U.S. Department of State
FRUS, 1961-63, Vol. IX: Foreign Economic Policy
Office of the Historian

[Section 16 of 18]

314. National Security Council Record of Action No. 2455

//Source: Department of State, S/S NSC (Miscellaneous) Files: Lot 66 D 95, Records of Action by the National Security Council. Secret. Taken at the 503d NSC meeting (see Document 313).

Washington, July 17, 1962.

U.S. Economic Defense Policy

a. Discussed the memoranda presented by the Departments of State and Commerce./1/

/1/Reference is to four papers, Documents 309 - 312, transmitted to President Kennedy with an explanatory memorandum by Kaysen, July 17. The word "Defense" has been crossed out on the source text and "Commerce" typed in, in accordance with a July 23 memorandum (filed with the source text) to all holders of NSC Action No. 2455.

b. Noted the President's directive that the State and Commerce Departments add to the statement of U.S. Economic Defense Policy contained in NSC 5704/3 any language considered necessary to reflect pertinent legislation approved by the Congress this year.

c. Agreed that no major review of NSC 5704/3 was necessary at this time.

d. Noted the President's decision that for the next few months, until further review, the level of export controls would be that existing prior to August 1961. Pending export license applications will be decided in accordance with this decision.

e. Agreed that licenses for export to the Soviet Bloc of automotive manufacturing machinery would be denied.

f. Agreed that as a complementary approach to U.S. economic defense, an effort should be made in an appropriate Allied forum, OECD, the economic committee of NATO, or other suitable forum, to draft a Western code of fair trade practices for presentation to the Soviet Bloc.

g. Noted that the State and Commerce Departments, taking into account the results of action initiated under f. above, will keep the U.S. economic defense policy under continuing review.

315. Current Economic Developments

//Source: Washington National Records Center, RG 59, E/CBA/REP Files: FRC 72 A 6248, Current Economic Developments. Official Use Only. The source text comprises p. 17 of the issue.

Issue No. 655 Washington, July 31, 1962.

[Here follow articles on unrelated matters.]

COCOM COMPLETES 1962 LIST REVIEW

The Coordinating Committee on Export Controls (COCOM) has completed its annual review of 1962 of the international lists. Changes will be effective October 1. The lists define strategic items over which the Free World exercises control of exports to the Soviet bloc. The major part of the review was devoted to the electronics category of the embargo list. This reflects the strategic importance of advancing electronics technology in today's age of rocketry and space exploration.

The results of the review, which was conducted in Paris April 1 - July 13, 1962, are highly satisfactory from our standpoint. There were no significant differences of opinion with the British similar to those which characterized the review last year. This was due in large part to successful high-level policy discussions with the UK here in February and subsequent bilateral working level meetings in London. (See page 1, February 27, 1962 issue.)/1/

/1/Document 307.

Agreed Changes

The participating countries in the 1962 list review took some 90 actions affecting 74 items as defined in International List I (embargo), List IV (watch list) and the Munitions List. New important items added to the embargo list include: electric arc devices, electron beam welders, some 15 fluorocarbon compounds, gravity meters, and special batteries or power sources. Most of these new items embody advanced technology and in the US are related to production for or use in military and space exploration programs. The only new item of consequence we had proposed for embargo and which did not get acceptance was multifuel engines.

Jig borers, forging hammers, and picric acid were deleted from the embargo list as were certain type of transistors and magnetic metals, in view of the unanimous judgment of COCOM that they no longer meet the strategic criteria for embargo.

Many more items were redefined. Embargo coverage was narrowed for 22 IL - I items, expanded for 17 items, and clarified for 6 items. Twelve of the 67 IL - I items discussed were left unchanged after an exchange of views in COCOM on strategic considerations./2/

/2/Further documentation on the COCOM 1962 List Review is in airgrams Polto A - 157, July 23, and Polto A - 208, July 31, from Paris. (Department of State, Central Files, 460.509/7 - 2362 and 460.509/7 - 3162) A detailed report on the 1962 COCOM List Review was enclosed in a letter from Dutton to Kitchin, September 20, and in Rusk's letters to Vice President Johnson and interested Congressional committee chairmen, September 27. (Ibid., 460.509/9 - 2062 and 460.509/9 - 2762) For Mutual Defense Assistance Control Act (Battle Act) Lists, promulgated October 1, 1962, reflecting the changes in the International Lists, see Department of State, The Battle Act Report, 1963, Mutual Defense Assistance Control Act of 1951--Sixteenth Report to Congress (Washington, December 1963), pp. 16 - 20.

[Here follow articles on unrelated matters.]

316. Letter From Secretary of State Rusk to Secretary of Commerce Hodges

//Source: Department of State, Central Files, 400.119/7 - 2062. Secret. Drafted by Robert B. Wright and James L. Colbert (EUR/SOV) on July 27. A copy was sent to Carl Kaysen. The source text is Tab A to a July 30 memorandum from G. Griffith Johnson (E) through Under Secretary Ball and Executive Secretary Brubeck to Rusk, which explained the need to call Hodges' attention to NSC Action No. 2455 (Document 312) because "Hodges' letter was almost certainly written before he received NSC Action 2455." (Department of State, Central Files, 400.119/7 - 3062)

Washington, August 9, 1962.

Dear Luther: Thank you for your letter of July 20 giving some further thoughts on the matters discussed at the National Security Council meeting on July 17./1/

/1/In his July 20 letter to Rusk, Hodges called for a U.S. approach through the Consultative Group in Paris "to get our Allies to agree to improve the level of multilateral export controls toward the Sino-Soviet bloc, as proposed at the NSC meeting on Tuesday, July 17." He suggested discussions in the Consultative Group for joint action on expanding trade in consumer goods with the Soviet bloc or arranging U.S. bilateral trade agreements with Soviet bloc countries for trade not under multilateral controls. He also suggested a commercial code of trade behavior. (Ibid., 490.119/7 - 2062)

Since receiving your letter, we have also received the National Security Council Record of Action (NSC Action 2455) of the Council meeting of July 17, 1962. The Record of Action conforms with my understanding of the agreement reached on that occasion with regard to the nature of the approach to our Allies, namely, that as a complementary approach to economic defense an effort would be made in an appropriate Allied forum "to draft a Western code of fair trade practices for presentation to the Soviet Bloc". In this connection, we have already undertaken work within this Department on the question of a code of fair practices, and are reviewing that work at the moment as a basis for further discussion with the other interested agencies.

It seems quite clear that the receptivity of our Allies to the proposal for establishment of a code of fair practices in East-West trade will depend on their initial understanding and support of our concern at the need to develop uniform ground rules covering the conduct of Allied trade with the Union of Soviet Socialist Republics and the Bloc. It will be necessary to obtain their agreement at a high level on the desirability, as a general matter of foreign policy, of agreeing upon such principles. In this connection, I agree with your suggestion that at an appropriate time preliminary high level approaches be made bilaterally to prepare a favorable reception for our formal multilateral approach. Only following agreement by the NATO countries as a group would it be possible fruitfully to consider such specific matters as the development of uniform rules to cope with disruptive pricing practices, the resale of primary commodities, inadequate arbitration, patent and copyright procedures, and the lack of reasonable access by businessmen. I think you will agree that these are all rather complicated and diverse matters which will involve considerable study in order to coordinate an Allied position thereon.

As to the appropriate international forum for these projected discussions, it would seem to us that the NATO Council of Economic Advisers (ECONAD) would be initially the suitable and logical place for such discussions with our principal Allies. As you know, with the exception of the question of strategic trade controls, the ECONAD is the forum in which questions of economic relationships between NATO countries and the Soviet Bloc have been discussed--for example, Soviet oil, oil pipelines, credits to the Soviet Bloc. If we meet with some success in NATO, we could then consider broadening our approach to other forums.

We will be taking up with your Department shortly our detailed proposals for the code of general trading practices.

With warm personal regards,

Sincerely,

Dean/2/

/2/Printed from a copy that indicates Rusk signed the original.

317. Letter From Secretary of State Rusk to Secretary of Commerce Hodges

//Source: Department of State, Central Files, 460.509/8 - 1762. Secret. Drafted by Trezise and Clarence T. Breaux (E/MDC) on August 23, and retyped in S/S on September 1.

Washington, September 5, 1962.

Dear Luther: This is in response to the suggestion in your letter of August 17 about the possibility of negotiating an expansion of multilateral controls on trade with the Soviet bloc./1/

/1/In his August 17 letter to Rusk, Hodges proposed negotiations on expansion of trade in the NATO Council of Economic Advisers and on expansion of the level of export controls in the Consultative Group. (Ibid.)

I realize that the National Security Council on July 17 discussed the idea of a determined effort to get our Allies to agree to a higher level of multilateral export controls, but I am not aware of any agreement having been reached that a special attempt along those lines should be made, nor does NSC action 2455 record any such agreement.

In my judgment, we could not at this time obtain agreement in COCOM on an expansion of export controls. Prevailing attitudes in Western Europe and Japan on Soviet bloc trade, when coupled with the rule of unanimity in the Coordinating Committee, make it clear that negotiations would be fruitless. At a time when we are engaged in talks with the Soviets on matters of major political importance, I would not wish to undertake trade control negotiations which I believe could not succeed and which would seem likely to have an adverse impact on our bilateral talks with the Soviets and add to the differences among the NATO Alliance countries. In saying this, I wish to add that should the situation in Berlin or elsewhere take a marked turn for the worse, I would expect that NATO would promptly take up the imposition of selected economic countermeasures as one of several important indicators to the Soviets of the unity of the Western nations in the face of a crisis. As you know, last year NATO agreed in principle on a total economic embargo on the Soviet bloc in the event of blockage of access to Berlin and on air countermeasures in the event of significant air corridor harassment.

As I wrote you on August 9 we have been proceeding under NSC Action 2455 to develop a code of fair practices./2/ We have now sent you a draft of such a code and I hope to have your views on it in the near future./3/

/2/Document 316.

/3/The draft Code of Fair Practices in International Trade was sent to Hodges on September 5 under cover of another letter from Rusk requesting "views and suggestions before proceeding further in discussion bilaterally with other NATO countries." (Department of State, Central Files, 460.119/9 - 562)

With warm personal regards,

Sincerely,

Dean/4/

/4/Printed from a copy that indicates Rusk signed the original.

318. Letter From Secretary of Commerce Hodges to Secretary of State Rusk

//Source: Department of State, Central Files, 460.119/10 - 1962. Secret.

Washington, September 12, 1962.

Dear Dean: Thank you for your letter of September 5th on negotiation with other countries of expanded controls over, and a code of fair practices on, trade with the Soviet bloc./1/ As you will recall in the discussion at the July 17th meeting of NSC, I coupled the approaches to our Allies on these two issues. I have since that meeting reported to both Congressman Kitchin and Senator Dodds and stated in my press conference today that we would seek multilateral agreement with our Allies on these aspects of trade with the bloc. These statements were in accord with my understanding of the discussion at the NSC, in which the President told the two of us to see what could be done towards multilateral agreement on both expanded controls and peaceful trade, even though it appeared that we might not succeed.

/1/See Document 317 and footnote 3 thereto.

I, of course, accept your judgment as to whether now is the appropriate time to seek an expanded level of controls with our Allies, particularly to offset the economic warfare thrust of the bloc. But I had a clear understanding from the NSC discussion that we would seek an appropriate time for such discussions.

It was my further clear understanding that after the multilateral discussions, setting the limits of beneficial trade, we would seek to develop an agreed code of fair practices for trade with State-trading countries. I am glad to have the suggested code which you sent and am having it examined by my staff. I am asking Dr. Behrman to pursue the technical aspects of the code with Assistant Secretary Johnson./2/

/2/A memorandum attached to the source text from Ruth H. Kupinsky (EUR/RPE) to Cleveland (RPE), October 19, indicates that Jack N. Behrman, Assistant Secretary of Commerce for International Affairs, discussed East-West trade with Nathaniel McKitterick (OES) and Walter M. Kotschnig (IO), "suggesting that we use ECE to develop studies on trade between market economies and state trading companies, on the assumption that we look to an expansion of trade."

Sincerely yours,

Luther H. Hodges/3/

/3/Printed from a copy that indicates Hodges signed the original.

