Mr. Waugh stated that this Department
would like to circulate a discussion of the subject as additional
background. He hoped that this would contribute usefully at whatever time
specific action problems might be considered by the Council.
The paper to be circulated by State would not be addressed to any particular
current problem. Circulation of the paper therefore would not amount to
pre-judging the position the Department would take on any specific question.
We have found in the past however that there is danger of some prejudices
concerning these subjects being aroused quickly after a specific question
has arisen. It is difficult thereafter to obtain objective consideration of
numerous aspects of the problem which deserve to be taken into account.
The paper we have prepared is therefore in the form of a review and
discussion of various ramifications and past actions. This has been checked
generally throughout the Department and has been submitted to staff members
in other agencies for comment. We did not ask for clearance by other
agencies but we have made more revisions in response to their
suggestions.
The particular type of presentation we desired to make did not lend itself to
the standard form of documents which are circulated as CFEP papers on current action problems. Our
discussions with the CFEP staff have led to
the conclusion that the best means of circulation would be for State to send
its paper directly to the other members including of course Mr. Dodge.
It is recommended that the attached discussion of United States policy toward
intergovernmental commodity arrangements (Tab A) be sent to the other
members of CFEP with a transmittal
memorandum (draft memorandum attached as Tab B3).
[Tab A]
A REVIEW AND DISCUSSION OF UNITED STATES POLICY TOWARD
INTERGOVERNMENTAL COMMODITY ARRANGEMENTS
(Prepared by the Department of State as a background
paper for submission to the members of the Council on Foreign Economic
Policy)
Problem
The national interests of the United States are directly and
significantly involved in a limited number of commodity situations which
at times require this Government to take a position on the question of
entering into an international commodity agreement. The subject of
intergovernmental commodity arrangements arises frequently in
international discussions of economic affairs. The United States
Government therefore finds it necessary not only to have a definite
policy but also to state it on numerous occasions with the object of
obtaining a wide understanding and appreciation of that policy and the
reasons for it.
Background
For purposes of this discussion, trade controls which are concerned
entirely with considerations of security are excluded. Commodity
agreements are considered to include all other arrangements
[Page 536]
in which three or more
governments make specific commitments having the purpose or effect of
regulating the quantity or price of one or more commodities in
international trade. Such agreements may vary greatly in their form and
methods of operation as well as in their objectives, effects, and
participation.
This definition is broad enough to include temporary international
arrangements for rationing or price controls to deal with an acute
shortage in time of war or other general emergency. However, the
practical problems and policy aspects of such emergency short supply
arrangements are clearly distinguishable (in the United States view at
least) from regulatory programs proposed or undertaken at other times.
The discussion in this paper is therefore limited to these other types
of arrangements which are designed generally to reduce the instability
of commodity prices even in the absence of severe shortages related to a
general emergency. The long term trend or average of prices is a
separate matter but the relationship of this to action taken with a view
toward moderating fluctuation is considered at a later point in this
discussion.
It is not possible for governments to ignore the basic problem of
instability in the prices of major commodities. Many of the basic
foodstuffs and raw materials are subject to price fluctuations much
greater than those of manufactured products and greater than any which
are needed or useful for the fundamental economic purpose of guiding
desirable adjustments of production. These comparatively violent
fluctuations in the prices of primary commodities can have seriously
harmful effects upon large population groups and wide areas which are
heavily dependent upon the earnings derived from particular
commodities.
Some problems of this kind exist within the United States or develop in
this country from time to time in a manner which requires the earnest
consideration of this Government. These problems in the United States
present an urgent claim for governmental attention notwithstanding the
large and diversified economy of this country and its high degree of
dynamic mobility.
Some other countries are concerned by similar problems to a
proportionately much greater extent. Their total employment, tax
revenues, and earnings of foreign exchange are largely dependent upon
one or a few commodities. Developments in these commodities are vital to
the social and political structure in those countries. Excessive
instability of commodity prices can retard economic development and
reduce defense capabilities in many important areas of the Free
World.
