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

47. Action Memorandum From the Deputy Assistant Secretary of State for Economic Affairs (Trezise) to the Under Secretary of State (Ball)¹

Washington, undated.

SUBJECT

• Department of State Comments on Proposed Letter from Secretary Connor to U.S. Business Executives Implementing the Moral Suasion Program on Direct Investment

Problem

Secretary Connor has sent you a copy of the letter (Tab B)² he proposes to send to about 500 top corporate executives, to implement the moral suasion program on direct investment. He has requested your comments and suggested changes.

Summary

The program outlined in the letter has been considerably watered down from its original concept at the request of the Advisory Committee. Items dropped are: (1) Advance notification of any foreign investment of $10 million or over; (2) Virtual elimination of the 15–20% proposed guidelines for cutbacks in foreign investment; and (3) A watered down reporting system.

The program spelled out in this letter is probably inadequate to assure meaningful compliance by the corporations. Its proposed guidelines, reporting requirements, and instructions are so vague and generalized that it would be difficult for corporations to comply with them, even acting in the best of faith. There are also significant omissions in the list of items to be reported. The best that we can probably do at this time, however, is to give support to the approach and note that the program may have to be tightened in the future. We should at least recommend some specific changes in both the letter itself and the reporting form, to close some of the loopholes.

Discussion

Secretary Connor had originally planned to send out a quite comprehensive set of instructions and reporting forms. After meeting with his Advisory Committee of businessmen last Friday, however, he decided not to require any reports.³ The present draft represents a compromise between those two positions, although it leans more toward the latter.

The trouble with the proposed letter is that it sets no firm guidelines for standards for the companies to meet. Even the idea that companies should report large transactions before undertaking them has been dropped. This approach increases the likelihood that companies, even acting in the best of faith, will not make maximum contributions because of the fear that their competition will take advantage of the program’s flexibility. Under this program, the burden of proof will be largely on the Government to tell the companies where they should have done better—not, as it should be, on the companies to justify their not having adhered to guidelines. The program which Commerce originally developed would have satisfied these criteria, although it may have required too much paperwork.

Several specific problems are listed in the Annex of the proposed letter from you to Secretary Connor, with proposed changes in the letter to take care of them without changing the tenor of the overall approach.

1. The most important is the problem of Canada. Secretary Dillon had committed himself to special treatment for Canada in the field of direct investment and your letter makes this problem clear. Secretary Dillon took a different view on investment of corporate liquid funds in Canada. Your letter takes a different view of this problem because of the special relationship between Canada and Euro-dollar loans to the U.K. At a meeting yesterday, the Canadians stated that loans to the U.K., largely with U.S. dollars, had been very heavy in the last quarter.⁴ Since the U.K. problem is so delicate, it is important to urge caution with respect to withdrawals from Canada as well as with respect to direct U.S. investment there.

3. [sic] Although investment in LDC’s is not to be discouraged, companies should be required to report on their activities there to preclude evasion conducted through LDC affiliates. Such evasion could be particularly important for holding companies in Panama, Liberia, etc.

4. The proposed reporting form does not make it clear that unremitted earnings are to be reported, although we understand that it intends to do so. Since this area is of vital importance in assessing the overall performance of a company, it should be clearly included.

5. The proposed reporting form does not require information on imports by the companies although there is a textual reference to them. This is another important area, and should be included for all reporting forms.

Recommendation

That you sign the attached letter, with annex (Tab A).

Tab A

Washington, March 4, 1965.

Letter From the Under Secretary of State (Ball) to Secretary of Commerce Connor ⁵

Dear Jack:

Thank you for the opportunity to comment on your proposed letter asking for the cooperation of the industrial executives in reducing our balance of payments deficit. I do have some major comments which relate to Canada and the United Kingdom.

As you know, we have a special arrangement with Canada under the IET. We are greatly concerned that, as the letter now stands, corporations will be encouraged to reduce investment projects in Canada. To that extent, it would force the Canadians to float more securities in the New York market to maintain their level of reserves. There would thus be no net benefit to our balance of payments. The psychological effect, moreover, of the suggestion of a cutback in investment in Canada could be serious since the markets there are already quite nervous. You will recall that Secretary Dillon discussed this point at your meeting on February 18 and stated that the program should not affect any direct investment project in Canada. I would strongly urge that special mention be made of Canada in your letter. I am attaching suggested language to this effect.

One other problem affects both Canada and the United Kingdom in connection with the investment of corporate liquid funds. I agree that U.S. corporate liquid funds that are invested in Canada and loaned to continental Europe should be withdrawn in an orderly manner. However, as you know, a large part of these funds are loaned by Canadian banks to the United Kingdom. Since your letter stresses caution in such withdrawals when invested directly in the United Kingdom, I believe that similar caution is needed in the case of Canada. Suggested language is attached.

A few additional specific comments are annexed. Most of them would serve to clarify somewhat the guidelines for business reporting.⁶

Sincerely,

George W. Ball ⁷

1. Source: Department of State, Central Files, FN 12 US. No classification marking. Drafted by Benjamin Caplan (E/OFE) and C. Fred Bergsten (E/OFE) on March 4.
2. The letter and Secretary Connor’s transmittal note to Ball are attached but not printed. The letter is a draft of the one printed as Document 52.
3. For minutes of this meeting, see Document 46.
4. This meeting has not been further identified.
5. No classification marking. Drafted by Benjamin Caplan (E/OFE) on March 4 and cleared by Sharon E. Erdkamp (BNA).
6. The annex is not printed.
7. Printed from a copy that indicates Ball signed the original.