BACKGROUND PAPERS FOR NSC MEETING, JULY 16, 1982

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP83M00914R000500080008-5
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 49
• Document Creation Date: December 22, 2016
• Document Release Date: September 14, 2010
• Sequence Number: 8
• Publication Date: July 15, 1982
• Content Type: MEMO

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These are two additional pages whi ch. Should-"
be inserted after Options for Agriculture in the
package that was circulated earlier for the NSC a`
meeting tomorrow on: US EC Economic.Relations.
~~h t g l,n
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DDi
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NTO/ECON
ANTO/USSR
SUSPENSE
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P1 ease forward coordinated comments
~.. .by COB 15 July.
363
EXECUTIVE SECRETARIAT
Routing Shp
ecu rve Secretary
T5. July 82
Dm.
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NATIONAL SECURITY COUNCIL
WASHINGTON, D.C. 20506
July 15, 1982
Ms. Nancy Bearg Dyke
Assistant to the Vice President
for National Security Affairs
Mr. William V. Vitale
Director, Office of Executive Secretary
Department of Energy
Mr. L. Paul Bremer, III
Executive Secretary
Department of State
Mr. William Schneider
Associate Director for National
Security and International Affairs
Office of Management and Budget
Mr. David Pickford Mr. Thomas B. Cormack
Executive Secretary Executive Secretary
Department of the Treasury Central Intelligence Agency
Lt Col Richard Higgins Ms. Jackie Tillman
Assistant for Interagency Matters Executive Assistant to the United States
Office of the Secretary of to the United Nations
Defense
Mr. F. Henry Habicht
Special Assistant to the
Attorney General
Mr. Dennis Whitfield
Executive Assistant to the USTR
Mr. Raymond Lett
Executive Assistant to the Secy
Department of Agriculture
Ms. Helen Robbins
Exec Asst to the Secy
Department of Commerce
Mr. James B. Burnham
Executive Assistant to the Chairman,
Council of Economic Advisors
Col George A. Joulwan
Exec Asst to the Chairman,
Joint Chiefs of Staff
SUBJECT: Background Papers for NSC Meeting, July 16, 1982
Attached are background papers for the NSC Meeting on US-EC
Economic Relations which is scheduled for July 16, 1982, at
11:00 a.m., in the Cabinet Room. (C)
P o.
Michael O. Wheeler
Staff Secretary
Attachments
Background Papers
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0 MU AK em I
Discussion Paper for NSC Meeting, July 16, 1982
OPTIONS ON STYLE AND APPROACH
In managing current issues with its European Allies, there are
a number of ways in which the United States could respond 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. Such steps could be undertaken
to negotiate specific issues or to reinforce existing
negotiations within regular channels. This approach
will inevitably raise some expectations of high-
level compromises on the oustanding 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 negotia-
tions with greater vigor and willingness to achieve
compromises on individual issues based on mutual
concessions.
3. Some combination of one and two above.
This option involves special high-level steps
including the designation of'a Cabinet-level official
or officials to carry on intensified negotiations
with the Europeans, combined with enhanced commit-
ments to pursue solutions to other issues in existing
channels. This appraoch also implies a U.S. willingness
to compromise.
4. Pursue business-as-usual in US-European economic rela-
tions.
This option involves focusing on already scheduled
events and negotiations in US-EC relations and
pursuing these activities in line with recent levels
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of emphasis (i.e., pre-Summit and since). No
special high-level activities would be considered.
This approach implies that the US intends to hold
its positions on the issues, and use existing
machinery to keep pushing our points.
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0clft r r r
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OPTIONS ON SPECIFIC ISSUES
Whatever approach the United States chooses, it is essential.
to consider beforehand how we intend to proceed on specific
issues. Otherwise, we risk raising-expectations through high-
level contacts which cannot be met through.negotitions on
specific issues.
The issue papers attached to this discussion paper outline the
present status of various issues in US-European relations. As
the overview paper suggests, the issues divide generally into
three categories:
1 Issues such as East-West trade, sanctions, export
credits and economic and monetary policy coordination,
where there is general agreement that US policy is
developing in the right direction and should emphasize
the broad policy rationale these initiatives, addressing
specific issues such as sanctions or high interest rates
in the context of overall US and Western security and
economic policy objectives.
2. Other individual issues such as steel, agriculture,
textiles and various domestic actions that would
benefit the allies, where the United States may have
some flexibility, in timing or style if not in sub-
stance, and can seek to develop maneuvering room fully
aware of the legal and other limits and.the desire not
to raise expectiations which cannot be fulfilled.
3. Long-term issues such as US policy toward the GATT
Ministerial or the IMF and multilateral development
banks, where US leadership and continuity of policy
are too important to alter for short-term objectives.
Below, some alternatives are outlined to initiate thinking and
discussion about US options in specific areas,'particularly in
the second category-of issues above.
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OPTIONS ON STEEL
Any solution to-the steel problem as. required by the statute must
relieve injury to the US industry caused by subsidized or dumped
EC steel imports. The US industry can block any settlement which
does not meet this condition.
1. EC-wide settlement. Secretary Baldrige continues his
current intensive effort~to settle the steel cases
through negotiations with European Commission officials.
2. Country-by-country. settlement on products subject to
pending cases. If EC-wide settlement appears impossible,
individual countries may seek separate settlements in
pending cases. Any such country/product specific settle-
ment acceptable to the foreign country probably would not
meet the statutory requirement of relieving injury to
the US industry.
3. Completion of pending cases. If neither EC-wide settle-
ment nor country-wide settlement is possible, the Depart-
ment of Commerce has no choice under the statute but to
continue the cases to their conclusion. This will, no-
doubt, result in the exclusion of major steel imports
from France, Belgium, Italy, and the United Kingdom.-
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SECPrT:
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 - -?e.w Agnew*
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OPTIONS ON AGRICULTURE
1. Continue to press vigorously on current agreed
stragegy.
2. Soften the current approach.
Limit debate to government-to-government
dealings, i.e., remove debate from public
domain;
-- Extend time period for review of 301 petitions.
3. Strengthen the current approach. -
Establish a limited export credit subsidy
program;
Establish a limited direct export subsidy
program designed for particular. market and
particular commodity such as poultry in the
Middle East.
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TABLE OF CONTENTS
1. U.S.-European Economic Relations - An Overview
2. Steel Trade Tensions Between the U.S. and the
European Communities
3. Agriculture
4. U.S.-U.S.S.R. Grain Agreement
5. Extension of December 29, 1981 Sanctions on oil and
Gas Equipment to the U.S.S.R. and Impact on Political
and Trade Relations with Europe
6. Other East-West Issues
7. Macroeconomic and Monetary Issues
8. Reduction of Export Credit Subsidies
The International Arrangement on Export Credits
9. GATT Ministerial
10. Outward Processing in Textiles
11. U.S. Domestic Policies
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U.S.-EUROPEAN ECONOMIC RELATIONS
AN OVERVIEW
ISSUES
The confluence of a number of contentious issues in U.S.-EC
economic relations has produced strong reactions in Euro
among these issues are: (1) the decision to extend extraterri-
torially the sanctions on oil and gas equipment and technology;
(2) Commerce preliminary determinations on European steel subsidies;
and (3) U.S. complaints against EC agricultural subsidies in the
GATT (General Agreement on Tariffs and Trade).
These disputes threaten to color overall U.S.-EC relations,
despite earlier progress in a number of areas -- including agree-
ment at. the Versailles Summit on future economic policy consultations,
a study of the effect of past exchange rate interventions, and a
narrowing of the gap on North-South issues. We have also recently
achieved EC agreement to an extension of the international
arrangement on export credits, including substantial increases in
export credit rates for the Soviet Union.
The European nations are generally united in their strong
opposition to the oil and gas equipment decision, but differences
exist within the Community on both the steel and agriculture issues.
As the United States has moved to challenge subsidy practices in
international trade and as the current confrontation with the EC
in steel has developed, the EC continually has attempted to
discuss our bilateral trade relations in the broader context of
U.S.-European security and political issues. Prior to the pipeline
decision, U.S. representatives had some success in limiting this
linkage, and in persuading the EC that the-issues should be managed
individually through the proper GATT and OECD mechanisms.
The Europeans also have argued that the oil and gas equipment
decision casts doubt on the Summit process and consultations
generally between the U.S. and its allies. The Heads of Government
of the European Community have called for a genuine and effective
dialogue with the United States and stated their determination to
defend vigorously its legitimate interests in GATT. The Euro
have already announced their intention to distance themselvesans
from the GATT Ministerial planning process in Geneva and have
questioned the continuing utility of the Ministerial given current
economic problems.
Unless the United States addresses these concerns, the
Community may well be led to undertake specific retaliatory
actions or to adjust its broader policies in GATT or elsewhere
to conflict more sharply with U.S. objectives. Continued poor
economic relationships can make it-more difficult for us to
gain and maintain the cooperation of our allies on security and
diplomatic issues.
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The poor state of the economies in both the United States
and Europe has increased the political sensitivity on these
economic issues in both Europe and the United States. The threat
of protectionism, which lurks in the current economic environment,
permits no hesitation in the Administration's policies to pursue
specific as well as broad goals in GATT. --Yet-Europeans see our
efforts to force an end to EC steel and agriculture subsidies
which disrupt trade as confrontational and kicking them while
they are- on their knees ^
NATURE OF U.S. RESPONSE
In responding to this situation, U.S.. Policy should stress
continuity, consistency, a low-key action-oriented aproach,
above all,. not raise expectations that cannot be fulfilled. and
Rather than being defensive or apologetic, we should approach the
Europeans with a sincere desire to pick up on their appeal for a
genuine and effective dialogue, pointing out that such a dialogue
cannot continue to focus on U.S. policies alone.
