X

Japan and the Communist Bloc

SHU NI MAJIWAREBA AKAKUNARU
He who mixes with vermilion becomes red

IN THE mid-thirties about 20 percent of Japan’s imports came from Korea and Formosa, which were then Japanese colonies, and another 10 percent from China; about 25 percent of Japan’s exports went to Korea and Formosa and 20 percent to China. Political and economic changes over the past 15 years have reduced Japan’s trade with these areas to only 9 percent of its exports and 5 percent of its imports. After the Occupation ended, and the Japanese turned to explore avenues of expanding their trade, strong pressures from diverse sources developed to reopen the old China trade.

The “Peoples’ Republic of China” was formed on October 1, 1949 and Japanese trade with Communist China was formally authorized by United States Occupation authorities on March 15, 1950. Although Japan was still under occupation, its trade with Communist China grew rapidly during 1950; exports reached $19.6 million and imports amounted to $39.6 million.

With the imposition, in December 1950, of restrictions on exports to Communist China, Japan’s trade with China decreased sharply, as Table X-1 shows. The ban on exports of strategic materials to North Korea and Communist China adopted by the United Nations on May 18, 1951 led to a further decline. The drop was even more pronounced in 1952, after the passage by the United States Congress of the Battle Act.¹

The present system of United States security controls over trade with the Communist bloc dates from March 1, 1948. An export licensing system was initiated at that time over all United States exports to the Soviet bloc. This system is based on a series of extensive lists which distinguish among commodities on the basis of their strategic importance. In practice, no shipment of a commodity on any strategic list is authorized to the Soviet bloc. Licenses to export non-strategic goods to Communist countries in Europe are, however, commonly granted. This does not apply to Communist China or North Korea, with respect to which a complete export and import embargo is maintained.

TABLE X-1. POSITION OF CHINA IN JAPANESE FOREIGN TRADE, 1930-1956

Note: Figures for 1946-48 include Formosa. 1946 covers the period from September 1945 to December 1946.

Sources: Figures up to 1950 are compiled from the data of the Ministry of International Trade and Industry; others from Annual Return of Foreign Trade of Japan and Monthly Return of Foreign Trade of Japan, Ministry of Finance, Tokyo.

As the Randall Commission noted, “it was obvious from the outset that the efforts of the industrialized nations of the free world to deny strategic goods to the Soviet bloc would be of little avail unless these efforts were well coordinated. Accordingly, in the fall of 1948 the United States initiated bilateral discussions with its major European allies which led to the establishment in January 1950 of an informal international organization, the so-called Consultative Group and its Coordinating Committee (COCOM) based in Paris.”² The 15 countries now (1957) participating are the United States, Belgium, Canada, Denmark, France, West Germany, Italy, Japan, Luxembourg, the Netherlands, Norway, Portugal, the United Kingdom, Greece, and Turkey. The leverage of the Battle Act doubtless had an impact in persuading countries to adhere to COCOM decisions.

Simultaneously with Japan’s accession to the Group in September 1952, a China Committee (CHINCOM) was also created to serve as a forum for discussion of security trade control problems relating to Communist China.

The complete embargo against Communist China was applied at the time of its intervention in the Korean War. The CHINCOM embargo list was much more extensive and stringent than the COCOM list. Beginning in the latter part of 1955 a number of participating countries in CHINCOM began to express restiveness over the extensive differential of controls toward Communist China.

The Strategic Trade Control report declares:

Some of the participating governments were under heavy and unremitting domestic pressure, both political and commercial, to seek alteration of the China control system. Certain businessmen and influential newspapers considered the controls anachronistic, meaningless, and hampering trade expansion with Communist China. Some countries advocated that the China lists be brought into line with the controls applied against the European Soviet bloc. . . .

