Foreign Relations of the United States, 1961–1963, Volumes VII, VIII, IX, Arms Control; National Security Policy; Foreign Economic Policy, Microfiche Supplement

317. Memorandum from Coppock to Ball, April 18¹

April 18, 1962

SUBJECT

• A Proposed Status Report by You on Foreign Economic Policies before the Interdepartmental Committee of Under Secretaries

I suggest that you give the Under Secretaries’ Committee a roundup on foreign economic policies and programs on May 2 or May 16. (Mr. Harriman is discussing the economic situation of Japan and related matters on May 31.) There has not been such a review since early in the present Administration and it would no doubt be good for Mr. Griffith Johnson, as well as the people from other agencies. Also, you might want to use the material for a report to the President. It seems preferable that this be done now rather than after Congress adjourns, since you would be able to point up issues that need pushing.

If you approve of this suggestion, I will assemble from appropriate sources a list of topics and background material. It would be desirable to announce the topic at this afternoon’s meeting—subject to your wishes.

Joseph D. Coppock

Director
Foreign Economic Advisory Staff

Attachment

April 26, 1962

I suggested in a memorandum to you last week that you give a general run-down on foreign economic policy to the Interdepartmental Committee. Mr. Springsteen said you wanted to see a list of topics. Here is a list. Attached is a memorandum setting forth the gist of what I would cover. A list by itself is not very helpful.

I. Criteria for judging foreign economic policy.

II. Effects of foreign economic policy actions on domestic economy during the past year.

III. The foreign impact of foreign economic policy actions.

a. Trade and monetary matters.

b. Economic development programs.

c. International organizations.

Joseph D. Coppock

Director
Foreign Economic Advisory Staff

Attachment

NOTES FOR MR. BALL TO USE BEFORE THE INTERDEPARTMENTAL COMMITTEE OF UNDER SECRETARIES ON FOREIGN ECONOMIC POLICY

SUBJECT

• Critical Review of Foreign Economic Policy

1. This Administration has been in power for over a year now and it seems worth while to have a comprehensive run-down on U.S. foreign economic policy.

2. Foreign economic policy has to be judged on two fronts, the domestic and the foreign. On the domestic front, the test is mainly the extent to which it contributes to economic prosperity. On the foreign front, the test is more complex but fundamentally it comes down to the contribution of foreign economic policy to our national security. In this framework, foreign economic policy is just one aspect of our general foreign policy.

3. The domestic economy has been operating substantially below capacity, so policies which foster increased imports tend to bring vigorous objections from those who might feel the increased competition. This was reflected in the tariff-reduction offers made by the U.S. at Geneva last year and conspicuously in the textile situation. Our balance-of-payments condition has also inhibited stronger domestic expansion measures. Under these conditions, expansion of exports has had an unusually strong appeal, as a stimulant for the economy generally and as a relief from balance of payments pressure.

4. Two important foreign economic policy actions should have some expansionist influence on the domestic economy. One is the completion of the Dillon round of tariff negotiations, in which we got more than we gave; the other is the negotiation of the special credits to deal with short-term capital movements, still before Congress. Neither of these has yet had any direct effect on the domestic economy. Some anticipatory actions are probably afoot by businesses in response to the forthcoming lower duties, and the prospective availability of the special credits, even with all the strings attached, should make for a bit more monetary and fiscal ease domestically.

5. Restrictionist measures, such as the textile arrangement, limit the movement of goods to this country, reduce the competition from abroad, and make for higher prices. The proposal to increase the domestic share of the sugar market would have a similar effect. The actions on tourist purchases, carpets and glass are also of the same sort. There are pressures in shipping, oil and some other areas for increased restrictions. The underutilization of domestic economic capacity makes these restrictionist measures very appealing to parties directly affected by foreign competition, and the balance-of-payments situation provides an additional rationale. Fortunately, we have not yet felt the full force of Buy-Americanism pressures “dispassionately” interested in restoring equilibrium to the U.S. balance of payments.

