(UNTITLED)

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP75-00662R000300070021-2
• Release Decision: RIFPUB
• Original Classification: S
• Document Page Count: 44
• Document Creation Date: December 12, 2016
• Document Release Date: July 28, 1998
• Sequence Number: 21
• Publication Date: February 9, 1951
• Content Type: REPORT

L _
9p 1951
1 attar ct g b copies of the repo an "U.S.
P alicl s and P gas 1n the Ex,-or . r.." o Fig?-1d %. L .
A T'fectf the Wax Potontial of the a ov iot Elm" %r ch ip
I:3irg t smittedd to the PPre slAcrit td. the
n tad ?~
V 6 A ~?P~ oA State. IN.,ppondice3T A i ind 4:' 3~M1~M a no aF at l.ach d
tot. ', h r apor ,, but copiea be r; . fie x -i.tloblo at a.
2atsr ,.Brit Q
101M Rr L OUISS a9 JR.
Approved For Release 2000/09/08 : CIA-RDP75-00662R000300070021-2
 Approved For Release 1rObO/09/08 : CIA-RDP75-00662R0003000 0021-2
Report to the President
91'SG d~.-_ /2y
on
5-53 S
February 9, 1951
U.S. Policies and Programs in the Economic
Field whigh may Affect the War Potential of
the Soviet Bloc
DEPARTMENT OF STATE
Approved For Release 2000/09/08 : CIA-RDP75-00662R000300070021-2
 Approved For Release 2000/09/08 : CIA-RDP75-00662R000300070021-2
Page
Introduction . . . . . . . . . . . . . . . . . . . . . . . .
Part I: Conclusions . . . . . . . A . . . . . . . . . . .
Part II: Recommendations . . . . . . . . . . . . . . . . . 4
B - Recommendations as to Organization . . . . . . . . 10
Part III: Bases for Conclusions and Recommendations . . . . 11
A - Vulnerability of the Soviet Bloc to Existing
and Tightened Western Economic Controls . . . . . 11
B -? Economic and Political Aspects of Trade of
Non-Soviet Countries with the Soviet Bloc . . . , 15
C - Techniques for Denying Resources to the
Soviet Bloc . . . . . . . . . . . . . . . . . . . 19
1. Complete Embargo . . . . . . . . . . . . 19
2. Export Controls . . . . . . . . . . 22
3. Preclusive Operations . . . . . . . . . . . 28
4. Financial Measures . . . . . . . . . . . . . . 31
5. Blacklisting . . . . . . . . . . . . . . . . . 35
o. Control of Technology . . . . . . . . . . . . 35
7. Shipping Controls . . . . . . . . . . . . . . 37
8. Civil Aviation . . . . . . . . . . . . . . . . 39
D - Positive Programs for Economic Strength . . . . . 39
Approved For Release 2000/09/08 : CIA-RDP75-00662R000300070021-2
 Approved For Release 2/09/08 : CIA-RDP75-006628000300070011-2
-1-
II TRODUCTION
As Soviet aggressive intentions have become more and more evident,
the United States, and under its 1-.adership other important nations of
the free world, have progressively adopted stronger and stronger measures,
both positively to build up their own strength and negatively to reduce
the strength of the Soviet orbit. The establishment of the North Atlantic
Treaty Organization, the European Recovery Program, and improved inter-
national relationships in the fields of trade, finance and economic
development, have helped constructively to create strength in the free
world. Negative measures to impair the Soviet war potential began with
the imposition by the United States, in March 1948, of export restrictions
or prohibitions on the shipment of strategic goods to the Soviet Union and
the satellite countries of Eastern Europe. In the following months and
years those controls were progressively tightened, and, through inter-
national negotiation, were extended to cover exports of similar items
from I?lestorn European countries. Today, an important segment of the
free world's exports to Soviet-dominated areas has been prohibited or
brought under control.
Thu invasLon of South Korea by co.munist forces served as an un-
mistakable warning to the free world that it must accelerate its efforts
to develop a preponderance of military and economic strength over that
of the Soviet bloc. The defense mobilization program of the United States,
Canada and I'estern Europe is a constructive response to this warning. It
has also been necessary to step up our efforts to impair the strength
of the Soviet world through the intensification or extension of controls
over its trade and financial relationships with outside areas.
The present report has boon prepared with a view to recommending
the measures which should now be adopted, or continued, to weaken the
war potential of the Soviet bloc consistently with the objective of
building greater economic and political strength in the free world.
As n basis for its conclusions (Part I) and recommendations (Part II),
the report in Part III surveys the vulnerability of the Soviet bloc to
western economic controls, analyzes the position of the free world countries
in their trade with the Soviet bloc, and examines the effectiveness and
practicability of various control techniques that are available.
As used in this paper, the term "Soviet bloc" includes the USSR,
Bulgaria, Rumania, Hungary, Albania, Poland, Czechoslovakia, the Soviet
zone of Germany and Communist China.
PART I
Apprn d For Release 2000/09/08 m CI-RDP7,662R000300070021-2
 Approved For Release 2Ob/09/08 : CIA-RDP75-00662R0003000700Y1-2
S E C R E T
CONCLUSIONS
The following are the most important conclusions reached after
reviewing present policies and programs and appraising possible
additional lines of action:
1. The economy of the Soviet bloc is, to a large extent, free
from dependence on trading relationships with the non-Soviet world.
Segments of its economy, however, and particularly some closely related
to the war--making potential, are susceptible to external pressures.
These vulnerable spots are, broadly speaking, in the fields of machinery
and equipment, precision tools, anti-friction bearings, electronics,
certain non-ferrous metals, rubber and certain grades of essential
minerals. Selective controls directed at these vulnerable spots can
achieve most of the results that could be achieved through a complete
embargo.
2. The volume of trade between Eastern and Western Europe is
today at about 40 percent of the pre war level; the strengthening of
controls proposed in this report will mean a further reduction in this
trade. A diminution of trade as a result of this process of strengthening
international controls is desirable, provided adequate provision is made
to assist the non-Soviet world to meet the resulting economic dislocations
and provided the shrinkage is effected through programs which maintain
the political unity of the West.
3. It is not at this time in the best interests of the free world
to pursue a policy of complete embargo against the USSR and its European
satellites. (The policy with respect to exports to China is dealt with
in recommendations 1 and 7). Without significantly increasing the net
economic advantage to the West, a complete embargo might well serve to
orient the European satellites, particularly Poland and Czechoslovakia,
even more rapidly and more deeply toward the USSR; it would make more
difficult the settlement of the problems of Germany and of Austria;
it would increase the risk of our having to resort again to the Berlin
airlift; and, if urged by us, it'would raise major doubts in the minds
of the other free nations as to the sincerity of our objective of a
peaceful settlement of the existing differences with the USSR.
4. The effectiveness of external pressures on the Soviet bloc,
to a large extent, depends upon the degree of cooperation of the members
of the non-Soviet world, There are, however, limitations on the degree
of control other governments can undertake. Many governments are limited
in the extent to which they can take political decisions against the
Soviet bloc,
Approved For Release 2000/09/08 : CIA-RDP75-00662R000300070021-2
 Approved For Release 2000/09/08 : CIA-RDP75-00662R00030007Q021-2
Soviet bloc, some by the presence of large indigenous Communist parties,
some by public demand for an official policy of neutrality, and some
by the fear of direct military reprisals. In addition, many countries
of the free world are dependent in varying degrees on trade with the
Soviet bloc. Complete stoppage or a.significant decrease in this trade
would result in serious economic dislocations, particularly among the
countries of Western Europe.
5. The economic dislocations could be mitigated to some extent
by gradual readjustments which would require the development of alterna-
tive sources of supply and the opening up of markets in the Western
world for goods now marketed in the Soviet bloc. However, these readjust-
ments would require major alterations in some of the domestic policies
of the U.S. and other countries. Domestic policies such as those
relating to the export of products in short supply, the protection of
national maritime fleets and the protection of domestic industries would
have to be readjusted to fit the concept of a self-contained and
mutually re-enforcing Western world.
6. Despite the cost, the principal nations of the non-Soviet
world are cooperating and can be expected to cooperate further in a
series of measures, short of full-scale economic warfare, which can
materially retard the building of the Soviet war potential..- It is
important, however, in order to increase the likelihood that other nations
will expand and strengthen their existing controls, that the concept of /`
"economic defense" as distinct from "economic warfare" be maintained.
Certain neutral governments will not participate fully in any case, but
to some extent their lack of cooperation can be offset by special measures.
7. Western Germany, although agreeing in principle to the imposi-
tion of selective controls, is faced with formidable enforcement problems
in making such controls effective. Unless measures are devised for
enforcing controls on exports from Western Germany, particularly illegal
traffic and transshipments, the effectiveness of Western controls
generally will be greatly impaired.
8. As many of the measures employed in World War II to damage the
German war economy are of limited usefulness against the relatively
self-sufficient Soviet bloc, new techniques for exploiting the la tterts
weaknesses should be constantly sought, These techniques should be
designed not only to weaken the Soviet war-making potential, but also
to place an increasing strain on economic and political relations within
the Soviet bloc. Because of their security aspects, certain techniques
in this and related fields should be closely guarded and not dealt with
directly as part of the more traditional measures.
S E C R E T
Approved For Release 2000/09/08 : CIA-RDP75-00662R0003000 1---2
 Approved For Release 2000109/08 : CIA-RDP75-00662R000300070021-2
9. Plans should be formulated and made ready for implementation
to deal with a situation of full-scale economic warfare in the event
the Soviet bloc initiates such a policy, or in the event that develop-
ments make it advisable for the non-,Soviet world to adopt this course.
10. The economic strength and cohesiveness of the free world will
determine, in large uieasare, its willingness and ability to take
adequate measures against the Soviet bloc. Accordingly, the various
aspects of our f:,rcign economic. pclicy which are aimed at the positive
goal of building free world strength shout, be adapted to the present
situation and augr:or ed~ k.m~,nng the pr- grams which lend themselves to
this objective, and vh:ich an be utli_;el to develop the alternative
sources of supply; are our various ' oa.n and grant programme; Point IV, and
the programs for trade barrier reduction in the free world.
