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Tuesday, 27 April 1965

We have now had a chance to give careful study to your letter of March 12 concerning the effect on Australia of our Balance of Payments Program. We fully understand the importance that your Government attaches to this matter, and appreciate the frankness with which you expressed your concern.

I am grateful, too, for your sympathetic understanding of the reasons which impelled us to take forceful action. We think it fair to claim that because of the special role of the dollar in international monetary arrangements, an early and substantial improvement in the United States' Balance of Payments is in the interest not only of the United States, but also of the entire free world. We are determined to eliminate the United States' international deficit, and I am happy to be able to say that the February 10 Program already appears to be taking hold.

We understand, of course, that external capital is of great importance to Australia. In terms of the high standard of living of the Australian people, and the remarkable pace of advance during the past decade, Australia must be counted one of the advanced countries of the world. But as you point out, yours is a country with a great potential for further development. As an old friend and ally, we have watched with admiration your record of achievement, and we know the importance of continued Australian success. We attach high value to the good economic relations between Australia and the United States.

In the present instance, we believe after careful review that our Balance of Payments Program is not likely to have a serious adverse effect on the Australian economy. The part of the Program supervised by the Secretary of Commerce is designed to avoid any undue disruption in the growth of sound business relationships. Indeed, I understand that certain large direct investments in the production of iron ore in Australia are planned for the near future. And in the case of loans by our banks and financial corporations, we intend to emphasize primarily the need to curb the outflow of such funds to industralized countries already rich in reserves.

We believe, therefore, that this program will not impose undue strain on Australia. But it is always possible that specific actions under a program of this sort can have consequences for a friend that outweigh their value to the general program. 1 have asked the Secretary of the Treasury and the Secretary of Commerce to give a careful hearing to Australia's view in any particular case which might be of this sort.

On our general commercial relations, I can assure you again that a reduction in trade barriers, in agriculture as well as in industry, is a prime objective of the United States policy. As I wrote you last August, our negotiators in the Kennedy Round will bend every effort to help bring the Geneva Negotiations to a successful conclusion.

Again, let me thank you for your letter and for your forthright statement of views.

Sincerely (sgd.) Lyndon B. Johnson

I make my initial approach to consideration of this matter by a reference to President Kennedy's legislation of July 1963, when he introduced into Congress a bill to provide for interest equalisation by way of tax. That legislation had three main purposes. Its intention was, firstly, to restrict foreign investment - in other words, to restrict the outgo of capital moneys from the United States of America - secondly, to promote the repatriation of dividends earned overseas, and thirdly, to an extent to recall capital that had already been invested overseas. The legislation current at the moment is expressed to expire on 31st December this year. There, clearly, was some warning to us, in common with the rest of the world, that capital restrictions were on the tapis for America; that no longer was there to be complete freedom for American nationals and institutions to invest abroad. Difficulties were interposed in their way.

I come now to the first of the letters referred to in the motion that is before the chamber, lt is the letter that the Prime Minister (Sir Robert Menzies) addressed to the President of the United States of America quite recently, following the President's announcement to Congress on 10th February this year of a series of decisions that he had made. They have nol been recorded fully in the Press. I have before me the Congressional Weekly Report for the week ending 12th February of this year, in which the President's statement and details of his proposals are set out. With the concurrence of honorable senators I incorporate the proposals in " Hansard ".

First, to maintain and strengthen our checkrein on foreign use of United States capital markets, 1 ask the Congress to extend the Interest Equalization Tax for two years beyond December 31, 1965; to broaden its coverage to non-bank credit of one-to-three year maturity;

Second, to stem and reverse the swelling tide Of U.S. bank loans abroad, 1 have used the authority available to me under the Gore Amendment to the Act to apply the Interest Equalization Tax to bank loans of one year or more.

Third, to stop any excessive flow of funds to Canada tinder its special exemption from the Equalization Tux, 1 have sought and received firm assurance that the policies of the Canadian Government arc and will be directed towards limiting such outflows to the maintenance of a stable level of Canada's foreign exchange reserves.

Fourth, to limit further the outflow of bank loans, I am asking the Chairman of the Board of Governors of the Federal Reserve System in co-operation with the Secretary of the Treasury to enroll the banking community in a major effort to limit their lending abroad.

Fifth, to ensure the effective co-operation of the banking community, I am requesting legislation to make voluntary co-operation by American bankers in support of our balance of payments efforts, under the Government's auspices, exempt from the antitrust laws wherever such co-operation is essential to the national interest.

Sixth, to reduce the outflow of business capital, I am directing the Secretary of Commerce and the Secretary of the Treasury to enlist the leaders of American business in a national campaign to limit their direct investments abroad, their deposits in foreign banks, and their holding of foreign financial assets until their efforts - and those of all Americans - have restored balance in the country's international accounts.

