Foreign Relations of the United States, 1977–1980, Volume XVI, Southern Africa

334. Memorandum From the Executive Secretary of the Department of State (Tarnoff) to the President’s Assistant for National Security Affairs (Brzezinski)¹

Washington, March 20, 1978

SUBJECT

• Review of U.S. Economic and Commercial Relations with South Africa

The President decided on October 25² on a number of measures concerning the recent developments in South Africa. Included among these was the decision that the United States “should immediately undertake a review of its commercial and economic relations with South Africa.” Pursuant to this decision the Department of State undertook the preparation of such a review in collaboration with other U.S. Government agencies. Contributions to the review were received from the Department of the Treasury, the Department of Commerce, Central Intelligence Agency, the Department of Agriculture, the Department of Energy, the Department of Defense, and the Export-Import Bank.

The Review of U.S. Economic and Commercial Relations with South Africa has now been completed and is attached. All contributing agencies are in basic general agreement on the review.

Peter Tarnoff³

Attachment

Review of U.S. Economic and Commercial Relations With South Africa⁴

Washington, undated

[Omitted here is the title page.]

TABLE OF CONTENTS

I. Scope

II. Summary

III. Current U.S. Economic and Commercial Policies

A. Commercial Promotion

B. Export-Import Bank

C. Commodity Credit Corporation

D. Restrictions on Selected U.S. Exports

IV. Trends in Economic/Commercial Activities with South Africa

A. Trade

B. Investment

1. U.S. Investment in South Africa

2. South African Investment in the U.S.

C. Finance

1. Commercial Banking

2. Export-Import Bank

3. Commodity Credit Corporation

V. Range of U.S. Policy Options for a Change in Relationships

A. U.S. Government Support for Voluntary Actions by Private U.S. Firms or Banks

1. Neutral Position Toward U.S. Private Sector Activities

2. Unilateral Encouragement of Progressive Behavior

3. More Active Encouragement Through Multilateral Efforts

4. Additional Unilateral Encouragement of Progressive Behavior Through Forceful U.S.G. Leadership

B. Other U.S. Measures Which Might Be Taken Under Existing Legislation and Their Likely Impact on All Parties

1. Termination of U.S. Export Promotion Activities

2. Discourage New Investment and/or Bank Loans

3. U.S.G. Restrictions on Exports

4. U.S.G. Restrictions on Export Financing

C. U.S. Measures Which Would Require Legislative or UN Action, and Their Likely Impact

1. Moratorium on New Direct Investment and/or Bank Loans

2. U.S. Import Restrictions

3. Denial of Foreign Tax Credits

4. Freezing of South African Assets

VI. U.S. Vulnerability to Range of South African Economic Measures

A. Trade

1. U.S. Exports

2. U.S. Imports

a. Chromium

b. Manganese

c. Industrial Diamonds

d. Vanadium

e. Platinum Group Metals

VII. Popular Attitudes and Proposed Legislation in the U.S. Congress

VIII. Conclusions

Appendices:

A—Statistical Tables

B—Pending Legislation Related to South Africa

C—Additional Eximbank Options

I. Scope

The President decided on October 25, 1977, on a number of measures to signify our displeasure with the increase in repressive measures in South Africa. At that time it was decided that the United States “should immediately undertake a review of its commercial and economic relations with South Africa.” Pursuant to this decision the Department of State undertook the preparation of such a review in collaboration with other U.S. Government agencies. Contributions to the review were received from the Department of the Treasury, the Department of Commerce, Central Intelligence Agency, the Department of Agriculture, the Department of Energy, the Department of Defense, and the Export-Import Bank.

The review which follows identifies a number of measures in the economic and commercial field which we could take to achieve one or more of our objectives in South Africa. In the review we have considered the likely impact of such measures on ourselves, South Africa, or third parties. We have not conceived of the review in itself as leading to policy recommendations for future action since such action, if any, will depend on the evolution of our political relations with South Africa.

II. Summary

Over the past twelve years, the United States has neither encouraged nor discouraged U.S. investment in South Africa. Nor has the U.S. taken part in trade promotion events in South Africa involving substantial and readily identifiable government participation and sponsorship. The U.S. Export-Import Bank has not granted direct loans to South Africa since 1964, and the U.S. Government restricts the export of selected items to South Africa. Further, the U.S., which voluntarily embargoed arms shipments to South Africa in 1963, fully observes the recent mandatory UN arms embargo against South Africa.⁵ On November 28, 1977 the President issued a directive to prohibit future exports of all commodities and technical data destined for sale to or use by the South African police or military.⁶

Despite our self-imposed restrictions (albeit limited in nature) in response to apartheid and specific repressive measures, U.S. trade with South Africa expanded substantially during 1965–76, although less rapidly than trade with the rest of Africa. In 1977, however, because of the economic recession in South Africa, our exports to South Africa declined. United States direct investments in South Africa also grew steadily over the 1965–76 period and contributed to the growth of the South African economy. U.S. banks increased their share of foreign commercial loans to South Africa in the 1970’s and have been an important factor in South Africa’s ability to sustain large balance of payments deficits. There has been a decline, however, in the rate of increase in the book value of U.S. direct investment and bank loans during the last year, brought about by uncertainties concerning South Africa’s political future and by the current recession in South Africa.