PART II
SECRET
Approved For Release 2000/09/08 : CIA-RDP75-00662R000300070021-2
 Approved For Release 2000/09/08 : CIA-RDP75-00662R00030007 0 1-2
S O R E T
4
AR
RECOMMENDATIONS
It is not possible to make final recommendations covering
the entire subject under review without further study and
consultation with other agencies of the Government. However,
the following recommendations are submitted with a view to
setting a pattern for immediate action and establishing
machinery for carrying forward the consideration and develop-
ment of policies and programs. Because of the interests of
certain other departments and agencies of the Government in
this subject, and because some aspects of it have been before
the National Security Council, it is suggested that these
recommendations be referred to the Counolil for review and
consideration by it and other appropriate departments and
agencies.
A - RECOMMENDATIONS ON SUBSTANTIVE MEASURES
Export Controls
1. The U. S. Government should, pending further
developments in the U.N., continue to prohibit all exports
to communist China, Manchuria and North Korea, but should
apply licensing controls so as to permit Hong Kong and
Macao to procure from U.S. sources imports for local uses
and fe>r transshipment to non-communist destinations.
2. The U.S. Government should extend its present
export licensing system over trade with the Soviet Union
and its Eastern European satellites by requiring an export
license for all products proposed for shipment to these areas.
In licensing such experts, the U.S. should continue to.
prohibit exports of all items of significance in the atomic
energy field, all arms, munitions and implements of war, all
items which are determined to be in short supply, and all
items which if exported would contribute directly to the
Soviet war potential (the so-called I and I-A lists). The
U.S. should normally deny the issuance of licenses for all
items which, if exported in significant quantities, would con-
tribute to the'Soviet'war-potential (the so-called'I-B list).
All-other items should be kept under coils a t surveillance throu{
the. comprehensive licensing system recommended above-.,-. Specific
items should be added to the list of commodities which are =
restricted '
S E -C R E T
Approved For Release 2000/09/08 : CIA-RDP75-00662R000300070021-2
 Approved For Release 2tO G109/08 : CIA-RDP75-00662R000300070021-2
106
S EC _R E T
- 5-'
restricted or prohibited on a selective basis and in
accordance with established procedures and existing
criteria for control, whenever such action is justified
for short supply or security reasons.
3. The U.S. overall security objectives should be
controlling in the implementation of Section 117(d) of
the Economic Cooperation Act of 1948 and of Public Law
843. Section 1304 (the Cannon Amendment). Accordingly,
although the U.S. Government should prohibit or restrict
shipments of important strategic goods to friendly coun-
tries, in accordance with policies and procedures which
have been laid down by the National Security Ctuncil, if
necessary to prevent the frustration of U.S. security ex-
port controls or the misuse of U.S, economic or financial
assistance, action should be taken in such a way as not
to endanger other U.S. security objectives of equal or
greater importance,
4. The U.S. Goverrnnent should continue to provide
vigorous leadership in the strengthening of the security
export controls of the Western European countries, recog-
nizing, however, that considerations of political feasi-
bility, military risk and economic cost make it undesirable
to press for European controls completely parallel to
those exercised by the U.S. The U.S. should continue to
press for (a) embargo to the Soviet bloc of scarce
materials or equipment needed for Western defense pro-
grams, (b) international agreement to embargo or limit
shipments of additional goods which are not yet fully
controlled but have already been recognized by most of
the Western European countries in the Coordinating Com-
mittee in Paris (COCOM)1/ to be of strategic importance,
(c) more effective international controls over trans-
shipments and illegal trade, (d) maximum cooperation by
countries, such as Sweden and Switzerland, which do not
at present participate in multilateral export control
arrangements, (e) measures to minimize past and future
trade
1 7 In addition to the United States and Canada, the Con-
sultative Group and its Coordinating Committee include
the German Federal Republic and the following NATO coun-
tries: the United Kingdom, France, Italy, Belgium,
Netherlands, Luxembourg, Norway and Denmark.
S E C R E T
Approved For Release 2000/09/08 : CIA-RDP75-00662R000300070021-2
 Approved For Release 20'x/09/08 : CIA-RDP75-00662R000300070021-2
S E C., R- E T
-6-
trade agreement commitments to supply gods of strategic
importance, (f) measures to promote coordination among
the Western European countries in their trade agreement
negotiations with the East, and (g) improved organizational
arrangements in COCOM and in the NATO to further these
objectives.
5. The U.S. Government in association with the
British and French Governments should request further
action by the Federal German Republic to ensure more
effective control over the illegal trade and transshipment
of goods agreed for control in COCOM.
6. The U.S. Government should seek the further co-
operation of the American Republics and where necessary
that of other countries in applying export controls to
direct shipments and transshipments to the Soviet bloc
of items of strategic significance or in short supply.
7. The U.S. Government, in view of the Chinese
Communist aggression in Korea, should press for the
application of effective controls on exports to China.
Its efforts through the United Nations should be directed
at achieving agreement on economic sanctions by the maxi-
mum number of countries; if necessary to achieve a wide
measure of agreement, such sanctions may be confined to a
list of goods including atomic energy materials, arms,
ammunition and implements of war, petroleum, and industrial
equipment useful in producing war materials.
8. Multilateral arrangements among free world coun-
tries for the equitable distribution of materials in short
supply should be used by the U.S., to the greatest practi-
cable extent, to deny or limit shipment to the Soviet bloc.
Preclusive Operations
9. Arrangements for governmental procurement of
commodities in short supply, including government-.to-
government purchase agreements, should be designed in
such a way as to deny or limit shipments to the Soviet
bloc, to the extent that this would not interfere with
the primary procurement purpose of the arrangement.
10. To the extent
S E C R E T
nrnrnAd Fnr Release 2000/09/08 : CIA-RDP75-00662R000300070021-2
 Approved For Release 2.000/09/08 : CIA-RDP75-00662R00030007021-2
S. E C R E T
_7-
10. To the extent that export controls, allocation
and normal purchase mechanisms do not sufficiently limit
the export to the Soviet bloc of materials in which the
bloc is vulnerable, the U.S., after consultation with its
major allies, should engage unilaterally or jointly in
preclusive buying and the preemption of productive
facilities to achieve this objectives Preclusive buying
operations should concentrate in the first instance on
such items as industrial diamonds, jewel bearings and
mica, rather than bulk items. Efforts to preempt indus-
trial capacity should be directed primarily at capacity
capable of producing critical manufactured products,
particularly those requiring large amounts of skilled
labor, in countries which do not voluntarily prohibit the
movement of these products to the Soviet bloc.
Financial measures
11., The Strategy Board referred to under Section B
of these recommendations should determine the point at
which export controls have become so restrictive and other
economic and political relations so curtailed that block-
ing of the dollars and dollar transactions of the USSR
and its satellites would be appropriate.
12. Continued study should be given to the subject
of gold with a view to evaluating measures of interna-
tional cooperation which might prove fruitful in reducing
the ability of the Soviet bloc to utilize gold.
Blacklisting
13. It would be undesirable at this time to publish
a "blacklist" or "proclaimed list". However, to assist
in tightening the enforcement of existing export and other
controls and as a preliminary step in preparing a more
formal "blacklist", arrangements should be made to develop
a central file of information on individuals, firms and
corporations suspected of evading U.S, or international
controls,
14. The determination
S E C R E T
Approved For Release 2000/09/08 : CIA-RDP75-00662R000300070021-2
 ,^
Approved For Release 2d 0/09/08 : CIA-RDP75-00662R000300070021-2
S E C R E T
14. The determination whether to publish a "blacklist"
at a later date should be made after careful consideration
by the Strategy Board referred to under Section B of these
recommendations.
Technology
15. The U.S. should sponsor measures to strengthen
security controls of plants and factories employing ad-
vanced technological processes.
16. The U.S. should press for more effective action
by COCOM countries to implement their agreement that "the
object of the embargo or quantitative controls should not
be defeated by the export of technical assistance, design
data, manufacturing technique, and specialized tools for
making any controlled items."
17, The U.S. should develop further programs to
prevent the export of advanced technological information
to the Soviet bloc, including export achieved through
the movement of persons, and should enlist the coopera-
tion of other countries in this effort. These programs
should be devised in such a way as to create the least
possible impediment to the exchange of such information
among the nations of the free world.
Sh_ippin
18. The U.S. should seek coordinated action on the
part of the important maritime powers to prohibit the
carriage to Soviet bloc destinations of all goods which
are the subject of embargo,
19. The U.S. should explore the feasibility and
desirability of instituting, in cooperation with other
major maritime powers, a system of ship warrants and of
control over the issuance of ship stores in aid of our
controls on the movement of prohibited goods.
De_ creasing Reliance on Trade with the Soviet Bloc
20, The U,S,, with the aid of friendly countries,
should pursue vigorously programs for increasing production
SECRET
Approved For Release 2000/09/08 : CIA-RDP75-00662R000300070021-2
 Approved For Release 20607 09/08 : CIA-RDP75-00662R0003000700221-2
SECRET
9..
of those basic materials that are now exported by the
Soviet bloc. These programs should be carried out as
part of our general program of procurement and develop-
ment,
21. The bargaining position of friendly countries
which now rely on the Soviet bloc for essential materials
should be strengthened by making alternative sources for
these materials in the free world more readily available.
To this end, policies governing U.S. export controls on
short supply items should be so designed as not to fore-
close a shift to U.S. sources by friendly countries, In
addition, a fund should be established, possibly out of
ECA appropriations, to make possible the extension of
financial aid to friendly countries to offset partially
any increases in cost involved in a shift from Soviet
bloc to free world sources, whenever such a shift would
carry net advantages for the West, Pending further con-
sideration, it is estimated that aid for these purposes
would involve something less than $100 million annually.
22. A more comprehensive analysis than has so far
been possible should be made to determine what specific
products or services now being offered by the free world
to the Soviet bl c could be diverted to other countries
of the free world, This analysis should point out (a)
how productive capacity might be reoriented to provide
materials needed by the free world and (b) to what extent
the diversion will require the reduction of such obstacles
as high tariffs, quotas, and shipping discrimination.
Further study should also be given to the need for govern-
ment purchasing of goods abroad now marketed in the Soviet
bloc wh ch can only be disposed of in the free world at a
loss.
