Foreign Relations of the United States, 1952–1954, General: Economic and Political Matters, Volume I, Part 1

PPS files, lot 65 D 101, “Economic Policy”

Paper Prepared in the Bureau of Economic Affairs¹

official use only

[Washington,] May 17, 1954.

Foreign Economic Relations of the United States²

The basic aim of our foreign policy is to improve the security and well-being of the US. This objective is generally accepted and understood. What is less widely appreciated is the fact that our international economic policies are a major instrument for achieving this objective. In fact, unless we can regain and step up the initiative in the foreign economic field, US leadership in the free world is threatened.

The purpose of this paper is threefold: (1) to indicate the role of US foreign economic policy in our total foreign policy; (2) to explore the general requisites of effective economic leadership; and (3) to suggest some specific steps toward a positive program to capture and maintain the economic initiative in the free world.

the role of u.s. foreign economic policy in our total foreign policy

There is a ready acceptance of the fact that our political and military arrangements with other countries, such as the NATO, make a direct contribution to the advancement of US security and wellbeing. It is more difficult, however, to explain what it is about the Schuman Plan³ or the European Payments Union that should command active US support. And when it comes to such detailed matters as a proposed increase in the US duty on lead and zinc, or the imposition of quota restrictions on imports of almonds or tung oil, the connection with our broad foreign policy objectives seems remote indeed.

Why should the State Department, including on many occasions its highest ranking officials, become concerned with matters which are so technical or seemingly so unrelated in any direct way to the effective conduct of our foreign affairs?

General Policies

The answer lies in the basic nature of our present foreign policy. That policy is predicated on the idea that we strengthen US security by solidifying our ties with other nations of the free world. Accordingly, we have built a web of relations which, taken together, amount to an alliance among virtually all free world nations—NATO, ANZUS, OAS, our ties with Japan, etc. But these ties are not purely military or political. An alliance without economic underpinnings would be inadequate and unreliable

Success in modern warfare depends upon the basic economic strength of the nations involved. A modern war cannot be fought without access to highly complex and expensive material and equipment and without the means to support the civilian economy at the same time. A country can maximize its ability to contribute to a common military cause if it maintains a high level of production through the most efficient use of its human and material resources. But efficiency is reduced when each country tries to build on its own resources alone. To the extent that a country insists on producing things which it can purchase more cheaply abroad, it reduces the total quantity of goods available to it as well as to its trading partners. The amazing productivity of the American economy is in considerable measure a reflection of the fact that we have in the US a vast common market virtually free from internal restrictions on trade and the movement of capital. Our efforts in the international field to promote a freer system of trade and payments and a freer flow of capital are aimed fundamentally at achieving a more efficient international use of resources and thereby maximizing the economic and military strength of the free world.

Concerted efforts are also being made by the USSR to achieve a maximum military potential by integrating the economies of the countries within the Soviet bloc. A considerable measure of success has been achieved through a centrally directed allocation and use of resources for this purpose. The Soviet drive underlines the importance of removing those restrictions and impediments which stand in the way of the most efficient use of resources in the free world.

It is against this background that our support of the International Monetary Fund and the General Agreement on Tariffs and Trade takes on added significance. These are the instruments through which we try jointly with other countries to establish a world trading system that will provide the real basis for high standards of living and a maximum contribution to military security. There may be nothing dramatic about technicians from 34 countries spending months of laborious work negotiating an agreement involving 8,800 tariff concessions. And it may take several years or longer before the full economic effects of the action are realized. But the fact that the results may be imperceptible from day to day doesn’t make them less important. In setting our foreign policy goals we look beyond tomorrow, and our foreign policies must therefore also be directed to building the long-run strength of the free world as well as to dealing with tomorrow’s crisis.

Our alliances with other countries of the free world consist of far more than the provisions of formal agreements to which we may jointly be party. The formal undertakings are in fact largely reflections of the sense of mutuality of interest shared by the peoples of the countries involved. To the extent that this feeling is shaken by economic fears or disputes, the military alliance can be weakened or destroyed.

