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September 4, 1968 
POLICY APPROACH FOR HANDLING U.S. MILITARY BALANCE OF PAYMENTS DEFICITS IN NATO COUNTRIES 
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A. Facts 
.1. Balance of payments projections through CY 1972, con­cluded before the Czech crisis, show a net deficit on U.S. defense expenditures and receipts in NATO Europe of $855 million in calendar 1970, $1.2 billion in calendar 1971 and $925 million in calendar 1972. This should be compared with $412 million in calendar 1967, $270 million in calendar 1968 and a projected $168 million in calendar 1969. Clearly,. these increasing deficits cannot be absorbed by special financial arrangements of the German type, which are unsatisfactory both to the United States and the central banks of the countries concerned as a long-term answer to U.S. payments losses resulting from U.S. force deploy­ments in NATO Europe. 
2. U.S. gross military expenditures in NATO in 9alendar 1967 could have been completely offset if our NATO allies, excluding
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France, had procured in the U.S. 46% of their defense procurement of major equipment, missiles and ammunition. ,, A table showing the same picture for CY 1968-9 is attached. ~ 
3. The pursuit of a procurement policy yielding these results would have substantial b~dgetary and military benefits for all concerned, and would avoid the ha~sh necessity in the years ahead of being forced to choose between· the security risk of withdrawing U.S. forces from Western Europe and the financial risk of large U.S • . payments deficits to the international finan­cial system. 
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B. Principles . " 
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by new emphasis on military pro­
curement in the U.S. and with 
decreasing reliance on special financial arrangements to 
neutralize the residual deficit. 
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4. The hard choice to be made clear to our NATO partners . is: 
a. NATO-wide agreement in principle (imple­
.. mented by bilateral actions) to offset the U.S. balance of payments costs of ,. • whatever level of U.S. forces the U.S. connnits in Europe. 
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b. 	A weaker U.S. role militarily in Western Europe in· the years beginning with CY 1970. 
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CONFI:BEHTIAL 

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l. Obtain ngreement in princ~ple nt the Hinisteril11 level in the NATO Council that: 
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a. 	It is necessary to nlleviete to the mnximum extent U.S. military bnlance of pPyments drain9 from its expend'itures for NATO · 
·mutual s_ecurity• . 
. . b. 	Alleviating the U.S. deficit should be · accomplished through stnnc1Ardiz8tion •· .
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of military equipIBent 'Within.the Alliance, 
in or<ler to improve military cap~bilities 
of the Alliance, obtain the technological
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nnd economic benefits of the ~dvnnced U.S. arms industry end conserve budget resources. 
c. 	
NATO org~ns 8nd Defense H:tnistries should undertake an urgent review of the require­ments for militnry equipment in nntion~l inventories to maximize.standardization with U.S. forces over a long-term period. 

d. 	
The U.S. review with individuAl NATO ~ countries Pltern~tive me8ns for produc­tion allocation (nmong two or .three or more countries ·dep~nding upon the specific equipment, production cnpf'bilities. etc.,) to fulfill theil." equipment requirements in a wny which m~ximizes procurement in the 


U.S • . At the SP.roe ti~~ appropriate atten­tion would be given to insure production shnres for foreign countries '.;here it is economically feasible with a view to most 
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effective use of defense budgets • 
e. 	Fin~nce Ministries ~nd.central b~nks of NATO countries should cQnsult bilaterally with the U.S. to devise longer-tenn arr8ngements for neutralizing residual 
-OONFIDENTIAL · · 
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-OONF!DENTIAL · 
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Amounts of the U.S. militncy bplnnce of pnymcnts deficit in their respective countries, including invcotments in the 
U.S. ·which are convertible ~s required for payments by governments to U.S. 
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· militnry suppliers. 

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Haunt a major 
political effort with our NATO allies which includes the following rationale: 
a. 	
Czech developments and the economic t'nd military realities of the world mean tha~· we cannot practice business as usual. 

b. 	
U.S. approach proposed in NATO is based 
on mutuCll gnin for the security of all 
members, economic production shares for 
foreign countries and international 
financial viability. 


c. 	
The undesirable alternntives to hard 
choices in long-term production ~lloca­
tion and financial coope·rntion are A 
"'eaker U.S. role abroD.d militarily ·or 
financially, or both. 



Undertake nn urgent U.S. study on A country-by-country 
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a. 	
Equipment requirements of our sllies. 

b. 	
Major potential nrens ·for production allocation (for example, tn8in battle tank, truck modernizntion, aircraft replacement, naval missiles Bnd fire control, _etc.) 


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GONFIDffirTIAG­
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c. 	GenerAl m~gnitudes of U.S. ond other 
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nationnl production shvres which would cover the foreign exch8nge drnin of U.S. 
:· ·~ ... 	forces deployed in foreign countries. 
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d. 	Residunl foreign exch~nge drnin requiring finsncinl neutrAlization cooperation. 
e·. Possibilities for bilateral or multi­lnteral techniques for implementing the . . U. S • epproach•. • 



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Cha:-iges i n \.~e~az e Annual Procurement During 1961-67 lS 
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5,998 
18. 7% 
50.2% 16.3% 67 . 488 
14. 5% 
107.2% 14.1%