INTELLIGENCE MEMORANDUM COMMUNIST CHINA: CONTINUED UPSWING IN TRADE WITH JAPAN

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001700010091-8
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 21
• Document Creation Date: December 21, 2016
• Document Release Date: August 23, 2002
• Sequence Number: 91
• Publication Date: April 30, 1998
• Content Type: IM

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L
Secret
DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
Communist China: Continued Upswing In Trade With Japan
Secret
ER IM 71-139
July 1971
Copy No.
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69
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WARNING
'T'his document contains information affecting the national
defense of the United States, within the meaning of Title
18, sections 793 and 794, of the US Code, as amended.
Its transmission or revelation of its contents to or re-
ceipt by an unauthorized person is prohibited by law.
GROUP I
Ecdudnd from aulamollc
Jo~_nr)rod;ng and
dndomRrotion_-
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CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
July 1971
INTELLIGENCE MEMORANDUM
COMMUNIST CHINA: CONTINUED
UPSWING IN TRADE WITH JAPAN
Summary and Conclusions
1. Japan, China's number one trading partner since 1965, provides
such important imports as chemical fertilizer, industrial machinery,
construction and transportation equipment, and specialty steel products.
A large portion of China's imports of high-technology goods come from
Japan, China's military research
and production, as well as its general economic development, reap
substantial benefits from this trade. The political element is present in all
Sino-Japanese trade negotiations, but it has clearly been subordinate to
economic considerations during the past decade.
2. In 1970, total trade between the two countries jumped by $200
million to $855 million, about 20% of China's total foreign trade but only
2% of Japan's foreign trade. Most of the 1970 expansion came in Chinese
imports - which rose from $415 million in 1969 to $600 million in 1970.
As a result, the already sizable trade deficit rose to a record $345 million.
3. China's trade with Japan in 1971 appears likely to expand by
"only" 10%, the rise in exports being roughly in line with the rise in imports.
The rate of growth beyond 1971 probably will slow down further, unless
the Chinese lose their reluctance to incur long-term foreign indebtedness.
Chinese requirements for Japanese technology and industrial products will
increase as the Fourth Five-Year Plan (1971-75) progresses. Because of
Peking's policies of technological and financial self-reliance, China will
continue to maintain a high degree of selectivity in imports.
Note: This memorandum was prepared by the Office of Economic Research
and coordinated within the Directorate of Intelligence.
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4. In the absence of long-term credits, the expansion of imports will
be tied closely to export possibilities. Chinese exports in the first quarter
of 1971 rose by 23% while imports registered a small decline. Raw silk
and foodstuffs have sparked this spurt in exports, and steady though small
expansion in these exports in the next few years appears possible. Greater
gains could come if the Chinese resume exports of coking coal and make
petroleum available to Japan. The need of Japanese industry for those two
commodities is almost insatiable. In the case of coking coal, however,
Chinese domestic demand is rising rapidly and little is likely to be available
for export. In the case of petroleum, the outlook is more promising, and
the Chinese might have as much as 10 million tons of petroleum available
for export by 1975.
Discussion
Background
5. The level of Sino-Japanese trade during the past two decades has
been influenced by both economic and political considerations. In the early
1950s, China's entry into the Korean War caused trade to fall sharply. After
the war, trade recovered and by the end of China's First Five-Year Plan
(1953-57) was nearly two and one-half times the 1950 volume (see the
chart). By late 1957, however, China was becoming more sensitive to the
approaching renewal of the security pact between Japan and the United
States. China seized upon the Nagasaki flag incident (the tearing down of
the Chinese flag by two young Japanese toughs at the Nagasaki Trade Fair
in May 1958) as an excuse to institute a drastic cut in Sino-Japanese trade.
Imports from Japan were slashed from $52 million in 1958 to $4 million
in 1959 and $3 million in 1960. During this peeriod, visiting Japanese were
assured that an advantageous trade pattern could be negotiated if Japan
would abandon its hostile attitude toward China.
6. The Sino-Soviet rift and the collapse of the Leap Forward
(1958-60) made it impossible to maintain the distorted trade pattern.
Therefore, Communist China dropped the three principles (no hostility
toward Communist China, no two-China conspiracy, and no opposition to
normalization of relations) that it had announced in 1958 as governing trade.