6. The Council of Economic Advisers may wish to go into more detail on the effects on the domestic economy of foreign economic policy developments in the past year or so, but it is my impression that our foreign economic policy actions have not contributed much to domestic prosperity and economic well-being. Undoubtedly, the balance-of-payments restraint has been the most inhibiting influence. A year ago February we deliberately chose the present policy of dealing with the balance-of-payments deficit and the related problem large out-movements of short-term capital and gold. Our success is not so overwhelming that we can look forward to an early relaxation of this restraint. At some point, we may have to give serious consideration to more drastic alternatives. We can hardly consider it good foreign economic policy to be subject to a balance-of-payments restraint that seriously retards the rate of economic growth and contributes to a high level of unemployment. Our power position in the world depends heavily on a prosperous U.S. economy.

7. With respect to the foreign impact of our foreign economic policies, the underlying main purpose, as noted above, is to enhance our national security position. This is accomplished, however, by increasing the economic well-being and economic interdependence of the Free World. Policies which inhibit the economic progress of Communist countries are logically relevant, but we have very little unexercised power with which to influence them. Our trade with the Bloc countries is nominal, except for our wooing operation with Poland. Moreover, our European allies see expanded trade with the Bloc as a means of developing a pattern of political accommodation while providing some economic benefits. The principal opportunity to increase the relative economic strength of the Free World, as compared with that of the Communist Bloc, is to increase the absolute economic power of the Free World. This is the true national security task of our foreign economic policy.

8. At bottom, there are just two prongs of foreign economic policy that are involved here. One is to increase the trade opportunities among the countries of the Free World; the other is to provide means for increasing the rate of economic growth.

9. For the trade task, the proposed Trade Expansion Act of 1962 is at the top of the list. It has domestic implications, of course, but its largest thrust is to provide a new momentum to the effort to expand the trade and economic development of the Free World generally, with all this means for our policy of preventing the expansion of Communism and building up the political cohesiveness of the Free World. Failure of the U.S. to have a good Trade Agreements Act would unleash a new era of protectionism. As indicated earlier, there are numerous restrictionist pressures at work in this country and there are strong ones elsewhere. Without the example of the European Economic Community—and the competitive threat it poses—our drive to get a strong Trade Expansion Act would run into very strong opposition. Thanks to the European Economic Community and heavy press play, U.S. public interest in trade expansion is greater than it has been for many years. It is still a question whether Congress will respond adequately.

10. We are involved in a number of measures which restrict trade and which conflict with our proclaimed progressively liberal trade policy. None of these has been dropped during the last year. In fact, the tendency in coffee, sugar, oil, textiles and shipping—to cite prominent examples—is for more restrictions. These restrictionist moves may be explained in terms of national defense, market disruption, or related domestic assistance programs, but the undoubted effect internationally is to restrict trade. Other countries have their restrictionist measures too, but our position of leadership puts a special responsibility on us to apply and advocate liberal measures.

11. Very closely-related to the basic policy of expanding trade opportunities is the policy of developing and maintaining an international monetary mechanism that will facilitate trade (and of course international investment). Undoubtedly, the international monetary mechanism is better than it has been for thirty years, but we are now back on a gold-exchange standard with its inherent faults. Our efforts during this past year to counteract the disturbing effects of short-term capital movements and the frequently associated gold movements cannot be considered an outstanding success though the special credits for the principal countries are all to the good. This is an unsolved problem, which will be only ameliorated, not solved, when the U.S. balance of payments gets into “basic equilibrium,” since there will still presumably be large foreign holdings of dollars and dollar-securities which can be offered against insufficient quantities of gold or foreign currencies. Quite aside from the domestic economic restraints imposed by this problem, our trade expansion efforts for the Free World, if successful, are going to require a better international monetary mechanism.

12. Just a word on our balance-of-payments problem. Looking at it from the international angle, we must continue to resist restrictionist measures for dealing with it, whatever the nominal form of the measures. The more we apply Buy-American or capital-export controls, formal or informal, the more difficult will it be to make our foreign economic policy serve our national security needs. Hence, it is to be hoped that the balance of payments can be brought nearer to equilibrium by expert promotion and security-selling efforts. If it cannot, then we must face up to the unpleasant task of changing the exchange rate, whether or not this means cutting loose from gold. We simply must not hobble the domestic economy with depressive policies imposed by a balance of payments deficit, nor must we lapse into exchange controls, quantitative restrictions or higher duties, in view of our position of leadership in moving the Free World toward freer trading arrangements.

