Foreign Relations of the United States, 1964–1968, Volume VIII, International Monetary and Trade Policy

148. Department of Commerce Paper¹

Washington, November 7, 1967.

STATUS OF PROPOSALS FOR THE 1968 BALANCE OF PAYMENTS PROGRAM

1. Commerce Voluntary Program

Our package is approved.

2. Federal Reserve Voluntary Program

Secretary Fowler is scheduled to meet with Chairman Martin to resolve the remaining difference of opinion regarding the placing of Exim “associated loans” under the 109% ceiling. All other Agencies oppose this Fed proposal. Such loans refer in particular to financings undertaken by commercial banks for the export of jet aircraft. These are made in conjunction with direct loans by the Eximbank for the same transaction. In these instances, commercial banks take the early maturities without Exim guarantee.

Treasury has not yet given up hope that export financing, together with LDC loans, can be excluded from the Fed ceiling altogether. While such a drastically revamped Fed Program cannot be devised in time for the mid-November announcement of the 1968 BoP Program, Treasury is determined to keep up the pressure on the Fed to revamp its program.²

3. Tax Incentives for Exports

The following have been rejected, principally because of Treasury and State opposition.

(1) A credit against total income tax liability calculated as a flat percentage of export sales.

(2) A lower rate of corporate income tax for profits derived from exporting.

(3) A credit against income tax liability based on accelerated depreciation of plant and equipment used in the production of export goods.

(4) An investment tax credit applicable to plant and equipment used for the production of export goods.

(5) Exemption from income tax of remitted income of U.S. sales subsidiaries abroad.

(6) Rebate of property tax and indirect taxes for exported goods.

(7) Overexpensing for increases in export promotion expenditures.

Treasury is now considering administrative rulings to:

(1) clarify Section 482 regulations of the Code dealing with inter-company pricing

(2) establish alternative procedures under Section 863 for defining foreign-source income

(3) liberalize regulations concerning the amount of reserves for bad debts that banks may establish in connection with their financing of U.S. exports.

In addition, Treasury is now examining a series of technical, administrative and legislative changes to liberalize the scope of Export Trade Corporations.

No details on any of these matters have been provided. No agency is opposed at this general level. It is clear that any tax incentive which might become part of the final program will be very weak in relation to some of the proposals which were seriously considered at the outset.

4. BIC’s Export Promotion Budget Supplemental

This supplemental for $7.1 million has survived several BOB reviews and still forms part of the overall Government supplemental request which we expect to be submitted to Congress in November.

5. “Joint Export Associations” for Export Expansion

The Executive Committee of the Balance of Payments Committee at its November 2 meeting³ endorsed in principle this new form of export promotion which calls for cost sharing by Government and industry of certain designated export associated expenditures (advertising, participation in trade fairs, market research, overseas travel, cost of overseas sales offices, warehouses, etc.).

The Commerce Department would provide funds under contract to: (1) groups or firms, (2) trade and industry associations, and (3) export intermediaries. In order to avoid anti-trust complications, the Secretary of Commerce would be given the authority to issue charters to trade and industry associations or groups of firms that wished to form Joint Export Associations. Enabling legislation and appropriations would be needed for this new form of export promotion.

Many details remain to be worked out, including whether Commerce should enter into cost sharing contracts with individual export firms. No detailed budget estimates have been developed to date. Earlier studies indicated an expenditure level of $6 million in FY 1969.

This item is scheduled to be considered at the BoP Cabinet meeting of November 9.

6. Expanded Rediscount Facility at the Eximbank

A meeting was held towards the end of October with Harold Linder.⁴ Presented on this occasion was the proposal for a liberalized rediscount facility which was prepared by the Art Okun Committee on export financing and endorsed by the BoP Executive Committee. Larry McQuade who attended this meeting believes that Linder will go along with the suggestions after having “revamped” them somewhat in order to give them the “Linder imprint.” The expanded facility calls for, among other things, rediscount loans of more than one year (present limitation) and for reduced lending rates.

7. Export Expansion Fund

The concept of an Export Expansion Fund was endorsed in principle at the Cabinet level meeting of the BoP Committee on October 23.⁵ State⁶ and AID still have certain misgivings about the proposal and a meeting is scheduled between Treasury, State, Commerce and CEA for November 7.

Our current proposal calls for a Special Account to be set up at the Eximbank for National Interest Export Financing which would not exceed 5% ($675 million) of the Exim’s requested lending authority of $13.5 billion. The Exim could have special P & L and balance sheet statements covering this Special Account. Loan or guarantees to be made with funds from this Special Account would need certification by a committee. This would be chaired by the Secretary of Commerce and would include the Secretaries of Treasury and State and the Chairman of the Eximbank.⁷

This proposal has not yet been presented to Linder and probably will not be until after the November 9 meeting of the Cabinet Committee. He is likely to resist it, as he wished to have appropriated funds for the Export Expansion Fund in lieu of a “set aside” of his existing lending authority.⁸

8. Reexamination of GATT rules concerning the treatment of direct and indirect taxes, subsidies, and countervailing duties.

This proposal emerges as an alternative to a strong tax incentive for exports. All agencies agree that reexamination is desirable, but tactics remain to be worked out.

9. Tightening Gold Budget Procedures

No specific proposals have yet been made. Indeed, the Budget Bureau, which is responsible for the Gold Budget, was not aware that Treasury planned any initiatives in this area before the agenda for the October 31 Executive Committee meeting was distributed.

1. Source: Washington National Records Center, RG 40, Executive Secretariat Files:FRC 74 A 30, Balance of Payments Cabinet Committee. No classification marking. Drafted by Gerald A. Pollack, Deputy Assistant Secretary of Commerce for Economic Affairs, and Mark Feer, Deputy Assistant Secretary of Commerce for Financial Policy. Attached to the source text is a November 7 note from William H. Shaw to Secretary Trowbridge, which reads as follows:
   “The attached report on the Status of Proposals for the 1968 Balance of Payments Program would seem to suggest—

   • “a. that final agreement on a complete program is not likely at the November 9 meeting, and
   • “b. that when such agreement is achieved, those points of the program intended to increase exports will be relatively weak as compared with the initial hopes in this area.”
   No record of the November 9 meeting has been found.
2. A handwritten note in the margin next to this paragraph reads: “Not issue today—Study to be conducted on how to do it.” The handwritten comments, here and elsewhere on the source text, are presumably Shaw’s.
3. No record of this meeting has been found.
4. Chairman and President of the Export-Import Bank of Washington.
5. No record of this meeting has been found.
6. A handwritten note in the margin, with a line drawn to this word, reads: “Worried about impact on AID budget.”
7. A handwritten note in the left margin next to this paragraph reads: “Slice of new lending authority—Special Comm. revisits & recommends—can’t force Ex-Im.”
8. A handwritten note at the end of this paragraph reads: “New legislation? Review with Committee for Congress. Could do administratively—but criteria question is difficult.”