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ase 2006/12/27: CIA-RDP79-00927A0044000900CE45 April 1964 OCI No. 0328/64A Copy No. SPECIAL REPORT GATT AND THE KENNEDY ROUND CENTRAL INTELLIGENCE AGENCY OFFICE OF CURRENT INTELLIGENCE SECRET GROUP I Excluded from automatic downgrading and declassification Approved Felease 2006/12/27: CIA-RDP79-OOA004400090002-5 G THE NATIONAL DEFENSE OF THE UNITED STATES THIN THE M ANING OF THE ESPIONAGE LAWS. LE 18, USC, SECTIONS 793 AND 794, THE TRANSMIS- N OR REVELATION OF WHICH IN ANY MANNER TO NAUTHORIL D PERSON IS PROHIBITED BY LAW. document MUST NOT BE RELEASED TO FOREIGN )VERNMENTS : If marked with specific dissemination trots in accorcance with the provisions of DCID 1/7, document muse be handled within the framework of 'imitation so imposed. Approved For Release 2006/12/27: CIA-RDP79-00927AO04400090002-5 Approved For Release 2006/12/27: CIA-RDP79-00927A004400090002-5 -i..~ SECRET 24 April 1964 The Kennedy Round negotiations to reduce trade barriers, opening in Geneva on 4 May, not only have high economic stakes but could also have im- portant political implications for Western solidar- ity. The negotiations--in particular the US effort to keep the Common Market open to American farm exports--will be handicapped by differences among the Common Market countries themselves over issues of farm policy. The likelihood is for prolonged stalemate over agricultural questions, with a pos- sibility that failure to get agreement on these questions could torpedo the rest of the conference. Barring this contingency, the prospect appears fav- orable for world-wide reductions of industrial tar- iffs, although the average depth of cut will fall short of US objectives. The General Agreement on Tariffs and Trade (GATT) , which came into force in 1948, has a good record of achievement in working out multilateral tariff concessions. Five of the ple- nary conferences of GATT to date have been so-called rounds, which have affected tariff adjustments on a total of almost 65,000 items. full customs union might work eventually to the serious dis- advantage of the Common Market's traditional trading partners. The measure of US interest is the volume of US trade with the countries of the European Eco- nomic Community (EEC). These countries have accounted in re- cent years for about a sixth of US foreign trade; well over a fifth of US farm exports go to the Community. In the 1961-60 Dillon Round, the Common Market agreed to re- duce the projected level of its tariff wall in exchange for re- ciprocal concessions by other GATT signatories. In all, some 4,400 concessions were negotiated during this round, covering an estimated five billion dollars, worth of trade. Despite the accomplishments of the Dillon Round, many gov- ernments remained uneasy that the progress by the Six toward The Trade Expansion Act, which Congress passed in Octo- ber 1962, set the stage for the sixth round--the Kennedy Round-- of tariff reductions. This act gives the President broader au- thority in negotiations to re- duce tariffs than he has ever had before, with a view particu- larly to getting reciprocal con- cessions from the Common Market. One of the act's major objec- tives is to help preserve the economic basis for Atlantic co- operation, which requires a SECRET Approved For Release 2006/12/27: CIA-RDP79-00927A004400090002-5 Approved Fo, please 2006/12/27: CIA-RDP79-009004400090002-5 SECRET GATT MEMBERSHIP CONTRACTING PARTIES Australia Austria Belgium Brazil Burma Cameroon Canada Central African Republic Ceylon Chad Chile Congo (Brazzaville) Cuba Cyprus Czechoslovakia (b2) Dahomey Denmark Dominican Republic Finland France Japan Kenya Kuwai t Luxembourg Malagasy Republic Senegal Sierra Leone Spain South Africa Southern Rhodesia Gabon. Germany, West Ghana Greece Haiti India Indonesia Israel Italy-- Ivory- Coast Jamaica Malaysia Mauritania Netherlands New Zealand Nicaragua Niger Nigeria Norway Pakistan Peru Portugal Sweden Tanganyika Toga Trinidad and Tobago Turkey Uganda United Kingdom United States Upper Volta Uruguay: COUNTRIES THAT HAVE ACCEDED COUNTRIES PARTICIPATING IN PROVISIONALLY (b) SOME OF THE GATT WORK UNDER Argentina Switzerland United Arab Republic SPECIAL ARRANGEMENTS (2) Iceland Tunisia Yugoslavia Cambodia Poland NEWLY INDEPENDENT COUNTRIES APPLYING GAIT RULES PENDING FINAL DECISIONS ON THEIR FUTURE "COMMERCIAL POLICY (5) Algeria Burundi Congo (Leopoldville) Mali Ruanda Common Market tariff that is tolerable to the US and to the countries of Western Europe out- side the EEC. The record of previous