Mr. STANS. It is just one element of dealing with the whole antipoverty program.

Senator JAVITS. I thank the Secretary very much and hope that we have not taxed him.

Mr. STANS. Thank you.

Representative REUSS (presiding). Senator Percy?

Senator PERCY. Mr. Chairman, first I would like to say how disappointed I was that I was in a Government Operations hearing while the committee had, I understand, a stimulating discussion on the soybean problem. I would have rushed out to come down and talk about soybeans as I represent the largest soybean exporting State. I understand the question came up as to whether or not the President was to discuss this subject in Brussels with the EEC. I was wondering whether he would also, and after I discovered who was making up the agenda I wrote a letter to Mr. Helmut Sonnenfeldt of the National Security Council. Here is an unclassified reply in which he says he is grateful for the letter suggesting that this be put on the President's agenda. He says the subject is being included in the material and preparation for the President's discussion in Brussels and that a copy of his letter was being sent to the Department of State.

So I assume that it was discussed, although some would say that soybeans are not the most worldshaking issue today. To farmers in Illinois, they are. I think the whole point was that if the EEC implemented its proposed tax this would start a round of retaliation that would open the door and provide an excuse for textile, steel, clothespin, and shoe quotas over here. The only response we would get is more retaliation on the other side and reverse a trend of 35 years standing. So I think this is an important subject.

I would like to ask a question of Secretary Stans.

I think very wisely, you have pointed to the problem of inflation and also set a goal of $50 billion in exports by 1973. I think it is a good idea to have a goal. You may not, as they say, when you reach for a star, get one, but you do not end up with a handful of mud, either. We all know where we want to go and should try to go. How important will inflation be, however, this year and next year, in our attempt to achieve a goal of this type?

We have had estimates before this committee that we expect inflation of 32 to 42 percent again in 1969, despite expenditure cuts and the tax increase. How high a priority must we place on fighting inflation? What will be a significant cutback in inflation this year and next year that could favorably affect our exports?

Mr. STANS. Well, it is very difficult to know how much we can achieve in a short period of time in reducing inflation, because it must be done so delicately as not to disturb other important elements of the economy, as you know. I think the main objective of the administration must be this year to turn the direction of inflation downward so that we do not have as much as we had last year and, hopefully, to reduce the amount of inflation thereafter. The illustration that you make is an important one. Obviously, if we had very high inflation in the next few years, we could have $50 billion in exports before 1973. It certainly would be a very poor outcome for the country to achieve that goal in that manner. We are hoping that we can achieve that goal

with a minimum of inflation over the next 5 years. I do not think anyone can name at this date the precise point that we hope inflation will be down to 3 percent a year or down to 2 percent a year, but we have to maintain the effort and keep the pressure on as much as we can, without seeing unemployment increase unduly or seeing other elements of the equation get out of balance.

Senator PERCY. The balance of payments picture in 1968 looked on the surface to be good and we have discussed it at some detail in the committee. We feel it looked good primarily due to high U.S. interest rates that have attracted foreign capital, to U.S. direct investment restriction programs which we want to get rid of, and special official transactions of large foreign purchases of U.S. bonds. What do you anticipate or what does the Treasury estimate will be the capital movement picture in 1969?

Mr. VOLCKER. That is an area in which I think it is just impossible to make anything like a precise projection. I think that tight money has been an important element in this, as you suggested. Obviously, tight money is continuing. At present, if anything, it has intensified. I think this provides a substantial element of protection in terms of the total picture this year. But in saying that, I think clearly one is not happy in having to rely upon this degree of tight money for a variety of reasons. So in shaping our longer run program, I certainly think we have to consider this particular support for the balance of payments, valuable as it is in the short run, valuable as it is continuing to be, it is something we have to work our way out of.

In general terms and without trying to predict the timing of the thing, what we want to see over a longer period of time is a recovery in trade balance which will, at least in a rough way, be synchronized with the relaxation of pressures in the money market as we return to a more balanced domestic economy. This timing will permit a reduction in capital inflow without throwing us entirely off course in the balance of payments as a whole. There is many a possible slip in the timing when one is talking in these terms. But as a general strategy for the balance of payments, I think this is the way we would like to see it go.

Senator PERCY. This is going to be a shared responsibility. I think the Secretary of Commerce's goal to increase exports and trade will, in the long run, do more to do this on a really sound basis than anything I know of. But I think there are other loopholes that can be plugged in the meantime. One of the loopholes is NATO expenditures. We have a balance-of-payments deficit of three-quarters of a billion dollars on our NATO expenditures for mutual defense. Canada has and the United Kingdom has an unfavorable deficit. Germany, Italy, and Belgium all have surpluses every year as a result of our expenditures for mutual defense. I went to Brussels in November and attended the parliamentary sessions there. I proposed the creation of something like an international settlements bank among NATO countries where automatically, every year, we settle these accounts multilaterally. Such settlements would not be subject to the political whims or political problems faced in Germany and it would not have short-term, 41/2-year bonds that they are now buying, but it would have long-term bonds.

Will the Treasury place high priority upon this, now that we have the approval of 16 countries in the parliamentary session and the NATO ministers have written it into their communique from Brussels, also in November. I think it is up to us to devise the mechanism. Nobody else is going to do it. We have all the incentive. No one else really has it to that extent. How high an importance can we place on it?

I am supposed to report back in May to NATO on what action we have taken. With the change in administrations, I recognize the problem of deciding on this quickly.

