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

55. Memorandum From the Deputy Assistant Secretary of State for Politico-Military Affairs (Kitchen) to Secretary of State Rusk¹

Washington, March 24, 1965.

SUBJECT

• Probable Shortfall in German Military Offsets of DOD Balance of Payments Expenditures: Possible Redeployment of US Forces in Germany

1. On March 3, we described results of two days of discussions between concerned US officials in Bonn on the German offsets problem (Tab A).²

2. The difficulties anticipated in achieving full offset of US defense expenditures of $1.35 billion for CY 1965–1966 now appear even greater than earlier anticipated. On February 26, FRG officials told the DOD “arms salesmen” that they were only willing to show a potential procurement of $542 million for these two calendar years. Of this sum, $192 million would involve a carryover of purchases from previous years plus some orders already placed in the first two months of 1965. The Germans said they could not anticipate meeting the $1.35 billion goal through military purchases and that the US should accept as offsets German purchases in other fields (e.g., Boeing aircraft sales to Lufthansa). Further, the MOD officials said they had been unsuccessful in persuading the Ministry of Finance to agree to substantial advance payments on orders prior to delivery, an important US objective in terms of relieving our balance of payments problems. Attached at Tab B are pertinent tables indicating the procurement problem, in terms of the items accepted by the Germans as a potential and those which US negotiators would consider possible.³

3. I call these matters to your attention now because we have been informed that Mr. McNamara, on March 22, asked his negotiators why they should not simplify their negotiations by telling the Germans that, if the FRG cannot meet the US balance of payments costs in Germany, then the US would pull out US Divisions. The implication is, of course, that our force levels will be determined primarily, if not wholly, by the amounts of German purchases of US military goods and services, and not by other considerations of a political or military nature.

4. I think it would be a grave error to use now tactics of the kind described above, which Mr. McNamara may be considering. Negotiations on the offsets are in an early stage; the picture may not be as bad as the German tactics would indicate. Even if the offsets will not be adequate, the US should very carefully consider what then needs to be done, rather than, as a low-level negotiating tactic, making a threat which is bound to have the most serious meaning for our relations with Europe, and particularly with Germany. Apart from the issues of common defense, I would think that too direct a link between our balance of payments problems and our own level of forces would tend to undermine precisely that confidence in the US economic position which bears directly on our balance of payments position. Finally, we have stated publicly a number of times that we will maintain our present level of combat forces in Germany as long as they are needed. The President, in fact, most recently made this point when CDU/CSU majority leader Rainer Barzel saw him on February 24.⁴

5. I recommend that:

A. You find an appropriate occasion to speak to Secretary McNamara and to Secretary Fowler along the lines of the argument in paragraph 4 above.

B. Alternatively that you sign the letter attached (at Tab C) to Secretary McNamara, copies of which would be sent to Secretary Fowler and McGeorge Bundy.

Tab C

Washington, April 4, 1965.⁶

Letter From Secretary of State Rusk to Secretary of Defense McNamara ⁵

Dear Bob:

I have been informed there is presently a considerable question whether the Federal Republic of Germany will, through the purchase of US military goods and services, wholly offset for CY ′65–′66 US defense expenditures in Germany entering the international balance of payments. I gather that this is a question of both German ability and willingness to achieve this goal, as well as the FRG view that German purchases of items other than US military goods and services should be considered as offsets.

I have been greatly impressed by the skill and determination demonstrated by DOD officials in working with German officials and American business organizations to develop agreed areas for German offset purchases. In addition to the various balance of payments benefits, these activities have helped draw the Germans closer to the US in standardization of equipment and understanding our politico-military thinking.

I hope that, as I understand has occurred in the past, your negotiators will successfully demonstrate to the German side that there are available items for mutually desirable offsets. In achieving this end, however, I trust that we will not use tactics which imply that failure to meet fully US defense expenditures through these offsets will involve a consequential reduction of US military forces in Germany. I believe it would be very undesirable to convey, even by implication, that the level of US forces would be determined primarily, if not wholly, by the amount of German purchases of US military goods and services, rather than by other considerations of both a political and military nature.

I know you are aware that the German elections will take place this fall and that this fact alone may well affect the offsets negotiations. You may also recall that Ambassador Knappstein told the President on February 9 that the situation could arise in which German military purchases under the offset agreement would in fact constitute partial financing of our balance of payments deficit derived from massive US business investment in Germany.⁷ This capital outflow, of course, has been moderate but I mention the matter to note that the German Government is itself under a variety of pressures related to the relationship between our balance of payments and German military offset purchases. Moreover, we could not threaten to reduce the level of our forces in Germany without examining carefully the effect this might have on our relations with and commitments to our other NATO partners.

May I assure you that the State Department whole-heartedly supports this effort to achieve these offset goals, and that we will cooperate fully in these negotiations. In view of their interest in this subject, I am sending copies of this letter to McGeorge Bundy and Joe Fowler.

Sincerely,

Dean ⁸

1. Source: Department of State, Central Files, DEF 12–5 (GER W). Secret. Drafted by Howard Meyers (G/PM) on March 23, concurred in by Assistant Secretary for European Affairs William R. Tyler, and sent through George Ball. Copies were sent to Ambassador Thompson and Mann.
2. Tab A, a March 3 confidential memorandum from Kitchen to Ball on the German offset discussions, is not printed.
3. Tab B, “Tables on Procurement” is not printed.
4. The meeting included the President, Barzel, German Ambassador Knappstein, and the Country Director for German Affairs Alfred Puhan, and lasted from 12:01–12:30 p.m. No other record of this meeting has been found. (Johnson Library, President’s Daily Diary)
6. The April date is stamped on the source text, presumably indicating the date of signature.
5. Secret. Drafted by Howard Meyers (G/PM) on March 25. Copies were sent to McGeorge Bundy and Fowler.
7. President Johnson met with German Ambassador Knappstein on February 9 at the White House. For President Johnson’s remarks at the conclusion of his meeting, see Public Papers of the Presidents of the United States: Lyndon B. Johnson, 1965, Book I, p. 169.
8. Printed from a copy that indicates Rusk signed the original.