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263. Memorandum From the President’s Assistant for National Security Affairs (Brzezinski) to President Carter 1

SUBJECT

  • Completion of EPG Work on PRM–8—North-South Issues

Mike Blumenthal’s memo (Tab A) reports on the EPG review of the economic aspects of North-South policy. It identifies four major issues requiring your decision prior to the Summit and the Conference on International Economic Cooperation (CIEC). Following your decision, we will promptly seek Congressional support and build support among our allies and key LDCs.

In sum, your affirmative decisions on the most important of these four issues, coupled with the more forthcoming position already agreed upon by the EPG in a number of other areas—including softening aid terms, improved procedures for assessing LDC debt problems and a willingness to negotiate an international grains reserve—will represent a positive, but not dramatic, movement in the US position toward the LDCs.

The LDCs will doubtless want more; and a number of smaller industrialized countries may sympathize with the LDC demands. However, it is the view of your advisors that our proposals achieve the proper balance between being politically forthcoming and economically sound, and are important steps in a positive direction. The larger developed countries (Germany, Japan and probably the UK) will be highly supportive; and a number of LDCs will also regard them as constructive.

The key to how our position is received by the LDCs as a group, and whether CIEC will be seen as a “success” or “failure,” will be whether we can convince influential LDCs that (a) our proposals represent a positive first step by the Carter Administration, and that (b) although the proposals do not meet their every expectation, the LDCs do have more to gain by accepting them as a sincere effort, pointing to the CIEC as a positive step, and continuing the cooperative process than by decrying them as unacceptable and returning to the confrontation of 1974. (We believe that our proposals, and others developed in CIEC, will be adequate to avoid a new confrontation, but there is no cer[Page 791]tainty.) In order to encourage the LDCs toward the more constructive of these two outcomes, we will consult actively with them prior to the next meeting of the CIEC at official level (April 26–27).

With regard to the specific issues:

Issue 1. All agencies agree that the US should support a common fund which permits a pooling of the funds of various buffer stocks and includes a provision for World Bank lending to supplement these funds. This will be seen as a demonstration of US flexibility, although it will not meet all the demands of the LDCs.2

Issue 2. All agencies recommend that the US negotiate a substantial World Bank general capital increase—which is important to many of the medium-income LDCs, particularly in Latin America—and indicate our willingness to do so at the Summit and/or at the CIEC Ministerial. 3

Issue 3. The agencies agree on the desirability of a public pledge by the US to seek major increases in foreign aid, but they differ on specifics—whether to announce our intention to seek a five-year doubling of aid appropriations (from the FY 77 base) or only to signal an intention to seek substantial increases. State, AID, HUD and Labor support the “doubling” option. Treasury, OMB, CEA and Commerce prefer the “substantial increase” option.

There is a risk in offending Congress by an implied pre-commitment to double aid, which could endanger aid increases we are now seeking for FY 78, and there would be advantages to avoiding such an announcement before completing our aid review. However, a “doubling” announcement would demonstrate a sustained multi-year Administration commitment which might help deter annual piecemeal, Congressional cuts, and it might help stimulate similar efforts from Germany, Japan and OPEC.

A pledge to seek major increases in foreign assistance is highly important and I recommend that you approve it. A “doubling” announcement, although beneficial from a foreign policy perspective, is not as critical; a commitment to a “substantial increase” would also be quite useful.

Approve pledge to seek a “substantial increase in foreign aid”

Announce intent to seek a “doubling of aid appropriations”

Disapprove4

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Issue 4. The Europeans believe that a $1 billion increase in industrialized country aid to the poorest LDCs, with similar action from OPEC, is critical to the success of CIEC. The point is tactical, although the poorest countries certainly need the money. Such a commitment could, by demonstrating support for the lowest income developing nations, enable CIEC to claim a major success. By supporting this European proposal, we would be better able to convince the Europeans to support our initiatives; our failure to support the Europeans might cause a split.