GATT rounds is limited largely to tariff reductions in indus- trial items. International dif- ferences over agriculture have been difficult to reconcile, since nearly every major govern- ment is committed politically to support domestic farm in- comes. Differences over agricul- ture have been reinforced by recent economic and political trends in Europe. A technolog- ical revolution in European agriculture has caused farm production in the EEC to ex- pand some four times faster than the rate of population growth. Farm interests in France particularly, which has the most productive agriculture SECRET Approved For Release 2006/12/27: CIA-RDP79-00927AO04400090002-5 Approved For Release 2006/12/27: CIA-RDP79-00927A004400090002-5 NNO, Now, SECRET in the Community, now are seri- ously concerned about emerging problems of surplus disposal. When the US and other tradi- tional suppliers of farm prod- ucts to the EEC try to get as- surances in the Kennedy Round of continued access to the Com= mon Market, they will run up against French aspirations to make France the breadbasket of the EEC. A common market that is not virtually self-sufficient in food, De Gaulle declared last July, is not a common market. A further complication for the Kennedy Round negotiations on agriculture is the unfinished business of agricultural inte- gration in the Common Market. Integration hinges on the re- placement of national support prices by single Community-wide support prices for grains and other agricultural products. The level of protection to Com- mon Market farmers will be a derivative, in large part, of the Community-wide support prices. The US and other tradi- tional suppliers therefore want the Common Market countries to agree on relatively low supports. The Six are currently at loggerheads over a proposal by the EEC Commission that would set the Community grain price between the low French and high German support prices. This would make German agriculture less profitable and enlarge the Community market for the more efficient French farmers. EEC officials want to get this is- sue settled within the Community before the Common Market under- takes commitments on agricul- tural commerce at Geneva. How- ever, the German Government, with an anxious eye cocked on the farm vote, is resisting the Commission's proposal. Hence, the 1965 elections in Germany come at a bad time for the Kennedy Round. The French feel that Ger- man industry has been the prin- cipal beneficiary of the Com- mon Market's success in lower- ing industrial tariffs on intra- Community trade. It is time, they think, for Bonn to recip- rocate by conceding to France on agriculture. The continuing failure of the French to get satisfaction from the Germans on the issue of the grain price could jeopardize the whole Kennedy Round. At his press conference in January, De Gaulle expounded at length on the ne- cessity of prior agreement on a common policy for EEC agri- culture. Only after this, he declared, could the Six "tackle the negotiations with other countries, notably America,on the question of external trade." In the context of his re- marks, this statement may have implied only French reservations about the Kennedy Round negotia- tions on agriculture. Taken literally, however, the words convey a warning that the French could feel it necessary also to obstruct the negotiations to reduce industrial tariffs. SECRET Approved For Release 2006/12/27: CIA-RDP79-00927A004400090002-5 Approved For ease 2006/12/27: CIA-RDP79-0092704400090002-5 SECRET Whatever the French course of action, the arduous prepara- tions during the past year in GATT working groups for the Kennedy Round leave no doubt that the negotiations on indus- trial tariffs will be tough. US tussles with the Common Mar- ket on the subject have revolved around the issue of "disparities" --instances where the differ- ence between the US and the EEC tariff rates on a given product is large. Although US and Com- mon Market tariff rates are comparable on the average, the US has more rates in very high j and very low brackets. The ministerial meeting in Geneva in May 1963, which tried to set the ground rules for the Kennedy Round, could not work out a satisfactory compromise for dealing with disparities. The meeting did adopt a formula which accorded in general with the US proposal for 50 percent across-the-board cuts in tariffs by the contracting parties of GATT. It was specified, how- ever, that the formula would not apply in the case of "signifi- cant" disparities, which would instead be subject to some rule for