Foreign Relations of the United States, 1961–1963, Volumes VII, VIII, IX, Arms Control; National Security Policy; Foreign Economic Policy, Microfiche Supplement

451. Memorandum from Ball to President Kennedy, October 23¹

October 23, 1961

SUBJECT

• Obtaining the Tools Necessary to Meet Our Negotiating Requirements in a Trading World Undergoing Revolutionary Changes

Mr. Petersen’s memorandum ably argues the proposition that you should request the next Congress to extend existing trade agreements legislation with modifications to reduce the restrictive effect of the “peril point” machinery. Mr. Petersen bases the case for staying generally within the traditional pattern on the contention that this is the most authority that can be obtained in the present atmosphere of conservatism and protectionism.

I do not agree with Mr. Petersen’s underlying assumption or with the proposals that he erects upon it. I am convinced that a more radical approach might yield better tactical results. Even granting that Mr. Petersen is correct in his pessimistic appraisal as to what Congress might ultimately accept, I feel moreover that it would be unwise to concede so much at the outset.

But the issue does not have to be posed with such narrow options. The times and the circumstances call, I feel, for a quite different approach.

I urge, therefore, three propositions:

1. The mere renewal of negotiating authority within the structure of traditional trade agreements legislation, even though modified as proposed by Mr. Petersen, is not good enough for our purposes. It would not provide us with the powers we need if the United States is to make full use of the opportunities and avoid the dangers implicit in the newly emerging trading world.

2. The requirements of this new trading world make it necessary for the Executive to be equipped with a whole new arsenal of tools.

3. The Administration should not seek new trade agreements authority in the 1962 Congressional session. We should devote the next year to an intensive education of the American people and the Congress in the nature and significance of the new world trade patterns that are now emerging. As soon as those patterns become clearly defined, we can design the tools we need, tailoring them so as to enable us to deal effectively with these new conditions. We should request the legislative authority for such tools in the 1963 Congressional session.

I

THE CONDITIONS OF WORLD TRADE ARE RADICALLY CHANGING

Between now and the end of next year the following developments will shape a new trading world:

(A) The British Government’s application for membership in the European Community will, if successful, unite the major trading nations of Western Europe in a single vast market. The conditions for trade negotiations will this be fundamentally altered.

Traditionally the process of negotiating industrial tariffs has been characterized by a large number of nations each seeking to make a satisfactory bargain with the nation that is the principal supplier of each product. The results have been generalized through the application of the most-favored-nation principle.

In the new trading world the principal suppliers of the greatest proportion of industrial products will be contained within two markets—the United States and the expanded EEC. The task of American negotiators will be to trade off reductions in the common external tariff of the expanded EEC against reductions in our own trade barriers, while again applying the most-favored-nation principle.

We shall never achieve our objectives if our representatives are limited to trading on an item-by-item basis. The internal tariffs of the expanded Common Market are being eliminated by a phased series of across-the-board cuts. If the differential between external and internal tariffs is to be substantially lowered (and we must reduce this differential if we are to avoid having our exports placed at a major disadvantage) the common external tariff of the EEC must also be reduced on an across-the-board basis. This in turn requires across-the-board action on our part.

It is impossible to achieve this result if on our side we retain the obsolete machinery of “peril points” as Mr. Petersen recommends. The use of peril points, no matter how liberally defined, would inevitably require highly selective, product-by-product tariff negotiations inconsistent with an across-the-board approach.

(B) Over the next year, trade in agricultural products, both temperate and tropical, will become a major issue in international relations. Trade agreements legislation in the traditional pattern is neither relevant nor adequate to deal with these products.

Two developments are bringing about this situation:

First, the arrangements for the adherence of the United Kingdom to the Common Market necessarily involve a solution of the highly complex problem of Commonwealth preferences. These preferences affect both temperate and tropical agriculture. Their solution is related, in turn, to the system of preferences presently extended to the Associated Overseas Territories of the Common Market.

These preferential systems must ultimately be eliminated in order to avoid discrimination against our domestic producers and producers in Latin America. Yet these preferential systems can be adequately disposed of only if we are in position to cooperate in the development of global arrangements for important agricultural commodities. We began exploratory negotiations along this line with respect to certain tropical products as early as last February. Within the past fortnight we have begun preliminary talks regarding possible global arrangements covering key temperate agricultural products.

