of Belize, the
neighboring British self-governing colony that
Guatemala claims as its own territory. Belize
wants independence, coupled with a defense guar-
antee from the British, but London wants to
withdraw completely. Its dilemma is how to pre-
vent a Guatemalan take-over of an independent
Belize while avoiding the albatross of a defense
guarantee. Launerud professes a hard line on
Belize and would probably intervene, by force if
necessary, should the UK give Belize inde-
pendence without reaching an accommodation
with Guatemala. His preferred course, however, is
probably to emulate his predecessors?
procrastinate for four years and pass the problem
unresolved to the next president.
BRAZIL'S AFRO-LUSO DILEMMA
Brazilian diplomatic skill is currently being
tested by developments in Portugal and its Afri-
can colonies. The new situation presents both
opportunities and pitfalls.
Brazil, linked to both sides by history, race
and culture, sees an opportunity to make political
and economic gains by helping the mother coun-
try leach a settlement with its overseas po5ses-
sions. The Foreign Ministry's optimum goal
would be to demonstrate Brazil's ability to serve
as a bridge between the West and the Third
World.
Complicating the situation is Brazil's some-
what strained relationship with Portugal. Tradi-
tionally, relations with Lisbon have been good,
and Brazilians feel genuine affection toward the
mother country. In fact, a 1971 treaty gives vir-
tual rights of citizenship to nationals of one coun-
try residing in the other. Recent developments,
however, have caused problems that point to a
downgrading of ties with Portugal.
Even before the Lisbon coup, Brazil had
apparently decided to strengthen ties with black
Africa, an area of interest to Brazil since the
colonial period. In addition to the attraction of
Angolan oil and Mozambican copper and coal,
Portuguese African ports could provide access
routes for Brazilian products to areas of high
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purchasing power, such as Rhodesia and South
Africa. Brazil's interest in Africa may have trig-
gered fears in Portugal that Brasilia was intent on
supplanting Lisbon there. Last year Brazil refused
to sell Portugal armored vehicles that might have
been used in Africa, despite Brazil's great need to
expand exports. This year, Brazil displeased the
Portuguese by sending as ambassador a personal
enemy of the Pew Brazilian president.
At present, Brasilia is distrustful of the new
junta, which is allowing socialists and communists
to re-enter public life, something the Brazilian
generals would not even contemplate. Portuguese
junta member Galvao de Melo accomplished little
of substance during a recent visit designed to
obtain Brazilian support. Moreover, Brasilia is
anything but certain just what policy line the
Portuguese will ultimately take toward their over-
seas trritories.
For the moment, Brazil is making no com-
mitment so as to avoid as long as possible com-
pletely alienating either side. In fact, the Foreign
Ministry has deftly turned aside an Organization
of A4ican Unity call for Brazilian mediation by
responding that, while Brazil is prepared to coop-
erate, it is not yet ready to serve as formal
mediator.
If the African colonies persist in their de-
mands for independence, Brazil may eventually
feel compelled to come down on their side. This
position would reassert Brazil's anti-colonial,
Third Vliorld credentials, which its African and
Middle East oil suppliers are surely watchina
? ? ?
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MB FILE COPY
RETURN TO 111-11V
Secret
Weekly Review
Special Report
Nationalirt China Revirited
.74F9P777?
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Chiang Ching-kuo
Natthitalist
aka
Revisited
25X1
Chiang Kai-shek
The Nationalist regime on Taiwan has profited from the island's spectacular
economic development, stable political institutions, and close relationship with the
US to solidify its control. International political and economic developments,
however, such as the rapprochement between the US and Peking and the interna-
tional oil crisis, have led some on Taiwan question the ioland's prospects.
Increasing political isolatinn, the prospect of further normalization of relations
between the US and Pekiiab and continued buffeting of the island's economy by
world economic developments will confront the Nationalist leadership with in-
creasingly difficult problems that must be handled with limited political and eco-
nomic resources.