In this broader context, the U.S. should distinguish among
the various specific issues we face and the.manner in which we
proceed to address them. Where we have flexibility, we should
also be more sensitive to timing of our decisions and, announce-
ments. Poor timing can give the appearance. of a coherent-
anti---European policy where none exists.
Moreover, we should recognize that U.S.-EC differences on
East-West trade issues will not be easily resolved. However, we
can seek to establish an improved framework for U.S.-EC coopera-
tion and mutual understanding and to maintain progress toward
our basic economic objectives -- despite these differences -- if
the EC is willing to divorce East-West disputes from other trade
issues. This requires an EC recognition that we can have differ-
ences and still maintain an economic/political alliance.
1. On certain issues, such as East-West trade, sanctions, export
credits, and economic policy coordination, we should proceed with -
a stress on the larger policy rationale.
2. On-other issues, such as steel
a
ric
l
,
g
u
ture, textiles, and
various domestic actions that would benefit the allies,; we should
.search=for maneuvering room or flexibility, fully aware of the
L_ ____
and of the des;
no
3. Finally, on the broadest issues of U.S. trade policy in GATT.
and U.S. Policy toward the IMF and MDBs
th
U
i
,
e
n
ted States should
maintain its leadership and continuity of policy, seeking to improve
the operation of the international economic system. Obviously,
our ability to find flexibility on the second group of issues
above will support U.S. efforts to maintain its leadership and
credibility on the long-term objectives.
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4. In making our individual
the following upcoming events:
decisions, we should be aware of
July 15
July 21 - 22
GATT Subsidies Code discussion
of U.S. steel findings
OECD Steel Committee meeting
-
July 22
Possible Polish announcement of
domestic policy changes
-- August 14
U.S. extension of pipeline sanctions
August 24
takes effect
Deadline for final ruling by Commerce-
Department on ste
l CV
-- September 6-9
e
D cases
IMF/World Bank meetings on economic
policy consultations and intervention
September 30
study
Expiration of U.S..-USSR grain
November
GATT Ministerial
-- December
NATO Ministerial
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STEEL TRADE TENSIONS BETWEEN
THE U.S. AND THE EUROPEAN COMMUNITIES
ISSUE
U.S. unfair trade statutes require the imposition of special
duties on imports benefitting from subsidies or dumping (sales
below fair value) and causing injury to a U.S.-Industry. On June=
10, the Commerce Department issued a preliminary determination
that certain major steel producers in France, Belgium, Italy, and
the U.R. receive subsidies ranging from 18-40% of the value of
production..
Imposition of the duties, which would equal the level of
subsidization, would effectively exclude those producers from
important sectors of the U.S. market. At the same time, the
Commerce Department found that major producers in West Germany
and the Netherlands do not receive significant subsidies. While
those producers (and their governments) are pleased at our
preliminary determinations, they fear that their own markets
could be severely disrupted by steel coming from the countries
effectively excluded from the U.S. market. The importance of the
steel industries in the countries named means that the European
Communities (EC) must consider the U.S. action as a major trade
irritation, even though the existence of the subsidies was widely
acknowledged, and the U.S. action is both required by our law and
clearly permitted by the GATT international agreement: allowing
countervailing duties.
At the same time, failure by the Administration to enforce
our statutes and our rights under the GATT agreements could lead
to domestic pressures for extreme protectionist measures by the
U.S.
In accordance with Administration policy, Secretary Baldrige
left for Europe on July 7 to resume intensive efforts to find a
solution acceptable to all sides that will enable us to settle
these cases prior to October 8, (the date by which, under the
statute, final determinations in the subsidy cases must be made
by the International Trade Commission). Preliminary determinations
are due August 9 in dumping cases covering the same EC countries
and products. These determinations may heighten the existing
tensions. 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.
BACKGROUND
The world steel industry has been in crisis since 1975 as a
result of growing structural imbalance between supply and demand
as well as recurrent cyclical downturns. The industry in many EC
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countries has adjusted poorly, relying on increasing government
financial assistance rather than closing excess inefficient
capacity and reducing its excess labor force. The West German
steel makers' trade association estimates that--$3'G-35 billion has
been spent or is already committed by governments of other EC
.countries for steel for the period 1975-83. In the last two
months alone, the French Government has proposed about $4 billion
in additional subsidies, leaving the Dutch and German steelmakers
to seek help from their governments in order to modernize and
stay competitive with their heavily subsidized neighbors..
The current recession in Western Europe has hit steel quite
hard, with. production levels down 3.9% in May 1982 from last
year's-low level, and capacity utilization down to below 65%,
while imports (i.e., from outside of the EC) now take 10% of the
market (up from 7% in 1981).
The EC approach to the current steel crisis has been to
raise internal prices through coordinated cutbacks in production.
For the third quarter of this year, production is scheduled to be
reduced by 40%, while steel industry employment has continued to
decline and alternative employment is scarce at a time of extremely
high unemployment for Europe (over 9%). As a result, continued
steel subsidization has become a political necessity for several
government-s-,'either out of desperation (Belgium), as part of.--
economic programs (France and Italy), _ or to keep- a-
nationalized steel company going while reducing it down to a
rational size (Great Britain). Nevertheless, the EC member states
recognize the need to eliminate obsolete and excess capacity, and
to create an industry that can compete without government
assistance. The EC as a whole is committed to a State Aids Code
in steel designed to eliminate both excess capacity and subsidi-
zation by the end of 1985.
While exports from the countries likely to be excluded by
the cases only amount to about 2% of those countries' steel
shipments, the loss or redirection to internal markets in the EC
of this production would exacerbate steel-related economic and.
political difficulties, especially in Belgium and France...
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 when funds are available.
High import levels can harm the U.S. industry,:-not only by-.
depriving it of sales, but also because the low price levels- -
caused in part by imports have prevented the industry from
obtaining the capital (either through retained: earnings, or
outside financing) necessary for modernization:`-"S-ince November
1980, the U.S. steel, industry, relying on the Administration's
economic recovery program has announced $6.6 billion in new
capital investment, but in recent months a number of those projects
have been put on "hold" as a result of declining demand, low
prices, and high levels of imports.
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The U.S. industry's capacity utilization, which averaged
77.7% in 1981, dropped below 50% by May 15 of this year, and has
not gone above 50% since. Many of the major steel producers will
lose significant sums of money this year, and one is reported to
be approaching bankruptcy. Over 135,000 steel workers are laid
off or on short-time (31% of the industry). Imports have reached
24% of consumption. While imports are not the sole problem for
the industry, failure to.address the trade problem vigorously
would have serious political consequences for the Administration.
The U.S. industry in 1977 and in 1980 sought to .have.the
U:S. -government enforce the unfair trade laws.. - The U..S.. S.-govern
'wishing to avoid a di
t
ith
spu
e w
the Europeans,_ sought to buy time
for the Europeans to move their industry on to a sound commercial
footing so that the EC industry might compete internationally
without dumping or subsidization. Both times, the Carter
Administration persuaded the U.S. industry to withdraw its
complaints, first by establishing the trigger price mechanism
(TPM) in 1977, and then by strengthening TPM in 1980, to run for
five years. The maintenance of the TPM through 1985 was intended
to protect certain European producers from countervailing duty
(and possibly antidumping) complaints. Nevertheless, some of the
European producers openly (or through evasion) undercut the
trigger prices in 1981 and rapidly expanded.their.sales while the
demand in the U.S. market declined substantially. Because the
European producers violated the TPM, the American industry now
doubts the good faith and reliability both of the European
producers and the EC Commission. They will insist that any
settlement guarantee that they not be deceived again.
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vWMW+ a eGNM s
OTHER EAST-WEST ISSUES - CREDITS AND COCOM
Credits
1. Continue our pre-summit efforts to persuade Allies
to restrain credits. to the USSR:
.2. Concentrate-in the short. term on exchanging informa-
tion on credits; move in a few months to a.monitoring
mechanism and only later to another try at actual
controls.
3.. Drop attempt at restraining credit.
COCOM .
1. Continue our efforts to tighten COCOM controls and
improve enforcememt
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OPTIONS ON US-SOVIET GRAINS. AGREEMENT (LTA)
1. Do nothing, allow LTA to lapse.
2. Extend the LTA for one year on its present terms;
3. Explore the possibility of negotiating a new LTA
with different terms.
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ISSUE
EC agricultural policies represent the single greatest
distortion of world agricultural trade. Efforts by the United
States'and other principal agricultural trading countries to
moderate the negative impact of EC policies have been unsuccess-
ful. The EC has continued unwarranted increases in its intervention=
in support of its farmers. Although the direct cost of the
price supports have been borne by EC taxpayers, U.S. farmers have
paid the indirect costs through lost export sales and lower
world prices; U.S.. taxpayers have paid through higher cost farm
programs.
The farm community believes that a more competitive footing
for U.S. exports must be established either through direct U.S.
Government assistance or by eliminating the unfair advantages
provided by the EC to its producers. In the last year, the
United States has introduced a series of complaints to the General
Agreement on Tariffs and Trade (GATT) on separate EC practices.
The EC has maintained that the U.S. actions are an attack on
the CAP and a threat to its sovereignty. The EC points to the
U.S. bilateral trade surplus with the EC in agriculture as an
indication of the openness of the EC market. (In the past, the
United States was able to obtain several key agricultural
:ccyscns from the EC including duty-free entry for soybeans
and certain feed grains.) It points to distortions caused by
U.S. agricultural policies such as our marketing orders for fruits
and vegetables, our price supports and our import quotas, parti-
cularly on dairy and sugar.
