U.S. DEPARTMENT OF STATE
95/05/18 Foreign Relations, Vol. IX, 1961-63, Foreign Economic Policy
OFFICE OF THE HISTORIAN

Office of the Historian
Bureau of Public Affairs
United States Department of State

May 18, 1995

When John F. Kennedy became President in January 1961, the U.S. balance of payments was rapidly worsening. The Kennedy administration's preoccupation with reversing this deteriorating situation is the predominant subject documented in Foreign Relations of the United States, 1961-1963, volume IX, Foreign Economic Policy, released today. Administration officials launched many short- and long-term policy initiatives in the areas of financial and monetary policy, foreign assistance, and trade and commercial policy to try to eliminate the deficit and stem the outflow of gold caused by loss of foreign confidence in the dollar.

Perhaps the most controversial of these measures was the effort to reduce U.S. overseas expenditures. The United States tried to gain the cooperation of other nations to expand their foreign aid programs in the developing world and negotiated burdensharing military offset accords with the West German Government. U.S. policymakers also had to deal with Japan's vigorous protests against the administration's proposed interest equalization tax, which would have imposed a tax on all capital borrowed by foreign governments or individuals from U.S. sources.

The Kennedy administration also initiated multilateral trade negotiations aimed at increasing U.S. exports. Although the Trade Expansion Act of 1962 gave the President broader authority to offer tariff concessions, the textile, cotton, and wool industries and their allies in Congress pressured the President to impose ceilings on textile imports and consider an equalization fee on cotton imports. These pressures and the raising of certain U.S. tariffs provoked hostile reactions abroad. Retaliatory action by the European Economic Community resulted in a "chicken war" and contributed to the failure to agree on the ground rules for the 1964 Kennedy Round negotiations.

Kennedy administration officials also developed a new foreign assistance policy aimed at moving developing nations into self-sustained economic growth. The purpose of the newly-created Agency for International Development (AID) was to cooperate with other developed nations in fashioning a coordinated long-term strategy for developing nations. AID became the central coordinating agency for both economic and military assistance as well as for the training of police in foreign nations. Kennedy officials also hoped to use foreign assistance policy to help improve the balance of payments.

The U.S. Government simultaneously promoted its foreign assistance goals in multilateral agencies. Kennedy called for increases in the resources of the International Development Association and designated the 1960s the United Nations Development Decade. However, his administration's opposition to modest U.N. funding for an agricultural research project in Cuba suggests the limits to U.S. support for multilateral development during the Cold War.

The Kennedy administration also debated other foreign economic issues. On East-West trade, the Department of State favored expanded trade with the Soviet bloc, but the Congress, the Department of Commerce, and other agencies generally wanted to restrict trade. Disagreements also existed in the 15-nation Coordinating Committee on Export Controls (COCOM) between the United States and other member nations over exports of Western technology to Soviet bloc countries. Finally, President Kennedy's decision to sell off part of the surpluses in the U.S. stockpile of strategic materials resulted in mixed reactions in Congress and by the interested departments.

This volume presents the official record of U.S. policy drawn primarily from documents originating in the Departments of State and Commerce, the White House, the Agency for International Development, and from papers of key participants. The Office of the Historian has prepared a summary of the volume. For additional information, contact David S. Patterson, Chief of the Arms Control and Economics Division, at (202) 663-1127 (fax: (202) 663-1289).

Volume IX (Department of State Publication No. 10229; GPO Stock No. 044-000-02396-2; ISBN 0-16-043103-4) may be purchased from the U.S. Government Printing Office for $38.00 (postpaid; $47.50 for foreign orders).

Order from: Superintendent of Documents P.O. Box 371954 Pittsburgh, PA 15250-7954 Telephone: (202) 512-1800 Fax: (202) 512-2250

Foreign Relations of the United States 1961-1963, Volume IX Foreign Economic Policy (This is not an official statement of policy by the Department of State; it is intended only as a guide to the contents of this volume.) Since 1861, the Department of State's documentary series

Foreign Relations of the United States has constituted the official record of the foreign policy and diplomacy of the United States. Historians in the Office of the Historian collect, arrange, and annotate the principal documents comprising the record of American foreign policy. The standards for the preparation of the series and the general deadlines for its publication are established by the Foreign Relations of the United States statute of October 28, 1991 (22 USC 4351, et seq.). U.S. policies during the administration of President John F. Kennedy are the subject of 25 print volumes and 6 microfiche supplements. Volumes in the Foreign Relations series are published when all necessary editing, declassification, and printing steps have been completed.

