THE WEST EUROPEAN/CHINESE CONNECTION

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP80T00634A000500010037-1
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 36
• Document Creation Date: December 20, 2016
• Document Release Date: December 28, 2005
• Sequence Number: 37
• Publication Date: December 22, 1978
• Content Type: MEMO

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CENTRAL INTELLIGENCE AGENCY
NATIONAL FOREIGN ASSESSMENT CENTER
MEMORANDUM
THE WEST EUROPEAN/CHINESE CONNECTION
The Chinese and the West Europeans view their steadily
expanding relationship from very different perspectives.
For Peking, two considerations are dominant: rapid eco-
nomic development and greater security vis-a-vis the Soviets.
After years of insisting that China must rely mainly on its
own resources for development, the Chinese are now making
up for Zost time. Their delegations are crisscrossing Europe
with Zong shopping lists (including military items), economic
agreements are proliferating,, and hundreds of students will
be sent to Europe over the next few months. In the security
area, Peking is making clear at every opportunity the importance
it attaches to the containment of the Soviets and its concern
that weakness in the Atlantic Alliance is undermining this
effort.
For the Europeans there are many secondary motives,
but the driving force is commercial. Few Europeans suffer
from the illusion that there is a vast and easily exploited
market in China, but they all know that significant oppor-
tunities do exist; and given Western Europe's current
economic situation, the opportunities Zook particularly
enticing to them. To the extent that security considera-
tions enter their calculations, the lessons they draw are
This paper was prepared by the West European Division of the Office
of Regional & Political Analysis. It includes contributions from other
divisions in ORPA and from the Office of Economic Research. Questions
and comments may be addressed to
State Department review completed
25X1
25X1
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ambivalent. They recognize that bolstering the Chinese makes
sense in terms-of the international power balance--and also
could open up diplomatic opportunities. for them in their
relations with the Soviets. At the same time, many of them
are concerned over the possibiZity of an adverse: reaction
from Moscow.
Nowhere is West European ambivalence more noticeable
than in the area of arms sales. These are often particularly
lucrative, and they have an obvious appeal to those who
emphasize Europe's interest in helping China become a more
effective counterweight to the Soviets. Yet deals in this
field have the greatest potential for producing an unpleasant
25X1
The Soviets probably recognize that they will be
unable to prevent the expansion of Sino-West European
ties, including those in the arms field. The pace of
expansion is likely to be gradual for other reasons,
however, and China will remain a small market for European
industry. The Chinese have consistently proven to be
sticky negotiators, and they are asking for things which
the Europeans will often be reluctant to give: the sale
of weapons production technology, for example. Even more
important, China's ability either to pay for or to absorb
the goods it wants is limited. Both the Chinese and the
West Europeans, moreover., have other foreign policy con-
cerns that Zoom much larger than Sino-West European
relations, and neither the leaders in Peking nor those in
Europe are likely to put too much faith in a nexus of this
sort.
But the expansion, gradual though it may be, also
seems irreversible--barring another sea change in Chinese
policy. The Europeans will remain nervous about the Soviets,
and while recognizing that they are in competition with
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each other (and with the United States), they will at the
same time be reluctant to move too far ahead of each. other
in such a sensitive field as arras. Commercial advantage
will remain the dominant consideration, however, and a
slow growth in Sino-West European commerce in such sen-
sitive fields as weapons technology and nuclear power is
almost certain. West Germany, France, the UK, and Italy
will probably get the Zion's share of China's business,
both military and otherwise, but smaller countries. such as
Switzerland and the Nordic countries will also obtain a
piece of the action.
The pace of the expansion is not ZikeZy to be af-
fected much by the establishment of diplomatic relations
between China and the United States. If anything, this
development is ZikeZy to accelerate the Europeans'
efforts, both because they will consider that it
enhances the respectability of doing business with Peking
and because they aZmost certainly anticipate more active
competition from the US in the uture.
This memorandum has 11 different sections, beginning
with a Zook at Western Europe from China's perspective,
at trade ties with China, and at some organizational aspects
(EC and NATO) of the Chinese/West European Zink. These
three sections are followed by discussions of the following
countries' relations with China: France; West Germany; UK;
Italy; Greece, Turkey and Cyprus; Canada; and Malta. The
last section discusses Moscow's view o Sino-West European
relations.
From China's Perspective
China expects to draw heavily on Western Europe as a source. of
modern industrial equipment, technology, and expertise and to use the
region as a vital element in a strategy of counterbalancing the USSR on
a global scale. Chinese officials miss few chances to warn the West
Europeans about the peril Moscow poses to the West and to encourage a
strong, united Western Europe firm in its opposition to Soviet expansionism.
Conversely, the Chinese are quick to criticize what they interpret as
the slightest sign of "appeasement" on the part of. the West Europeans.
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This encouragement of anti-Sovietism goes beyond European regional
concerns to encouragement of greater West European cooperation with the
Third World, particularly i.n Africa and the Middle. East. For example,
earlier this year the Chinese were.approving,of French aid to President
Mobutu to repel the second Katangan invasion of Zaire. Peking also
hopes for closer relations between Western Europe and Japan in the
interest of containing the Soviets.
This does not mean that Peking wants to encourage West European
unity, strength, and independence at the expense of Western European
ties to the United States. On the contrary, though uncertainty about US
steadfastness produces an occasional note of ambivalence in Peking's
statements, the Chinese generally emphasize the indispensability of the
United States, in the maintenance of NATO and the defense of Western
Europe. "Neutralization" of the region, with its concomitant damn a to
US - Western European relations, would be a severe blow to Peking. 25X1
The anti-Soviet orientation of China's attitude toward Western
Europe has contributed to Peking's continuing ambivalence toward the
major "Eurocommunist" parties. Although there have been tentative signs
this year that the Chinese are rethinking their policy toward these
parties, Peking's suspicion of their continued links to the Soviets has
continued to inhibit Chinese-Eurocommunist rapprochement. 25X1
Increasing Sino - West European trade, with the prospect of greater
increases to come, provides tangible content to the more problematical
and slower developing political relationship. So far this year Peking
has signed a trade agreement with the EC and a long-term economic cooperation
agreement with France. Various types of long-term agreements with
Italy, West Germany, and Great Britain are under consideration. During
the same period, China also has concluded scientific and technical
cooperation agreements with France, Italy, West Germany, and Britain.
Chinese delegations of all sorts have crisscrossed Europe in increasing
numbers. China also is turning to Western Europe as a source of educa-
tion necessary to improve and expand its pool of scientists and engineers.
Large numbers of Chinese students eventually will study at European
institutions.
Western Europe will continue to be a major supplier'of plants and
equipment for China's modernization drive, although the Europeans face
stiff competition from Japan and--potentially--the United States.
Peking is interested in purchasing a wide range of industrial goods,
including steel mills, petrochemical plants, thermal and nuclear power
stations, truck plants, and mining equipment. By'purchas'ing technology
from various West European countries the Chinese will avoid overdependence
on one source, gain access to US technology produced in Western Europe
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under license, and promote competition in price and financing terms
among potential suppliers. They also hope. to encourage West European
governments to press for revision of strategic trade controls. 25X1
China's military interest in Western Europe goes beyond urging that
the region look to its own military strength vis-a-vis the USSR. Peking
is interested in purchasing modern arms and military technology, including
such items as antitank missiles, helicopters, and combat aircraft.
During the past year, Chinese military delegations have visited every
major national armaments industry In Western Europe. Moreover, China is
attempting to create the impression of a military relationship between
Western Europe and China through visits by West European military delegations
to Peking, exemplified by the publicity given by the Chinese press to
the visit last April of the chief of the British defense staff. 25X1
China's opening to Western Europe still faces major economic obstacles,
and there remain important differences over political subjects, particularly
detente. Nevertheless, barring a political upheaval in Peking that
might bring to power a more inward looking, less pragmatic leadership,
the opening is likely to continue and will probably widen. 25X1
EC-China Trade
A spate of contacts, rumored deals, and negotiations on trade
agreements highlights the European Community's scramble to profit from
China's decision to turn again to Western suppliers for technology and
equipment. The two-way flow of commodities and cash, however, remains
small. Increases implied in recent agreements are on the order of 15-20
percent per year through the mid-T980s-- 'ble target starting from
current low levels.
