same form, and the program will operate with a similar set of goals or targets. At the same time, we must find the means to raise the contributions of the business community more rapidly in 1967, and this will demand more rigorous restraint on capital outflows or a more rapid expansion in foreign earnings.

Our objective for overall improvement by the reporting companies is to increase 1967 contributions on the major selected transactions by at least $2 billion above the 1966 level. This is an ambitious goal compared with the expected increase of about $22 billion over the past two years, but it represents the minimum improvement needed to keep the overall deficit at manageable levels. This goal cannot be accomplished without renewed effort, but we are hopeful that the more favorable 1967 outlook for economic growth abroad will foster a more rapid growth in foreign earnings and make the task somewhat less difficult.

It appears highly unlikely, however, that the necessary improvement will be attained without special restraint on the outflow of funds to finance capital expenditure plans of foreign affiliates. I would like to urge you and each of the corporate chief executives to review your individual plans to see if any projects in program countries can be cancelled, postponed, or refinanced in order to lessen the adverse impacts on the balance of payments during 1967. As I suggested in March 1965, when the voluntary program was launched, projects that are of marginal importance for your company and do not soon result in higher exports or larger investment incomes should be cancelled or, at least, postponed until a later date. I would hope that you will make a careful review of the expectations for "pay-out" under proposed projects to see if they might not, in fact, be marginal in these terms.

We are again asking for a specific limitation on your direct investment capital transactions (capital outflows plus reinvested earnings) with your affiliates in the same countries designated for the current program. The new specific target utilizes the same base period as the current program, and provides during the two years 1966 and 1967 for an annual average rate of capital transactions 20 percent higher than the annual average during the three years 1962-64. Thus the total for the two years combined is 240 percent of the annual average

during the 1962-64 base period, and the amount available for 1967 is determined by subtracting the current year's transactions from the two-year total. A more detailed description will accompany the statistical forms for the calculation of the target and for the preparation of 1967 projections. These are being prepared and will be mailed at a later date.

Applied to the total direct investment capital transactions of all firms, this formula would have the effect of maintaining 1967 transactions close to the level presently expected for 1966.

We recognize that the results of the direct investment target formula will vary widely among individual firms. Some firms will find less difficulty than others in staying under the suggested target, and I hope they will in no way relax their efforts to cut their investment outflow even further. In particular, I hope that all firms will increase their efforts to obtain funds abroad in 1967. In spite of the inconvenience and the added costs, foreign borrowing has made it possible for companies to carry out their investment commitments while meeting the needs of the voluntary program.

28 The Federal Reserve Board administered the Voluntary Program for financial institutions. In a statement, issued Dec. 13, 1966, by Secretary of the Treasury Fowler on the 1967 Voluntary Program, the Federal Reserve Board's program was summarized as follows:

"With respect to the Federal Reserve Board's program, it was noted that as of October 1, 1966, there existed a potential leeway for an outflow of bank credit in the neighborhood of $1.2 billion. For this reason the Federal Reserve program for commercial banks for 1967 suggests that there be no increase in the current ceiling of 109 percent of claims outstanding as of the end of 1964. For smaller banks, however, extra room to expand their loans is allowed.

"Each bank is requested not to use more than 10 percent of its leeway to expand nonexport credits to developed countries between October 1, 1966, and December 31, 1967. For all banks combined this would leave over $1 billion for the expansion of export credits and loans to less developed countries.

"The proposed program for the nonbank financial institutions for 1967 replaces with a single guideline the three different guidelines used in the 1966 program. This will permit an increase of 5 percent in outstanding foreign assets covered under the program over the fifteen months from October 1, 1966. through December 31, 1967. The suggested target ceilings would allow for increases in these assets between October 1, 1966, and December 31, 1967, of about $100 million." (Treasury Department press release dated Dec. 13, 1966.)

Some firms, especially those with minimal investments during the 1962-1964 base period, may find it exceedingly difficult to meet the specific requirements of the direct investment target. Executives of companies confronted with special problems under the program should feel free to consult with us at any time. One of the greatest innate strengths of the voluntary approach is the flexibility it permits in handling the exceptional cases which are bound to arise under any program.

The President is encouraged, as we all are, that our experience to date justifies our continued reliance upon a voluntary program. During periods of serious national concern we all have a duty to contribute to the achievement of national objectives. We must accept this duty and should welcome the opportunity to participate in shaping the outcome just as surely as the men who are engaged in the struggle in Vietnam.

I am confident that you and all other leaders of our business community fully appreciate the vital significance of limiting the balance of payments deficit in order to strengthen the dollar and maintain an international economic environment favorable for continued growth. I am equally confident that you will continue your contributions to the solution of these problems by giving your fullest support to the voluntary program during the coming year.

