IMPOSITION OF FINANCIAL (BLOCKING AND IMPORT) CONTROLS VIS A VIS THE SOVIET BLOC COUNTRIES OTHER THAN COMMUNIST CHINA

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP63-00084A000100150002-8
• Release Decision: RIFPUB
• Original Classification: S
• Document Page Count: 66
• Document Creation Date: December 12, 2016
• Document Release Date: May 21, 2001
• Sequence Number: 2
• Publication Date: June 22, 1955
• Content Type: REPORT

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CFEP DRAFTING GROUP
ECONOMIC DEFENSE POLICY REVIEW
Staff Study No. 10
Draft of June 22, 1955
Imposition of Financial (blocki andort) Controls vis a vie
the Soviet - oc oun rtes Cher than Communisst hhia
This draft of Staff Study No. 10, "Imposition of Financial
(blocking and import) Controls via a via the Soviet Bloc Countries
Other Than Communist China", is transmitted for your use in con-
nection with the work of the CFEP Drafting Group on Economic Defense
Policy Review.
In compliance with the request of the Chairman of the
Drafting Group, the Executive Secretary, EDAC, is providing repro-
duction and distribution facilities as a service to further the
work of the CFEP Drafting Group.
Irving I. Kramer
Executive Secretary
Distribution:
CFEP Drafting Group
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gaited States except as authorised by the Secretary of the Treasury. As other
Germany invaded Norway, and Wit. The President, by &ecutive''Arden No.., 8389,
Prohibited transactions .invalT11Ag Nogan and Danish property within the
countries were invaded or d "-d=t#ted by -the Axis, the Control ft's successively
C.
during World War 11 first as a measure to Protect the; ` K t f. -? ,
economic warfare measure against the Ax s Powers.
Freezing or blocking contrQla; were first initiated in Apri 1#40, when,
extended during the aei mr and fall of 1940 to the assets of the Itherlands,
Belgium, France and the" Baltic and Balkan States.; In' June' 191x1, th, Control
wets extended to G0
rsagy and Italy and to the- rest of continentalrope,
Japan. *t the same time, freezing control was extendedto Mina,at the
July 26, 1941, when Japan overran Indo-China, thq Control Was invoked. against
speai c request of generalissimo' Chiang ` aai-shek;; in ?rair -t0 aasiet chiba
the '. control of ` its' economy and -in order to prevent Japan fro m -tieing the'
proved:
Staff Study No. 10
Draft of JVo 22, 19,55
(Contributed by Treasury,
Cameros)
IMosition of Fiaano a] :'~brdarc t f1 Y i I
rt trc+ a a a vis ` the Soviet, :6A 0 *;
oc vattri
ea er an .v,.,i..
China
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occupied areas Ii a loophole for evading freasiing control. After the
I., I
United States entered -e' wa
r' the blocking controls were ' exte On automatically
to all Japanese oceupib u sga.` the Far East.
At its inception, .the I reign Funds Control Of World War II had as its `
0 -
primary purpose fns'?prt~i'ta6"11~i of the assets within the "'Unnited Staten of
invaded countries in order' tp `pre vent their'? falling into the hands of the
, .. ... ..+r
invaders and 3n order to'pratecat American ins'titu;
tona. fron gossi.ble adverse
severing- all financial and commercial intercorse, trade and 'C ication,
claims. As the late crisis doe sod the' oa
Pe s ., , king` coitrtl was used
as a weapon of eoono c,1Iar ,err. directed against the Axis
. ,...~ powers' thi'o
direct or' indirect,' bets 1ihe: United States' and lzi
d
between the United _States` a d f?rei ndire07 ctwhich direc*. or indirectly
%JWV+ .?s, a8a preventia `financial and commerdal in
t0rcowse and trade
as
zis
s -deainated
C~ Pis sere Tested
At the end of World II the' blocking controls weirs"lifted from the
assets in the IInited States"oZ'the formerly occupied countries The United
States assts of. the 049f. ,enespr countries. Ger mr and Ja
n ---- -?~""+ ii 4000100 1A Ti is country of the Axis
controls: The `World far'.II ten, ls' ears, in effect, not annlied +^ +s _4P,
are still blocked under the Jurisdiction of the JusticeDepartarent (which
succeeded the Tress
ury ` a siistrator of florid War II. blocked Property) but
assets accruing to.these countries since December 1945 are`not blocked at
present. The World War II assets of Latvia, Lithuania
and Estonia and some
' polish and Czech assets' .are ' lik '
Oise still under Justice Doparttient blocking
satellites, Rumania, Hungar7 and Bulgaria, which are now Soviet satellites,
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Separate controls over imports of merchandise originating in Axis held
territory were unnecessary during the World War II period since such products
mere prevented from reaching the United States by the Allies naval blockade.
(B) 1 position of controls via a vis Communist China and
North Korea in 'December 1950.
The present blocking regulations, the Foreign Assets Control Regulations,
were one of the economic warfare measures taken by this Government in December
1950 when the Chinese Communists intervened in Korea. These Regulations were
intended to deprive Communist China and North Korea of foreign exchange which
could be used in support of their aggression. The Regulations block all
property in the United States in which there exists any Communist Chinese
or'North Korean interest and prohibit all trade or other financial trans-
actions with those countries.
Imports of goods of Coamsnist Chinese and North Korean origin are pro-
hibited as a part of this program to deny China foreign exchange. Moreover,
in order to effectuate this policy., the Control has found it necessary to
prohibit the unlicensed importation of various types of merchandise
historically imported from China, regardless of the alleged place of
origin of the merchandise. These restrictions have been imposed because
of the extent to which products of Communist China had been misdescribed
as the growth or product of some other country in an effort to evade the
Regulations.
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4
2. Legal Luthorit3r0 Statutory' authority now exists for Secretary of the
Treasury to impose blocking and import controls under Section 5(b) of
the Trading with the EmemyAct.
By E=ecutive Order 9193 the President has conferred upon the Secretary of
the Treasury all powers and authority vested in the President by If 3(a) and
5(b) of the Trading with the Enemy Act (40 Stat. 412,9 k159 as amended; 50 U.S.C.
APP. (3) (a) and (5)). This delegation carries with it responsibility in time
of national emergency for the regulation$ where required., of all dealings in
property subject to the jurisdiction of the United States in which any
foreign country or national has any interest and of all trade and financial
transactions with such countries or persons.
The Foreign Assets Control Regulations were issued pursuant to this
statutory authority following the declaration of a national emergency by
the President on December 16, 1950. The same statutory authority may be
utilised to impose blocking and import controls on the other Soviet bloc
countries if desired.
3. Objectives and Basic Concepts of this Control Mechanism.
While the United States has since December 1950 imposed blocking and
import controls on Communist China and North Korea (as well as a virtual
export embargo) such controls have not been imposed on the assets of and
import from the countries of the European Soviet Bloc. In the case of the
European Soviet Bloc countries the United States has thus far been concerned
only with denying to such countries goods of significance to the Bloc's war
potential and for this purpose has chosen as its primary instrument inter-
national security export controls.
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Certain basic questions which would be involved in extending blocking
and import controls to the countries/the European Soviet Bloc would seem
to require some discussion before considering the economic impact of such
controls on the Bloc and certain administrative problems which would be
involved in such an extension of these controls. The questions are the
followings
(A) Is the economic p ose i the case of the Soviet ffiecs as
in the case of C2gMist China, to deli? foreign exchange so
as to prevent acquisition of goods and services therewith?
The primary economic purpose of imposing blocking and financial controls
on Communist China and North Eorea is to deprive 'those countries of foreig8
exchange--through immobilising the dollar assets they hold in the United
States; closing the important United States market to their goods; and
cutting off the exchange which normally would accrue to the Communist
authorities if persons in the United States could freely continue to
send support and other remittances to persons in China.
Although the European Soviet Bloc does not have as many unblocked
assets here as Communist China did prior to our blocking that country's
assets and is not dependent on the United States market for its exports
to the extent the Chinese were, the economic warfare objective in extending
the blocking and import controls to the European Soviet Bloc would be the
same as in the case of Communist China., namely to deal as hard a blow to
their economy as we are capable of through action which deprives then of
needed foreign exchange with which they might otherwise acquire goods and
services in the United States and abroad. This is not to say that in any
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extension of these controls to the European Bloc this economic warfare
objective would be the paramount consideration involved. Indeed, political
and psychological aspects would probably be of considerably more importance
in any determination to extend these controls. However, aside from any
political and psychological reasons for imposing blocking controls on the
European Soviet Bloc our economic purpose would be to deal a blow to their
economy, through depriving them of foreign exchange.