Our agreeing on this proposal would entail seeking in our regular FY 79 bilateral aid programs, $300 million above the FY 77 request for the poorest countries. All agencies except OMB, which prefers to wait until this can be examined in the FY 79 budget context, support this recommendation. This proposal could well be a key swing factor in ensuring a “successful” CIEC; I recommend that you approve it.5

Tab A

Memorandum From the Chairman of the Economic Policy Group (Blumenthal) to President Carter 6

SUBJECT

  • North/South Economic Strategy: Major Decisions Issues

The EPG has reviewed the economic aspects of North-South policy. Tab 1 summarizes the EPG’s discussions/recommendations on various elements of our overall strategy. This memorandum covers four major issues highlighted by the EPG review which require your early decision in view of pressures arising from the Summit and CIEC. In each case, if you approve our recommendations we will seek Congressional support prior to consulting with our OECD partners.

Decision Issue 1—Common Fund for Buffer Stocks

Issue: The developing nations have placed a great political priority on the establishment of a common fund for financing commodity buffer stocks. We are now being pressed to further specify our policy and should be prepared to take a clear position by the Summit or CIEC Ministerial.

Background: The less developed countries (LDCs) are backing a $6 billion common fund which they could control. They want to establish the [Page 793]fund prior to concluding new individual commodity agreements. In current negotiations we have expressed willingness to consider a common funding arrangement for financing buffer stocks where they are part of commodity agreements. The European Community has just gone one step further by stating unconditionally that it will support the establishment of a common fund—but clearly not the one proposed by the LDCs.

We do not recommend a commitment by the US to a common fund now, but need to lay the groundwork with the Congress in coming weeks.

The common fund arrangement we believe we could eventually support is a pooling of buffer stock funds supported by some lending to the pool, preferably by the World Bank. Aside from any contributions which we would make to individual commodity agreements, we plan no budgetary outlays. While this position responds to the real problems in financing buffer stocks, the developing countries will find it wanting. If we have a positive US approach on aid, trade and individual commodity agreements, however, we believe our approach to a common fund will further an overall constructive U.S. stance in North-South relations.

Recommendation:

The EPG unanimously recommends that you agree to the following approach as a basis for our consultations with Congress:

1. We will consider participating in financing individual buffer stocks where direct government contributions are necessary.

2. We could support a common fund arrangement consisting of a) a pooling of the funds of various buffer stocks—preferably linked institutionally to the World Bank; and b) provision for the World Bank, on decision of its own board, to lend some supplementary funds to the pool, should extraordinary circumstances such as a severe recession cause most buffer stocks to draw all their funds from the pool. (Such World Bank loans would be financed from its regular capital resources.)

3. We are prepared to negotiate toward establishment of a common fund arrangement, parallel with specific commodity negotiations, but we believe one or more commodity agreements beyond the existing arrangements for cocoa and tin should be in place before a common fund arrangement is implemented. 7

Decision Issue 2—World Bank Capital Increase

Issue: The World Bank will inevitably need an increase in its general capital to support a lending level beyond the current one. Should we participate, to what extent, and when?

Background: McNamara is pressing for an early decision on a large general capital increase for the World Bank. Politically we see great ad[Page 794]vantage in responding now to such an increase as part of a forthcoming overall U.S. position on aid at the Summit and CIEC Ministerial. Increased World Bank resources would enable the Bank to expand lending in its normal programs. Also, it would enable us to propose new departures in its lending to promote energy development in non-OPEC LDCs, to increase production of minerals in short supply, and to aid diversification in LDCs dependent on commodities with bleak long-term prospects.

We believe an ultimate U.S. contribution to a World Bank capital increase could involve up to $2 billion annually in FYs 81–83, with probably no more than 10% or $200 million annually for 3 years representing cash outlays.

Recommendation:

The EPG unanimously recommends that we agree at the Summit and/or CIEC Ministerial to negotiate a substantial World Bank general capital increase but leave the amounts and timing to be worked out in the Bank Board. 8

Decision Issue 3—Strategy on Future Aid Levels

Issue: A forthcoming position on future aid levels is essential to meet long-term development needs. A commitment by the US now would pay major political dividends at the CIEC Ministerial. Should the US publicly pledge this spring to seek major increases in our aid, and if so, should we specify our plans in general or quantitative terms?

Background: The EPG unanimously agrees that our present aid levels need to increase to respond to the legitimate development needs of LDCs as well as to sustain our objective of a constructive US position in North-South relations. A key element of our Summit and CIEC strategy should, therefore, be a general undertaking with other major donor countries to increase substantially our foreign assistance over the coming years.