Because the GATT rules on agricultural subsidies are ineffec-
tive, the U.S. Government may lose some of its GATT cases against
the EC. At the November 23-26 GATT Ministerial, the Government
intends to seek a commitment to tougher rules on agricultural
subsidies. The EC realizes that it will be the target of these
rules and is wary of the commitment.
BACKGROUND
The CAP has enabled the EC not only to achieve self-sufficiency
in many commodities but also to produce surpluses which can only
be disposed of by government-subsidized sales to third countries.
Inside the EC, the CAP is'viewed as a success. It has protected
farm income and helped the EC to achieve self-sufficiency in
many products. Outside the EC, however, the effects of EC policies
are looked upon as a major distortion of normal competitive trade
development, both in the EC market and in third-country markets.
The United States and other major agricultural countries
have, for the most part, refrained from defending their interests
too forcefully, in the interest of preserving European unity.
However, in recent years it has become clear that the CAP has
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permitted production of many products to.reach proportions that
can be managed only by shifting the cost to other countries.
This is accomplished by insulating the EC farmer from price
fluctuations with tight import protection, encouraging him to
overproduce through high guaranteed support prices, and pouring
the resulting overproduction onto the world market with export
subsidies, regardless of the existing price situation in the
world market.
The Administration, following consultations with-leaders -of
-Congress and the farm community, has decided-to=defend its
interests where EC practices are hurting U':S:`=trade and, there-
fore, the domestic economy. U.S. farm income in real terms is
at its lowest point since the depths of the great depression.
Because of this situation, the Federal Government may find itself
making huge financial outlays in deficiency payments and other
aids to farmers. At least a portion of these difficulties;find
their root in the domestic support and export subsidy programs
of the EC.
In the early 1970's the EC was considerably less. than self-
sufficient in several important agricultural commodities including
wheat and wheat flour, beef and veal, poultry and sugar. By the
mid-1970's, through the price support and income-enhancement-
provisions of the CAP, the EC had achieved self-sufficiency-in;
all-of these commodities. But production-increases dj.d not stop
there. In the 1970's and 1980's, surplus production has been
dumped into world markets with the use of large export subsidies,
in direct competition with. the U.S. and other traditional export
suppliers. (See figure 1.)
A recent analysis by USDA in conjunction with Michigan State
University shows that, had the EC held wheat exports in 1981 at
the previous year's level, they would have exported 7 MMT less.
The U.S. could have exported 4.1 MMT more with an export value of
-$816 million (Canada 1 MMT, Australia 2MMT, and Argentina-.l MMT
more), U.S. wheat producer's price would have been $.50 higher, U.S.
GNP would have been $4.4 billion higher, federal tax revenue
would have been $98 million greater and 1E,0AQ_j.obs would have
been created.
A large portion of EC agricultural exports are irr the .high
value unprocessed, processed or semi-processed-category and -are-
exported-through the use of producer, processing and export
subsidies. U.S. agriculture is unable to compete in this high
value-market that is more stable and provides greater returns to
the total economy per ton exported than do-the lower value-bulk
commodities as long as the EC continues its subsidy policies. -In
1970 the unit value of all U.S. agricultural exports was $170 per
ton; by 1980 this unit value was $265 per ton. During the same
period the unit value of EC agricultural exports grew from about
$400 per ton to $1225 per ton.
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In the case of sugar, the Community's subsidies have
contributed to depress world prices which have caused the
United States to institute fees and quotas to protect our
domestic producers.
We face heavily subsidized EC products in a number of..
markets. Their poultry competes with ours in the Middle East;
their-wheat flour takes markets all around the world; their beef
exports depress prices in a number of markets; and their dairy
exports are part of the justification for maintaining our own
quotas on dairy imports. Since the adoption of a -common agri-
cultural policy, the EC has changed from a net importer to. a ne?t- .
exporter of one key agricultural. product after another with
tremendous impact on world markets; this trend shows every sign
of continuing. They have aggressively taken markets from our
private sector with the use of the combined treasure's of ten
Member States.
Over a period of years, we have-attempted to work out our
differences bilaterally, but the EC has told us repeatedly either
that we are not being hurt or that it is the Community's right
to subsidize and that we should not complain. Since our bilateral
discussions have been unproductive,- we have taken these differences
to the dispute settlement mechanism of the GATT. Although some
in th-e EC view this as a hostile act, we see-it as using arbitration
to defend our rights as a contracting party to the GATT.
CURRENT SITUATION
The GATT cases now in progress are in each instance an
attempt to pursue legitimate trade complaints. However, they
also are a signal to the EC that the United States will -no longer
tolerate government-induced trade distortions. This is all the
more crucial now that.the EC is considering, for internal budgetary
reasons, ways to "reform" the CAP. The United States is concerned
that, among other things, some of the suggested reforms will
solidify and institutionalize gains in EC exports to third country
markets brought about by subsidies.
On June 24, we received formal notification from the EC that
they want GATT Article 22 consultations to discuss the "disruptive
effect of imports of corn gluten feed," one of the more valuable -
tariff concessions that we have with the EC. The Community would
like to restrict such imports. To ease our pressure on EC agricul-
tural policies would encourage the EC to seek restraints on other
valuable concessions..
On the other hand, we need to find ways -to. strengthen the
hands of those in the EC (especially the British, Dutch and
Germans) who share many of our concerns and are seeking ways of
making the CAP more rational. We have, in fact, been encouraged
by officials in these Governments and by the Budget and External
Affairs Directorate of the Commission to persevere in our efforts
as the only way to bring about effective change in Community
unfair trade practices.
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U.S.- U.S.S.R. GRAIN AGREEMENT
ISSUE
The EC.is extremely critical of the U.S. grain sales to
the U.S.S.R. while this country presses for cooperation on trade
sanctions against the Soviets. The current U.S.-U.S.S.R. Grain
Agreement will expire on September 30, 1982 and the Administration
must decide soon whether to negotiate a new agreement, extend the
current one, or allow it to expire.
BACKGROUND
Soviet food policy shifted in the early 1970's fran one
of living with wide variation in grain supplies and slow growth
,in production of livestock products to one of raising the trend
in livestock output and using grain imports to balance surges
and shortfalls in production. The first indication of the new
policy came in 1972 when the Soviets purchased 19 million tons
of grain in U.S. markets within 3 months. In the wake of con-
tinued volatile and largely unpredictable purchases from the
U.S., the Ford Administration suspended sales in 1975 until the
U.S.-U.S.S.R. long-tern grain agreement (LTG) was negotiated.
The agreement required minimum Soviet purchases (6 mint) and
allowed them to purchase 2 million additional tons without
consultation. The purchases were to be evenly spaced over the
year. Purchases above 8 million tons could be made only after
consultations with U.S. officials. During 1976-79, when the
agreement was in force and before the January 1980 embargo,
grain sales were less volatile than previously and the U.S.
share of the Soviet market increased. Although the embargo.
was lifted in April 1981, the Soviets have only purchased U.S.
grain residually to other supplies, notably from Argentina,
Australia, and Canada. This pattern has been reinforced by
the postponement- of negotiations on a new agreement in the
aftermath of the Polish Declaration of Martial Law. As a result,
the U.S. has slipped from supplying a peak of over 70 percent
of U.S.S.R. grain imports to around 40 percent. Only a fourth
consecutive poor U.S.S.R. crop will prevent the U.S. share
from declining even further in 1982/83.
II. DISCUSSION
Soviet Requirements. The U.S.S.R. has imported over 100 mot of
grain since June 1979, and will likely import another 40-45 mint by
July 1983. It now appears that the volatility in grain import
requirements is being compounded by chronic failure to meet long
term output goals. Total Soviet imports of food items, including
e.g., meat, dairy products, sugar, vegetable oil, etc., account
for 40 percent of all hard currency imports. In 1982, the total
bill for agricultural products will likely increase by Si billion
up to $12 billion, but the.total will depend on several policy and
production related factors.
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The Soviets are committed to ambitious food goals through the
1980's, with the intent of relying more heavily on domestic production.
Although they have indicated a shift to decreased reliance on
capitalist countries as a food source, the consumption goals will
be difficult to meet without large-scale imports from the West.
World Grain Trade. The U.S.-U.S.S.R. Agreement is expected to
have little impact on grain trading patterns in the next year. in
the longer term, however, the lack of an agreement would remove the
minimum levels of Soviet purchases from the- LF:S. Without an 'LTG,
other exporters would likely continue their--recent 1pattern-of.--
production expansion, to the detriment of U.S. market share in the
U.S.S.R. Since 1980, Argentina and Canada have .nczvaGed production
by roughly 25 percent. Even larger supplies in the future will
mean increased competition for non-Soviet grain-trade as well.
U.S. Foreign Policy Considerations. The'U.S.- is pursuing, and
encouraging its allies to pursue, a general policy of economic
restraint with the U.S.S.R., based upon fair burden sharing in the
test. A government-to-government agreement, especially one perceived
as newly-negotiated, that promotes grain exports, would be regarded
as an exception to that policy. It would provide Moscow with
partial insurance against any future changes in grain export poli_cy._
Fiore specifically,, negotiations with the'Soviets would signal
an end to one of the President's measures against the U.S.S.R. in
response to the Poland crisis, undercutting-the-general package of
Poland-related sanctions, and implying that the situation there has
improved and that the U.S is prepared to adopt a-"business as usual"
stance. The Soviets could be expected to promote this interpretation
vigorously.
Resuming negotiations would conflict with the decision to
extend extraterritorially sanctions on oil and gas equipment and-
technology. In the absence of real changes in Poland, resuming
negotiations would undermine U.S. credibility on burden sharing
and U.S. efforts to induce its allies to exercise restraint in
credit and trade arrangements with the U.S.S.R.