It has been suggested that blocking the European Soviet countries
might be done to prevent them from using their dollar assets and earnings
for propaganda and subversion and to prevent them from financing in dollars
imports into the. Bloc from third countries of strategic goods, while non-
inimical uses of their dollar assets could be licensed. It would be
difficult if not impossible to operate an effective blocking control
which would achieve these objectives. In licensing transactions considered
not inimical to the UnitedStates9 the licensing authority would have to
rely in the main on either representations made to it by Bloc applicants
or on onerous investigations. The only operationally feasible approach
would appear to be a firm policy of denying all applications for licenses
to use Bloc assets except in unusual circumstances. This would probably
amount to denying use of Bloc assets in almost all cases so that we would
wind up with close to complete blocking.
Moreover, even the most rigid blocking would not eliminate cloaked
assets and transactions. Propaganda and subversive activities could still
be financed from assets cloaked in the names of nationals of friendly
foreign countries and in the names of secret agents in the United States*
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Blocking controls likewise would not preclude cloaked illegal strategic
trade dollar transactions financed through institutions in non-blocked
countries, where the transactions are cloaked and neither the bank abroad
nor the U. S. bank holding the cover dollar account is aware of the purpose
of the payment. In short, direct enforcement could hamper, but not prevent,
cloaked activities.
The blocking and import controls, however, would, through the denial
of foreign exchange to the European Soviet Bloc countries, have some effect
on undetected cloaking activities. Since the Bloc would have less exchange
available for goods and services some subversive activities and some
clandestine strategic trade might be eliminated as a by-product of the
denial of exchange to the Bloc.
The basic economic warfare objective that a blocking and import control
directed at the European Soviet Bloc countries could have would therefore
appear to be a denial of dollars to the Bloc to prevent their obtaining"
goods and se ricea through their trade and financial transactions with
the United States.
(B) Are there difficulties conceptually in having import
controls without blocking Soviet Bloc assists here and
I without preventing non-trade remittances to the Bloc?
It would be difficult to justify a program having as its objective the
denying of foreign exchange to the European Bloc countries if the United
States merely banned imports but at the same time allowed these countries
the free use of their dollar balances here and placed no restraint on the
transmission of funds by Americana to these countries. There would appear
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to be no logical answer to queries from the public asking why, if the U. S.
was interested in depriving the Bloc of foreign exchange, it did not take
all effective measures at its disposal to accomplish this objective and not
just impose controls on imports. United States importers affected by import
restrictions under such circumstances could and undoubtedly would complain.
They would allege discrimination since they could not buy goods from the
Bloc and make payment therefor although other Americans could freely make
any type of payment they wished to the Bloc countries such as for services
or support remittances without let or hindrance. They would point out that
the dollars accruing to the Bloc in this fashion, though perhaps not as
voluminous as those which it might derive from United States imports, were
nnetheleas valuable dollars to the Bloc.
(C)
To it illogical' when viewed sole],v from an economic defense
standpoint, to have selective import controls with possible
exception of allowing certain strategic imports for overriding
reasons?
mile it might be easier as a purely administrative matter for the
United States to impose import controls on a limited number of Soviet Bloc
products--for example on the BLoc's larger dollar earners--such selective
import controls would be difficult to justify assuming the U. S. objective
in imposing controls is to limit the purchasing power of the Bloc. In the
short run the imposition of restrictions on the most important exports of
the Bloc to the U. S. would deprive the Bloc of substantial dollar exchange.
However, depending on the importance of such loss of exchange to the Bloc
and whether a market could be found here for other products, the Bloc might
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within a reasonable time substitute unrestricted products for their
restricted imports. This would then necessitate our imposing new import
restrictions after each significant change in the composition of Eloc
exports to the U. S. if we wish to keep down their dollar earnings.
Additionally, and probably more important, since selective import
controls would affect only those import businesses concerned with the
controlled commodities and the importers from the Bloc of unrestricted
commodities would not be affected, such a policy would be difficult to
justify to the United States importers of restricted commodities. If our
reason for imposing import controls is to deny exchange to the Bloc there
is no reason for singling out a particular group of importers to bear the
burden of the control, other than perhaps administrative convenience which
is not likely to be a convincing reason for the discrimination.
However, it would appear to be defensible to allow some Bloc imports
to come in while others are excluded if the basis for the admission is
overriding defense considerations. In the case of our presentfbmmunist
China import controls at one time we licensed imports of certain Chinese
commodities held by the.Defeuse Department to be essential to the defense
effort--it being felt that our obtaining the commodity was more important
to the U. S. than the fact that the Communists obtained foreign exchange
therefor. However, short of such a justification it would be difficult to
defend publicly a program which allowed some commodities to come in and kept
others out so long as our reason for keeping some commodities out is damage
to the Bloc through their loss of dollar earnings.
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If the U. S. were to exclude certain Soviet Bloc commodities for a
purpose other than to deny the Bloc the dollar proceeds of such sales as
for example import restrictions imposed for essentially protective tariff
reasons or to prevent the U. So from unduly relying on imports of certain
commodities from the Bloc., such a program could be defended logically.
However., this could not be justified on the ground their purpose is to hurt
the Bloc through deprivation of dollar purchasing power.
(D) Do blocking controls including import controls imply a
cessation of exports to the Soviet Bloc too except to
extent we are willing to allow innocuous exports for
"free exchange"?
If the economic purpose of imposing,blocking and import controls on the
European Soviet Bloc is to deprive these countries of foreign exchange with
which they can freely acquire goods and services both in this country and
abroad it would be consistent with this objective to license such exports
to the European Soviet Bloc as we may desire provided they are willing to
pay for such U. S. exports with new funds remitted from abroad for such
purpose. This is the situation which exists at present with respect to the
exporting of publications to Communist China, virtually the only exports the
U. S. is willing to allow to go to that country. A Department of Commerce
general license authorises the export of publications to Communist China but
the applicable Treasury general license only authorises payment therefor
from new free funds remitted to the U. S. for this purpose by the Chinese
Communists.
If the U. S. objective in imposing import controls was not to deprive
the European Soviet Bloc of the use of all foreign exchange., in so far as
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it is in our power to do so, but merely to control the use of the Bloc's
dollar earnings we could permit non-strategic exports to the Bloc to be
paid for from their blocked assets. Under $uch a program it would be possible
to license exports of non-strategic commodities to the Bloc if payment were
made from blocked accounts established with the proceeds of imports from the
Bloc which have been licensed. This, however, would not be a U. S. control
for the purpose of denying utilization of Bloc earnings from transactions
with the U. S. It would be allowing the Bloc to utilize such assets and
earnings for such exports as we are willing to permit, and more importantly,
which the Bloc deems it in its interest to acquire through the proceeds of
its exports to the U. S. Moreover, it would be unlikely that if the European
Soviet Bloc were blocked, but with the privilege of using the proceeds from
its exports to the U. S., for certain U. S. goods, they would be willing to
export goods.to the U. S. to acquire blocked dollars. For the value to
them of such blocked dollars would be limited to obtaining certain innocuous
merchandise which they could probably obtain anywhere in the world and where
they would not be in as much danger of losing the use of the blocked proceeds
of their exports if the U. S. later decided to impose a more severe blocking
control. Even if we were to permit the utilization of the proceeds of Bloc
exports to the U. S. to pay for authorized U. S. exports to the Bloc, it
would not be logical to allow the Soviet Bloc to use its blocked assets not
accruing from current transactions for exports to the Bloc, however isniocuous,
since the result of such a policy would be that any pressure which the blocking
of these funds might otherwise have had would be substantially dissipated.
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It would seem., therefore, that if the U. S. objective in imposing
blocking and import controls is to deprive the Bloc of what it would be
able to acquire with its dollar assets and earnings it necessarily follows
that they should not be allowed to acquire any goods whether they be U. S.
exports or not with any of their assets or earnings. For if we allow the
Bloc to use dollar earnings to pay for U. S. exports we should recognise that
while we are controlling their imports into the U. S. so that they may only
acquire therewith U. S. goods which we desire to sell them, these goods mast
also be the commodities they desire to buy from us or they would not allow
exports to the U. S. in payment. Such a controlled system of U. S. Soviet
Bloc trade would also necessitate our forcing into Soviet Bloc trade channels
those Bloc exports to the U. S. that normally move here through third countries.
We could not allow indirect imports from the Bloc through third countries
since they would be acquiring free exchange with their sales of such goods
in third countries, while if they sold to the U. S. directly the proceeds
of the exports to the U. S. would be blocked. We would have to bar such
indirect imports in any scheme to tie their imports into the U. S. with their
purchases from the U. S. Of course, if our import controls were enforced to
bar any useful employment of Soviet Bloc foreign exchange earnings this
indirect trade would have to be banned too.
