Foreign Relations of the United States, 1961–1963, Volume IX, Foreign Economic Policy

15. Memorandum From the Deputy Under Secretary of State for Political Affairs (Johnson) to the Under Secretary of State (Ball)⁰

Washington, July 18, 1962.

SUBJECT

• Presidential Memorandum of July 16 to Members of Cabinet Committee on Balance of Payments¹

The Defense attachment to the Presidential memorandum² was discussed at a meeting in my office last Saturday³ with Defense, AID, White House and BOB representatives. At that time Mr. Hitch⁴ elaborated on the scope of the various projects contained in the list. He pointed out that these were still in the study stage and that final procurement actions would not be taken until the completion of these studies. However, in some cases partial steps are being taken in some of these areas that should result in an early decrease of overseas expenditures by Defense.

During our discussions, the impact of reduced Defense expenditures in certain countries in terms of possible increased aid requirements was explored. In addition to the countries mentioned in the President’s memorandum, there also may be problems with respect to Greece, Turkey and Pakistan. However, the precise impact on AID cannot be determined until we know more specifically the nature and extent of Defense’s proposals to reduce expenditures in those countries.

In addition to the AID considerations, the implementation of certain of the projects proposed by Defense will have significant political repercussions. Most obvious are those projects relating to force reductions in overseas areas. In some cases the withdrawals are rather small and should not present any unmanageable political problems. On the other hand, the projects to reduce our Army forces in Europe by 44,000 and the withdrawal of the one squadron in Iceland present extremely serious political problems in terms of our security objectives. Additional political repercussions will arise from the economic impact in overseas areas of a number of Defense projects should they be implemented, e.g. returning a major portion of petroleum procurement to the U.S., reducing hiring of foreign nationals. The seriousness of this impact, however, cannot be judged until we have more precise information on the magnitude and nature of these reductions. Furthermore, a number of the suggested actions would put such activities as PX and commissaries in direct competition with the local economy to a greater degree than is presently the case, and we can probably expect local reaction to a move of this type. The degree to which we can take such actions would have to be carefully reviewed in light of agreements and understandings we have with the host countries with respect to the basing of our forces in their territory.

The Defense Study program does not provide explicitly for estimates of the amounts of compensating aid that might be necessary as a result of the impact on individual countries of the suggested actions. The net benefit to our balance of payments depends on this, and on the amount by which curtailment of dollar expenditures in each of the various countries can be expected to result in reduced purchases from the U.S. by all countries. Studies to establish a basis for reasoned judgments on both scores must precede decisions on the various proposed policies. It must also be recognized that procurement policies tailored to these considerations would probably be discriminatory, in an absolute sense, as between countries. This, also, could be productive of diplomatic frictions.

I believe it is important to alert Defense to the fact that, unless reductions are carefully and selectively applied, it may well result in the development of a political atmosphere in a number of countries which will make it extremely difficult for us to negotiate for the various Defense arrangements and facilities that Defense itself considers extremely important to have in order to maintain an effective combat posture.

Nevertheless, I believe that the studies outlined by Defense are justified and should be undertaken. However, I think it extremely important that the Department of State be fully consulted on these studies and that, in those instances, where we believe there will be serious adverse political effects the issue should be placed before the Cabinet Committee prior to any implementation by the Department of Defense.

0. Source: Department of State, E Files: Lot 64 D 452, Balance of Payments-Procurement. Secret. Drafted by George S. Newman (G/PM) and transmitted through S/S. The date, “7/18/62,” was added by hand.
1. Document 14.
2. Reference is to McNamara’s July 10 memorandum; see Document 13.
3. July 14.
4. Presumably Charles J. Hitch, Assistant Secretary of Defense (Comptroller).