Foreign Relations of the United States, 1955–1957, Western European Security and Integration, Volume IV

84. Report by the Department of State to the Council on Foreign Economic Policy¹

CFEP 520/1

Washington, March 16, 1955.

SUBJECT

• Department of State Comments on “The Development of Cartel Aspects in the Schuman Plan”

The Department’s comments which follow relate to the four points raised in Mr. Dodge’s memorandum of February 5, 1955, on the above mentioned subject.

(a) Steel Export Cartel. The steel producers of the European Coal and Steel Community (CSC) have, without sanction from the High Authority, established a cartel to set minimum prices for exports from the Community. So far as is known, this agreement does not involve an allocation of markets. The High Authority has in no way condoned the existence of the agreement. Up to now, however, it has felt that it lacked the power to take action against the cartel under the CSC Treaty’s anti-cartel provisions, which could be applied only if the export cartel’s activities had an adverse effect on competition within the Community.

It would also be possible for the High Authority to establish maximum export prices if the prices fixed by the cartel were found to be substantially higher than prices within the Community and therefore inequitable to importing countries. A thorough examination in February of CSC export prices, made at the instigation of the Danish Government during the Ninth Session of the GATT, has failed to show that the export prices were in fact inequitable. Nevertheless, as a result of combined expressions of concern from the U.S. and other governments, the High Authority has currently decided to renew its investigation of the export cartel. Another favorable result has been the establishment of a precedent for consultation between the High Authority and third countries with respect to CSC export prices and practices.

(b) United Kingdom–CSC Agreement. The agreement between the United Kingdom and the CSC, which has not yet come into force, was entered into primarily to strengthen the political significance of the CSC and to give impetus to the movement towards European unity. It provides for consultation and an exchange of information between the U.K. Government and the executive organs of the CSC on such questions as the supply situation for coal and steel, investment, pricing policies, and technological development. Provision is also made for consultation with a view to reducing tariffs and other trade barriers in line with objectives of the CSC Treaty.

The Department has recognized that such a relationship could form the basis for restrictive arrangements. It seems clear, however, from the history and context of the agreement, that the exchange of information on pricing is designed to reveal the presence of artificial price factors, such as subsidies or export incentives which distort trade. The powers of the High Authority in the CSC Treaty with respect to prices are, moreover, defined in such a manner as to limit the possibility of restrictive agreements on prices. It has been suggested also that the existence of arrangements for governmental supervision of the relationship between CSC and UK steel producers may in fact help to forestall restrictive agreements.

(c) CSC Scrap Importing Arrangements. A private scrap organization in Brussels (OCCF) is primarily responsible for CSC scrap imports. While the OCCF determines CSC scrap import requirements, so far as we know, it does not administer any system of scrap allocation for the High Authority. There is an exclusive scrap purchasing arrangement between the OCCF and certain U.S. scrap dealers. This arrangement is tied in with a so-called Perequation Fund to equalize the cost of imported and domestic scrap. The High Authority supervises the administration of both the OCCF and the Perequation Fund through designated observers. Scrap may be imported by CSC consumers outside the OCCF arrangement but no perequation payments are made on such imports. The exclusive purchasing arrangement with U.S. scrap dealers is supposed to terminate March 31, but there is a possibility that it will be renewed.

The scrap import purchasing arrangements have developed as a means of coping with the special problems created by the removal of national barriers to trade within the CSC. Current information seems to indicate that the High Authority regards this scrap importing arrangement as temporary and that it will be terminated when supply and demand for scrap come more closely into balance. Past actions of the High Authority against restrictive scrap arrangements appear to sustain this view.

The U.S. Representative to the CSC has been instructed to indicate informally to the High Authority our reservations about the exclusive scrap purchasing arrangement² It should be noted that the Federal Trade Commission currently is investigating the relationship between the U.S. scrap dealers and importers in other countries, including the CSC.

(d) U.S. Loan to CSC. The loan of $100 million to the High Authority was designed to demonstrate concretely the U.S. support for the movement toward European unity. The loan agreement gives specific recognition to the basic principles of free competitive enterprise and it stipulates that loans shall be made in a manner consistent with the operation of a common market free from national barriers and private obstruction to competition.

The attached document (Tab 1) comments on these points in more detail.