Many examples of such fears or disputes could be cited. Foreign governments and representatives are still deeply concerned and preoccupied with the damages that might be expected in their countries from a recession in the US. The pressure to impose restrictions on wool imports has created consternation in Australia. Congressional demands to curb imports of petroleum raise doubts in the minds of Venezuelans as to whether we really care about the welfare of their country which is so closely tied to oil exports to the US. Relatively small actions, such as the failure of the low-bid English concern to obtain the government contract for the Chief Joseph Dam, have given rise to tremendous ill feeling abroad. Such actions and the retaliations to which they give rise create an atmosphere inimical to the building up of political and ideological loyalties among peoples. And without strong loyalties political alliances remain fragile at best.

In our efforts to prevent actions harmful to the free world security system we face the practical dilemma posed by the conflict between the special and often short-run interest of particular domestic economic groups and the more general longer-run national interest in free world strength and solidarity. Much of the time and energy of the people concerned with foreign economic affairs is devoted to assuring that in resolving these conflicts the longer-run national interest is adequately taken into account.

In our efforts to build the strength of the free world, we have had constantly to recognize risks short of outright warfare which may imperil our ultimate plans. They include the transfer of political power to unfriendly hands as well as the risks of internal subversion and defection in strategic areas. Areas in which such risks exist are spotted around the globe. In the underdeveloped areas a continuous frustration of the desire for growth can bring these dangers to the surface.

Increased Soviet efforts at subversion are now directed to the people of underdeveloped countries. The Communist appeal runs largely in terms of the hopelessness of the present economic situation of the masses in these areas and their subservience to the economic, political and strategic needs of the US. Since many of these areas have never known political democracy in our sense, a counterappeal in terms of the advantages of Western democracy is apt to seem abstract and not too meaningful. What is needed is steady economic improvement and the creation of a sense of hope for the future.

To be effective a program for the underdeveloped areas must appeal to these basic aspirations. Unfortunately, the instruments available to the US are not entirely adequate in relation to the job to be done. They consist of the technical assistance program, a modest amount of economic aid, mostly in Asia, the temporary availability of agricultural surpluses, the lending activities of the Export-Import Bank, and our participation in the International Bank. Although their importance should not be minimized, these various forms of public assistance, taken together, contribute only a small portion of the resources that underdeveloped countries need for economic growth. An additional contribution is, of course, made by US private capital but, outside of Latin America and the oil countries of the Middle East, private US investment in underdeveloped areas has not been substantial. Moreover, private capital can be influenced by US action to only a minor extent. It has to be attracted by the foreign countries themselves. And the principal deterrent—the uncertainties engendered by the present tensions—are outside the control of the underdeveloped countries.

A basic problem we face in underdeveloped countries is that economic improvement depends in large part on policies pursued by the local governments. Proper policies on their part can greatly increase the effectiveness of our contribution. In fact, the direct aid programs constitute to a considerable extent the means through which we attempt to induce other countries to take appropriate action. It is in this sphere that some of our most difficult and delicate economic activities are conducted. While recognizing and respecting the diversity of values and institutions in other countries, we must foster the adoption of policies conducive to local investment and initiative and the establishment of a rational system of priorities in development programs. We must encourage appropriate monetary, fiscal, and other policies in order to help trigger off a development process in economically stagnant countries and to cope with the danger of run-away inflation in economies undergoing rapid development. And at the same time we must avoid even the appearance of “intervention.”

We aim to improve our security not only by building the strength and cohesiveness of the free world but also by retarding the build-up of Soviet economic power internally and the extension of Soviet influence beyond the Iron Curtain. We seek to accomplish these objectives through a cooperative system of strategic trade controls and through specific efforts to prevent the growth of a dangerous reliance on trade with the Soviet bloc on the part of free world countries.

The ability of other countries to refrain from selling strategic goods to the Soviet bloc depends in good measure upon their ability to market such goods elsewhere in the free world. Similarly, the avoidance of undue general reliance on Soviet sources of raw materials and on Soviet markets depends on the extent to which other channels of trade remain open.

