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

254. Memorandum From the Assistant Secretary of State for Economic Affairs (Johnson) to the Under Secretary of State (Ball)⁰

Washington, November 29, 1962.

SUBJECT

• Meeting of Messrs. Ball, Bell, Dillon, and Gudeman on November 30, 1962 to discuss the Commerce Department’s proposed export expansion program

Introduction

In the Treasury’s submission of September 28 to the Cabinet Committee, the payments projections for 1964 indicated an over-all U.S. deficit of $1 billion rather than our stated objective of equilibrium. In view of the shortfall, Commerce undertook to prepare a detailed program designed to raise the export level, presently projected at $23.2 billion. The report under review (Tab A) contains the recommendations that have resulted from Commerce’s work.¹

The Commerce program comprises twelve major elements, summarized below. With a few exceptions, the program presents no problems for us. Commerce has not shown, however, how the program’s elements, singly or in combination, can be expected to contribute to the necessary $1 billion increase in exports, but such a showing is probably not feasible. Commerce estimates that, to carry out the program, $4.05 million in supplemental appropriations will be needed for FY 1963 and that appropriation requests for FY 1964 will have to be increased by $13 million.

Recommendations

A. We recommend that the following proposals should be particularly supported as offering special promise for export gains:

(1) Expanding the number of overseas trade centers;

(2) Subsidizing American exhibitors at overseas trade fairs;

(3) Promoting private trade missions abroad; and

(4) Bringing foreign buyers to the United States under the reverse trade mission program.

B. We recommend opposing the following proposals:

(1) Establishing a separate commercial service;

(2) Submitting the proposal for a separate commercial service to the Cabinet Committee on the Balance of Payments;

(3) Giving the National Export Expansion Coordinator explicit or implicit supervisory authority over Ambassadors; and

(4) “Reversing” our approach to government representation of business abroad, if that means departing from our policies, as stated by Secretary Rusk, of not “participating in actual sales or giving unfair competitive advantage to one American company over another.”

C. On the Commerce proposal for a tax incentive, we recommend:

(1) Explaining its implications with regard to GATT and our commercial policy relations with other countries which cause us concern; and

(2) Urging study of other possible tax incentives which do not have adverse GATT implications and hold more promise.

Details of the Commerce Program

21. Tax incentives. Allow deduction of export marketing expenses when computing income taxes at 120 percent of outlays rather than 100 percent. (See p. 5 of Tab A.)

32. Export financing. Provide an additional $1 billion for medium-term export financing, improve administrative procedures, and revise priorities (p. 5).

3. Expanded domestic and overseas service. Reconstitute the Overseas Commercial Service, now under State, as a separate service (p. 7).

4. Trade centers. Establish centers in the twenty top markets for U.S. exports (p. 8).

5. Changed orientation of trade fair program. Instead of constructing new pavilions, subsidize participation by U.S. companies at specific fairs (p. 9).

6. Trade missions. Encourage U.S. business groups to finance their own missions abroad (p. 10).

7. Reverse trade missions. Bring foreign buyers to trade shows in the United States, if necessary at government cost (p. 11).

8. Overseas market studies. Expand work on market studies, with a larger role to be played by trade association or industry groups (p. 12).

9. Government representation. Make the National Export Expansion Coordinator responsible for assuring government representation for the interests of particular businesses overseas in specific transactions (p. 12).

10. Regional Export Expansion Councils. To support these Councils and make them more effective, provide additional funds for rejuvenating field offices and expanding the staff of the National Export Expansion Coordinator (p. 13).

11. Promotional “tactics.” Introduce an “E” award program, a nationwide, state-by-state export contest, and an export symbol (p. 14).

12. Enlarging the National Export Expansion Coordinator’s staff. Provide the Coordinator with a staff of 25 “Senior Foreign Trade Advisors” (p. 16).

Comments

The following comments deal only with the major issues raised by the Commerce paper.

Proposal for a Separate Commercial Service⁴

1. This is a matter to be resolved jointly between State and Commerce, and should be eliminated from the proposals. The Cabinet Committee on the Balance of Payments is an inappropriate forum for discussion of the Commerce proposal, inasmuch as it relates to the jurisdiction over services of the Department of State abroad, from which the proposed separate commercial service would be withdrawn and transferred to Commerce.

2. There is no apparent need for a separate overseas commercial service.

(a) The present joint State-Commerce commercial program, under an agreement between the two departments signed on November 15, 1961, has been in operation only some seven months—too short a time to judge its performance.

