175. Memorandum From Charles Cooper of the National Security Council Staff to the President’s Assistant for National Security Affairs (Kissinger)1

SUBJECT

  • Phase IV—the Opportunity to Minimize Export Controls

I understand that some basic decisions regarding Phase IV2 may be taken at a meeting with the President tomorrow. Although there is considerable sentiment within the Government for allowing greater flexibility in food prices under Phase IV, the final decision, which is of critical foreign policy importance, is still in doubt. Your intervention is needed to make sure that the foreign policy implications of the decisions taken are fully appreciated.

Problem

Economic. Supplies of agricultural and other commodities are tight in the U.S. and abroad. Export controls have been initiated under Phase 3½ to keep domestic supplies at a level high enough to maintain low domestic prices.3 As an example, under Phase 3½ the price of meat is controlled, but the price of feed grains is not; if feed grain prices remain high and meat producers cannot pass the increase on to consumers, meat production becomes unprofitable and is cut back. Thus, export controls are needed to maintain sufficient domestic supplies to insure that grain prices are reduced below a certain target price so that meat [Page 654]production again becomes profitable. Greater flexibility in the price of meat and other food products by raising the ceiling price would also diminish the need to retain such high amounts of domestic supply and thus the need for export controls. They would also elicit new domestic production to meet high demand (the present freeze reduces production incentives), and the resulting higher prices for domestic products would diminish foreign incentives to purchase in the U.S. (Present low prices give foreigners a substantial bargain which provides an incentive to buy in the U.S. and draw down our tight supplies.)

Political. The foreign policy cost of these controls has been enormous.4 Japan and Europe, on whom we have applied heavy pressure to provide greater market access for our agricultural products, will almost certainly take new measures to increase their self sufficiency and to develop new sources in order to reduce reliance on the U.S. This will, over time, seriously damage our balance of payments. It will contribute to intense friction when our farmers demand—in spite of foreign perceptions that we are demonstrably an unreliable supplier—greater European and Japanese reliance on U.S. supplies. And, the problems which will arise under Phase IV if we must, in establishing controls, make decisions as to which countries will receive our exports will be mind boggling.

Recommended Response

Dealing with this problem requires that Phase IV allow adequately for increases in the price of food products. While preventing any increase in food prices is desirable, it isn’t feasible: all laws of economics argue that in a period of high demand and limited supply, prices should rise both to elicit new production and dampen demand. If such price increases aren’t permitted, administrative controls to restrict exports will have to be imposed.

Our entire strategy for dealing with trade problems in agriculture, our relationship with Japan (which as the result of our pressures is heavily dependent on the U.S. for its food supply), and ultimately our [Page 655]relations with the Soviet Union and China will be strongly affected by what we do in Phase IV. If we let higher prices be the primary vehicle for limiting exports we will not be forced to make invidious decisions as to which countries will get how much, and we will not be blamed directly for limited food availability and contributing to inflation abroad. In short, your strong intervention could be the determining factor making the difference between a regime of overly rigid prices, and consequently intensified export controls, and a regime of more flexible domestic prices, and consequently minimized export controls.

Recommendation

That you discuss this subject with Secretary Shultz and the President.5

  1. Source: National Archives, Nixon Presidential Materials, NSC Files, Box 403, Subject Files, Trade, Vol. VI, April 8–December 1973. Secret. Sent for action.
  2. Phase IV was the name for the new system of price controls President Nixon promised to implement in his June 13 speech; see Document 174.
  3. On June 27, the Nixon administration instituted a temporary embargo on soybean and cottonseed exports. On July 2, it lifted the embargo, replacing it with controls on exports; at the same time, the administration also instituted restrictions on scrap metal exports. On July 5, the administration restricted the export of an additional 41 agricultural goods. (The New York Times, June 28, July 3, and July 6, 1973)
  4. In telegram 8165 from Tokyo, June 28, the Embassy reported the Japanese Government’s "deep concern over possible implications of U.S. action to embargo shipment of soybeans, and in particular over prospect of future allocation of exports of soybeans and products." The embargo and the possibility of future export restrictions had led to "increased talk in Japan of need to diversify sources of supply in agriculture, as well as to increase the percentage of Japanese self-sufficiency in agricultural area." (National Archives, RG 59, Central Foreign Policy Files) In telegram 3950 from USEC Brussels, July 13, the Mission reported the "deep concern throughout the European Community" evoked by U.S. export controls. "We also hear with increasing frequency," the Mission reported, contentions that the controls "have undercut the US case for major liberalization of agricultural trade in the MTN and strengthened the hand of those in the Community who favor maximum European ’self sufficiency’ and ’organization’ of world agricultural markets." (Ibid.)
  5. Kissinger did not mark either the approve or disapprove option. Instead, he wrote at the bottom of the memorandum: "Chuck This has to be much more systematic along the lines of our conversation—ASAP." The attached NSC correspondence profile notes that the memorandum was returned to Cooper for revision according to Kissinger’s comments. No revised memorandum has been found.