Documents 82 through 97

/1/Source: Department of State, S/S Files: Lot 73 D 153, Box 124, Morning Summaries, August 25-December 31, 1971. Limited Official Use. Repeated to the Secretary of Defense, COMUSJAPAN, HICOMRY, and CINCPAC.

10649. Sub: Japanese reactions on defense burden-sharing. Ref: Tokyo A-377, May 24, 1971./2/

Begin Summary: Embassy believes it would be useful to summarize present state of Japanese views on this subject. Japanese have been casting about for ways to cope with apparent pending US demands on defense burden-sharing. They see issues as falling into different categories. All Japanese seem to favor idea of increasing economic aid to Southeast Asia, and GOJ has already started to do this. GOJ expects double its concessional aid in CY 71 to $700 million. It intends to increase total financial flows abroad to one percent of GNP by 1975 (about $4 billion). Possible proposal that Japan assume a greater share than present of US garrison costs in Japan, in ways amounting to defense support arrangement, has met with categorical opposition. Question of increasing arms purchases from US is being debated with increasing intensity. GOJ favors idea, mainly as a means to cut cost of expensive new weapons programs, and despite probable 8 to 13 percent cut in fourth defense buildup plan, probably will purchase $800 million to $1 billion worth of US equipment, or roughly double purchases under third DBP. End Summary.

1. Defense burden-sharing has become one of major concerns of the Japanese in recent weeks. Japanese are not clear as to what this may entail or its ultimate cost. They feel they must respond positively in some manner to placate the US and win concessions on currency and trade issues, but do so in light their plans to prune already modest defense budget proposals because of anticipated revenue shortfalls.

2. In GOJ and public mind, defense burden-sharing consists of: (A) increased economic aid to Southeast Asia to help compensate for US aid reductions; (B) assumption of a greater share of costs for stationing US forces in Japan; and (C) increased purchases of US military equipment. There has been little opposition to point (A). Big business interests favor increased economic aid as the means for meeting US defense burden-sharing demands. GOJ not only expects to double concessional assistance this year to $700 million, its objective is to increase its economic assistance to same level as US (.32 percent GNP CY 70) and other industrial countries relative to GNP as soon as possible. Further, GOJ has declared it intends increase its financial flows to developing countries to one percent of GNP by 1975 (estimated at about $4 billion). Governmental economic assistance would then amount to about $1.3 billion of this sum, and target is 50 percent ODA (concessional) GOJ assistance.

A. Japanese have publicly and privately expressed categorical opposition to anything which seems reinstitution of defense support arrangements existing under 1952 Treaty. (Department will recall administrative agreement at that time provided GOJ would pay $155 million per year for purpose of procurement by US of transportation and other requisite services in Japan; that GOJ insisted prior to 1960 Security Treaty on omitting such provisions anticipatory to 1960 Treaty.) According to press reports, US has suggested that Japan assume balance-of-payments costs for maintaining troops in Japan amounting to about $650 million per annum. GOJ leaders, including Foreign Minister Fukuda and JDA Director General Nishimura, have stated that no formal request on this matter has been received from the US, but that in any event it would be unacceptable.

B. Other Japanese officials argue that much of US costs are being incurred more for strategic defense of the US than for the defense of Japan, or that a large portion of the $650 million is being spent not on defense but on US forces purchase of goods and services for private personal consumption. (Comment: In fact, in CY 1970, 62.5 percent of this sum was from non-appropriated fund sources, so Japanese analysis is correct.) In any case, they state that national sentiment would not permit assumption of such additional cost for US troops, equal to more than one-third annual JDA defense budget. After reversion of Okinawa, they fear this amount might have to be doubled to take care of US forces costs there.

C. Finally, FonOff officials state that SOFA Article 24 would have to be amended to enable GOJ to pay for costs of stationing US troops beyond what is done presently. They are extremely reluctant to make any changes in SOFA for fear of provoking opposition moves against SOFA and Security Treaty. In this connection, it should be noted it is estimated GOJ on annual basis in Japan contributes $110.247 million from budget (JFY 71 estimate) for land rentals on facilities provided US forces, land acquisition expenses, management of facilities, relocation expenses, subsidies to municipalities to compensate for revenue loss or other expenses incidental to presence of US forces, payment of highway tolls, unreimbursed labor administration costs and special contributions to US forces Japanese employees. (This does not take account of similar substantial contributions expected for Okinawa, post-reversion, on which we do not yet have budgetary estimates. It should also be noted US expects to save $30 million per year for local defense responsibilities, which will be assumed by JSDF, and $10 million per year on land rentals, as result of reversion.)

4. Question of increasing arms purchases from US is being debated with increasing intensity between certain GOJ sectors and big business interests. Fukuda and Mizuta have argued in favor of this burden-sharing approach, while warning against GOJ adoption of any clear-cut weapons purchase plan similar to US-West German offset agreement. Both Finance Ministry and Secretariat of National Defense Council have reportedly expressed strong support for purchase of major new weapons systems (such as F5B trainer aircraft in place of Japanese XT-2) mainly in interest of cutting costs. Strong opposition views have come from MITI and industrial organizations such as Keizai Doyukai (Committee for Economic Development) and Keidanren (Federation of Economic Organizations). They claim that increased purchases from abroad would represent a reversal of former JDA Director General Nakasone's "autonomous" defense policy, which has as one of its long-term objectives development of indigenous defense industry capable of meeting all of JSDF's equipment requirements. Business interests also argue that foreign weapons purchases would detract from domestic development of technological know-how and benefits to the economy, and subject JSDF to whims of arms export nations.

5. JDA is now revising 4th defense buildup plan (covering JFY 1972-76) based on views of Finance Ministry and NDC Secretariat. While definitive information is presently unavailable, it appears likely that cost of this five-year plan may be reduced from 5.2 trillion yen ($16 billion at 330:1 current exchange rate), excluding 0.6 trillion yen for pay increases, to about 4.5 to 4.8 trillion yen ($13.6 to $14.6 billion). Defense spending will, therefore, probably range 8 to 13 percent below originally planned level. Heaviest cuts will reportedly be made in supply, service support, and procurement of new equipment. Embassy (MDAO) believes reduction in last category will probably be in neighborhood of 20 to 25 percent.

6. Latest indication is that, partly as result of Finance Ministry pressure, JDA would make little change in revised 4th DBP as regards military purchases from US, despite overall budget reduction indicated above. On 11 October, JDA Director General Nishimura stated that his agency was currently studying possibility of buying $800 million and, "depending on circumstances," up to $1 billion worth of equipment from US under that plan. Relative to purchases from the US under the current 3rd DBP (estimated at $500 million by Nishimura), his latest estimates represent increases of 60 to 100 percent at 360:1 exchange rate, or increases of 45 to 85 percent at 330:1 exchange rate. Thus, even at a time of budgetary stress, there will still be proportionately large purchases of US military equipment and technology out of total sums available for procuring new equipment.

7. Meanwhile, partly as a sop to business interests, Nishimura has repeatedly emphasized that JDA would make no basic change in its "autonomous" defense policy. On 11 October, he said that despite reduction of total spending under 4th DBP, he hoped to increase R and D funds above originally planned levels. He said primary effort would be placed on development of aircraft and missiles.

8. Foregoing represents latest state of play in Japan on defense burden-sharing issue. Underlying GOJ reaction is prevailing mood against increased government spending in view of anticipated revenue shortfalls. We will have a clearer picture of Japanese response when JFY 72 budget, and possible 4th DBP, are put in final form late this year.

/1/Source: National Archives, Nixon Presidential Materials, NSC Files, Agency Files, Box 285, State Volume 13. Secret.

Your meetings with Brandt, Caetano, Heath, Pompidou, Sato and Trudeau/2/ underscore your commitment to full consultation with our Allies prior to your discussions in Peking and Moscow./3/ These meetings, however, have a significance for the Free World beyond moving further from confrontation to an era of negotiation; they should also establish the basis for resolution of current international economic and monetary issues.

/2/President Nixon met with Prime Minister Trudeau in Washington December 6 (see Document 85), President Pompidou in the Azores December 13-14 (see Document 219), Chancellor Brandt in Key Biscayne December 29, and Prime Minister Sato in San Clemente January 6-7, 1972 (see Document 87). Portuguese Prime Minister Caetano was the official host for Presidents Nixon and Pompidou in the Azores and gave a dinner in their honor on December 13. President Nixon met with Caetano for their Summit upon his arrival in the Azores during the evening of December 12, a largely courtesy/protocol event. Documentation on the Caetano Summit is in the National Archives, Nixon Presidential Materials, NSC Files, President's Trip Files, Box 473, PM Caetano 1971.

/3/President Nixon traveled to the People's Republic of China February 17-28, 1972, and to the Soviet Union May 22-29, 1972.

First, seek to assure that your forthcoming summit meetings with the Communist world are undertaken against the background of Free World unity and understanding;

Second, reassure our Allies, both in the Atlantic and the Pacific, that you go to Peking and Moscow with no intention of "dealing over their heads" on any matters where their security or other vital interests might be affected;

Third, stress that, before these summit meetings with Communist leaders, you want to see the pressing trade and financial differences between Free World countries well on the way to resolution; and

Finally, indicate that these consultations are part of a continuing process of discussion with our Allies.

The agenda for the scheduled talks covers your visits to Peking and Moscow, the current international economic and monetary situation, other international issues such as the Middle East and South Asia, and bilateral issues.

Your own discussions should concentrate on your forthcoming visits to the Communist world and on resolving the current economic and monetary issues that tend to divide the Free World today. The cabinet-level talks that will be held in tandem can cover in addition other major international issues as well as bilateral problems.

Our Allies should be left with the clear impression that we do not intend to negotiate in Moscow on security issues that affect their interests. They should be disabused of the idea that we intend to negotiate mutual and balanced force reductions or an arrangement for a CES with the Soviets bilaterally. You should alert them to the possibility that some agreements may be reached in connection with the Moscow visit e.g., on SALT and bilateral trade issues.

I believe you should particularly stress that any ally, in going to Moscow, will be most successful if he is backed by the strength of the Alliance. To this end, you should stress your firm intent to maintain U.S. forces in Europe and the need for our Allies to pursue improvements in their conventional force capabilities.

Regarding Peking, you should emphasize that your purpose is the initiation of a dialogue to remove the misunderstanding that has accumulated over the decades. Therefore, no dramatic results or major agreements are foreseen; there is no intention to reach agreements on third party problems or change existing commitments. Sato in particular should be assured that Japan's security and other interests will under no circumstances be undermined.

In addition, you should stress that you want to learn about each Allied leader's views and experiences in dealings with the leaders in Peking and Moscow, stressing that shared knowledge is important to Allied unity. You should also assure our Allies that they will be informed of the results of these visits.

The agenda item on international economic and monetary issues reflects the fact that your August 15 measures have resulted in a critical change of attitude on the part of our major Allies and trading partners./4/ It is now recognized that the imbalance in the international economic system has to be corrected and that fundamental measures are necessary to achieve this. The outcome of recent sessions of the Group of Ten in Rome appears to indicate that we now have an opportunity to reach a near-term settlement involving a major realignment of the principal currencies and some concessions in the trade field. We should concentrate our attention on realignment initially because gains in that area will produce the greatest results both in terms of our international balance of payments and in the strength of the American economy.

The shock treatment used to achieve this major breakthrough, however, has left bruised feelings and concerns about the future direction of American economic policy. The succession of consultations you will have can lead to a strengthening of allied relationships and create a firm basis for going on with the next stage in talks looking toward the creation of new monetary arrangements and negotiations for expansion of trade. Your talks can serve the purpose of beginning this next stage with the firm assurances that the United States, under your leadership, has no intention of retreating into an isolationist or protectionist policy.

