CIA REPORT ON FOREIGN REACTION TO INTERNATIONAL ASPECTES OF THE NEW ECONOMIC POLICY

• Document Type: CREST
• Collection: Library of Congress
• Document Number (FOIA) /ESDN (CREST): LOC-HAK-19-1-9-0
• Release Decision: RIFLIM
• Original Classification: S
• Document Page Count: 4
• Document Creation Date: January 11, 2017
• Document Release Date: November 9, 2010
• Sequence Number: 9
• Publication Date: December 6, 1971
• Content Type: MEMO

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MEMORANDUM
NATIONAL SECURITY CO "NCIL
SECRET
MEMORANDUM FOR: HENRY
FROM: ROBER
SUBJECT:
35226
INFORMATION
December 6, 147J j'.
r si
ON-FILE NSC RELEASE
INSTRUCTIONS APPLY
CIA Report on Foreign Reaction to International
Aspects of the New Economic Policy
CIA Director Helms has sent you a personal copy of a memorandum (Tab A)
evaluating foreign reaction to the international aspects of the New Economic
Policy, including the economic and political impact abroad, and the likely
responses of foreign nations. I have attempted a brief summary for you
and a shorter summary (at Tab I) for the President.
The New Economic Policy came "as a shock" to the International Commu-
nity. There was apprehension that the surcharge would have immediate
disruptive effects on foreign economies, that the job development tax
credit would severely restrict the import of foreign equipment, and that
the Domestic International Sale Corporation (DISC) would illegally subsi-
dize American exports. The initial reactions were tempered by the hope
of a quick settlement of the underlying issues, but the possibility of a
prolonged impasse has given rise to growing concern about the future,
Foreigners fear the combined effects of instability in foreign exchange
markets, the possibility of competitive trade restrictions, and a U. S.
retreat into protectionism and isolationism.
Economic Effect
The economic impact of the NEP on foreign countries has so far been
small, but there is danger that it will become considerably larger in
coming months if the impasse continues. There is concern that by trying
to do too much too quickly, the U. S. may risk triggering a worldwide
recession..
The NEP caught most industrialized nations at a sensitive moment: an
economic slowdown was already underway in Germany; in Italy strikes,
large wage increases, and political uncertainty had nearly halted economic
expansion; in Japan a slowed-down economy was just beginning to improve;
in Britain recent expansionary policies to produce an up-turn in a stagnating
economy had not yet brought about the expected upturn; and Canada, although
recovering from a recession, still had a higher unemployment rate (7. 1)
than the U. S. , chiefly because of its rapidly growing labor force.
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coming at this time, had a major psychological impact and
NEP
Th
,
e
contributed further to an emerging crisis of economic confidence. Uncer-
tainty in exchange rates makes investment decisions more difficult and
causes consistent, apprehension about the future of international trade.
Germany and Japan, whose currencies have appreciated significantly, and
whose exports are diminished by the general economic uncertainty, are
extremely concerned about their export prospects. Germany seems to be
developing a "recession mentality". restment throughout the industrialized
world is off -- and estimates of GNP growth are being revised downward.
The economic impact of our policy varies from country to country. Canada's
manufacturing development has been seriously hurt by the surcharge and the
Canadian dollar's float in the past year. Lacking substantial foreign markets
outside of the U. S. for much of its manufacturing exports, and some of its
raw materials, Canada is hard pressed to reach some agreement with the
U. S. In. Japan small and middle-sized enterprises which turn out "sundry
goods" will suffer, but important export industries are sufficiently competi-
tive to absorb the impact, of the surcharge. In Western Europe potential
economic damage is relatively small. Some growth in industry will be
affected -- perhaps more by the proposed investment tax credit than by the
surcharge. But few Western European countries send as much as 10% of
their exports to the U. S. and most send much less. All could prosper if
they kept up a brisk level in their far more important trade with each other.
Political Effect
The NEP has created - - or added to - - domestic political problems for some
of our allies. Sato may be forced to leave office sooner than he would have
liked. In Germany, Canada, Italy and U. K. trade is a prime political is sue
and our share of the blame for their economic troubles will be greater than
our contribution to them. The spectre of U. S. protectionism will help Britain,
Norway and Denmark "sell" entry into the EC to their electorates, and harden
the determination of the EFTA neutrals to make industrial free trade agree-
ments with the enlarged EC. France, which has less political desire or
economic incentive than most West Europeans to resolve present economic
problems, has stressed a more "European solution" to the problem which
stresses European unity vis-a-vis the U. S. And the domestic heat is on the
West German Government to disprove the charge that its eagerness to help
the U. S. has led to a weakening of West European and especially Franco-
German ties.
Probable Responses
The NEP already has produced general agreement on the need for worldwide
currency realignments. Japan, Germany and Canada expect to make some
upward adjustments from their old parities. But there is no indication that
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w
foreign governments will do much more unilaterally than they already have.
Many governments believe that if the surcharge is not lifted by early 1972
it will stay on through the U. S. elections. They fear that by that time
relations with Washington will have worsened >> and maybe the political
fortunes of some of our friends as well.
EC, Gold and the Dollar < Pressure is growing in the EC for a restoration
of normal conditions for intra??EC trade and for a resumption of progress
toward economic unity and monetary union. Member countries prefer a
currency alignment on a global basis, which would include a devaluation of
the dollar in terms of gold. France has stated that it will not revalue the
franc, Germany will not revalue to a point significantly higher than the
franc since its industry -- which is now moving slowly -?- would be at a
significant competitive disadvantage vis-a-vis French industry. Britain
faces the same problem. Thus a change in the value of the dollar is con-
sidered necessary by the Europeans if the magnitude of exchange rate
realignment we desire with the EC is to be realized. But if no settlement
is reached soon, the EC countries are likely to establish fixed parities
among themselves. The main obstacle to such a step has been that Germany
favors a joint float vis-a-vis the dollar, while France insists on fixed rates
based on the present gold parity of the franc. The French are in a stronger
bargaining position >- their economy is in good shape and they can afford to
wait.: Germany -< whose currency has appreciated more than others in
Europe and who is threatened by a recession cannot let the present
situation continue for long. A compromise on terms closer to those of
France. is likely. Because most trade of the EC is among the member countries,
agreement on new parities within the EC would reduce economic pressures
for an accommodation with the U. S.
To facilitate a global settlement Germany and Japan would be willing to
make some concessions. However, the Western Europeans are unlikely to
agree to unilateral trade concessions. They will neither change the essentially
protectionist Common Agricultural Policy nor hold off in their efforts to bring
the "EFTA non-applicants" into an industrial free trade arrangement with
the EC. Developments since August 15 may, in fact, have created a sense
of need to strengthen European institutions as a bulwark against a menacing
outside world. And Japan, although probably amenable to some additional
sharing of defense burdens, would balk at any measures >> such as
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assuming a greater share of the cost of U. S. forces in Japan -- which
would entail renegotiation of -the basic U. S. -Japanese security agreements.
Some of the understanding and sympathy which the U. S. problem was
accorded last August is beginning to erode, and this is likely to continue
unless at least the outlines of a settlement are worked out at a fairly early
date.
RE COMMENDATION:
1. That you sign the memorandum for the President (Tab I) summarizing
the CIA memorandum.
2. That you sign the note (Tab II) thanking Dick Helms for sending this
to you.
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