Foreign Relations of the United States, 1977–1980, Volume III, Foreign Economic Policy

149. Memorandum From John Renner of the National Security Council Staff to the President’s Assistant for National Security Affairs (Brzezinski) and the Special Representative for Economic Summits (Owen)¹

Washington, July 19, 1978

SUBJECT

• International Economic Policy Balance Sheet

Now that the Bonn Summit is history, we should take a look at how our international economic policy is doing.

Over the last year our efforts have been directed primarily at reducing our large current account deficit and strengthening the dollar. The depreciation of the dollar should make our exports cheaper and imports more expensive. When the pipeline is drained of earlier orders, this change in relative prices should have some impact on our trade balance. However, it could be several years before the full impact is felt.

Meanwhile no progress has been made and none is expected this year. The current account deficit for the first quarter of 1978 was running at an annual rate of $28 billion, almost twice the 1977 deficit, and no large improvement is in sight. The dollar is hovering around its all-time low with regard to the Mark and the Yen, and it probably will sink further.

Our campaign to improve our current account position and strengthen the dollar, aside from allowing the dollar to float, has had five major elements. We have:

—Encouraged foreign governments to stimulate their domestic demand, expecting that this would suck in more imports.

—Attempted to gain passage of an energy bill to begin the protracted process of reducing our dependence on imported oil.

—Tried to persuade foreign governments to reduce barriers to foreign goods, including ours.

—Begun the effort to develop a national export policy designed to expand our exports.

—Announced an anti-inflation program and have assigned a high priority to it.

My purpose is to scrutinize each element and suggest what additional measures should be taken.

Economic Activity Abroad

To date we have been unsuccessful in our efforts to bring about increased economic activity in our major trading partners. The rate of economic growth in the US in 1977 was greater than that of Japan and more than twice that in all the other Summit countries. The first quarter data suggest that the disparity in economic growth may be diminishing somewhat, in part due to a less bouyant US economy. However, there is little evidence pointing to a sharp upturn in economic activity abroad.

If Schmidt and Fukuda deliver on their promises at the Summit, economic activity in Germany and Japan could pick up. We should keep a close watch and maintain the pressure on the surplus countries to expand domestic demand.

Energy Bill

Our efforts to date to gain passage of the energy bill have flopped. One of the key features of the bill, the COET, appears no nearer passage now than six months ago. All my contacts on the Hill and in the private sector say it has virtually no chance this year or next.

However, even if the energy bill is passed and even if the domestic price of oil is brought to the world price level by 1980 as the President promised at the Bonn Summit, the impact on consumption and production will be slow and insufficient. Our oil imports will remain immense unless we quickly institute additional measures. There are many steps we could take over and beyond those currently contemplated to stimulate domestic production, encourage the shift to other sources of energy, and to bring about greater conservation.

I think the President should appoint a high-level public task force and assign the members the job of preparing specific recommendations on means to this end. The task force should examine the extent to which incentives and disincentives other than price would be required to reduce steadily our oil imports. Here are examples of questions the task force should consider:

—Are additional incentives necessary to bring about greater shifting from oil to coal?

—How could public transportation of all types be made cheaper, more reliable, more pleasant? Should subsidies be used?

—What additional incentives and disincentives would be needed to reduce the use of private vehicles to and from work?

—Should taxes be increased on luxury and leisure vehicles, boats, airplanes?

—How much energy would be saved if night-time advertising were cut in half?

—Should trains, which use electricity, be subsidized further?

—Should research on renewable forms of energy be subsidized by a substantially greater amount?

Reducing Foreign Trade Barriers

Our bilateral and multilateral negotiations have not produced much in the way of tangible benefits.

Following intense pressure, the Japanese agreed to take a series of measures to encourage and facilitate imports. But the results cannot yet be seen in the trade figures. Nor does the Japanese performance in the Geneva multilateral trade negotiations suggest that they are serious about opening their market. The Japanese negotiators have been haggling over every half of one percent decrease in tariffs on items of special interest to us. I regret to say that the time probably has come to consider mounting another campaign. This might entail some political costs but how else can we get the Japanese to move?

The European Community negotiators are more sophisticated and smoother. But their opposition to big reductions of trade barriers is just as adament as the Japanese. In Geneva this last week, agreement was reached on a report on the status of the Tokyo Round.² It has a lot of nice sounding words but very little hard positive results. In fact, the European Community withdrew previous tariff-cutting offers, including the entire paper sector, which is important to us politically and economically. Without the support of the US paper industry, the prospects of getting Congressional approval of the MTNs would be reduced.

In the fall, when the serious, detailed negotiations are joined, we should insist on:

—Substantial tariff cuts by the EC in the paper sector.

—Major tariff reductions by the Japanese on high technology products, including computers and related equipment.

To have a reasonable chance of getting these concessions, the US will have to forego the planned withdrawal of tariff cuts in the textile and apparel sectors.

National Export Policy

Following the President’s directive to develop a national export policy, Frank Weil chaired a task force to examine possible steps to expand exports and has come up with a draft report to the President based on a consensus of the views of the task force members. Although this consensus report does not go nearly as far as required to deal seriously with the problem, it has run into heavy opposition. OMB does not want to spend any additional money; CEA puts its faith entirely in macro-economic policies; DPS is negative for religious reasons.

I think it is important for the US to have a hard-hitting, practical, and effective national export policy that will create incentives for exports and eliminate the multiple disincentives that exist now. This cannot be done, in my opinion, unless basic attitudes toward the importance of exports change and until national priorities are re-ordered to subordinate particular policy objectives to the need to export.

Exports are required to enable us to acquire the foreign exchange to pay for needed and desired imports. Expanding exports would contribute greatly to reducing our current account deficit and to strengthening the dollar.

I recommend that you both take every opportunity to stress the importance of an effective national export policy to the President, Eizenstat, Strauss, and Schultze.

Inflation

We have not cut taxes as planned; we have increased interest rates; we have jaw-boned. Some think that these measures (especially the increase in interest rates) threaten recession. But prices continue to go up. What can we do?

In my opinion, modern societies have a structural bias toward price increases that, short of a depression, are not responsive to the standard macro-economic techniques to reduce prices. Demand will remain high. I think more work needs to be done on the supply side to increase productivity and production. This requires savings and investments. Both have been quite low in recent years. This is so because of uncertainties arising from inflation, unpredictable energy costs, fluctuating exchange rates, and proliferating governmental regulations. It is also so because the risk-benefit ratio of business investment is low.

In my judgment it would be highly desirable to stimulate business investment by an appropriate mix of reduced corporate income tax rates, accelerated depreciation for investment, especially for research and development and energy conservation and production, and reduced capital gains taxes. The loss of revenue should be off-set by reduced government expenditures. Certainly the big industrialists will benefit. But in our system the little guy probably will not be able to improve his welfare unless the fat cats are persuaded to take risks with their capital.

Summary

We are not doing well. Our international economic policy goals are not being attained. We need to stress the importance of these objectives and give higher priority to means to attain these ends.³

1. Source: Carter Library, National Security Affairs, Brzezinski Material, Subject File, Box 16, Economic Policy Group Executive Committee: 1/78–3/80. Confidential. Sent for information. A handwritten notation at the top of the page reads: “DA has seen. 7/21.”
2. See Document 144.
3. In memoranda to Brzezinski and Owen dated July 28 and August 4, Renner discussed how the organization of the international economic policymaking process was affecting the achievement of the administration’s foreign economic goals. (Both in the Carter Library, National Security Affairs, Brzezinski Material, Brzezinski Office File, Subject Chron File, Box 59, Administration’s Policy: General: 1978)