Further Considerations:

It is apparent that various restrictive arrangements exist among the coal and steel industries of the CSC. The steel export cartel has already been discussed. Another example is the German central organization known as GEORG which decides price and sales policies for all Ruhr coal. The High Authority is attempting to reorganize this restrictive system but is encountering determined opposition from the Ruhr industry. In the latter case, as in most cases involving restrictive business practices, there are political and social factors involved as well as economic. Although it is fully realized that action by the High Authority to promote competitive conditions is of vital importance to the success of the Community, it was not expected that the establishment of the CSC would quickly lead to the abolition of all restrictive arrangements. There are a number of important factors which must be taken into account such as the complexity of the problem; the long history of such arrangements in Europe; the limits on the High Authority’s powers for dealing with restrictive arrangements extending outside the Community; the pioneering character in Europe of the High Authority’s efforts; and the long and careful preparation required in undertaking an antitrust action, as shown by U.S. experience. Consequently, although progress is slow, to some extent this is inevitable in the circumstances.

Some steps have already been taken by the High Authority against restrictive arrangements and we have been assured that further measures are now in preparation. We consider that there are reasonably good prospects for further progress by the Community in combating such arrangements.

The developments cited by Mr. Dodge should, moreover, be considered in the broad perspective of the Community’s potential contribution to U.S. interests in Europe. The following points deserve attention:

(a) The European Coal and Steel Community represents a dramatic movement in the direction of European unity, the promotion of which has been established by Congress and the Executive Branch as a basic objective of U.S. policy. Although the collapse of the EDC³ provided a set-back to the extension of the supranational principles embodied in the CSC, the Community serves as a rallying point for those upholding the idea of a united Europe. United States support for the CSC is widely recognized as a symbol of U.S. interest in encouraging progress towards this goal. The President has on frequent occasions expressed his support for this objective, and has described the CSC as “the most hopeful and constructive development so far toward the economic and political integration of Europe.”⁴ The Secretary, in a communication to M. Monnet, has recently referred to the CSC as “a bold and inspired conception which will serve as a beacon for the future.”⁵

(b) The provisions of the CSC Treaty directed against monopolies and restrictive business practices, while quite analogous to U.S. antitrust legislation, are completely unprecedented in Europe. They point the way for other efforts in Europe to encourage more competitive and dynamic economics.

(c) While the Community’s progress in combating restrictive practices has been slow, it has been substantially more active in this sphere than most individual European governments or other international bodies. Further, it should be realized that the CSC cartel problem cannot be considered entirely apart from the same basic cartel problem in other segments of the European economy. Some progress on this problem has been made by Western European governments since the war. Much remains to be done, however, and we should continue to give all possible encouragement to these governments, as well as to the High Authority, toward further development of programs for the elimination of restrictive business practices.

Conclusions:

(1) The United States should continue its strong support for the High Authority and the Community, especially in view of the far-reaching significance of the CSC as a major step towards European unity.

(2) The United States should continue to take every opportunity to encourage the High Authority to use its powers firmly and expeditiously in order to develop a competitive market for coal and steel. In this way the U.S. can help to promote continued progress by the High Authority towards this goal.

(3) The facts currently available to the Department concerning reported cartel developments in the CSC, in conjunction with the steps which the High Authority has taken and is anticipating in implementing the anti-cartel provisions in the CSC Treaty, do not warrant a reconsideration at this time of U.S. policy towards the Coal and Steel Community.

[Tab 1]

ANALYSIS OF REPORTED CARTEL ASPECTS IN THE SCHUMAN PLAN

(a) Steel Export Cartel

The report is correct that the steel producers of the European Coal and Steel Community have established a cartel to fix minimum prices for export from the Community. This has been done without sanction of any organ of the CSC. There is evidence that a quota system was introduced in the spring of 1954 when the market was slack. However, export quotas were reported to have been abandoned in late summer as a result of the resurgence of demand for steel in world markets. There is no evidence that the cartel has allocated markets.

This arrangement, known as the Brussels Convention, was entered into by the steel producers of five of the six member states of the Community shortly before the establishment of the common market for steel in May 1953. It covers substantially all of the steel exports of the Community.

The High Authority has two possible courses of action against the steel export cartel. It has the power under Article 65 of the CSC Treaty to act against the export cartel if the cartel’s activities directly or indirectly adversely affect competition with the common market. It is also empowered under Article 61 to fix maximum export prices if existing prices are found to be inequitable to importing countries outside the Community. Both lines of action have been considered by the High Authority.

The Department has been concerned about the export agreement since its institution. After consultation with the High Authority, this Government approached the individual governments of the member states of the CSC with respect to the possibility of governmental action against the export cartel. No positive results were accomplished by this approach. Our concern about the export cartel was also expressed to the High Authority during the loan negotiations in April 1954.