In summary it may be said that to the extent that U. S. exports are
allowed to the Bloc for its dollar earnings we are softening the impact
which our import controls could have on the Bloc if they were used to deprive
the Soviets completely, rather than partially of the U. S. market for these
goods.
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(B) Is it feasible to impose selective import controls to
promote primarily non-economic defense U. S. objectives,
such as allowing' certain imports only if the proceeds are
utilized,for purchases of U. S. agricultural surpluses?
As pointed out above, allowing the Soviet Bloc to buy with the dollar
earnings from its exports to the U. S. some selected goods from this country
(in essence U. S. exports agreed to by both the U. S. and the Bloc) is not
logical if our aim is to deliver the maximum economic blow to the Bloc which
can be brought about through the imposition of import controls.
However, if the purpose of the U. S. in imposing import controls is
something other than to deprive the Soviet Bloc of goods useful to it through
curtailing its foreign exchange earnings, import controls might be appropriately
used in conjunction with selective export controls. Fbr example, if it were
determined to be U. S. governmental policy to promote the sale of agricultural
surpluses to the Soviet Bloc we might bar imports from the Bloc unless their
proceeds were used to purchase such U. S. agricultural commodities. Of
course, if the Bloc did not wish to utilize exports to the U. S. for the
agricultural commodities this procedure would'notwork. But if the Bloc
were willing to acquire the commodities in question in exchange for its
exports to the U. S.--import controls and controls blocking the proceeds
of such imports except as released for agricultural purchases could be used'
as a mechanism to effectuate such a program.
This, however, would not be a program to deprive the floc of the purchasing
power of its dollar earnings. It would merely be a plan to give it only those
goods for its dollar earnings that the U. S. wished to sell to it and which
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Would only be bought by the Soviet Bloc with.its dollar earnings if the Bloc
considered it to be to its advantage to do so. If it did not, there would
be no U. S. imports from the Bloc and accordingly no sales of agricultural
surpluses to the Bloc.
lt. Administrative Problems involved in Extension of Controls.
(A) Difficulty of blocking assets of and preventing dollar
transactions by Soviet agents and cloaks located in
friendly foreign countries.
If the blocking controls were extended to the European Soviet Bloc
countries the assets here of agents and cloaks of the Bloc who live in
friendly foreign countries would be technically blocked under the Regulations
but in practice their American assets would not be blocked unless the Govern-
ment or the American financial institution had reason to believe that the
person was a Bloc agent or cloak. Satisfactory information that such persons
were agents or cloaks would usually be difficult to come by for it must be
remembered that a national of the United States or of a friendly country
cannot be blocked on mere suspicion.
There might also be involved difficulties with friendly foreign
countries if the U. S. should block some of their nationals, as nationals
of a Soviet bloc country. This is obvious in the case of ostensibly
respectable businessmen. Even blocking a notorious Communist leader in
one of the Western European countries on the ground that he is an agent
of the U.S.S.R. might be a cause of friction between this country and the
country concerned, which the Bloc would be certain to exploit.
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(B) Difficulty of controlling certain imports from the Bloc
physically indistinguishable from imports from friend v
countries.
Mm the case of Communist China the Uo S. import controls are relatively
easy to enforce because Chinese exports to the U. S., by and large, are raw
materials physically distinguishable in many cases from similar raw materials
produced elsewhere; European bristles for example can generally be distinguished
from Chinese bristles. Imports to the U. S. from the Bloc countries, however,
particularly from some of the satellites, would involve many different
manufactured products indistinguishable from similar products made in
Western European countries. In the Far East the U. S. has entered into
agreements with the principal countries, such as Hong Kong, Japan, and
Formosa, whose products are similar to Communist China?s, under which these
governments certify to the U. S. that their exports to the U. S. of Chinese
type goods are not in fact of Communist Chinese origin. Imports so certified
are admissible into the U. S. under a general license. Such certification
procedures have only had to be set up with a relatively small number of
countries and commodities. The Czechs have been exporters to the U. S. of
semi-precious stones and the East Germans of considerable amounts of photo-
graphic equipment. In order to prevent such products from continuing to
enter the U. S. through other countries in Europe masquerading as the
products of such countries it would probably be necessary to bar similar
products from all European countries in the absence of a certification
procedure, as described above. It may well be that it would be an impossible
burden on the trade between the U. S. and the Western European countries to
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set up such certification procedures for all Soviet Bloc type products.
To the extent such procedures were not or could not be set up there would
be avenues through these countries for some products of the Soviet Bloc
countries to continue to reach the U. S.
Economic impact of application by O. S. of financial (blocking and
import) controls on Soviet Bloc other than Communist China.
(A) Estimate of magnitude of balances in U. Si which would be
blocked.
In the absence of taking an actual census of the unblocked assets
which the European Soviet Bloc countries now hold in this country only
rough estimates can be made of the magnitude of such assets. The following
table gives such an estimate for all the countries of the European Soviet
Bloc, to wit, Albania, Bulgaria, Czechoslovakia, Estonia, East Germany,
Hungary, Latvia, Lithuania, Poland and Danzig, Rumania and the U.S.S.R.
These unblocked assets, estimated to amount to $21 million, would be
affected by the imposition of new blocking controls. It should also be
noted that there are presently blocked subject to the World War II blocking
controls administered by the Office of Alien Property of the Department of
Justice approximately $50 million in assets of'certain of these European
Soviet Bloc countries, to wit, Rumania, Hungary, Bulgaria, Latvia, Lithuania,
Estonia, Poland and Czechoslovakia. In addition, approximately $9 million
in Czechoslovakian assets are now blocked under Treasury controls, representing
the proceeds of the sale of a Czech steel mill.
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Estimated Unblock Dollar Assets
of Eastern can Co ntries is the United States
as of Latest Available Date
(In thousands of dollars)
Total
Albania ..................
192
Czechoslovakia...........
1,162
Poland and Danzig........
2,142
Rumania ..................
4014
U.S.S.R ..................
1,830
Total Short-Term......
6,030
Long-Term i[....,..,
15,9000
Total Dollar Assets.**
21,030
Bank
Assets 1 Other 1
192
682
2,1;27
104
281
4,850 1,180
Note: Short-term assets of Eastern European countries not listed appear to
be largely blocked. Data on holdings through third countries not
available.
As reported by United States banking institutions as of March 31,
1955, except for Albania which is as reported by banks in the
Second Federal Reserve District as of December 31, 1954. Less
estimates for blocked balances derived largely from OAP-700 data.
As-reported by United States commercial and industrial concerns
and brokers as of December 31, 19514.
Not available but believed to be negligible.
Not available by country. Estimate based on United States
international investment position data as prepared by U. S.
Department of Comm rce and on data from Treasury Department
capital movements forms.
Source: Treasury Department Forms B-1, C-1/2, S-h, and S-1/3
Office of Alien Property Form OAP-700
Department of Commerce, Survey of Current Buses
may 1954.
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It will be noted that the above estimate of approximately $21
million does not include assets of the European Soviet Bloc countries
held here indirectly through accounts in the names of banking institutions
in third countries. It is not possible to estimate the amount of such
assets and the ownership of some portion thereof sight be so well concealed
that such assets would not be affected by blocking controls imposed on
the European Soviet Bloc countries and their nationals.
(B) Estimate of magnitude of loss to bloc through U. S.
ban on imports of goods of Soviet Bloc origin.
(i) Value of U. S. snorts f$m the Iloc.
The magnitude of U. S. imports of goods of European Soviet Bloc
and Outer Mongolian origin for the years 1952-1954 is shown In the
following table.
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II, S. aImports for Cats tion frm Soviet Bloc Countries
1952 -,1254
In thousan s of dollars)
Total , ..........'........... .
Albania... ................
Bulgaria..................
Czechoslovakia............
Eastern Geraany..........
!stoma ... .............?.
Hungary............., .. .
Latvia.....................
Lithuania .................
Poland and Dansig.........
Buaania...................
U.S.S.R...................
Outer llbngolia............
1954
50,9136
8
.325
2,960
4,470
1,309
1
21,512
381
11,785
7,385
Use than #500.
1 Not available separately; estimated
on basis of 1953 figure.