Except for the problems involved in sales of military equipment and
nuclear technology, constraints on increased EC-China trade are largely
on the Chinese side--primarily China's limited ability to pay for and
absorb the goods offered. While China may now be willing to accept
conventional foreign credits, Peking still wants to offset imports with
exports of Chinese commodities.
For the West Europeans, the key obstacle to meeting trade goals
will be finding suitable Chinese products at competitive prices. Soviet
displeasure with growing EC-China trade, and particularly with the
prospect of Chinese arms purchases, may affect E.C relations with both
China and the USSR. The West Europeans.will consider the Soviet angle,
as well as US policy, in responding to Chinese requests for goods con-
sidered sensitive. Although a turning point appears to have been reached,
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frustratingly long and difficult ne.goti.ations..loom forthe- W_e.s.t Euro-
peans; regardless of theutcome China will remain a small market for
West European industry.
EC-China Trade Ties
The EC Commission has sole authority to set general rules for trade
between member states and outsiders. Commercial arrangements are left
up to individual member states whose. bilateral accords cannot specify or
eliminate quotas or provide for preferential trading arrangements. In
November 1974, the EC offered to negotiate trade agreements with state-
trading countries, including China. Following mutual diplomatic recognition
in 1975, China responded favorably to the EC invitation. An agreement
was tentatively approved in September 1977 and formally signed in Brussels
last spring. The five-year, nonprefere.nti-al agreement contains a weak
most-favored-nation clause; a "balance trade" clause, according to which
the two sides promise to make "best efforts" to expand trade at similar
rates; a safeguard clause, which provides for "friendly consultations"
in case of EC difficulties with Chinese goods and which tacitly recognizes
an EC right to apply specific restrictions if difficulties persist; and
a clause designed to prevent Chinese sales at prices well below market
levels.
The agreement allows the EC to maintain its current restrictions on
selected Chinese goods while calling for the Community to liberalize
imports from China as much as possible. For its part, China promises to
take imports from the EC into "favorable consideration," a promise
hailed by the West Europeans as a Chinese concession not previously
granted to any trading partner. The agreement also establishes a joint
EC-China Economic Commission to review progress in promoting trade. The
initial meeting of the Commission will be held in the first half of 1979.
Exports from the EC to China reached $1.4 billion in 1975 but by 1977
had fallen back below $1 billion. Even in 1975, however, exports to
China represented less than 0.5 percent of total exports by EC countries,
or about 1 percent of sales outside the Community. China's- share of
imports by EC countries was only about 0.3 percent.. Both market shares
were well below the levels of the early 1960s.
Over the past two years, a flurry of Chinese delegations has descended
on Western Europe. At each stop, the missions have looked, poked.,
prodded, and made various---sometipne's'overlappi.ng or contradictory--promises
to government and business offi.ci.als. Very few major contracts have
been signed. Nevertheless, a, quiet but sharp increase in trade has
occurred. In the first half of'1978, EC shipments to China ran close to
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the total for all of last year. Over the full year, EC exports to China
no doubt have broken the 1975 record.
Major European Traders
West Germany
The West Germans have been less active than their EC partners in
obtaining an all-encompassing trade agreement with China, possibly
because West Germany outsells the rest of its EC partners combined.
Nevertheless, West Germany agreed in November to begin discussions
leading toward an economic cooperation agreement. West Germany recently
won the first major West European contract from the Chinese since the
current buying round began. It calls for a West German consortium to
provide approximately $4 billion in know-how and equipment to modernize
the Chinese coal mining and coal mining equipment industries. While
financing details still must be worked out, a West German bank consortium
apparently will provide credit with five- to 10-year terms. The West
Germans have also signed contracts for the construction of five petro-
chemical plants. A rumored $14 billion contract for West German construction
of an integrated steel complex will probably be split among suppliers in
several countries, including Japan and perhaps France, the UK, and
Italy.
France
France's independent foreign policy stance makes Paris the obvious
first point of contact for the Chinese in Western Europe. As with
Franco-Soviet ties, however, the "special relationship" provides only
limited trade advantages for France. Although at the forefront in
negotiations and publicity, the French consistently run a poor second to
made
i
li
d
.
es
ver
e
West Germany when final contracts are signed and
In the current round of Sino-European trade talks, France was the
first to obtain formal signature of a new bilateral trade agreement.
The pact, signed in Peking on 4 December by French Foreign Trade Minister
Deniau, calls for total two-way trade of $13.5 billion in 1979-85. The
agreement also stipulates that "best efforts" be made to balance trade,
and France has promised to make $6.75 billion worth of credits available
for its exports, probably at interest rates of 7.25-7.50 percent. The
credits, reportedly repayable in 10 years, will be made. available only
as contracts are signed.
Specific sectors mentioned in the agreement as being of priority
interest to the Chinese include steel, electrical energy (nuclear,
hydroelectric, and thermal), mining research, hotels, port facilities,
aviation, agricultural machinery, rail transport, and oil. Projects
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listed as being in advanced stages of negotiations--anal for which French
firms will receive ?preference" from.Pe'kJ.ng if all competitive and
technical considerations are equal include a steel complex, a magnesium
plant, a specialty steels plant, a sugar refinery; and an aluminum
complex. The most publicized project connected with the trade package
is a Chinese commitment to purchase two nuclear power plants, which
would be built by the French. under US license. France has pledged not
to sell the plants until US approval is obtained. China is pushing for
French arms sales not spelled out in the a reement articular) deliveries
of missiles and possibly Mirage aircraft. 25X1
United Kingdom
A draft UK-China trade agreement was drawn up during Chinese Deputy
Premier Wang Chen's visit to the UK. in November. The, draft contains a
target of $10 billion in total two-way trade during the period 1979-85.
The signing of the agreement is planned for Industry Minister Eric
Varley's trip to Peking next April. The pact lists 12 sectors. of key
interest to the Chinese, largely duplicating the. French-Chinese list.
One potential problem is that conclusion of the agreement may hinge on a
British decision to sell the vertical-takeoff Harrier aircraft.
The full extent of British credits apparently is still being worked
out. A consortium of banks reportedly agreed on 6 December to lend the
Bank of China a total of $1.2 billion, with repayment in about five
years and an interest rate of 7.25 percent. According to the press, the
funding will work exactly like a standard buyers' credit, with the money
released to the Bank of China and then to British companies as sales are
made. The credits will be guaranteed by the British Government.
Italy
Italian companies have a relatively long history of activity in
China, particularly in oil and petrochemical equipment sales. Italy was
the first EC member to sign a trade agreement with China, in 1971. That
three-year agreement contained a general list of goods to be traded,
provided most-favored-nation treatment (with exception for EC obligations),
and established a joint commission to meet at least once a year to
review progress. No specific trade target was set. 25X1
The Italians are negotiating a new trade agreement with China and
hope to conclude it early next year. Given the French and British
precedents, a target two-way trade goal will probably be specified
through 1985. One deal currently being discussed with. the Chinese would
involve Fiat construction of a tractor plant. In the long term, Fiat
hopes to participate in a complex producing trucks and diesel engines.
The Italian state oil company, ENI, hopes to playa role in Chinese oil
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development. Italy has already offered China a $1 billion line of
credit, although details have not been worked out and probably will not
be decided until specific contract negotiations are further advanced.