The EEC heavily criticizes the U.S. for-continuing-the Grain
Agreement while we request them to undertake sanctions against the
Soviets.. Allowing the Agreement to expire, however, is unlikely to
change the Europeans' attitudes. They will see aur-demand for
additional sanctions as unreasonable regardless of the status
of the- Agreement. Furthermore, even without an ag eement,=-the . -
Soviets are likely to continue purchasing coris-iderabie amounts of
U.S. grain (at least in the next year); thus,--the Europeans would
accuse the U.S. of undertaking no real hardship_- in the near term
by letting the Agreement expire. Furthermore, the Europeans seem
to use the Agreement as an argumentative point and care little
about the substance of grain sales.
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Renegotiation of the Agreement, however, (or extension of an
amended agreement with a larger minimum.) might cause even more
rhetoric from the Europeans. They might also refuse to undertake
any further sanctions and could even reverse those already imposed.
In the absence of an agreement, the U.S. would have to take
drastic action under the Export Administration Act to limit Soviet
purchases from the U.S. either through export controls on all
foreign customers (because of severe domestic shortages) or-through
use of the national security and foreign policy. provisions of .tire. .
Act. Thus, continuation of the current. agreement. would be-more
effective in regulating U.S.-U.S.S.R. grain"trade than letting the-
agreement expire. Some analysts believe that a new agreement
would increase Soviet vulnerability to a new embargo.
On the domestic front, the U.S. fast sector __i,s_experi.encing
serious econcmic-hardships in the face of record grain supplies and
low prices, as well as high interest costs and continuing increases
in the prices of production tems. '- Relieving these burdens on
farmers will require continuation and possibly expansion of fart
programs which will require additional budget outlays. The
negotiation of a new agreement that guarantees a larger share of.
the Soviet market for U.S. farmers is virtually the only cost-free,
market-oriented step the Adminstration can take to help -the farm
community. I.t is also consistent with the central featti?re of the
Administration's farm policy--increasing agricultural. exports.
Farmers will regard the decision on the agreement as a test of
Administration commitment. to agriculture. The U.S. maritime. industry
also has an interest in a new agreement in order to preserve a
share df the U.S.-Soviet grain trade for U.S. shipping.
Note: USDA has recorded its objection to paragraphs 2 and 3
under the section entitled U.S. Foreign Policy Considerations
on the preceding page and to the final sentence of paragraph
2 on this. page.
.
SLCR.=:T,
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EXTENSION OF DECEMBER 29, 1981 SANCTIONS ON OIL AND GAS
EQUIPMENT TO THE U.S.S.R. AND IMPACT ON POLITICAL AND
TRADE RELATIONS WITH EUROPE
ISSUE
The President's decision to extend the December 29 sanctions
to include equipment produced by subsidiaries of U.S. companies
abroad as well as equipment produced abroad under licenses issued
by U.S. companies, has resulted in serious strains in political
and trade relations between the-U.S. and several EC members,
notably France, Germany, the U.R. and Italy. Japan's reaction
to the decision is considerably less critical due to'the pro-
duction phase of the Sakhalin project having already been postponed,
together with assurances given by the Soviets that the 1975 General
Agreement governing the.project would remain in force.
BACKGROUND
On June 18, 1982, President Reagan announced his decision to
extend foreign policy controls on exports of oil and gas equipment
and. technical data to the U.S.S.R. to include products manufac-
tured abroad by U.S.-owned or controlled companies or by foreign
firms under U.S. licenses. Pre-June 18, 1982 controls restricted
exports and re-exports of U.S. origin and gas goods and technical
data for all phases of the U.S.S.R. oil and gas industry (explora-
tion, production, transmission and refining). The controls on
transmission and refining equipment were imposed on December 30,
1981, as a result of Soviet-sponsored repression in Poland. Con-
trols on exploration and production were first imposed in July
1978 in response to harsh treatment of Soviet dissidents and the
arrest of an American businessman. In addition, all licensing of
high technology items to the U.S.S.R. was suspended by the
December 30, 1981 decision.
The actions of June 18 were necessary because of serious
U.S. concern over the continued lack of reconcilation in Poland,
and continued U.S. opposition to the Trans-Siberian natural gas
pipeline. In the past six months there has been little modera-
tion of the repression in Poland.
The President's decision to amend oil and gas controls will
increase the cost of the pipeline, and delay its construction.
Assuming our friends and allies do not transgress our regulations,
the Soviets are faced with several options: use smaller turbines
from Switzerland and other sources, employ electric motors instead
of gas turbines to power the compressors, or produce their own gas
turbines. All of the options will significantly. delay pipeline
construction, raise the costs to the'Soviets, and affect the
efficiency and reliability of the pipeline.
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European Reactions. As anticipated, our European and -
Japanese allies have reacted sharply to the expanded sanctions.
Their reactions, thus far, have been rhetorical, however. They
have not taken any concrete measures, e.g., court action or
blocking legislation.
The FRG has voiced criticism, using -s-ttatements like "economic
cold. war"., claiming that the U.S. decision went-contrary to. under-
standings reached during President Regan's visit to Bonn and. toL..
-agreements made at Versailles. The French followed with-equally.
hostile" accusations and expressed fear for the weakening"' of - the
Western Alliance. Italian officials have-also expressed concern
over the expansion of the sanctions, claiming that the U.S..action.
would hurt Western European companies more than the U.S.S.R..
The European Community issued a statement, following a late June
summit meeting, criticizing the expansion of the sanctions. The
EC claimed that the U.S. action, taken without consultation with
the Community, is contrary to principles of international law,
unacceptable to the Community, and unlikely to be recognized in
EC courts. (This criticism is somewhat unwarranted since consul-
tations have been ongoing since the impos4-G-ion-of--sanctions in
December 1981.) The Community also called for adialogue at the
highest:_levels. to find solutions to a range. of contentious trade.-,
The.U.K. has issued an order invoking the Protection of_.-
Trading Interests Act (PTI) of 1980, asserting that the U.S.
controls are damaging to British trading interests. The order,
thus far, does not carry substantive actions. The British can,
take additional measures to: .(1) require U.K. firms not to pro-
vide information to the USG or (2) prohibit.them from complying
with U.S. regulations. British officials stressed that the U.K.
wants to avert confrontation with the U.S. on this issue. Other
countries might follow the precedent in an export controls conflict
fifteen years ago when a French court put--a receiver in charge of
a U.S. subsidary to compel shipments to China barred by U.S.
controls.
(A. State Department paper, "Poland and Economic Sanctions:
Managing_These Issues with the Allies, Poles, Soviets, and. _
Domestically," which discusses this issue,--among others, at
greater length is attached. Also attached= -is a- paper, _ "Energy- _
Alternatives," which discusses the U.S. effort, currently under
the guidance of an interagency group headed by Under_Secretary
Buckley, to develop other energy sources in the West as_alterna
tives togas from the Siberian pipeline.)
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Economic Costs. The President's decision to-expand--controls"
on oil and gas equipment and technology can result in a noticeable
economic loss to U.S. firms and U.S. foreign subsidiaries and
licensees. It is estimated that U.S.-based company export losses
from th
D
b
e
ecem
er 30 sanctions could range from $300 - $600
million over the next three years. U.S.-owned or controlled
companies abroad could lose, as a result of-the June 18 decision
to extend-controls, an additional $600 million.over_the.next
.three years, while foreign firms which are licensees.of U.S.
technology stand to lose over $1 billion over-the next three--
years.
Besides the estimated short-term costs to U.S. companies and
their foreign subsidiaries there can be a diminution.of the U.S.
reputation as a reliable supplier of equipment.and._technology and
as a dependable commercial partner. _
There exist about 40 U.S. companies with subsidiaries that
have been brought under the export control umbrella as a result
of the June 18 actions. The major ones are (country in parenthe-
sis indicates where subsidiary is located): ARMCO (Brazil),-
Baker-(U-K.;)., Camco (U.K.), Cameron Iron Works (France), . Control.
Data (France), Dresser (Canada, France), FMC_(France), Grove __7
Valve and Regulator (Italy),. Honeywell Control and Measuring
Devices (Austria), Howmet Turbine Components (U.K., France), and
Rockwell International (Netherlands).
In addition there exist at least an equal number of foreign
firms that depend on_U.S. technology to manufacture oil and gas -
equipment. The significant ones include: Alsthom-Atlantique
(France, GE licensee), John Brown (U.K., GE licensee), AEG Kanis
(FRG, GE licensee), Nuovo Pignone (Italy, GE licensee), Mitsubishi
J
(
apan, TRW licensee), and Hitachi (Japan, GE licensee).
Legal Implications. To date, we know of no violations of the
U.S. controls. Any creditable investigative leads concerning
questioned controls would, of course, be vigorously investigated
by the Commerce Department Office of Export Enforcement
-If
as
.. _
r
a result of such an investigation, a violation-were found to have _
occurred
a
r
ri
t
d
i
,
pp
op
a
e a
m
nistrative and/or-criminal sanctions
would: be pursued, depending on the.circumstances.underlying:the-
scope and nature of the facts constituting the alleged violation(s),-.
the stren
th and
il
bi
g
ava
a
lity of competent evidence of the alleged.
offense,-and the equity considerations in the case. .We have a _
broad range of administrative and criminal sanctions available
against any violations:
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Administrative sanctions -- Formal administrative
proceedings can be initiate which could result in: (1) the
imposition of a civil penalty of up to $10,000 per violation for
violations of the foreign policy controls; (2) suspension or.
revocation of existing export licenses; and/or (3) partial or
total denial of U.S. export privileges for aspecified period
of time.
