Economic Statecraft during the Cold War

European Responses to the US Trade Embargo

Frank Cain

• Publisher: Routledge
• Year: 2013
• Print ISBN: 9780415647359
• eBook ISBN: 9781134200580
• Edition: 1
• Topic: History
• Subtopic: Military & Maritime History
• Index: History

Discussing a rarely researched aspect of the Cold War, this volume uses new material to examine how the United States trade embargo on the Soviet Union and communist China severed relationships with Europe, particularly focusing on Great Britain.

In the late 1940s, the US government stopped nearly all exports to the entire Sino-Soviet bloc in the belief that it would hinder the expansion of Soviet and Chinese military potential. To continue receiving the US Marshall Aid, European countries had to impose similar bans, but were reluctant because their trade links with the USSR and its satellite countries had existed for centuries. The US thereafter negotiated with Europe about what to include or exclude from the list of authorised goods, severely straining diplomatic relations.

Economic Statecraft during the Cold War details these negotiations, casting new light on the ambivalent US-UK relationship and providing insights into the changing emphasis between the Republican and Democrat administrations on the key question of trade embargo, by explaining how the firm consistency in the application of the US policy over the succeeding decades of the Cold War was maintained.

This book will be of much interest to all students and scholars of Cold War history, intelligence studies and international history in general.

1 The evolution of America's Cold War trade planning

The contribution of trade wars to the winning of wars has little register in historical writing. The battlefield is the principal focus of the historians and the effectiveness of blocking a protagonist's trading links is rarely acknowledged in a war's outcome. In the First World War, for example, Germany was compelled by 1918 to request an armistice through exhaustion of its economic and physical resources in spite of its army remaining strong and intact. It was the denial of resources through the loss of its trading links, caused considerably by the effectiveness of the British naval blockade, that forced Germany to seek an armistice. Adolf Hitler applied that lesson when planning the Second World War by harnessing the skills of I.G. Farben Industries and other German chemical firms to make Germany independent of commodity imports through the production of chemically produced substitutes such as synthetic rubber, petrol from coal and other chemical-based resources. Hitler's awareness of the importance of the trade war was further demonstrated by his switching of naval resources to expand Germany's submarine campaign against Britain's transatlantic trade which resulted in severe strains on British war-fighting capacities. One of the most successful aspects of the American navy's submarine campaign in the Pacific War was the sinking of Japanese merchant shipping transporting essential raw materials from Southeast Asia to metropolitan Japan, thereby denying it the commodities for continuation of the war.

In response to America's perception of Soviet expansionism occurring in 1945 and 1946, it was not surprising that America looked to renewing elements of trade warfare. However, US relations with Russia and later with the Soviet Union had never followed a smooth path. US trade connections with Russia had never been extensive either during the tsarist period or following the Bolshevik Revolution, and it withheld diplomatic recognition from the new Soviet Union until 1933 when the newly elected Roosevelt administration softened those tensions by exchanging ambassadors. Roosevelt had established a modus vivendi during the Second World War with the Soviet government, but the ending of that relationship with the death of Roosevelt opened a new chapter of more hostile associations with the advent of the new Truman administration. Concerned at the trend of international events, the Truman officials began rebuilding US military forces during 1947, resulting in the US army expanding from its existing 542,000 personnel to 790,000 by June 1948, and another 1,165 aircraft were to be purchased to boost naval aircraft numbers. The number of active navy combat ships was also increased to reach 280 by June 1947.¹ There was a mood of marshalling resources to fight another war. In a similar expansionist policy, the Joint Chiefs of Staff agreed to the Plans and Operations Division mounting two covert and deception projects on what it termed ‘a wartime basis’, the information about which was to be divulged to only a small circle of brigadier generals and colonels.²

Chinese communism and America's new military preparations

The Truman administration was concerned about events in Western Europe, but with the establishment of the North Atlantic Treaty Organization in April 1949 by twelve nations, including the US, the possibility of hostilities commencing there became more remote. But it was America's involvement in China's ongoing civil war in support of the nationalists, led by General Chiang Kai-shek, against the Chinese communists led by Mao Tse-tung, that brought the US closest to adopting a national war footing. America's contribution was directed at supplying Chiang with large quantities of arms and ammunition. In November 1947 the Secretaries of State and Defense instructed the War Assets Administration to hand over military munitions and supplies to Chiang, including surplus munitions in the Marianas, in what was described as the ‘39 Division Program’.³ It was later calculated that from March 1941 until the end of 1951, US military and economic aid amounting to $3.3 billion was furnished to bolster Chiang's forces by the US military. Of this amount, $1.4 billion had been supplied before the Japanese surrender and another $1.9 billion delivered between then and December 1951. Included in this amount were 1,000 military aircraft, 131 naval vessels, 6,500 tons of ammunition, enough rifles to equip nine US infantry divisions and 231 million rounds of 0.30 calibre ammunition. The earlier deliveries were conducted under Lend-Lease, but a further delivery of $14 million of ordnance was supplied under the Sino-American Cooperation Organization Agreement. The rifles for nine Divisions were provided under the China Aid Program of 1948 and still more equipment was delivered under the Mutual Defense Assistance Program.⁴ In some areas of the Truman administration the mood was evident of the US already being at war in China, albeit in an indirect form.

