Foreign Relations of the United States, 1964–1968, Volume XV, Germany and Berlin

24. Memorandum of Conversation¹

Washington, April 8, 1964, 11 a.m.

SUBJECT

• Current Economic Topics

PARTICIPANTS

• Germans
  • Ambassador Knappstein
  • The Minister of Economics, Mr. Kurt Schmuecker
  • Dr. Edgar Horn, Director for Customs and Tariffs
  • Dr. Hans Weber, Economic Advisor for Foreign Trade
• Americans
  • The Under Secretary
  • Mr. Robert Anderson, Special Assistant to the Under Secretary
  • Mr. Jerome Jacobson, Deputy Assistant Secretary for Economic Affairs
  • Mr. Robert C. Creel, Director, Office of German Affairs
  • Mr. Deane R. Hinton, Director, Office of Atlantic Political, Economic Affairs
  • Mr. Joseph A. Greenwald, Director, Office of International Trade
  • Mr. Joseph E. O’Mahony, Economic Advisor, Office of German Affairs

UNCTAD

The Under Secretary stated that so far the Communist delegates at the Geneva talks² have engaged in less mischief than might have been expected. The Soviet Minister’s speech, in fact, was quite mild.

The Minister agreed, but said he remains cautious about the future—many problems are yet to be faced. As a consequence of the discussions he has had during the past few days he has come to understand the United States position on stabilizing world commodity prices, etc. He appreciates our “reserved position” on these matters, and will take a similar line with his colleagues in Bonn.

The Minister continued that he also tends to agree with the United States position regarding trade preferences for the LDC’s, but it must be recognized that certain preferences, such as those provided to a number of new nations by the EEC, are required. He has received the impression in Washington that the United States considers that the Kennedy Round will reduce the significance of these preferences.

What we must guard against, the Minister warned, is the wrecking of the whole international trading system, including the GATT, by the decisions of the Geneva conference. It is gratifying to learn that no real difference of opinion exists among the US, FRG and even the IMF on matters of substance, as well as institutional issues, in connection with UNCTAD.

Kennedy Round

The Minister briefly outlined some of the matters he had discussed with Governor Herter during the previous hour,³ and said he is of the opinion that American offcials are overemphasizing the technical difficulties connected with the disparities issue. He believes he got this point across to Governor Herter, and hopes that the Americans can understand why Austria, Switzerland and Denmark must be given special treatment because of their close geographic proximity and traditional economic relationships with Germany and France.

The Minister’s ensuing remarks on the subject of the GATT negotiations rambled somewhat and their meaning was always not entirely clear. He said that, especially when it comes to agriculture, we must not think in terms of tariffs alone—subsidies must be taken fully into account even though it is difficult to obtain full information about them. In every country he has visited he asked about the subsidies provided to that nation’s agricultural sector, and in every country he has found that this is top secret information. He has figures which indicate that in some countries subsidies constitute 25 percent of the price of farm products. But the truth is that no one knows what subsidies the other partners are giving. One country gives subsidies to lower prices, another gives subsidies to raise prices. The Federal Republic ties its subsidies to production, other countries do not. This situation is not only confusing, it causes enormous waste.

Establishment of common agricultural prices in the EEC, therefore, will take considerable time. Governor Herter, the Minister added, agrees with him that this is a subject which should be debated extensively. The wheat price cannot be settled until the subsidies problem has been solved. If a wheat price is agreed upon first, it will not be possible to bring pressures to bear to harmonize subsidies.

When, the Minister asked the Under Secretary, do we really have to decide upon grains prices? Governor Herter indicated we should try to settle the price problem quickly, but he also agreed that we cannot entirely separate the price issue from other matters that must be negotiated. The Chancellor goes along with the latter point—that is, all these matters should be negotiated together during the course of the Kennedy Round.

The Under Secretary asked whether the Federal Republic wouldn’t find it easier from the political standpoint to come to a decision on grains prices during the next month or two, rather than some time later which would be closer to elections.

The Minister said opinions differ on this question in the Federal Republic, but the Cabinet generally agrees that the time to fix grains prices will be when the gap between German and French prices has been reduced. Under present circumstances, subsidies of DM 2,000 would have to be paid per farm. This is impossible. Poor workers would have to contribute to the incomes of rich farmers. The workers would certainly demand equal subsidies.

