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

SUBJECT

  • Additional Issues on New Foreign Aid Program

There are several additional issues which you need to decide for your forthcoming message to the Congress on our new foreign aid program. The message is scheduled for submission before the House recess begins on August 14.2

Management of Security Assistance Program

Peterson , supported by State 3 and Budget, recommends that we set up a single security assistance program to include military assistance (MAP), foreign military credit sales (FMCS), disposal of surplus military stocks, our economic assistance for security-related programs (“supporting assistance”), perhaps the public safety program, and the contingency fund. State would set policy for the program and coordinate [Page 347]its operation. Administration of MAP, FMCS and surplus disposal would be left with Defense.

Defense recommends an alternative arrangement: that MAP and FMCS be located completely in Defense. Their objective is to avoid the Senate Foreign Relations Committee, which would have authority over a combined security assistance program but would not, of course, over DOD’s own budget. The other aspects of security assistance would then be distributed among the other agencies.

The Peterson/State/Budget proposal approach for a single security assistance program would:

  • —Enable us to better coordinate all aspects of our security assistance, trading off military and supporting assistance in countries such as Korea.
  • —Avoid shifting to Defense the major authority presently held by the Secretary of State for MAP.
  • —Avoid leaving supporting assistance standing alone in State, raising major problems in getting Congressional support for this program, which is extremely important in Vietnam and other trouble spots.

The Defense proposal to move MAP/FMCS into the Defense budget, if successful, would:

  • —Improve the likelihood of getting favorable Congressional response to future requests for MAP funding.
  • —Avoid the risk of eventually having to move Southeast Asia MAP back into the Foreign Relations and Foreign Affairs Committee. (Military assistance to Vietnam, Laos and Thailand is now in the DOD budget, but the shift was based on an agreement to return it to regular MAP as soon as possible.)
  • —Lead to better development of tradeoffs between MAP/FMCS and our own overseas military expenditures.

I have talked to Secretary Laird, who thinks we could win a battle to get MAP/FMCS out of Foreign Relations. Bill Timmons thinks the outcome would be uncertain. Everyone agrees that such a proposal would touch off a furious fight—especially in Foreign Relations but also in the House Foreign Affairs Committee, which have commitments to get back the military assistance now in the Defense budget (Vietnam, Laos, Thailand) and would vigorously resist the loss of jurisdiction. Our making the proposal might therefore jeopardize the whole new foreign assistance effort, like the Taiwan jets did on a smaller scale last year, although Timmons doubts that Fulbright could block the whole program and is less concerned about the House.

The choice on this issue rests on whether we are willing to touch off a major battle on the Hill in an effort to get better receptivity for our MAP/FMCS requests in the future, recognizing that the effort might [Page 348]not succeed and that there could be serious costs for the rest of the new assistance program whether or not it does.

Recommendation:

On balance, I recommend that we include MAP/FMCS in a new Security Assistance Act comprising all assistance programs pursuing U.S. security objectives, under the policy guidance of State and with DOD continuing to administer both, as proposed by Peterson and supported by State and Budget. This would leave them in the Foreign Relations/Foreign Affairs Committees.

Approve4

Disapprove, prefer to propose to Congress that MAP/FMCS be included in the Defense budget, with the other security assistance programs divided among other agencies, as proposed by DOD.5

Balance of Payments Restraints on U.S. Investment in LDCs

Peterson , supported by Commerce and CEA, recommends elimination of the current restraints on flows of private U.S. investment to the less developed countries, which were imposed in 1968 in an effort to protect the U.S. balance of payments. The move would take effect in 1971. Treasury and the Federal Reserve strongly oppose it at this time.6

Under the present program, each U.S. firm can transfer U.S. funds abroad for investment in less developed countries at a rate no greater than 10 percent above its rate of transfers in 1965-1966. There is no limitation on the amount of actual investment, only on transfers of funds from the United States—firms can invest any amount which they can finance with foreign borrowings.

