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

60. Report From the Voluntary Cooperation Program Coordinating Group to the Cabinet Committee on Balance of Payments¹

Washington, May 26, 1965.

SUBJECT

• Operating Problems under the Voluntary Cooperation Program

Since the announcement of the President’s balance-of-payments program, a small informal group has been meeting periodically in the Treasury Department to discuss operating problems arising under the voluntary cooperation program. In particular, the group has endeavored, through consultation, among the agencies directly concerned, to insure a coordinated interpretation of the Commerce Department and Federal Reserve guidelines in specific cases. These cases fall into several general categories which are discussed below.

1. LDC’s

The Federal Reserve 105% guideline for commercial banks includes credits to LDC’s as well as to borrowers in developed countries. Concern arose on the part of State and AID that banks would tend to lend to borrowers in advanced countries rather than meet the credit requirements of LDC’s. A situation involving bank reluctance to make an $80 million credit to Brazil indicated the need for a more definitive guideline regarding bank credits to LDC’s. After thorough inter-agency consultation, a Federal Reserve guideline was established giving bank credits to LDC’s a priority next only to U.S. export credits. The Brazilian case and a number of other smaller credit transactions have undoubtedly been facilitated by this encouragement to the banks to accommodate LDC credit requests.

The Treasury is periodically providing to the agencies directly concerned a detailed list of U.S. bank long-term loan commitments to LDC borrowers as well as data on the net outflow of bank funds, short and medium term, to LDC’s. The data show that LDC’s have received about $440 million of long-term bank commitments so far this year (thru mid-May)—$218 million since February 10. Last year’s commitments amounted to $926 million.

Another aspect of bank financing for LDC’s arose with respect to U.S. exports of military equipment to these countries. DOD will probably not have sufficient MAP funds available during the remainder of this fiscal year to provide credits for military equipment sales to a number of less-developed countries, including $8–10 million for Venezuela, $2 million for Malaysia and varying amounts for other LDC’s. The banks have not been generally receptive to the extension of such credits because they are generally considered to be less remunerative than other foreign credits, and have suggested that such credits be exempted from the 105% ceiling in cases where they know that DOD favors the transaction. In this situation the possibility of Export-Import Bank financing was explored. The Bank agreed to extend a military equipment export credit to India but is not eager to extend credits directly to the other countries, even with a DOD guarantee. The Bank is willing to purchase paper from DOD’s credit portfolio, but DOD’s legal authority to make such sales is questionable. It now appears that DOD may be able to delay extension of the credits mentioned above until its MAP funds are restored by the FY 1966 appropriation. If this should not turn out to be the case for particular credits, the matter of Export-Import Bank financing will be re-examined.

Another aspect of bank credits to LDC’s involves financing of AID’s extended risk guarantee programs (for example, Latin American housing). Some banks have indicated that they would not be disposed to lend for such programs within the 105% ceiling for the reason noted in the paragraph above. This situation will require continuing attention to determine whether the programs are being affected. In the case of the housing programs, a large part is being financed by non-bank financial institutions which are not subject to any guidelines in the case of loans of over 5 years’ maturity.

A special situation arose with regard to U.S. bank credits to Mexican customers by banks along the Mexican border. For many of these banks, the base date of December 31, 1964, under the Federal Reserve 105% guideline, was a seasonally low date for credits to Mexico. After the situation was reviewed, the Federal Reserve advised that where a bank could not absorb a seasonal variation within its total foreign business under the guideline, it might base its 105% ceiling figure on the monthly average of outstanding credits during 1964 or use some other appropriate seasonal adjustment.

2. Export Credits

Despite the likelihood that the turnover of outstanding commercial bank credits to foreigners enables the banking system as a whole to take care of any necessary increases in export financing during the year, there has been considerable pressure to have export credits removed from the 105% ceiling. The Federal Reserve has resisted this pressure on the grounds that this would greatly weaken the effectiveness of the guidelines in view of the difficulty of assuring that so-called “export credits” actually were essential to the accomplishment of exports in each particular case. The Federal Reserve has indicated to banks that they may exceed their 105% ceiling on a temporary basis to make bona fide export credits as long as they work towards a return to their ceiling amounts within a reasonable length of time.

The Co-ordinating Group discussed a number of cases involving reported reluctance of banks to engage in export financing and where appropriate the agencies concerned have discussed the situation with the banks themselves.

The Export-Import Bank requested and received a decision from the Federal Reserve that commercial bank loans which are participated in or guaranteed by the Export-Import Bank are exempt from the 105% ceiling. It was recognized that this exemption posed the danger of a great increase in requests for Export-Import Bank (and FCIA) guarantees. Review of the situation is being coordinated through the NAC to insure that such a patent abuse of the Export-Import Bank exemption privilege is not allowed to develop. The Federal Reserve informed the Coordinating Group that it feels free to tell commercial banks, if necessary, that the Export-Import Bank guideline is subject to change.