If all these matters are negotiated as part of the Kennedy Round, the Minister continued, there is no immediate need to settle such complex issues as price and subsidy-price relationships immediately. Furthermore, there is much more to the Kennedy Round than agriculture. We should not spoil our chances to accomplish something “in the big picture” simply because we have problems with agriculture.

The Under Secretary pointed out we have a definite interest in the grains price problem, but we have not made their fixing a hard-and-fast precondition for beginning the negotiations. He asked Mr. Greenwald for his comments on this subject.

Mr. Greenwald agreed with the Under Secretary, and added that, of course, if price unification can be worked out at a proper level now, even if implementation must be delayed, that would represent the best solution. We are not “holding out” for such a decision, however.

The Minister said he agrees with this position, but again stated that agreement on prices will not be easy because no one knows enough about the varied, hidden and difficult-to-calculate subsidies that are involved in current prices. To what extent, for example, does the United States wheat price represent subsidy payments? Without this information and similar data on subsidies paid in each of the European countries, how can we relate various countries’ prices?

Mr. Greenwald acknowledged that it is difficult to make these calculations, and added that this is one problem we have with the Mansholt plan.⁴ The Under Secretary remarked that it is not a matter of keeping the data on US subsidies secret, but calculating them is very complicated.

East-West Trade

The Minister referred to what appears to him to be a rethinking exercise in progress in the United States on the subject of trade with the Communist countries. It is generally considered likely, he said, that the United States will change its policies in this regard. It is speculated, for example, that the United States will extend credits to the USSR up to Bern Union limits.⁵ This is somewhat puzzling to him, in as much as Americans continue to tell officials of the Federal Republic that West German trade with the Bloc is so large that no thought should be given to increasing it. The Under Secretary should not overlook West Germany’s geographic position and its traditional trade ties with the East.

The Under Secretary stated that we do have our policy on trade with the Bloc under review, though it should be kept in mind that our actions in this field are not entirely governed by administrative decision, but are in many respects affected by law. We do not foresee any radical changes in our trade with the Bloc.

We do feel, the Under Secretary continued, that we should distinguish between the USSR and the Eastern European countries. There may be considerable advantage in increasing trade with the latter, even if credits would be involved. Such credits, he believed, should fall within the Bern Union rules; i.e., five years, except for larger ships and aircraft where seven years’ credit may be extended. The Under Secretary explained the provisions of the Johnson Act,⁶ and pointed out that government-guaranteed credits cannot be provided to the USSR because that country is in default on settlement of its lend-lease obligations. This is not a problem with the Eastern European countries.

While the Attorney General ruled that normal 18 month credits could be provided to the USSR in the case of the wheat deal, we do not believe that we would have even this flexibility if industrial plants were involved. Perhaps we could defer payment until a plant were installed, but we could not go beyond this limit.

As far as trade in strategic goods is concerned, we continue to adhere to a policy of strict compliance with COCOM and other prohibitions. Problems arise, however, with items which are not on the strategic list but involve sophisticated technology. The USSR frequently only wants to obtain prototype models of such equipment which it then copies. They do not want our production, they want our technology.

It is this category of goods—non-strategic items of sophisticated technology—that requires the greatest study. While no final conclusions have been drawn, we feel that we probably will have to continue to decide each case individually on its merits. This isn’t any easy policy to administer, but it is probably a necessary one.

Another problem involved in establishing internal policy guidelines for trade with the Bloc results from the absence of common Western policies. For example, we recently considered a proposal to build a refinery near Moscow—an installation which would turn out products to flow through the Friendship Pipeline.⁷ We probably will not approve this sale, though we know that in all probability one of the Western European countries which does not look upon this matter quite as we do will make the sale. What purpose is served then, we ask ourselves, by our decision?

The Under Secretary then described the various obstacles standing in the way of any large-scale increase in our trade with the USSR: the Soviets’ limited financial reserves, our lack of interest in the items the USSR has for sale, our established sources of supply for most raw materials, the nature of the Soviet trading system which makes bilateral exchanges of goods with other countries necessary, our laws which prevent us from extending credits to USSR, and the Soviet demand for MFN treatment.

We strongly support the resolution before NATO on limiting credits to the Bloc, the Under Secretary went on. He mentioned that we have heard a number of stories of negotiations between the British and Bloc countries for as much as 12 and 15 year credit terms. We regard such arrangements as unwise.