Criminal Sanctions -- Criminal charges would also be considered
-for-violations of the controls. Any foreign company official
individually charged may be arrested if he enters the United
States. He may also be arrested on the basis of probable cause.
Anyone who knowingly violates any of the controls is subject to
a fine of five times the value of the exports or $50,000, whichever
is greater, or to a five year prison term, or both. .Willful
violations of the new controls on the part of a company could
result in the firm's being fined five times the value of the
export involved or one million dollars, whichever is greater.
Individuals who willfully violate the controls may be fined up
to $250,000 or sentenced to a prison term of up to ten years, or
both for each violation.
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?O. R
Poland and Economic Sanctions: Managing These Issues
with the Allies, Poles, Soviets and Domesticall
BACKGROUND
The combination of mounting Allied resentment over the
President's June 18 sanctions decision, hints that significant
moves by the Polish regime toward relaxing martial law may be
announced- July._ 22, and a delicate negotiation- between_th-Pore - ?+
and the Poh sh regime regarding his proposed visit-to Poland in-
August make it essential that we focus on the sanctions
issue. How we manage this issue over the next month will have
very broad implications, since we have linked other questions,
such as this fall's CSCE meeting in Madrid and sanctions on-oil
and gas equipment, to developments in Poland. The manner in
which we handle the increasingly pressing question of Polish
debt will also have ramifications far beyond Poland itself
given the manifold uncertainties currently at play on the
international financial markets.
Impact of the Sanctions Decision. How our European
friends plan to play this issue remains a matter of
conjecture. To a degree, the decision rests with the Soviets,
who can decide whether or not to insist that the contracts,
which cannot now be fulfilled under US regulations, be met by
the three European turbine manufacturers. The Soviets could,
by calling the Europeans for non-performances, cancelling-the
contracts, and invoking penalty clauses, remove a certain
element of urgency from our consideration of the issue,
although the resulting bankruptcies and additional unemployment
in Western Europe would further sour Atlantic relations for
some time to come. This could also be the source of legal
challenges to the President's decision both here and in Europe.
Given the uncertainties involved, the legal route does not
offer an attractive means to resolve this dispute from our
point of view. For our Allies, this route appears much too
time-consuming as far as the case at hand is concerned.
Unless, the Soviets move quickly to invoke penalty clauses
and/or cancel their contracts, we estimate that the Europeans
will make yet another effort, individually at first and perhaps
then collectively, to persuade the President to reverse his
decision. If they follow this course of action, we will have a
certain element of leverage over them. The question which then
arises is what we should seek to persuade them to do, the two
obvious alternatives being further steps regarding credits and
actions in the Polish context.
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Possible Linkage with Credits. One reason for,"E"uropean-----_
unhappiness with the June 18 decision is their claim- which' an"
only be based on a misreading of the situation, that the
understanding reached at Versailles on future credits to the
Soviet Union presupposed a decision by the President to permit.
the executi f
on o contracts in existence at the--time-of his
original December 30 sanctions decision. The President's
reaction to the agreement reached at Versailles makes clear
-that lacking a strong credits arrangement he felt he should.-
extend the sanctions and link the extension to co
ti
ti
n
nua
on of.
:.the-situation in Poland. Obviously, further Allied action-to -
restr
t
ffi
c
o
cial credits and credit guarantees-to the Soviet
Union is a highly desirable objective. We must recognize,
however, that there is very little possibility with a
continuation of the sanctions that the Allies, in particular
..the French,. will go beyond (a) the very limited agreement at
Versailles (or even effectively implement it) or (b) the
June 30 agreement to revise the OECD export credit consensus
arrangement, which has the effect of pushing the minimum
lending rate for credits to the Soviet Union up from 10.5
percent to 12.15 percent. We should further recognize that
even were the Allies willing to do significantly more on the-
--.-.-credits front, it is not clear that this would _sdtisfy --t-Fie
President's requirements, which are explicitly tied to Poland;
to mislead them on this score would be irresponsible. This
leads us back to the situation in Poland and the inescapable
fact that, at least in the short run, absent an extremely
umpromising effort to put together a credits-for-sanctions
package, movement on the sanctions depends on developments in
Poland.
Situation in Poland. At this point, the outlook for
movement in Poland toward satisfying the three Allied
conditions (end of martial law, release of detainees and
resumption of "genuine" dialogue with Solidarity) is uncertain
at best. Clearly, a major struggle is underway within the
Polish leadership regarding what measures, if any, should be-
taken in connection with the July 22 National-Day toward --
satisfying these conditions. From the beginning, US and
Alliance policy has been that sanctions are reversible provided.
14 -& A A.
however,--is that whatever emerges on July 22 will be les
s-than.
full sati
f
ti
f
s
ac
on o
the three conditions, posing in a
particularly difficult way the question which-we have notyet
been. unable= to answer of "how much is enough" -to remove.some,-
or all., of-the sanctions. The Pope's proposed visit to Poland
in connection with the 600th Anniversary of the Madonna of _
Czestochowa is another factor putting pressure on the Polish
leadership to relax martial law and its attendant
restrictions. Opposition to the Papal visit, notably from
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Moscow, dramatizes the link between this event and the -internal-
situation.in Poland.
Allied Attitudes. Our Allies are anxiously awaiting any
move by the Polish authorities which can serve as a basis for-
relaxing, and if possible removing, both the political and
economic sanctions which they adopted following the December 13
imposition of martial. law. The Allies are not united on which
sanctions to relax or on the degree of urgency;, they expect a
sober.and-restrained approach and hard bargining.with us.
.Noneth.eles-s, the urge to relax sanctions if the Polish
authorities move is general. On the political side this
relates primarily to how the West will handle the resumption of
the Madrid CSCE Review Conference on November 9 and the
possibility of enhanced contacts with the Warsaw regime. None
of..the Europeans belive the resumed conference can or should be
devoted exclusively to Poland, as the last session was, and the
search is on for ways to open out the agenda; the Swiss are
peddling the concept of private US-Soviet contacts to turn the
key. On high-level contacts with the Polish government, these
have been sporadic since December 13 (Schmidt, for example, met
with Foreign Minister Czyrek June 14 in New York). Our-Allies
see some benefit in an enchanced political dialogue with-Warsaw.
On the economic front, the Allies are clearly anxious to
remove some or all of their remaining sanctions, particularly
in the critically important area of debt rescheduling and new
credits. Although there is little or no enthusiasm in Western
Europe for assistance to Poland, per se, aside from an
impressive humanitarian effort centering in Germany, there is
substantial support for debt rescheduling and perhaps the
provision in that context of limited new assistance--to-.Poland-----.._=---
(particularly for spare parts and industrial raw materials
needed for exports), which would, in turn, make it possible for
the Poles to service, even in a symbolic way, their rescheduled
debts. The Europeans are distinctly unenthusiastic, given the
mounting pressures on the international financial markets,
about encountering the uncertainties which default on Poland's
$27 billion foreign debt would entail. Even the most exposed
European banks (Dresdner, BFGW and Credit Anstalt-BankvereinY
could absorb a Polish default, but the Europeans fear the
ripple effect of a default, not without reason: -Unless the = = =
Europeans decide to go it alone, any movement on rescheduling
would depend upon whether the US is willing.
Taking all these factors,including the European attitude,
into account, our key objectives will be to: (a) join with our
Allies in exerting maximum pressure on the Poles, and the
Soviets, prior to July 22 to satisfy the three conditions; and
(b) avoid a situation in which we and our Allies argue about
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whether moves taken by the Poles to relax the December 13-
measures are "enough" to justify corresponding moves by the
West and, if so, which measures would be appropriate on our---
side. Reaching agreement on this point will be extremely
difficult, and the Poles (and Soviets) will doubtless do
everything they can to use this issue to provoke additional
disputes. in the West. -
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ENERGY ALTERNATIVES
The United States has been and continues to be actively
engaged in developing the abundant and economically attractive
energy resources in the West as an alternative to increased
imports of Soviet energy by Western Europe.
BACKGROUND
There are abundant and economically attractive energy
resources within the Western community. The United States
is striving for a new commitment with our European and
Japanese economic partners to develop indigenous energy
resources through greater reliance on market forces
supplemented by government action when broader Western
economic and security concerns are threatened.
Under Secretary Buckley has convened a high level inter-
agency group to review these energy resources as alternatives
Lv LL-,Le Siberian pipeline and to determine what actions the-
United States can take to assist in their development.
Ambassador Galbraith has been consulting with North Sea
petroleum producers and European governments to determine
what measures would be necessary to accelerate development
of North Sea oil and gas that could minimize western
European dependence on Soviet energy. Some progress has
been made. The Norwegian press has noted the energy security
significance of North Sea petroleum for Western Europe. The
Netherlands and Belgium have virtually withdrawn from the
Siberian project, in favor of using more Dutch natural gas.
New attention has been focussed on the regulatory and tax
obstacles to North Sea hydrocarbon development. A U.S. mission
has attracted new interest in U.S. energy exports to Western
Europe.
While the promotion of alternatives to the Siberian
pipeline is still an early stage, it is already receiving
public attention in Western Europe and has resulted in the
beginning of quiet discussions on the Continent.
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OTHER EAST-WEST ISSUES
Although U.S. sanctions and the Siberian pipeline form the
most contentious East-West economic issue dividing us and our
Western allies, there are others on which differences have arisen,
or may potentially develop. These include: (1) the U.S. initiative
to obtain agreement on restraints on officially-backed credits
to the Soviet Union; (2) rescheduling of Poland's debt; and (3)
strengthening COCOM.
BACKGROUND
There is a gap between some elements of the U.S. approach to
East-West economic relations and that of our West European allies.
