Grzybowski, Kazimierz

English

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CONTROL OF U.S. TRADE WITH CHINA:AN OVERVIEWKAZIMIERZ GRZYBOWSKI*INTRODUCTIONThe political approach to foreign trade has a long history in the UnitedStates, especially in our dealings with communist countries. For example,the emergence of the Soviet regime in Russia after the 1917 Revolution wasgreeted in this country with misgivings and a concomitant refusal to recognizethe new government. That recognition and the settlement of outstandingeconomic and political questions between the U.S. and Russia came onlyafter the rise of Hitlerism upset the balance of power in Europe. Similarly,the Soviet-Nazi Alliance of August, 1939 affected American relations withRussia, as did the German attack on the Soviet Union in 1941. This articleexamines the development of the legal basis for foreign trade with CommunistChina and suggests alternative structures for future economic relations.ITRADE RESTRICTIONS IMPOSED ON COMMUNIST COUNTRIES IN GENERALA. LegislationIn the post World War II period, the Soviet Union became the center ofa system of states with communist governments which extended from CentralEurope to Asia. The expansion of communism over this vast area led to theCold War in which trade restrictions became an important instrument of policy.One important component of those restrictions, the Trading With the EnemyAct of 1917,' antedates the Cold War, but provided a workable basis for con-trolling economic cooperation with the communist countries. Similarly, theJohnson Debt Default Act, enacted in 1934, which originally prohibited cer-tain financial transactions by private persons involving foreign governmentswhich were in default of their obligations to the United States,2 was later usedas an instrument for restricting trade with the socialist countries. The mostimportant piece of legislation specially designed to impose controls on trade*Professor of Law, Duke University.1 50 U.S.C. App. §§ 1-44 (1970). U.S. foreign trade regulations affecting China since theestablishment of the communist regime in 1949 are described in a number of studies and articlesin legal and professional journals; some of them are cited in subsequent footnotes. A more com-plete bibliography may be found in Note, Recent Changes in United States Trade Regulations Affectingthe People's Republic of China: A Market Decontrolled, 13 VA. J. INT'L L. 78 (1973). See also Reghizzi,Legal Aspects of Trade With China: The Italian Experience, 9 HARV. INT'L L.J. 85 (1968); Starr, De-veloping Trade With China, 13 VA. J. INTL L.J. 13 (1973).2 18 U.S.C. § 955 (1970). While its main effect was on the terms of credit, which at one time werequite general and absolute, as time went by the terms of the Johnson Act became quite diluted.See Starr, Trading With the U.S.S.R. and China, 28 Bus. LAW. 1301, 1303-04 (1973).LAW AND CONTEMPORARY PROBLEMSwith communist nations was the Export Control Act of 1949, 3 which wasreplaced twenty years later by the Export Administration Act of 1969. 4Virtually all of this legislation provided for regulatory action which gave therelevant government agency great control over U.S. trade.B. Regulatory ActionThe mechanism of trade regulation established by the Trading With theEnemy Act of 1917 continues to serve as the basis for regulations issued bythe Office of Foreign Assets Control of the Department of the Treasury. Theseregulations prohibit any United States citizen or resident or any American-controlled corporation-irrespective of the country in which it is doing busi-ness-from dealing with communist countries unless properly licensed bythe U.S. Government. With respect to China and Cuba, the result was once atotal prohibition against exportation of any goods or unpublished technicaldata. This prohibition applied even to goods and data which were not of U.S.origin. In addition, purchase of commodities of Chinese origin was prohibited,even if for resale or for export to non-American markets. Bunkering or de-livery of petroleum products to Chinese ships, Chinese chartered ships, orto ships which could have called at Chinese ports was also proscribed. Finally,all Chinese assets (some $71 million)5 were blocked and frozen.Pursuant to the Trading With the Enemy Act of 1917, the Treasury De-partment has also issued Transaction Control Regulations 6 which authorizethe scrutiny and licensing of all exports to communist countries accordingto both classes of goods and the country to which the delivery is to be made.The power to license such exports is shared by the Treasury and CommerceDepartments; in fact, to avoid conflicts over authority, the Treasury Depart-ment automatically confirms export licenses approved by the CommerceDepartment. 