A significant increase in development assistance levels might take the form of doubling U.S. appropriations over the five years FYs 78–82 (from the base of $5.8 billion in FY ’77). Doubling would imply our seeking total U.S. aid appropriations of $11.6 billion by 1982, compared to $7.6 billion we are seeking for FY ’78. A World Bank general capital increase (as described in the previous issue) would account for about $1.5 billion of the increase. The remaining $2.5 billion might be utilized in our bilateral development and food aid programs and in other multilateral pro[Page 795]grams. Attached are some illustrative tables, but the program mix is very flexible (Tab 2).9

Alternatively, you could announce a pledge to seek a substantial increase in future aid levels, but with no quantitative target. Specific levels would continue to be decided on the basis of annual budget submissions.

If you agree to increasing aid levels, then the issue is how we express our pledge.

Factors favoring an announcement to double our appropriations:

—It could help to stimulate similar efforts of West Germany, Japan and other donors.

—It could provide a firmer basis for engaging the recipient countries in the policy and institutional reforms required for more effective use of development assistance.

—It would enable us to demonstrate a sustained commitment to development and thus might help deter the annual piecemeal Congressional cuts in our requests by placing them in a more appropriate multi-year context.

—It would provide a constructive US stance in the North-South dialogue in this critical first year of your Administration.

Factors favoring a non-quantitative announcement:

—The announcement of specific increases over coming years could offend Congress through the implied pre-commitment of its action, and this could endanger aid increases we are seeking now for FY 1978.

—We would be committing ourselves to specific levels before completing an overall review of our foreign assistance programs.

—It would not accord with the stated intent to conduct zero based budgetary reviews of all programs.

—A failure of Congress in future years to go along with quantitative targets would damage our relations with LDCs and other OECD countries.

Recommendation:

The EPG unanimously recommends that you approve in principle a public pledge by the U.S. this Spring to seek major increases in foreign assistance. 10

If you approve there are two options:

Option 1: Announce this Spring an Administration intention to seek a five-year doubling of U.S. foreign aid appropriations from the 1977 base. (State, AID, NSC, HUD, and Labor support this option.)

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Option 2: Announce our intent to seek substantial increases in US aid over coming years. (Treasury, OMB, CEA, and Commerce support this option.)11

Decision Issue 4: Immediate Action on Additional Aid for the Poorest LDCs

Issue: The European Community (EC) places great importance on its plan to propose at CIEC a $1 billion increase in industrial countries’ aid to low-income LDCs to be complemented by similar action from OPEC countries. What should be our response?

Background: The EC believes that its proposal is critical to a successful CIEC outcome. We believe it is less important to the Ministerial, but would have serious coordination problems with the EC if we flatly refused to join in. Even if we did participate, however, we could not accept three features of the present EC plan: that the money come from 1978 appropriations, that it go to IDA, and that it be used for balance of payments support as opposed to specific projects. Compromises in these areas would have to be negotiated with the EC.

The advantages of joining the EC plan would be to improve our stance on North-South issues, bolster the final CIEC package, and improve OECD coordination. The principal disadvantage is that your FY ’79 budget flexibility would be constrained. Moreover, it would be difficult to sell to the Congress, and as it now stands is of questionable substantive merit.

Recommendation:

That we inform the EC that we can participate in a special effort for the low income LDCs subject to the caveats noted above by declaring our intent to seek Congressional approval in FY ’79 for $300 million additional (over FY ’77) for these countries in our regular bilateral aid programs. (We would also cite our requested FY ’78 increase of $100 million for these countries.)

State, Treasury, AID, NSC, Labor, HUD, and CEA support this recommendation. OMB believes a decision on FY ’79 aid requests for these countries should await our examination of the entire FY ’79 foreign assistance budget. 12

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Tab 1

Paper Prepared by the Economic Policy Group 13

Washington, April 8, 1977

Review and Recommendations of Economic Issues in North/South Relations

1. Should the U.S. improve the “quality” of its aid by softening terms, untying procurement, making multi-year appropriations, and enhancing the developmental focus of food assistance programs?