President Truman was uneasy about Chiang's lack of progress against the communists and called for a report on the situation in both China and Korea from Lieutenant-General A.C. Wedemeyer who had succeeded the deposed General Stilwcll as Chief of Staff to Chiang. Wedemeyer was also commanding the American Forces in China, then amounting to 6,180 military and naval personnel. Wedemeyer's report in September 1947 showed little optimism for the immediate success of Chiang's forces. He remarked on how ‘maladministration and corruption have caused the loss of confidence in the Government and basic freedoms of the people are jeopardised due to oppression by government police agencies’. The General saw the marshalling of financial resources as essential to Chiang's gaining an advantage over the communists. ‘China will not exhaust her foreign official assets (US$327 million)’, he reported, ‘until early 1949 at the present rate of imports and exports’, and he urged the mobilisation of the ‘privately held foreign exchange assets [amounting to] from six hundred million to fifteen hundred million dollars’. The General perceived economic inflation looming in the future and recommended a large US loan of $200 million in silver. The weakness of Chiang's administrative capacities concerned the General and he remarked that ‘it is not certain that he [Chiang] has sufficient determination to make needed reforms if it requires absolute overruling of the political and military cliques surrounding him’.⁵ Truman ordered Wedemeyer's report to be classified as ‘Top Secret’ and insisted that ‘its contents should not be used in any way nor should reference be made to its recommendations or conclusions, either orally or in writing’, and that it should be seen only by himself and the two Secretaries of State and Defense.⁶ It was decided to distribute more military equipment to Chiang, but to keep this action secret.⁷

However, Chiang's forces continued to retreat south, and over a year later US military intelligence reported to the Chief of Staff that although Chiang still had an army of 2,325,000 as opposed to the communists' 1,433,000, the prognosis was not favourable.⁸ By early 1948 the possibility of nuclear war was under consideration by the US administration, prompting the development of the programme known as Operation CROSSROADS. This outlined the proposal for responding to a nuclear attack from the Soviet Union. An evaluation of this plan by the Joint Chiefs of Staff (JCS) recommended that the President be enabled, after consultation with the Cabinet, ‘to order an atomic bomb retaliation when such retaliation was necessary to prevent or frustrate an atomic energy attack upon us’. The JCS also wanted a greater representation on the Atomic Energy Commission so as to control the weapons' fabrication, the design and testing and the handling of information on the weapons use.⁹ A large increase in the production of aircraft was planned by the US, amounting to an expenditure of $1.5 billion over the next two years and the Finletter Commission was appointed in 1947 as the means of achieving this goal. The Congressional Aviation Policy Board, supported by its Subcommittee on Combat Aviation, called on the Secretary of Defense to present his recommendations on how the Finletter's Commission proposals should be implemented.¹⁰

Probably the strongest indication that the US was marshalling its resources for war was its revival of wartime intelligence apparatus. The Office of Strategic Services (OSS) was ordered to be disbanded by President Truman at the war's end, but in 1946 the Central Intelligence Group (CIG), which had been part of the OSS was expanded. From a staff of 100 early in 1946 it was increased to 1,816 people by the end of 1946 to become the Central Intelligence Agency (CIA).¹¹ The passing of the National Security Act in July 1947 provided not only for the establishment of the CIA but also for the coordination of the three military services, including the newly established air force, and later a centralised Defense Department in 1949.

Another important intelligence development at this time was the revamping of the wartime signals or communications intelligence organisation which had effectively helped defeat the Axis powers. At the end of the war it was in the hands of a coalition of the military, the State Department, and the Federal Bureau of Investigation (FBI). Eventually it was to become the National Security Agency (NSA), which eavesdropped on worldwide communications traffic. In 1947, moves were in progress to place this coalition of parties under the more direct control of the National Security Council, and by February 1948 James Forrestal, the Secretary of Defense, was aiming to establish the US Communications Intelligence Board which would take over this coalition establishment. This was to be done not by issuing an Executive Order, but simply by implementing the terms of the National Security Act, in the same way as the CIA had been established.¹² Forrestal could not have predicted the resentment by the military services towards this arrangement, but he died before commencing battle to achieve that outcome. The management of this highly important US intelligence asset was settled by Forrestal's successor, Louis H. Johnson. In May 1949, he established the Armed Forces Security Agency, thereby placing this vast COMINT organisation under the control of the military through the Joint Chiefs of Staff.

