The Acting Deputy Special Representative in Europe (Riddleberger) to the European Cooperation Administration
Ref: (a) Torep 7702,1 rptd Brussels Ecato unnumbered Oct 15; (b) Deptel 2231 (Oct 15), sent Geneva Gatt 94, Brussels 518, Ottawa 103.
Subj: Maximizing Eur defense effort and economic unification in relation to dol import restrictions.
Repto 5531. 1. OSR believes necessary re-examine position taken (and implication thereof) in reftels and related messages Wash series on Belg dol import restrictions in relation to solution Belg EPU problems and Belg’s obligations GATT and IMF. Our concern with practical impact this position on achievement of US objectives in Eur and not from any doubts re validity ultimate and longer range objectives of US executive branch in establishing liberalized multilateral non-discriminatory trade and payments system over as much of world as possible.
2. We start from firm conviction that under political and economic conditions facing us we must continue efforts promote Eur economic unification (and political federation) including transfer requirements of EDF and Schuman Plan in addition to basic purposes maximizing Eur defense effort. These purposes are specifically stated in Mutual Security Act 1951 (continued functioning of the EPU) or some such central payments settlement (mechanism) and its Siamese-twin trade liberalization code is indispensible for (a) enhancing the defense effort of the Eur NATO countries, and (b) forming one of the most important nuclei around which Eur economic integration and political federation may be achieved. Without EPU and code we shld face collapse of intra Eur trade and payments. We shld therefore seek such solutions of Belg’s EPU problem as will not interfere with Eur defense effort and keep Belg full and effective partner in EPU. Of course solution must minimize US dol contribution. Cannot continue to finance Belg nonessential imports from US through interest dol assistance.
3. Our understanding is that Belg does not believe her dol restrictions (QR’s or exchange restrictions) can be justified under relatively narrow criteria arts XII, XV, GATT or XIV fund, on grounds dol balance of payments difficulties. Ref cables appear to imply must be justified on this ground and that in view Belg’s reserve position, there is no case for Belg dol restrictions. However, fact that Belg has admitted impossibility justification under art XII GATT and proposes automatic facilities art XV GATT and XIV fund must cause US [Page 1501]consider other factors situation in determining position on justification. We feel there may be serious question, in light objectives US policy indicated para (2), whether narrow provisions substantive arts GATT and Fund applicable Belg situation unless appropriate definition given to art XIV fund. Valid case cld be made, in terms substance IMF objectives, for particular currency restrictions under XIV fund as step towards creation of vast multilateral trade and payments area. Alternative is bilateralism for large part of trading world.
4. Re suggestion that Belg use other methods to remedy her imbalance with EPU or to finance it, we must be extremely careful that such other methods do not lead to a lessening of her maximum defense effort which yet remains to be made or to undercutting the defense efforts other countries. We assume that TCC exercise will lead to larger defense burden for Belg, which wld be reflected one way or another in form smaller Belg EPU surplus. This will act as partial but probably not sufficient corrective to EPU surplus. As increased defense effort wld probably be accompanied by internal credit expansion, which wld cause an increase in demands for both EPU and dol goods. Belg, in order to reduce resulting increase in dol deficit wld stress diversion of exports from EPU area to dol area. However, Belg [garble] exports are primarily hard goods (raw materials and metal products) needed by her own producers and other EPU countries for their defense efforts. Hence the results of any diversion are not likely to help the defense efforts per se of other NATO countries unless part of a NATO-wide agreed scheme for defense export controls which has not yet been devised.
To extent that Belg does divert essential exports from NATO-Eur area, whether in context of internal expansion or to reduce EPU surplus, NATO countries will look to dol area as (a) physical source, and (b) source financing their increased dol needs. Therefore any extensive diversion Belg exports to meet dol deficit wld be harmful Eur defense efforts and in end require additional US dol assistance.
If, however, Belg permitted exports to flow to EUP [ EPU ?] area freely without forced diversion to dol markets, she wld count on EPU dol earnings to offset her dol deficits, and wld expect assurances therefor. Problem is how much can be paid. Under present circumstances these dols wld have to come either from the US by additional contribution or from EPU debtors who themselves are in financial difficulties and expected carry maximum defense effort. Wish Belg to solve problem in way cheapest to US and most effective in terms of defense program.
Finally, if Belg withdrew from EPU and returned to bilateral gold settlements with her EPU partners we cld certainly expect sharp trade restrictions against Belg, with retaliation by her, and a breakdown of whole liberalized trade and payments structure thus far built [Page 1502]up in Eur through ERP. Hence it appears to us that the “other means” open to Belg to deal with her dol deficit may directly injure Eur defense effort and retard seriously closer Eur integration.
5. Strongly feel that US defense objectives clearly require greater rather than less Eur cooperation. Greater Eur defense efforts may well call for intensified dol restrictions generally, since Eur less able afford “non-essentials” than US. Under these circumstances precipitate formulation and declaration US policy re Belg restrictions dol imports solely on basis some interpretation articles GATT or fund wld clearly tend to confuse Europeans and weaken our efforts obtain kind of Eur unification and defense effort we are pressing for. It shld be fully appreciated that if Belg dol restrictions will make it possible for Belg to make greater contribution to these ends, US willingness to accept these temporary measures strengthens our arguments for maximum defense effort, and wld make any legalistic objection seem ill-advised.
6. In view current and forthcoming discussions burden sharing, future of EPU, offshore procurement volume and techniques, etc., and since Belg issue temporarily suspended in GATT, strongly urge that US interpret Belg measures as consistent with XIV fund and postpone any further consideration of matter. We hope to make concrete proposals re such re-orientation of Belg trade pattern as may be necessary to meet requirements of NATO defense program, transfer problem of EDF and Schuman Plan as well as economic integration of Eur generally.2