U.S. INTERNATIONAL ECONOMIC OBJECTIVES AND STRATEGY

OUTLINE

SECTION I. INTRODUCTION

1. <u>Relationship of Economic to Other Objectives</u>

International economic objectives are meaningful only insofar as they relate to and implement U.S. foreign and domestic policy and support U.S. interests abroad. This may sound like a truism, but it is often ignored either because overall U.S. policy objectives are not carried out or because there is a conflict between foreign and domestic policy objectives, as in the case of our program for the disposal of agricultural surpluses abroad.

2. <u>Approach to the Problem</u>

This outline attempts to examine the situation which gives rise to
our international economic objectives, to define the aims of our trade and
aid programs, to set forth, where possible, policy concepts and to relate
these to our overall interests and values. Finally it attempts to point out
those obstacles which must be overcome or minimized if a successful

foreign economic policy is to be adopted and implemented.

# SECTION II. TRENDS AND DEVELOPMENTS AFFECTING FOREIGN ECONOMIC POLICY

## 3. Situation in the Underdeveloped Areas

Certain generalizations, while not equally applicable in each country, can be made concerning the situation in the so-called underdeveloped countries of Asia, Africa, and, with exceptions, Latin America.

To a lesser degree these factors also apply to some of the states of southern and southeastern Europe.

(a) Population is increasing at 2-3% annually, due primarily to reduced mortality and continued high birth rates. Population pressure puts a severe strain on available resources, requires greater capital accrual and investment than would be necessary with a less rapid growth of population, and (coupled with latent or active anti-Westernism) tends to cause the adoption of nationalistic economic and political programs.

(b) Since the backward countries are primarily agricultural, a major and immediate problem is increasing agricultural production and productivity. In many instances, as in Egypt and India, additional land is not readily available; even in cases where additional arable soil may be found, such as South Vietnam, organizational techniques, technical knowledge and capital to effectively utilize this land are frequently lacking.

(c) Mobilization of capital for investment purposes is difficult because of the already low per capita income ($50 for 1.2 billion people), population pressure and desires for increased consumer consumption, lack of adequate fiscal and financial machinery, and reluctance of moneyed interests to invest in developmental projects as distinct from real property or money-lending.

(d) While accurate estimates are unavailable, the capacity of the underdeveloped countries to absorb and effectively

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utilize capital is limited. Handicaps are shortages of
skilled labor, lack of an entrepreneurial and managerial
class, low levels of labor productivity (because of low
medical, educational and work standards), inefficient and
frequently corrupt governments and state enterprises, and
the need for basic facilities such as schools, roads, public
water supply, etc., which must precede or accompany any
large-scale investment of industrial capital. Optimistic es-
timates are that 38 underdeveloped countries could absorb
about two billion dollars yearly in additional capital.

(e) A cultural lag on the part of some peoples affects both their readiness and their ability to undertake programs of economic expansion. Even basic agriculture is in many instances woefully inefficient and progress may depend on such simple things as better hand tools, the provision of better seeds, or new methods of utilizing human and animal fertilizer. This

cultural lag is reflected not only in the technical field but
in the attitudes of individuals and groups toward organized
and sustained productive efforts.

(f) In some instances the mores and customs of the people mitigate against the introduction of new ideas, new habits, or new attitudes -- however necessary these may be in improving economic or social conditions. For example, nepotism is not only condoned but encouraged, village life cannot easily adapt itself to the needs of an industrial society and the land tenure system may actually inhibit the peasant from attempting to increase production.

(g) In most areas fiscal and financial institutions are rudimentary or non-existent. This makes difficult not only the mobilization of capital but also the sale of goods and services. In addition, inexperienced or incompetent personnel frequently adopt inflationary or confiscatory policies which inhibit the intro-

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duction of foreign capital or have a regressive effect on
domestic enterprise.