The documents in this volume are drawn from the centralized indexed files of the Department of State, the decentralized lot files of the Department's Executive Secretariat, and Bureau, Office, and Division lot files. In addition, the editors made extensive use of the Presidential and other papers at the John F. Kennedy Library in Boston, Massachusetts. Most of the documents were originally classified. The Historical Documents Review Division of the Department of State in concert with the appropriate offices in other agencies and foreign governments carried out their declassification.

The following is a summary of the important issues covered in the volume. Parenthetical citations are to numbered documents in the text. For additional copies of this summary or more information on the volume, contact David S. Patterson at (202) 663-1127 (fax: (202) 663-1289).

Summary

General Foreign Economic Policy

The need to reverse the deteriorating U.S. balance of payments, which had become the growing concern of the Eisenhower administration in its second term, became the core of the Kennedy Presidency's foreign economic policy. Briefed on the problem by President Eisenhower shortly before he took office, President Kennedy delivered a major address only 2 weeks after his inauguration, in which he proposed both short- and long-term measures to eliminate the deficit and stem the outflow of gold caused by the loss of foreign confidence in the dollar. (1, 2)

Kennedy mobilized the Departments of the Treasury, State, Defense, Commerce, and Agriculture, the Bureau of the Budget, and the newly created Agency for International Development (AID) to implement his program of export promotion, burden-sharing in defense and foreign assistance, and financial restraints and incentives designed to encourage foreign dollar investments. Kennedy instructed Secretary of the Treasury C. Douglas Dillon to oversee and coordinate the balance-of- payments effort (2, 3, 4, 7, 8, 9) and created the Cabinet Committee on the Balance of Payments in the summer of 1962 to assist him. (10, 11)

All agencies worked to implement the President's program. The Departments of Commerce and State (and later the Special Representative for Trade Negotiations) concentrated on general tariff reductions and export promotion. AID attempted to reduce its foreign expenditures (i.e., not including assistance funds spent on U.S. goods) first to $1 billion and then $500 million. (12, 17, 18) Treasury, in addition to its central role as coordinator, attempted to promote foreign investment in the United States through tax incentives and international cooperation. (18)

Perhaps the most controversial efforts to reduce capital outflows were made by Secretary of Defense McNamara, who developed a program of far-reaching reductions in U.S. overseas military expenditures. His proposals were dramatic and impressive. If implemented, they promised to create a significant improvement in the U.S. payments position. (13, 26, 28, 36) They elicited strong reservations from the Department of State hierarchy, however, which feared that the proposed cuts would send a message of weakness and vacillation to the Soviet Union and the nations that the United States had pledged to protect from Communist aggression. (15, 27, 34) Ultimately, senior Department of State officers succeeded in watering down the reductions in the interest of national security. (37, 38)

In the end, the Kennedy administration had only mixed success in reducing U.S. balance of payments deficits. After its initial success in reducing net capital outflows early in the administration, a significant fourth quarter deficit in 1962 dashed hopes of achieving a balance before 1965 at the earliest. Although the Department of the Treasury had some success in restoring international confidence in the dollar and stemming the gold outflow, it remained necessary for the incoming Johnson administration to take additional steps to reduce U.S. expenditures abroad.

Financial and Monetary Policy

While President Kennedy mobilized his Cabinet under the leadership of Secretary of the Treasury Dillon to reverse growing balance-of- payments deficits, he also launched negotiations on various fronts to gain the cooperation of other nations in reducing U.S. expenditures abroad as well as their understanding for unpopular measures deemed necessary to achieve U.S. objectives. The major portion of these negotiations were held with West Germany, which the Kennedy administration attempted to enlist in several burden-sharing arrangements. The Department of State worked to persuade the West Germans to expand its foreign aid program, particularly to the underdeveloped world, thereby allowing the United States to trim its own foreign assistance commitments. (40, 41, 44, 45, 46, 64)

Simultaneously, the Departments of the Treasury and Defense worked to achieve a German military offset agreement, whereby the German Government would reduce the net U.S. payments outflow required to maintain U.S. troops in Germany by increasing military purchases in the United States. The results of these negotiations proved only partially satisfactory to the Kennedy administration. Despite reaching an agreement with the German Government on these issues, the German actions ultimately fell short of their promises. (49, 50, 53, 65, 72, 73, 74, 80, 82)

Another major foreign policy issue arose with Japan over Kennedy's interest equalization tax proposal. The proposed tax, which was one of the measures announced in Kennedy's second major balance-of-payments address on July 18, 1963, would have imposed a tax equal to a one percent interest increase on all capital borrowed by foreign individuals or governments from U.S. sources. The Japanese, at that time heavy borrowers in U.S. capital markets, protested vigorously, particularly in view of U.S. willingness to make an exception for Canada. U.S. leaders were only partially successful in allaying Japanese resentment, which had been fanned on other fronts (79, 81, 83), particularly trade and textile imports. In any event, the tax was not formally approved until September 1964, and then only for a relatively short duration.

