Canberra, [ 4 February 1971] ¹

Confidential

You will recall that a number of questions were asked in Parliament towards the end of the last session about our trade in steel and other such products of possible strategic significance with Communist China. The point of the Opposition attack was that recorded exports to Communist China of over 12,000 tons of iron and steel scrap and 14,000 tons of refined zinc in the last financial year had added to the capacity of Hanoi and the Vietcong forces against Australian and allied forces through the Chinese supply of rifles, mortars and ammunition.

In my own reply on 14th October I indicated that I was having my Department study again the restrictions as reflected in the COCOM list with a view to referring the matter to you and, if necessary, to Cabinet. I do not think the matter has been raised since.

I make the suggestion that it may be well to consider making a major restatement of Government policy at an appropriate time on this whole question in order to clear up misunderstanding and misrepresentations that have emerged. I further suggest that, in doing so, we lean towards a position of easing, at some moment when it may be timely, say over the next year, the range of restrictions we currently impose on trade with China.

I have in mind that the 'China Differential' may not only have outlived its usefulness but became an anachronism when most Western countries ceased to apply it. Now it is simply a limitation and an inconvenience to important sectors of our economy that require and have scope for more liberal trading opportunities at a time when other Western countries are uninhibitedly developing this market.

Our attitude on trade with China is part of our overall policy towards that country. Under that policy we have tried to ensure that China did not become isolated to the point where its return to the international community was made too difficult. By continuing to trade in non-strategic items we kept the door open for a resumption of normal relations should China change its attitude and demonstrate a sincere and convincing willingness to exist peacefully and without interference to other sovereign nations.

It is necessary, of course, to look at our trade with China in two sectors–one dealing with products that have no recognisable strategic or military significance, and the other with products that are 'sensitive' in the strategic sense. As to these latter, whereas they can be, and are in significant measure supplied by other countries including NATO members, for our part we take care not to trade with China not only in goods of a military character but also as regards items that have identifiable strategic utility. As you know, the great bulk of our exports consists of wheat and wool, which, though of only marginal significance to the Chinese economy, are a valuable source of foreign exchange to us and, in consequence, strengthen our capacity to improve our defences. Moreover, as the Chinese economy develops, a significant market in agricultural products, particularly in coarse grains, could open up.

During the 1950's China traded in the main with the Soviet Union and with other bloc countries. At the end of the 50's China paid back all debts to the Soviet Union, and, since then there has been a continuing re-direction of much of its trade to non-Communist countries. Whereas non-Communist countries in the early sixties supplied approximately one-third of China's total trade, they are now supplying some 80 per cent of it. Its major trading partners are now Japan, the United Kingdom and West Germany. In this development of trade generally with the Chinese mainland the Australian part has been relatively very small, and I see no scope for any major additional breakthrough in the period ahead. Whether, on the other hand, we will be handicapped by a new trend of discrimination in trade matters on the part of China in favour of those recognising it–as many current reports suggest–I cannot yet tell.

I am more concerned for the moment with the range of exports of strategic materials. The basic control lists remain those of the Co-ordinating Committee (COCOM), comprising all the NATO member countries, except Iceland, but including Japan, which still works to control the export of strategic goods to Communist countries (except Yugoslavia). Broadly, the COCOM international embargo lists, up to their latest revision of September 1969, include arms, atomic energy materials, and other materials or equipment that are directly related to military production or military potential. The lists are continuously revised and are gradually being reduced. It has been a matter of consistent Australian policy to observe the COCOM lists in respect of exports to all Communist countries and I see no reason to suggest any departure from this stand for the future.

As I will mention later the United States is of course in a category apart. Its Mutual Defense Assistance Control Act (Battle Act) of 1951 remains its legislative authority not only for the COCOM arrangements but also for its own more stringently restrictive policy whereby there is a virtual embargo on direct trade and financial transactions with Communist China.

In our own case, however, the factor of the 'China Differential' enters into the calculation, arising from our policy decision to observe, in respect of Asian Communist regimes (and of Cuba), controls over a far greater range of items than those in the COCOM lists. The export of these is not prohibited, but each application is considered on its merits, and approval can only be given by the responsible Minister, that is the Minster for Foreign Affairs, on the recommendation of relevant Departments, including your own.