The decision to extend and expand sanctions did not create this
gap; it did make it clearer. Our long-range objective is to
develop a common approach which will reinforce Allied solidarity.
In the short run, we must overcome the divisions within the
alliance, thus denying the Soviets an opportunity to pry it further
apart.
There are are three general attitudes that can be adopted
towards the question of East-West trade and financial relations.
First, one could make the case that any economic relations between
Western countries and Communist countries are inevitably of greater
benefit to the latter than to the former. This is principally
based on two arguments. One is that trade and finance are much
more important to the Communists, given the manifest failures
and inefficiencies of their economic system. Another is that,
on the Communist side, trade is conducted by and through state
trading combines, which are able to play Western firms off against
each other because of their monopoly seller or'monopsony buyer
position and obtain below-market terms and conditions.
Our problems with the Europeans arise in part from the
different choices we have made between the other two alternatives.
The position of the European countries by and large is that
economic relations between Western and Communist countries serve
to tie the latter to the former, at least to some degree, and
thus provide a moderating element to the calculations of the
Soviet Bloc. The very dependence of the Bloc on foreign economic
relations to keep its economy going is a guarantee that it will
be loath to disturb those arrangements. In any case, massive
Soviet orders keep factories operating and save jobs, and it .
would be masochistic to reject them. Additionally, Soviet exports
are made up largely of raw materials which the Western countries
need. Using Soviet sources diversifies supply and adds to inter-
national competition, thus moderating prices. (This was also
the economic reasoning underlying the. policy of detente.)
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While recognizing some merit in the first position and the
logical and political attractiveness of the second, the Reagan
Administration has adopted an intermediate attitude towards
East-West economic relations. Detente has:nat, in fact, had. the
hoped-for effects. The Soviet military buildup and foreign
adventurism have not moderated -- indeed they have greatly increased.
On- the other hand, the first attitude underestimates the bargaining
:.- ability-. of the Western corporate trading companies. Thus, trade
=
a.nd finance carried on in commercial. terms=and:following-commercial
. considerations are of approximately equal benefit-to both sides arid-:--
---should be encouraged to the same extent that all external commercial
relations are encouraged, so long as the terms-and conditions of
these relations are not skewed by official guarantees and/or
subsidized interest rates. It is ridiculoua-that__Western taxpayers
are forced to pay for East-West trade on terms disadvantageous
to-the West, which adds net resources to the Soviet Bloc, enabling
-it to accelerate its military buildup- and foreign adventurism.
There are two exceptions to.this position: one is trade in
military or dual-purpose equipment or technology and the other
is when egregious begavior on the part of the Bloc, such-as
the imposition of martial law in Poland leads-to-the-imposition-
of economic sanctions. It is the U.S. Government's application of
these exceptions that has generated problems with the Europeans over
the. three issues discussed below.
-Restraints-on Credit to the Soviet Union. The prospects for the
U.S. initiative for restraints by Western governments on credits.
to the. Soviet Union are uncertain. As developed and discussed
with the-Europeans, our proposal was for an agreement to restrict
officially-backed credits to the Soviets. Our analysis of the
Soviets' economic and financial prospects indicated that-they
would need to borrow substantial amounts from the West to finance
their import needs, and could thus build up a substantial debt.
A principal rationale for a credit restraint agreement was that
it would forestall this build-up and thus deny the Soviets the
reverse leverage it would entail. We also hoped to make their
.-resouce allocation decisions more difficult at the margin.
- In a series of meetings from mid-March -to :the Versailles-:::
Summit.-in?early June, Under Secretary Buckley --and other-high-===
.level U.S. officials tried to persuade the Europeans to ;pin-ii.
in a-.creait restraint agreement. Ultimately, :we-were unsuccessful.,
...noweve r,:we cia get communique language and a periodic review--
procedure that could enable us to continue7to press the point
with the Europeans. - ::
Soon after the Summit, we began to lay the groundwork for
the post-Summit phase of our effort. Concentrating first on
-improving collection of data on financial flows, we have raised
the possibility of bolstering NATO's system and are making a
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-3-
similar pitch in the OECD. Some European officials, professing
to be outraged over our extension of our export controls, have
said that all Summit agreements for follow-up action are no
longer valid. It is too early to predict what will happen,. but
such attitudes could jeopardize our effort to get improvements
in data collection in this area as well as in any future monitoring
proposal.. .
Eastern-European Debt. The Polish and Eastern European debt
situation=, which had reached serious proportions by the latter
part of-1981,._took on an air of crisis when the Poles imposed
martial law on December 13, 1981. In reaction to the Polish
crackdown, the United States and its allies agreed not to
reschedule Poland's 1982 maturities until martial law had been
lifted; the political prisoners were released; and a dialogue
was resumed-among the government, the Church, and Solidarity.
Some Europeans, especially the Germans and British, are now
showing signs of wanting to walk away from those conditions and
reschedule the Polish debt. However, this has not yet become a
major point of difference between us.
The-Polish crisis exacerbated the difficult financial -situ-
ation-whichother Eastern European countries were already-experi-
encing. It made explicitly clear the falsehood'of the "umbrella
theory" and caused a further reduction in banks' lending to
Eastern Europe. - -
These countries' debt situations have been dealt with
through existing institutions and have not become a major source
of contention among the Allies. Romania has reached agreement
with the IMF for a one-year standby program, and a Paris Club
rescheduling is getting underway; Hungary, which recently joined
the IMF, may seek a standby this fall and in the interim is
using the Bank for International Settlements (BIS) to raise
funds to augment its reserves. Yugoslavia (not a member of the
Warsaw Pact), which got caught in the backlash-of this situation,
also has an IMF program underway. -
000OM._-A major effort in the direction of reducing he flow of
Western-technology to the U.S.S.R. that strengthens. its war-making
= meetin (HLM). The HLM a r' -yg- provided the political- guidance and-
hil
hi
p
osop
cal umbrella needed to revitalize COCOM and strengthen
multilateral controls on strategic trade. The United States now
faces the task of negotiating and implementing the decisions taken
at the HLM. This will require a major bilateral and multilateral
effort if the United States is to be successful in restructuring
COCOM.
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U.S. goals for the HLM, considering the fact that it was
the first political level meeting of the group in over 25 years,
were largely achieved. The members basically reached a political
agreement to:
'1. Strengthen controls, placing more emphasis on
controlling technologies and equipment critical
to the Soviet military-industrial base, and
decontrol less strategic items;
.,...,pursue a program of harmonizing national control
systems, including licensing rules and procedures; and
3. strengthen the enforcement of controls.world-wide.
Subsequent to the HLM the COCOM Subcommittee on Export
Controls met in late May to consider the twin issues of improved
enforcement and measures for harmonizing the licensing process.
Although some forward process was achieved, it was less than
anticipated. The HLM guidance did not prove completely adequate
to achieve changes in direction or harmonization and enforcement.
but members agreed to continue examining the issues. The United
States has submitted most of the technical proposals-to_restructure
the COCOM List and will engage in negotiations starting;. this fall.
The proposals-followed the HLM guidance by strengthening technology
while decontrolling nonstrategic items. -
These proposals will not meet with ready acceptance by our.
Allies. However, we are proceeding in confidence that COCOM will
work, provided that we are willing to limit its-controls to military-
related items.
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~7L \Ii... y
MACROECONOMIC AND MONETARY ISSUES
There are four broad areas of tension between the U.S.
and its major allies on macroeconomic and monetary issues:
1. Exchange market intervention policy
2.. U.S. economic policy mix-(mostly the budget)
3. High interest rates
4. The Japanese trade surplus
We have had extensive, very candid discussions with our European,
Canadian, and Japanese counterparts on all these issues, and while
we_are obviously not in total agreement, there has been progress.
The United States has developed well-reasoned substantive positions
to address each of these, and steps are underway to deal with our
differences.
BACKGROUND
1. Exchange Market Intervention Policy
EC Position. Our allies (not just the EC) believe we should
intervene more frequently in foreign exchange markets. Most of
them believe that official intervention can help to dampen exchange
rate volatility. At a minimum, foreign officials feel that inter-
vention should not be renounced as a policy tool. In this regard,
they were concerned that markets had misinterpreted current U.S.
policy as one of total unwillingness to intervene under any
circumstances. We have worked hard to dispel this impression
during the past few months, through repeated private and public
statements that while our policy is not to intervene under normal
circumstances, we always stand ready to do so if necessary when
markets are disorderly. The fact that we actually intervened on
June 14, in the wake of the realignment of the European Monetary
System (EMS) and widespread political uncertainties elsewhere,
helped to lessen this source of tension with our allies.
Nonetheless, serious differences of opinion remain. Most
of our allies would still prefer a more active U.S. intervention
policy, and some would even like joint intervention to help peg
exchange rate levels (especially the. French).
U.S. Position and Rationale. Our policy is to intervene in
foreign exchange markets only if necessary to counter disorderly
markets. This policy is in full compliance with our obligations
under the Articles of Agreement of the International Monetary
Fund. In practice it has led us to intervene only twice since
February, 1981. Under normal circumstances we believe that
intervention is at best pointless, and perhaps even harmful, for
three main reasons:
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-- Foreign exchange markets are large and efficient, and
make full use of all available information in arriving at
a collective "judgment" about where exchange rates should
be. We do not believe any government or individual can
second-guess the markets.
-- Intervention to fix or manage exchange rates has not
succeeded in the past, and there is no reason to believe
it would do so now. Market forces cannot be disguised
for long. We should recall that frequent and massive
intervention during the late 1970s did not keep rates
from moving in the very directions that intervention
was trying to avoid.
Because they believe they can buy time through intervention,
sometimes delay needed domestic policy changes-
too long. In addition, governments in strong. economies.
which intervene against their own currencies--may sacrifice
domestic policy discipline and worsen their own inflation
performance.