Those who favored a substantial easing of the China embargo argued that the Korean armistice had been signed; that the U.S.S.R. and other Eastern European Communist nations could purchase goods which were under embargo to Communist China; that those items could therefore be re-exported to Communist China despite the added transportation and other costs; and finally, that the effect of the embargo was to force Communist China into a greater economic dependence on the Soviet Union.³

The objections to the more extensive controls toward Communist China grew in volume in western Europe throughout 1955-56. Finally, in the spring of 1957, Great Britain announced that it would no longer respect the so-called “China differential,” that is, it would no longer observe the CHINCOM list, but would conduct its trade with China on the basis of the less extensive COCOM list. Other countries quickly followed Britain’s lead, as did Japan in July 1957, when it announced a list of 272 previously banned items whose shipment to Communist China would thereafter be permitted.

From about the time of the passage of the Battle Act, pressures in Japan began to mount and nostalgic pleas began to be heard for a revival of the old China trade. For example, the conservative, business-minded Tokyo Journal of Finance and Commerce declared:

On a large scale it would be well for the Government to take greater pains in trying to provide trade with the Soviets and the Chinese Reds. Japan, of course, is committed to full cooperation with the United States, and any action which would prove detrimental, directly to free nations, must be strictly avoided. But if business can be transacted without violating Japan’s adherence to the United Nations effort, there is no reason why it should be rejected.⁴

The Oriental Economist, in an article entitled “Trade With Communists Desired,” stated:

Since the outbreak of the Korean War, Japan, by way of cooperating with the United Nations, has been refraining from carrying on trade with Soviet Russia and Communist China. But up to June 1950, Japan had traded with these two Communist countries to an appreciable extent. . . . The suspension of trade with these areas compelled Japan to import these materials from areas lying farther off and consequently at higher prices. This naturally led to a rise in the cost of products of our domestic industry. For this reason it is hoped that our trade may be resumed with Soviet Russia and Communist China, especially with the latter.⁵

Expressions of British opinion, at the time, indicated a desire to have Japan resume trade with Communist China as a means of avoiding increased trade rivalry between Japan and Britain in South and Southeast Asia.⁶

Since 1952 the Japanese yearning for the China trade has mounted, as is shown by headlines such as the following, taken from the New York Times over the last few years:

JAPAN STRIVES FOR CHINA TRADE

JAPAN IS PONDERING TIES WITH RED LANDS

JAPAN SEES HOPE OF RED TRADE RISE

United States Peiping Talks Expected to Bring Some

Relaxation of Curbs on Exports to China

JAPAN SEES TRADE GAINS

Bids from Red China for Goods Bolster Estimates

EAST-WEST TRADE BID RISES; GEORGE URGES JAPAN OUTLET

Senator Would Open China Markets to Tokyo

TOKYO SEEKS MORE RED TRADE; WANTS STRATEGIC
BANS RELAXED

In March 1955 C. L. Sulzberger, reporting from Osaka on “The China Trade—As Seen Through Japanese Eyes,” declared:

Japanese policy shows definite signs of becoming both more nationalist and more neutralist. In other words our influence is waning. . . . For Japan, with its immensely crowded territory, its straitened post-war economy and heavy reliance upon shrinking American aid, feels it must develop new markets. The nearest at hand is across the narrow seas in China.⁷

Writing in mid-1956, Tanzan Ishibashi, then Minister of International Trade and later Prime Minister for a brief period, urged an increase in trade with China, declaring that the “Japanese Government could hardly pursue a policy that ignored the demand from many Japanese business men for restoration of the old economic relations with the Chinese mainland.” In an article in Nihon Keizai, leading Japanese economic and financial daily, Ishibashi asserted that many Western nations including the United States were discriminating against Japanese trade and that these developments “have increasingly instigated Japanese public opinion in favor of more trade with Peiping and has placed the Japanese Government in an extremely difficult position.”⁸

During early 1957 China intensified its propaganda campaign. Headlines read:

PEIPING TO PRESS TOKYO FOR TRADE

INTENSIFIED DRIVE TO WIN CONFIDENCE IS REPORTED
READY TO BE STARTED

RED CHINA OFFERS FAVORS TO JAPAN

PEIPING TRADE BID IS TAKEN TO JAPAN

A Socialist Party delegation returning in April brought substantial commercial bait back with it. Peiping’s proposals included:

Joint arrangements for meteorological, postal, and fishing operations.