It is most important, I think, to look at the way the China Differential came about. Until the Korean war all Communist countries including China were treated the same by the COCOM group of countries. That is the various international lists (those embargoed, List I; those quantitatively controlled, List II; and those kept under watch, List III) were applied to China. Following the United Nations condemnation of China arising from Chinese military intervention in Korea the COCOM countries embargoed all trade with China in the goods on all the international lists. In addition the Group also prohibited trade in items on a further list known as the Special China List.

From 1954 on the COCOM Group began to relax the restrictions on export of goods to the European Communist Countries. However, the original lists and the special China list were still applied to China. As the European lists were revised the difference between them and the original lists and the special China list became known as the China Differential. The China Differential has inevitably grown as the European lists became relaxed further. In the early 1950's the COCOM countries also agreed to an exceptions procedure whereby items of little strategic importance (items on the watch list and the special China List) were permitted to be sold to China at the discretion of Governments. Australia first adopted the exceptions procedure in 1956 but has been following it ever since.

In 1957 the British Government unilaterally abolished the China Differential and applied the same standards to China as to other Communist countries. Most other members of COCOM followed suit until now only Australia and the United States can be said to be observing the China Differential, at least in its original form. This situation is, I believe, highly anomalous and may be imposing unnecessary hardships on Australian exporters for little purpose.

Cabinet last considered exports to Mainland China (and North Korea) in detail in 1967, when, in its Decision 311 of 2nd May, 1967,¹ it agreed that it could not look with equanimity on the rate of growth of steel exports to Communist China (29,000 tons in 1965/66 and 38,000 tons in 1966/67). Measures to curtail steel exports have applied since then. Administratively, departments observe an upper limit of 30,000 tons on iron and steel and non-ferrous metal exports per annum to Communist China in interpretation of the Government decision .

Until recent years most applications from the China Differential lists were for the supply of steel, and these were approved when we were satisfied that the export involved could not be put to direct warlike purposes, or that the quantity was not excessive and no undue dependence on the China market was being built up. A number of applications were turned down. The types of steel included tin plate scrap, tin plate for cans for canned goods, toys, casings for electric torches, and mild steel sheet of restricted thickness and small gauge for roofing, guttering and the like.

In more recent times a wider range of steel and metals has started to feature in export applications, including scrap iron, silicon steel, zinc, copper. This widened interest in goods other than steel plate, both by Australian exporters as well as the Chinese, may in itself be good reason why we should examine whether the China Differential is any longer relevant. Some of these applications have been refused or a lesser amount than that applied for has been allowed-for example of zinc, steel and scrap. The export of steels of certain types and other metals is permitted but each application is still judged on its merits, having regard to possible end use, and the implications for the Chinese economy and the Australian economy.

A sharp watch is maintained to see that the overall figure of exports of iron and steel and other metals to Communist China does not reach a significant level. The export of steel products from Australia to Communist China represents about only 0.06 per cent of China's total imports of steel. I attach tables illustrating all the above.²

My conclusions from the above survey are:

i) From the point of view of the interests of the United States as well as of other nations friendly to us, our observance of restrictions on trade with Communist China in products that might be of strategic importance or add to that country's military potential have been more than adequately observed and meticulously administered. Only the U.S. does more. Most Western countries do much less.

ii) The facts associated with the Australian policy and the nature of the controls and surveillance maintained affecting the export of strategic products to Communist China, in particular iron and steel, are such that, subject to the politics involved, we should be able to meet public criticism.

Looking to the future, I see a need for our policies to be flexible and responsive to change. I have noted the United States' interest in achieving improvement in relations with Peking and it is evident that, in the economic sphere as well as the political sphere, Japan is not going to allow the United States to secure a relative advantage in relation with China. The pressing interest of other Western countries, notably Canada and Italy, in trade with China, is clear. Economic and political relations are interrelated, but, at least on the surface, the question of trade is far simpler in as much as it is not seriously affected by the problem of Taiwan. As I have indicated above, any action or public decision we take in the field of trade with China will be seen to have political significance. For this reason, trade policy must be subsidiary to our actions in the domestic and international political sphere with regard to China. It is evident in the international sphere that the pace of China's widening international acceptance, and the rapid movement towards seating Peking in the U.N. necessitates our adopting policies with a flexibility enabling us to adjust to developments as they arise. I have the broad question of China policy under close study at present, and I do not think any action in the trade sphere should anticipate our consideration of the whole problem.

