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The original documents are located in Box B48, folder "Foreign Direct Investment
Program, 1971-73" of the Arthur F. Burns Papers at the Gerald R. Ford Presidential
Library.
Copyright Notice
The copyright law of the United States (Title 17, United States Code) governs the making of
photocopies or other reproductions of copyrighted material. Dr. Burns donated to the United States
of America his copyrights in all of his unpublished writings in National Archives collections.
Works prepared by U.S. Government employees as part of their official duties are in the public
domain. The copyrights to materials written by other individuals or organizations are presumed to
remain with them. If you think any of the information displayed in the PDF is subject to a valid
copyright claim, please contact the Gerald R. Ford Presidential Library.
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
Date March 26, 1971
To
Chairman Burns
Subject: Comments on the Greenspan
From A. B. Hersey
OWH
Study for Ashland Oil Company
This is an analysis of the study, "The U.S. Foreign Direct
Investment Program: A Threat to the American Dollar, "which was sent
to you by Mr. Orin E. Atkins of Ashland Oil, Inc. with his letter of
March 17, 1971.
1. To summarize the comments that follow, I would say that
the argument of the paper is open to serious questioning at all its
vital points. The whole cast of the study is propagandistic.
2. Statistical foundation. Mr. Pizer, who has had a great
deal of experience with direct investment statistical material, tells
me that a lot of interpolation and extrapolation is involved in producing
the estimates for 1970 and projections for 1971 given in the study. The
capital flow from the United States last year is now known to have been
larger than the study estimated. Pizer believes that the 1971 outflow
is probably underestimated in the study, and that the growth in foreign
debt of the foreign affiliates since 1968 is probably overestimated.
Nevertheless, it is certainly true that foreign liabilities
of the foreign affiliates have increased greatly in recent years. But
this growth includes accounts payable and accrued liabilities as well as
"borrowings," and it has served to finance inventories and receivables
as well as plant and equipment. It is Mr. Pizer's opinion, and mine,
that the rise in foreign liabilities of the foreign affiliates reflects
primarily the very high (and still rising) level of their fixed capital
FORD & LIBRARY GERALD
Chairman Burns
-2-
outlays and the large additions that have been made to working capital
assets, rather than the pressures of the OFDI program. Much of the
pressure of the OFDI program has worked to increase borrowings by
US-based financing affiliates, about which the study's statistics say
very little (except in Table 4 of the Appendix).
3. Deleterious effects of the OFDI Program. Starting from
the thesis that foreign borrowing by the foreign affiliates is excessive,
the study tries to suggest (pp. 4-5) that (a) in coming years, though
perhaps not in 1971, affiliates may run into severe financing difficulties,
and (b) that this may cause "deterioration in the competitive position
of U.S. affiliates. " Point (a) is flimsily supported, and (b) is merely
asserted. Some very useful further comments by Mr. Pizer are appended
to this memorandum.
4. Purposes of U.S. Government programs. The government's
aims are denigrated by the use of such phrases as "conventional view"
and "conventionally measured deficit. " Greenspan recognizes (pages 7
and 11) that the basic aim is "to preserve the status of the dollar as
the critical reserve currency," and he then refers to "a large and
growing body of views which largely dismiss concern over the U.S.
FORD is LIBRARY CERALD
balance of payments deficit and threats to the status of the dollar"
(page 12). Citing a tabulation of government transactions dominated
by military expenditures abroad and economic aid, he insinuates that
"the source of our difficulties" (page 11) lies there. "Hence," he
says (page 12), "justification for O.F.D.I. controls cannot be found
in the conventional arguments" any more than in "the newer conceptual
Chairman Burns
-3-
frameworks governing balance of payments policies. = One might with
equal lack of logic put the blame for our balance of payments diffi-
culties on tourist expenditures. The over-simplification here is
typical of the study as a whole.
5. Usefulness of the OFDI program. Greenspan suggests
(pages 14-15) that the program has not helped the balance of payments,
because of "offsetting sales of other U.S. assets from the portfolios"
of those who have been acquiring the debts of U.S. parent or affiliate
corporations. No real attempt is made to support this thesis. He
suggests that the worsening of the balance of payments (liquidity
basis) in 1969 was a lagged reaction to the improvement in 1968 caused
by the OFDI program; "net sales from foreign portfolios were only
delayed. = This is an unwarranted conclusion, which disregards the
effect of the downturn in the U.S. stock market on foreign buying of
U.S. equities in 1969 and the attraction of U.S. private funds to the
Eurodollar market by the extraordinarily high interest rates U.S. banks
were willing to pay there in 1969. Mr. Pizer (in the appended notes)
gives a further comment on the issue of diversions of real savings.
6. Crisis ahead? The heart of the propagandistic argument
of the paper lies in (a) the picture painted (on pages 8-10) of a
collapse of international financial cooperation, when (b) the United
States will need "secondary reserves" to supplement its gold and SDRs,
for which purpose it should be able to fall back on U.S. direct invest-
ment assets abroad (pages 10-11)! But (c) the coming deterioration in
the competitive position of U.S. affiliates will have impaired the
FORD : LIBRARY GERALD
Chairman Burns
-4-
market value of "this huge stock of capital," much of which "is, in
fact, quasi-liquid" (pages 5-6). I think you will agree that the idea
that the United States Government would enact the controls needed to
make corporate direct investments abroad serve as "secondary reserves"
in a crisis is too fantastic to deserve a hearing. (Mr. Pizer adds a
further comment.)
7. The perpetuation of controls. One of the less pleasant
features of the paper is an attack on the "administrator" -- not
"second and third-level administrators" but those "making the final
decisions," "whose self-interest lies ... with their specific positions
and/or their authority" (pages 16-17).
FORD :- 9ERALD LIBRARY
Some Further Comments on the Greenspan Study
The crux of the study's concern is that the financial position
of the foreign affiliates is being undermined by the large amounts of
their foreign debt, and that this will cause them to become ineffective
competitors. This expression of concern about weakened balance sheets
has persisted since the program began, and is generally put largely in
terms of a future problem, though not without some current aspects.
The thought is that the foreign affiliates would be looked on as better
risks in capital markets if they had less debt to foreigners and more
to their parent companies or other U.S. investors. How much weight
should be given to such a consideration?
One fact not mentioned in the study is that a large part of
the debt of foreign affiliates (certainly that part that arises because
of the pressures of the OFDI) is explicitly guaranteed by the parent,
or is implicitly guaranteed when the parent is a company of pre-eminent
international stature. In fact, one of the first actions of the OFDI
was to make clear in the regulations (originally General Authorization
No. 1 and now Section 1000. 1002) that a parent company would never be
prevented by the regulations from making good on a guarantee which it
had issued under normal conditions. Some companies are reluctant to
give such guarantees, but that is their own policy decision, not forced
on them by the controls. In general, however, the credit standing of a
given foreign affiliate (where there is majority ownership by a major
U.S. parent) depends mainly on the credit standing of the whole parent
organization, rather than on its own balance sheet.
Admittedly, foreign lenders have their own view of financial
analysis, and in some cases they may be concerned when they see a local
balance sheet that contains too much debt, especially short-term debt.
Repeated drawings on credit lines with foreign commercial banks, or
other sources of funds, may in time become unwelcome, requiring a
constant search for alternative sources. Thus, one cannot say that
problems will not arise. However, the study puts the question in
much too limited a framework. One option always available, which some
have used but most companies avoid for business reasons they consider
overriding, is to sell equities or convertible debentures of the foreign
affiliates in capital markets abroad. It may be noted also that some
U.S. companies find themselves in an easy liquidity position overall,
and are naturally displeased at their or their subsidiaries' having to
borrow anywhere, but especially overseas.