7The Export Control Act of 1949-administered by the Office of ExportControl of the Bureau of International Commerce of the Department ofCommerce-has served as a basis for the compilation of the Commodity Con-trol List which, by an ingenious method, permits the regulatory agency tocontrol the flow of exports in support of U.S. foreign policy. The CommodityControl List classifies, according to a code letter, each commodity requiringan export license from the Office of Export Control. Correspondingly, eachcountry to which American exports may be directed is grouped in one of eightcategories according to another classification system designated by the lettersfrom Q to Z. Thus, the resultant combination of two letters will indicate whichcommodities require a license depending upon the destination of the export.Commodities listed under category "A" require an export license for alldestinations, while all countries in group "Z'--in which China was placed atthe time of its entry into the Korean War-require export licenses for all3 Act of Feb. 26, 1949, ch. 11, §§ 1-12, 63 Stat. 7 (expired 1969).4 50 U.S.C. App. §§ 2401-13 (1970).5 See Note, supra note 1, at 83-84.6 31 C.F.R. §§ 505.01-505.60 (1973).7 1d. § 500.533(a)(1).CONTROL OF U.S.-CHINA TRADEclasses of goods. So long as China remained in class "Z," practically no exportsto that country were permitted. 8C. 1969 ModificationsIn 1969, the Export Control Act expired and was superseded by the ExportAdministration Act,9 which reoriented the policies export controls were de-signed to serve. The 1949 Act was intended to prevent distribution to anynation representing a threat to U.S. national security of those commoditieswhich would make a significant contribution to the military or economic po-tential of such nations. 10 While the 1969 Act retained the entire mechanismof controls and regulations governing the licensing of exports, it modifiedsignificantly the overall purpose of trade restrictions, limiting the absoluteprohibition of exports only to those items which would make a "significantcontribution to the military potential" of the country of destination.1 In addi-tion, the 1969 Act was no longer specifically oriented against communist-dominated nations.The Export Administration Act of 1969 was the result of the growing con-viction that the 1949 Act failed to achieve its purpose. The Soviet Union andthe P.R.C. had forged ahead with programs of economic and military devel-opment, while the 1949 Act merely diverted Soviet and Chinese purchasesfrom the U.S. to other countries following a less restrictive policy. Hence, therequirement that American commodities or technological data must not con-tribute to the economic potential of the country of destination was eliminated.Moreover, the criterion of availability was promulgated as a basis for licensingthe export of a commodity or technology to a communist country included onthe Commodity Control List. Undoubtedly, an important consideration bearingon this liberalizing trend in export controls was the need to improve ourbalance of payments.IIRESTRICTIONS ON TRADE WITH CHINAChina emerged from World War II a close ally of the United States,which had supported its ambition to achieve unification, independence, andleadership in the postwar world. Not until the communist take-over in 1949did the U.S. Government adopt any restrictive measures aimed specificallyat controlling and restricting trade with China. At the same time, formulationof the Marshall Plan to assist in the European reconstruction caused the UnitedStates to adopt a policy of allocating materials in short supply to countries whichparticipated in the Marshall Plan. Discrimination against other countries was,at that time, merely an unintended side effect, not an immediate goal of theU.S. Government. However, as the Soviet Union embarked on the policy ofestablishing communist regimes in Eastern Europe, the element of national8 See Note, supra note 1, at 80-81.9 50 U.S.C. App. §§ 2401-13 (1970).10 Act of Feb. 26, 1949, ch. 11, §§ 1-12, 63 Stat. 7 (expired 1969)."1 50 U.S.C. App. § 2402 (1970).LAW AND CONTEMPORARY PROBLEMSAmerican-owned) to suspend execution of the contract since it was in violationof the U.S. Transaction Control Regulations.' 7 The French minority directorsinstituted proceedings when Fruehauf attempted to comply with the TreasuryDepartment directive. A temporary administrator was appointed by a Frenchcourt for the execution of the contract, and eventually the purposes of theU.S. policy were frustrated. The French courts clearly acted in defense ofFrench economic interests, seeing to it that French foreign policy prevailedover that of the United States.' 