1953 3-952
142260 47$222
65 52
338 296
1,924 1,531
5,356 6s732
1,527 2,894
13,971 10,347
275 638
10,780 16,731
8,024 8,000 2/
Sourest Bureau of the Census, IT 110
S
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The Bureau of the Census and Bureau of Customs ordinary definition of
"country of origin" is the basis for these statistics. The Treasury's
Fbreign Assets Control in administering its import controls vis-a-vis
Communist China also regards as of Communist Chinese origin products of
that country which are processed in third countries, even though such
products would not be regarded as of mist Chines origin under the
usual Bureau of Customs and Bureau of the Census interpretation of that
term (See 5 (C).infra)
The following table shows the principal U. S. imports from the
Soviet Bloc countries other than China, with a breakdown by countries
for the years 1952 and 1953.
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Principal U. S. Imports for Cons tion from Soviet Bloc Countries
1952 an
In thousands o dollars
1953 A of
Amount Tbtal
1952
of,
Amount Total
Aibanla...........ee.o..o.oe..o... 65 52
Furs, unmanufactured.......... 65 100 52 100
Bulgaria........e.oe.s..ee.ooe.-.e. 338 296
Veg. oils & waxes, inedible... 243 72 226 76
risechoslovs ia...o.e+....es....... 1,924 1,531
Semi precious stones........-. 6444 33 147 10
Coal-tar qq products ............. 326 17 72 5
Furs & M:f'i8.......e..e......o. 138 7 172 11
Animal & animal products,
inedible, n.e.s.?.e.?o....... 3 - 3117 23
Eastern G'ermany. a ..... a .. a ... e . e .
Fertilizer ....................
Photographic goods............
5,356 6,732
2,695 50 2,727 41
1,316 25 1,911 28
Hungary, .........ee....ee e......e..
Animal & animal products,
inedible, n.e.e..e..se.oe....
Poland and Dansig.....o..e.e..e...
Neat products (hams & bacon)..
Animal & animal products,
inedible, aee.se.a..e.. oe...
1,527 2,8911
757 50 1,293 45
13,971 10,347
10,545 75 7,244 70
1,180 8 1,466 14
986 7 395 4
Rtmania?ee...e.seooooeeaoseaoo.oe? 275 638
Animal & animal products,
edible, n.e.s...o.sooee..e. 100 36 256 40
Furs & Mfrs.e..eo...s.....o..e 37 13 287 45
U.S.S.Reeo.eee.o..o.eoeeeeooo.oeo. 10,780 16,731
Furs & Mfrs........o.......... 7,068 66 12,304 74
Animal & animal products,
inedible, n.e.s. 1,011 9 903 5
Outer 1 ngolia...e.....aooao.e... 8,021
Wool, unmanufactured.e..e..... 5,599 70 (n.ae
Furs & Xfrs..eeo.eeeooooe...e. 2,310 29 (
Sources Bureau of the Census, FTUO, Ffl20.
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The following table shows a further commodity breakdown of
imports frost the entire European Soviet Bloc for the years 1952,
1953 and 19% and furnishes for comparison purposes a commodity
breakdown of imports from the Bloc for the year 1948.
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U. S. Imports from Soviet Bloc Countries i - Europe-- 1948, 1952, 1953 and 1951
(In thousand dollars)
Commodity
laports for consumption.?..e...e..eee.e
Meats and sausage casings-.I-o6.00666004
Fish products including shell fish.....
Other foodstuffs .............?..e......
European Soviet Bloc
9
1 45 92 1953
115054 39,268 31,351 12,639
919 1,782 10,653 17,726
696 585 331 381
161 516 196 279
Fars and manufactures.??s.?e,?ee??..
Bristles.?e.?eee??e?e?s????.?e??e?e?oo?
Feathers, crude .............e.......ee.
Tobacco, unmanufactured?.o...o?..eo.o.o
Hops??...s...??...?..?..?oe.?.???...oo?
Tung o~,1.....e....e.e.....ses.se.e....o
Cotton waste.... 0 ......... ***6006000004
Raw cotton and linters .................
Wool, unmanufactured...........o..e....
Hair and masufactnree...??....??.......e
Bilk waste .............................
Other textiles and manufactures........
Glass and glass products...e...seoo....
Pottery and clay products ..............
Precious and semiprecious stones,
imitations & industrial diamonds....
Manganese ol'e ................?........e
Chrome ore.?...se.o.?s.?.?s.?s?.?eos.eo
Tungsten ore....,?.?e??......se.e.e?oe.
Antimony...?eeseo.esee?ee.ee?e?eee.e.e.
Precious metals, jewelry and plated
ware....?.....?.e.?..e.se??o?..e?e.oo
Fertilizers and fertilizer materials...
lure works........???.?.??..?........?.
Photographic goods..? .................?
Ar1-orhs and antiques....?..o...ee oe.e
Beads and fabrics and articles of beads
Vessels returned (Lend Lease).......e.e
All other imports.....?.os?o?.s.ee.....
12,151 13,018
212 1,275
1,7114 2,970
14,281 5
3,058
173
1,985
1,181
506
117
1,831
2,121
173
7,116 8,595
1,286 860
1,768 951
36 21
218 20 211
776 562 781
208
338 369 221;
112 32 270
795 621 1,118
1,202 715 913
296 112 55
3,569
8,213
11,0214
153 655 193
127
'3,083 11 660 239
798 2,716 2,819 1,187
1
114 1,916 1,353 1,781
19 117 914 .58
2,6146 20 251 119
7,855
7,866 14,201 14,085 5,1499
Sources Based on data prepared by
the International Economic
Inajysis Division, Dept.
of Commerce, May 23, 1955
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(ii) Estimate of amount of such goods denied
import into the United States vhich could
be sold In other markets and amount
realisable by the Bloc thereon.
An examination of the make-up of goods imported from the Bloc in 1954
ifldiaates that alternative markets in lieu of the U. S. will probably not
be readily found. A review of the individual commodities, on an item by
item basis, suggests that underdeveloped areas may be disregarded in
considering possible alternative markets for these goods. Underdeveloped
areas do not require raw materials, pork products, furs or Christmas tree
ornawnts. The utilization of commodities exported by the Bloc to t
United States requires an economy with a pattern of consumption similarAo
that of the United States-namelyWestern Europe, the U. K. and Canada.
Meat and other foodstuffs imported by the U. S. from the Soviet Bloc
amounted to $18.4 million, of which $17.7 million were pork products,
$?.h million fish products and $0.3 million other foodstuffs. U. K.
demand for protein foods is high. In 1954 the U. K. imported $30.9
million (cif basis) worth of Polish pork products of which $28.4 million
was bacon. It appears reasonable to assume that the U. K. could expand
its imports of these Polish pork products provided the price is right and
it is also reasonable to assume that the U. K. would pay a lower price for
these products than the U. S. For working purposes, we may take the earnings
from sales in the U. K. at about 70 percent of the present level of sales
in the U. S.
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By comparison with meat, it is difficult to envision possible markets
for the remaining $32 million worth of E ropeap Soviet Bloc and Outer
1Kongolian goods. Fare, amounting to $9.2 million, do not appear to be
readily marketable in Western 1urope. London is a world market for furs
but there is no real additional (consumption) demand in Western Europe,
U. 1. and Canada for this commodity, especially under the Treasury concept
of country of origin. Fertilizer, worth about $1.5 million may be a
marketable item in these areas. Cashmere hair, amounting to #5.4 million,
would be saleable in Western Europe (including U. K.) and a substantial
quantity of the manufactured product of this material could be exported
to the U. S. (e. ., sweaters or coats). In order to sell their commodities
in Free Vorid markets, the Bloc suppliers would be forced to compete with
Free World supplisrs of the same types of commodities; ibis would of
necessity result in price cutting by the Bloc, seller. It would appear,
even if prices were significantly lowered, that the Moo could sell in
other markets only minor quantities of products outside the food group.
In all, probably 50 percent of their present sales, or $25 million, would
be a maximum estimate of what the Bloc countries could realize for the
goods currently exported to the U. S. market.
(C) Est, if possible, the loss to the Bloc if the United
States ban on imports extended not only to goods entirely
produced in the Soviet Bloc but also extended to goods
processed (as distinguished from manufactured) in friendly
countries from materials which are of Soviet Bloc origin.
It has not been found possible to estimate the loss which would be
imposed on the Bloc by banning such products.
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(D) Estimate of the maauitude of other remittances which would
be cut off, i.e, support remittances from relatire8,
remittances for services, other invisibles, etc., as
distinguished from payments for imports.
Remittances to the European Soviet Bloc from the 'United States are
estimated to have been $14 million in 1952, $17 million in 1953, and $15
million in 195h. Included in these figures is a substantial amount
attributable to gift parcels.
The estimated economic impact on the Soviet Bloc of an extension of
blocking and import controls would therefore appear to be:
(in millions of dollars)
Assets (exclusive of indirectly held assets) $21
Imports denied ('5h basis)
Sales abroad of such 'exports by the Bloc
Estimated net loss from imports denied
$50 any wally
2 annually
W annually
$i5 annually
There would also be an additional uneatimatable lose to the Bloc through
the exclusion of those Bloc products which are processed in third countries.