Other issues covered in the compilation include negotiations leading to the creation of the Group of 10 and the General Arrangements to Borrow (GAB) in late 1961 (54, 55, 59) as well as some of the more technical aspects of the balance of payments problem (gold flows, foreign dollar balances, lending, and taxation issues). (56, 57, 58, 63, 66, 67, 68)

Foreign Assistance Policy

This compilation focuses on the Kennedy administration's attempts to develop new approaches to foreign assistance policy. President Kennedy believed that the United States had a major responsibility to try to help the developing nations get on their feet economically. One of his first executive orders centralized government oversight of the movement of U.S. agricultural surplus products abroad in the White House under George McGovern, Director of the Food for Peace Program. Kennedy wanted to transform this program from the routine disposal of U.S. agricultural surpluses abroad to a "food for development" program, and he early endorsed a McGovern mission to Latin America to explore ways in which U.S. food abundance could be used to help end hunger and malnutrition throughout the Western Hemisphere. (85, 86)

Throughout most of 1961, the Kennedy administration gradually developed its foreign aid program. Believing previous administrations had tried to bolster weak economies for short-term gains, Kennedy officials fashioned a "new look" that would promote a coordinated long- term strategy with other developed nations to move the peoples of the developing nations into self-sustained economic growth. Departmental reports and several meetings with the President formulated aspects of the new program. In his special message to the Congress on foreign aid, he emphasized that a new agency would be created to supplant the International Cooperation Administration and Development Loan Fund and serve as the single coordinating agency for all forms of foreign assistance. (94, 95, 100, 106)

Under Secretary of State for Economic Affairs George Ball visited several European countries to explain the administration's program and to encourage the Development Assistance Committee (DAC) of the nascent Organization for Economic Cooperation and Development (OECD) to increase its foreign assistance funding and to coordinate their programs. The administration persisted with some success thereafter in enlisting the cooperation of DAC and OECD members, particularly Germany. (99, 101, 102, 104, 149, 153, 156, 157, 165, 172, 174) Kennedy also appointed several task forces to draft legislation for the new agency and provide other details for its operation. The resulting Foreign Assistance Act of 1961, various executive orders, and interagency reports created the Agency for International Development (AID) and sought to define its functions. (103, 116, 117)

Although President Kennedy and the new AID Administrator Fowler Hamilton received much well-intentioned advice on foreign aid (115, 118, 120, 121, 122, 124), the administration's assistance programs encountered difficulties. At the outset Secretary of Agriculture Orville Freeman tried to persuade Kennedy to assign a larger role on food and technical assistance to the Department of Agriculture. As Freeman put it to Under Secretary Chester Bowles, "We just want to do a job & not from left field where the Dept. has been for 8 years. Tell us what to do & and we will go!" While not unsympathetic to Agriculture's position, senior policymakers in the White House and the other relevant agencies persisted with plans to make AID the central coordinating agency for economic assistance. (105, 106, 110, 111, 119) The White House also gave it responsibilities over the training and equipment of police in foreign countries and the utilization of U.S. military engineers on AID projects. (131, 132, 137, 138, 139, 150)

The President and his assistants nonetheless were somewhat critical of AID's inability to implement and coordinate the various programs. Following one meeting, Kennedy's aides told AID officials that the President noted "certain deficiencies in AID's preparation" and "was unhappy with the inability of A.I.D. to provide information on (a) the follow-up and implementation of loans and projects, and (b) the effect of these loans, grants and projects on balance of payments." (142, 143, 145)

AID was also given responsibility for coordinating economic and military assistance. Until AID's establishment, the Departments of State and Defense studied the premises underlying the Military Assistance Program as part of a broader long-range study of U.S. military posture. (84, 93, 96) The two agencies also hired consultant Charles Burton Marshall to investigate whether the complex economic and military issues might require a different approach to military aid. An interagency Military Assistance Steering Group followed with a study of "feasible alternative methods" that would better accomplish U.S. long- term objectives and "facilitate a more complementary programming of U.S. economic and military assistance." In early 1962 the NSC assigned AID the responsibility for preparing further progress reports for specific countries and the coordination of military and economic assistance programs. Robert Komer called one of these reports "a d bald-faced whitewash. . . . When you add up five pages of words they total `no progress' at all." (108, 109, 112, 123, 128, 129, 130, 140, 149, 167, 168)