lopping off the "peaks." The issue is complicated by the interests of third countries, and the bargaining to work out a rule for determining "signifi cant" disparities is taking a much longer time than was orig- inally expected. In addition to the dispar- ities roadblock, the Kennedy Round must surmount the issue of "exceptions"--the lists of commodities which the contract- ing parties to GATT will propose to exempt from the negotiations. If the exceptions are numerous, the tariff reductions will aver- age far less than the 50 per- cent targeted by the US. Two months ago, a French official offered his "personal view" to a US Embassy officer in Paris that the best way out of the Kennedy Round complexities was to aim for a lower percentage of tariff reductions. De Gaulle's Shadow In January 1963, President de Gaulle slammed the door on British accession to the Com- mon Market. His proclivity for differentiating between Eu- ropean and Anglo-Saxon interests seems also to underlie some of the French leader's reserva- tions about GATT and the Kennedy Round. Among his more extremist supporters, the attitude takes the form outlined by a Gaullist member of parliament in Novem- ber to an audience of German industrialists. The US, in this exposition, had been accustomed to seeing Europe in the role of permanent petitioner. With Europe's economic resurgence, the Americans had come to real- ize that they "are up against a dangerous rival." The US was accordingly embarked on a "coun- teroffensive," one feature of which was the Kennedy Round, to keep Europe "a victim of Ameri- can production." The tactical implications of this attitude were illuminated SECRET Approved For Release 2006/12/27: CIA-RDP79-00927AO04400090002-5 Approved For Release 2006/12/27: CIA-RDP79-00927AO04400090002-5 Vftspol 1400 SECRET last year in a report by a mem- ber of the French Parliament. The Common Market is still a "fragile structure," he said, and the Europeans will "play for time" before opening seri- ous negotiations with the US to lower trade barriers. He foresaw only difficult contacts between the US and the EEC pend- ing the "maturity of European institutions." This sort of commentary has generated some apprehensions that De Gaulle might decide at some point to sabotage the Kennedy Round altogether. Paris, however, does not yet rule out the possibility that the Kennedy Round can be turned to some French advantage. Last fall, a ranking official in the French Foreign Ministry tried to enlist US support in pressing West Germany to move forward toward a common grain support price for the EEC. In making his appeal for US assistance, he held out the possibility that the EEC would then be ready to work out a world-wide trade agreement on grain in the con- text of the Kennedy Round. The French feeling seems to be not that some achievement in the Kennedy Round is impossible, but that it must take second place to the consolidation of French economic interests in the European Community. For all his influence, De Gaulle alone does not set the tone of EEC policy. The first SECRET tariff reductions on intra-Com- munity trade, which went into effect on 1 January 1959, were extended in large part to all GATT signatories as well. The liberal spirit manifested by this decision remains strong in the EEC and in favor of the Kennedy Round objectives. Despite some misgivings about lowering trade barriers on farm products, the prevail- ing sentiment within Benelux is for an "outward-looking" Com- munity. In the aftermath of the collapse of the negotiations for British accession to EEC, Bene- lux has been uneasy about a fur- ther setback to the liberal forces in the Community if the Kennedy Round fails. Italy presents a more com- plex picture. A relatively high-tariff country in past years, it is wary of bargain- ing away tariff advantages for its newly developed industries. A few of the big firms look in- creasingly to market opportuni- ties abroad, but in general Italian industry is not yet so large as to feel the urgent need of sales outlets beyond the markets offered by the EEC. The adverse trend in Italy's balance of payments also rein- forces protectionist sentiment. Nevertheless, the Italians have given strong support to the Atlantic partnership and are prepared to make concessions in the Kennedy Round in the in- terests of preserving Western solidarity. The relatively large share of German industrial output sold Approved For Release 2006/12/27: CIA-RDP79-00927AO04400090002-5 Approved Fcelease 2006/12/27: CIA-RDP79-009004400090002-5 SECRET outside the