319. Editorial Note

The Cuban missile crisis of October 1962 had an impact on U.S. export control policy. On October 23, President Kennedy proclaimed U.S. interdiction of offensive weapons to Cuba, effective October 24. The Department of Commerce continued to allow shipments only of nonsubsidized foodstuffs, medicines, and medical supplies on humanitarian grounds as well as gift parcels of limited value to Cuba, but held up, for the time being, approval of all licenses for shipment to Soviet bloc countries and Yugoslavia, except general licenses for moving goods of no strategic value and gifts. It did nothing about licenses already issued, all of which were valid for 6 months. (Memorandum from Edward Gudeman, Under Secretary of Commerce, to Kaysen, October 23; Kennedy Library, National Security Files, Trade Policy, East-West Trade)

President Kennedy lifted the naval quarantine of Cuba on November 20, but the policy in effect since October 1960 discouraged all shipments to Cuba other than specified food and medical supplies, and from September 6, the cargoes of American vessels and planes going to Cuba were subject to the same regulation and control that applied to American vessels and planes going to European Soviet bloc countries. (Revision of Transportation Order T - 1 to include Cuba, signed by Secretary of Commerce Hodges, September 6; Washington National Records Center, RG 40, Department of Commerce, Executive Secretariat Files: FRC 69 A 6828, Office of the Secretary, Export Control (Sept. through Dec.))

President Kennedy had prohibited imports from Cuba from February 7, under authority of Section 620(a) of the Foreign Assistance Act of 1961. (Department of State Bulletin, February 19, 1962, pages 283 - 284) Documentation on U.S. discouragement of international trade, shipping, and aviation to Cuba, is scheduled for publication in volume XI.

320. Memorandum From the Department of State Executive Secretary (Brubeck) to the President's Special Assistant for National Security Affairs (Bundy)

//Source: Kennedy Library, National Security Files, Kaysen Series, Trade Policy, East-West Trade Policy Subjects, East-West 4/63 - 7/63. Secret.

Washington, December 4, 1962.

SUBJECT

Revision of U.S. Economic Defense Policy--NSC 5704/3

Under cover of a memorandum dated October 24 to Assistant Secretary Johnson,/1/ Mr. Kaysen transmitted a copy of a memorandum directed to you from Under Secretary Fowler of the Treasury commenting on the proposed revision of Paragraph 11 of NSC 5704/3 recommended in my memorandum of September 17./2/ We still consider the proposed revision of Paragraph 11 to be in accordance with the National Security Council Record of Action 2455 of July 17, and urge it be promptly circulated as an amendment to NSC 5704/3.

/1/Not printed. (Ibid.)

/2/Reference is to a memorandum from Fowler to Bundy, October 23. (Ibid.) The September 17 memorandum from Brubeck to Bundy proposed revision of NSC 5704/3 identical to the text in enclosure 1 to Rusk's July 16 memorandum to the NSC, Document 311. (Kennedy Library, National Security Files, Departments and Agencies, Department of State, 9/17/62 - 9/30/62)

Under Secretary Fowler's memorandum suggests that the United States should make "a more vigorous approach to our Allies for a more effective [and he makes clear, a more comprehensive]/3/ multilateral economic defense program" and that the revision of NSC 5704/3 should reflect this objective. Under Secretary Fowler's viewpoint is based in part on the amended Section 2 of the Export Control Act (the so-called Javits Amendment).

/3/All brackets are in the source text.

Secretary Rusk has dealt specifically with the issue of a new approach to our Allies for a broadened control program and with the interpretation of the amendment to Section 2 of the Export Control Act. I am enclosing for your information and for use at your discretion with Under Secretary Fowler copies of relevant letters from Secretary Rusk to Secretary Hodges and to Senator Keating concerning these points./4/

/4/Reference is to two letters from Rusk to Hodges, September 5; see Document 317 and footnote 3 thereto; and to a letter from Rusk to Keating, August 28, not printed.

In summary, these letters set forth a Department position along the following lines. The annual review of the international strategic lists in the Coordinating Committee (COCOM) is the principal means of carrying out the intent of Congress that the United States should "formulate, reformulate, and apply such [export] controls to the maximum extent possible in cooperation with all nations with which the United States has defense treaty commitments." Any consideration of an expanded multilateral export control program of the comprehensive nature described by Mr. Fowler must take account of the basic non-negotiability of such proposals in the absence of a very much worsened international climate. The lines of development in East-West relations growing from the Cuban confrontation seem today even less likely to support a broad new economic warfare approach than was the case in early September when Secretary Rusk dealt with this question in his letter to Secretary Hodges. With respect to the more explicit requirement in the amendment to Section 2 of the Export Control Act that the United States should "formulate a unified commercial and trading policy to be observed by the non-Communist nations", the Department has proposed and transmitted initially to Commerce for comment under cover of the Secretary's letter to Secretary Hodges of September 5 a draft "Code of Fair Practices in International Trade".

It should be recognized that progress has been made, to the extent warranted by the circumstances and practicable at the time, on all the four points enumerated by Mr. Fowler on pages four and five of his memorandum, even though they have not been presented in an over-all package program. We do have a coordinated program with our Allies for the utilization of economic sanctions in the event of blockage of access to Berlin and with respect to Cuba, even though these measures may not be as extensive as we would prefer. (Indeed, Mr. Fowler himself performed a valuable service in handling the four power negotiations in Paris and Washington last year on Berlin countermeasures.) We do have an agreement developed in NATO which lays the basis for the limitation of sales of large diameter pipe to the Soviet bloc. We have discussed in NATO the problem of Soviet oil sales and NATO countries have agreed to a policy of caution and restraint with respect to imports of Soviet oil. We also have in NATO a recognized opening to discuss other commodity problems that may involve questions of excessive dependence on bloc materials or supplies. We have over the years made a very great effort to obtain recognition of the United States position on the extension of credits to the Soviet bloc, and have an agreed system of reporting, periodic review and discussion in NATO. It is surely fair to say that the entire array of our efforts to enlist cooperation from our Allies in aid programs for less developed countries represents the kind of effort at "preventing, countering, checking or minimizing Sino-Soviet bloc economic penetration and subversion of uncommitted or less developed countries" which Mr. Fowler mentions in his third point. There is also an established program in NATO for periodic review and discussion of the Soviet economic offensive, an arrangement which makes possible the discussion of potential danger spots. Finally, there is agreement to discuss in ECONAD the kind of program concerning trade with the Soviet bloc visualized in Mr. Fowler's fourth point, and this Department's draft trade code looks in the direction of developing a United States position for such a discussion.

The achievement of the kind of comprehensive program outlined by Mr. Fowler would depend upon gaining the full support of our Allies. Since there are very real differences on their part with both the underlying policy justification and details of such a program, we believe our best course is to continue to pursue more limited objectives. We would conclude, therefore, that the NSC policy, amended as we have suggested, will for the present continue to provide an adequate basis for our efforts in the economic defense area.

William H. Brubeck/5/

/5/Printed from a copy that bears this typed signature above which are unidentified handwritten initials.

321. Memorandum by the Under Secretary of State for Political Affairs (Harriman)

//Source: Department of State, Central Files, AV 1 Com Bloc - US. Secret. On May 1, Harriman sent this memorandum and two statements on civil air transport relations between the United States and the Soviet bloc and on U.S. policy toward bloc civil aviation activities in the free world with a covering letter requesting comments to the Departments of Commerce and Defense, Central Intelligence Agency, Federal Aviation Administration, Civil Aeronautics Board, and the Bureau of the Budget. The replies, May 14 (Department of Commerce), undated (Central Intelligence Agency), May 20 (Bureau of the Budget), May 24 (Civil Aeronautics Board), and June 21 (Federal Aviation Administration and Department of Defense), are ibid.

Washington, April 19, 1963.

MEMORANDUM ON CIVIL AVIATION POLICY TOWARDSINO-SOVIET BLOC

It is necessary to bring up-to-date our policy statement on bilateral civil aviation relations with the Sino-Soviet Bloc in view of developments since the previous policy statement adopted in 1957 by the National Security Council was withdrawn last year./1/ While we assume that in the foreseeable future there is unlikely to be an improvement in our relations with the Bloc of sufficient importance to warrant consideration of a bilateral civil aviation agreement, we should be ready for such a contingency. The attached policy statement (Tab A) provides for that contingency and incorporates considerations militating for and against an agreement on our side and on the Bloc side./2/

/1/Reference is to NSC 5726/1, "U.S. Civil Aviation Policy toward the Sino-Soviet Bloc," December 9, 1957, printed in Foreign Relations, 1955 - 1957, vol. IX, pp. 490 - 503.

/2/Tabs A and B are not printed.

The second draft policy statement (Tab B) has been developed because NSC 5726/1 has been withdrawn and we need comprehensive policy guidance in the area of Bloc civil air activities abroad. Our experience with the Congo, the Sudan, and Cuba suggests strongly to me that we need a basic policy statement against which to measure and develop programs of action, particularly in Africa and Latin America, related to Bloc civil air activities in the Free World.

It is felt that such a policy must rest on the following premises and rationale:

(1) That Bloc inroads in the civil aviation area are undesirable because they can enhance, sometimes in substantial measure, the Bloc's capabilities to attain its military and political objectives in the developing countries, and

(2) For both political and economic reasons, our capabilities to prevent such inroads are limited and therefore must be applied with circumspection on the basis of a carefully defined system of priorities.

While the dangers from Bloc moves in this field can be indiscriminately exaggerated, our experience amply demonstrates that they can afford opportunities for Bloc political gains beyond those provided by other forms of Bloc presence. In a crisis situation such as occurred in the Congo and in Cuba, the lack of air traffic rights handicapped the Bloc in supporting footholds it had gained through other means. Equally serious is the possibility that Bloc influence in, and control over, air facilities within a country could enable it to act quickly and decisively at a time of internal political crisis.

Beyond these critical potentialities, civil air access to the LDC's tends to enhance the Bloc's prestige and to facilitate its over-all program to develop close political and economic bonds with specific developing countries. Bloc experience in Guinea and Ghana, however, indicates that civil aviation activities can boomerang. When the Bloc undertakes to support a civil aviation program that is uneconomic to begin with, it runs the risk of being saddled with the costs and the onus of responsibility when the program fails and disillusionment sets in. More generally, in any attempt to establish a broad international civil aviation network in competition with the West, the Bloc operates under the considerable disabilities of its relatively inferior equipment and of prospectively thin traffic routes.

In regard to our own limitations, we must recognize first that among the non-aligned developing countries the negotiation of an exchange of air rights with the Bloc frequently is viewed as an assertion of their recently won sovereignty and an evidence of balanced neutrality. Additionally, an offer of Bloc civil aviation assistance can appeal to a strongly felt need irrespective of its justification for improved transport facilities within and through these countries. We could attempt to consider such offers whenever they are made but such an across-the-board effort would be politically burdensome and would create serious distortions in our economic assistance programs.

These circumstances point to the need for flexible and carefully modulated measures in this field. Our civil aviation program in developing countries will be most successful in limiting Bloc penetration to the degree that they are consistent with over-all economic assistance criteria. We cannot, however, limit our actions in this field solely to measures justified by these criteria. Our approach should be based on the following principles:

1. We should use diplomatic means to discourage other Governments from entering into civil aviation agreements with the Bloc, stress-ing the dangers involved and our unfavorable view of such actions. At the same time, we should make sure that the developing countries have a clear understanding of where their self-interest in fact lies and an accurate measure of their bargaining strength in any negotiation with the Bloc.

2. Through our own programs and through actions developed jointly with our allies, we should seek to encourage the development of national air services that meet the transportation development needs of the country concerned and fit into feasible regional services. Such programs would tend to fill vacuums that Bloc civil aviation offers seek to exploit and thus would provide the developing countries with effective self-interest grounds for rejecting civil aviation ties with the Bloc.

3. We should limit our preemptive efforts to those countries where such programs would be politically feasible and strategically dictated.

Concurrent with the process of obtaining the concurrences of the other interested agencies, work will be started to formulate action programs designed to achieve our objectives in anticipating and in contravening Sino-Soviet Bloc civil air activities.

322. Memorandum From President Kennedy to the Export Control Review Board

//Source: Kennedy Library, National Security Files, Subject Series, Trade, East/West. Secret. The Export Control Review Board consisted of the Secretaries of Commerce (Chairman), State, and Defense. Regarding its establishment, see Document 300.