Any proposals to change our economic/commercial relationships with South Africa would have to be viewed in light of the following three possible U.S. policy objectives as well as our own economic welfare and that of our principal allies: 1) encouragement of a progressive transformation of South African society; 2) distancing the U.S. from South African human rights abuses through a reduction of U.S. business and official involvement in South Africa; and 3) improvement—or no deterioration—of our political and economic/commercial relations with black Africa. The pursuit of one or both of the first two objectives could, of course, serve to facilitate the goal of improving our relations with black African countries, as well as serve to protect U.S. interests in a future majority-ruled South Africa.

For example, additional measures involving U.S. Government support of enlightened employment practices by U.S. firms would respond to the goal of encouraging progressive transformation of South African society. Measures to further restrict trade or to curtail loans or investment would tend to distance the U.S. from South Africa.

There are a number of possible ways in which to change our economic and commercial relations with South Africa. They include a) U.S. Government support of voluntary actions by U.S. firms and banks; b) various measures which the U.S. Government could take under existing legislative authority; c) measures which would necessitate new legislation; d) measures which could be taken pursuant to Chapter VII of the UN Charter and e) declaration of a national emergency in order to invoke the International Emergency Economic Powers Act.

U.S. measures that could be taken under existing legislation include policies to encourage and reinforce action by private firms and banks, the termination of remaining U.S. export promotion activities, discouragement of new direct investment in or bank loans to South Africa (e.g. by official persuasion), and a variety of possible restrictions on U.S. exports or export financing (i.e. Eximbank guarantees and CCC credits). U.S. measures requiring new legislation or action by the U.N. Security Council include a range of possible U.S. import restrictions against South Africa, a moratorium on new investment in or bank lending for South Africa, denial of foreign tax credits and, in the extreme, freezing South African assets in the United States.

South Africa, in retaliation to our measures or for other reasons, could take various actions including possibly an embargo on U.S. exports, refusal to repay commercial bank and Eximbank guaranteed loans, restriction of the remittance from South Africa of dividends of U.S. firms, or a cut off of sales to the U.S. of strategic minerals. The loss of South African minerals would be costly, particularly with regard to chromium, especially in the unlikely event that South Africa ceased exporting these minerals to other countries at the same time. There are other suppliers of some of these minerals, however, including some black African states. Not all these suppliers could meet the immediate U.S. demand. Because of its dependence on foreign capital, technology and earnings from minerals exports, South Africa would be unlikely to undertake severe economic measures against the U.S. unless we took severe economic measures against it. If the South Africans undertook a major retaliation, the U.S. economy could adjust only after considerable dislocations and adverse effects on some U.S. domestic policy goals.

Severe U.S. restrictions on exports to South Africa and ending of export financing could be costly for the U.S. in economic terms especially if taken unilaterally. Equally, maintenance of the status quo—if the situation in South Africa does not improve—would be costly in terms of our foreign relations with the rest of Africa, and the credibility of our general human rights policy. Limited measures, such as providing tax credits or Eximbank facilities solely to U.S. firms which practice enlightened employment practices, would be less costly in economic terms, but less helpful in our relations in the rest of Africa. Actions taken multilaterally would put more effective pressure on South Africa with possibly less cost to the U.S.

Increased U.S. Government support of voluntary action against apartheid by U.S. firms and banks is one means of influencing changes in the work place. There are a number of possibilities for U.S. Government measures, including the elaboration of a code of conduct for U.S. multinational firms operating in South Africa. By itself, however, this kind of action would not be enough to contribute significantly to all our policy objectives.

While a growing number of members of the House and Senate favor taking action against South Africa, the majority is silent on U.S. policy regarding South Africa. There are currently six pending bills dealing with South Africa. These include, inter alia, proposals to deny tax credit to U.S. firms operating in South Africa, prohibition of U.S. imports of South African coal and uranium, and prohibition of Eximbank facilities for U.S. exports to South Africa. Legislation which would adversely affect American business in a serious way—in either the investment or trade field—would be unlikely to pass, at least under present circumstances.