As to the weakening of the competitive position of the
foreign affiliates, this is not spelled out at all in the study.
What is happening is that they are expanding rapidly and borrowing
in foreign capital markets to do it. That is what their foreign
competitors have to do, and the competitors do not have access to
any U.S. parent company funds or guarantees. If the investments are
GERALD FORD LIBRARY
-2-
being well chosen, there need be little concern about competitiveness
on the score that the affiliates are financed in Europe rather than
in the United States. The additional cost would certainly be a minor
factor.
***
The discussion of the question of offsets to the balance of
payments savings attributable to the OFDI controls is thoroughly
confused. For example, the footnote on page 14 expresses skepticism
that the proportion of real savings abroad going into U.S. assets
can have increased significantly. What actually happens, if the program
is working, is that private foreign claims on U.S. companies and their
affiliates grow more, and foreign official reserve claims on the United
States grow less than in the absence of the program; the savings that
otherwise would have been channeled through foreign banking systems to
build up central bank international reserves are used instead to finance
productive enterprise in the foreign countries.
***
In one of its more lucid moments, the report alludes in a
footnote to the ultimate support of the vast real domestic wealth of
the United States, but never rises to the level of recognizing that it
is the productivity of that wealth, in international market terms,
that counts.
The view that one can look at a table of international assets
and liabilities to find out the international strength of a nation, or
to identify changes in that strength, is essentially naive, though it
crops up even in official circles.
Samuel Pizer
March 26, 1971
LIBRARY GERALD R. FORD
DEPARTMENT OF COMMERCE
T.
SECRETARY OF COMMERCE
UNITED STATES OF AMERICA
Washington, D.C. 20230
JAN 14 1972
MEMORANDUM FOR: Honorable John B. Connally
Secretary of the Treasury
Honorable George P. Shultz, Director
Office of Management and Budget
Honorable Arthur F. Burns, Chairman
Board of Governors of the Federal Reserve System
Honorable Herbert Stein, Chairman
Council of Economic Advisers
Honorable Peter G. Peterson
Assistant to the President
for International Economic Affairs
Subject: Liberalization and Termination of the Foreign Direct
Investment Program
We recommend the following program for the phaseout of the
Foreign Direct Investment Regulations, pointing to a termina-
tion effective December 31, 1973.
1. We would announce a liberalization for 1972 consist-
ing of a collapse of schedules, an increase in the
earnings allowable from 40 percent to 50 percent of
prior year earnings of foreign affiliates, and a
$6 million minimum allowable (compared to the 1971
minimum allowable of $2 million for Schedules B/C
and a supplemental $4 million in Schedule A). The
cost of such liberalization would be just under
$1 billion or about 40 percent of total current
restraint, and would reduce the companies under
restraint from about 220 to half that, or 113.
FORD & LIBRARY GERALD
- 2 -
2. In 1973, we would increase the earnings allowable
from 50 percent to 75 percent and the minimum allow-
able from $6 million to $25 million. This would pro-
vide an additional cost in 1973 of approximately
$850 million, an additional 40 percent of current
restraint, and would reduce the companies under
restraint to about 30.
3. In 1974, all further restraint in terms of current
investment activity would be terminated. The balance
of payments cost of this final liberalization would
be only approximately $400 or $500 million.
We would retain control over the repayment of accumu-
lated borrowings resulting from the prior controls.
We believe this could be accomplished by the use of
voluntary guidelines, but the discipline could be
made mandatory if it appeared necessary at that time.
A reasonable structure of the guidelines used for
repayments of foreign borrowings could create a po-
tential annual outflow of U.S.-source capital for
repayment of the foreign borrowings of $2 to $3
billion per year. A greater or lesser outflow could
be provided by varying the guidelines.
I would propose that the effective termination date be an-
nounced at this time and would also suggest that the same
course be followed with regard to the succeeding liberaliza-
tion stages beyond the 1972 liberalization. I believe this
is absolutely necessary in order to redeem the President's
commitment to the termination of the controls and I think a
vigorous liberalization proposal for 1972 is equally crucial
in establishing the credibility of our commitment to termina-
tion at the end of 1973.
A possible counter-argument to establishing the termination
date at this time is that a specific Administration commitment
to termination at this time might increase resistance from
organized labor during 1972.
Marrice Stans
FORD is GERALD LIBRARY
Secretary of Commerce
CONFIDENTIAL
January 18, 1972
To:
Governor Brimmer
Subject: Proposed Changes in,
From: Samuel Pizer and Bernard Norwood
OFDI Program.
This note is an evaluation of the proposal in a memorandum
of January 14, 1972 by Secretary Stans to substantially liberalize
the OFDI program in 1972 and announce at this time an effective
termination date. As we understand it, it would be announced now
that the mandatory restraints would be removed at the end of 1973,
but that a voluntary (or mandatory, if necessary) control over the
repayment of foreign borrowing would be instituted. We will discuss
(1) the nature of the proposed liberalization and some alternatives
(2) the relationship of relaxation to the VFCR and IET and (3) some
general considerations regarding the extent, timing, and procedure
for relaxing controls.
The specific recommendation for relaxation in 1972 is in
three parts, each of which bears a cost in terms of net additional
use of U.S. - source funds.
Cost (millions)
a. Combine all foreign scheduled
areas
$600
b. Raise the earnings allowable from
40% to 50%
250
c. Raise the minimum to $6 million
worldwide
100
$950
Two other alternatives have been under consideration by
OFDI. One would completely exempt Schedule A rather than merge it with
the two other schedules, plus the changes in earnings and minimum
FORD & 038870 LIBRARY
-2-
mentioned above. That would cost $1.2 - 1.3 billion, and we understand
it is no longer being actively pushed. It would have involved a
problem for the VFCR rule on tanker financing. The other alternative
would have substituted an optional collapse of schedules for the full
combination now being recommended. The difference would be that those
choosing this option would be forced to relinquish their accumulated
unused allowables in Schedule A, or they might only have the use of
such allowables suspended. Under such a regime there would be a
reduction in the cost of relaxation of about $350 million, correspond-
ing to the accumulated unused allowables that OFDI calculates would
be fully used if the schedules were combined. In effect, this is a
measure of the foreign borrowing that would have had to take place
given the investment plans of the companies, and which would no longer
be needed since U.S.- source funds would be used.
One can envisage other alternatives, e.g., not raising the
earnings allowable or the minimum, and giving only an optional
collapse of schedules, that would cost much less -- perhaps only
$250 million, or giving only the change in earnings and minimum,
at a cost of perhaps $350 million, or doing nothing to liberalize.
The arguments for going as far to liberalize as OFDI has
suggested are as follows:
1. This continues a rather steady trend toward liberalization
that has come to be expected not only by the business community but
probably also by authorities in other countries.
FORD & GERALD LIBRARY
-3-
2. Something must be done to reduce the administrative
complexities and rigidities of the controls. The proposal would
reduce the companies under restraint from 220 to about 110, and
would greatly simplify their operating problems.
3. If a low key announcement were made, without an
estimate of the amount to be involved, this would be viewed as a
relatively routine continuation of modest relaxations.
4. To substitute the optional method of combining schedules
would make a difference of only $350 million, and would lead to further
administrative problems, some of them probably unforeseeable.
5. Political pressures are thought to be intense, requir-
ing an action that is not so meager as to be counter productive. This
would be the case with any of the alternatives mentioned above.
It is in connection with this last aspect that Secretary
Stans advocates not only a broad liberalization but also the immediate
announcement that the program would be terminated at the end of 1973.
These two aspects of the extent of the liberalization and
the wisdom of announcing the termination are to some degree separable.
The announcement of abolition by the end of 1973 would raise immediate
and substantive risks for U.S. relationships with other countries.