3. Japan

Application of the program to Japan has given rise to a special situation in view of the agreement worked out by Assistant Secretary of the Treasury Trued and Deputy Assistant Secretary of State Trezise for a $100 million exemption from the IET of obligations issued or guaranteed by the Government of Japan and an understanding that the guidelines would not interfere with an increase in U.S. export financing for Japan, expected to be proportional to the estimated ten per cent increase in U.S. exports to Japan in 1965.²

With regard to the $100 million exemption, it was necessary to provide that underwriters or institutional lenders would not be deterred by the Federal Reserve guidelines from purchasing Japanese Government or government guaranteed obligations. It was also necessary to arrange for maintaining a record of such issues in order that the $100 million tax-free limit would not be exceeded. In the latter connection, it was agreed that only issues purchased by U.S. persons at the time of issue or within 90 days thereafter should be counted against the $100 million exemption amount. A special Treasury form was devised for use by underwriters or other U.S. lenders to obtain tax exemption for purchases within the $100 million exemption.

With regard to export credit financing for Japan, it was necessary to develop statistics which showed the amount of such financing in the past as a base for the expected increase during 1965. Progress has been made in reconciling Japanese and American data, and an approach is currently being made to Japanese officials for agreement that an approximately $70 million increase during 1965 in outstanding acceptances and collections (plus identifiable short-and long-term export credits) would fulfill the understanding.

A third problem that has arisen involving Japan relates to application of the Federal Reserve guidelines to Japanese agency banks in the U.S. The Japanese claimed that to put their U.S. agency banks under the 105% ceiling imposed a double restraint on them since the greater part of their dollars was furnished by their head offices which, in turn, obtained most of these funds from American banks operating under the 105% ceiling. The agency banks make the bulk of their loans to Japanese trading companies situated in the U.S. and to foreign borrowers outside of Japan.

It was tentatively decided not to ask foreign agency banks in the U.S. to report to the Fed on conformance with the 105% ceiling. U.S. bank loans to Japanese agency banks in the U.S., however, would fall within the Fed’s guideline No. 13 (revised) dealing with loans to U.S. residents. A watch will also be kept over the activities of Japanese agency banks to see if they are accepting bills and then selling them in the U.S. market as a means of raising additional funds to lend abroad. The Japanese trading companies’ foreign transactions fall under the guidelines issued by the Commerce Department to American affiliates of foreign companies.

4. Australia

In March the Prime Minister of Australia in a letter to the President expressed his concern about the effect on Australia of the U.S. balance-of-payments program.³ The President’s reply indicated that, in the judgment of the U.S. Government, the U.S. balance-of-payments program was not likely to have a serious adverse effect on the Australian economy.⁴ The President indicated he was asking the Secretaries of the Treasury and of Commerce to give a careful hearing to any particular problems that the Australians might wish to discuss in connection with the program’s operation. Following this exchange of letters, various letters arguing the Australian case have been received by Commerce, Federal Reserve and Treasury. In early May Mr. Harold Holt, the Federal Treasurer of Australia, visited Washington and met individually with Secretaries Fowler, Rusk and Connor and Vice Chairman Balderston and Governor Robertson.

The coordinating group discussed the Australian approach and proposed agency replies in order to insure that a consistent position would be presented. In particular, it seemed important to avoid any appearance of concession to Mr. Holt’s request that Australia be exempt from the IET.

5. Canada

The Co-ordinating Group has discussed on several occasions the operation of the arrangement with Canada whereby its special status under the IET would not be taken advantage of to obtain funds in the U.S. and pass them along to borrowers in other developed countries. It seemed that an appropriate guideline from the Canadian Government to Canadian banks would be for the latter, at most, not to draw down their assets in the U.S. by an amount larger than that needed to pay off U.S. firms’ withdrawing deposits from Canadian banks. By adhering to this guideline, Canadian banks would not be shifting funds from New York to the Euro-dollar market at a time when Canadian residents had special privileges regarding borrowing in the U.S. (from other than banks). Such a guideline was given by the Canadian Minister of Finance to the chartered banks and reports to date suggest that Canadian banks have not been acting as a “pass-through” for U.S. funds.

6. U.S. Affiliates of Foreign Companies

The status of U.S. affiliates of foreign companies has required special consideration by the Co-ordinating Group to minimize the possibility that any threat of an exchange control procedure under the voluntary guidelines might induce the foreign parents to repatriate existing investment in the U.S.

Under the Federal Reserve guidelines, a U.S. affiliate of foreign banks is not subject to the 105% ceiling on foreign credits; but otherwise is treated in the same way as a U.S. owned bank. Also under its revised guideline 13, the Federal Reserve has noted that loans to U.S. affiliates of foreign business firms could interfere with the program if such loans represented an attempt to evade the limitation on direct loans by the U.S. bank to the foreign parents, or if such loans were to finance operations of the U.S. affiliates which would normally have been financed from abroad.