Kennedy also asked AID for reports on the net effects of foreign assistance on the U.S. balance of payments. In addition to other studies on this subject, Kennedy turned to John Kenneth Galbraith, Ambassador to India, for advice. Galbraith proposed among other things a form of super-tying of foreign assistance dollars to the major recipient countries' purchase of U.S. exports, but the President's aides argued that some of Galbraith's proposals might contradict U.S. traditional support for free multilateralism. (142, 143, 146)

When Hamilton resigned in late 1962, Kennedy appointed David Bell as AID Administrator. The President also created a private advisory group headed by General Lucius Clay to take a fresh look at the Agency for International Development and recommend ways to revive public support for foreign assistance. The Clay Committee generally approved the main thrust of AID's efforts but criticized their application to some specific areas and countries. (154, 158, 160, 161, 166)

Despite Kennedy's efforts, Congress consistently slashed his requests for economic and military assistance appropriations. President Johnson inherited this situation in November 1963. Concerned about the congressional reductions, at the end of the year Johnson appointed another interagency committee to try to find ways "to present to the Congress next year a more effective, efficient aid program." (175, 176)

International Investment and Development Policy

This compilation deals with U.S. efforts to promote its foreign assistance and development goals in multilateral forums. The focus is on the International Bank for Reconstruction and Development (World Bank), its recently created affiliate International Development Association (IDA), and the economic programs of the United Nations.

Regarding the World Bank, U.S. policymakers encouraged more flexible approaches to loans such as lengthening of grace periods and maturity dates. (190, 206, 207) Following the Bank's report on the need for much larger IDA resources, U.S. Representative to the United Nations Adlai Stevenson urged that the U.S. Government should propose at the 1962 IBRDIMF annual meeting an increase in the capital of the IDA, which offered credits and "soft" loans to developing nations, from $1 to $4 billion over the next several years. Most industrialized nations were unwilling to go that far, and Kennedy's speech to the meeting only endorsed an increase in its resources in general terms. (190, 197, 201, 204, 205)

Kennedy had early called upon the nation to make the 1960s a Decade for Development, and in an address to the United Nations in September 1961 he designated the 1960s the United Nations Development Decade. The United States thereafter supported U.N. resolutions that implemented an expansion of U.N. development efforts. (185, 188, 189, 191, 197, 200) The Kennedy administration opposed, however, efforts to create a U.N. Capital Development Fund and a United Nations Development Authority as duplicative of U.S. and other existing development programs. (180, 186, 193)

A final issue involved the U.N. Special Fund, which early in 1961 tentatively approved an agricultural research project in Cuba. Although the money for this Cuban project totaled barely over $1 million, the Kennedy administration opposed the project as part of its attempts to isolate Fidel Castro. Public criticism in the United States also may have made the administration more reluctant to acquiesce in it. Paul Hoffman, Managing Director of the Fund, unsuccessfully tried to convince Department of State officials that the project was designed to help the Cuban people, not Castro. In response to U.S. opposition, Hoffman deferred final decision for more than a year but finally approved the project in early 1963. When Rusk publicly criticized the decision, Hoffman commented on U.S. "stupidity" in the matter, which he did not feel was against U.S. national interests. (179, 182, 183, 184, 195, 196, 198, 199, 202, 203)

Trade and Commercial Policy

Trade and commercial policy during the Kennedy years focused on multilateral trade negotiations. The administration aimed to expand U.S. exports abroad which, it was anticipated, would result in increased domestic growth and a decline in the growing U.S. balance of payments deficit. These negotiations were hampered by two key factors: suspicions among foreign negotiators at the Dillon Round (May 1961July 1962) that the United States sought to gain more than it was willing to give, and existing trade legislation. The peril point provisions in the Reciprocal Trade Agreements Act (208) obligated the President to exempt large numbers of items from significant tariff cuts (below points deemed to be injurious to domestic industry), thereby limiting the President's flexibility in any trade negotiations. The Trade Expansion Act of 1962 was enacted in large part to counteract this limitation by granting the President broader authority to offer tariff concessions.