The principal conclusions of this study will be found in Part VIII.

[Omitted here are Parts III–VII.]

VIII. Conclusions

1. Evolution of our Economic and Commercial Relationship with South Africa

The movement toward increased restrictions on our economic relationship has been imposed by the U.S. and not South Africa. It has been triggered largely by concern about apartheid in general and by specific harsh measures taken by the South African Government rather than by factors relating to the situation in Namibia and Rhodesia. Our future relationships will hinge on domestic U.S. Executive and Congressional responses to South Africa’s actions in all these areas.

2. Recent Trends

Restrictions have not thus far had a great impact on the trend of our economic relationship. General economic conditions have been the controlling influence, with apprehensions about long-term internal stability a secondary but progressively important factor. Confidence—particularly important for investors—has been shaken by recent events in South Africa.

3. Policy Options

a) Increased voluntary actions by U.S. firms and banks in the field of enlightened employment practices could be one way of combatting apartheid in the work place. South Africa’s desire to maintain its link to foreign technology and capital leads us to believe that the South African Government is highly unlikely to oppose efforts to upgrade employment practices. Voluntary measures might be among the easier and least costly of the options for change in the relationship. There is some disagreement, however, as to how much progress has been made thus far under existing guidelines. Black Africans could view increased voluntary measures as inadequate, and they do not fall into the category of measures which would distance us from South Africa.

b) The U.S. could reinforce these voluntary actions through more forceful leadership. This could include updating the 1973–74 guidelines, seeking new ideas from the U.S. business community, highlighting good and bad employment practices, discouraging bank loans to non-subscribing firms, and/or publicly discouraging new investment in South Africa unless the firms are willing and will be permitted to meet more progressive employment standards. U.S. Government support of the firms’ progressive activities would less likely provoke an adverse South African reaction than outright U.S. calls for a reduction of business activity in South Africa, although it would have less impact than U.S. Government direct actions.

c) The unilateral discouragement of new U.S. investment in South Africa would have greater impact if accompanied simultaneously by discouragement of U.S. bank lending to South African borrowers. Although possibly difficult to obtain, multilateral action would have still greater impact in South Africa and reduce the effect of benefiting U.S. banks’ foreign competitors which unilateral action implies. An actual U.S. prohibition or moratorium on investments in or bank loans to South Africa could have a significant psychological and economic impact but might run greater risk of South African retaliation.

d) Legally the U.S. has considerable authority to restrict exports and deny U.S. Government financial support for exports to South Africa. Restrictions on U.S. exports to South Africa would have an adverse impact on certain sectors of the U.S. economy. Their impact on South Africa’s economy would be negligible unless the other main trading partners of South Africa also adopted such a policy. Their psychological-political impact, however, could nonetheless be significant, depending upon the circumstances. Measures worked out in coordination with other countries would have the greatest impact.

e) Barring mandatory action by the UN Security Council or a Presidential declaration of a national emergency, U.S. restrictions on imports from South Africa would require legislation and would have some adverse economic effects for the U.S., particularly because of our large imports of certain strategic materials. These adverse economic effects would be costly, particularly in the case of chrome where the cost of adjustment clearly would be high.

4. U.S. Vulnerability to South African Countermeasures

Should South Africa restrict exports to the U.S. we would face cost and supply problems in terms of strategic materials. As noted above the dislocations would be most difficult in the case of chrome until it becomes available again from Rhodesia. A complete break in our economic relationship with South Africa would hurt U.S firms with large sales and investments in South Africa, as well as Eximbank with substantial exposure there. South African retaliation would obviously be more difficult if our actions were multilateral. For example, South Africa could not hold its exports off the market completely without depressing its economy.

5. Congressional Sentiment

A full consensus has not emerged in support of a fundamental across-the-board change in our economic/commercial relationship with South Africa but pressures for change in the relationship are mounting.

6. Impact on Black African Countries

While certain economic/commercial actions might not have great economic impact on South Africa, they would have the advantage of distancing us from South Africa and its racial policies and thereby reduce pressure on the U.S. from black African countries where we have important interests, and also lend consistency to our overall human rights policy.

[Omitted here are Appendices A–C.]

1. Source: Carter Library, National Security Council, Institutional Files, Box 66, PRC 041, 2/11/77, Southern Africa. Confidential.
2. See Document 314.
3. Wisner signed for Tarnoff above this typed signature.
4. Confidential.
5. Reference is to UNSC Resolution 418 (1977), adopted on November 4, 1977. See footnote 2, Document 314.
6. See Document 324.