Henry Kissinger didn’t take much interest in the global economy at first–until he did and changed it forever

Robert Hormats
Bettmann Archive - Getty Images

Much has been written in the past few weeks about the enormous impact Henry Kissinger had on American diplomacy and the world order over the last seven decades. As his economic advisor for several years while he was the president’s national security advisor and in the years that followed in different capacities in the State Department and then in the private sector, I witnessed–and I hope contributed to– his growing policy role in the global economy.

For over half a century, I learned much about how his overall approach to diplomacy, policymaking, and strategy relating to key areas such as Europe, China, and the Middle East sustained America's strong alliances and built a more effective global order. He was my mentor and close friend throughout.

I began working for Henry in 1969 as a freshly minted graduate student from the Fletcher School of Law and Diplomacy thanks to the recommendation of a former grad there, another great mentor and friend, Fred Bergsten. When he and another colleague, Ernest Johnston, left, I became Kissinger's only economic advisor, with a growing set of responsibilities and a formidable agenda of issues.

Fortunately, I had time to grow into the job because, in those early days, Kissinger had no great interest in economics. So I spent a fair amount of time getting to know and learn from the likes of Paul Volcker (then Undersecretary of the Treasury), Jim Baker (then Undersecretary of Commerce), and Arthur Burns (then Fed Chair).

The end of the gold-dollar convertibility and the falling out with Europe

Kissinger's first consequential engagement on international economic policy came in August 1971.

At a secret meeting at Camp David, President Richard Nixon and Treasury Secretary John Connally decided to sever the dollar’s convertibility into gold, force other countries to accept a devalued dollar in order to boost the competitiveness of U.S. exports, and impose a 10% surcharge on their imports into the U.S. Neither Kissinger, nor Secretary of State William Rodgers, nor I were invited. We were not even aware that this meeting was about to happen. Nixon wanted to limit participants to top monetary officials and ensure total secrecy for the final announcement to have the maximum impact.

Needless to say, his announcement set off a huge political firestorm amongst America’s friends and allies around the world. I received a less than calm call from Kissinger, then in Paris negotiating with the Vietnamese to seek an end to the Vietnam War, asking “What the hell is going on.” I was tasked with finding out and reporting back to him immediately. I was also peppered with questions from officials of other governments, including several foreign ministers who could not reach Henry while he was in negotiations with the Vietnamese. Fortunately, I was able to get a fairly detailed readout from Volker and Treasury lawyer Mike Bradfield.

I enquired whether our allies had been informed of this in advance, briefed on the details of the outcome, or told what exactly it was they were being asked to do to get the U.S. to lift the surcharge on their exports. They expressed a combination of anger and profound resentment at being kept in the dark, being hit with a 10% unilateral tariff, and finding out about it on TV. I received calls of a similar tone from officials in the State Department, who were incensed that the White House had blindsided them.

I immediately began writing a cable to U.S. ambassadors in a wide range of countries giving them as many details as possible–a formidable challenge since I was not at Camp David. All the while, I was briefing Kissinger who, understandably, was now receiving a blizzard of calls from his counterparts. To say that he was also upset with not being briefed in advance and given a chance to comment would be an enormous understatement.

As the weeks passed, a series of negotiations produced no deal on how much other countries were expected by Washington to raise the value of their currencies. They also deeply resented the sustained 10% import surcharge that remained on their goods. Tensions mounted with virtually every industrialized country. In his book White House Years, Kissinger wrote that this “was seen as a declaration of economic war.” Over the course of several weeks, I met with Volcker and Burns regularly and briefed an increasingly irritated Kissinger twice daily.

Increasingly, our briefings contained information on retaliatory actions others were planning to take. This worried Kissinger who had expected that the problem would be negotiated away relatively soon. He urged me to use my presence as his representative at the various interagency meetings to press hard for rapid progress in the negotiating process, fearing that waiting too long would lead to an international confrontation and gravely damage our alliances.

I had written him a warning to this effect after conversations with officials of numerous allies and included a suggested negotiating strategy. He made a few adjustments to this strategy regarding how to deal with specific allies such as France, which was the most outraged by U.S. policy and pressures. On my several trips to meet with European officials, my conversations were guided by this strategic approach.

Citing his negotiating experience and historical knowledge, Kissinger emphasized that the “optimum time to settle was when the other side is still suspended between conciliation and confrontation.” He concluded that “once it has decided on confrontation, (which he feared was not far away) it cannot yield until the test of strength is far advanced."

“My preference,” he frequently emphasized, is “to go along with 'hard-nosed' negotiating for a time but to stop short of an all-out confrontation that would threaten our relationships.”