One of the Nationalist government's best assets is the firm leadership supplied
by Premier Chiang Ching-kuo. The Premier has been de facto head of the regime
since his father's two years ago. Broadly experienced, with an extensive
network of supporters throughout the party, government, and army, Chiang Ching-
kuo so far has succeeded in coping with Taiwan's international isolation. Increasing
concern over his economic, and some of his international policies, however, has
contributed in the past few months to the first serious, albeit muted, criticism of his
leadership.
Special Report June 28, 1974
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SECRET
The Nationalist regime in Taiwan is counting
on continued economic prosperity, stable polit-
ical institutions and continued close relations
with the United States to help prolong its 25-year
hold on the island. These assets are offset, how-
ever, by potential weaknesses in the economy,
long-range morale problems, and a widespread
belief that the all-important relationship with
Washington will be further eroded.
An encouraging sign of the Nationalists'
prospects for political survival has been the
regime's ability to weather successfully a change
in leadership. Since retreating to Taiwan in 1949,
the Nationalist regime had been dominated by
President Chiang Kai-shek. In the summer of
1972, serious illness and the vicissitudes of age?
he was 85?forced President Chiang out of active
political life. He made no public appearances and
received no high-level visitors between July 1972
and late March 1974, when he bade farewell to
the departing US ambassador. Although he is no
longer ill, he appears to be only casually in-
terested in public affairs.
Chiang Ching-kuo
Since mid-1972, Taiwan has been under the
leadership of the president's son, Premier Chiang
Ching-kuo, who had been groomed by his father
in a series of increasingly responsible positions.
He maintains a busy schedule,
and appears fully in command of
political power. The Premier, for example, made
all the major decisions in Taiwan's confrontation
with Japan last April over Tokyo's civil air agree-
ment with Peking.
There's more to Chiang Ching-kuo's political
authority than the inheritance of his father's
mantle and his constitutional powers as Premier.
Chiang Kai-shek still provides a psychological
buttress, but Ching-kuo's authority rests on the
network of supporters built up over decades of
work at the heart of Nationalist politics. This
network is a major asset in a society where per-
sonal loyalties remain important.
Since becoming Premier, Chiang Ching-kuo
has attempted to consolidate further his political
Special Report - 2 -
position. As Premier, he selected, subject to his
father's approval, the membership of the Execu-
tive Yuan--the national cabinet?and brought
young technicians into the middle reaches of the
government. They owe their status to him and
have a vested interest in his continued political
success. Older associates of the president are
slowly being shunted aside.
To improve his government's image, Premier
Chiang has pushed hard to combat corruption,
not sparing those having high-level connections
with his father's regime. He has tried to make the
administraiive apparatus more efficient and to
weed out the incompetent, the no longer useful,
or, in exceptional cases, the potentially hostile.
To strengthen his position in the army, the
Premier has instituted a system of rotation among
unit commanders and political officers, and per-
sonally approves all appointees from command
down to the regimental level. The new minister of
national defense, General Kao K'uei-yuan,
reputedly is a Chiang Cilino-kuo man.
The Premier also has his supporters planted
in important Kuomingtang offices. Although the
party is more a tool of power than a source,
control of it gives Chiang Ching-kuo dominance
over the island's only major political organization.
Almost without exception, the standing commit-
tee endorses the decisions of the Premier, as they
did those of his father. Chiang Ching-kuo holds a
seat on the Central Standing Committee, and his
close associate, Li Huan, heads the party organiza-
tion department?the main lever of power in the
party. The reorganization of the party central
headquarters in the spring of 1972 inevitably
entailed some redistribution of power within the
party hierarchy?generally to Ching-kuo's advan-
tage. The Premier also played a major behind-the-
scenes role in selecting the candidates for election
to the Central Standing Committee in March
1972. Chiang Ching-kuo is now second only to his
generally inactive father in the official party hier-
archy.