But the task of keeping the channels of trade open runs squarely into the same conflict of interest to which we have already referred. While seeking to reduce the present heavy reliance of Finnish trade on Soviet markets, the US is considering the imposition of anti-dumping duties on imports of Finnish hardboard. While seeking to prevent Italian dependence on Iron Curtain markets for its agricultural products, the US has imposed a quota on almonds and filberts and has subsidized exports that compete with such traditional Italian products as oranges and lemons. Many other examples could be cited. It is the task of the Department to bring into sharp focus the conflict between proposals for such actions and the achievement of our foreign policy objectives so that in the last analysis decisions are made in terms of the totality of the US national interest.

Some Specific Area Policies

The achievement of many of our specific foreign policy objectives for particular areas can be advanced through programs primarily of an economic nature.

In Western Europe, for example, the US has been fostering closer political and economic integration as a means of more fully developing the strength of the area commensurate with the richness of its human and material resources. In addition, it is realized that the most practical way to permit Germany to assume her role in the common defense without alienating France and Benelux is to merge Germany into a larger complex of Western European nations.

The major concrete step already taken in this direction has been the establishment of the Coal and Steel Community. In this organization Germany, France, Italy and Benelux have each relinquished to a supra-national body powers over basic industries such as have never before been yielded by sovereign governments. Without affirmative US support from the beginning, it is unlikely that this unprecedented step could have been taken. At the present critical time when the fate of the European Defense Community hangs in the balance, the US is seeking to strengthen the Community of Six by providing a substantial loan to the High Authority of the CSC as evidence of our faith in the European integration movement. The link between economic action and political objective is direct and clear.

For Western Europe as a whole the US has encouraged closer economic ties through the elimination of national trade and payments barriers. Under the OEEC trade liberalization program, supported by the credit and clearing arrangements of the European Payments Union, most nations of Western Europe have gone a long way toward eliminating quantitative barriers against each other. But the success of further measures in the same direction depends heavily on the example provided by the US. The fact that the US restricts the imports of chemicals and cheese, for example, has in practice armed the chemical and cheese producers of Western European countries with a powerful argument for resisting their Government’s efforts to reduce similar restrictions within Western Europe.

In the Far East our security plans include the development of Japan as an outpost of strength in the free world’s efforts to stem Soviet aggression in that area. To achieve this objective, Japan must assume the major responsibility for her own defense and become a defense base for the area as a whole. These military objectives cannot be achieved, however, unless the Japanese economic position markedly improves.

With an arable land area less than that of California, Japan must support a population of 86 million. Under these circumstances, Japan is dependent on international trade. She must export in order to earn the currency she needs for her vital food, raw material, and other imports. But today Japan’s trade is seriously out of balance.

The Japanese trade deficit in 1953 was over a billion dollars. Much of this deficit has been made up in recent years through our special expenditures in Japan related to the war in Korea. With the end of the fighting in Korea, the slack will have to be made up either through subsidy by the US tax-payer or by developing adequate trade possibilities within the free world, especially within the area of South and Southeast Asia which has many of the physical resources needed by Japan. The latter solution is obviously the desirable one. It is rendered especially difficult, however, because of the natural attraction of trade with the China mainland and Manchuria, important trading areas for Japan before the war.

Here again we have a military objective which can only be met if certain basic economic adjustments take place. Through our foreign economic policy we have been seeking to bring about the necessary adjustments.

We have assisted in the economic development of the region, the ultimate results of which should raise standards of living and increase the market for products of the free world, including Japan. Steps are now being examined to aid in the modernization of Japanese productive facilities through the extension to that country of a program of industrial technical assistance.

Of major significance have been our efforts to influence the degree of access offered to Japanese goods both in the US and in other free nations. In the process we have encountered opposition from domestic interests (e.g. the West Coast tuna industry) and a deep fear of a resurgent Japan on the part of Australia and other countries in the area. Nevertheless, some limited success was achieved last year under US pressure when the contracting parties to the GATT permitted Japan to associate with the group and allowed her to acquire some of the rights of a contracting party. Major further strides can be made through concrete steps on the part of the US to lower its own tariffs on Japanese goods and through making concessions to third countries which in turn will make it possible for them to open up their markets to Japanese goods. We are now seeking the authority to take this initiative.

In Latin America the US has promoted over the years a program of hemispheric solidarity. Our purpose has been to have friendly republics with strong economies south of our border that would give support to our general international policies, provide appropriate military support in time of war, and facilitate exports to us of strategic materials. These are primary US objectives in the area. In addition, we have sought to insure profitable opportunities for trade and investment in Latin America. While our primary objectives are political and strategic, the means for achieving them are primarily economic.

