179. Memorandum From the President’s Assistant for International Economic
Affairs (Peterson) to the
President’s Assistant for National Security Affairs (Kissinger)1
Washington, September 24, 1971.
This is about as hurriedly thrown together as anything can be since the
Coordinating Group has only been in operation since yesterday morning.2 It is so much a first
draft that the rest of the Group are getting copies the same time you
are.3
However, given your Alaskan trip4 and the
forthcoming IMF meetings, I felt that your
looking at this might at least give you a preliminary glance of where we
stand.
Attachment
SUMMARY5
We can, perhaps summarize the present status of discussion within the
Government as follows:
A. Areas of Agreement
- 1.
- We agree on a two-phased Negotiation. Phase I, to be completed,
hopefully, in 6 to 8 weeks and no later than Christmas would involve
negotiations on monetary, trade, and defense issues that would
provide clearly identifiable results of our negotiating efforts and
a basis for removing the surtax and the discriminatory aspects of
the investment tax credit. Phase II would involve long-range
negotiations on key monetary, trade, and defense issues-the outline
of which would hopefully be agreed to.
- 2.
-
The surcharge-a domestic economic liability, although politically
very popular-as an international asset will soon begin to
deteriorate,
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unless
constructive negotiations are underway promptly. Therefore, if
we are to avoid serious complications, both internationally and
domestically, we must promptly remove it in return for
achievement of Phase I objectives.
Promptly means at the latest before Christmas. More desirable
would be to end international Phase I simultaneously with the
end of the 90-day domestic Phase I (November 15).
- 3.
- The highest priority Phase I objective is an exchange rate
structure that promises to redress the United States balance of
payments.
- 4.
- We need tangible trade and defense achievements in Phase I, as
well as significant exchange rate realignment (in fact or through a
credible process).
- 5.
- In no circumstances will we agree to more than “limited
convertibility” in Phase I, since this is our major negotiating
leverage for Phase II reform of the monetary system.
- 6.
- In Phase II highest priority attaches to reform of the monetary
system so that we will not find ourselves in a few years back in the
same situation which led to our August 15 actions.
- 7.
- In addition, in Phase II we want far-reaching trade liberalization
and a significant shifting of defense responsibilities to our
allies.
- 8.
- Finally, we want the President at the earliest possible date to
put before the world a vision of our international goals for this
country which would add to the Phase II elements mentioned above
(trade liberalization, defense burden sharing, basic monetary
reform), the prospect of the developed world more fully sharing its
wealth with the less developed countries.
B. Issues
- 1.
- We have done considerable work but are not entirely agreed on
specific trade and defense concessions we would want and expect as
minimum consideration for removal of the surtax.
- 2.
- We have not defined precisely the minimum levels at which we would
agree to return to fixed parities with limited dollar convertibility
although the Deutsche Mark and the Yen both somewhere over 10%,
agreement might be desirable … particularly if the outlines of an
improved monetary system had been agreed to that would presumably
correct any imbalances in the future.
- 3.
- Others argue that a continuing honest or bona fide float,
particularly if it were agreed that reserve accumulation and any
significant intervention would be ruled out for key countries,
would, for now, be preferable to fixed parities at almost any
level.
- 4.
-
Although we have a clearly preferred view of not changing the
price of gold in Phase I, there is an issue over what we would
actually do if others insist, and this is a route to getting a
substantial adequate realignment.
[Page 503]
Why have others asked for devaluation of the dollar vis-à-vis
gold? Politically, because such a move would appear to make the
necessary exchange rate adjustments in other countries more
easily tolerable. Also, the bookkeeping effects are certainly
not negligible to some countries. Strategically, because some,
i.e., the French, want to force us back to convertibility at a
higher fixed gold price. The wealth redistribution effects of a
price change are tolerable for us and others, although not
desirable. Politically, devaluation is difficult for the
President, but perhaps not impossible, and the atmosphere is
clearly changing. There is a practical difficulty due to
legislative requirements which argues for action only in the
context of system changes which also would require Congressional
approval but which would come near the end of the Phase II
negotiation rather than Phase I.
- 5.
- What we mean by “limited convertibility” and how far we would go
in what circumstances is also an issue.
- 6.
-
While there are issues concerning our minimum trade terms, with
respect to Japan, Canada, and the U.K., and some disagreement as
to how much we originally ask for, the major trade issue
concerns the European Community.
We know what we want from the Community but we recognize that the
chances of obtaining much, if anything, on agriculture,
preferences, and industrial policy in Phase I may be small.
A specific central issue here is whether or not to try to use the
situation to seek a standstill on the European Community
negotiations with the EFTA
non-applicants. Success would be valuable, but the cost of
trying and failing could be high, both on the monetary and
political fronts.
- 7.
- Are there circumstances in which we would differentially lift the
surcharge for some countries who had cooperated with us in making
meaningful adjustments but not doing so for remaining countries?
This raises major policy and legal questions, including heightened
dangers of retaliation and probable incompatibility with our
international obligations. Fortunately, the decision is not needed
now, but there are quite different legal and policy views on this
within the government and we have much to do here.
- 8.
- While we prefer not to discuss our investment control programs and
let the liberalization take place at a quiet but accelerating pace,
others will probably make an issue of this. Eventually, we seek
elimination of our controls and, indeed, action now would put more
pressure on the rate structure, but it would also stimulate others
to go even further in applying exchange controls.
- 9.
- We recognize that the existing situation inequitably places a
large adjustment burden on developing countries, but until our Phase
I objectives are achieved, most would agree that we cannot make
major concessions
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through
the less developed countries. However, if progress is not made
promptly, further consideration of surcharge exemption for the less
developed countries collectively or on products of major interest to
them should be explored.
- 10.
- Last, but not least, there are issues concerning the negotiating
scenario. How do we coordinate bilateral trade, defense, and
monetary negotiations with the general multilateral discussions of
questions involving the payments and trading systems? What is the
proper role of various departments and individuals in Phase I? Phase
II?
