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

197. Current Economic Developments¹

Issue No. 804

Washington, April 23, 1968.

DEVELOPMENTS IN IMPLEMENTING BALANCE-OF-PAYMENTS PROGRAM

The President’s balance-of-payments program announced on January 1 is leading to a variety of actions. Some of our major trading partners have come up with proposals for acceleration by them and/or deceleration by us of the Kennedy Round tariff cuts as a means of assisting our trade balance and helping to avert restrictive US trade legislation. The International Air Transport Association members have approved a reduced family fare for visitors coming to the US from Europe and the Middle East. A part of the travel package proposed by the Administration has been approved in the House. Other major developments pertain to our foreign investment regulations, the Eximbank, reduction of overseas personnel, and efforts to neutralize military costs overseas.

Kennedy Round Acceleration

As a means of averting restrictive trade measures as a part of the US balance-of-payments program, a number of countries have suggested differential cutting of Kennedy Round tariff concessions as a means of meeting the US problem. The suggestions vary in detail and structure. We have neither accepted nor rejected any offer. Since all of them are conditional upon similar action by many countries, no proposal actually exists until the offers have been coordinated. We have, however, attempted to gain improvement in the EC proposal for a one-year deceleration by the US combined with a one-year acceleration by the other major participants. We have also made clear that the strongly stated EC conditions requiring a unanimous finding by the EC Council, prior US passage of the American Selling Price legislation, and US abstention from any protectionist measures are unacceptable.

Last week GATT Director General Wyndham White called a meeting in Geneva of the EC, Japan, Canada, and the EFTA countries to discuss the divergence between the various KR deceleration/acceleration proposals that have been made. The declaration that came out of that meeting calls for one-year acceleration but improves the previous offers on deceleration so that we would get continued balance-of-payments advantages until 1973. If we do not pass the American Selling Price legislation and if we do pass protectionist legislation (presumably of a general nature), all countries would consider once again before the end of the year whether their offer to us on both acceleration and deceleration could still be maintained so that they would still take action on January 1, 1969. This latest proposal is now under consideration within the US Government and by the governments of the major GATT trading countries.

IATA Directional Fares

The members of the International Air Transport Association have agreed via a mail vote upon a directional family fare which would permit dependents of a traveler in Europe of the Middle East to enjoy approximately a 50 percent reduction in first class or economy fares on round-trip travel to the US. The new fares were filed with interested governments on April 11 and, subject to their approval, will become effective April 24. The new fares will entitle adult and adolescent family members in Europe and the Middle East to buy a round-trip ticket to the US, Canada, and Mexico for the price of a one-way ticket. When the head of a family buys a full fare, each member of his family who normally pays for a full fare will be entitled to a round-trip ticket at the price of the normal one-way fare. The family members may buy first or economy class tickets, regardless of the class in which the head of the family travels.

The new fares were initially agreed upon at a meeting in New York February 20 of 21 airline members of IATA engaged in transatlantic service. The meeting had been requested by Pan American Airways and Trans World Airways to consider proposals for directional fares to stimulate tourism to the US. When the proposal that evolved from that meeting was submitted to all IATA members it encountered some opposition from some of the Arab, British, Canadian, Mexican, and Colombian airlines. After concerted action by the Department, our Embassies concerned, and the IATA Secretariat, the opposing airlines were persuaded to abstain. As a price for Mexican abstention, Mexico, as well as Canada and the US, will benefit from the reduced fares.²

The USG was intensely interested in obtaining IATA agreement on the directional transatlantic family fares, despite the fact that the IATA proposal was more limited than we had initially hoped for. The new fares will, however, be a significant part of the overall effort to increase European tourism to the United States.

Travel Legislation

The House on April 4 passed a travel package by a large majority. In addition to extending the five percent domestic tax on air travel to international air tickets, the bill reduces tourist duty-free entry from $100 to $10 until October 1969, and gift parcel exemption from $10 to $1. It exempts Canada and Mexico from the reduction in customs duty exemptions, largely because of the administrative difficulty in dealing with the enormous number of border crossings. It also exempts certain US island possessions. The exemptions could give us some GATT problems against which our defense will be the seriousness of our balance-of-payments problem and the temporary nature of the discriminatory provisions.

