68. Paper Prepared in the Department of State1

US-FRG Offset Negotiations—Current Status

U.S. and German delegations met in Bonn June 28-29 for a third round of formal negotiations on a new offset agreement. Presentations during the formal sessions consisted mainly of reiterating previously stated positions. The only new idea advanced by the German side was the suggestion that the gap between the U.S. target and FRG offer be filled by a four-and-a-half-year Bundesbank loan of DM 2 billion ($572 million). The FRG offer, on a two-year basis, would consist of the following:

Military procurement $929.5 million
Budget support 228.8 million
Bundesbank loan 572.0 million
Total $1,730.3 million

As previously reported,2 the FRG has proposed that a portion of the funds for military procurement and all of the funds for budget support be taken from money deposited in the Treasury under previous offset agreements. Thus, under the German proposal, only the following would be new money and constitute a balance-of-payments inflow for the United States:

Military procurement $715.0 million
Budget support 572.0 million
Bundesbank loan $1,287.0 million

We informed the German side that we were unable to accept the offer because it did not contain sufficient balance-of-payments benefit and because interest-bearing loans have not proven to be very satisfactory offset features in the past. We suggested that the Germans make an effort to improve their offer by increasing the budget support component, [Page 164]using new money. The German negotiator replied that he was working under specific instructions from the FRG Cabinet and that he had little flexibility. He stated that he was authorized to make only “minor adjustments” in the German offer.3

At the conclusion of the formal sessions, the German chairman expressed concern that the two sides had not been able to reach agreement. He then informally outlined a “personal” proposal which he said had not been discussed with the Cabinet but which he believed the Cabinet might be persuaded to accept as an “alternate” German offer.

The following are the elements of this proposal:

Military Procurement—$929.5 million, of which $300 million would be taken from Treasury Accounts 1 and 2 and $629 million would be new German budget funds.

Budget Support—$314.6 million, of which $228.8 million would be taken from Treasury Accounts 1 and 2 and $85.8 million would be new German budget funds. Of the total, $228.8 million would be a lump-sum payment, $57.2 million would be utilized for rehabilitation of U.S. troop facilities in Germany during FY 1972 and FY 1973, and $28.6 million would be used to pay interest due the Bundesbank loan during FY 1972 and 1973.

Bundesbank Loan—$572 million for 4-1/2 years at 2-1/2% interest.

This proposal represents a slight improvement over the official offer. However, from the balance-of-payments point of view, the benefit to the U.S. would average only about $626 million per year (including the loan)—about half our estimated balance-of-payments costs in Germany. Therefore, State, Treasury and Defense prepared a counterproposal which was transmitted to the Germans on July 24.4

The counterproposal suggests a package comprised of the following on a two-year basis:

Military Procurement—$929.5 million, of which $14 million would be taken from Treasury Account 1.

Budget Support—$686.4 million, to be financed entirely from funds already on deposit in Treasury Accounts 1 and 2.

Bundesbank Loan—$572 million for 4-1/2 years at 2-1/2 interest.

Under the counterproposal, the total of military procurement would remain the same, but the amount of new money required would [Page 165]be increased by DM 700 million ($200 million). The amount of budget support payments would be increased by the use of additional funds from Treasury deposits and Bundesbank credits would remain as proposed informally by Dr. Herbst. Treasury Accounts 1 and 2 would be almost entirely exhausted, so that in any subsequent offset agreement new money would be required and have a full balance-of-payments effect.

The counterproposal is substantially above either the formal offer or the personal Herbst proposal and there has been nothing in our negotiations thus far to suggest that the Germans might be prepared to improve their offer to this extent, if at all. However, we believe it is desirable to make this additional effort to bring about an improvement in their position.

The initial German reaction to our proposal has been very negative.5 However, they are studying it further and we should have an official response soon. If our latest proposal is rejected, then a decision on our part to obtain this particular result would probably require intervention between the highest levels of both governments. Should we persevere, we would almost surely, at the least, pay a not inconsiderable price in terms of an irritated mutual relationship. It is our hope, however, that our proposal, even if not accepted in its present form, will provide a basis for a compromise within Presidentially approved guidelines.

We have just learned that the principal German negotiator, Dr. Herbst, has proposed to come to Washington for private talks next week. We have agreed that such discussions would be desirable and are in the process of making arrangements for meetings on August 3-4.6

  1. Source: National Archives, Nixon Presidential Materials, NSC Files, Country Files—Europe, Box 685, Germany Volume IX 4-8/71. Confidential. Forwarded to Kissinger under cover of a July 29 memorandum from State Department Executive Secretary Theodore Eliot informing him the report was prepared by Nathaniel Samuels, chairman of the U.S. delegation to the offset negotiations. An attached July 31 memorandum from Sonnenfeldt apprised Kissinger of the current status of the offset negotiations in preparation for his August 3 meeting with Ambassador Pauls. Sonnenfeldt advised Kissinger to make it clear the Germans would have to improve their offer.
  2. Reference is to an undated status report by Samuels sent under cover of a June 24 memorandum from Eliot to Kissinger; both attached but not printed.
  3. Telegram 7765 from Bonn, June 25, reported that Herbst, the chief German negotiator, told an Embassy official in Bonn that he would not go into the June 28 negotiations “with significantly more to put forward.” He said that the Cabinet had approved only a “very slight margin” of negotiating room; his instructions were “extremely rigid.” (National Archives, Nixon Presidential Materials, NSC Files, Country Files—Europe, Box 685, Germany Volume IX 4-8/71)
  4. A letter from Samuels to Herbst was transmitted in telegram 133748 to Bonn, July 23, and delivered by the Embassy on July 24. (Ibid., RG 59, Central Files 1970-73, FN 12 GER W 4/1/71)
  5. Reported in telegram 9070 from Bonn, July 24. (Ibid.) On July 21, as the U.S. proposal was being drafted, John J. McGinnis sent Secretary Connally a memorandum suggesting that the Germans would be unable to accept the proposal without a direct intervention by President Nixon with Chancellor Brandt. (Washington National Records Center, Department of the Treasury, Files of Under Secretary Volcker: FRC 56 79 17, German Offset) During his August 3 meeting with Kissinger, Ambassador Pauls said the German view was that all the concessions had been made by the German side and none by the United States. Pauls urged compromise since “the Germans could not swallow the latest U.S. proposal.” (Memorandum for the record by Sonnenfeldt, August 4; National Archives, Nixon Presidential Materials, NSC Files, Country Files—Europe, Box 685, Germany Volume IX 4-8/71)
  6. On July 30 the Embassy in Bonn reported confirming these dates with Herbst. The Embassy also elaborated on the extreme negative reaction to the latest U.S. proposal. (Telegram 9349 from Bonn, July 30; ibid., RG 59, Central Files 1970-73, FN 12 GER W)