Elimination of the direct investment controls:

  • —Would be the best possible indication to the U.S. business community of our desire for U.S. private investment to play a major role in the development process. (This desire will be one of the major features of our new aid program.)
  • —Might elicit some additional investment, since some firms may be (a) unable to borrow abroad or (b) unwilling to pay the higher interest costs of doing so, and (c) since the red tape of the present program would be removed.
  • —Would be a significant step toward your stated objective of eliminating the capital controls program altogether.
  • —In strongly opposing elimination of the controls at this time, Treasury and the Federal Reserve argue that:
  • —Elimination would adversely affect our balance of payments by several hundred million dollars annually, because U.S. outflows would replace borrowings abroad which would occur otherwise, in addition to a one-time cost as previous foreign borrowings of $1.6 billion are paid off over time.
  • —In view of the present large deficit in our balance of payments, such a step would seriously undermine foreign confidence in our resolve to solve our payments problem. Foreign monetary authorities might become unwilling to finance our deficit by holding dollars. In addition, their unwillingness to support our efforts to further reform the monetary system (and help our own payments position), through increased flexibility of exchange rates, might be increased.
  • —It would be possible to limit the balance of payments loss, but doing so would require maintaining or even increasing the amount of red tape under the program, thereby obviating one of the major pros of taking the step.
  • —The step would probably not promote any significant increase in private investment in the LDCs, since most firms can borrow abroad to pursue virtually all of their desired investments.

Both the pros and cons of the proposed action are largely psychological. Elimination of the controls would clearly signal your intent to promote private investment as an integral part of our development assistance. On the other hand, foreign monetary authorities might regard the step as “further proof” that the U.S. had no intention of attempting to control its balance of payments deficits. In real terms, it is unlikely that the measure would significantly increase either U.S. private investment in the LDCs or the magnitude of our balance of payments problem.

Recommendation:

That you not make any decision now to eliminate the balance of payments controls on U.S. direct investment outflows for 1971. Treasury, State, and the Federal Reserve recommend this position.

Approve7

[Page 350]

Disapprove, prefer to announce now that we will eliminate the controls in 1971, as recommended by Peterson and supported by Commerce and CEA

Overseas Staffing of New Development Bank

Peterson recommends that the new Development Bank should operate with a “minimum of field representatives.” His report, however, did not define “minimum” or indicate what functions should be centralized in Washington.

There are essentially three alternatives:

  • —Centralize all operations in Washington, as now done by the Export-Import Bank, with field visits by Washington personnel when necessary to help prepare project proposals. This would permit a major reduction of overseas U.S. personnel and place desirable pressure on borrowing countries to assume more responsibility for preparing their own projects, perhaps at the cost of reducing the quality of these project proposals for a while.
  • —Centralize loan operations in Washington but station technical advisers overseas to help develop projects, as necessary, on the grounds that the LDCs and international organizations cannot yet do the whole job themselves. This would still permit significant reductions of our overseas staffing but phase out our advisory functions more gradually.
  • —Have the Bank retain the same functions as present AID personnel, though reducing their numbers. AID supports this approach, which would maintain a major U.S. assistance capacity within the LDCs and prevent any major reduction in overseas personnel, thus detracting from our basic thrust of shifting responsibility to the LDCs themselves.

Recommendation:

That you approve centralization of all operations of the new Development Bank in Washington, with technical advisors supplied only via field visits. This is the option most consistent with the Peterson recommendation.

Approve8

Prefer to centralize most operations in Washington but station advisers overseas for project development as needed.

Prefer to retain the present AID approach, on a reduced scale, as proposed by AID.

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Hickenlooper Amendment

Peterson , supported by State, recommends that our new aid legislation exclude the Hickenlooper amendment. Instead, we would work actively to find and utilize international forums to resolve expropriation disputes.

The presentation of completely new aid legislation provides a unique opportunity to eliminate the Hickenlooper amendment without seeking its elimination from existing legislation. Avoiding it in the future would:

  • —Increase our flexibility to deal with expropriation disputes, which of course always includes the possibility of cutting off aid.
  • —Would be of major political significance to the LDCs, particularly in Latin America where it is widely regarded as the economic version of a “big stick” U.S. policy.
  • —Would further improve our relations with Peru, and perhaps make it easier for the GOP to eventually settle the IPC issue.
  • —Encourage our seeking multilateral means to resolve expropriation disputes.

