Foreign Relations, Vol. IX, 1961-63, Foreign Economic Policy OFFICE OF THE HISTORIAN

When John F. Kennedy became President in January 1 961, the U.S. balance of payments was rapidly worsening. The Kennedy administration's preoccupation with reversing this deteriorating situation is the predominant subject documented in Foreign Relations of the United States, 1961-1963, volume IX, Foreign Economic Policy, released today. Administration officials launched many short- and long-term policy initiatives in the areas of financial and monetary policy, foreign assistance, and trade and commercial policy to try to eliminate the deficit and stem the outflow of gold caused by loss of foreign confidence in the dollar.

Perhaps the most controversial of these measures was the effort to reduce U.S. overseas expenditures. The United States tried to gain the cooperation of other nations to expand their foreign aid programs in the developing world and negotiated burdensharing military offset accords with the West German Government. U.S. policymakers also had to deal with Japan's vigorous protests against the administration's proposed interest equalization tax, which would have imposed a tax on all capital borrowed by foreign governments or individuals from U.S. sources.

The Kennedy administration also initiated multilateral trade negotiations aimed at increasing U.S. exports. Although the Trade Expansion Act of 1962 gave the President broader authority to offer tariff concessions, the textile, cotton, and wool industries and their allies in Congress pressured the President to impose ceilings on textile imports and consider an equalization fee on cotton imports. These pressures and the raising of certain U.S. tariffs provoked hostile reactions abroad. Retaliatory action by the European Economic Community resulted in a "chicken war" and contributed to the failure to agree on the ground rules for the 1964 Kennedy Round negotiations.

Kennedy administration officials also developed a new foreign assistance policy aimed at moving developing nations into self-sustained economic growth. The purpose of the newly-created Agency for International Development (AID) was to cooperate with other developed nations in fashioning a coordinated long-term strategy for developing nations. AID became the central coordinating agency for both economic and military assistance as well as for the training of police in foreign nations. Kennedy officials also hoped to use foreign assistance policy to help improve the balance of payments.

The U.S. Government simultaneously promoted its foreign assistance goals in multilateral agencies. Kennedy called for increases in the resources of the International Development Association and designated the 1960s the United Nations Development Decade. However, his administration's opposition to modest U.N. funding for an agricultural research project in Cuba suggests the limits to U.S. support for multilateral development, during the Cold War.

 

The Kennedy administration also debated other foreign economic issues. On East-West trade, the Department of State favored expanded trade with the Soviet bloc, but the Congress, the Department of Commerce, and other agencies generally wanted to restrict trade.   Disagreements also existed in the 15-uation Coordinating Committee on Export Controls (COCOM) between the United States and other member nations over exports of Western technology to Soviet bloc countries. Finally, President Kennedy's decision to sell off part of the surpluses in the U.S. stockpile of strategic materials resulted in mixed reactions in Congress and by the interested departments.

Foreign Relations of the United States 1961-1963, Volume IX Foreign Economic Policy (This is not an official statement of policy by the Department of State; it is intended only as a guide to the contents of this volume.)
 

Since 1861, the Department of State's documentary series Summary General Foreign Economic Policy.

The need to reverse the deteriorating U.S. balance of payments, which had become the growing concern of the Elsenhower administration in its second term, became the core of the Kennedy Presidency's foreign economic policy. Briefed on the problem by President Elsenhower shortly before he took office, President Kennedy delivered a major address only 2 weeks after his inauguration, in which he proposed both short- and long-term measures to eliminate the deficit and stem the outflow of gold caused by the loss of foreign confidence in the dollar. (1, 2.)

Kennedy mobilized the Departments of the Treasury, State, Defense, Commerce, and Agriculture, the 13ureau of the Budget, and the newly created Agency for International Development (AID) to implement his program of export promotion, burden-sharing in defense and foreign assistance, and financial restraints and incentives designed to encourage foreign dollar investments. Kennedy instructed Secretary of the Treasury C. Douglas Dillon to oversee and coordinate the balance-of- payments effort (2, 3, 4, 7, 8, 9) and created the Cabinet Committee on the Balance of Payments in the summer of 1962 to assist him. (10, 11)

 

All agencies worked to implement the President's program. The Departments of Commerce and State (and later the Special Representative for Trade Negotiations) concentrated on general tariff reductions and export promotion.  

AID attempted to reduce its foreign expenditures (i.e., not including assistance funds spent on U.S. goods) first to $1 billion and then $500 million. (12, 17, 18) Treasury, in addition to its central role as coordinator, attempted to promote foreign investment in the United States through tax incentives and international cooperation. (18)

Perhaps the most controversial efforts to reduce capital outflows were made by Secretary of Defense McNamara, who developed a program of far-reaching reductions in U.S. overseas military expenditures. His proposals were dramatic and impressive.  If implemented, they promised to create a significant improvement in the U.S. payments position. (13, 26, 28, 36) They elicited strong reservations from the Department of State hierarchy, however, which feared that the proposed cuts would send a message of weakness and vacillation to the Soviet Union and the nations that the United Stales had pledged to protect from Communist aggression. (15, 27, 34) Ultimately, senior Department of State officers succeeded in watering down the reductions in the interest of national security. (37, 38)

In the end, the Kennedy administration had only mixed success in reducing U.S. balance of payments deficits. After its initial success in reducing net capital outflows early in the administration, a significant fourth quarter deficit in 1962 dashed hopes of achieving a balance before 1965 at the earliest. Although the Department of the Treasury had some success in restoring international confidence in the dollar and stemming the gold outflow, it remained necessary for the incoming Johnson administration to take additional steps to reduce U.S. expenditures abroad.