S/P–NSC files, lot 61 D 167, “Communist China, US Policy Toward”
No. 840
Memorandum by Sherman Kent of the Board of National Estimates to
the Director of Central Intelligence (Dulles)
Subject:
- Japanese Trade with Communist China*
1. Although the Japanese had developed a substantial trade with mainland China during the 1920’s and early 30’s, it was only after the political seizure of Manchuria in 1937 that mainland China became a major Japanese trading area—in 1939 it became Japan’s most important trading area. (See Table 1.) Manchuria and subsequently much of China became protected Japanese markets. By developing [Page 1809] Chinese and particularly Manchurian economic resources the Japanese provided themselves with an outlet for capital goods exports, and, through increased indigenous purchasing power, a market for consumer goods. In addition they obtained a secure source for many of Japan’s essential raw material requirements, particularly coal, pig iron, iron ore, tin, salt, and soya beans and oil cake. (See Table 2.)
[Here follow tables 1 and 2, neither printed.]
2. Until the war years 1941–45, when Japan was largely cut off from other sources of supply, mainland China was more important to Japan as a market than as a source of imports. Japanese exports to mainland China of textiles, steel, and capital equipment were only partially paid for by purchases of essential raw material and foodstuffs. This export surplus was balanced primarily by Japanese investment in Manchuria and in other areas of China.
3. Japanese postwar trade with mainland China has been relatively insignificant. (See Table 3.) Although it had revived somewhat by 1950, Sino-Japanese trade was almost completely stopped by the restrictions following the outbreak of the Korean war. Following the armistice in 1953 it began to revive as controls were slightly relaxed. Unlike the prewar period, recent Japanese trade with mainland China has shown an import surplus.
[Here follows table 3, not printed.]
4. The future level of Sino-Japanese trade will be determined primarily by political factors, and secondarily by economic factors. The principal political factors will be: (a) the extent to which Communist China, in conjunction with the USSR, continues to pursue a policy of Bloc autarky, deliberately minimizing trade with non-Communist area; (b) the extent to which the Free world will maintain controls on trade with Communist China; and (c) the extent to which trade will be used by the Bloc as a weapon of economic and political warfare. The principal economic factors are: (a) the availabilities of Communist Chinese exports of coal, iron ore, salt, soy beans, and to a lesser extent rice and other grains, and (b) the availabilities of Japanese exports of capital equipment which both meet Chinese specifications and are competitive with Free world and Bloc prices.
5. In attempting to determine the possible magnitude of Sino-Japanese trade expansion within existing controls, the Japanese, assuming Communist Chinese agreement, estimate that this trade could probably be raised to some $70 million each way per year by 1957. The Japanese Ministry of International Trade and industry has estimated that Japan, at this level of trade, might import from Communist China the following quantities of certain essential commodities: [Page 1810]
| Quantities Imported | ||
| 1957 | 1953 | |
| Rice | 100,000 m. tons | (none) |
| Soy Beans | 100,000 | 16,000 m. tons |
| Coal | 800,000 | 137,000 |
| Iron Ore | 500,000 | 38,000 |
| Salt | 300,000 | 197,000 |
6. We believe that, under the assumptions stated in the preceding paragraph, Sino-Japanese trade could probably be increased to approximately $70 million each way per year by 1957, but that the quantities of rice and soy bean imports projected by the Japanese Ministry might not actually be available. Chinese export of such quantities of those commodities to Japan might conflict with increasing domestic requirements and with export commitments to the Soviet Bloc. In any case, Japanese imports from Communist China at this projected level of trade, although almost two and a half times the value of 1953 imports from mainland China, would still be only 3.5 percent of the projected total of Japanese imports in 1957.
7. If controls on Chinese Communist trade were lowered to the level now applied against other Bloc countries and if Communist China desired substantially to increase trade with Japan, we believe that by 1957 Sino-Japanese trade could probably be raised to at least $100 million each way. It might even reach $150 million each way, but we believe this would require some diversion of Communist Chinese trade from other export markets.
8. The estimate that the $100 million level could be reached is based primarily upon the Communist Chinese capability to export coal and iron ore in greatly increased quantities—a capability which we believe they can exercise without significantly modifying their present trade commitments to the Bloc. It is probable that the large iron ore deposits on the island of Hainan could be exploited without great expenditure on the part of the Chinese. We believe that the iron ore presently produced from Hainan is not included in Communist China’s internal steel program, but is earmarked for export. In these circumstances, we believe that Communist China could probably increase its production on Hainan sufficiently to provide for the export of about 1.5 million tons of iron ore to Japan, a quantity equal to about one third of Japan’s 1953 total iron ore imports of 4.3 million tons. We believed that Communist China could supply a major portion of the coal imported by Japan (some 3.5 million tons in 1953) with relatively small investment. It is estimated that Chinese coal production will be approximately [Page 1811] 100 million tons by 1957, a quantity which appears to be greater than that required for internal consumption and export to the Soviet Far East.
9. Even if Sino-Japanese trade under COCOM levels of controls were to reach $150 million by 1957 it would still constitute only about 7 percent of Japan’s estimated total foreign trade for that year. Indeed, even if all controls on trade with Communist China were eliminated, we believe it very unlikely that trade relations between mainland China and Japan would regain their pre-war significance. There has been a fundamental change in the Chinese economic situation since the establishment of the Communist regime. It now produces practically all of its own textiles and much of its steel. It is now firmly committed to a program of industrialization and of integrating its economy with that of the Bloc. China’s export commodities are now committed to the needs of its own industries and to those of its Bloc partners. As for Japan, it no longer possesses the political control over Manchuria which permitted it to develop that area as an integral part of its own economy. For these reasons we believe that as long as Communist China remains in the Bloc it is unlikely that Japanese trade with Communist China will become a substantial proportion of Japan’s total trade.
Note: The economic data in this memorandum is based on official Japanese sources, or as these sources have appeared in ORR and OIR publications, or in despatches from US Embassy Tokyo.
- The memorandum has been coordinated at the working level with OIR, ORR, and OCI; these representatives concur with the substance of this memorandum. [Footnote in the source text.]↩