98. Memorandum From the President’s Assistant for National Security
Affairs (Kissinger) to
President Nixon1
Washington, August 29, 1972.
[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