A trade agreement replacing the present temporary non-official arrangement.

A long-term contract for Red China to export 1,000,000 to 4,000,000 tons of coal annually to Japan.

An offer to purchase fishing vessels from Japanese shipyards.

A plan for the importation of Japanese chemical-fiber fishing nets and the establishment of a factory in Red China to process these fibers.

A cooperative agreement for the development of Red China’s iron-ore deposits on Hainan Island with Japanese technical assistance.

Partly to offset this pressure, Prime Minister Kishi toured South and Southeast Asia seeking trade and investment opportunities for Japan and then came to the United States in mid-1957, seeking, among other things, American approval for relaxing trade controls between Japan and China. Shortly after he returned to Tokyo, Japan followed Britain’s lead in reducing the list of embargoed products. Among the items removed from the embargo list were machinery and equipment, electric motors, wooden and steel ships, railway rolling stock, trucks and automobiles, rolled steel, special steels, dynamos, diamond-tipped tools, nonferrous metals, electrical and communications equipment, etc.

How traditional and how extensive has been Japan’s trade with China? What are likely to be the dimensions of such trade in the near future—if present COCOM restrictions continue, or in their absence?

Foreign trade was of little significance to Japan until the late nineties, and the China trade did not assume any importance until almost a full decade after the Sino-Japanese War of 1894-95.⁹ Then it was based on a semicolonial relationship that had to be enforced by Japan, at times with punitive measures, and was resisted with periodic regularity by the Chinese.

In the 1930’s Japan’s trade with China was even more strongly influenced by political and military factors. The decline of trade in the years immediately after 1930 (see Table X-1) was due in part to the boycott of Japanese goods in China Proper before and after the “Manchurian Incident” (1931). The trade expansion of the late thirties was due in large part to the expansion of Japanese exports to Manchuria, paid for by Japanese investment in the area, as well as to the occupation of North China starting in 1937. There was, therefore, nothing “normal” about trade relations between Japan and China in the 1930’s, and the conclusions that are often drawn about the “importance” of China’s trade to Japan and the natural complementary relationship between their economies, in the thirties, must be qualified in large measure by the fact that during this period Japanese tentacles were being fastened tightly about China’s economy. The resulting trade was therefore neither normal nor typical.

What did Japan ship to China in the mid-thirties and what did it receive in return? Textiles accounted for 25.8 percent of total Japanese exports to China, machinery and tools represented 18 percent, food and beverages 12.8 percent, metals and metal products 12.4 percent. While the ratio between producer and consumer goods was almost half and half, it should be clearly noted that 70 to 80 percent of the machinery, equipment, and metal products went to foster heavy industry development in Manchuria, while exports of these products to China Proper were insignificant.¹⁰

On the import side, Japan obtained the bulk of its soybeans, oilseeds, tung oil, bristles, coal, and pig iron from China. Soybeans (including bean cake) ranked first, amounting to 25 percent of Japan’s total imports from China, followed by coal (10.9 percent) and oilseeds (9.1 percent). Imports from China in prewar days consisted mainly of agricultural, livestock, and mineral products. The soybeans, oilseeds, and coal came largely from Manchuria and North China, areas under Japanese control or domination.¹¹

The greater significance of Manchuria than of China Proper in Japan’s trade is evidenced by the fact that 70 percent of Manchuria’s exports went to Japan and 45 percent of its imports were derived from Japan. In the case of China Proper the overall proportion was only about 15 percent. Manchuria accounted for only about 10 percent of the total area of China and had only 7 percent of China’s total population, yet it generated 40 percent of aggregate Chinese exports.¹² Japan, as a capital exporter, vis-à-vis China, had an export surplus, and this was especially true of its trade with Manchuria. It was Japanese investment that enabled Manchuria to pay for imports from Japan, and as a puppet state in the yen bloc Manchuria was sealed off from international competition¹³ and was allowed to buy only from Japan. Thus Sino-Japanese trade in the thirties was highly contrived, relationships were forced, and any conclusions drawn from this period as to the importance of the China trade to Japan have little validity today. All that can be said is that China was more useful to Japan as an export market than as a source of supply, for it furnished only one-tenth of Japan’s import needs. And this export market was in good part the result of Japanese investment and of Japanese coercion.