The Tenth Inter-American Conference⁴ at Caracas serves as an excellent example of this relationship between our total foreign policy and our foreign economic policy. Our principal objective at Caracas was to obtain the concrete expression of hemispheric solidarity that was embodied in the anti-communist resolution. It was apparent, however, that the willingness of some of the Latin American countries to follow our lead in political matters was closely linked in their minds with the expectation of some concrete evidence of US willingness to contribute more fully to the solution of the major economic problems confronting the area. It was in recognition of this sentiment that Secretary Dulles devoted almost two-thirds of his speech⁵ in the Plenary to economic matters and in addition made a personal appearance before the Economic Committee. US acceptance of the suggestion of a Special Economic Conference to be held later this year at Rio⁶ was also widely interpreted as an acknowledgment of US interest in the problems of trade and economic development which are of central concern in Latin America. Our preparations for the Rio Conference have provided us with the occasion for a searching re-examination and reformulation of our economic policy toward Latin America with a view to making it a more effective instrument for promoting our general objectives in the area.

The foregoing examples illustrate the intimate link between our foreign economic policy and the attainment of our broad political and military objectives. It follows that the effective conduct of foreign affairs can only be achieved if we adopt a bold and constructive foreign economic policy designed to strengthen the economic underpinnings on which the security of the free world rests.

united states economic leadership

The US occupies a position of economic leadership regardless of its wishes. The question is whether it uses this position for good or for harm—that is, whether it uses it to build or to undermine the strength and cohesiveness of the free world. It hardly seems possible that in its present position US economic policies could operate as merely a neutral force.

Sensitivity to US Economic Conditions and Policy

The predominance of the US in the world economy is well known. With only six percent of the world’s population, we account for well over forty percent of the world’s output of goods and services. We generate as much as two-thirds or more of the world’s savings. Our foreign trade amounts to between fifteen and twenty percent of the world total. We are the largest single supplier to, and the largest single market for, a very large number of individual foreign countries. Accordingly, the course of economic conditions in the US and the policies we pursue in the international economic field assume tremendous importance in terms of our relations with our allies.

In 1949 we had a slight recession here—a drop in our national income of 3.4 percent. We hardly noticed it. But during this mild adjustment Western Europe’s exports to the US dropped almost 22 percent. Chile’s sales to us dropped 36 percent and Australia’s 34 percent. Changes of this degree rock the economies of friendly countries, directly affect the jobs and well-being of their people, and often create threats to political stability.

It is not easy for Americans to appreciate this great sensitivity of other countries to even small changes in economic activity in the US. While we ourselves have suffered severe declines, they have not in our lifetime been induced by economic forces stemming primarily from abroad. The US is relatively invulnerable to economic shocks originating in foreign countries. Our foreign trade and investments, though of major importance in certain particular lines, are in the aggregate such a small portion of our tremendous national income that the US is in a position to withstand external shocks with only minor disturbance. This relative invulnerability to changes from abroad is a reflection not only of the great size and diversity of the American economy but also of the high degree of resiliency with which a free enterprise and free market system reacts to those changes which do occur.

In most countries other than the US, the economic well-being of the population is much more heavily dependent on direct earnings from international trade and is therefore affected to a much greater degree by changes both in the physical volume of trade and in the prices of internationally traded goods.

This dependence is dramatic in the case of many underdeveloped countries whose foreign exchange earnings are highly concentrated in a few primary materials. Sixty percent of Brazil’s export earnings are derived from coffee; for Chile 51 percent are derived from copper; for Columbia 78 percent from coffee; for Cuba 82 percent from sugar; for Venezuela 97 percent from petroleum; for Egypt 89 percent from cotton; for Indonesia 95 percent from tin and rubber; for Ceylon 78 percent from tea and rubber; for Iraq 80 percent from petroleum; for Pakistan 87 percent from cotton and jute.

Access to foreign markets is also far more vital for other highly developed countries than it is for the US. Though large in absolute terms, US exports constitute only about 5 percent of the national income. For the UK exports amount to 21 percent of the national income; for Canada 26 percent; for Denmark 27 percent; for the Netherlands 46 percent; for New Zealand 37 percent; for Australia 21 percent.