In their stead, China substituted new principles calling for governmental
trade agreements, agreements between individual firms, and continuing trade
of certain goods. China's more pragmatic approach ushered in a period of
rapid growth in Sino-Japanese trade which began in 1961 and, with the
exception of 1967-68, has continued to the present.
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COMMUNIST CHINA: Trade with Japan
Chinese Exports
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ojr-Vlti.1 1
Japan Moves Up
7. Sino-Japanese trade began to assume major significance for China
in 1964 when turnover more than doubled to $310 million and Japan's
share of China's total trade jumped to 10%. A primary impetus for increased
Sino-Japanese trade came from the rapid fall-off in Sino-Soviet and Sino-East
European trade which followed the widening of the Sino-Soviet rift in 1960.
China's imports from the USSR, which were $955 million in 1959 had
fallen to only. $135 million by 1964. Japan, because of its geographical
and cultural propinquity as well as its capacity to supply needed industrial
products at highly competitive prices, was a natural alternative source of
supply.
. 8. Japan replaced the Soviet Union as China's leading trading partner
in 1965 (a position it has held even since); trade that year increased 52%
to $470 million. Sharp increases in imports of machinery and equipment
and fertilizers led to a $44 million deficit, the first sizable deficit in trade
with Japan.
9. China's growing demands for chemical fertilizer and an upsurge
in purchases of iron and steel forced imports still higher in 1966. A 37%
increase in China's exports offset the higher imports and the trade deficit
remained at the 1965 level. Exports of foodstuffs ($119 million) and
oilseeds ($58 million) reached record levels in 1966. In subsequent years,
sales of both foodstuffs and oilseeds have been depressed, making it difficult
for China to avoid large deficits in its trade with Japan.
A Temporary Decline
10. Sino-Japanese trade fell 9% in 1967, the first decline in this trade
since 1959. Smaller purchases of fertilizer, iron and steel, and machinery
and equipment were paralleled by reduced sales of foodstuffs and oilseeds.
The lower level of trade in 1967 was directly attributable to the economic
disruptions of the Cultural Revolution - factory shutdowns, shortages of
coal and electric power, delays in transportation, and purges of economic
bureaucrats. The foreign trade sector as a whole suffered from these
disruptions, and total trade fell by approximately the same percentage as
Sino-Japanese trade.
11. The economic dislocations of the Cultural Revolution continued
on into 1968. The lessened availability of crude materials, coupled with
Japan's growing self-sufficiency in the production of rice, resulted in a
further sharp decline in China's exports to Japan..At the same time, China's
imports of Japanese fertilizer and steel increased $42 million, pushing total
imports from Japan up from $303 million to $345 million. The trade deficit
with Japan was $123 million in 1968, more than triple the 1967 level.
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New Heights
12. The economic effects of the Cultural Revolution had largely faded
away by the start of 1969, and Sino-Japanese trade resumed its amazing
growth. The surge in imports in 1969 was led by sharp gains in purchases
of steel, machinery and equipment, nonferrous metals, and fertilizer.
Imports of $415 million exceeded the $239 million of exports by $176
million, and it became clear that China was willing to incur a continuing
large deficit in its trade with Japan.
13. Economic planning and administration had settled back to normal
in 1970, the last year of the third Five-Year Plan, which had been engulfed
by the Cultural Revolution. Both agricultural and industrial production
reached new highs, and Sino-Japanese trade shared in the general advance.
Trade turnover grew by 31% over 1969 to $855 million. Of the $201 million
increase, $185 million was in Chinese imports and only $16 million in
Chinese exports. Thus, Chinese exports remained below previous peak levels
attained In 1966-67, but imports were nearly twice as great as during that
earlier period. The deficit in 1970 was a record $345 million.
14. Of the $185 million increase in imports in 1970 over 1969, two
categories accounted for $150 million - machinery and equipment and iron
and steel. The sharpest rise in imports in 1970 was in machinery and
equipment - from $47 million in 1969 to $120 million in 1970. This
category, which was 11% of total imports in 1969, accounted for 20% in
1970. Particularly noteworthy were the quadrupling of imports of
transportation equipment, a more than tripling of imports of metalworking
machinery, and a recovery in imports of construction and mining machinery
to levels approaching those of 1965. Trade in other categories of machinery
generally continued along trends established in the last five years. The largest
absolute increase in imports in 1970 over 1969 was in iron and steel
products, which increased from $172 million in 1969 to $249 million in
1970. Japan probably supplied more than 70% of China's imports of iron
and steel products in 1970.
