306. Airgram From the Mission to the European Office of the United Nations to the Department of State1
SUBJECT
- Comments on EEC Commission’s Report on KR
REF
ExOff. For Governor Herter from Blumenthal.
[Page 812]1. Since USEC is preparing a summary of the Commission’s report (Ref. B), the present message is limited to comment on points of particular significance contained in the report. These points include indications of Community positions not known (or fully known) to us before, cases of incomplete statements of the negotiating situation, or of inaccurate presentation of U.S. positions. These comments are intended primarily for the background information of the addressee posts, to provide additional clarification of the principal KR issues in relation to the Community. [5 lines of source text not declassified]
2. As indicated in Ref. A, we consider the report generally well-designed and constructive in approach. Although on a number of points it omits important nuances or fails to make clear the interests or positions of other major participants, it succeeds for the most part in focusing attention on specific actions or decisions needed to enable Community negotiators to negotiate. Specific comments follow.
Disparities
3. This issue is raised first and frequently, and quite evidently looms large in Community thinking. While the lack of agreed rules is mentioned, the report glosses over this aspect of the problem and fails to mention the important fact that the “rules” that the Commission speaks of were rejected by other participants unless accompanied by additional rules to protect the interests of others. Also, no mention is made of the fact that presently only the Six intend to invoke disparity claims. We learn for the first time explicitly that the Community plans to claim “free exceptions” (i.e., uncounted for reciprocity purposes) on those disparity items which a high-rate country excepts from its linear offer. In effect, this proposal would mean that, since the U.S. has watches and wool textiles on its exceptions list, and since the EEC plans to claim disparities on these items, the EEC would be entitled to exclude them fully from its linear offer without having them counted as exceptions. In practical terms, it seems highly unlikely that the exporters of these products would accept this action by the Community. The Commission appears confident that talks with European countries (which clearly have made little progress) and technical criteria will sufficiently reduce the number of disparity cases to make the issue manageable with us and others. We plan to continue to make our views known and fully reserve our position, but to steer clear of theoretical arguments. Through use of the “European clause” and pragmatic handling in key sectors we hope to see the issue greatly reduced in the course of the negotiations, and our response will be determined by the significance of the disparities ultimately claimed by the Community in the light of the negotiating situation at that time. But potentially the EEC position means that the disparity problem may give rise to further serious US–EEC difficulties.
[Page 813]Exceptions
4. Partial offers and ex-outs are the two most interesting topics in this section. The Commission acknowledges that on 60% of the partial exception items the proposed depth of the tariff cut to be offered has not been revealed to third countries. The emphasis for selecting the degree of duty reduction on these partials is arithmetic, not economic, and rests on the same sliding scale formula that the Community proposed for disparities. This formula, which no one has accepted, works out to about 22% cut on all 2:1/10 disparity candidates, and the average reduction on partial offers revealed to date is 21%. This approach seems clearly inconsist-ent with the intent of the agreed formula contained in the GATT Ministers’ directive for the negotiations (a bare minimum of exceptions to be justified on grounds of overriding national interest), which appears to refer to economic factors. The Community appears receptive to ex-out suggestions, but the report never raises the prospect of improving offers on entire exception items by removing them from the list or by increasing the partial reductions offered. The U.S. is preparing to make known a number of ex-out proposals covering identifiable items of particular interest, but the problems of the length of the EEC list and breadth of American export interests will not be solved through the ex-out method alone, and the Commission itself notes the technical limitations of this method.
Nontariff Barriers
5. There is a general readiness to discuss NTB’s but no focus on the procedural problem of who will negotiate for the Six, the Member States still being individually responsible for this aspect of commercial policy under the Rome Treaty. Our views on coal and road taxes were set forth in July 1964 papers presented to the Multilateral Group on NTB’s,4 but the EEC has not been willing to schedule a bilateral meeting with us on nontariff obstacles. In this report our interest in road taxes is more than adequately reflected, while our complaints on coal (which cover state trading in France as well as the German tariff quota and licensing restrictions in the Netherlands and Belgium) and other barriers need more emphasis in Community consideration. We do not, as implied in the report, attach less importance to restrictions on coal than to road taxes. It should be borne in mind that when mention is made by the Community of such U.S. restrictions as the Wine-Gallon system and Buy American, there are a number of nontariff restrictions maintained by Member States of the Community that are of interest to us. Examples are government purchasing practices and the French prohibition against the advertising of whiskey.