In consolidating his own position, the
Premier has sought the support of the Taiwanese,
in part by bringing more of them into political
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SECRET
life. Since the Kuomingtang retreated to the
island in 1949, mainlanders have held most of the
high-ranking posts in the party, the civil bureauc-
racy, and the military service. A Taiwanese did
not reach .he rank of ambassador in the foreign
service until 1972. The new cabinet that accom-
panied Chiang Ching-kuo into office in May 1972
contained an unprecedented number of six
Taiwanese, double the number in the previous
cabinet. For the first time, a Taiwanese became a
vice premier, while another was made governor of
the province.
Some Taiwanese intellectuals and politically
conscious young businessmen dismiss these moves
as meaningless sop. Mainlanders still hold the
most important positions in the government,
security apparatus, party, and army. Those
Taiwanese who have achieved high office not only
occupy the less vital offices, but also have been
involved with the Kuomingtang for almost all of
their political lives and are carefully watched by
mainlander subordinates. Some are "half-
mountainmen" who were born in Taiwan but
spent a Teat part of their lives in the mainland.
Mainlander-Taiwanese Tensions
Nevertheless, mainlander-Taiwanese animos-
ities have become less intense. Differences be-
tween the two groups have become blurred
through intermarriage and common cultural ex-
periences. As Taipei's diplomatic isolation deep-
ened, increasing concern about Taiwan's future
provided impetus for greater cooperation. Neither
group wants to come under the domination of
Peking. The mainlanders are interested in main-
taining their privileged political status on an
independent Taiwan. The Taiwanese business
community, which controls the private sector of
the island's economy, is equally determined to
maintain the capitalistic economic system that
has made it prosperous. Even though Taiwanese
appointments to national ministries are largely
cosmetic, the Taiwanese do have a stake in the
island's political life and are prominent in local-
level politics.
The Kuomingtang's iron grip on Taiwan's
political process, reinforced by a usually efficient
Special Report
- 3 -
security organization and backed up by martial
law legislation, makes organized political opposi-
tion hazardous. Most politically ambitious
Taiwanese have made their peace with the party
because there is no other choice. Many young
Taiwanese politicians believe that time is on their
side, not only because they outnumber the main-
landers, but because of Chiang Ching-kuo's need
to placate the Taiwanese in order to secure polit-
ical support and stability in the uncertain days
ahead.
Once hopeful of making Taiwan a republic
with no ties to the mainland, the Taiwan hide-
pendence Movement has become badly frag-
mented and is poorly led. Improved relations be-
tween the US and China and Japan's recognition
of China ended the movement's hope of support
from Washington and Tokyo. Visits to Peking by
the movement's members reportedly have
resulted only in communist admonitions that the
future of Taiwan is within a united China. China
is interested in the Taiwanese independence
movement mainly for its potential nuisance value
against the Nationalist regime.
The Economic Picture
The importance of the Taiwanese within the
island's economy involves them in one of the
most sensitive areas of Nationalist policy. Busi-
ness support and confidence in the regime's
future are important elements in maintaining
stable control of the island. So far there has been
no indication that Taipei's diplomatic reverses
and anxiety about relations with the US have led
to a lack of business confidence, even though
many in Taiwan, both in and out of yovernment,
now regard US-Chinese diplomatic relations as
only a matter of time. But if prosperity has
helped induce political apathy useful to the
regime, an economic downturn could spun
trouble. Certainly, the economy is still providing
a standard of living for the average citizen far
surpassing that on the mainland. Some of the
bloom, however, has come off the rose. Like
other developing countric Taipei has been hard
hit by the sharp increases in prices of oil, basic
commodities, and manufactured goods that
Taiwan must import to continue its industrial
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Imports to Taiwan in 1973
Total=$3,792.5 (million U.S. dollars)
West Germany
5%
556083 6.74
25% Jj
Australia
31/0 Indonesia
3%
Japan
38%
23%
Hong Kong
3%
development. Nationalist policy makers were
already concerned about inflation last year, even
before the oil crisis, when inflation averaged 10
percent. By last fall, the prices of some items,
including daily necessities, were 30 to 50 percent
over those prevailing at the beginning of the year.
