Foreign Relations of the United States Diplomatic Papers, 1939, The Far East, Volume III

894.24/6351

Memorandum by Mr. Roy Veatch, of the Office of the Adviser on International Economic Affairs

[Washington,] March 21, 1939.

Some Pro and Con Considerations With Respect to the Proposed Restriction of Exports of Scrap Iron and Steel

Pro:

1. The great expansion of exports during the past few years to Japan, Italy and Germany.

2. The rapidly arising proportion of total exports of scrap going to these countries.

3. The unquestioned effect that these supplies of scrap have been of material assistance in stepping up the armaments industries in these countries.

4. The fact that the United States is the principal large scale market for such scrap; in some cases there has been no surplus for export due to heavy domestic demand and in other cases legislative restrictions have been imposed on exports.

Con:

1. A prohibition or radical restriction of the exportation of scrap iron might prove to be of some embarrassment to Japan, Italy and Germany but it is not probable that their armament industries would be crippled by this action alone. It is probable that there would be little serious effect on the industries in Italy and Germany. In the case of Japan, American scrap has formed one of the principal raw materials for the iron and steel industries. It is probable, however, that if this resource were cut off Japan would be able to turn to other sources of basic materials for her industry. To a great extent scrap iron and pig iron are interchangeable in the manufacture of steel and it is probable that Japan’s first recourse, if scrap iron supplies are cut off, would be to increase the importation of pig iron. The Japanese industry already imports very large amounts of pig iron from abroad, including during the last two years very heavy supplies from the United States and unless these foreign sources of pig iron were cut off at the same time that shipments of scrap iron were prohibited or restricted, the Japanese industry would be embarrassed to the extent that slightly higher expenditures might be required for pig iron. Should foreign sources of pig iron be restricted at the same time then it is probable that Japan would seek to increase her imports of iron ore, principally from Burma, Malaya and the Netherlands East Indies, her best present sources of supply. Should increased shipments from these sources prove unobtainable then the next recourse of Japanese industry probably would be the utilization of the extensive low grade iron ore resources in Manchukuo, Korea and Japan proper, and at the same time an attempt to import larger quantities of semi-manufactured iron and steel products. It is understood that the processing of the low grade iron ores and iron sands of Japanese controlled territory would be relatively expensive and of course semi-manufactured products would cost more than scrap iron and pig iron which could be manufactured by existing plants in Japan. The probable effect of restrictions on foreign supplies of raw materials for the Japanese iron and steel industry would appear, therefore, to be merely an increase in the cost of supplying necessary munitions rather than an actual stoppage of such munitions; should Japan be unable to secure as large amounts of iron and steel products as formerly, she probably would be driven to the expedient of limiting even further the amounts of iron and steel allotted to nonmilitary uses, maintaining thereby the necessary supplies for the army and navy.

2. The prohibition or restriction of the export of iron and steel scrap would be largely ineffective as a means of “stopping” Japan unless there were similar restrictions upon the supply of raw materials for the iron and steel industry from other foreign sources and also upon the supply of other vital raw materials such as petroleum, copper and nickel.

3. Should action be taken to restrict exports of iron and steel scrap only there would be ground for the charge of discrimination against the scrap industry. There is no logical reason why this product should be singled out for restriction; there is just as much reason for prohibiting the export of pig iron and semimanufactured iron and steel products, of petroleum and petroleum products and of copper, to Japan or other “aggressor” countries. It is obvious that public attention has been focused upon exports of iron and steel scrap largely as the result of a propaganda campaign initiated by the independent steel producers three or four years ago with the objective of removing price competition for scrap, one of their principal raw materials.

4. Legislation restricting the export of scrap as a means of bringing economic pressure upon Japan and the Rome-Berlin axis no doubt would encourage a number of industries to demand similar restrictions on exports of raw materials which they require and also the demand by manufacturing industries for restrictions upon the importation from these countries of competing commodities. Furthermore, it may be taken for granted that Japan and the other countries involved would retaliate against American trade in other commodities wherever possible. In other words, action along these lines runs counter to the commercial policy of this Government and its foreign trade interests and should be taken only if there is conclusive reason for such action in support of our foreign policy or the national defense.

5. For these and other reasons the interested executive departments including the Department of State have opposed legislation along these lines on a number of occasions during the past two or three years.

R. Veatch