S E C R E T
Approved For Release 2000/09/08 : CIA-RDP75-00662R000300070021-2
 Approved For Release 2d'/09/08 : CIA-RDP75--00662R0003000700 1-2
B. RECONE', NDATIONS AS TO ORGANIZATION
1. Ponding further consideration within the
Executive Branch, the operating responsibility for
carrying out approved policies should rest with the de-
partments or agencies normally having responsibility in
? the particular field of action in question. Iii connec-
tion with its operating responsibilities, it is expected
that each agency will provide the necessary staff work
for the development of suggested operating programs
within its assigned field.
2. To formulate overall operating programs, central
staff ir;ork and analysis will be required for the purpose
of coordinating and evaluating individual agency proposals
as to the most promising course of action. This analysis
must take into account the probable effects of proposed
economic defense measures on the economies of friendly
and neutral countries whose cooperation is necessary to
make them effective. It should also consider the possibi-
lities of using foreign assistance and other positive
foreign economic programs to reinforce economic defense
objectives. This centralized staff work should be organized
and directed'by the Chairman of the Board referred to in
paragraph 3 below, who, for completed staff work, should
make maximum use of the facilities of the departments and
agencies having responsibilities in these fields.
3. The operating programs in this field must be
carried on in terms of and in a manner consistent with our
foreign policy objectives. The operations in this field
must be coordinated with other programs and efforts in
the field of foreign policy. It is therefore recommended
that an Economic Defense Strategy Board be established
under the Chairmanship of the Department of State. Other
agencies to be represented on the Board should include the
Departments of Treasury, Defense, Commerce, Agriculture
and Interior and the Economic Cooperation Administration,
the Central Intelligence Agency, and the Office of Defense
Mobilization. This Board should consider proposed econe.,mic
defense programs and their relationship to foreign policy
objectives and other foreign operations; should aid in
coordinating the operations of the various agencies; should
assist in evaluating the effectiveness of operating programs;
and should stimulate the development of effective policies
and programs, The Board should recommend policies to govern
operations in this field.
S E C R E T
Approved For Release 2000/09/08 : CIA-RDP75-00662R000300070021-2
 Approved For Release 2000/09/08 : CIA-RDP75-60662R00030007 021-2
S E C R E T
BASES FOR CONCLUSIONS AND RECO.124ENDATTONS
A - VULNERABILITY OF THE SOVIET BLOC TO EXISTING AND TIGHTENED
WESTERN ECONOMIC CONTROLS
In reassessing the vulnerability of the Soviet bloc, the
Department of State has had access to the intelligence reports
of the Defense Establishment and other relevant sources. It is
believed that the resulting estimate, set forth in summary form
below and in greater detail in Appendix As represents the best
judgment of the United States Government.
The Soviet Policy of Self-Sufficiency
The Soviet bloc has always pursued a deliberate policy of
reducing to a minimum its vulnerability to outside economic
pressures.
Not only does the Soviet Union have extensive natural
resources but each of the Five-Year Plans has had as a principal
objective the building up of Soviet productive capacity in
deficient areas, even at the cost of great wastage of resources
and energies. The USSR is today capable of meeting within its
own boundaries the bulk of its operating requirements in every
major area of production. Where shortages of particular com-
modities continue to exist, a systematic attempt has been made
to provide a cushion against an interruption of outside supplies
through extensive stockpiling.
Soviet emphasis on self-sufficiency has been extended to
the satellite countries; although the dependence of these countries
on the West remains substantially greater than that of the USSR
itself, this dependence has been greatly reduced as compared with
pre-war.
The Chinese Communists have given every indication that they
too will follow a policy of enforced economic isolation from the
Western world. However, factors of geography and economic
structure seriously restrict the degree to which China can be
integrated with the rest of the Soviet bloc.
S E C R E T
Approved For Release 2000/09/08 : CIA-RDP75-00662R000300070021-2
 Approved For Release 2'000/09/08 : CIA-RDP75-00662R00030007 021-2
SECRET
12 -
The Nature and Extent of Soviet Sphere Vulnerability
Despite strenuous efforts to develop self-sufficiency, the
Soviet bloc is still dependent to an important degree on the Vilest
for the rate at which it can sustain its long-term growth. The
Soviet Union itself, most of the European satellites, and China,
are in relatively early stages of industrialization. All of
them need from abroad industrial equipment, especially high
quality machines and instruments, some vital raw materials and
semi.-finished goods, 11pilot plants", and technological
information.
The Soviet Union and its satellites are also short of a
number of commodities that are necessary for the operation of
their economies at the current level. While substantial stock-
piles of these commodities have been build up (probably in most
cases at least a year's requirements), the relief that these
would offer in case of en interruption of imports would be
temporary.
The entire bloc constantly needs replacement parts for the
vast amount of foreign equipment acquired in former years. It
is estimated that approximately 35 percent of the machine tools
in operation in the USSR are western built. The bulk of this
equipment is now over five years old and is already beginning
to present serious maintenance problems because of lack of spare
parts. The problem is further complicated because most of this
equipment is of an especially complex type, obtained from abroad
because of Soviet inability to produce it domestically. For
example, it is estimated that 75 percent of Soviet specialized
machine tools are of foreign make. The constantly growing spare
parts problem is therefore concentrated in the weakest and most
important sector of the Soviet-orbit industrial establishment.
The importance that the USSR and its satellites attach to
the continuation of supplies from abroad is directly evidenced in
a number of ways. It is estimated that in 1950 the USSR and its
satellites, including China, imported roughly X1.7 billion worth
of goods from the outside world. This amount is little more than
1 percent of the aggregate output of the Soviet bloc. However,
except for the China trade, these imports consisted very largely
of items essential for military preparedness and for the expansion
of the industrial base of the eastern countries. They included,
in particular, prototypes Which embody Western technical improve-
ment.
S E C R E T
Approved For Release 2000/09/08 : CIA-RDP75-00662R000300070021-2
 Approved For Release 2'00/09/08 : CIA-RDP75-00662R00030007 021-2
S C R E T
- 13 -
Another indication of the importance of supplies from the
?Test is the fact that the USSR and its satellites have shown
great official sensitivity to western export control policies.
Moreover, they have made strenuous efforts to obtain controlled
items. Irregular and covert eastward shipments have assumed
large proportions and range from complicated third country deals,
frequently utilizing the facilities of free ports, to smuggling
in knapsacks. Such imports are necessarily expensive because of
? circuitous hauls, price gouging, and middleman commissions and
therefore strongly indicate pressing Soviet and satellite needs.
Specific Vulnerability Targets
Existing controls over exports to the Soviet bloc are aimed
at curtailing current production and development prospects. The
most recent vulnerability studies, which in the main confirm the
accuracy of the decisions on which existing controls are based,
indicate that the Soviet bloc is most vulnerable from this view-
point in the following commodities: Swedish iron ore, on which
satellite steel output depends-unless and until reconversion to
Soviet ores can be effected; alloy steel, and alloy metals includ-
ing nickel but not including manganese and chrome; tin; copper;
industrial diamonds and gems; piezo-electric quartz; sulphur,
pyrites, and sulphuric acid; special types of graphite, mica,
asbestos and their manufactures; natural rubber, ball and
roller bearings, including high-grade bearing steels and parts;
electronic equipment, including materials and component parts;
abrasives, especially critical grain sizes; all types of re-
placement parts for equipment previously acquired by the Soviet
bloc in the '.Icst.
In addition to the foregoing, the continuation, or
institution where necessary of an embargo on the export of the
follaving commodities to the Soviet bloc would substantially
impair ability to raise production above existing levels; equipment
for petroleum explora zon, drilling, and refining, especially
certain crucial components, such as drills; power generating
equipment; anti-friction bearing producing equipment; machine
tools (principally complex, specialized and automatic types);
precision instruments and testing equipment; complete plants of
all types, but especially chemical plants, steel and aluminum
mills, and building materials plants; blast furnace equipment and
electric furnaces; laboratory equipment, and vessels and chart-
ering services.
SECRET
Approved For Release 2000/09/08 : CIA-RDP75-00662R000300070021-2
 Approved For Release 2 /09/08 : CIA-RDP75-00662R000300070021-2
F,CRET
- 14 -
Soviet Bloc Adjustment to an.'1nbargo
In part, the USSR and its satellites can counter a western
embargo of these commodities. A widespread net of more or less
covert trade channels has been developed in recent years through
which the Soviet bloc continu'-.s to obtain products on Western
control lists. However, the volume could be reduced to a
significant extent if full cooperation of the major non-Soviet
producers wore secured.
In those cases where it becomes impossible for the Soviet
bloc to erocurc vitally needed imports some compensating internal
adjustments can be made. Labor, fabricating facilities, and
materials. can be reallocated and synthetics and substitutes can
be utilized; but such measures could only partially offset the
damage resulting from Western trade restrictions. Since Soviet
plans in allocating resources already give top priority to the
development of capacity for military production and heavy industry
as opposed to consumers' goods, reallocation of priorities can
only take place within an already narrowed area. Furthermore,
scarcity is so general throughout the Soviet sphere that there
is but a small cushion for adjustment, particularly if a number
of commodities are involved simultano usly.
D.-spite Soviet counter-measures, a control program encom-
passing the commodities listed above and receiving the support
of at least the major producers impairs current production and
makes difficult the fulfillment of existing plans. In the USSR
and the European satellites, especially the latter, it forces a
lower standard of living on the peopled Soviet domination of its
Eastern European satellites, however, permits thn USSR to assign
itself priority on critical items of mutual interest without
weakening Soviet control.
With respect to China, elimination of a substantial part
of the x300 - $350 million of imports received in 1950 would
have relatively little over-all economic impact. While such a
move would severely affect the "modern sector', of the economy, the
Chinese Communists do not depend vitally on this sector for maintenance
of an operating administration or for support of their military
and police establishmont.
Without key imports the USSR, and even more the European
satellites and China, would find it difficult to carry out their
? plans for rapid, balanced development of their economies. The
Soviet bloc's potential to wage a prolonged war of attrition would
be considerably impaired but the capability of the Soviet Union to
conduct a general war of limited duration would not be materially
SEC R E T
B - ECONOMIC
Approved For Release 2000/09/08 : CIA-RDP75-00662R000300070021-2
 Approved For Release 2000/09/08 : CIA-RDP75-60662R000300070021-2
S E C R E T
- 15 -
B - ECONOMIC AND POLITICAL ASPECTS OF TRADE OF NON-SOVIET
COUNTRIES YVITH THE SOVIET BLOC
The problems of the individual non-Soviet countries in
curtailing or embargoing trade with the Soviet bloc vary
widely Some of these problems are essentially economic;
some essentially political. Their magnitude depends in good
part on how heavily the country relies on the bloc as a market
for its goods or as a source for the materials it needs. Much
depends also on the internal political complexion of the country;
a strong indigenous Communist party, a tradition of successful
neutrality, or a distrust of colonial powers can be controlling
considerations.
