108. Paper Prepared in the Department of State1

NSSM RESPONSE

Part I

II. The US and Europe in Transition: Background for the Future

[Here follows discussion of subjects unrelated to economic policy.]

Developments in the US, meanwhile, create uncertainties and concerns among the Western Europeans: Congressional efforts to reduce US forces in Europe, increased preoccupation with domestic issues, balance of payments problems, budgetary stringencies, and the appearance of growing isolationism and protectionism are seen as affecting US policies toward Europe.

[Here follows discussion of subjects unrelated to economic policy.]

Economic problems on both sides of the Atlantic, deriving in part from domestic concerns, exert serious pressure on US-European relations generally and US-EC relations specifically. In the United States, there is major concern about unemployment, and many fear that the US is losing its competitiveness in international markets, that US corporate giants are exporting jobs through their investments in Europe, and that American industry will suffer from waves of cheap goods from Asia. There is growing sentiment that other countries have been dealing unfairly with us in the economic field to their own advantage. The conclusion by the EC of preferential trade agreements with a widening circle of countries has fed this sentiment. An important complaint also has been the Community’s protectionist agricultural policies.

European economic concerns also are affecting our relationships. While Europe experiences unabated strong inflation, some countries and regions continue to suffer from economic stagnation. Europeans, too, are chafing under the accumulation of unneeded and inconvertible dollars, which add to inflationary pressures and nullify monetary policies. Resentment over American private investment is rising. Europeans [Page 284]see the US as adopting aggressive foreign economic policies. They complain about our tough application of anti-dumping and countervailing duty provisions. More importantly, they continue to fear that the US seeks to extort unilateral trade concessions by our preponderant leverage in the monetary field.

[Omitted here is discussion of subjects unrelated to economic policy.]

Part II

IV. Issues and Goals

The following are specific issues confronting us in the economic, political, security, military, scientific and technological fields. Many of these issues will require additional detailed study before decisions relative to them can be taken, and goals established. Each should be examined in its specific terms, with consideration carefully given to its impact in other fields.

A. Economic

US policy has been to:

—support Western European economic integration as a means to strengthen Western European ability to share responsibility for maintaining a stable and prosperous world order.

Americans and Western Europeans both have the same overriding economic goal of maximizing their prosperity. The open, interdependent economic system, with free movement of goods and services has been an important element of Atlantic economic prosperity. It is important to restate this basic goal because government policies which affect economic conditions on one side of the ocean will also affect the other. An atmosphere of orderly international cooperation is as important to maintain business confidence as is a climate of sound domestic management.

American business has done well within this open system and now has a very large economic stake in Western Europe. US direct and indirect investment assets in the enlarged EC amount to some $36 billion. Western Europe is also our largest customer. Our exports to the enlarged EC and its Western European associates in 1971 were about $13 billion or 30% of our total exports.

In other words, despite some important problems and irritants, we have had and have a highly profitable economic relationship overall with Western Europe, and the opportunity exists to enhance this relationship in the long term.

Issues to be Addressed

—how to deal with the series of new and emerging economic problems which are creating pressures on both sides to restrict the open economic [Page 285]system. These are now being addressed in various US fora, such as CIEP and STR.

1. Monetary:

US policy has been to:

  • —press major surplus countries to revalue or to take other measures to bring their payments balances into equilibrium;
  • —develop a new multilateral monetary system based on a more symmetrical adjustment process that facilitates freer trade and capital flows;
  • —favor EC movement toward a closely integrated monetary union consistent with the foregoing US aims.

The 1971 monetary crisis represented the culmination of several major trends, especially the serious, long-term balance of payments problem. That crisis was brought to an end by the Smithsonian agreement, but the international payments imbalance persists despite the fact that the US now has better control over its inflation than Europe. The Western Europeans at present have the choice of continuing to accept non-convertible US dollars, changing their exchange rates in our favor, and/or instituting capital controls. The US economy is not seriously hampered by the continued payments deficit. However, progress towards a new system must be made to avoid further financial crises which could seriously undermine business confidence and lead to governmental restrictions on trade and capital movements. In order for the US to restore some form of convertibility, however, all the other elements of the system must be compatible. Most importantly, it must provide for satisfactory adjustment by surplus and deficit countries.