1. It would come at a time when there is great doubt
about our intentions and about the viability of the new set of exchange
rates. Our actions in easing credit conditions here have already
created concern. The market has shown signs of restlessness that could
GERALD FORD LIBRARY
-4-
turn to outright speculation. There can be no doubt that other
Governments would consider this action to be contrary to their
understanding and would be seriously offended.
2. An announcement of outright abolishment of the controls
will intensify the protectionist drive of all those opposed to the
expansion of the multi-national corporations, especially organized
labor.
3. With a fixed date for abolishment, the credibility of
controls in the interim is undermined and compliance would suffer
all along the line.
4. Announcement of termination, along with any 1972
relaxation, no matter how moderate, would make it impossible to
present the change as part of a more-or-less routine easing of the
programs.
5. Foreign central banks in particular would consider
that such a final step would also imply a final end of controls over
bank lending. In their minds this would signal a return to an
unacceptable situation when the U.S. would be able to relax behind
the protection of inconvertibility while forcing others to accommodate
to whatever monetary and other policies were being pursued here.
There is next the aspect of whether there should be any
relaxation at this time, or, if the option is taken to have some
relaxation, whether it should be less than Secretary Stans is
recommending. One position is that the choice lies between no
GERALD FORD LIBRARY
-5-
relaxation and a fairly sweeping relaxtion of the type suggested by
OFDI. To carry out the intermediate alternatives would be recognized
by business to be merely cosmetic, and foreign governments might be
just as much irritated by the minor actions as by the broader one,
since they would have no real way of weighing the expected effect.
However, this assumes that if the greater change were made it would
not be accompanied by any statements about abolition of the program
and would be presented as another relatively modest step in a series
that began some time ago. Otherwise, there is no disagreement that
the broader step would be extremely hazardous for some of our most
basic objectives.
Another view is that a sweeping revision, no matter how
presented, would be recognized as an important indication of policy
attitudes and would therefore be too risky at this time. In that
view, the external considerations militate against any but the more
modest alternatives suggested above, and even those have a serious
element of danger.
It might be added that major U.S. businesses with overseas
commitments take a long view, and would very likely be seriously
concerned if actions were taken that might be of some immediate
benefit, but would cause disruptions and antagonisms that would be
damaging in the years ahead. For many this would surely be an
important argument against overt relaxation at this time.
FORD & LIBRARY GERALD
-6-
Implications for the VFCR
1) Weakening of the request for voluntary action
An announcement that the Foreign Direct Investment Program is
being phased out according to a definite schedule -- even the
announcement that the FDIP will be terminated by a specified date
-- would seriously weaken the Board's effort to get banks and non-
bank financial institutions to observe the Voluntary Foreign Credit
Restraint (VFCR) Guidelines. VFCR participating institutions would
expect that the VFCR, an integral part of the Government's overall
capital controls program, would also be phased out in parallel with
the FDIP. In the face of an obvious phase-out, it would be awkward,
to say the least, for the Board to resort to its stand-by authority
to maintain the VFCR. If, as would be more probable, the Board had
to administer the Program without invoking that mandatory authority,
it might well find its task impossible.
Because of its essentially voluntary nature, and because of the
need for a high and uniform level of observance by all participants,
the Program could probably not be adequately maintained for long if
an expectation were created that it would be terminated according to
a schedule already in force or by a not distant fixed date.
GERMLO FORD LIBRARY
-7-
2) Required liberalization of the VFCR
The VFCR would have to be liberalized generally in keeping with
the liberalization of the FDIP: the liberalization would add to an
outflow that will in any case probably occur under the Guidelines
as revised last November; and the resultant outflow through financial
institutions might well be in excess of what would be prudent or
tolerable in light of our international economic negotiations.
Interest rates have been dropping in the United States, and
interest rate differentials between the United States and Europe
remain large. Pressuresconsequently persist for a capital outflow.
Under these pressures, credit subject to restraint could
increase -- banks having had about $1.3 billion in leeway at the end
of November. (We do not yet have corresponding data for nonbanks.)
Also, credit outside therestraints may increase. This may occur
as the result of the recent full exemption of export credits and
the possible effectiveness of the Eximbank to strengthen programs
under which it stimulates private U.S. financing.
Alternative VFCR Steps
If it were determined to phase-out the several sets of U.S.
capital controls in a manner that did not provide an announcement
schedule of steps or a definite terminal date, the VFCR should, and
GERALD FORD LIBRARY
-8-
could, be liberalized parallel with the liberalization of the FDIP.
The liberalization would have to be developed on the basis
of selective steps. It probably could not be maintained beyond a
particular, "threshold", at which point a full termination of the
Guidelines would have to be effected.
FORD LIBRARY
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
Date January 19, 1972
To
Chairman Burns
Subject: Possible Liberalization of
From Andrew F. Brimmer aMB
Foreign Direct Investment Program
Summary
Personally, I would not have initiated the degree of
liberalization and the specific modifications that Secretary Stans
has proposed for the Foreign Direct Investment Program (FDIP)
for 1972. However, if it is necessary to do "something," the steps
proposed appear reasonable and do not in themselves create risks
beyond what I would be willing to accept. The changes are not
inconsistent with the revision made last November in the Federal
Reserve's Voluntary Foreign Credit Restraint program (VFCR). The
FDIP revisions could be presented publicly as an orderly process
of relaxation and relief from burdensome administrative and
reporting procedures.
On the other hand, I believe that Secretary Stans'
further proposals for announcement at this time of a decision that
the FDIP is to be phased out, with a terminal date at the end of
1973 (and that other specific steps will be taken in 1973 and 1974)
would pose unacceptable risks in terms of our international relations.
Such an announcement should not be made.
Discussion
Commerce Program
The first step recommended by Secretary Stans in his memorandum
of January 14, for the phase out of the Commerce Department's Foreign
Direct Investment Program, would be a liberalization in 1972 amounting
to slightly less than $1 billion. This amount is larger than I would
have recommended--since I would have kept the figure to about $750
million. Yet, I would not fight over the amount. It is modest
compared to the extent of the liberalization eventually required to
eliminate the FDIP and also when compared to last November's VFCR
liberalization. Our liberalization included the exemption required
by statute of $1.6 billion of export credits under ceilings--plus an
additional liberalization of about $1 billion in general (non-export)
VFCR ceilings. In the ensuing months (because of the provision for
newcomer banks), the potential liberalization could be somewhat greater.
FORD & GERALD LIBRARY
of
Chairman Burns
- 2 -
The step that Secretary Stans has proposed could be introduced
without great fanfare. It might also be possible to do so without
attaching any estimates of the effect. In the case of the last VFCR
revision, as the result of a deliberate effort by us, the magnitude
of our liberalization was not fully appreciated publicly; it was
presented as small and "technical." With reasonable care, I believe
the Commerce measures could also be introduced "in low key. " The
companies directly affected would quickly perceive that the change
was of substantial benefit to them. Nevertheless, we must recognize
that there would be some risk of enhancing foreign apprehensions.
The Commerce liberalization should avoid any indication
that it is the beginning of an agreed upon phase-out schedule or
that any terminal date for the program is under discussion.
We cannot offer any realistic alternatives to the collection
of steps for 1972 that Commerce has put forward. Commerce appears
to have included the most important variables that could be the
basis for formulating an FDIP revision. Those elements could be
varied, or some dropped out, if one wished to change the amount
involved, but we could not propose an entirely different approach.
It is difficult for us, or for anyone else outside OFDI, to place a
value on possible alternative measures of liberalization and, therefore,
to put together a package to achieve a particular target. Nor is it
reasonable to propose at this time a sweeping reformulation of the
program--e.g., by substituting a tax on direct investment outflows.
VFCR
I see no need for us to propose any liberalization in the
VFCR. to accompany a liberalization in the FDIP at this time.