In spite of this legislation, countervailing forcespowerful business interests and their congressional allies in the textile, cotton, and wool industriespressured the President to shield their products from foreign competition. (219, 221) In an effort to moderate these forces, President Kennedy early in his administration announced a seven-point program (213) to provide relief for domestic textile manufacturers from foreign competition. This program included passage of a multilateral long-term textile arrangement, which set ceilings on textile imports (223, 249), and serious consideration of an equalization fee on cotton imports. (235, 236, 239) Meanwhile, the wool interests lobbied to secure for itself the same protection that the cotton industry had achieved. (249)

These domestic pressures elicited hostile reactions from Japan, a leading exporter of cotton textiles (235) and the principal target of a cotton equalization fee. Elsewhere, the President's decision to raise tariffs on carpets and glass (245, 247, 248), an important Belgian export, and to impose a tariff on bicycles (250, 252), a major export of the United Kingdom, provoked such a hostile reaction among member nations of the European Economic Community (EEC) that the subsequent increase in tariffs on U.S. poultry exports to the Common Market represented retaliatory action. The resulting "chicken war" (260, 267, 284) further exacerbated existing trading tensions to the point that they contributed to the failure to agree on ground rules for the 1964 Kennedy Round negotiations and on the goal of the General Agreement on Tariffs and Trade (GATT) Ministerial meeting held in May 1963.

At this GATT meeting, the United States proposed that the goal of the negotiations should be an across-the-board 50 percent cut in tariffs. The Europeans, led by the French, favored a sliding scale approach, referred to as the "ecretement" plan (leveling of peaks), which provided for higher percentage cuts for high tariffs and lower percentages for low ones. (278, 281) They argued that since the United States had the largest number of high tariffs (over 30 percent), a 50 percent cut would still provide significant protection while it would reduce already low European tariffs to the point where they would no longer have any protective effect. This disagreement persisted, and the delegates failed to reach a compromise agreement. By the end of 1963, additional differences over the proper guidelines for the agricultural talks also put the future of the trade negotiations in doubt.

Economic Defense Policy

The principal feature of this compilation is the debate within the administration over the nature of East-West trade. The Department of State favored trade with the Soviet bloc as an instrument for nudging the Soviet Union away from its Cold War attitudes. The Department of Commerce and Congress viewed restrictions on the trade as a means of retarding growth of the Soviet economy. President Kennedy decided the issue by favoring more East-West trade than either the Departments of State or Commerce had advocated. (329)

Another issue involved the disagreement between the United States and the United Kingdom over the export of Western technology to the Soviet bloc. In the 15-nation Coordinating Committee on Export Control (COCOM) in Paris, the British resisted adding items to the embargo list. The U.S.-British debate continued in bilateral talks aimed at resolving COCOM list issues. Finally, the Department of State instructed its COCOM representative to resolve these issues by compromise. (297)

President Kennedy offered American wheat for sale to the Soviet bloc and asked Congress to give him discretionary authority to extend Export-Import Bank loans to Communist countries by legislation which President Johnson approved in January 1964. (330) The period ended with U.S.-Soviet trade talks under way. (332)

Strategic Materials and Commodities Policy

This compilation deals principally with the management of the U.S. stockpile of strategic materials. President Kennedy stated in his news conference of January 31, 1962, that the stockpile valued at $7.7 billion exceeded emergency needs by nearly $3.4 billion worth of strategic materials. He offered to cooperate with a Congressional investigation of the program, and he gave assurances that the United States would do nothing to disrupt commodity prices. The Congressional investigation, however, did not lead to reform of the stockpile program because Congress failed to pass the necessary legislation. (346)

An executive order instituted reform by prescribing the responsibilities of the Director of the newly formed Office of Emergency Planning. (341) The administration also investigated the stockpile program. (349) The report of the Executive Stockpile Committee recommended among other things that the Office of Emergency Planning decide on disposals from the stockpile after consulting with interested agencies, but the Departments of State and Interior both wanted to require their prior approval of any disposals. (349, 350) President Kennedy resolved this dispute by providing for referral of disagreements over disposal policy to him for decision. (353)

The United Kingdom raised the issue of threats to free world oil supplies brought on by demands of oil-producing countries for more earnings and even for ownership and by Soviet exports of cheap oil. The U.S. and British Governments agreed to give political guidance to the oil companies. (336) The United States put off any action to counter demands for more earnings until after the results of oil company-OPEC talks. (355)

The compilation also includes documents on uranium purchases (335, 338), oil import quotas (344, 345, 363), sugar legislation (337, 339, 348), tin disposal (342, 343, 356), the barter program (358, 359, 363), and the International Coffee Agreement (360).

Office of the Historian Bureau of Public Affairs May 1995

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