361. Memorandum from Ball to President Kennedy, June 211

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SUBJECT

  • Talking Points for Your Conversation with Vice Chancellor Erhard

General Approach

This memorandum takes account of the comments in Bonn #3544 reporting an Erhard-McGhee conversation about Erhard’s meeting with you. This telegram is attached as Tab A.

I think it important that you talk to Erhard, not as the German Economics Minister, but as the Chancellor-designate and a distinguished economics professor. The emphasis on these two latter capacities would, I think, tend to evoke the most useful response.

I suggest the emphasis on his role as Chancellor-designate because it is important that Erhard begin to think of himself as the potential leader of Germany, responsible for political as well as economic decisions. Not only will he respond to the implied flattery of being treated by the Head of State of the world’s leading nation as the potential Head of the German Government, but he may be somewhat hurt and disappointed if you still appear to regard him merely as an Economics Minister. Finally, and most important, he desperately needs political education, and he will take it better from you than from anyone else.

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I suggest a secondary emphasis on his role as a distinguished economist, because, in my experience, he responds far better to appeals to his intellectual purity as a classical economist on commercial and economic issues between our two countries than as a minister forced to make accommodations to domestic political forces.

The Political Education of Professor Erhard

As I have suggested in the memorandum I sent you entitled “The Mess in Europe and the Meaning of Your Trip”, one of the great dangers we face in a post-Adenauer Germany is the fact that Erhard operates without a fixed political philosophy. I think it important, therefore, that you spend as much time as you can spare outlining the fundamental framework of East-West and Atlantic relationships. Erhard has never [Typeset Page 1551] progressed beyond thinking of Europe as a potentially big customs union, which he would like to expand to include not only the United Kingdom but also the United States.

It is important that he be made to understand our own conception of a Europe integrated, not merely economically but politically—a united Europe capable of playing an effective role in the Atlantic Partnership. He must be made to see this in the larger strategic and political terms, and must be made to understand clearly the motives and objectives of American policy.

Balance of Payments

It is in this context that the balance-of-payments problem might be touched upon. Erhard understands very well the nuts and bolts aspects. We have all been over [Facsimile Page 3] them countless numbers of times, and he knows the answers as well as the questions. But what has not been sufficiently brought home to him is the security and political context of the present imbalance in the accounts of the Atlantic nations.

I understand that Douglas Dillon is sending you a detailed paper on the current state of our balance of payments, which contains details on offset arrangements, the present state of German reserves and the evolution of the German balance of accounts. What I think you should emphasize is that Germany has not merely an interest in, but some responsibility for, helping the United States manage the difficult transition period until equilibrium is restored.

Our deficit reflects our overseas expenditures for security and economic development, and Germany is the most direct beneficiary of our vast defense efforts. Now that Germany has achieved economic strength and good economic health—for which you can pay tribute to Erhard’s leadership—she must begin to carry a commensurate share of responsibilities. And these responsibilities should include an obligation to help the United States weather the difficult days until balance-of-payments equilibrium can be restored.

Germany can do this by assisting the United States both to reduce and to finance her deficit. The reduction side includes such matters as offset arrangements. The financing side might include not merely German cooperation in funding some of our short-term dollar claims through three to five year loans, but also a German willingness to continue to increase the proportion of dollars carried in its reserves.

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In this connection a flat, private assurance from you to Erhard that the United States will not devalue the dollar or revalue gold could be useful.

There is an interesting passage in Bonn’s #3544 in which Erhard suggests that he has several ideas on the dollar problem which he feels “should be considered as a world-wide problem”. I think it would be [Typeset Page 1552] useful to draw him out a bit on these ideas. It is possible that he is concerned with the liquidity question. As a background for that I would strongly urge you to read pages 2–4 and 12–15 of the brilliant chapter of recommendations from the forthcoming Brookings balance-of-payments study. I have attached that Chapter as Tab B.

Trade Negotiations

Here I would emphasize Erhard’s profound belief in sound classical economic theory.

It is important not to discuss trade negotiations in the context of our balance-of-payments problem. Such an emphasis would be taken to mean that we expect to profit from trade liberalization at the expense of Europe. I am personally convinced that we can improve our trade balance with Europe as the result of the Kennedy Round negotiations for a number of reasons. But this is not something to be said to Europeans, since it puts them on the guard against American ambitions to get a net advantage over them in the negotiations. This, they cannot accept, for obvious reasons.

Instead, you should emphasize that we have a mutual interest in bringing about a world of free and expanding [Facsimile Page 5] trade. Erhard religiously believes in liberal trade, particularly through the reduction of tariffs on industrial products. Quite likely he regards access to the UK and EFTA countries as more immediately important for Germany than access to the US market. But he is, by conviction, a free trader. He devoutly believes in the most liberal commerce, particularly in industrial goods, all over the world. He understands the value for Germany of imports as well as exports and the advantages to everyone from the better use of resources that expanding world trade can bring about.

For these reasons he is firmly committed to the success of the Kennedy Round. He played a key role at Geneva—for which you should thank him—in pressuring the French to agree to a workable negotiating formula.