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6. ESTIMATE OF ECONOMIC IMPACT ON SOVIET BLOC OF
FREE WORLD FINANCIAL (BLOCKING AND IMPORT) CONTROLS
Assumptions and Conclusions
Assumptions
The present discussion is based on the assumption that the multi-
lateral application of financial controls vis-a-vis the Soviet Bloc would
encompass the complete denial of exports, as well as a control of other
financial transactions comparable to that exercised by the Foreign Assets
Control. By their unselective nature, import and transaction controls
constitute an ultimate action directed against the entire economy of the
target area, and presumably would therefore be invoked only after, or in
conjunction with, application of a full embargo on exports. kcordingly,
the possible consequences of financial controls will be discussed in terms
of a full cessation of trade between non-communist areas and the Bloc.
The fundamental interest of the Soviet Bloc in trade with non-communist
areas has been focused on the import phase of this trade. The search
for vital supplies from abroad, rather than an outlet for surplus
domestic production, has hitherto provided the main impetus for economic
relations with the Free World. Accordingly, the present disoussd.on will
be devoted primarily to the foreseeable consequences of the deprivation
of access to imports from the Free World.
With respect to the effect on the Bloc's foreign exchange earnings,
detailed comment has been omitted in the light of the following con-
side rations:
In the event of the full application of financial controls by the
entire Free World to the Bloc as a whole, the problem of the effect on
the exchange reserves of the Bloc would become academic as the present
Bloc trade with the Free World is roughly in balance. The impact of such
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an action on intra-bloc economic relations would call for a significant
reallocation of resources, the nature of which is regarded as outside the
scope of this study.
In the event of the full application of financial controls by COCCU
countries only, the loss of the modest surplus earnings by the Bloc ($125
million in 1951.) from this phase of its trade would not seriously inter-
fere with the procurement of essential goods from non-COCOM areas. Under
such circumstances, the Bloc could bring into balance its payments with
non-COCCU areas by greater diversification of exports to underdeveloped
countries, by marketing more of its raw materials in the non-000CM in-
dustrialized countries, or by the sale of precious metals.
Conclusions
The conclusions reached in the present paper with respect to the
effect on the European?3oviet Bloc of the loss of Free World supplies
are as follows:
(1) If full financial controls (i.e., suspension of all trade)
were applied by CHINCCK countries to communist China alone, basic re- ~,.
visions and considerable retardation of China's industrialization pro-
gram would be required. The impact would be most telling with respect
to fertilizer, drugs, and machinery spare parts. Non-access to COCCM
sources of machinery and chemicals would increase China's demands on
the rest of the Bloc, which presumably could be met insofar as the
most urgent needs of that country are concerned.
(2) If such controls were also exercised by all non-COCCU Free
World countries, the non-availability.of_,,raw rubber, either by direct
shipment or transshipment through Eastern Europe, would seriously hamper
China's rubber industry. Adverse effects would also be felt by the
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cotton textile industry, particularly in years of short domestic crops,
although strict rationing controls would be expected to cover minimum
requirements. The adoption of full financial controls by non-CHINCCL
countries would greatly facilitate the enforcement of CHINCOM actions.
(3) If full financial controls were applied by COCCM countries to
the entire Soviet Bloc, the inability to import raw metals and semi-
man-ufactures from the West would seriously di erupt Bloc industrial
operations. Non-access to machinery and ships from C0C( areas would
deprive the Bloc of contact with Western technical innovations and
improvements in labor productivity, of supplies of equipment to bolster
and balance domestic output, and of a means of freeing certain domestic
production facilities for full concentration on military end g oduots.
Furthermore, the cessation of legal trade would dimAnish procurement
opportunities for clandestine acquisitions.
(4) In the event of a complete cessation of trade relations
between the non-COCCI[ Free World and the Soviet Bloc, the principal
effect on the Bloc would be felt with respect to supplies of industrial
raw materials, particularly of natural rubber. Secondary effects would
occur in respect to certain foodstuffs (fruit, spices, cocoa, tea) and
vegetable fibers (particularly textile products such as wool, jute, and
cotton) related to the areas of civilian production and public morale.
Briefly, vthile the civilian sector of the economy would be materially
handicapped by the logs...of_.. ree World trade, the Bloc could, for the
short term "continue to maintain and improve its military production
and to expand basic industrial capabilities.
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Discussion
(a) Traditional Significance of External Trade to Bloc Countries
The countries now comprising the Soviet Bloc were never counted among
the leading commercial nations of the world. By reason of their geography
and historical development, the principal members of the bloc, Russia and
China, were''long characterized by predoiainantly agrarian economies. As
largely self-contained economic entities, their participation in world
trade was on a comparatively small scale. Their capacity to engage in
international trade was limited by a lack of significant export surpluses.
Thus, in 1938 China ran]aed fifteenth in number among the exporting nations
of the world, the U.S.S.R. -- twenty-sixth. The principal features of the
foreign trade in. Which these countries engaged over the years consisted,
in the main, of an exchange of domestic raw materials, chiefly agricultural,
for imported industrial products.
As countries deficient in industrial production, Eastern Europe and
China in the past gravitated to the industrial countries of the West, and
in Japan in the Far East, as an outlet for their raw materials and as a
source for their principal imports. Thus, Chinats trade with nations out-
side the current Bloc normally accounted for over 90 percent of its entire
foreign, commerce. In the case of the U.S.S.R., trade with the West also
approached 90 percent of the total; the present satellite countries con-
duoted about 65 percent of their trade with the West European and other
industrialized nations.
In the main, recent Eastern European bloc trade with the Free World
has been characterized by large scale imports of machinery and metals aid
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a pattern of exports consisting principally of foodstuffs and raw materials.
The export content of China's trade has been basically the same; but its
imports have fallen predominantly in the categories of fabricated intermediate
industrial products and industrial raw materials.
(b) Significance of East West Trade in Soviet Bloc Economy
Since their subjection to Communist rule and Soviet forms of economic
organization, the countries now in the Soviet Bloc have expanded significantly
the industrial sector of their economies. In the process of centrally directed,
forced tempo industrialization, the state of farm production was seriously un-
settled, chiefly as a result of the shift of considerable labor resources
away from agriculture and the disruption of the former system of incentives
in the countryside. Despite the rapid expansion of their industrial plant
expansion, the bloc countries have continued to draw upon the world economy
for a significant volume of economic resources required to raise the level
of their industrial self-sufficiency.
Following the extension of Soviet political domination over Eastern
Europe at the end of World War II, a major effort was made by the U.S.S.R.
to organize the adjacent area into a trading bloc subject to its oar ef-
fective control. Within this enlarged trading zone at its disposal, the
U.S.S.R. proceeded to carry out a directed distribution of economic re-
sources in the interest of achievement of a maximum increase of economic
power as defined by Soviet standards. At the same time, the newly annexed
border area was made to serve as an instrument for economic warfare against
the West. Within the framework of this two fold objective, trade relations
between the individual bloc countries in Eastern Europe and the outside
world were drastically cut but not severed.
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Beginning in 1950, the first full year after the communist conquest
of the Chinese mainland, China began to be drawn systematically into the
Soviet Bloc trade orbbit. 1hereas, prior to communist rule, China's trade
with Eastern Europe had been under 10 percent of the total, in 1950 it
reached 26 percent, and rose precipitously to 61 percent of total trade
turnover in 1951.
,Depending upon its utility to the U.S.S.R., the commercial inter-
course of each bloc country with the Free World eras reduced systematically
during the postwar period to a minor proportion of its total international
trade turnover. By 1953, for example, the percentage of trade devoted to
areas outside the bloc, as officially reported, was as follows for the in-
dividual bloc countriess Poland, 29.6; China, 25; Hungary, 23; last
Germany, 23; Czechoslovakia, 27..6; Rumania, 15.6; Bulgaria, 14.11 U.S.S.R.,
"about 20%e.
Although confined to a narrow, and presumably safe, segment of total
trade, the commodity exchange with the Free World economies has oOntinded
to contribute significant economic value to the Soviet Bloc countries. In
terms of its relative magnitude, as well as significant economic content,
recent East-West trade has loomed notably larger from the standpoint of
the bloc nations than from that of their trade partners in the Free World
countries. On the one hand, for example, the volume of goods involved in
this exchange, valued at approximately 1.7 billion dollars each way in
1954, represented approximately 20% of the total trade turnover of the
countries comprising the Soviet Bloc. Measured against the full range
of the international commerce of the Free World, on the other hand, the
volume of goods exchanged with the Bloc accounted for only 2.2 percent
of their total trade.