By December, the tone was improving. A full confrontation had so far been avoided and negotiations were moving both sides closer together. At a mid-December summit in the Azores, Nixon and Connally agreed on an acceptable solution. Kissinger was given the task of presenting it to the European leader seen as the decisive voice in whether the Western allies would go along, French President Georges Pompidou. The American plan incorporated some of Pompidou's views, modified to reflect many other European, Japanese, and Canadian concerns. Kissinger and Pompidou worked out a mutually satisfactory compromise, which fully satisfied neither but gave both sides most of their highest priorities.

The U.S. had its way in that it no longer had responsibility for converting dollars into gold and the dollar was devalued to a more competitive level. America’s main trading partners secured a lifting of the surcharge and their exchange rates vis a vis the dollar were set considerably lower than the U.S. had originally sought. Washington had learned that excessive use of its economic power risked damaging a vital component of its geopolitical power: allied cohesion.

This lesson is one well worth remembering today: Often applied sanctions of various sorts deployed to force allies to bend to our will can lead to adverse reactions, nationalism, and doubts about American reliability. They can fragment our alliances. Thus, thoughtful strategic discussion and often prudent restraint are needed before making such decisions. The whole situation was also a strong signal to Kissinger that he had to pay more attention to economic issues because they had a major impact on international security issues and America’s global leadership.

Opening up to China

Economics was only a small portion of the issues discussed by the president and Kissinger in the early stages of establishing and building Sino-American relations. At the time, there had been no trade or mutual investment between the two countries for several decades. China was hardly seen as a significant market for American products and had little to sell to the U.S. What products it might have sold were restricted by American laws and regulations that prevented or imposed strict limits on imports of goods from Communist countries, including China. So Sino-American economic relations were hardly on Kissinger’s or my agendas when I first arrived in Washington.

Nevertheless, after Kissinger’s surprise visit, these issues began to inch up the list of priorities. I began to compile a list of possible steps the U.S. could take gradually to begin increasing economic ties. Most of these, at the outset, would be small steps designed not so much because they would have a significant impact on the value or amount of trade, but rather because they would be signals of our desire for closer ties. Further down the road, the focus turned to lifting some U.S. trade restrictions, on generally closer mutual economic engagement, and ways to integrate China into the international economic system, such as supporting its membership in the International Monetary Fund and World Bank.

During his first trip to China, Kissinger had suggested to Premier Zhou En-lai that to help signal a mutual desire for closer ties, there might be a few limited steps with respect to trade relations, but we had not heard back from China on this matter for several months, and thus we assumed a lack of interest in the matter. Zhou, we were aware, was also facing domestic pressures not to get too close to the Americans, and Chairman Mao wanted to focus on bigger issues.

A bit tired of waiting, we decided on a small move before Nixon left for China on Feb. 17. We announced that China would henceforth be eligible to purchase American commodity exports that could be purchased by several other Communist countries. Previously, Russia and Eastern Europe could purchase certain American products that were banned from purchase by China. This move lifted the ban, putting China on an equal footing with these nations. My recollection is that we received no reaction from Beijing even then, which was a significant disappointment since I had hoped that even a small American gesture at this point would be reciprocated. Subsequently, we concluded that this would be the last unilateral economic gesture we would make to China. Months later, we received signals that what we saw as small gestures had a bigger impact than we had imagined.

The signal came from Mao himself. He eventually told us that he had decided "to expand trade and exchanges." While the likely reason for the slowness in responding to our gestures was that Mao needed time to squelch any remnants of opposition, he attributed the slowness to a "bureaucratic approach." But even Premier Zhou had been skeptical. He told a visiting U.S. congressional delegation that China was “disinclined to repeat the misfortunes the nation suffered during the 19th Century in trade with the West.” Mao had never cited this sore point in Chinese history but had earlier insisted “that the major issues had to be settled before smaller issues like trade and people-to-people exchanges could be addressed.” That is likely why China had demurred when Kissinger urged progress on smaller issues such as trade to signal progress on at least a few items. Later, referring to his earlier conversation with Kissinger, Mao said, “ I saw you were right."

Upon returning to Washington, Kissinger recounted this conversation with Mao, encouraging me to dust off my list of possible new trade items, search for other small gestures we could make, and identify ways we could signal to Beijing what we expected in return. Sensing my elation that my earlier work had not been in vain, he pulled out a bowl of candies he always kept handy in his office, offered it to me with a smile, and said I was entitled to a little “extra reward" for my efforts.

Both Nixon and Kissinger were eager to see more trade for another reason as well. They wanted to mobilize U.S. business support for the new relationship with China to counter influential groups within the U.S. who were less than thrilled with our newfound closeness to the country. So when House Majority Leader Hale Boggs and Minority Leader Gerald Ford made a June trip to China and returned with the recommendation that the U.S. create a “non-governmental” or “quasi-governmental” organization to promote trade with China, the president and Kissinger jumped on it. Commerce Secretary Fred Dent and I were asked to work with the business community to set up a group, which became known as the National Council for U.S.-China Trade, to promote trade relations. More than 500 companies attended the opening meeting in May 1973.