[Page 814]Chemicals
6. We find this section somewhat confusing and ambiguous, but in its entirely not without hope. The U.S. position on ASP is at first (pages 20–21) fairly reflected, but then our willingness to negotiate on the system is clouded and questioned. There is much emphasis on the U.K. proposal, but only passing attention to what would be required of the Community (removal of its exceptions and disparities) in such an approach. An EEC quid-pro-quo for American movement on ASP is not discussed. Nevertheless, despite the steady theme that the U.S. position is restrictive and is stalling sector negotiations, the Commission urges that it be authorized to participate in discussions of an overall sector solution that would permit a softening of the American stance. We should continue to work for this development, in effect a dropping of the Community’s “prealables” for negotiating in this field. We have stated that ASP is negotiable within the context of a chemicals sector package and overall KR reciprocity. Contrary to implications in the report, we have not precluded the possibility of elimination of ASP as a method of customs valuation, but have tried to make clear that our negotiating authority under the Trade Expansion Act limits us to a 50% reduction of the existing level of protection. We have said that the U.K. proposal can be discussed, although in its present form it is not sufficiently attractive to us, and have pointed out the reasons why it appears most unlikely that the U.S. could negotiate a greater-than-50% reduction in the protective incident of its chemical tariffs. The report suggests a belief by the Commission that our present position should be sufficient to permit the Council to authorize Community negotiators to begin exploring a possible package solution in the chemical sector. Additional missionary work, however, is needed to place the whole ASP question in proper perspective and to underline our willingness to bargain meaningfully, provided that others are also willing to make important contributions in the chemicals sector and elsewhere.
Pulp and Paper
7. Commission thinking in this sector is somewhat clarified. The prospect of a “European deal” seems dimmed because of the difficult demands for Scandinavian price data as a condition for agreement, and the emphasis appears to be a non-discriminatory consumption tax for paper products in order to support domestic pulp and newsprint production, reforestation and scientific research in the paper industry. The Commission offers to draw up specific proposals if the Council agrees in principle to this approach. Whether this latter device, coupled with lowering of tariffs, (eventual duty-free entry for pulp and a 50% cut for news-print is mentioned) would help or hinder imports depends, of course, on the details. In any event, its compatibility with GATT articles will have to be closely studied. The report also reveals that on four basic tariff positions [Page 815] the existing mandate permits a maximum cut of only two percentage points (or about 13% reduction). These four items, which include kraft paper and board, cover roughly two-thirds of U.S. exports of all paper and board to the Community. Kraft liner is the only American interest cited, although U.S. pulp exports to the Six ($66 million in 1964 and rising rapidly) almost tripled our kraft trade. The document blurs the precise internal and/or external prerequisites for beginning talks with the U.S. and Canada, still looking to an accord with the Nordics in the “first months of 1966,” but certainly moves us no closer to this objective.
Cotton Textiles
8. We have no reason to believe that there has been a slackening of Community support for the extension of the LTA. However, the report reflects a greater uncertainty about the chances for renewal of the Arrangement than the facts seem to warrant, indicates serious Commission weighing of alternatives, and lays the uncertainty over the future of the LTA to US–LDC confrontation in the cotton textile issue. In our view the Wyndham White package approach for this sector, including LTA extension, has been tacitly accepted and the positions of the only holdouts, India and Pakistan, appear flexible. The report fails to make clear what actions (i.e., decisions authorizing the Commission to negotiate on Member States’ quotas and on Community exceptions) are required by the Council in order to permit completion of the package deal.
Aluminum
9. The report confirms that two alternatives that the Six have been rumored to be weighing on unwrought aluminum: a partial reduction from 9% to 7% with the removal of the present 5% tariff quotas (resort to Rome Treaty Article 25 still being applicable), or a maintenance of the 9% tariff and a binding of a Community tariff quota at 5%. We are examining these possibilities to determine which is less unpromising. Norway’s interest in this sector is singled out, while the very substantial North American concerns are not reflected. The major problem underlying the sector remains the virtual certainty that offers of other interested participants on aluminum will not remain on the table in the absence of action by the Community to liberalize conditions of access to its aluminum market.