Washington, May 16, 1963.

The Secretary of Commerce has raised two important questions about our present trade with the Soviet Union which I think worth serious high- level examination.

1. Do we now deal with the Soviet Union on the export of technically advanced machinery and equipment in a manner which adequately protects U.S. interests? Where a national security issue is presented, we of course deny an export license. There are, however, many cases in which no clear security issue arises and yet we know that the Soviets are using American machinery and equipment as a basis for copying our technology. Are we being adequately compensated in these sales?

Is there any method of organizing these transactions which would secure a better quid pro quo than the present method of leaving it to the individual seller to secure the best price he can in the transaction, in the light of the fact the Soviet Union does not ordinarily respect the patent and copyright arrangements on which we rely in our commercial transactions with other nations?

2. Should we reconsider the whole of our trade with the Soviet Union in the light of trade between Western Europe and the Soviet Union and its European satellites? Considering the character and volume of that trade, would a generally less restrictive policy be more in keeping with the interests of the United States? How much possibility is there for a significant broadening of trade that is consistent with our security interests? Would this possibility be such as to justify a general negotiation on trade and commercial matters with the Soviet Union?

3. I would like the Export Control Review Board to examine these questions and report its findings to me in ninety days.

John F. Kennedy/1/

/1/Printed from a copy that indicates Kennedy signed the original.

323. Letter From Secretary of State Rusk to Senator Jacob K. Javits

//Source: Department of State, Central Files, STR 7. No classification marking. Drafted by Robert B. Wright on July 2 and retyped on July 10.

Washington, July 22, 1963.

Dear Jack: I regret the delay in making this further reply to your letter of May 22, but as I indicated in my response of May 28,/1/ the question you raise requires an answer in some depth.

/1/Both letters are attached to the source text, but not printed.

Enclosed is the report which you requested on the steps taken to implement Section 3(b) of the Export Control Act as amended July 1, 1962./2/ After reviewing this report, I am satisfied that given the far greater magnitude of trade carried on with the Soviet bloc by our Allies as compared with our own trade with the bloc, as well as the differing political evaluations of that trade by individual Western governments, the United States has been remarkably successful in obtaining as substantial a multilateral control policy as now exists. It is, however, a compelling fact that without itself having a significant stake in East-West trade, the United States cannot expect to have a determining voice in the manner in which such trade is carried on by other major Western countries under present world conditions.

/2/Section 3(b) of P.L. 87 - 515, approved July 1, 1962, added the following paragraph to Section 2 of the Export Control Act of 1949: "The Congress further declares that it is the policy of the United States to formulate, reformulate, and apply such controls to the maximum extent possible in cooperation with all nations with which the United States has defense treaty commitments, and to formulate a unified commercial and trading policy to be observed by the non-Communist-dominated nations or areas in their dealings with the Communist-dominated nations." (76 Stat. 127)

Since the enclosed report includes a full and frank discussion of the complex problems we would face now in attempting to negotiate with other Western countries a uniform policy on trade with the Soviet bloc countries, I would appreciate it if you would regard the report as not being for public dissemination.

With warm personal regards,

Sincerely,

Dean/3/

/3/Printed from a copy that indicates that Rusk signed the original.

Enclosure/4/

/4/No classification marking. Prepared on July 10.

REPORT TO THE SECRETARY OF STATE ON IMPLEMENTATION OF SECTION 3(b) OF THE EXPORT CONTROL ACT OF 1949 AS AMENDED JULY 1, 1962

The amendment to Section 3(b) of the Export Control Act of 1949 provides a clear endorsement of the principle that our efforts in the East-West field should be carried out to the maximum extent possible on a multilateral basis. This amendment has two aspects which are commented on separately.

The first is the provision that the United States should formulate, reformulate and apply export controls to the maximum extent possible in cooperation with Allied nations. The major means whereby we pursue this objective is through the Consultative Group and Coordinating Committee (CG - COCOM) operation and the annual list review procedure. The purpose of the annual COCOM list review is to keep the International Lists currently valid by adjusting them to new technological, military and economic developments in the Sino-Soviet bloc and the free world. It provides this Government with an opportunity to propose the addition of important new items to the International Lists, provided that they can be justified under the applicable criteria. In the 1962 review the United States was successful in obtaining agreement for the addition to the embargo list of the following new items: electrical arc heaters, electron beam welders, some fifteen fluorocarbon compounds, gravity meters, and special batteries or power sources. Most of these new items embody advanced technology and in the United States are related to production for or use in military and space exploration programs. Only two whole items and two partial items were deleted from the embargo list; the United States itself proposed deletion of these items on the grounds that they were no longer significant. Forty-five items were revised or clarified, seventeen of these revisions resulting in net expansion of embargo coverage.

The COCOM annual review is scheduled to begin in October of this year. Careful preparations are being made for this review by canvassing all available American research developments and intelligence in order to identify the technologically advanced items of strategic significance that should be brought under multilateral control. While we cannot be certain what negotiating problems may be faced this year, the Department intends to make every effort to further the interests of this Government consistent with the objectives of United States policy in this field as set forth both in the Export Control Act and the Mutual Defense Assist- ance Control Act of 1951.

With respect to the second provision of the amendment requiring the formulation of a "unified commercial and trading policy to be observed by the non-Communist nations",/5/ the situation is not as clear cut as is the case with respect to the COCOM negotiations. With respect to COCOM and Battle Act strategic controls it is fair to say that we do have a unified policy although there may be differences in detail on the merits of embargoing particular commodities. In the area of trade and economic relations with the Soviet bloc beyond the scope of strategic controls, however, the fact is that the United States has a more restrictive policy than do other Western nations. The United States denies the export to the Soviet bloc of a wider range of commodities and technology than do other major trading countries. We maintain a complete embargo on trade with Communist China, North Korea and north Viet-Nam. We do not permit United States flag vessels to engage in voyages to those areas. Our controls on trade and shipping with Cuba are more sweeping than the controls of other friendly countries. American law in effect prevents the extension of credit to the Soviet bloc and requires the payment of a higher level of import tariffs on goods of Soviet bloc origin. The entry of certain types of furs from the Soviet Union is prohibited by United States law.

/5/This phrase should read "by the non-Communist-dominated nations."

To achieve uniformity on the basis of the policies and practices of our Allies, assuming we wished as a matter of policy to do so, would require changes in American laws. Alternatively, to attempt to achieve uniformity on the basis of present American policy and practices would require a major policy confrontation with other Western countries. Given the economic and foreign trade problems that some of these countries face, they are aggressively pursuing the expansion of trade with the Soviet bloc, and they consider that this has political as well as purely commercial or balance of payment advantages. While United States policy toward trade is permissive, it also is based on the assumption that the continuation of a pattern of mutually advantageous trade relationships with the Soviet bloc is to the interest of the West.

The question is, therefore, whether there is a redefinition of East-West economic relationships which would be advantageous, which would fall somewhere between our policy and that of our Allies, and which might be negotiable with them. In studying the possibilities for such a proposal, we are considering the concept of a code which might set forth standards to be sought by market economy countries in their trading relations with the state trading countries of the Soviet bloc.

The objective of achieving agreement on such a standardized pattern of trading relations with the Soviet bloc nations is unquestionably a highly desirable one. Whatever attempts we make to this end, however, must be viewed against the background of the present state of trading relationships between Western countries and Soviet bloc nations.

The principal compelling fact is that the other major industrialized countries of the Western world carry on trading relationships with the Soviet bloc at a much higher level than is the case with respect to the United States, and with far less predisposition to restrict exports. The exports of the Western European countries to the Soviet bloc run at a rate of over $2 billion annually while the United States exports are only a twentieth of that. Western European (and Japanese) exports to the Sino-Soviet bloc rose to $2.8 billion in 1962 and imports to $2.9 billion. United States exports to the bloc were only $125 million and imports $79 million. The exports of all free world countries to the Soviet bloc exceeded $5 billion.

In these circumstances and under present conditions in East-West relations, the United States would be in a very difficult position to persuade other major trading countries that they should make any sweeping changes in their methods of trading with the Soviet bloc. From their standpoint, while there may be some complications in carrying on trade with state-trading countries, the amount of trade that takes place indicates that the Western countries have been reasonably successful in overcoming those difficulties. Without a significant stake in East-West trade the United States cannot expect to have a determining voice in the manner in which such trade is carried on by other Western trading countries.

The trade of other free world countries, moreover, is carried on without the apparatus of restriction and control over both strategic and nonstrategic trade which already characterizes United States trade with the Soviet bloc. As long as the other industrialized countries of the West are satisfied with the conditions under which their trade with the Soviet bloc takes place, there is no compelling reason for them to impose new or different standards or regulations, especially if such action is unlikely to increase the level of trade. At the same time, so long as other countries are unwilling to adopt rules on exports as stringent as those enforced by the United States, American controls will inevitably have a limited effect. Unless the commodities embargoed by the United States are subject to identical international control or are uniquely American in their availability, the Soviet bloc can obtain what it wishes from other supplying countries. In these circumstances and recognizing that in the absence of a marked worsening of international relations a change in the attitude of other countries is unlikely, the problems of achieving a general agreement on a common code of trade practices appear very formidable indeed. Nevertheless, the Department intends to have discussions on this problem with our Allies in the future and has been actively working on the elements of a standardized code which might be negotiable. We cannot, however, be optimistic about the prospects for making a useful settlement in this area.

Although we face the general negotiating problem outlined, we have on certain issues sought an accommodation with Allied countries in an area beyond the limitations of the present COCOM system. This has been the case on such questions as the supply of wide diameter pipe to the Soviet Union, the problem of credit terms to the Soviet bloc, Soviet penetration of less developed countries, and specialized world commodity problems such as petroleum in which Soviet capabilities are a significant factor. We will continue to make further efforts at reaching multilateral agreements over and beyond the COCOM control when the situation warrants such efforts.

In summary, it must be recognized that there are manifold issues involved in the carrying on of economic and commercial relations with the Soviet bloc during the present stage of East-West relationships. Concurrently, it must also be recognized that almost without exception the objectives which we seek in terms of a more regularized Western trading policy towards the bloc would require a strengthening of governmental control in one form or another by other cooperating nations. Given the present attitude of Western European countries towards East-West trade, we could not expect to obtain full Western European acceptance and application of any pattern of economic relationships with the Soviet bloc that might contain elements of economic warfare, even if that aim were considered by this Government to be desirable.

United States policies are kept under continuous examination to assure that they contain the proper balance of restraint and permissive contacts which are so highly necessary as a means of working towards a long-term assumption of responsible patterns of conduct by the Soviet Union and other Soviet bloc countries. As is recognized in the amendment to the Export Control Act, our only prospect for effectiveness in seeking coordinated trade policies is to work with our Allies on a mutual basis. While there is some indication of an increased awareness on the part of our Allies and the less committed countries of Soviet objectives and capabilities in the economic field, it must be emphasized that given the present attitude of Western European countries on East- West trade it would at best be very difficult to obtain their cooperation in a uniform trade policy. So long as we are enabled to preserve a flexible and balanced approach to these problems under existing legislation, we should continue to be able to make some progress towards United States objectives.

324. Report Prepared by the Policy Planning Council

//Source: Department of State, S/P Files: Lot 70 D 199, Economic Policy, 1963. Secret. A July 29 covering memorandum from Walt Rostow to Rusk reads as follows: "Although you had a chance to read and hear discussion on an earlier draft of this paper, you may wish to have this latest version at hand which incorporates suggestions made at your planning session on July 18, 1963." A July 29 cover letter from Rostow to Ambassador Kohler in Moscow states that the paper was prepared in the Policy Planning Council in response to a request by the President for a review of present U.S. policies. The paper was based on views developed in discussion of an informal group drawn from the interested geographic bureaus and the Bureaus of Economic Affairs and Intelligence and Research. "It has gone through a fairly extensive review process in the Department, including a session of the Secretary's Policy Planning meeting, and appears to have general support." Kohler's comments and his endorsement of the recommendations in Part III of this paper are contained in telegram 474 from Moscow, August 7. (Ibid., Central Files, STR 7) A handwritten note on the title page of the report reads: "Basis for Draft Report to President--See WR memo to Secy. 8/9/63." That memorandum has not been found.