8As a result of this conflict, the Treasury Regulations were amended toprovide that American firms in COCOM countries would no longer be subjectto the requirement that they obtain a U.S. license in addition to the one issuedby the host country for export of prohibited goods and technical data toChina.19 On the other hand, it continues to be the position of the U.S. Govern-ment that a subsidiary or licensee residing or doing business in a non-COCOMcountry remains subject to U.S. licensing regulations. Nevertheless, the recentexportation of automobiles manufactured by American companies in Argentinato a communist nation suggests that U.S. jurisdiction in even non-COCOMcountries may be seriously circumscribed.IVTHE NEW COURSEOn June 10, 1971, controls on a large list of nonstrategic U.S. exports tothe People's Republic of China were terminated 20 in accordance with theprovisions of the Export Administration Act of 1969, as amended by the EqualExport Opportunity Act of 1972,21 signaling a new era in Sino-American traderelations. That move did not arrive unheralded. It was preceded by modifica-tion of restrictions on the travel of U.S. citizens to China, permission forAmerican tourists to import Chinese goods for noncommercial purposes, 22 andallowance of trade in nonstrategic goods with China by U.S. firms abroad,provided that U.S. dollars were not used in the transactions. 2 3 In addition,nonstrategic foreign-made products incorporating American produced com-ponents and parts were authorized for sale and shipment to the P.R.C. inApril, 1970, subject only to obtaining an export license in each case.24 The fol-lowing August, bunkering of free world ships carrying nonstrategic goods tothe P.R.C. with petroleum products of non-U.S. origin was permitted .2 Finally,f31 C.F.R. §§ 505.01-505.60 (1973).18 See also id. § 500.29, which extends U.S. jurisdiction to corporations and other entities abroadowned and controlled by any citizen or resident of the United States or any person actually presentwithin the U.S.1937 Fed. Reg. 3511, 3520 (1972).o For a summary of those lists, see 64 DEP'T STATE BULL. 815 (1971). A more detailed listingmay be found in 36 Fed. Reg. 11,808 (1971).21 Act of Aug. 29, 1972, §§ 101-210, 86 Stat. 644.22 34 Fed. Reg. 12,179 (1969).23Id. at 12,189.24 U.S. DEP'T OF COMMERCE, EXPORT CONTROL BULL. (Office of Export Control Pub. No.16, 1970)." Letter from U.S. Dep't of Treasury to interested firms, Aug. 26, 1970.CONTROL OF U.S.-CHINA TRADEsecurity became increasingly more dominant in the allocation of materials.The communist take-over in China in October, 1949, precipitated a pro-hibition against exports of certain goods to China. The forbidden list wasexpanded the following year with the outbreak of the Korean War and China'sintervention. A total prohibition of exports to what was now the People's Re-public of China was ordered in December, 1950,12 including the revocationof already issued export licenses. In addition, American planes and ships wereforbidden to land at Chinese airfields or call at Chinese ports; assets of Chinesenationals residing in the United States were blocked (in response to the con-fiscation of all American property in China); imports from China to the U.S.were prohibited; parcel post shipments from China were barred; and U.S.passports began to list China among the countries where travel for Americancitizens was not authorized. Finally, the Foreign Assets Control Regulationsblocked assets in the United States which were, owned by residents of China.1 3IIIINTERNATIONAL COORDINATING COMMITTEE ON STRATEGIC TRADE WITHCOMMUNIST COUNTRIES (COCOM)In 1949, informal consultations were initiated between the U.S. Governmentand its allies to achieve economic cooperation in stemming what at that timelooked like a tide of communist aggression in Europe and Asia. These informalsessions ultimately developed into a system of prohibitions, enforced by anumber of countries from the American continent, Europe, and Asia, aimedat denying strategic goods to communist nations. The legislative basis forAmerican participation was provided by the Mutual Defense Assistance ControlAct of 1951 (Battle Act).' 4The interested countries have since established the International Coordi-nating Committee on Strategic Trade with Communist Countries (COCOM). 15The Committee maintains a list of goods which are uniformly denied to com-munist countries, although each government reserves to itself the right todeny export licenses to additional classes of goods. Accordingly, there areconsiderable discrepancies in the trade policies of the countries involved whichsometimes lead to conflicts among the member countries. One example isFruehauf Corp. v. Massardy,1' which concerned the execution of a contract be-tween Fruehauf-France and Berliet, S.A., for the delivery of sixty vans ear-marked for shipment to the People's Republic of China. In January, 1965,the U.S. Treasury Department directed Fruehauf (which was two-thirds12 Lee, U.S. Policy Toward China: From Economic Warfare to Summit Diplomacy, in CHINA'S TRADEWITH THE WEST: A POLITICAL AND ECONOMIc ANALYSIS 33 (A. Stahnke ed. 1972); 1957 U.S.DEP'T OF STATE, MUTUAL DEFENSE ASSISTANCE CONTROL ACT REPORTS 32.13 Lee, supra note 12, at 43-44. See also Garson, The American Trade Embargo Against China,in CHINA TRADE PROSPECTS AND U.S. POLICY 23-43 (A. Eckstein ed. 1971).14 22 U.S.C. §§ 1611-13 (1970).5 Initially the Committee, headquartered in Paris, consisted of two