261. Paper Prepared in the Department of the Treasury1

Treasury Comments on Critical Imported Commodities: NSSM 197/CIEPSM 332

This study puts in perspective one threat we face in securing access to critical imported commodities at a reasonable price—the threat of price or supply manipulation by foreign producers, acting alone or in concert.

The study’s detailed analysis of this significant aspect of the imported commodities problem tends to refute the well publicized assertion that the U.S. must take action because it faces a mineral crisis, comparable in scope and immediacy to the oil boycott.

However, the study is not so reassuring that we can dismiss the possibility that new government programs to deal with certain imported commodities’ problems may be warranted. At a minimum, further analysis is required. We therefore reject the "no action" option (1A) and offer comments below on the action options.

Option 2—Economic Stockpiles

Option A—government ownership of the stockpiles—appears to be the best of the stockpile options. Such government ownership would not preclude contracting the actual maintenance and operation of the stockpile program to private industry in the interests of efficiency.

The other two options might prove both politically infeasible and unwise. Option B—private ownership at government expense—could be misconstrued as intended to provide industry with a "no loss" proposition: industry benefits from inflation in the value of the inventory while government pays the expense. Option C could also be construed as an unwarranted subsidy to industry. Moreover, it is not clear whether the quantity and distribution of the increase in commodity inventory generated by option C would justify the tax revenues lost.

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Therefore, we recommend an immediate interagency effort to reduce option A to a concrete proposal. A final decision could then be made whether or not to go forward to Congress with this proposal.

A concrete proposal should deal, inter alia, with the following issues:

1.

Acquisition

Consider aluminum: What quantity should be stockpiled? How would it be acquired, over what time period and at what cost? For example, if a year’s supply is to be stockpiled, and the 5½ months excess currently in strategic stockpile is transferred to an economic stockpile, a huge quantity, 6½ months supply, remains to be purchased in the open market. How can this be bought without strengthening the hand of foreign producers who wish to drive up the price? In what form should the stockpile be held (ore, semi-processed metal)?

2.

Cost

Congressional critics may be expected to claim that government stockpiles in the past have proven extremely expensive due to unwise acquisition policies and other inefficiencies: If this assertion is incorrect, how can we dispel such misconceptions? If this assertion is correct, what corrective measures can be taken to insure such inefficiencies do not recur?

3.

Sale

What circumstances should trigger sale of stockpiled commodities? How will it be sold? Without the wisdom of hindsight, how does one decide when prices are "excessively" high or low? In the absence of an objective trigger mechanism, the administrator of the stockpile will be subject to fierce crosswinds of consumer and producer, domestic and foreign, interests which may not coincide with the national interest.

4.

Commodities

Precisely what criteria will be applied in identifying commodities for inclusion in the stockpile?

Option 3—Diversification and Increased Production

We should encourage the use of financial incentives, such as priority loans and guarantees, to increase the number of producers. More producers mean less cartels and less effective cartels.

However, we are dubious about the effectiveness of Ex-Im or OPIC priorities, since priorities granted by these institutions may have little influence on the decision we seek to affect, the exploration or development decision. For example, Ex-Im priorities would encourage the purchase of U.S. equipment, but is unlikely to influence the threshold decision—whether or not to invest. World Bank loans may be more effective [Page 911]in influencing the exploration or development decision, but asking the Bank to grant such priorities would raise other serious problems. Nevertheless, in view of the importance of the diversification objective, these options should be given further consideration.

Options 4A and 4B—Government Organization to Monitor Future Developments

It would be premature to establish a secretariat or augment the staff of an existing agency to deal with imported commodities problems at a time when Congress is considering legislation for this purpose.

Therefore, as contemplated by option A, the ad hoc interagency group which prepared this study should continue to monitor these developments. The establishment of a secretariat to support this effort should be deferred for a reasonable period until Congress has had an opportunity to act.

Options 5A–F—Domestic Production

We agree with the staff conclusion that the specified programs (A–F) to encourage domestic production are not warranted at this time. However, we may wish to reconsider if, for example, subsequent events prove us wrong in concluding that most minerals producers cannot form effective and lasting cartels.

Options 6A–C—Implications for Strategic Stockpile Guidelines

We have no comments on these options at this time.

Bilateral and Multilateral Dimension

We share the view that the approaches proposed are an important element of an effective strategy for securing access to imported commodities at a reasonable price. The recommendations concerning Canada, for example, should be incorporated in the upcoming NSSM/CIEPSM on U.S.-Canadian relations.3 However, it is unnecessary to analyze these issues at length in this study as they are receiving adequate attention in other interagency fora.

  1. Source: National Archives, Nixon Presidential Materials, NSC Files, NSC Institutional Files (H-Files), Box H–203, National Security Study Memoranda, NSSM 197 [3 of 3]. Confidential. Attached to an August 7 memorandum from Parsky to Scowcroft and Eberle that reads: "Attached are the comments you requested in your memorandum of July 26, 1974, concerning NSSM 197/CIEPSM 33." See footnote 2, Document 260.
  2. Document 260.
  3. NSSM 206 on "Relations with Canada" was issued on July 29, 1974.