Minerals and Metals
10. The U.S. position on base rates for petroleum is fairly presented, but it is clear that the related subjects of exclusions and reciprocity (see below) will be of crucial importance to the US–EEC negotiations. Community preference for bilateral handling of ferro-alloys is confirmed, while the suggestion of studies of the economic situation of the ferro-alloy industries in various countries hints at some possible movement in [Page 816] the present phalanx of total exceptions in this sector. The revelation that ferro-silico-manganese is slated for disparity treatment satisfies the curiosity of those who wondered why this ferro-alloy alone did not qualify for the Community’s exceptions list. The situation for iron and steel is pre-sented weakly and the ECSC base-rate position is termed legally defensible on the ground that the majority of the negotiating partners are using bound rates as base rates. (See Tagg 3792 for our comments on this topic.)5 The action program refers only to EEC partial exceptions and not to the root problem of the ECSC “offers,” which is the lack of ECSC offers to cut effective rates.
Mechanical
11. There is particular emphasis on ex-out possibilities and principal suppliers, while the huge U.S. (and U.K.) trade interest in this sector, which has been repeatedly stressed, does not emerge from the report. A Community reciprocity requirement in agricultural machinery is revealed for the first time and parallels its demand for reciprocity in the automotive and aircraft fields.
Agriculture
12. In our view the section of the report devoted to agriculture falls short in three respects. First, it concentrates on decisions relating to domestic policies and regulations, so that the focus of attention seems to be on the achievement of the CAP rather than on the formulation of KR agricultural offers. Second, it ignores the unacceptability of the MDS concept as a basis for negotiation which has been expressed by the U.S. and others at every occasion. Third, it seems to look forward to further discussion of issues rather than tabling of concrete and specific agricultural offers. What is really required in order to permit the Community to participate meaningfully in the negotiations on agricultural products are decisions authorizing offers that go beyond the mere binding of MDS margins and afford genuine prospects of increased trading opportunities.
Cereals
13. The report makes clear the need for a new mandate that would provide authority to negotiate international reference prices and differentials and to negotiate commitments for food aid in terms of a formula for sharing. Reference is made to the interests of U.S. and Australia in some form of quantum or other arrangement for limitation of production but otherwise the access problem is not dealt with. The Community’s internal price is recognized as an element of the problem but there is no [Page 817] real discussion or analysis of its relation to international arrangements or KR offers.
Dairy Products, Meats, Sugar, Fats and Oils
14. The main conclusion for each of these groups of products is that the Community will not be able to negotiate effectively until the Council decisions on common internal prices have been made. In the case of dairy products there is no recommendation for any international measures to deal with surplus production, as proposed by New Zealand in the case of butter. For meats, while referring to the technical discussions to be carried on in Geneva beginning in March, the report appears to postpone consideration of the sort of international arrangement that might be proposed. In the case of sugar, the report notes that the Community has reserved the right to call for a sector group, (although in fact it has not called for one up to this point). While noting the need for a general international sugar arrangement and the interest of the LDC’s in a reorganization of the world sugar market, the report cites the reluctance of most other countries (attributed mainly to problems of internal policy) to negotiate such an arrangement. The fact is that the emphasis on sugar by the EEC is directly related to internal problems of sugar policy. The U.S. view is that sugar is of relatively little importance as an item of negotiation in the KR since it is unrealistic to expect that interested countries will be prepared to agree in the KR context to do what they are not prepared to do in the context of the International Sugar Agreement.6 Noting that most of the negotiating partners do not accept the idea of an international fats and oils arrangement and the fact that the United States has expressed outright opposition, (attributed to reluctance to bind internal policies and apprehension of less favorable conditions in foreign markets), the report urges such an agreement on grounds of LDC interest and calls for rapid decision on the organization of the Community’s fats and oils market in order to be able to submit concrete proposals at Geneva. (The U.S. is in fact opposed to attempting to negotiate an international agreement on fats and oils, chiefly because we believe such an arrangement would worsen opportunities for trade and would be unworkable. The number and variety of fats, oils and oilseeds entering into world trade would require provisions and regulations of unmanageable complexity.)