Second, Western Europe is on the verge of becoming a net surplus agricultural producer. The technological revolution in farming methods has already achieved this result for France. As the results of the revolution are more widely applied, both the United States and Europe will be spewing out surpluses to the remaining parts of the world, which, under present conditions, will be unable to pay for most of them.

The imminence of this problem requires that we work with European and other major agriculture producers, to arrange for the coordination of pricing policies. This is necessary if we are to protect our diminishing market position. In addition we must seek to establish the machinery for orderly marketing arrangements around the world and closely coordinated operations for the provision of surpluses on non-commercial terms to the underdeveloped nations.

Legislation providing the traditional pattern of reciprocal trade agreements powers would be irrelevant to, and thus totally inadequate for, the pioneering task of forging a system of global agricultural arrangements.

(C) The present decade of economic development is generating many new low-wage sources for primary commodities and industrial goods which must be accommodated in world markets. Their problems cannot be solved with traditional trade legislation. The success of our foreign aid programs may well turn, in the case of a number of key countries, on the ability to solve their export problem.

To a large extent we hope to be able to meet the problems created by an improved production of primary products through global commodity arrangements. But, as is explained later, we shall also need a new bargaining mechanism for assuring that a wide range of raw materials from underdeveloped countries are granted free entry by the advanced countries.

The trading problems that will result from widespread industrialization will be even more sensitive and difficult than for primary products. I cannot overstate the pressures that will be generated as the underdeveloped countries pour out larger and larger quantities of labor-intensive manufactures onto world markets. We have had a foreshadowing of this problem in the case of textiles during this past year. I do not recommend that the pattern of the Geneva textile agreement should be generalized—it was merely an effort to make the best of a bad bargain. But the continuance of the existing pattern of trade-agreements legislation is clearly inadequate to deal with the problem.

II

TO DEAL EFFECTIVELY WITH THE CONDITIONS OF THE

NEW TRADING WORLD WE SHALL NEED A NEW KIND OF

TRADE LEGISLATION

The trade agreements legislation passed in 1958 authorized a twenty percent cut in tariffs over a period of four years. This was intended to enable the United States to negotiate reductions in the common external tariff of the EEC in phase with the reduction in internal tariffs as provided by the Rome Treaty. In practice, however, the bargaining authority of our negotiators was eroded away before the negotiations began. This resulted from the operation of internal procedures developed over the long history of trade agreements legislation, including the “peril point” machinery.

When bargaining began our representatives found themselves in position to offer tariff reductions equivalent to less than 5% cut in our industrial tariffs in exchange for the 20% across-the-board cut we were seeking in the common external tariff for industrial products of the EEC.

This one time we shall probably be able to achieve close to a 20% across-the-board reduction on industrial tariffs from the Europeans in spite of the weakness of our own bargaining posture. But this will require a major breaching of “peril points” on our side. Besides, we cannot expect that the Europeans will be so generous with concessions in the future. Their current willingness to treat us liberally springs in large part from the fact that the United Kingdom and the EEC have a motive for reducing their industrial tariffs in cadence because they wish to facilitate the merger of the United Kingdom into the EEC trading system. But during the next year that merger should be consummated. Thereafter the expanded Common Market will have no similar incentive for generosity.

We should not, therefore, take much comfort from this experience. In order to protect American trading interests in the future we shall need a much more powerful piece of negotiating machinery than that offered by legislation in the traditional framework of the trade agreements act, even as modified by Mr. Petersen.

The drafting of legislation adequate for the new trading world will involve the radical revision of the concepts that have circumscribed our trading powers in the past.

Most important of all we must not merely redefine but, in fact, eliminate the concept of injury. I suggest the substitution of a new concept which might be called “absorbable adjustment”.

The genius of a dynamic industrial economy is its adaptability. Our economy has adjustments forced upon it every day by changes in public taste, population shifts, the application of new technology, the refinement of automation techniques, etc. Compared with these normal adjustments those brought about by tariff reductions are marginal. The adjustments that would be required even if we were to eliminate industrial tariffs entirely would, in fact, be relatively small for the economy as a whole. But admittedly they would fall heavily on certain industries.