Our November program revision was substantial- over $1 billion
for non-export financing and an indeterminate amount for export
financing. I doubt that the banks would expect a further relaxation
to parallel the OFDI measures.
Also, the announcement of an FDIP liberalization without
any accompanying VFCR liberalization would help to avoid the impression
that the action is part of a Government plan to phase out all the
capital controls programs.
BERALD FORD LIBRARY
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
Date January 20, 1972
Chairman Burns
To
Subject: OFDI Program for 1972
Robert Solomon
From
A case can be made against the amount and composit ion
of Secretary Stans' proposals for relaxing the Commerce Program
on direct investment for 1972.
1. An additional $1 billion in outflow of dollars
from the United States is a large amount. It equals about
one-eighth of the total improvement we expect in our trade
balance from the recent realignment.
2. A substantial part of the $1 billion comes from
the reallocation of unused "allowables" from LDC's to
Europe and Japan. Both the Europeans and the LDC's are
likely to react against this.
Alternatives
The Stans' proposal is as follows:
Balance of Payments Cost
(In millions of dollars)
a. Combine all foreign scheduled
areas
$600
b. Raise the earnings allowable from
40% to 50%
250
on
c. Raise the minimum to. $6 million
worldwide
100
oil
$950
1. One alternative is simply to drop part a, thereby
reducing both disadvantages cited above.
a. If this is too severe a cut back, the
earnings allowable could be raised to
GERALD FORD LIBRARY
60%, rather than 50% as suggested by
Secretary Stans. This would add about
$100 million to the additional outflow,
making it $450 million instead of $950
million.
-2-
2. Another alternative is to tell the corporations
that from now on they need not distinguish between the
three geographical areas but they have to give up unused
allowables instead of using them in Europe and Japan.
This would reduce the 1972 balance of payments cost by
$350 million and avoid the second disadvantage cited in
the first section of this memo.
RS
fm leviling credits
unused allmoses 350 \ our
how
"
250 ys
(wih Myse)
also (b)+(c)
LIBRARY GERALD GERALD R. FORD
January 26, 1972
Dear Pete:
The Foreign Direct Investment Program
is again on our agenda. I have struggled long and
hard with this issue. My letter to Maury Stans
indicates where I have come out.
Sincerely yours,
Arthur F. Burns
The Honorable Peter Peterson
The White House
Washington, D.C.
Enclosure
GERALD FORD BRAPT
AFB:ccm
identical letter &:
the President
Heabert Sugnetary Connally steen
seorge sheely
OF
DEPARTMENTORS
OFDI
CHAIRMAN OF THE BOARD OF GOVERNORS
SYSTEM
FEDERAL RESERVE SYSTEM
THE
WASHINGTON, D.C. 20551
RESERVE
CO24
C
January 26, 1972
Y
The Honorable Maurice H. Stans
Secretary of Commerce
Department of Commerce
Washington, D. C. 20230
Dear Maury:
I have given considerable thought to your memorandum
of January 14 on "Liberalization and Termination of the Foreign
Direct Investment Program." Although I am entirely in sympathy
with your objectives, I differ with some specific parts of your
proposal.
It would be unwise, in my view, to announce now a date
for future termination of the program. My objections to such an
announcement are:
1. So soon after the Smithsonian agreement,
such an announcement by the United States would be
regarded as aggressive by the other participants to
the agreement. They would view the announcement as
a threat to the structure of exchange rates agreed
to on December 18.
2. It would be detrimental to the trade nego-
tiations now under way and to the negotiations fore-
seen later.
3. It would encourage other countries to erect
or reimpose controls on inflows of capital.
4. It would strengthen the opposition of the
labor movement and some business people to direct
investments overseas. We cannot dismiss lightly
their argument that direct investment leads to the
export of U.S. jobs. Announcement of termination
of the program would strengthen support for the
Hartke-Burke bill, which is aimed at both limiting
direct investment and fixing quotas for imports.
FORD LIBRARY
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
The Honorable Maurice H. Stans
-2-
5. Currently the foreign exchange markets are in
an uncertain state. Announcement of termination of the
program would put the dollar under additional pressure,
increasing the danger that the Smithsonian agreement will
unravel.
With regard to the 1972 program, I would suggest some modifica-
tion in your proposal for collapsing the schedules. It seems to me un-
desirable to permit companies to shift unused allowables from LDC's to
more developed countries. Thus I would suggest that the collapse of the
schedules should apply only to the 1972 and later programs. This modi-
fication would reduce the amount of the prospective outflow, desirable
in any event for the five reasons cited above, and would also reduce
adverse political reaction in both developing and developed countries.
I am inclined to go along with your proposals for an increase
in the earnings allowable from 40 to 50 per cent and for an increase in
the minimum allowable to $6 million.
Sincerely yours,
/S/
Arthur F. Burns
LIBRARY GERALD
JAN 14 1972
MEMORANDUM FOR:
Honorable John B. Connally
Secretary of the Treasury
Honorable George P. Shultz, Director
Office of Management and Budget
Honorable Arthur F. Burns, Chairman
Board of Governors of the Federal Reserve S₁
Honorable Herbert Stein, Chairman
Council of Economic Advisers
Honorable Peter G. Peterson
Assistant to the President
for International Economic Affairs
Subject: Liberalization and Termination of the Foreign Direc
Investment Program
We recommend the following program for the phaseout of the
Foreign Direct Investment Regulations, pointing to a termina-
tion effective December 31, 1973.
1. We would announce a liberalization for 1972 consist-
ing of a collapse of schedules, an increase in the
earnings allowable from 40 percent to 50 percent of
prior year earnings of foreign affiliates, and a
$6 million minimum allowable (compared to the 1971
minimum allowable of $2 million for Schedules B/C
and a supplemental $4 million in Schedule A) The
cost of such liberalization would be just under
$1 billion or about 40 percent of total current
restraint, and would reduce the companies under
restraint from about 220 to half that, or 113.
GERAL FORD LIBRARY
4.
2. In 1973, we would increase the earnings allowable
from 50 percent to 75 percent and the minimum allow-
able from $6 million to $25 million. This would pro-
vide an additional cost in 1973 of approximately
$850 million, an additional 40 percent of current
restraint, and would reduce the companies under
restraint to about 30.
3. In 1974; all further restraint in terms of current
investment activity would be terminated. The balance
of payments cost of this final liberalization would
be only approximately $400 or $500 million.
We would retain control over the repayment of accumu-
lated borrowings resulting from the prior controls.
We believe this could be accomplished by the use of
voluntary guidelines, but the discipline could be
made mandatory if it appeared necessary at that time.
A reasonable structure of the guidelines used for
repayments of foreign borrowings could create a po-
tential annual outflow of U.S. -source capital for
repayment of the foreign borrowings of $2 to $3
billion per year. A greater or lesser outflow could
be provided by varying the guidelines.
I would propose that the effective termination date be an-
nounced at this time and would also suggest that the same
course be followed with regard to the succeeding liberaliza-
tion stages beyond the 1972 liberalization. I believe this
is absolutely necessary in order to redeem the President's
commitment to the termination of the controls and I think a
vigorous liberalization proposal for 1972 is equally crucial
in establishing the credibility of our commitment to termina-
tion at the end of 1973.
A possible counter-argument to establishing the termination
date at this time is that a specific Administration commitment
to termination at this time might increase resistance from
organized labor during 1972.