More recently, the Danish Government has raised the subject in various international forums, including the GATT, contending that the export prices fixed by the cartel are inequitable in being substantially higher than CSC domestic prices. Such a situation would place Danish steel fabricators at a disadvantage in relation to fabricators within the Community. GATT consideration of the problem was recently suspended pending outcome of direct discussions between the Danes and the High Authority. The latest advice is that, in these discussions, the High Authority has proved to the satisfaction of the Danes that the Community’s export prices are equitable, there being no significant difference between CSC export and domestic prices. A favorable result of this exercise has been the establishment of a precedent for consultation between the High Authority and third countries with respect to CSC export prices and practices.

Although clearly not condoning the activities of the export cartel, up to the present time the High Authority has felt that it does not have the power to act against it under the anti-cartel provisions of Article 65 because of lack of evidence of an adverse effect of the cartel’s activities on competition within the common market. The High Authority has informed us that it intends to renew its investigation of the export price agreement.

(b) United Kingdom–CSC Agreement

An agreement concerning relations between the United Kingdom and the CSC was signed in London on December 21, 1954, and is now awaiting ratification. The agreement provides essentially for consultation and the exchange of information between the U.K. Government on the one hand and the High Authority and Council of Ministers representing the Community. This consultation is to embrace a wide range of topics of common interest concerning the production and marketing of coal and steel; and institutional framework—a Council of Associations—is established to facilitate the discussion of them. These topics include such matters as investment policy; pricing arrangements, including subsidies; technical developments and research; supplies of coal and steel and other raw materials; and trends in production, consumption, imports and exports. If possible, before introducing any additional restrictions on trade in coal and steel in time of shortage or oversupply of coal and steel, the U.K. and the CSC are to notify the Council in order to permit consideration of coordinated action by the appropriate governmental organs of the U.K. and the CSC. The Council may also examine tariffs and other trade barriers, with a view to their reduction. The main task of the new Council is likely to be the working out of the CSC tariff reductions called for under Sections 14 and 15 of the CSC Transitional Convention. Negotiations of reciprocal concessions from other countries, and particularly the U.K., is envisaged in those sections.

The High Authority and the United Kingdom have considered the new agreement as primarily of political significance. This indication of U.K. support for the Community was regarded not only as a means of strengthening the CSC but also as a way of encouraging the advocates of further progress toward European integration. Generally speaking, the State Department has favored the close association of the U.K. with the CSC.

We have been aware of the possibility that such an association could facilitate restrictive agreements on prices, and have discussed this matter with the High Authority. In light of the provisions of the CSC Treaty, and the history and context of the relevant sections of the agreement, we consider it unlikely that the agreement will be utilized for such purposes. It seems clear that the consultation on pricing arrangements is designed to reveal artificial factors, such as subsidies, which distort international trade. In addition, the powers of the High Authority with respect to price are defined in such a way as to limit the possibility of its sponsoring or entering into restrictive price agreements.

(c) CSC Scrap Importing Arrangements

The High Authority currently supervises the operation of a private organization in Brussels (Office Commun des Consommateures de Ferraille, or OCCF), which performs certain functions with regard to CSC scrap imports. The OCCF determines CSC scrap import requirements, but, so far as we know, does not administer any system of scrap allocation for the High Authority. There is an exclusive scrap purchasing arrangement between OCCF and two or three American scrap dealers. This arrangement is tied in with a Perequation Fund to equalize the higher delivered cost of imported scrap with domestic scrap. The High Authority has designated an observer to supervise the administration of both OCCF and the Perequation Fund. This observer participates in all their meetings and must approve any decisions made unanimously by them.

The OCCF acts as agents for CSC scrap importers and negotiates contracts on behalf of the actual importer. The latter is free to select his foreign supplier but if he wants to get the perequation payment, or subsidy, necessary to make imported scrap cheap enough to buy he has to let the OCCF negotiate the contract. With respect to scrap imports from the United States, a more rigid system is used. The OCCF has designated two or three American scrap dealers as exclusive agents for scrap purchases in the United States. U.S. scrap may be imported by CSC consumers from other than the exclusive agents but no perequation payments are made on such imports. We understand that the exclusive purchasing arrangement with U.S. scrap dealers is scheduled to terminate March 31, but there is a possibility that it will be renewed.

Payments into the Perequation Fund were made obligatory by the High Authority on March 26, 1954. These payments are levied on each ton of collected scrap consumed by the CSC steel producers, irrespective of origin. Recently, the High Authority extended for a period of three months the arrangements for perequation of scrap imported from third countries which was scheduled to terminate on March 31, 1955.

