Foreign Relations of the United States, 1964–1968, Volume VIII, International Monetary and Trade Policy

19. Briefing Paper Prepared by the Department of State and the Department of the Treasury¹

PMW/B–15

Washington, December 4, 1964.

VISIT OF PRIME MINISTER HAROLD WILSON

December 7–8, 1964²

International Economic Situation

The Prime Minister has asked that the “International Economic Situation” be put on the agenda for his talks with the President. We have no details as to what aspects of this wide-ranging topic Wilson wishes to discuss, but we believe that he will merely present some of his ideas on various topics in general terms for US consideration. No deep or detailed discussion is envisaged.

He will almost certainly talk about the world trade and payments situation because of its bearing on the UK balance of payments position. He may also wish to touch on the need for new imaginative action to help the low income countries; an “international new deal” for the LDCs was the phrase used by the head of the newly created Ministry of Overseas Development at the recent Colombo Plan meeting.³

I. World Trade and Payments Situation

1. International Liquidity: Prime Minister Wilson is known to be concerned about the “international liquidity problem,” i.e., the sufficiency of the international money supply (monetary reserves and credits) to finance expanding international trade. His general thesis is that if world trade is to expand, major and reasonably automatic expansion of international credit is also needed. In addition, because of its severe recurrent balance of payments difficulties, the UK has a very strong interest in longer-term sources of finance.

There is general recognition that world reserves and money supply will probably require expansion as the volume of world trade increases. European central bankers favor some expansion of credits but place heavy emphasis on the avoidance of inflationary monetary expansion. They are not sympathetic to the idea of extending more credit to chronic debtor countries and consider that the United Kingdom and the United States should take steps to correct their balance of payments deficits.

The US favors measures to provide adequate international liquidity but does not consider that this is the time for any major new initiative. For the present we are concentrating on carrying through the recently agreed increase in quotas in the International Monetary Fund so as to put them into effect next year. This should handle the international credits issue at least for the immediate future.

We do not yet know enough about Wilson’s ideas to make any substantive response appropriate if he should make specific suggestions, and it would be best, therefore, if he should put forward any specific proposals, to say we would need to consider them before taking any position.

(A fuller discussion of this subject is appended at page 5.)

2. Kennedy Round: The Prime Minister may refer to the urgent interest of the UK in the success of the Kennedy Round and express gratification at the recent US decision to table our non-agricultural exceptions list despite the lack of progress on treatment of agriculture in the negotiations. The Prime Minister may caution, however, that because of the complexities and the entrenched positions of farmers in all countries, agriculture may lag behind industry in the Kennedy Round. He may go further and suggest that at some point it may be necessary to divorce industry and agriculture. The UK is interested in industrial exports only. However, it is in our trade interest to obtain the reduction of trade barriers on both industrial and agricultural products, and we are convinced that a combined package will include more benefits for industry as well as for agriculture. It thus is important to keep the pressure on in agriculture in order to get the best over-all deal not only for the US but also for other countries, including the UK.

II. Helping the Less Developed Countries (LDCs)

Because so many Commonwealth members are LDCs, the UK would like to play a larger role in helping them, but in ways that do not further burden the UK balance of payments. After reaffirming the intention of the UK—strapped as she is—to continue to provide financial aid on favorable terms, the Prime Minister may propose a series of measures to help the LDCs in the trade and payments field, measures that would be less costly, and perhaps even helpful, to the British economy. He may propose:

1. Commodity Agreements: More commodity agreements to provide stability in the prices and production of primary commodities important to the trade of the LDCs, such as cocoa, tea, sisal, and jute.

2. Favored Treatment for LDC Manufactures: Increased imports by the advanced countries of LDC-manufactured goods, by imposing lower duties on goods coming from LDCs than on those from advanced countries.

The UK grants duty-free entry to imports from the Commonwealth. As a result, it imports relatively more LDC-manufactured goods than does the US and substantially more than does the EEC. At the UN Conference on Trade and Development last Spring,⁴ the then British Government proposed a system of generalized tariff preferences from all advanced countries to all LDCs, a measure warmly supported by the LDCs and warmly opposed by the US.

3. International Credit for LDCs: Substantial expansion of international credit availabilities for the LDCs (presumably through new IMF techniques), such credits to be directed to spending in debtor countries, e.g., UK and US.

4. World Food Aid: International action to channel food surpluses from advanced countries to meet the needs of hungry nations. (The UK is not a food-exporting country. What contribution would the UK make in support of world food aid?)

U.S. Position

With respect to these proposals, we might respond as follows:

The US recognizes that the low-income countries need stable and growing earnings from trade as well as increased aid on favorable terms.

1. Commodity Agreements: We are prepared to help develop and support commodity agreements to stabilize markets and arrest price erosion in those cases where workable arrangements can be devised. We are, however, aware of the great technical difficulties in putting together and executing such agreements.

2. Favored Treatment for LDC Manufactures: We believe there are two effective ways to help the LDCs increase their exports of manufactured goods: (a) by reducing tariff and non-tariff barriers in world trade, and (b) by helping them produce and market more effectively, for example, by offering technical assistance in export promotion and quality control, by encouraging regional groupings of LDCs to widen the internal market so as to develop industries of efficient size.

We hope to see significant reductions in trade barriers to LDC exports on a multilateral basis within the Kennedy Round. We are opposed to preferential treatment for LDC exports, believing such arrangements would prove to be unworkably complex and divisive, would benefit only a few LDCs at best, would lead to quantitative restrictions to protect injured industries in the advanced countries, and give the LDCs a vested interest in high tariffs among advanced countries to assure a significant margin of preference for LDCs.