Sorting Out the Potential Market
A summation of current Chinese agreements and negotiations involves
the danger of double-counting. The Chinese are not averse to--and are
rather adept at--negotiating with several countries for the same items
at the same time. For example, aluminum and steel complexes head the
lists of potential contracts with both France and West Germany. France
appears to have the inside track on the initial aluminum contracts
while, within Western Europe, West Germany could be the first to supply
steel equipment. Both the UK and France hope to participate in coal
modernization plans, but West Germany has already won the lion's share
of the early contracts in this field. France and Italy both are confident
of winning vehicle plant contracts, and all major EC countries are
bidding on oil development projects--areas in which the United States
and Japan hold sizable leads.
Even after allowing for double-counting, China's 1976-85 modernization
plan could entail a substantial amount of business for all the large EC
countries. The plan lists 120 major projects, including:
-- Ten steel plant complexes.
-- Nine nonferrous metal plants.
-- Eight coal fields.
-- Ten new oil and gas fields.
-- Thirty electric power plants.
-- Six major railway networks.
-- Five major ports.
Compensation and Balanced Trade
Compensation and balanced trade are constant themes in talks with
the Chinese. Most negotiations commence with Chinese offers to pay for
oil exploration and, equi pment with crude oil, for coal mining equipment
25X1
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and technology with coal, and so forth. Western Europe's response has
been skeptical, questioning just how much China has to offer. While
China's crude oil reserves, for example, may be great, the West Europeans
note that Chinese crude is not well suited to their refineries because
of its high paraffin content. In addition, Peking thus far refuses to
discount its price to make Chinese crude competitive with Arab oil that
is closer to Western Europe. Italy and France have agreed to buy small
test shipments of Chinese crude and both have hinted at larger purchases
in the future. Italy has mentioned the possibility of taking up to
20,000 barrels per day in 1979. A truly significant increase in pur-
chases, however, depends on West European refining results and Chinese
price decisions.
Peking has naturally raised questions about increased West European
imports of Chinese manufactured goods and liberalization of Western
Europe's tariff and quota restrictions on Chinese products. Despite the
EC-China trade agreement, liberalization will be slow in coming. It is
likely to be particularly slow for textiles, a sector in which West
European firms are already suffering from foreign competition, over-
capacity, and high unemployment.
The possibility of West European firms obtaining access to China's
huge and presumably low-cost labor force for subcontracting and assembly
operations--somewhat along the lines of the Taiwan, South Korea, and
Hong Kong models--is being explored. Although the Chinese until now
have disdained such operations, associating them with colonialism and
exploitation, these activities could offset a growing share of the cost
of Chinese purchases.
Credits and Direct Investment
For many years China has adamantly refused to accept overt foreign
credits. Suppliers' credits, euphemistically referred to as "defer'red
payments" by the Chinese, have been used to finance plant purchases.
The Chinese, however, have now agreed to buyer's credits from France and
the UK. In addition, a thinly disguised form of debt has operated
fairly efficiently, whereby the Bank of China has accepted foreign
currency in interest-paying deposits and drawn on the deposits to pay
for imports. Although deposits have been limited to about one year,
two-five year deposits are now being considered; five-TO year credits of
this type may result from current contract and financing negotiations.
Just how far China will go in accepting standard commercial credits
and other financial schemes cannot be predicted. The Chinese have given
conficting signals on the issue, probably because the leadership is
still formulating a decision. West European bankers and government
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officials would prefer to use standard commercial loans or lines of
credit rather than the deposit scheme. With a regular line of credit,
West European banks would have use of the funds until called upon by the
Chinese, and government guarantees would be easier to obtain. West
European banks, businesses, and governments will be flexible on the
financing issue, and few deals will fall through because of credit
EC: Share of Trade With China*
Ex orts
Imports
1960
0.79
0.53
1970
0.41
0.30
1973
0.50
0.31
1974
0.35
0.29
1975
0.48
0.27
1976
0.41
0.28
1977
0.24
0.26
1978
(1st half)
0.39
0.26
1985
(illustrative)
2.0
- 2.5
2.0
- 2.5
I
*Figures include intra-EC trade. China's trade share excluding intra-
EC trade would be about double the figures shown. Data cover all nine
current EC members--Belgium, Denmark, France, Ireland, Italy, Luxembourg,
the Netherlands, the UK, and West Germany.
I
The possiblity of direct Western investment in China appears more
remote than conventional trade financing, although again Peking's signals
are conflicting. A French business and banking delegation in Peking
last month reported that China formally proposed that a vehicle manufacturer,
Peugeot-Citroen, and an aluminum and specialty steel firm, Pechiney-
Uqine-Kuhlmann, invest directly in Chinese projects. According to the
press, the only stipulation was that Chinese capital represent at least
51 percent of the total investment and ownership. The Japanese report
similar proposals. These reports should be treated cautiously, for they
may reflect nothing more than China's increased willingness to discuss
alternative financing possibilities. 25X1
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PRC: Trade With Selected Countries
million US $
1975
1976
1977 25X1
t
Exports Imports
Exports Imports
s
Exports Impor
Total
7,180 7,395
7,265
6,010
7,955 7,100
040
875 1
EC
703 1,637
825
1,475
,
Japan
1,459 2,369
1,306
1,746
1,473 2,036
Hong Kong and
Macao*
1,400 35
1,630
30
1,795 45
Eastern Europe
485 525
435
550
600 625
H
United States
158 334
202
149
203 188
Singapore
254
41
262 62
USSR
179
238
177 161
Communist Far
East**
460
160
420 210
*Including entrepot trade.
**North Korea, Mongolia, Vietnam, Cambodia and Laos.
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.From The EC/NATO Perspective
The story of increasing Chinese - West European relations has
unfolded in multilateral organizations as well as in the bilateral
dealings of individual West European states with China. The West
European approach so far has been positive but cautious, largely out of
fear that West European relations with the Soviet Union might be damaged.
The West European treatment of Chinese relations in the EC and NATO--and
China's approach to these organizations--has, naturally enough, differed
because of the differing purposes the organizations themselves are
designed to serve.
In the case of both the EC and NATO, China has voiced strong support
for the organizations' goals: increased integration for the Community
and a strong defense against the Soviets for NATO. With the EC, how-
ever, it has been both necessary and desirable from the Chinese point of
view to go beyond verbal support: necessary, because the EC Commission
must negotiate trade agreements with outsiders; desirable, because the
Chinese think a more economically, politically, and militarily integrated
Europe cannot help but be troublesome to the Soviets.
The West Europeans, for their part, are interested in trade with
China and intrigued by the Chinese support for integration; at the same
time, they are aware of the potential for irritating the Soviets that is
inherent in stronger EC-Chinese ties. Hence the caution in the West
European approach. There is a sense that the proper amount of EC dealings
with China might actually make the Soviets more cooperative, while too
rapid movement toward closer ties could only alarm Moscow and produce
specific negative results. The problem, of course, is finding the magic
' h th ositive disappears and the negative begins. What-
h
i
point at w s e p
ever the course of West European - Chinese trade relations, however., the
EC provides a useful framework within which they can develop. 25X1
In the military sphere, there is no organization readily available
to structure and contain West European - Chinese relations. This has
led some West Europeans to suggest that, to the extent they consult each
other on arms sales to the Chinese, they should do'so in the EC. Others
have thought that specific arms sales could be considered by COCOM-the
Western committee that approves sales of-items based on advanced technology
to Communist countries. Most., however, agree that neither the EC nor
COCOM can treat properly the milita dimension of the subject--which
leads, almost inevitably, to NATO. 25X1
From the West European point of view, however, NATO is far from the
ideal forum. For one thing, deliberations would be heavily influenced
by the United States: a common NATO policy for selling arms to China
-13-
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would not necessarily coincide with an ideal common European policy.