There is only one way to get fundamental stability in exchange
markets, and that is through greater convergence-"in the domestic
economic policies and performance of the major trading nations.
As long as some countries have high inflation rates, -and-'run
generally-
unstable and undisciplined economic policies, there is simply no-._
way to-keep-.their currencies from depreciating-relative=to=countries-
-with stronger economies. Only when all are moving toward stable, _
:non-inflationary economic policies and performance can we expect
more stable.ex-change markets.
The EC. is far from blameless in this matter. The French are
the greatest critics of U.S. intervention policy, but the franc is
a weak currency in the EMS principally as a result of Mitterrand
government-policies. Poor French inflation performance, policies
and.prospects_have made the franc the weakest-of the-major European
-currencies. Other EC countries, like Italy and Belgium, have let
their budgets go totally out of control. At times participants in
the EMS have vainly tried to impose stable exchange rates among
the EC currencies through intervention, while-letting underlying
economic policies and performance drift apart.
Not:.only have we taken great pains to overcome misconceptions _
about-our-:intervention policy, but we have also set in motion two
major-procedural initiatives to help deal with the major issues.
First, and in our view potentially most important, is the process
of enhanced consultation on relative medium-term economic_policies
of the major countries, outlined in the Versailles .S-diti rt'--"Monefary `-
Statement." In response to a U.S. initiative, the leaders-of the
= major.industrial countries agreed at Versailles that individual
success in the fight against inflation is a precondition-for 'a
durable-economic recovery. They recognized that exchange market
stability stems from stable, non-inflationary domestic policies, and
agreed to work together. in cooperation with the International
Monetary Fund to hasten the convergence of economic policies and
performance among them. Preparatory work to establish procedures
for this process is now underway, and we expect to have the first
full meeting of the group at Ministerial level in September.
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As a complement to this, the other major governments agreed
just before the Summit to join us in a thorough multilateral study
of the impact of past exchange market intervention. Preparations
for this study are being worked out by an experts group, which met
in mid-June in Paris and in early July here in Washington. Two
additional meetings are scheduled for late July and early September.
We expect a Ministers meeting in Toronto to approve a definite
terms of reference and timetable for the study.
o O 0
2. U.S. Economic Policy Mix (Budget Deficit)
EC-Position. At times, most foreign governments- have: complained
that an-alleged U.S. "policy mix" of tight monetary policy and loose
fiscal policy is forcing our "real" interest rates (nominal interest
rates- adjusted for inflation expectations) to be unnecessarily high,
which in turn forces their own interest rates up. Over time, most
have realized that there is no acceptable alternative to a non-
inflationary monetary policy, so the focus of their complaints has
shifted to the U.S. budget. They argue that our current and
prospective budget defici.ts*are the major reason for our high real
interest rates. They suggest that we should reverse or defer the
scheduled tax cuts and slow the growth of military spending in order
to reduce the d
fi
i
e
c
t more rapidly.
U.S. Position and Rationale. While the- budgetdeficit is a
problem-,.. the deficit in itself is not the only, reason for. high real
interest rates. Our basic problems have been the lack of discipline
in government spending and the variability of money growth. These
two factors contribute to the lingering uncertainty that inflation
will be kept under control (see also "High Interest Rates" below).
As a general matter, we believe that incentive-oriented tax
rate reductions are an essential component of the President's program
for sustainable non-inflationary economic recover
i
y. S
milarly one
of the government's primary responsibilities is-to provide a strong,
national defense. While a number of factors. are adding to-the
budget deficit, including the prolonged weakness of the economy,
our unexpectedly rapid progress in cutting the inflation rate, and.
inadequate control of non-defense expenditures, the answer is not_
to-change our basic tax and defense policies-and abandon a stable -
policy course. Rather, we will be working aggressively with Congress-
'to--rediuc-e-the budget deficit in FY 1983 and-beyond:---The--recent- -----
budge.t- compromise is the first step in this-process.-
The
most important thing we can do in this area, for. domestic
as well as international reasons, is to continue to press for-' _
expenditure restraint and less volatile money growth.. In the mean-
while, foreign officials will have a chance--chance.' to review our efforts
and. discuss them with us in bilateral and multilateral consultations,
especially the enhanced consultation proces's.'endorsed at Versailles.
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4 -
3. High Interest Rates
EC Position. Europeans believe that whatever the reason for
unprecedentedly high "real" U.S. interest rates, there is no hope
for vigorous economic recovery anywhere in the world until we get
our interest rates down. They argue that because of the dominant
role of the U.S. dollar in world financial markets, high U.S. real
interest rates automatically push other countries' interest rates
up as well. The result is worldwide economic stagnation and'rising
unemployment.
They would like for the United States to do "whatever-it takes"
to get our interest rates down. The most widespread-prescript-`o-ci~s--
that we should move faster to cut the projected government budget
deficits--(see "Policy Mix" above). Some also believe it =woiil-d be
possible to lower real interest rates by targeting monetary policy
less on slowing the growth of the money supply, and more on
stabilizing interest rates.
U.S. Position and Rationale. We, too, are being harmed.by our
high real interest rates. Our stake in getting them down is at
least as great as that of any of our allies. U.S. interest rates
are already well below their peaks, and we remain convinced that
interest rates will come down further if we persevere in implementing
the President's basic program for economic recovery.- We are of
course disappointed that it is taking so long to happen, and consider
this the major short-term uncertainty in the economic outlook. -
We. should note, however, that interest rates are high abroad ~~
for domestic reasons, not just due.to passive responses to high real.
interest rates in the United States. This is especially true of the
unusually high rates now prevailing such countries as France, Italy,
and Belgium as a result of their very poor inflation peformance and
weak economic policies.
While it is difficult to explain fully the persistence of high
U.S interest rates in the face of our declining inflation rate,
there seem to be a number of contributing factors. The budget deficit
is clearly one of them -- particularly the uncertainty surrounding
the impact of unrestrained government spending on the budget situation
in future years. In addition, the Federal Reserve-has had.difficulty
in keeping near its target growth path for the monetary aggregates,
raising; concern about the ultimate direction-of monetary policy and
thus-of inflation. Market reactions to the volatility-of money growth
have added several percentage points to the level-of-interest rates.
We must continue our efforts on both of these fronts. -we-should
keep up-pressure on the Congress to enact the measures needed-to
bring government spending under control. We-.must- certainly stick to
the fight against inflation. While there has been a dramatic
improvement in underlying U.S. inflation performance over the past
year-, inflation expectations are lagging behind_because.our citizens
are not sure we can stick to our guns. The faster we can convince
them that we are going to bring inflation permanently under control,
the faster we can reduce the "uncertainty premium" in interest rates.
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On the monetary policy front, we fully support the stated
Federal Reserve policy of achieving a gradual reduction--_in-.. the--
growth rate of the money supply. However, while the Fed has on
balance given us slower money growth, the growth path-has-.been
erratic: performance has not matched intentions. As a result,
interest rates have been much higher than would have been the case
with steady, stable, and predictable money growth. We believe
that a smooth and steady reduction in the growth rate of the money
supply is essential to our efforts to reach a sustainable non-
inflationary economic recovery. We know the-Fed is sincere,'and
we are hoping that. it will improve the implementation of monetary
policy. One positive sign that the volatility of money growth
might be reduced is the Fed's recent decision to approve-in principle
one.of. the.technical changes this Administration= has been- urging- - - =
..them to adopt -- contemporaneous reserve accounting. While we
believe that some other technical changes are=also needed,'this-
decision.to shorten the lag in bank reporting to the Fed from two
weeks to two days could help increase the Fed's ability to control
Obviously the complaints by our allies,
about high U.S. real interest rates will persist until we are
successful in bringing them down. Our best method of dealing with
their complaints is to continue being candid with them about our
own concerns on this score, to express sympathy for their diffi-
culties,.and to emphasize the measures we are taking to remedy the
.-situation...--Again, the Versailles Summit "consultation group"-
should.-provide a forum for thorough discussion which 'w-ill help
clear the air.
4. The Japanese Trade Surplus -
EC Position. There is concern, both in Europe and the U.S.,
over the growing Japanese trade surplus. The-Japanese have become
extremely successful competitors in a number of large-and politically
sensitive industries,. including automobiles, electronic appliances,
and semiconductors. Some observers have argued that the Japanese
.have "artificial" advantages, caused by relatively low Japanese
interest rates and an "undervalued" yen exchange rate which makes
their exports unreasonably cheap on foreign markets. Some believe
that.the.Japanese should change their economic policy mix -- easing
fiscal.policy-and tightening monetary policy-(i.e. the -reverse of
what-they.want the U.S. to do). They argue that=this would lead-
to both faster growth and higher interest rates in Japan -- and
that these in turn would cause the yen to strengthen on exchange
markets. Others believe that the Japanese should-institute capital
.-controls to strengthen the yen. =
U.S. Position and Rationale. Japanese-interest rates are low
as a result of their consistently successful economic policies,
and the good Japanese track record on inflation. We feel it would
be highly inappropriate to press the Japanese to run bigger budget
deficits at a time when their deficit is already quite large in
terms of GNP. We have no evidence that the Japanese are artificially
depressing the yen exchange rate. In fact, it is clear that Japanese
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officials would like to see a stronger yen, but have not found
an acceptable way of bringing this about. We have a long-standing
objective of getting the Japanese to o en their capital markets
more to foreign participation -- a goal which is inconsistent with
the imposition of new capital controls (and whose achievement
might, at least in the short run, tend to put downward pressure on
the yen). We should avoid becoming a party-to proposals for new
Japanese capital controls or a weakening of Japanese economic
policy.
We believe that the Japanese can best ease tensions with the
rest of the world by moving vigorously to open further their markets-
for imports (as well as their capital markets} The:Japanese- -
government recently announced a package of measures to further -
"liberalize market access, which we greeted with cautious approval.
These are a step in the right direction, but we are pressing them
on both the follow-up and possible additional measures.-
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THE INTERNATIONAL ARRANGEMENT ON EXPORT CREDITS
ISSUE
With the EC acceptance on June 30, 1982 of a new
.Arrangement on Export Credits, this is no longer a
contentious issue. There is nothing the EC wants from
us right-now. Indeed, this was never a U.S.- European
problem. Generally, the Europeans have shared our view
that official export credit subsidies are wasteful and
should be reduced. Typically, only France opposed reduc-
tions of these subsidies. The EC's acceptance was the
result of a hard-won consensus within the EC, with other
countries persuading the French to cooperate.
German Economics Minister Lambsdorff personally inter-
vened to persuade the French to accept the Arrangement
Chairman's (Axel Wallen of Sweden) final compromise.
The French sought to raise'their negotiating leverage by
touLi,:g this as a U.S.-EC problem. It was not.
RATIONALE FOR U.S. ACTION
The United States, along with 20 of the other 21
Arrangement Participants, views export credit subsidies
as wasteful and trade-distorting and seeks a negotiated
reduction of this practice.. Exports should be differ-
entiated by product price and quality and not by the
level of official financing subsidy. The subsidies
are not a long-term solution for domestic problems
such as unemployment and inflation. When matched by
foreign competitors, nothing is achieved to alter
the competitive balance,..
While the compromise did not eliminate subsidies,
the U.S. Government accepted the compromise proposal
in an effort to keep the Arrangement alive. We have
no need to feel defensive on the export credit issue,
as we have bent over backwards to accommodate the
French. Specifically, for the French we:
1. Accepted a single subsidized interest rate for
all currencies, while the United States strives
for market rates differentiated by currency;.
c~rvrrr+
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2. Accepted much smaller increases to the minimum
interest rate matrix than we and the other Parti-
cipants had originally agreed to. All Participants
but the EC (whose acceptance was barred by France)
agreed to increases which would have raised the
matrix from a weighted average of 10.20_ percent
to 11.60 percent. The compromise before=us now,
increases the weighted average to 10.95 percent-
effective immediately and to 11.40 percent on
January 1, 1983. (The weighted average is based -.
on Eximbank's portfolio.)
3. Accepted a six month delay -- at French insistence
-- in the effective date of these interest rate
increases for the countries in which we are
competing most strongly, e.g., Brazil, Korea,
Mexico. (In practical terms, the new rates will
not uniformly be in effect for one year since--
credit commitments, valid for six months, extended
prior to January 1, 1983 will be the rates:in:;effect-'
before that date.) -
4. Did not take the EC to task on its conditional
acceptance of the new Arrangement terms. Rather,
we are seeking resolution of these loose ends
through further discussion. This "salami" approach
has been typical of the French negotiating style
- with regard to export credits.
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GATT MINISTERIAL
ISSUE
The EC has threatened to withdraw support for U.S. initiatives
for the GATT Ministerial in response to recent U.S, trade actions.
Especially vulnerable are U.S. proposals for work on services,
investment, agriculture, and high technology. For other items,
such as establishment of new rules on temporary increases in
import protection (safeguards), the EC may give only lukewarm
support.
BACKGROUND
While the EC was an early supporter of the concept of a
1982 GATT Ministerial, they did not anticipate the ambitious
program that the United States and others have proposed. As a
result, the EC has been unenthusiastic concerning most of the
U.S. initiatives. In the first half of this year discussions
with the EC were generally positive and non-confrontational, and
led to grudging EC acceptance of most of our proposed agenda
items.
The United States and the EC have a common position on the
need for a GATT agreement on trade in counterfeit goods. However,
in other areas the EC seeks solutions that are modest and that
tend to put off the difficult decisions. The EC is particularly
concerned with the prospects for changes in GATT rules on
agriculture and has flatly stated that negotiations on this
topic are out of the question. In regard to safeguards, the EC
continues to seek authority to unilaterally impose discriminatory
quotas only on certain suppliers (unilatera_, selectivity) as the
price for completing an agreement. The EC has questioned our
proposals regarding advanced technology goods and trade-related
investment and has suggested that studies in these areas should
not be completed in 1983 as recommended by the United States.
The EC is somewhat more supportive on services, but has indicated
that a GATT study will take years..
The EC agrees that something needs to be done to bring the
newly industrializing countries more fully into the GATT system.
The EC also has been more sympathetic than the United States to
LDC positions in the North-South dialogue. So far, however,
these positions have not led to support for the LDC trade
initiative. A number of member countries (notably the Germans)-
are supportive of the proposal; the others simply are hesitant to
support anything that could lead to further trade concessions by
the EC, regardless of what they might get in return. Given their
acceptance of the importance of the North-South issue in the
GATT, the EC may ultimately support our proposal if there is no
alternative. We will continue to consult with the EC in hopes
that refinement of the proposal can be a more collaborative
effort.
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OUTWARD PROCESSING IN TEXTILES
ISSUE
During the preliminary stages of last year's Multifiber
Arrangement (MFA) negotiations, the Commission negotiators pro-
posed rolling back textile trade from their dominant suppliers
but providing a partial offset through a special quota for products
made from EC components. (These products are known as outward
processing traffic, or OTP.)
We, and others, refused to accept language in the new protocol
which would sanction OTP quotas and told the EC repeatedly that
if it concluded agreements with OTP quotas, we would challenge
them in the MFA or the GATT or both. By giving special treatment
to apparel made from EC fabric through OTP quotas, the EC
would be in violation of the most-favored-nation principle and
would prevent EC textile suppliers from sourcing from the United
States and other countries in filling those quotas.
In the first half of this year, we have concluded bilateral
agreements with our major suppliers that did not include either
cutbacks in quotas or special compensatory quotas for OTP. Because
of our strongly-held view of the illegal nature of the outward
processing traffic as envisaged by the EC, as well as our concern
for equity, we informed Hong Kong and Korea that we would reopen
our bilateral agreements, if such an OTP arrangement was included
in their bilateral agreements with the EC. Likewise,-'we again
restated our views in a letter from U.S. Chief Textile Negotiator.
(Murphy) to the EC Chief Textile Negotiator (Krenzler). EC
Commissioner Davignon has subsequently expressed irritation
that the United States is interfering in EC matters.
The European Commission, because it has a negotiating mandate
from the member states to pursue cutbacks in quotas to be compen-
sated by outward processing arrangements, is continuing to seek
such agreements despite the results of the Multifiber Arrangement
negotiations. The EC, however, because of its highly protectionist
mandate has been unable to conclude bilateral textile agreements
with its major suppliers. Their next round of negotiations will
most likely take place in September and October.
In recent contacts with the EC,. we have stressed that the
Murphy letter to Krenzler was only a reaffirmation of the U.S.
position and not meant to be contentious, but to be sure that
the record was clear. We again also highlighted our concerns
over the negative and far-reaching implications for trade in
other sectors if this approach is pursued.
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U.S. DOMESTIC POLICIES
A number of U.S. domestic policies are of concern to the
European Community because of the actual or potential impact on
their interests. To put U.S.-EC economic relations in context, a
partial list of such U.S. policies is presented in the background'
section.
BACKGROUND
1. Fiscal, monetary, and exchange intervention. See separate
paper covering these issues.
2. Potential protectionist legislation being considered by
Congress:
A) Local content regulations on motor vehicles sold in the
United States. The bill would impose minimum levels of U.S.
content (escalating with number of sales by manufacturer). The
bill would sharply reduce Volkswagen sales in the United States.
The Administration is firmly opposed to the bill, but it has over
200 co-sponsors in the House and has.been favorably reported by a
subcommittee.
B) Reciprocity. The Administration has obtained changes in
the bill to make it acceptable, but the EC is still concerned
that its tone is belligerent and that it gives the President new
retaliatory authority.
C) Imports of works by U.S. authors. The Congress has
passed an extension of existing law that in effect prohibits
imports of works published abroad that are written by U.S.
nationals. The Presidential veto of this legislation should
reassure the EC, although it is still concerned that the veto
might be overriden.
3. Gas Deregulation. The EC has long criticized U.S. regulation
of natural gas prices on trade and energy grounds. On trade, the
EC argued that artificially-low natural gas and oil prices gave
U.S. producers of man-made-fibers and chemicals an unfair cost
advantage which resulted in U.S. exports to Europe displacing EC
production. U.S. exports have, however, declined recently,
quieting the issue. On the energy side, the EC has. argued that
price controls discourage increased gas production in the United
States -- while at the'same time the U.S. opposes the EC becoming
increasingly dependent on the Soviets for gas.
4. Agricultural policies. The EC believes its sales of cheeses
are limited by U.S. import quotas, and is concerned that the
current U.S. support price for milk is stimulating surplus
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production that might be moved into world markets with subsidies.
The Administration is working on legislat-ion to reduce dairy
price supports. The EC has also expressed its intention. to
complain in the GATT about U.S. import quotas and fees on
sugar. The quotas protect U.S. price supports, which were
recently increased, while world prices have fallen sharply,. due
in part to subsidized EC exports.
5. State "Huy American" policies. Many s-tates are considering
bills that would give a preference to U., S--.-products, especially
steel,. in procurement by the state governments.. The Administration -
has sent letters to governors and state legislatures opposing
such legislation.
Classified by ThaT*+a P....
O Declassify IN Review for
.Declassification on.- 9 0 / 0 7 / 0 8
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