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Department of State bulletin (Volume v. 56, Jan- Mar 1967) online

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lateral lending agencies — the World Bank family
and the regional development banks. The United
States firmly supports these agencies as mechanisms
for mobilizing both e.xternal capital and domestic
resources of the developing countries themselves.
Replenishment of the resources of the International
Development Association (IDA), which lends on
easy terms, ought to be high on the agenda of the

developed countries. The IDA's resources should be
substantially increased in ways which take into
account the balance of payments situation of the
contributing countries. The recently established
Asian Development Bank represents a new stage in
Asian economic cooperation, in which the United ^
States is participating with other non-Asian coun-
tries. For Latin America, the United States con-
tinues its strong support of the Inter-American
Development Bank, which serves as the financial
arm of the Alliance for Progrress and is helping to
draw funds from inside and outside the hemisphere
into Latin American development. The African De-
velopment Bank, which has recently begun opera-
tions, will perform similar functions in its area.

Foreign aid and private foreign investment
finance only one-fifth of the foreign exchange ex-
penditures of the developing countries. The remain-
ing four-fifths is financed by their own export
earnings. After near stagnation in the late 1950's,
these earnings rose by about 6 percent a year during
the first half of the 1960's. The increase was pro-
duced by many factors, including strengthened prices
for many primary commodities, the growing ability
of the less developed countries to supply these com-
modities, and the rapidly expanding markets in the
United States, Western Europe, and Japan. Only
with continued vigorous grrowth in the developed
world and improved access to its markets can the
less developed countries earn the foreign exchange
needed to support their own continuing g^rowth.

Trade Policies

The less developed countries obviously have much
to gain from reductions in tariffs, quotas, and other
barriers to trade in primary products, since such
products constitute 85 percent of their exports. Over
the longer run, satisfactory growth in the export
earnings of the less developed countries will require
relatively less reliance on sales of primary products
and continuation of the sharp expansion in exports
of manufactured goods. Such diversification will also
be important for their internal grovrth. Reductions
in tariffs and other trade barriers in developed
countries can contribute much to the needed growth
of manufactured exports from developing countries.

In most of the less developed countries, internal
markets are too small to support efficient modem
industrial plants. It is not geographic size or popu-
lation but effective purchasing power that deter-
mines the size of a market. Regional cooperation can
create larger markets so that the enterprises of the
developing countries can benefit from the economies
of scale and of specialization on which growth and
efficiency depend.

Encouraging progress toward regional integration
is being made in a number of areas. The Latin
American Free Trade Association, despite handicaps.



can form the basis for a true Latin American com-
mon market. Particular progress has been made in
the Central American Common Market. The United
States supports outward-looking regional integra-

The importance of trade expansion as a factor in
economic growth in all countries argues strongly
for more rapid trade liberalization. This proposition
is effectively demonstrated by the recent experience
in the new free-trade areas of Europe, just as it
■was earlier demonstrated in the great common mar-
ket of the United States. Thus, it is essential that
success be achieved in the current multilateral trade
negotiations, by far the most comprehensive in his-

Kennedy Round

This success is important to both the developed
and less developed countries. The substantial reduc-
tion in tariif barriers which the United States and
other countries are seeking to achieve in the Ken-
nedy Round negotiations should make an important
contribution to increased world trade.

Expanding world trade encourages capital and
labor to move out of those economic activities which
are better supplied from abroad and into those fields
which provide higher real income through greater
productivity. By permitting countries to produce ef-
ficiently and on a large scale, freer trade makes a
contribution to higher incomes everywhere. And
through reduction of artificial shelters to laggard
domestic industries, the lowering of barriers to im-
ports spurs innovation and efficiency.

In the Kennedy Round, the major reductions in
barriers to world trade are expected to be made by
the developed countries — the United States, EEC,
EFTA, and Japan. EFTA has now virtually elimi-
nated barriers to industrial trade among its mem-
bers while the EEC will do so for both industrial
and agricultural products by July 1968. The reduc-
tion of barriers to trade with nonmember countries
would now help these groups to continue their rapid
pace of growth, and would avoid distortion of the
normal pattern of European trade in particular and
world trade generally. The less developed countries
are not being asked to grant tariflf concessions that
would endanger their economic development pro-

Longer-Run Tasks

A successful Kennedy Round will be a great
achievement, and will promote rapid and healthy
economic expansion throughout the world. But the
Kennedy Round cannot be the end of the road for
the liberalization of world trade. In the year ahead,
further study and international consultation should
be directed at four remaining tasks in the trade

(1) Continuing efforts to liberalize those tariff

and nontariff barriers which will remain after the
Kennedy Round;

(2) Developing a better international pattern of
agricultural production and trade to speed economic

(3) Achieving more stable export prices and rais-
ing the export volume of developing countries;

(4) Improving economic relations between the
countries of Eastern Europe — including the Soviet
Union — and the United States.