--move quickly to a new, credible structure of exchange rates which would help bring about a substantial improvement in our balance of payments. We would remove the surcharge and the buy-American feature of the proposed job development tax credit.

--resolve certain trade issues immediately and work intensively on others in the next few months bilaterally and through GATT.

--work together in the Group of Ten and the IMF on a more fundamental reform of the international monetary system, and in the OECD high-level group on preparations for a major--and reciprocal--effort to bring down barriers to industrial and agricultural trade.

Needless to say, movement toward the favorable settlement of these economic issues will strengthen ties with Europe and Japan and strengthen your hand in talks in Peking and Moscow.

In terms of press results from these meetings, I believe we should strive to achieve:

a) understanding and support for your visits to Peking and Moscow as efforts to reduce tensions without impairing Free World security;

b) agreement that current economic and monetary issues can be resolved through efforts on the part of the leading allied powers at the political level;

c) recognition that we remain, as a superpower, a nation cognizant of our Allies' interests, prepared to take these into account, and to work with them for reasonable solutions.

84. Memorandum From Secretary of the Treasury Connally to President Nixon/1/

/1/Source: Washington National Records Center, Department of the Treasury, Records of Secretary Shultz: FRC 56 80 1, JBC Memoranda for the President-71. Secret.

At the Rome meetings,/2/ we continued to make the point that part of our needed balance of payments adjustment should be an improved arrangement for defense burden-sharing. This point was explicit in your August 15 speech. We took the position that this was a matter that had to be discussed in the NATO forum. Thus, if we fail to carry through with this position at the NATO ministerial meeting in Brussels this week, we will have passed up the obvious time and place. That will leave us in a weak position for pressing the issue later.

/2/Reference is to the G-10 Ministerial meeting in Rome November 30-December 1; see Documents 200 and 201.

This means that we need to decide now whether the Administration is to rely solely on the European Defense Improvement Program, which gives us no financial help, or whether we should also seek some multilateral arrangement for sharing the foreign-exchange burden of defense. The extra effort we are asking our Allies to make with their own defense forces requires only an additional fraction of one percent of their Gross National Product. What we need from them as financial burden-sharing comes only from their excess dollar reserves. It would not require added manpower or use any of their real resources, although it might add to their internal budgets.

I believe we have a proposal we could put on the table along with the European Defense Improvement Program. It is to designate all extra-territorial military bases in NATO Europe as "NATO bases." These consist mostly of American, British, and Canadian bases in Germany. The annual costs of about $1.2 billion of operating these bases--though not the pay and equipment of the forces manning them--would be placed in a NATO bases budget, to which NATO members would contribute negotiated shares. An appropriate offer by the United States as to its share of this new budget would be the same 30 percent now borne by the United States in the NATO infrastructure budget.

As a component of a larger settlement with the European nations, the United States could also press France to pay off over a reasonable period of, say, four years the NATO losses of approximately $700 million that resulted from premature termination of the agreement to station NATO forces in France. Four hundred million dollars of those losses were incurred by the United States.

This proposal for a NATO bases budget is reasonable. I believe that other countries would support the principle. There have been many indications from key Europeans, particularly from the German Government, that they are anxious to find some new and more stable basis for continuing the American presence in Europe. In my meetings with finance ministers, I have found philosophical agreement that there needs to be some arrangement of this kind. We can expect resistance when it comes to budgetary impact and negotiating a formula for shares, but there is recognition of the principle. The mood in the Nation and in the Congress makes it urgent that we obtain such an arrangement. The benefit would be political as well as financial.

The merits of the proposal aside, we should not give away this issue for nothing. Even if we fail to get financial burden-sharing, vigorous pressure for it may help us arrive at better economic arrangements in other fields.

Therefore, it would be most helpful if Secretary Rogers emphasizes burden-sharing at the NATO ministerial meetings this week. Indeed, if this issue is to be kept alive, we will need to make a proposal for a multilateral financial arrangement on the table at NATO. If you agree, the attached draft statement outlines our approach for the use of our delegation./3/

/3/Not printed. The draft statement was for Secretary Rogers' use at the NATO Ministerial meeting December 9-10. According to the communique of the meeting, the European Defense Improvement Program (EDIP) was reaffirmed but a NATO bases proposal was not adopted. (NATO Final Communiques, 1949-1974 (Brussels: NATO Information Services), pp. 266-272)

/1/Source: National Archives, Nixon Presidential Materials, NSC Files, Subject Files, Box 356, Monetary Matters. Secret. The meeting was held in the Roosevelt Room. Prime Minister Trudeau also met with President Nixon the same day.

Canada
Edgar J. Benson, Minister of France
Jean Luc Pepin, Minister of Industry, Trade and Commerce
Sol Simon Riesman, Deputy Minister, Department of Finance
James F. Grandy, Deputy Minister, Industry, Trade and Commerce
Albert Edgar Ritchie, Under Secretary of State for International Affairs
Marcel Cadieux, Canadian Ambassador to the United States
Peter M. Towe, DCM, Canadian Embassy

United States
Secretary John B. Connally
Secretary Maurice Stans
Under Secretary Paul Volcker
Assistant Secretary of Treasury, John Petty
Assistant Secretary of Commerce, Harold Scott
Acting Assistant Secretary of State, Julius Katz
Deputy Assistant Secretary of State, George Springsteen
William Johnson, Canadian Country Director
Ambassador Adolph William Schmidt
Helmut Sonnenfeldt, NSC
Robert Hormats, NSC
Denis Clift, NSC

Minister Pepin indicated Canada's desire to keep trade discussions outside of the surcharge context and to discuss "trade irritants" of interest to both the U.S. and Canada. Trade irritants for the U.S. were the Canadian-American Automotive Agreement, tourist allowances for Canadian tourists returning to Canada, and the Defense Production Sharing Arrangement.

Canada was concerned with such matters as uranium, petro-chemicals and U.S. anti-dumping regulations. Canada believes it must have a balanced trade package in which it also receives something from the U.S. and does not believe the U.S. has helped in developing this package. Mr. Petty discussed Canada's request of changes in U.S. trade programs and indicated what was being done on these matters.

Secretary Connally indicated a need for Canada to help the U.S. eliminate its balance of payments deficit. Minister Benson insisted that Canada had a deficit on current account (trade and invisibles) with the U.S. Secretary Connally indicated that the reverse is true and that last year Canada had had a trade surplus with the U.S. of $1.7 billion. (These terms and our figures are illustrated below) Mr. Volcker pointed out that Canada continues to be a strong exporter of goods and a strong importer of capital. Minister Benson maintained that last year Canada's overall surplus on current account was less than one-half of what it was in 1970 and that capital inflows have fallen off steadily. Canada also pointed out that it has engaged in a clean float in which its dollar has floated upwards and that forces currently at play will decrease or eliminate Canada's surplus with the U.S.

U.S. Exports	9,044
U.S. Imports	-10,720
Trade Balance	-1,676
Invisibles (shipping, tourism, etc.)	1,080

a) Current Account Balance	-596
U.S. Direct Investment in Canada	-915
U.S. Purchase of Canadian Securities	-475
Other	-19
Canadian Investment and Security Purchases in U.S.	+367
b) Capital Account Balance	-1,042
Basic Balance (a & b)	-1,638

Secretary Connally pointed out that we will have a deficit of $10-11 billion in 1972, and that we would expect some help from Canada in improving our position. He indicated that the Canadian dollar was undervalued. Minister Benson replied that it was not, and that Canada was allowing its dollar to float freely and would re-peg it when it arrives at a sustainable market rate. It had moved upward recently and was now nearly at par. Canada's pulp and paper industry, to cite one example, had been hurt by the exchange rate adjustments, and is now realizing no profits. He indicated that Canada had a deficit of $220 million on current account with U.S. last year. It had had a $2 billion overall current account deficit in 1965 and had steadily progressed to the point where it has a much smaller deficit.

Secretary Connally repeated that the U.S. had a $1.7 billion trade deficit with Canada and a current account deficit of $600 million. Canada stated that the U.S. had a current account surplus with Canada, but that its basic balance with Canada was indeed in deficit.

Canada strongly asserted its intention to let the market rate determine the value of its dollar and to re-peg when it is sure it has a sustainable rate. It hopes to do this as soon as possible. Canada pointed out that its currency is extremely vulnerable to market crises primarily because big American firms can move huge sums of money across the border almost instantly.

Secretary Connally wanted to know whether, because it was so intent upon floating, Canada would help him at the next Group of Ten meeting to get others to float as well. He said that U.S. would be happy to keep its dollar floating if others agreed to float. Canada indicated that its policy was to float because it would be difficult to re-peg while monetary conditions were uncertain. However, other countries may assess their interests differently. Secretary Connally indicated that Canada should be able to find a viable parity for its currency; and, that, because it has floated longer than anyone else, it should know at what rate the Canadian dollar could be sustained. Minister Benson indicated that Canada did not know, during this period of uncertainty, at what rate its dollar could be sustained and could not afford to re-peg at a rate which would necessitate large-scale Canadian intervention in the exchange market. It would float until it did have enough information to re-peg.

With regard to trade questions,/2/ Minister Pepin indicated that Canada was prepared to remove the first two (the requirement that auto manufacturers in Canada produce in Canada approximately 75% of all products sold there, and that their companies maintain specific minimums of absolute values of their production in Canada) of the three "transitional safeguards" of the Canadian-American Automotive Agreement, but is still sticking on the third-no duty-free import of automobiles by individuals, (i.e. Americans are free to import cars from Canada, but Canadian individuals must still pay a 15% duty on cars imported from the U.S.). Minister Pepin indicated that a committee should be set up to look at this tariff, and examine measures to broaden the agreement. Secretary Connally indicated that "symmetry" would dictate imports of American cars into Canada be treated the same way as Canadian cars into the U.S.

/2/Sub-Cabinet level meetings on "trade irritants" had been held in Ottawa on November 4 and November 15. Reports on those discussions were sent in telegram 1816 from Ottawa, November 6, and telegram 1871 from Ottawa, November 17. (Department of State, S/S Files: Lot 73 D 153, Box 124, Morning Summaries August 25-December 31, 1971)

On tourist allowances, Canada indicated that it was willing to raise the exemption on duty from $25.00 to $50.00, and would be willing for the U.S. to drop its duty-free allowances from $100 to $50.00. With regard to granting special tariff exemption for Micheline to build a factory in Canada, Minister Pepin indicated that Canada would make no tariff change without first consulting with the U.S. Minister Pepin indicated a desire to develop a package on "irritants" and was willing to continue negotiations to this end. Pepin indicated, however, that it would be politically very difficult to drop the third "safeguard" in the Canadian Automotive Agreement at this time. In fact, he said, the Canadian Government was way out on a limb for having agreed to remove two of three.

Mr. Volcker indicated that the U.S. wanted a solution conducive to expanded trade. Canada had imposed certain trade restrictions when it was in deficit. He proposed that we negotiate to make these arrangements reciprocal, and that we take the necessary political steps to bring this about. Canada indicated, however, that it would have to get a GATT waiver to remove the 15% duty on cars imported by individual Canadians from the U.S.

Secretary Connally indicated that it would be important to reaching a solution to the monetary problem in the near future if Canada could move on these trade issues. He felt that we should try for reciprocity in our trade arrangements. Minister Pepin indicated that this might be possible. Secretary Connally again repeated the importance which this country attaches to resolving our balance of payments and trade problems and indicated that Canada would have to do its share.

The meeting concluded with the understanding that the bilateral committee being established to find solutions to trade irritants would submit its recommendations by December 17./3/

/3/According to an April 12, 1972, memorandum from Assistant Secretary of Commerce Scott to Kissinger, Assistant Secretary-level consultations with the Canadians were held in Washington December 16-17. (National Archives, Nixon Presidential Materials, NSC Files, Country Files--Europe, Box 671, Canada Volume III 9/71-12/72) No record of recommendations was found.