The United States Government and other governments therefore find that
erratic marketing conditions for some leading commodities present on
occasion very difficult problems which involve a complex
[Page 537]
of considerations: social, political, and
strategic, as well as economic. The reality of these problems, and the
importance of the interests involved in them, warrants review of
pertinent United States policy and confirmation of its adequacy.
Basic United States Policy
The traditional view of the United States emphasizes that a maximum
reliance on market forces will promote economic development and well
being. This is the basic policy perspective, notwithstanding numerous
exceptions, especially in agriculture. In the absence of a compelling
showing to the contrary in specific circumstances, this policy presumes
that the public interest is best served by a high degree of freedom for
individual enterprise and incentives under competitive conditions. The
policy emphasizes concern over rigidities which would inevitably
accompany wide-spread intergovernmental intervention in markets under
comparatively ordinary conditions.
Some who advocate a larger role for governments in economic affairs may
criticize the United States view and charge that it is excessively
passive or negative. The United States is convinced however that its
view is a broadly positive approach to economic progress. United States
policy seeks in general to release and encourage the constructive forces
of private enterprise. It recognizes that private enterprise requires a
high degree of freedom and competition for its full development in the
public interest.
Extensive resort to governmental controls could deprive individuals of
basic freedoms which the United States would much prefer individuals to
have and to use consistently with the national interest. Regulation of
production or marketing or prices could be a heavy drag on the
continuous process of economic adaptation toward more efficient
employment of resources and higher standards of living.
As for governmental policies which would best assure against undue
depression in commodities, the United States looks primarily to broad
measures (such as tax and credit policy) designed to insure the
maintenance of generally high levels of economic activity without
inflation. Successful administration of such policies would in itself
assure a generally high demand for commodities. The United States
considers furthermore that well-conceived national measures offer more
practical promise in this connection than international programs. It is
recognized of course that some underdeveloped countries, whose progress
and capital development are most heavily dependent on export earnings,
are also underdeveloped in their
[Page 538]
capacity to administer effectively such contra-cyclical measures as
national credit controls and flexible tax policies.
Applications of Policy
The United States opposes strongly certain lines of international action
which are sometimes proposed in connection with the international trade
of commodities but which would inevitably introduce rigidities and
substitute official decisions for private judgment and responsibility on
a scale so broad as to be unnecessary and unwise, as well as
impractical, in the United States view.
Such proposals include the concept of international parity prices;
regulation of relationships between the prices of primary commodities
and manufactured goods in international trade; commodity reserve
currency; and multi-commodity agreements.
Even in the case of the more limited type of proposal which is directed
toward an intergovernmental agreement for a single commodity affected by
exceptionally troublesome circumstances (such as wheat or sugar), the
policy of the United States is first to explore all possibilities of
satisfactory solutions which avoid direct regulation. Although this
Government has been willing to consider such situations on a case by
case basis, the United States has consistently placed a heavy burden of
justification upon the advocacy of a commodity agreement. When resort to
a commodity agreement has been found justified in an exceptional case,
the United States has desired nevertheless to minimize the extent and
duration of the regulation consistently with all of the national
interests of the United States which are directly involved.
If the original misgivings in principle are overcome in the course of
examining the particular situation it is nevertheless necessary to
scrutinize very closely the detailed arrangements connected with the
specific agreement. Commodity agreements tend to become very complicated
in their administration. They may require substantial sums of government
money. Such agreements need to be safeguarded carefully against becoming
continuing subsidies. Care has to be exercised that they do not
unnecessarily circumscribe opportunities for individual initiative and
competition and that they do not unduly jeopardize progress in economic
adjustment and economic development.
The Alternative Is Not Always a Free
Market
A realistic approach requires recognition that national price support
measures, particularly in agricultural commodities, are so firmly
imbedded in the policies of so many countries that the question of a
free market is irrelevant to the visible future of some
[Page 539]
major commodities. Modifications of
support levels can be discussed and frequently are. Some programs of
national governments could be shifted from prices to income support.