3. International Credit for LDCs: We should go no further than indicate our willingness to study any specific proposals in this matter the Prime Minister may put forward.

4. World Food Aid: We are making our food surpluses available to feed the hungry not only through our PL 480 program but also multilaterally through the pilot World Food Program to whose modest resources the US is now contributing in excess of 50%. We would hope to see others increase their contributions to such programs, making available cash as well as surplus foods. We also need a more concerted and systematic effort to increase agricultural productivity in the LDCs so that they can over time feed themselves.

International Economic Situation—Appendix

International Liquidity

Prime Minister Wilson has at times expressed concern about the “international liquidity problem”, that is, the adequacy of the supply of international monetary reserves and international credit in relation to expanding international trade. In Washington last year, as leader of the Opposition, he called for an expansion of credits from the IMF to developing countries that could be spent only in “debtor countries” such as the US and the UK. In London recently he has commented in general terms on the need for steps to increase and strengthen world liquidity.

In his conversations scheduled for December 7 and 8, he is expected to mention the importance he attaches to progress in the field of international liquidity, rather than to bring up specific proposals or suggestions. The British have encountered severe balance of payments difficulties on several occasions in the past ten years. The recent financial assistance of $3 billion is short-term and the United Kingdom now has a very strong interest in alternative and longer-term sources of credit, in addition to the earlier feeling that more reserves would give them greater leeway in internal policies.

Apart from the United Kingdom case, there is a general feeling that reserves are adequate for the world as a whole in the immediate future, allowing for the 25 percent increase in the resources of the International Monetary Fund (IMF) that is now in process of negotiation in the IMF. There is general recognition that in the longer run, there is likely to be a need for more international liquidity, with the continuing growth of world trade and payments. However, European central bankers and governments place heavy emphasis on the avoidance of inflationary monetary expansion. They are also not sympathetic to extending more credit to chronic debtor countries, especially those in a less developed stage. They consider that the United Kingdom and the United States should correct their balance of payments deficits, and that the less developed countries do not need liquidity but rather aid and capital investment.

The United States places particular emphasis on the importance of improved credit facilities, and regards the immediate need as met by an expansion in the resources of the IMF and further development of our bilateral credit arrangements. Looking ahead to a longer-term future, we feel that the Europeans, especially the French and the Dutch, are too restrictive in their attitude towards the further development of the international monetary system. The French particularly favor control of future reserve creation by a small group of major financial powers, with an important role for the central banks of Europe, acting through the Bank for International Settlements. Although other European countries are not so restrictive in their approach, the leading Continental powers lean in the direction of a conservative approach through a limited group. The United States, the United Kingdom, and the other members of the Group of Ten favor the use of the IMF for assuring an orderly growth of international liquidity for a wider group of countries. (The Group of Ten is composed of Western European countries plus the US, Canada, and Japan.) The entire subject of the long-run problem of liquidity is closely related to the need for effective policies to correct balance of payments deficits and surpluses. Detailed examination of both questions is being actively pursued through special study groups established last year by the Group of Ten.

U.S. Position

The United States’ view is that this is not a time for any major new initiative in the field of international liquidity. The monetary system is now weathering quite well the shock occasioned by the recent British difficulties, and it would be unsettling to consider any new approach. Our objective at present should be:

1. We should concentrate on carrying through the 25 percent increase in quotas now in process in the International Monetary Fund so as to put it into effect next year. This should handle the international credit problem at least for the immediate future.

2. We should press forward on the studies now under way on ways to supplement the present reserve system of gold and reserve currencies, if that should be needed in the longer run.

3. We should also press forward with the study of the proper way to minimize and correct balance of payments deficits and surpluses and with the program of international financial cooperation and consultation that has done so much to facilitate the handling of our own deficit and to meet the problems of other countries such as the United Kingdom.

It should probably be sufficient at the December 7 and 8 meetings to agree with the British Prime Minister on the importance of the liquidity question, and of our proceeding with the current program of attacking it. We should also indicate our satisfaction with the close working relations with the British technical people that have been in effect for the past two years and which currently are being intensified. If, contrary to our expectations, the Prime Minister were to make any specific proposals, they should not be given any encouragement until we have had the necessary time to give them appropriate consideration. At the present time we have no knowledge of any new specific ideas that he might have in mind.

1. Source: Department of State, Conference Files: Lot 66 D 110, Visits and Conferences, 1964. Limited Official Use. Drafted by Jerome Jacobson (E), William K. Miller (OFE), Selma G. Kallis (OT), Ruth A. Gold (OR), George H. Willis (Treasury), Harold J. Shullaw (BNA), Frank M. Tucker (BNA), and Robert C. Creel (EUR), and cleared by Ammon O. Bartley (S/S–S).
2. British Prime Minister Harold Wilson visited Washington December 7–8 to discuss with President Johnson the international economic situation. For remarks upon Prime Minister Wilson’s arrival in Washington on December 7, together with the text of the joint communique released at the close of their talks on December 8, see Public Papers of the Presidents of the United States: Lyndon B. Johnson, 1963–64, Book II, pp. 1643–1650.
3. The Consultative Committee of the Colombo Plan for Cooperative Economic Development in South and Southeast Asia held its 16th annual meeting in London November 17–20, 1964.
4. The U.N. Conference on Trade and Development was held in Geneva March 23–June 16, 1964. For developments at this conference, see Yearbook of the United Nations, 1964, pp. 195–207.