Foreign Relations of the United States, 1969–1976, Volume XXXI, Foreign Economic Policy, 1973–1976

290. Memorandum From Robert Hormats of the National Security Council Staff to Secretary of State Kissinger¹

Washington, May 22, 1975.

SUBJECT

• Commodities

Report on Interagency Task Force

As you know, an NSC/EPB Interagency Task Force on International Commodity Issues is now in place. (Summary of last meeting at Tab A.)² Its study of six minerals recently concluded that commodity arrangements or stockpiles for them were either impracticable or unnecessary; other commodities should be explored on a case-by-case basis.³ The work of the Task Force is now being broadened to include (a) compensatory finance and earnings stabilization issues, (b) an expanded role of the IMF/World Bank, (c) economic stockpiles to strengthen our hand vis-à-vis producers and to add a modicum of price stability, (d) promotion of investment in raw materials in developing countries, (e) the multilateral trade negotiations and their relationships to commodities, and (f) issues related to market volatility. A paper for NSC/EPB principals should be ready by the end of June.

The Task Force has a reasonable prospect of ensuring that the agencies needed to produce a constructive policy operate in harmony rather than at cross purposes, in a climate of suspicion. While substantive and theological differences remain, there is at least now the prospect of a useful study of commodity policy which will provide analysis and raise options to appropriate levels for decision.

Interim Strategy

How should we handle commodity issues in the interim—before we have an explicit set of new policies, or in the likely event that our policies are not all the developing countries want?

Jules Katz (Tab B)⁴ and I (Tab C)⁵ have offered similar suggestions on a scenario and the basis for a commodity policy. Our political line—to support these approaches—should be one of sympathy to specific problems and willingness to listen and be open minded.

We also need to point out quietly, but firmly, at a technical level the errors of fact and logic in the diagnosis of the developing countries. These countries claim, for instance, that income and wealth differentials between themselves and the developed countries can be attributable to past and present imperialism and capitalist exploitation, that cheap energy and other resources from the developing countries are the foundation of high living standards in the developed countries, that overconsumption in the developed countries deprives developing countries of adequate consumption. For all these reasons, they argue, the market system should be dramatically changed through intergovernmental agreements designed primarily to increase the flow of resources from developed to developing countries. They argue, further, for “reparations” for past “exploitation” and a total revamping of the international economic system to achieve this. Chief among the changes are what they loosely refer to as “commodity arrangements.”

Several points need to be made in response:

• —Raw material trade is not primarily from poor to rich countries. Outside of tropical products like sugar, coffee, cocoa, and bananas, the wealthy countries (US, Canada, Western Europe, Australia, and South Africa) account for about 60% of commodity exports.
• —The resource-poor developing countries rather than developed countries suffer the greatest impact from commodity price increases.
• —The terms of trade for commodities vary over any considerable period of time—sometimes improving for the exporters, sometimes for the importers.
• —Reduced aggregate consumption in the developed countries is matched closely by reduced demand for products of developing countries. Less consumption by developed countries does not mean more for developing countries (except perhaps in some limited areas such as fertilizer). The factors which cause a slowdown in consumption in developed countries have the same effect on their imports of developing country production.

A basis for common agreement will not be found if developing countries attempt simply to bring about a unilateral transfer of wealth on grounds either of morality, retribution, or reparations for past sins. But neither should we rebut this rhetoric with our own ideology. We should, instead, take the high road—asserting that, correctly conceived, collaborative actions by the governments of producing and consuming countries could be achieved for mutual benefit. A strengthening of the present international economic system can provide for growth from which every country can benefit, and procedure [produce?] means for dealing with specific problems of individual countries. Resource transfers have been and will continue to be effected under the present system. The developing countries themselves would suffer the most from its disruption.

There are a variety of areas where affirmative initiatives, worked out in collaboration with other OECD members, can achieve mutually beneficial results. These are, for the most part, best taken with respect to individual problems, or commodities. Disaggregation of the overall commodity problem will move it from the realm of political rhetoric into that of substantive negotiations and accommodation. (Katz’ paper and my earlier memo suggest potential areas.)

It is also in our interest to take maximum advantage of the World Bank/IMF to finance buffer stocks, support exploration and production to increase supply availabilities, and undertake compensatory financing of balance of payments shortfalls. This institution is the strongest and most “Western-influenced” of the international institutions; and it is the one which operates on the most solid economic, and political, principles. To the extent we can ensure that this, and such institutions as the GATT—which can be a useful vehicle for negotiating principles and rules of supply and market access—bend to the needs of the developing countries without sacrificing our fundamental principles, we can prevent these and other institutions from being pushed to the breaking point.

1. Source: Ford Library, National Security Adviser, Presidential Files of NSC Logged Documents, Box 56, NSC “NS” Originals File, 7503556—Commodities—Interagency Task Force. No classification marking. Sent for information. Scowcroft wrote at the top of the memorandum: “HAK has seen.”
2. Tab A, attached but not printed, is a summary of the May 16 organizational meeting.
3. See Document 287.
4. Tab B, attached but not printed, is an undated paper on “International Commodity Strategy.”
5. Tab C, attached but not printed, is a May 16 memorandum from Hormats to Kissinger on a “Scenario for Dealing with Energy and Raw Material Issues.”