Such changes however would not produce a market situation essentially
free of governmental intervention in major commodities which sometimes
give special concern leading to consideration of commodity agreements.
The large scale of some governmental programs, such as stockpiling and
the disposal of agricultural surpluses, inevitably affects the nature
and operation of commodity markets, regardless of any decisions made
concerning international agreements.
The question of a commodity agreement appears in a somewhat unwelcome but
nevertheless special light if it is found that the advantages which one
would ordinarily hope to be attainable through a relatively free market
could not in fact be achieved irrespective of any decision concerning an
intergovernmental agreement.
However unfortunate this may seem from some points of view, the
alternative to a commodity agreement may not be a situation of private
and competitive trade on a multilateral basis. The alternative may be
wide-spread and uncoordinated national regulation; perhaps intensified
to a stage of economic warfare; emphasizing state trading, bilateral
agreements, and subsidies.
Wheat and sugar are examples of commodities in which regulation by
national governments is deep rooted and almost universal. The question
of an international agreement in these commodities does not present
itself as a choice between freedom and regulation. The actual decision
to be made is whether or not an appreciable advantage is seen in an
international framework for consideration and coordination of national
measures. The prospect is that national programs of regulation will
proceed in any case, with significant effects on the vital interests of
numerous other countries directly concerned with world trading
conditions for the particular commodity.
The United States is participating in the International Wheat Agreement
and the International Sugar Agreement. Neither of these agreements has
complete coverage of international trade in the commodity concerned.
Both have limited capabilities for effective stabilization but each of
them is credited with some amelioration of trade conditions which would
have existed in the absence of an international agreement. The
International Wheat Agreement expires
[Page 540]
in 1956; consideration is being given to the
question of renewal and, if so, in what form.5
The Inherent Advantages of a
Relatively Free Market May not be the Only Important Concern of the
United States
Examination of a particular important world commodity has sometimes shown
that the advantages attainable by avoiding international regulation
would necessarily be accompanied by special difficulties so serious as
to require careful weighing of the balance of United States national
interests in the particular case.
The International Tin Agreement of 1953 raised questions of this kind.
The threat of extreme instability in the price of tin was related
directly to the termination of procurement for the United States
stockpile. This instability would fall most heavily on areas in which
the United States has significant political interests (Bolivia,
Indonesia, Malaya, and Thailand). The United States decided not to sign
the tin agreement but recognized publicly that the agreement could be
made effective without United States participation and stated that this
Government would not oppose the agreement being brought into operation
if that was the desire of a sufficient number of other interested
governments. Entry into force is now awaiting ratification by
Indonesia.
The number of commodity situations which might develop a balance of
United States interests problem of this type is undeniably small. It is
essential however that the United States specifically consider the
balance of its national interests in each such situation. The aggregate
of United States interests could not be well served by a doctrinaire
approach which took no account of the facts and United States interests
directly involved in the particular case. The attitude of the United
States toward such exceptional cases is a subject of intense interest to
other governments and significantly affects their overall appreciation
of the foreign economic policy of the United States.
Some Special Problem Cases
The United States has recently indicated its willingness to consider with
other governments the special problems in the international trade of
coffee and rice, including proposals for stabilization.
[Page 541]
Special programs of the United States Government for the export of
surplus agricultural commodities may stimulate interest in international
agreements for some of these commodities. Considerable opinion in the
United States has been emphasizing increasingly the objective that the
United States shall have a “fair” share of world trade, obtained through
various forms of export subsidies. However it must be recognized that a
declaration of “fairness” in such a matter can not be meaningful, or at
least can not be generally acceptable, if the determination is made
unilaterally. The quality of “fairness” in this connection is usually
taken to be meaningful only if the share reflects agreement with other
interested parties, since an objective criterion of “fairness” is not
ordinarily available.
There is no active discussion of a cotton agreement at present. However
the possibility of a revival of such discussion is inherent in the
present and prospective cotton situation, despite the administrative
complexities disclosed by previous extensive discussions of cotton
regulation as a practical problem.
