CAB129-45 — Page 186

166

Page 186

Financial Controls

9. It would be technically possible, though far from simple where Hong Kong is concerned, to use financial controls to reinforce a total embargo, if this were thought desirable; but the status of sterling as an international currency would be affected. There would be little advantage in using financial controls to reinforce a selective embargo.

PART II. STRATEGIC AND POLITICAL IMPLICATIONS OF ECONOMIC

SANCTIONS

10. We are not in a position to predict accurately how the Central People's Government would react to the application of economic santions. The possibility cannot be ruled out that they would retaliate not only by action in the economic sphere (where their scope is limited) but also by political and possibly military measures. Much would almost certainly depend on the severity of the sanctions imposed. A complete embargo on all exports to China, backed by a naval blockade, would almost inevitably produce a much stronger reaction than the more limited proposal of a selective embargo. A full naval blockade of the China coast (even if the legal difficulties of its enforcement against non-participating countries could be got round) would be regarded as an aggressive move against which China might almost certainly find it essential to retaliate (see 8 above); thereby involving most serious strategic and political consequences.

11. A selective embargo would probably not result in immediate and serious repercussions, although the risk cannot be entirely excluded that even such a limited programme might result in some or all of the consequences examined below, although probably in less drastic form. On balance we consider that a strictly limited and sħlective embargo might in the first instance be ignored by the Chinese as was the case when the export of strategic materials was first prohibited and what amounted to an embargo on oil was introduced. might well take the line that they are not dependent on economic assistance from the West and that any such attempts to dislocate their economy must inevitably fail.

The Chinese

1.2. As regards the strategic implications of full economic sanctions, the Chiefs of Staff have reached the following conclusions:

(a)

Hopes of military co-operation against Communism by the Asian Commonwealth countries would recede. In the short term this would not prove to be much of a disadvantage owing to the preoccupation of India and Pakistan in the Kashmir dispute, but in the long term it may well prove to be serious.

(b) Differences between the United Kingdom and the

United States over the degree and method of application of sanctions to be applied might result in prejudicing their world-wide defence co-operation.

Page 186

-3-

Page 186