(b) The present arrangement permits realization of all the advantages that Commerce sees in a separate service. It does not, in any way, preclude expanding the overseas service staff, increasing its quality and effectiveness, and enlarging the scope of its activities.

(1) Commerce presently had primary responsibility for nominating and training expert personnel.

(2) Commerce already participates fully in budgeting procedures and in administrative and communications matters.

(3) State has already taken steps to assure the full support of our overseas missions to export expansion efforts.

3. The present arrangement preserves a unified operation abroad, and is thus preferable to a separate service reporting directly to different bosses in Washington.

4. Commerce is on record as favoring a commercial specialty within a unified Foreign Service.

5. Commerce’s proposal may be based on the hope that a separate service would be able to attract larger appropriations from Congress than has the present organization. Congress rejected Commerce’s request for increases in commercial positions in FY 1963. However, the composition of appropriations committees and the past treatment of requests for overseas commercial positions give us reason to believe that future requests for this purpose would receive no better treatment for a separate service than for the existing organization.

Proposal for Improved Governmental Representation

1. Commerce would subordinate Ambassadors to the National Export Expansion Coordinator in representing U.S. business interest abroad. We believe that the Ambassadors must retain principal jurisdiction over commercial matters in their respective countries, so that such matters can be coordinated with other aspects of U.S. foreign policy. There is nothing in this Ambassadorial role, however, which precludes the Export Expansion Coordinator from defining broad policy objectives and providing specific guidance.

2. Commerce states that our approach to government representation in helping U.S. business win contracts “must be reversed.” It is already our policy to do as much as other countries, short of acting as agents for U.S. firms or giving an unfair competitive advantage to one American company over another. We must certainly intensify our general efforts, but should not reverse ourselves on these qualifications, to which Commerce itself adheres in its dealings with U.S. business.

Proposal for a Tax Incentive

1. Commerce has orally confirmed that it contemplates overexpensing of only those export marketing expenses that exceed the level of a recent, and as yet undefined, base period. This has the advantage of providing an incentive for export promotion without permitting windfall profits as a result of expenses which, more or less, would have been made in any event.

2. Commerce suggests that additional export marketing expenses be deducted at 120 percent instead of 100 percent when income taxes are computed. As a result, such expenses would cost a profitable company only 37.6 cents per dollar after taxes, compared with 48 cents per dollar for all other deductible business expenses.

3. There is international precedent for such an incentive measure. Australia permits the deduction of all export promotion expenses at 200 percent, and New Zealand at 150 percent. This results in after-tax export promotion costs of 30 cents and 25 cents per dollar, respectively, by profitable firms in each country, compared with 65 cents and 50 cents, respectively, for all other deductible expenses.

4. Adoption of a tax incentive would conflict with our objective of getting foreign countries to drop their export subsidies. (In a letter of October 4, 1962 to the President, Secretaries Hodges and Wirtz, Chairman and Vice Chairman of the President’s Advisory Committee on Labor-Management Policy, said: “Our Government must continue and intensify its efforts to obtain the elimination or reduction of subsidies which aid export industries of foreign countries and place American industry at a disadvantage in world trade.”)

5. The proposed incentive would violate the GATT if it led to lower foreign than domestic prices for the same American goods. It would be difficult to deny that the proposed incentive is a subsidy within the meaning of GATT Article XVI:4. In particular, it is generally considered that this article applies to the remission of direct taxes calculated in relation to exports.

6. Considering the important position of the United States in world trade, the tax incentive might touch off an export subsidy race.

7. It is doubtful that the incentive, as proposed by Commerce is large enough to have a significant effect on exports. If it does prove to be too small and if it is therefore enlarged, the dangers of a GATT violation and subsidy race would be increased.

0. Source: Department of State, Central Files, 400.11/11-2962. Confidential. Drafted by Gerald A. Pollack (E/OTF/FN) on November 29 and concurred in by Herman Pollack (A) and Theodore Hadraba (E) in draft, Leonard Weiss (E), Bernard Norwood (E/CPT), and Mortimer Goldstein (E/FN).
1. For text of the Department of Commerce’s proposal for an Export Expansion Program, November 8, see the Supplement.
2. Requires new legislation. [Footnote in the source text.]
3. Requires new legislation. [Footnote in the source text.]
4. For a point-by-point rebuttal of Commerce’s arguments for a separate service, see Tab B. [Footnote in the source text.]