I list the following considerations that might suggest, at the right time, a more forward-looking trade policy on our part, more particularly as it affects continued adherence to the China Differential restrictions:

i) Trade is, of course, a major factor in assessing the China problem in terms of our national interests. France, Italy and Canada, for instance, cannot be said to have suffered in a trade sense from their negotiations and ultimate agreements with Peking.

ii) It has become increasingly clear that China is easily able to meet its requirements of such China Differential items as steel, iron, zinc, copper and so on from other countries of Europe and Asia which do not maintain these lists of restrictions on their export. Figures attached, which are also a matter of public record, show a flourishing state of trade in many instances in the relevant products. Alone of United States allies Australia binds itself to the original China Differential.

iii) Although seemingly minor in nature, there have been significant shifts in the United States' own policy. Regulations introduced following President Nixon's policy statement of December, 1969,³ permit American subsidiaries abroad to engage in non-strategic trade with Communist China (and restrictions have also been eliminated on dealings outside the United States by Americans in presumptive Chinese goods). Consequently we have the odd situation that U.S. firms abroad are in an even more favoured position than Australian exporters in respect of items on the China Differential lists, thus calling more into question the validity of ourselves sticking to these.

iv) The pressures on Australia's established markets arising from Britain's move to join the EEC and growing protectionism -in the United States and elsewhere, make it necessary for us to diversify further our exports. Many firms have demonstrated or indicated a potential to enter the Chinese market or further expand what slight foothold they may already have there, and in many cases in the very products that are embraced by the China Differential lists. They would be aided in their planning and in their operations if they were aware of a new 'climate' affecting the Government's policy. If China returns to the fold of the world community the trade prospects could be enormously enhanced. We should not put ourselves in a position where other countries' products have exclusively captured the market. We have a geographical advantage which could give us a competitive edge on price, and which we should look to using.

I fully recognise that in a trade context, no less than in a political context, we would be faced with a problem with the Republic of China on Taiwan if we made any move away from traditional policies.

I need to mention how abolition of the China Differential might affect other countries at present relevant in our trade. There would be no effect on North Vietnam in respect of which we observe a complete trade embargo subject to minor items of a humanitarian or literary nature. North Korea is in the same position as Mainland China, but our trade contacts and interests there are limited, and removal of the China Differential restriction would be of little practical significance one way or the other. Cuba would also be removed from the application of China-type restrictions but this would present no difficulty in the existing political and trade environment affecting that country.

Subject to your own views, and to the views of Cabinet if, as may well be the case, you judge that this whole matter should go to Cabinet, I tend to favour for the immediate future a continuance of the existing policy of adherence to both the COCOM and China Differential lists, but with rather more flexibility, still subject to Minister for Foreign Affairs control on a case-by-case basis, after consultation with interested departments, as to the types of products approved and the upper annual tonnage (now approximately 30,000 tons) allowed. In the longer term, as I say, we could perhaps look to dropping the China Differential lists as such whilst still retaining close Ministerial and administrative surveillance over the type, range and quantities of any sensitive items, outside the COCOM lists, for which export applications were received. I think it would be wise that an interdepartmental Committee be set up to examine critically the question of Australian adherence to the China Differential, and to report to Cabinet at an early date considerations for and against its retention.

I should point out that, since the Parliamentary references in October, administrative action has been suspended on outstanding applications received for the export of 'sensitive' items to China, including iron, scrap steel and zinc. It would be desirable to have these processed in the usual way as soon as this is feasible.

I would like to speak to you personally about the political implications and would be grateful for your views about the proposals in this letter.

[NAA: A1838, 714/3/2, xv]

1 The date was handwritten on the original.

1 Document 121.

2 Attachments not published.

3 On 19 December 1969, the US State Department announced that President Nixon had decided to relax some of the controls on trade with the PRC. Foreign subsidiaries of US companies would be allowed to trade with the PRC in non-strategic goods; US companies would be able to buy goods of 'presumptive Chinese origin' and to resell them in third countries; and US citizens would be able to buy, when overseas, an unlimited amount of Chinese goods for their own private and personal use.