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

69. Letter From Secretary of the Treasury Dillon to Secretary of State Rusk⁰

Washington, March 8, 1963.

Dear Dean: I have read your letter of February 25 to Ros Gilpatric about the Japanese offset negotiations¹ and am somewhat concerned about certain points in it.

If I correctly interpret the last paragraph of your letter, it implies a direct link between the level of U.S. military expenditures in Japan and Japan’s remaining “a highly favorable market for U.S. civilian exports.” While any such direct link might be possible under a bilateral trade arrangement it would be contrary to the principle of multilateral trade and payments which we have all sought so strenuously to foster and which is the foundation of our entire international trade and financial policy. There is, of course, no question of the over-all adequacy of Japan’s foreign currency earnings.

Moreover, the experience of recent years indicates that reductions in U.S. military spending have not hindered the growth of U.S. commercial exports to Japan. Since 1953 our military expenditures in Japan have declined by more than half (from $725 to $350 million) while our commercial exports have more than doubled (from $681 to $1,413 million).

The fact that U.S. commercial exports to Japan normally exceed our imports is sometimes cited as a reason why we should not try to reduce our expenditures in Japan. However, we have in the past always stood by the position that it would not be proper to concentrate on one item—merchandise trade—without considering the other items in our trade and payments which are highly favorable to Japan and which more than cover Japan’s trade deficit with us. On merchandise trade alone the U.S. sells more than it buys not only to Japan but also to Germany, Italy, Spain and France (the other nations where we have sought offsets), and in fact to most industrial nations. If we were to limit our balance of payments corrective actions to nations where we do not have a trade surplus, we would eliminate from consideration most of the major countries of the world.

Japan’s balance of payments prospects give no cause for concern. According to Embassy Tokyo’s projections of last November 21 (A-738),² Japan will increase its foreign exchange reserves over the three years 1963 through 1965 by almost $1 billion, despite an estimated $70 million reduction in the level of U.S. military spending. This increase of $1 billion is well in excess of the offset targets which I discussed with Secretaries Ball and Gilpatric last October ($100 million in 1963; $200 million in 1964; and $300 million in 1965).

I know you recognize the urgency of getting our more prosperous allies to assume a more equitable share of the burden of Free World defense and aid, and we are in agreement that the Japanese military effort is inadequate. However, in considering military offsets and reductions in Japan, I am concerned that we may be setting our sights too low and may not be approaching the problem with sufficient urgency and initiative.

I would think that once the Joint Chiefs’ analyses on possible reductions in Japan are completed it might be useful to arrange a State/Treas-ury/Defense meeting, possibly with the President, to consider the offset negotiations and possible defense reductions, and to get agreement on precisely what we should aim for and how we expect to achieve it.

I am sending copies of this letter to Ros Gilpatric and to McGeorge Bundy.³

With best wishes,

Sincerely,

Douglas

0. Source: Department of State, Central Files,FN 12 US. Confidential.
1. This letter is scheduled for publication in volume XXII.
2. Not printed. (Department of State, Central Files, 794.5/11-2162)
3. In his March 22 reply to Dillon, Secretary Rusk wrote that certain points in his February 25 letter to Gilpatric “may have lent themselves to misinterpretation.” After agreeing with Dillon on the importance of “getting the industrialized countries of Europe and the Pacific to carry a more equitable share of the burden of Free World defense and economic assistance,” he went on to stress the equal importance of greater trade liberalization by Japan. “The military area is circumscribed by constraints,” he argued, “while the much larger civilian sector offers considerably greater room for maneuver.” (Department of State, Central Files, FN 12 US)