As 1974 began, inflation showed no sign of
abating; indeed, the round of crude oil price hikes
that had just occurred promised to aggravate in-
flationary pressures.
In January 1974, the government announced
sweeping economic stabilization measures, in-
cluding large price increases for such basic needs
as petroleum, electricity, and transportation, as
well as a tight money policy. To offset the in-
creased cost of living, a 10-percent pay raise was
granted to civilian and military government per-
sonnel with a 40-percent rise to follow in July. By
late May, there were some indications that infla-
tion may have begun to ease as wholesale and
consumer p.:ce indexes in April dipped from
March levels. The implementation of the eco-
nomic stabilization program, however, did not
eliminate concern within official and business
circles about Premier Chiang's ability to handle
economic problems. The tight money policy
threatens bankruptcy for many small and medium
firms, and the Premier may be unable to resist
Speciai Report - 4 -
Exports from Taiwan in 1973
Total=$4,483.4 (million U.S. dollars)
Hong Kong 111114
West Germany
7%
5%
Canada
4%
556064 6.74
pressures to loosen the reins. In fact, Taipei has
decided to extend credits to small- and me-
dium-sized firms to finance imports of vital raw
materials.
The International Problem
Continued economic prosperity and political
stability are closely bound up with problems of
foreign policy. Taiwan still depends heavily on
export growth, imported raw materials and in-
dustrial machinery, and continued foreign?
particularly US?investment for sustained eco-
nomic growth. But the series of political reverses
suffered in the last four years?expulsion from the
UN and its affiliated organizations, and the
massive shift by other countries to recognize
China?call into question the long-term interna-
tional position of the island and the regime.
Diplomatic representation has been reduced to 35
countries, mostly in Africa and Latin America, as
the number of governments recognizing China
increased from 45 in 1969 to 90 by mid-1974.
The erosion is continuing. Taipei is probably cor-
rect in fearing that Malaysia's recognition of
China in May will be followed by the Philippines
and Thailand. In Latin America, Brazil and
Venezuela are actively interested in expanding
contacts with Peking.
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OCUI1C I
Taipei has been able to minimize the effects
of growing political isolation by adopting a more
flexible approach, including a de facto two-China
policy. More importantly, essential economic ties
have been preserved with major trading partners
that have switched their diplomatic recognition to
Peking.
The US Connection
Relations with the US, however, are at the
heart of Taipei's concern. Premier Chiang Ching-
kuo recognizes that continued close political, eco-
nomic, and military ties with Washington are a
major element in maintaining popular morale and
continued confidence in the future of the Na-
tionalist regime. Between the announcement in
July 1971 of plans for President Nixon to visit
Peking, and the arrival in May 1974 of Ambas-
sador Unger in Taipe!, the Nationalist leadership
underwent a period of increasing anxiety about
relations with the US. Washington's detente with
Peking moved faster and was more substantial
than the Nationalists expected. The recent arrival
of a new US ambassador and the current ferment
Nations Having Diplomatic Relations With China
on the mainland have probably reduced fears of
new and precipitous moves in US policy toward
Peking, but many in the Nationalist leadership
and in the Taiwanese business community believe
that relations with Peking occupy a more prom-
inent place in US foreign policy than does a
competing concero to preserve a special relation-
ship with Taiwan.
Taipei's immediate reaction has been to cling
to ties with Washington as tightly and as long as
possible, while attempting to build up a greater
measure of economic and military self-suffi-
ciency. Preservation of the US defense commit-
ment to Taiwan, embodied in the 1954 Mutual
Security Treaty, is particularly important to the
Nationalists. Concurrently, the regime, while de-
emphasizing the "impossible dream" of a trium-
phant return to the mainland, steadfastly trum-
pets its refusal to talk with Peking. Premier
Chiang has ruled out the notion of turning to the
USSR to attain more room for political ma-
neuver?although he does allow the use of in-
cidents, such as occasional Soviet naval units
transiting the Taiwan Strait, to twit Peking. At
'Republic
of China
- A
556089 6-74
Special Report
-5.