The International Cotton Advisory Committee includes in its membership
most of the governments which are substantially interested in the cotton
trade. This committee keeps the world cotton situation under close
review and would be the forum in which any proposals for renewed
consideration of an agreement would be likely to be made.
The United States takes some actions or has some interests in
non-agricultural commodities which at times become related closely to
the nature and purpose of commodity agreements. These may set the stage
for discussion of an agreement or constitute a leading step toward such
discussion. For example if it is the desire of the United States to
avoid increased imports of lead, zinc, or petroleum, it might be found
as a practical matter that this would require an arrangement under which
the shipments by several other countries would be regulated by their
respective governments in accordance with a definite pattern established
through agreement among the group of governments, including the United
States.
Limitations and Possibilities of
Commodity Agreements
The process of negotiating a commodity agreement has been found to be
very laborious. Great difficulties of reconciling divergent interests
need to be surmounted before an agreement can be brought into force.
Intergovernmental agreements therefore emerge only slowly and not by any
means in all of the small number of commodity situations where serious
consideration is given.
When an international agreement for rubber was a subject of major
interest to other governments, the United States avoided the
[Page 542]
difficulty in foreign
relations which would have resulted from a rejection of the proposals in
principle and eventually achieved a general recognition of the lack of
necessity disclosed by an examination of the facts on their merits.
Some of the commodity agreements which have been brought into force have
proven not to have very significant effects on prices or trade. Such
ineffectiveness is sometimes the result of the compromises in objectives
and methods of operation which were found necessary to induce sufficient
acceptance and participation by divergent interests.
To the extent that the practical effects of commodity agreements either
for good or harm in economic terms are less than those which might have
been hoped by some or feared by others, the total significance of the
agreements becomes proportionately more intangible. The primary
significance in some cases may be the effects in general relations which
follow from a willingness or unwillingness to consult and attempt some
limited degree of joint approach. This places the emphasis on forms of
international cooperation rather than on economic objectives or results.
The existence of a joint stabilization effort may induce some actions
consistent with its purposes, beyond those directly required or
demonstrably caused.
Dangers and Necessary
Safeguards
Any commodity agreement is likely to involve dangers against which
specific safeguards must be provided to avoid action which is
excessively narrow-minded in not recognizing all of the interests
affected, or unduly short-sighted regarding economic consequences.
It is not unusual for some or most of the governments concerned with a
commodity agreement to be preoccupied with the so-called “producer
interests” as distinguished from the “consumer interests”. This
preoccupation may not be soundly conceived either from the standpoint of
producing interests or from the standpoint of desirable economic
adjustments over a representative period of time.
Much of the United States thought concerning commodity agreements has
emphasized that they should not freeze patterns of production or
marketing or establish continuing subsidies. A corollary is that the
agreement should include provisions which would encourage and exploit
all possibilities for reducing the degree of regulation and returning
freedom to markets when circumstances permit.
A further point of much emphasis has been that stabilization agreements
should be guided by the principle of avoiding an increase or decrease in
the average of prices which would have been maintained over a
representative period in the absence of the agreement.
[Page 543]
The fact that this principle is so
difficult to apply in practice, even under the most favorable
circumstances, seems to make it especially important for the conception
to be firmly in mind and constantly stressed as an objective.
These propositions have led to the view that agreements should not be
binding on governments for long periods. There is excessive danger of
losing touch with underlying developments unless an opportunity for
review and reconsideration is allowed at intervals of five years or
less.
The United States has taken the position on numerous occasions that the
negotiation and administration of agreements should be subjected to
considerable publicity and disclosure of the principal policy
considerations at all stages.
The United States has consistently supported the view that agreements
should be open to participation by the governments of all interested
countries. Adequate opportunities for effective participation by
importer and consumer interests has been thought particularly important.
The United States has recognized that the equitable interests of
non-participating countries need to be borne in mind constantly and
assured of full consideration.