Seventh, to minimize the foreign exchange costs of our defense, and aid programs, I am directing the Secretary of Defense, the Administrator of AID, and other officials immediately to step up their efforts to cut overseas dollar costs to the bone.

Eighth, to narrow our tourist gap, I encourage our friends from abroad, as well as our own citizens, to " See the U.S.A.;" and 1 request legislation further to limit the duty-free exemptions of American tourists returning to the United Slates.

Ninth, to earn more trade dollars, I am calling for a redoubling of our efforts to promote exports.

Finally, to draw more investment from abroad, 1 am requesting new tax legislation to increase the incentives for foreigners to invest in U.S. corporate securities.

If honorable senators have an opportunity, now, to locate these particular ten points, they will find that they are even more comprehensive than one would have thought from a perusal of the newspapers. We are already aware of their general effect, which is to restrict overseas investment on the part of American nationals and institutions, to encourage the repatriation of both dividends and capital from overseas, and to call upon the investing public to raise the capital necessary for overseas purposes in the countries where those purposes are being served. They would be the three broad aims of the ten steps that the President proposed should be taken. Each of them is, more or less, on a voluntary base, except for the first proposal which is to extend the interest equalisation tax for a further period of two years from the end of this year. So the very firm legislative provision is to be extended and is to be buttressed by many arrangements that are now on a purely voluntary base. I do not think that anybody in America is under any illusion as to what will happen if the President's wishes are not voluntarily complied with.

Soon after the President made his statement on 10th February, he called together the representatives of the leading 370 companies in America with subsidiaries or investments abroad. He put his views very plainly to them. It can be assumed from a report of the proceedings that appeared in the " Sydney Morning Herald " of 25th February that he has very firm ideas as to what will happen. The report stated -

President Johnson and members of his Cabinet told the businessmen at last week's session that the Government expected each company to improve its own balance of payments by 15 per cent, and preferably by 20 per cent, this year.

I take it that the words " this year " mean the calendar year, because so little of the current financial year remains. That unquestionably sets a very high standard to be attained by the 370 leading companies. The report continued -

The company leaders were made to understand that if these appeals, backed up by the threemonthly reporting system, did nol produce results, then the Government might have to lake direct action as it has already done with the "equalisation tax " imposed on foreign loan raisings in the U.S.

In these circumstances, one may safely say that' the nationals - the companies in particular concerned - will take very grave note of what the President requires. We in this country must expect that the subsidiaries of those nationals, functioning as good Americans, will listen to the President's requests and injunctions and will obey them. So we may expect a smaller flow of direct capital from the U.S.A., an even higher repatriation of profits and perhaps some repatriation of capital moneys. One would expect those companies to do that lor their own country, which is placed in a difficulty.

The President, in his address to Congress, did not express any worries about the state of the dollar. Indeed, in his opening remarks he said -

The slate of the dollar in the world today is strong - far stronger than three or four years ago. ***

The dollar is, and will remain as good as gold, freely convertible at S35 an ounce.

That pledge is barked by our firm determination to bring an end to our balance of payments deficit.

No! in regard to the current balance of payments situation, but in other respects, the situation in America is quite grave. America has a colossal surplus on its normal trading account, but she exports about £3,000 million per annum for investment abroad. On top of that, America provides a similar amount for foreign defence, foreign aid and other matters with which we all are familiar and for which we, in common with many other countries, have cause to be grateful. A tremendous financial strain has been placed upon the United States as a result of the new role that she has assumed in world affairs. We, in common with the rest of the world, have a very live interest in ensuring that the dollar maintains its value and power because, in contributing to the financial and economic strength of the U.S.A., the dollar makes a very useful contribution to the strength of the Western alliance.

The Prime Minister of Australia, being concerned at the effect that the proposals of the President of the United States might have upon us, wrote to President Johnson on 12th March and pointed out the difficulties associated with our balance of pay ments situation. The Prime Minister stated the facts accurately and clearly. To state the position broadly, the Prime Minister pointed out that the balance of our trade with America on current account is heavily in favour of that country and that such capital inflow as we get from America makes up only about one half of the gap. So we have a chronic deficit of dollars, even taking into account the inflow of capital from America. Accordingly, the Prime Minister properly is concerned about the fact that a restriction of that flow of capital would tend to widen the already large and chronic gap in our financial dealings with the U.S.A. The President replied immediately, courteously but formally on receipt of the letter, and soon afterwards he replied on the substance of the letter. He wrote on 24th March of this year.