The Minister said that the Federal Government would not guarantee any credits for the USSR. What would we be guaranteeing, he asked, and answered that it would be a guarantee given to West German traders by the Federal Government against Soviet aggression directed toward Germany.

The Under Secretary then explained how from a strategic viewpoint it is to the West’s advantage to see the USSR forced to reallocate resources from military to non-military uses. We should not make it possible for the USSR to avoid such reallocations.

We look at Eastern Europe somewhat differently, the Under Secretary pointed out. It is to our advantage to encourage a movement by these countries from total dependence upon the USSR. In this connection, we have looked with favor on the actions of the Federal Republic to establish trade missions in many of the Eastern European countries. We are a little disturbed, however, over the Federal Government’s attitude toward Yugoslavia. It would be in our mutual interest to see Yugoslavia move further toward the West.

The Minister said he generally shares the Under Secretary’s opinion about Eastern Europe. Opportunities for improving commercial and other relations with those countries are not great, though. It will be necessary to proceed slowly.

The Minister then briefly recounted the Pipe Episode,⁸ and concluded by saying that he has taken a very hard line in the German Cabinet as far as credits for the USSR are concerned. If the United States now proceeds to extend five or six year credits to the USSR, his position will have been made extremely difficult.

The Under Secretary said he fully appreciates the Minister’s position, and explained again why it would be impossible for the US to extend such credits to the USSR.

Foreign Aid

The Under Secretary remarked that foreign aid is not his direct responsibility, but he has been informed that the Federal Republic’s bilateral development lending commitment authority was cut to DM 750 million this year and our Embassy in Bonn has been advised that no more than a like amount is contemplated for 1965. The Under Secretary referred to the Federal Republic’s strong financial reserve position and high level of economic activity, and said that it would seem the Federal Republic could finance a considerably larger foreign assistance program.

The Minister replied that foreign aid is also the direct responsibility of another official in the Federal Republic, but he does participate in the budget discussions of the Cabinet. He called DM 60.3 billion “a magic figure” at present for the overall budget. For business cycle reasons it is impossible to raise that figure now, and, because of a great many internal problems, funds cannot be switched among accounts in the budget.

Nevertheless, for 1965 he does not believe the Federal Republic will hold to only DM 750 million. There is a budget meeting scheduled for next week, and the figure being mentioned for “foreign aid” is DM 1 billion. (The Minister was not clear whether DM 1 billion represents an overall foreign aid allotment, lending commitment authority or something else.)

The Minister concluded by saying one thing that has been made clear to him as a result of his talks in Washington is that the proposals of the LDC’s for achieving large-scale capital transfers by means of rigged prices or other devices in the international trade field are illusory. Capital transfers for development in excess of the real earning power of the underdeveloped countries will have to be made largely through foreign aid channels for some time to come. The Federal Republic intends to do its part in this field.

1965 Munich Exhibition

As the meeting was breaking up, the Minister mentioned the 1965 Munich Transportation and Communications Exhibition, and asked the Under Secretary to do what he can to assure official US participation.

The Under Secretary replied that he is not familiar with the details regarding our possible participation—other agencies are primarily concerned with fairs and exhibitions—but he will look into the matter.

1. Source: Department of State, Secretary’s Memoranda of Conversation: Lot 65 D 330. Confidential. Drafted by O’Mahony and approved in U on April 10. The meeting was held in Under Secretary Ball’s Conference Room.
2. Reference is to the U.N. Conference on Trade and Development held at Geneva March 23–June 16.
3. These talks were summarized in circular telegram 1908, April 13. (Department of State, Central Files, INCO GRAINS EEC) Christian Herter was the U.S. Special Representative for Trade Negotiations.
4. Reference is to the plan for a European agricultural free trade zone that became the basis for the Common Agricultural Policy of the EEC.
5. Apparent reference to the European Payments Union.
6. For text of the Johnson Debt Default Act, signed on April 13, 1934, see 48 Stat. 547. The Act was amended on July 31, 1945, to exempt foreign governments who were members of the International Monetary Fund and the International Bank for Reconstruction and Development from some of its provisions. (59 Stat. 516)
7. Reference is to the pipeline linking the Soviet Union to Eastern European states. The sections to East Germany and Poland opened in 1963.
8. The Soviets were unable to manufacture pipe of sufficient diameter for the pipeline. Over NATO objections, Italy sold the Soviets pipeline.