Another problem is that NATO, loose association of states that it is,
has traditionally had a difficult time defining itself in relation to
other parts of the world (except, on most occasions, the USSR). So it
is difficult to arrive at common external policies. Common arms sales
policies are particularly difficult to arrive at because national economic
as well as security interests are involved. In the Chinese case, the
glaring implications for Ea -W t relations increase the complexity of
25X1 attempts to act in common.
For many of these reasons, NATO has dealt with the Chinese problem
in the most general way. At the North Atlantic Council meeting on 20
November--the most thoroughgoing recent discussion of China in a NATO
forum--the West European caution on selling arms to the Chinese was
evident. Most of the Ambassadors agreed that the Soviet reaction should
be a primary consideration of NATO countries in their dealings with the
Chinese. Some speakers pointed to the possibility of future political
turmoil in China; others highlighted the practical constraints on Chinese
25X1 economic development.
The Dutch had little success recently in proposing that NATO go
beyond general discussion and consult on arms sales to China. While the
Italians and Canadians were willing, the British and French-;both of
whom had possible military sales in the works--were opposed.
Arms sales will continue on a purely bilateral basis for the foreseeable
future. This is not merely because the political rhetoric about caution
conflicts with economic interest. It is, rather, that some NATO members
feel themselves to be perfectly capable of exercising caution in selling
arms to China--without detailed Alliance discussion. And yet it is
possible that as more arms are sold (or look as if they might be sold)
to the Chinese, other members may feel the need for more specific con-
sultations. For instance, discussions might be held on the implications
of a particular sale, with the' understanding that the results of the'
discussion were in no way binding on the seller. Or an attempt might be
made to arrive at a definition of what it is proper to sell--bilaterally--
to the Chinese: defensive weapons only--or some offensive weapons as
well? However, anything resembling a common policy on arms sales seems
a distant dream.
France
Most French officials see the Chinese opening to Western Europe as
an opportunity that should be seized upon for maximum advantage--not
only because of its economic potential but also as another way of enhancing
French leverage with the USSR. According to this thesis, the Soviets--
feeling themselves in danger of encirclement by a Chinese-West European-
SFCRFT
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U.S alliance--will be more inclined to accommodate European interests in
hopes of securing their Western flank. A minority view in the French
foreign office holds that an increase in Chinese activity and influence
in Western Europe--particularly if Moscow perceives it as fostered by
the West Europeans--could provoke unforeseen and possibly dangerous
Soviet reactions. Thus, the French reaction to China's probes has two
predominant themes: an avid interest in the possibilities, mingled with
anxiety over the reactions of the superpowers--particularly in such
areas as arms sales and nuclear exports.
A more active China on the Soviets' eastern border suits French
foreign policy. France is interested in keeping the Soviets off balance,
in reducing their ability to involve themselves militarily in Africa and
elsewhere, and in easing their military pressure on Europe. At the same
time, France does not want to antagonize the USSR by aligning itself too
closely with the Chinese. In its more grandiose moments, France sees
itself as a sort of Zubin Mehta, orchestrating the superpowers' relations
with the Third World. One of its main goals is to bring China into the
concert of nations, provided that China does not try to play firs
violin and provided its contribution contains sufficient nuances. 25X1
France has long seen itself as the industrial nation best qualified
to deal effectively with the Third World. Paris aspires to be more than
just a principal source of technology for Peking; it hopes to be China's
main interlocutor and primary point of contact on the European continent.
The French think that the public way in which the Chinese have
sought West European technology is intended to create the impression
that the West Europeans are aligned with Peking in the Soviet-China
dispute and are not averse to furthering that impression within limits.
Accordingly, France is happy to be supportive of.China's effort'to
expose many of its senior officials to Western organization and work
methods--provided the Chinese do not venture into areas the French
consider sensitive. Paris, for example', expects almost 500 Chinese
students to arrive in France, starting in February 1979. But the Chinese
had proposed that over 200 be accepted for advanced studies at certain
scientific research centers that are considered sensitive by the French.
According to a Quai official, the French refused. 25X1
Moreover, the French have not yet taken a firm position on the
transfer of computer technology to the Chinese because of its military
ramifications and because it might incur Soviet displeasure. Some 13
delegations of Chinese technicians visited the French computer research
center during 1978. The French do not want to be put in the position,
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however, of providing a few high-technology i_tems,, while more, profitable
contracts for less, advanced items go to.th.ei,r competi.tors.. In fact, the
main return the Fren.c.h expect for the. time they spend satisfying Chinese
interest in such technology is to open th.e. door to a wider array of
French goods.
The seven-year bilateral trade agreement signed in Peking in early
December was a psychological boost to French ambitions in China and a
signal from the Chinese that they are willing to expand their trade with
France in at least certain areas. At the moment, France is more interested
in economic and commercial sales to China than in arms sales. France
has no illusions that China will become a major export market in the
near future--the ambitious new agreement projects an eight-fold increase
over 1977 in French-Chinese trade through 1985. France is starting from
a low base, however: France's share of the Chinese import market was
less than 2 percent in 1977. France in the past five years dropped from
fourth to 12th among China's trading partners because of. its inability
to move beyond occasional one-shot capital equipment contracts into a
wide spectrum of high volume repeat sales of consumer goods. France
feels that, as a late-starter in the newly opened and potentially impor-
tant Chinese market, it must hurry to establish its share against compe-
tition from Japan, UK, West Germany, and the United States. In addition
to more work for its own industries, France hopes that China will become
a significant supplier of raw materials, The signing of what is a
framework agreement signals a turning point in French-Chinese economic
relations, but France must now quickly table some highly competitive
offers in order to exploit the Political and psychological momentum the
accord has generated.
Projects that might reach fruition quickly are those involving
hydroelectric power as well as China's agreement in principle to buy two
nuclear power plants from France--the first such sale of nuclear technology
to China by a Western power. If approved by the United States, the'
highly coveted order will go to Framatone, a nuclear plant construction
company financed by the French Government .(COGEMA) and another private
firm, Altshom-Atlantique. The sale has yet to be approved formally by
the Coordinating Committee for Export Control (COCOM), an organization
set up by industrial nations to screen the sale of sensitive technology
to Communist countries, but France foresees no objections from other
COCOM members since China is already a nuclear power.. The sale, however,
requires US approval since it is a Westinghouse license. The French
have received an "exclusively peaceful use" guarantee, from the Chinese
and have asked the United States for approval prior to 23. December, a
deadline the Chinese have set. Other details of the sale. remain to be
worked out.
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France has not yet signed a major arms agreement with. China, although
the French are ready to sell defensive weapons: and the. Chinese ready to
buy. Guided mi_ssi.les are. the most li.ke.ly sale to be consummated, but
quantities and financial terms. still must be worked out. Given the
complexities involved--and the fact that both the Chinese and the French
are prudent traders agreement on terms will most probably be time-con-
suming. But it is likely that some French weapons systems--probably
defensive--will be ultimately sold. The French claim that they are
picking and choosing from the Chinese wish-list and that they have no
desire to help China achieve strategic objectives. The French in fact,
may be. trying to condition military sales on economic sales. 25X1
The Soviets have given the French several sharp warnings against
selling arms to the Chinese, most recently in a letter from Soviet
President Brezhnev to French President Giscard last month. France's
stock reply to Moscow is that France is a sovereign nation and will'act
in its own national interest. France is, however, sensitive to Soviet
concern and will not deliberately strain its relations with the USSR.
The French think they are on safe ground by confining sales to defensive
systems, although they admit not always easy to determine the
difference.
In addition to the economic and nuclear. agreements, the French have
concluded a scientific and technical accord with the Chinese and now
hope to add high fashion to the list. Designer Pierre Cardin has accepted
a Chinese invitation to organize two fashion shows to beheld in Peking
and Shanghai next March. Cardin, who in previous seasons showed a
modified version of the Mao tunic as part of his collection, now hopes
to persuade the Chinese to discard their "grotesque" clothes and adopt
international fashion. There is undoubtedly a great deal of wishful
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thinking and a bit of cultural chauvinism i:n the French optimism about
the future Chinese market, but the race for the. embourgeoisement of the
Chinese is on.