The diplomatic lessons I drew from this experience still resonate. The first is that there are moments in U.S.-China relations when starting with small successes and confidence-building measures can lead to larger successes and greater trust. This does not mean that larger issues can be ignored since they are critical to our long-term relationship. The second lesson is that the business community is important to the sustainability and support of good Sino-American relations. Nixon and Kissinger both understood this.

The 1973 oil crisis

Perhaps the most difficult economic challenge Henry Kissinger faced during his White House years was the combination in 1973 of sharp oil price increases, OPEC production cuts, and an Arab oil embargo aimed at the U.S. and several allied countries. These events also led to intense tensions between the U.S. and some of its European allies.

During the Yom Kippur War, members of the Organization of Petroleum Exporting Countries (OPEC) recognized that collectively they could dominate the oil market. They imposed an embargo against the U.S. and other nations in retaliation for their resupply of military equipment to Israel and sharply increased oil prices. By the end of the year, OPEC had jacked up the price of oil by nearly 800%. In his book Years of Upheaval, Kissinger called it "one of the pivotal events in the history of this century."

From the outset, Kissinger understood that these actions had the potential not only to do enormous economic damage to the U.S. and many other nations but also to produce deep divisions among the ranks of America’s allies. It did not take long for him to be proved painfully correct. Many allied nations distanced themselves from U.S. policy by seeking to make separate deals with oil producers and refused to share oil with the Netherlands, which went along with U.S. policy. They were concerned that support for the U.S. and the Netherlands would subject them to the embargo as well. Kissinger was adamant that the embargo could not succeed in breaking or even bending U.S. policy. He thought that even giving in partially to Arab demands would merely generate more demands and strengthen the most uncompromising producers. He emphasized instead the need for allied solidarity.

Kissinger’s shuttle diplomacy to achieve a disengagement between Israeli and Egyptian troops and engineer other measures to reduce tensions gave him a sense of the political situation in the Middle East and enabled him to press for the lifting of the embargo.

I went along on some of these trips, focusing on the latter issue. We quickly saw that the moderate nations we met were faced with a dilemma. As Kissinger put it, “Having resorted to the oil weapon in a moment of high emotion, they found it hard to end it. The requirement of Arab unity in effect gave the radicals a veto.”

To turn the situation around, Kissinger took the position that "we would not carry our diplomacy in the region beyond our first goal of Egyptian-Israeli disengagement unless the embargo was ended–in effect we turned the oil weapon against the producers."

Our diplomacy also benefitted the oil moderates. Once it became clear that the U.S. would not alter its diplomacy or its resolve to end the embargo, the radicals in the region saw no benefit in pushing the Arab moderates to press Washington to make such policy alterations. The same diplomatic posture had a similar benefit for our allies. Kissinger emphasized that we thought we served them best “by stressing their inability to affect our decisions, thereby removing an incentive for producer pressures against them."

After months of U.S. pressure and unwavering resolve, and many hours of negotiations, in early 1974, the embargo was lifted.

Through a series of diplomatic measures, the U.S. and its allies convened in what came to be known as the Washington Energy Conference–13 oil-consuming countries banding together. Kissinger was careful to stage this as a device for strengthening Atlantic unity to placate allies, some of whom feared that if it were billed as a "consumer cartel" it would appear confrontational to OPEC and thus reignite the embargo. And while it did achieve the above goal of Atlantic–and indeed Western–unity, its primary geo-economic objective was to strengthen consumer unity against–and curb the power of–OPEC producers. And from it sprung one of the major new international institutions of our era: the International Energy Agency (IEA).

While there are numerous other topics I could discuss, such as Kissinger’s role in ensuring that the world’s emerging economies were given a greater role in the global economic institutions, thus strengthening the global order, I will stop here with one summary remark.

The period that I have been discussing represents a time when geoeconomic and geopolitical issues were rapidly merging and becoming intertwined. Kissinger understood this transition–and his diplomacy enabled it to emerge in a way that avoided major or sustained confrontations and strengthened the global order. We are living with many of the positive results of that today–and facing similar challenges. His lessons and successes should be seen today in historic terms of strengthening the global political and economic order. They are also useful guideposts for current diplomats facing similar difficult challenges.

Robert Hormats is a former Under Secretary of State for Economic, Growth, Energy, and the Environment, and the author of The Price of Liberty: Paying for America’s Wars.

More must-read commentary published by Fortune:

The opinions expressed in Fortune.com commentary pieces are solely the views of their authors and do not necessarily reflect the opinions and beliefs of Fortune.

This story was originally featured on Fortune.com

Advertisement