The House Ways and Means Committee deferred action on the proposed travel expenditure tax proposed by the Administration “for further consideration along with measures related to improving our trade balance to which the President referred in his January 1 announcement.” Specifically, the Committee decided to wait to see the extent to which factors swelling the deficit in the fourth quarter of 1967 proved to be temporary, “to consider the expenditures tax proposal in conjunction with efforts on the part of other countries to aid our balance of payments by accelerating tariff reductions … under … the Kennedy Round … and pending an opportunity to examine proposals for a tax on imports and/or rebate on exports … the so-called border tax adjustments.” A desire to evaluate the effectiveness of directional fares and other meas-ures to stimulate tourism to the US was given as an additional factor. Although the Committee’s inaction on the expenditures tax is widely viewed as indicating that it will not be enacted, Chairman Mills indicated that this conclusion is not necessarily valid.

The Senate Finance Committee will take up the travel measures sometime after the Easter recess.

Visa Act Amendment

In February, President Johnson transmitted proposed legislation to the Congress calling for a lowering of visa barriers as a means of encouraging tourism to the US.³ This was one of the recommendations of the President’s Commission on Travel. In testifying in support of the pending legislation (H.R. 15651, the Non-Immigrant Visa Act of 1968), Under Secretary Katzenbach said that we have given substantial thought as to how this proposal would be implemented. He added, “We contemplate that the Secretary of State will designate, by public notice, the countries whose nationals may be admitted as 90-day visitors” without visas. The Under Secretary urged prompt enactment of the legislation.

Other Travel Measures

Progress is being made in implementation of the recommendations of the President’s Commission on Travel (see page 1, February 13, 1968 issue).⁴ Among these is an accelerated clearance program for air passengers arriving from abroad which is now being inaugurated at Kennedy Airport. Another is the issuance of Hospitality Cards permitting residents of foreign countries to take advantage of a wide variety of discounts on transportation, hotels, motels, car rentals, restaurants, etc., throughout the United States.⁵ A card may be obtained by any resident, including American citizens, of a foreign country when he purchases a round-trip ticket to the US. Canadian and Mexican residents, however, are only eligible when they travel to the US by air, ship, or rail. Cards will be distributed by members of the travel industry, who will also have information on available discounts. Upon arrival in the US the traveler must have his card validated by an Immigration official at the port of entry. It will then be valid for 90 days.

US-Canada B/P Review

The semi-annual US-Canadian balance-of-payments review, which took place early this month, focused mainly on the recent exemption of Canada from the Commerce and Federal Reserve investment restraints and the Canadian undertaking to prevent the “pass-through” of US capital to third countries.⁶ Canadian action in this regard has been slowed by the cabinet change-over in that country. The Canadians have, however, taken interim steps to tighten controls on the chartered banks, the largest potential source of leaks. These controls are designed to prevent the banks from increasing their net position vis-a-vis third countries and also prevent the pass-back of deposits in the US and then use of this money in the New York call market, which, because of our balance-of-payments definition worsens our liquidity position without affecting their situation.

In the course of the b/p review, the US participants pressed the Canadians to liberalize the duty-free allowance on purchases by Canadian tourists returning from the US. This would relieve the present discrimination against the US and make more palatable the special status for Canada and Mexico in our pending tourism legislation. The Canadians promised to take another look at this question.

Foreign Investment Regulations

As the second quarter of the Foreign Direct Investment Program commenced, the Office of Foreign Direct Investment (OFDI) had received over 750 applications for special authorizations or exemptions. The OFDI had forwarded to American firms Base Period Report Form FDI–101 for completion by March 22, 1968. Due to the exemption of Canada from the FDIP and certain amendments in the instructions, the filing date for Amended Form FDI–101 was moved to April 5. When these forms have been received and processed, the Department of Commerce will be in a position to administer the program on the basis of more concrete information than is available at this time.

The OFDI intends to publish periodically general interpretive rules in order to clarify and implement the program. In addition, general authorizations or amendments to the regulations will be issued in proposed form, subject to revision and issuance in final format, after the public has been given the opportunity to furnish written comments or objections.

On January 23, 1968 General Authorization No. 1 relating to repayments of foreign borrowings and honoring guarantees of foreign affiliates of US companies was issued.⁷ Subsequently, General Authorization No. 2 permitting direct investors in Schedule A and B countries to refrain from repatriation of earnings to the extent transfers of capital in equal amounts would be generally authorized in that year and General Authorization No. 3, later rescinded, were issued on February 28. Miscellaneous technical Amendments and General Authorization No. 4 exempting Canada from the FDIP were published on March 12, 1968.

