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98. Memorandum From Clinton E. Granger and Robert B. Oakley of the National Security Council Staff to Secretary of State Kissinger1

SUBJECT

  • USC Study and Recommendations on Co-Production in Iran

Deputy Secretary Ingersoll has forwarded to the President the study and recommendations of the Under Secretaries Committee on co-production of defense articles in Iran (Tab B).2

The USC was requested on October 8, 1974,3 to:

—Analyse the impact of co-production on our relations with Iran,

—Estimate the growth of co-production projects in Iran,

—Examine economic and political problems raised by co-production in Iran as well as in the U.S., and

—Devise a set of guidelines for the review of specific projects.

The study was needed to assure the success of co-production as a useful and innovative adjunct to our overall military supply relationship with Iran. It was widely recognized that, without such a thorough-going and realistic study, there was a considerable danger that co-production could quickly:

—Cause serious Iranian disappointment,

—Pose very troublesome problems of management, and

—Become embroiled in domestic controversy in the U.S.

The deadline of the study repeatedly slipped due to disagreements among the participating agencies and shortcomings of analysis. Despite the lengthy period, we feel the study is still not fully responsive or useful. In particular, the study:

—Lacks an estimate of what co-production will involve in money, manpower, and time in specific, quantitative terms,

—Combines all views, however contradictory, with little emphasis on their relative importance,

—Ignores or undervalues difficulties, and overstates advantages,

—Provides no clear guidelines, and

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—Repeatedly suggests that we have little option to approving Iranian requests because other nations can provide the same services and the Shah will misread our intentions, with a negative impact on the fundamental U.S.-Iranian relationship.

Some of the individual items requested for co-production when the study was begun have by now been approved on an ad hoc basis. Nevertheless, a good study would still be valuable since it could be used as a basis for:

—Discussing with Congress any domestic extensions of co-production with Iran;

—Discussing with the Iranians what practical difficulties we both face as co-production moves forward;

—Evaluating future co-production requests which we will almost certainly be getting from Iran (e.g., the YF–16), and

—Deciding on how to deal with co-production programs with other countries.

As we see it, there are three alternatives open for you in handling the current version of the study:

—Ask the USC to re-do it with a precise time limit (State has primary action),

—Give a special working group, chaired by the NSC staff, ten days to recast the study before it is submitted to the President, and

—Have the President approve the study as it is or simply let it die. In either case this means we would proceed on a case-by-case basis with no basis for thorough, thoughtful analysis of the implications of co-production and no study which would be the general basis for considering all individual requests from Iran and could also provide useful guidelines for other countries.

On balance, we prefer the second course, as promising to be quicker and easier, given conflicting agency points of view. The third course would be, we believe, a mistake since the USG would find it very difficult to anticipate the theoretical and practical limits and consequences of our actions. This would not serve our interests abroad, as it could lead to misunderstandings with the Shah, and at home it could open us to serious charges of depressing U.S. trade and employment by exporting production without studying the domestic effect. Moreover, it is likely to create problems with those agencies who expressed reservations about the study (e.g., Labor and Treasury). The first course is a possibility, although the record to date suggests it will be little easier to re-do the study properly than it was to do the study in the first place.

At Tab A is a memorandum to the Chairman of the Under Secretaries Committee directing him to assign a representative to an NSC-chaired Special Review Committee for Co-Production in Iran. The [Page 295]memo outlines specific steps which are needed to correct deficiencies, as outlined below:

1. Co-Production and the U.S.-Iranian military supply relationship.

USC study asserts that “co-production could give us increased influence—and potentially longer term leverage—should the Shah or his successor embark on policies contrary to U.S. interests.”

In support of this view the study argues that:

—“The Shah views our response to his co-production requests as a very important political indicator for future U.S.-Iranian cooperation,” and

—co-production is “visible evidence of the closeness of our political ties,” and

—“In approving co-production programs the U.S. will have passed a new threshold” in its special relationship with Iran.

We are sceptical. Although co-production will add a new dimension to our military supply relationship, our potential leverage and influence will continue to rest on other bases.

For instance, co-production is most unlikely at any time in the foreseeable future to replace sales as the chief means of Iranian procurement of weapons, and thus will not add much to our overall security relationship nor give us any significant increase in potential leverage.

—This year Iran bought $4.0 billion in arms from the U.S. Estimates of sales over the next three years are $15 billion. Co-production projects in the same period are unlikely to exceed $2 billion in value at the maximum. We think it may be much less (under $0.5 billion).

—Co-production will continue to struggle against the limits of skilled Iranian manpower to produce even these few defense articles. Iran will not gain much independence in arms supply when it must import almost all component and most skilled personnel. Assembly is likely to be the rule rather than manufacture, and the chief benefits of co-production to Iran are likely to be prestige and a slowly growing pool of technical manpower. These benefits will be qualified, however, by the large number of U.S. managers and technicians needed to operate new plants in Iran.

—Iranians will not want to depend too heavily on co-production. They are buying from us, as complete systems, the same weapons they propose to co-produce, to give themselves a hedge against industrial and technical failure. Co-production will cost from 50% to 100% more than purchase of the same weapons systems.

