Washington, March 28, 1969.

TO
The Secretary of State
The Secretary of Defense
The Secretary of Commerce
The Secretary of the Treasury
The Secretary of Agriculture
The Special Representative for Trade Negotiations
The Director of Central Intelligence
The President of Export-Import Bank

SUBJECT
U.S. Trade Policy Toward Communist Countries

The President has directed a review of U.S. Trade Policy toward Communist countries. This subject was originally to be covered in the response to NSSM 16, U.S. Trade Policy, but the President wishes a fuller treatment of these issues than would be possible as part of that overall review./2/

This study should examine policy towards COCOM, U.S. differential controls, trade with Eastern Europe, Asian communist and Cuban trade embargos, and extraterritorial effects of trade controls, by treating the following elements:

--the effectiveness of present measures;
--the strategic impact of these controls upon communist countries;
--relations with our allies;
--other relevant factors including U.S. exports, our balance of payments and relations between the U.S. Government, on the one hand, and U.S. business and labor, on the other.

The paper should then explore alternative U.S. policies, including legislative changes if necessary, such as continuation of our present course, various means of modifying controls, what countries should be included and possible differentiation among them. Finally, the paper should briefly describe present U.S. government organization for implementing trade control policy and examine possible improvements in this machinery.

The President has directed that this study be prepared by an Ad Hoc group chaired by the Assistant Secretary of State for Economic Affairs and including representatives from the Department of Defense, the Central Intelligence Agency, Department of Commerce, Department of Agriculture, Department of Treasury, Office of the Special Representative for Trade Negotiations, the Export-Import Bank, and the Assistant to the President for National Security Affairs. The Chairman may invite other agencies to send representatives as appropriate.

This report should be submitted to the Review Group by May 9, 1969.

Henry A. Kissinger

Vienna, April 4, 1969.

Dear Mr. Samuels:

I have just received CA-1888 of March 26, 1969,/2/ indicating that we are reviewing our East-West trade policy at this time. I am happy to hear this because I think a basic and searching high-level review as to the validity of some of the assumptions under which we have been and are now operating in the field of East-West export controls in peaceful trade is long overdue. Last year I recommended to the previous administration that such a high-level review be conducted not only because I believe our present system is outmoded but also because I think it could have, over a period of time, an important relationship to our very difficult long-term balance of payments problem.

Since my arrival here about two years ago I have followed this problem closely, not only because Vienna is a major center of East-West trade but also because a number of U.S. companies handle their trade with the Danubian states through their Vienna offices. My conviction is that a number of the fundamental premises on which our present East-West trade policies and procedures are based are no longer valid and are even contrary to our own long-term interests.

At the heart of the problem is the fact that in our East-West trade policy as it relates to peaceful trade we are going it alone. Today only American industry has such heavy bureaucratic governmental licensing requirements and controls for the export of many kinds of peaceful goods to East Europe. If the governments of the European industrial nations of NATO followed a policy similar to ours, it would be one thing. But this is not the case. Not only do they not have the barriers we have unilaterally erected for our own exports of peaceful commodities, but European NATO and other free-world governments are actively supporting their business communities to expand exports to East Europe by assisting in long-term credits, subsidizing exports, encouraging barter arrangements, etc.

Fundamental to our policy has been the premise that by limiting or controlling our exports to the East European Communist states we can exert meaningful economic pressures on them or do them economic hurt. This premise is, of course, not valid in a very broad range of peaceful trade and would only be valid if a substantial majority of European and other free-world industrial nations followed a similar course. Our policy of denial in this field denies very little and simply forces the satellite nations to obtain comparable products from Britain, France, West Germany, Italy and other European nations, and Japan at the expense of American business and industry.

What is the balance sheet of our present East-West trade policy in nonstrategic items which constitute the bulk of Western exports to the East and what are we accomplishing? We are certainly not denying such exports to the East because while there is often a preference for U.S. products, if they are not readily obtainable, products generally competitive in quality and price can and will be obtained from European NATO and other industrial free-world sources. We are certainly not getting any moral or other credit in East or West Europe for our policies, nor is our image being burnished by them, although Western European businessmen naturally welcome our controls as they tend to inhibit or eliminate American competition for trade with East Europe.

And finally we are punishing American business and industry by making it uncompetitive at a time when peaceful trade with Eastern Europe is beginning to open up and we should be getting in on the ground floor and building a solid foundation for winning and holding a permanent part of this market. If we continue on our present course there is danger that we risk being permanently frozen out of a market which although presently not extensive has great potential value in the years ahead, as a Dow-Jones study by some 90 leading foreign businessmen clearly indicated last year./3/ Today we are progressively being considered as an uncertain and unreliable source for peaceful goods by East Europeans and they are turning elsewhere.

Business representatives here in Vienna of West European countries make no bones about the fact that they are today laying a solid foundation for permanent and increasing foothold in the presently interesting but potentially very lucrative East European market. They maintain that their governments have no intention of changing their basic policy and cutting back on peaceful East-West trade because of Czechoslovakia.

West European industry today is turning out products for export to Eastern Europe which increasingly are highly competitive in quality and price with those we have to offer. However, we do have one important asset. This is not the temporary edge we have in a few sectors but the general belief in East Europe that American products are superior and, therefore, there is willingness in some cases even to pay a premium for them. This asset will be frittered away in a few short years unless American companies can fill orders for peaceful goods in reasonable length of time. Continuing our present policies will simply force American industry out of much of the field over the longer term and result in the loss of this market to West European, Japanese, and other free-world competitors with no corresponding advantage for us.

With due respect I suggest that in our East-West trade policies we tend to look backward to the past for our guidelines for the future--back to the war and then post-war period when the concept of economic denial bloomed since we virtually alone had things to export--back to the time when the Communist world appeared a steel-hard monolith--back to the days before Europe and Japan were industrially and economically restored with a major capability for export. The realities of today are vastly different. Europe and Japan are not only restored but are making a major trade drive to the east where the winds of political and economic change are blowing despite Czechoslovakia. And in this connection most qualified observers (both businessmen and officials) agree that the welcome winds of economic change in parts of Eastern Europe have been substantially encouraged by contacts of Western businessmen with East European communist economic and other officials.

I, of course, realize that this is a difficult emotional and political problem to deal with in the United States because of the aid the Communist nations of Eastern Europe have extended to Hanoi. It is also clear that Czechoslovak developments will tend to obscure the longer-term picture and evoke calls for economic restraints or sanctions against the five communist nations that raped Czechoslovakia./4/ While some temporary pause may have been indicated and it is indeed useful for us to consult with our NATO allies on this, I would hope that we would go no further in our pause than our NATO allies, some of whose business representatives here are saying that there is no question of any serious cutbacks, delays, or failures to keep pushing for more trade with all the countries of Eastern Europe. For us unilaterally to cut back on trade with East Europe or maintain barriers that no other country observes would seem to accomplish little constructive. It seems to me that a high-level review which lifts the problem from the official bureaucratic level that administers the present system is essential. I have had some people in the "E" area of the Department argue that the Congress will not accept change in our control system. I am inclined to doubt this from talks I have had with many members of the Congress in the past nine months. Furthermore, I note from the Journal of Commerce of March 24, 1969, that Senator Mondale will seek sweeping liberalization of our export control system.

How can we best get at this problem? If the judgment should be that we have a serious congressional and public opinion problem, consideration could always be given to establishing a nonpartisan, nongovernmental special commission of highly respected business and other leaders, including members with experience in government (for example, people of the stature of Jack McCloy, Douglas Dillon, David Rockefeller, Henry Ford, etc.) to take a thoroughly objective new look at the entire history and nature of our present controls; their effectiveness in terms of preventing Communist satellites from getting what they want elsewhere in light of the policies of NATO and other free-world countries; the future effect of the present system on our enlightened self-interest and on the ability of American business and industry to lay a basis for future expansion of trade to the East; whether mutually beneficial trade ties and contacts with us do not encourage economic liberalization in East Europe more than the present system; etc. If such a special Blue Ribbon Commission, after a searching study, came up with recommendations for modifying our present system of controls and regulations to bring them more into keeping with reality, it could be of great help with U.S. public and congressional opinion.

I apologize for writing you at such length about this matter for I know how desperately busy you are at this time as you take on your new and very heavy responsibilities. However, I do feel that our present system of East-West trade controls not only needs overhaul but over the long term can place certain important sectors of American business and industry in a position which makes it either very difficult or virtually impossible for them to compete with the business and industry of many of our free-world allies with sad consequences for our balance of payments.

To conclude, what I am really suggesting is a new and basic look at the entire problem not by people who understandably have certain preconceived ideas because they are also administering the system, but by a broadgauge high-level group. Perhaps my views from Vienna are myopic. If so, such a review would establish that fact.

With every good wish and again apologies for the length of this communication,

Sincerely,

Doug MacArthur II

Washington, April 9, 1969.