/1/Source: National Archives, RG 59, Central Files 1970-73, FN 12 GER W. Confidential. Repeated to Bonn.

Following is text of US-FRG offset agreement for FY 1972-73 signed in Brussels December 10 by Deputy Under Secretary of State Nathaniel Samuels and Ministerial Director Dr. Axel Herbst.

The Governments of the Federal Republic of Germany and the United States of America agree as follows:

A) Between July 1, 1971 and June 30, 1973, the Government of the Federal Republic of Germany will make payments for procurement of US defense goods and services in the field of defense in the amount of DM 3950 million.

B) Part of such procurement in the amount of DM 1650 million shall be financed through utilization of funds now on deposit in the name of the Federal Republic of Germany with the United States Treasury in accounts entitled "Account No. 20X6409--Secretary of the Treasury, Department of Defense, Military Purchases by Federal Republic of Germany" and "Account No. 20X6415-Secretary of the Treasury, Special Transfer Account, Military Expenditures by the Federal Republic of Germany".

C) The balance of such procurement, which is DM 2300 million shall be financed by June 30, 1973, by the utilization of German funds not on deposit with the United States Treasury on June 30, 1971, which the Government of the Federal Republic of Germany will transfer directly to suppliers of defense goods and services in the United States or which it will deposit with the United States Treasury in Account No. 20X6409. Of this amount DM 81 million was paid before July 1, 1971.

D) All military procurement by the Federal Republic of Germany will be made in the light of German military requirements and budget capabilities, given the availability and economic advantage of procurement in the United States of America.

A) Between July 1, 1971 and June 30, 1973 the Government of the Federal Republic of Germany will make available an amount of DM 600 million for services and deliveries for the modernization, construction and improvement of barracks, accommodations, housing and troop facilities of the forces of the United States of America stationed in the Federal Republic of Germany. Specific projects will be agreed between the two sides. The disbursement of the funds will be made in portions subject to the progress of the building projects, similarly to existing procedural arrangements. Amounts not utilized prior to 30 June 1973 shall remain available for measures as envisaged under this paragraph of this agreement.

B) Structures, improvements and other alterations including built-in equipment financed in this manner will be treated as property owned by the Federal Republic of Germany used by the U.S. forces within the framework of the NATO Status of Forces Agreement and the supplementary agreement thereto.

A) Arrangements will be concluded between the United States Treasury (in cooperation with the United States Federal Reserve Board) and the Deutsche Bundesbank concerning investment by the Deutsche Bundesbank during the period July 1, 1971-June 30, 1973, in special, 4-1/2 years, 2-1/2 percent, dollar denominated United States Government securities. The objective should be the investment by the Deutsche Bundesbank of DM 2 million during the above mentioned period.

B) The Federal Republic of Germany will pay to the United States of America prior to the date when interest falls due under paragraph 3A above an amount of DM 100 million in settlement of the United States interest obligation. Such sum may be paid out of funds on deposit in the name of Federal Republic of Germany with the United States Treasury in Account No. 20X6415.

Detailed arrangements implementing this agreement shall be made by the responsible agencies or ministries of the Governments of the United States of America and the Federal Republic of Germany.

As plans went forward for Japanese Prime Minister Sato's meeting with President Nixon in January 1972, U. Alexis Johnson, Under Secretary of State for Political Affairs, met with Japanese Ambassador Ushida on December 20, 1971. In a letter to Kissinger the same day, Johnson recounted a few highlights of the meeting relevant to the upcoming Nixon-Sato meeting, including their discussion of the People's Republic of China and Taiwan, the Soviet Union, and Okinawa. Johnson then continued:

"On the question of a further cutback on the Okinawa bases, Sato and Fukuda have the impression, on the basis of Kishi's talk with the President and Connally's talk with Sato and Fukuda while in Tokyo, that if they delivered on textiles, monetary reform and trade they could expect some movement on this issue. With their now having delivered on textiles and monetary reform, and what they expect to deliver on trade prior to San Clemente, they will hope for something on the base issue. Fukuda is now concentrating on golf courses and private American beaches and would very much hope to have some word on this prior to San Clemente." (National Archives, Nixon Presidential Materials, NSC Files, Agency Files, Box 285, State Volume 13)

President Nixon had met with former Prime Minister Nobusuke Kishi on October 22 from 3:15 to 4:47 p.m. (Ibid., White House Central Files, President's Daily Diary). No record of the meeting has been found. The reference to Connally's talks in Tokyo is to his visit November 11-12; see Document 193. Regarding textiles, an agreement was reached by President Nixon's October 15 target date; see footnote 2, Document 77. Documentation on the textile agreement is scheduled for publication in Foreign Relations, 1969-1976, volume IV.

"Sato very much hopes to avoid trade issues at San Clemente. Tokyo would probably have been willing to give a little more on this if it had been necessary to achieve agreement at this weekend's Washington Group Ten meeting. However, as Japan gave more on the monetary side than it had expected to give, MITI and agriculture were able to prevent further Japanese trade concessions. Both Mizuta (Minister of Finance) and Ushiba are convinced that even though the monetary issue was settled, Japan has a 'moral obligation' to do more on trade."

In preparation for the President's meeting with Sato, Kissinger met with Ambassador Ushiba in Washington on December 22, prior to the latter's traveling to Tokyo. Kissinger told Ushiba that the short-term trade issues should be settled before the President and Prime Minister met. When Ushiba expressed concern, Kissinger informed him that "the President did not like to discuss economic matters, and in addition, injecting trade into the discussions at San Clemente would make it appear to an undesirable extent that Japan had offered something on trade and had received something in return, e.g., concessions regarding Okinawa." Kissinger said the "Japanese do not need to offer too much; even some fairly limited moves would do." Ushiba said he would take it up with the Prime Minister. (Memorandum of conversation, December 22; National Archives, Nixon Presidential Materials, NSC Files, VIP Visits, Box 925, Japan-Sato San Clemente January 1972)

Following his return to Washington, Ambassador Ushiba met with Special Trade Representative Eberle. In a January 3, 1972, memorandum to Kissinger, Hormats reported that MITI Minister Tanaka planned to discuss trade issues with U.S. representatives in San Clemente with the hope of concluding an agreement that would not be made public until after the meeting to avoid any connection with the Okinawa agreement. The Japanese then wanted no additional trade bilaterals for at least a year to keep friction out of the relationship and wanted further trade discussions to be in a multilateral context. (Ibid.)

In his January 4 briefing memorandum for the President on the upcoming meeting with Prime Minister Sato, Kissinger noted that "the major frictions that have afflicted our relations with Japan in the past year appear to have bottomed out. Textiles are solved, the monetary system is realigned, and arrangements on Japanese trade liberalization should be completed before or during the San Clemente talks." Regarding the latter, Kissinger noted: "you will not need to touch it except in general terms." (Ibid.)

Japanese Prime Minister Sato met with President Nixon January 6-7, 1972, in San Clemente. The memoranda of the President's conversations with the Prime Minister indicate that aside from brief interventions on defense burdensharing and Japan's intention to increase its foreign economic assistance, the two heads of government did not discuss bilateral economic issues.

In a discussion with Sato of present and future high-level talks, the President and Kissinger noted that some European issues were different from U.S. issues with Japan, but the President said, "we must look at the world as a whole . . . in viewing the Free World, the great economic powers, the United States, Japan, Germany, Britain, France and possibly Canada, must consult closely if we are to build a stable and productive Free World economy with trade and monetary stability . . . the development of a 5-power consultative process (adding Italy, perhaps, and Canada) would not only serve the needs of the Free World, but would also contribute to the development of cohesion in policy for handling all the difficult political and security problems that arise." Prime Minister Sato supported the concept of a five-power conference as suggested by the President and, perhaps with the addition of Canada and Italy, saw no need to involve other countries. The records of the discussions are in memoranda for the President's file, January 6 and 7; National Archives, Nixon Presidential Materials, NSC Files, VIP Visits, Box 925, Japan-Sato San Clemente January 1972.

During more than 5 hours of conversations on January 6 and 7 with MITI Minister Tanaka and Finance Minister Mizuta, Secretaries Connally and Stans and Ambassador Eberle made it clear that Tanaka expected the trade negotiations to be completed by Eberle and Ushiba in Washington on January 12. Tanaka indicated he was prepared to discuss other issues, but not agriculture, which Ushiba would have to address on January 12. Pressed by Connally, Tanaka put a proposal on the table that Connally and Stans found disappointing. Connally noted that negotiations with the Canadians were going well and the United States anticipated significant concessions from the EC. "We were not asking more from Japan than we were looking for from others." (Memoranda of conversation, January 6 and 7; Washington National Records Center, Department of the Treasury, Files of Under Secretary Volcker: FRC 56 79 15, San Clemente Talks with Tanaka--1/72)

On January 19, 1972, George Willis sent Under Secretary Volcker a paper entitled "Alternative Possibilities for Coordinating Balance of Payments Improvement," setting forth conclusions reached at a January 17 meeting in Volcker's office. The paper noted that several departments and agencies had responsibilities in the balance-of-payments area, and concluded they could best be coordinated by a Cabinet-level committee chaired by the Treasury Department. In Willis' first scenario, a Cabinet Committee on the Balance of Payments would replace the Council on International Economic Policy. Other alternatives were also put forward. (Washington National Records Center, Department of the Treasury, Files of Under Secretary Volcker: FRC 56 79 15, BOP--General)

On January 20 former NSC Staff member C. Fred Bergsten, in his capacity as Visiting Fellow of the Council on Foreign Relations and Guest Scholar at the Brookings Institution, wrote Henry Kissinger to express his concern that if Peter Peterson left the White House, the Treasury Department, under Connally, would seek to monopolize the international economic policy decisionmaking process, making it more difficult for Kissinger to "find handles." (National Archives, Nixon Presidential Materials, NSC Files, Subject Files, Box 309, Brookings Institution) On January 27 President Nixon announced Commerce Secretary Stans' resignation and his intent to nominate Peterson as Secretary of Commerce. (Public Papers of the Presidents of the United States: Richard M. Nixon, 1972, pages 107-109) Peter Flanigan was named to replace Peterson in the White House.

On March 31 Michael Bradfield sent Under Secretary Volcker a draft memorandum to the President that set forth Secretary Connally's proposal that the President add to Connally's responsibilities for monetary and tax matters responsibility for overall trade policy as well. The reasoning was that monetary, trade, and tax matters were closely integrated, but international consideration of these issues was fragmented into separate jurisdictional compartments. Connally's proposal was in lieu of legislation pending in Congress to give a broad statutory mandate to the CIEP. (Washington National Records Center, Department of the Treasury, Files of Under Secretary Volcker: FRC 56 79 15, PAV International Monetary Reform 1972) No record has been found that the proposal was forwarded to the President.

89. Memorandum From the Executive Secretary of the Department of State (Eliot) to the President's Assistant for International Economic Affairs (Flanigan)/1/

/1/Source: National Archives, RG 59, Central Files 1970-73, E 1 US. Confidential. Drafted by A. Reifman (E) on April 5 and cleared by Dallas L. Jones (S/PC) and George Springsteen (EUR). Attached is an April 7 memorandum from Assistant Secretary Willis C. Armstrong to Deputy Under Secretary Samuels noting that Volcker's memorandum on the CIEP study on Canada revealed a large difference between Treasury and other agencies on Canada policy.

I have seen Paul Volcker's comments of March 29 on the CIEP study on Canada/2/ and have the following observations:

/2/Neither Volcker's comments nor the CIEP study has been found. A March 20 6:15 p.m. note for Under Secretary Volcker indicates that the draft CIEP paper was scheduled to be discussed in a CIEP Operations Group meeting at 10:30 a.m. on March 21. (Washington National Records Center, Department of the Treasury, Files of Under Secretary Volcker: FRC 56 79 15, CIEP Meetings) No record of the meeting was found.