West Germany
A responsible German foreign policy may not give in to the tempta-
tion to play up Soviet-Chinese differences. (West German Foreign Minister
Hans-Dietrich Genscher, 23 August 1978)
The West Germans are clearly pleased, yet somewhat uneasy, about
the rapid expansion of political, economic, and technical relations with
the People's Republic of China that has occurred during the past year.
The "Chinese breakthrough," as dubbed by the Soviet media, has resulted
in a steady stream of high-level Chinese visitors to Bonn, the virtual
doubling of West German exports to China, and the conclusion of several
technical and development accords. Not since the early heyday of Ostpolitik
have top leaders in West German industrial and government circles been
so acutely eastward-oriented.
The growing China trade has added an economic dimension to the
already delicate political balancing act inherent in Bonn-Peking-Moscow
relations. The Soviets have indirectly warned the West Germans about
overplaying the economic gains to be had in the Chinese opening to West-
ern Europe. West German officials are in fact worried about possible
economic retaliation by the Soviets for the sharp increase in West
German economic ties with China.* 25X1
G
Some West German officials are concerned the government will be
unaware of or unable to control commercial deals that could trigger some
sort of adverse Soviet reaction. Many of the major deals under consideration
are for the modernization of specific Chinese industrial sectors, such
as petrochemicals, which Moscow could conceivably view as directly
threatening Soviet interests. Such package deals do not require approval
It can be argued that the West Germans actually have a measure of
economic leverage with the Soviets, West Germany in 1977 supplied nearly
one-fourth of Soviet machinery and equipment for the chemical industry,
metal-cutting and forge press equipment, and auto production. It would
be hard for the Soviets in the short term to switch to alternate suppliers;
if they did so, they probabZ would not get the delivery terms and the
technology they prefer.
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 Approved For Rele
by the West German Government. The West Germans, particularly Chancellor
Schmidt, have gone. to great lengths i:_n.recent.we.e.ks, to assure Moscow
that such trade ties are simply part of the process of building normal
relations with China. Nevertheless, the West Germans: believe that the
Soviets are irrational on the subject and see little possibility of
completely assuaging Soviet fears about the Bonn-Peking connection.
Hints of possible West German "arms sales"* to China are apt to be
as unsettling to West German officials in Bonn as. they are to Soviet
officials in Moscow. During the past year the Chinese have feted a
variety of West German political and retired military figures, many of
whom are connected with aircraft and arms-related industries. The West
German Government would have to license or approve deals involving
specific armaments, but has little to say about the end use of ostensibly
nonmilitary hardware, such as trucks and communication gear, which the
Soviets tend to lump in the armaments category.
West German private industry clearly has become less reticent about
hosting Chinese arms shoppers, but continues to be reluctant to conclude
any deals without some sort of official sanction.
'Since 1971 the West German Government has banned the export of
armaments to so-called areas of tension. Although senior. officials of
both coalition parties--the Social Democrats and Free Democrats--have
defended specific sales to countries not directly affected by "tension,"
such as Iran, they have also stated their intention to maintain a restric-
tive arms export poZicy, at least for the foreseeable future.
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The West German Government must also contend with the line on arms
sales espoused by the opposition parties, the Christian Democrats and
their Bavarian ally, the Christian Social Union. Both parties publicly
claim that they would be less reluctant then the present government to
sell armaments to the Chinese.
n October, the
ris ian Democrats' spokesman in the un estag for defense policy
publicly called for a "deliberate development" of a "community of interests"
between NATO and China. He also said that West German policy should
"spare no effort" to be of assistance to the Chinese in their modernization
efforts.
Regardless of whether the present social/liberal coalition stays in
power or is replaced by a conservative government, the West Germans will
remain constrained for some time to come from too actively playing the
"China card." Although the Soviets appear to have resigned themselves
25X1
25X1
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to the growing economic links between Bonn and Peking, Moscow would
certainl seek to retaliate against any sort of arms. deals at the present
time.
Even here, however, Bonn
w 1 nee to weigh carefully the posse i y of an adverse Soviet reaction
which could damage the hard won and fragile benefits of Ostpolitik. For
their part, the Chinese are sensitive to West German concerns about the
Soviets and have purposely played down anti-Soviet polemics In the West
German - China context. For Bonn, however, there remains the tough
question of determining the limits of Soviet toleration before they are
exceeded.
UK
Relations between the UK and China, which began both to increase
and improve In the mid-1970s, will expand even more rapidly during the
next decade. Although stepped-up bilateral contacts have been confined
mostly to talk, some concrete deals have been made during the past three
years and, more importantly, the groundwork has been laid to broaden
cooperation in such diverse areas as trade, culture, education, public
health, industrial technology, energy resources, politics, and defense.
As Peking intensifies its contacts with the outside world, particularly
the West, the new era in Anglo-Chinese relations will become increasingly
important for both countries.
From the Chinese perspective, the step-up reflects the desires of
the post-Mao leadership to broaden contacts with the West generally and
specifically to speed up Peking's development program with sophisticated
Western technology and equipment. From London's perspective, future
economic and trade pacts are the most important aspect of cooperation
with China, since agreements in these areas hold open the prospect of a
vast new market that could give the British economy a much needed boost.
Despite the existence of certain limiting factors related to the ability
of the Chinese to finance and absorb Western goods and technology,
British leaders see the prospect of a large-scale market as an opportun-
ity that cannot be missed.* The British already have offered the Chinese
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extensive lines of credit, including possible government-to-government
loans, and will conclude. phased agreements geared to the Chinese capability
to absorb. Bilateral trade already has. picked up significantly and
tentative agreement has been reached to bring tw - rade to between
$8 and $10 billion by 1985.
Arms sales will play an important part in future Anglo-Chinese
relations, both because the UK is willing to supply Peking with weapons
and military technology and because the Chinese have linked the question
of expansion in other areas with. London's willingness to sell arms.*
Peking has expressed an interest in purchasing a varied and substantial
amount of military hardware, such as tanks, guns, naval vessels, radar
systems, missiles, aircraft, as well as the spare parts and know-how.
If agreement can be reached, the most significant and controversial
deal--symbolically, if not militarily--will be to sell the Hawker-
Harrier jump jet fighter to China. The British Government is presently
considering a Chinese request for the plane but London 11 move cautiously
before making a final decision.
The sale of weapons--particularly offensive weapons--is a sensitive
issue that Prime Minister Callaghan wants to defuse. He points out that
any broad economic or trade agreement will emphasize British industrial
and commercial goods and that military hardware and technology will
assume a much smaller role. Callaghan's rationale is that nonmilitary
sales probably would be more lucrative in-the long run. More importantly,
he recognizes that military sales could have a negative effect on relations
with the other Western Allies and the SSR, as well as on domestic
politics. F__ f
Callaghan has indicated that the UK does not want to be China's
lone supplier of military goods and prefers a coordinated Western approach.
Therefore, London has announced that arms sales to China will be handled
on a case-by-case basis and in full consultation with Britain's allies.
*During the mid-1970s the sale of the Spey engine, including license
to produce it in China, for a Chinese-designed aircraft was the single most
important deal between Britain and China. That agreement has recently been
updated, another jet engine agreement has been made with Vickers, and a deal
to supply China with marine turbine engines for high-speed naval vessels is
near completion. The earliest deal between London and Peking was for the
Trident jet and, although it is primarily a civilian aircraft, some have
been adopted for military purposes.
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The sale of defensive weapons does not appear to bother the UK's West
European allies who are themselves involved in arms deals. with China or
the United States, but London believes that Washington i,f not the other
allies, would be more skeptical about offensive arms..