13. Some remarks now about the other international prong of our foreign economic policy, namely, the promotion of economic development in the less developed countries. Increased trade opportunities are extremely important in promoting economic development, but much more is involved, of course. What the United States does in this field is primarily to provide human and material resources which these countries would not be able to buy from their current earnings or accumulated foreign assets. The real push toward economic development must come from within the countries, despite our urging, cajoling, technical assistance and provision of capital. Our record in this field during the past year looks quite good. The aid program is now seen as a continuing enterprise; new lending institutions are getting underway; the Alliance for Progress is moving about as fast as could be expected; the Europeans are at least considering bearing part of the aid burden. The criteria for aid can never be very precise, but we can always strive to have the aid money used in what seems a reasonably efficient way in the light of detailed knowledge of the particular country’s circumstances. The use of surplus agricultural commodities and the use of tied-loans or tied-grants should give way to straight-forward loans or grants fairly soon, since they involve economic inefficiency, and since they detract from the political effectiveness of our aid programs. We are certain to encounter nationalistic excrescences in the less developed countries, particularly the new ones, which will bring unfair taxes, discriminatory controls, and even expropriation without proper compensation. Good diplomacy can go far to make these actions bearable. It is uncertain how effective we can be in helping other countries deal with their population problem, a major factor in their long-run economic development. We have not rushed into this field, which is full of political booby-traps, but we are in a position to help interested countries study the problem. This can be counted as one of the modest achievements of the past year. Fortunately, there are numerous non-governmental activities afoot in connection with economic development, so perhaps the most important thing government can do in this realm, outside the trade and aid fields, is to help clear the way for individual and small-group action. We must learn to take a long and patient view of the economic development or modernization problem for the backward countries. We cannot have a new Alliance for Progress or new Decade of Development every year.

14. Finally, there should be some mention of international organisations in the context of our foreign economic policy.

a. This Administration can take no credit for the establishment of the European Economic Community, but it can take credit for encouraging its progress and its projected expansion. Thus far, we have played our part well in this important development. There are obviously a great many unsettled issues. One of the emerging problems of importance is the relation between the OECD and the EEC. We got Congressional approval in 1961 for U.S. participation in the OECD as a vehicle for North Atlantic cooperation, both among the countries of the region and toward other countries. If the EEC progresses and if the global organizations, particular the GATT, the IMF and International Bank, serve their intended purposes, there will be a tendency for the OECD to be less useful. This means less rather than more relative emphasis on the Atlantic Community. It would obviously be unfortunate if NATO were weakened by a lack of economic cohesion among its members. This problem is not an urgent one, but it will become progressively important.

b. The problem of how to include Japan in some form of association of nations for purposes of economic cooperation has been considered over a number of years. The global organizations and ECAFE and the Colombo Plan do not seem to be sufficient. Japan’s membership on the DAC of the OECD is hardly sufficient to meet this apparent need for “belonging.” The pre-war co-prosperity sphere haunts new regional groupings in the Pacific. If the UK goes into the EEC, there might be a tendency for some Commonwealth countries to view a new grouping with interest. This problem, like that of the OECD, does not seem to be urgent, but it is real.

c. The UN Economic Commission for Africa may serve this purpose for the African states, but the Israel issue has long blocked the projected Middle East Commission. It is not entirely clear why there is such a push for these regional economic organizations, but the push has been steady since the end of the war. The organizations have not done much, in a real economic sense, but they seem to satisfy in part a genuine desire to belong. It may be a reaction to the bigness of the U.S., the U.S.S.R. and now the E.E.C. The United States can help make these organizations of some use.

15. There is no easy way to summarize this critical review. Obviously, we have not been outstandingly successful in the foreign economic field. The Trade Expansion Act is still to be passed; failure would represent a serious set-back. We must of course use our tariff-cutting power promptly, after it is granted. We must not let the commodity-control arrangements, whether unilateral or multilateral, provide a back-door means of hyperprotectionism. The hot money—gold problem is the only problem in this field that could blow up in our faces without much advance notice. It will take some major institution-building to rectify that situation, but it must be done in due time. The balance of payments problem is still with us. The aid work, with all its headaches, must go ahead on a long-range basis. International organizations are a part of the furniture of our contemporary world and we must be prepared to devise them, use them, drop them as they serve our purposes.

1. Recommends Ball convene meeting of Interdepartmental Committee of Under Secretaries to provide status report on foreign economic policy. Official Use Only. Two attachments provide agenda and briefing material for May 2 meeting. 9 pp. Department of State, E Files: Lot 65 D 68, ICFEP.