53. Memorandum From the Chairman of the Council of Economic Advisers (Schultze) to President Carter1


  • Oil Imports, Trade Deficit, etc.


The swing in our balance of trade has been very large and projections for the future take it outside the range of “benign neglect.” International financial markets are resilient, however, and we can afford a careful and orderly response.

As Mike Blumenthal suggests, we ought to organize our efforts.2 But we should not restrict our examination to oil. I suggest a PRM led by Treasury, which has two goals:

A. An assessment of the severity of our deficit problem under various scenarios.

B. A review of the costs and benefits of alternative responses, both oil and non-oil.


1. Secretary Blumenthal’s projections of the trade deficit ($30 billion, 1977; $40 billion 1978) are about the same as our own. The deficit on current account (subtracting U.S. earnings on investment abroad and some other items) would be about $12 billion a year lower. This is the amount that has to be financed by foreign investment in the U.S.

2. Even with a successful energy program, U.S. oil imports will continue to rise for awhile. An $80 billion oil import bill in 1981 is a good bit higher than a “quickie” estimate which we have just made. But it is not out of the question.

3. Since we are growing faster than most other nations, our exports may continue for awhile to grow more slowly than our non-oil imports.

4. So long as the U.S. economy is perceived to remain healthy, and particularly so long as our rate of inflation is favorable compared to most other nations (as it now is), we should be able to attract OPEC and other investment to finance large current account deficits.

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5. Some depreciation in the value of the dollar may occur if our current account deficit continues to grow. If the depreciation is moderate and orderly, the bad consequences (increased prices for imports) would be outweighed by the good consequences (promotion of exports).

6. We cannot, however, rule out the possibility that growing trade and current account deficits would have two highly undesirable consequences:

(a) substantially increase protectionist pressure here;

(b) a psychological impact on holders of dollars, leading to a sharp and disorderly decline in the dollar, which in turn might lead to competitive devaluation or protectionist measures in other countries.

We think the probability of (b) is quite small, but not zero.

7. Almost any action to reduce the trade deficit substantially will have budgetary, economic, or other costs. But some possible actions would have far less costs than others.

8. There is a list of items we could explore, not all of which relate to oil. (In each category I have tried to list the items in order of least cost.)

A. Oil imports

(i) Rescind the plan to cut back Elk Hills petroleum reserves production3 (up to $1½ billion lower imports).

(ii) Speed up repairs to Alaskan pipeline and accelerate second phase (can it be done, and at what cost?). The potential national savings on oil imports are very large.

(iii) Stretch out oil acquisition for the strategic petroleum reserves (we think current plans call for about $4 billion in purchases in 1978).

(iv) Work closely with Saudis, Iranians, and others to see what we can do to encourage increased production, smaller price increases, and willingness to hold dollars (e.g., should we develop special kinds of investment instruments for them?).

(v) Institute additional voluntary gasoline and other energy conservation measures (substantial question if they can have a lasting effect, but could be explored).

(vi) Surcharge on oil imports. Hard to sell to the public; would also raise price of domestic energy and add to inflation.

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B. Other measures

(i) Delay effective date of DISC removal in tax reform bill4 ($1/2 to $1 billion a year in exports).

(ii) Increase export promotion efforts by Department of Commerce (cheap, but of questionable effectiveness).

(iii) Increase funds for Ex-Im bank. (Effective, but may induce competitive response by other exporting nations).

(iv) Promote orderly depreciation of the dollar (takes effect slowly but could have large effect on trade balance; adds to inflationary pressure).

C. Steps we should not take

(i) Deliberately slow down growth in economy to reduce imports.

(ii) Higher interest rates to attract more foreign investment. (This would, among other things, also slow the economy.)

(iii) New protectionist measures.

  1. Source: Carter Library, Plains File, Subject File, Box 36, Schultze (Charles) Memos, 1977. No classification marking. Schultze did not initial the memorandum.
  2. Not further identified. In his October 18 memorandum to Carter (see Document 66), Blumenthal referred to a report that he made to Carter on September 10 suggesting “that the sharp decline in the U.S. balance of trade and payments requires our immediate attention.”
  3. Among the measures included in Carter’s national energy plan, which he submitted to Congress on April 20, was a proposal to limit production at the Federally-owned Elk Hills Naval Petroleum Reserve in California. See footnote 7, Document 25.
  4. In an article printed in the August 18 edition of The New York Times, Clyde Farnsworth noted: “Ever since his election campaign President Carter has been calling the DISC—essentially an incentive that defers taxes on profits from exports—one of the most expendable of tax advantages for business.” (Clyde H. Farnsworth, “Washington & Business: Carter vs. Industry on DISC Benefits,” The New York Times, August 18, 1977, p. D1) In an August 26 memorandum to Eizenstat, Strauss discussed the utility of the DISC as a bargaining chip in the MTN. (National Archives, RG 364, 364–80–4, Special Trade Representative Subject Files, 1977–1979, Box 3, DISC 1977) In January 1978, Carter proposed a tax reform plan to Congress that included, among other measures, the phased elimination of the DISC. For the text of Carter’s January 20, 1978, message transmitting the tax reduction and reform package to Congress, see Public Papers of the Presidents of the United States: Jimmy Carter, 1978, Book I, pp. 158–184.