Washington, July 26, 1963.

U.S. POLICY ON TRADE WITH THE EUROPEAN SOVIET BLOC

I. The Problem

The President has directed an Inter-Agency examination of two questions relating to our trade with the USSR:/1/

/1/See Document 322.

"1. Do we now deal with the Soviet Union on the export of technically- advanced machinery and equipment in a manner which adequately protects U.S. interests? Where a national security issue is presented, we of course deny an export license. There are, however, many cases in which no clear security issue arises and yet we know that the Soviets are using American machinery and equipment as a basis for copying our technology. Are we being adequately compensated in these sales?

"Is there any method of organizing these transactions which would secure a better quid pro quo than the present method of leaving it to the individual seller to secure the best price he can in the transaction, in the light of the fact the Soviet Union does not ordinarily respect the patent and copyright arrangements on which we rely in our commercial transactions with other nations?

"2. Should we reconsider the whole of our trade with the Soviet Union in the light of trade between Western Europe and the Soviet Union and its European satellites? Considering the character and volume of that trade, would a generally less restrictive policy be more in keeping with the interests of the United States? How much possibility is there for a significant broadening of trade that is consistent with our security interests? Would this possibility be such as to justify a general negotiation on trade and commercial matters with the Soviet Union?"

Although phrased in terms of the commercial possibilities and security interests involved in trade with the USSR, these questions are intimately concerned with our over-all political relations with the Bloc. Trade policy toward the European satellites is a necessary element in the examination. For the same reason, our policy on trade with Communist China and Cuba can be excluded, as being greatly subordinated to a separate body of political factors affecting our relations with these areas.

The President's questions, therefore, pose all the basic issues involved in our controls on trade with the European Communist Bloc. What are these controls achieving and what are they failing to achieve? What are the major stakes we have in this policy? Is this an "expendable" policy from the standpoint of the U.S. and under what circumstances; is it a "saleable" commodity to the USSR, and in what sense?

These are broad issues because the political significance attached to our trade restrictions has been disproportionate to the trade itself. For a number of years now, we have attempted to maintain, virtually in isolation, a posture tantamount to economic warfare. A change in this stance would therefore carry considerable meaning. In essence, the problem comes down to this: how can the U.S. most effectively use trade policy as an instrument in the conduct of its affairs with the USSR and Eastern Europe?

II. Operational Conclusions

1. The major issues in our trade control policy are political--not strategic, economic, or commercial. Neither full access to, nor complete denial of, trade with the U.S. can affect Soviet capabilities to wage war--either hot or cold war. Nor can either trade situation affect in any meaningful sense the performance or potentialities of the Soviet economy. And from the U.S. side, the economic and commercial significance of trade with the USSR, whether free or restricted, is negligible. It is in this context that the President's questions must be answered.

2. With regard to the narrow question of compensation for U.S. technology, there are no convincing grounds for attaching special significance to the technological components of Soviet imports, or for believing that the U.S. represents a particularly unique source for such imports. Above all, the amount of present U.S.-Soviet trade is so small that there is no practical need to question the assumption that compensation secured by individual sellers in private transactions is adequate to meet the requirements of the national interest.

Beyond this it must be recognized that so long as the U.S. operates within the framework of its existing control system there is no realistic possibility of our finding "any method of organizing these transactions [with the USSR]/2/ which would secure a better quid pro quo than the present." The USSR would be unresponsive to any U.S. initiative to secure a negotiated arrangement, and would treat unilaterally imposed conditions designed to secure greater compensation for U.S. exports as an extension of the control system. Thus the first question posed in the President's directive becomes a part of the second.

/2/Brackets in the source text.

3. The question of the liberalization of present U.S. trade policy toward the Bloc involves an assessment of what this policy accomplishes- -strategically, economically, and politically--weighed against what would be accomplished by a change in policy.

4. In assessing the strategic and economic consequences, there are two governing considerations: (a) the European Communist Bloc comes close to being a self-sufficient, closed economy; and (b) the Bloc's trade with the industrial West takes place with our allies and not with the U.S., and for this reason is largely beyond our power to affect.

5. Even under conditions of a maximum interdiction of East-West trade, the USSR would have the capability (a) to maintain and probably to improve in its own favor the present balance of world power, (b) to preserve its internal social and political order, and (c) to continue relatively rapid economic growth.

The most that can be said for trade with the industrial West as a whole is that it provides a useful element of flexibility to Bloc planning and perhaps adds a lubricating quality to the complicated process of innovation and technical change in Bloc industry. But this trade cannot exercise a determining influence on the Bloc's economic performance or prospects.

In these terms U.S. trade alone, which is all that is relevant to this review, takes on negligible strategic and economic significance. Present U.S. trade with the Bloc is small enough to be completely disregarded.

If the U.S. removed restrictions and traded with the Bloc on the same basis as does Western Europe the trade would expand. Payments difficulties, however, would set sharp limits on this expansion. At maximum projected levels, the USSR would obtain moderate and marginal advantages from this trade. For the U.S., the whole affair would continue to be of very minor economic significance.

6. The U.S. controls system has political and psychological significance disproportionate to the trade itself.

a. From the standpoint of the U.S., the system has become intricately interwoven into our over-all strategic thinking about the cold war and in our over-all cold war posture. Trade denial is looked upon as an effective weapon of cold war, regardless of how large or how small the quantities of goods involved may be, on the simple assumption that since the U.S. is richer than the USSR any trade between the two must necessarily help the USSR more than the U.S. and hence must improve the relative power position of the USSR. Trade denial has also come to be an important symbol of our cold war resolve and purpose and of our moral disapproval of the USSR. The trade controls issue has an important place in our continuing efforts to arouse the free world to common action and policies against the Communist threat. We have sought to induce non- communist states to hold trade to a minimum, not only on grounds of denying help to the Communists to build their power, but on the grounds that increased trade would carry real and immediate dangers to free world participants in that trade.

b. From the standpoint of the USSR, the political significance of U.S. restrictive policies have been out of all proportion to their impact on the Soviet economy or strategic position. The principal reason for this is that they serve as a symbol of U.S. unwillingness to grant the USSR full respectability as an equal in the post-war world order, a symbol that the U.S. dares to discriminate against the USSR under contemporary conditions. Less important but nevertheless real reasons for Soviet dissatisfaction can be found in: the Soviet belief that without U.S. restrictive policies, large-scale trade based upon credit financing and highly beneficial to USSR could be developed; in the Soviet desire to be sure of "the best" in its technological imports; and in Soviet faith that the expansion of trade would give it important leverage, through the American business community, over U.S. policies.

c. From the standpoint of the European satellites, the U.S. controls policy symbolizes their economic, and hence political, dependence on the USSR. In practical terms, denial of trade with the U.S. is of even less economic importance than in the case of the USSR. Yet the regimes see U.S. controls as an obstacle to creating new alternatives to total economic reliance on the USSR. This is of particular importance at the present time when the USSR is making strenuous efforts to impose supranational planning and "division of labor" arrangements on the satellites, the result of which would be an even greater subordination of their economies and national identities.

7. The political role played by the U.S. control policy under static cold war conditions is so significant that the policy would be difficult to do without, or even to modify, as long as those conditions continue. In a situation of unyielding confrontation between the U.S. and the USSR, there can be no question of giving quarter, psychological or otherwise, to the enemy. A change in the policy in such circumstances would constitute an important shift in the over-all U.S. political stance, and would impair U.S. effectiveness in holding up its end of the cold war. Moreover a change under static conditions would be difficult to justify to the American public and to the Congress.

8. The usefulness of the restrictive policy is, however, solely the product of a static situation in the cold war. All the criteria that underlie and justify the policy are the criteria of warfare in the traditional sense. These criteria presuppose that for the time being at least we cannot protect ourselves or promote our interests by normal methods, that we are in a position where we have no choice but to resort to "the continuation of politics by other means."

9. In a situation of cold war movement, the governing considerations would be completely different. All of the peculiar values that attach to the control policy, except in-so-far as it affects items of direct strategic importance, would fall away. At the same time, the control policy would be particularly useful, and almost uniquely so, as a means of furthering the movement process.

--Controls could be given up without affecting the existing power balance. There would be no increase in Soviet strength nor loss in U.S. strength.

--Controls would be an enticing inducement for the USSR. In them the U.S. has one of the few commodities which it can afford to give up that the USSR would be interested in buying.

--Unless the U.S. should be willing to give up controls, the movement process would necessarily be of short duration. The Soviet leaders have made clear they equate "peaceful relations" with "trade relations;" they would insist on consideration of controls in any serious negotiations; and they would consider U.S. attitudes on this issue as a decisive test of U.S. intentions.

--The "concession" made by the U.S. through lifting its controls, unlike other concessions, would be revokable at will. At the same time, once a new start had been made on trade, the U.S. for the first time since the war's end would be able to employ on a continuing basis the potentialities of trade as an instrument for political bargaining and for meaningful communication with the USSR.

--Lifting controls under conditions of cold war movement would increase the effectiveness of the Western alliance. It would eliminate irritants and frictions that have arisen between the U.S. and major allies over the controls and would enable the U.S. to employ the capital previously expended to hold the trade line on more constructive undertakings to strengthen the alliance.

10. The exact circumstances under which the U.S. should be willing to negotiate an end to its control system cannot and should not be spelled out in advance. It must be a matter of political judgment based on both objective and subjective considerations. On the one hand, there would need to be concrete evidence of Soviet interest in generally improved relations with the U.S. and of Soviet willingness to take, on the basis of mutual concessions, the specific steps necessary to effect this improvement. On the other hand, the situation should be such as to indicate that discussion of the trade issue would be a logical and fruitful, perhaps necessary, means of adding significant momentum to the forward movement that had been gotten underway. As a rule of thumb, it can be said that the U.S. should wait for the USSR to raise in the course of serious negotiations the trade question. If at that time the USSR had already agreed to the settlement of one or more of the dead- center issues between us, and showed at the same time a genuine desire to proceed with a serious and fruitful discussion of other matters, including those that most closely press in on immediate U.S. security interests, the U.S. should agree to a mutual review of "obstacles to improved trade and general intercourse" between the two nations. Final modification of the system, which could only be effected after necessary discretionary authority had been granted the President, would be left to a later and more decisive stage in the negotiation process.

11. Should the U.S. negotiate an end to its control system, it would need do so not in terms of a simple abandonment of the system but in terms of replacing it with another. Despite the likely absence of any large volume of trade between the U.S. and the Bloc, even under relaxed conditions, it would not be in either our commercial or political interests to allow transactions to fall again under the exclusive control of U.S. private traders, on the one hand, and Soviet state traders, on the other. We would need to cover trade with a government- to-government arrangement that would (a) reserve the right of the U.S. to deny items of direct strategic importance (i.e., items on the COCOM list); (b) insure maximum protection for such U.S. commercial interests as patent rights and copyrights, (c) provide safeguards against Soviet abuses like dumping, and (d) permit the U.S. to change the volume and condition of trade as political considerations made desirable.

The principal advantage the U.S. would gain from a change in its trade policy would be the one-shot impetus that would be given to a movement of the USSR toward policies and conduct more compatible with U.S. interests. However, assuming no early renewal of cold war conditions, the U.S. might find that it had exchanged a limited and wasting asset for a still limited but growing asset. The main hope for such a fortuitous turn would lie in the possibility that even as a minor trade partner of the several Bloc countries the U.S. would be better able to influence the course of events and the evolution of policies.

The prospects for influencing Soviet policies, at least for the nearer term, would be modest at best; but they could be of very considerable significance in the case of the Satellites. We have good reason to believe that the forces now making for unrest and change in Eastern Europe will mount. The ability to use trade flexibly and actively in Eastern Europe would add greatly to the presently limited capacity of the U.S. to shape the course of these events. In any case, from the point of view of dealing with either the USSR or the Satellites, we would surely be in a stronger position if trade were active (and thus subject to change) than if it were virtually stagnant (and played in only one key).

III. Policy Recommendations

1. The U.S. should be prepared to treat its trade control policy as a useful and uniquely appropriate negotiating instrument in discussions with the USSR directed toward resolving outstanding issues. We should view the policy as expendable in circumstances that promise a break in the cold war stalemate. Specifically, we should be willing to take all necessary steps to remove obstacles to trade except trade in items of direct strategic importance (COCOM items), if such action would contribute to constructive moves on the part of the USSR.