But perhaps most important is the fact that conditions in China in the 1950’s are so completely changed as to negate the relevance of any relationships in the 1930’s. There has been a complete redirection of Chinese trade. Approximately 60 to 70 percent of China’s trade in the early 1950’s was with the Soviet Union and members of its bloc, as compared with less than 1 percent in the 1930’s. Imports of consumer goods have been cut drastically, purchases of capital goods and raw materials have been stepped up sharply. To free themselves from the need for importing consumer goods, the Chinese have begun a vigorous expansion program in textiles and raw cotton output. An enormous industrialization program has been undertaken in China with profound effects on the structure of foreign trade.

A United Nations report declares:

A radical change also took place in the pattern of trade: capital goods imports began to predominate, while agricultural exports tended to decline in relative importance; furthermore trade gravitated increasingly, if not exclusively, to the Soviet Union and countries of eastern Europe, with a corresponding reduction in importance, or elimination, of trade with former trading partners, particularly the United States, the United Kingdom and Japan.¹⁴

Approximately 75 percent of China’s imports are now obtained from the Soviet Union.

It is estimated that capital goods now account for two-thirds of China’s imports. Since the United Nations had sponsored an embargo on exports of strategic goods to China more drastic than that in effect on shipments to the rest of the Soviet bloc, China had to obtain the bulk of its capital goods imports from the Soviet Union, possibly even obtaining some Western products trans-shipped through or re-exported by the U.S.S.R. and its satellites. The Communist regime in China has replaced private enterprise in foreign trade with state trading in the form of the Chinese National Import and Export Corporation.

To spur industrial expansion, investment in agriculture under the first five-year plan was held to a minimum and yet surpluses were drained from the agricultural sector to finance industrialization. This raises doubts as to the ability of Chinese agriculture to yield any surpluses to pay for imports as in the past. Furthermore, the large increases in output of coal and iron ore required to meet planned goals in steel production suggest that Chinese coal and iron ore resources will have to be utilized largely, if not entirely, at home. Thus it would appear that the Chinese, as a result of their new economic program, may have trouble in financing imports.¹⁵

These major changes, the restructuring of the Chinese economy, the drive for autarchy, the shift in imports, the changes in demand intensities, the new parameters and new targets, all postulate very different Sino-Japanese trade relationships from those which prevailed in the thirties. The old benchmarks, contrived in a different setting, are gone and the evolving new relationships are likely to be very different.

The first great change in the postwar period was, of course, the enormous diminution in the total volume of trade between the two countries. The civil war in China, which lasted until late in 1949, reduced the level of trade to minor proportions, as did the wartime destruction inflicted on Japan, including the loss of its merchant fleet.

The trade expansion in 1950 which followed stabilization of the scene in China was checked by the imposition of the United Nations embargo on the shipment of many types of goods to China, as a result of its aggression in the Korean War. The low point was reached in 1952, when Japanese exports to China fell to a mere $600,000 and represented less than 1 percent of Japan’s total. In August 1952 an understanding was reached between Japan and the United States authorizing exports to China of four categories of goods: textile machinery, woolen and worsted yarn products, paper, and dyestuffs. Since then the effort of both Japan and China to expand their trade has had some effect. On January 30, 1953 the Japanese Ministry of International Trade and Industry announced the release of 93 commodities from the list of prohibited exports. Japanese vessels were allowed to enter Chinwangtao. Several private (non-governmental) Japanese trade missions were dispatched to China. On 14 occasions between the summer of 1952 and the autumn of 1954 the Japanese government announced the release of about 270 items from the contraband list. From November 1954 on export permits were granted for certain contraband items on a “special approval” basis.¹⁶ As a result, by the end of 1955 trade had exceeded the 1950 level.