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As far the commloditie s involved in the exchange are concerned, the
records indicate that the Bloc has most commonly required from the Free
World countries carefully selected categories of goods of vital importance
to its further economic development and, what is more important, ave. lable
for the most part from the more industrialized Western nations. By the
same token, the types of commodities brought by the Bloc into East-West
trade channels have generally fallen in the categories of goods marketable
chiefly among the nations constituting the Western coalition.
In view of the fact that Soviet Bloc industry functions under a rigid
and unpredictable planning system, its requirements for current operational
purposes could be met more adequately under conditions of relatively free
access to the markets of the outside world where, under normal conditions,,
it is only necessary to have adequate purchasing power in order to be able
to procure any volume of goods, of any specified quality, at fair, ' com-
petitively determined prices.
From the standpoint of the Free World, the Bloc has represented in
recent years a limited or marginal market for hard-to move exports and an
alternative (or supplemental) source of raw materials obtainable for soft
currency or, in effect, on barter terms.
(1) The Limits of Intra-Bloc Trade
There is a clearly discernible double standard underlying the Soviet
approach to foreign trade: the exchange of goods within the Bloc is
adjudged as a constructive activity in economic cooperation, while trade
with areas outside the frontiers of the Soviet empire is equated with
potential economic dependence. On the theory that this official dogma.
is wholly accepted by partners in the Bloc, the U.S.S.R. has utilized its
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dominant position to devise legal instrtmentalities and to exert pressure
for a maximum expansion of commodity trade inside the Bloc. As a result,
by 1949, two-thirds of the foreign trade of the U.S.S.R. was conducted
with its own satellites; by 1952 this percentage rose to 80. Within the
Bloc as a whole, the net effect has been the same: the scope of commercial
contact with the outside world has been contracting steadily. In 1951,,
non Bloc trade amounted to 31% of total; by 19538 extra Bloc trade was
further reduced to 20% of the total trade turnover of the Spvitt orbit
countries.
As presently constituted, intra-bloc trade represents a fairly sub-
stantial transfer of goods across national frontiers. It must be re-
cognized, however,, as a movement motivated only in part by considerations
of comparative economic advantage. In part, too, this trade is compounded
of a good deal of cross-hauling of goods from all parts of the orbit,, via
the U.S.S.R., a kind of movement that is justifiable chiefly on the grounds
of increasing the opportunities for penetration by the Soviet Union into
the internal economic life of the individual Bloc countries. It is quite
apparent, even from the meager official reports, that a substantial pro-
portion of the goods which the individual Bloc countries acquire via the
U.S.S.R. are in the nature of re-exports., provided to them by the Soviet
trade monopoly in its capacity as the largest trader and self-elected
commercial intermediary for the area. Some of these Soviet reexports
within its own orbit,, to be sure, may originate in other Bloc countries.
In these categories are-, coal, coke,, petro1e.mi, baste, synthetic
rubber, timber, paper, sugar,, fertilizer, vegetable oils, oil cake,
zinc, copper., tin,, lead, and machinery. Other groups of reexports pro-
vided by the`V.S.S.R. frequently have their origin in normal world trade
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markets. Among these are= wool, cotton, jute, rubber, meats, animal fats,
vegetable oils, tea, cocoa, graphite, mica, industrial chemicals, and
machinery.
By means of this artificially inflated system of intra-Bloc trade
promoted and partly financed by the U.S.S.R., the individual Bloc countries
evidently succeed in meeting the bulk of their foreign commodity require-
ments. It is reasonable to assume, however, that in order to cover a
ma3dmum of intra-Bloc needs through this channel the Bloc governments
have to be willing to accept certain of their imports without regard to
minimum standards and without the freedom to choose among all available
alternatives. In a world in which political power rather than purchasing
power speaks with the highest authority, the well-behaved Bloc participant
will usually be satisfied with the kind, and mount, of exports the Soviet
Union feels it can spare. For example, even a relatively abundant raw
material like iron ore, a commodity basic in the Blocts drive for optimum
capacity in steel, has to be procured by several, satellites from Free
World sources, - from Europe, India, North Africa, and South America.
On the whole, true economic complimentarity appears to a rather
exceptional phenomenon within the Bloc. Many of its members, it will
be recalled, are in approximately the same stage of industrial development.
For this reason, they must continue to turn to the world market for the
geographically localized raw materials as well as for industrial goods
of the latest technological quality available in the world economy as a
whole.
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(2) Function of Economic Intercourse with the Free World
As shown by Soviet Bloc practice, trade with the Free World reduces
itself in essence to a governmental procurement operation. The chief in-
terest in the world market, on the part of the economic strategists of
the Bloc, stems unmistakably from the import side, to the extent that such
imports are required to provide added support for domestic program of
economic expansion. Exports play a subsidiary, supporting role in Bloc
commercial calculations since, in theory at least, surpluses could be
prevented in a planned economy by a shift of resources to other areas of
production. To the extent, however, that essential goods from the world
economy at large continue to be required, exports have to be mobilized by
Bloc economic authorities in sufficient volume to pay the costs incurred
in connection within the officially approved import program.
For the purpose of conducting this type of controlled foreign made,
within the framework of a centrally directed economy, the U.S.S.R. has
devised, and the rest of the Bloc has emulated, a system of trading by
goverment-owned corporations. While this elaborate system of state-
trading does not recommend itself for its flexibility or efficiency,
it does provide the assurance that (a) all commercial contacts with the
outside world will be funneled through a single ministry of the govern-
ment3 and that (b) all activities in this sphere will be coordinated
with prevailing domestic economic policies.
Hence, all goods procured by the Bloc countries from the Free World
must be considered as constituting a list of official requirements,
screened and approved against a standard of essentiality set up by
highest political authorities within a Bloc country., To qualify by
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this standard, the selected goods must males a contribution towards the
development of forced industrialization, strategic self-efficiency, and
maximum military power.
From the standpoint of their end use, recent Bloc imports from the
Free World have reflected a strong emphasis on the acquisition of in-
dustrial goods, of which machinery is a large component, required for
the purpose of stiu].ating domestic economic development. More than 45
percent of all goods imported by the Bloc in 1953 fell within this broad
class of merchandise. The remaining categories of imports fell into two
other major groupingg,Nraw materials" and Nfoodstuffsn, comprising in
1953, respectively, 32% and 16%, of all goods bought by the Bloc in the
world market. The emphasis in the China pattern of trade was on raw
materials with machinery and metals nevertheless representing a most
important segment of the total.
Composition of Bloc Imports from Free World (in %)
1951
IZ2
Foodstuffs.............
9.4
9.5
16.2
Raw materials..........
39.7
42.4
32.1
Industrial goods.......
43.4
42.9
45.4
Other..................
7.5
5.2
6.3
Total (in %)........
100.0
100.0
100.0
Total (in millions of
dollars)..........
1,688
1,438
1,389
From-the standpoint of their economic significance, recent Bloc
imports from Free World sources can be identified as serving the following
purposes:
1. providing the Bloc economies with a sizeable complement of
equipment for use in current exploitation as well as for
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technological development beyond domestic capacity to produce;
2, helping to channel into the industrial plant of the Bloc a con-
siderable supply of industrial raw materials, thus contributing
towards the maintenance of a higher level of output and towards
reducing the idle time of industrial installations and manpower;
3. serving as a source of industrial semi-manufactures have best!
Sr r4'ifg to compensate for planning mistakes of omission, un-
economical management, and shortfalls in the fulfillment of
established production quotas;
4. contributing substantial quantities of vital foodstuffs to
help maintain minimum diet standards, public health and morals,
and labor productivity;
relieving the pressure against the commodity resources of some
of the major suppliers within the Bloc, chiefly the U.S.S.R.
(3) Capacity for Self-Sufficiency Within the Bloc
The concept of economic development by which the Bloc countries are
guided, envisions, among other things, a process of maximum internal ex-
pansion of strategic economic capabilities based, in the first instance,
upon a coordinated distribution of resources to be found within the area.
In this broad development program, the industrial sector of the economy
is admittedly the principal beneficiary of all new capital resources,
domestic or imported. For this reason, intra-Bloc commodity trade re-
flects a pre-occupation with the acquisition and redistribution of
machinery and raw materials required to keep up a high rate of expansion
in heavy industry, by Soviet definition the main source of economic
growth.
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For a brief consideration of the effective self-sufficiency of the Bloc,
it should be most useful, therefore, to focus upon these two broad
categories of commodities, industrial machinery and raw materials.