SUBJECT
East-West Trade Relations

Here are my general views on East-West trade. They should not be taken as prejudicial to the results of current NSC study on the subject. My views are separately stated for Eastern Europe (including the USSR) and for Communist China and are followed by comment on my proposed handling of East-West trade questions on my European trip. I deal most extensively with the Eastern European part of the problem with emphasis on trade levels and controls, key legislative restrictions on export credit guarantees and most favored nation (MFN) treatment, the need for an Administration policy statement and our attitude toward promoting improved East-West trade./2/

By way of background, our two-way direct trade with Eastern Europe has been, and remains, modest. It amounted to less than $420 million last year, divided about equally between exports and imports. This does not include the trade involvement by foreign subsidiaries of American firms, which was probably substantial. Estimates differ as to the potential growth prospects of East-West trade. My own opinion is that, even were conditions made more favorable by the removal of certain existing obstacles, there would be only a modest increase. Our East-West trade is likely to remain in fairly close balance (because the Communists do business on a bilateral, rather than a multilateral basis) and thus make little contribution to the amelioration of our balance of payments problem. From an economic and commercial viewpoint, however, such trade can be quite important to the firms, laborers, and industrial and agricultural communities involved. From a foreign policy viewpoint, also, there are benefits to be derived from extending the trade contracts of American businessmen with these countries.

Beginning with the Eisenhower Administration the long-range policy of the Department of Commerce has been to encourage peaceful East-West trade. During the past several years we have urged our businessmen to explore East-West trade possibilities, sent trade missions to Eastern Europe and made continuing efforts to relax our trade controls consistent with our national security and foreign policy requirements. Our promotional approach was interrupted by the invasion of Czechoslovakia in August 1968. Since then no Commerce official, nor any other Executive Branch official, has openly encouraged East-West trade.

I believe the American business community for the most part is prepared to continue to expand its business relations and its trade with Eastern European countries and, at the same time, to abide by whatever reasonable trade controls we feel must be maintained toward these countries for national security and foreign policy reasons. Many businessmen feel that our current controls exceed what is now required and would welcome further relaxation of them and of various other governmental obstacles to trading relations with Eastern Europe. Views on the adverse impact of our trade controls are sometimes highly exaggerated. At the same time, some segments of the American public and the Congress rigorously oppose relaxation of trade controls, particularly while warfare continues in Vietnam. I have asked my staff to explore further whether our continuing efforts to reduce our controls, consistent with our national security and foreign policy interests, can be expedited.

Legislative limitations effectively prohibiting Eximbank financing of export transactions to Eastern Europe and the extension of most-favored-nation (MFN) treatment to imports from Eastern European countries are far more important obstacles to improved trade with Eastern Europe than are trade controls. These limitations directly affect our firms' ability to increase exports to these countries and the ability of these countries to increase their sales to us.

Extensive international trade requires credit. Such credit for East-West trade is readily available in other industrial countries, with appropriate governmental guarantees and facilities. It is not now available here. Without it, our firms cannot compete effectively for increased trade, particularly for the larger and more important transactions. In early 1968 Congress, by prohibiting Eximbank from using its facilities to finance transactions with countries aiding North Vietnam, ruled out such support for U.S. exports to Eastern Europe. There are strong Congressional views on both sides of this issue. I believe we should seek removal of this limitation as quickly as Congressional support can be obtained to do so.

The trade significance of MFN treatment to Eastern European countries (now extended by the U.S. only to Poland and Yugoslavia among communist countries) can be substantial./3/ The tariff differentials involved are frequently large and become larger as the Kennedy Round tariff cuts are made effective. More importantly, the trade of these countries with the Free World is largely under bilateral agreements that require fairly close balancing. Thus, these countries have only limited leeway to use convertible currency earnings for the purchase of U.S. goods. Their own currencies are not convertible on the world money markets, and, except for the USSR, they have little gold. Therefore, any large increase in imports from the United States must be accompanied by increased exports to the United States. Two-way trade, in its narrowest sense, is therefore essential here until their overall trade bilateralism is significantly modified or abandoned. I believe it is essential that the Executive Branch once again obtain discretion to extend MFN to these countries because of its significance to the growth of such trade and of its leverage potential in commercial and broader foreign policy negotiations with these countries. Such leverage arises not only from the trade importance, but also from the important political and psychological significance these countries attach to obtaining MFN treatment from us--viewed by some as equivalent in importance to the trade value.

Of equal significance will be the general public posture the Administration will take toward East-West trade relations. The seven-month interval since last August has been without a clear statement of governmental policy on this matter. This has left businessmen unguided following an extensive period of promotional efforts. They are seeking guidance from us. A negative attitude now would further disrupt past favorable trade developments. A merely permissive attitude toward peaceful trade transactions would bring little additional effort from the trade community. A positive and highly promotional approach, on the other hand, would give a substantial boost to the efforts of businessmen, particularly if it is coupled with strong efforts on credits and MFN and is implemented with some of the down-to-earth businesslike programs which this Department has instituted.

I would favor a positive promotional attitude even now, looking toward obtaining authority for extending Eximbank export credit guarantees and MFN treatment along with bilateral negotiation of other measures to improve East-West trading relations. Our promotional efforts could be tied in scope and intensity to the practical objectives and limitations of the changing East-West trade scene. We have, in Commerce, a number of promotional programs, already used in East-West trade, that could be used more widely and intensively, and others which are susceptible to effective use with such trade. I am prepared to move ahead on a positive program if you decide that this Administration clearly favors the promotion of such trade and expanded trade relations with Eastern Europe. Without such a determination, however, I would prefer not to mount any major promotional program.

I recognize that even with favorable conditions and with a full trade promotion program, our East-West trade will grow only to modest levels in the near future. However, there are also foreign policy advantages to be gained from extending our trade contacts with these countries. Even more important may be the foreign policy value of reaffirming a positive position toward East-West trade. I believe that these benefits can be obtained by a positive policy while retaining a high degree of flexibility to meet changing conditions, including a deterioration in the international situation.

Whatever East-West trade policy you decide upon following completion of the NSC study will probably find both supporters and objectors among the Congress. Such differences in view were apparent in Congressional exchanges on last years' Eximbank legislation and in other Congressional hearings on East-West trade. Moreover, both viewpoints on East-West trade will also receive a thorough review during the Congressional hearings on the extension of the Export Control Act of 1949. The first of such hearings is being scheduled by Senator Mondale for April 21. We expect to hear there numerous proposals for liberalizing trade controls and promoting East-West trade, as well as attacks on any such proposals.

Of course, increased trade and improved trade relations will not result from U.S. action alone. There is much that the Eastern European countries must do as well. They must be willing to give our exports meaningful treatment that is equivalent in substantive effect to the extension of our MFN treatment to their exports. Among their other needs in this regard must be improvement of their products and their marketing to meet our requirements, the opening up of their own marketing channels more fully to our traders, the providing of better protection for industrial technology and other property rights, and the continuance of their partly-thwarted moves to develop more open economies.

With respect to our trade embargoes with Communist China and other Far East Communist areas, the basic issue remains one of foreign policy. It may be some time before that foreign policy problem is resolved. In the interim, I believe it is important that we look forward to the possible reopening of trade with these areas. I am, therefore, planning upon my return from Europe to have my staff explore the nature and extent of existing trade potential for the United States with these areas and the manner in which we might react on the trade front to various possible contingencies in changing relations between the United States and these areas.

On my trip to Western Europe during the next two weeks, I do not plan to raise the subject of East-West trade. If officials of other governments, the foreign press, or businessmen abroad raise East-West trade questions, I plan to respond only in general terms and will in no way commit the Administration to any policy or course of action. I shall note that the matter is even now undergoing policy review within the Administration and that the Export Control Act of 1949 is before the Congress for extension. I shall, of course, listen with an open mind to any comment they may make on East-West trade, including U.S. controls and the multilateral control system, and I shall bring any such comment to your attention upon my return.

Maurice H. Stans

Washington, April 16, 1969.

SUBJECT
Your Request for Views on Ambassador MacArthur's Letter of April 4 and a Reply Thereto

The substance of Ambassador MacArthur's comment/2/ is that our export controls on non-strategic trade with Eastern Europe are outmoded, ineffective, and economically damaging to American business. We agree with these findings. They are generally consistent with our analysis of East-West trade controls in the memorandum to the Secretary from Mr. Greenwald on "Strategic Trade Restrictions" that has been sent to you for your review./3/

United States controls that go beyond the multilateral strategic embargo have an impact of close to zero on the economic or military potential of Communist countries. (For special reasons Cuba is an exception.) There may be rare instances in which some specialized American equipment or technology cannot be supplied by another Western country, but the predominating pattern is one of substitutability.

Commerce Department export controls are designed to catch the rare case with so wide a margin of safety that they have become unnecessarily cumbersome. Of the categories requiring export licensing on the Commerce control list, about 600 represent items on the international COCOM strategic embargo list. An additional 500 entries represent goods not on the COCOM list but individually licensed for export to Western as well as Communist countries. A further 800 items, not on the COCOM list and not controlled individually to Western countries, nevertheless require individual licensing review for shipment to Eastern European countries. Thus approximately 1300 items, none of them on the international strategic list, are individually controlled. Our rough estimate is that not more than 200 of these items are even remote candidates for effective unilateral U.S. control.