Under Executive Order 11387 the Secretary of State was authorized to advise the Secretary of Commerce with respect to matters under the FDIP involving foreign policy.⁸ The Department has commenced a liaison function with the OFDI to transmit State/AID’s views on projects which might affect our foreign political and/or economic relations with other countries and which should be taken into account in approving or denying applications for special authorizations or exemptions.

Foreign Investment Regulations and OECD Code

The b/p regulations governing foreign direct investment necessitated a derogation by the US to the OECD Code of Liberalization of Capital Movements. The Invisibles Committee considers the US justified in introducing its restrictions on capital operations on balance-of-payments grounds. Nevertheless, the majority of the Committee is of the opinion that the US measures are contrary to the letter of Article 7 (c) of the Code of Capital Movements (which specifies that any measures should be non-discriminatory) but that the probable effects of the measures will not run counter to the objectives of Article 7 (e) (to avoid unnecessary damage which bears especially on the financial or economic interests of another member). The report sets forth these views and is still under consideration within the OECD.

Eximbank

On March 13 the President signed into law S. 1155 which gives a new five-year mandate to the Eximbank and increases its lending authority to $13.5 billion.⁹ As part of his b/p program, the President said he would ask Congress to earmark $500 million of the Eximbank authorization to: a) provide better export insurance, b) expand guarantees for export financing, and broaden the scope of government financing for exports. To this end, a proposed new law is pending in the Congress (S. 3218) which would authorize the Bank to facilitate, through loans, guarantees, and insurance, certain export transactions which, in the judgment of the Board of Directors of the Bank, do not meet the test of reasonable assurance of repayments as provided in the existing Eximbank legislation, but which in the judgment of the Board nevertheless deserve support. The principal emphasis of this program is expected to be export credit insurance and guarantees on export credits extended by private lenders. These are areas where the government-supported export credit facilities of competing nations now provide broader coverage and more flexible terms than the current Eximbank-FCIA programs. The export expansion authority would also permit direct project loans on transactions that while still determined by commercial considerations, nonetheless fall marginally below the normal standards of the Export-Import Bank. It is envisaged that loans, guarantees, and insurance extended under the proposed authority would be considered according to commercial criteria and would not be used to supplement or augment foreign assistance programs authorized in other legislation.

To further stimulate exports, the Eximbank on April 1 announced changes in its Discount Loan Program. The changes will allow the Eximbank to lend against new export obligations at a preferential rate, to lend for the full term of export credit paper, and in some cases, to make outright purchases of export obligations owned by a bank.

Also pertinent to the b/p program is the fact that credits involving Eximbank participation continue to be exempt from the Federal Reserve voluntary guidelines on foreign lending.

End Limited Official Use—Begin Confidential

Neutralization of Military Costs Overseas

As part of the January 1 balance-of-payments program, the President directed Secretaries of State, Treasury and Defense to find ways of minimizing the foreign exchange cost of keeping US troops in Asia and elsewhere. Discussions of measures to deal with this problem are underway in Europe (Belgium, Denmark, UK, Germany, Netherlands) and Japan. We are planning to schedule talks with the Governments of China, Korea, Thailand, and Viet Nam and may consider an approach to the Philippines depending on an improvement in that country’s reserve position. Our objective with the four Asian allies is to neutralize the b/p impact of US security expenditures. At present, we believe that the most practicable way these allies can help is by investment in special longer-term US Treasury securities. Therefore, the USG hopes to reach appropriate agreement with each of the four Asian nations to shift during CY 1968 further amounts of their reserves into such securities as follows:

China	$75–$100 million
Thailand	$150 million
Korea	$60 million
Viet Nam	$50–$100 million

These amounts would be in addition to what these countries presently hold of longer-term US investments which the USG expects they will maintain in semi-liquid form.

End Confidential—Begin Limited Official Use

Prepayment of Debt

As part of the President’s program we are canvassing possibilities for payment of debts to the USG in advance of scheduled repayment dates. In addition, in some cases we have been able to arrange investment in non-convertible, non-marketable USG securities or certain obligations of USG agencies which result in an equivalent liquidity basis b/p improvement. Three techniques have been used to implement prepayments: a) appropriation of funds by Parliament which would be used to pay in full or in part the Government’s debt to the US; b) Treasury borrowing domestically in order to raise the funds with which to pay off external obligations—in these cases there was merely a shifting in the composition of the Government’s debts without any change in the total, and the role of Parliaments was limited; and c) Central Bank purchase of notes representing the long-term debt obligations of its government to the US. This last technique has been used for most repayments.