Because of various pressures, particularly from Japanese business groups desirous of expanding trade with China, a series of agreements were signed between Chinese trade officials and Japanese businessmen and Diet members.¹⁷ During 1956, for example, 1,200 Japanese businessmen and politicians visited China in 60 delegations. The terms of the agreements and the extent to which they were implemented may be seen from the following table:

a This agreement was extended for another year, until May 1957, when it was allowed to expire and was not renewed.

Source: Fuji Bank Bulletin, Tokyo, December 1956, p. 13, Table 6.

While responsible business groups frowned on the agreements and the Japanese government took no official cognizance of them, partly because the list of products to be traded included embargoed products, much of the trade that developed could not have been carried on without the tacit consent of the government. A Japan-China Export Import Association was organized to foster trade and assist in carrying out the terms of the agreements. A Diet Members’ League for Promotion of Japan-China Trade was also formed.

These agreements, and the extensive publicity and propaganda associated with them, were designed to and did exert pressure on the Japanese government to obtain a relaxation of restrictions on trade with China. To heighten the pressure, the agreements divided trade items into three categories. In the first category were placed those things which Japan wanted most and which, it was claimed, it could buy in China cheaper than from Western countries. This included coking coal and ores. Japan could secure these, however, only if it delivered machinery and equipment that were on the embargo list. Each new pact, as well as the one-year extension of the 1955-56 agreement, put more pressure on the Japanese government to press the United States to relax the embargoes.

The nature of this pressure may be seen from the following statement with its subtle distortions and inaccuracies:

Nevertheless there cannot be the slightest doubt that segregation of the China market has been a major factor contributing to such phenomena as the change, as against prewar, of Japan’s pattern of trade, the delay in recovery of the prewar level of trade, the chronic dollar gap resulting from trade with the dollar area, the heavy dependence on United States military spending, and the high cost of production and high export prices resulting from handicaps encountered in raw materials supply. . . . It is obvious that without a steady and nearby source of such costly key industrial items as coal, iron ore, and salt, high prices for heavy and chemical industry products cannot be avoided.¹⁸

Thus Japan’s noncompetitive prices in heavy goods and chemicals are ascribed entirely to the embargo on the China trade. The statement was accompanied by the following table:

DEPENDENCE ON THE UNITED STATES AND COMMUNIST CHINA FOR KEY RAW MATERIALS AND FOOD

Source: The Oriental Economist, from Ministry of Finance data.

In chapter V a variety of reasons for Japan’s high cost structure were presented. The cost of imported raw materials was only one factor, and indeed a minor one, since only in the case of coking coal did the higher cost of transportation from the United States than from China have a material effect. Most of Japan’s iron ore now comes from Southeast Asia, and the costs of transporting ore from the Philippines and Malaya are almost as low as from China.

In contrast with the prewar situation only token shipments of iron ore and coking coal flowed from China to Japan in the early 1950’s, in part because of China’s need for these products to meet five-year plan targets and in part also because Japanese exports of nonferrous metals and steel sheets and plates, steel pipes, galvanized sheets, vessels, etc., were under embargo. The Communist policy of tying its sale of goods wanted by Japan to embargoed exports, which, of course, the Japanese, under COCOM and CHINCOM restrictions, could not ship, helped keep the level of trade low and was also responsible for the adverse balance against Japan.

Soybeans, oilseeds, rice, and salt have been the main items which China has been willing to send to Japan, while the Japanese have partially paid for such imports by shipments of rayon yarn, chemical fertilizers, cement, textiles, textile machinery, bicycles, etc.¹⁹

Apart from the embargo, however, there have been other basic reasons why Sino-Japanese trade has not flourished over the last decade and why it appears improbable that it will regain the prewar level in the foreseeable future. During the late forties, of course, the chaos in China and the difficulties in Japan attendant upon defeat and occupation operated to restrict trade. In the early 1950’s the understandable reluctance of the Japanese government to guarantee the enforcement of the informal Japan-China trade agreements, and the methods by which the Chinese Communists carried on trade, were retarding factors. The fact that the Chinese engaged in state trading, while on the Japanese side there was severe competition among numerous small and inadequately financed trading firms, resulted in a disadvantageous trading position for Japan, with low export prices and relatively high import prices. As the prices of Chinese export goods were fixed by the government trading corporation on a “take-it-or-leave-it” basis, while the Japanese firms cut prices in desperate bids for the limited amount of trade, the terms of trade were usually unfavorable to Japan, which received low prices for its exports but had to pay relatively high prices for its imports.²⁰