2. Pending such circumstances or negotiations, the U.S should not substantially modify its policies toward trade with the USSR. These policies permit considerable latitude in licensing decisions; we should use this latitude to serve our political purposes and in a manner appropriate to the prevailing state of relations with the USSR. We should, in particular, avoid individual licensing decisions that would in effect amount to a tightening or relaxation of licensing standards unrelated to concrete changes in Soviet conduct. We should also avoid pressing our allies to extend the scope of multilateral controls, except in response to a new Soviet-initiated crisis situation.

3. Apart from the question of trade policy toward the USSR, the US should use trade more actively as a means of influencing events in Eastern Europe, recognizing that such trade can symbolize for a Satellite country another avenue for achieving greater national identity and independence. Specifically, we should use the discretionary authority provided in export licensing and other legislation to respond effectively to overtures from any of the Satellite governments with which we have relations. We should also continue to press for new legislation to increase the existing discretionary authority. Should we reach a basic agreement on trade with the USSR, we should be prepared to negotiate at least as liberal an arrangement with the Satellite governments.

4. If we change our control policy, we should plan to conduct trade with individual Bloc countries on the basis of bilateral agreements. Through such agreements we should seek maximum political advantage from trade and the development of better safeguards for U.S. commercial interests.

5. Should it develop to our advantage to negotiate trade arrangements with the USSR, the Administration should be prepared to secure Congressional enactment of a new East-West Trade Act. Such legislation should be based on a full and frank examination with the Congress of all the relevant issues and would presuppose the existence of evidence that the USSR was in process of significant movement toward ending the dangers and strains of the cold war. Such legislation should provide the President with all the administrative authority he needs to use trade as an effective political instrument for dealing with the USSR and its Satellites.

6. The U.S. should in this circumstance also undertake, through advance consultation, to prepare the ground with our allies for a change in U.S. policy. In these consultations, we should discuss any implications that a change in U.S. policy would have on the multilateral system of controls and any changes that might be required to maintain collective surveillance and control of strategic commodities as multilaterally defined. In keeping with the objective of using trade more effectively for political purposes, we should seek a closer understanding with our Allies whereby we would collectively restrict or cut-off trade as a means of response to Soviet-initiated crises.

[Here follows the remainder of the report.]

325. Memorandum From David Klein of the National Security Council Staff to the President's Special Assistant for National Security Affairs (Bundy)

//Source: Kennedy Library, National Security Files, Subject Series, Trade, East/West. Secret.

Washington, August 14, 1963.

McGB--

SUBJECT

East-West Trade

The Rostow paper on "U.S. Policy on Trade with the European Soviet Bloc"/1/ is in the process of revision as a result of a series of talks last Thursday and a new and more forthcoming version is supposed to be in the offing./2/

/1/Document 324.

/2/The revised version of the Policy Planning Council paper has not been found.

The first draft talked in common-sensible terms about the character of our present trade policy toward the Soviets--emphasizing that its primary considerations were largely political rather than strategic or economic and recognizing that trade provided useful political leverage in dealing with the Soviets. But its recommendations, in effect, denied the use of trade as an instrument for political bargaining. It set as a pre-condition for a modification of our present policy "concrete evidence of Soviet interest in generating improved relations with the U.S. and of Soviet willingness to take, on the basis of mutual concessions, specific steps necessary to effect this improvement."

This perhaps is unchallengeable as a statement of abstract principle, but as an operating guideline its value is questionable because it leaves little or no maneuvering ground for useful political bargaining.

It is not enough to say the trade question should be reconsidered after the Soviets have taken specific steps to bring about an improvement in the existing situation. Improvement will only be possible by some give and take on both sides, and it is unrealistic to suggest that the other side must first demonstrate its good intentions before we can consider meeting them part way. For it is in the give and take process that the intention of the other side can be ascertained.

No one can seriously assert that our present relationship with Moscow can properly be characterized as "detente" or "rapprochement." Whether either of these is in the cards remains to be seen. But the indisputable fact is that there is movement--the first in a long time--and there is an obligation on our part to attempt to ascertain its course and assess its significance.

In this context, it makes little sense to assert that insofar as the possible use of trade in this bargaining exercise is concerned, the only real alternative is to wait and see what the other side does. Some waiting and seeing is called for. But carried on over a prolonged period, it will not produce much. If there is to be progress, there must be movement on both sides, and there is no convincing argument for excluding trade from the dialogue if it provides useful leverage.

In this context, it is important to define the kinds of trade and trade restrictions we are talking about.

There were the restrictions on crabmeat which were lifted early in this Administration. The impact of this action was largely psychological. Politically and economically it did little either for us or the Soviets except to clear away something which had only nuisance value.

At the other end of the spectrum there are broad legal restrictions in the form of multilateral agreements (COCOM) and legislation--the Battle and Johnson Acts. And there is little that can be done about these limitations since this clearly is not the time to seek modification either of the multilateral agreements or legislation.

But in between the crabmeat exercise and the treaty and legislative barriers, there is also a considerable area of potential activity that is controlled by administrative action--export licensing. Its character depends on the way the Secretary of Commerce's discretionary licensing authority is used. Historically, the restrictions have been severe and rigid because the political decision was taken to keep trade with the Communists at an absolute minimum. As a consequence, the United States has less trade today with the Soviet Union than any of its major Western European Allies.

The Soviets, of course, are not interested in trade in general; they are interested in specific kinds of trade--selected heavy industrial goods and industrial plants. Khrushchev, in his conversations with the Secretary and Governor Harriman, talked about the possibilities of buying American chemical plant equipment. In other contexts, the Soviets have talked about buying tire plants and transportation equipment. All of these commodities, the experts have assured me, can actually be sold to the Soviets now, if a political decision were taken to do so. They are not COCOM items; nor do they appear on any other trade ban list. They merely require an export license which is within the Secretary of Commerce's discretion to issue.

One "expert" has said that if the political climate is right and the political decision is taken to lift--to whatever degree is deemed desirable--East-West trade barriers, what needs to be done is "to liberalize export licensing, and let them (the Soviets) come and shop up to their ability to pay, by normal marketing of their commodities, gold sales, or settlement in foreign exchange earned elsewhere."

But the exercise is somewhat more complicated, for as pariahs in our market place, the Soviets have several additional problems to contend with:

(1) The Soviets and their satellites are not entitled to MFN privileges (and are unlikely to get them) and therefore must face unequal competition.

(2) In the sale of their goods here, the Soviets and their satellites have to contend with importer and consumer resistance, and, in some cases, boycott.

(3) Moreover, the Soviets and their satellites do not have easy access to credits. The Battle and Johnson Acts cut off the most important sources, although by recent rulings on the Johnson Act, the Justice Department has in fact made it possible for the Communist states to apply for short-term commercial credits.

And over and above these, there are several political factors which must also be taken into account. Assuming that the licensing and payment problems can be dealt with, the fact is if trade with the Bloc should reach substantial proportions before the necessary political groundwork is laid on Capitol Hill--even though legislative requirements are not directly involved--the entire operation could boomerang and complicate rather than help the situation. Moreover, at some point in any large- scale trade exercise with the Soviets, lend-lease is almost certain to rear its head and create political, if not legal, complications.

Having said all this, the essential points are:

(1) Even within the present restrictive parameters this government has substantial authority already at its disposal to expand trade with the Soviet Bloc, provided such trade makes political sense.

(2) In our dialogue with the Soviets, the trade question is certain to arise again and at the very least we should be prepared to let the Soviet leadership know that we would consider liberalizing existing trade arrangements if the political developments were right--that we would be prepared to meet them part way if they met us in equal measure on significant ground.

(3) Above all, timing is a factor of major importance. While we clearly should not move ahead precipitously (and there will be no end of advice to this effect), it is equally important that we remain alert to political developments and aware of the importance of not holding back so long that an opportunity for significant East-West movement might be missed.

As I mentioned above, a revised Rostow paper is in the making which should be here later this week. This, I would hope, would provide the basis for further discussion and instructions.

DK

326. Minutes of the Meeting of the Export Control Review Board

//Source: Department of State, S/P Files: Lot 70 D 199, Economic Policy, 1963.

Washington, August 15, 1963.

Secretary of State Rusk Secretary of Defense McNamara Secretary of Commerce Hodges Under Secretary of State Ball Assistant Secretary of Commerce Behrman Deputy Assistant Secretary of State Trezise Deputy Assistant Secretary of Commerce Wyman Mr. Mose L. Harvey, Policy Planning Staff, State Department

Secretary Hodges opened the meeting by saying that he had drafted a letter to the President/1/ to cover the paper responding to the President's memorandum addressed to the Export Control Review Board of May 16, 1963./2/ He asked Assistant Secretary Behrman to review the background of the proposals to the President and then asked for comment.

/1/Secret.Document 327.

/2/Document 322.

Secretary Rusk indicated he had no adverse comments on the report itself but offered his views about the current state of Soviet policy and US - USSR relations and about the place of trade relations in our over-all relations with the Soviets.

He cautioned, first of all, against being swept away by excessive optimism. Soviet foreign policy has appeared to change before. Each time, however, hostility toward the West has come to the surface again. Present comparatively friendly attitudes could change overnight. The break between Communist China and the Soviet Union seems to be genuine but we cannot be certain about its durability. There could be a reversal of Chinese or Soviet attitudes and a restoration of the Sino-Soviet common front against the West.

On the other hand, Secretary Rusk said, Soviet policy probably is in a state of flux. It is often said that we must wait for a change in "the atmosphere" before we take steps in trade relations or in other matters to ease our relations with the Soviets. The trouble with that axiom is that the things that we say should not be changed without a change in the atmos-phere are the very elements that make up the atmosphere. In our trade relations with the Soviets and the European Soviet Bloc, he said, we should begin actively to probe and explore. There is plenty of room for scouting the terrain, he thought, as for example, by being ready to sell fertilizer plants and other items. Our willingness to sell certain kinds of advanced plant equipment for cash, even without pushing for relaxation of the existing ban on longer term credits, would be a signal to the Soviets of our willingness to move ahead on a fair basis. We need not rush too far or too fast. There is much exploration and scouting to be done before we will be ready to negotiate a bilateral trade agreement, although such an agreement may indeed be the end product of our explorations.

Secretary Hodges pointed out that American businessmen frequently cannot understand the fact that, although Western Europe was trading with Russia in an increasing amount, we were still maintaining a very tight restriction on such trade. In reply Under Secretary Ball pointed out that differences exist between European attitudes toward trade with the Bloc in that there has been a closer historical connection and a heavier reliance on trade by the Europeans than by the United States.

Secretary Rusk mentioned that Khrushchev had said to him, on the question of trade, that both sides should get an advantage. Secretary Rusk thought that we sometimes tend to forget this truism. In loosening our trade controls, we should be watchful, not only to see that we are making satisfactory trade exchanges but also to be sure that progress is being made in other areas. At the moment, Rumania seems to be ripe for a push toward better relations. We should be forthcoming promptly on a number of trade items in which Rumania is interested. If, then, the hoped-for improvement in our relations takes place, we should liberalize further.

Returning to the question of the Soviet Union itself, Secretary Rusk expressed the view that it was almost inevitable that Ambassador Dobrynin will raise the trade issue when he begins his talks with him. Secretary Hodges agreed and referred to the invitation to Under Secretary of Commerce Roosevelt to visit the Soviet Union as indicating the USSR's interest in expanded trade. He went on to say that he is frequently asked by American businessmen why the Europeans can sell such large amounts to the Soviet Union while Americans are restricted in their access to the Soviet market. In effect, Secretary Hodges said, they are asking whether we are right and the Europeans wrong about proper trade policy toward the Soviet Bloc. He mentioned in this context Soviet statements that a U.S. export market of $1-1/2 billion per year could be developed in the Soviet Union.

There was a general discussion of the possibilities of the Soviet market. Secretary Rusk and Under Secretary Ball both stressed the USSR's payment problem and the limits which this sets on the Soviet purchases. The Soviets seem to be unwilling to expand imports by gold sales and for the most part resist multilateral balancing of trade in favor of fairly strict bilateral equivalence. Furthermore, Under Secretary Ball noted, the Johnson Act prevents us from extending credits of up to five years which the European suppliers do provide. The Johnson Act thus sets the limits on exports to the Soviet Union at fairly low levels.