Mannice R. Stans
Secretary of Commerce
076839
THE WHITE HOUSE
WASHINGTON
February 9, 1972
MEMORANDUM FOR:
Honorable John B. Connally
Secretary of the Treasury
Honorable George P. Shultz, Director
Office of Management and Budget
Honorable Arthur F. Burns, Chairman
Board of Governors of the Federal Reserve
System
Honorable Herbert Stein, Chairman
Council of Economic Advisers
Honorable Peter G. Peterson
Assistant to the President for
International Economic Affairs
Honorable Nathaniel Samuels
Deputy Under Secretary of State for
Economic Affairs
FROM:
Peter M. Flanigan
Subject: 1972 Liberalization of the Foreign Direct Investment Program
The following proposal for liberalization in 1972 of the
Foreign Direct Investment Program has been developed by the Commerce
Department. Commerce reports that this proposal has been agreed to
by the Fed and reflects inputs of the Treasury staff. The elements
in the proposal are:
1. The schedules will be collapsed for 1972 and later years.
Carryforward of unused allowables accumulated under
Schedules B and C (the developed areas) will be permitted,
but those allowables accumulated under Schedule A (less
developed countries) will not be permitted. In order to
avoid recrimination where the denial of Schedule A carry-
forward may work a hardship because of unusual circumstances,
the Office of Foreign Direct Investments will grant specific
relief on application where inequities are demonstrated.
OFDI anticipates little actual need for such special relief.
GERALD FORD LIBRARY
-2-
2. The earnings allowable in 1972 will be increased to
50 percent of prior years' earnings by foreign affiliates,
up from 40 percent in 1971.
3. The worldwide minimum allowable will increase to
$6 million for 1972, compared to the 1971 minimum of
$2 million in Schedules B/C and $4 million in Schedule A.
An announcement of the changes for 1972 is attached. It
follows the form and tone of the 1971 announcement which was also
designed to forestall adverse foreign reaction, in which objective
it appears to have been successful. Announcement of limited
changes for 1972 removes one element of uncertainty from the U.S.
position, further insuring against adverse reaction.
While the announced changes might increase the scrutiny
of restraints on direct investment abroad, the 1972 liberalization
of the Foreign Direct Investment Program is in line with the
Administration's commitment to termination and its past actions.
Please give me your response to this proposal by close
of business Monday, February 14.
Attachment
QERALO FORD LIBRARY
STATEMENT OF
SECRETARY OF COMMERCE MAURICE H. STANS
ON THE FOREIGN DIRECT INVESTMENT PROGRAM FOR 1972
Changes in the Foreign Direct Investment Program incorporating
a simplification of the Program and a modest increase in investment
allowables for 1972 were announced today by Maurice H. Stans, Secretary
of the Department of Commerce. Secretary Stans noted that recent
developments in the international monetary area do not yet permit the
Administration to terminate the Program, but give some promise of
removal of foreign direct investment restraints as the U.S. balance of
payments improves.
The changes were announced as follows:
1. The schedular feature of the direct investment restraints
has been eliminated commencing in 1972. Allowables and
the reporting of foreign direct investment will be consoli-
dated on a worldwide basis. Historical allowables generally
will be aggregated; however, the carryforward of unused
Schedule A allowables will not be permitted except as autho-
rized by OFDI in particular cases evidencing hardship.
Canada will continue to be exempt from the Program and
separately reported.
2. The optional earnings allowable, permitting investment equal
to a percentage of the direct investor's share of the earnings
GEBALD FORD ARARK
of its foreign affiliates during the preceding year, has been
increased from 40 percent in 1971 to 50 percent in 1972.
The incremental earnings allowable has been correspondingly
increased.
3. As a consequence of the elimination of the schedular feature,
the minimum allowable of $2 million in Schedules B/C and
supplemental allowable of $4 million in Schedule A during
1971 are aggregated, and the worldwide minimum allowable
in 1972 will be $6 million.
The elimination of the schedular feature should significantly
reduce the administrative burden on companies in reporting and planning
their compliance under the Program. The increase in the worldwide
minimum investment allowable that accompanies the elimination of the
- 2 =
schedules will be of substantial help to smaller direct investors and
new entrants to foreign business in carrying out their foreign invest-
ment plans, while the increase in the earnings allowable to 50 percent
will provide some relief for companies with rapidly growing foreign
earnings.
Further details will be made available by the Office of Foreign
Direct Investments.
FORD & GERALD LIBRARY
THE WHITE HOUSE
WASHINGTON
February 9, 1972
MEMORANDUM FOR:
Honorable John B. Connally
Secretary of the Treasury
Honorable George P. Shultz, Director
Office of Management and Budget
Honorable Arthur F. Burns, Chairman
Board of Governors of the Federal Reserve
System
Honorable Herbert Stein, Chairman
Council of Economic Advisers
Honorable Peter G. Peterson
Assistant to the President for
International Economic Affairs
Honorable Nathaniel Samuels
Deputy Under Secretary of State for
Economic Affairs
FROM:
Peter M. Flanigan
Subject: 1972 Liberalization of the Foreign Direct Investment Program
The following proposal for liberalization in 1972 of the
Foreign Direct Investment Program has been developed by the Commerce
Department. Commerce reports that this proposal has been agreed to
by the Fed and reflects inputs of the Treasury staff. The elements
in the proposal are:
1. The schedules will be collapsed for 1972 and later years.
Carryforward of unused allowables accumulated under
Schedules B and C (the developed areas) will be permitted,
but those allowables accumulated under Schedule A (less
developed countries) will not be permitted. In order to
avoid recrimination where the denial of Schedule A carry-
forward may work a hardship because of unusual circumstances,
the Office of Foreign Direct Investments will grant specific
relief on application where inequities are demonstrated.
OFDI anticipates little actual need for such special relief.
GERALD FORD
-2-
2. The earnings allowable in 1972 will be increased to
50 percent of prior years' earnings by foreign affiliates,
up from 40 percent in 1971.
3. The worldwide minimum allowable will increase to
$6 million for 1972, compared to the 1971 minimum of
$2 million in Schedules B/C and $4 million in Schedule A.
An announcement of the changes for 1972 is attached. It
follows the form and tone of the 1971 announcement which was also
designed to forestall adverse foreign reaction, in which objective
it appears to have been successful. Announcement of limited
changes for 1972 removes one element of uncertainty from the U.S.
position, further insuring against adverse reaction.
While the announced changes might increase the scrutiny
of restraints on direct investment abroad, the 1972 liberalization
of the Foreign Direct Investment Program is in line with the
Administration's commitment to termination and its past actions.
Please give me your response to this proposal by close
of business Monday, February 14.
Attachment
FORD j LIBRARY
STATEMENT OF
SECRETARY OF COMMERCE MAURICE H. STANS
ON THE FOREIGN DIRECT INVESTMENT PROGRAM FOR 1972
Changes in the Foreign Direct Investment Program incorporating
a simplification of the Program and a modest increase in investment
allowables for 1972 were announced today by Maurice H. Stans, Secretary
of the Department of Commerce. Secretary Stans noted that recent
developments in the international monetary area do not yet permit the
Administration to terminate the Program, but give some promise of
removal of foreign direct investment restraints as the U.S. balance of
payments improves.
The changes were announced as follows:
1. The schedular feature of the direct investment restraints
has been eliminated commencing in 1972. Allowables and
the reporting of foreign direct investment will be consoli-
dated on a worldwide basis. Historical allowables generally
will be aggregated; however, the carryforward of unused
Schedule A allowables will not be permitted except as autho-
rized by OFDI in particular cases evidencing hardship.
Canada will continue to be exempt from the Program and
separately reported.
2. The optional earnings allowable, permitting investment equal
FORD
to a percentage of the direct investor's share of the earnings
GERALD
LIBRARY
of its foreign affiliates during the preceding year, has been
increased from 40 percent in 1971 to 50 percent in 1972.
The incremental earnings allowable has been correspondingly
increased.