(h) Important in this respect is the attitude of many of the governments. In some cases, such as Thailand, the ruling clique derives its revenues from state-operated or mono-polistic enterprises; in others, such as Burma and Brazil, there is a reluctance to permit the introduction of foreign capital except under strict state control and primarily for the further development of state-supported institutions.

Moreover, there is a general feeling against "economic imperialism" which causes restrictions to be placed on capital importation, transfer of funds, etc.

(i) Governments on the whole are relatively inefficient and provide only rudimentary services to the people. In many cases government or its institutions (as with the Iranian gendarmerie) are looked upon as parasites or oppressors.

Honesty in government is virtually unknown and a corrupt bureaucracy generates resentments which are exploited by extreme political factions, discontented intelligentsia, etc.

(j) The impact of the West has either broken or breached the previously cohesive life and social structure of the underdeveloped countries. Old values have been shattered and new ones not yet formed. Urbanization has increased restlessness, discontent, and a feeling of "not belonging". While social unrest is not in all cases widespread, it provides a sufficiently numerous, emotional, and influential group to cause extreme political instability.

(k) To summarize, the backward areas are confronted with pressures to develop their economies at a rate which they cannot hope to attain unaided and in a direction which, whatever its long-run advantages, may immediately cause increased political and social unrest. They lack not only

the facilities for such economic development but also for
even minimally honest and efficient administration. Even
in those cases where leaders desire increased social justice,
their efforts are hampered by corrupt and inefficient
subordinates and by counter-pressures from groups such as
landowners and money-lenders.

4. The Situation in the United States

Historically the United States has been an economic phenomenon.

Its balanced economy, its relatively high degree of self-sufficiency, and its high level of economic activity has enabled it to exercise a powerful if not dominant influence on world economic life while itself remaining affected to a lesser degree by trends and developments abroad. Moreover, the domestic market is so large and so active, and the rewards so high, as to inhibit the exportation of capital except, broadly speaking, in the extractive industries. Thus, although the United States is increasingly importing both raw materials and finished products, it has never been nor

considered itself a trading nation as has, say, the United Kingdom. Total U.S. trade (exclusive of military and economic assistance) has averaged about $20 million annually for the post-war period, or approximately 5% of the present U.S. gross national product. Broadly speaking, this has amounted to only about 10% of our industrial production and 20% of our agricultural output, although in selected cases such as tobacco, the proportion *proposition* is considerably higher. Certain trends which might be foreseen as affecting this situation should be noted:

(a) A reasonable assumption is that U.S. gross national product will double over the next two decades. If only the same percentage of the U.S. product is involved in foreign trade and aid, then will amount to some $50 billion annually.

(b) However, our increasing demands for raw materials and resources and the shrinkage of low cost domestic supplies indicates an increasing reliance upon foreign raw material resources. To the extent that this segment of our imports expands at an in-

creasing rate, additional purchases could be made in the
U.S. However, the U.S. currently maintains a trade balance
only by various grants amounting to some $5 billion annually,
so that it is questionable whether increased raw material
demands will suffice to maintain a true balance of trade or payments.

(c) Conversely, unless agricultural surpluses are reduced, pressures for the sale of cotton, tobacco, soy beans, dairy products and eggs, etc., will continue, thereby administering an artificial stimulus to our export trade. If American agriculture were generally more competitive at world prices the demand for certain of its products would be certain to increase, particularly with growing world population.

(d) Industrial machinery, tractors and accessories, automobiles and accessories, chemical products, textiles and petroleum are among the most important export items. In some instances over 10% of industrial output in a given class goes to the

export trade. Whether or not this export ratio will be con-
tinued depends partly on demand for similar or alternate
products in the domestic market; however, there is no reason
to believe that these export lines should not continue to grow
at least at a comparable linear rate.

