204. Memorandum From the Acting Deputy Assistant Secretary of State for Economic Affairs (Kalijarvi) to the Acting Secretary of State 1

SUBJECT

  • Background Paper on Intergovernmental Commodity Arrangements

Discussion

In the CFEP meeting on July 20 there was a brief discussion of commodity arrangements and Mr. Dodge asked whether any of the members desired to place additional background material before the Council on this subject.2

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.

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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.

Recommendations

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).

If you approve, I will proceed with this distribution.4

[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.

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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.

  1. Source: Department of State, Central Files, 411.0041/11–2155. Official Use Only. Drafted by Nichols.
  2. Under cover of a memorandum, July 1, to the Council on Foreign Economic Policy, Cullen circulated a paper prepared by his staff entitled “U.S. Participation in International Commodity Agreements”, in anticipation of the Council’s discussion of CFEP 531, “U.S. Policy With Respect to International Commodity Agreements”. In a memorandum of July 7 to Samuel C. Waugh, Nichols discussed the inadequacy of the CFEP paper. He wrote in part that it did not “provide any reasonable basis for a serious discussion of the policy”, that it was not only “highly abbreviated” but also “deliberately slanted” with implications that were “improper and inaccurate”. On September 13, a CFEP draft “Staff Study on International Commodity Agreements” was circulated to the Council for review. For a brief summary of this study as revised, dated October 5, see infra . These documents are in Department of State, ECFEP Files: Lot 61 D 282 A, International Commodity Agreements—CFEP 531.
  3. Not printed.
  4. Approved by Hoover on September 27.
  5. The International Wheat Agreement of 1949 was renegotiated in Washington April 13–27, 1953, and entered into force for the United States, August 1, 1953; for text, see 4 UST 994. The International Sugar Agreement was concluded in London on October 1, 1953, and entered into force for the United States, May 5, 1954; for text, see 6 UST 203.