The red tape involved in terms of documentation, end-use checks, interdepartmental review, etc. is a drag on trade. It would certainly help our exports to put American businessmen more nearly on equal terms with other Western businessmen.

However, to realize the advantages of significantly increased trade that Ambassador MacArthur envisages, a change is needed not only in export controls but in lifting the ban on Export-Import Bank export financing and on most-favored-nation tariff treatment. Even if these actions were taken, there are some purely economic factors that would operate as limitations on the magnitude of trade expansion--bilateral trading patterns between West and East Europe, a tendency of American firms to trade with the East through their West European subsidiaries, and a shortage of attractive products from East European countries.

That you sign the attached response to Ambassador MacArthur. (Tab A)/4/

Washington, undated.

U.S. TRADE POLICY TOWARD COMMUNIST COUNTRIES
(Excluding China, Cuba and Yugoslavia)

(NSSM 35)

Summary Paper on Major Issues for Decision

There are nine issues on which decisions are needed in the area of East-West trade. The broadest is:

1. Should expansion of U.S. trade with the Soviet Union and the other countries of Eastern Europe be actively and publicly endorsed by the Administration?

Three are legislative:

2. Should we favor extension of the Export Control Act in its present form or propose or support amendments that would provide a suitable legislative base for a less restrictive export control policy?

3. Should we seek authority to extend most-favored-nation tariff treatment to Eastern European countries, including the Soviet Union?

4. Should we seek removal of the barriers to Export-Import Bank financing for Eastern European countries, including the Soviet Union?/2/

Two relate to the administration of our own export controls:

5. Should the U.S. continue to maintain a control list more restrictive than the international COCOM list?

6. Should the Eastern European countries, including the Soviet Union, continue to be treated differentially in the application of our export controls?

Three relate to specific rules:/3/

7. Should we license a U.S. firm to design and install a $26 million system for oil extraction and gathering for the USSR?

8. Should we license U.S. firms to design and install a $60 million engine foundry to expand a Moscow truck factory?

9. Should we change our 50-50 shipping requirement to enable U.S. firms to respond affirmatively to a Soviet request to buy U.S. corn?/4/

The decisions taken on these matters and on other issues in East-West trade policy should be seen as part of the total fabric of Western relationships with the Soviet Union and the other countries of Eastern Europe. Those relationships involve:

--Maintenance of Western deterrent military strength relative to that of the Communist countries;

--The President's desire to move from the period of confrontation to a period of negotiation vis-a-vis the Soviet Union and the other Eastern European countries.

While our export control policy has rested on a distinction between strategic and non-strategic goods, we must be aware of the fact that this distinction is difficult to define precisely and concretely. It is meaningful primarily from a short-run point of view. In the longer run, since economic resources can be interchanged over a broad range of uses, the difference between so-called strategic and non-strategic goods fades.

Decisions on U.S. policy hinge on four major questions of fact:

1. What effect an export control policy has on Communist economic and military capabilities.

In order to answer this question, we must assess what would happen in the absence of our export control policy. This is an extremely difficult problem under the best of circumstances, and even more difficult given the ambiguities of data on Communist economies. Moreover, very few detailed studies of the effects of controls have been conducted despite the long period of time over which these controls have been applied.

We can be reasonably confident that export controls, particularly as they apply to the transfer of technology critical to the development of advanced weapons systems, have imposed a heavy cost on the Communist countries in special areas such as computer facilities. We can also be reasonably confident that the strictest and broadest export controls could not be expected to impose more than a moderate effect on the Communist economies as a whole, since those economies do not depend heavily on trade with the non-Communist world. Trade controls have had an adverse impact on the quality of economic growth in Communist countries, however, and the cost of the differential controls unilaterally imposed by the United States has added marginally to this impact. It is difficult to be any more precise than these broad generalizations on the basis of studies so far made.

2. What effect the current export control policy has on relations with our allies.

The export control policies of the United States and fourteen other allied nations are coordinated through COCOM. Our allies have consistently attached less significance to export controls and more importance to expanded commercial relations with Communist countries than we have. This divergence in views stems in large measure from a realization by both parties that the United States must bear the main responsibility for offsetting such improvements in the Communist strategic posture as may result from expanded commercial relations. As a result of frequent reviews in COCOM, the international embargo list is now somewhat less than half what it was fifteen years ago. The separate U.S. list, although also considerably reduced from its former size, substantially exceeds the COCOM list.

The divergence of views between the United States and its COCOM allies on trade controls has generated some friction between U.S. and allied governments, on the one hand, and business firms, on the other hand. It is not clear, however, that friction would be diminished if U.S. and allied firms competed more actively for trade with Communist countries in a regime of generally more relaxed controls although the inter-allied frictions related specifically to the COCOM list would of course diminish.

Trade by the COCOM countries with Eastern Europe, including the Soviet Union, was valued in 1967 at $3.9 billion of exports to the East and $4.2 billion of imports from the East. The United States share of this trade was roughly $200 million each way.

3. What prospects there are for expanded trade if U.S. trade restrictions were relaxed.

A relaxation of the restrictions can be expected to have only a moderate effect on expanding trade. This is largely because most Eastern European countries will insist on expanding their sales to us pari passu with expanding their purchases from U.S., and they have very few products which we are likely to buy in large quantity. Trade estimates prepared for this study indicate that, under various optimal conditions including significant relaxation of export controls, extension of MFN, competitive credit arrangements and substantial multilateralization of Eastern European trade with the Free World, but excluding elimination of the 50-50 shipping requirement on grain sales, U.S. exports to European Communist countries might expand from the level of about $200 million in 1967 to around $500-$700 million in 1975. The expanded exports would come in part from an overall increase in trade and in part from trade now conducted with Eastern Europe by our allies. Such anticipated increase in trade would be much more dependent upon removal of the present MFN and credit restrictions than upon further relaxation of export controls.

4. What effect our trade policy has on East-West political relations.

There are no simple cause-and-effect relations between the level of our trade with Communist countries and the state of our political relations with them. Under some conditions, expanded U.S. trade could strengthen the power of existing ruling groups; under other conditions, it might gradually weaken that power. Expanded U.S. trade with the countries of Eastern Europe but not with the USSR could encourage their desires for greater independence, but, as a result, could increase U.S.-Soviet tensions and even induce increased Soviet efforts to control the others. The probable effects of relaxed trade restrictions can be assessed only with careful regard to the specific political situation of the time within the relevant Communist countries.

ALTERNATIVE POLICY APPROACHES

The following are five policy approaches and related patterns of action with respect to trade with the European Communist countries.

There would be no modification in our approach in COCOM; export controls and licensing policies would be continued with progressive relaxation as at present; Export Control Act would be renewed without change; there would be no initiative on tariff legislation or removal of Export-Import Bank Act financing limitations; and encouragement of trade with Eastern Europe would remain, but at low key.

Would keep all liberalization options open until the direction of Soviet policy and of Vietnam peace talks are clearer; would avoid raising additional opposition from those parts of Congress and the public that are opposed to East-West trade; would tend to maintain present level of COCOM control over strategic goods.

Within the short-term context, the only flexibility in trade policy available to the President derives from discretionary implementation of export controls; the current level of friction with other COCOM countries would remain; some potential expansion in exports would be denied U.S. business.

We would develop standby proposals for reducing COCOM lists and procedural frictions; export controls would be reduced as rapidly as feasible under existing ground rules with active steps to encourage East-West trade and with modification of the Export Control Act to provide at least a sense of Congress favoring expansion of non-strategic exports to the USSR and Eastern Europe; no initiative on tariff legislation or Export-Import Bank Act except to support desirable Congressional initiatives.

Administration would be in a position to take advantage of possible favorable developments in relations with the USSR or individual Eastern European countries; would be prepared to move toward a scaling down of COCOM effort if desirable. Such steps by the Administration, including amendment of the Export Control Act, would give guidance to American exporters now unsure of future U.S. policy.

The President would forego the possibility of using accelerated reduction of our controls and active encouragement of non-strategic trade as instruments for political bargaining with the Soviet Union as per Package 5. In addition, the timing of further initiatives towards Eastern Europe and the Soviet Union on tariffs and export financing would be left in the hands of Congress.

We would develop standby proposals for reducing COCOM lists and procedural friction; reduce the level of unilateral U.S. export controls as rapidly as feasible to those goods and technical data of strategic importance likely to be susceptible of effective U.S. unilateral control; modify Export Control Act to encourage permitted East-West trade, to remove the "economic" impact criterion for denial from the Act; undertake initiative on tariff negotiating legislation and Export-Import Bank Act as soon as Congressional acceptance appears likely and in interim support desirable Congressional initiatives in these fields.

Administration would be in a position to take greater (than in Package 2) advantage of possible favorable developments in relations with the Soviet Union or individual Eastern European countries; would be prepared to move toward a scaling down of COCOM effort if desirable. Amendment of the Export Control Act would give guidance to American exporters and support promotion efforts. By eliminating "economic" criterion, amendment would remove point of criticism of the export control program. Prior decision as described on tariff and Export-Import Bank legislation would enable Administration to move quickly to take advantage of favorable Congressional attitudes.