President Johnson has emphasized the importance
of this last task on several occasions. In his recent
State of the Union Message,* he noted that the
Export-Import Bank can now extend commercial
credits to Bulgaria, Czechoslovakia, Hungary, and
Poland, as well as to Rumania and Yugoslavia. He
called again for legislative authority to extend most-
favored-nation — i.e., nondiscriminatory' — tariff treat-
ment to the countries of Eastern Europe and the
Soviet Union. Their trade with Western Europe has
increased steadily in recent years, while U.S. trade
with these countries has been stagnant, and consti-
tutes less than 1 percent of all U.S. foreign trade.


A country's foreign trade and payments are its
main points of economic contact with the rest of the
world. The balance of payments of any nation is
intimately dependent on policies and developments in
the outside world. U.S. exports depend heavily on
European, Canadian, and Japanese growth and the
foreign exchange receipts of the less developed coun-
tries as well as on U.S. growth and price stability.
The flow of capital from the United States depends
on profit opportunities and monetary conditions
abroad as well as on those in the United States.

For most of the decade following World War II,
U.S. balance of payments deficits provided needed
international currency to support the rapid expan-
sion of world trade and economic growth. Other
countries were eager to hold more dollars; indeed,
it was commonly known as a period of "dollar short-
age." Recently, however, as foreign reserves have
increased, U.S. deficits have been less welcome.

These deficits do not, of course, contradict the
unmatched strength and productivity of the U.S.
economy; neither' do they mean that our competitive
position in world markets is weak. The United
States is not living beyond its means, increasing its
net debt to foreign countries, or using up its inter-
national capital. U.S. ownership of assets abroad
continues to grow faster than foreign ownership of
assets in the United States. U.S. assets abroad, net
of foreign assets in the United States, increased

* Ibid., Jan. 30, 1967, p. 158.

FEBRUARY 27, 1967


U.S. Balance of International Payments

















1— ^9»-



Liouioni' e*si*



1 I.I 1 . i







from $7 billion in 1935 to $14 billion in 1950; by
1961 they had risen to $28 billion; and in 1965 they
were $47 billion.

The deficits have, however, resulted in a steady
erosion of the U.S. stock of reserve assets, which are
needed to maintain a stable value of the dollar in
international transactions. At the same time, there
have been steady increases in U.S. liabilities to for-
eigners that may be considered potential claims
against our reserve assets. This combination implies
a continuing decline in liquidity; it is clearly not
indefinitely sustainable if confidence in the safety
and stability of the dollar is to be maintained.

The U.S. balance of payments performance is now
evaluated in terms of two alternative accounting
definitions. Both measure an over-all U.S. deficit or
surplus in terms of what is currently happening to
(1) U.S. reserves and (2) certain types of claims
against the United States. Both count as an increase
or decrease in reserves any change in the sum of
U.S. holdings of monetary gold, U.S. "gold tranche"

claims on the International Monetary Fund (IMF) ,
and U.S. official holdings of convertible foreign cur-
rencies. They differ in how they treat changes in
various outstanding claims against the United

One measure — the "official reserve transactions" "^
balance — treats any increase in foreign private
claims on the United States, liquid or illiquid, as an
ordinary capital inflow. Only the change in claims
on the United States held by foreign official agencies
is counted, along with the change in U.S. reserves,
as a measure of the U.S. deficit or surplus. Foreign
official monetary agencies have the privilege of con-
verting claims on the United States into gold at the
U.S. Treasury; their net purchases thus add to the
direct claims on U.S. reserves. Moreover, they are
charged with maintaining stable exchange rates for
their national currencies. They usually do this by
buying or selling dollars to close any gap between
normal supply and demand for dollars which might
otherwise upset the exchange rate between the dollar
and their currency. In this sense, the net balance of
such transactions by other countries, together with
changes in our own reserves, is one indicator of the
size of the imbalance in U.S. payments.