At the present stage, intra-Bloc capabilities for the manufacture
of machinery are fairly extensive, if not too well distributed or economically
balanced. The three largest producers of equipment in the area (the U.S.S.R.,
East Germany and Czechoslovakia) appear to be making a conspicuous effort
to provide a flow of machinery to the other, less developed countries of
the Blocs especially to China. It is of some interest to note, for aacample,
that the U.S.S.R. has recently identified the dollar value of its aramal
machinery shipments within the Bloc at 200 million dollars yearly (1953).
it shortly thereafter, in an international forum, a Soviet spokesman
raised the figure to "three times as much", or 600 million dollars.
Despite the extravagant claims made on behalf of the U.S.S.R. as a sup-
plier of machinery, the evidence seems to show that East Germany and
Czechoslovakia contribute a larger volume of equipment for distribution
through intra-Bloc channels.
Yet, the evidence from East-West trade quite clearly identifies
machinery as one of the chief current deficiencies within the Soviet Bloc.
The value of imports in this category from non Bloc sources in 1953 came
to about 230 million dollars, or 16.5% of all imports. This figure may
be assumed to represent an approved minimal procurement programs con-
ditioned principally by the scarcity of purchasing power, rather than a
full measure of the greats total requirements in machinery from the world
market. In the light of the Blocts preoccupation with the development of
military equipment, there is a strong suggestion in the evidence that the
Bloc continues to be dependent to a very marked degree upon the Free
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World for a balanced supply and for new technology in the civilian sector
of its machine-building industry.
There is also considerable firm evidence, from the Communist press
and from Bloc procurement activities, indicating that industry in the
Soviet orbit has been unable thus far to meet in full its current re-
quirements for metals and other material ingredients.
On metals alone, for example, the bloc spent not less than 196 mil-
lion dollars in 1953, chiefly in the categories of steel exclusive of
trans-shipments, semi-manufactures and non-ferrous metals (14% of total
imports). In the case of at least two non-ferrous metals, copper and
lead, the urgency of Soviet Bloc current needs has been heavily under-
scored by the special pressure tactics, premium prices, and circuitous
channels used.by Bloc purchasing agents in recent years to acquire these
commodities.
Other essential raw materials for which the Bloc is strongly de-
pendent an outside sources are: natural rubber, textile raw materials,
chemicals, hides, vegetable oils, abrasives, cork, sulfur, and a variety
of rare metals (cobalt, cadmium, mercury). In 1951, imports of rubber,
valued at $205 million, accounted for over 12% of Bloc purchases in the
world market; in part this rubber was evidently destined for the Soviet
stockpile.
A recent manifestation of weakness in Bloc self-sufficiency has
developed in a rather unexpected quarter, namely in foodstuffs. Soviet
Bloc imports of meat, fish, dairy products, fats and oils in the Free
World aggregated 225 million dollars, or 16% of total imports in 1953.
In more recent months, the intake of food products from the outside
world has continued, highlighted by large scale purchases of sugar and
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meat by the U.S.S.R.
(c) Effedt on Soviet Bloc Economy of Free World Financial Controls at
Selected Levels of Effective Control
For the purposes of the present discussion the term "full financial
controls" is construed to mean that no financial or economic transactions
of any kind will be permitted between Free World countries and the entire
Soviet Bloc. Consequently, only the movement of goods, services, eta.,
between the Free World and the Bloc will be considered.
Inasmuch as the main value of East-West trade to the Bloc is
generally agreed to arise from the opportunities it affords for
curement of selected "s `'
goods essential to Bloc programs of economic de-
v
elopment and viability, the following examination of the impact of
-------------
Free World financial controls is focussed on the movement of goods to as
lbvjet-Djft~. It is assumed, in this context, that the pressures to
find markets for surpluses and to earn foreign exchange are, from the
Soviet Bloc viewpoint, incidental to the principal task of acquiring
imports.
From the standpoint of the opportunity for western action in the
field of foreign trade, it is important to note at this point that the
nations currently cooperating in the system of strategic trade controls
constitute a substantial factor in the world trade of the bloc countries.
In 1954, 48.4% of the Bloc's imports from the Free World and 44.9% of
its exports to these areas involved the COCOM countries.
1. Application of Full Financial Controls by CHINCOM to China 0 v
China's trade with Free World areas has tended to stabilize cur-
rently at about 25 percent of her total trade. Of the estimated re-
corded imports into China from non-communist countries in 1953, totalling
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approximately $280 million, goods valued at $200 million were supplied by
Western Europe, Hong Kong, and Japan, Adjustments for goods in this total
not originating from CHINCOM areas would not basically reduce the relative
significance of this trade to communist China. Trade of such magnitude
with these industrialized areas is believed to represent both volition
and necessity. As to the first, despite the extremely close political
and military alignment with the Eastern European sector of the Bloc, it
is not unreasonable to assume that China officially encourages some trade
with the West as a hedge against complete economic dependency on the Bloc.
At the same tine because Chinese requirements towards its ambitious in-
dustrialization are essentially for investment goods, China must of neces-
sity look to that part of the Free World which possesses a capacity to
supply such goods beyond availabilities in the Bloc.
China's principal imports from the CHINCOM area in 1953 were the ni cais,
pharmaceuticals, dyestuffs, fertilizer, industrial machinery., metals and
electrical machinery and spare parts.
These goods are required both for industrial maintenance art ex-
pansion and for agricultural developmental purposes., the latter not only
for domestic consumption, but also to generate surpluses for trade.
Essential to the expansion of agricultural output is the avail-
ability of fertilizer in large quantities. Such an availability of
chemical fertilizer could come about only through increased fertilizer
production not only in China itself but in other manufacturing countries,
Since the European Bloc appears to require its own surplus production of
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fertilizer for its own trade with the Free World,, China has been looking
largely to the West and to Japan as its principal suppliers of chemical
fertilizer. Thus, as the Free World supplies approximately half of China's
chemical fertilizer requirement in the current period, the cut off of the
availability of such fertilizers would be likely to have a very significant
adverse effect on the maintenance of China's economic equilibrium.
Drugs and other chemicals have constituted an important component of
China's recorded imports from the CHINCOM area in recent years, totalling
about $90 million in both 1953 and 1954. Purchases of drugs, particularly
of antibiotics, have had a high priority in China's import program9 and
Bloc availability is both inadequate and uncertain. An effective suspension
of trade Mich would prevent China's acquisition of such drugs from CHINCOM
sources would complicate the task of maintaining adequate health standards
in the segment of the population essential to the fulfillment of national
economic and political programs.
The Five Year Plan places a high priority on increasing the total
output of such industrial chemicals as sulphuric and nitric acid, caustic
soda, soda ash, synthetic ammonia, calcium carbide and coal tar dyestuffs.
Pending the attainment of these goals, -%hich are largely limited by the
availability of production equipment,, to&nical personnel, and raw
materials, China will have to continue to rely on substantial imports
from both the Bloc and non-Bloc sources. The magnitude of these imports
from non-Bloc sources, about $50 million yearly, suggests that, except
perhaps for some specialties, the Bloc would be in a position to furnish
the more essential requirements in the event of a cessation of CHINCOM
country trade with China,
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The Free World has been supplying China with sizeable amounts of metals,
machinery and equipment since 1950, rangi g from $125 million in 1950 to $20
million in 1952 and $70 million in 1953. The scale of machinery production
in the European sector of the Bloc is a?virently quite large and varied, and
a large portion of China's requirements (,f an estimated $600 million yearly)
is satisfied from these sources. It must be borne in mind, however, the
European Bloc countries are themselves net importers of almost the entire
range of machinery. This fact has been reflected in China's continued ef-
fort to procure in the West and Japan various types of machi ne ry and equipment
both within and outside the embargo categories.
China has needs for replacement parts for a considerable amount of
equipment originally installed by Western countries and Japan. This need
has been reflected in recent months in a fairly substantial number of
CHIZCOM exceptions requests. While the value of some of these items is
seemingly inconsequential, it may well be that the actual cumulative effect
of the denial of such items would have *horseshoe nail' implications.
Present imports into China of metals of CHINCOM area origin are not
considered here on the grounds that such metals are embargoed and there-
fore fall outside legitimate East-West trade e
As to machinery and equipment, aside from the replacement part pro-
blem, the conclusion is that while additional requirements on the Bloc
for China would produce some inconveniences and involve readjustments in
Bloc programs, the comparatively small magnitude of present imports from
the Free World, as compared with the extensive Bloc production capacities..
and current heavy shipments therefrom to China indicate that the Bloc would
find the means to replace the Free World ripply.
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2. Application of Full Financial Corttrols `fir Entire Free World to Grim
In the event of the additional application of fall financial controls
Free World countries, the loss of imports to China, based
on 1953 trade, would be well over 1O0 million.
