Instead of new thinking in Washington, the old conflict between hard-liners and moderates persisted. Weinberger and Perle, for example, pushed to break through the SALT II restrictions that the United States still had not reached. The arms control bureaucracy also continued its usual disagreements, and Undersecretary of Defense Fred Ikle tossed a knuckleball into the field with a zero ballistic missile proposal. Shultz liked the idea as a way to get Reagan to agree to limit SDI, as less offense would reduce the need for defense. Only Paul Nitze, a veteran arms control negotiator, vigorously objected to the proposal as nonnegotiable and very disruptive to both the ongoing strategic modernization program and to the Western allies. Nevertheless, Reagan went away with the zero missile proposal in July and linked it to SDI with a proposal to not withdraw from the ABM Treaty for five years and to continue research, development, and testing as permitted by the treaty.
After the disruptive FBI arrest of a Soviet scientific attaché, followed by the KGB arrest of an American journalist in Moscow, Nicholas Daniloff, Washington announced that Reagan would meet with Gorbachev in Iceland in fifteen days for discussions to complete arrangements for the next summit in Washington. The Reykjavik meeting, however, turned into an intense two-day summit in which a prepared Gorbachev attempted to obtain a significant settlement of offensive and defensive weapons. Gorbachev presented new proposals on START and INF that significantly moved toward Washington's position, to the increasing enthusiasm of Shultz and other officials. At the same time, Gorbachev continued to link agreement on these two issues with missile defense, insisting that both sides keep the ABM Treaty for ten years and confine all research and testing to the laboratory. Gorbachev wanted the offensive reductions, but the politburo and Soviet military insisted on the maintenance of the ABM agreement to prevent space weapons that could be used for offensive and defensive purposes.
Despite the disclaimers in their memoirs, Reagan, Shultz, and the U.S. delegation had not prepared for substantial negotiations and consequently had to scramble to prepare responses and counterresponses, at one point redrafting the U.S. position in an upstairs bathroom in Hofdi House. Reagan defended SDI and indicated that the United States would share the technology when it became available so that both sides could eliminate ballistic missiles. After discussions that continued through the first night of the meeting, the negotiators made progress on START and agreed to zero missiles in Europe for the INF agreement. SDI remained the main obstacle. Reagan and his advisers and Gorbachev began to maneuver less for an agreement during the afternoon session on the second day and more for an advantageous position with respect to public perceptions on the results. Since the United States had not prepared any offers to make in response to Soviet proposals, Shultz and his advisers put the zero missile proposal on the table. Reagan wanted to leave and suggested they take it up again at the Washington summit. The negotiators, however, went off into a series of confusing exchanges in which they ended up with a proposal to get rid of all strategic weapons—missiles, bombers, cruise missiles—until a failure to get any movement on SDI prompted Reagan to stand up and say, "Let's go, George, we're leaving."
The Reykjavik discussions initially looked like a failure, but the negotiations did foreshadow the eventual INF agreement signed at the Washington summit and the START agreement that President George Bush finally concluded in 1991. The very critical reaction of the Joint Chiefs of Staff, congressional leaders, and Western allies to Reagan's willingness to give up all strategic weapons would have forced a U.S. retreat from this position if SDI had not blocked any preliminary agreement.