The summary that follows indicates simply the range of these
problems. Thei'degree of interdependence..between the Soviet and
non-Soviet worlds is considered in more detail in the analysis
(attached as Appendix B) prepared by the Economic Cooperation
Administration in close cooperation with the Departments of
State and Commerce and other agencies.
Economic Aspects
For the United States, the economic problems of terminating
trade with the Soviet bloc are almost insignificant; our trade
with the entire bloc, never very large, has already dwindled
as a result of export and funds controls, to a point where' it
no longer has much importance to either side. Our strategic
imports consist of some manganese and tungsten, for which
alternative sources would have to be found. Canada's position
is much like the United States; her chief problem would be the
loss of the Chinese market for a range of products which, for
the most part, could easily be absorbed in the West. Latin
America's problems also would be marginal; she would have tc-
forego moderate amounts of Czech manufactured products which
she might have some difficulty replacing from Western sources.
The central problems of East-West trade lie largely in
Western Europe from which the Soviet bloc derives the largest
part of its imported fabricated products. For Western Europe
the sudden loss of all East-West trade would be a serious blow
to economic recovery.l This area would lose important food and
raw material
1. For a detailed analysis of the economic problems associated
with a termination of East-West trade, see Appendix B, particu-
larly Parts III and IV.
S E C R E T
Approved For Release 2000/09/08 : CIA-RDP75-00662R000300070021-2
 Approved For Release 200'Q/09/08 : CIA-RDP75-00662R000300070021-2
S E C R E T
- 16 -
raw material items. The industries of Sweden, Austria and
Denmark would be crippled if they could not replace the coal
they now receive from Poland and Czechoslovakia; Sweden and
Austria would lose 15 percent of their total energy supply,
Denmark 22 percent. Sweden would also have to replace its
entire potash supply, now obtained from Eastern Germany. The
United Kingdom would be hard-hit; it receives 30 percent of
its coarse grain imports from the Soviet Union, 20 percent of
its timber from the Soviet bloc and an added 35 percent from
Finland, and a significant amount of its acutely inadequate
meat supplies from Poland and the USSR.
Western Germany's losses in being cut off from the bloc
would be particularly heavy, partly because of her close ties
with Eastern Germany, The artificial separation of these two
areas by the present boundaries, if completed by an embargo,
would compel painful adjustments in trade relations of all
kinds. nest Berlin is a particularly difficult aspect of the
problem confronting all of Western Germany.
Western Europe's reliance on the Soviet bloc as a market
is a less important problem than its reliance on the bloc for
raw materials. Nevertheless, some segments of Western Europe's
export industry would have difficulty in finding alternative
markets. The Icelandic fishing industry, for example, which
now relies on the Soviet bloc as a major market, would have
little chance to sell its product in the highly protected
markets of the Western world; and some segments of 'western
Europe's agriculture would suffer for the same reason. Even
where the products involved were marketable in the Western
world, it would take time time to establish new channels of
distribution. In addition, machinery producers of the West
who have orders in process being produced to Soviet specifica-
tions would have a difficult transitional problem of limiting
their losses on these products. During this transitional
period of adjustment, there would be a considerable strain on
Western Europe's balance-of-payment position.
Outside Western Europe, the principal economic problems
are in those countries of the Near and Far East which border
on the Soviet bloc. Iran, which supplies the bloc with insigni-
ficant amounts of some strategic items such as wool, relies
heavily on the Soviet Union to absorb the otherwise unmarketable
agricultural surpluses of its northern provinces. Afghanistan,
which also contributes to the Soviet wool supply, depends on
SECRET
Approved For Release 2000/09/08 : CIA-RDP75-00662R000300070021-2
 Approved For Release 2000/09/08 : CIA-RDP75-00662R000300070021-2
S E C R E T
- 17 -
the Soviet blrc to supply it with its vital gasoline require-
ments. A large part of Hong Kong's population is employed in
its entrepot and processing trade with Communist China. Japan
obtains part of its vital coal needs from China and, historically,
the viability of Japan's economy has been based upon access to
large volumes of coal, iron, salt, soy bean and other raw material
imports from the China mainland in exchange for exports of ^apital
and processed consumers goods. The assumption that this tra-
ditional pattern of trade will and must be resumed by Japan is,
despite present obstacles, deeply implanted in the mind of the
Japanese business man. In each of these cases, the problem is
insignificant in dollar terms but important when measured by
its effect on the economic life of the non-Soviet country it
affects.
Political Aspects
The extent of the political problems of any country in cur-
tailing or terminating trade with the Soviet bloc depends in part
on the scope of the economic problems that such a move would
create. In the United States, Canada and Latin America, where
no significant economic interests are involved in a termination
of East-pest trade, public opinion is no obstacle to its termina-
tion. In Western Europe, where each successive step in export
control has been paralleled by a shrinkage in the volume of es-
sential commodities received from the Soviet bloc, there is wide-
spread concern over steps which will cut further into these sup-
plies.
But the economic impact alone does not determine political
reactions and in sgme countries it is of secondary importance.
In some Western European countries, such as France and Italy,
there are large indigenous communist parties strongly represented
in the parliaments and vociferous in their opposition to any move
directed against the Soviet Union. In Sweden and Switzerland
a policy of successful neutrality during World War II is deeply
imbedded in the public mind. To a greater or less degree through-
out -Western Europe, there is a widespread reluctance to weaken
further the few remaining ties with the satellite countries,
particularly Poland and Czechoslovakia. And throughout the area,
the realization that a war would tarn Western Europe once more
into a battleground pervades all political decisions. These are
important limiting factors on the degree to which the Western
European countries will go in curtailing trade, and it is there-
fore not practical for the United States to seek full parallel
action.
S E C R E T
Approved For Release 2000/09/08 : CIA-RDP75-00662R000300070021-2
 Approved For Rele se 2000/09/08 : CIA-RDP75-006628000300070021-2
S E C R E T
- 18 -
Outside Western Europe and the Western Hemisphere, the
political problems associated with curtailing Soviet trade
have, in some instances, an even deeper significance and impose
even greater limitations. The people of the Arab countries and
of India, Indonesia and Ceylon are unwilling to be identified
too closely with the "Western world. This basic attitude results
in part from a reaction against the earlier political domination
of these areas by the Western powers and reflects the recent
growth of strong nationalism throughout the area. In India,
Pakistan, Indonesia and other countries of the Far East, it re-
flects also the strong attraction exercised over the peoples by
their communist neighbors.
C. TECHNIQUES
S E C R E T
Approved For Release 2000/09/08 : CIA-RDP75-00662R000300070021-2
 Approved For Release 2000/09/08 : CIA-RDP75-00662R000300070021-2
SECRET
- 19 .
C - TECHNIQUES FOR DENYING RESOURCES TO THE SOVIET BLOC
Whenever the Soviet bloc attempts to obtain resources from
the free world, it is vulnerable at three steps in its efforts:
it must find a source'of the goods; it must pay for them; and
it must arrange transportation to move them to the Soviet bloc.
Most measures intended to control or to deny goods to the Soviet
bloc are directed at one or another of these three critical
points. Accordingly, the summary and appraisal of these measures
which follow discuss the controls at each of these points.
The principal types of action which can be taken to deny goods
at the source are: complete embargo, selective export controls,
and preclusive operations, including intergovernmental purchase
arrangements and allocation schemes. These are considered sepa-
rately below. Following them, measures to control funds are dis-
cussed, and then measures directed at the transport of goods.
The question of control of technology is also considered, since
by this device it is possible to accentuate what is already the
greatest single strategic shortage in the Soviet bloc, skilled
manpower.
1, Complete Embargo
The basic question in this entire field is whether the United
States stands to gain more by advocating a complete severance of
economic relations between the Soviet and non-Soviet worlds than
it does by pursuing and advocating a policy of selective controls.
In deciding between the two courses, a number of questions have
to be answered. First, if a complete embargo were rapidly achieved,
what would be the cost to the Soviet bloc as compared with a gradual
and selective approach, Second, if a virtually complete embargo
were in fact rapidly achieved, what would be the cost to the Western
World as compared with a gradual and selective approach. Finally,
if a complete embargo were announced as the United States objective
for the free world, what effect would such an announcement have..on
the degree of cooperation of other countries in restricting trade
to the Soviet bloc,
(a) Costs of an embargo to the Soviet bloc.
It is clear that a complete embargo would have a greater
impact on the Soviet bloc than any less sweeping type of restric-
tive program. However, an effectively enforced program of selective
controls directed at vulnerable spots can achieve most of the same
results. Beyond that, it is difficult to generalize.
(b) Costs
SECRET
Approved For Release 2000/09/08 : CIA-RDP75-00662R000300070021-2
 Approved For Rele4 , 2000/09/08 : CIA-RDP75-00662R000300070021-2
- 20 -
(b) Costs of an embark to the Western World.
Some aspects of the cost of an embargo to the Western
World are subject to a rough kind of measurement; others can
only be appraised in qualitative terms. If trade were abruptly
terminated with the Soviet bloc, the first job confronting the
Western World would be to achieve a reshuffling of its trade
patterns; necessary goods denied to the Western World by this
action would have to be found elsewhere, while markets would
have to be found for a variety of Western products now absorbed
in the Soviet bloc.
The goods from the Soviet bloc for which alternative sources
would have to be found are, principally, coal, wheat, timber,
coarse grains, potash, meat and sugar. Price considerations
aside, alternative sources might be found: in the United States
for coal; in the United States, Canada and possibly other coun-
tries for wheat; in Argentina and the United States for coarse
grains; in Argentina for meat; in Cuba for sugar. Although part
of the timber could bemade up from the United States and Canada
the world supply shortage would make alternative sources for the
full amount difficult to find. Any undertaking to supply these
products from the Western Hemisphere, to be meaningful, would
need to be accompanied by firm commitments that Western Europe's
needs would not be subordinated to United States domestic needs
in any domestic allocation scheme. Moreover, the coarse grain
demand could only be met if the United States were prepared to
prevent any significant expansion in the use of animal feeding-
stuffs hero, and hence in domestic meat supplies.