1. The difference between Treasury and the agencies that prepared the CIEP study are not necessarily irreconcilable. Thus:

--Treasury's balance of payments forecast is more gloomy than that in the CIEP study. Surely this is an area where agreement should be possible.

--Treasury opposes the establishment of a sub-Cabinet standing group./3/ But Treasury's opposition is based at least in part on a misunderstanding. The proposed standing group is not intended to displace the balance of payments subcommittee (which has not met for almost two years) nor to deal with, or delay in any way the negotiation of, the short-term trade issues between the U.S. and Canada. The proposed standing group would provide a framework for advance consultations on emerging and sensitive matters, such as investment and industrial policy, that cannot be looked at solely in a balance of payments context.

/3/This was a Department of State proposal that came out of the Department's internal Policy Analysis and Resource Allocation (PARA) exercise that sought to match resources with policy issues. In a January 31 Policy Analysis Decision Memorandum (PADM 10) from Under Secretary Irwin to Assistant Secretary for European Affairs Hillenbrand regarding the PARA review of Canada, the second policy conclusion was that "the Department should propose a sub-Cabinet U.S.-Canadian standing group," which would "deal with the wide variety of political-economic matters arising between the two countries and engage in a systematic dialogue on major long-term problems of common concern." (Department of State, S/S Files: Lot 82 D 126, Box 5195, PADM File Book PADM 1 Thru 32)

--Treasury believes direct unilateral action may be necessary to deter Canada. Until Treasury spells out the kinds of unilateral action it has in mind, some quantification of the gains to our balance of payments if the action is successful and some estimate of the risks and costs involved (we have more than $30 billion of investment in Canada), other agencies cannot be expected to subscribe. We do not object in principle to unilateral action--we took such action, for example, on Canadian oil. We do believe, however, that a cost-benefit assessment should be made in each case.

/4/In an October 2 letter to Flanigan, Under Secretary of State Irwin referred to the failure to make progress in resolving the disagreement with Treasury. Irwin noted that after discussing the matter with Secretary Shultz, he believed Treasury would cooperate in preparing for negotiations. (National Archives, RG 59, Central Files 1970-73, E 1 US) In his November 15 Evening Report to the President, Secretary Rogers indicated that Under Secretary Irwin and Canadian Under Secretary of State for External Affairs Ritchie had discussed a wide range of issues including bilateral trade problems and preparations for multilateral trade and monetary negotiations. Both reportedly agreed consultations should precede any unilateral actions. (Ibid., S/S Files: Lot 74 D 164, President's Evening Reading Items)

On May 16, 1972, the White House announced that George Shultz would replace John Connally as Secretary of the Treasury. In his address to the OECD Ministerial meeting on May 25, Paul Volcker opened by expressing greetings and regrets from Secretary Connally "who, as you know, intended, until a certain event last week, to attend the Council meeting here today." See Department of State Bulletin, June 19, 1972, pages 827-836, for President Nixon's May 24 message to the OECD, Stein's May 24 statement, Volcker's May 25 statement, Irwin's May 26 statements, and the final Communique of the May 24-26 Ministerial meeting. A slightly different text of Volcker's statement was circulated to members of the Volcker Group under cover of a May 31 memorandum from Willis. (Washington National Records Center, Department of the Treasury, Volcker Group Masters: FRC 56 86 30, VG/Uncl. INFO/72-79)

On May 5 Hormats had sent Kissinger a memorandum apprising him of the status of the international economic policy negotiations and recommending that Kissinger discuss the matter with Connally and Flanigan. Hormats told Kissinger that "after much debate, a USG position has been reached on the forum for discussing international monetary and trade reform--the OECD." He continued: "A related matter, which may be the source of an intense interagency conflict centers on the U.S. posture with regard to future trade negotiations. Treasury regards the major goal of the U.S. in forthcoming trade negotiations as balance of payments improvement for the U.S., i.e., an attempt to bring about changes which do not provide reciprocal benefits to our trading partners. This was the same posture we took in attempting to obtain trade concessions following the August 15 announcement. It produced little real benefit for the U.S. and subjected us to strong foreign criticism for attempting to press our trading partners to undertake measures in the area of trade without our reciprocating." Hormats indicated that Eberle and Irwin thought Connally's position untenable. (National Archives, Nixon Presidential Materials, NSC Files, Agency Files, Box 273, OECD)

On May 25 Under Secretary Irwin sent a cable to Secretary of State Rogers, who was with the President in Moscow, noting that he would probably see sensationalized press reports about differences with other OECD members, particularly France. Irwin concluded, however, that there seemed to be consensus about a link between trade and monetary negotiations and a role for the OECD. (Telegram 10087 from USOECD to Moscow (repeated to the Department of State), May 25; ibid.)

91. Report by the President's Assistant for International Economic Affairs (Flanigan)/1/

/1/Source: Washington National Records Center, Department of the Treasury, Files of Under Secretary Volcker: FRC 56 79 15, CIEP. Confidential. Attached to a June 23 transmittal memorandum from Flanigan to Rogers, Irwin, Shultz, Volcker, Peterson, Kissinger, Eberle, Shakespeare, the Ambassadors at the posts Flanigan visited, and CIEP Staff members.

There were three main purposes for my trip to Western European capitals. They were: (1) to get to know some of the key European personalities with whom we will be dealing in the forthcoming trade and monetary negotiations; (2) to express my concern over the development of a spirit of economic isolationism or turning-inward on both sides of the Atlantic which, if left unchecked, could drift toward a new kind of dangerous political isolationism which neither side could afford, and (3) to report on the status of the commercial negotiations in Moscow,/2/ while emphasizing that these talks in no way diminished the importance of the US-European ties.

/2/These negotiations were undertaken pursuant to the President's May 22-29 trip to the Soviet Union.

In each of my discussions with European leaders (list attached),/3/ I made the above points and asked for comments. The following report breaks down my talks into sets of issues which arose out of these talks.

As examples of the kind of policies which Americans see as moves by Europeans to opt for strictly regional, Europe-oriented solutions rather than to attempt to find more broadly-based, worldwide answers, I cited the Common Agriculture Policy and the developing web of special preferential deals which the EC was working out with non-member European states, the countries in the Mediterranean basin and, according to some recent indications, even with some East European states (e.g., Romania). I made it clear that we were not concerned with generalized preferences for LDC's, though we did object strongly to the system of reverse preferences which the EC worked out with many of them.

In virtually every case, the response was that the EC was forced into these arrangements for either domestic socio-political reasons (the CAP) or for reasons related to economic or, mainly, foreign policy concerns. Typical of these was my talk with Raymond Barre, Commissioner for Financial and Monetary Policy at the EC Commission.

On agriculture, Barre's defense was that Europe was just now going through the agricultural revolution which the US had undergone during the 1930s. In about 10 years, this process would be complete. Meanwhile, the US and Europe were talking past each other on different levels of understanding about the nature of the problem. On preferences, he (as did others) emphasized the political importance to both Europe and the Atlantic Alliance of keeping the Mediterranean countries closely associated with the West. In Europe, the deals with the EFTA non-applicants were the inevitable consequence of British entry. The new EC could not erect new barriers to trade among the different categories of EFTA countries where trade had previously been free. He thought we should re-examine the problems this creates for outsiders on a reciprocal basis, adding that, even if reciprocity is not full, there needs to be some overall concept of "global reciprocity" to guide the next round of negotiations.

I responded to him, as to others, by noting that the solution to a political problem in one country inevitably creates a political problem for those at whose expense the solution has been imposed. This was especially true in agriculture. I said I'd rather try to find an intrinsically free trade solution rather than to continue to appeal to each side's comprehension of the other's political problem. I said we were not seeking to destroy the CAP, only asking that it be transformed into another kind of common policy which would be fairer politically and more rational economically.

On preferences, I argued in all capitals that, while we understood (even if we did not always accept) the rationale behind any particular deal, what concerned us was the total implication of these deals taken as a whole. Here is a clear case of the whole being greater than the sum of its parts. I stressed that Americans see them as a conscious effort by the EC to discriminate against us commercially to Europe's advantage while calling upon us to accept these disadvantages on the grounds that they serve our common political and security interests. I said that this kind of argument is no longer acceptable in the US, and that Europe should be aware of the fact that the days when we were able to accept almost any commercial costs for political reasons are over.

The response to this line of argument varied among the capitals. My talk with Giscard d'Estaing was frank and not discouraging. However, I cannot be optimistic about a forthcoming French response. In Belgium, Davignon was positive, Fayat non-committal. The EC Commission was divided, but not encouraging. (Mansholt, for reasons of his own, was not only indifferent but actually hostile. See the attached report of my talk with him.)

The British clearly recognize the dangers involved if the trends I discussed above are allowed to go unhindered. They agree on the need to redress the imbalance between internal European preoccupations and external relations. However, it is also clear they feel a constraint as new members not to move out in front of the Six either too far or too fast.

Within the Six as such, Schiller was most encouraging. While he said Germany was determined to keep the EC outward-looking, even he cautioned against expecting too much. However, he assured me that Germany would work hard within the EC to prevent the rise of blocism in both trade and monetary relations.

The Italians all make sympathetic statements about the problem and were conscious of the need to avoid an Atlantic split. However, the internal situation of political (and Ministerial) uncertainty led me to conclude that, at the moment at least, the best we can expect from Italy is support for someone else's initiative, but certainly no disposition to share a leadership role for an outward-looking reorientation of EC foreign policy.

My trip took place after the OECD Ministerial session, Paul Volcker's speech to it and the decision that, while the link was recognized by all, there should be no special mechanism created in which to discuss it./4/ I found OECD Secretary General van Lennep satisfied that the organization has been given a mandate to deal with the link, even if the specific forum proposal was rejected. He advised us to be relaxed on the problem for now and to have another look at it after the Rey Group had submitted its report in late June.

The alleged French opposition, he said, was mainly directed against the Schweitzer proposals for terms of reference for the Group of 20, to be created as the main monetary reform body at the September Fund meeting. The French tended to confuse these with the van Lennep proposal.

During my talks in all the capitals, I found that no one questioned the basic thesis of the Volcker speech that there was need for consistency between trade and monetary rules. All agreed on the fact of the link, that this fact had to be addressed and that, in all probability, the OECD was as good a place as any to do so.

In London, Barber apologized for what he admitted may have seemed to us to have been a British let down at OECD. He said he was originally inclined to favor the creation of a special group but, on seeing the clear opposition developing against it, simply had to reverse himself to accommodate to reality.

During my talk with Barre, it became apparent that the EC, as a unit, is still a long way from any kind of consensus concerning the objectives which "Europe" should seek in reform negotiations. The first meeting at which the Finance Ministers of the 10 will discuss this question has just been scheduled for July 17 and 18 in London. The most optimistic expectation for the emergence of a consensus, according to Barre, would be at or after the September IMF meeting. A more realistic estimate would be not before October or November, at best.

Barre doubted that the October EC Summit would give much attention to this issue. Its main preoccupations, he said, would be on "consolidating" the internal EC system and the development of coordinated economic and social policies linked to monetary union. Thus, the definition of a European position on reform would probably be left in the hands of Finance Ministers for the foreseeable future.

I asked each of the Finance Ministers I saw after the Brussels stop to comment on this scenario. All agreed that it would not be realistic to expect a fully coordinated EC position before year-end, if then. The British even remain skeptical that there will ever be a fully common EC position short of the point of final agreement internationally.

I used these admissions to remind the Ministers that, given the lack of a common EC position, I hoped they no longer believed that it was the U.S. which was dragging its feet on initiating reform negotiations. All agreed that the fault was not ours.

