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for the feelings of moribund Nationalism (which it should be remembered has shown itbegechstenfriendly to us in the partager484tafs66am protecting
our own interests.
5. There is apparently no useful action which can at present be taken in regard to artificial exchange rates. But something can and should be done to alleviate the blockade which is merely injuring foreign interests and not to any appreciable extent the interests of the Communists. It can have no conceivable effect on the outcome or even on the progress of the war.
6. In this connexion the attitude of the United States Government regarding both the scheme for relief ships and the proposal for an “Air Venture Company is the first obstacle to be surmounted. I suggest that representatives in Washing- ton of the United Kingdom, Australia, Canada and India should make a combined approach to the United States Government (supplementing the message contained in your telegram No. 7581 to Washington) pointing out that the fundamental difference between the nature of the Commonwealth interests in China and that of American interests makes it inevitable that we should pursue different methods to attain our common goal of keeping China open to democratic influences and urging the United States Government to support as strongly as possible our request to the Nationalist Government to agree to the despatch of relief ships (see my telegram No. 1187, paragraph 4). Our representatives in Washington should at the same time, try to prevail upon the United States Government to withdraw their objections to the proposed Air Venture Company.'
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7. Apart from the question of Shanghai I consider that there is much to be · said from a political point of view for an increase in contacts by sea and air between Hong Kong and the Communist occupied territory before the fall of Canton and the arrival of Communist troops on the frontier of new territories.
8. Should support of the United States Government not be forthcoming within a reasonable time I consider that the Commonwealth Governments should themselves approach Nationalist Government making it clear that the latter's closure of Chinese ports, which we do not recognise as valid, is destroying our interests (without incidentally advancing their cause) and that we are therefore compelled to relieve the discomfitures of our communities so far as we can by sending supplies to them by sea and removing those of our nationals who wish to go.
9. I would be in favour of our presuming (not asking for) the concurrence of the Nationalist Government and of making immediate arrangements for the despatch of periodical relief ships to Shanghai and, if that should later prove necessary, to Tientsin. The worst that could happen to a relief ship (apart from possible Air Venture bombardment) would be to be turned back by Nationalist naval patrol in the Yangtse estuary and I think there is a fair chance of its getting through without serious challenge.
10. Foregoing has been drafted in consultation with my Commonwealth colleagues who are in full agreement with it and would be grateful if its contents could be communicated to their respective Governments.
(Secret)
ANNEX D
CONTROL OF TRADE WITH CHINA
Aide-Mémoire from American Embassy
1. Although it is recognised that the final form of the United Kingdom's reply to the United States proposals regarding the control of trade with China is still subject to confirmation of other interested British Departments, the Department of State has read with disappointment the tentative British response, which the Foreign Office recently communicated to the Embassy.
2. During the meetings held in the Foreign Office beginning 21st July, 1949, the United States representatives stressed on several occasions their belief that it was highly important that the Western Powers demonstrate their bargaining strengthage-484s of Chinese Communist régimePage44ctif66f necessary, of
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western interagem hinf66nd that those Powers be in a pasiting possibly to influence the orientation of that régime through the concerted control of selected exports of key importance to the Chinese economy. The Department of State, consequently, is seriously concerned that the proposed United Kingdom response represents far less than the absolute minimum requirements for joint protective measures in view of the present Chinese situation.
3. Any failure to demonstrate effective western control over selected key imports would represent the abandonment of the most important single instrument available for the defence of mutual vital western interests in China and the Far East generally. Yet the proposed United Kingdom response would appear to imply the desirability of a completely passive rôle by the Western nations in their economic relations with China. Such a rôle would extend not only to all strategic aspects of the China problem, but would cast serious doubt on the possibility of arriving at an effective joint approach towards the mutually agreed objective of combating the spread of communism throughout Asia.
4. In regard to the specific implementation of a positive approach, the Department of State has the following comments :-
5. The Department understands that the United Kingdom is prepared to keep the flow of 1A strategic goods and materials to Communist China and Northern Korea under control, since it is, of course, necessary to prevent possible transhipments via China to the Soviet orbit. It also appreciates the importance which the United Kingdom attaches to securing, before the United Kingdom can extend its export controls over 1A items to cover transhipment in Hong Kong and Singapore, prior assurance from the Belgian, French and Dutch Governments that these Governments are prepared to take similar action covering both their metropolitan and Far East colonial territories. The Department is pleased, in this connection, to assure the United Kingdom Government that S.C.A.P. is now controlling strategic exports to China in accordance with the proposed United States United Kingdom policy, and that, furthermore, the United States Govern- ment is prepared to obtain Philippine co-operation.