Since the products Western Europe would need are, for the
most part, already in short supply, the effect of imposing Western
Europe's added requirements on the Western Hemisphere's strained
supplies would be either to drive prices up, precipitate the need
for more drastic price controls and rationing here, or both. The
total cost of the principal goods Western Europe needs from Eastern
Europe is about $600,000,000 a year. Assuming it were possible to
redirect trade with a minimum of dislocation, the amounts which
Western Europe would have to pay in replacing the essential supplies
now obtained from the Soviet bloc would be on the order of $150
millions more than they are now paying for these goods. However, a
shift of these proportions would probably result in Western Europe
having to pay higher prices for all of its imported supplies of
these products, not merely those formerly obtained from the Soviet
bloc. These added costs cannot be accurately estimated.
SECRET
Approved For Release 2000/09/08 : CIA-RDP75-00662R000300070021-2
 Approved For Rel 2000/09/08 : CIA-RDP75-00662R00030!D070021-2
SECRET
Another element of the cost involved in a quick embargo
arises out of the free world's loss of markets. For many pro-
ducts, no problem exists. The %t4O0 million spent by the Soviet
bloc for rubber, cotton and wool, in 1950 would presumably
readily be paid by the United States. The problem of providing
markets for the type of product typified by Icelandic fish, that
is, products not in acute short supply which are produced by
highly protected industries is far more difficult to solve.
One added aspect of the costs of an embargo which is subject
to rough measurement is the transitional problem of disposing of
partially fabricated machinery being produced in the Western World
to Soviet bloc specifications. While no figures are available to
indicate the value of these products, a first approximation can
be derived from that fact that annual sales of these products to
the Soviet bloc have run at about $200 million.
The non-monetary economic costs of an embargo are probably
more important than the actual dollars involved. Direct controls
would have to be established in fields in which they are not now
needed; European cooperation would have to be channeled for a time
into dealing with difficulties of our own making; a supplementary
economic aid program would have to be devised and divided, absorb-
ing some of the energies required to mount the defense program and
the rearmament effort.
Certain other non-monetary costs must be added to the total.
A complete embargo would servo to orient the European satellites,
particularly Poland and Czechoslovakia, even more rapidly and more
deeply toward the USSR; it would make more difficult the settle-
ment of the problems of Germany and of Austria; and it would increase
the risk of our having to resort again to the Berlin airlift.
Lastly the danger that a complete embargo may precipitate new
or intensified military action by the Soviet bloc in areas such as
Indochina and the Malay States in order to secure supplies denied
the bloc by the embargo is a risk which is difficult to appraise
but one which must be weighed heavily in the balance.
(c) Free world reaction to complete embar o.
The answer to this question can be made unequivocally. A
United States announcement that its objective was a complete embargo
of the Soviet bloc would materially impair our efforts to obtain
the cooperation of the rest of the free world on measures aimed at
limiting
SECRET
Approved For Release 2000/09/08 : CIA-RDP75-00662R000300070021-2
 Approved For Release 2000/09/08 : CIA-RDP75-00662R000300070021-2
SECRET
22 -
limiting the strength of the Soviet bloc. The reasons for this
conclusion have been indicated in earlier sections of this report.
The rest of the Western World has very much more to lose than we
in any severance of economic ties. Many countries are much more
irunediately faced with the prospect of attack and invasion; some,
though hostile to or fearful of the Soviet bloc, are publicly com-
mitted to a policy of formal neutrality. Many countries of the
?!estern World who would agree to specific measures directed at
retarding the build-up of the war potential of the Soviet bloc,
if these measures were presented on their merits, would reject
the some measures if they were expressly labelled as st::ps in the
direction of complete embargo.
If the United States were unilaterally to launch a complete
embargo, without parallel action on the part of the rest of the
free world, it would have no significant effect on the Soviet bloc.
United States exports to the entire Soviet bloc now run at the rate
of less than x'1,000,000 monthly and provide little of real signifi-
cance to the Soviet war potential. Imports might be reduced, in
order to cut off a source of dollars usable to purchase strategic
commodities in other parts of the world, or for subversive purposes,
but such an operation would be ineffective without an effective
program to sterilize Soviet gold holdings, about which there is
little the United States can do unilaterally. Any benefit to be
gained from completing the American embargo on exports at this time,
in terms of satisfying a public demand for action in time of crisis,
would almost certainly be offset by an increased American dissatis-
faction in the early future with the failure of our allies to take
similar action and a resulting strain on our relations with them.
2. Export Controls
Given the varying vulnerability of the Soviet bloc from sector
to sector and the known limitations on multilateral action, export
control measures applied selectively appear to offer the best
method for curbing the growth of the Soviet war potential. This
technique is also one in which most progress has been made both
domestically and internationally.
(a) U.S.
SECRET
Approved For Release 2000/09/08 : CIA-RDP75-00662R000300070021-2
 VT 1)
Approved For Release 2000/09/08 : CIA-RDP75-00662R000300070021-2
SECRET
- 23 -
(a) U.S. Controls The United States imposes an absolute
embargo on shipments to the entire Soviet oloc of arms, munitions
and L-_plements of war, atomic energgy.aterials, a broad range of
indc strial machinery, equipment and materials of highest strategic
inpci?tance for the dev lop^ent of Soviet :-rar potential and an in-
crcasing number of ,-.oods which are in short supply in t : _s country.
Several hundred additional its can:lot be exported to the Soviet
bloc without a license, and licenses are customarily denied. A
de facto embargo thus extends to all Direct saiprr.ents of goods of
reconized strategic s.::rificanee. Careful screening, end-use
checL._s and a orocudu;xe for penalizing; those -.rho violate export con-
trol re ulations have also been i-:stitured in an attempt to control
the indirect shipments through other non-Soviet countries.
In the case of Con;unist C Dina, I :anchuria and ',orth Lorca, the
U.S. embargo extends to all cont:oditics, and controls almost as
severe are exercised with respect to adjacent entropot points,
especially Hong r"ong and l ~aeao.
A proposal for a further extension of U.S. export controls,
short of complete cnbargo, is c1u._~r, ntly before the stational
Security Council. It .could be a ,,seful precaution at this tine to
require c;:port licenses for all shipments to Lhie entire Soviet bloc,
in or-,'or to keep thorn under close scrutiny and to enable inn.ediate
cut-off if proposed shipments of particular items seen excessive.
On the other .land, it rould appear to be unnecessary and un.ri3e to
change the existing standards of control or substantially to .-riden
the area of do facto embargo, although is is clearly desirable to
revent or limit the export of s;~; cific hens additional to those
now cor_trolled . henevcr necessary for security reasons or to pro-
tect stocks of goodsin short sup;ly. Adequate procedures already
exist for extending controls in taese cases.
(b) 4estern I,;uro,e. All of the major industrial and
tradini; rya i fors of "iestern v.ro -e, except S.ruden and S. i'..,rland,
participate .~;ith the United _ tatos and Canada in a secret Coordinat-
in- Ccrrimittcc (COCUF.) .,,hich meets in ::iris, for cihe purpose of
develo in; a ,creed interna;:ional cx))ort controls. A large measure
of agree,,ent hasu: on rmached arion, t iese countries, much of it in
very recent months. Sweden arid S..itzerland cooperate to a more
limited extent outside of the COCOL.
The ~.:uropean countries in COCOi embargo to the Soviet bloc,
including China and i`orth Vorea, all shipments of aras and munitions,
atomic energy materials, and. also about 85 percent of the present
Approved For Release 2000/09/08 : CIA-RDP75-00662R000300070021-2
 Approved For Releds `e~ 2000/09/08 : CIA-RDP75-00662R000300070021-2
SEC
-24
U.S. list of embarLoed items and 25 percont of the U.S. list of
quantitatively controlled ite:is. I.:ost of the remaining items on the
L.S. control lists arc currently '~eing considered by CUCOI::, to
determine what measures of control should be imposed.
In addition to the selective embargo and limitative controls
imposed on trade with China, the principal oil-producing companies
ooeratin_~: outside of "iJestern ELroc and North Az:ierica have agreed
to see that shipments of etrolcuin are not made to China, from
sources outside the *.:estern European and +,'orth American areas, A
number of Western European countries also embargo all trade with
North Korea.
::hen the agrecnants so far reached through COCOE are compared
~:rith the conclusions on Soviet vulnerability summarized earlier, it
is clear that impressive progress has already been made in agreeing
to deny or to limit to the Soviet bloc the xroods in which the bloc
is :;3'iieciallyr vulnerable. '4here -caps exist in the agreed COCO1?a con-
trols, they are due principally to two factors. One of these is the
fact that the principal producers of same strategic goods such as
tin, rubber and iron ore, arc not in COCOP.i and are unlikely to par-
ticipate in coordinated controls in the foreseeable future. The
other factor is that, thus far, the COCOL countries have not agr.:ed
to extend the scope of their control activities to items which con-
tribute to the general econo--,iic base of the Soviet bloc, but have
concentrat::d instead on materials more directly related to its war-
maLin; potential, This latter factor explains COCUi:i*s limited
action to date on such items as construction and conveying equipment,
transportation equipment, coal mining equi>:ient and electric po,rer-
gcner.ting installations.
Any proposal to extend ap,rcciably the existing; system of agreed
international controls ::ill encounter real resistance from the other
participants in CUCOL:.l/ There ar:: three prerequisites for any
successful
1 During recent negotiations with the British and French and subse-
quently with the other COCO: countries, it was understood that
there :could be no further wholesale extension of export controls
unless changed international conditions demanded a drastic shift
in policy in this field. This un6erstanling was last confirmed
at a Meeting of the Consultative Group on November 29, 1950s the
day before the Communist C'-iineso aggression began in North i orea.
The understanding has reference to the level of international
controls and not to those of any inr.ividual country.