As distinct from the CHINCOM courtries,~, the categories of goods
acquired in these markets are for the most part raw materials, the most
prominent of which are rubber and textile fibres.
In recent years China has became a substantial importer of raw
rubber from Ceylon (50,000 tons yearly) for its growing rubber goods in-
dustry, rich has been aiming at self-sufficiency in the manufacture of
truck and automobile tires, rubber footwear, and bicycle tires. In part,
the imported rubber is forwarded to the European members of the Bloc.
Were China to be denied access to rubber from Free World sources,
and there were fairly effective controls militating against trans-
shipment from the rest of the Soviet Blooe China's rubber industry would
be seriously hampered in its operation. The minor amount of natural
rubber trickling through to China would nut be sufficient, even in the
light of an expected adequacy in the supply of synthetic rubber from
Eastern Europe, to enable production of a durable standard product.
'While China's vital cotton textile industry has been maintained at
a high level of production, primarily on the basis of indigenous raw
ton, such as from Pakistan.
cotton, significant amounts of imported cot41
and Egypt, have been required in recent years. In 1952, for example,
Pakistan supplied $95 million Worth of raw cotton, this constituting
China's single largest import item from the Free World.
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The cessation of imports from Free World sources would cause serious
problems for the textile industry, especially in years of domestic crop
insufficiencies. Strict rationing controls would, of course, avert any
serious failures in the fulfillment of the minimum requirements, .
. It would appear from the above that the cessation of trade between
the Free World and China resulting from the full application of financial
controls would have its principal impact in terms of China's acquisition
of rubber, chemicals, drugs, fertilizers, machinery and spare parts. Within
these commodity categories the loss of Free World supplies would be felt
adversely by the Chinese economy both directly and cumulatively. Such
controls, if applied by CHINCOM countries only, coupled with the effective
denial of such goods through diversion channels, would be such as to re-
quire some basic revisions and considerable retardation of China's in
anstrialization program. The adoption of such controls by other Free
World countries would not only greatly facilitate the enforcement of
CHINCOM actions, but would operate to deny China access to substituted
sources of industrial supplies, and to key raw materials presently fur-
nished the Chinese economy.
3. Application of Full Financial Controls by COOOM to 'Whole Bloc
The nations who cooperate in the security trade control system also
represent the principal sources of supply and markets of chief interest
to the Bloc. This is a fact that is admitted, even if grudgingly, by the
Soviet leadership. Stalin, acknowledged this fact in October 1952, when
he warned the industrialized nations that "matter?s will soon reach a
point" where the Bloc will be able to dispense with Western industrial
goods and will, simultaneously, develop new types of surpluses to sell
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to the underdeveloped, neutral markets. Until that eventuality is reached,
however, the COCOM countries continue to account for about half of the
Blocts commodity trade with the world market. What is more important,
they provide the strategic substance of East-West trade, from the viewpoint
of the Bloc.
The effect of a full halt in trade with the COC(L countries may,
therefore, be expected to be felt by the Bloc chiefly in the following
commodity groups% metals, semi-manufactures, foodstuffs, textiles,
machinery, and ships. While these types of imports are acquired in re.
latively modest quantities, supplemental to domestic production, they
constitute an important tributary to the pipeline servicing Soviet Bloc
industry. The inability to import raw metals and semi-manufactures from
the West would, therefore, have a seriously disruptive impact on the
Bloc industrial plant by forcing it to depend wholly on an internal
supply systems that has in the past been found to be inadequate and in-
flexible, as far as the civilian sector of production is concerned.
Even in the case of metals for which there are abundant raw materials
in the Bloc, the uneven development of resources, and the frequent short-
falls in planned output, have made it necessary in the past to resort to
additional imports in order to keep supplies in harmony with the changing
pattern of consumption in industry.
The loss of the present degree of access to the vast pool of
machinery and ships available in the COGOM areas would undoubtedly
constitute a setback of serious, if indefinable magnitude. As a result
of such a loss the Bloc would be deprived, among other things, oft (a)
a vital means of maintaining contact with the movement of innovation in
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Western technology and improvements in labor productivity; (b) a source
of current supply of equipment to bolster and balance domestic output;
and (v) a means of freeing certain domestic production facilities for
full concentration on military and products.
The absence of regular, legal commercial exchanges with the COCCII
countries mould, furthermore, diminish opportunities for the acquisition
in these markets of a variety of small parcels of vital goods that lend
themselves to clandestine shipments to Soviet Bloc destinations.
4. Application of Full Financial Controls by the Free World to the Whole Bloc
In the event of a fall freak in trade relations with the Free World,,
the Bloc would feel the effects most acutely in the drying up of supplies
of raw materials vital for the operation of a large scale industrial plant.
Secondary effects would occur in the areas of foodstuffs and tropical
vegetable products not available within the boundaries of the Soviet power
orbit. The most prominent among the raw material products in the present
range of Soviet Bloc imports has been natural rubber. Although the Bloc
can restrict somewhat the tonnage intake of rubber in particular years,
as it did in 1954, to a little over 100,000 tons, its average requirements
in recent years (1948-54) have been apprordmately 170,000 tons per annum.
In view of the absence of any substitte for this commodity in the Soviet
Bloc, the possible loss of access to natural rubber, needed to strengthen
the synthetic rubber product, may be expected to interfere rather seriously
with the known large scale production of civilian and military vehicles
within the Bloc.
The loss of imports in the categories of foodstuffs (fruit, spices,
cocoa, tea) and of textile products (wool, jute, cotton) by the Bloc from
all sources would be felt above all in terms of morale among the technical
elite~lfei~~~3~i~CPoncsaye SACRIT
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Without the acquisition of an additional volume of selected goods
annually from the Free World, the maintenance of the lose favored, civilian
and. consumer, areas of the Bloc economy would be materially handicapped.
Given the present pattern of resource supply and use within the Bloc, how-
ever, it must be concluded that the Bloc could, for the short term, without
this trade continue to most the strategic objectives of its economic pro-
gram, namely the maintenance and improvement of its vast military production
and the expansion of its basic industrial capabilities.
5. Impact of Denial of-;hipping and Shipping Services
This analysis has not sought to estimate the impact on China and the
Soviet Bloc in the event of the denial to them of CHINCOM and other non-
Bloc shipping and shipping services (re-insurance, bankerings repair, etc.).
Two views have been expressed in NIE 100-55, "Controls on Trade with Com-
munist China, with respect to the impact of such actions directed at com-
munist China.
One view is that if all non Bloc shipping and shipping services were
denied to the uses of Chinese commerce, the Chinese economy would in the
short term be adversely affected and transportation costs increased. Ad-
justment would probably be made within a reasonable period by shifting a
share of China's seaborne trade now carried in non- loc vessels to the
Trans-Siberian railroad, and provided non-Bloc vessels could be chartered
to free Bloc flag shipping for the China trade. If denial affected only
CHINCCt flag shipping and services,, the Chinese could shift at least part
of their seaborne trade to non-CHINCOM flag vessels.
The other view is that the effect would be marked and adverse, and
that there would be considerable curtailment of China's foreign trade,
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SZCM
This is based on t wo considerations (1) that only a small portion of the
China trade could be handled through an increase or readjustment in the use
of Bloc shipping; (2) rail transportation facilities within China and
between China and the European Bloc probably are not adequate to handle
the additional tonnages involved. If denial affected only CHINCOM flag
shipping and services the Chinese could shift at least part of their sea-
borne commerce to non-CHINCOM vessels; bat the mitigating effect would
not be significant in the light of the limited availability of non-CHINCC&
vessels and the anticipated reluctance of these countries to commit their
vessels to this trade.
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51
Stati3tical Appendix
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01
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Ii
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- 57 -
Free World Imports from the Soviet Bloc, by Principal Commodity Groups, 1951-53
(In millions of United States dollars)
Commodity
12LI
12L2
Imports, total..006..00000000o00?
1,883.0
1)1,625,6
1)1,620.0
Live animals and meat.................
79.5
74.9
92.0
Dairy products........................
31.0
44.7
51.9
Cereals and preparations..............
219.9
346.0
229.0
Fruits and vegetables .................
52.0
69.7
65.3
Sugar and preparations ................
56.5
73.1
52.8
Other and unspecified food, beverages,
and tobacco........................
112.3
55.8
58.7
Oilseeds........ ......................
111.5
43.5
68.3
Oils and fate .........................
54.2
34.6
47.1
Wood and lumber, unmanufactured.......
64.0
73.3
105.9
Other and unspecified wood, paper, and
manufactures.. .................