268. Memorandum From the President’s Special Assistant for National Security Affairs (Bundy) and Francis M. Bator of the National Security Council Staff to President Johnson1
SUBJECT
- European Agricultural Deal
- 1.
- The six EEC (Common Market) countries agreed yesterday to establish a common market in grains, in 1967, with support prices fixed part way between the low French and high German prices, some 60% above world market prices. We don’t yet know the details, but grain producers and experts in the Department of Agriculture are likely to come down hard against the decision as a serious threat to U.S. agricultural exports. We think this is natural; we also think they are likely to overstate their case.
- 2.
- The truth is that the 1965–1970 prospects for our grain sales to
the Common Market (although not for our agricultural exports as a
whole) have never been good. This new agreement simply confirms what
was bound to happen in any case.
- (1)
- Making five-year forecasts is an uncertain business, but a recent USDA exercise indicates that, with the newly agreed high support [Page 691] prices, U.S. grain exports to the EEC may fall by 1970 by as much as $140 million, from $380 million in 1961/64 to some $240 million. Matched against total U.S. agricultural exports of $5.6 billion in 1963 the estimated loss is small. But it will hurt.
- (2)
- Those who may blame the specifics of the new EEC policy will miss the point.
The heart of the matter is:
- a.
- the determination of individual European governments to protect their farmers’ incomes largely through price supports, and
- b.
- the technological revolution in European agriculture. Europe’s farmers today are about where our farmers were a generation ago, but they are catching up fast. Even if common prices were set at the low, French end of the EEC spectrum—which would cause a revolution in Germany—our sales of grain to the EEC would still shrink by some $90 million by 1970 (a tentative estimate by the Economic Research Service of USDA).
- (3)
- Our announced U.S. objective has been to maintain our recent percentage share in the EEC grain market. This target, set under pressure from Agriculture, has never been realistic. Given the support prices that are politically inevitable in Europe, it would require the Six to stockpile or give away, by 1970, some $325 million of imported grain each year. The central fact—which some of the agriculture people tend to ignore—is that we do not have the bargaining power to make the Common Market import $325 million of grain a year beyond its needs.
- (4)
- With the politics of agriculture just as tough in Western Europe as here, our leverage on the grain price deal has been minimal. Agriculture has wanted us to say that we will not negotiate on industry in the Kennedy Round unless the internal agricultural arrangements of the EEC are favorable to U.S. agriculture. This threat simply wouldn’t work vis-a-vis the French. They are protectionist across the board, and they have been in the driver’s seat in Brussels. More generally, we do not have the cards to force Europe to keep its farmers poor on our behalf.
- 3.
- Moreover, there are some real and reasonable answers to U.S.
agricultural worries.
- (1)
- Before we finally strike a bargain in Geneva, across the entire front including industry, we shall have a fair chance to get some concessions on the way the Europeans run their grain scheme, so as to hold down their production and maximize their consumption. We will not throw in the towel. (On the other hand, we must not expect too much. The Six had a tough time striking their bargain, and they are not in a mood to tamper with the package.)
- (2)
- More important: increased exports of other farm products, and of grain to non-EEC markets, will much more than offset the drop in sales of grain to the Community. It is expected that U.S. exports of farm products to our 14 largest commercial markets abroad, including the EEC, [Page 692] will rise from $2.8 billion in 1961 to $3.4 billion in 1970. Even to the EEC, the total of our agricultural sales is expected to increase.
- 4.
-
Apart from the economics, German agreement on a grain price represents a clear gain in terms of Atlantic politics. For over a year now, the Germans have been in the Common Market doghouse for failure to perform on their promises on agriculture.
The shoe is now on the other foot. The Germans are in a much better position:
- (1)
- to stand up to French buffeting in cooperating with us on NATO matters, offset purchases, money arrangements, and the like;
- (2)
- to take the lead within the Community in working for a large industrial tariff cut—in which they share with us a political as well as an economic interest, and to which the protectionist-minded French are distinctly cool. They may even be able to strengthen our hand a bit on the agricultural side.
We cannot be sure that the Germans will in fact stand up to the French. But we can be sure that before this agreement their bargaining position in Europe was hopeless.
- 5.
- Much of the above is bitter medicine for some of Orville Freeman’s people. (Freeman has himself always tried to see both sides.) They may want Herter to dig in his heels and make unbargainable demands at Brussels. The danger in that is that we may paint ourselves into a corner and lose the chance for a really profitable deal on industry without making a nickel for agriculture.
If we are to stay loose, Herter will need a signal about not overplaying his hand in Geneva. I will give him such a signal on an interim basis, but before you set our final policy, you ought to hear from all sides. We’ll arrange a meeting for January, if you’re willing, and we’ll get the arguments on both sides in order beforehand. Orville agrees to this procedure.
- McG. B.
- F. M. B.
Go ahead2