Other Agricultural Products
15. The report divides these products between those related to products (e.g., grains) provided for in international arrangements (grain-based products such as pork and poultry) and others, many of which are provided for in Community regulations and market organizations (e.g., [Page 818] fruits and vegetables, processed products, etc.). The report points out also that for certain products, i.e., those for which all decisions have been made or those which are subject only to fixed duty protection, it would be possible to make offers immediately, while for others, offers must await decisions of the Council as to market organization, etc. That there has been no movement in the Commission’s negotiating position is shown by a statement that the Community has held to the approach laid down by the Council in December 1963, i.e., the pursuit of undertakings as to the total effect of direct supports, and nothing more. This is merely another way of formulating the MDS binding as a basis for negotiations on these products. In any event, decisions relative to specific offers on these products are subordinated to the adoption of definitive Community regulations.
Tropical Products
16. The report merely urges that the Community’s offers on tropical products be tabled as soon as possible, after appropriate consultations with the AOC’s, but gives no indication of Commission thinking as to the scope or nature of such offers. One point of interest in relation to U.S. authority under TEA Section 213 is reference to the view, evidently expressed in the Tropical Products Group, that measures taken to reduce or eliminate barriers to trade in tropical products should not be conditioned upon similar action by other industrialized countries.
U.S. Exclusions and Reciprocity
17. In a section devoted to negotiating problems between the Community and particular countries, the report singles out, for the U.S., the question of reciprocity and the role that our exclusions might play in redressing the manifest imbalance between the two exceptions lists. Recalling that the U.S. delegation had many times characterized the EEC exceptions list as much longer than that of the United States, the report argues that U.S. “exclusions” (mainly petroleum and products) should properly be classed as exceptions, in which case the two exceptions list would be “parfaitement comparables.” The launching of this argument at one of the bilateral negotiating sessions last summer gave rise to a spirited debate in which U.S. representatives reminded the EEC team that no participant in the KR negotiations has a significant trade interest in U.S. imports of petroleum—indeed the Community’s interest is virtually nil—and asked the question (unanswered) what the Community would be willing to pay for a U.S. concession on petroleum if it were available. It is clear from the treatment of this issue in the report that the Commission will make a major effort to have our exclusions counted as exceptions in order to write off some $1.5 billion of EEC exceptions and thus hopefully to avoid withdrawals by the U.S. at the balancing stage of negotiations.
[Page 819]Conclusions
18. The concluding section of the report underlines three points, all of which are sound and constructive. First, referring to the Wyndham White report and to the meeting of Ambassadors Roth and Blumenthal with members of the Commission in Brussels on January 11, the Commission emphasizes the urgency of moving into the active phase of negotiations and commends the timing problem to the most serious attention of the Council. Second, while recognizing that all important decisions must be made by the Council, the Commission calls upon the 111 Committee to play a more active role in providing guidance for the EEC delegation in questions of less crucial or technical nature and states the Commission’s intention to maintain close contact with the permreps of the Member States in matters pertaining to the KR negotiations. Third, the Commission calls upon the Council to schedule a special session, with participation of both ministers and technicians, for detailed examination of the Commission’s report with a view to adopting the decisions required for “fruitful pursuit” of the Geneva negotiations.
Counselor for Economic Affairs
- Source: Department of State, Central Files, FT 7 GATT. Confidential. Drafted by Winston Lord, Albert E. Pappano, cleared in draft by Blumenthal, J. Birkhead, W. Kelly, Ernest H. Preeg, and Courtenay P. Worthington, Jr. on February 14, and cleared by James H. Lewis. Received on February 19 and repeated to nine diplomatic missions↩
- Dated February 4. (Ibid., EEC 3)↩
- Dated January 27. (Ibid.)↩
- These papers have not been further identified.↩
- Dated January 31. (Department of State, Central Files, FT 7 EEC-US)↩
- Signed at London on December 1, 1958, and entered into force for the United States on October 5, 1959. (10 US 2189)↩