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

412. Memorandum from Cooper to Kaysen, July 13¹

July 13, 1962

SUBJECT

• Quick observations on Ambassador Galbraith and bilateralism

1. It is necessary to draw the distinction, which Ambassador Galbraith seems to confuse, between the real effect of aid on the balance of payments and its apparent effect as presented in the accounts—which take into account neither feedback nor substitution effects. Galbraith’s opening paragraph sounds as though he is concerned with the apparent effect; the rest of the memorandum seems to be concerned with the real effect.

This is an important distinction, for while aid could suffer in Congress because of the balance of payments, it can also suffer in the field because of the balance of payments. Just at the moment the second possibility may be more likely than the first. If investment in a school has the highest social return, and the U.S. has to bribe a country to build it if it is to be built at all, then elimination of this type of expenditure can hurt U.S. aid objectives as much as Congressional penuriousness.

Reducing the apparent impact on the balance of payments of the aid program may be desirable for the purposes of Congressional presentation. Segregated accounts may serve that function well. Galbraith’s recommendations go beyond that and attempt to improve the real position as well. This is good if the cost of not doing so is high, or if the cost of doing so is really low. Galbraith seems to hold the cost of not doing so higher than I think it is, and he is therefore willing to pay a higher price.

2. The “costs” of Galbraith’s proposal for “mild bilateralism” are:

(a) retaliation in the field—Europeans are more likely to seek restrictive agreements favoring their own position, or hold on to the ones they already have. Galbraith is right in asserting that the scope for increased European bilateralism here is small; Europe runs a trade surplus with every major trading area except Japan and North America. But European anxiety to hold onto existing preferential and bilateral arrangements—e.g., the Commonwealth trading system and the French franc system—may be strengthened considerably by U.S. moves away from its former preachments on multilateralism toward a new kind of bilateralism of its own.

(b) European resistence to multilateralism may be stiffened considerably closer to home. We are not sufficiently confident about the future orientation of the Common Market to risk obvious moves toward bilateralism in our own affairs. Already there are pressures in the EEC for maintaining and strengthening various kinds of bilateralism—the special position being cut out for Africa is the most obvious case—and any substantial U.S. moves toward bilateralism would weaken the position of those in the EEC pressing for fewer “special arrangements”. This could result in a non-trivial direct loss to the U.S. and indirect losses through areas with strong commercial ties to the U.S., such as Japan and Latin America. There are many Europeans and others who fear U.S. competition (see the statement of the Italian, of all people, in Southard’s report of the IMF Executive Board meeting on the U.S.) and would welcome a chance to reduce it.

(c) The proposed bilateralism would certainly weaken the European interest in other, preferable ways to reduce or finance the U.S. deficit, such as military offset payments (which so far have been negotiated successfully only with Germany), advance debt repayments, and easier monetary policy in Europe.

3. Using the “balance of payments” as a special plea for bilateralism without prejudicing the case for a general multilateral trading system will not work, because of the universality of deficits and the existing asymmetry in viewing deficits and surpluses; deficit countries look at the sign of their balance; surplus countries look at the sign of the change in the balance (or low reserve countries look to the level of reserves, high reserve countries to changes in the level). Acknowledging the existence of a liquidity problem is not sufficient to keep a card as a professional economist; Galbraith should also recognize the bearing of the liquidity problem on the response of Europeans to U.S. moves toward bilateralism. It is very doubtful that many European countries, with their high internal demand, would provide more aid on credits to maintain exports formerly financed directly or indirectly by U.S. aid. Closer bilateral ties of their own would more likely result.

4. It is true that former colonials have powerful commercial bonds with former rulers, and aid tied in a sensible way is one method for loosening some of these bonds. LDC’s learn that it is not as difficult to buy in the U.S. as they might have thought. But the strength of former connections should not be exaggerated. Germany, which did not rule in India, sells about as much to that country as Britain, which did. Britain, which had no political connection in Laos, sells nine times more to that country than France, which did. I suspect a little selling ingenuity can go a long way toward overcoming time-honored commercial ties.

1. Observations on Galbraith’s views on effect of aid on the balance of payments. Confidential. 3 pp. Kennedy Library, National Security Files, Kaysen Series, Balance of Payments, AID, Box 362.