SECRET
ED Republic of China (Taiwan)
Peoples Republic of China
June 28, 1974
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some time in the ful-ure, however, events beyond
their control may force the Nationalist leaders to
reconsider their absolute prohibition on talks
with the mainland. Unless they feel forced to do
so and they clearly have not, even when the
diplomatic tide has been running strongly against
them- they cannot be expected to change their
mind. The Taipei government will not easily give
Li p its claim to be the legal ruler of all China. To
do so would gn7.vely undermine the juridical basis
of mainlander rule and render more acute the
question of Taiwanese access to real power.
The Japanese Factor
? Taipei's all-out effort to maintain good iela-
tions with its major economic and political
partner the US- -is in marked contrast to rela-
tions with its second-ranking economic associate,
Japan. Tokyo's switch of diplomatic recognition
from Taipei to Peking in September 1972 was a
severe psychological blow to the Nationalists.
Economic imperatives, however, forced Taipei to
maintain close business ties. Unofficial channels
of political communication were arranged and,
after a short period of uncertainty, economic ties
regained a high level. Nevertheless, a degree of
emotionalism has recently appeared in Tapers
handling of its relations with Japan that is absont,
or at least suppressed, in its policy deliberations
concerning the US. In part, this may be due to
the supreme importance of maintaining special
ties with Washington. Moreover, Chiang Ching-
kuo's handling of the political confrontation with
Japan over the issue of civil airline arrangements
with Tokyo suggests that he miscalculated the
relative power of political factions in Japan's
ruling Liberal Democratic Party. Chiang's reaction
to the conclusion of the Sino-Japanese air agree-
ment in April 1974 was to terminate services by
China airlines and Japan airlines to Taiwan and to
close the island's airspace to all Japanese aircraft
rather than accept Tokyo's conditions for con-
tinued civil air service. The Premier probably had
little choice in making this move?he had publicly
threatened to do just this in an attempt to build
opposition to the proposed agreement in Tokyo.
Nevertheless, Chiang was careful to keep Taiwan's
economic relations with Japan separate from the
civil air issue and probably hopes to resume air
service after enough time has passed to save face.
The Premier's handling of the civil air issue is
atypical of his efforts to adopt a more flexible
Special rteport
Premier Ching-kuo reviewing honor guard
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June 28, 1974
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foreign policy. Taipei warned Manila that recogni-
tion of China would damage the entire spectrum
of Filipino relations with Taipei, but nevertheless
is formulating plans to maintain economic, civil-
ian, and cultural ties with the Philippines even if
Manila does not heed the warning. The same
policy is being applied to Malaysia.
The Honeymoon Ends
After nearly two years as de facto head of
the Nationalist regime, Chiang Ching-kuo's polit-
ical honeymoon may be ending. His handling of
the Japanese civil air issue and his tight money
policy have led to the first real, if muted, crit-
icism of his government. So far, the Premier has
earned support from foes in the Nationalist old
guard, as well as from his long-time supporters
and the population at large, for his successful
economic policies and his handling of relations
with Taiwan's one indispensable friend?the US.
As Washington proceeds with further normaliza-
tion of relations with Peking, and as economic
problems, such as inflation and world oil prices,
buffet Taipei, Chiang Ching-Kuo will face harder
problems than ever before. Missteps in dealing
with these problems could shake public confi-
dence in his leadership.
His regime is not in any immediate danger.
Moreover, the Premier benefits from a widespread
popular belief that there is no one capable of
taking his place and from the fatalistic feeling
that tiny Taiwan is merely a pawn in the game of
international politics. The island will probably
face a succession crisis when Chiang Ching-kuo
dies. There is no successor in sight, nor is the
Premier grooming one. Chiang will probahly be
succeeded by a collective leadership, which will
have to deal with the enduring problem of main-
taining an independent Taiwan in a still less
friendly international environment.
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June 28, 1974
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