In the light of the foregoing we can understand why it is that an American discussion of restrictions on wool imports is front page news in Australia, although it is barely known beyond wool circles in the US. A US decision to subsidize the disposal of dairy products abroad is important domestically primarily to our dairy interests. It becomes a matter of the greatest moment, however, to the entire population of a country such as New Zealand, one-quarter of whose exports consist of dairy products.

Exporting countries can contemplate subsidies by countries other than the US without fear; but subsidization by the US is cause for alarm. If carried to its ultimate conclusion—the disposal of our agricultural surpluses regardless of international consequences—the end result could be virtually the economic destruction of other countries dependent on the export of agricultural products. The decision by the US to dispose of its surpluses abroad, either through gifts and special aid programs or through the simple device of selling at a loss, has brought a flood of inquiries and representations from Canada, Argentina, Australia, New Zealand, the Netherlands, Egypt, Turkey and others. Promises that we would use our vast power with restraint have only been partly reassuring. Our position of economic leadership requires that we be certain that decisions taken for reasons that may be responsive to domestic pressures do not sacrifice the solidarity of the free world.

Psychological and Propaganda Factors

It is not only the actual or potential consequences of US economic policies which cause them to assume such magnified importance abroad in terms of our political and security objectives. Certain psychological realities must also be taken into account. Because the US is so big and so strong, it is expected by other nations that we will act more in terms of the common interest of the free world than in terms of a narrow conception of US self-interest. When countries other than the US take action which in the short-run furthers their own interests at the expense of their neighbors, it may be quickly forgotten. The same action on our part is regarded as a breach of the standards of responsibility which nations associate with our position of leadership.

Because friendly countries are conscious of the tremendous power of the US for economic good and economic harm, they are especially sensitive to the importance of prior consultation before we take decisions that can affect their welfare. One of the most impassioned speeches at Caracas was that in which Chile protested the allegedly inadequate US consultation with respect to the strategic embargo on copper exports to the Soviet bloc. Copper exports are vital to Chile’s economic welfare and there is no question but that the embargo hurts. But it was the lack of adequate consultation that rankled most. The Chilean speech struck a responsive chord in many other countries.

Much of the harm that might have been done to our international relations by our surplus disposal operations has been prevented by our promises to consult affected countries before we act. But the need to act quickly may tempt us to make our own appraisal of the effect on friendly countries and to act without consulting them. If we yield to this temptation, our previous promises to consult will be the cause for new grievances. Even very slight damage to the economy of a friendly country may create a breach in relations that will be difficult to repair.

US policies which damage the interests of our allies, or which create doubts as to where their interests lie, are not only in themselves destructive of free world unity. They constitute propaganda weapons in the hands of the Communists in their program of dividing and conquering the world.

Stalin, before his death, sketched in rough outline the way the Communists hoped that the disunity of the free world could be achieved. He saw the crisis in terms of inevitable trade conflicts between the nations of the free world. Stalin may be dead, and the music coming from Moscow may be soft and sweet. But the recent moves of the Kremlin clearly indicate that it intends to exploit to the full weaknesses and divisions in the economic structure of the free world.

Malenkov in his report to the 19th Party Congress on October 5, 1952 stated:

“American imperialism is acting today not only as an international exploiter and enslaver of nations, but also as a force that is disrupting the economics of the other capitalist countries … it is wrecking the historically established multilateral economic ties between the capitalist countries and replacing them by unilateral ties between these countries and the US. Boosting their exports through the most unscrupulous dumping while at the same time closing their home market to foreign goods the economic policy pursued by American imperialists is bound to aggravate the antagonisms between the US and other capitalist countries.”⁷

The leaders of the Soviet Union are apparently proceeding on the theory that economics is the Achilles heel of the West.