Recommendation (1): Provide assistance including food aid to the least developed countries (29 countries identified by UNCTAD) primarily on a grant basis; (2) provided other donors take similar steps, untie bilateral assistance except security supporting assistance to the Middle East, food aid, and technical cooperation grants; (3) earmark minimum regular quantity of grain for multi-year food aid programming according to development criteria.

LDC Position: Developed countries should: provide all assistance for the poorest or least developed countries (LLDC’s) by grants; untie all development assistance; increase the dependability of food aid; and commit to multi-year aid appropriations.

Industrial Countries Position: Despite some reluctance on the part of France and Canada, industrial countries are likely to support U.S. initiatives.

Summit Action: Inform our allies of what aid quality improvements we plan to adopt and seek assurances that our approach is consistent with their plans. Perhaps the Summit could recommend improving the quality of aid by donor countries.

CIEC Action: Seek: a uniform developed country commitment to U.S. proposals on the “quality” of aid; and an agreement that OECD negotiations on aid untying be accelerated to permit agreement in principle so that the results could be mentioned in the CIEC ministerial communique. We would seek comparable commitments from OPEC countries.

Options Considered and Rejected: TERMS. Adopt terms to individual debt servicing capacity and project characteristics while continuing to provide all development assistance as grants to LLDCs; give all bilateral assistance in grant form; provide AID development assistance to LDCs with per capita annual income under $300 base essentially [Page 798]through grants. UNTYING. Untie all development loans, except SSA; untie all AID bilateral assistance provided other donors untie their loans. MULTI-YEAR COMMITMENTS/PL 480 PROGRAMMING. Oppose multi-year programming; continue PL 480 program as it presently exists; abolish PL 480 Title I and appropriate equivalent dollar amount for additional official development assistance (ODA).

2. Should some form of generalized debt relief be provided LDCs? They desire additional resource transfers, and believe debt relief is more readily obtainable than additional foreign assistance. The issue has taken on disproportionate significance relative to its economic impact because of the importance accorded it by certain LDCs in terms of their political leadership among developing countries.

Recommendation: Continue to oppose all proposals for generalized debt rescheduling because: (a) the distribution of debt accumulation markedly mismatches current need of LDCs; (b) the U.S. would bear a disproportionate share of cost; (c) incentives for efficient LDC resource management would be reduced; (d) LDC creditworthiness in world capital markets could be undercut; and (e) there would be little development payout.

LDC Position: ODA loans outstanding to LLDCs should be converted to grants; ODA loans to the other poor countries should be rewritten on IDA terms or better; and debt relief (on unspecified terms) should be granted any other LDC requesting it.

Industrial Countries Position: Although the weight of industrial countries’ opinion is against generalized debt relief, the industrial countries are not united. Strongest opponents of debt relief are the U.S., France, Germany and Japan; advocates are Sweden and the Benelux countries. EC unity is not easy to maintain because some regard debt relief as a low-cost pacifier of the LDCs (important because the EC depends heavily on trade with LDCs).

Summit Action: Be silent on this issue.

CIEC Action: Support existing U.S./EC proposals that: improve functioning of “Creditor Clubs”; provide a new mechanism for speedy assessment of LDCs with serious balance of payments difficulties (including debt service problems); and coordinate donor responses.

Options Considered and Rejected: Use debt relief as a normal means of transferring aid resources to LDCs; provide generalized debt relief on a one-time basis and limit the cost by controlling the number of recipients, terms of relief and the consolidation period.

3. To what extent should the developed countries commit themselves to provide increased market access to developing country exports and how do we respond to domestic requests for increased protection against imports from LDCs?

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Recommendation: That the substance of the Tokyo Declaration be reaffirmed at the Summit,14 while we try to make significant progress in the multilateral trade negotiations (MTN) on issues of interest to LDCs.

LDC Position: LDCs want DCs to remove restrictions on imports of LDC goods with no or very limited reciprocity on their part.

Industrial Countries Position: These countries generally favor a moderate and preferential liberalization of tariffs affecting LDCs, although with sufficient U.S. effort they might support a substantial but non-preferential reduction in tariffs.

Summit Action: The Summit declaration would reaffirm the general principles of the Tokyo declaration regarding LDCs.

CIEC Action: The industrial countries should commit themselves to make reductions in the MTN to barriers to LDC trade with a view to enabling LDCs to increase their share in world trade over time. LDCs would be expected to reciprocate in ways consistent with their development.