SECIU T
Approved For Release 2000/09/08 : CIA-RDP75-00662R000300070021-2
 Approved For Releaser 2000/09/08 : CIA-RDP75-00662R0003;'0070021-2
SECPQ T
- 25 -
successful ne~_'otiations in this direction. First, we must avoid
actions which appear to other countries as tantamount to economic
warfare against the Soviet bloc; this would seriously hamper our
nf;otiations for further cooperative action. Second, the financial
r_-,cano arid administrative r:achinery must be at hand to deal with the
problems of economic adjustment :rhich other countries would face in
any further diminution in East-nest ride; these are discussed more
fully belo:r. Finally, if the list of controlled items is to be
extended substantially to cover types of machinery and equipment not
now controlled, the COCOA: countries first must share our conclusion
that circumstances now require efforts to restrain the rate at which
the Soviet bloc is building its broad economic base, in addition to
its war-equipping industries :roper.
In addition to these r_easures taken through COCOId, steps have
bc,en taken in the i:orth Atlantic Treaty Oc?ganization to control
exports of scarce r.:_.tterials re ,ulred for the defense programs of
the :'orth :atlantic ~`reaty nations, The main purpose of the action
is to ensure that materials which are not at present prohibited or
effectively controlled by ether measures and ahich are clearly
required for the i ATO defense program arc not exported eastward.
These arrangements are still in an early stage of development and
the cx-.~cnt to which they may riale it unnecessary to expand other
control measures cainot yet be determined.
Perhaps the most urgent and rlost difficult problem faced in
the effort to make international ex-port controls more effective is
that presented by transshipments and irregular trade. Agreement
has been reaehee after numerous technical discussions in CGCOL on
various ^r tiods co control transshipments, but the easures recom-
r_ended are not yet fully in effect and may be found impracticable
in so:,ie countri cs. The :;roblen of ocstern G,:rmany is particularly
acute. hot only are border controls ineffective but the arbitrary
character of the division bet-een the Eastern and western zones has,
as indicated earlier, cut --,cross natural production and distribution
are=as, accentuating- the economic consequences of an embargo and
hence stimulatin? evasion. Although the United States can take some
measures unilaterally to limit irregular operations of this sort,
reall r effective action depends upon effective international coopera-
tion.
In addition to this action by the countries represented in the
COCOi: and the NATO, efforts arc uein made in cooperation with the
British and French to obtain an expansion in the export controls
exercised by Sweden and Switzerland. So far, cirese countries have,
undertaken to control shipments of the highest strategic importance
Approved For Release 2000/09/08 CIA-RDP75-00662R000300070021 2
 Approved For Rele.2000/09/08: CIA-RDP75-00662R0003;OOb70021-2
- 26 -
certain types of transit movements. Although these traditional
neutrals will probably not agree to adopt controls as extensive
as those imposed by other Western European nations, further expan-
sion in the scope of their present controls may well be achieved
and efforts to this end should be continued.
The question of expanding the membership of C000M is under
active consideration and it appears likely that Portugal, and per-
haps Greece and Turkey, will be invited to participate. None of
these countries exports significant amounts of strategic goods to
the Soviet bloc, but there may be advantages in obtaining wider
cooperation in controls over transshipments and irregular trade
movements.
In addition to agreeing on export control lists and on methods
fcr limiting transshipments, the COCOM countries have agreed that
trade agreement commitments with the Soviet bloc should not in the
future be allowed to frustrate the internationally-agreed security
controls. These countries have also agreed to exchange information
concerning their current trade negotiations with bloc countries,
especially with respect to the good most desired by the bloc; and
the U.S. has urged an expansion of the COCOM staff for this purpose.
Consideration has been given to the possibility of encouraging
some form of thoroughgoing bloc-trading by the Western World in its
trade relations with the East. It seems clear that an international
trading corporation or similar organizational arrangements arc not
administratively feasible while East-West trade remains at or near
its present levels. Nevertheless, there are clear advantages to be
gained by fostering a much greater coordination of Western trade
agreement negotiations, perhaps even to the point eventually of bulk
purchases to meet total Western needs for a critical commodity such
as Polish coal. In addition, the bargaining power of the countries
in the West could be strengthened if there wore alternative sources
to which they could turn for needed goods, and alternative markets
in which they could see the products now sold to the bloc. The
first of these objectives would be assisted by a number of measures.
New sources for theproducts now imported from the bloc could be
developed through the various United States and international develop-
ment programs. Moreover, friendly countries could be offered
alternative supplies at prices which reduced the monetary sacrifice
SECRET
Approved For Release 2000/09/08 : CIA-RDP75-00662R000300070021-2
 loll's
Approved For Release?2000/09/08 : CIA-RDP75-00662ROO03 0070021-2
SEC ,T
- 27 -
involved in turning to higher-cost sources in the West. The
objective of opening up now markets for their goods is more
difficult to achieve. It may require the elimination of pro-
tectionist devices employed by the countries of the Western
World which now exclude the goods and services offered by
their neighbors. In some cases, it may even require the pur-
chase and extraordinary disposal of unmarketable surpluses
abroad.
(c) Other countries. The trade of many non Western
European countries with the Soviet bloc is now under review by
a special committee of the National Security Council. Although
some instances of shipment of strategic items may be found, it
is not expected that the magnitude of trade with the Soviet bloc
will be significant enough to require extensive negotiations with
most of these countries.
In so far as the other American Republics are concerned,
there have in the past been some shipments to the Soviet bloc
of goods of strategic importance; these have included export of
petroleum to China and of copper and quartz crystal to the Soviet
bloc. However, in all such cases, the United States has promptly
received the cooperation of the countries concerned in terminating
such trade. The subject of security export controls will be dis-
cussed further with the other American Republics at the forthcoming
Foreign Ministers Conference in Washington. Such a discussion
should cover not only the movement of specific strategic commodities
from these countries to the Soviet bloc, but also the means of
avoiding the use of Latin America as a transshipping point to the
bloc.
The question
Approved For Release 2000/09/08 : CIA-RDP75-00662ROO0300070021-2
 Approved For Relea`2000/09/08 : CIA-RDP75-00662R00030Q'070021-2
- 28 -
The question of cooperation on the part of the Far Eastern
suppliers of commodities such as tin and rubber is more difficult.
In most of these cases the problem of strategic shipments can be
solved better by U.S. or 17estern Europe allocation, purchasing
and stockpile programs, than by the development of a parallel
export control policy by the country concerned.
(d) Legislative policies. From the first, Congress
has taken an extensive interest in the security export controls
exercised by other countries. This interest has crystallized in
two statutory provisions, the Cannon Amendment to the Supplemental
Appropriations Act of 1950, and Section 117(d) of the Economic
Cooperation Act of 1948. Both measures are intended to insure that
the U.S. will not extend economic or financial aid to a country
which by its own exports is frustrating our efforts to deny
strategic goods to the Soviet bloc.
In invoking these legislative sanctions it must be borne in
mind that for some countries, the costs of cutting off trade with
the Soviet bloc bulk large and the fear of retaliation is well
grounded. Accordingly, if pushed to a decision, they may under-
take commitments they will not enforce, or, by being unwilling to
accept United States' aid on these grounds, be, unable to undertake
their share of programs for strengthening the defenses of the free
world. Greater U.S. security objectives may thus be imperilled.
3. Preclusive Operations
Since the Soviet bloc relies upon the outside world for
significant quantities of certain basic materials and highly
fabricated products, there are possibilities of engaging in pre-
clusive buying operations to cut off the supply of these products
to the bloc. Operations of this sort can take several forms;
the principal techniques and their applicability to the present
situation are described below:
(a) Government-to-government urp chase agreements.
One technique is to negotiate with governments, from whose territo-
ries the Soviet bloc obtains its supplies, contracts under which
the supplying government would undertake to sell its total pro-
duction to friendly countries and to deny any of its production to
the Soviet bloc. Under present circumstances, however, this tech-
nique can be applied only to a limited degree. The Soviet bloc is
S E C R E T
Approved For Release 2000/09/08 : CIA-RDP75-00662R000300070021-2
 Approved For Release 2000/09/08 : CIA-RDP75-00662R00030 070021-2
S E C R E T
- 29 -
vulnerable principally in two areas: in the supply of highly
fabricated manufactured products, such as electric power instal-
lations and machine tools, and in the supply of a limited number
of raw materials, notably, copper, rubber, tin, cotton and wool.
Government-to-government purchase agreements are impracticable
for highly fabricated manufactured products, since these products
are typically manufactured to specification and are not sold in
bulk.
Government-to-government buying is much more practicable for
copper, rubber, tin, cotton and wool. However, these are all
commodities which are short in the free world and the supplies
that the U.S. and its allies must obtain are much more important
to us than is the denial of the relatively small amounts reaching
the Soviet bloc. Accordingly, the first objectives of procure-
ment of these products must be to stimulate their production and
to avoid adding to their cost, objectives directly at variance
with those of a preclusive buying operation. While most supplying
countries will cooperate fully 7d th us in the stimulation of
production, some of them would refuse outright a negative
covenant requiring them to deny these products to the Soviet bloc.
This is illustrated by the cases of rubber and tin; Ceylon and
Indonesia, while willing to negotiate for an increase in their
shipments to the free world, strongly resist efforts to preclude-
all shipments to the bloc.
Another illustration of the drawbacks of government-to-
government buying as a technique of preclusion is that it induces
undesirable demands on the part of supplying countries, which are
less likely to arise in connection Yd th normal procurement opera-
tions. The type of demand most likely to be made as a price for
a government-to-government commitment not to sell to the Soviet
bloc is the demand that the buying governments, in return, guarantee
certain specific goods to the selling government; this type of
bargaining makes difficult any attempt to ensure an equitable
distribution of scarce commodities in the free world.
Accordingly, in the use of government-to-government buying
operations the object should be to insure that the aim of pre-
clusion does not interfere with the more pressing objective of
maximizing free world supplies and thus result in net harm to
the economic strength of the free world. Nevertheless, the pos-
sibility of preclusion must always be kept in mind as a desirable
by-product of an arrangement aimed essentially at procurement.l/
(b) Other
1/ These same conclusions apply in general to inter-
governmental allocation agreements.
Approved For Release 2000/09/08 : CIA-RDP75-00662R000300070021-2
 Approved For Relea es'1000/09/08 : CIA-RDP75-00662R00030070021-2
- 30 -
(b) Other preclusive operations. In addition to the
government-to-government procurement activities described above,
there are other types of purchase operations. The principal one
of these is preclusive buying in friendly or neutral countries of
the world.