EEC disposes Bonn to favor world-wide reduction of industrial tariffs. During his visit to De Gaulle in Febru- ary, Chancellor Erhard obtained French professions of readiness to approach the Kennedy Round in a "positive spirit." Later, however, Erhard privately ad- mitted to "gnawing doubts" about De Gaulle's true intentions. Such doubts may derive from un- easy feelings that German obduracy on farm policy could be charged with a good deal of the blame if the French throw monkey wrenches into the negotiations. The German leader understands that obstruction by Bonn of EEC progress toward a common policy for agriculture gives De Gaulle all the reason he need to be recalcitrant in the Kennedy Round. The Less Developed Countries GATT is generally unpopular among the less developed coun- tries, which are skeptical about its ideals of freer trade. Their insistent appeal has been for a trade organization that would promote rules committing the industrialized countries to buy more at higher prices from Asia, Africa, and Latin America, while permitting trade restrictions in the less developed areas for the protection of domestic in- dustries. Communist propaganda has made capital of the widespread antipathy to the free market forces that GATT encourages. As one Communist review of GATT put it, "It has been repeatedly shown by practice that both the free operation of market forces and free competition invariably strengthen the positions of the industrially more advanced par- ticipants and weakens those of the economically developing coun- tries and agricultural producers." The challenge from the left could sharpen if the less de- veloped countries come away deeply dissatisfied by the re- sults of the Kennedy Round. The indictment of GATT is transparently unfair in many of its points. The General Agree- ment already provides for some special preferences to the less developed countries. In addi- tion, working groups have been set up in GATT to study means of improving the export earnings of these countries. Most of the contracting parties to GATT voted last year to approve a so-called Action Program, call- ing for such measures as the abolition of import duties on tropical products and for the progressive reduction by the industrial countries of tariffs on the manufactures of the less developed countries. A good por- tion of the Kennedy Round nego- tiations will be directed to- ward getting agreements to im- plement these recommendations. The executive secretary of GATT once expressed concern that the General Agreement might break under the strain if the Kennedy. Round should fail. The remark 6 SECRET Approved For Release 2006/12/27: CIA-RDP79-00927AO04400090002-5 Approved For Release 2006/12/27: CIA-RDP79-00927A004400090002-5 SECRET reflected his anxiety over the implications of failure for West- ern solidarity. The less de- veloped countries would be fur- ther alienated. There would be a hardening of the economic boundary lines separating the Common Market from the British and other West European govern- ments. Fresh fuel might be added to the controversy within the EEC between the so-called inward-looking elements and the more liberal forces, with jeop- ardy to the Common Market's progress toward economic and po- litical union. The less developed coun- tries will not get all they think is their due in the Kennedy Round, although they will probably win concessions without undertaking correspond- ing obligations of reciprocity. In the main area of negotiations --trade among the economically advanced countries--the Common SECRET Market countries are pivotal; much depends on their ultimate ability to break out of their own impasse with respect to Com- munity policy on farm prices. They may not be able to do this until after next year's elec- tions in Germany. This means that the Kennedy Round may have to take a good deal longer than the ten months needed to negotiate the Dillon Round concessions. Once the Community's farm policy is clearly defined, however, a ma- jor reason for French obstruc- tionism will have been elimi- nated. De Gaulle will still be a strong influence for caution in reducing trade barriers, and the EEC's agricultural trade with foreign suppliers will remain the knottiest of the issues in the Kennedy Round. The prospects will nevertheless be improved for a fairly successful outcome of the negotiations. (SECRET NO FOREIGN DISSEM) Approved For Release 2006/12/27: CIA-RDP79-00927A004400090002-5 Approved For lease 2006g P79-00921&004400090002-5 Approved For Release 200 { 1g"tfiATDP79-00927A004400090002-5