America continued to move to a war footing in what it believed was an unstable world. General Hodge, Commanding General of the US Forces in Korea, recommended to the Department of the Army in October 1947 that all dependants be removed from Korea within the year due to the fear that a civil war would soon erupt in that region.¹³ Other plans were prepared late in 1948 to build what was termed a radar fence around the US. This was done in the knowledge that although Soviet bombers could not make more than a one-way flight to the US, it was anticipated that by 1953 the USSR would have ‘over 1,600 long-range bombers of improved design’ and the radar was seen as ‘the main means for employing counter weapons in air defense’.¹⁴

America's new policies for controlling East—West trade

The Truman administration was anxious to stop all US exports to the Soviet bloc by 1947. The Neutrality Act of 1939 offered a dated means for containing the export of arms, ammunition and implements of war, but the National Security Council and the Cabinet looked to the National Military Establishment (NME) for new methods of exercising export controls that would ‘implement the foreign policy and the security interests of the United States’. During the war years, the NME controlled the export of munitions and the Commerce Department exercised similar authority over the commercial exports of US commodities. The National Security Council in December 1947¹⁵ and the Cabinet in March 1948 laid down new policies for the government's exercise of controls over all exports to Eastern Europe. The Joint Chiefs of Staff supported the administration with the severe warning that, ‘from a military point of view it would be undesirable to assist, directly or indirectly, in strengthening either the military or the economic potential of the U.S.S.R. and her satellites as they are our most probable enemies’. After the war the Commerce Department had controlled the export of scarce local commodities that were required for postwar domestic use under the First and later the Second Decontrol Acts. The administration established an Inter-agency Committee in 1947 to adopt a classification scheme in which commodities were allocated to three classes depending upon their relative war potential value, particularly to the Soviet bloc.¹⁶ In fact this assemblage of export control mechanisms was unnecessary because America's trade with the Soviets was minimal. The State Department was concurrently assuring worried Congressmen and others that the combined total of imports and exports with the USSR did not exceed 1 per cent of US foreign trade. The Department assured them that apart from undressed furs, imports from the Soviet Union consisted of magnesium, chrome and platinum, ‘domestic supplies of which are inadequate or lacking’.¹⁷

Stopping America's trade with the East, therefore, was a simple operation; the more difficult task was to persuade the West Europeans to limit their trade with the Soviets, but by an amazing coincidence the means were then at hand for America to accomplish that end. At that time, Congress was legislating to implement the Marshall Plan which was a $12 billion aid programme over four years to assist sixteen of the Western Europe nations repair their war-battered economies. The Foreign Assistance Act was passed by Congress in March 1948 to establish the Marshall Plan to be known officially as the European Recovery Program (ERP). Congress also legislated for a new body to administer the ERP, with the name of the Economic Cooperation Administration (ECA), and the Act establishing that new body was the Economic Cooperation Act. An amendment was made to this Act while in the Senate that barred any country receiving US aid if it exported any product to a non-participating European country which might contain a US-supplied commodity that would ordinarily be refused a US export licence ‘in the interest of national security’.¹⁸ This amendment was identified as Section 117(d) and was known as the Mundt Amendment.

Implementing the Mundt Amendment fell to the Economic Cooperation Administration, which set about an ‘intensive reconsideration of the interim war potential classification of commodities’. Meanwhile the Secretary of State established an Ad Hoc Sub-committee to plan for the further restrictions on exports to the Soviet bloc. On 30 March 1948, after Cabinet approval, the same Ad Hoc Sub-committee was charged with making recommendations for the establishment of a peacetime economic warfare organisation aiming ‘to prevent or delay further increase in the war potential of Eastern European economies’.¹⁹ To this end the Sub-committee proposed that exports to the East be classified under four levels of priority. Class 1 contained all military goods and equipment that could be used in their manufacture, such as machine tools, precision instruments, electronic equipment, roller bearings, heat-treatment equipment, oil-drilling equipment and a range of chemicals including nitrates, soda ash, benzene, lead, copper, mercury and tin. Class 1A contained semi-militar...

Table of contents

• Cover
• Half Title
• Cass series: Cold War history
• Full Title
• Copyright
• Contents
• Preface
• Acknowledgements
• List of abbreviations
• 1 The evolution of America's Cold War trade planning
• 2 America and the European trade embargo
• 3 Expansion of the trade war under the impact of the Korean War
• 4 The firming of Cold War tensions and its effects on the trade war
• 5 America faces European demands for changes to CoCom: pressures from Germany, France and Britain
• 6 American flexibility in conducting economic warfare
• 7 US handling of the European trade expansion
• 8 Dealing with European dissent
• 9 The Johnson years of innovation
• 10 The Johnson-Nixon era in trade controls
• 11 The Nixon administration and the openings to the East
• 12 Nixon and high-technology trade control
• 13 Relaxation of restrictions on communist trading
• 14 Conclusion
• Notes
• Select bibliography
• Index