6. The Department agrees that joint control of petroleum shipments is important, but regards it as only one aspect of a common general control pattern.
7. Although the Department of State and the Foreign Office thus appear to be largely in accord regarding the above two types of controls, and although the Department hopes that the United Kingdom Government may be able to extend control over the transhipment of 1A items through its Far Eastern colonies, 1A and petroleum export controls alone would not be adequate to permit the Western Powers to demonstrate their bargaining strength vis-à-vis the Chinese Communist régime, to influence the orientation of that régime, and therefore to combat the spread of communism throughout Asia. The reasons for this are that (a) China depends relatively little upon imports of 1A items, and (b) petroleum controls not only would be effected largely through informal arrangements with private companies rather than through governmental export licensing, but in addition China's petroleum purchases over the foreseeable future are likely to be far below normal civilian requirements.
8. The Department therefore believes that it is principally through the inclusion of selected 1B items in the present pattern of the United Kingdom's 1A licensing system that the Western Powers can secure leverage in dealing with the Chinese Communists. More exchange of information would not be sufficient for this purpose.
9. The selective character of the 1B items which might be included under 1A controls was evident in the discussions between United Kingdom and United States representatives acting as a subcommittee of the United Kingdom-United States
group. It will be recalled that this subcommittee selected five categories of goods in the 1B category which might be suitable for control in respect of China:
All essential types of mining equipment. Essential power generating equipment.
Really essential transport equipment. Steel mill equipment.
Petroleum
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In addition thegg wernumber of miscellaneous items in these categories which were regarded as of key importance to the Chinese economy!
10. The Department wishes therefore to reopen with the Foreign Office the matter of controlling these items, and suggests that the following factors be taken
into account:
The Foreign Office has already indicated its desire to control the export of petroleum products. The same reasoning would appear to require control of the other categories studied by the subcommittee.
The difficulties of including 1B items in the present pattern of the United Kingdom's 1A licensing system are recognised. It is not understood, however, why the control of selected 1B exports to China could not be effected through the creation of a new list under which licences would be required in effect only for exports to China and adjacent areas. This would limit procedural deterrents on Britain's general export trade to a marginal scope.
The question of discrimination seems hardly relevant. Not only does the present pattern of United Kingdom export licensing involve open dis- crimination as between broad areas of the world, but, as maintained success- fully in G.A.T.T. and E.C.E. conferences, the present world situation obviously justifies discrimination on security.
In connection with Asia restricting the spread of communism is clearly a security matter for the Western Powers. Control over the export of selected IB items vis-à-vis Communist China is as important for the mutual security interests of the western world as is the control of 1A items to Eastern Europe. Certainly as far as Asia is concerned the mutual security interests of the western world must be considered at least as much in terms of political and economic strategy as in terms of direct military factors.
In conclusion, it is difficult for the Department of State to understand what "political and administrative difficulties" might be so great as to outweigh the importance of solidarity in the adoption of a strategy for the maximum protection of United States-United Kingdom mutual, vital long-range interests.
11.
American Embassy,
London, 3rd August, 1949.
ANNEX E
CONTROI. OF TRADE WITH CHINA
Draft Reply to American Embassy Aide-mémoire of 3rd August
Upon receipt of the American Embassy's Aide-mémoire of 3rd August, the United States proposals regarding the control of trade with China were once again made the subject of careful study by the interested Departments of His Majesty's Government.
2. The objectives of the United States proposals appear to be-
(a) to ensure that Western trade with China does not have as a direct consequence an increase in the military strength of the Chinese Communist administration; and
It
(b) in the words of the American Embassy's Aide-mémoire, "to influence the orientation of that (the Chinese Communist) régime, and therefore to combat the spread of Communism throughout Asia.” appears to be the United States view that this end might be achieved by demonstrating to the Chinese Communists the economic bargaining strength of the West through the concerted control of selected exports of key importance to the Chinese economy.
•
3. It is perhaps unnecessary to emphasise that there is no difference between His Majesty's Government and the United States Government as to the importance of these aims. Indeed, His Majesty's Government, because of their position in Hong Kong and South-East Asia, have immediate and compelling reasons for being anxious to secure the achievement of both objectives.