15. Chinese exports to Japan in 1970 continued well below the peak
level of 1966. Exports of animal and vegetable products and textiles
continued to rise slightly, while export of oilseeds again declined and grain
exports remained near the depressed level of 1969.
Western Europe a Loser
16. Part of the reason for the rapid growth of China's imports from
Japan in 1968-70 can be attributed to a reorientation of trade from Western
Europe to Japan. Western Europe's exports to China, which totaled $720
million in 1967, had fallen to $565 million in 1969 and recovered partially
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to about $660 million in 1970. Because of shorter shipping times, lower
freight costs, and competitive pricing, Japan has an advantage over Western
Europe in the supply of many items, particularly bulk commodities like
steel and fertilizer. The closing of the Suez Canal and the ease with which
the Japanese have been able to provide those products most desirable to
the Chinese have added to the Japanese advantage in the last few years.
Memorandum Trade
17. The sharp increase in Sino-Japanese trade in the 1960s was
facilitated by the institution of the "Japan-China Memorandum Trade
Agreement" and the ease with which politically imposed conditions for trade
were circumvented. COCOM restrictions, the Yoshida letter, and such minor
skirmishes as the disagreement over acceptance of Chinese meat products
by the Japanese exerted some restraining influence on this trade.
Nonetheless, except in Memorandum Trade, politics have clearly been
subordinated to economic needs in most instances. China recognizes the
limitations of its influence in Japan and has rarely been willing to abandon
its import priorities in favor of political objectives.
18. In the absence of formal diplomatic relations between the two
countries, the nearest thing to an official trade channel is the "Japan-China
Memorandum Trade Agreement." Memorandum Trade was started in 1963.
(It is based on an agreement between Liao Cheng-chih and Tatsunosuke
Takasaki and thus was originally called L-T Trade.) This trade is renegotiated
annually between Chinese officials and influential members of Japan's ruling
Liberal Democratic Party. Each year, the Japanese delegates ritualistically
denounce the fundamentals of Japan's foreign policy and then proceed to
arrange the next year's contracts, which are parceled out among loyal
government supporters. The trade normally includes Japanese exports of
chemicals, steel, and machinery and Chinese exports of inint~rals and
agricultural products.
19. Memorandum Trade accounted for more than 50% of
Sino-Japanese trade in 1963 and in absolute value reached a peak of nearly
$200 million in 1966. Since then, the amount and proportion have declined
steadily so that this trade now accounts for only about $70 million, or
less than 10% of total Sino-Japanese trade. Memorandum Trade as a portion
of total trade in 1963-71, is as follows:
Year
Percent Year
Percent
1953
1964
1965
1966
1967
51
40
36
31
27
1968
1969
1970
1971
20
11
8
7-1/2
a/
a. Projected.
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Friendly Firms
20. Most trade with Japan is now carried out between the government
of China and "friendly firms." Any Japanese firm can become a "friendly
firm" and thereby carry on trade with China as long as it meets the various
conditions imposed by the Chinese from time to time. Conditions
supposedly imposed at present are encompassed in the following "Four
Principles" which were announced by Premier Chou En-lai in April 1970.
(1) China will not trade with those who want to help
South Korea and' Taiwan;
(2) China will not trade with those investing in
enterprises in Taiwan and South Korea;
(3) China will not trade with those sending arms to wars
staged by the United States in Vietnam, Laos, and Cambodia;
(4) China does not intend to trade with American
enterprises in Japan.
According to Chou's statement, China will cancel contracts with Japanese
trading firms, whether they are engaging in memorandum trade or friendly
trade, if they go against these principles.