In this connection, I suggest that you develop two major lines of argument:

1. The basic political role that the Germans will have to play if the Kennedy Round is to succeed.

In view of the present evolutionary state of the European Economic Community, we find it difficult to know how to negotiate with the Six. Dealing with the EEC Commission and six separate governments puts a strain on the negotiating process. It buries important political objectives in a mass of technical detail. The great role that Erhard personally can play is to take the lead in the Council of Ministers, in order to assure that the Commission is given adequate leeway in negotiating. In this way we can avoid having the special and narrow [Typeset Page 1553] interests of individual Common Market countries impede the achievement of our common objective of trade liberalization.

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With this in mind, the United States intends, so far as possible, to negotiate with the Commission, since, if we are forced to work with six separate governments, the French will be able to play one off the other—with the result that all of us would lose the leverage that can be applied to a reluctant French Government by having the Common Market countries thresh these problems out in the Council of Ministers.

2. We do not intend to lose sight of the basic objective of these negotiations—trade liberalization.

There is danger that the highly technical issues emerging can obscure the real objective of the Kennedy Round, which is large-scale trade liberalization. This is why we stood firm at Geneva in insisting that the Conference adopt the principle of equilinear cuts. The negotiating formula we proposed could make possible 50% cuts in the EEC and US tariffs. The EEC proposals, which concentrated on disparities in rates, would have limited cuts closer to a 10% average on both sides.

Our negotiators freely recognized that the problem of “high and low” tariffs (disparities) should be given attention when it affected the flow of trade, just as we recognized other special problems, such as structural peculiarities in the economies of certain of the major trading countries. But this could not be the main negotiating principle if we were to liberalize trade. (A further and more technical discussion of the disparity problem is attached as Tab C. This paper was prepared by the Trade Executive Committee.)

3. Agriculture.

In talking with Erhard you should have in mind that Germany is the leading obstacle to the liberalization of [Facsimile Page 7] agricultural trade. Much of German agriculture is medieval. German prices are pegged at abnormally high rates to keep uneconomic production alive.

The French, with a far more efficient agriculture, are pressing for lower prices under the Common Agriculture Policy of the Common Market. On this issue, the French interests are much closer to ours than the German interests.

Unfortunately, Erhard’s Party, the CDU, depends for much of its support on the German farm vote, and the present German Government feels heavy pressure from farmers, particularly as its voting minority diminishes.

You should make it quite clear to Erhard that from the United States’ point of view it is essential that agriculture be liberalized through the current trade negotiations. To be most effective, you might appeal to Erhard as a good economist. United States agriculture is highly efficient, and it is to the interest of Germany and the whole Free World [Typeset Page 1554] that it have a cheap food supply. If Germany would only buy an increasing portion of our low-cost agricultural products this would lower food costs and reduce the inflationary pressures of wage increases. German industry would thus be able to compete even more advantageously.

Beyond that Erhard, as a distinguished economist, must understand that the principle of comparative advantage requires that Germany, should take more and more of her food from America, an efficient agriculture producer, thus releasing agriculture workers for the German industrial labor market where there is a persistent labor shortage.

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While making these economic arguments you should, of course, sympathize with Erhard’s problems as a politician facing heavy pressures from the farm sector. But you should point out that the United States has reduced its farm population from about 13% of its working force in 1950 to less than 9% today, while at the same time rationalizing agriculture. It is important that for the economic health of the Free World that Germany also get her men off the farms where they are inefficient producers and into the factories where they can produce with high efficiency.

The Central Problem for Our Agricultural Exports

The central question that must be faced in freeing agricultural trade is, of course, the wheat price. Here I think you should emphasize that the maintenance of an artificially high price, such as the present German average producer price of $3.01 per bushel (as compared with the American price of $1.83 and the French price of $2.33) would only mean a perpetuation of all the worst distortions of the German economy. Moreover, it would mean the gradual extension throughout the European community of agricultural autarky.

You should indicate that we are prepared—and in fact, plan—to attack this problem on a global basis. We hope that serious negotiations for a world grains agreement can begin this summer. We recognize, of course, the complexity of such an undertaking and the lamentable consequences if it should fail.

If you feel you must deal with the problems of poultry, be blunt. You should state that we regard the bilateral negotiations between ourselves and the EEC as offering virtually a last chance for providing redress for the unquestioned trade damage we have suffered. Emphasize to Erhard that it is essential, if the broad trade negotiations are to progress in an amicable climate, that the Council of Ministers authorize the Commission to negotiate a fair settlement of the poultry problem.

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In this connection you should be aware that Erhard, in his conversation with McGhee, took credit for the fact that the German Cabinet [Typeset Page 1555] had just decided to favor a 27 pfennig kilo reduction in the levy application to US poultry, such reduction to be subject to approval by the Council of Ministers. If it became operative, this would have the effect of lowering the present levy from 14.2¢ per pound to 11.1¢ per pound.

Such a reduction would be helpful and we would welcome it. However, there are indications that the French may block even this. Moreover, our minimum position in the US-EEC negotiations aims at a total levy under 10¢ per pound. At least for the time being, we should continue to have this as our target.

George W. Ball
  1. Talking points for the President’s conversation with German Vice Chancellor Erhard. Secret. 9 pp. Department of State, Central Files, POL 7 US/KENNEDY.