Secretary Rusk asked about the recommendation that a U.S. Commercial Corporation be formed to conduct trade with the Soviet Union. He expressed his own misgivings about this idea. Mr. Wyman asked how otherwise we could get a quid pro quo for our sales to the Soviets. Under Secretary Ball observed that this could be achieved through a bilateral trade agreement, to the extent that private firms were not able to hold up their end in bargaining. He pointed out that the Europeans had not found it necessary to establish governmental agencies to conduct trade with the Soviets and he wondered if we needed to conform our economy to that of the Soviet Union in order to conduct trade.

Returning to the problem of credits, Secretary Rusk said that he would be willing to consider the legislative action needed to liberalize our position if we could have credit liberalization accompanied by a Lend- Lease settlement. Secretary Hodges thought a Lend-Lease settlement well worth exploring. Secretary Rusk and Under Secretary Ball agreed.

Secretary McNamara, in response to a question from Secretary Hodges, said that to him the question of trade relations with the Soviet Bloc was "purely a foreign policy matter." He had thought for years that we have been misjudging and grossly overestimating the impact of our trade controls on Soviet military power. While the controls undoubtedly commend themselves to the body of American opinion and in political terms are probably necessary, the fact is that peaceful trade between the United States and the USSR would tend on the whole to mold the Soviet Union in the Western image. He felt that it should be U.S. policy to seek to alter Soviet attitudes and he thought that a positive attitude toward trade was an important aspect of such a policy.

Secretary Rusk agreed noting that a recent U.S. Congressional delegation to Russia had come out in favor of a greater exploration of the possibilities of trade. Secretary Hodges noted that even two members of the Kitchin investigating committee indicated that they were willing to expand trade on a quid pro quo basis.

In another brief exchange with Secretary Hodges, Secretary Rusk mentioned some of the small indicators for a change for the better in Soviet attitudes toward the West, such as the end of jamming of VOA and BBC broadcasts, and an apparent increase in Soviet receptivity to scientific exchanges. He thought that there may be basic reasons for a change in the Soviet viewpoint toward the West and in Soviet policy. One, of course, was the conflict with Communist China, but there was also, first the increasing awareness among the Soviet leaders of the awful hazards of atomic conflict and, second, a desire, at least on the part of Mr. Khru-shchev to make progress toward the solution of internal economic problems, foremost of which is a conflict between enormous expenditures on the military budget and the goal of higher living standards for the Russian people.

A number of possible actions were then discussed:

Secretary Rusk said that it was his impression that there was considerable interest in the Congress in the question of trade with the Soviets. The Senators who had accompanied him to Moscow had mentioned the matter and Senator Williams of Delaware had asked for an assurance that the test ban pact had not been accompanied by an understanding on a trade agreement. Secretary Rusk thought that he, Secretary Hodges, and Secretary McNamara should explore informally with the Hill leadership the whole area of trade with the Bloc, not in relation to any immediate legislative requests, but as a means of keeping the Congress informed of the possibilities for a changed U.S. position in trade matters. This suggestion was accepted by the other Secretaries.

Secretary Rusk then suggested that after he had begun his talks with Dobrynin, Secretary Hodges join them some Saturday afternoon for discussions in a relaxed atmosphere, perhaps on a boat on the Potomac. This proposal was also agreed.

Secretary Rusk asked that in addition to the studies proposed in the recommendations to the President, the agencies concerned take a close look at the possibilities for purchases from the Soviet Union and at the whole Soviet payments problem.

Secretary McNamara said that it appeared that we could proceed promptly to liberalize trade with the satellites, whatever the decision about the Soviet Union itself. Secretary Rusk agreed and said that Rumania was the most immediate matter to be looked at. He thought, also, that Secretary Hodges should have "something in his pocket" for his forthcoming visit to Czechoslovakia. Secretary Rusk thought that the Czechoslovakians may be ready for expanded trade with the United States, since international trade represents a very large factor in the Czechoslovakian economy.

At this point there was a brief discussion of press inquiries. It was agreed that the agencies concerned should not, at this stage, give backgrounders or otherwise talk to the press about an increased U.S. interest in Soviet trade possibilities.

The three Secretaries agreed that the report drafted in response to the President should be forwarded and each signed the letter of transmittal.

327. Memorandum From the Export Control Review Board to President Kennedy

//Source: Kennedy Library, President's Office Files, Commerce, 1963. Secret.

Washington, August 15, 1963.

CONCERNING

East-West Trade Policy

Attached for your consideration are actions which we recommend for your approval leading to an expansion of our trade with the Soviet Bloc. Some of the recommendations involve further research and analysis on the part of our Departments; one calls for discussions with our Allies to attempt to hold them in line.

Recommendation No. 6 involves changes in existing legislation and, therefore, an approach to Congress relative to trade discrimination toward the Bloc, Most Favored Nation Treatment and repeal of the Johnson Act.

Luther H. Hodges/1/

/1/Printed from a copy that indicates the original was signed by all three officers.

Chairman

Dean Rusk Secretary of State

Robert S. McNamara Secretary of Defense

Attachment/2/

/2/The source text, marked "FINAL DRAFT," bears the date August 9.

SUBJECT

East-West Trade

Your memorandum of May 16th directed us to examine two questions relating to U.S. trade with the USSR:

"1. Do we now deal with the Soviet Union on the export of technically- advanced machinery and equipment in a manner which adequately protects U.S. interests? Where a national security issue is presented, we of course deny an export license. There are, however, many cases in which no clear security issue arises and yet we know that the Soviets are using American machinery and equipment as a basis for copying our technology. Are we being adequately compensated in these sales?

"Is there any method of organizing these transactions which would secure a better quid pro quo than the present method of leaving it to the individual seller to secure the best price he can in the transaction, in light of the fact the Soviet Union does not ordinarily respect the patent and copyright arrangements on which we rely in our commercial transactions with other nations?

"2. Should we reconsider the whole of our trade with the Soviet Union in the light of trade between Western Europe and the Soviet Union and its European satellites? Considering the character and volume of that trade, would a generally less restrictive policy be more in keeping with the interests of the United States? How much possibility is there for a significant broadening of trade that is consistent with our security interests? Would this possibility be such as to justify a general negotiation on trade and commercial matters with the Soviet Union?"

On the basis of the analysis attached, we make the following recommendations. It should be particularly noted that the recommendations bearing on possible policy changes with respect to U.S.- Soviet trade should be negotiated and undertaken only in the context of an easing of East-West tensions over a broad front.

1. Given the fact that it is still unclear whether the U.S. Government could organize arrangements which would permit us higher compensation for technology sold to nations under Communist control without incurring greater costs than advantages from the effort, a study should be made to provide adequate information and analysis, especially in the following areas:

The ability to obtain precise identification of advanced technology within industry and the status of its dissemination (published or unpublished).

The ability to maintain a roster of changes in techniques and the manner in which they are transferable.

The feasibility and effectiveness of unilateral controls over technology, especially when they may be frustrated merely by publication.

Feasibility of obtaining sufficient information on the comparative standings of U.S. and European industry on specific techniques, since the relevant comparison of technologies, given a difference in treatment under control by the U.S and its Western Allies, is not between the U.S. and Russia but between the U.S. and the Allies which are making such technology available.

The advantages and disadvantages of restricting exports of such technology to non-Communist countries to prevent frustration of U.S. controls and feasibility and desirability of restricting the sale of com- modities made with such technology, for the same reason.

Determining pricing and quid pro quo arrangements which would assure adequate commercial and national returns from permissible trade with the bloc.

Proposed Action: The Export Control Review Board should, as a matter of urgency, analyze the possibilities and problems inherent in an effort to organize the sale of technology to nations under Communist control and make policy recommendations. This study should develop clear criteria for "adequate compensation" in the field of technology; determine whether or not present prices meet those criteria; examine the feasibility of acquiring in the government the requisite information in particular fields; weigh the likelihood of cooperation from other nations; and assess the political and economic benefits and costs of such a program, both within the United States and in our relations with other nations./3/

/3/All the proposed actions in this memorandum were anonymously approved with checkmarks on approval lines following each proposal.

2. Given a continuation of political and other tensions between the U.S. and the USSR similar to those which have existed in the recent past, no significant change should be made in our export control policy with the USSR--either over goods or technical data. Some rationalization of controls between the Departments of Commerce and the Treasury in the field of technology is in order. And we should avoid licensing decisions inconsistent with the present negotiating situation. There is, however, little to be gained from a serious extension of the controls or a serious relaxation of them on a unilateral basis.

Proposed Action: The Department of Commerce should keep existing procedures under review through the ACEP structure to make sure that individual licensing decisions are not made in a manner so as to weaken a future negotiating posture for the U.S. and so as to reflect the prevailing state of relations with the USSR.

3. As an immediate response and when the political circumstances are judged appropriate, we should use the discretionary authority in existing export licensing and other legislation to respond effectively to overtures from any of the satellite governments with which we have relations including the possibility of bilateral agreements. In this context, we should seek some specific response in the areas of patent and copyright protection, tourism, etc., without the need for legislation.

Proposed Action: In the light of the rapidly changing conditions in Eastern Europe, Export Control Review Board should prepare guidelines for a less restrictive, step-by-step expansion in trade with individual nations of Eastern Europe, within the present legal structure.

4. If a significant movement toward a relaxation of tensions with the USSR gets under way, the U.S. should be willing to take all necessary steps to remove obstacles to trade, except trade in items of direct strategic importance (COCOM items), if such action would gain equally constructive moves on the part of the USSR. We should be prepared to treat our trade control policy as a useful and uniquely appropriate negotiating instrument in discussions with the USSR directed toward resolving outstanding issues. We should view the present unilateral policy as amendable in circumstances that promise a break in the cold war stalemate, to be substituted for by a system of bilaterals.

Proposed Action: The Export Control Review Board should prepare, on an urgent basis, a contingency plan for negotiating a bilateral trade agreement with the USSR. It should explore the coverage of such an agreement. It should also explore what is necessary for protection of industrial property and copyrights, and should consider whether any other means to secure better returns for the sale of technology are feasible.

5. In view of the possibility that the protection of the national interest in East-West trade may require a stronger institutional base than that now available, and that government purchasing may be necessary to keep a better balance in the accounts with bloc countries, consideration should be given to the desirability of establishing a form of U.S. Commercial Corporation, including its advantages in the event of need to exercise preclusive buying.

Proposed Action: The Export Control Review Board should promptly study whether U.S. national interests in a period of expanded East-West trade could be adequately protected by either a step-by-step or bilateral agreements approach and whether it is necessary also to constitute a U.S. Commercial Corporation.

6. The Administration should be prepared as the situation justifies, to seek Congressional enactment of a new East-West Trade Act. Such legislation should be based on a full and frank examination with the Congress of all the relevant issues and would presuppose the existence of evidence that the USSR was in process of significant movement toward reducing the dangers and strains of the cold war. Such legislation should provide the President with all the administrative authority he needs to use trade as an effective political instrument for dealing with the USSR and its satellites.

Proposed Action: The Departments of State and Commerce should establish a working group to determine the necessary content of such an Act and to develop data for use in possible/4/ Congressional consideration of the Act.

/4/The word "possible" was added by hand.

7. We should make advance preparations for a discussion with our Allies of the implications that a change in U.S. policy would have on the multilateral system of controls and the possible need we may face to modify its overtly discriminatory form without damage to our ability to maintain collective surveillance and the control of strategic commodities as multilaterally defined. In keeping with the objective of using trade more effectively for political purposes, we should aim at a closer understanding with the allies, whereby we would collectively restrict or cut off trade as a response to Soviet-initiated crises. We would, of course, make clear that the proposed changes in U.S. arrangements involve no alteration in our policy towards Cuba and Communist China. In addition, we must assess the impact of any change in U.S. East-West trade policy on Latin America and other third countries and prepare to cushion reactions adverse to U.S. interests.

Proposed Action: The Department of State should examine problems arising from relations with our Allies and third countries in this sphere. It should explore the feasibility of modifying the COCOM system but preserve the substance of mutual security protection.

[Here follow 15 pages of analysis.]