(e) To summarize, while contradictory pressures make trade trends difficult to forecast accurately, there seems to be no reason why total trade (exclusive of foreign aid) should not at least double over the next two decades. It is possible that increased imports may offset a volume of foreign aid of the present magnitude ($5 billion annually) even though foreign aid may still be given in this quantity; in other words,

ADDITIONAL
foreign countries may have dollar credits amounting to ⑫-
10-

PART OF
$ billion annually, which could be used for machinery and
other capital goods. Although U.S. private capital export
may also increase, there seems little reason to believe that

it will be of this magnitude. Hence accrual by the underdeveloped countries of capital for rapid industrialization will depend primarily upon increased sales of raw materials, secondarily upon grant economic assistance or governmental loans, and only to a tertiary degree upon private U.S. investment.

## SECTION III. RELATION BETWEEN FOREIGN ECONOMIC POLICY AND OTHER AIMS

### 5. Economic growth

Harmony between U.S. foreign economic policy and U.S. domestic economic policy can be readily established through the common objective of growth -- which, as indicated, will be the primary factor in providing capital resources for the underdeveloped countries. Growth is the accepted objective of U.S. domestic economic policy and is explicitly or implicitly assumed by businessmen, union members, and professional economists as well as by politicians. This economic growth has certain important significances:

(a) Significance in creating markets for the products of other societies. The American economy represents almost half the economic activity of the world outside the Soviet Communist orbit. Whatever degree of success may be anticipated in the lowering of American tariffs, this degree of success is unlikely to affect America's availability as a market as much as a sustained and increasing high rate of activity in the American economy.

(b) Significance as a source of human and physical capital needed by other societies. As indicated previously, U.S. economic growth, with its presumed increase in imports, is the sine qua non of capital availability for the underdeveloped areas.

In addition, growth, in the broad sense of the word, is essential if we are to provide the technicians, the managers and the other human resources which must play a major role in the development of foreign economies. Parenthetically,

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U.S. growth must be spiritual as well as physical so that in
addition to expansion in such areas as industry, agriculture,
technology and education, we must similarly increase our
knowledge and our understanding of mankind in general and
of our system of American values in particular. For example,
the maintenance, expansion and strengthening of the
American educational system is of the essence for U.S.

international economic objectives and strategy as well as for
U.S. domestic economic objectives and policy.

(c) **Significance in the struggle with the Soviet Union.** On the assumption of a possible hot war, it must furnish the underpinning for the armaments needed. On the assumption of a protracted cold war, it must enable us to bring time to our side - i.e., to increase our present economic advantage with the passing of the years.

(d) Significance of growth in the economies of the free world
and uncommitted areas.

(1) **Importance in and of itself** - The American national interest can only be measured in terms of American values. Since American values are fundamentally moral and humane, it is not unrealistic to suggest that one objective of Americans is a world in which the odds will not be too high against the efforts of ordinary men and women to grow their bread and realize their deeper potentialities as human beings.

(2) **Significance for the growth of the American economy** -

It may be doubted whether the American economy can grow at a satisfactory rate if the economies of the other free societies and uncommitted areas do not also grow. Obvious illustration - the raw material problem; industrial growth since 1939 has been at a far higher

rate (worldwide) than the growth in the production
of raw materials. In addition, as indicated by the
report of the President's Materials Policy Commission,
America is increasingly a deficit nation in almost all
metal ores. The very rate of growth of the American
economy will assure the extension of these deficits.

6. Growth and Cohesion

The ultimate objective of American foreign policy is a peaceful,
just and workable international order in which free societies may
flourish and free men have a reasonable chance to fulfil their potentialities
as human beings. A foreign economic policy, to reflect and support this
objective, should not only promote growth but should also be cohesive.
In operating terms, a policy of economic cohesion means the identifica-
tion of actual common economic interests, together with a realistic
appraisal of the point at which these interests diverge, and the organiza-
tion of arrangements to give effect to the common interests, and to

reduce to a minimum the elements of friction or disaffection. Policies which might further economic cohesion include:

(a) **Support and extension of multi-lateral trade.** As Stalin pointed out shortly before his death, one result of World War II has been the disintegration of a single universal world market, the establishment of a separate economic bloc consisting of the Communist countries, and (to some extent) an intensified economic struggle among the capitalist countries within the restricted orbit. While the first two points of Stalin's thesis are factual, the third holds true only if, either through Soviet efforts or because of divisive tendencies among the free nations, competition overshadows cooperation. For instance, the long-range need for an expansion in metal imports by the U.S., and the availability of investment capital in the U.S. would be mutually supporting. The need for imports could be made the basis of a stable

American market for metals produced abroad and the
prospect of such a market could make the producing
enterprises an attractive and practical opportunity for
dollar investment.

(b) International monetary policy. This, in conjunction
with efforts toward expanded trade, requires increased
pressure for convertibility and for a flow of funds which
will both protect and make easier the currents of trade.
An important part of such policy should be circumstances,
such as political or financial guarantees, which will
encourage the export of private capital from the U.S.
This is important not only per se but because it gives an
opportunity to bring American managerial and technical
talent directly to bear in a great variety of private and
semi-private relationships, thereby promoting the
diffusion of American values.

(c) **International organization.** In both these fields multi-lateral economic organizations, whether these be limited to a single field such as tariffs or expanded to cover a wide range of economic activity, will assume increased importance. To illustrate, these might provide for commodity agreements which would enable long-run price stabilization or, as in the European coal and steel community, enable the pooling of both resources and market, or in other ways speed the task of expanding trade.

7. **Foreign aid.**

Foreign aid is not an end in itself, but like other measures proposed, a means to an end. Some of the ways in which it might be important are:

(a) In maintaining forces required to deter or check Communist aggression. To this end we are currently devoting 75% to 80% of our current $4 billion annual expenditure on various

governmental aid programs. Funds of this type may be
needed either to improve military forces, through the pro-
vision of modern equipment, or to support these forces,
through the provision of essential funds or commodities.
In either event, it should be recognized that these large
sums, while appropriate and desirable instruments of
policy, do not constitute and should not be confused with
genuine economic aid.

(b) Promoting economic development. This is a recognized
objective of our present aid programs, although the end
allegedly sought is an economy capable of bearing the
necessary military burden rather than one which provides
better facilities for, or an increased standard of living to,
its citizens. Whether economic development per se is an
answer to problems of political stability may, in the
short-run, be questioned. However, aid for this purpose

(and in increased magnitude) is frequently urged.

(c) Stimulating U.S. exports and maintaining a more stable world economy. There is no question that aid serves as a means of stimulating exports which might not otherwise take place, thereby maintaining a higher level of economic activity in some fields than would otherwise occur. Also, economic assistance helps maintain a more stable world economy by protecting the grantees to some extent from dollar imbalances and from fluctuations in, or sinkings of, their own economies. However, it may well be asked whether these are of sufficient worth and value in themselves to justify the continuation of economic assistance.

(d) Furtherance of U.S. interests. It is frequently argued that it is in our national interest to give both military and economic assistance. Assuming a continued military threat, the case for the former can be made with relative ease -- and

has been stretched to cover the granting of economic
assistance. However, there is a more subtle, if equally
valid, argument for grant economic assistance. Such
aid, in the short-run, provides not only the capital, the
resources, and the technicians needed by the under-
developed countries but serves as a means of exerting
pressure upon these countries for political, social and
economic reforms. While there are obvious limits to the
extent to which such pressures can be carried, we cer-
tainly can proceed faster with their assistance than with-
out it. Thus economic aid offers a means not only of
promoting economic growth but also of spreading American
values and thereby ultimately maintaining American interests.

SECTION IV. CONCEPTS AND PROBLEMS

8. Policy Concepts

Although these have already been discussed in part, it might be use-
ful to summarize here certain concepts which might guide U.S. and foreign
economic policy.