The step-up in Anglo-Chinese relations and the possibility of major
arms deals have brought a sharp reaction from the Soviet Union. Soviet
President Brezhnev, in a recent blunt letter to Prime Minister Callaghan,
warned the UK. to exercise. caution in selling arms. to China, since Peking
is "not part of arms control talks. and follows an aggressive ideology."
The Soviet initiative, which climaxed a campaign to dissuade the British
from selling the Harrier to China, warns that UK-USSR relations could be
damaged by this and other weapons deals.
The letter actually may have increased the likelihood of an agreement
on the Harrier. Callaghan and Foreign Secretary Owen, not wanting to
appear to be pressured by Moscow, have indicated that they support moves
toward detente, but will not permit the Soviets to interfere with growing
British-Chinese relations or with a specific arms deal. A stiffening
attitude in Westminster is likely to increase tensions between London
and Moscow, which already are high because of Soviet human rights policy,
adventurism in Africa, and the Warsaw Pact arms build-up. Nonetheless,
Soviet anxiety, which is taken seriously by the Callaghan government, is
one of the most important reasons for delays in completing a Harrier
deal and, along with the concerns of Britain's allies, will he a major
consideration in future arms deals.
The expansion of British-Chinese relations is supported by the
Labor and Conservative parties, although Labor's left wing has strong
reservations about arms deals because it fears that they will lead to an
increase in Chinese-Soviet and Anglo-Soviet tensions. The Conservatives
see little chance for a thaw between the UK and the USSR and favor
strengthening China primarily as a counterweight to growing Soviet rower
as long as the Chinese do not pose a threat to the security of Britain
or Western Europe. For this reason the Tories are particularly anxious
to see major agreements concluded, and have charged that the Callaghan
government-a ecause of fear of Soviet reaction--has deliberately dragged
its feet on the Harrier deal.
British policy toward China will continue regardless of which party
wins the next general election. If a Tory government is returned,
however, the policy--particularly its military aspects--will be pursued
even more vigorously, and anti-Soviet undercurrents are likely to be
more blatant.
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Italy
During the past year, bilateral contacts and agreements between Italy
and the People's Republic of China have burgeoned i.n several key areas.
Rome has welcomed the.opportun.ity to capitalize on a potentially significant
export market as well as to strengthen ties between. China and Western
Europe--particularly Italy--on all fronts. At the same time, Italian
initiatives have been complicated by problems related to possible Italian
arms sales to Peking clearl the most controversial aspect of relations
between the two countries.
After establishing diplomatic relations with China in 1970, Rome
sought persistently to increase Italian trade with Peking but experienced
uneven success as a result of Mao's commitment to autarky. But the
signing of a trade agreement with China in 197] placed Italy in the
forefront of EC nations dealing with China. The agreement provided for
an annual mixed commission meeting to review the progress of bilateral
trade, numerous exchanges of technical delegations, and participation i.n
reciprocal trade fairs. As a result of the treaty, Italy agreed to
provide China with items such as machine tools, agricultural machinery,
chemical products, and motor vehicles in return for textiles, food
products, and handicrafts. The volume of this trade, however, was
strictly limited by_the Chinese preference for deferred or installment
payments over the extension of export credits--a fact dictated by Peking's
chronic shortage of hard currency and its desire to keep exports and
imports balanced.
Improving Trade Prospects
The current Chinese leadership's-more outward looking policies have
greatly improved the prospects for Sino-Italian cooperation, especially
in the industrial and technological fields. This attitude was underscored
by Chinese Foreign Minister Huang 1-1ua's unofficial visit to Italy in
early October. Although Huang signed bilateral cultural, scientific,
and technological agreements while in Rome, I'tali'an Foreign Ministry
officials viewed his trip as having three broader objectives: to heighten
West European perceptions of the Soviet threat, to use that as a basis
for greater Sino - West European cooperation, and to arrange West Euro
participation in Ch.ina's 20-year development plan. 25X1
The most recent Sino-Italian trade statistics give some idea of the
dimensions of the new Chinese opening to the West.- In the past year,
for example, the Chinese sent four trade delegations to Italy, and
during the first half of 1978 Italian exports to China increased by over
300`percent, compared to the same period in 1977. The total value of
Italian exports to China--$70 million--now slightly exceeds the value of
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their imports for the first time in three years. Despite the improvements,
the current level of trade is still not commensurate with Rome's ability
to supply or with China's ability to consume Italian products. A significant
expansion of bilateral trade can only be achieved if the Italians convince
the Chinese to buy entire "turn-key" industrial plants, to accept lines
of export credits, or to agree to trades involving industrial plants or
production for Chinese energy-producing supplies such as coal and oil.
I I
Last February, Italian Foreign Ministry officials recognized their
country's potential to play a role in China's master plan, especially
those-aspects involving improved transportation and increased agricultural
mechanization. There were signs, for example, that the Chinese were
interested in having Fiat build a proposed truck and diesel engine
factory--at a total cost of $8 billion. At that time, Italian Foreign
Minister Forlani even ventured to suggest to Ambassador Gardner that
such projects could, over the long term, mark the reorientation of
Italian trade away from the Soviet bloc and toward China.
Italy wasted no time reacting to the apparently favorable Chinese
attitude. In recent months, several high-level Italian delegations--
representing both government and industry--have visited Peking. One of
the most significant trips was led by the Italian Minister of Transpor-
tation, who returned with the impression that China wanted to sell some
of its oil to a West European country. Subsequent negotiations culminated
last November in the first large-scale petroleum contract between Peking
and a West European country. Although the amount of oil involved--100,000
metric tons--is relatively small, the deal could conceivably result in
much broader trade agreements involving entire Italian industrial plants
in exchange for more substantial amounts of Chinese oil. 11
The Italian Foreign
Ira de Minister also prepared the groundwork for a trip to Italy next
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spring by his Chinese . counterpart--gi_vi.ng rise. to speculation that they
might then conclude a bilateral economic and industrial cooperation
agreement. In the meantime, negotiations over such diverse projects as.
the construction of a tractor manufacturing faci.li,ty, a coal slurry
pipeline, and long-distance power transmission. li'nessuggest, the potential
for a further expansion of Sino-I'tali.an relations.
The Question of Arms Sales
The one area in which bilateral relations seem stalled Is the
question of Italian arms sales to Peking. Italy faces a dilemma: On
the one hand, arms exports traditionally have contributed to the improvement
of the trade balance and the expansion of employment opportnities in the
fragile Italian economy. On the other hand, the Italian Government is
constrained by fear of an adverse react ion on the part nf thp Soviets.
the United States and the Italian Communist Party.
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The PCI's Position
The question of arms sales to China is a complex one for the Italian
Communists. They have recently shown a keen interest in reestablishing
party-to-party relations with the Chinese. Such a move would also serve
to emphasize to domestic and foreign audiences the PCPs independence
from the Kremlin.
Chairman Hua Kuo-feng's trip to Yugoslavia last fall produced
rumors that the Chinese were willing to reestablish relations with the
Italian Communists. The PCI reacted warmly and also took a positive
view of Foreign Minister Huang Hua's subsequent visit to Italy. But de-
spite the PCI's apparent willingness, little concrete progress has been
made in improving relations between the Italian and Chinese parties.
This probably reflects Peking's continuing skepticism of the PCI's
independence as well as its desire to pursue relations on a state-to-
state basis with the Italian Government.
The Italian Communists hope to improve their ties with the Chinese
without needlessly antagonizing Moscow. The PCI might thus be inclined
merely to look the other way-.particularly if an arms deal with Peking
included mainly defensive weapons and was concluded quietly. Sales
through third-country outlets or international arms traffickers might
permit the PCT to disclaim responsibility. But if the Italian Communists
were forced to make an official public record of their position on arms
to Peking, there is a greater chance they would o ose the deal to keep
peace with the Soviets.