328. Memorandum From David Klein of the National Security Council Staff to the President's Special Assistant for National Security Affairs (Bundy)

//Source: Kennedy Library, National Security Files, Subject Series, Trade, East/West. Secret.

Washington, September 7, 1963.

McGB

SUBJECT

NSC Standing Group Meeting--Discussions of East-West Trade Policy

The planners--the Export Control Review Board--have now come up with a set of propositions on East-West trade to be approved by the President (Tab A)./1/ Their recommendations are in response to a Presidential request of May 16, 1963 (Tab B)./2/

/1/Document 327.

/2/Document 322.

Their recommendations generally provide license for expanded East-West trade and more flexibility for managing this trade. The next step is to transfer the further responsibility in this exercise to the operators to put these recommendations into a meaningful political context. As I see it, this should result in giving Averell Harriman the mandate to come up with proposals for using trade as a lever for developing our relations with the Soviet Union and the Soviet satellites.

As far as the Export Control Review Board's specific recommendations are concerned, the key passages are nos. 2 and 3. They call upon Commerce to tidy up its licensing practices to insure that these do not weaken the future negotiating posture of the U.S., and also recognize possible advantages in liberalizing existing practices to permit better exploitation of the changing situation in the Communist world.

Recommendation #1 calls for a special study by the Export Control Review Board of the problem of "adequate compensation for U.S. technology." This could be useful and I see no reason for discouraging it.

Recommendation #5 proposes that the Review Board study the advisability of establishing a U.S. commercial corporation to provide a stronger institutional base for conducting East-West trade under the conditions of expanding trade. This, too, might produce something constructive and the Board should be instructed to go ahead.

However, I am reluctant about recommendations 4, 6 and 7. Recommendation 4 suggests that the Review Board prepare "on an urgent basis a contingency plan for negotiating a bilateral trade agreement with the USSR." I appreciate the possible advantages of such an enterprise, but I do not think we are quite ready for this step yet and I do not think it would be useful to have the departments become energetically engaged in such enterprise. It could not be kept under wraps long and would not only get in the way of domestic politics; it would get in the way of negotiations with the Soviets. For the same general reasons, I have even greater qualms about seeking Congressional action to eliminate present legislative restrictions on East-West trade (Recommendation 6) and going to our Allies to review COCOM (Recommendation 7). The experts in the field believe we already have sufficient leeway and authority to deal with the problem (via licensing) and even credit arrangements, limited as they are, are adequate to cope with the first anticipated increases in trade. If there is progress in East-West trade, these things will have to be dealt with in a more comprehensive fashion. But at this point our emphasis should be on utilizing the discretionary authority the Executive branch already has and the credit arrangements which already exist and which, in fact, have been liberalized by Justice Department's rulings. (Tab C)/3/

/3/Document 325.

In summary, recommendations 1, 2, 3 and 5 should go on to the President for approval and recommendations 4, 6 and 7 should be shelved for the present. With this action out of the way, it should be possible to go ahead with the more important part of the exercise--determining how trade leverage might be usefully exploited with the Communist Bloc.

As I mentioned in two previous memoranda (Tab C and D),/4/ trade with the satellites is a problem of different order and magnitude than trade with the Soviet Union. The two are not tied together; nor should one wait upon the other.

/4/Tab D is a memorandum from Klein to Bundy, August 12, on relations with Hungary, Romania, and Bulgaria; it is not printed.

In the case of the satellites, our purpose is to establish broader Western ties with them, giving them an alternative to the Soviets for their economic development and political relations. Go ahead signals have already been given in the case of Rumania because of developments there. But there are interesting opportunities in other Bloc states as well--including Bulgaria, Hungary, Czechoslovakia and even Albania.

As far as the Soviet side of the picture is concerned, there is an important place for the trade item in moving along the dialogue--which already includes such items as security (non-aggression pacts, observation posts, etc.), Germany and Berlin.

All this requires a hard look at the political problems at a high level, by someone with sufficient authority and prestige to direct the exercise, not only through the Department of State, but also through the other interested Government agencies--e.g., Harriman.

The end product of Tuesday's meeting,/5/ therefore, should be to give a mandate to Harriman to move ahead on both the Soviet and Satellite fronts and to produce recommendations for final consideration and decision by the President.

/5/Reference presumably is to the meeting of the NSC Standing Group on September 10, which discussed the Export Control Board's recommendations on East-West trade and "suggested that prompt action on the Board's recommendations be taken as soon as the Senate voted on the Test Ban Treaty." (Kennedy Library, Meetings and Memoranda Series, Standing Group Meetings, 1963, September 10, 1963, East-West Trade, Record of Actions)

DK

329. Memorandum From President Kennedy to the Export Control Review Board

//Source: Kennedy Library, National Security Files, Subject Series, Trade, East/West. Secret.

Washington, September 19, 1963.

1. I have reviewed the report of the Export Control Review Board/1/ and its recommendations for action in response to my request of the 16th of May./2/ In general, I approve these recommendations, but in giving this approval I should like to have it understood that I am strongly in favor of pressing forward more energetically than this report and its recommendations imply, in our trade with the Soviet and Eastern Bloc. The course of events of the last two months, including particularly the test ban agreement/3/ and the evidence of greater trade by our allies with the Soviet and Eastern Bloc, persuade me that we must not be left behind. I believe also that one person within the Government should have central responsibility for setting this program into action, and after further consultation I expect to designate such a person. I should be glad to have prompt advice from each of you on this point.

/1/Document 327.

/2/Document 322.

/3/Reference is to the Treaty Banning Nuclear Weapon Tests in the Atmosphere, in Outer Space and Under Water, done at Moscow on August 5, 1963, and entered into force on October 10, 1963; 14 UST 1313; 480 UNTS 43.

My more specific comments follow.

2. I agree that the Board should, through the appropriate agencies, go forward with the studies suggested in the first, fourth, fifth and sixth recommendations. Further, the studies and other staff work described in the seventh recommendation should be undertaken under the leadership of the Department of State, with the collaboration of the Department of Commerce and the Department of Defense. These preparations, which are essentially contingency activities, should remain on the staff level for the present.

3. I approve the second and third recommendations. In giving effect to these recommendations, the judgment of the Secretary of State on the political situation in the satellites and the state of bilateral relations with the Soviet Union should be given special weight by the Board.

The spirit of the third recommendation with respect to satellites should apply not only to the preparation of guidelines but to the disposition of current licensing issues by the Board and the agencies under its direction.

John F. Kennedy

330. Editorial Note

At his news conference on October 9, 1963, President Kennedy stated that the U.S. Government would not prohibit sales of surplus wheat to the Soviet Union and various East European countries by American private grain dealers at the regular world price for dollars or gold, either cash on delivery or normal commercial terms. He said that he had decided this after consulting with the National Security Council and informing the appropriate leaders of Congress. He added that "the wheat we sell to the Soviet Union will be carried in available American ships, supplemented by ships of other countries as required."

President Kennedy also stated that "this particular decision does not represent a new Soviet-American trade policy," but "it did represent one more hopeful sign that a more peaceful world is both possible and beneficial to us all." He pointed out that "to the extent that their limited supplies of gold, dollars, and foreign exchange must be used for food, they cannot be used to purchase military or other equipment." (Public Papers of the Presidents of the United States: John F. Kennedy, 1963, pages 767 - 768)

Because of Congressional interest and concern with the decision, President Kennedy reported the reasons not to prohibit wheat sales to the Soviet Union and other East European countries in a letter to President of the Senate Lyndon B. Johnson and Speaker of the House of Representatives John W. McCormack on October 10. (Ibid., pages 776 - 778) Released with the letter was the opinion of the Department of Justice that this decision neither required nor was prohibited by any act of Congress. (Letter from Attorney General Robert F. Kennedy to Secretary of State Dean Rusk, October 9; Department of State Bulletin, October 28, 1963, pages 661 - 667) Attorney General Kennedy's letter referred to a letter from Under Secretary of State Ball, September 23, requesting the Attorney General's opinion concerning the applicability of certain laws to the prospective sales. That letter has not been found.

Assuming that the President's announcement of U.S. willingness to sell wheat to the Soviet bloc might raise questions about U.S. East-West trade policy, the Department of State circularized to its posts abroad an expression of U.S. policy on East-West economic relationships as background for responses to official inquiries. It stated that the United States was exploring the possibility of modifying U.S. restrictions on non-strategic trade with the European Soviet bloc on a basis more comparable with other trading countries. Trade would be used to take advantage of current trends in East European states and to enhance the range of communication with the Soviet Union.

The circular telegram stated that the approach on economic problems would be "considered within the context overall U.S. relationship with European Communist countries." It pointed out that signature of the nuclear test ban treaty and other disarmament discussions had not ended the cold war. "Soviet leaders will hold uncompromising positions on such matters as Berlin and continue to make clear ultimate goal of world communism and advocate what they term `national liberation movements of oppressed peoples.'" The United States therefore adhered to its basic East-West economic policy, which the circular telegram then outlined. (Circular telegram 688 to 112 Embassies and Consulates, October 14; Department of State, Central Files, FT 1 US)

During consideration of the foreign assistance authorization bill (H.R. 7885, 88th Cong.) on November 14, Senator Karl E. Mundt (R.-S.D.) offered an amendment to prohibit the Export-Import Bank from guaranteeing or extending credit to any Communist country for the purchase of U.S. grain. President Kennedy urged "in the strongest terms" that the Senate not approve this amendment. (Letter from President Kennedy to Senator Mike Mansfield (D.-Mont.), November 15; Kennedy Library, National Security Files, Trade, East/West) On the same day, Senator Mundt withdrew his proposal after the Senate leadership agreed to consider it in a separate bill. That bill (S. 2310, 88th Cong.) would have banned Export-Import Bank credit and credit guarantees to Communist countries for purchase of any U.S. commodity, but it failed of adoption in the Senate on November 26.

The House of Representatives approved a similar ban in the foreign aid appropriation bill for fiscal year 1964 (H.R. 9499, 88th Cong.), December 16, but the Senate rejected it on December 19. On December 24, the House of Representatives agreed to the foreign aid appropriation conference report (H. Rept. 1091, 88th Cong.) with a provision that left to the President's discretion authorization of Export-Import Bank credit or credit guarantees to Communist countries if he determined it was in the national interest and reported each determination to Congress within 30 days. The Senate approved the conference report on December 30. Presidential discretionary authority to approve Export-Import Bank credits to Communist countries thus became part of the Foreign Aid and Related Agencies Appropriation Act, 1964, approved by President Johnson on January 6, 1964. (P.L. 88 - 258; 77 Stat. 857)

331. Memorandum From the President's Special Assistant for National Security Affairs (Bundy) to the Export Control Review Board

//Source: Kennedy Library, National Security Files, Subject Series, Trade, East/West, 10/63 - 11/63. Secret.

Washington, October 21, 1963.

The President has now received recommendations and comments with respect to the internal organization of the Government for consideration of the problem of East-West trade, and has asked me to report the following decision.

The President wishes to proceed as his memorandum of September 19/1/ suggests--with a comprehensive review of our position in this field and with substantial efforts to improve it promptly. He accepts the recommendation of the Secretary of State that established channels of coordination and control be used for this purpose, and it is his understanding that under the direction of the Secretary of State, Under Secretary Ball will be responsible for this coordination, with due regard of course to the statutory responsibilities of the Secretary of the Treasury and Secretary of Commerce. The President further understands that under the general direction of the Secretary of Commerce, Under Secretary Roosevelt will take special responsibility for the work of his department in this field.

/1/Document 329.

Finally, the President accepts the recommendation of the Secretary of State that initial discussions with the Soviet Government shall be conducted by Ambassador Thompson under appropriate guidance.

The President asked me to emphasize again his interest in prompt and energetic action in this field.

McGeorge Bundy

332. Memorandum From the Under Secretary of State (Ball) to President Kennedy

//Source: Kennedy Library, National Security Files, Subject Series, Trade, East/West. Secret.

Washington, October 25, 1963.

