Foreign Relations of the United States, 1969–1976, Volume XXVIII, Southern Africa

83. Memorandum From Malcolm Butler and Harold Horan of the National Security Council Staff to the President’s Assistant for National Security Affairs (Scowcroft)¹

Washington, February 11, 1976.

SUBJECT

• Response to NSSM 236: Ex-Im Bank Policy Toward South Africa

We have received the response to NSSM 236,² which examines the advisability of changing Ex-Im Bank policy toward South Africa to permit direct lending in addition to the guarantees and insurance which are permitted under the current policy. The economic arguments for making such a change are not impressive, and the decision should rest largely on political considerations. (NSSM 236 and response are at Tab A.)³

The purpose of this memorandum is to summarize the results of the study, and to obtain your judgment as to whether an SRG meeting should be called.

Background. This review was prompted in large measure by intense lobbying, on the Hill and with domestic agencies, by the Fluor Corporation. Fluor has obtained the overall design contract for SASOL II, a $2.5 billion coal liquification plant which will satisfy virtually all South Africa’s liquid fuel needs; Fluor argues that Ex-Im loans are necessary if US firms are to win supply contracts for the plant. We have emphasized in the NSSM process, however, that we were not examining whether US firms should participate in this project; they will participate significantly even without Ex-Im direct lending. The task was rather the much broader one of determining the economic and political costs and benefits of permitting the Bank to extend its government-supported credits to finance US exports to South Africa.

Economic Considerations. The study shows that the economic benefits of changing the policy to allow Ex-Im direct lending would be marginal. The shift would give US firms access to loans at Ex-Im’s government-supported interest rate, making their bids more competitive with the officially-supported credits of competitors. According to the study, the change would increase US exports to South Africa by $0–50 million per year over the current annual base of $1.3 billion. In addition, SASOL II would bring US firms $575–675 million in additional exports over five years, even without direct lending; with direct lending this would increase by $20–40 million per year over the five year period. These figures are somewhat uncertain, since interest rates are only one of the elements which go into the purchasing decision—also important are service, delivery, down payment, grace period, duration of the loan, and diversification of supply source among several industrial countries for political and economic reasons.

Technological Considerations. One argument advanced for changing our policy is that we need access to the new technology which will be developed in the SASOL II project. Since Fluor already has the overall contract for SASOL II, however, it will have access to any new technology during the design, installation, and start-up phases. Regardless of credit terms, US companies will almost certainly be included in the diversified supply contracts for items of technological interest, thus obtaining useful “hands on” experience. In any case, South Africa has given US companies full access to the predecessor SASOL I plant. (ERDA believes significant technological benefits could be obtained from increased participation, but FEA’s argument that we will obtain the technology without expanding participation with Ex-Im loans is more persuasive. See Annex E of NSSM response.)

Importance of the Precedent. The change of Ex-Im Bank policy appears to be more important in symbolic than in economic terms. South Africa’s strong lobbying supports this view—since the goods are apparently available more cheaply from other suppliers, South Africa would gain no economic advantage from slightly improved US financing. The symbol of liberalized policy, on the other hand, could be valuable. Nor is it clear why Fluor, which already has the overall contract, has expended so much effort on behalf of potential US subcontractors, unless the company plans to deal with its own subsidiaries or anticipates future financial benefits from helping the South Africans. All agencies agree that Fluor’s lobbyists have greatly exaggerated the potential economic benefits.

Political Considerations. In the absence of strong economic arguments, political considerations must be determining. Internationally, a decision to extend US government-supported Ex-Im Bank lending to South Africa would risk alienating all those who disapprove of apartheid. This would be particularly so in the wake of perceived “cooperation” between the US and South Africa on Angola. There is little most African countries can do by way of direct retaliation against US investments or trade interests as a result, but there is no doubt that a policy change would have a negative impact on our relations with the rest of Africa. Nigeria is one example, where the undoubted adverse reaction could take the form of retaliation with regard to crude oil supplies. Our best friends would have to condemn the policy liberalization if asked.

Congressional Considerations. Any change toward closer relations with South Africa will of course draw strong criticism from those members of Congress who oppose apartheid. Ex-Im Bank must notify Congress of any project larger than $60 million, and the Bank candidly admits that even an individual Member could in effect block an action by making enough noise. In this regard Congressman Diggs has sent a telegram to Ex-Im questioning reports of a change in policy (Tab B). Ex-Im is also concerned about the possibility of alienating Congressional support when it is seeking increases in its overall program. Of course there are other members of Congress who would support such a policy change, either because of their political beliefs or because industry in their districts would stand to benefit from increased exports. Ex-Im has received several letters in support, including one from Congressman Dent (Tab C).

The Secretary of State’s Proposed Trip to Africa. That we are reviewing our policy toward Ex-Im lending to South Africa, which we tried to hold closely, has been in the press and is known in Congress. A decision to change our policy would quickly become public knowledge—Congress would have to be informed of Ex-Im lending to Fluor in any case—and would have an adverse impact on the Secretary’s reception in Africa.

Agency Positions. At a recent IG meeting at the Assistant and Deputy Assistant Secretary level, agencies took the following positions:

• —State opposes any change on political grounds since the economic arguments are not compelling.
• —Treasury opposes any change because the economic benefits are not clear, and indicates that even if there were economic advantages their position would be negative on political grounds.
• —Ex-Im Bank opposes change as Congressionally dangerous, even though it does see some economic benefits.
• —Commerce supports change in order to increase US exports to South Africa and to gain access to important technology.
• — CIEP opposes change (staff level).
• —Defense supports change to emphasize US leadership in the development of alternate fuel supplies (DOD position paper, at Annex F of study, is wide of the mark; level of clearance unknown.)

Bureaucratics. Because of the strong lobbying which has taken place on the SASOL II project, it may be advisable to hold an SRG meeting despite the rather lop-sided results of the agency poll. We will have to touch base with the EPB in any case, and an SRG would be preferable to the superficial airing the issue would get in a morning EPB meeting. It might also reduce carping about the decision within the Administration by emphasizing that it is being given high level consideration. Alternatively, we could circulate the paper for official agency comment. Agency positions would probably not vary from those already expressed except possibly in the case of Defense.

Recommendation

That we call an SRG meeting to discuss the response to NSSM 236.⁴

Alternate Recommendation

That the NSSM 236 study be circulated for official agency comment.⁵

Robert Hormats concurs.

1. Source: Ford Library, National Security Council, Institutional Files, Box 40, NSSM 236. Secret. Sent for action. Tabs B and C are not attached.
2. Document 82.
3. Tab A, Response to NSSM 236, February 6, attached but not printed.
4. Scowcroft initialed his approval. The Senior Review Group did not meet.
5. Scowcroft did not initial his approval or disapproval, but wrote: “Isn’t this part of the SRG process?”