A few illustrations drawn from the trade policy field will show how the Soviet world has sought to exploit recent US actions. When steps were initiated in the US to restrict imports of Australian wool, the Soviet Union for the first time in two years entered upon a program of buying wool in the Australian market. When the Department of Defense turned down the low British bids for the sale of generators and transformers for the Chief Joseph Dam, the Soviet Union, Bulgaria, Poland, and Rumania offered at the ECE meeting in Geneva to buy electrical equipment, including transformers and generators, from the UK. When, in the spring of 1953, imports into the US of dried whole milk were embargoed and a comprehensive list of dairy products were placed under quota, representatives of two Soviet bloc countries immediately offered to buy Swedish dried whole milk. When the US imposed a quota on almonds and filberts, while at the same time subsidizing exports of oranges and lemons, Czechoslovakia and Bulgaria offered to buy almonds, lemons and oranges in the free world. When the US, as a result of an escape clause action, raised the duty on Turkish figs, Czechoslovakia offered to buy figs from Turkey. When a countervailing duty was imposed on Uruguayan wool tops and when pressure was exerted to curb other imports from Latin America, the Soviet Union pressed for the completion of a trade treaty with Argentina.

This partial list of the many opportunities seized upon by Communist propaganda makes clear the Soviet intentions to use economics to divide the free world and to conquer it by peaceful means if possible. Victories on the battlefields would be hollow indeed if we lose the struggle in which we are now engaged on the economic front. Survival of the free world may depend upon the way in which we use our position of economic leadership.

The Requisites of Economic Leadership

It is easier to point out the pitfalls to be avoided than it is to lay out an affirmative and constructive foreign economic policy commensurate with our leadership in the free world. There are, however, five essential ingredients in such a policy.

(1) The US must maintain a high level of economic activity at home. This is a responsibility which derives not only from considerations of domestic welfare but equally because of the effects of a decline in US economic activity on the well-being of friendly countries. A serious depression in the US is still pathologically feared by most countries of the free world. If it should ever materialize, the achievement of our foreign policy objectives would literally be imperiled.

(2) To a greater extent than heretofore, the US should discuss in advance and in a spirit of genuine consultation with friendly foreign governments, any contemplated US actions significantly affecting their economic well-being. Part of the sting can be taken out of actions adversely affecting friendly countries when advance consultation is held and the necessity for the action explained.

(3) The US should consider courses of action in terms of the common interest of the free world rather than in terms of a narrow conception of US self-interest. Official recognition has been given to this principle in connection with tariff matters. The escape clause and peril point provisions of our tariff legislation are designed to mitigate injury to our domestic producers from tariff reductions. In commenting on these, I shall carefully consider the findings and recommendations of the Tariff Commission. My responsibilities for the welfare of the nation require that I continue to base my decisions at times on broader grounds than the Tariff Commission is empowered to consider.”

(4) The US should adopt a fairly long-run view of what is in the common interest, implying a willingness to take constructive economic action even in the absence of imminent crises. The massive relief and economic aid programs of recent years to Europe bear testimony to the ability of the US to respond quickly and effectively to situations of crisis. Now that these programs are tapering off, our position of leadership will be tested by our initiative and steadfastness in pursuing the same goal of strengthening the free world through measures which will generally be less dramatic and more conventional. Our policies looking toward freer trade, multilateral convertibility and economic development should be strengthened even though those policies are designed for the long pull.

(5) The US should assert an affirmative interest in the economic well-being of the free world as something which is good in itself and not merely as a defense against Communism. This is both good policy and good propaganda. As propaganda, the Communists have used it effectively in constantly giving voice to a concern for the poor, the “downtrodden” and “exploited”. In terms of policy, we cannot afford to be purely on the defensive. Even if there were no Communist threat, it would be in our interest to promote economic development in underdeveloped areas and raise the general level of production and trade in the world. The worst mistake we can make in this connection would be to link our constructive economic programs so directly and obviously to our military objectives as to raise doubts in the minds of free world countries as to whether we are really interested in economic welfare as something which is good in itself (e.g. recent proposals that aid to India be cut off because of India’s refusal to permit the flight of troop planes over Indian territory).

steps toward a positive program

A Basic Dilemma

In trying to translate these general principles into a bold and affirmative program of action, the US faces a basic dilemma.

