862A.00/11–2553
No. 234
Memorandum of Conversation, by
William K. Miller of the Office of
German Affairs1
Subject: Off-shore Procurement
- Participants: Dr. Ludwig Erhard, Minister of Economics, German Federal Republic
- Dr. Mueller-Armack, Economics Ministry, German Federal Republic
- Dr. Albert F. Ernecke, German Diplomatic Mission
- Mr. Hans Podeyn, German Diplomatic Mission
- Miss Grosse-Schware, Interpreter
- Mr. Frederick E. Nolting, Jr., S/MSA
- Mr. Allen Moreland, S/MSA
- Mr. Louis Pollak, S/MSA
- Mr. Oscar Gray, L/MSA
- Mr. Geoffrey W. Lewis, GER
- Mr. Jacques J. Reinstein, GER
- Mr. Daniel F. Margolies, GER
- Mr. William K. Miller, GER
- Mr. Howard Hilton, GER (2)
- Mr. Michael Harris, HICOG, Bonn
- Mr. Weir Brown, HICOG, Bonn
- Colonel Haas, Defense, OMA
- Lt. Col. Beaudrias, Defense, OMA
- Mr. Shafer, Defense, OMA
- Miss Lejins, Interpreter (TC)
The meeting was arranged at the request of Dr. Erhard.
Dr. Erhard said that he was not too satisfied with the situation as respects German participation in the OSP programs. So far only a minor start had been made. He attributed this to three reasons:
- (1)
- The prolonged tax negotiations: This problem, he said, is now settled. The Finance Minister had agreed with him to give tax relief for OSP on basis requested by the United States.
- (2)
- The question of the use of surplus property DM: The Finance Minister had also agreed that expenditures for OSP of DM drawn by the U.S. under the surplus property arrangements would, like expenditures in free dollars, be given the same tax relief as exports.
- (3)
- Prohibitions on German production administered by the Military Security Board: Dr. Erhard said he had the impression that the MSB might be interpreting the rules more narrowly than it ought to be, that is that it probably has more latitude in permitting production than it uses. He observed that perhaps negotiations should be started to give Germany more latitude in industrial production if Germany approves the agreements for Western integration.
Dr. Erhard said that he would like more OSP in Germany, which would mean more inclusion of Germany in the Western defense production effort.
Mr. Nolting said that he was glad to hear that the tax problem was settled and that he wished to be sure he understood Dr. Erhard correctly on this point. Was his understanding correct that the surplus property funds could be used for OSP and would be tax exempt?
Dr. Erhard confirmed that this was correct. At the same time he said he assumed that OSP would be larger in scope than the available surplus property funds.
Mr. Nolting assured Dr. Erhard that there would be no attempt to match OSP to the surplus property funds.
Colonel Haas, at Mr. Nolting’s request, described the basic purposes of OSP, the categories of equipment purchased, and the purchase procedures. He emphasized the competitive factor in bidding and our intention to use the available funds where they would procure the most and best equipment. In response to Dr. Erhard’s remark that he could not understand the low volume of procurement in Germany if competitive ability is the test, Colonel Haas said that this resulted from the exclusion of Germany from manufacture of most of the major items in the program, such as ammunition and aircraft.
[Page 561]Dr. Erhard questioned whether it would be possible to relieve the Federal Republic in respect to the restrictions on production, conditional upon German ratification of the treaties.
Mr. Reinstein said that this is a delicate problem, particularly with EDC under discussion in several parliaments. OSP generally relates to completed weapons. Weapons and armament production in Germany now might cause difficulty in speedy ratification. Whether it would be necessary to await ratification of the EDC Treaty by all parties, however, is a question that might be examined at a later stage. He recalled that the Foreign Ministers had agreed that there should be an examination of the resulting problems if the other parties to the EDC Treaty should delay ratification after the Contractual Agreements had been ratified by all four parties and the EDC Treaty ratified by France and the Federal Republic.
Dr. Erhard raised the problem of unemployment in Berlin, which he said the Burgermeister of Berlin had asked him to raise, and what could be done through OSP to relieve the situation. He indicated that other business could be shifted from Western Germany to Berlin in certain industries if these West German industries could secure OSP orders. He mentioned particularly the electrical goods industry and some branches of mechanical engineering. Dr. Erhard said Berlin would supply as much as possible in parts and supplies for OSP contracts placed in West Germany. He asked whether orders could be placed in other countries and subcontracts for “harmless objects” placed in Berlin. Dr. Erhard emphasized the importance of helping Berlin and specifically of relieving the unemployment situation.
Mr. Nolting, Mr. Lewis and other U.S. representatives indicated that we fully share the desire to help Berlin and expressed appreciation for any efforts to steer business from West Germany to Berlin. However, subcontracting is ordinarily left to the prime contractors. Subcontracts probably are being placed in Germany without the German Government or German business knowing that they are for our OSP program. An effort has been made to shift business to Berlin whenever possible; we are helping through payment of transportation costs, but the competitive factor cannot be dismissed. The proposal regarding subcontracts from other countries would involve real difficulties, but the U.S. would explore it.
Dr. Erhard interjected during the above that he was primarily interested in dollar orders, not subcontracts paid in other currencies, which throw out the EPU balance more. With respect to the question of competition, he agreed that things are not always in order on the German side; there have been price agreements, which is against his economic policy.
[Page 562]Dr. Ernecke raised the problem of the application of the “Buy American Act” to aluminum. He had been informed earlier by Aide-Mémoire2 that the exemption of aluminum to the provisions of the “Buy American Act” would be interpreted to include rolled products and other semi-processed shapes and forms as well as pig and ingots; now he had heard that there was some doubt about this since the Department of Defense had apparently acted to change this interpretation by removing mill forms and shapes from the exemption and to examine each case separately on its merits. Dr. Ernecke said that his Government would regret extremely any change in the previously announced position and requested assurance that the position remained as stated in the Aide-Mémoire.
Mr. Margolies said he understood that Mr. Kalijarvi had further information on this subject and that the problem could perhaps be better explored in the meeting with Mr. Waugh scheduled for that afternoon.3
Mr. Nolting, in response to Dr. Erhard’s question, said there had as yet been no definite determination of how much OSP there would be in Europe with FY 54 funds. A general order of magnitude as a target had been set, but time would be needed and so far no contracts had been placed. As regards placement of contracts in Germany, we could not be specific with respect to this year, and it would be even more difficult to forecast FY 55. Mr. Nolting said that we are interested in procuring some light naval craft, minesweepers and motor torpedo boats. As to future years, we do not know what funds there will be for MSP or what part will go for OSP. He believed OSP requirements in FY 55 would be less than this year, however, since most equipment requirements would already be filled.