Barber used the occasion of our talk to emphasize his interest in hearing from us any ideas we may have about the kind of reformed system we would like to see come out of the negotiations. He said it would be very useful to him in his talks with both the Europeans and the Commonwealth Ministers. He particularly wanted to avoid the development of a situation later this year in which, in the absence of clear signals from the U.S., the U.K. and others began to find themselves being locked in to a "European" consensus which would prove to be unacceptable to us. He urged us to use him as a sort of honest broker and assured me that he would respect the confidentiality of any ideas which were passed to him that we wished to be so treated. I agreed he deserved a response to his proposal, even if it were non-committal.

I am inclined to agree with Barre's assessment that, at least as of now, external relations is not likely to be an item of great concern to the Europeans at the Summit. Institutional and internal issues are expected to loom much larger by comparison. On external relations, attention seemed to be about equally divided among three areas: relations with developed countries, relations with LDC's and East-West issues.

In countries where I thought it would be useful (UK, Germany and Belgium), I suggested that a declaration from the Summit, recognizing that EC enlargement imposed special responsibilities on members toward their partners outside (and especially toward those in the Atlantic Alliance) and stating the intent of the 10 to move toward major reform of the international system and external liberalization would be very helpful to us in stemming the tide in the US toward the kind of economic and political isolationism of which I warned them earlier.

The response to this proposal was positive from the British, Schiller and Davignon. While I did not make the suggestion as such with the EC Commission, it was clear from the conversations that there was little or no disposition on their part to push for such an outcome. Mansholt in particular had neither sympathy nor comprehension of the problem.

Despite Giscard's attentiveness to the problem and his apparent sympathy with it, I remain skeptical that the French would endorse it unless substantial pressure (and, probably, concessions on other issues) were forthcoming from her EC partners. However, I believe the Italians would support such an initiative if others pushed it, and I was given to understand that the Dutch would do likewise. I have no feel for the Norwegians, Danes, Irish and Luxembourg.

While there are some risks involved, I believe the proposal should be followed up with those who were responsive and I plan to do so.

Though NATO Secretary General Luns told me he did not think that there would be much emphasis on East-West economic issues at the Conference on European Security and Cooperation, Ambassador Kennedy and his staff believe that, with MBFR excluded, most of the content of the conference will in fact be economic. We will need to keep close watch over the preparations for this meeting for at least two reasons: (1) there are indications that some EC countries may be toying with the idea that special ad hoc preferential arrangements could be worked out to promote closer industrial cooperation between East and West Europe, and (2) there is a danger that France may convince her EC partners to go into the Conference as a bloc with common positions, thus introducing a split into NATO coordination.

Luns is particularly conscious of the latter danger and emphasized his determination to see to it that the EC as a group does not preempt decisions which should properly be discussed and taken in NATO. He stressed in particular his opposition to the French attempt to set up an EC political institution in Paris separate from the international organizations in Brussels.

In each conversation, I discussed the results achieved by the President in Moscow, ending with a reference to his speech to the Congress on his return in which he emphasized the need to maintain and strengthen the Atlantic Alliance. Without exception, the Europeans expressed satisfaction with the Summit results, and were appreciative of the President's speech.

Schiller told me that Gromyko was in Bonn the week before (after the Summit) and mentioned that the Soviets were studying the reaction in the US to the visit. He said it appeared to be "at least 95 percent positive," which, he told the Germans, was very encouraging to him.

1) On monetary reform, I believe we should give careful consideration to the best method of preempting the creation of an anti-US European consensus, and with whom we can work toward this end. It is clear that there are significant differences of view among the member states about both overall goals and specifics, and we may be able to use these differences to our advantage if we move rapidly ourselves.

2) A forthcoming declaration from the October EC Summit, reemphasizing among other things, the importance of strengthening the EC's economic relations with its Atlantic Alliance partners, would be most helpful to us as we prepare to face the Congress with the need for legislation. Indeed, without a strong statement, we could be in considerable trouble. I will discuss ways to work with our friends in Europe on this with Secretaries Rogers, Shultz and others in Washington.

3) We must give careful attention to the preparations for the CESC and the economic content thereof. Specifically, we need to assure that the European desire to improve economic relations with the East does not run counter to our broader trade and monetary objectives that we will be working out in OECD, IMF and GATT during the rest of this year and beyond.

After a discussion of the President's trip to Moscow, I concluded by expressing my conviction that, despite our satisfaction with the progress we were making in improving Soviet-American relations, it is the strengthening of the Atlantic system that deserves our highest priority.

While not directly disagreeing, Mansholt responded with a long speech which began by noting what he believed was a growing sentiment in European public opinion and parliaments about the future of relations between the developed and developing countries. He said that, in comparison with the "minor" economic problems among developed countries, those between developed and developing economies were much more serious.

He had made two trips to the UNCTAD meeting at Santiago. He said that the U.S. attitude there was, to say the least, disappointing. He warned that Europe was becoming deeply concerned about the north-south split and its implications for future peace. It seemed clear, from the U.S. performance in Santiago, that this concern was not shared in America. Thus, a serious confrontation between Europe and the U.S. was in the making over trade and aid policies toward LDC's. He assured me that Europe will meet its obligations, even if the U.S. will not.

Specifically, the EC will begin to develop commercial and industrial policies which will look to the interests of the LDC's. The problems Europe has with the U.S. are not important. The "Eberle negotiations" earlier this year were a big mistake for Europe. It was "silly" to have spent so much time and political capital on a few million dollars worth of trade in citrus fruit, tobacco, etc., when 20 percent of the world was starving.

He assured me that he was not the least concerned with soyabeans, ("to hell with your soyabeans") but he was over palm oil because it is an essential LDC export. He said we don't need free trade or even market-determined trade in such products but rather product agreements specifically designed to organize trade in a way to favor LDC exports. If the U.S. does not join in such arrangements, he was sure Europe will go it alone. He even went so far as to suggest that there should be no tariff reductions among developed countries, since it would reduce the advantage of tariff preferences to the LDC's.

On aid, he was highly critical of the U.S. which had consistently failed in recent years to come anywhere near the one percent of GNP aid target. Here again, Europe would meet its responsibilities even if the U.S. did not.

These problems, he suggested, would be the most critical with which the EC summit should deal in its discussion of relations with third countries (implying that relations with the U.S. would be decidedly secondary). He also stated that a large part of the new EC political cooperation talks ("an EC foreign policy") will be devoted to consideration of strengthening economic links between the EC and all developing countries. He recognized that the past concentration on Africa was disproportionate and that these links had to be broadened to include South America, Asia, etc. He concluded that it was the real world he was talking about, not that which occupied so much of the time of our respective governments. He particularly stressed that the U.S. members of Congress with whom he had talked were not aware of this real world.

I replied that the real world in which a U.S. Congressman and Senator lives is one of politics. I then said he should bear in mind that the U.S. has been in the aid business--starting with Europe itself--far longer and that the total of that aid over the years was still the highest by far.

I then said that, in assessing responsibilities, he could not overlook the fact that the U.S. bears the main burden of maintaining the defensive shield of the free world. The percentage of GNP which we devote to this responsibility is substantially higher than that of the Europeans. (He attempted to debate this.) He should look at these--aid and defense--together in judging who was meeting whose responsibilities.

He said that, as a Socialist, he did not agree that the war in Vietnam was contributing to the solution of the problems he had outlined. I said that, even excluding our expenditures on Vietnam, what I said still held up. As regards Europe in particular, it was clear that the burden borne by us was more than disproportionate. If Europe felt it could devote a larger percentage of its resources to aid, that was fine, but it should understand that this was made possible largely because it is not as burdened by defense expenditures as we, even for Europe itself.

I went on to point out to him that, for 20 years, we have been running balance of payments deficits, due largely to our military and aid commitments. Europeans tell us this has to stop; that they don't want any more dollars. Under these circumstances, I didn't see how we could increase our aid as he suggested in the absence of some fundamental readjustments in the monetary and trade systems--reforms which recognize and take account of the fact that all these issues--trade, aid, defense, finance--are interrelated.

Concerning preferences, I suggested his argument might be more convincing in the absence of the reverse preferences which the Europeans required from the LDC's, whose value to the latter I failed to see. Finally, I said I thought we both needed to give at least as much attention to the U.S.-EC relationship as he wanted to give to the developed-developing country problem.

Mansholt agreed that Europe should shoulder more of its own defense burden. However, he said, the real issue is that income from future growth needs to be distributed more extensively to the LDC's to close the gap. This should be done by heavy new taxation in developed countries (even if it resulted in a decline of standards of living in the developed countries, and in the U.S. in particular as the richest), and by trading arrangements to organize markets in favor of LDC exports. We need, he said, to adapt our agricultural and industrial policies to meet their needs. There is no need for developed countries to produce those things which LDC's can, even if the former can do it more efficiently.

I said that his suggestion was not only unrealistic politically but also contrary to all past experience. I said it had been my experience that a prospering country with a high standard of living was both a better market for LDC exports and a more generous giver of aid. I asked how we could be expected to import more--from LDC's or anyone--with falling demand and declining standards of living.

Mansholt did not answer but, reverting to his Santiago experiences, charged that the U.S. was embarked on a deliberate policy of destroying the only democratic regime left in Latin America "in the same way we had destroyed democracy in Cuba." He said that Allende was faced with a serious challenge from both the left and the right in Chile and that, if he went under, the country would give way to anarchy and, ultimately, become another Cuban-style dictatorship.

I said we had in no way interfered in Chile, and denied flatly that we were embarked on any venture to destroy the Allende Government. He fired back a question about our policy of voting against loans by the international institutions to Chile. I replied that we felt that the Chilean Government should discharge its obligations to the companies it had expropriated before we could justify such loans. I said we were not contesting Allende's right to expropriate, but we did believe he should offer prompt and adequate compensation.

Mansholt claimed that Chile owed us nothing because companies like Anaconda had exploited Chile for years, contributing nothing while withdrawing only profits. For example, he said that, as a Socialist, he did not believe that capitalism is effective or desirable as a means of promoting development. He had visited El Teniente while in Chile and could find no schools, no housing, no roads built by Anaconda to serve the people in all the years it was there. Instead, there were large latifundia, estates, etc. for the managers, while the peasants toiled in misery.

I asked him how many schools, houses, roads, etc. had been built by the tax money collected from Anaconda by the governments (eg Frei) which he professed to admire. He did not answer, contenting himself with a remark that Allende was right to have not only assessed ex post taxes but to have offered nothing to Anaconda.

/1/Source: Washington National Records Center, Department of the Treasury, Files of Under Secretary Volcker: FRC 56 79 15, Japan General. Confidential. The meeting was held in Secretary Shultz' office. Drafted on July 18 by Unger and approved by Volcker. Ambassador Ushiba also met with Flanigan on July 15 prior to his travel to Tokyo. A memorandum of that conversation, dated July 17, is ibid.

United States
Secretary of the Treasury George P. Shultz
Under Secretary for Monetary Affairs Volcker
Schubert Dyche, OINF
Michael Unger, OINF

Japan
Nobuhiko Ushiba, Japanese Ambassador to U.S.
Michio Kondo, Finance Minister, Embassy of Japan

Ambassador Ushiba stated that he would be leaving for Tokyo tomorrow morning to meet with the new Prime Minister who takes great interest in our mutual problems. He also stated that Japan's exports to the United States had eased very much compared to last year partly because of voluntary agreements on textiles, autos have leveled off and electronics have slowed. However in spite of these changes, a large trade imbalance exists which Japanese business and government is anxious to see reduced. The Ambassador believes that unless the trend is eased by September or October, there will be very strong protectionist pressures in this country.