If we are to meet the demands of the times it is imperative that our new trade legislation recognize that the process of tariff reduction involves the acceptance of structural adjustments in individual industries. European industry already has accepted this concept, with some startling effects upon investment and innovation. For the most part the required adjustments take the form of the shift of resources from one type of production to another, design changes, the substituting of materials, etc.

Up to a certain limit of tolerance individual industries and companies might be expected to assume the burden of such adjustments for the good of the economy as a whole. This is the assumption implicit in many types of legislation—taxes, regulatory arrangements, etc.

Beyond that limit of tolerance the adjustments should be cushioned by the provision of Federal assistance to facilitate the conversion to new types of production, the modernization of plant, the retraining of workers, etc.

Beyond a certain further limit it would probably be necessary to restrict, or at least to provide a long transition for, tariff reductions. And in addition a limited list of products, for one reason or another, might have to be dealt with by special agreement, as in the case of List G items under the Rome Treaty.

We should not deceive ourselves as to the need for this conceptual change. The opening up of the trading world will be possible only if we are able to secure the acceptance of the concept of “absorbable adjustment” by the United States industrial community. This acceptance implies a repudiation of the traditional concept of “injury”—and there is great reason for making this explicit. The very fact of forcing a debate in Congress on this new concept would be a means of educating the Congress and the American people to the requirements of an adequate philosophy for approaching the whole trade problem.

Other changes in nomenclature as well as concept would be useful. I have already recommended that the new legislation not be treated as merely an extension of the trade agreements pattern; I would, in fact, suggest that it should be given a fresh name. The new proposals might take the form of a “Trade Expansion Act”.

(A) We may require legislative authority to negotiate global arrangements for agricultural products.

An adequate trade bill should not be limited to creating a mechanism for a reduction in barriers to the movement of industrial products. It should provide the President with the authority he needs to undertake the kind of global arrangements for agricultural products both temperate and tropical which have been outlined earlier in this paper. Just what form this authority should take deserves further study as the form of such arrangements becomes clearer.

(B) The new legislation should provide for dealing with the products of the less-developed nations.

As has been mentioned before we must provide techniques for assuring access to world markets for the products of the less-developed nations. Two types of legislative authority may be necessary for this purpose.

First, we should have authority to bargain with other industrialized countries for agreements under which the industrialized world as a whole will provide free access for a wide range of raw materials produced for the most part by the underdeveloped nations south of the equator. This power would complement the powers to work out global agricultural arrangements which we have mentioned earlier.

Second, we should design new mechanisms for the orderly acceptance of an expanding volume of labor-intensive manufactures produced by the underdeveloped nations. The textile agreement was an improvisation and its techniques should not be generalized. But we should seek to devise longer-term plans that might be facilitated by new powers provided in a new trade bill. This is a problem of considerable urgency. It should be given a great deal of attention by the interested Departments of the Government.

III

WE SHOULD POSTPONE THE SUBMISSION OF NEW TRADE

LEGISLATION UNTIL 1963

(A) Action Recommended.

Instead of asking Congress for legislation during the coming session we should give serious consideration to postponing the submission of a program until 1963. Meanwhile the Congressional leadership should be consulted as to whether the existing Trade Agreements Act need be extended for one year or whether we should let the authority under existing legislation lapse next June 30. So far as existing trade agreements are concerned, a lapse of one year or so is of small practical consequence. The domestic political consequences might, however, be different.

While we recommend that the decision be made now to postpone submission of the legislation we do not recommend that the decision be announced in those terms. Instead we would suggest a program along the following lines:

(1) The appropriate Administration leaders should in a series of speeches make clear to the American people that developments now in process in Europe and around the world are resulting in a wholly new free world trading pattern.

(2) They should make it clear that the Administration is determined to press on toward even more liberal policies. It intends to advance such measures as are necessary to enable American industry and agriculture to take advantage of the expanded opportunities that the new trading world will offer while at the same time defending the vital interests of the United States economy.

(3) To this end the Administration is working on a whole new set of tools to enable it to deal with the requirements of the new trading world. Those tools cannot be finally designed until the shape and pattern of the new world become more clearly evident. But the Administration should announce that as soon as that time arrives it proposes to go to Congress with a basically new trade bill.