Outlook
As a result of China's expanding. commitments to internal development
and foreign contacts, bilateral relations and trade with Italy will
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probably improve. s.i,gni.fi.cantly in the. future.. There appears to he a
convergence of interests. centering on Rome's. ability to provide. large-
scale industrial plants and technology in. return for Chinese energy
supplies. Any si:gni:ficant expansion of trade, however, is. dependent on
Peking's willingness to accept a li:ne.of export credits tied to purchases
of Italian goods. And although. the Chinese desire. for Italian arms is a
key element in the relationship, Italy will remai'n..re.luctant to deal
with the Chinese unless it can convince: i;ts' EC partners to adopt a
common position. on the issue while avoiding developments that would
force the Italian Communists to take a public stance. Under these
circumstances, the prospects for Mutually beneficial ties between Italy
and China appear virt lly unlimited. 25X1
Greece/Turkey/Cyprus-
China's contacts with Greece, Turkey, and Cyprus had been quite
limited before. the visits of Foreign Minister Huang Hua to Ankara and
Athens earlier this year. They now promise to increase as China seeks
to counter Soviet influence in the region and as the eastern Mediterranean
countries try to exploit Peki'ng's interest for political, economic, and
even security benefits. China's positions on issues affecting the
region underscores its greater interest in recent years i ten th-
ened Western Europe able to cope with any Soviet threat.
Background
Relations between the three countries and China date back to 1971-
72, when Ankara, Nicosia, and then Athens recognized Peking. At that
time, the unexpected abstention of Cyprus on the vote to bring China
into the UN--as well as the yes votes of other so-called ministates--was
one of the factors leading to Peking's entry into that body sooner than
either its opponents-or its supporters had expected. In establishing
ties with Peking, none of the three countries felt it was doing more
than conforming to the growing view in the West that China could no
longer be ignored. On a more positive note, Greeks and Turks were
hoping for profitable commercial ties with Peking and for diplomatic
support of their respective cases on the Cyprus problem. For the Chinese,
the eastern Mediterranean connection was yet another effort to inch
their legitimacy and to match. the Soviet presence . i n the-area.
Ties Developing Slowly
The Hua visits to Ankara and Athens were in fact aimed at countering
Soviet initiatives such as the invitations to-Turkish Prime Minister
Ecevit and Greek Foreign Minister Rallis and Moscow's proposals for a
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far-reaching Soviet-Turkish "political document." In addition to delivering
warnings in both.,capi.ta.ls.. about Soviet i.ntenti.ons, Hua agreed in Ankara
to the. activation of a dormant. committee t~.conside.r greater economic
cooperation. I?n Athens., he.si'gne.d a cultural cooperation agreement--the
first of its kind with.-a' West European country--that provides for scientific,
educational, and cultural exchanges. Greek and Ch_inese.leaders, also
agreed to look into the possibili'ty-of broadening their economic cooperation,
particularly in the maritime fi.eld.. Hua invited Eceyit and Greek. Prime
Prior to the Hua visit, neither Peking nor any of the. three. countries,
except perhaps Cyprus, had shown much interest in developing political
and economic ties. Close. party ties were not feasible because the
Communist parties in Greece, Turkey, and Cyprus are generally pro-
Soviet, and pro-Chinese. splinter groups are insignificant. To be sure,
Peking signed trade agreements with all three countries during ministerial
and, in the case of Cyprus, presidential visits, to Peking between 1972
and 1974, but these. did not significantly advance. commercial ties. In
1977, for example, Greek, Turkish, and Cypriot trade turnover with China
only amounted to $5 million, $7 million, and $300,00.0 respectively, most
of it in the form of Greek and Turkish exports of icultural products
and raw materials to China.
China Neutral on Regional Disputes
If the economic gains of the Peking connection have been disappointing
for the Greeks and Turks, so too have been the diplomatic payoffs for
their respective cases on the Cyprus and Aegean disputes. Peking has
pursued an evenhanded policy on both, generally abstaining on the Cyprus
issue in the UN and listening without comment to the Greek and Turkish
views on the Aegean. Such commentary as they have made portrays these
issues as yet another example of su er owe -- ularly Soviet--
machinations in the region.
Eastern Mediterranean Connection Highlights Sino-Western
Rapprochement
Hua and other Chinese officials have in fact shown more. concern
about the adverse. effect th.e.di:sputes are. having on NATO. In a policy
that differs little-from that-of the Western allies of Greece and Turkey,
the Chinese have. urged both countries to show a spirit of compromise and
not--6. ..- +1___.- JS rr____-_
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Peking has urged Greece to
return fully oNATO, and Hua expressed satisfaction at the Karamanlis
government's recent moves in that direction.
Hua also praised Karamanlis for his efforts on behalf of West
European unity and expressed support for Greece's bid to join the EC.
Similarly, the Chinese have welcomed Karamanlis' initiatives on behalf
of Balkan cooperation, which they see as an antidote to Soviet influence
in the region, particularly in the post-Tito era in Yugoslavia.
Outlook
Relations between Peking and the three countries are likely to
improve further, but the process is apt to be slow. Although Greeks and
Turks appreciate Peking's new interest in their region and in a strengthened
Western Europe, they continue to view their relationship with the Soviet
Union and their more immediate Communist neighbors as more important
politically and economically. And while they welcome China's presence
as a counter to Soviet influence, they are also concerned about the pos-
sible adverse consequences of the intrusion of the Sino-Soviet rivalry
into their area. China, for its part, gives greater priority to improving
its ties with the larger and technologically more advanced West European
states, from which it hopes to secure arms. and the means to rapid modernization.
Greeks and Turks do, however, appreciate China as a potential
market for their products, and this appreciation is apt to grow as their
export capabilities develop. And if the USSR adopts a more active
foreign policy in the region in the post-Tito era, both the eastern
Mediterranean states and Peking may see it in their interests to strengthen
their ties. F_ I
Canada
25X1
Canadian Prime Minister Pierre Trudeau?made an-extensive private
visit to China in 1960 before he became involved in Canadian politics.
The country fascinated him, and as part of his campaign to be prime
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minister eight years later, he promised to work toward establishing dip-
lomatic relations. China was already a major market for Canadian wheat,
and Canada had high hopes for both expanding the bilateral relationship
and for playing a special role in convincin the Chinese to broaden
their contacts with the rest of the world.
Diplomatic relations were established in 1970 and a steady stream
of Canadian officials visited China to discuss trade and other matters.
The high point of these early years was Trudeau's official visit in
1973. He concluded a wide range of bilateral agreements that covered
consular relations, most-favored-nation treatment, establishment of a
joint trade committee, a long-term wheat sale, and a unique family
reunion program. Under the program, some 3,000 Chinese have joined
relatives in Canada. Trudeau talked extensively with Premier Chou En-
lai and met Chairman Mao Tse-tung for two hours in what the New China
News Agency described as "a friendly atmosphere." The Canadians took
this to mean that China highly favored Canada.
The opening to China fit nicely into Trudeau's "Third Option," set
out in 1972, which was an attempt "to create counterweights" to the
heavy US influence in Canada and to develop a distinct identity in
international politics. The Canadian public--almost as fascinated with
China as Trudeau--also favored this move. The US Embassy in Ottawa
surmises that in the Chinese view, part of the attraction was
Canada as a strategically placed window on North America.
But the Canadians became disappointed with the relationship. China
was mainly interested in buying wheat, and last year wheat still accounted
for 83 percent of Canada's exports to that country. Finished goods
represented only .3 percent of total sales to China in 1977. After
Trudeau's trip, four years passed before another cabinet-level minister
visited China, again to sell wheat. Canada concluded that its limi,ted
relationship was probably as qlose "as it is possible for a Western
country to have with China."
