204. Memorandum From Secretary of the Treasury Fowler to President Johnson1
SUBJECT
- Balance of Payments Program for 1969—Early Announcement of the Foreign Direct Investment Program
As you know I plan to be in Europe next week and two days of the following week for the NATO Ministerial meeting and bilateral consultations. These will have an important bearing on U.S. balance of payments for 1969 and ensuing years.
In considering the content and timing of the announcement of the balance of payments program for the coming year we have kept very much in mind the importance of these consultations. It has seemed very desirable to have an estimate of our military costs and the burden sharing we could expect from our NATO partners before recommending continuation of the Action Program you announced on January 1, 1968, with appropriate modifications. This timing has coincided with the equally important desire to protect the balance of payments and international monetary system from any buffeting in the political campaigns.
Shortly after my return from Europe I expect to present to you the over-all balance of payments program for 1969 recommended by the Cabinet Committee on the Balance of Payments. One item, however, the Foreign Direct Investment Program, should not wait until that time. The 3,000 or more business firms affected by that program are well along in their budgeting for this coming year. In view of this fact, as well as the mandatory nature of the program, it seems highly desirable to announce the Foreign Direct Investment Program as quickly as possible. The Cabinet Committee, including representatives of the White House, has reviewed the modified program proposed by Secretary Smith. The Committee unanimously recommends that you approve this program and its announcement on or about November 15. The announcement will make clear that it is only one feature of the continued Balance of Payments Program for 1969 and that the over-all program will be announced later.
We expect that the Commerce program in 1968 will achieve its goal of saving $1 billion in direct investment in comparison to 1967, notwithstanding the exemption of Canada granted in March. The program has not stifled the foreign activities of U.S. firms. Indeed, direct investment [Page 572] by U.S. firms in foreign countries will probably set an all-time record this year with continuing high levels of capital flows to the less developed countries despite the reduced outflow of funds from the U.S. and the Foreign Direct Investment Program.
The capital markets of Europe have proved much more vigorous than most observers expected. They have provided the capital needs of American business for direct investment abroad in place of capital outflows from the U.S. or increased reinvestment of foreign earnings. Nonetheless, the increased borrowings of the U.S firms have not reduced the ability of European firms or governments to meet their capital requirements on normal terms. There is a clear expectation that a similarly large supply of capital will be available in 1969 from these offshore sources.
In summary, Commerce proposes to continue the basic Foreign Direct Investment Program established under the Executive Order of January 1, 1968. This would still
- —Seek maximum savings in direct investment flows to continental Western Europe;
- —Permit high level of direct investment in less developed countries;
- —Provide for ample amounts of direct investment in those countries that have been heavily dependent upon U.S. capital (e.g. United Kingdom, Australia and the oil producing regions); and
- —Exempt Canada.
In addition, the proposed modifications of the Foreign Direct Investment Program in 1969 would
- —Increase the foreign direct investment target from approximately $2,600 million to $2,850 million;
- —Maintain the net savings of 1968 in the over-all balance of payments since the increase in the investment target would be offset by greater earnings remittances; and
- —Use the increased leeway to provide additional flexibility for firms with limited or no foreign investment experience, relieve inequities for companies that received investment quotas unusually low in relation to direct investment earnings, remove potential blocks to the growth of inter-company exports by American firms to their foreign affiliates and reduce some unique problems for special industries which became apparent in 1968.
While the basic format of the 1969 program will remain the same as in 1968, there will be one major change bearing importantly upon 1969 and future years, should it be necessary to continue the program beyond 1969. The introduction of foreign earnings as the criterion for expanding the direct investment quota available to each company will introduce incentives benefitting both U.S. firms and the balance of payments. This concept will gradually free the program from the otherwise growing inequities inherent in a quota system based upon past amounts of investment.
[Page 573]In short, we will pass along to the incoming Administration a viable and much improved Foreign Direct Investment Program. Although the program was designed to be temporary it had been modified to minimize any adverse long-term effects. It has also been supplemented to facilitate an orderly transition to a more permanent system to restrain direct investment outflows should future circumstances so require.
Approve:2
Disapprove: