REPORT ON IG ON U.S.-EC RELATIONS; SUGGESTED AGENDA FOR WEDNESDAYS SIG

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP83M00914R000600030080-9
• Release Decision: RIFPUB
• Original Classification: S
• Document Page Count: 25
• Document Creation Date: December 22, 2016
• Document Release Date: September 17, 2009
• Sequence Number: 80
• Publication Date: July 27, 1982
• Content Type: MEMO

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SECRET
Date: July 27, 1982
MEMORANDUM FOR:
From:
Subject:
The IG recommends that the SIG discuss the following issues
to prepare for discussion of U.S.-EC relations on Friday, July
30 with the President at the NSC:
Report on IG on U.S.-EC Relations; Suggested Agenda
for Wednesday's SIG
1. State of U.S.-EC Relations. What type of response does
the overall state of our relations with Europe require? Our
relations are described in attachment 2. Possible views are:
a. Relations are such that changes on both sides are needed
to improve the relationship.
b. The Europeans are angry, but that is to be expected;
we should continue business as usual.
a,
c. Despite the state of relations, we should press harder
to assert U.S. interests (agriculture, East-West 'ssues).
The discussion might cover how to respond to European defiance
of the President's sanction decision on the pipeline, the differ-
ences among the EC members on most issues (other than the pipeline),
the economic malaise in Europe that invites using the United
States as a scapegoat, and the European perception that the United
States is aggressively pursuing its interests irrespective of
European views or GATT rules.
2. Current Issues. What are they, which are most pressing, and
how much freedom of maneuver is there? The immediate issue is
our policy response to the Europeans going ahead with the pipeline.
Steel is next. Option papers on steel, agriculture, and GATT
Ministerial are at attachment 5.
The IG discussion revealed very little room for maneuver on
most issues. These issues continue to be ,handled ndeoendent
by the intere ted_age-ncies, which oppose basic changes in-current
NSC review
completed.
S EC RT ,'Iassified by Marc E. Leland
C Declassify i-X Review for
Declassification on_ 7/27/88
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-- On steel, Secretary Baldrige will continue to seek an
agreement acceptable to U.S. industry.
-- On agriculture, there was disagreement on whether to
reduce U.S. rhetoric, withdraw weak GATT cases, and
seek a negotiated solution to EC export subsidies
(accepting the EC's right,. to subsidize but trying to
discipline it) or whether to start subsidizing
our exports to strengthen our negotiating position.
-- On DISC, the IG believed the Europeans had made DISC a
symbolic issue of U.S. obstinacy, but the U.S. would be
in an untenable position should the GATT rule against
us, as is likely.
-- On the GATT Ministerial, the IG felt the real options
were whether to press on agriculture, and how hard to press
for U.S. objectives in investment and high technology trade.
However, U.S. concessions would have little effect on over-
all U.S.-EC relations.
3. U.S. Strategy. How should we structure our economic
policy with Europe? The IG felt more work needed to be done on
both substance and style.
-- On the first, we should develop, by the end of August,
a decision package on key issues in U.S.-European economic
relations for the President. `IA
-- Based on those substantive decisions, we should decide on
the most appropriate, effective followup -- ranging from our
existing approach, to a more visible emphasis on high-level
contacts, such as a senior mission to Europe, the convening of a
U.S.-EC Ministerial this autumn, or an expanded mandate for a
Cabinet officer to deal with U.S.-EC economic issues.
The attached papers provide background as follows:
1. Objectives of U.S. economic policy toward Europe.
2. Assessment of present economic relations between the United
States and Europe and their implications.
3. Future decision points affecting U.S.-EC relations.
4. General approach in responding to the EC.
5. Option papers on steel, agriculture, and the GATT Ministerial.
SECRET
Marc E. Leland
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1. OBJECTIVES OF U.S. ECONOMIC POLICY TOWARD EUROPE
I. General U.S. Goals
A. Protect most important U.S. economic interests.
B. Prevent economic arfd trade disputes from undermining
transatlantic cooperation on fundamental political and
security issues.
C. Pursue dialogue with the Europeans to contain economic
problems and reduce tensions, after we have set our own
priorities and identified areas for possible shifts in
policy by the U.S. and Europe.
II. Specific Issues
A. Macroeconomic Policy
1. Convince Europeans that we are following a coherent
strategy for controlling inflation and lowering
budget deficits and interest rates.
2. Demonstrate that we are prepared ;.o follow up on
Vgrsailles commitments on macroeconomic policy con-
suTtation and study of exchange market intervention.
3. Use action on 1 & 2 above to reduce Europeans' tendency
to use the U.S. as a scapegoat for their failure to
deal more effectively with their own economic problems.
B. East-West
Sanctions
a. Maintain pressure on Soviet Union and Poland.
b. In view of European decision to challenge pipe-
line sanctions, examine our legal options so
as to preserve our credibility, while minimizing
damage to our future commercial prospects.
c. Seek coordination on responses to July 22
announcements in Poland to prevent precipitous
European action.
2. Credits
a. Implement recent agreement to the OECD Arrangement
on Export Credits to raise the cost of official
credits to the USSR.
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b. Concentrate now on improving data collection and
policy-oriented discussion in the OECD and NATO,
including U.S. reporting.
c. Move later, using that information, toward
setting up a Summit Monitoring Group.
3. Polish Debt
a. Prevent the Poles from making credible political 7
arguments rather than economic arguments for
their inability to repay their debts.
b. Coordinate decision with Allies on the July 22
announcement to block rescheduling at this time.
c. Avoid isolation from Europeans so that we do
not lose leiterage.
4. Long-Term Grain Agreement with the USSR
a. Preserve markets for our farmers and ensure
decision on the Agreement that is consistent
with other aspects of U.S. policy.
b. Resist European efforts to use U.S. grain sales
~'.as justification for go-ahead on pipeline and/or
other actions.
a. Protect U.S. industry from injurious unfair trade
practices, without unduly jeopardizing U.S.-EC
relations.
b. Demonstrate that GATT Subsidy Code can work to
increase market discipline.
c. Seek EC-wide settlement before October S.
2. -Agriculture
a. Encourage improved discipline on EC export
subsidies.
b. Negotiate stronger GATT rules on agricultural
trade.
c. Deflect SC efforts to force renegotiation of
tariff bindings (corn gluten-soybeans).
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d. Negotiate with the EC on problems of agri-
cultural trade. This could involve a lowering
of rhetoric and reexamination of policies on
both sides (EC on subsidies -- U.S. on weaker
GATT cases which have not yet gone to panel).
3. GATT Ministerial
a. Obtain EC cooperation in pushing a broad agenda
for strengthening the international trading
system. Our priorities include initiatives on
agriculture, services and trade-related invest-
ment, high technology and a North/South round
of trade negotiations. (Many Europeans are
lukewarm, at best, about the scope of our
proposals and, on agriculture, actively opposed.)
b. Consider whether sharpened emphasis on areas to
which EC is now receptive (services, North/South
round) can improve cooperation.
D. Energ_y
1. Accelerate efforts to develop credible energy
security program, through U.S. domestic measures and
efforts in Europe. (Under Secretary Buckley chairs
an-Bnergy Alternatives Group which plans to present
a package to the President soon.)
2. Continue to discourage undue European vulnerability
to cutoffs of Soviet natural gas.
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B. Differences in European Views
In addition to keeping in mind the economic backdrop in
,considering U.S.-EC relations, we need to recognize the diversity
of views in the European Community. The European Commission
tries to lead, but often ends up bridging differences among
states with a 'least-common-denomihhtor' position. While they
may agree on some issues, there are huge differences on many
issues of interest to us among leaders such as Thatcher, Schmidt,
Mitterand, and Papandreou. Some of these differences, which
often exist within governments as well, are described in the
following discussion of current issues.
C. East-West Issues
There are fundamental differences between U.S. and Euro-
pean views of the proper rem nse to the Soviet threat. Even
if the_odds-are 90 to 10 that,the Soviets can be brought to the
,bargaining table through economic sanctions -- and the Europeans
jug,-teve the odds are nearly that favorable -- they consider
the odds unacceptable.- A 10 percent chance that sanctions will-
instead produce a cornered, dangerous Soviet bear is too high
for them.
While- hey will otssay so publicly, most European countries
caccept the division of Europe, and feel Soviet policies are unlikely
to be changed--b conom c measures. Therefore they might as well
get the benefit of trade, jobs and income they otherwise would
not have in sectors such as steel and agriculture.
The pipeline decision thus went against a basic European
viey. It also went against the views of individual countries:
-- Germany: While German leaders can't publicly accept the
division of Germany, they also cannot oppose detente and
risk losing contact with East Germany.
-- UK: Thatcher's response in Parliament was sharp because
of strongly-held British views against foreign countries'
assertion of extraterritoriality.
-- France: The pipeline decision touched the sensitive
sovereignty nerve.
European opposition to extension 61 the U.S.-USSR Grain
Agreement is also strong. They think we are willing to sacrifice
European sales but are unwilling to sacrifice our grain sales
because it would be politically unpopular.. They think we impose
more political pain on the Europeans than.we are willing to
take. They miss the point that sanctions hurt the United States,
too. We made the decision recognizing it would hurt U.S. exports
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~~ ~ s 147
OFIDENTIAL
2.(a) ASSESMENT OF PRESENT ECONOMIC RELATIONS BETWEEN THE
UNITED STATES AND EUROPE
The current tensions in U.S.-EC relations are the result of
(a) fundamentally different views on policy vis-a-vis the Soviets,
(b) long-festering trade disputes, and (c) coincidence of a series
of U.S. decisions affecting Europe. These issues are made much more
serious -- and reactions to them sharpened -- by Europe's economic
malaise. Before formulating a policy response to the current
situation, it is necessary to put these issues into perspective.
A. Economic Situation
While the current economic difficulties of the European
economies seem similar to those of the United States, in many
respects the European situation is worse, particularly in regard
to jobs and outlook.
Unemployment in the EC has risen to historic levels in the
last two years and threatens to stay at least that high. They view
their unemployment as more struc a3,_Lhan ~yrl~cml. While U.S.
unemployment is also high,~the American economy has created many
new jobs in the last few years and the outlook is encouraging.
The differences in policy response, and in hopes for the future,
are even greater.. The European governments have more often yielded
to the pleas of.special interest groups for direct subsidies. Faced
with economic stagnation and inflation, European leaders are pessi-
mistic.
The European economic malaise strongly influences our relations.
European leaders cannot escape the temptation to make U.S. policies
the.scapegoat for their own economic failings -- now castigating
the United States for exporting unemployment (through too tight
monetary policy), previously for exporting inflation (through too
loose monetary policy).
European unemployment also makes European leaders hyper-sensi-
tive to U.S. actions that cost Europeans jobs, as is threatened by
the steel cases and pipeline sanctions.
The more aggressive assertion of U.S. interests, combined with
the somber European economic situation, explains the sense of "crisis"
in EC statements on current trade issues. But the issues themselves
are old ones: EC steel exports have been a problem since the late
1960's (when we negotiated voluntary export restraints). The CAP
has been a major element in U.S.-EC relations since the early 1960's
but the adverse impact on our farmers has become steadily
worse. And as to the third major trade issue, the GATT Ministerial,.
we have always had to lead trade liberalizing initiatives, pulling
along a reluctant EC.
ONFIOENTIAL
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a CONFIDENTIAL - 3 -
immediately, and over the longer run. We also recognized it
would encourage nationalists in other countries, as in Canada,
who are trying to reduce dependence on the United States.
These fundamental differences in policy view, as well as
opposition to the pipeline decision for different national
reasons, means there is no leader in Europe who will speak for
the United States on these i'esues in EC councils.
D. Individual Issues
Differences among EC members are sharp on several current
U.S.-EC issues:
Steele Completion of the countervailing and dumping cases
will have widely different effects -- virtually eliminating from
our markets British, French,'Belgian, and Italian steel, while
Dutch and German exports migtft increase.
CAP: The UK and Germany are critical of expenditures for
exports, while France sees them as an essential benefit of
membership in the EC.
GATT Ministerial: There is a large gulf between he German
trade liberalizing approach and the French job protection view.
Export Credits to USSR: Also a West-West issue. The French
subsidize to keep the Germans from getting the sales, not tb help
the USSR.
U.S. policies should recognize and take advantage of these
differences and not assume the EC has one view Without under-
mining such European unity ~s the~EC represents, we should never-
theless work with these leaders who agree with U.S. on individual
issues to take up our cause in EC councils. Well-handled, such
an approach can strengthen rather than weaken the EC as an
institution.
MCDENTIAL
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? JUL 26
19b,
SECRET
U.S.-European frictions in the trade area are serious in
their own right. Coming together, they heighten economic tension
and may be troublesome for our broader political and security
relations as well.
Economic
The EC may be tempted to react to U.S. actions on the pipe-
line and steel by retaliatory actions in other areas: a tariff
quota on corn gluten, a tax on vegetable oils and fats, retalia-
tion against DISC if found in violation of GATT by the September
GATT Council, a refusal to cooperate (or to attend) the November
GATT Ministerial.
It is not clear that the EC would do any of these things.
A continuing tense atmosphere,, however, will inevitably make
cooperation at the GATT Ministerial difficult and could jeopardize
the achievement of a GATT work program on services, investment,-
high technology, and agriculture -- all key U.S. objectives.
Political
Failure to address promptly the confluence of contentious
economic issues in U.S.-EC relations could result iii a further
deterioration ot.U.S.-EC economic relations and ultimately jeop-
ardize our political relationship with our Allies. It could
play into Soviet hands by sharpening divisions in the Alliance.
While we see recent U.S. moves as an overdue and appropriate
assertion of legitimate U.S. interest, the Europeans perceive
recent U.S. decisions on steel, expansion of Polish sanctions,
and Law of the Sea as indications of a new U.S. determination to
act without-regard for the interests of traditional friends and
Allies. This perception could strengthen the hands of European
advocates of a distinctly European approach to political/security t-
issues, e.g., the Genscher-Colombo pla Political disunity in
the transatlantic co umm nity wou eopardize our cooperation
with the Allies on East-West relations, the Middle East, Southwest
Asia, the Caribbean, Africa and Southeast Asia. It would also
jeopardize our pursuing common objectives on other important
issues, e.g., Law of the Sea and nuclear non-proliferation --
especially where European commercial interests and relations with
the Third World are concerned. The United States cannot hope to
realize its objectives in'these areas without the cooperation and
support of our Allies.
Security
Current tensions in U.S.-European relations could also spill
over into the security area. Our efforts to build a.strong Alli-
ance consensus on policies necessary to bring about Soviet
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2 (b) IMPLICATIONS FOR ECONOMIC, POLITICAL, AND SECURITY RELATIONS
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restraint and responsibility could be damaged by Allied anger over
economic issues, coupled with the perception that we are seeking to
impose an 'economic warfare" strategy on our Allies.
More specifically, the Allies could be less willing to make
political or economic sacrifices to carry out key security initi-
atives or to cooperate on questions of priority U.S. interest if
they believe we are insensitive to their own needs and concerns.
Fundamental security interests remain unchanged, and the current
strains do not yet threaten the Alliance. They do, however,
weaken the spirit of mutual confidence on which effective Alliance
consultations and action depend. These tensions may damage the
NATO consultative process by encouraging the tendency of EC
partners to consult, and even reach decisions among themselves
on issues of direct concern to us and the Alliance as a whole.
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Wrriuar i iaL
3. FUTURE DECISION POINTS AFFECTING U.S.-EC RELATIONS
Grains: U.S. decision on long-term grain
agreement with tie USSR. Any decision involving
larger amounts is likely to add significantly .
to the frictions in U.S./EC economic relations.
Steel: Commerce preliminary findings in dumping
cases against EC producers.
Pipeline: End of period of public comment.
Steel: Commerce final subsidy finding in EC
cases.
Autos: Possible passage of local content legis-
lation for autos which could exclude Volkswagen
Key decision points which could add to the frictions in U.S.-
,EC relations between now and October are as follows:
Late July
August 9
August 14
August 24
Mid-August
Aug./Sept.
Sept. 20,
Sept,. 21
Sept. 23-24
Sept. (date
uncertain)
(FRG?) from the U.S. market.
Agriculture: GATT Director General Dunkel may
attempt conciliation in U.S./EC citrus preference
dispute following GATT Council's inability to
agree on forming a panel.
Agriculture: Working Party on the U.S. GATT
waiver for agricultural programs (Section 22
waiver), possible forum for EC complaints about
U.S. attacks on their agricultural system.
A riculture: GATT Article 22 consultations with
the EC on corn gluten where the EC has threatened
to withdraw tariff concessions of major importance
to the U.S.
Agriculture: GATT Article XXII consultations
on sugar (tentative).
Agriculture: GATT panel decision in U.S. case
against EC wheat flour subsidies.
DISC: GATT Council review of DISC's consistency
w tai GATT; the EC is-expected to request authority
to take. measures to offset the effect of DISC.
Export Credits: U.S. expects to begin nego-
tiations with EC member states, and perhaps
the EC, on export financing of aircraft.
Grains:' Expiration of current U.S./USSR
grgr agreement.
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Sept. 30
Sept./Oct.
Sept./Oct.
Sept./Oct.
Mid-October
A riculture: Deadline for interagency report
in 301 case against EC poultry subsidies.
Greek Accession: Continuation of negotiations
w t EC on tariff adjustments, primarily on
agricultural commodities, following Greek
accession.
GATT Ministerial:? EC likely to play passive
roe, hampering-U.S. efforts to include agenda
items on trade in services.and investment as
well as stronger rules for agriculture.
Pipeline: European companies may ship pipeline
related equipment covered by U.S. sanctions or
face penalty clauses in their contracts with
Soviets.
Steel: Commerce preliminary determination in
u dy cases against welded pipe from France
s
and FRG.
Steel: USITC final injury determination in
EC steel CVD cases.
Export Credits: Beginning of discussions with
major participants on the outlines of possible
improvements to the arrangement on Export Credits.
France, not the EC, has resisted U.S. efforts to
limit export credit subsidies.
Oct. 24 Steel: Deadline for recommendation to the Presi-
dent in 301 case on EC specialty steel subsidies.
Oct ; 25 Steel: U.S.-EC final injury determination in EC
steel antidumping cases.
Oct. 30 Agriculture: Deadline for recommendation to the
President in Section 301 complaints on EC sugar
policies.
Oct./Nov. Maritime: Negotiations with the EC on the imple-
mental on of the UN. Code of Conduct for Cargo
Liner Conferences. U.S. is asking EC members
to suspend ratification process and join U.S.
in opposition to cargo allocation schemes.
Oct./Nov. Textiles: EC should have concluded its negotia-
tions on major textile agreements. If they
contain outward processing clause, USG must
decide whether to press-EC on this in the GATT.
Oct./Nov. Unitary Taxation: Arguments before the Supreme
Court. EC wants continued USG support in arguing
the unconstitutionality of worldwide combined
tax reporting. (Decision likely next spring.),
Oct./Feb. Steel: Commerce determinations due for subse-
O ITNTIQ!quently filed CVD cases on steel.
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MCDENTIAL
4. GENERAL APPROACH IN RESPONDING TO THE EC
.JUL 2 61982
? As far as our general approach to these discussions is
concerned, individual issues are dealt with in specific-options
papers, but a few generalizations may be useful:
1. U.S. policy should stress continuity, consistency, a low-
key, action-oriented approach, and, above all, not rail tations
that cannot be fulfilled, Rather than being defensive or apologe c,
we s ould approach the Europeans with a sincere desire to pick up
their appeal for a dialogue, pointing out that this cannot focus
on U.S. policies alone. We should show understanding of European
concerns and their point of view.
2. We should recognize differences within the EC and work
with those nations most likely to support us on individual issues
(the UK and Germany on agriculture).
3. The nature of our differences with the EC does not lend
itself to 'trading off! across issues. However, the timing of
our decision may affect the tenor of our dialogue, and, where
possible, we should take this into account. Poor timing can give
the appearance of a coherent anti-European policy where none
exists.
4. We cart alddress our problems in other areas more produc-
tively if we dissociate them from our differences on East-West
economic relations.
In managing current issues with its European Allies, the SIG
could consider the following procedural options for responding
to European concerns:
1. A visible, high-level response beginning a 'new dialogue.'
This option could involve a variety of new steps, such as
sending a Cabinet-level delegation to Europe or inviting the
EC Council President to visit President Reagan, to demonstrate
special sensitivity to European concerns and reinforce
existing consultations and negotiations. It involves no high-
level negotiations on specific issues.
2. Address key issues through existing channels with greater
intensity and commitment.
This option precludes any special steps outside existing
channels and ongoing negotiations but implies a commitment
to pursue existing issues with greater vigor and willingness
to achieve compromises based on mutual concessions.
3. Some combination*of one and two above.
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This option involves special steps, perhaps including the
designation of a Cabinet-level official, or officials, to
carry on intensified negotiations with the Europeans
designed to demonstrate and reinforce enhanced commitments
to pursue solutions to issues in existing c annels.
4. Pursue business-as-usual in U.S.-European economic
This option involves focusing on already scheduled events
and negotiations in U.S.-EC relations and pursuing these
activities in line with recent levels of emphasis (e.g.,
pre-summit and since). No special high-level activities.
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5. OPTION PAPERS
Attached are option papers on steel, agriculture,, and
GATT Ministerial. The agriculture paper was prepared by
Treasury after the July 27 IG meeting. It synthesizes the
papers previously prepared by USDA, State and Treasury.
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STEEL TRADE TENSIONS BETWEEN
THE U.S. AND THE EUROPEAN COMMUNITIES
How to reduce tensions between the U.S. and the European
Communities while providing the U.S. industry with relief from
injury caused by subsidized or dumped imports.
EC POSITION
The EC wishes to reach an overall agreement with the U.S. which
would alleviate the current tensions over steel trade.
CURRENT U.S. POLICY
The U.S. Government is actively exploring avenues of agreementwith the Europeans which would eliminate injury to the U.S. industry-
Barring such an agreement it is required by law to proceed with the
ongoing antidumping and countervailing duty cases.
OPTIONS
-- Comprehensive EC-wide settlement. Secretary Baldrige
continues his current intensive efforts to settle the steel
cases through negotiations with European Commission
officials.
-- Completion of pending cases. If the above is not possible,
the Department o Commerce has no choice under the statute
but to continue the cases to their conclusion. This will
probably result in the exclusion of major steel imports from
France, Belgium, Italy and the United Kingdom.
RECOMMENDATIONS
That USG seek an agreement with the EC, while simultaneously
proceeding with cases. -
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DISCUSSION
Problem
The U.S. unfair trade statutes require that, if imports are
found to have been subsidized or dumped (sold below fair value) and
cause injury to a U.S. industry, special duties must be levied to
counter the subsidy or dumping. In 1981, certain EC steel producers
openly (or through evasion) undercut the Trigger Price Mechanism,
which had been set up to ward off complaints by the U.S. industry
under the unfair trade laws, and rapidly expanded their sales while
demand in the U.S. market was declining drastically. The U.S.
industry on January 11, 1982 filed complaints under our laws. On
June 10, the Commerce Department issued preliminary determinations
that producers in seven EC countries are subsidized in varying
amounts. Preliminary determinations are due August 9 in dumping
cases covering the same EC countries and products.
Although the subsidies are widely acknowledged, and U.S. action
is both required by our law and clearly permitted by international
agreements, the importance of the steel industries in these EC
countries means that the EC must treat the U.S. action as a major
trade problem. At the same time, failure by the Administration to
enforce our statutes and our rights under the international
agreements could lead to domestic pressures for extreme
protectionist measures by the United States.
We are intensively seeking a solution that will enable us to
settle these cases prior to October 8 (the date by which, under the
statute, final injury determinations in the subsidy cases must be
made). Any settlement must relieve the U.S. industry of injury
caused by the subsidized or dumped imports, while still providing a
trade regime that will not totally eliminate major segments of
U.S.-EC trade in steel.
In recent weeks Secretary Baldrige and Ambassador Brock have
met with Vice President Davignon of the EC on both sides of the
Atlantic to seek a resolution of the problem. After a special
meeting of the EC Council of Ministers on Saturday, July 24,
Davignon announced that the Council had given the EC Commission an
an exclusive mandate to negotiate with the U.S. Government to seek a
means to alleviate the tension between us-over steel trade.
Preliminary discussions about suspension agreements were held last
week with representatives of several EC member states, but since it
has been decided to pursue a comprehensive solution these were not
further pursued.
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Background
.The world steel industry has been in crisis since 1975 due to a
growing structural imbalance between. supply and demand and to
recurrent cyclical downturns. The industry in many EC countries has
adjusted poorly, relying on increasing government financial
assistance rather than closing inefficient capacity and reducing its
excess labor force. The West German steelmakers' trade association
estimates that $30-35 billion has been spent or is committed by
governments of other EC countries for their steel industries for the
period 1975 through 1983. Such levels of subsidization are forcing
Dutch and German steelmakers to seek government aid to modernize and
stay competitive with their heavily subsidized neighbors.
The current recession in Western Europe has cut EC steel
capacity utilization to below 65%, and imports from outside of the
EC now take 10% of the market.
The EC has attempted to deal with the current steel crisis by
raising internal prices through coordinated cutbacks in production
and employment. Continued steel subsidization has consequently
become a political necessity for several governments. Nevertheless,
the EC member states recognize the need to eliminate obsolete and
excess capacity, and to create an industry that can oompete without
government assistance. The EC as a whole is committed to a State
Aids Code designed to eliminate both excess capacity and
subsidization in steel by the end of 1985.
The U.S. industry has adjusted somewhat better than the
European industry by closing obsolete plants, reducing its labor
force, and investing in modern equipment. However, high import
levels, in addition to depriving the U.S. industry of sales, may
have helped push prices down and thus limited the industry's ability
to obtain the capital necessary for modernization. Relying on the
Administration's economic recovery program, the U.S. steel industry
has announced $6.6 billion in new capital investment, but in recent
months a number of those projects have been suspended as a result of
declining demand, low prices, and high imports.
The U.S. industry's capacity utilization, which averaged 77.7%
in 1981, is now below 45%. Over 135,000 steel workers (31% of the
industry) are laid off or on short-time. Imports have reached 24%
of consumption. While imports are not the industry's sole problem,
failure to address the trade problem vigorously would have serious
political consequences for the Administration.
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Options Available
01 Seek a comprehensive settlement. At this juncture, the most
attract ve option is to seek a comprehensive settlement of all of
the cases. Without such a settlement, the existing U.S. - EC
tensions over steel trade will increase. To both resolve the trade
tensions and avoid long-term economic distortions, a settlement will
have to take into account the EC commitment to progressive
elimination of subsidization of its steel industry and the legal
right of the U.S. industry to enforcement of our unfair trade laws.
In the EC view, a settlement should permit limited U.S. sales
by all EC producers while giving the EC time to eliminate
subsidization through enforcement of its State Aids Code. The U.S.
industry will insist, in accordance with its legal rights, that any
settlement relieve it of injury caused by dumped or subsidized
imports. Any settlement that did not relieve that injury would
probably not survive a court test, and could lead to protectionist
trade legislation.
Proceed with the cases. If a settlement cannot be reached, we
will have no choice under U.S. law but to proceed with the cases.
This would further strain relations between the EC countries and the
U.S., while perhaps not relieving the problems of the U.S. industry
(since other sources of imported steel -- including some relatively
unsubsidized EC countries -- may quickly replace those countries
excluded by our findings).
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U.S.-EC AGRICULTURAL TRADE
Issue
How to address the serious controversy between the U.S.
and the EC on agricultural trade._.
EC Position
The Europeans view U.S. objections to their subsidized export
policy as an attempt to destroy the CAP, a cornerstone of European
unity, and contrary to explicit GATT provisions permitting export
subsidies on agricultural products. They view the tone of U.S.
rhetoric as offensive and a dramatic shift from previous assurances
not to attack the CAP. Despite considerable differences within
the Community over the direction and cost of the CAP in recent years,
Brussels has shown no willingness to be more flexible. Instead
they point to U.S. interference in the market through import quotas
and threats to subsidize U.S. exports of surplus dairy and other
products. And they charge U.S. insensitivity to EC needs to curb
imports of feedgrain substitutes and oilseeds.
Current U.S. Policy
The European Community's system of high agricultural support
prices, variable levies on imports, and export subsidies has
resulted in distortions to trade which cause U.S. farmers to lose
sales in international markets, reducing potential U.S. farm
income, exports and GNP.
U.S. policy has been to defend vigorously our GATT rights on
agricultural trade and to urge reform of the CAP away from unlimited
production and subsidized exports. The Trade Policy Committee in
1981 endorsed a comprehensive strategy to deflect the EC from its
agricultural trade practices, stepping up our GATT challenges,
strengthening the multilateral trading framework on agriculture and,
when the climate is right, seeking EC agreement to restrain or
eliminate objectionable EC practices. It also approved a vigorous
stance against any new EC import restrictions (e.g., on corn gluten
or vegetable oils).
Options
Option 1: Avoid further confrontation, minimizing further
challenges to EC trading practices, accepting whatever concessions
can be obtained without major U.S. concessions.