Document XI-11

Annual Report on the Finances by the Secretary of the Treasury (Fowler), March 1, 1967 (Excerpt)*0

Review of the United States Balance of Payments Situation for the Year 1966

By mid-1965, the goal of balanceof-payments equilibrium seemed to be

Annual Report of the Secretary of the Treasury on the State of the Finances for the Fiscal Year Ended June 30, 1966 (Treasury Department Document No. 3239), pp. XXV-XXVIII. The excerpt is taken from Secretary Fowler's letter of transmittal, Mar. 1, 1967, to the President of the Senate and the Speaker of the House of Representatives.

within sight. Since then, the Vietnam conflict has, of course, had a significant adverse impact. There has been a direct impact in the form of a higher deficit on defense account in the balance of payments. And there has been an indirect impact primarily in the form of larger imports. Despite these extra drains, there was no significant widening of the deficit during 1966. Although the attainment of equilibrium has been delayed, certain underlying forces continued to help the United States in bringing its foreign exchange transactions into sustainable equilibrium in more normal circumstances.

30

In calendar 1966, the balance-ofpayments deficit on the liquidity basis was at $1.4 billion, about $100 million above the 1965 deficit. (Detailed discussion of balance-of-payments results, through the first half of calendar 1966, will be found in the accompanying report, pages 50-55.) This relatively small increase in the deficit should be viewed in the perspective of a much greater increase during the year in the direct-foreignexchange costs associated with Vietnam, and an additional increase in indirect-balance-of-payments cost resulting from higher defense spending at home.

On the official-reserve-transactions basis, there was a 1966 surplus of $0.3 billion, compared to a deficit of $1.3 billion in 1965, and deficits of $1.5 billion and $2 billion in 1964 and 1963, respectively. (The liquidity balance is measured by changes in U.S. reserve assets and in liquid liabilities to all foreign residents and international organizations. The official-reservetransactions balance differs from the liquidity balance by excluding changes in liquid dollar holdings of private foreigners, and including changes in certain of our nonliquid liabilities to foreign official institutions which are not part of the liquidity deficit.)

The surplus on the official-reservetransactions basis in 1966 was due to some extraordinary factors which are not likely to be present to the same degree in 1967. There were heavy borrowings from abroad by U.S. banks and a consequent accumulation of liquid-dollar claims by foreign commercial banks, including foreign branches of U.S. banks. This reflected the very tight credit situation in this country and the unsettled condition

30 Not printed here.

of sterling during part of the year. Under more ordinary circumstances, a larger proportion of these dollars might have been expected to move into official hands.

Gold losses during 1966 amounted to $571 million in contrast to $1,665 million in 1965, including a $259 million payment in connection with an increase in IMF quotas. The overall reserve loss in 1966-gold, convertible currencies, and IMF gold tranche position-was $568 million in contrast to $1.2 billion in 1965. Despite the surplus on the official-reserve-transactions basis in 1966, our net reserve position showed a decline, due mainly to continued heavy conversions of gold by France during the first 8 months of the year.

In very broad terms, the 1966 payments results featured a worsening in the trade and military expenditure accounts offset by unusually large receipts of foreign capital. On trade account, nonmilitary exports for the year were $29.2 billion, up more than 11 percent from 1965. This was a substantially greater percentage rise than in any of the past 5 years, except for 1964. But imports rose to $25.5 billion, up almost 19 percent from 1965. As a result, the merchandise trade surplus narrowed by $1.1 billion, averaging $3.7 billion for 1966 as a whole.

The large advance in imports appeared to be primarily due to:

-the rapid rise in gross national product.

-near-capacity operation in some sectors of the economy, and selected shortages of skilled labor.

-a high level of military orders for specialized items.

-certain special situations such as that arising from the elimination of duties on automobiles produced in Canada under the recent U.S.-Canadian auto agreement."

With the economy moving ahead at a more moderate pace and selective pressures reduced, imports were expected to grow more slowly in 1967. While a longer period of time would be needed to establish any trend, it was encouraging that by the end of 1966 imports were reflecting the slower rate of GNP growth that began

31 See ante, doc. III-55.

in the second quarter. On the export side, the U.S. competitive position appeared to have been maintained. However, in order to insure progress toward a balanced payments position, an early return to the 1961-65 pattern of cost-price stability is essential.

Data on capital flows during 1966 are not yet complete. Available information suggests that the outflow of U.S. private capital apparently continued at roughly the 1965 level of about $32 billion, compared to a range of $42 to $6 billion in the years 1963 and 1964. This showing undoubtedly reflected the tight credit situation in the United States during 1966; but it also reflected the sharpening and reinforcement for 1966 of the voluntary cooperation program for business corporations and financial institutions.

