98. Memorandum From the President’s Assistant for National Security Affairs (Kissinger) to President Nixon 1

[Omitted here are Section I on Purpose, Section II.A, Background, and subsections II.A.1, II.A.2, and II.A.3 on Reaffirmation of the Alliance, Japan’s Normalization of Relations with the PRC, and US China Policy, respectively.]

4. US-Japan Bilateral Economic Relations. Although Japanese leaders now recognize Japan’s major responsibility for reducing the massive trade deficit, they are reluctant to commit themselves to the kind of decisive, short-term ameliorative action we want. They fall back rather on projections that Japan’s new economic recovery supplemented by Japanese government fiscal policy and other economic trends now underway will resolve the problem in about two years.

The problem at Honolulu will depend on the progress made in our current economic negotiations following up on Eberle’s meetings in Hakone and Ingersoll’s discussions preparatory to Honolulu. In these the Japanese are moving to develop a concrete package to meet the Tanaka Government commitment to reduce to below $3 billion the trade deficit by the end of this Japanese Fiscal Year (next March 31). There is greater reluctance to commit Japan to another billion reduction by the end of the following JFY.

We understand that the Tanaka Government’s inability to agree at Hakone, and subsequently, on additional measures to reduce the trade [Page 252]gap further has probably been due to the unexpectedly strong resistance of mid-level bureaucrats in the economic ministries. These officials are loyal to Japanese business and industry interests. Nevertheless, past experience has indicated that we can be most effective by pressing the Japanese Government quietly but firmly to specific commitments that are politically feasible for it domestically. Indeed, US pressure is one of the most effective levers available to a Japanese Prime Minister and the Foreign Office to use with recalcitrant economic bureaucrats. Tanaka, with his currently strong political position (he is supported by over 70% of the people in opinion polls) is by virtue of this and his decisive temperament in a position to use such leverage.

[Omitted here are sections on Participants, Press Plans, and the Schedule.]

Tab C2

Economic Issues

The Problem

For the U.S. to: (a) allay protectionist pressure which could be troublesome next year, (b) successfully conclude monetary reform negotiations, and (c) obtain Congressional support for trade negotiation legislation, we must substantially improve our balance of payments position. Realistically, a major part of the improvement must come vis-à-vis Japan. However, our bilateral trade deficit, which was $3.2 billion in 1971 is projected by us to be about $3.8 billion in 1972. (The Japanese are now predicting $3.6 billion.) Japanese Foreign Exchange Reserves rose by over $10 billion in 1971 and today are above $16 billion.

Japan, for its part, recognizes in principle the necessity of reducing its trade and payments surplus which has made it the target of protectionist pressure in Europe and the U.S. However, the Government and the business community are extremely reluctant to translate this principle into concrete actions which are harmful to specific interests in Japan.

Japan’s Position

Prime Minister Tanaka has stated that his target is reduction of the trade deficit to below $3 billion by the end of the current Japanese fiscal [Page 253]year (March 31, 1973). [This was the target agreed on in the Tanaka/Kissinger meeting.]3

Tanaka has put substantial pressure on his bureaucracy to come up with an acceptable package. His objective was to have this ready prior to the Summit so that detailed economic issues would not have to be discussed, and in order to avoid the appearance that Japan had made concessions at Hawaii under pressure from the U.S. Tanaka also did not wish to bring with him his Minister of International Trade and Industry, Nakasone.

In the package put together as the result of Ambassador Eberle’s meetings with the Japanese at Hakone and Ambassador Ingersoll’s follow-up the Japanese have agreed to purchase $320 million in uranium enrichment services, $320 million worth of civil aviation equipment including wide-bodied aircraft, $20 million worth of helicopters and aviation related facilities, and $26 million worth of special agricultural purchases. Total value: $686 million. In addition Japan projects an estimated increase in agricultural purchases, over last year’s level, of $270 million and in purchases of fishery and forestry products of $120 million, plus $24 million in additional purchases of U.S. feed grain resulting from a reduction in sales from Japan’s stockpile of feed rice. Total value: $414 million.