subcommittees, one dealingwith European communist countries, and the other with Far Eastern communist countries. Indue course the two were merged into one body. See generally Lee & McCobb, United States TradeEmbargo on China, 1949-1970: Legal Status and Future Prospects, 4 N.Y.U.J. INT'L L. & POL. 1 (1971).16 5 INT'L LEGAL MATERIALS 476 (1966).LAW AND CONTEMPORARY PROBLEMSon April 4, 1971, President Nixon announced further ameliorations in traveland trade restrictions: visas for visitors from China were to be expedited; U.S.currency controls were to be relaxed to permit the use of dollars in trade withthe P.R.C.; American vessels and planes were to be allowed to carry Chinesecargoes between non-Chinese ports; U.S. firms were permitted to fuel Chineseships and aircraft (except those bound to and from North Vietnam, North Ko-rea, or Cuba); and American-owned foreign flag carriers were permitted to callat Chinese ports.26The rationale behind these various steps was to modify the U.S. regimenof China trade regulations in accordance both with changes taking place inother countries and with changing attitudes in the United States itself. Themost significant domestic factor was the armistice in South Vietnam whichpermitted the disengagement and withdrawal of American forces from thatcountry. At least in part, that armistice had to be credited to China's policyof reducing tensions with the United States.After the June 10, 1971 announcement removing the need for specialexport licenses for goods and commodities excluded from the list, includeditems could still be exported under the condition that a special license be ob-tained-subject only to the general provisions safeguarding American nationalsecurity-in accordance with the U.S. export control regulations. Moreover,under the general license provisions all imports from China were allowedentry into the United States subject to the usual controls and customs dutiesrelating to goods originating in communist countries. The P.R.C. was alsoincluded in the June 10, 1971 termination of the requirement that fifty percent of wheat, flour, and other grain exports be carried in American bottoms. 27The June announcement was complemented by that of February 14, 1972,which placed the P.R.C. in country group "Y" on the Commodity ControlList of the Department of Commerce, finally elevating China to the samestatus accorded the Soviet Union.2 8VTOWARD A BILATERAL SYSTEMFurther progress in the development of U.S. economic cooperation withChina calls for bilateral action-a formal or informal trade agreement whichwould meet the requirements of section 231 of the Trade Expansion Act of1962,29 and a legislative act calling for a reciprocal trade agreement to grantfavorable tariff rates, a most-favored-nation clause, or duty free status. Ofall the nations with a communist regime, only Yugoslavia and Poland are inthis category. Nevertheless, there seem to be indications that the time may comeeventually when China will also be offered a more formal arrangement re-garding terms of trade. A statement of policy suggesting this developmentappears in the so-called "Shanghai Communique" issued at the termination26 7 WEEKLY COMPILATION OF PRESIDENTIAL DOCUMENTS 628 (1971).27 See 64 DEP'T STATE BULL. 815 (1971).28 37 Fed. Reg. 3511 (1972). See also 66 DEP'T STATE BULL. 291 (1972).29 19 U.S.C. § 1861 (1970).CONTROL OF U.S.-CHINA TRADEof the President's visit to China in February of 1972:Both sides view bilateral trade as another area from which mutual benefitcan be derived, and agreed that economic relations based on equality and mutualbenefit are in the interest of the peoples of the two countries. They agree tofacilitate the progressive development of trade between their two countries.30On the other hand, it is difficult to determine to what extent expandedtrade with the United States is desired by Chinese leaders. Recent remarksby Undersecretary for Economic Affairs William J. Casey indicate that there islittle hope for a rapid growth in the volume of trade between the U.S. andChina, even though some progress has been made.3 ' Indeed, given the highlycentralized trade regime presently prevailing in China, there is no reasonto suppose that expansion of foreign trade will be other than a selective process.The fact that Chinese importers have not availed themselves of the creditopportunities available to them in the United States suggests a continuingreluctance to expand American trade.3 2 Our experience in trading with thecommunist countries on the whole confirms that foreign trade is primarilya part of domestic industrialization plans, used almost exclusively to expandtheir own productive capabilities.30 66 DEP'T STATE BULL. 438 (1972).31 See 69 DEP'T STATE BULL. 567 (1973).32 Starr, supra note 1, at 30.

Control of U.S. Trade With China: An Overview

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Control of U.S. Trade With China: An Overview

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