The President would forego a broader (than in Package 2) set of instruments for political bargaining per Package 5. The further reduction of U.S. controls would elicit stronger reaction from opponents of relaxation. If the sought legislation changes were rebuffed, it would be a major setback to improvement in trade relations and trade levels and subsequent initiatives by the President might lose credibility in the eyes of the Communist countries.

We would agree to a maximum defensible reduction in COCOM controls towards the USSR and Eastern Europe; we would reduce the export control list as closely as possible to the COCOM list, support further amendment of the Export Control Act to incorporate a narrow definition of "strategic" and authorize a strong promotional effort on permitted trade, and take a strong stand to this effect; press now for broad tariff negotiation authority and the removal of the ban in the Export-Import Bank Act on financing during the Vietnam war.

The President's negotiating position would be strengthened by the new authority. We would be in the best possible position to increase exports and to reduce friction with our allies over export controls, though the actual commercial effect would be uncertain. We would gain support of those segments of Congress and the public favoring the expansion of East-West trade relations.

The President would relinquish virtually all the leverage for political bargaining which comes from relaxation and requesting new trade authority. This course could lead to charges of Western weakness. There would be an inevitable strategic cost difficult to measure, but particularly detrimental if East-West relations deteriorated. Moving now in present Congressional climate to obtain tariff and Export-Import Bank credit authority may jeopardize the entire trade program. Seeking such extensive modification of the Export Control Act now could cause a Congressional reaction tightening rather than relaxing.

Any of the liberalizing packages discussed above might be carried out in the context of a quid pro quo negotiating approach to the USSR or other East European countries. There are three separate issues: 1) extension of most-favored-nation tariff treatment to the USSR or other Eastern European countries; 2) elimination of the present restrictions on Export-Import Bank financing to these countries; 3) reduction in U.S. export controls. There are also several kinds of bargaining concepts: 1) seeking specific trade concession counterparts; 2) settling specific problems in our relations with a particular country outside the trade field (e.g., settlement of financial claims); 3) as part of a larger understanding on non-trade issues. If the negotiating course were followed, a fallback policy should be prepared for the contingency that negotiations were to prove fruitless.

This approach provides an opportunity to implement an era of negotiation in an area not heavily affected by critical strategic problems. In the case of most-favored-nation tariff treatment, the negotiation of equivalent benefits would be involved, although differences in trading systems create difficulties. In case of export controls, to the extent that reduction reaches into the strategic "gray area," return concessions would help offset the strategic cost to the United States of the relaxation. Moreover, this approach might assist in obtaining Congressional and public support for legislative changes. Relaxation in export control and licensing of many consumer goods might not be considered a valuable concession by the Soviet Union or Eastern Europe, but an effort to negotiate on this basis is the only effective way to find out.

The principal difficulty of this approach is that refusal by the USSR or another Eastern European country to grant the necessary concessions might place the U.S. in an awkward position to take unilateral action if that seemed desirable. (This problem does not arise on the issue on MFN treatment, where we would always insist on reciprocity.) To the extent that export control relaxation relates to goods and technology that the USSR and Eastern European countries do not want or that are available to them from other sources at the same or lower cost, these countries would regard such relaxation as being solely of benefit to U.S. exporters. The degree of U. S. success could be affected by lack of cooperation by our allies, who could (if they do not already) match or exceed our liberalized policies, hence diluting their economic value to the Eastern Europeans and presumably reducing their willingness to make concessions in return.

THREE PENDING EXPORT SALES

Three pending export opportunities are of such magnitude and hence political sensitivity as to merit NSC attention. They illustrate problems likely to be involved in moving toward increased trade with the USSR. And they are important because the actions taken on them may be construed by business firms, the public and the Congress as signals of the Administration's policy on East-West trade.

Each case would, in principle, be approvable under the current interpretation of existing policy guidelines. However, the U.S. has not heretofore approved transactions of the nature and magnitude of the oil field and truck factory cases. The corn sale transaction cannot be completed as a practical matter without waiving or repealing an executive requirement for 50 percent shipment in American bottoms.

The USSR is negotiating for a U.S. firm to design and install a system for oil extraction and gathering that would give the Soviets for the first time a modern, semi-automated oil field. Almost all the project's $26 million cost would go to either U.S. domestic firms or their foreign subsidiaries. U.S. government agencies have concluded that this transaction would not aid the Soviets militarily or economically in a way detrimental to our interests. Approval of export licenses would, however, constitute the first U.S. government decision to provide the USSR with significant equipment and technology in the petroleum field.

The USSR is negotiating with U.S. firms to design and install a $60 million engine foundry and to supply $4.5 million of gear-cutting machines to expand and modernize the ZIL truck factory. This is one of the two Soviet plants producing civilian and military heavy duty motor vehicles. (Although U.S. domestic firms may obtain the entire $60 million of business for this foundry, they could end up obtaining only $2.5 million for technology with the equipment sales going to Western Europe because of financing.) U.S. Government agencies have concluded that neither the foundry nor the gear cutters are specially designed nor likely to be used principally, in peacetime, for military purposes, although a significant share of the foundry's output (probably 25-35 percent) would go to the military.

The Soviets can purchase both elsewhere with some delay and added costs. This could be our largest single transaction with any East European country since the late 1940's except the 1963 wheat deal with the USSR. U.S. export participation in the Fiat small passenger car deal with the Soviets aroused great controversy even though less potentially controversial than this one, which involves a Soviet plant producing trucks for military or civilian use. Because of this sensitivity and the size of the sale, consultation with appropriate Congressional leaders may be politically advisable, following the precedent established on the Fiat and wheat deals.

The USSR wants to buy about $15 million of corn at world market prices with possible continuing purchases in the future. Substantively, the export of bulk corn offers no export control problems. However, present shipping restrictions require at least 50 percent of such grain to be carried on U.S. ships--compliance with which would price us out of the deal both economically and politically.

The present regulations were adopted at the time of the Soviet wheat deal at the urging of the U.S. maritime unions and ship owners. The completion of the proposed transaction would require either a waiver or repeal of the current 50-50 shipping regulations. Commercial advantages must be weighed against the prospect that the maritime unions may still oppose waiver or repeal and may, in any event, refuse to load grain for the USSR. Approaches to the Longshore and Maritime Unions would involve a major Administration effort with no guarantee of success, especially in the light of recent developments in Czechoslovakia.

Washington, May 14, 1969.

SUBJECT
U.S. Trade Policy Toward Communist Countries (NSSM 35)

The paper on East-West trade requested in NSSM 35 has been completed (Tab C)./2/ The interested Departments and Agencies have been asked to make their recommendations in memoranda to the President. An NSC meeting on the general subject of East-West trade may be held at a later stage, but will be held before the May 20-21 date for Commerce/State testimony on the renewal of the Export Control Act before the House Banking and Currency Committee only if the memoranda response procedure proves unsatisfactory. The major issues are identified in a summary of the basic paper (Tab B)./3/

In the Review Group discussions, Defense (Warren Nutter) has been most reserved about liberalization of trade with the USSR and Eastern Europe. Nutter is probably personally opposed to moving at all, but his line has been that we should not take any step (even public indication of a more favorable attitude, administrative relaxations under existing law, or requests for Presidential authority to negotiate) without trying to get something in return from the Communist countries involved. No one (including the Soviets) would disagree that the granting of better tariff treatment (applying the MFN rates instead of the higher 1930 tariff rates) calls for trade and related concessions on the other side. But Nutter does not draw any distinction between this kind of mutual exchange of benefits and the relaxation of export controls or credit limitations which we impose on our own trade (and the Western Europeans do not). In the latter case we think it is unrealistic to talk about asking for reciprocity except possibly in the broad, atmospheric political context.

The President of the Export-Import Bank, Henry Kearns, feels strongly that no attempt should be made to remove the restrictions in the Export-Import Bank Act that bar its participation in financing exports to the Soviet Union and Eastern Europe because he fears that such an attempt might lead to even more serious limitations on the operations of the Export-Import Bank. We believe that despite Mr. Kearns' concern, it would be logical for the Export-Import Bank to engage in normal export financing as a part of a decision to adopt a policy of encouraging East-West trade.

In the attached memorandum to the President,/4/ we have restated our view of the major premises and have recommended a policy of actively supporting increased East-West trade for both political and economic reasons. We also recommend that the President seek necessary legislative authority to liberalize export controls, negotiate for extension of most-favored-nation tariff treatment, and permit export financing. With these tools, the President will be able to use trade more effectively as an element in our relations with the Soviet Union and each of the Eastern European countries. We recommend approval of the three illustrative export cases.

That you sign the attached memorandum to the President (Tab A).

Washington, May 14, 1969.

SUBJECT
U.S. Trade Policy Toward Communist Countries--NSSM 35

My recommendations to you on the issues set forth in this study are based on four major premises:

We share the CIA judgment/2/ that

--the cost imposed on Communist military capabilities by the Western strategic trade controls has been some lag in the efficiency of design and production technology in certain areas involving advanced weapons systems.

--while there has been no measurable impact upon the economic growth of the Soviet Union and Eastern Europe, the quality of that growth has been adversely affected in some sectors.