I think that there are two important matters contained in the letter. First, the President expressed the view that the United States balance of payments programme is not likely to have a serious adverse effect on the Australian economy. Quite clearly from that statement he is prepared to have it make some adverse impact upon our economy, but he declined to regard what will happen as being really serious. The second matter of importance is that he indicated that he has asked the Secretary of the Treasury and the Secretary of Commerce to give a careful hearing to Australia's view in any particular case in which the consequences of the United States action to a friend might outweigh their value to the general programme that he has indicated.

The reply does not give us any cause for great hope. The most it says is that the Americans will look at special cases of hardship. As we stand on the basis of that letter, we would have to make out a case of hardship before they would even listen to us. As we were told by the Leader of the Government in the Senate (Senator Paltridge), the Treasurer (Mr. Harold Holt) has already gone to Washington and New York to discuss with the American authorities the anticipated impact of the measures on us. Before leaving he also caused the Reserve Bank of Australia to make a request to banks and other financial institutions not to provide loan moneys for overseas companies that wish to use those moneys for their own expansion or development in Australia. In other words, he has asked that everything be held pending the Government's assessment of the situation, the receipt of his report on his return from America and the information that is being elicited from American companies here. Those companies have been asked to provide the Government with a statement of their financial intentions for the future and to indicate whether they propose to go onto the local market to compete for money and for our savings for their own purposes; whether they propose to remit capital moneys to the United States; and what their proposals are regarding the remittance of dividends.

We may confidently expect that there will be in this country a stepping up of all those activities, and that if things proceed as one can only anticipate and rather fear at the moment, our trade position or our overall financial position with America will undoubtedly take a turn for the worse. That must mean, of course, that in the absence of any other alternative we shall have to draw rather heavily upon our reserves. This matter concerns us particularly because we in this country have, as I have said on many occasions, a dependent economy. We are very vulnerable. We depend for the great bulk of our exports on primary production. We depend upon the seasons, which are untrustworthy, to determine the quantity of those products available for export. We have our periods of floods, droughts, fires and pests. We note from time to time great fluctuations in the quantity of primary produce that is available for export.

Then there is the fact that we are dependent for our proceeds upon foreign buyers. We are in no way able to condition the overseas market, or to determine the prices that our products will be able to win. We have had many unfortunate experiences of great variation and fluctuation in overseas prices for the commodities in which we are interested. At the moment we are undergoing a period of difficulty regarding some of our major items of primary production. In recent times the production of wool, wheat and sugar has provided us with difficulties. Apart altogether from anything that might arise out of the American action and the President's directions, and despite the better position that exists for some commodities, such as meat, iron ore and other minerals, including coal, it does look as though we shall lose anything from £100 million to £150 million of our reserves this year in order to balance out the year's transactions.

Accordingly, the prospect at the moment is not good. It would seem that the trend is likely to be projected into next year and, it may well be, for some years that lie ahead. The United Kingdom Government, in putting its Budget before the Parliament on 6th April last, also addressed itself to the problem of solving its difficulties in the matter of balance of payments on current account. There is a wide gap which it intends to close. The United Kingdom' Government has set out the various proposals and, thanks to the office of the British High Commissioner in Canberra, I, no doubt in common with other honorable senators, have been supplied with the Treasurer's precis of those proposals. The document is dated 7th April. It is most informative to read pages five and six which are devoted to this question of the external capital account. With the concurrence of honorable senators, I incorporate those two' pages in " Hansard ".


Over the past 13 years the total flow of new investment overseas has amounted to around £4,000 million; but our reserves have fallen and our short-term monetary position deteriorated. Our national balance sheet is badly lop-sided. Our tax arrangements give a positive bias towards overseas, as compared with domestic, investment. The time has come to do something to correct this. The return which we receive from our long-term investments overseas is moderate and nowadays frequently less, from the point of view of the national economy, than the return on home investment.


With this as background, the Chancellor has taken the following decisions relating to the external aspects of the corporation tax:

(a)   The Chancellor proposes to limit the circumstances in which relief is given for " underlying tax " (i.e. overseas tax charged on the profits of an overseas company from which a dividend is paid to a United Kingdom company). It will continue to be given when the U.K. company holds 25 per cent, of the shares in the overseas company. But for other cases the double taxation agreements will be re-negotiated and legislation will be introduced to withdraw unilateral relief.

(b)   The Chancellor has received many representations urging that the overseas tax paid by a U.K. company should be allowed to " spill over " and qualify for relief against the shareholders income tax as well as the corporation tax. To make this " spill over " relief a permanent feature of the corporation tax would be inconsistent with the principles of that tax and contrary to the national interest. But transitional relief will be provided by way of cash payments: the relief will begin to taper off after the first two years and disappear after five years, i.e. in 1970-71.

(c)   The special tax treatment of the overseas trade corporations will be abolished as from April 1966.

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