Overseas Personnel Reductions

The President on March 30 approved an initial reduction of 10 percent of USG employees serving overseas under Ambassadors as part of the b/p program.¹⁰ Additional reductions will be made later this year.

Known as “operation BALPA,” the overall plan for a reduction in US personnel overseas involves four steps, as directed by the President. The first step, already taken, provided for a 10–15 percent cutback (depending on the country-wide size of the mission) and met the President’s April 1 deadline for a recommended reduction of at least 10 percent at overseas missions. Included in the cutback consideration were all Americans and foreign nationals presently employed by 21 Federal agencies and working under the jurisdiction of the Ambassadors in every country except Viet Nam. As a result of this initial action, full year savings in expenditures abroad beginning in 1970 is estimated at $20–22 million. In fiscal year 1969, the transitional year, these savings will amount to $12–15 million.

Of 22,757 US citizens now employed abroad, 2,770 and their families will no longer be stationed abroad when the reductions are completed. Of the 26,293 foreign nationals employed by American Embassies, 3,177 will be separated from employment to the maximum extent by attrition. Also, there are 2,800 Americans abroad who are contract employees; about 13 percent will be returned to this country.

Steps two and three of the President’s directive, which call for special intensive reviews in selected countries with the aim of proposing additional substantial cutbacks, have been combined into one operation. The 28 countries selected for special intensive review are as follows: Guatemala, Honduras, Costa Rica, El Salvador, Nicaragua, Germany, Iran, Taiwan, Turkey, Ethiopia, the Philippines, India, Japan, the UK, Greece, Italy, France, Pakistan, Liberia, Spain, Colombia, Peru, Venezuela, Morocco, Argentina, Ecuador, Congo (Kinshasa), and Austria. The general objective in those countries will be to effect an overall personnel cut of 24 percent. The report on the special intensive review is to be submitted to the President by August 1.

Step four of the President’s directive envisaged the initiation of special studies to reduce reporting requirements in the field and to restudy activities in functional areas with a view to reducing staff requirements. An interagency task force under the chairmanship of Ambassador Parsons has been established for this purpose. The task force, as part of its task is reviewing 388 suggestions for improvements in procedures and operations submitted by 60 posts. A notable achievement of the task force to date is a reduction by 10 percent in reporting requirements.

GATT WP on Border Taxes

The US persuaded the GATT Council to set up a working party to examine the GATT rules on border tax adjustments and their possible effects on international trade. The President called for such a review in his January b/p message. The compromise terms of reference are broad enough to meet our objectives for a thorough review of the rules and of current national practices with the possibility of linking the discussion to the b/p situation.

[Here follow articles on unrelated subjects.]

1. Source: Washington National Records Center, RG 59, E/CBA/REP Files: FRC 72 A 6248, Current Economic Developments. Limited Official Use (Except Portion Marked Confidential). The source text comprises pages 1–7 of the issue.
2. Memoranda documenting progress on negotiations on directional air fares are in Department of State, Central Files, AV 10, and ibid., AV 10–2 IATA.
3. See footnote 3, Document 182.
4. “Developments of Travel and Other B/P Measures,” Current Economic Developments, Issue No. 799, February 13, 1968, pp. 1–5. (Washington National Records Center, RG 59, E/CBA/REP Files: FRC 72 A 6248, Current Economic Developments)
5. The 50% discount on domestic air fares is only available to residents outside the Western Hemisphere. [Footnote in the source text. The President’s Commission on Travel issued a press release on April 11 announcing the implementation of the Hospitality Card. (Johnson Library, Fowler Papers, International Balance of Payments: 1968 B of P Travel Task Force [2 of [2], Box 9)]
6. This meeting was scheduled for April 11 (telegram 142478 to Ottawa, April 5; Department of State, Central Files, FN 12 US), but no record of the discussion has been found.
7. Additional details on General Authorization No. 1 are in Current Economic Developments, Issue No. 798, January 30, 1968, pp. 16–17. (Washington National Records Center, RG 59, E/CBA/REP Files: FRC 72 A 6248, Current Economic Developments)
8. Regarding the executive order, see Document 167.
9. P.L. 90–267; 82 Stat. 47.
10. The President made a brief announcement of this reduction in U.S. personnel serving abroad at the outset of his news conference on March 30. For text, see Public Papers of the Presidents of the United States: Lyndon B. Johnson, 1968–69, Book I, p. 462.