3. As a consequence of the elimination of the schedular feature,
the minimum allowable of $2 million in Schedules B/C and
supplemental allowable of $4 million in Schedule A during
1971 are aggregated, and the worldwide minimum allowable
in 1972 will be $6 million.
The elimination of the schedular feature should significantly
reduce the administrative burden on companies in reporting and planning
their compliance under the Program. The increase in the worldwide
minimum investment allowable that accompanies the elimination of the
- 2 - =
schedules will be of substantial help to smaller direct investors and
new entrants to foreign business in carrying out their foreign invest-
ment plans, while the increase in the earnings allowable to 50 percent
will provide some relief for companies with rapidly growing foreign
earnings.
Further details will be made available by the Office of Foreign
Direct Investments.
FORD & LIBRARY GERALD
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
Date February 11, 1972.
To
Chairman Burns
Subject: Direct Investment Controls.
From
Samuel Pizer SN
We have been informed by the OFDI that they have sent on
to the White House a proposal for their 1972 program that is very
close to the one you have recommended. The program includes the
consolidation of the present scheduled areas but cancels out the
carry forward of Schedule A allowables; they will not be available
for use in any scheduled area. However, OFDI finds that canceling
the carry forward would impose special hardships in a few cases
and they anticipate approving the use of perhaps $50 million of the
unused allowable in such circumstances. This would mean that the
1972 program would represent a liberalization amounting to roughly
$650 million.
We are told that the proposed press release presents the
program in a very low key. We should be getting the proposed press
release for comments very soon.
cc: Governor Daane
Governor Brimmer
Mr. R. Solomon
Mr. R. Bryant
Mr. Norwood
FORD is LIBRARY GERALD
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
f
Office Correspondence
Date February 11, 1972.
To
Chairman Burns
Subject: Direct Investment Controls.
From
Samuel Pizer SP
Further to my memorandum of this morning, the attached
material describes the OFDI program for 1972.
The only remaining issue that I can see is whether the
second sentence of the statement should stand.
Attachment
cc: Governor Daane
Governor Brimmer
Mr. R. Solomon
Mr. Holland
Mr. R. Bryant
Mr. Norwood
FORD & GERALD LIBRARY
THE WHITE HOUSE
WASHINGTON
February 9, 1972
MEMORANDUM FOR:
Honorable John B. Connally
Secretary of the Treasury
Honorable George P. Shultz, Director
Office of Management and Budget
Honorable Arthur F. Burns, Chairman
Board of Governors of the Federal Reserve
System
Honorable Herbert Stein, Chairman
Council of Economic Advisers
Honorable Peter G. Peterson
Assistant to the President for
International Economic Affairs
Honorable Nathaniel Samuels
Deputy Under Secretary of State for
Economic Affairs
FROM:
Peter M. Flamigas
Subject: 1972 Liberalization of the Foreign Direct Investment Program
The following proposal for liberalization in 1972 of the
Foreign Direct Investment Program has been developed by the Commerce
Department. Commerce reports that this proposal has been agreed to
by the Fed and reflects inputs of the Treasury staff. The elements
in the proposal are:
1. The schedules will be collapsed for 1972 and later years.
Carryforward of unused allowables accumulated under
Schedules B and C (the developed areas) will be permitted,
but those allowables accumulated under Schedule A (less
developed countries) will not be permitted. In order to
avoid recrimination where the denial of Schedule A carry-
forward may work a hardship because of unusual circumstances,
the Office of Foreign Direct Investments will grant specific
relief on application where inequities are demonstrated.
OFDI anticipates little actual need for such special relief.
FORD i LIBRARY GERALD
-2-
2. The earnings allowable in 1972 will be increased to
50 percent of prior years' earnings by foreign affiliates,
up from 40 percent in 1971.
3. The worldwide minimum allowable will increase to
$6 million for 1972, compared to the 1971 minimum of
$2 million in Schedules B/C and $4 million in Schedule A.
An announcement of the changes for 1972 is attached. It
follows the form and tone of the 1971 announcement which was also
designed to forestall adverse foreign reaction, in which objective
it appears to have been successful. Announcement of limited
changes for 1972 removes one element of uncertainty from the U.S.
position, further insuring against adverse reaction.
While the announced changes might increase the scrutiny
of restraints on direct investment abroad, the 1972 liberalization
of the Foreign Direct Investment Program is in line with the
Administration's commitment to termination and its past actions.
Please give me your response to this proposal by close
of business Monday, February 14.
Attachment
BERALD FORD LIBRARY
STATEMENT OF
SECRETARY OF COMMERCE MAURICE H. STANS
ON THE FOREIGN DIRECT INVESTMENT PROGRAM FOR 1972
Changes in the Foreign Direct Investment Program incorporating
a simplification of the Program and a modest increase in investment
allowables for 1972 were announced today by Maurice H. Stans, Secretary
of the Department of Commerce. Secretary Stans noted that recent
developments in the international monetary area do not yet permit the
Administration to terminate the Program, but give some promise of
removal of foreign direct investment restraints as the U.S. balance of
payments improves.
The changes were announced as follows:
1.
The schedular feature of the direct investment restraints
has been eliminated commencing in 1972. Allowables and
the reporting of foreign direct investment will be consoli-
dated on a worldwide basis. Historical allowables generally
will be aggregated; however, the carryforward of unused
Schedule A allowables will not be permitted except as autho-
rized by OFDI in particular cases evidencing hardship.
&
Canada will continue to be exempt from the Program and
separately reported.
2. The optional earnings allowable, permitting investment equal
to a percentage of the direct investor's share of the earnings
of its foreign affiliates during the preceding year, has been
increased from 40 percent in 1971 to 50 percent in 1972.
GERALD
LIBRARY
The incremental earnings allowable has been correspondingly
increased.
3.
As a consequence of the elimination of the schedular feature,
the minimum allowable of $2 million in Schedules B/C and
supplemental allowable of $4 million in Schedule A during
1971 are aggregated, and the worldwide minimum allowable
in 1972 will be $6 million.
The elimination of the schedular feature should significantly
reduce the administrative burden on companies in reporting and planning
their compliance under the Program. The increase in the worldwide
minimum investment allowable that accompanies the elimination of the
- 2 -
schedules will be of substantial help to smaller direct investors and
new entrants to foreign business in carrying out their foreign invest-
ment plans, while the increase in the earnings allowable to 50 percent
will provide some relief for companies with rapidly growing foreign
earnings.
Further details will be made available by the Office of Foreign
Direct Investments.
FORD is GERALO LIBRARY
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THE SECRETARY OF COMMERCE
WASHINGTON, D.C. 20230
April 11, 1972
MEMORANDUM FOR:
HONORABLE PETER FLANIGAN
Assistant to the President
FROM:
PETER G. PETERSON
SUBJECT:
OFDI Liberalization in the Area of
Export Financing
International monetary conditions and domestic sensitivities to
the Burke/Hartke proposals have inhibited an annual liberaliza-
tion in the Foreign Direct Investment Program for the first time
in four years. This is particularly unfortunate in 1972 in view
of the President's 1968 commitment to terminate capital controls.
OFDI has come up with a proposal that may help. They propose
to liberalize their specific authorization process in the export
credit area to align OFDI policy with the export initiative compre-
hended in the DISC legislation and in the exemption of exports from
the Federal Reserve Program on bank lending.
OFDI proposes that increases in export credit extended by a direct
investor to its affiliated foreign nationals would be permitted under
specific authorization policy where the credit has been extended on
GEBALO FORD LIBRARY
reasonable commercial terms. The policy would impose a limit
on the total relief granted in any year equal to the increase in exports
to affiliated foreign nationals, thereby assuming in part an incentive
cast.
The recommended policy, further outlined in the attached memo,
goes a long way toward eliminating the restrictive, contradictory
export credit features of the Foreign Direct Investment Program.
