Foreign Relations of the United States, 1948, Eastern Europe; The Soviet Union, Volume IV

740.00119 EW/11–1648: Telegram

The Ambassador in Italy (Dunn) to the Secretary of State

top secret

Rome, November 16, 1948—8 p. m.

4336. Further ourtel 4149, October 28 (102 to Moscow and 659 to Paris) and ourtel 4176, October 30 (103 to Moscow and 663 to Paris).¹

We should appreciate examination by Department and other interested agencies following possible approach to the reparations aspect of Italian East-West trade (Deptel 2674, October 28; repeated Moscow 1275, Paris 4198 especially lettered Paragraph (D)²).

Department is of course, aware of Italian conviction that conclusion of trade agreements is dependent upon prior commitments on reparations from current production. We have had full discussions with Italian authorities along the lines of the Department’s telegrams (e.g. 2559, October 13³ and 2674, October 28⁴) and the Foreign Office fully aware that the quantity of reparations from current production is residual and a function of eventual evaluation of surplus war equipment and Balkan assets. As a tactic to obtain Russian abandonment of demand for 1938 price basis and Reparations Control Commission Italians offered delivery naval vessels on transactional basis (see Moscow’s 2579, November 6 to Department; repeated to Paris as 585, Rome as 80 and Embtels 3941, October 9, 4086, October 22 and 3825, September 28⁵). The quantities of goods proposed by Russians, therefore, are without meaning as reparations “schedule”. However, Foreign Office fears it may become necessary to make definite commitments of quantities of some items, and perhaps even accept some orders prior to September 1949 up to [apparent omission] as a maximum difference between 100 millions and the Italian evaluation of the Balkan assets. There would be no deliveries, however, before September 1949.

During Italian treaty negotiations London and Paris, including Paris Peace Conference on Article 74, no question arose of the kind of goods which would be deliverable on reparations account.⁶ The Russians, therefore, disregarding reasons Italy might allege for refusing certain items on reparations account, might exploit what they would call our unilateral restrictive interpretations of Italian treaty obligations under Article 74(A), Paragraph 3. That is simply by way of calling attention to position that we will have to defend if our unilateral East-West trade restrictions are applied in full to reparations clauses of Peace Treaty (and especially if applied to list 1–B).

The Italian production in which Russia is primarily interested is that of Italian industries particularly depressed because of cost factors. These industries may be uneconomic in the sense that if they insisted on payment in dollars US and perhaps other countries would undersell. However, they do not ask dollars in payment and being willing to accept other forms of payment and as a corollary offering a means to Italy to obtain commodities without increasing its own dollar burdens they are real assets to Italian economy. Furthermore, so long as economies of Russian orbit exist in present or similar form these industries will continue to be economic in this special sense. The million or more workers in Italian heavy industry who have been led to believe they would be fully employed by orders from Eastern Europe (which in turn can furnish recovery goods and can contribute to Italian self-support), are under present conditions among the most valuable assets of Communist Party. As a general policy ECA on strictly economic grounds cannot view with equanimity the flow of ERP paid in volume toward certain of these depressed industries. Russian reparations and trade agreement orders would, therefore, complement not interfere with ERP assistance to other sectors of the economy more particularly as acceptance of orders from East would be contingent upon receipt of raw materials.

Moreover, it is our understanding that East-West trade restrictions apply in final analysis to deliveries. The bulk of reparations orders involved from Russia because of the treaty lag (September 1949) and the period consumed in drawing up specifications and completing manufacture would not be completed for two or more years. Who can foretell conditions prevailing in two years? If certain manufacturers for reparations account when ready for delivery are considered indispensable to Italian or European recovery; or create inflationary pressure arising from states financing of lire costs; or increase the burden on another ally; it should be possible to stop delivery and make a good case under the safeguard clause of the peace treaty. If reparations deliveries on other hand are stopped at sometime for reasons of US political policy a means could be found at time of such decision for financing the acquisition of the Russian interest (i.e. raw materials furnished on commercial terms) under ERP within a Western European payments arrangement or perhaps even if circumstances warrant under some military appropriation. The Italians even might finance part of the labor costs in interest of general security it should be more palatable to them than financing those costs as reparations.

Anyway we submit our thinking on reparations problem as related to East-West trade in hope of making contribution to development of policy which instead of tying us, perhaps to our disadvantage, to a set of principles that may vary in time, leave us with space for movement and is carefully calculated to secure our long-range political and security interests.

Sent Department 4336; repeated Paris for Harriman 681, Moscow 105.

Dunn

1. Neither printed. These messages were related to the negotiations being conducted in Moscow regarding trade and reparations agreements. These negotiations eventuated in the signing on December 11, 1948 of an Italian-Soviet Treaty of Commerce and Navigation together with agreements on trade, payments, and reparations deliveries from Italy to the Soviet Union. Documentation on these negotiations are included in Department of State file 661.6531 and 740.00119 EW.
2. Not printed.
3. Telegram 2559, October 13, to Rome, not printed, cautioned that if the Italian trade delegation in Moscow allowed the Soviet authorities to draw them into negotiations involving any commitment of reparations from current production, there might be unfavorable public reaction in the United States and might diminish the possibility of eventually securing international support for the reduction of the current production burden. The telegram further observed that general U.S. policy on East-West trade was set forth in telegram 3352, Torep 816, August 27 to Paris, p. 564 (661.6531/10–948).
4. Not printed.
5. None printed.
6. Documentation on the negotiation of the Treaty of Peace with Italy is presented in Foreign Relations, 1946, volumes ii , iii , and iv .