Japan has also agreed to allow 100% foreign-owned investment in retail operations totaling up to 11 stores and in limited import-processing activities such as film and cosmetics; also, to permit an increase in the U.S. share of the Japanese computer market. The AEC and the Japanese have agreed to use their best efforts to set up a working group to examine feasibility of a joint-venture uranium enrichment facility to be built in the U.S.

Japan wants to make the announcement of these specifics in a separate press release.4

The Japanese allege that—aside from the above and some minor steps to liberalize imports—the Japanese political situation presently precludes a) removal of quotas (34 GATT illegal quotas are still retained) although there is some possibility that the quota levels on oranges, juices, beef, and feeder cattle will be reduced, or b) special budget increases for procurement from the U.S. They argue that last December’s yen revaluation, projected Japanese economic growth with an attendant increase in import demand, and orderly exporting practices [Page 254]will with time move us closer to equilibrium. They might argue that beyond present commitments, it will be difficult at this time to make any formal commitment on specifics or targets for the next Japanese fiscal year.

U.S. Position

This package—containing the purchase of U.S. goods and services of over $1 billion—while helpful in reducing our trade and payments imbalance, contains some items—uranium enrichment, wide—bodied aircraft, helicopters—which are being prepaid. These represent real sales for now and the future but except for agricultural purchases these do not help our trade balance this year. The package is an indicator of our mutual effort to turn around the growing imbalance in U.S.-Japanese trade. But its significance in this regard is diminished without a Japanese commitment to reductions in the trade imbalance. Accordingly, it is important that we receive in the joint statement a commitment that Japan intends to reduce by March 31 its trade surplus with the U.S. to below $3 billion, or by an amount of roughly $1 billion from the present projected surplus of $3.8 to $4 billion. Further, we want to receive an additional commitment to continue to work for additional concrete measures to reduce the imbalance and, on a longer-term balance of trade objective, that Japan will exert its best effort to reduce the trade deficit by at least an additional $1 billion in the next Japanese fiscal year beginning on April 1, 1973.5

We also want to:

  • —Stress the importance we attach to cooperation with Japan in multilateral trade negotiations and monetary reform.
  • —Reach agreement with Japan to hold future meetings at a high level to review evolving economic relationships.
  • —Agree to hold a meeting of the Ministerial-level Committee on Trade and Economic Affairs (ECONCOM) in the first half of CY 1973.6

[If Tanaka does not agree to commit himself to reduce the deficit by an additional $1 billion during the next fiscal year, you may wish to get a commitment that we will work to develop concrete measures to further reduce our trade imbalance and that we will review progress toward this end at ECONCOM and other high level meetings to be held next year.]7

Should the Japanese raise the issue of the Smithsonian Agreement in such a way as to seek our agreement that the rates are unalterable or [Page 255]to get our support to help defend the present yen rate to prevent another yen revaluation (which Tanaka and Japanese businessmen wish to avoid because it would cut into Japanese competitiveness), our position is that the Smithsonian Agreement was a propitious beginning and we should now work to achieve fundamental reform. We should avoid a commitment to any specific yen-dollar rate in the future. [George Shultz’ attached memorandum explains this position in detail.]8

  1. Source: National Archives, Nixon Presidential Materials, NSC Files, VIP Visits, Box 926, Tanaka Visit 31 Aug-1 Sept. Top Secret; Sensitive. A stamped notation on the memorandum indicates that the President saw it.
  2. Secret; Sensitive. Tabs A-I are attached to Kissinger’s memorandum. The others are: A. Talking Points; B. Japan’s Normalization of Relations with the PRC; D. Korean Peninsula; E. Relations with the Soviet Union; F. US Military Presence in Japan; G. Biography of Tanaka; H. Memorandum to you from Secretary Rogers; and I. Memorandum to You from Secretary Laird.
  3. See Document 96. Brackets in the source text.
  4. The trade package was announced at the conclusion of the talks in Honolulu on September 1. See Department of State Bulletin, September 25, 1972, pp. 332-333.
  5. No separate press release has been found. The Joint Statement is printed ibid., pp. 331-332.
  6. These three objectives were affirmed in the Joint Statement.
  7. Brackets in the source text.
  8. See Document 97. Brackets in the source text.