The balance of payments "cost" lies somewhere in a range between
$100 million and $500 million --a guesstimate might be $200 or
$300 million.
The proposals eliminates a major source of friction with the direct
investment community, who feel that our current OFDI guidelines
on exports are both contradictory of other Administration actions
2
and counterproductive of our announced goal of improving ex-
ports. It should be saleable domestically in terms of the export
and job effect, and interpreted by foreign observers as a measure
designed to redress the trade imbalance.
The attached mailing to direct investors would announce the re-
vision in the export credit specific authorization policy. The
announcement would be handled in a low-profile way.
The mailing to direct investors addresses certain other current
issues in regard to the 1972 program so as to emphasize that this
change is an "administrative" one. No direct investors have yet
reported serious discomfort as a result of the lack of guidance with
respect to OFDI regulations and policy in 1972, but they are post-
poning action on 1972 financing pending further information. We
owe them an answer in the not too distant future. I support the OFDI
response and hope we can reach an early accord.
Attachment
Peter y Petten
CC: The Honorable John B. Connally
The Honorable George P. Shultz
The Honorable Arthur F. Burns
The Honorable Nathaniel Samuels
the Honorable Serbert Stein
FORD is GERALD LIBRARY
DRAFT
MEMORANDUM FOR: Direct Investors
From: William V. Hoyt
Director
Subject: 1972 Program
1. There has been no announcement to date of modifi-
cations in the Foreign Direct Investment Program for calendar
year 1972 and direct investors are reminded that the 1971
Regulations, and the allowables thereunder, continue with-
out change in 1972. Direct investors should not anticipate
any changes in the Program unless and until announced of-
ficially by this Office. The special 60-day features an-
nounced in December 1971 may or may not be reinstituted for
the 1972 compliance year, as international monetary and trade
developments indicate; however, the rescission of 203 (d) (1)
will be made permanent.
2. In order to ease the effect of the Program on the
extension of normal trade credit by direct investors to
their foreign affiliates, the specific authorization policy
for 1972 will be revised. An increase in trade credit will
be specifically authorized where the trade credit is extended
in the ordinary course of business pursuant to arms-length
FORD & LIBRARY
- 2 -
terms (but not in excess of the increase in exports to foreign
affiliates in that year). This revision will align OFDI
policy in the export area with other recently announced
provisions in support of the export initiative, such as
exemption of export credits from the VFCRP and enactment
of the DISC legislation. Special consideration will be
given to direct investors who shift from exporting to non-
AFNs to exporting to AFNs, and to direct investors who
utilized bank discount facilities for export sales to foreign
affiliates in 1970 and 1971. Those direct investors wishing
to continue to apply for specific authorization for export
credit relief under the old historical formula approach will
be permitted to do so.
3. Other features of specific authorization policy will
be essentially unchanged from the guidelines set forth in the
February 23, 1971 Memorandum to Direct Investors, except that
provision will be made for more consistent treatment of ex-
propriation losses under the Foreign Direct Investment Program.
Further details and guidelines for application for specific
authorization will be made available as soon as possible.
FORD & LIBRARY GERALD
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
Date April 21, 1972.
To
Chairman Burns
Subject: OFDI Liberalization
From
Robert Solomon, Ralph Bryant
of Export Credit.
and Samuel Pizer
We have been asked by Mr. Flanigan to comment by April 24
on a proposal by Secretary Peterson to liberalize the OFDI program
in the area of export financing. Secretary Peterson points out that
there has been no liberalization of the Program for the first time in
four years, and suggests that the proposed liberalization of the spec-
ific authorization process covering export credit extended by parent
companies to their foreign affiliates would be a helpful gesture.
Moreover, such a liberalization would be in line with the VFCR
exemption for export credit and the export initiative in the DISC
proposal.
Discussion: At present a direct investor can obtain
additional leeway to finance exports to foreign affiliates by (1)
arranging financing with a bank, which would utilize the export
credit exemption of the VFCR or (2) by utilizing a special author-
ization procedure which was adopted by OFDI in 1968, and requires
documentation justifying the need for extra credit to cover rising
exports. Moreover, there is no limit to the export credit a direct
investor can extend to nonaffiliated foreign customers, and under
the DISC proposal there would be some encouragement of such credits.
The increased ease with which export credit can be extended
through other channels cuts two ways insofar as the OFDI proposal is
FORD & LIBRARY GERALD
Chairman Burns
-2-
concerned: (1) if so many alternatives are available, why is it
necessary to liberalize the OFDI rules? (2) if the Government
generally is moving away from limitations on export credit, why
retain these complicated rules in the OFDI program, or force direct
investors to use devious channels?
OFDI has estimated a net balance-of-payments "cost" of
$200-$300 million connected with its proposal. The initial cost
could be that low -- primarily because if direct investors do not
get relief this way they will tend to avail themselves of the VFCR
exemption. However, there are less direct costs that should be
taken into account.
When banks extend export credit we can be reasonably sure
it is on standard commercial terms, and we are able to observe month
by month whether the aggregate amount of such credit, or the amount
for any given bank, is growing excessively. When the credit is
extended directly from a U.S. parent company to its foreign
affiliates it will tend to be merged with other financing, can
easily become a substitute for long-term financing, and will show
up much less clearly and with considerable lags in the OFDI report-
ing system. If there is to be a credible OFDI program for the
foreseeable future, it is necessary to proceed cautiously with
liberalizations that may have little initial net balance of payments
cost, but which undermine the basic operational rationale of the
regulations.
FORD & LIBRARY GERALD
Chairman Burns
-3-
The present rules governing the specific authorization
are quite complicated, requiring that a number of tests be satisfied
and a considerable amount of specific information is required.
However, simplification need not take a form that weakens the
effectiveness of the restraints. The OFDI proposal tends to do
this when it provides as a ceiling for the increase in export credit
to affiliates an amount not in excess of the increase in exports to
affiliates: the present rule, generally, is that the increase in
credit should be proportional to the increase in exports. The latter
formulation tends to ensure that credit terms to affiliates are not
being changed and that this credit is not being substituted for long-
term credit covered by the regulations.
The proposed OFDI announcement would be much less likely
to evoke adverse reaction from abroad than the liberalizations
proposed earlier, but the direct investments are a particularly
sensitive area and it is still important to avoid the appearance
of deliberately opening up a substantial loophole. There has not
yet been any noticeable adverse reaction abroad to the VFCR exemption
of export credit.
Options:
(1) Recommend against any change in the export credit
rules at this time.
(2) Accept without modification the OFDI proposal.
&
FORD
GERALD
LIBRARY
Chairman Burns
-4-
(3) Agree that some change could be made, but somewhat
more cautiously.
Recommendation:
(1) The present proposal is much more limited in its overall
effect and likely impact on foreign observers than earlier OFDI
proposals, so that the ground for outright rejection is relatively
weak. Agreement to a minor modification could lessen pressure for
more sweeping changes.
(2) The liberalization proposal in its present form goes
further than necessary if the objective is mainly to relieve any
actual difficulties encountered by direct investors. It would be
preferable that any OFDI announcement emphasize the simplification
of procedures rather than suggest that the overall restrictiveness of
the Program is being substantially affected. Apart from the way in
which the change is presented, this would mean sticking to the existing
rule that increases in export credit should be proportional to increases
in exports, rather than equal to the whole increase in exports. The
OFDI should be requested to modify its proposal in that respect.
(3) The modification suggested is relatively marginal to
the general question of whether the OFDI should take this step at
this time. It is worthwhile to attempt to get the modification,
but if agreement cannot be reached this would not be sufficient
ground for rejecting the OFDI proposal.