The alternative "liquidity" balance attempts an
assessment of changes in the U.S. liquidity position.
It takes account of the fact that liquid dollar hold-
ings of private foreigners may be readily sold to
foreign central banks. It therefore treats only in-
creases in foreign non-liquid claims on the United
States as ordinary capital inflows. Changes in all
liquid claims are included along with changes in U.S.
reserve assets as a measure of the U.S. balance,
regardless of whether the claims are acquired or
sold by an official agency or by a private individual,
bank, or business.

While these measures of balance are important,
they must be viewed as indicators, rather than defi-
nitions, of equilibrium. In part, the limitation arises
because any measure of balance must arbitrarily
divide dollar assets into two distinct groups — those
which are claims against our reserves and those
which are not. Such a clear division does not exist
in reality. To a degree, any marketable dollar asset
can be indirectly exercised as a claim against U.S.
reserves. Moreover, the likelihood that assets will
be used as a claim against U.S. reserves depends not
only on their marketability and maturity but also
on the motivation and attitude of current and pro-
spective holders. Evidence on such attitudes, includ-
ing the performance of the dollar in foreign ex-
change markets, helps to interpret the U.S. position.
But, however that position is assessed, the U.S.
balance of payments clearly has not been in sustain-
able equilibrium in recent years and must be im-

Where a sustainable equilibrium may lie over the
long run is not completely clear. The expansion of
international transactions — ^most of which are set-



tied in dollars — suggests that some growth of for-
eign private holdings of dollars is natural and
desirable and may be perfectly sustainable. Some
increase in official claims on the United States may
also occur over the long run, given the preference
of many countries to hold all or some of their official
reserves in dollars, and the fact that transactions
needs of official agencies will continue to expand.
Regardless of the movement of dollar holdings
abroad, however, continuing U.S. reserve losses
would not be compatible with sustained equilibrium.
On the other hand, any growth of either official, or
official plus private liquid, holdings of dollars need
not be precisely equaled by growth of U.S. reserve
assets in order that sustainable equilibrium be

Recent Developments

The U.S. liquidity deficit vridened slightly in 1966
while the official settlements balance registered a
small surplus for the first time since 1957.

The liquidity deficit had improved markedly in
1965 and showed a slight further improvement
through the first three quarters of 1966. Preliminary
evidence points to a somewhat larger fourth quarter
liquidity deficit which will bring the year's total
slightly ab

Balance on goods and









Balance on mer-

chandise trade. _^








Military expendi-

tures, net








Balance on other









Remittances and pen-


— .7

— .7


— .9



— 1.0

Government grants and

capital, net








U.S. private capital.









Foreign nonliquid

capital, net








Errors and omissions-.

— .9

— 1.0


— .4











— 1.3


Plus: Foreign private

liquid capital, net2__








Less : Increases in non-

liquid liabilities to

foreign monetary

authorities 3






Balance on Official

Reserve Trans-

actions Basis


— 1.3






Gold (decrease -|-)_-








Convertible cur-

rencies (de-

crease -1-) 1

— .1






IMF gold tranche

position (de-

crease + )


— .1




— .1


Foreign monetary

official claims

(increase -|-)___








' First 3 quarters at seasonally adjusted annual rates, except
as noted.

2 Includes changes in Treasury liabdlities to certain foreign
military agencies during 1960-62.

3 Included above under foreign nonliquid capital.
■* Lffis than $50 million.

5 First 3 quarters at unadjusted annual rates.

Note. — Detail will not neccBsariJy add to totals because of
Source: Department of Commerce.

The Balance on Goods and Services

The U.S. surplus on goods and services more than
doubled from 1960 to 1964, reaching an exceptional
peak of $8% billion. Subsequently, however, the sur-
plus declined. As the combined result of a narrowing
trade surplus and sharply increased military ex-
penditures in 1966, it fell to $5% billion.

Trade. The trade surplus fell through the first
three quarters of 1966, to the lowest level since 1959.
The most striking factor in this deterioration was
the sharp acceleration in the growth of merchandise
imports beginning in 1965, to an annual rate of

FEBRUARY 27, 1967


about 20 percent. In 1966, imports rose to about 3.5
percent of GNP — the highest in the postwar period
— from about 3.2 percent in 1965 and an average of
less than 3 percent in previous years of the 1960's.