The USC view, moreover, suggests there is little alternative to approving any request the Shah makes. It is true that an attempt to manipulate co-production projects—unless we are also willing to manipulate our overall military supply relationship—will result in little more [Page 296]than Iranian anger. But, having demonstrated our bona fides by approving several co-production projects, we believe we are in a position systematically and rationally to explore with Iran the limits and problems of co-production. We can—and should—decline to approve projects which are likely to fail or badly disappoint the Shah or create serious problems with Congress or the public for U.S.-Iranian relations.

We believe the question of our leverage—and the importance of co-production within the context of our over-all security relationship—should be analyzed much more carefully than in the present study, and recommendations to the President should reflect this analysis.

2. The Limits of the Growth of Co-production. The study fails completely to estimate how far we could go in approving co-production projects. There is no quantitative analysis of the size or number of projects, the impact on employment in the U.S. and Iran, the impact on our respective balances of payments and U.S. and Iranian investment.

Mr. Ingersoll states that, although he has been unable to obtain any figures, he has directed the Department of State to continue this part of the study.

We believe quantitative estimates should be a corporate part of the rest of the study, and a basis for USC recommendations. A rough factual basis can be made within a few days. Without any factual basis, the other problems of co-production could quickly snowball. Inter alia, members of Congress and labor representatives may well produce figures aimed to show the depressing effect of co-production on U.S. employment and trade. We must have some factual basis of reply. (The Department of Labor, noting the absence of this data, objects to Mr. Ingersoll’s conclusion that co-production, in the short-run, will have a favorable impact on our economy.)

3. Problems of Co-Production.

The problems of co-production will be numerous and large:

—The Shah will want clear reasons if we refuse to approve any particular request.

—We will be reluctant to give Iran permission for sale to third countries, and the Shah should understand this situation from the outset if later misunderstandings are to be avoided.

—Weapons assembled in whole or part may not prove as reliable as U.S. manufactured weapons. They will cost more, and could take measurably longer to produce than U.S.-made weapons. The Shah needs to understand this.

—Iran may want some co-production systems and particularly production processes which will reduce the U.S. technological lead, U.S. readiness or production base, and possibly the difficulty of an adversary who wishes to develop counter-measures to our weapon [Page 297]systems. Iranians should understand this particular U.S. concern from the outset.

—Iran will want direct USG participation in and responsibility for contract management while we will generally want to shift these burdens entirely to a U.S. defense contractor, the GOI. Given the problems already arising with the Bell co-production project, it is evident that this can be a cause of considerable USGGOI friction if not understood at the outset. At present the guidelines cover only co-production under FMS procedures, ignoring commercial licensing procedures. FMS management of Iran’s arms industry will eat up USG staff as well as saddle us with difficulties and unwanted responsibilities. (Treasury objects to FMS procedures.)

—The lack of Iranian skills and management experience will limit and impede co-production projects at every turn and require very large communities of U.S. technicians for successful operation. This will conflict with the Iranian hope for their own prestige and development of skilled manpower.

Among Iranians, the scope of the difficulties in co-production are underestimated, with the result that, over time, co-production could erode our good mutual relations rather than strengthen them. Iranian disappointment is likely, and we should plan to contain this disappointment through early frank discussions and continuing cooperation in order to protect our bilateral relations and preserve our reputation as a reliable partner in security.

The study does not ignore the problems of co-production but consistently states them with undue optimism and generality. Furthermore, the study makes no specific recommendations on how to deal with the various problems. For instance, the study now concludes:

—“Political benefits will depend in part on resolution of significant technical and managerial problems,” and

—“The inevitable technical difficulties, skilled manpower short-ages, and low technical and educational levels in Iran pose risks of disappointment with co-production proposals which, given the Shah’s expectations and ambitions, could damage bilateral relations. The U.S. must closely monitor these projects, which poses difficulties in itself, and insure that the Shah is apprised of potential difficulties and limitations.”

4. Guidelines

The USC recommendations simply say approval should be on a case-by-case basis and that existing “guidelines should be amended to cover sales of co-production and take account of the new management and other problems considered in this study.”

The recommendations do not otherwise define how the guidelines, which were adopted in 1973, should be amended. We feel that each of [Page 298]the problems identified earlier should be specifically and unambiguously analyzed and, in [each] case, recommendations made to the President as a basis for a revised set of guidelines.

Recommendations should also address the procedures for approval within the USG. The existing guidelines would leave the changes in the hands of the SAPRC head, Mr. Carlyle Maw. We think this is satisfactory. Treasury objects, however, and a clear set of options should be provided to enable the bureaucracy to pull together in the future.

The memo at Tab A4 to the Chairman of the Under Secretaries Committee draws on the above analysis in recommending improvements in the present study. The memo directs Mr. Ingersoll to appoint a representative to a Special Review Committee for Co-production to produce, within ten days, a revised co-production draft for submission to the President. The Committee will be chaired by Colonel Granger of the NSC Planning Staff.

Recommendation

That you sign the memo at Tab A.5

Approve

Disapprove (I prefer to ask the USC to re-do the study.)

  1. Source: Ford Library, NSC Institutional Files, Box 74, Under Secretaries Committee, NSC–U/DM–131, Co-Production in Iran (1). Secret. Sent for action.
  2. Attached but not printed.
  3. See Document 79 and footnote 5 thereto.
  4. Attached but not printed.
  5. Kissinger did not approve either option, but a revised version of the memorandum at Tab A was sent to the Under Secretaries Committee. See Document 101.