Mr. VOLCKER. That is right, Senator. I think we do attach the highest kind of priority to this military deficit problem in our balanceof-payments effort. We fully sympathize with your view that we should aim at a more permanent kind of arrangement here and get away from the kind of stopgaps that have been used. I do not think there is anything in your views to which I would take exception. I think we do also face the practical problem of assuring progress in the shorter run, so that while working toward the multilateral framework, which I think would be certainly desirable, and while thinking about what mechanism might be most appropriate there, I am not ready to suspend the bilateral effort. I think it will be necessary to push vigorously bilaterally.

I think in principle, we have made an important step in getting a NATO consensus that this is a problem requiring cooperative effort. I think we want to build upon that general principle into some practical arrangements. But for the immediate problem, I think we have to go to work also on a bilateral basis and do that promptly and effectively and as quickly as we can.

Senator PERCY. I would like to say that working in Brussels, I had the full support of the Treasury Department. Your Mr. Albright was exceedingly helpful. We took fully into account the fact that we did not want to in looking at the short run picture, interfere with the long run. We wrote right into the council document that we should continue those bilateral arrangements. I think we strengthened your hand and put the force of NATO behind those negotiations and, hopefully, removed from them some of the political problems that are always present in Germany, particularly in an election year.

Mr. VOLCKER. Precisely. I think we should be working in both direc tions simultaneously.

Senator PERCY. Lastly, I would like to make a comment to Secretary Stans. I do not know what the administration has in mind for organization of our trade agreements program. I would just like to say for the record that many of us have enjoyed a fine relationship with Ambassador Roth. We feel that he carried the torch and he fought the good battle. I think his testimony today is an exceedingly enlightened statement. I really agree with him on his analysis of the textile situation. Everyone thinks they have a special case. All of my compatriots for 25 years in the photographic business used to think we had a really special case and I did not find in all my years there that their case was any different than that of a hundred other industries, even though Japanese and the Germans developed a little interest in our business. But I think we just have to put the country's interest ahead of company interest. I think Ambassador Roth has done that, and I hope however

we organize our trade program, we will strengthen the office of special trade representative rather than weaken it. We need a voice looking out to the future, not just to be on the defensive, but rather offensively to broaden and strengthen trade.

I wonder if you would mind commenting on some of the ways we might have in mind to reduce nontariff barriers and to extend the authority to negotiate additional agreements? Or if it is a little early in the administration to talk about that, I will certainly abstain and wait until such time as you care to discuss it with us.

Mr. STANS. It is quite early in the administration to say very much in terms of details. I have called, as I said in my statement, the first meeting of the Cabinet Committee on Export Expansion that has been held for 5 years. I think perhaps the Committee was inactive during the time because our trade balance was in a range of $5 billion and it may have been justified in not working to increase it. But now that our trade balance has practically expired in 1968, it seems as though we really have to go to work on this and consider all of the alternatives. We are considering recommendations of the National Export Expansion Council, the International Chamber of Commerce, and other bodies. The Department of Commerce itself has just completed a 5-year study of the potentials for export trade with somewhat gloomy predictions as to where we will come out unless we take specific, positive steps. And through these reports there are some 75 or 100 recommendations that have been made as to things that can be done. We may find it possible to increase very materially the opportunities for extending credit in export trade. We are certainly going to take a look through a task force headed by Treasury, at the possibilities of tax benefits of some kind or other. We have to take a look at the questions of the value added tax, even though it may be a very difficult matter to get the American public and the Congress to accept the idea of the value added tax because it is so new. But there are, as I said, many items of approach to this problem that are now being studied. I have asked each of the task forces working on these matters to deal with them in terms of a crisis basis, with the objectives that we will get some conclusions in the next 60 or 90 days and others may take longer. We are going to do everything we can to analyze this problem to the fullest and determine what steps might be taken.

Beyond that, Senator, it is a little difficult for me to make any prognosis indications or promises. I hope that we can, the next time I come back here, point to results that we have secured in this area. Senator PERCY. Well, I sense a new feeling of activism in the Department of Commerce under your leadership. I think many of us will welcome this. I do not think it should be a statistical department that analyzes figures and says what has happened in the past, as a historian does. I think it has a really creative role, because if American enterprise can't continue the leadership that it has, if we have to as a Government impose our official restraints on investment abroad, it will take the best ambassadors we have ever had away from their work abroad. It will place restrictions on us that will do irreparable damage to carrying on an effective foreign policy. Foreign aid programs will go by the boards, overseas military programs will go by the boards if we cannot solve the problems. I just can't imagine,

Mr. Chairman, anybody I would rather see in this role than my former neighbor and longtime friend, and a very knowledgeable friend who enjoys the confidence of the President, Mr. Stans.

Representative REUSS. Activism in the Department of Commerce and passivism in the Department of Defense that would be a good combination.

Mr. Stans, you mentioned now to Senator Percy the study made of export expansion by the Department of Commerce. Does that have a name?

Mr. STANS. I do not know the precise name, but it is a 5-year study of foreign trade prospects.

Representative REUSS. Would you file that study with us for our general education?

Mr. STANS. Yes, we have no objection to that.*

Representative REUSS. Do you have any further questions?

Senator PERCY. No.

Representative REUSS. I want to express my gratitude to Mr. Volcker, Mr. Stans, Mr. Chartener, for their excellent testimony. You are off to a fine start. We wish you well. Take care of your health.

We will now stand in adjournment until next Wednesday morning in this place at 11 o'clock, where we shall have Mr. George Meany of the AFL-CIO.

(Whereupon, at 12:20 p.m., the committee adjourned until Wednesday, March 5, 1969, at 11 a.m.)

"U.S. Foreign Trade-A 5-Year Outlook With Recommendations for Action," a report to the Secretary of Commerce by the Bureau of International Commerce, U.S. Department of Commerce, December 1968. Copy retained in committee files.

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