--the cost of the export controls unilaterally imposed by the United States has added marginally, in the overall, to these impacts.

Our allies attach more importance to commercial prospects in Communist countries than does the United States. This fact has put us very much on the defensive in COCOM where we attempt to hold the line on multilateral strategic controls. Although the current COCOM list review can probably be brought to a moderately satisfactory conclusion without a major crisis, friction over COCOM and the extraterritorial impact of our more extensive controls will continue unless the direction of U.S. policy changes.

In the case of the Soviet Union, good trade relations can be associated with favorable political relations, but increased trade by itself is not a matter that would rank high in importance in influencing basic political attitudes on either side. Increased trade and the removal of obstacles thereto would, however, have some beneficial effect on U.S. bilateral relations with the USSR and individual Eastern European countries. Moreover, in varying degrees, all of these countries actively want closer economic and trade relations with Western Europe and the United States, and modifications in our trade policies towards them could carry a significance beyond the purely commercial.

We accept the estimates that direct trade gains will be modest, but it is hard to make firm predictions in this field. The Western Europeans are certainly trading with the East at a much higher level.

In foreign policy terms, U.S. trade policy toward Communist countries is properly a function of the broader U.S, relationship with each of these countries. Our aim is to move toward improvement in these broader relationships as rapidly and effectively as circumstances permit. Hence my recommendations on the issues are as follows:

I favor active promotion of such trade because it will help to convey to the Soviet Union and the Eastern European countries the direction in which you wish to move in East-West relations. A positive lead by the Administration in this matter is essential because otherwise American business will tend to hold back. We believe this initiative will be welcomed and supported in trade circles and should help to develop support by such interests for the legislative proposals that we recommend below. It will also help our balance of payments.

Legislative proposals should constitute a logical set of changes that will give you the basic authority and maximum flexibility to develop constructive relations in the trade area including direct negotiations as appropriate with the Soviet Union and the Eastern European countries. This can be done either by a Presidential submission or by supporting bills already before the Congress which cover all the necessary points.

The present Act should be amended a) to include a clear statement that we favor trade in peaceful goods, b) to eliminate the ambiguous language that seems to require controls over goods of purely economic (as opposed to military) significance, and c) to include a narrow definition of what constitutes strategic trade so that we can move promptly towards a much shorter control list.

An essential element in any East-West trade expansion program is flexible authority for you to enter into negotiations for the extension of most-favored-nation tariff treatment in bilateral commercial agreements with individual countries (in addition to Poland and Yugoslavia which already have MFN treatment) in return for benefits to the United States. Whether or not we are successful in obtaining the authority, the fact that you would actively seek it would give credibility to our diplomatic posture toward the USSR and the Eastern European countries.

Presidential discretionary authority to permit Export-Import Bank financing of East-West trade on a country-by-country basis should be restored removing the Fino amendment/3/ that has the effect of an absolute ban for the duration of the Viet-Nam war. This is an important negotiating tool.

The U.S. control list should be reduced to the level of the COCOM list except for those cases where the United States clearly can maintain an effective unilateral control.

The practice of differentiating in the treatment of the Communist countries should be continued as a logical part of using trade as an element in our relations with individual countries.

These are all cases whose approval would be consistent with the approach I have recommended and would carry a useful message as to the direction of Administration policy. In the case of the truck engine foundry for the USSR it would be advisable for Commerce to carry out appropriate Congressional consultation before approval. In the case of lifting the 50-50 shipping requirement, there should be consultation not only with the Congress but also with the unions.

With respect to the negotiating approach described in Package 5, we would not propose to offer better tariff treatment to the Communist countries except in exchange for trade and other related benefits of importance to the United States. This concept of negotiation, we believe, is accepted by Communist countries. Beyond such a negotiation, however, it is unrealistic to think in terms of obtaining other specific benefits except possibly in the broad atmospheric context.

The foregoing recommendations constitute an endorsement of Package 4, except that we would, for the present, defer a decision on further initiatives in COCOM. The principal difference between Package 4 and Package 3 relates to the timing of legislative changes. Package 3 assumes that the climate for achieving Congressional action is not present at this time. In making our recommendation for Package 4, we assume that your endorsement of this approach and your support for obtaining these negotiating tools will have a positive effect on the Congressional climate. We believe that Package 4 more clearly reflects your desire to see the beginning of an "era of negotiation" and that flexible negotiating authority in your hands will enhance the chances of developing a broad administration policy toward relations with the Soviet Union and Eastern Europe. A strong Administration position supporting this approach to East-West trade would provide us with potential diplomatic advantages.

ELR

Washington, May 14, 1969.

In general, the summary paper, "Trade Policy Toward Communist Countries" (NSSM: 35)/2/ is a fair presentation. It also becomes rather obvious that there is lacking a comprehensive analysis of both the effect of our export control policies relative to Communist countries and the impact which can be expected should we change our policy to either a softer or harder line.

In addition to the political questions, there just are not expected to be any big trade benefits with cash or early repayments in the foreseeable future, for Eastern Bloc countries do not have the foreign exchange resources. Thus, it would not appear too profitable to make a big push in this direction, especially when economic return would be modest and political expense could be sizable.

The underlying question requiring a decision is: Would sufficient benefits result from liberalizing our trade policies toward the Communist countries of eastern Europe to justify running the domestic political risks of seeking necessary authority?

Since liberalizing trade with Communist countries is construed by many in Congress and the public generally as "trading with the enemy" there are political dangers. It is a volatile issue; therefore, approach and timing become all important. A proper environment must be established before requesting legislation.

You have already clearly taken the stance that we are entering "an era of negotiation"; thus the use of trade as an instrument of negotiation is both logical and desirable. It seems to me that the major element which would gain you acceptance would be to make it clear that you are seeking some reciprocity. Further, that you distinguish between Communist nations.

The most desirable position for you would be to have the various instruments necessary to bargain effectively available--meaning that there should be an extension of your present authority to regulate exports, have the ability to permit Eximbank to guarantee credits, and the authority to offer tariff concessions. On this basis you should:

--Take a public stance in favor of increased trade of peaceful goods provided that there is reciprocity in some form.

--Support the renewal of the Export Control Act of 1949 without major change, and certainly without crippling restrictions.

--Take administrative action to reduce the scope of our controls (COCOM lists) to the internationally agreed level. (In addition continue to try to control strategically significant goods and techniques as it is within our unilateral power to block the export to Communist countries.) Our licensing procedures should be speeded up and simplified.

--Request authority to be able to extend tariff concessions to Communist countries in consideration of equivalent trade benefits from them.

--An effective tool would be the ability to extend Eximbank guarantees on export credits to Communist countries. However, since the prohibition on such guarantees was only recently enacted, and is tied closely with a prohibition on guarantees to countries trading with North Vietnam, it would be inappropriate to request such repeal at this time.

Relative to the three specific pending cases mentioned in the summary paper, it is my understanding that based upon the current interpretation of the regulations, approval would not contravene the terms of the Act. Since these cases are so large and significant, however, caution is suggested. In my view all three could have serious political repercussions. Let me make clear that in my opinion there is insufficient data, at least on the oil and truck factory cases, to give you a recommendation with a very high degree of confidence.

Based upon the experience of past Administrations, I would expect that there is a very real possibility the oil and truck factory cases will receive adverse acceptance by the more conservative and right wing elements in the country. In both cases there appears to be directly or indirectly strategic implications. Based upon the data available the extent is not known. With particular reference to the truck factory, we were specifically informed that it would have "significant" military applications. (The sense of the Congress was expressed last year when it amended the Eximbank Act to include a prohibition against guaranteeing, insuring or extending credit, or participating in any extension of credit, for exports to Communist countries--e.g. the Fiat deal.)

Your decisions on these three cases will be interpreted as a signal both at home and abroad as to your attitude toward trade with Communist countries. With the Czechoslovakian incident still in peoples' minds and the recognition that the Soviets are heavily supplying North Vietnam, any favorable decision would require extensive justification by the Administration as well as preparing the Congress and the public for its acceptance. With these qualifications based upon the data available, I would recommend deferring a final decision at this time. Certainly more data is needed as well as a precise assessment of Congressional and public acceptance for these actions.

Regarding the corn sales, it is again a political risk with the public and Congress generally but more specifically with the unions and their insistence on 50-50 shipments in American ships. It is my opinion that the unions (and other large sectors in our country), particularly in view of Vietnam, would not readily accept a favorable decision on this transaction. It is not to say that neither the union nor public acceptance cannot be gained but it certainly will take far more direct and specific effort than has been accomplished to date.

David M. Kennedy/3/

Washington, May 15, 1969.

SUBJECT
US Trade Policy Toward Communist Countries

I have been asked to give you my recommendations on nine policy issues listed in the NSSM 35 Summary Paper, 12 May 1969,/2/ on the above subject. Before doing so, I think it is essential to give you my recommendations on the general line of trade policy I favor toward Communist countries.