FORD
GERALD
LIBRARY
Subject: Proposed OFII DRAFT 4-24-72 SP:RS:rmb Liberalization
Draft Memorandum from Chairman to Mr. Flanigan
I have reviewed the liberalization of export credit to
foreign affiliates under the OFDI Program proposed by Secretary
Peterson, and can give you my own reaction at this time, as
requested in your memorandum of April 18. Governor Brimmer may
have some comments on the relationship of the proposal to the
VFCR when he returns from Europe next week. I hope you will be
able to defer action until he is able to consider the matter.
strong for reasons the you know
My own preference would be to make no substantive changes
In this connection,
in the OFDI Program at this time. It is important to note that the
2
exemption from the VFCR of bank-financed export credits already
provides an escape valve for those parent companies that find they
need more financing of their exports to or through foreign affiliates.
As I understand it, there is now a specific authorization
process in OFDI that is intended to take care of any need for
increased credit from parent companies to cover rising exports to
their affiliates, but the procedure for applying for such authorization
is rather burdensome and complicated. I would not object to a move
to simplify that process, provided it did not undercut the effective-
ness of the restrictions affecting longer-term investments of U.S.
funds in those affiliates. We are concerned, however, that the
present proposal by OFDI goes somewhat beyond a mere simplification
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and has the appearance, and probably the result, of a relaxation
in the effectiveness of the OFDI controls.
I would recommend that any announcement by the OFDI should
stress the modification in the procedure, rather than the greater
freedom for outflows of credit to affiliates. In particular, the
existing general ground rule, which is that increases in export
credit to affiliates should be no more than proportional to the
Secretary Percitmi
increase in such exports, should be retained. The proposal indicates
that such credit could be increased by the full amount of any increase
in such exports and I fear that this would make possible an increase
in longer-term investment abroad.
GERALD LIBRARY ? FORD
THE WHITE HOUSE
WASHINGTON
May 11, 1972
MEMORANDUM FOR: ARTHUR S. BURNS
FROM:
PETER M. FLANIGA amr
SUBJECT:
1972 Foreign Direct Investment Program
The attached OFDI announcement will be released to the press on
Friday, May 12, at 1:00 PM.
FORD & GERALD LIBRARY
SPARTMENT OF COMMERCE
U.S. PARTMENT OF COMMERCE
UNITED STATES OF AMERICA
Office of Foreign Direct Investments
Washington, D.C. 20230
May 12, 1972
MEMORANDUM FOR: Direct Investors
From: William V. Hoyt
Director
Subject: 1972 Foreign Direct Investment Program
1. Direct investors are advised that the allowables gener-
ally authorized under the Foreign Direct Investment Regula-
tions will be the same for 1972 as they were for 1971. As
outlined below, the Office plans to continue the year-end
features announced in December 1971, to make certain tech-
nical amendments to the Regulations, and to revise the
specific authorization policy pertaining to export credit
relief.
2. The two-month extensions of certain year-end deadlines,
which were available at the direct investor's option for
the 1971 compliance year, will be made available again for
the 1972 compliance year. Section 203 (d) (1) of the Regula-
tions (relating to the holding of proceeds at year-end),
which was previously revoked only for year-end 1971, will
be permanently revoked. The Office will soon publish im-
plementing provisions in the Federal Register, together with
several proposed technical amendments to the Regulations
concerning borrowings by overseas finance subsidiaries and
the holding and allocation of available proceeds of long-
term foreign borrowing.
3. The policy for issuing specific authorizations, upon
application by individual direct investors, will be revised
for 1972 with respect to the extension of export credit by
direct investors to their affiliated foreign nationals
(AFNs). The revision will provide for the specific auth-
orization of an increase in such export credit extended on
reasonable commercial terms (but not in excess of the in-
crease in exports to AFNs in the year). In considering
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applications for such relief, the Office will give particu-
lar attention to the problems of direct investors who shift
from exporting to non-AFNs to exporting to AFNs, and of
direct investors who utilized bank discount facilities for
export sales to foreign affiliates in 1970 and 1971. This
revision will align OFDI policy in the export area with
other recently announced provisions in support of exports,
such as exemption of export credits from the Voluntary
Foreign Credit Restraint Program and enactment of the DISC
legislation.
4. Other features of specific authorization policy will
continue essentially unchanged from the guidelines set
forth in the February 23, 1971, Memorandum to Direct In-
vestors, except that provision will be made to assure con-
sistent treatment of expropriation losses under the Foreign
Direct Investment Program. The detailed 1972 instructions
for applying for specific authorization will be made avail-
able as soon as possible.
GERALD B. FORD LIBRARY
UNITED STATES DEPARTMENT OF
COMMERCE
OFFICE OF
FOREIGN DIRECT
INVESTMENTS
NEWS
WASHINGTON, D.C. 20230
FDI 73-1
1973 Foreign Direct Investment Program
Enslow
Phone (202) 343-7317
For Release 3:00 P.M., January 2, 1973
William V. Hoyt, Director of the Office of Foreign Direct Invest-
ments, announced today that the following changes will be made with
respect to the Foreign Direct Investment Program for 1973.
1. Credits extended by direct investors to their affiliated
foreign nationals with respect to the export sale or lease
of qualifying U.S. goods and services on normal commercial
terms will be exempted under the Foreign Direct Investment
Regulations.
2. The alternative minimum positive direct investment allowables
(Sections 503 and 507 of the Regulations) will be consolidated
into a single worldwide minimum allowable of $6 million per
year.
3. As in the 1971 and 1972 Program years, direct investors will
be allowed to count certain transactions effected in the
first two months of 1974 for purposes of computing their 1973
Program compliance.
Mr. Hoyt noted that the consolidation of the alternative minimum
allowables would simplify the reporting and compliance burden imposed
on many smaller direct investors whose annual investment flows are
relatively modest, individually and in the aggregate.
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USCOMM-DC-22070
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Ce3TaTe
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Mr. Hoyt said that the Office is preparing proposed Regulations
with the objective of carrying out the exemption of qualifying export
credits entirely within the Regulations, thereby relieving direct in-
vestors of the need to obtain specific authorization from the Office
with respect to such credits. Mr. Hoyt noted, however, that in the
complex field of export credit there are difficulties in establishing
comprehensive standards to cover all cases. Thus, it may remain
necessary to retain to some degree the use of the specific authoriza-
tions procedure in this area.
Mr. Hoyt observed that the exemption of qualifying export credits
should eliminate any substantial distinction between the Foreign Direct
Investment Program and the other U.S. capital controls in the treatment
of extension of export financing. As a result of the exemption, there
will be no Program restraint on direct investors' extensions of credit
on normal commercial terms for exports of qualifying U.S. goods and
services to their foreign affiliates. Relief from Program charge
under the exemption will be similar to that previously available by
specific authorization, but will be expanded to include qualifying
U.S. services and lease transactions, and the exemption will not be
limited by the year-to-year increase in exports to affiliated foreign
nationals.
Since extensions of qualifying export credits would be exempt
from Program charge after December 31, 1972, repayments of such credits
to the direct investor after that date will not result in negative trans-
fers of capital for 1973 or subsequent compliance years. No change will
be made in existing regulations permitting direct investors to elect to
count certain transactions entered into in January or February of 1973,
including repayments of trade credit to the direct investor, for purposes
of computing 1972 compliance. Mr. Hoyt emphasized, however, that direct
investors using such repayments for 1972 compliance purposes would be
subject in 1973 and subsequent years to appropriate deemed transfer of
capital charges, to take the place of net charges they would have in-
curred if the present regulations were extended unchanged.
The Office will soon publish proposed Regulations encompassing the
above modifications, as well as certain other technical features of the
Regulations. The public will be invited to comment upon these proposals
before they are adopted in final form. Protective interim amendments to
the Regulations have been adopted and are being published in the January 3
Federal Register.
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