Foreign Relations of the United States, 1955–1957, Western Europe and Canada, Volume XXVII

10. Telegram From the Embassy in France to the Department of State¹

Paris, November 21, 1955— 7 p.m.

2491. Reference A—Embassy telegram 2162, November 1.² Reference B—DEFREPNAMA (Repnamto 309, November 4 (to OSD)).³ Reference C—Embassy telegram 2475.⁴ I feel that time has come when I must point out and emphasize the serious adverse political consequences that will result if favorable action is not taken promptly on the recommendations contained in reference telegrams. As a result of action described in reference telegram C, we have a short respite of two or three weeks in which to take our decision.

Problem involved is complex one dealing with accounting procedures. Reference telegrams describe problem in detail and I will not repeat descriptions. I wish to point out that if DeptAr does not modify their present regulation in accordance with recommendations made by country team and concurred in by DEFREPNAMA, severe and lasting damage will be done to the United States position in France.

Present DEPTAR accounting regulations adopted in June retroactively modify the basis of our OSP understandings with the French. Retroactive aspect this regulation is what aggravates matter. We cannot expect the French to accept unilateral action of this nature on our part without grave consequences to our relationships.

An explanation of current DEPTAR accounting policy, admittedly greatly oversimplified, is that French Government some three years ago asked company A to bid on offshore contract. To help reach price satisfactory to U.S., and in interests maintaining French defense production base, French Government agreed to subsidize company A production. Production cost estimated by French at $100 and bid was made at $90 with French Government agreeing to carry the $10 difference between cost and bid price. U.S., although knowing that French Government was making such subsidy, made no objection at time contract was let but three years later unilaterally decides it will only reimburse company for $90 contract price less all subsidies paid by French Government which means reducing price to be paid by U.S. by $10 to figure of only $80.

The policy, if persisted in, will bring an end to French OSP program in a blaze of bankruptcy proceedings. French industries concerned will naturally turn to their government to save them. French Government has no money in their budget to meet such unexpected claims which if applied to all outstanding contracts at rate unilaterally established by U.S. in Sofranic case could equal approximately 20 million dollars. Recourse would have to be made to National Assembly for supplementary appropriation which could lead to very unpleasant debate full of charges of bad faith and unfriendliness. It is difficult for me to imagine a more effective way to embitter Franco-American relations and to destroy the mutual confidence we have tried so hard to build.

I would think that such action on our part would also provide a most effective case history argument for the Soviets in their attempt to persuade undeveloped countries of the dangers inherent in dealings with U.S.

Finally I would like to re-emphasize that this is not a case of reducing or changing a program for the future, but an attempt on our part to unilaterally and retroactively change the rules of the game for work which has been completed on our order. This question will not be judged here in France on any esoteric argumentation of accounting philosophy. Question for French will simply be how much reliance can they place on good faith and friendly understanding of United States.⁵

Dillon

1. Source: Department of State, Central Files, 751.5–MSP/11–2155. Secret; Limit Distribution.
2. In telegram 2162, Dillon discussed the French-U.S. differences of opinion regarding French Government financial assistance to OSP producers and specifically the contract to the Sofranic Company for 105-mm. ammunition. He recommended that the formula proposed by the U.S. Government for OSP contract price determination be reconsidered by the Departments of State and Defense, and that the subsidies from foreign governments to firms holding OSP contracts be dropped from the formula. (Ibid., 751.5–MSP/11–155)
3. Not found.
4. Telegram 2475, November 19, reported that the French Government had persuaded the banks that had made loans to companies receiving OSP contracts to take no action on these loans for several weeks, and again recommended reconsideration of the U.S. “formula.” (Department of State, Central Files, 751.5–MSP/11–1955)
5. In despatch 1105 from Paris, December 8, Earl T. Crain, Ambassador Dillon’s Special Assistant for MDAP Affairs, noted that the United States had decided to disregard French aid to MDAP contractors, while the French Government had agreed to provide written assurances that it would not permit French MDAP contractors to earn excessive profits. (Ibid., 751.5–MSP/12–855)