I would continue our present policy while undertaking preliminary negotiations with individual Communist countries to explore whether there are reasonable prospects for liberalizing trade on the basis of quid pro quo concessions on both sides./3/ In other words, I favor a combination of packages 1 and 5 of the Summary Paper. To achieve this end, we should first discover what areas of negotiation with the Communist countries are likely to bear fruit and then seek additional Congressional authority as needed. I believe it is neither wise nor necessary to seek broad changes in current laws affecting trade with these countries until we are reasonably sure that specific negotiations on a reciprocal basis can be successful. Congress is likely to take a similar view and be more disposed to grant liberalization authority to you if there is evidence of some reciprocal gain to the US from a specific area of negotiation.

The limited amount of study considered for NSSM 35 does not provide evidence for sound decisions on many of the issues on which I have been asked to give my views. However, the issues are not all equally urgent, and action on many can be deferred until more complete analyses are in hand. The one that must be dealt with at this time is the future of the Export Control Act, which expires on 30 June 1969. With respect to this and the other issues, my views are as follows:

a. Should expansion of US trade with the Soviet Union and the other countries of Eastern Europe be actively and publicly endorsed by the Administration?

Comment: Recognizing the lack of a thorough-going analysis, I would refrain from active and public endorsement of new policies intended to expand trade with the Soviet Union and the other countries of Eastern Europe.

With or without a restatement of policy, it seems unlikely that US exports to Eastern Europe will grow at rates substantially above those applicable to US exports as a whole. Today the exports to Eastern Europe approximate 1 percent of total US exports. Assuming US exports reach $55 billion to $60 billion by 1975 and exports to European Communist countries reach the $500 million to $700 million projected in the Summary Paper, we are still dealing with an approximate 1 percent figure.

Since the economic effects of a revised policy are thus not likely to be significant, the Administration's active and public endorsement of a more liberal policy should be determined by psychological and political considerations. In the short run, a new policy intended to expand trade would probably afford less leverage with the USSR than with the other East European countries, but in the absence of a detailed study of each situation it is difficult to determine whether the latter leverage would be significant or in the right direction. With respect to our allies, reactions would be mixed, depending, among other things, on the extent to which they regarded our policies as tending to preempt their export markets.

Endorsement of major changes in policy at this time could create several disabilities for the Administration. These would involve loss of flexibility both to deal pragmatically with the Congress while acceptable legislation is being evolved and to hold out the prospect of expanded trade for whatever future negotiating advantage it might have.

b. Should we favor extension of the Export Control Act in its present form or propose or support amendments that would provide a suitable legislative base for a less restrictive Export Control Act?

Comment: I support extension of the Act in its present form. Under its provisions you have considerable flexibility to exercise judgment in the pursuit of trade policies that you perceive to be in the national interest. It has been possible under the present Act to generate an impressive list of commodities that can be freely exported to the Soviet Union and Eastern Europe. Only 2 percent by value of export license applications are currently rejected. Moreover, this list may be expanded or contracted without any change in legislation. Under these circumstances, arguments that amendments to the present Act are required to provide a suitable legislative base for expanded trade do not appear to be well-founded. If subsequent analysis, including assessment of probable Congressional reaction, produces adequate evidence in favor of amending the Act, this could be done next year.

c. Should we seek authority to extend most-favored-nation tariff treatment to Eastern European countries, including the Soviet Union?

Comment: I recommend against seeking this authority. The trade-creating effects of MFN would be small, even insignificant in the US perspective. As I have pointed out above, it is my general recommendation that we should first engage in preliminary negotiations with individual Communist countries to discover whether there are reasonable grounds for expecting some reciprocal gains to the US should such authority be obtained in each particular case. Only when such reciprocal gain has been identified should this authority be sought. One of the benefits of negotiating in advance would be to make it easier to obtain favorable Congressional response to a request for additional authority.

d. Should we seek removal of the barriers to Export-Import Bank financing for Eastern European countries, including the Soviet Union?

Comment: I recommend against seeking removal of the barriers to the Ex-Im Bank financing for these countries. In addition to the reasons already given for not seeking general authority to extend most-favored-nation treatment, there are special problems involved in removing restrictions on Ex-Im Bank financing. We have a firmly established policy, enacted into various laws, of prohibiting lending or guaranteeing of loans by the US Government to countries with a record of (a) default of debts, (b) confiscation of property without due compensation, and (c) provision of supplies to countries engaged in hostilities with us. Here again I believe we should not seek to alter this policy until we have some concrete grounds for doing so.

e. Should the United States continue to maintain a control list more restrictive than the international COCOM list?

Comment: I recommend we maintain control over commodities whose export, by reasonable interpretation, would endanger the security of the United States or be contrary to other vital interests. To the extent possible we should coordinate our policies with our COCOM allies, although it is becoming increasingly difficult to persuade them of the validity of our views, largely because our interests in the international arena are more extensive than theirs. In these circumstances, I think we will find it prudent to remain relatively restrictive. Of course, maintaining a differential should not in itself be considered an objective of our policy. If it is found that our national interests would be best served by bringing US controls closer to those of COCOM, we should do so.

f. Should the Eastern European countries, including the Soviet Union, continue to be treated differentially in the application of our export controls?

Comment: I recommend we continue the concept of differentially applied export controls. The notion of differential treatment stems from a recognition of the economic/political differences between countries in the communist sphere. If the notion of differential treatment is abandoned, the opportunity is lost of exploiting the developments in one country vis-a-vis those in another; the mode of response to each nation is reduced to that required for the worst; and, the possibility of using trade as a flexible instrument of foreign policy is forfeited.

9. Should we license a US firm to design and install a $26 million system for oil extraction and gathering for the USSR?

Comment: I recommend that, before we approve this transaction, we explore the possibility of using it as a means of gaining compensating benefits for the US from the USSR. While the type of item involved meets current criteria for non-strategic goods, the magnitude of this single transaction introduces an element not sufficiently taken into account in our current guidelines for export controls.

h. Engine Foundry and Gear-Cutting Machines for Soviet Truck Factory.

Comment: As in the oil extraction case, the $60 million magnitude of this sale places it in a special category. Before being approved, it should be reviewed very carefully for any advantage that can be extracted for the US. CIA has estimated that at least 1/3 of these trucks will be military. My personal belief having studied the back-up support for Soviet army divisions would lead me to believe that this estimate is understated.

i. Should we change our 50-50 shipping requirement to enable US firms to respond affirmatively to a Soviet request to buy US corn?

Comment: No strategic question is at issue. There is nothing to prevent this transaction except the 50-50 shipping requirement. There is also no reason to waive this requirement in order to consummate this sale, particularly since it is a one-shot affair sought by the USSR in order to tide them over a temporary difficulty. The 50-50 requirement, therefore, should be addressed on its merits. Parenthetically, it may not be wise to engage the labor unions on this matter when they have generally supported our foreign policy.

My views on the above subjects are shared by the Chairman, Joint Chiefs of Staff.

Melvin R. Laird

Washington, May 19, 1969.

SUBJECT
Arguments for Presidential MFN Authority for Eastern Europe

In setting forth the rationale for Presidential authority to extend MFN treatment to those Eastern European countries which do not have it (only Poland and Yugoslavia do), one must begin with the premise that it is desirable to seek improvement of relations between these countries and the United States. If merely standing still or retrogressing is the preferred course of action, then MFN becomes irrelevant. I take it, however, that our present policy is to try to take advantage of such opportunities as exist to move towards better if not completely normal relations with Eastern Europe.

On this assumption, arguments for MFN authority for the President may be made on two levels:

(a) On the psychological-political level, it is a fact, rightly or wrongly, that US failure to offer MFN has acquired considerable symbolic significance in the minds of Eastern European leaders. They regard it as a significant area in which the United States can evidence the reality of its desire to improve relations with them, even though in their more realistic moments they recognize that the immediate economic benefits will be small. MFN treatment would thus have an effect considerably beyond its intrinsic importance, not only removing one of the standard excuses which these regimes advance for not being able to improve relations with us, but providing real evidence of movement by the United States away from the political aloofness, if not downright hostility, which characterized political relations during the cold war period. If one asks why the United States should take the initiative in the absence of any real gesture of good will from the other side (Romania had already made them),/2/ the answer is that we are a great power, hopefully capable of conducting an imaginative and flexible diplomacy.

(b) On the economic level, the principal argument is that failure to grant most-favored-nation treatment works to the disadvantage of American exports to Eastern Europe. While one should have no illusions about the potential for such exports (Eastern Europe will always remain a marginal market), countries such as the United States which face a secular problem in balancing their foreign trade accounts cannot afford to scorn even limited export possibilities. Patterns of trade are now being established between Eastern Europe and the West which are working to the detriment of American interests as the countries of Western Europe move into Eastern European markets on a preferential basis. American exports suffer not only from the higher tariffs raised against them in the absence of MFN treatment, but by the negative effects in directing imports which its absence has on economic policy-makers on Eastern Europe. We are likely to wake up one day and find the established patterns of trade so firmly fixed that we will have lost any possibility of significant penetration of the Eastern European market in the face of Western European competition.

One final point--in this context it is better to have tried and lost than not to have tried at all. The US executive will be in a better diplomatic posture if the President requests MFN authority and fails to get it from Congress than if the effort is not made. In the latter case, invidious comparisons with the previous Administration will be inevitable.