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Commodity Composition of Trade
24. In recent years about three-fourths of China's imports from Japan
have consisted of iron and steel, fertilizer, and machinery and equipment
(see Table 1). Imports or iron and steel increased by four times between
1965 and 1970, from $49 million to $249 million. Not only have these
imports grown sharply in absolute terms, but they have also increased
relative to other imports. In 1970, iron and steel accounted for 42% of
China's purchases from Japan in contrast to 19% in 1965. China's imports
of steel include basic shapes and plates, strips, wire, tubes and pipes..nd
a variety of special steels.
25. Japan is also a major source of chemical fertilizer for China.
Imports increased rapidly until 1966 when fertilizer purchases totaled more
than $90 million. Larger sales by the West European consortium Nitrex
depressed Japanese sales below the 1966 level in 1967-69. In 1970, Japanese
sales reached $97 million, slightly above the 1966 level. The benefits of
lower shipping rates from Japan are illustrated in the instance of fertilizer
imports. In 1969, purchases on an f.o.b. basis from Japan and Western
Europe were $81 million and $80 million, respectively; delivered costs were
$88 million from Japan, compared with $111 million from Western Europe.
Thus, in the purchase of roughly equivalent amounts of fertilizer, China
had to pay an additional $24 million to cover the freight differential from
Western Europe. Major types of fertilizer imported from Japan are urea,
ammonium sulphate, and ammonium chloride.
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 ?? ?;' ti'I .?4965'1966' 1967.:.'l968 '';'1969.',1970?
?~ .. .C6minunis,t Chinai ;Commodity: ' '
? U' Composition..of ;'$ino-Japanese Trade -?'
' ~' ~. `.~?.' .Million: US $ .
Chinese imports 331, 303' .345 415 , 600:'`,'
' ? j:
Crude materialsn, fuels, ? and edible oils `? _ 16 , 12 5,'; '8... 9 f 15
Textile yarn and fabr is
13- t
16
14: ? ?'?1;5;
l'"
Chinese exports 0
213
Crude materials, fuels,
and edible oils$
1234
?131 109 ?
123
Oilseeds
50
58 ?
5'5 %?. 51
48?
Textile fibers
9
19
25. 23 a
32.
Crude animal materials,
5
6
6 6
6?
Animals, meat, fish
Grains
41
59
39 *23 L
2 ?
Fruits and vegetables
15 ,,.
21'a
20 ? 19
?2n
Chemicals
9 10
18. ??
Manufactures
390
41
36 30
41
Of which:
Textile yarn and fabrics
1
ab
or
Clothing
1
2
3 6
10
Iron and steel
23
21
9 1
b/
Nonferrous metals
1
4
2 2
1 ??
0
V
1
2
2
a. Data are base on official Japanese
adjusted to show China's imports c.i.f.
f.o.b.
b. Less than 0500,000.
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and China's exports w? , T
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26. 19. ,:t'he' ''1'99g'?'s, "wli*eo the ? `?1JS512 supp'Ii'erd:' ;tFme ma'cli ile jy. c er
'; ?'' teeluticians foi' Elan?u-'s -indust~r?,i tioli; im orts; v~>;e; r redominant baS'
y ~. p p, lY le
{;~,. ';; ;? ?h ateria1s ;and equipment. In '1-9,6.0's, 'in .con,trast:, the Chinese lhe'msel,ves
are able
requirements ?and'
de ends on imports for h'i her, ?technoloBY'i heiiist Japan : and 1
p g. ' Yqstern? ;Farb c }
r ;: ~? , r ',: e' sujppla,nted', the U$Sx t?asaind>tstri ii supplier:'',) Cl ,n'a's imports
i av of
machin'er'y', -'an'd, equiptne'`froiii'? Japicp? nearly: doubled: ?froi>~':
to .$120imillion? bet~veen.1965' nd 1)70:~.11'fter?~j,u ~' :in 1965:' :?'' ?:'~ ?'' `~
''~ , : roping sha' ply ,
S ?. '?' }, c: , ;, ~~';'imports gradually.'de'clined:; in 1966:68` td. a; low of
increased by about%SOlo; n 1':969'.t.b":S4,7?million'a'nd`?nea"rly,."rtii'pled in. 1970:.