Imports of capital goods rose by about 50 percent,
and accounted for more than 20 percent of the in-
crease in imports in 1966. For the second consecutive
year they rose sharply as a percentage of total do-
mestic purchases of capital goods. As the increasing
demand for capital goods began to strain domestic
capacity in 1965, and even more in 1966, purchasers
increasingly turned to foreign suppliers to get
prompt delivery. While less than 3 percent of domes-
tic requirements was imported in 1964, about 9
percent of the increase in domestic purchases of
capital equipment between 1964 and 1965, and over
12 percent between 1965 and 1966, was accounted
for by additional imports. The earlier strains and
pressures continued to affect imports, especially for
long lead-time items, in the second half of 1966,
after the pace of over-all economic advance had

Export performance in 1966 was healthy despite
domestic demand pressures. Exports were more than
10 percent greater than in 1965, even after adjust-
ment for the effects of the 1965 dock strike. The U.S.
share of world exports (excluding exports to the
United States) remained stable, while the U.S. share
of world exports of manufactured goods rose

A major source of the strength of U.S. exports in
the 1960's has been the stability of the U.S. cost-
price structure, while costs and prices have been
rising elsewhere. Recent price developments in the
United States, however, brought this relative im-
provement to a halt. Even so, unit labor costs in
manufacturing have risen less rapidly in the United
States during 1966 than in most other industrial
countries. On the whole, it appears that the U.S.
competitive position with respect to prices and costs
was essentially unchanged in 1966.

Other Goods and Services. Overseas military ex-
penditures increased in 1966 by more than $700 mil-
lion, after having been relatively stable for several
years. The war in Vietnam, of course, was the cause
of the increase. Expenditures in Europe still account
for about 45 percent of the total, but have been
largely offset by purchases of U.S. military equip-
ment and by various financial transactions.

Other items in the goods and services balance be-
haved normally. Investment income receipts, expand-
ing by 6 percent, showed continued strength. U.S.
travel expenditures abroad also continued to in-
crease. Foreign travel expenditures in the United
States rose faster on a percentage basis, but by less
in dollar amount, than the expenditures of U.S. na-
tionals abroad.

The deterioration of the U.S. balance on goods and

services during 1966, in summary, reflected pri- .'
marily pressures stemming from the rapid advance I'
of the domestic economy and the foreign exchange
costs of the hostilities in Vietnam.

The Capital Account

As shown in Table 31, net U.S. private capital
outflows fell from a record $6.5 billion in 1964 to
$3.7 billion in 1965 and remained essentially un-
changed in 1966.

U.S. Purchases of Foreign Securities. After a sharp
rise in new issues of foreign securities in U.S. mar-
kets beginning in 1962, the United States in July
1963 imposed an Interest Equalization Tax (lET)
on purchases from foreigners of securities of issuers
in developed economies other than Canada. The lET
was designed as a partial offset to the lower interest
rates which prevailed in U.S. capital markets as a
result of better organization and greater competi-
tiveness, and of the need for the United States to
press toward full employment of its resources
through expansionary fiscal and monetary policies.

The lET has worked well. Prom 1964 through
1966, U.S. net purchases of foreign securities aver-
aged about $700 million annually, down from the
average of $1.1 billion of 1962 and 1963. U.S. pur-
chases of new issues have stabilized near $1.2 bil-
lion; virtually all new issues have been by Canadians
and other borrowers not covered by the tax.

U.S. Direct Investment and Bank Lending. The
outflow of direct investment funds from the United
States began to accelerate in 1963. By 1965, the
flow was more than double that in 1960-62. The
years 1963 and 1964 also saw a sharp rise in loans
abroad by U.S. banks. The total outflow of U.S.
capital in 1964 was more than $2% billion in excess
of its average in 1960-61.

Although the outflow of portfolio capital and
bank loans is largely explained by differentials in
the cost of borrowing and the efficiency of U.S.
financial markets, the increase in direct foreign in-
vestment by U.S. corporations in the last few years
is somewhat more difficult to explain. The rapid
increase in investment in Europe generally reflects,
of course, a desire to participate in a large and
rapidly expanding new market.

Earnings on investments in Europe, however,
have fallen since 1962. Between 1955 and 1962,
rates of return on investments of U.S. manufactur-
ing affiliates in Europe, at 14 to 19 percent, were
significantly higher each year than the 10 to 15
percent earned ' by U.S. manufacturers at home.
However, since 1962, earnings on direct investments
in Europe have varied between 12 and 14 percent,
about the same as, or — in 1965 — even below, those
in the United States. It is possible that long-term
plans for expansion of foreign operations decided

Online LibraryUnited States. Dept. of State. Office of Public CoDepartment of State bulletin (Volume v. 56, Jan- Mar 1967) → online text (page 60 of 90)