Option 2: Negotiate to mutually reduce price supports and
trade barriers and/or seek to limit the disruptive effects of
export subsidization. To improve the atmosphere for negotiations,
we would tone down the aggressive public rhetoric and withdraw
clearly weak GATT cases. We would also insist on a meaningful
work program for agriculture in the GATT Subsidies Code context.
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-
CONF1D!NTIAL
Option 3: Compete directly with the EC through a counter-
subsidy program, possibly by challenging EC markets on dairy
products, refusing to protect the EC's usual markets in food aid
recipient countries, subsidizing export credit rates or extending
CCC credit maturities.
Recommendation
USDA firmly-supports Option 3; other agencies oppose this
option, preferring an option 2 approach.
Discussion
The EC problem in agriculture is long-standing and fundamental.
The U.S. has complained since 1962, but it is only in the past two
years that the EC has become a net exporter competing directly with
the U.S. by means of subsidy. The EC became a net exporter of
grain last year. It has doubled its sugar exports in 4 years. It
is the second largest exporter of poultry and of beef and veal --
all a result of export subsidies. At the current rate of expansion,
the EC will surpass the U.S. in value of agricultural exports Within
2-3 years.
The United States has met with the EC repeatedly at the Cabinet
level over the past 15 months, with State, Commerce, Agriculture,
and USTR working in close cooperation. The U.S. has six Section
301 cases in the GATT seeking relief from unfair trade practices.
We also plan to seek a clarification and improvement of GATT
Subsidies Code rules affecting agriculture at the November GATT
Ministerial.
USDA believes that the U.S.-EC agricultural trade issue is
nbw at a crisis point. After intensive U.S. effort in the GATT
and through bilateral discussions, the Europeans show no sign of
responding. USDA argues that direct head-to-head competition with
the EC would not be very costly to the U.S. and is our only possible
leverage to bring the EC to the negotiating table. USDA believes
that we should now back up our rhetoric.with positive action;
unless we demonstrate our willingness to subsidize U.S. exports
to match the EC, the Community will refuse to discuss agriculture
meaningfully at the GATT Ministerial or anywhere else. If we
take the lead, other exporting countries such as Canada and
Australia might join us in pushing hard for a resolution of the EC
problem. U.S. non-farm employment in processing industries will
benefit from an increase in agricultural exports.
Other agencies are not convinced that we should introduce
U.S. countersubsidies at this time. Most prefer further effort
to reach agreement with the EC, both on the specific issues under
IT;
CONfl.
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CONFIDENTIALP-3
GATT complaints and more broadly through mutual negotiations on
support prices and/or restrictions on the use of subsidies. They
fear that a countersubsidy program could.be very expens'.ve and
could cost us Australian and Canadian support in seeking changes
in EC policies.
The GATT now permits export subsidies on agricultural products,
provided they do not result in an inequitable market share or
significantly undercut prices: weak concepts that need to be
strengthened and better defined. Unless we can prove EC practices
violate these weak rules, unilateral EC concessions are unlikely.
A broader approach would seek to negotiate improvements in these
rules under the GATT Subsidies Code, but also go beyond this to
address the fundamental cause of our problems: agricultural
support levels. Mutual reduction of support levels would provide
substantial budget savings for both the U.S. and the EC, but
will be politically difficult. If this proves impossible, nego-
tiations could focus on limiting the disruptive effect of export
subsidization. This could include limits on the level of export
subsidies, restrictions on the use of export subsidies for certain
markets or products, or market share arrangements.
The SIG may want to recommend that further thought should be
given to develop a comprehensive U.S. approach to agriculture
which will:
-- Impress on the EC our intent to use the GATT dispute
settlement mechanism for its intended purpose and not
as a hostile act;
-- Seek to strengthen the hands of those countries in the
EC who may share our concerns and are trying to make the
CAP more rational; and
-- Permit us to fully explore, without mutual hostile
recriminations, the potential for serious negotiations
on price support levels and current distortions to trade.
CO1F1llENTLi1
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 ISSUE
-r-
a
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For the first time since 1973, the trade ministers of the
eighty-seven members of the General Agreement on Tariffs and Trade
(GATT) will seat in November 1982 to examine, at the political
level, the functioning of the multilateral trading system.
Preparations for the meeting are being carried out in R
Preparatory Committee, which is not anticipated to complete its
,work until just before the November meeting. In part because the
meeting was an EC Idea (Davignon), and in part because the
specific issues to be addressed, with the exception of
agriculture, are not particularly contentious ones between the
D.S. and EC, with good will on both sides preparations for the
Ministerial are likely to proceed on course. However, the success
of the meeting will depend on and reflect our bilateral
relationship with the EC and the state of global trade relations
in November.
EC POSITION
The EC representative to the GATT has been instructed to
"distance himself" from the Ministerial preparatory process in
light of recent O.S. action in the trade field. Privately, EC
officials have said that they still support the goals of the
Ministerial and will work with as to ensure a successful seetiag
but that publicly they suet maintain a more critical posture.