SUBJECT

Trade Relations with the Soviet Union

The Soviet Ambassador/1/ informed me today that the Soviet trade delegation headed by the Soviet First Deputy Minister of Foreign Trade, Borisov, will be prepared to discuss the general question of United States-Soviet trade relations as well as the specific problem of wheat sales. The Ambassador agreed that the first discussion on this subject might be held in the middle of next week, in an unpublicized manner, and, for the first meeting, would be held to two or three persons on each side./2/ I informed Dobrynin that Thompson/3/ and I would represent the United States at this first meeting. My thought was that we should first ascertain what the Soviets have in mind as to the scope of the negotiations. The following appear to be the chief elements of the problem:

/1/Anatoly F. Dobrynin.

/2/For documentation on the U.S.-Soviet talks on wheat, see vol. V, Documents 224 ff.

/3/Llewellyn E. Thompson, Ambassador at Large.

1. Large or Small Deal. We shall first have to decide our own policy and ascertain the Soviet views as to whether, in these discussions, we will seek a major settlement of trade problems or simply some modest expansion through liberalizing current restrictions without involving Congressional authorization.

When Gromyko was recently in Washington,/4/ I expressed to him the opinion that we probably could not reach a broad settlement of trade problems, including legislative action, until after our elections. I think this is probably recognized by the Soviet side. On the other hand, there have recently been indications that they would consider a lend- lease settlement which could conceivably open the way to a major deal. The Soviets have always stated they were seeking the end of any discrimination against them in the trade field. The only important fields of discrimination are the denial of Most-Favored-Nation treatment, the restrictions on credit by the Johnson Act, and controls on arms and strategic items.

/4/For documentation on meetings with Soviet Foreign Minister Andrei A. Gromyko in Washington on October 10, see vol. V, Documents 221 - 223.

2. Credits. The Johnson Act prohibits loans to countries in default in the payment of their obligations to the United States. In the past, we have generally interpreted this to prevent extension of credit terms beyond one hundred and eighty days. The Attorney General has ruled that the Johnson Act does not prohibit extensions of credit "within the range of those commonly encountered in commercial sales of a comparable character."/5/ We could presumably interpret this to allow the extension of credit by private firms to the Soviet Union for the sale of industrial plants for three and possibly even five years. Our Allies are now giving or guaranteeing credits up to five years for such equipment, and we are now engaged in an exercise in NATO to prevent the extension of even longer credit terms which the British, in particular, are inclined to give. If the Soviets thought they could get credit from us for as much as five years, they would probably have less interest in a lend-lease settlement, although they will still wish to obtain MFN treatment. To remove the prohibitions of the Johnson Act with respect to the Soviet Union, it would be necessary to arrive at a lend-lease settlement as well as the settlement of certain Government loans in default. These could, of course, be included in the lend-lease settlement.

/5/Reference is to the October 9 letter from Attorney General Kennedy to Under Secretary of State Ball; see Document 330.

3. Lend-lease Settlement. The last Soviet offer of a lend-lease settlement was for three hundred million dollars and our last offer was eight hundred million dollars, not including ships furnished to the Soviet Union. When we attempted to renew negotiations in January 1960, the Soviets attempted to make a condition of settlement, the simultaneous conclusion of a trade agreement giving MFN treatment to the Soviet Union and the granting by the United States Government of long- term credits. It is probable that the Soviets are now prepared to give up the latter condition.

4. Most-Favored-Nation Treatment. The extension of MFN treatment to the Soviet Union is now forbidden by law. In any lend-lease negotiations, the Soviets would certainly take the position that they could not be in a position to meet payments for interest and amortization unless they could have Most-Favored-Nation access to our markets. It seems questionable whether in the present political climate Congress would be willing to grant MFN treatment to the Soviet Union even to secure a substantial payment on lend-lease. Even with MFN treatment, it is doubtful whether the Soviets could sell substantial amounts of commodities in the United States.

5. Arms and Strategic Items. Neither we nor probably the Soviets expect any substantial change in current restrictions on the export of strategic items to the Soviet Union, although there is some leeway in our definition of what constitutes strategic materials.

6. Licensing Requirements. In practice, in carrying out licensing requirements for exports to the Soviet Union, we have frequently denied licenses for items such as agricultural machinery which could only be considered strategic under the widest interpretation of that term. It is in this field that it would be easiest for us to facilitate some expansion in trade with the Soviet Union. Mr. Khrushchev raised with Secretary Freeman/6/ the question of Soviet purchase of a larger number of fertilizer plants in the United States and the Soviet Ambassador recently indicated to Thompson that he understood his Government was expecting an answer to this approach.

/6/Secretary of Agriculture Orville L. Freeman visited East European countries, including the Soviet Union, in August 1963.

7. Conclusions. In our first talks with the Soviet delegation, I believe we should keep our sights low, since I believe it is unrealistic to think we could get legislation giving them Most-Favored-Nation treatment at this time and without this, I do not think we can expect them to settle their lend-lease accounts. It would seem to me that we might, however, reach an agreement somewhat along the following lines:

a) Expression of our willingness to license the export of certain types of equipment, such as agricultural machinery, fertilizer plants, textile machinery, etc. (A United States firm has been asked to participate in an international consortium for the sale of a huge oil refinery to the Soviet Union. The United States participation would be chiefly the sale of technology. This is being investigated by Commerce, but we will probably have to reject it.)

b) Interpret the Attorney General's ruling to allow the extension of private credits on large industrial plants up to three or (five ?) years.

c) Let it be known that the foregoing is Government policy. Many firms are now unwilling to make bids or do business with the Soviet Union because of their belief that it will be impossible to obtain export licenses.

d) We should probably sound out the Soviets on the possibility of their adhering to international copyright and patent conventions, although their agreement is unlikely and, in the belief of some, is neither very realistic nor necessary since most exporters protect themselves by refusing to sell small quantities for the Soviets to copy.

George W. Ball

333. Report Prepared in the Department of State

//Source: Department of State, Central Files, STR 5. Secret. No drafting information is on the source text. There are two covering memoranda to the source text: One memorandum from Assistant Secretary of State for Economic Affairs Johnson to Under Secretary of State Ball, December 6, requests approval for transmittal of this report to McGeorge Bundy, and the approval line on the memorandum is signed. The second memorandum from Benjamin H. Read, Department of State Executive Secretary, December 18, transmits this report to Bundy.

Washington, December 6, 1963.

STATUS REPORT ON EAST-WEST TRADE ACTION PROGRAM

For convenient reference, each of the seven action recommendations approved by President Kennedy on September 19, 1963/1/ is quoted below, followed by a summary of the progress thereon since that date.

/1/Document 329.

1. Study of Sale of Technology

"The Export Control Review Board should analyze the possibilities and problems inherent in an effort to organize the sale of technology to nations under Communist control and make policy recommendations. This study should develop clear criteria for "adequate compensation" in the field of technology; determine whether or not present prices meet those criteria; examine the feasibility of acquiring in the government the requisite information in particular fields; weigh the likelihood of cooperation from other nations; and assess the political and economic benefits and costs of such a program, both within the United States and in our relations with other nations."

This assignment involves the very complex question of whether some form of compensation other than the price set by the exporter would be both feasible and desirable in the case of sales of technology to the Soviet bloc. The Department of Commerce has prepared a preliminary draft study on this topic./2/ It also has in process the development of information from private business on their experience in dealing with the Soviet bloc on technology. Further analytical staff work will be necessary before significant progress on this assignment will be possible.

/2/The draft study under reference has not been further identified, but a "Study of Special Aspects Pertaining to Export Controls of Technical Data, Plants, Prototypes, and Components, Parts and Materials" by the Bureau of International Commerce, Department of Commerce, July 30, is in the Kennedy Library, National Security Files, Departments and Agencies, Department of Commerce, Technical Export Controls Report, July 30, 1963.

2. Review of Licensing Procedures

"The Department of Commerce should keep existing procedures under review through the ACEP structure to make sure that individual licensing decisions are not made in a manner so as to weaken a future negotiating posture for the United States and so as to reflect the prevailing state of relations with the USSR."

As noted in Secretary Hodges' memorandum to the members of the Export Control Review Board on September 27,/3/ no special action is required of the Board members beyond instructions to their respective "staff people working in the Committee structure of the Export Control Review Board to keep [Recommendation 2]/4/ firmly in mind and to note the President's statement that `the judgment of the Secretary of State on the political situation in the satellites and the state of bilateral relations with the Soviet Union should be given special weight by the Board,' and that the spirit of the third recommendation concerning satellites should be implemented in our current licensing policy."

/3/Attached to the memorandum from Under Secretary of State for Political Affairs Harriman to Secretary of Commerce Hodges, October 7, in Department of State, Central Files, STR 5.

/4/Brackets in the source text.

3. Guidelines for Eastern Europe

"In the light of the rapidly changing conditions in Eastern Europe, Export Control Review Board should prepare guidelines for a less restrictive, step-by-step expansion in trade with individual nations of Eastern Europe, within the present legal structure."

In the President's memorandum of September 19 he gave special emphasis to the approval of this recommendation and the second recommendation above, setting them, in terms of priority, ahead of the less urgent studies provided for in the first, fourth, fifth and sixth recommendations. A draft "Policy Guidelines on Trade with Eastern Europe",/5/ based on consultation by State, Defense and Commerce, is expected to go forward to the Board in the very near future.

/5/Not found.

In a memorandum of September 26 to the Chairman of the Advisory Committee on Export Policy (ACEP Document No. 174, October 17, 1963)5 the Department of State Member set forth the reasons for the Department's judgment that the political situation and attitudes of Rumania had reached the stage where special trade arrangements would be helpful to the achievement of United States objectives. There has been favorable action by the Committee on recommendations in the State document, including:

1. Some liberalization for Rumania of export controls applied to items subject to individual licensing;

2. Procedural changes in the ACEP structure to secure quicker action on export license applications for Rumania;

3. Completion of a technical study, now under interdepartmental review, of technical data on polyisoprene and polybutadiene synthetic rubber plants because of interest on the highest levels in the Rumanian Government in such purchases in the United States and the likelihood that possible approval of those plants would be a key element in the development of a program for further constructive developments in United States - Rumanian relations.

In addition, officials of the Departments of State and Commerce met with the Chairman of the Rumanian State Planning Committee on November 26 and 27 to discuss United States - Rumanian trade relations in general terms with a view to meeting for more detailed discussions at a later date.

4. Study of Possible Bilateral Trade Agreement with USSR

"The Export Control Review Board should prepare a contingency plan for negotiating a bilateral trade agreement with the USSR. It should explore the coverage of such an agreement. It should also explore what is necessary for protection of industrial property and copyrights, and should consider whether any other means to secure better returns for the sale of technology are feasible."

The Department of State has developed the major elements of a bilateral agreement and has an up-to-date staff study on the status of the Lend- Lease problem. A special Working Group has also prepared a preliminary report on "The Protection of Industrial and Intellectual Property in U.S. - U.S.S.R. Trade"6 as a basis for determining a United States position in any negotiations regarding industrial property and copyrights in United States - USSR trade.

5. Study of Possible United States Commercial Corporation

"The Export Control Review Board should study whether United States national interests in a period of expanded East-West trade could be adequately protected by either a step-by-step or bilateral agreements approach and whether it is necessary also to constitute a United States Commercial Corporation."

A draft report/6/ has been prepared and interdepartmental discussion on it will begin shortly.

/6/Not found.

6. Study of New East-West Trade Act

"The Departments of State and Commerce should establish a working group to determine the necessary content of such an Act and to develop data for use in Congressional consideration of the Act."

Preliminary staff work is under way on such an Act.

7. Relationships with Other Free World Countries

"The Department of State should examine problems arising from relations with our Allies and third countries in this sphere. It should explore the feasibility of modifying the COCOM system but preserve the substance of mutual security protection."

The Department of State has transmitted a circular instruction to all posts describing the nature of current East-West trade policy developments./7/ No proposal has been developed for changes in the COCOM system. It has thus far been premature and inappropriate to enter into discussions with our Allies and third countries about expanded trade with Eastern Europe.

/7/See Document 330.

334. Editorial Note

On December 16, 1963, President Johnson approved the Foreign Assistance Act of 1963 (P.L. 88 - 205; 77 Stat. 379), which, among other things, authorized the President to continue most-favored-nation tariffs on imports from Poland and Yugoslavia. Section 231 of the Trade Expansion Act of 1962 (P.L. 87 - 794, approved on October 11, 1962; 76 Stat. 872) had required the denial of such tariffs to products of Communist countries, "as soon as practicable." This had not yet been done.

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[End of Section 16]

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