The new outward-reach policy of China has reinvigorated Canadian
interest. This time the Chinese are the initiators of delegations and
agreements. In October 1977, Chinese Foreign Minister Huang Hua, former
Ambassador to Canada, chose Ottawa for his first visit abroad as Foreign
Minister. A steady stream of other delegations followed, including
Chinese experts who have been quietly scouring Canada for advanced
technology. Canadian officials see these trips as evidence of a con-
centrated Chinese effort to absorb Western know-how. They point to the
Chinese push to train thousands of studepts in the'W6st--up to 500 of
them in Canada--as part of this effort.
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Canadian businessmen also got the message. A. high-level Canadian
industrial and commercial delegation in Peking in October received a
"promise of over $10 billion of trade between now and 1985," up from
about $2.2 billion over the past six years.. One observer estimated,
however, that this jump would be just enough to maintain Canada's current
share of 2 percent of China's external trade.
Canadians, concerned that the 7 to 1 trade imbalance in favor of
Canada would inhibit the Chinese from making further deals, are busily
devising ways to keep the imbalance within bounds China will find acceptable.
There are few Chinese products that Canada wants to buy, but businessmen
are exploring other methods, such as "triangulating" trade (receiving
payment in goods that Canada then sells to a third country), to encourage
China to deal with Canadian companies. F777 I
As a member of NATO, Canada has been concerned about the security
aspects of other countries selling arms to China, and has no visible
intentions to do so itself. Fear of Soviet reaction could play a part,
but would not weigh nearly as heavily as it does on West Europeans, who
face the Russian bear on their doorstep.
The Canadians, eager to share in the boom in sales to China, take
comfort from the Chinese assurances that they will favor Canadian goods
over those of the US, given comparable technology and price. These
assurances will probably not hold good in light of the normalization of
relations between the United States and China. Observers point out, in
addition, that the US generally outperforms Canada in most areas, that
Japan is already far ahead of everyone else in trade with China, and
that !lest European industrialists have also made inroads. Thus, while
Canadians believe that they were a contributing factor in China's emergence
from isolation, they realize with regret that Canada can no longer
claim to the best relationship with China of any Western country. 25X1
Mal Malta
D
Prime Minister Mintoff has always emphasized Malta's links with the
Third World and with most Communist countries except the USSR. It is
not. surprising, therefore, that he agreed to China's request for diplomatic
recognition in 1972 or that he accepted Peking's terms: the severance
of relations between Valletta and Taipei Since then, Mintoff has
traveled to China three times and economic relations between China and
Malta have deepened. Chinese assistance to Malta is substantial and has
had a significant impact on the country both economically and politically.
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Economic Ties
Shortly after diplomatic recognition, China agreed to grant Malta a
$45-million interest free loan, with no conditions attached. A $4.6
million line of credit was also included in the package.- The $45 million
loan is being used for a variety of projects, but the most important is
the construction of a drydock facility that will be capable of servicing
300,000 ton vessels; when completed it will be one of the largest facilities
of its kind in southern Europe. There are approximately 100 Chinese
technicians involved in the project, which has been plagued with a
variety of problems ranging from language barriers between the Maltese
and Chinese to the inexperience of both sides in building a facility of
this size.
Meanwhile, China has emerged as one of Malta's major trading partners,
accounting for about 30 percent of Valetta's transshipment business.
The percentage will increase, moreover, under the terms of a May 1978
agreement calling for more Chinese ship visits. The Chinese have also
contracted for more ship repair visits and for the construction of a
variety of small vessels; two 5,700 ton petroleum carriers have already
been delivered. The carriers are Malta's most significant export to
China, but do little to correct the heavy trade deficit with the Chinese.
Domestic Impact
Projects such as the drydock construction help shore up Mintoff's
domestic political base. With. the British military forces scheduled to
withdraw from Malta on 31 March 1979, unemployment is certain to increase
and Mintoff--who depends on Malta's labor movement for much of his
political strength--could become more vulnerable politically. The new
drydock's increased capacity for ship repair and modification should
offset some of the unemployment potential since it will be inaugurated
next March. The threat of unemployment in Malta's present drydocks
should be reduced by further contracts for a variety of vessel construction.
Even the Nationalist opposition, which had been cool. to China when
it was in power, has been compelled to take notice of China's economic
contribution to Malta. In July 1978, at Chinese invitation, a Nationalist
delegation headed by opposition leader Fenech Adami paid a five-day
goodwill visit to China. The Chinese invitation to the Nationalists is
a clear ''signal to Mintoff that China has no qualms about dealing with
his oppositi-on if t would facilitate blocking an eventual Soviet
presence in Malta.
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Chinese Objectives
Keeping the Soviets. out of Malta is clearly the main Chinese motive
in establishing strong economic and diplomatic links with Valletta.
Since the Soviets lost their Egyptian bases, it has become more difficult
to resupply and refit their Mediterranean naval squadron. Obviously,
the Soviets would like a replacement for these lost facilities. Malta
possesses everything they need--strat is location, drydock facilities,
and a skilled labor force to man it.
China will probably continue to support Mintoff as long as he
maintains his current policy of neutrality--with an emphasis on aloofness
toward the Soviets. And given his excellent relations with Peking,
Mintoff would have to think long and hard before yielding to Soviet
overtures.
The Soviet Response I I 25X1
With each demonstration of Western receptivity to overtures from
the Chinese, Moscow professes to be more alarmed. In even the most
minor incidences of conciliation or cooperation, the Soviets perceive an
unsettling new alignment of international forces, an alignment directed
primarily against themselves. But the increasing stridency of their
warnings and threats against this Chinese-Western rapprochement is
doubtless accompanied by a growing realization among the Soviet leadership
that there is little--if anything--they can do to prevent it. F 25X1
The Soviets condemn China's growing connection with Western Europe
in all its manifestations, from innocuous cultural exchanges to suggestions
of overt military support. Party-level dealings--for example, Chinese
Premier Hua Kuo-feng's recent visit to Romania and Yugoslavia and the
favorable reactions of the Italian and Spanish Communist parties---
complete the threat posed by warming state relations and the evident
willingness in some West European capitals to balance their Soviet
connection with their new Chinese one. The Soviets have closely moni-
tored the nature and development of each country's relationship with
China, particularly those whose governments are considering sales of
military hardware. The Soviets see multiplying Western sales and investments
in China as strengthening the Chinese not only economi-cally, but--most
significantly--politically. They appear to. realize that any genuine
military impact would be further down the road. 25X1
It is unquestionably the political, impact of West European arms
sales to China that disturbs the Sovitets most profoundly, particularly
the global perception of the success of China's anti-Soviet policies.
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But while they have said they would regard such sales as "unfriendly
acts," they are clearly unwilling to ri.sk alienating the West Europeans
with strong-arm tactics. Moscow may also have concluded that arms sales
to the Chinese--of defensive weapons, at least--are inevitable, and that
a moderate approach on the Soviets' part may induce the. West Europeans
to place some limitations on their dealings with the Chinese. Soviet
Embassy officials and military attaches in West European capitals are
energetically seeking information on possible Chinese military pur-
chases. It is also possible that Moscow will attempt to enli.st some
Third World countries to support its position.
The tone of Soviet diplomatic demarches to West European governments
concerning arms sales to the Chinese has been cautionary, the theme
being China's warlike intentions and the certain damage to international
detente. This was the approach taken by Soviet President Brezhnev
during his talks with West German Chancellor Schmidt in Bonn last May
and by Soviet Foreign Minister Gromyko on his visit to Paris in late
October. The Soviet media ceaselessly echo this warning, only more
stridently.
The Soviets can be expected to maintain and 'amplify their outcry
against arms sales. It is doubtful, however, that Moscow will take
stronger measures if such mea'sures.threaten to harm Soviet interests
without ensuring the desired impact on West European. policy. SALT,
MBFR, or bilateral economic arrangements could well prove to be the next
forum the Soviets choose to express their displeasure over the West's
Chinese connection.
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