(a) The primary purpose of U.S. foreign economic policies is to support and maintain U.S. interests and to promote U.S. values. This means that we should aim ultimately at a world structure which enables the continuation and growth of free societies, gives maximum opportunity for individual development and advancement, and provides for the diffusion and adoption of basically democratic ideas and ideals. This is a tall order and may never be reached, but there are intermediate and immediate steps which can be taken toward this objective.

(b) On the purely economic side, this can be done by a variety of measures including greater economic cooperation,

measures for promoting and/or guaranteeing private invest-
ment abroad, liberalization of our tariff restrictions and
import quotas, and above all the recognition that continued
U.S. economic growth not only implies but demands a
larger foreign trade.

(c) While U.S. economic growth and certain auxiliary measures in the field of economic policy should be relied upon to provide the bulk of the capital and resources needed by the underdeveloped countries, this alone cannot, will not and should not be expected to meet the requirements of American policy. Additional concepts which should govern are:

(1) The need for relatively large-scale military aid and supporting programs will continue. Indeed, if allied forces are to be modernized, military aid requirements may expand at a rate faster than U.S. growth.

(2) At least in the short-run, the underdeveloped countries will need capital beyond their ability to earn or to accrue. Whether this is provided by loan or by grant is not, in the long-run, financially important -- since we cannot expect to receive back the equivalent in constant dollars of our loans. The governing factor should be the extent to which U.S. influence can be exercised by one or the other forms of economic assistance.

(3) In any event, the U.S. should utilize every means, governmental and private, to insure that its technicians, its managers and its administrators help to shape the institutions and the ideas of the underdeveloped areas.

This is the crucial factor in the maintenance of American interests and the diffusion of American values.

## 9. Problems

It cannot be assumed that policy concepts such as those outlined

above can be easily adopted or automatically implemented. It is essential
that we understand some of the difficulties which will arise in carrying out
our foreign economic policy. Among these are:

(a) The isolationist bias on the part of many elements in the U.S.,
which leads them to oppose measures for U.S. involvement
abroad and for U.S. assistance to other countries. This
isolationism crops up in such varied forms as emphasis on
massive retaliation from bases in the Western Hemisphere,
in opposition to aid programs, and a reluctance or refusal
to participate in international bodies such as GATT. The
Bricker Amendment is an excellent illustration of the think-
ing of some members of this group.

(b) In addition, various pressure groups in the U.S., while
supporting expanded trade in theory, seek to put obstacles
in the way of products which compete with their own or
even threaten to lower their percentage of an expanding

domestic market. Examples are so numerous as to be
almost unnecessary, but the recent actions of the bicycle
industry, the New England fishing interests, and the
producers of turbo-generators and dynamos spring
immediately to mind. To the ranks of the traditional
protectionists can be added new and powerful elements
from the industrializing South, which seek to protect
their comparative advantage and to maintain, behind
a tariff wall if necessary, their rapid industrialization.

(c) In addition expanding trade will inevitably bring dislocations
in the American economy and can result in the driving from
the scene of inefficient producers, economic dislocation,
and unemployment. Entirely aside from the political
repercussions of these events, consideration must be given
to mitigating their economic impact through such measures
as retraining programs, dislocation allowances, insurance

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programs, etc.

(d) Economic nationalism is some foreign countries is perhaps even more rampant than in the U.S. Whether this takes the form of Britain's belief in Commonwealth vs. European markets or is manifested in such ways as the Egyptian nationalization of the Suez Canal, it has a common effect. Nations in general are reluctant to make economic concessions although they eagerly seek comparable advantages. The underdeveloped areas place obstacles in the way of private capital and indeed of any Western efforts which, in their opinion, have "strings" attached. Thus although economic logic might seem to indicate the desirability of greater economic freedom, political, emotional and psychological factors generate counter-trends. These can be overcome, if at all, only by the most skillful combination of patience and industry.