Secretary Shultz stated that the strong Japanese surpluses were not compatible with a stable world system. It's not only a question of protectionist sentiment but in a broader view it is not compatible with global stability. He further stated that some very substantial changes with real magnitude were necessary. The United States appreciates the goods Japan supplies us with--our consumers want them. The Secretary stated that he had met the new Prime Minister at a breakfast here and stated that the Prime Minister was a strong man and that if he decided to do something, it will get done.

The Secretary commended on the recent go around on the financing of a nuclear power plant in Japan./2/ Japan has the resource and should have financed the plant itself. It's a question that goes beyond exports. What we want is a stable world trading and payment situation and given the income and price elasticities of Japan they are not consistent with a stable world system.

/2/On July 1 Export-Import Bank President Henry Kearns send a memorandum to Under Secretary Volcker informing him that on June 28 he had communicated with the Chairmen of Tokyo Electric Power and the Japan Atomic Power Company about financing two projects from Japanese dollar sources. Both had responded that it was not possible in the timeframe necessary to line up financing. General Electric Vice President Hoyt Steele also informed Kearns of the need for Export-Import Bank financing "if the United States is to achieve a major supply situation." (Ibid.) On July 7 Federal Reserve Governor Brimmer wrote Volcker expressing his concern over an Export-Import Bank nuclear power loan for Japan, with which he had reluctantly concurred in the National Advisory Committee meeting. (Ibid.)

Ambassador Ushiba stated that the Japanese well understand the problem and that they were moving in the right direction by trying to reflate the economy and use foreign exchange for useful purposes. These things take time but Japan is moving in the right direction.

Secretary Shultz stated that it was important to have major things happen to bring about a better trade balance. The magnitudes are gigantic and that while little things are important they add up to numbers like $100 million or so--which is just a drop in the bucket.

The Secretary asked the Ambassador if there was any prospect of Japan setting targets for increased imports from the United States. He felt this was useful for the short run. The Ambassador stated that this was one of the themes to be taken up at the meeting in Hakone./3/ The Ambassador wanted to know if this was a proposal from the U.S. side. Secretary Shultz stated that it was not a formal proposal, but was a substantive thing to talk about.

/3/Special Trade Representative Eberle headed the U.S. negotiating team that met with Japanese trade negotiators at Hakone, Japan beginning July 25. See Document 93.

Ambassador Ushiba stated that Japan was considering some emergency measures such as stockpiling certain commodities.

Secretary Shultz stated that he thought this was a possibility which might be considered but such actions should be considered within the framework of a $3.6 billion trade surplus with the United States and $8 billion overall. The numbers that have to be brought into balance are very, very large.

Ambassador Ushiba stated that he had been informed by his government that the basic trade trend is changing--that trade should be less this year than last. Under Secretary Volcker inquired as to whether the Ambassador was referring to trade with the United States. The Ambassador stated yes. Under Secretary Volcker stated that he didn't believe this was true.

Mr. Dyche stated that the results to date for 1972 indicate a deficit approaching at least $3.6 billion for the year, quite apart from various forecasts that also show deficits in this range. It's difficult to see how a reduction for the year will come about in the next five months.

Ambassador Ushiba stated that he is certain that by end of year--by this fall a change will occur in the trading pattern. The effect of the revaluation is beginning to be felt and it is getting much more difficult to sell in existing markets.

Secretary Shultz stated that we must be realistic--the magnitudes are gigantic and that steps which have potential for real magnitude must be taken.

Secretary Shultz said that a few had been mentioned earlier. He thought the revaluation last December should have been greater./4/ Our studies showed a revaluation of 25 percent would have been appropriate, even though we agreed it probably could not be done at one time. Our economy is growing faster this year and our imports will go up. He then reiterated that the problem was a broad world matter and Japan must take actions with real magnitude.

Ambassador Ushiba inquired as to whether Secretary Shultz thought the U.S. economy would continue to expand.

Secretary Shultz replied that he thought so. The building of inventories is beginning and economy moving quite well. The GNP problem is net negative exports--a problem in the expansion of last year. Basically economic expansion seems to be moving quite well--probably better than we forecast last January. Price indexes with some exceptions are settling down. A major problem is the management of 1973-74 budget, but the President has a way of getting things around to his point of view. He stated he thought the domestic economy looked good.

Secretary Shultz doesn't feel that there should be a new dollar crisis at this time. The U.S. economy is now stronger and prices are settling down. He thinks that the relative position of the dollar abroad if anything, has moved in a more positive direction. However, there remains the big deficit in our balance of payments with Japan and Canada. It's a joint problem and unless there is a better balance, he sees no chance for stability.

Ambassador Ushiba asked a question about when the G-20 would be meeting./5/ Also what happened to G-10?

Secretary Shultz felt the two groups would have continuity and perhaps the two would come together at some point. He indicated that the G-20 is broader to include the developing countries. He stated there are a number of things that have to be worked out--not only in an intellectual sense but in an administrative sense. The United States wants to stay close to Japan as we have a common problem.

Secretary Shultz asked Under Secretary Volcker if he had anything to add. To this Under Secretary Volcker stated that it was only a matter of emphasis. We don't have much time as the foreign exchange markets show. Although the speculation occurs in Europe, one of the main reasons for speculation is the imbalance between the United States and Japan, and speculation won't go away until our problem is resolved.

Secretary Shultz, in concluding, wished Ambassador Ushiba a pleasant trip and asked him to give his regards to Ambassador Ingersoll.

Bilateral trade issues with Japan had not been resolved prior to or during the President's January 1972 meeting with Prime Minister Sato in San Clemente (see Document 87), and a new drive was underway to conclude the trade negotiations before President Nixon and the new Japanese Prime Minister, Kakuei Tanaka, met in Honolulu August 31-September 1, 1972.

Special Trade Representative Eberle led a U.S. negotiating team to trade bilaterals in Hakone, Japan, that began on July 25. The Japanese team was headed by Kiyohiko Tsurumi, Deputy Vice Minister of Foreign Affairs. At the outset of a July 29 meeting with Ambassadors Eberle and Ingersoll, Tanaka said he had just talked with MITI Minister Nakasone and understood the Hakone talks had reached agreement on 60-70 percent of the U.S. expectations. Eberle said the Hakone talks had been "most useful," but added that a major disappointment had been limited progress on the bilateral trade imbalance. Prime Minister Tanaka indicated that he had already issued instructions that the bilateral imbalance should be reduced to less than $3 billion for the Japanese fiscal year ending March 31, 1973 (a U.S. projection estimated it would be $3.6-3.8 billion). Eberle agreed with Tanaka that the trade balance needed to be viewed in a multilateral context, but added that the imbalance was so large it was a "serious distortion of the total market."

Tanaka agreed the two sides should expedite discussions in the uranium and aircraft purchase areas, and Eberle added that expert meetings on agriculture, computers, integrated circuits, and the Japanese distribution system were also required. (Memorandum of conversation, July 29; Washington National Records Center, Department of the Treasury, Files of Under Secretary Volcker: FRC 56 79 15, Japan General) During August a number of cables were exchanged between the Department of State and the Embassy in Tokyo as agreements in these and other areas were sought. These telegraphic messages are in the National Archives, Nixon Presidential Materials, NSC Files, Country Files--Far East, Box 538, Japan Volume 8 5-12/72.

On August 10 Ambassador Ingersoll reviewed with Foreign Minister Ohira what he thought should be the trade results at the upcoming meeting in Honolulu between President Nixon and Prime Minister Tanaka. Ingersoll noted that it would be useful for the "President and PM to announce overall package of increased Japanese purchases, perhaps in $700 million-$1 billion range, which might include items such as agriculture, enriched uranium, uranium ore, wide-bodied aircraft, helicopters, and small aircraft." (Telegram 8543 from Tokyo, August 10; ibid.)

On August 2 Hormats had sent Kissinger a memorandum apprising him of the outcome of the Hakone negotiations and Eberle's reading of the political dynamics of the trade issue in Japan. Tanaka was viewed as not fully in control and reportedly did not want MITI Minister Nakasone at the Honolulu meeting where his image might be burnished. Hormats cautioned Kissinger that the trade issues not be over-publicized lest Nakasone's hand be strengthened and commented that if Tanaka wanted to exclude Nakasone from the Honolulu meeting he might be willing to agree in advance on some issues in Nakasone's domain. (Ibid., Subject Files, Box 404, Eberle)

On August 9 Hormats sent separate memoranda to Kissinger and Haig regarding the trade negotiations, and that evening Kissinger, Flanigan, Eberle, Haig, Holdridge, and Hormats met to discuss strategy, possible outcomes, and trade-related matters that might arise during Kissinger's and Holdridge's forthcoming trips to Japan. The Japanese were to understand that what the United States sought was based on authority at the highest level. Hormats' memoranda and the memorandum of the August 9 conversation are ibid., Country Files--Far East, Box 538, Japan Volume 8 5-12/72.

The President met with Eberle from 10:42 to 11:09 a.m. on August 14 to discuss U.S.-Japanese trade negotiations, a meeting that included a brief opportunity for members of the press and the White House photographer. Flanigan and Haig were present at the outset, but left at 10:55 a.m. (Ibid., White House Central Files, President's Daily Diary)

On August 16 a White House message to Ingersoll and Holdridge in Tokyo informed them of what Washington agencies understood to be already agreed and what additional measures they sought; see Document 95 and footnote 1 thereto.

/1/Source: Washington National Records Center, Department of the Treasury, Files of Under Secretary Volcker: FRC 56 79 15, NSDMs. Confidential. Attached to a November 30 memorandum from Flanigan to the Secretaries of State, Defense, Commerce, Treasury, and Agriculture, which indicated the paper was prepared "last summer in cooperation with your departments." Flanigan's transmittal memorandum suggests the paper was prepared in the CIEP, but parts of it are identical to the paper that Treasury Deputy Under Secretary Bennett prepared for the Volcker Group Alternates on June 5; see Document 230.

A. The primary United States objective in the comprehensive trade and monetary negotiations is to maintain a thrust toward a liberal trading and payments order in a manner that supports our efforts to restore and sustain an external economic equilibrium and equity or fairness in our trading relationships, real and perceived. This objective grows out of the fundamental goals of encouraging competitiveness and efficiency in American enterprises and open, harmonious political and economic relations with other nations, thus offering improvement in our standard of living in a context of the growth and cohesion of the Western world. On the premise that expanded world trade on an equitable basis and monetary and balance of payments equilibrium can benefit all parties through more efficient use of resources, and promote the close economic and political integration of Western economies, the basic goals are in the interest of, and attainable for, all participating countries.

B. Specifically, these interests would be served by an international economic system providing an environment which--

i. facilitated international trade and capital flows among nations; subject only to such safeguards as may be necessary against shifts so rapid as to undermine the stability and sustainability of the system;

ii. involved a minimum of governmental restraints and subsidies on international economic transactions and a maximum of market-directed U.S. and world trade and investment;

iii. preserved the habit of cooperation which has become established in international economic affairs.

C. In the complex task of reshaping the world's economic system, a balanced "package" approach must necessarily be employed in judging specific proposals affecting the system and the adjustment process; the implications of parts of the proposed system cannot be judged fully until the broad outlines of the whole package are in view; in order ultimately to reach an agreement embracing all major trading nations, the U.S. may have to accept less than full achievement of some objectives.

a) which will both enhance economic competition and efficiency and promote international payments equilibrium through reduction in governmental barriers and subsidies which distort international trade;

b) which will preserve needed freedom of action in domestic macro-economic policies;

c) which will confine use of discriminatory trading arrangements to clearly defined circumstances in which such discrimination is related to broader political economic requirements;

d) which will avoid discrimination against or among investors from abroad while providing host governments with adequate control over business activities within their territories;

e) which will minimize restrictions for balance of payments purposes by industrialized countries generally on long-term capital flows and avoid their use by the U.S.;

f) which will limit distortion of international transaction by tax and other forms of governmental incentives affecting the location of economic activities and the selection of markets for production;

g) which will promote coordinated consideration of trade and monetary problems, and improved institutional arrangements with and among international organizations as well as national governments providing for continuing high level consultation with respect to the operations of and inter-relations among the international monetary and trading systems and national laws and regulations affecting international trade and finance;

h) which will while leaving necessary scope for national and international consultation and decision-making be clearly spelled out in international agreements.

