INITIATIVES FOR THE NSC

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP87T00759R000100100003-3
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 4
• Document Creation Date: December 22, 2016
• Document Release Date: May 5, 2010
• Sequence Number: 3
• Publication Date: July 26, 1985
• Content Type: MEMO

Sanitized Copy Approved for Release 2010/05/05: CIA-RDP87T00759R000100100003-3
26 July 1985
NOTE FOR: Bill Martin, Executive Secretary, NSC
FROM: David B. Low
National Intelligence Officer for Economics
SUBJECT: Initiatives for the NSC
1. In response to your request, I put together (very
informally--personal views only) the following list of issues that the
NSC might tackle in an NSSD format, either at its own ititiative or
because of events, over the next twelve months.
2. Aside from the more obvious issues I listed, you might consider
tackling the question of the dollar, our trade deficit with Japan, and
the eroding trade surpluses of debtor LDCs. If you believe, as many
argue, that the US current account deficit is roughly set by our need to
import foreign capital, then we should give more thought to the direction
of the largess created by this deficit. The penchant for European
countries to use monetary policy to temper the movement of their
currencies vis-a-vis the dollar and of LDCs to peg to the dollar means
that most of the changes in our deficit must be reflected by trade with
Japan. The current policy of lowering interest rates in part to bring
the dollar down and help trade does little to alter this imbalance since
the LDC currencies and, to a lesser extent, the European ones, will
follow the dollar.
3. Another course would be to bring the dollar down by selectively
allowing more imports from favored LDCs and indirectly reducing our
deficit with Japan. To some extent we are already doing this de facto
with the CBI and our free trade agreement with Israel. I think we could
do more, however, by looking more at the Latin countries.
4. This is a particularly good time to take an initiative in this
area.
o We are considering a new GATT round which, absent major
progress on services, will do little for US interests.
Sanitized Copy Approved for Release 2010/05/05: CIA-RDP87T00759R000100100003-3
 Sanitized Copy Approved for Release 2010/05/05: CIA-RDP87T00759R000100100003-3
o We are also considering an extension of the MFA, an
agreement which works to the detriment of many friendly
debtors.
o Also, the decisions of Latin countries to limit
devaluations in order to hold down inflation portends real
problems in the future.
5. The problems with this idea are, of course, even more compelling.
o The abstruse nature of the argument that financial deficits
determine trade balances.
o The individual interests that would be affected by
selectively allowing more imports from favored LDCs.
Obviously you can never get agreement that financial deficits cause trade
deficits. It is possible, however, to widen our bilateral trade
initiatives with major debtors, perhaps even parallel with GATT
negotiations, to bring about the desired result.
Attachment:
List of Issues
Sanitized Copy Approved for Release 2010/05/05: CIA-RDP87T00759R000100100003-3
 Sanitized Copy Approved for Release 2010/05/05: CIA-RDP87T00759R000100100003-3
SECRET
Initiatives for the NSC
1. Key Debtor Countries: I sense an erosion, although not
necessarily a fatal one, in the current system of ad hoc debt
negotiations. For one, the current governments in Brazil and Mexico seem
less in control of events than most analysts anticipated several months
ago. Sarney, in particular, seems wed to a populist policy and may be
vulnerable to demarches on debt moratoria if his policies fail. Also,
I'm less sanguine about global growth and, hence, the environment for
trade improvement in these countries. There is, at a minimum, a growing
downside risk on the OECD growth front. Lastly, I'm concerned about the
real currency appreciation that has taken place in these countries which
has eroded the trade cushion which benefited them last year. We are, by
the way, in the early stages of formulating a special estimate on this
issue.
2. Mexico: The Mexican situation is particularly troublesome. The
one major plus the government had going for it--the ability to rule
strongly and take decisive economic and political action--seems to be
eroding. This erosion coupled with the prospects for lower oil prices,
devaluation of the peso, IMF confrontation, and the growing concerns of
businessmen in the northern areas portends a possible substantial
increase in friction with the U.S. both in economic areas and in
emigration.
3. West European Energy Dependence: As you are aware, the Soviet
Union is taking a more aggressive approach to pricing natural gas than
they have in the past. This comes at a time when projections for future
gas use in Western Europe may be near an ebb because of the national
currency cost of imported oil and an extended period of sub-par economic
growth. You have been as close to this issue as anyone in the government
and know the problem well. Perhaps there are still untapped ways of
spotlighting the problem in a more convincing way.
4. Israel and Egypt: I am also concerned that two largest aid
recipients seem bent on courting economic disaster. In Israel, a lack of
economic leadership could eventually drain the country of the very
resource base that has been the backbone of the country's strength in the
past. If oil prices fall, and Egypt suffers also, it will alter
substantially two pillars of our political policy in the Middle East. I
am aware that State Department has been playing an active role in trying
to get Israel back on track. Perhaps NSC could also review the bidding
in an analytic and policy sense, however, to develop a coordinated
approach to the problem.
Sanitized Copy Approved for Release 2010/05/05: CIA-RDP87T00759R000100100003-3
25X1
LOA I
 Sanitized Copy Approved for Release 2010/05/05: CIA-RDP87T00759R000100100003-3
5. Falling Oil. Prices: I believe we are underestimating the effects
falling oil prices could have on the stability of friendly oil exporters
simply because it is analytically difficult to do more than extrapolate
present trends in internal political strains. There is already a good
deal of tension among the ruling elements in Saudi Arabia. Whether the
Saudis continue to play the role of swing producer or strike out on their
own, these tensions are likely to increase with results that are
impossible to determine. I am concerned that taken together with the
problems in Israel and Egypt, we may be on the verge of suffering a
relative loss of our political leverage vis-a-vis more radical elements
in the area and, by extension, the Soviet Union. We have underway an
estimate on this topic.
7. Pacific Basin: Clearly, events are moving rapidly on the Pacific
rim. Japan may be on the verge of a new political system for changing
Prime Ministers. Economically, the country (save for exports) is in the
doldrums and in need of imaginative leadership to get the domestic
economy going. China's prioritization of light industry and agriculture
are obviously extremely important but, as yet, not well understood moves;
and there is the sense of some movement on the Korean issue, although
just what changes will result are not clear.
On the economic front, I am, as others, struck with the potential for
a Pacific dialogue, but I find it as difficult as others to define this
in useful terms. The complementarity and contrasts between the Asian and
Latin economics are striking. In the past, bilateral forays by Asia into
Latin America have foundered on the rocks of unwise heavy industrial
projects that have not panned out. Perhaps there is another level to get
an economic exchange going--managerial, other services, light industry or
whatever--that could bring about a successful economic interchange
between Asia and the Americas.
Sanitized Copy Approved for Release 2010/05/05: CIA-RDP87T00759R000100100003-3