The scrap import purchasing arrangements have developed as a means of coping with the special problems created by the removal of national barriers to trade within the CSC. They were designed to mitigate the impact on the Community of the sudden entry into competition for CSC scrap of Italian steel consumers and to avoid placing at a competitive disadvantage the consumers of imported scrap.

There seems to be little question, however, that the High Authority regards the existing scrap importing arrangement as temporary. Last November we were informed that the High Authority did not intend to renew the exclusive purchasing arrangements with U.S. scrap dealers which were scheduled to expire on March 31. Because scrap is apparently in such short supply in the Community now, there is a possibility that the arrangement will be extended. The past record of the High Authority with respect to scrap has been clearly against restrictionism. For example, when the OCCF was established in April 1953, its principal function was to collect data to establish scrap import requirements of the CSC. Joint purchasing of scrap by the OCCF was specifically prohibited by the High Authority. Further, under authority of Article 65 of the CSC Treaty the High Authority in June 1953 ordered the liquidation of the German and Italian scrap cartels and prevented the organization of a French scrap cartel. It has been reported recently that the Italian scrap cartel has continued to operate in violation of the High Authority’s liquidation order.

The Department has instructed the U.S. Representative to the CSC to inform the High Authority that the United States questions the compatibility of the exclusive scrap purchasing arrangement with the CSC objectives of establishing and maintaining competitive conditions in the Community. The arrangement suggests a type of restrictionism which impedes progress toward these objectives.

The Federal Trade Commission currently is investigating the relationship between U.S. scrap dealers and importers in other countries, including the CSC, to ascertain if there has been any violation of the anti-trust laws.

(d) U.S. Loan to CSC

An agreement between the United States and the High Authority of the CSC was concluded in April 1954 for the loan of $100 million to the High Authority for the purpose of assisting in modernizing and developing the natural resources of the CSC, principally coal and iron ore. The negotiation of the loan followed an expression by President Eisenhower of the view that such financial assistance would be concrete evidence of this Government’s support for the movement toward European unity.

During the course of the negotiations U.S. representatives expressed concern about the problem of restrictive arrangements both in the export and domestic markets. The president of the High Authority, M. Monnet, agreed that this problem was an important one which had to be solved, but which involved many factors. For example, action against cartels in coal involves complex economic and social problems arising out of the displacement of miners. M. Monnet assured U.S. representatives that the High Authority would proceed to deal with the cartel problem as soon as possible. Some steps have been taken and negotiations are presently being conducted with coal operators looking toward the elimination of certain restrictive practices in that industry.

The High Authority specifically recognized this Government’s interest in the basic principles of free competitive enterprise in the loan agreement itself. The preamble reads in part as follows: “… the High Authority of the European Coal and Steel Community has requested the extension of credit by the United States of America in order to provide additional capital resources, thereby enabling it to further the creation of a broad competitive market in coal and steel. …” Further, Article I states that loans will go to projects which are considered by the High Authority to be consistent with the operation of a common market free from national barriers and private obstruction to competition.

1. Source: Department of State, E–CFEP Files: Lot 61 D 282A, CFEP 520. Secret. Transmitted to the Council on Foreign Economic Policy (CFEP) on March 16, under cover of a memorandum from Samuel C. Waugh to Joseph M. Dodge. Waugh’s memorandum reads as follows: “There are enclosed the Department’s comments on the reported cartel developments in the European Coal and Steel Community cited in your memorandum of February 5, 1955. Our comments are in the form of two documents. The first of which is a brief summary of the specific points raised in your memorandum in relation to our CSC policy, while the second is a more detailed analysis of these points.” A copy of the report and the covering memorandum are ibid., Central Files, 850.33.
2. Robert Eisenberg was the Acting U.S. Representative to the ECSC. The instruction in question has not been found in Department of State files.
3. Reference is to the proposed European Defense Community (EDC), which was defeated by the French National Assembly in August 1954. For documentation on U.S. policy toward the EDC, see Foreign Relations, 1952–1954, vol. v, Part 1, pp. 571 ff.
4. The President made this statement in identical letters to the Chairman of the Senate Foreign Relations Committee and the House Foreign Affairs Committee, dated June 15, 1953. For complete text of the letters, see Department of State Bulletin, June 29, 1953, pp. 927–928.
5. Reference is unclear. Jean Monnet was the President of the High Authority of the ECSC.