Our conception of the proper role of government in economic affairs is much more narrow than that of most other countries. In peacetime we tend to think primarily in terms of private action rather than in terms of governmental capabilities. For us the major normal function of government in the economic sphere is to provide an environment in which private enterprise can flourish free from artificial restraints. This basic creed we carry over into our economic relations with other countries. Our principal specific objectives relate to the removal of artificial restraints on the movement of goods, services and capital, whether publicly or privately imposed. We seek to reduce tariffs, eliminate quotas, get rid of cartels, do away with exchange restrictions, get rid of restraints on foreign investment, etc. The burden of the program is that the government should interfere as little as possible with the free market, but should act as the promoter and guardian of conditions under which the market can operate most effectively.

This conception of the role of government is not shared by many other countries of the free world. To these countries, therefore, there appears to be a contradiction between our vast responsibilities as leader of the free world and what seems like the absence of a bold, positive and constructive program except in time of emergency. It is this difference in basic premises as to the function of government that gives rise to a great deal of misunderstanding and disappointment abroad in regard to our economic policies.

Two examples will serve to illustrate the problem. Raw material producing countries expect us, as the largest consumers of raw materials, to take affirmative action to stabilize the markets for their products. In reply we have pointed out how attempts to interfere with the free market in domestic agriculture have gotten us into major difficulties, how the most constructive contribution toward greater stability which we can make would be to avoid procurement practices which disturb world prices and to temper the fluctuations in our own economy. Similarly, some underdeveloped countries expect the US itself to assume a major financial obligation for economic development. Our position has been, however, that private capital must provide the main source of foreign investment. Except for special situations, the direct US contribution should be limited to technical assistance and a limited amount of public lending. In many foreign countries, particularly in the underdeveloped areas, these policies give rise to a feeling that the US has not measured up to its responsibilities.

A major task for US foreign economic policy is to get across to other countries an understanding of our conception of the role of government in economic affairs.

The President’s Program

Against a background of such understanding the program which the President presented on March 30 in his message on the Randall Report will be regarded as a forward-looking and constructive approach to our foreign economic policy. The President’s message contains recommendations on the subjects of tariffs and the General Agreement on Tariffs and Trade, customs administration and procedures, US investment abroad, Buy American legislation, raw materials, shipping, international travel, economic aid and technical assistance, East-West trade and convertibility. A copy of the President’s message and a detailed summary of the proposals contained therein are attached.⁸

The Department should take advantage of every opportunity to support the President’s message. Particular emphasis should be placed on his statement; “If we fail in our trade policy, we may fail in all. Our domestic employment, our standard of living, our security, and the solidarity of the free world—are all involved.”

Pending action on the President’s message, the Department should seek a moratorium on actions by other agencies inconsistent with the spirit of the message. Examples include Treasury’s use of anti-dumping legislation to restrict imports from Finland and other sensitive areas; the sudden raising of import duties by reclassifying items which have previously entered under lower rates; periodic threats of countervailing duties; Agriculture’s use of Section 22 restrictions on agricultural imports.

Other Measures

The Department should begin a review of measures not included in the President’s message which would help maintain a position of constructive leadership in the economic sphere. The following are illustrative of subjects for such a review:

(a) Consideration should be given to the possibility of adapting our stockpile policies as a specific means of contributing toward greater stability in the markets for basic commodities exported by underdeveloped countries. Policies have already been adopted by the Office of Defense Mobilization to make certain that excess commodities acquired under materials expansion program contracts do not produce serious adverse market effects. These policies are essentially preventive rather than affirmative stabilization measures. In the new long-range “safe level” stockpile policy, recently announced by the White House, the basis is laid for more affirmative steps to stabilize the markets for strategic minerals through the concentration of purchases in periods of distressed market conditions. While the announcement emphasizes that preference will be given to minerals of domestic origin, purchases abroad are not precluded. Regardless of the origin of the materials purchased, however, a positive contribution to international commodity stabilization can be made by counter-cyclical purchases of materials that are traded on world markets. Can the new policy laid down by the White House announcement of March 26⁹ be so developed and carried out as to meet some of the legitimate hopes of the underdeveloped countries in this matter?