/2/The mechanics of a system meeting these criteria including the exchange rate regime, convertibility requirements, and the reserve role of the dollar are not addressed in this "Objectives" paper. [Footnote in the source text.]

a) encourage the use of price-oriented measures and adequate financing facilities to deal with volatile short-term capital flows;

c) more symmetrically apply pressure to adjust on surplus as well as deficit countries;

d) encourage countries in surplus on current and overall official account to liberalize trade more rapidly than deficit countries as one acceptable means of adjustment.

a) We have agreed internationally to seek authority for trade negotiations "on the basis of mutual advantage and mutual commitment with overall reciprocity." The President has defined our general objective as "progress toward free and fair trade" which requires both rule changes and institutional improvements and a more detailed set of objectives for trade negotiations per se.

b) The "free and fair trade" concept must extend to agricultural trade as well as to trade in industrial goods and raw materials. It requires elimination or harmonization of NTBs as well as tariffs. It postulates that the enlargement of the EC and the negotiations of preferential arrangements including those with EFTA non-applicants will further adversely affect our trade, and that we should seek to reduce the trade-restricting effects of the Common Agricultural Policy, the new discrimination against our exports resulting from the preferential arrangements, and the ability of the EC or other areas to extend such preferential arrangements.

c) We seek acceptance of the principle that, ultimately, tariffs should be eliminated or at least made the only form of protection at the frontier. If the European Common Agricultural Policy continues to frustrate our ability to exploit our clear comparative advantage in some agricultural products we may be forced to impose countervailing restrictions, or to adjust exchange rate relations, which measures, however, would be costly as they would adversely affect our terms of trade.

1) There must be no discrimination among outside suppliers to any given customs area. This means, in particular, that we seek the end of special preferential arrangements, including reverse preferences, which fall short of full economic unions. Generalized preferences for LDCs should be the only exception, and the exception will be less important as tariffs are progressively reduced.

2) Countries in determining their own economic, commercial agricultural, and industrial policies should endeavor insofar as possible, not to transfer the costs of such policies to other countries, except to the extent to which other countries agree to accept such costs. This principle is particularly important with respect to agriculture, NTBs in general, and export subsidies. A foreseeable exception would be the new orderly marketing/market disruption mechanism (see e(2) below) which contemplates mutually agreed use of safeguards. Unilateral invocation of safeguards would be permitted if agreement could not be reached, but compensation or retaliation would also be authorized in that event.

Unfair advantages, conferred on its exporters by a nation's tax system, domestic subsidy programs or other arrangements should be eliminated or harmonized internationally through agreed rules. Similarly, advantages conferred on domestic industry or agriculture, whose effect is to introduce a barrier to imports other than a defined tariff, should also be progressively eliminated.

In moving toward free trade we and other countries will need defined and acceptable arrangements:

1) to govern and restrict the use of trade or capital controls for balance of payments purposes;

2) to safeguard markets temporarily against disruption by an excessively rapid buildup of imports while domestic adjustment is given time to work with reasonable smoothness;

3) to control indefinitely imports which could compromise national security, health, environment, etc.;

4) to phase reductions in some tariff and non-tariff barriers over longer periods to provide time for easier adjustment; and, perhaps--

5) to maintain moderate tariffs in agriculture since the elimination of barriers to imports of some agricultural products might pose excessively difficult adjustment problems.

The major constraints on our negotiators--as on others--will be political and balance of payments considerations.

1) The political constraint arises largely because import pressures are specific and vocalized whereas the benefits of trade are general and under-represented in the absence of a strong executive attitude. Realistically, a precondition for Congressional enactment of substantial trade negotiating authority probably is declining or low unemployment. Congressional realities also demand that trade liberalization authority result in clear progress in dealing with what we have seen as inequities for U.S. producers.

2) The balance of payments constraint requires that the process of multilateral trade liberalization support to the extent possible an overall equilibrium in our balance of payments and strength in our current account, which are essential to re-establish confidence in the strength of the dollar and monetary stability.

The scope of negotiations concerning trade and related matters should be sufficiently broad to make allowance for the overall conditions of doing business internationally and to assure that concessions gained by liberalization in one area, e.g., tariffs, are not offset by new restrictions elsewhere. Thus, variations in tax treatment, policies toward foreign investment, regulation of industrial production and sales activity, and industrial and regional policies which distort competition should be negotiated as well as direct trade restrictions.

/1/Source: National Archives, Nixon Presidential Materials, NSC Files, Country Files--Far East, Box 538, Japan Volume 8 5-12/72. Confidential. Attached to an August 15 memorandum from Hormats to Haig indicating that the paper was a "final agreed position paper" and recommending that Haig send it to Holdridge and Ingersoll in Tokyo, because "it is a clear and accurate representation of the U.S. position." Haig approved that recommendation, and a telegraphic text of the message was sent from the White House to the Embassy in Tokyo at 0104Z on August 16. (Ibid., VIP Visits, Box 926, Tanaka 8/31-9/1/72)

The U.S. has requested that Japan take action to reduce its trade surplus with the U.S. by at least $1 billion in each of the next two years. What we would like is for Japan to reduce from the present anticipated surplus of $3.6-$3.8 billion by $1 billion, to be achieved by March 31, 1973-the end of Japan's current fiscal year. Then, in the next fiscal year, we would like Japan to reduce the surplus by a further $1 billion.

We desire that the Japanese government undertake to ensure this in part through an increased level of purchases as follows:

(a) Agricultural purchases: Japan has projected an increase of $270 million of purchases. We seek information detailing the components of this category, and to develop language for a commitment. In addition, Japan agreed to make $50 million additional purchases for food agency account. We seek information detailing the components of this category, and to develop language for a commitment; and would like to receive a commitment for another $100 million which might include long staple cotton.

(b) Forestry and fisheries: Japan has projected an increase of $120 million of purchases. We seek information detailing the components of this category, and to develop language for a commitment.

The three aspects of this category are subject to discussion by a Japanese team with Atomic Energy Commission officials. We request that the Japanese team arrive in the U.S. as soon as possible.

(a) Enriched Uranium: The Japanese have agreed to purchase $160 million of enriched uranium (5,000 special working units). Details to be worked out by U.S.-Japan discussion in the near future. U.S. could supply up to 10,000 special working units, and we would hope that the purchase could approach this amount.

(b) Uranium Ore: The Japanese have agreed to $200 million purchases, providing the U.S. price is competitive. Details to be worked out by U.S.-Japan discussions in the near future. (This $200 million figure covers twice the ore necessary for the 5,000 SWU's).

(c) Enrichment Facilities: A letter of intent is sought between the two governments to approve the principle of a joint-venture enrichment facility and encourage the respective country's private companies to proceed to work out a program.

The U.S. seeks assurances of the Japanese to facilitate by financial and other measures the purchase of at least $150 million of commercial aircraft by private companies.

The following measures were agreed upon and require written commitments from the Japanese government:

(a) Retailing: It was agreed that 100% U.S.-owned retailers could operate in Japan with up to 11 branches. The key element is the definition of the U.S.-made products required for 50% of sales. The language for the commitment is agreed and we are awaiting this letter.

(b) Processing and Packaging: Liberalization was agreed on U.S. bulk imports by Japan, particularly cosmetics, film (except color and color-sensitive paper), and pharmaceuticals. The language for the commitment is agreed and we are awaiting this letter.

(c) Computers: It was agreed that the U.S. share of the Japanese computer market could rise from 46% to 50%. Also imports of parts and peripherals were to be liberalized to allow Japanese and U.S. firms to import with fewer restrictions. The language for the commitment is agreed and we are awaiting this letter.

(d) Government Procurement: The Japanese maintain they have no "Buy Japan" requirements, except on computers and nuclear reactors. A written communique by MITI to government agencies or a written commitment in another form is needed.

While this issue would not be raised publicly or announced, a private commitment is sought to increase such purchases from the U.S. from a level near $200 million per year to $300 million to $400 million per year.

/1/Source: National Archives, Nixon Presidential Materials, NSC Files, Presidential/HAK Memcons, Box 1026, HAK-PM Tanaka 8/19/72. Top Secret; Sensitive. The meeting was held in the Mampei Hotel.

PARTICIPANTS
Prime Minister Kakuei Tanaka
Shinsaku Hogen, Vice Minister of Foreign Affairs
Mr. Kiuchi, Private Secretary to the Prime Minister
Mr. Konaga, Foreign Office
Mr. Ukawa, Head of Economic Section, North American Bureau, Foreign Office (Interpreter)
Dr. Henry A. Kissinger, Assistant to the President for National Security Affairs
Ambassador Robert S. Ingersoll
John H. Holdridge, NSC Senior Staff Member
Peter W. Rodman, NSC Staff

Prime Minister Tanaka: Particularly since I learned you were coming, I have asked my officials to look at the short-term and long-term trade picture. I have looked at your figures myself.

To give you my rather frank estimate of the situation, I do not think it is possible to arrive at a comfortable balance in a half year, or even one year. Perhaps in a period of three years, having studied the issues, we may be able to stabilize our economic relationship, in the sense of a not so uncomfortable imbalance as today. All of us should be seeking to achieve that goal, in that time frame, and I think it is possible.

Dr. Kissinger: What is the Prime Minister's definition of a "comfortable" trade balance?

Prime Minister Tanaka: It is perhaps a rather difficult question to answer in exact terms, because basically you must seek a balance in a multilateral sense; this can't be achieved just between the U.S. and Japan. In abstract terms, we don't have export or import terms where our going up or down is too abrupt. And if I remember the figures from last year, the imbalance is on the order of $3.2 billion. I have asked my officials to come up with means to reduce it to less than $3 billion by the end of the present Japanese fiscal year, and if this is not possible also to seek other means, in a multilateral sense, to make the situation less difficult. So we may be able to arrive at within not too long a trade balance which is less difficult. Not just between ourselves but also with other areas--the Middle East, Europe--as long as ten years, as well as near-term measures.

Dr. Kissinger: We agree there cannot be an exact balance between our two countries, and that an overall balance has to be solved on a multilateral basis. We also favor a mid-term projection, in the framework which the Prime Minister indicated. At the same time, if our bilateral balance becomes uneven, the pressures within the U.S. for some sort of unilateral steps become so great that we will never have the time to develop the long-term projection.

On the statistics--I'm not an economist/2/--they seem to indicate the imbalance this year between our two countries will be about $3.6-3.8 billion, according to our figures. If that is accepted, if it could be reduced below $3 billion before the end of your fiscal year, that would be a positive contribution. We must think about what base you start with. And then, if we can take another significant step next year, that will be considered a very real progress.

/2/In a June 12 conversation with Tanaka (when he was still MITI Minister), Kissinger said: "Let me ask the Minister something about economics, which is not a field I usually address in great detail. . . . My major interest in economics is to make sure it doesn't disturb foreign policy." (Memorandum of conversation; ibid., HAK-Tanaka 6/12/72)

Actually the President's thinking is that, assuming these figures are accepted, we should make an effort to get next year's program settled before Hawaii--because we don't want to spend so much time negotiating on purely commercial matters when we have so many profound political things to discuss between us.

