Foreign Relations of the United States, 1964–1968, Volume XXIX, Part 1, Korea

59. Memorandum From the Assistant Director of the United States Operations Mission to Korea (Brown) to the Director of the United States Operations Mission to Korea of the Agency for International Development (Bernstein)¹

Seoul, September 23, 1965.

SUBJECT

• Procurement in Korea for Vietnam

Over the last several months there has been considerable discussion within Korea and between the ROKG and the U.S. on procurement in Korea for Vietnam. Discussions have touched on both civilian procurement, using U.S. aid funds for Vietnam, and military procurement both for U.S. forces and under the Vietnam MAP.²

In our general discussions with the ROKG we have informed them that there is no possibility of granting Korea special preference for such procurement for both political and legislative reasons. We have also stressed that Korea should emphasize the development of permanent export markets rather than place too much emphasis on what is hopefully a temporary situation. At the same time, it is important for the U.S. to recognize the political and psychological attitudes within Korea on this question. Korea is providing a full combat division plus a non-combat engineering unit to Vietnam. While the ROKG and the U.S. have repeatedly maintained that such action was based on Korea’s understanding of its own interests in the war in South Vietnam and its responsibilities to the Free World, there is inevitably the feeling within Korea, and particularly in the Assembly, that Korea should receive some tangible trade benefits from its willing response to the request for troops. This feeling is fortified by the feeling that persists in Korea that Japan profited greatly economically from the Korean War. Korea now sees an opportunity to capitalize itself on the economic consequences of the Vietnam engagement. But equally important, Korea resents any implication that while Korea is contributing troops to the war, Japan may once again be making large profits through U.S. off-shore procurement.

In order to meet these problems, the U.S. has promised the ROKG that Korea will be given full and equal opportunity to compete for U.S. off-shore procurement whether military or civilian. Some steps have been taken in this regard, but others still remain to be implemented, and certain other recommendations in this area are still awaiting U.S. action.

Civilian: USOM recommended in April that Korea be made eligible for purchases under Supporting Assistance for Vietnam of tires and tubes which are currently restricted to U.S. procurement. This recommendation was made on the basis of Korean capability to produce tires and tubes of high quality, having supplied such products over the past several years to U.S. forces stationed here in Korea. Furthermore, Korea utilizes U.S. surplus rubber in its production of tires and tubes and thus the procurement in Korea would not represent entirely a gold drain. Finally, this industry is one which AID has helped to develop and is one of the most competent and competitive industries in Korea. Action on this recommendation lies with AID/W.

The second recommendation on civilian procurement, made in June, related to the 10% rule on steel products. The rule in question states that not more than 10% of an item purchased on a limited world-wide basis can be obtained from a non-eligible source of procurement. In the case of galvanized steel products from Korea, roughly 10% of the value of the final product is paid for with cash to Japan for certain interim processing with additional payment to Japan paid for with scrap iron imported from the U.S. Thus while Japan contributes more than 10% of the total value of the finished product, only 10% is paid for in dollars and the remainder in U.S. purchased scrap. Our recommendation was that the U.S. interpret the 10% rule broadly enough to permit Korean exports of this product under the AID Vietnam program. This was not a waiver request, but a request for a broad interpretation which appears legitimate within the purposes for which the rule was established. This recommendation is important because Korean exports of galvanized steel to Vietnam have run as high as $13 million a year and steel has thus been one of Korea’s chief exports to Vietnam. In addition, Korea manufacturers undertook long negotiations and paid an indemnity to Vietnam to reopen the market in Vietnam after a bad shipment caused the RVN to exclude Korean steel imports. To deny this market to Korea now would mean rendering past Korean efforts both in developing the market and in settling a difficult dispute useless. Action on this question is with USOM/Saigon, which has been given discretionary authority by AID/W to resolve the matter.

We discussed with Washington the possibility of other types of civilian procurement in Korea, particularly the processing of PL 480 products for Vietnam and the purchase of textiles. Washington has informed us that such procurement is not feasible.

Military: Korea has been informed that MAP and DOD funds can only be spent off-shore for emergency or other special reasons such as storage problems, substantial price differences, etc. In such cases, procurement must be completely competitive, and no preference can be granted. To meet Korean complaints about procurement in Japan, DOD has requested Japan, Vietnam and Korea to review procurement procedures and to determine whether Korea was in fact in a less advantageous position, because Korea was now receiving information on all orders for Vietnam and would in the future be receiving information on all U.S. procurement in the Far East for U.S. forces. However, to date while information on Vietnam procurement has been provided to the U.S. Army’s Korean Procurement Agency, information on other military procurement of the Far East has not been so provided. While Korea may not be able to compete with Japan on certain sophisticated items, there is an important political and psychological importance in giving Korea completely equal opportunity to compete on all U.S. off-shore procurement in the Far East. Action on this matter lies evidently with U.S. Army’s Japan Procurement Agency.

A second item of military procurement was in the use of Korean facilities of rehabilitation and repair of vehicles, aircraft, and other equipment, for which Korea was believed to have some very adequate facilities. Last spring, CINCPAC undertook to survey some of these facilities—on a priority basis—for use in connection with Vietnam. To date, however, nothing has been heard from CINCPAC on this matter.

Conclusion: Korea’s hopes for large-scale exports to Vietnam, which have frequently been mentioned as high as $30 million a year, will largely be frustrated, particularly since off-shore procurement of most textiles, which represented over half of the value of items in the Korean planning, has been precluded by Washington under either U.S. forces or AID procurement. This makes it all the more important that in those items in which Korea does have a legitimate right to compete, efforts should be made to provide Korea the necessary information and opportunities. Action on the tires and tubes and on the steel questions for example, would be most welcome. A determination of Korea’s capability in repair and rehabilitation would also be important.

In addition, off-shore procurement by the U.S. for other than Vietnam should not discriminate against Korea and should in fact provide Korea with as much opportunity as possible. Particularly important in this area is the procurement for the U.S. forces stationed in Korea, including the purchases for the PX. This subject is dealt with in a separate paper which is attached.³

1. Source: National Archives and Records Administration, RG 59, Central Files 1964–66, DEF 12–5 KOR S. Secret. Attached to a September 28 letter from Roger Ernst, Acting Director of the United States Operations Mission to Korea, to Barnett.
2. Documentation regarding increased Korean participation in procurement programs for Vietnam under AID and MAP is ibid.,POL 27–3 VIET S; DEF 12–5 KOR–VIET S; DEF 19 US–KOR S; DEF 19 KOR S-VIET S; AID VIET S; and AID (KOR S) VIET S.
3. Attached but not printed.