CURRENT O.S. POSITION
The O.S. strongly supports the Ministerial iee,ting. ~ Our
objectives for the meeting are to receive commitments from the
trade ministers to strengthen the GATT, resist protectionism,
provide a forum for the discussion of developing country trade
issues, and launch a program for trade liberalisation in the
1980's. This should include work on the emerging problems of
trade in services, trade-related investment?aeasures, and trade in
high-technology goods.
OPTIONS
-- scale-back O.S. proposals for GATT study of trade in
services, trade-related investment measures, and trade in
high-technology goods;
-- resolve certain tensions in the broader GATT context
(e.g., steel, Section 301 petitions, U.S.-EC GATT dispute
settlement cases) with a view towards improving the tenor of EC
rhetoric leading up to the Ministerial;
continue to press for inclusion of all U.S. proposals for
the Ministerial, irrespective of the current tensions;
agree to drop Ministerial discussion of the problem of
trade in agricultural products.
RECOMMENDATION
,Initiate a dialogue with appropriate EC officials to improve
the atmosphere sufficiently to promote EC cooperation in ensuring
a successful Ministerial.
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DISCUSSION
The ministerial meeting provides a prime opportunity for
trade ministers to reaffirm their countries' commitment to uphold
the GATT principles and strengthen the operation of the system.
This session will be held during a period of strong protectionist
?? pressures resulting in large part from the prolonged recession
that has gripped member countries. Decisions taken at the
Ministerial will set the course of GATT activity during the
1960's, and can determine whether the organization will continue
to be a major force for trade liberalization. Given the difficult
global economic situation and the increasing pressures for
protectionism, the U.S. and EC, as leaders in the GATT, have an
important stake in seeking agreement on how to strengthen the
system.
While the U.S. has taken a such more ambitious approach to the
Ministerial than the IC, discussions in the Preparatory Committee
and in private conversations have revealed few substantive
differences. The Community has not been thoroughly supportive of
all U.S.-proposed agenda items but last week the Director-General
of the GATT confirmed that the major U.S. proposals most likely
will be on the agenda, including trade in services, trade-relL ed
investment measures, and trade in high-technology goods. For esch
of these items, the U.S. Is proposing that the GATT begin to study
the problems and develop an inventory of trade barriers. Option
one above suggests that the U.S. scale-back these proposals in
order Co make them more, acceptable to the EC and thereby jmprove
overall U.S.-EC relations. This option should nVr be pursued
since the proposals are modest to -begin with and the' EC has
agreed, or more accurately acquiesced, to their placement on the
agenda.
The few substantive differences which do exist concern issues that
either are being dealt with outside the regular GATT framework or
are specific bilateral issues which will not be part of the
Ministerial agenda (e.g., steel, the pipeline decision and the
number of U.S.-EC trade disputes currently before the GATT). To
the extent that these problems can be resolved prior to the
Ministerial, the chances for a productive Ministerial session will
be enhanced. Option two, tboi&gh not directly related to
preparations for the GATT Ministerial per se, notes the spill-over
effect of resolving tbe.current bilateral trade tensions and the
prospects for a successful Ministerial meeting. The details of
these problems and recommended courses of action are the subjects
of other SIG papers.
The third option recognises that the preparations for the
Ministerial meeting have developed a momentum of their own and are
continuing in spite of the current tensions. Because we are
reasonably certain of achieving our objectives for the Ministerial
and have reached tacit agreement with the IC on issues of
importance to us, any further modifications of the Ministerial
agenda are unlikely to result in tangible improvements in our
overall trade relationship with the EC. however, in order to
ensure that preparations for the meeting proceed on course, and
tbat,the stage is set for the trade ministers to make concrete
deciripns to improve the trading system, the U.S. should initiate
a dialogue with appropriate EC officials in Geneva, Brussels and
Washington concerning the Ministerial.
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dTy substantive difference-'is On t efficient producer of
es. The O.S. is a mad?or,
ral products, and therefore seeks to liberalize
ral issu Of trade.
ral trade. The EC is an iiefforts to open up
ion that the
ral products, and thus Opposes from out posit e
u= above suggests retreating
tsed at
of trade in agriculture must be addinsGeneva todotermtne
ends. it is 'Clear
Lal, 109ottatious ate taking PISC
this issue should including Australia, Canada, Oet_.
other countries, in countries, Mill insist that
and a Dunbar of develop g Our position is
Ural issues be discussed. Changing laced on the
to prevent agriculture from being placed by the U.S.,
Bovever, without strong
rogran would not likely lead to trade-lib eralist?g
ipal agenda. an active agriculture program in GATT at
:ions. Turther, the Con non Agriculture policy to
that the EC is modifying ful in mintmising the
Its Spanish accession will be help
e effects on third countriese
high-level discussions with appropriate EC officials
ad preparations appear to be the best way
Ing e that Ministerial Prep
r
gS?
hat the broader tensions ifrometheS _Ministerialomeeti o
re
rapt the progress anticipated
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