The most important limiting factor in trade between the two countries, however, is the probability that China does not have the means to pay for any large volume of imports from Japan. Traditionally China had paid for imports by shipping agricultural products. In the first five-year plan, however, agriculture, although given the heavy burden of virtually financing the huge industrialization effort by a siphoning-off process in which it was drained and squeezed, was allotted only a minimum investment.²¹ To provide a surplus for financing industrialization, to feed the expanded urban factory population, and to meet the food requirements of an increasing total population, agriculture, forestry, and water conservation were allotted a mere 7.6 percent of total five-year-plan investment.

In September 1957 the Oriental Economist, explaining why the relaxation of trade controls on commercial intercourse with China was not likely greatly to increase Japan’s trade, declared:

Thirdly, and this is not the least important, the economic reconstruction of China has not been smoothly progressing and she has not developed enough agricultural and mineral exports in order to afford a great deal of imports. . . .

China’s purchasing power is short. China’s main items for export are agricultural products. But the poor 1956 crops and the growing demand at home seem to have combined to reduce China’s farm produce for export.²²

Famines and food shortages have been recurring phenomena in China for centuries. There seems to have been no abatement of this condition, perhaps even an intensification under the Communist regime. A report from Hongkong in December 1956 stated:

Communist China is facing a food shortage that may reach famine dimensions before spring, according to the latest reports received here.

The severe rice ration cut in all cities, announced in Peiping two weeks ago, has just gone into effect. It further reduces the admittedly inadequate distribution of the basic food to China’s 600,000,000 population.

The cut was attributed by Peiping mainly to food distribution failures under China’s widely publicized Second Five-Year Plan. It was also laid to floods and other natural calamities earlier this year.

Last September Liu Shao-Chi, generally recognized as second in command of Communist China, cautioned the Government against taking the food problems lightly this winter. He warned bluntly that the task of feeding the Chinese people could become as great as in the 1954 famine.

In 1954 millions of casualties resulted from the famine and flood damage. This year the flood damage in China was serious despite the control projects, and midyear reports disclosed large scale suffering.²³

Another report in October 1957 said:²⁴

RED CHINA FEARS FARM TROUBLES

Peiping Reports Peasant Opposition and Shortages
May Delay Harvests

Peasant resistance, famine, and starvation, which may plague Communist China over the next decade, make it questionable whether any sizable quantity of foodstuffs can be wrung from the Chinese economy for export to Japan. While the Communists’ capacity for sacrificing 15 or 20 million people to starvation may enable them, from time to time, for political and strategic ends, to squeeze out marginal quantities of food for export, China’s capacity to sustain a large and steady volume of agricultural exports is open to considerable doubt.

This doubt becomes even more grave with respect to industrial raw materials for export. The huge industrialization effort that is contemplated, the vast expansion of heavy industry that is now under way, suggest that any increases in raw material output that China can achieve may do no more than keep pace with domestic industrial expansion, if that. Lai Jo-yu, trade union leader, has given specific figures on China’s economic objectives beyond 1957, the last year of the first five-year plan. By 1962, the end of the second five-year plan, China will attempt to produce approximately 14 million metric tons of steel, Lai indicated. By 1967, when the third five-year plan is scheduled to end, steel output would be about 28.5 million metric tons. China’s steel production in 1955 was officially announced as 2.8 million tons.²⁵ The goal for 1957 was 4.2 million tons. Lai’s data indicate that China expects to industrialize much more rapidly than did the Soviet Union before World War II. Where the Chinese plan to increase their steel production ten times during the next twelve years, the Soviet Union increased its steel production less than five times in the twelve years between 1928 and 1940.²⁶

Of Communist China’s second five-year plan, the United Nations Economic Commission for Asia and the Far East declared:

The outline for the second Five-Year Plan proposed a 50 percent increase in national income, through a rise of 100 percent in industrial (including handicraft) output and 35 percent in agricultural production, as compared with the lower rates of increase of 90.3 percent and 23.3 percent respectively under the first Five-Year Plan. . . .²⁷

Possibly these goals will not be met, but in the attempt to achieve them it would appear that much of the iron ore and coking coal which Japan desires will be needed in China. It is possible to quantify this doubt as to China’s (or indeed the entire Soviet bloc’s) ability to pay for capital goods imports. A study by George Waldstein of the Soviet bloc’s ability to export gave interesting results. He took the 17 leading Japanese imports for the years 1951 and 1953, and compared them with the Soviet bloc exports of the same products to the free world. These 17 key commodities accounted for almost 72 percent of total Japanese imports in 1953. He concluded that except for four commodities—coal, soybeans, timber, and oilseeds—the total volume of Communist bloc exports to Western countries of the items urgently needed by Japan was, in both 1951 and 1953, less than the import requirements of Japan alone.²⁸

If we extend the analysis to the years 1954, 1955, and 1956, as shown in Table X-2, it is seen that for each of the three years coal, timber, and hides and skins were exported from the Communist bloc in sufficient total volume to cover Japan’s import needs, while for 1955 pulp could have been covered as well. Thus in 1956, in the case of only 3 of the 17 commodities (coal, timber, and hides and skins) was the bloc exporting sufficient quantities to meet Japan’s needs. These three commodities accounted for only 6 percent of Japan’s total imports in 1956.²⁹ In the case of rice, cotton, wool, wheat, rubber, tin, sugar, barley, iron ore, crude oil, etc., the bloc seems to be incapable of meeting more than a small fraction of Japan’s needs. Whether it could furnish all of Japan’s coal requirements, or would wish to do so, is not clear. Poland, the major bloc exporter at present, is already deeply and profitably committed to sending its coal to western Europe.

This dim view of the ability of the Communist bloc, and especially of Communist China, to meet much of Japan’s import requirements is supported by an analysis of the Chinese economy. Alexander Eckstein, a leading American expert on the subject, declares:

One of the initial questions that needs to be posed is whether mainland China is able to provide Japan with these raw materials at prewar rates, in the face of the re-structuring of internal demand in China. In this connection perhaps a distinction ought to be made between soybeans and salt, on the one hand, and the raw materials for industry, on the other hand. Soybeans, for instance, have continued to be exported in appreciable quantities in recent years, mostly to the Soviet Union. Yet, whether even with considerable re-direction of trade in case of relaxation of controls, China will be able to ship prewar quantities to Japan is rather questionable. According to official Chinese Communist statements, oilseed production as of 1954 was still below prewar. At the same time, with a rapidly growing population and a domestic emphasis placed upon the need to increase soil fertility, domestic bean and bean cake requirements may be expected to rise. These considerations apply with even greater force to industrial raw materials and semi-manufactures. Thus, in the early 1940’s about one half of the pig iron produced in Manchuria was exported to Japan. While there have been some shipments to the Soviet Union even in recent years, one may safely surmise that the preponderant bulk of pig iron now produced in China will actually be consumed by the local steel industry. The same may be true for iron ore, unless important new deposits are discovered and mined. At the same time, however, if Communist China comes anywhere near meeting Five-Year Plan production targets for coal, it may possibly have a considerable surplus for export. All of the factors outlined above would therefore tend to indicate that the basis of trade between China and Japan has been greatly narrowed, as compared to the situation prior to 1945.³⁰

TABLE X-2. JAPANESE IMPORT REQUIREMENTS COMPARED WITH SOVIET BLOC EXPORTS TO THE WEST, 1954-1956

a Includes bituminous and anthracite.

b Less than one million dollars.

Sources: Japan: Monthly Return of the Foreign Trade of Japan, December 1954, 1955, 1956. Soviet bloc: Commodity Trade Statistics, Statistical Papers, United Nations, Series D, January-December 1954, January-December 1955, Januarys-December 1956.