The Federal Reserve guideline to non-bank financial institutions is also applicable to American affiliates of foreign companies.

The Co-ordinating Group discussed Commerce Department guidelines for the U.S. affiliates of foreign business firms and a letter inviting their cooperation was issued along with a request for the filing of a special report on their assets and liabilities by U.S. affiliates of foreign firms. It was made clear that participation in the program by U.S. affiliates of foreign companies was not to be construed as a restraint on the remittance of earnings or the repatriation of capital.

Several specific cases involving the operations of foreign affiliates have been considered by the Co-ordinating Group. In one case the U.S. affiliate of a foreign firm was borrowing in the U.S. to make funds available for other subsidiaries in less-developed countries. To minimize the immediate impact on the U.S. balance of payments, the foreign parent company arranged to transfer to the U.S. for investment in long-term certificates of deposit an amount equal to what its U.S. affiliate was borrowing in the U.S. for transfer abroad.

7. Relation of Program to U.S. Imports and Exports

The President of the British Board of Trade expressed his concern to the Secretary of Commerce that the voluntary program induced American firms to reduce their imports from the U.K. He was particularly worried about the possible effect of the program on the decision of U.S. airlines to purchase U.S. rather than British aircraft. After discussion within the Co-ordinating Group, it was agreed that a clear statement should be made to the effect that limitations on imports have no place in the U.S. voluntary cooperation program.

The question was raised of whether the program requires that investment in LDC’s by U.S. firms be tied to the export of U.S. goods and services. The Co-ordinating Group agreed that the program does not involve any such restraints on private investment in the developing countries, although it is hoped that emphasis on increased exports under the program may lead American firms investing anywhere abroad to use a larger amount of U.S. equipment than might otherwise be the case.

8. Foreign Request for U.S. Government Guarantees

A number of situations have arisen in which foreigners have sought some kind of a U.S. Government guarantee in connection with the completion of credit transactions under the hypothetical situation of institution of U.S. exchange controls before the transactions were completed. In one case foreign commercial banks requested a potential U.S. borrower to obtain a statement from the U.S. Government to the effect that in the event of exchange controls the borrower would be permitted to honor a guarantee of repayment. In another situation American banks wanted an assurance from the U.S. Government that if exchange controls were imposed they would not be made retroactive to existing commitments by American banks to foreign borrowers.

A statement was prepared for use, as appropriate, to the effect that no expression by the U.S. Government was called for on such a hypothetical matter.

9. Classification of Firms under Guidelines

Several cases arose in which it was not clear whether a particular U.S. firm should fall under the Federal Reserve guidelines or the Commerce Department guidelines. For example, the General Motors Accept-ance Corporation, as a wholly owned subsidiary of General Motors, might have been reasonably made subject to either set of guidelines; but it was decided in view of the predominantly financial nature of its business to make it subject to the Federal Reserve guidelines for non-bank financial institutions. It was also decided that a leasing corporation involved in financing a new foreign subsidiary should come under the Federal Reserve non-bank financial guidelines.

10. Revision of Fed Guideline to Non-Bank Financial Institutions

The Fed has asked the Co-ordinating Group to consider a revision of this guideline on the following points: (1) raise from 5 years’ to 10 years’ maturity the claims on foreigners subject to the 105% ceiling and include within the 10 year maturities, the portion of claims in the form of serial notes falling due within ten years; (2) include under the 105% ceiling both dollar and foreign-denominated deposits regardless of maturity; and (3) make all forms of direct investment in foreign branches and subsidiaries subject to the 10 year cut-off mentioned above.

11. U.S. Taxes

Several cases were discussed by the Co-ordinating Group in which a company had stated that it would take certain action in compliance with the program if it received some form of special tax consideration from the U.S. Government. It was noted that the Treasury had already adopted certain policies designed to facilitate compliance with the program; viz., the announcement of a procedure whereby current dividend distributions could be reclassified and excluded from gross income if the Internal Revenue Service subsequently adjusted the income realized from transactions between U.S. corporations and their foreign affiliates. Furthermore, the Treasury had adopted policies which allowed taxpayers to make repatriations tax free under certain circumstances.

Several of the cases which had been presented to the Group involved requests that the Treasury treat certain amounts advanced by U.S. corporations to their foreign affiliates as debt whereas under existing laws such advances would be treated as contributions to capital. The Treasury is considering this problem which is complex because taxpayers similarly situated seek different results and any solution may well have significant domestic tax implications.

1. Source: Johnson Library, National Security File, Balance of Payments, Vol. 2 [1 of 2], December 8, 1964, Box 2. Limited Official Use. The report was sent under cover of a May 26 memorandum from Merlyn N. Trued to the Cabinet Committee on Balance of Payments. A copy was also sent to Martin, Chairman of the Board of Governors, Federal Reserve System.
2. See Document 42.
3. Document 50.
4. See Documents 51 and 54.