to%$1' 20.?million: *?The 'rapid: ri'set'in- 11969-70 refle'ct's the -fee'-recovery ' of.. ptatit. y f ? , ?.,
}? ":c( expansion?-:activity, in Clun'a ~follo'wi-ng the Culfu;al: ? I evolution nd: ,the`
resumption of systematic .t'brward? planning. ;;f:'~'` '; ,' ?', '`'
'?r' 'A,' ?~
'~'
7
i'? Table?~2?'ves
a
e
'
`
oi
'
t
il d'
eb
a~kd
w
n
~
'
'e
'
f"
~
-.~ .t? ?.'. ? ;1111 jJu1 11J, ? fu:J_ a,.lu ? ? i 7 (u ? JaISO . re-?iee>:.'?l.nlne.SC'v: 1 _ 1 rge-scat . / ?
e c ,?9f '',.'!.. .?. :, , p nssr' 1 or-~; a e,.
.i ,,5.~ e.. _? - "r - ? `~ - l l1 a''~'.r .. _,w.;. - -, ~. ;, .. .,, p,,,~-? t? fi
equipment and China s attem_ts'to expa''n_dt~.its:transpor?'t?aanatiill'ties:. The''
,.~., , ? ? 11URMU rsLaV,r.q pcreasea auring?. this ,perioa an,a""tnen:ro$e .spar 1."' its. \? ,~
?r, :;;, iriaenery; yireatirig%'and coolii~g:,equipmeiit;;rand electrical,viiiaelur-e ~? 'On ~ :- '"
,~ thee tidier .';hand', imports of 7 internal combustion. en'gines,?; metalworking'
v'N.~, ?,, .. _ .?.. '.maeh,'nPrir? ni,ri,ne . 'ritl ~,.~i?r~.,4,?,??nno : ko.,;-, .,.,,~? . r:...:... ;._F ...,...: t _._~?.. .. ?,' .. -
1, .. .. ..v,,..," Y, GVUYIGN.,1}.GI11',I,7j ?.Y?..r~ .fr
;to:? .196,imports a','of? / + (' ?.:~;
:i:'?F,~11, ;~??` ~,, p e0(1SaTUCt1QIT and ;'miph1g machinery;'; textile r? ti. .,:
?a
??
:
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re
o
n,of.-.i
achi
ry,
n
9r!d
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,
.
mmports-''from Japanhe gro.wtn'of such'??mports has' been phenbtiiieiial %;'
1Z$. - Attnougn,;nonterrous metals comprise
only;:aisFriall-;- rtibiio
f total
was,bore- '
eclip, e,, , t %rq pc. y_. < ports~~of fibers
ade: u for b.' increases iii;,
}i textile
in 1965 alt}ioli.?ri ` 'be - _i~~.- -- - -? :- --:... s ?: .JA
msg low that; ofs '1966 Exports' of grain;-mostly rice,,,: >, ,?
' declined s} arply .from . ~$4'l .,million M in'. 1'9M 'tn ~~' illion 171 ' '1 Q7(1 Thid,~'a'i' it ..
9.Q%''of he~:aotal~tri?_ 19/0.? r-;,aluinii umi platinum zinc`' i :? ?~ ''I? "'
': . I:,? t~;,C, s.> ,'.? . _ .... . _. r ? .? .. '.? , : and tifamum'' '' . "
the `?:world: Nonfeir,ous? metals'importe:d',from-,Japan?in'clu.d'e,'copper? -'nearly,
~:-
`duets' which- increai , ,.. 1 62.
and;'=P ?.
ro sed; `from $?1:1 tiiiillion?an 196'C ~
.~K,.r~ / ;'..;.- ?. ".~,1 ?. _ , ! ?~ r 1. ,j., , S~;tb''$ millon ,.?1; '?'.1/~\
1970 :'Oilseeds'haye'ranged between~$40 million and~$60 million annuall ' -72
:Table ?,1 ,t ? b~ 7~, r ,
,
. ,- ~'Importanee W-;'J'
apanese Trade-to China
^
. ,~
f
.i'.~'rJ ~ ,,.?~ `,_30:- ~Trade~,wit$rJapan,was,:about)?20% o:f::totalChinese foreign trade
Ig ;?::;' ' - ? in 1970. ;Tlie' proportion 'lies=markedl `?iricreased'''over'tlie': a r~~
'~'~ ~?~ ?~~~? _.'-;?, ~.3; r, , , . _ ..~ ., Sri ,