Your EX-26 dated 5th January.³ Trade with China and North Korea.

1. This subject was discussed with Robert Barnett, Officer in Charge, economic section of the office of Chinese Affairs in the State Department. His remarks, in summary, were as follows:

(a) Export control

Licences are required for all shipments to Communist China, Hong Kong and Macao. The prevention of all exports to China is not a declared United States Gov­ernment policy, but this, in effect, is being achieved by the denial of licences for any exports to China and by the order that United States vessels can not carry cargo to Communist China.

The export of a small quantity of non-strategic materials to Hong Kong and Macao is being permitted. Hong Kong's difficulties may make it necessary to enlarge the flow of goods to the colony but United States public opinion makes this very difficult. (b) Imports

The freezing of Chinese assets and the blocking of outgoing payments is calcu­lated to prevent direct imports from China. It is the intention of the United States Government to put an end to all normal import trade. Foreign exchange for imports from China will only be pernutted where the imports are considered to be in the national interest, i.e. strategic material. It is also planned to attempt to prevent indi­rect imports from China, i.e. by goods in transit from other countries.

Barnett admitted the ineffectualness of unilateral economic sanctions of this kind but seemed to think that the government's hand was forced by the pressure of public opinion. Barnett was informed about our concern over the United States action, as outlined in teletype EX-26 of January 5th.

2. The remainder of this message is concerned with the execution of the policy of the United States Government with respect to imports into the United States of goods originating from China and North Korea. It is expected that additional com­ment will be forwarded shortly after discussions with Department of Commerce representatives to obtain their views about the probable impact of the import restrictions on current trade.

3. The object of the present United States policy is to prevent the acquisition of United States dollars by China and North Korea. The measures in force are finan­cial in nature and are in the process of being correlated with customs procedures to ensure their effectiveness. The regulations issued by the Treasury Department per­mit the entry of commodities originating from China and North Korea into the United States, provided that payment for such imports is made into a blocked account. The government does not make any assurance with respect to future disposition.

4. The action taken by the Secretary of the Treasury is based on section 5 (B) of the Trading with the Enemy Act, under authority delegated by the President by executive order No. 9193. This legal position was considered to be adequate for independent action by Secretary Snyder but the adoption of the current policy took place after full discussion by the National Security Council and it is considered that any departure from the present policy position will require re-consideration at this level.

5. This question was referred to the National Security Council as it would con­sider the wider defence and political aspects in addition to the international finan­cial aspects which alone might have been considered if the matter had been referred to the National Advisory Council. Treasury Department representatives have requested that this information about internal procedures be kept confidential.

6. Treasury Department regulations governing the financial control aspects of trade with China and North Korea were issued under title 31, chapter V of the United States Code (forwarded to the Department by despatch No. 66 dated Janu­ary 5th).? Specific references of interest are sections 201 of subpart B and 533 and 534 of subpart E. The work of linking these regulations with a customs procedure designed to ensure the compliance of United States importers is in progress and it is expected that instructions to customs authorities will be issued within two weeks.

7. The plan being worked out contemplates using the existing customs definition for determining the country of origin. If this results in specifying China or North Korea as the country of origin, the goods will be impounded until proof is presented to customs that payment in United States dollars has been made into a blocked account. Precise procedural methods are being developed to prevent prac­tices "which would make a mockery of existing regulations which have the status of law".

3. Treasury Department representatives hold the opinion that the regulations in force, buttressed by customs procedures now being developed, will bring import trade from China and North Korea to a virtual standstill. The method employed is expected to produce results closely approaching an embargo although embargo techniques are not being employed. Paragraph 4 of teletype message WA-3414, dated the 29th of December, 1950 should therefore be modified accordingly .⁴

9. The question of familiarizing United States importers with the ramifications of these trade restraints is being taken up with the "National Council of American Importers" which is considered to be the best medium for providing additional trade publicity. Discussions with this organization have included the subject of trans-shipments. Subject to the customs rules with respect to country of origin, the same requirement for payment into a blocked account will be necessary regardless of the number of trans-shipment points.

10. It was emphasized that evasive procedures such as barter, deferred payment, and payment from funds lodged outside the United States will not qualify the goods for release and that transfer of title outside the United States will not be acknowl­edged unless it occurred before December 17th, 1950, the effective date of the financial controls.

11. One apparent weakness in the existing regulations is that the value which must be paid into a blocked account is the value billed by the Chinese exporter. If the exporter wishes to give the goods away, the financial controls of themselves would not offer a bar. This might mean that an evasive payment could be made by the United States importer from funds lodged abroad. When asked about this fea­ture, Arnold of the Treasury Department said that a watch would be kept for illegal transactions of this nature and evidence of below-value shipments would be care­fully investigated.

12. There are many transactional features about goods coming within the scope of these regulations which will not be clear until working arrangements with the cus­toms bureau have been effected and it may be preferable to delay consideration of notifying Canadian traders about the United States regulations related to transship­ments until that time.

13. The Canadian policy with respect to imports into Canada from China and North Korea for consumption or trans-shipment to points other than the United States has not been considered as being within the scope of the discussions with the Treasury Department, despite the general comment reported in paragraph 2 of WA­3414, dated the 29th of December. Treasury Department interest is centred in the question of re-exports from Canada, and Willis of the Treasury Department has been informed that we do not appear to have any legal authority for import controls at present that could be used to prevent goods being imported into Canada from China and North Korea for re-export to the United States.

(Please pass copy to J.H. English through Mr. Heasman's office).

³Voir/See Volume 16, Document 1038.

⁴Voir/See Volume 16, Document 1037.