Prime Minister Tanaka: I quite agree we ought to try to be tackling what you described as the profound issues. On this question of the trade balance I have taken an active part in asking my officials to see what measures are possible. Perhaps we can work this out before Hawaii./3/ Perhaps we can ask Ambassador Ingersoll and Mr. Hogen to look into the details. On the Japanese side some of the issues are: purchases of enriched uranium; purchases of civil aircraft; agricultural purchases, which was discussed with Mr. Eberle when we agreed to a special purchase of $50 million in addition to an estimated growth of $390 million in the current fiscal year in agricultural purchases, to a total of $440 million. It could reach a figure of $500 million. But I must emphasize that although we can put these figures together, it may not immediately have effect in solving the imbalance problem, because some of this will not show up immediately as Japanese imports. But by the end of March of next year, which is the end of the Japanese fiscal year, we will see if the Japanese officials concerned and a number of private companies might come up with measures that could reduce the imbalance to less than $3 billion. In the main by increased purchases. Also, by lending in foreign exchange terms, and at a cheaper rate of interest. These aren't easy to implement, and take time. But I want to emphasize that I have pressed Japanese officials and Japanese companies to take steps which if they don't have an early effect will come up with a reduced imbalance.

/3/President Nixon and Prime Minister Tanaka were scheduled to meet in Hawaii August 31-September 1.

There is also the question of whether we can liberalize our imports of agricultural goods. Theoretically it is correct that if we reduce the restrictions we might be able to purchase more--but it is also possible that we might end up with increased Japanese purchases from Southeast Asia, the Middle East, and even the Chinese mainland. We have to look at a mechanism whereby we can increase purchases from the USA.

On economic issues, as you see, I have a list before me detailing the items that can be increased. Gas turbine generators, for example. Let us see what we can best do, before Honolulu. Ingersoll and our officials can make their best efforts. I don't want to go into details now.

Dr. Kissinger: I agree. May I make one suggestion, Mr. Prime Minister, in the spirit of frankness we have always observed? Some of our differences in the previous period were due to the fact that we had an agreement to do something in principle--but the differences came up in the interpretation of what it means. Therefore I believe that before Hawaii it would be helpful, and will avoid difficulties in the future, if we could have an understanding on what to do in detail, not just in principle. It would help if Ambassador Ingersoll and your officials could work out something concrete and detailed; for example, concretely what a reduction of the trade imbalance to $3 billion means.

Prime Minister Tanaka: Yes. I think it is important perhaps to look at it through three phases, or through three actions. First of all, we agree in principle that we would seek a more normal economic relationship between our two countries; we acknowledge that as a common goal. As I said, this could not be achieved in a period of one year. It would take until 1973, or 74, or perhaps longer. Secondly it is important to have meetings at the expert level as often as possible. An idea comes to mind perhaps to organize them on a quarterly basis, to look at the trade balance. Not just Ministers, but as at Hakone--with Eberle. Not too much publicity.

/4/These and all but the last set of brackets in the text of the memorandum of conversation are in the source text.

Prime Minister Tanaka: That's what comes to mind. Perhaps in Tokyo, perhaps they might be invited to the U.S.

Third, the fact of the matter, the problem is we are getting dollars in increased numbers, and don't have much to do with them. We bought short-term Treasury Bills, SDRs, but refrained from buying gold so as not to drive up the price of gold. Perhaps we could make more substantial purchases, perhaps $3-5 billion of bills issued by the Federal Reserve Bank. I understand that the West Germany authorities buy these on five-year terms. Perhaps we could do this for longer, for 10 years. The experts can examine this. I understand the Germans get 5% interest. Perhaps we can pay you more as a means of bridging over the economic balance until we could seek longer term measures, a more basic international balance.

The third idea is a proposal like the man-wife relationship in this country: When they make a savings account they put it in both names, in a joint account. We should be doing the same. We should be saving jointly.

Dr. Kissinger: When they break up, one of them usually runs away with the money!

Dr. Kissinger: No, Mr. Prime Minister, I agree. For the long-term problem we need regular consultation, perhaps a mechanism by which the experts could every three to four months meet, with as little publicity as possible, perhaps at alternating locations. As regards your specific suggestion, I think it should be discussed by the appropriate experts. And also at Honolulu we could discuss the basic mechanisms of how to deal with the problem.

But on the short-term problem, as I understand what you have said here, we have agreed that before Honolulu, Ambassador Ingersoll and your officials will work out a specific program to reduce the deficit to $3 billion this fiscal year./5/ So that that matter doesn't have to be dealt with at Honolulu.

/5/Later in the day Kissinger discussed a wide range of topics with Foreign Minister Ohira in Tokyo. Concerning the trade balance issue, the memorandum of conversation reads as follows:

"Foreign Minister Ohira: Well, on the question of the trade imbalance which you touched on, it is a question which we in the Foreign Ministry are quite deeply concerned about. Under Prime Minister Tanaka's energetic leadership we hope hard work can continue so that by the time of the meeting in Hawaii we can announce to the peoples of the two countries what we have arrived at. I think we can conclude it.

"One thing on which I am a bit concerned, that is we are now talking about trying to reduce the fiscal year imbalance to a level around $3 billion or a little below that; we are also trying to work out a package between Ambassador Ingersoll and Minister Tsurumi. What concerns me is that these two things we want might not necessarily meet as an exact figure. In the package, we are talking not only about trade, but also about services and imports which extend beyond this fiscal year. So the resulting package may not necessarily be reflected in reductions in the trade imbalance referred to earlier. In our talks you have understood this. I would like to make doubly sure that there is full understanding of the question.

"Dr. Kissinger: The Prime Minister made this point this morning. Ambassador Ingersoll and I have had a chance to discuss it at lunch. We understand that some part of the package will not show up in the trade imbalance until after this year. But we are talking about the spirit and general objectives; we will not do it like bookkeepers. [Laughter.] What we are talking about is reducing the deficit, and we won't be too concerned if some figures don't show up in the trade imbalance." (National Archives, Nixon Presidential Materials, NSC Files, VIP Visits, Box 926, Tanaka Visit 31 Aug-1 Sept)

Prime Minister Tanaka: When you mention that we try to arrive at a program to cut it to $3 billion by the end of our fiscal year, this isn't entering figures in a bank account. What is important is that either it can be done or it cannot. What we will do is try. We will attack this problem using that figure as a guide. It is evidence of our forward-looking attitude. It is a guide I have given my officials, and also on the basis of reaching a solution as two family members, against the background of our effort to normalize our relations over a period of two-three years./6/

Let me use this example, in confidence: I have instructed our authorities to see if they can increase Japanese purchases of arms--this is now estimated in the range of $700 million--to make it, say, $850 million. If you say this must take place, and show in the statistics--which aren't the same in the U.S.--by the end of March, it won't be possible. What I'm saying is, it can be done in the range of, say, five years.

Let me use two more examples: You asked us to liberalize our imports of fresh oranges on a seasonal basis, in Hakone. My officials said no, it was not possible. I asked them to look again, to see if it could be done in a different time period, or with liberalized allocations. These won't show in the figures by the end of next March. I also asked my officials about importing a greater quantity of feeder cattle. It is now at 5000 head. We could consider going up perhaps twice or three times that amount, if this is possible to do. Other purchasers are aggressive and competitive, however.

There was also another idea floated at Hakone--on mixed blending orange prices--if we could seek an arrangement where the agricultural people on this side--the opponents--can be made a partner on this, with the American partners.

Dr. Kissinger: We will approach it in a spirit of friendship. And if you approach it, as you have, in a spirit of concreteness, then I am sure it can be resolved.

Prime Minister Tanaka: To put it frankly, during the Sato-Nixon talks on the question of textiles, I believe an Oriental, a Japanese expression was used by the former Prime Minister--zen sho sru. [The interpreter indicated that it was difficult to translate, but that it was roughly: "I shall look into this, in a judicious and forward-looking manner," or "in a spirit of goodwill, I will use my greatest efforts to see what can be done."] If someone says this in the Diet, it is accepted as a statement of a forward-looking attitude--but perhaps not between foreign governments. I want to avoid the misunderstanding, which may have been a problem in the past, by saying that we would aim at a reduction of $1 billion, and trying to indicate to my officials an approach in that sense. So if we cannot come up with a reduction by March 31, I do not wish to be accused of not being good at my word. I meant an order of magnitude, a goal.

Dr. Kissinger: That's fair enough. On this basis, no misunderstanding can arise.

Prime Minister Tanaka: The way to put it is, Japan and the U.S., working both together, mutually try to seek whether they can reduce the trade imbalance to less than $3 billion by the end of the Japanese fiscal year. But some measures, some purchases, mentioned earlier on would not show up in the trade figures by that time.

Prime Minister Tanaka: What I try to emphasize is that we try to tackle the problem with the best will in the world.

Dr. Kissinger: That's all we ask. We will blame Ambassador Ingersoll if anything goes wrong!

Prime Minister Tanaka: To try to solve this issue before Honolulu, I nominate Mr. Tsurumi, Deputy Vice Minister of Foreign Affairs--who has led the Japanese group on this. He can be in touch with Ambassador Ingersoll to work out the details.

Dr. Kissinger: Good. Where shall we make the announcement of this decision--at Honolulu or before?

Prime Minister Tanaka: We would have no strong preference. We should aim at the more effective use of this. Therefore, what is your view?

Prime Minister Tanaka: Just the confirmation at Honolulu of the details worked out.

Dr. Kissinger: Just confirmation, no details at Honolulu--just confirmation between you and the President of what our Ambassador and your people have worked out.

Prime Minister Tanaka: Taking this into consideration, Ambassador Ingersoll, perhaps you can discuss with us the details on timing and wording and content?

Prime Minister Tanaka: It may turn out that as long as we are agreed in advance on what we are planning to announce, perhaps we could announce it before Honolulu--so we could clearly divide it from what we are discussing at Honolulu?

/1/Source: National Archives, Nixon Presidential Materials, NSC Files, VIP Visits, Box 926, Tanaka Visit 31 Aug-1 Sept. No classification marking. Attached to Kissinger's August 29 memorandum to President Nixon, Document 98.

The effort to achieve a short-term trade and financial package with the Japanese prior to your Hawaii trip is useful and desirable from several standpoints. At the same time, there is a clear danger that, carried too enthusiastically in certain directions for the sake of the appearance of a harmonious "big package," our basic continuing economic problem could be aggravated. I find some possibilities under consideration that would be potentially counterproductive by giving a false sense of progress, make it more difficult for the Japanese Government to build the support at home for more fundamental, needed action in the future, and possibly prejudice negotiations in other directions.

These dangers can be avoided if we do not fall into the trap of appearing to enthusiastically accept essentially "window dressing" transactions as a substitute for the hard and continuing effort to produce a lasting equilibrium in Japanese (and, thus, U.S.) payments. All efforts should be made to increase the imports from the United States, and to reduce the trade imbalances. However, prepayment should not be an objective.

Such payments are of little or no help to us in the short-run, since Japan has no alternative at present to holding dollars in any case. To the extent they relieve pressure for other measures to actually increase imports into Japan, they could be counterproductive to our longer-term efforts.

In the strictly financial area, the Japanese have apparently proffered long-term low interest rate loans in yen. These should certainly be rejected for they dig us in a deeper hole and are a bad precedent. Long-term dollar investments are a matter of relative indifference to us, and should not be accepted as a Japanese concession (although we are willing to talk about it when convenient to them).

Finally, the Japanese are interested in a statement from the highest levels of the U.S. Government that they can use to help sanctify the present yen-dollar exchange rate. Their pressure poses a problem. On the one hand, realistically, a change in the yen exchange rate may soon be necessary to achieve balance. On the other hand, in avoiding placing your prestige on the line with respect to the present yen rate, we do not want to give the opposite impression we look to a break-up of the Smithsonian Agreement. Thus, a formula of words must be found that, while supporting the Smithsonian Agreement in general as a useful interim step, avoids a commitment to the specific yen-dollar parity in the future.



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