The major change in 1966 was a large increase in receipts of foreign capital. In the long-term area, there were investments of over $400 million by international lending institutions in long-term certificates of deposit and in U.S. agency issues, and investments of over $700 million by foreign official agencies in long-term certificates of deposit. Tighter monetary conditions domestically also induced an unusually large accumulation of liquid dollar holdings by private foreigners, mainly banks, including foreign branches of U.S. banks. Much of this accumulation reflected the borrowing abroad by U.S. banks during the period of monetary tightness in this country.

Extension and reinforcement of the voluntary restraint programs for corporate investment abroad and for foreign lending abroad was announced in December 1966. The overall balance-of-payments objective in 1967 is to continue to move toward balanceof-payments equilibrium as fast as the continuing foreign exchange costs of Vietnam would permit. In his Economic Report to the Congress in January 1967, President Johnson made additional recommendations designed to promote the achievement of that objective. The President's recommendations included:

33

1. Extension of the Interest Equalization Tax," in strengthened form,

32 See supra.

33 H. Doc. 28, 90th Cong., 1st sess.

34 See American Foreign Policy: Current Documents, 1965, pp. 1063-1074.

underlined the dominant place which they accord to these GATT [General Agreement on Tariffs and Trade] talks. The Dutch Government, indeed, has been one of those which has most consistently stressed this point. Queen Juliana, in her recent speech, stated that the government will "continue to strive for the success of the negotiations in the Kennedy Round. The EEC [European Economic Community] can make an important contribution to the expansion of world trade, which will in turn benefit the developing countries."

Other countries of the EEC have given equally firm support, and no meeting of the EFTA [European Free Trade Association] ministers has passed without urgent emphasis being given to these negotiations. In my own country, President Johnson has committed the full support of the U.S. Government to a successful conclusion of the Kennedy Round. Only last week in a message to Congress he reiterated the determination of the United States "to exert every effort" to lower trade barriers in the current round of negotiations in Geneva.*

This preoccupation with the Kennedy Round is not surprising. In the first place, it is a vastly more ambitious undertaking than any previous negotiation. Secondly, it comes at a time when there is much flux in commercial policy matters. For example, the final implementation of the Community's commercial policy and the present efforts of industrial countries to meet the demands of the developing countries for expanded export opportunity will certainly be closely related to the outcome of these negotiations. Third, there is a realization that success or failure-in the Kennedy Round may have repercussions far beyond purely commercial or trade issues: on intra-European cooperation, Atlantic solidarity, relations between the developed and the developing countries, and perhaps even on the future of the EEC itself.

We have now reached the decisive point in the Kennedy Round-the point of no return. The big decisions will be taken in the next few months. And the stakes-for progress if we succeed or for retrogression if we fail-are high.

3 See The New York Times, Sept. 21, 1966. Text in Department of State Bulletin, Oct. 31, 1966, p. 675.

It is appropriate that we should be discussing the Kennedy Round here in Rotterdam, the world's largest port. The invigorating spirit of international trade is a tradition to the people of Rotterdam, as it is for the Netherlands as a whole. It is fitting that the motto of the city of Rotterdam should be "Stronger through struggle." The Netherlands also provides a good example of what the Kennedy Round can offer in the way of new export opportunity. Exports account for roughly 30 percent of the gross national product. Last year. EFTA countries bought $1.2 billion of Dutch products; the United States $244 million. The EFTA countries and the United States together bought $270 million of machinery, $150 million of chemicals, $75 million of textile yarn and fabrics, $70 million of iron and steel products, and $75 million of canned meats alone.

I dwell on the exports at stake in this negotiation because I suspect that here in the Netherlands, as in most other countries, including the United States, export interests are at times obscured by exaggerated fears about new import competition. There is a tendency for businessmen to be notoriously pessimistic when it comes to trade matters. It is not uncommon to hear producers on one side of the ocean forecasting imminent doom if tariffs are cut to import competition, while exporters of the same product on the other side of the ocean express no particular interest in seeing tariffs reduced. Exporters often hesitate to stand up and be counted when issues reach the critical phase, while protectionist groups do not, in most countries, seem to have the same inhibitions.

The point is that if only domestic producers concerned about imports are heard as to what can not be given, the interest of the exporter, dependent on reciprocity of trade benefits, is lost by default. Is it not in the interest of Dutch producers to see substantial tariff reductions abroad for such products as steel sheets, radios, or electric generators? What action on the part of the Community is needed to obtain these benefits? These are the kind of questions before us at Geneva in coming months. The answers need to be heard and require careful watching by businessmen in all countries.