The disadvantages of the move would be:

  • —Some feeling in the business community that we were weakening our resolve to protect U.S. private investment.
  • —Some Congressional opposition, on similar grounds.
  • —An apparent backdown in the IPC dispute with Peru (though there has been no pressure from Congress or Jersey Standard to apply Hickenlooper in the case).

The Hickenlooper amendment has certainly not helped us protect U.S. private investment in the past, and it may have even made settlement of disputes more difficult by representing a heavy-handed U.S. threat. Its image as a weapon of U.S. economic imperialism is widespread. If strong Congressional opposition to its complete elimination were to develop, however, we could still eliminate most of its present problems by falling back to (a) elimination of its present mandatory six-month time limit for application of sanctions and to (b) simply requiring the President “to take into account” expropriations when determining U.S. aid levels.

Recommendation:

I therefore recommend that our new aid legislation (a) exclude the Hickenlooper amendment, (b) if major Congressional opposition develops, that we fall back to a Hickenlooper-type amendment which would require the President “to take into account” any foreign expropriations in determining U.S. aid levels but not include a mandatory time limit for sanctions. Bill Timmons concurs.

Approve9

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Disapprove, prefer a middle course of originally proposing the fallback language—requiring the President “to take into account” the effect of expropriations on U.S. aid levels but with no mandatory time limit for sanctions10

Disapprove, prefer to include Hickenlooper Amendment in new legislation

Other Political “Barnacles”

Over the years, Congress has written numerous restrictions into our foreign aid legislation. They include prohibitions on aid to unfriendly countries, countries assisting unfriendly countries, countries taking actions unfriendly to U.S. nationals, specific types of projects, and a wide range of miscellaneous prohibitions on aid to countries for various reasons. (A complete list of these “barnacles” is attached (Tab A).)11

Peterson , reported by State, recommends that we include none of these limitations in our new aid legislation.

I agree that most of the “barnacles” serve no positive purpose and represent an irritant in our relations with countries affected. However, some of them are consistent with our basic foreign policy objectives; none of them have provided serious practical problems; and all have at least some Congressional support.

Recommendation:

I therefore recommend that our new legislation eliminate all of the specific “barnacles” accumulated over the years, substituting for them a general provision authorizing the President to “take into account” the actions of other countries in determining which of them shall be eligible for U.S. assistance. Bill Timmons suggested this as the best way to meet the potential Congressional problem while avoiding substantive difficulties, and I agree.

Approve12

Disapprove, prefer to propose that present “barnacles” remain but that President “take account” of them rather than be required to apply them13

Disapprove, prefer to propose continuation of the restrictions in present mandatory form (not simply requiring the President “to take account” of them) Other

  1. Source: National Archives, Nixon Presidential Materials, NSC Files, Agency Files, Box 193, AID, Volume II 1/70-8/10/70. No classification marking. The date is handwritten on the memorandum.
  2. See footnote 2, Document 134.
  3. See Document 133. Rogers sent another memorandum to the President on this subject on August 4, reaffirming his previous recommendation; see Document 30.
  4. The President wrote “no” next to this option.
  5. The President wrote “yes” next to this option and added: “It is too dangerous to risk putting this under the Foreign Relations Committee. When we have a change in the Senate I shall reconsider.” This addressed the President’s earlier contradictory decision; see footnote 12, Document 134.
  6. This issue was discussed in a July 2 memorandum from Volcker to Secretaries Kennedy, Rogers, and Stans; Arthur Burns; Henry Kissinger; Paul McCracken; and George Shultz. Volcker noted that the matter was discussed in the Volcker Group on June 19 and there was a strong consensus that it would be undesirable at that time to make such an announcement. (Washington National Records Center, Department of the Treasury, OASIA Central Files, World Files: FRC 56 86 A 24, World/1/544-555)
  7. The President initialed this option. For additional documentation on foreign investment controls, see Foreign Relations, 1969-1976, vol. III, Documents 31, 33, and 54.
  8. The President initialed this option and wrote “no” through the other two.
  9. The President wrote “no” next to this option.
  10. The President wrote “OK” next to this option. See also Document 31 and Documents 148 ff.
  11. Not printed, but see Documents 9 11 and 31.
  12. The President wrote “no” next to this option.
  13. The President wrote “yes” next to this option.