Techniques in this field differ greatly from normal procure-
ment operations and must be conducted discreetly and at times
secretly. One prerequisite for a successful operation of this
kind is that the inflationary effect of such buying must not be
so great as to endanger legitimate and essential procurement
operations being conducted elsewhere in the world. Another is
that the operation should seek to avoid stimulating increased
production in the areas in which conducted.
These prerequisites narrow substantially the field where
preclusive buying can be really effective. Nevertheless, among
those raw materials the Soviet bloc must obtain through imports,
a few offer possibilities for successful preclusive buying
operations. In general, these are materials of small bulk but
high unit value and are commodities with relatively few sources
of supply. They are also commodities the denial of a comparatively
small amount of which could impair the Soviet war potential. For
example, diamond buyers located in each of the principal diamond
markets and the major diamond producing areas, if liberally
supplied with funds, could probably intercept a significant part
of the industrial diamonds now reaching the Soviet bloc. The total
inflationary effect on the economy of Western countries and on the
cost of our own war effort resulting from such an operation vrould
be negligible. Similarly with jeweled bearings: the scarcity of
skilled labor for their manufacture suggests the possibility of
purchases in the areas supplying the Soviet, notably Switzerland.
Although preclusive buying is not a promising mechanism for
denying strategic manufactured goods in general, it may be possible
by purchase to intercept key items of machinery designed to Soviet
specifications. Of even greater importance would be the,preemption
of the productive facilities of countries supplying these products
to the Soviet bloc by placing forward orders in sufficient volume
to utilize these facilities completely. In some cases, it might
even be possible to purchase the facilities outright.
4. Financial
Approved For Release 2000/09/08 : CIA-RDP75-00662R000300070021-2
 Approved For Releal~e,2000/09/08 : CIA-RDP75-00662R000300Q70021-2
S E C R E T
- 31 -
4. Financial Measures
The Soviet bloc obtains in several ways the funds
with which it buys the Western World's goods and finances
propaganda, espionage and sabotage. The bloc has avail-
able certain liquid assets including bank deposits in
Western countries, supplies of currency of Western coun-
tries, and gold. These resources can be augmented by
net earnings which the bloc manages to achieve through
its merchandise trade with the West, and by its current
gold mining production.
Theoretically, the ability of the Soviet bloc to
use any of these funds could be impaired. Attempts
could be made to locate and place under control assets
physically located in the West, including any assets
.earned in the future through the sale of goods; and
obstacles could be placed in the way of their using
their gold production and reserves.
(a) Blocking Soviet assets. There is nothing
to prevent the United States from blocking the assets of
the Soviet-bloc countries subject to our controls; we
have already done so with respect to Comnr.mn-ist China's
assets. However, the sums involved are believed to be
insignificant. Accordingly, the principal impact of
the order would be on future earnings. Since the Soviet
bloc then could not retain control of the funds it might
earn by selling goods in the United States; such imports
would cease; this conclusion might be qualified to the
extent that our blocking policy permitted the arrange-
ment of specific barter deals mutually attractive to
the United States and the Soviet bloc, but this is a
minor qualification at best. Accordingly, the wisdom of
instituting a blocking regulation depends largely upon a
broader question, namely, the wisdom of terminating
United States trade with the Soviet bloc,
Blocking and related action by the United States
could also have the effect of denying to the Soviet
bloc the privilege of using United States dollars in the
settlement of their international transactions outside
the United States. But the loss of this facility would
SECRET
Approved For Release 2000/09/08 : CIA-RDP75-00662R000300070021-2
 Approved For Release 2000/09/08 : CIA-RDP75-00662R000300070011-2
S E C R E T
- 32 -
be of little significance unless accompanied by parallel
action from certain other key countries in the blocking
of Soviet funds, For example as long as the Soviet bloc
was in a position to offer Swiss francs to the world,
they could finance their trade through Swiss francs
almost as easily as through dollars. The prospect of
obtaining the necessary degree of cooperation from
Switzerland effectively to deny the Soviet bloc the privi-
lege of using Swiss francs is remote. In addition, as a
member of the so-called "transferable account system",
the USSR is in a position to spend freely in the sterling
area and in certain countries associated with the area,
earnings acquired by it in any country in the group.
Since the only basis on which the USSR will sell its
goods to the United Kingdom is on the assurance'that it
can use its sterling earnings in other countries, a deci-
sion to drop the USSR from the transferable accounts
system would greatly impair the United Kingdom's bargain-
ing power in its dealing with the USSR.
Effective international action limiting Soviet
freedom in the use of the West's currencies would seem
to depend upon a prior decision of the countries of the
West that a drastic reduction or virtual cessation of
trade with the Soviet bloc is desirable. Once this
decision was made, however, more direct trade controls
would be available to achieve the result. Effective
financial measures, such as blocking, might then be
applied, ancillary to these direct trade controls.
(b) Denying the Soviet bloc use of its gold.
Gold is one of the Soviet bloc's most important potential
means of commanding goods and services in the West. Con-
servative estimates put the gold reserves of the Soviet
bloc and its satellites at about $3 billion; annual gold
production is estimated at approximately $200 million.
Almost all of these reserves are probably in the USSR.
Gold has an acceptability even greater than that of
dollars in many areas of the world, notably the Middle
and Far East, Its source is difficult to trace. It can
be used
SECRET
Approved For Release 2000/09/08 : CIA-RDP75-00662R000300070021-2
 Approved For Release,2Q00/09/08 : CIA-RDR75-00662R0003004021-2
S E C R E T
- 33 -
be used in cash transactions, avoiding official surveil-
lance. It makes an ideal form of payment for underground
activities.
The USSR is reported to be making a considerable
effort to establish and maintain channels for the sale of
gold in Western Europe. Satellite airlines are reported
shipping gold clandestinely to Paris, Brussels and
Amsterdam; French and British gold coins are reported
being counterfeited in the bloc and shipped for use in
outside areas.
A program for the effective suppression of Soviet
bloc gold sales would necessarily involve two major lines
of action. First the United States and other countries
would have to cease buying gold from the Soviet bloc and
from third countries which have had gold dealings with
the Soviet bloc, and would have to cease selling gold
destined for the bloc. Second, the free markets for
gold which exist in many countries of the world and on
which the Soviet bloc has heretofore primarily relied,
would have to be curtailed or suppressed.
The problem of obtaining the cooperation of other
countries in limiting official transactions in Soviet
gold cannot be separated from the broad policy of such
countries with respect to trade with the Soviet bloc.
It is unlikely that real cooperation could be obtained
in limiting these official gold transactions unless
countries were prepared to take the full step of block-
ing Soviet assets and instituting a de facto embargo on
trade with the Soviet world.
The United States could take unilateral action
against Soviet gold. This could be done either by block-
ing all Soviet assets or by measures short of a complete
blocking operation. If Soviet assets were blocked, we
would treat the proceeds from any sale of Soviet gold to
the United States the same as the proceeds of any other
commodity. Importation of gold would be permitted only
against payment in blocked dollars. This is the principle
currently
SECRET
Approved For Release 2000/09/08 : CIA-RDP75-00662R000300070021-2
 Approved For Release 2000/09/08 : CIA-RDP75-00662R0003000700'21-2
S E C R E T
-34-
currently applied to Chinese gold. Any unilateral action,
however, would be of limited effectiveness to the extent
that other countries were prepared to continue to take
Soviet gold and to sell essential supplies against the
proceeds of the sale of gold.
The United States might attempt to obtain interna-
tional cooperation by such drastic means as a declaration
by the United States that we would buy no gold from any
country unless it refuses to purchase Soviet gold. Such
a step would be difficult to justify unless we were will-
ing to go even further and refuse generally to trade with
any country which traded with the Soviet. Furthermore,
such action with respect to gold alone would probably be
of very limited effectiveness in forcing other countries
to curtail trade with the Soviet bloc and might well have
important adverse implications with regard to the ability
of the United States to. use its own gold for the acquisi-
tion of essential imports.
The curtailment of Soviet gold sales in the private
markets of tre world, notably those of the Middle and Far
East, would be difficult even with the cooperation of the
governments of those areas. However, the possibility of
obtaining some measure of cooperation in limiting such
sales is somewhat greater than the prospect of coopera-
tion in blocking Soviet funds in general. Some of these
measures, such as those aimed at the suppression of free-
gold transactions in general, could be publicly associated
with the International Monetary Fund objectives of 8tabiliar-
ing exchange rates and of protecting monetary reserves; such
an association would render these measures more palatable
to other countries. Furthermore, transfer of the proceeds
of gold sales into currencies other than those obtained in
the countries in which the gold was sold could be restricted
by appropriate exchange control measures. Possible action
in respect to Soviet gold sales in private markets is
worth further exploration.
5. Blacklisting
S E C R E T
Approved For Release 2000/09/08 : CIA-RDP75-00662R000300070021-2
 Approved For Release-2000/09/08 : CIA-RDP75-00662R000309V OO21-2
SECRET
S
-35-
5. Blacklisting.
The development of a blacklist is a means of enforcing other
measures which have been put in effect to deny resources to the
Soviet bloc, The purpose of the list depends on the nature of
these other measures. For examples in enforcing export controls,
a list has already been developed of domestic consignors and
foreign consignees suspected of helping in the evasion of those
controls; transactions involving such persons are prohibited or
are subjected to particularly careful scrutiny. Such a list might
also be developed to enforce the blocking of Soviet bloc funds;
drafts drawn by such persons on dollar funds might be specially
screened, Similarly a "black list" could be used to reinforce
shipping restrictions, import restrictions or other measures which
were a part of an economic defense program, In its extreme form,
a consolidated list could be developed of persons or corporations,
at home or abroad, who should be treated in all respects as enemy
aliens.