(4) In the course of these public statements we should make it clear that we recognize the revolutionary challenge and opportunity offered by the growth of the European Economic Community. We should emphasize that we see in its growth a partial answer to Khrushchev’s challenge of economic competition issued to the free world in his speech at the XXII Congress.

(5) We should emphasize also that there are values in the mutual opening of the European economy and our own to each other and to friendly third countries. The acceptance of this new competition offers us a spur to innovation and an important check on the wage-price spiral.

(6) We should also make it clear that any Administration proposal will include provision for adjustment assistance to facilitate the redeployment of labor and capital to more productive and competitive pursuits in the United States economy.

The reasons for recommending the postponement of the submission of trade legislation fall into two categories. One is substantive; the other is based on a political judgment.

(B) Arguments Favoring a One-Year’s Postponement.

(1) Substantive Arguments.

(a) Interference with the UK-EEC negotiations.

If we engage in a trade legislation fight in the United States Congress during the time when the most intricate negotiations are being carried on between the UK and the EEC we shall run the grave risk of “cross-talk”. The resultant passions, pressures, and misapprehensions could gravely endanger international relationships. They could also impede our own ability to influence the shape of the newly emerging European arrangements while seeking at the same time to protect our trading interests.

The process of negotiation initiated by the British application to the Common Market countries will be complex, delicate and difficult. Involved in this negotiation will be the whole delicate problem of evolving and substituting a new trading system for the existing preferential systems both of the Commonwealth and of the Associated Overseas Territories of the Common Market. It will mean a tense and difficult period for the neutral members of the OECD as well as for other Free World countries whose interests will be intimately involved.

At certain points the United States Government will have to become intimately involved in the negotiating process. At other points it will be just as necessary for us to remain aloof. If the United States’ interests are to be adequately protected the Executive must maintain the closest control over our relationships with this negotiating process.

There are great hazards in inviting a Congressional debate on trade legislation at a time when this intricate process of negotiation is going forward. By doing so we run the risk of focusing all the forces of United States protectionism on the UK-Common Market negotiations and of having our own ability to negotiate embarrassed by imposed Congressional restrictions or by ill-advised and ill-informed Congressional speeches. A trade debate at such a time would be more likely to evoke Congressional insistence that the United States act to impede the development of the Common Market than on providing the tools for well-conceived US moves to influence the shape and form of the Common Market in a direction compatible with our long-range political and economic interests.

At the same time that our own bargaining position in Europe might be impaired by the Congressional debate, the protectionist forces in the United States would be provided with potent ammunition by speeches and statements made in Europe in the course of the Common Market negotiations. The dangers of such “cross-talk” are formidable.

(b) We cannot yet foresee the precise shape and character of the new trading world.

Until the European negotiation has progressed much farther it will be difficult to predict with precision the form which the new trading world will take. As a consequence we cannot ask Congress with full confidence for the precise tools that we will need to protect our interests within that trading world.

It may be argued, of course, that our failure to ask for new trade agreements legislation in the Spring would weaken our ability to influence the negotiations in Europe. On the contrary we feel that if we submit to Congress traditional trade agreements legislation, even as modified by Mr. Peterson, we would betray to the Europeans that we were not going to have the tools to deal with the problems. We are on the strongest basis if we say to the Europeans that if this or that arrangement is made we shall undertake to obtain from Congress the authority that we need to play our part. The experience of both the UK and the EEC with our last piece of trade legislation (the 1958 extension) has convinced them that we will not be able to play a major role if we are not equipped with better weapons.

(2) Political Reasons.

In the present climate—or the climate likely to prevail next Spring—neither the Congress nor the American people is likely to grant the United States Government the powers necessary to deal with the new trading world. At the moment neither the Congress nor the public has more than a dim perception of the revolutionary nature of the change taking place in the trading world. Hopefully the accession negotiations will be completed in about a year. At that time it should be generally apparent that we are dealing with a totally altered trading world—a world which presents enormous opportunities for the expansion and development of American industry provided we are able to take the necessary negotiating steps which the conditions require.

If we carry on a systematic program of education in the meantime American opinion should be ready by the spring of 1963 to grant the kind of authority we shall need.

That will not be an election year and hopefully unemployment will have declined from its present high level.

George W. Ball

1. Trade legislation: Ball’s counterproposal. Confidential. 15 pp. Department of State, Central Files, 411.0041/10–461.