4. Should the United States support international grain reserves that emphasize price stabilization?

Recommendation: There should be speedily negotiated an international grain reserves system within the context of a general agreement on grains. Leave open the possibility of simultaneous inter-related bargaining in Geneva and London and the issue of whether to use a quantity or price trigger mechanism in the reserve.

LDC Position: Developed countries should bear the major burden of financing an international system of nationally-held grain reserves to provide food security in times of world crop shortfalls. These reserves should be made available to LDC’s at concessional prices.

Industrialized Countries Position: Most other countries support the concept of price stabilization scheme for grains. They oppose further concessions for LDCs on prices of grain during periods of shortage.

Summit Action: Seek support in the Summit declaration for the concept of an international system of nationally-held reserves, without explicit agreement on details and endorse negotiations to this end, without prejudging the relation to the MTN.

CIEC Action: Seek G–8 agreement for a unified announcement that there should be negotiated an international grains reserve within the context of a general agreement on grains.

Options Considered and Rejected: United States has proposed a grain reserves system based on solely quantity triggers; other countries have suggested a price-trigger system.

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5. Should the IMF Compensatory Financing Facility (CFF) be further liberalized? Drawings from the CFF played a significant role in meeting the financing needs of the LDCs in 1976. The chief advantage of expanding compensatory financing to offset downward fluctuations in LDC export is that it operates through income mechanisms rather than market intervention.

Recommendation: That we would sympathetically consider, with-out a prior commitment, liberalization of the IMF’s CFF if quota limits become a binding constraint and IMF resources have been expanded.

LDC Position: The CFF should be liberalized by: (a) calculating shortfalls in real terms, (b) relaxing or abolishing quota limits, (c) requiring repayments only from export earnings above norm, just as drawings are now based on “shortfalls” in export earnings, (d) allowing LDCs to draw without “basing claims entirely on balance of payments criteria,” (e) compensating for increased import volumes due to climatic or other factors beyond a country’s own control, and (f) providing drawings in the form of grants in some cases.

Industrial Countries Position: This issue has not been actively discussed since the 1975 liberalization. The Germans are reported to be considering recommending a liberalization of the CFF in the Interim Committee.

CIEC Action: Let it be known that the U.S. would sympathetically consider, without prior commitment, increased compensatory financing once the two conditions outlined in the recommendation are met.

Options Considered and Rejected: Liberalize the CFF at this time.

6. Should there be an expanded STABEX 15 Facility outside the IMF? We could consider globalization of an European STABEX-type scheme and expand its coverage to more commodities.

Recommendation: That we not pursue a globalized expanded STABEX on the grounds that it would: (1) require additional Congressional appropriations; (2) lead to recurring LDCs’ pressure for replenishment; (3) work outside the IMF framework—thus avoiding balance of payments need, IMF quota limits and mandatory repayment schedules.

LDC Position: The LDCs want compensation on highly concessional terms based on shortfalls in all commodity export earnings. They have expressed interest in CIEC in a Swedish proposal for a [Page 801]global, highly concessional income stabilization scheme in the U.N. framework.

Industrial Countries Position: The EC, particularly Germany,16 favors a globalized STABEX-type scheme, as does Sweden. Some elements in Germany believe such a scheme can substitute for the Common Fund and individual commodity agreements, a view we do not share.

Summit Action: Chancellor Schmidt has said he will raise the issue of a global STABEX. We should be prepared to explain our opposition to this approach.

CIEC Action: Same as the Summit.

7. Should we take new initiatives towards Saudi Arabia to obtain Saudi cooperation in ensuring adequate quantities of energy at manageable prices? The Saudis have expressed a concern over the safety and value of the surplus financial assets they are accumulating although this concern does not appear to have been an important factor affecting Saudi production policy thus far, and it is unclear whether it will become a constraining factor with regard to future production policy.

Recommendation: That, while we should be willing to discuss the OPEC assets issue if raised, we should not get out in front on the issue, and we should continue to oppose providing special treatment. Considerable further study is needed of the likely determinates of future Saudi production and pricing policy and of possible options for affecting Saudi policies. State and Dr. Schlesinger should work together to devise a U.S. position on overall international energy policies.