There are definite limits to what one might expect to be able to trade-off with specific countries for most-favored-nation treatment. The most tangible effects are likely to be in the general areas noted above. A country-by-country breakdown follows:

If the President had authority to grant MFN to Bulgaria, we might be in a position to link this position persuasively with such matters as cultural exchanges and VOA jamming. Another possibility would be to speed up the negotiation of a consular convention which we want.

In our proposed claims settlement package (on which we will now begin consultations on the Hill), an essential ingredient will be the offer to grant MFN treatment to Czechoslovakia as a quid pro quo for a more generous settlement of US claims. After the initial payment, execution of further payments by the Czechs would be contingent on our extension of MFN.

Willingness to extend MFN treatment to Hungary could have the effect of breaking the existing log jam in our bilateral relations. It would increase Hungarian willingness to be forthcoming on a range of subjects, including settlement of claims, consular convention, and removal of administrative disabilities imposed on the US Embassy in Budapest.

If we were actually in a position to deliver MFN, which the Romanians now seem to doubt, it would undoubtedly have a positive effect in such matters as reuniting divided families, achievement of a consular convention, and perhaps additional scope for our cultural activities.

While the MFN issue plays a considerably lesser role in our over-all relations with the Soviet Union than with the smaller Eastern European countries, it would undoubtedly have psychological and political effects along the general lines indicated above. Moreover, it might make the Soviets somewhat more forthcoming in their willingness to accept American imports which are competitive with those from other Western sources. MFN might also serve as effective bait to the Soviets as part of an acceptable settlement of the lend-lease debt.

Washington, undated.

SUBJECT
East-West Trade (excluding the Asian Communist countries and Cuba)

The NSC meeting on East-West Trade has been rescheduled for May 21./2/ An immediate decision is needed on one issue: our Export Control Act, which establishes the basis for regulating exports to Communist countries, expires on June 30. Commerce, State and Defense will testify early next week on a Muskie-Mondale bill to liberalize the present act. They need a decision on whether you wish to support a simple extension of the present Act, support the liberalizing Muskie bill, or submit an Administration liberalizing bill.

Your decision on this issue, however, can best be made in the context of your decisions on our overall approach to East-West trade. The summary paper discusses the issues which underlie all U.S. policy in this area and offers five packages:/3/

1. Continuation of the present fairly restrictive policy.

2. Adoption of new liberalizing attitudes but without major legislative changes.

3. Adoption of more liberalized attitudes plus support for Congressional initiatives toward liberalizing legislation and Administration initiatives as soon as Congressional acceptance becomes likely.

4. An immediate liberalizing initiative, including legislative proposals.

5. Linking of any of the liberalization approaches to specific concessions in return from Communist countries.

The specific issues, besides the Export Control Act, which could be part of any package and on which you could make decisions now, are listed on the first page of the summary paper and in the issues for decision paper.

When the NSC meeting on East-West trade scheduled for May 14 was cancelled, all agencies were asked to submit their recommendations on each issue for decision in writing./4/ These are summarized in the issues for decision paper, which also includes my recommendations, and the replies themselves are at the tab "Agency Views"./5/ The basic options paper is at the last tab./6/

ISSUES FOR DECISION AND SUMMARY OF AGENCY VIEWS ON
POSSIBLE COURSES OF ACTION

All agencies agree that our present East-West trade policy hurts the Communist economies marginally, if at all; is a source of irritation between us and our allies and between us and our business community; and that increased trade could be of some help in improving East-West political relations.

But there are three sharply different approaches to liberalizing our present policy:

1. To seek political concessions before we take any forward steps, including requests for Congressional authority to liberalize (Defense view);

2. To request Congressional authority prior to negotiations but then liberalize in the expectation that it will lead to improvement in the political climate (State view);

3. To seek authority but then liberalize in return for purely economic concessions (Commerce view).

Defense would prefer to undertake prior negotiations with the Communist countries to determine in advance what political concessions we can get in return for U.S. trade concessions.

State advocates an immediate major legislative initiative to liberalize the Export Control Act, seek authority for the President to extend MFN treatment to the Communist community and remove the proscriptions on Export-Import Bank lending. They see this approach as most clearly reflecting your desire to move into an "era of negotiations" and to enhance your bargaining power with the USSR. They assume that your advocacy will help generate the needed public support.

Commerce is firmly opposed to any major legislative initiative at this time, fearing Congressional rebuffs and hence a setback to the improvement in trade relations which they foresee under existing law.

The other agencies are in between State and Commerce, advocating initiatives on some issues but not on others, but generally leaning more toward Commerce's caution.

I recommend that the Administration take no major legislative initiatives at this time but go along with Congressional liberalizing initiatives. My judgment is based largely on foreign policy considerations, however, and domestic political ramifications must be a major element in your decision.

On the specific issues, the agencies' views and my own recommendations are as follows. My recommendations are confined to the foreign policy aspects of the decisions.

The Export Control Act requires the Administration to restrict exports to Communist countries of goods or technical data which would enhance their military or economic potential. Under this authority, exports can only be made if licenses are issued for them.

The proposed Muskie-Mondale bill would relax the conditions under which exports could be authorized by eliminating the "economic potential" criterion and liberalizing moderately the "military potential" test. It would also shift the administrative emphasis from requiring permission for exports, as at present, to requiring denial to keep exports from going. The presumption of denial would be replaced by a presumption of permission.

State, OEP, Labor and CEA (admitting that its expertise is of limited relevance on the overall subject) recommended that we seek liberalizing amendments. Defense, Commerce, Treasury, Agriculture, and STR support renewal of the present act (although STR would not rigidly oppose liberalization proposed by others). All are opposed to any tightening.

I recommend that we go along with the Muskie-Mondale bill for modest liberalization, subject to Bryce Harlow's views on Congressional considerations.

State and Commerce agree fully on the desirability of active promotion and are supported by Treasury, Agriculture, STR, and USIA. Commerce advocates a Presidential statement as soon as politically possible. Defense, OEP and CEA would hold back, feeling that there is little to gain with Defense arguing that there could actually be some costs in terms of our negotiating leverage with the Communist countries.

I recommend that we indicate our support for augmented trade, but in low key with prospects for more as the political situation improves. I recommend against a Presidential statement at this time and would leave most of the public presentation to the Secretary of Commerce.

At present, U.S. imports from most Communist countries must pay the tariffs contained in the 1930 Smoot-Hawley Act. The sizable tariff reductions made in numerous trade negotiations since then do not apply to them because the President has not had authority to treat them like all other countries. This distinction applies only to Communist countries.

State and Treasury recommend that you seek such authority; State feels that there would be a foreign policy payoff even if Congress did not agree. Commerce recommends that you support any Congressional initiatives which emerge. (Senator Magnuson, supported by Senator Fong, may reintroduce the East-West Trade Act proposed by the Johnson Administration in 1966.) But Commerce opposes an Administration initiative since it is convinced that it could not pass and Defense would await assurance of a specific quid pro quo before seeking the authority. (State is indifferent between an Administration proposal and Administration support for Congressional initiatives.) OEP, STR and CEA would also defer any initiative.

I recommend against an Administration initiative at this time but would support a Magnuson or other bill to give you MFN authority.

Under the Fino Amendment, the Export-Import Bank may not provide export credits to countries trading with North Vietnam. This of course covers all of the Communist countries.

The same views prevail on eliminating this as on MFN except that Treasury is opposed to a request at this time.

I recommend no initiative. No Congressional initiative has been taken in this area.

The list of goods and data unilaterally controlled by the United States is much more restrictive than the list maintained multilaterally through COCOM. There is widespread agreement that we are simply losing sales without adversely affecting the Communist countries.

Everyone agrees that we should liberalize to the COCOM level except in the very few areas, such as advanced computers, where we can effectively maintain unilateral controls. (Defense makes no specific recommendation on this issue.) This would be a purely administrative decision.

I agree with the majority view.

We treat the different Communist countries differently under the Export Control Act, both for political reasons and because there are some cases where we do not think an Eastern European country will transmit data or goods to the Soviet Union.

All except OEP favor continuation of the present differentiation approach. USIA is strongly in favor.

I agree.

Specific Issues

There are three specific licensing issues of sufficient magnitude and policy implication that they require your attention, which illustrate the overall policy issues addressed earlier. Your decisions on them will be regarded as a signal of the Administration's attitude toward trade with Eastern Europe.

The cases are:

a. USSR negotiations with a U.S. firm to design and install a system for oil extraction and gathering that would give the USSR for the first time a modern, semi-automated oil field.

All are in favor of granting the license except Treasury which would defer a decision until we have more information. Defense would seek a specific compensating benefit.

I recommend that we issue the license after conducting Congressional consultations.

b. USSR negotiations with U.S. firms to design and install a $60 million engine foundry to expand and modernize a Moscow truck factory.

All favor except Treasury, which wants more information. But CEA expresses reservations; CIA notes that the factory has a significant military potential; and Defense thinks the military potential may be greater than cited by CIA. State and Commerce counsel prior consultation with Congress before proceeding and Defense would look for "advantages for the U.S." (presumably beyond the export sale).