The need for an elaborate blacklisting operation is much less
important in the present emergency than it was during World War II,
On the other hand, there is need for a continuous improvement in
enforcement techniques, The information which the Commerce Depart-
ment has already compiled in the enforcement of its export controls
should be merged with that developing out of the Treasury Departmentls
fund control work and should be supplemented by the information avail-
able to ECA and the intelligence agencies. A central blacklisting
file should be developed and maintained by an operating agency, Since
the list would at this time contain the names of persons in NAT
countries and in other potential allies, unlike the practice during
World War II in which listings were usually restricted to those in
neutral countries, it should not be published at this time. Its
publication in the future should only be made after careful con-
sideration of its implications for our allies and after consultation
with them
6. Control of Technology
In the long run, the chief economic advantage the Western World
holds over the Soviet bloc is the advanced state of Western tech-
nology. l/ The West is far ahead of the Soviet bloc in the number
of
l/ This section does not deal with the enforcement of security
classifications applicable to technical data classified by the
United States Government, Nor does it deal with the problem of
protecting data which might be used by the Soviet bloc for sabotage
or actual warfare, such as information on U.S. plants. These are
security problems directly related to the prevention of espionage
which is outside the scope of this paper.
SECRET
Approved For Release 2000/09/08 : CIA-RDP75-00662R000300070021-2
 Approved For Release 2000/09/08 : CIA-RDP75-00662R000300IL70021-2
-36-
of its trained scientists and production specialists. We are capable
of using these specialists both intensively and extensively to a much
greater degree than the U.S.S.R.; we can mobilize greater skill to
meet a particular problem and we can deal with a wider range of prob-
lems at any given time.
The enormous extent to which the Soviet bloc has so far relied
upon Western technology is evident from the study of the Soviet bloc
vulnerability, attached as Appendix A. An effective embargo on the
export of technology to the Soviet bloc would have a measurable
deterrent effect on its economic growth.
There are, however, obvious inherent difficulties involved in
preventing scientific and technical information from reaching the
bloc. Such information usually takes a form difficult to intercept--
a concept in someonets mind, a formula, a model, a single blueprint,
or a bundle of plans. Once these end-products are in possession of
the Soviet bloc, unlike a ton of copper or barrel of oil, they can be
used not once but repeatedly. In addition, since effective measures
to prevent the leakage of scientific information to the Soviet bloc
would necessarily involve limitations on interchange within the
Western world, a major problem is to ensure that any measures adopted
are more costly to the Soviet bloc in terms of technological advance
than to the free nations of the world.
The advantages to the West of restricting the dissemination of
information are greater for detailed technical information on specific
production processes than for information which is in the nature of
abstract science. The Soviet bloc's greatest deficiency is in the
applied science and engineering fields rather than in abstract science.
Accordingly, the measures taken so far have been directed primarily
at restricting data in these applied fields.
Since 1929, the export of any technical data relating to the
production or use of commodities has been under general license,
although this standby control has only been implemented so far by
inviting "exporters" of technology to seek an advisory opinion of
the Department of Commerce on the advisability of exporting any such
data. This voluntary program has been exceedingly useful in blocking
the export to the Soviet bloc or other undesirable recipients of
various types of unpublished technology. There is now under con-
sideration a proposal to put screening of more important types of
unpublished technology on a mandatory basis. This would provide
legal sanctions against persons not cooperating in the present system
of voluntary controls. The problem, however, is to devise a technique
whose principal effect is not simply to create a new impediment in
the shipment of technical data to friendly countries and prospective
Approved or Release 2000/09/08 : CIA-RDP75-00662R000300 70021-2
 Approved For Release
-37-
allies. If a satisfactory ja ogram can be devised, it would be
desirable to attempt to persuade the other nations of the-free
world to adopt parallel controls.
In addition to the actual and prospective licensing measures
discussed above, the patenting abroad of inventions made in the
United States is subject to license by the Patent Office. This
licensing procedure is supplemented by the power on the part of
the Patent Office to require that an invention on which an appli-
cation is filed be kept secret for as long as the national interest
requires. Similar laws also exist in a number of other industrialized
countries. Here again, parallel enactments and policies would be
useful in countries where such legislation does not exist.
While discussion so far has dealt with information which is not
ordinarily published, there are also various possibilities in the
suppression of information which might normally be published. It
is hoped that a "Voluntary Program for the Protection of Technical
Information", now being given wide publicity by the Department of
Commerce, will produce useful results through a judicious process
of screening material prepared for publication and voluntarily
submitted by editors and publishers.
For controls in this field to be meaningful, they must also
extend to the movement of persons. The inspection of the plants
of American companies and overseas subsidiaries by suspected foreign
agents must be prevented. Moreover, travel abroad by American sci-
entific and technical personnel for the purpose of imparting advanced
technological information to the Soviet bloc should be prohibited
wherever the direct export of that information would be embargoed.
The great risk to be avoided in this field, as in others relating
to the exchange of technical and scientific information, is the risk
of impeding the interchance among friendly countries to a degree
which more than offsets the benefits of denying such information
to the bloc.
7 Shipping controls.
Controls in the shipping field serve to supplement export
controls. Since the degree of effectiveness of shipping controls
is dependent upon the degree of cooperation of the various maritime
po ers and upon the extent to which we are prepared to resort to
such belligerent acts as blockade and contraband control, the
potentialities are somewhat limited in the present "gray period."
Analysis of registration of world merchant shipping indicates
that the ownership of substantial tonnage is in the hands of those
who could not be expected to cooperate voluntarily in drastic
Approved For Release 2000/09/08 : CIA-RDP75-00662R000300070021-2
 Approved For Release,000/09/08 : CIA-RDP75-OOf62R00030 0021-2
SE.E
-38-
measures to deny shipping to the Soviet bloc. Assuming a list of
proscribed commodities and prohibited destinations, and some form
of coordinated export licensing by the participating countries, it
should be feasible for each country; to control the export of com-
modities from its own ports in the ships of all non-participating
countries. The effectiveness of commodity controls enforced by
shipping controls would vary according to the tonnage of countries
participating. This would range from 79% of world tonnage, if
commodity controls are implemented only by NATO countries, to
approximately 95ro if such controls are put into effect by all
maritime countries outside the Soviet bloc.
The only actions that have been taken to date in the field of
shipping are (1) the U.S. Maritime Administration Order forbidding
U.S. flag vessels td call at Chinese ports or to make available their
facilities for the transport of any cargoes to Communist Chinese
destinations and (2) issuance of General Order 59 of the U.S. Maritime
Administration which prohibits the charter, without specific license,
of U,S. flag vessels to satellite operators. So long as ships of
other flags continue to trade with China, however, the economic effect
of the UOS. action can be largely nullified* A similar situation
would result if the U.S. alone were to extend its embargo on shipping
to the U.S.S.R. and its European satellites.
In view of the fact that participation by all non-Soviet
countries in shipping and commodity controls cannot be expected,
certain indirect controls on nor.-participating shipping could be
applied which would have some value in curtailing shipment of
strategic items from non-participating countries to the countries
of the Soviet bloc. The most effective control of such shipping,
short of naval blockade, would be application by the NATO countries
and other governments of the World War II warrant system. Under
this system ships? operators would undertake to operate in accord-
ance with agreed objectives, or suffer the loss of bunkering and
other shore facilities and of access to insurance markets and fi-
nancial accommodations under jurisdiction of participating countries.
There is certain to be leakage. A small amount of uncontrolled
tonnage can move substantial amounts of critical items of a con-
centrated nature and shipping interests would be offered tempting
rewards to engage in bootleg trades? To be effective,, the controls
used must be enforced rigidly and the T-blacklisting< of unreliable
consignees made possible by a competent intelligence system.. As a
possible means of meeting this situation consideration should be
given to the feasibility of setting up a cargo control along the
lines of the British navicert system of World War II. That system,
hovrevcr, depended on the British naval blockade for enforcement.
Whether other sanctions in lieu of naval blockade, such as denial
,~~ Approved For M,9inR I1P75_MRR9RM= unnq1:Z
 Approved For Release ,,p.00/09/08 : CIA-RDP75-00662R00030OQ 0021-2
of access to port facilities, insurance markets and financial
accommodations would be adequate should be further explored.
8. Civil Aviation
United States policy regarding relations with the Soviet bloc
is set forth in NSC 15/3. It covers two principal points. Any
c?change of air rights with a member of the Soviet bloc should be
only on a reciprocal and short-term basis, only when such an exchange
Would result in some real advantage to the ,pest, and only on the
basis of providing no more than minimum facilities to the satellite
lines. Moreover, the U.S, objective should be to deny aircraft and
aviation related material, and maintenance facilities to the Soviet
bloc to the maximum extent possible,
The U.S. has been using every opportunity to urge these positions
on the other countries of the world,, Partial success has so far been
achieved. The remaining steps short of complete success in urging
the adoption of this policy are not of sufficient importance to
justify any significant change in present tactics.
D - Positive Programs for Economic Strength
In concentrating upon the measures of denial and restraint on
which this report has primarily focussed, it is easy to overlook the
fact that the strongest weapons in our arsenal are the positive ones,
the weapons which are directed primarily at adding to the strength
of the free world, rather than primarily at weakening the Soviet
bloc. These measures are particularly important because they are the
surer means of strengthening our ties with other friendly countries
and of ccnvincin; neutrals of the sincerity of our purpose in achieving
peace and economic betterment.
In one way or another, the major facets of our present foreign
economic policy are aimed at that objective. The Military Defense
Assistance Program, Point IV, the European Recovery Program, the
Trade Agreements Program, and the various programs of grants and loans
which the U.S. has fostered are all designed to build strength and
cohesiveness in the free world,
The relevance of these programs to our foreign policy has been
increased -rather than lessened by the present emergency. By strength-
ening the economic and political fabric of the countries concerned,
we can hope for more forthright stands by those countries in their
relationship to the Soviet bloc. More specifically, our objective
should be to ensure that U.S. economic aid programs are aimed at
building up sources of supply in the Western world which decrease
Approved For Release 2000/09/08 : CIA-RDP75-00662R000300070021-2
 Approved For Release Y0000'04%/09/08 : CIA-RDP75-006680003000 021-2
T
-40-
its dependence on the Soviet bloc and augment its supplies of
strategic materials. Our Point IV program should be directed to
building up the health and literacy of the peoples in those parts
of the world where discontent and disaffection of the west is based
in part. on disease and ignorance. Our trade barriers program should
be designed to a greater degree than heretofore to assure that the
surpluses produced in some countries of the Western world will be
marketed in other Western world areas from which trade barriers new,
bar them. These objectives call for the adjustment and extension
of the "peaceful" aspects of our economic foreign policy, rather
than their subordination and neglect.
pprove -2