Here is perhaps the single most important area of potential tension between the US and Europe. The Western European countries, which are more dependent on exports than the United States, have been accustomed to growth based upon increased exports and would tend to resist measures or rules that would erode their export surplus, which has ensured high levels of employment. Yet they will have to move in this direction if they wish to end the present situation which is so psychologically frustrating to them.

Because we are dealing with an area of extreme domestic sensitivity to Western Europeans and Americans alike, such as jobs and farm income, the task of constructing a new and equitable monetary system will require skill. A complicating feature is that the EC members have committed themselves to the goals of achieving economic and monetary union (EMU), but are only on the threshold of this development. In the short run, EC moves towards EMU may complicate the task of achieving a new world system. In the longer run, if the EC members can adopt a genuine single currency area through harmonization of policies, it may facilitate the adjustment process between the US and them.

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Issues to be Addressed

  • —how to achieve US-Western European agreement on an adjustment process in which surplus and deficit countries have symmetrical responsibilities.
  • —construction of a new and equitable monetary system that facilitates free trade and capital flows, while permitting the EC to form a monetary union. Like economic issues, these are being addressed today in various fora of the US Government.

2. Trade:

US policy has been to:

—exert controlled but mounting pressure to obtain Western European cooperation on both specific trade problems and the 1973 multilateral trade negotiations.

The vast bulk of our trade moves in a liberal, open system. More than ever trade flows are responsive to economic and business conditions on both sides of the ocean.

The most important exception, of course, is agriculture where the Community’s Common Agricultural Policy has been protectionist and restrains the development of our exports. Though our agricultural exports to the enlarged EC were at an all-time high totalling $2.4 billion in 1971, it has been estimated that these exports could amount to $5-7 billion in 1980 if the major agricultural producers and importers including Western Europe and Japan were to follow more liberal policies. This of course means that the Community would have to find a way to meet the political interests of their inefficient grain producers in Germany and we would have to override the interests of our dairy lobby.

However, the whole open trading system is jeopardized by the accumulation of tensions over developments, policies and practices. These tensions generate much heat and feed protectionist forces which seek to pressure governments to take restrictive actions. There is an important danger of an escalation of restrictive measures and counter-measures which added together would constitute a “trade war,” leading to a significant erosion of the open, interdependent system and threatening economic prosperity.

A priority task, therefore, is to move to control these pressures by solving some of the troublesome short-term issues, but more importantly to move into a major new round of trade negotiations which will subsume many of the problems and provide an effective counter-thrust to protectionist pressures. In doing so, it must be borne in mind that the trade problems are disparate. Some have more economic impact than others, while some generate more political heat than others. This argues for a sound appraisal of our priorities in the trade field.

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Obtaining a long-term liberalization of agriculture is in our interest both on economic grounds (a large balance of payments pay-off) as well as in terms of political advantages (the farm bloc is important to maintaining a liberal trade posture).

Lowering the common external tariff of the EC in reciprocal trade negotiations is important on both economic and political grounds. It would reduce the tariff discrimination inherent in the enlarged Community, and its free trade arrangements with EFTA and preferential arrangements with others. It would heighten the real and perceived interdependence of the two areas and would confirm that the two continents are being tied closer together rather than drifting apart.

The US and other countries not members of the enlarged EC will be engaged in the GATT in renegotiating with the enlarged EC the trade concessions accorded them in the past 25 years by the UK, Denmark and Ireland. The dissolution of the British Commonwealth trading system and the lowering of the UK tariff to the level of the EC’s common external tariff will provide us benefits. However, accession of the UK to the Common Market will have some important unfavorable consequences, particularly for exporters of agricultural commodities. It will be a delicate matter to obtain enough for US agriculture in these GATT renegotiations to maintain US agriculture’s support for further trade liberalization without jeopardizing Western European willingness and ability to include agriculture in the multilateral trade negotiations.

Eliminating the reverse preferences of the Community in non-European areas is more important politically than economically. While the trade impact may be small, the reverse preferences create the impression in this country that the Community is carving out a vast discriminatory trading bloc, and therefore undermine public and Congressional support both for our European political and security objectives and liberal trading policies. We have had some success in counteracting the spread of reverse preferences in the Mediterranean, and we must keep up the pressure.

There are many other issues in the trade field that require management both in the short run and during the negotiations, but the above are the immediate priorities.