In the absence of controls, trade between the two countries would, of course, expand somewhat, but it is not likely to rise to the levels which many Japanese optimistically expect. From the comparison of Communist bloc exports with Japan’s import needs, as shown in Table X-2, it can be estimated that over the next five years Japanese imports from Communist bloc sources, principally China, will not, even in the absence of all controls, exceed $300 million or less than 10 percent of Japan’s total imports.³¹

There are other limiting factors in the outlook for Sino-Japanese trade. For one, the Chinese are now largely self-sufficient in textiles and the policy of the Communist government thus far has been largely to eliminate imports of consumer goods, reserving its export earnings to pay for imported capital goods.

Indeed, in late 1957 it was reported that Communist China had become a trade rival of Japan in South and Southeast Asia. The dispatch declared:

Communist China has become a formidable trading rival of Japan in Southeast Asia and is beginning to displace her in major markets. This conclusion is based on reports from Japanese consular officials in Southeast Asia, who have been telling the Foreign Ministry what every Japanese exporter already knew: that their share of Southeast Asian trade is declining. . . .

Mainland China, instead of being a great open market eager to buy Japanese goods, eventually may be Tokyo’s biggest competitor in the rest of Asia, Foreign Ministry analysts believe.³²

While it is generally assumed that in the absence of trade controls and restrictions, Japan would find a large market in Communist China for capital goods, this is by no means inevitable. Shortly after controls were relaxed in mid-1957, Japan began to face sharp competition for the China capital goods market from West Germany and Great Britain. Both of these countries are, of course, eager for the China trade.

Shortly after the relaxation of trade controls in mid-1957, a West German trade and industry delegation negotiated a quasi-official trade agreement with Communist Chinese authorities. The agreement called for a 33 percent increase in the level of Sino-German trade over the 1957 figure. The head of the German delegation, who described his committee as “an extended arm of the Foreign Ministry,” reported his accomplishment directly, on his return to Germany, to Heinrich von Brentano, the German Foreign Minister. That West Germany and Great Britain can both undersell Japan in capital goods has been repeatedly demonstrated. Thus comparative costs of production, quality and efficiency of product, durability, etc., will become important considerations in determining how much Japan can sell to China. Many Japanese seem to have assumed that if controls on trade with Communist China are dropped completely Japan will have the range of the market in China. But, as was seen when controls were relaxed in mid-1957, most leading industrial countries will compete and the Japanese, with higher prices for machinery and equipment, may therefore obtain less of the market than they expect.

A final limiting factor is the need of the Chinese for long-term credits for imports and the reluctance of the Japanese to become entangled financially. They have the example of Ceylon before them as a case study. As the London Economist noted:

Light has been shed on the much-discussed question of China’s ability to pay for imports on a large scale by the long-drawn-out talks between the two countries on renewal of their agreement to barter rubber for rice. Under the old agreement, which expires this year, Ceylon sold China annually 50,000 tons of rubber, more than half its total output, in return for rice; any difference in the value between the rice and the rubber was to be settled in sterling. China’s debt in sterling now amounts to £13.5 million, which it seems reluctant to pay. It has been trying to persuade the Ceylonese to take the balance in manufactured goods, so that no money passes at all.

The Chinese move is a good example of the opportunities that barter agreements give of exerting economic, and eventually political, pressure. If Ceylon refuses to renew the agreement on China’s terms it risks losing both a market and the money which it is already owed. If it accepts, it will have to restrict its imports from other countries, disregard its obligations under the General Agreement on Tariffs and Trade, and allow its economy to become still more vulnerable to pressure from China.³³

It seems clear that in terms both of readiness and of capacity to absorb exports, and more important, of ability to supply Japan’s import needs, the Communist bloc has much less to offer Japan than the free world. Any Japanese Government which carefully weighed the advantages of its present trading relationships in the free world against a prospective or contemplated trading role as a member of the Communist bloc could hardly escape the obvious conclusion that purely in the national self-interest, Japan’s future economic progress, indeed its economic stability, will depend on maintaining and expanding present free world trade relationships. Obviously, however, Japan’s probable strategy is likely to be to try to avoid a flat choice between one side or the other; it will seek rather to secure the benefits of trade with both.