LDC Position: The non-OPEC members have only grudgingly supported the Saudi demands for special treatment of OPEC assets. They presumably would welcome an agreement which resulted in OPEC price moderation. Aside from the several other OPEC surplus countries (Kuwait and the UAE) the other OPEC members do not feel strongly about the OPEC asset issue but surely would be against any Saudi agreement to increase production or moderate prices. While the Saudis have asked for special treatment of their assets they, to date, have not aggressively pursued this request. The Saudi position on the possible contingency options is unknown.

Industrial Countries Positions: Other developed countries agree with the U.S. position on OPEC assets. Their position on the possible contin[Page 802]gency options is unknown although they clearly recognize the importance of ensuring adequate Saudi production and price moderation.

Summit Action: Reaffirm U.S. opposition to providing special treatment to OPEC assets or remain silent on the issue.

CIEC Action: Continue to support developed country position for calling for fair nondiscriminatory treatment of OPEC assets but not preferential treatment.

Options Examined on a contingency basis: Offer preferential treatment for OPEC (Saudi) assets in return for (1) a Saudi commitment to progressively increase production levels, to continue to moderate price decisions within OPEC and to produce enough oil to prevent future tight market conditions, or (2) a Saudi commitment to enforce within OPEC an oil price agreement that provides for small price increases over a limited time period.

8. Should the U.S. consider changes in its policy on the transfer of technology in order to accommodate the demands of the LDCs? Present USG policy is to work towards a voluntary Code of Conduct for Technology Transfer in the UNCTAD and to engage in various development programs to increase effective utilization of technology in LDCs.

Recommendation: That the U.S. (a) continue to oppose binding international obligations on corporations while emphasizing the importance of private sources of technology and, (b) increase technological assistance through existing or new government programs in the LDCs.

LDC Position: Developed nations should pressure their companies through binding codes of conduct into (a) transferring more technology (b) transferring it under more favorable terms and (c) transferring resources for development of indigenous technological development. LDCs also want more government resources to spur local research and technology.

Industrial Countries Position: Opposed to a binding code of conduct, however, opinion differs on the levels of governmental assistance to LDCs.

Summit Action: NONE

CIEC Action: Reaffirm the benefits from private transfers of technology and our continued interest in assisting LDCs in developing their capacity to utilize technology effectively.

Options Considered and Rejected: Accede to LDCs’ demands for more regulation of technology transfers.

  1. Source: Carter Library, National Security Council, Institutional Files, Box 26, PRM–08 1 of 3 [2]. Confidential. Sent for action. Aaron initialed the memorandum on Brzezinski’s behalf. Carter wrote at the top of the page: “Don’t announce our position until I approve. J.”
  2. Carter indicated his approval of this recommendation.
  3. Carter indicated his approval of this recommendation, writing in the adjacent margin “for hard loans.”
  4. Carter indicated his disapproval of this recommendation, writing in the margin “‘more effective aid’ ok.”
  5. Carter indicated his approval of this recommendation.
  6. Confidential. Sent through Brzezinski who did not initial the memorandum.
  7. Carter did not indicate his preference with respect to this recommendation.
  8. Carter did not indicate his preference with respect to this recommendation.
  9. Attached but not printed is an undated table entitled “A Doubling of U.S. Foreign Aid Appropriations FY-77–FY-82: An Illustrative Breakdown by Program.”
  10. Carter did not indicate his preference with respect to this recommendation.
  11. Carter did not indicate his preference with respect to either Option 1 or Option 2.
  12. Carter did not indicate his preference with respect to this recommendation.
  13. Confidential.
  14. For the text of the Tokyo Declaration, issued at the end of the September 1973 GATT Ministerial meeting, see the Department of State Bulletin, October 8, 1973, pp. 450–452.
  15. An EC facility which lends money to countries when commodity earnings are below normal. It contains a highly concessional element for the low income countries. [Footnote in the original.]
  16. On April 20, Owen forwarded to Carter a “non-paper” from Schmidt on stabilizing LDC commodity export earnings. (Memorandum from Owen to Carter, April 20; Carter Library, National Security Affairs, Brzezinski Material, President’s Correspondence with Foreign Leaders File, Box 6, Germany, Federal Republic of: Chancellor Helmut Schmidt, 2–4/77)