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4. His Majesty's Government consider that, as far as the first of these two objectives is
poncerned, they have already taken steps which safeguard the position. Theyve p1662
example, not only effectively prohibited the export from the United Kingdom of weapons of war of any kind destined for the Chinese National Government, but have refused to permit the trans-shipment in Hong Kong of military equipment so destined irrespective of its country of origin. They have done this because experience has shown that such shipments usually eventually result in an accretion to the military strength of the Chinese Communists. In any case, the fact that the American Embassy's Aide-mémoire under reference lays almost exclusive stress on the importance of controls, not from the narrower and more direct security point of view, but in the light of broader political considerations, suggests that it is to this latter aspect of the question that the United States Government now wish to draw especial attention.
5. It has already been stated that His Majesty's Government fully share the United States Government's anxiety to take such steps as may be effective and practicable to influence the Communist régime in China in the direction of more moderate and co-operative courses. Indeed, His Majesty's Government noted with gratification that the United States Aide-mémoire implies the practicability of the exertion of Western influence on the Chinese Communists, since it is because they share this view that His Majesty's Government do not favour a general policy of evacuation but on the contrary believe it important that the maximum Western influence should continue to be exerted in China. The basic difference between the two Governments on this issue appears to be that His Majesty's Government see no grounds for believing that the imposi- tion of export controls of the kind proposed is likely to produce this desirable result.
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6. It is understood that the United States proposals do not contemplate any immediate interference in the export to China of the list 1B items which have been suggested for control, and that the powers which it would be necessary to assume would, in fact, be held in reserve; the argument being that the mere assumption of these powers would provide an effective demonstration of Western bargaining strength and might also have the desirable political consequences mentioned above.
7. His Majesty's Government find it difficult to see the force of this argument. The Chinese Communists are presumably aware that a sovereign State has the power to control its own exports. The assumption of controls for this purpose would be regarded as a threat to impose economic sanctions and it is hard to see why such a step should be any more effective than an announce- ment designed to remind the Chinese Communists of the economic bargaining position of the West.
8. In any case, experience has shown that Communist Governments regard commercial relations as being entirely dissociated from political relations: they have consistently shown themselves to be unwilling to modify their political principles for the sake of commercial advantages, but they have at the same time demonstrated their willingness to trade freely, in so far as it is advantageous to them, with capitalist countries with whom they are in acute political divergence.
9. The American Embassy's Aide-mémoire refers to the subject of petroleum products in the following terms :-
"The Foreign Office has already indicated its desire to control the export of petroleum products. The same reasoning would appear to require control of the other categories studied by the sub-committee.
There is, however, an important difference between the United Kingdom objective in regard to petroleum products and the United States objective in regard to the other categories proposed for control. The United States proposal is that this latter group of items should be controlled, not because of its immediate security importance but because of the general political bargaining strength which it is assenge at afch6ontrols would bestow. As has algfdy been seated, His Majesty's Government are sceptical of the efficacy of export controls aimed at a modification of the political alignment of the Chinese Communist régime, and are not disposed to institute controls for such a purpose. In the case of
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petroleum products, however, there is an obvious security interest. It is clearly of direct agcumey potance to prevent the ChinesgCommunist from acquiring substantial reserves of petroleum products. Although the military operations of the Chinese Communists within China have not involved any substantial consumption of petroleum products, plans must be made on the assumption that sooner or later they will endeavour to expand beyond the frontiers of China. For such a purpose substantial quantities of petroleum products might well be indispensable. His Majesty's Government have to give particular considera- tion to the case of Hong Kong. It is considered that any overt attack on Hong Kong from the Chinese mainland could be successfully resisted unless the aggressor were able to acquire, at any rate temporarily, command of the air and sea. It was because of considerations of this order that the communication recently made by the Foreign Office to the American Embassy laid particular stress on the importance of petroleum products.
10. His Majesty's Government have indicated to the United States Govern- ment in another context that they see important advantages in the continued maintenance in China for as long as possible of Western commercial and financial interests. It is precisely because they are anxious to secure the second of the two objectives referred to in paragraph 2 above that they do not wish to show open hostility to the Chinese Communists by dissuading British commercial interests from entering into normal commercial relations with them. This does not mean that their policy in this regard can be considered as purely passive as is suggested in the United States Aide-mémoire. On the contrary, they consider it to be of importance to maintain their general position in China for as long as possible in order to permit the carrying out of a flexible policy of exerting influence and pressure whenever opportunity offers. They do not, however, consider that the means proposed by the United States Government are likely to lead to the desired result.
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