I recommend that we delay our decisions on these issues, until we can better assess our overall political relations with the USSR.

c. Corn sales to the USSR, which would in practice require elimination of the 50-50 shipping rule through negotiations with the unions.

State (after Congressional consultation), Agriculture, Commerce, and STR are in favor. CEA and Defense oppose the effort if only a single corn sale is in sight, and CIA concludes that there is no assurance of ongoing sales. In an earlier memorandum to you, the Secretary of Labor concludes that a great deal of effort will be needed to achieve agreement with the unions. Treasury agrees.

I recommend no action. The cost of seeking union agreement is too high for a single sale.

Washington, May 28, 1969.

TO
The Secretary of State
The Secretary of Defense
The Secretary of the Treasury
The Secretary of Commerce
The Secretary of Labor
The Secretary of Agriculture

SUBJECT
East-West Trade

The President has made the following decisions with regard to the issues discussed at the National Security Council meeting on May 21, 1969:/2/

1. Present legislation provides an adequate basis for U.S. trade policy toward the USSR and the Communist countries of Eastern Europe at this time, in view of the status of our overall relations with them. There is thus no current need for the Administration to make any proposals, or support proposals of others, to change the Export Control Act or provide authority for the President to extend most-favored-nation treatment to these countries./3/ Neither is there a need to try to facilitate sales by amendment of these regulations governing shipment to them of agricultural commodities.

2. In view of overall U.S.-USSR relations, we should not now issue licenses for the proposed sales of U.S. equipment and data for a semi-automated oil system and a truck engine foundry.

3. We should be prepared to move generously to liberalize our trade policy toward the Soviet Union and the other Eastern European countries whenever there is sufficient improvement in our overall relations with them.

4. The United States should continue to liberalize its export control list, within the framework of present legislation. As soon as possible, we should align our controls to the list agreed internationally by COCOM except where the United States can maintain effective unilateral control because the items are not available from non-U.S. sources. The United States should not place pressure on other countries not to pursue trade policies toward Eastern Europe more liberal than our own.

Henry A. Kissinger

Washington, June 21, 1969.

SUBJECT
Removal of Restrictions on US Trade with China

As you know, the United States currently maintains a virtually total embargo on all trade and financial transactions with Communist China, the only significant exception being the licensing of exports and imports of certain publications and educational materials. These controls prevent the export of American goods to China and prohibit the use of US dollars in any transactions involving Chinese Communist interests. Our regulations apply not only to US domestic firms but also to American subsidiaries abroad and to foreign firms insofar as we control resale of American goods and bank use of dollars in business involving Communist China.

At your request,/2/ I have reviewed these controls in order to identify restrictions which could be lifted without materially assisting the Chinese Communists, while still maintaining the basic regulatory framework.

In each of the situations described below, the removal of an existing restriction would, I believe, do more to promote US foreign policy and economic interests than it would benefit the Chinese Communists.

1. Controls on Foreign Subsidiaries. We could modify or completely remove the prohibition on transactions with China that now applies to foreign corporations owned by US interests. Without altering our controls on direct US/Communist China trade or Peking's access to US dollars, removal of this prohibition would be welcomed by friendly countries which regard our assertion of controls over the trading practices of their US-owned domestic corporations as an objectionable exercise of extra-territorial jurisdiction.

2. Bunkering Restrictions. We could remove the restrictions precluding US firms from supplying petroleum products to ships owned or chartered by Communist China or any ship destined for China. As matters now stand, a Norwegian freighter bound for China cannot--without licensing approval from Washington in each case--buy oil in Singapore from an American company but must buy it from a competitor of American companies. The result, of course, is to hurt our oil companies but not in the slightest to bother the Chinese.

3. Liberalization of US Tourist Purchases. We could modify the Foreign Asset Control Regulations prohibiting purchase of Communist Chinese manufactured goods to permit American tourists abroad to purchase Chinese goods in limited quantity. We would by this step eliminate the incessant irritation and annoyance of our tourists with the Government without contributing significantly to Chinese Communist foreign exchange earnings.

4. Selective Reduction of Controlled Items. We could modify the administration of the Foreign Asset Control regulations and Export Control Act to permit a more liberal licensing policy for such items as food grains, agricultural equipment, pharmaceuticals, and chemical fertilizers. (Additionally, if desired, we could link this with a similar licensing policy for certain mainland goods which would allow for a gradual development of trade generally balancing imports and exports.)

The Department from time to time has considered these and even more extensive reductions of China trade restrictions. (At the end of last year the Department recommended to the President removal of the extraterritorial controls on US subsidiaries abroad.)/3/ The previously foreseen benefits from taking these steps are, I believe, still pertinent:

--They remove the irritant which extraterritorial aspects of our present trade controls create in our relations with our allies, particularly those allies, like Canada, where our investment is heavy.

--They indicate our desire for increased contacts and a reduction in tension with Communist China and hold open the door for further relaxation of controls if the Chinese respond positively.

--They would substantially reduce an irritant to American citizens travelling abroad and simplify cumbersome and expensive administrative procedures.

--They remove elements of our policy which have little or no effect on China and would put our China policy on a more rational basis before both the domestic and international publics.

Although the GRC (and some of our other Asian allies) could be expected to react somewhat unhappily, the modesty of these measures would soften their impact on the GRC, and I think their reaction would be manageable. In any case, we now have, in my opinion, an important additional reason for taking these measures now. The tense relations between Russia and China make the Soviets extremely sensitive as to our attitude toward China. There is no question that our taking the proposed steps would arouse Soviet curiosity if not concern. The Russians would be reminded that they cannot take us for granted in respect to our relations with China and that we too have options in this area. It would point out to them that better relations with the US are not only in Russian long-term interest but are also a two-way street. And the Russians might thereby be encouraged to show a greater willingness to be helpful on some of the more vexing problems between us.

But if we are to obtain the benefits we seek from these moves, it is important they be quickly effected, before Sino-Soviet tensions worsen. This will require fast top-level consideration and direction to preclude their being thrown into the bureaucratic arena where they will be talked and nibbled to death as has occurred in the past. Widespread discussion will also lead to leaks and the diminution of the desired impact on the USSR.

Elliot L. Richardson/4/

Washington, June 23, 1969.

SUBJECT
Actions to Indicate a Possible Opening Toward China

You asked that I explore what could be done to indicate a possible opening toward China. I discussed this question with Elliot Richardson, who prepared the attached memorandum./2/ He recommends that:/3/

1. We could modify or completely remove the prohibition on transactions with China that now applies to foreign corporations owned by U.S. interests. This would not improve Peking's access to U.S. dollars, and would be welcomed by friendly countries which now object to our assertion of controls over the trading practices of their U.S.-owned domestic corporations.

2. We could remove the restrictions precluding U.S. firms from supplying petroleum products to ships owned or chartered by Communist China or any ship destined for China. This restriction hurts our oil companies through loss of trade far more than it bothers the Chinese.

3. We could modify the Foreign Asset Control regulations prohibiting purchase of Communist Chinese manufactured goods to permit American tourists abroad to buy a limited quantity of such goods. This would not contribute significantly to Communist China's foreign exchange earnings and would eliminate a source of irritation to our tourists.

4. We could modify the administration of the Foreign Asset Control regulations and the Export Control Act to permit a more liberal licensing policy for agricultural goods and pharmaceuticals. This could be followed by a selective reduction of controlled items which would allow for the gradual development of trade, generally balancing imports and exports.

I recommend approval of these proposals. If you approve, we would send out a directive indicating your approval on foreign policy grounds of these measures. Such a directive would also call upon State, Treasury and Commerce to work out specific details within a certain time period. The Undersecretaries Committee could be charged with this task./4/

Washington, June 26, 1969.

TO
The Secretary of State
The Secretary of the Treasury
The Secretary of Commerce

SUBJECT
Relaxation of Economic Controls Against China

The President has decided, on broad foreign policy grounds, to modify certain of our trade controls against China. He has decided, in principle, that we should:

(1) Remove the restraints in the Foreign Assets Control regulations upon foreign subsidiaries of U.S. firms on transactions with China that are regarded as non-strategic by COCOM.

(2) Modify the Foreign Assets Control regulations prohibiting purchase of Communist Chinese goods to permit Americans travelling or resident abroad to purchase Chinese goods in limited quantities for non-commercial import into the U.S.

(3) Modify the administration of the Foreign Assets Control regulations and Export Controls to permit general licenses for exports of food, agricultural equipment, chemical fertilizer and pharmaceuticals.

(4) Follow these steps, at the earliest appropriate time, by modifying import and export controls in non-strategic goods to permit a gradual development of balanced trade.

The President desires early implementation of these decisions. He has, therefore, directed that the Under Secretaries Committee supervise the preparation of the following documents, to be submitted to him by July 7, 1969.

(1) Implementing regulations (to be developed by State, Commerce, and Treasury);

(2) A press and diplomatic scenario (to be developed by State);

(3) A scenario for Congressional consultation (to be developed by State and Treasury).

The President has directed that until he decides when and how this decision is to be made public, the Secret/Sensitive classification of this project be strictly observed.

Henry A. Kissinger