Foreign Relations of the United States, 1981–1988, Volume I, Foundations of Foreign Policy

265. Memorandum From the Under Secretary of State for Economic Affairs (Wallis) to Secretary of State Shultz¹

Washington, March 13, 1986

SUBJECT

• International Economic Policy

It is not possible in international economics to set a course and adhere to it. There are too many rocks, reefs and other vessels. So if policy is to move in the right direction, despite inevitable twists and turns, it is essential to have a compass, to indicate the right direction as we maneuver among the constraints on our course.

Such a compass seemed to guide international economic policy in the first Reagan Administration but in the second Administration, if there is a compass, it is not clear to the officers and, too frequently, the message they get is one of uncertainty of even that the principles that guided the first Administration have been abandoned—if not reversed.

Do we still favor floating exchange rates? Do we intend to sponsor an international monetary conference? Will we support target (or reference) zones? What do we believe the World Bank’s policies should be—and why haven’t we named the new President?² Just what are our ideas for services in the new trade round? Do we favor orderly markets, to be attained through government allocations? Do we admit that free trade has been overdone? Will we stick to our requirement of policy reform as a prerequisite to debt relief? Do we ignore the effects on American business of foreign policy controls?

Following are suggestions for the elements of an international economic policy that would constitute a reliable compass to coordinate all participants in our international economic policy as they make numerous individual decisions or represent the U.S. Government at home or abroad.

First, the essential foundation of a sound international economy is sound economies in each country, especially ours; that is, economies which allow scope for individual initiative and enterprise in a system of law and respect for human rights, especially (in this economic context) property rights.

Second, a sound international economy requires freedom of exchange, in order to get the greatest advantage from the division of labor.

Third, if freedom of exchange is to be effective there must be a system of commercial laws and practices and methods of resolving disputes that covers transactions between participants in different nations.

Fourth, freedom of exchange will be far more effective if there is a stable medium of exchange and efficient markets in credit and foreign currencies.

Fifth, trade should not be allowed to bring a military advantage to our enemies even if it brings an economic advantage to us.

As I said in the beginning, we cannot just define a policy on these principles and set an automatic pilot. To illustrate, consider the question of government intervention in foreign exchange markets. This is contrary to the preceding principles, and in addition it has no effect (other than to waste money) except the effects of monetary expansion, whatever its form. During the first Reagan Administration, not only was the principle of nonintervention adhered to with only minor exceptions but other countries were led to understand the issue through a joint study of experience carried out by the Finance Ministers of the seven Summit countries, and thus to focus attention on their own domestic policies. This important and hard-won victory of the first Administration has been surrendered. But presumably it was surrendered because of rocks, reefs or other vessels in the form of protectionist pressures. The high value of the dollar was making it difficult to sell abroad, and businessmen were generating political pressures to “do something.” Perhaps foreign pressures played some role, since other countries were complaining that the “overvalued” dollar was causing them dire troubles. Although the intervention³ had little effect on the exchange rate, which already had been declining for nearly seven months and continued to decline at about the same rate, it was an unqualified public relations and political success and appears to have helped contain protectionist pressures, at least for the time being. So while it weakened one element of a sound policy, it may have strengthened another.

One of the effects within the government, however, has been detrimental. Top economic officials not only have no idea what our policy is but they doubt that there is one, other than to avoid rocks, reefs and other vessels, with no idea what the direction will be after the avoidance maneuvers.

Similarly, some high Civil Service officials are reported to be expressing relief that the Administration has at last abandoned its free-trade policies that were destroying American industry. It does, indeed, seem that we are devoting more attention (and enthusiasm) to the “strike force”⁴ and possible unfair-trade or countervailing-duty charges than to the new trade round, reform of the multi-fibre arrangement,⁵ or the Canadian free-trade area.⁶ We are participating in apportioning the world steel market. Even the debt policy worked out at the Williamsburg, London, and Bonn Summits has been partly disavowed as “austerity,” and “anti-growth”—though it appears to have been successfully reincarnated in the “Baker Plan.”⁷ The world believes, because of statements by our officials, that we want Germany and Japan to engage in pump priming, and some of our own people think so too. At least three high economic officials have said publicly that they know better than the market what the exchange rate of the dollar should be, but none has defended the market.

Postscript on organization: During the first Administration, there was a plethora of Cabinet Committees on economics. In fact, each appropriate Cabinet member had his own. Their jurisdictions overlapped, and they consumed a lot of time—I averaged probably three meetings a week. This has been cleared up in the second Administration by having only two or three committees. It turns out, however, that the new arrangement, though more efficient, has reduced the esprit de corps among top economic officials. Meetings afford not only opportunities to do business, but also opportunities for informal exchanges on the margins—and even the business parts of the meetings help build rapport and (usually) respect and collegiality. Our collegiality or esprit de corps has been attenuated, at some loss, I believe, to our morale and effectiveness.

Allen Wallis ⁸

1. Source: Department of State, Executive Secretariat, S/S Files, 1986 Official Office Files, Action/Briefing/Information/Through Memoranda/Chron Files/Memoranda to the Secretary Handled by Under Secretary Allen Wallis, (E) Economic Affairs: Lot 89D156, January/March—Memoranda to the Secretary. Limited Official Use; Eyes Only. Platt initialed the top right-hand corner of the memorandum and wrote “3/25.” Shultz’s stamped initials appear in the top right-hand corner of the memorandum.
2. Clausen served as President of the World Bank until June; Barber Conable succeeded him as President in July.
3. Reference is to the Plaza Accord of September 22, 1985. Documentation is scheduled for publication in Foreign Relations, 1981–1988, vol. XXXVII, Trade; Monetary Policy; Industrialized Country Cooperation, 1985–1988.
4. Reference is to the establishment of a Trade Strike Force, announced on October 2, 1985. Documentation is scheduled for publication in Foreign Relations, 1981–1988, vol. XXXVII, Trade; Monetary Policy; Industrialized Country Cooperation, 1985–1988.
5. Reference is to the Arrangement Regarding the International Trade in Textiles signed at Geneva on December 20, 1973. The Multi-Fiber Arrangement was extended in 1977 and 1981; negotiations on another extension began in 1985.
6. In a statement made before the Canadian House of Commons on September 26, 1985, Mulroney indicated that he had informed Reagan of Canada’s interest in negotiating a bilateral agreement with the United States reducing tariff and non-tariff barriers to trade. (Douglas Martin, “Canada Seeking Pact With U.S. On Freer Trade: Protectionist Mood Seen as a Threat to Ottawa,” New York Times, September 27, 1985, pp. A1, D5) In telegram 7451 from Ottawa, September 27, the Embassy reported on the initial Canadian reaction to the Mulroney announcement. (Department of State, Central Foreign Policy File, Electronic Telegrams, D850690–0606)
7. In an October 8, 1985, address delivered at the 40th annual meeting of the Board of Governors of the International Monetary Fund and the World Bank Group in Seoul, James Baker outlined the Program for Sustained Growth in the Developing Countries, subsequently known as the Baker Plan. For the text of the address, see American Foreign Policy: Current Documents, 1985, pp. 153–159. Documentation on the Baker Plan is scheduled for publication in Foreign Relations, 1981–1988, vol. XXXVIII, International Economic Development; International Debt; Foreign Assistance.
8. Wallis signed “AW” above his typed signature.