(b) Once the President’s domestic agricultural program is adopted, the US should consider strengthening its policy with respect to the avoidance of agricultural import restrictions. One of the weakest points in any effort to assume economic leadership is our inability to make commitments on the avoidance of such restrictions. Section 22 of the Agricultural Adjustment Act requires the President to impose import restrictions, despite any international agreement to the contrary, whenever he finds that imports are interfering with a domestic price-support program. This provision has compelled us to violate the GATT; it may compel us, on renegotiation of the instrument, substantially to weaken the existing commitments contained in it. This fact is strengthening the hands of agricultural protectionists throughout the world, especially Western Europe. It is likely to be one added deterrent to any efforts we may make toward agricultural integration in that area. And in any case it is likely to damage our own agricultural export markets in the long-run.

(c) On April 16, 1953, the President stirred the world with his pledge that a portion of any savings from world disarmament might be used by the US to help underdeveloped areas. This speech was not referred to in the Randall Report nor in the President’s message on the Report. The omission has been widely noted. The US should carefully consider whether the appeal of the President’s earlier pronouncement should be allowed to lapse. If not, what actions would we be prepared to take to regain and retain the initiative?

(d) The President’s message on foreign economic policy recognized the importance of encouraging an increased flow of private capital abroad and proposed tax changes and enlarged guaranty coverage to stimulate such a flow. These measures may be partially effective but the political hazards of foreign investment will continue to be a strong deterrent. If private capital could move abroad under the umbrella of a combined public-private agency, the political hazards would be significantly reduced. In this connection, it is well to note one of the recommendations of the Report of Lewis Douglas to the President: “In the immediate future, however, it may be practicable to focus our ingenuity on valid devices which might provide a reasonable transition from a period in which American dollars, through public agencies, have been invested overseas and the period when the flow of private capital becomes adequate. To this end, a combination of agencies of governments working in association with private management and capital might perform a useful service”. Consideration of “valid devices” of this character might well be undertaken.

(e) A related problem not dealt with in the President’s message concerns measures to stimulate local private investment abroad, particularly in the less developed countries. While this is essentially a problem for the governments and peoples concerned, further study should be given to measures we can take to encourage such investment, as for example, by supporting the establishment of domestic development banks abroad to provide capital to local private investors.

(f) Continued active study should be given to the peacetime uses of atomic energy, particularly as they affect economic development. We might also give some consideration to the feasibility of establishing one or more regional nuclear research centers, as for example a Latin American center, to which we would make available nuclear reactors for experimental purposes. An offer of this kind might be useful in itself, to the extent that there were technically trained persons in the regions who could carry forward research, but beyond that such an offer would have a powerful appeal. Atomic energy has a “mystique” of its own. It would gratify the intense desire of less developed countries to be associated in atomic research.

1. Drafted by Isaiah Frank of the Office of Economic Defense and Trade Policy, in response to a request from Director of the Policy Planning Staff Bowie for a paper on the subject for Secretary Dulles. Forwarded to Bowie under cover of a memorandum by Deputy Assistant Secretary Kalijarvi, dated May 17, which reads in part as follows: “As you are aware, the paper has gone through several drafts. Although I realize there never will be a ‘final’ draft, the present version is a result of a most careful review in E and, in my opinion, represents a useful effort to set down where we stand on the subject.”
2. Title sheet is not printed.
3. For documentation on the Schuman Plan, see volume vi.
4. For documentation on the Tenth Inter-American Conference, held in Caracas, Mar. 1–28, 1954, see vol. iv, pp. 264 ff.
5. Reference is to the address delivered by Secretary Dulles at the Second Plenary Session, Mar. 4, 1954; for text, see Tenth Inter-American Conference, Caracas, Venezuela, March 1–28, 1954: Report of the Delegation of the United States of America With Related Documents (Department of State Publication 5692, Washington, 1955), pp. 43–51.
6. Reference is to the Meeting of Ministers of Finance or Economy of the American Republics as the Fourth Extraordinary Meeting of the Inter-American Economic and Social Council (commonly referred to as the Rio Economic Conference), held at Quitandinha, Brazil, Nov. 22–Dec. 2, 1954; for documentation on the meeting, see vol. iv, pp. 313 ff.
7. Ellipses in the source text.
8. Attachments are not printed. Regarding the President’s message, see the editorial note, supra.
9. On Mar. 26, 1954, President Eisenhower announced the establishment of a new stockpiling program calling for the expanded purchase of about 40 minerals over a long-term period.