Foreign Relations of the United States, 1969–1976, Volume III, Foreign Economic Policy; International Monetary Policy, 1969–1972

188. Information Memorandum From Robert Hormats of the National Security Council Staff to the President’s Assistant for National Security Affairs (Kissinger)¹

Washington, November 1, 1971.

SUBJECT

• Talking Points for Your Meeting with George Shultz, Tuesday, November 2, at 8:45 a.m.

Shultz apparently wants to inform you of the results of the Quadriad Meeting which took place last Thursday,² and get your views on the present international economic situation. With regard to the latter, there are two points which you might stress.

• —The longer the surcharge is retained, the less of a bargaining asset it is and the greater the risk that it will harm our overall economic, foreign policy and security interests.
• —Recognizing this, the surcharge should be removed in return for small amounts of additional depreciation of the yen, mark, and Canadian dollar, plus a minimum list of additional desiderata in the area of trade and defense burden sharing which can be negotiated within four to eight weeks.

Background

Secretary Connally seems to have departed from what many had perceived to be a more “cooperative” line. Last week in San Francisco he told the American Bankers Association that the surcharge “is going to stay on for a while because it frankly is to our advantage to keep it on for a while.”³ The Europeans, Canadians, and Japanese, as the result of this and other such statements, increasingly believe that the U.S. is unwilling to cooperate with them to bring about conditions for removal of the surcharge. And there are indications that they feel that even if they are forthcoming, the U.S. will maintain an unreasonable posture and retain the surcharge indefinitely.

Disadvantages of retaining the surcharge

• —Many of our key trading partners (including Italy and Germany) are faced with economic recessions and growing unemployment. While the U.S. surcharge is obviously not the main cause of these problems, it may be a partial cause. At any rate, because of it the U.S. will be used as a scapegoat, thus making it increasingly difficult for other nations—no matter how well disposed they or their leaders have been toward us—to cooperate with us on economic, political, or security matters.
• —Canada and others are taking, or are considering taking, countermeasures such as instituting restrictions on monetary or trade flows. Vested interests in those countries will seek to maintain these controls thus making future negotiations more difficult. And such negotiations could become primarily efforts to eliminate countermeasures rather than the trade barriers and exchange rate inequities which were our original targets. [State (Tab A) indicates that Germany, as well as other European nations, may soon be forced to take such measures.]⁴
• —As other nations institute countermeasures, and become less disposed and less able to cooperate with us to bring about the changes we desire, the surcharge becomes a wasting asset. In addition it becomes increasingly detrimental to our overall economic and political interests. By contributing, even at the margin, to a deterioration in international trade and in the economies of our major trading partners, which will decrease U.S. exports, it runs the risk of harming our overall economic interests and, rightly or wrongly, increasing the intensity of domestic and foreign criticism of the President. And to the extent that the international political system is harmed by the spillover effect, the same reaction will occur. Far from being in our interest, long-term retention of the surcharge can be extremely detrimental to our interests.

You might, therefore, indicate to Shultz that our economic, foreign policy, and security interests will best be served if we move promptly to negotiate conditions which will allow us to remove the surcharge by the end of the year.

Conditions for surcharge removal

There are several conditions for surcharge removal which would a) be acceptable on domestic political grounds, b) allow us to realize some significant gains in terms of international economic policy, and c) we could reasonably expect to obtain by the end of the year:

• —A small increase in the parities of the yen, mark, and Canadian dollar.⁵
• —Additional trade measures with Japan as a follow-up to the ECONCOM.
• —An understanding with the Common Market about future negotiations on the reduction of tariff barriers, plus a reduction in their export subsidies on agriculture.
• —An agreement with Canada relating to the Canadian-U.S. Auto Agreement.
• —A favorable offset agreement with Germany.
• —A commitment from Japan (already made in principle) to purchase additional military equipment in the United States. You might wish to determine what conditions Shultz would attach to surcharge removal, whether he would agree with the above, and, if you agree with one another, the best method of getting Secretary Connally to act on the basis of your views.⁶

1. Source: National Archives, Nixon Presidential Materials, NSC Files, Agency Files, Box 268, Office of Management and Budget. Confidential. Initialed by Haig. A stamped notation on the memorandum reads: “HAK has seen.”
2. October 28; see Document 187.
3. No text of Connally’s remarks has been found. According to The New York Times, October 21, Connally delivered some extemporaneous remarks at the closing session of the American Bankers Association Annual Meeting on October 20. The focus of the article is on changes in the prime lending rate, but the language Hormats quotes in his memorandum is in a brief section on international economic policy, followed by: “It is going to come off when this nation has some assurance that our balance-of-payments deficit will indeed be rectified or until we can be assured that the mechanism is established by which it can be rectified.”
4. Brackets in the source text. Tab A, not printed, is another of the end-of-the-week Department of State reports from Executive Secretary Eliot to Kissinger entitled “Foreign Reactions to the President’s Economic Program” for October 29. The report indicated that about 20 diplomatic notes had been received protesting one or more U.S. actions and most of the U.S. major trading partners had threatened “appropriate compensatory measures should the DISC proposal be enacted.” The report noted that a senior German official told the Embassy in Bonn that the European Community had turned its attention to internal solutions, was hardening its position toward the United States, and that “Germany’s ability to urge a flexible EC position toward the U.S. was weakened by confusing reports of a possible deal between the U.S. and the FRG for selective removal of the surcharge.”
5. All three had already floated to new parities since May.
6. No record of a meeting between Kissinger and Shultz was found.