Foreign Relations of the United States, 1964–1968, Volume VIII, International Monetary and Trade Policy

169. Telegram From the Embassy in Japan to the Department of State¹

Tokyo, January 3, 1968, 1145Z.

4400. Sato-Rostow meeting: from Rostow. Balance of payments program. In two and a half hour meeting today with Under Secretary Rostow, Ambassador Johnson and Barnett, fully reported by later septel,² Prime Minister Sato said that he now understood the background and context of President’s balance of payments program, and expressed admiration and respect for the President’s courage and candor in laying his cards on the table, and taking such firm and difficult decisions. The political meaning of the program in Sato’s view is that the President refused to deal with the U.S. balance of payments problem by cutting security expenditures or aid, but absorbed the necessary adjustments purely on the economic side, and through tourism. That the President did not falter in his efforts for peace and security, Sato said, is “something we have to think about carefully.” At Rostow’s request, he later author-ized Igimura, Secretary General of Cabinet, to tell the press this was his general view, and that Japan would cooperate with the United States in protecting the stability of the world monetary system.

Rostow’s presentation put visit in context of regular consultations characteristic of present stage of Japanese-American relations, intended to facilitate not only exchanges of views, but harmonization of policy. President’s approach dominated, Rostow said, by desire through international cooperation (1) to prevent reactions that could undo all that has been accomplished in Kennedy Round and Rio agreement, and (2) to find solutions that enlarge trade rather than restrict or contract it. Main burden of adjustment process, following principles of OECD resolution and debate, should fall on deficit and surplus countries, with as little dislocation as possible for countries like Britain, Japan, Australia and Canada, whose special concerns had been taken into account in preparation of President’s program.

With respect to trade, Rostow stressed that trade should be regarded as significant element in balance of payments adjustment process: that we were anxious to proceed with post-Kennedy Round negotiations to reduce non-tarriff barriers, including import quotas and other quantitative restrictions; and were interested in revision of GATT rules to allow more flexibility in using trade policy to help deal with balance of payments problems, without being asked to choose between quotas or devaluation. Such procedures, however, like long run export promotion plans, would not permit us to use trade policy to help solve the balance of payments problem in 1968. For that purpose, our attention was directed to the problem of European border taxes, which had become an increasingly significant disadvantage to our trade, as they were to the trade of Japan.

It followed from the President’s basic approach to the problem of trade policy that we strongly prefer to achieve the indispensable increase in the U.S. trade surplus through a reduction of other peoples’ trade barriers (particularly those of Europe) rather than through an increase in our own. One goal of Katzenbach’s mission to Europe was to discover whether it was reasonable to expect a reduction of European border taxes, or at least a suspension of recent increases. It would be helpful if Japan could back us in this effort. President would make his decision about possibility of U.S. legislation in the light of these discussions, and other factors. U.S. legislation, if it should be proposed, would be a border tax adjustment of the usual type, legal within GATT rules, and of modest proportions, probably within 2 percent-2.5 percent range, since indirect taxes play so small a part in U.S. tax system. If we did decide to proceed with such legislation, we hoped the Europeans would stand still. While we were sympathetic to Japan’s balance of payments problems and prospects, our present view was that a border tax adjustment of such scope would not significantly affect Japanese trade, taking into account the range of export supportive devices, such as special depreciation allowances, Japan now had available to assist exports. We assumed that Japan would be studying the problem carefully, as the situation evolved. Rostow said “I hope you will authorize me to assure the President that you will take no steps in this field, and that while you will of course wish to consider the impact of these measures on Japan as the situation evolves in the weeks ahead, that impact should be discussed further if you desire it in the next meeting of our Joint Cabinet Subcommittee at Honolulu on January 25.” To this question, Miki later gave assurances that the possible reaction of Japan to a possible decision on border tax would be taken up at the Honolulu meeting. He spoke of Sato’s statement as an assurance of Japanese “cooperation.”

In prolonged exchange of views, there was repeated Japanese stress on these themes: (1) strong support for the policy of solving trade aspect of balance of payments problem by trade expansion rather than by contraction; (2) shock at the thought that the United States as the “standard-bearer” of the world would engage in any practices of a protectionist character; (3) anxiety about possible success of protectionist movements within U.S.; (4) assurance of agreement with us on principle of multilateral-consortium-IMF control of Indonesian aid program; and (5) clear view that stability of dollar was indispensable to stability of world monetary and economic system. Tokyo is likely to take all the steps, good or bad, which we take.

Dept repeat for Katzenbach and other addressees as appropriate.

Johnson

1. Source: Department of State, Central Files, FN 12 US. Secret; Exdis. Repeated to Canberra.
2. This telegram has not been found. A detailed, 15-page memorandum of this conversion as well as memoranda of conversations with other Japanese officials, January 2–4, are ibid., Conference Files: Lot 69 D 182, CF 270. Eugene Rostow’s summary of conversations with Japanese officials on the border tax is in telegram 4427, January 4. (Ibid., Central Files, FN 16 US) For his summary of his talks with Sato and other Japanese officials, see Document 175.