One may wish to build up pressure through some of the short run issues, e.g. by taking GATT action on the EC agreement with Spain and Israel, or in the negotiations on EC enlargement, but we must keep the priorities in mind and not permit the pressure on short-run issues to get out of hand and interfere with these priority objectives.

Issues to be Addressed

  • —solving or controlling short-term trade problems.
  • —obtaining industrial and agricultural concessions from Western Europe in 1973 multilateral reciprocal trade negotiations.
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3. Other Economic Issues

US policy has been to:

—seek to protect US economic interests on an ad hoc basis or in discussion of these issues in multilateral organizations.

Another potentially important area of confrontation involves investment and industry. At present, US investment in Western Europe enjoys non-discriminatory treatment and a generally favorable climate. But it is a sensitive issue and looms large in key sectors like computers and aircraft. The Western Europeans want to encourage the development of European firms which can match the efficiency and financial [Page 289]power of the giant American-based multinationals. Some would subsidize research and development on a broad scale in Western Europe and adopt “Buy European” policies which might adversely affect US exports and/or either limit or control US investment in favor of European-owned companies.

Given these dangers and our economic stake in Western Europe, we must choose our tactics carefully. Fortunately, the climate for US investment is still relatively favorable despite the vague and possibly mounting resentment over the large American investment. We have begun an exercise in the OECD to examine this whole area of policies and practices affecting investment including also the practices of multinational corporations. The object of this exercise should be to move towards sensible common rules of the game which will guide the major industrial powers in the investment field so as to minimize distortions to the international adjustment process and the rational allocation of resources.

Important to dealing with these problems should be the realization that the European governments identify their access to advanced technology as a crucial element of their economic strategy. This clearly affects their policy toward trade and investment.

Energy policy, too, is a potentially divisive issue between the US and the EC. The Western Europeans are concerned about security of supply and the EC is developing a common energy policy. Given the large US stake in the European energy market in both trade and investment terms, it is in our interest to avoid a competitive scramble for limited oil resources and to reach a broad understanding with the Western Europeans on a cooperative approach to the long-term energy problem and on arrangements to share supplies in the event of an emergency.

A coordinated policy should include not only agreement on supply policies but also an agreed approach to technical solutions to the energy question, i.e., the development of alternate energy sources, the improvement of environmental control, the increased efficiency of power production and utilization and the institution of methods to conserve energy. The United States is negotiating an agreement with the USSR for cooperation in some of these energy technologies. Western European nations will undoubtedly demand at least equal treatment, and we might wish to consider this in the context of energy programs being developed in the European Community and OECD.

In the environmental sphere, the US should continue the cooperation on environment already begun in the NATO Committee on the Challenges of Modern Society (CCMS), the OECD and bilaterally with individual states and the EC. By developing similar environmental standards, similar methods of environmental control, and common rules of the game on handling the costs of environmental control (the “polluter pays” principle), we may prevent either side from interpreting the environmental protective actions of the other as disguised trade barriers.

The Federal Water Pollution Control Act Amendment of 1972 requires that the President undertake to enter into international agreements to apply uniform standards of performance for the control of pollutants from new sources, toxic pollutants, and discharge of pollutants into the oceans. One of the principal objectives of this provision is to avoid handicapping US industry, to which stricter and more costly environmental control requirements might be applied. Problems may arise where European priorities and interests differ from ours.

[Omitted here is the remainder of Section IV dealing with political, security, military, and science and technology issues; the conclusion of Part II; Part III, “The U.S. Role: Priorities, Interrelationships, Institutions and Their Implications for the US”; and Part IV, “Issues and Goals.”]

  1. Source: National Archives, RG 59, S/S Files: Lot 80 D 212, Box 1113V, NSSM 164. Secret. The paper was prepared as a response to NSSM 164; see Document 106. A December 18 transmittal memorandum from Stoessel to Kissinger forwarding the 53-page NSSM Response indicates the paper was discussed in the NSC Interdepartmental Review Group for Europe and took into account views of its members and other recipients of NSSM 164. The paper and Stoessel’s memorandum are attached to a January 29, 1973, memorandum from Stoessel to Deputy Secretary-designate Rush, explaining that the paper was drafted in EUR taking into account other agency views but it did not represent interagency consensus.