Foreign Relations of the United States, 1969–1976, Volume III, Foreign Economic Policy; International Monetary Policy, 1969–1972

56. Paper Prepared in the Department of State¹

Washington, March 16, 1971.

INTERNATIONAL ECONOMIC STRATEGY FOR THE 1970’S

I. The Problem

The character of our economic relations with Western Europe and Japan have been strained. We are at odds on a variety of problems. Most important, at the moment, are textiles, agriculture and monetary issues. On the horizon are problems of reconciling various national policies which affect the economies of other countries, U.S. investment, and international trade in general. More specifically, some of the most immediate issues facing us are that:

• —U.S. industry and labor are demanding import restrictions on a variety of products.
• —The U.S. farm bloc is concerned over access to the European Common Market and over prospective losses when Britain enters.
• —Despite the economic benefits to the United States of an enlarged European Community, specific sectors of U.S. industry may be adversely affected when the British become part of the Community.
• —American labor is concerned about jobs presumably lost as the multinational corporation establishes production abroad.
• —American industry wants greater access to the Japanese market for exports and investment.
• —Foreigners are concerned about the resurgence of protectionist sentiment in the United States as illustrated by the Mills bill, voluntary textile, steel and meat restrictions and quotas for imports of dairy products.
• —Europeans are concerned about our balance of payments deficit, particularly stemming from massive flows of short-term capital, and our attitude toward it.
• —Foreigners are uneasy about the growing power of the U.S.-based multinational corporation.

Despite these problems the world economy has been growing rapidly and U.S. international trade and investment are thriving. The fact of our success, however, has produced sharp adjustment problems—domestically and internationally—that require urgent attention.

If these problems are not dealt with, the international institutions for economic cooperation, developed in the postwar period and which serve us well, could be threatened.

Even more important, there would be serious political fall-out if world economic cooperation deteriorated. We cannot expect the same cooperation on political and security issues from our major allies in an atmosphere of increasing acrimony over economic issues. Public support at home for our international security policies would be undermined. And, if the economic climate deteriorates sufficiently, the poor countries will have greater difficulty in standing on their own feet.

What we need is a framework among the industrialized countries—principally the U.S., the EC, and Japan—to deal with these existing concerns as well as the new developments we will be facing in the years ahead. The industrialized countries need to intensify their economic cooperation in all areas, including a better ordering of trade relationships directed toward more liberal access to markets, and a more smoothly functioning monetary relationship. Such a program can be undertaken only in cooperation with other countries. Acting alone, and on each problem separately, governments are under pressure to find narrow solutions to domestic problems at the expense of foreigners.

Such a program will require considerable preparation at home and careful consultation abroad. Until it can be developed, we need an interim program to deal with immediate pressures.

II. An Interim Program

An interim program might have four major components:

• —International action on specific problems, particularly textiles and certain agricultural products;
• —international consideration of the agenda and schedule for a broad economic initiative;
• —domestic discussion of issues with Congress and the public;
• —trade legislation.

A. Textiles and Various Agricultural Problems

Concerning textiles, we must first deal with the short run problems of imports from Japan and other Asian suppliers through 1973. We should also, however, take up GATT Director General Long’s proposal that a multinational consideration of trade problems for all textiles be undertaken before the expiration of the current arrangement on cotton textiles. In the face of increased imports from low wage countries the textile industries in developed countries constitute a strong force against trade liberalization. If Long’s proposal could be acted upon, the textile issue might be isolated.

In addition to an effort to settle the textile problem, we should press forward to resolve several highly politicized agricultural problems with the EC—citrus, tobacco, poultry, and lard—and should seek to avoid an increase in EC corn prices. We should recognize, however, that the probability of success is small. We have been trying to deal with trade problems one by one for years with no positive results. In this context governments find it difficult politically to stand up to particular interests.

B. International Consideration of a Broad Economic Initiative

The possible substance of a broad economic initiative is described in Part III of this memorandum. Such an undertaking will require a period of international consultation, as well as domestic soundings. The prospects for a major initiative can also mitigate domestic concerns and pressures, even though actual negotiations may not begin for some time.

We believe it is important, therefore, to initiate international consideration of a comprehensive economic program at the OECD Ministerial Meeting in June.

The organization is the right one in terms of membership. June is the time when the UK entry negotiations will be reaching a crunch and public interest and concern in this country are expected to be considerable.

No binding commitment to international negotiations can be expected before the basic decision on UK entry is made. However, such a commitment must be prepared by a careful process of international consultation and discussion in the media.

The OECD Ministerial Meeting would lay out the need for an international economic action program for the 1970’s, and appoint a special group to prepare the guidelines for such a program. This group should consist of high-level government representatives of the U.S., the EC, the UK, Japan, and Canada. Such a group would begin serious work in the fall of 1971 and outline the content of such an action program.

C. Domestic Discussion

We also need to enter into low-key but extensive consultations with Congress and to make a major effort to raise the level of public consideration of the issues at home. We must show how much we have gained from an open, integrated world economy, what we risk by standing still, and what we lose by moving backward.

While there is no substitute for good policy, such policy cannot grow without public understanding and support. The forthcoming reports of the Williams Commission and the Boggs Congressional Subcommittee could be keystones of a public discussion program. But the enormous prestige and influence of the President will be required to coalesce support for a liberal policy.

D. Interim Trade Legislation

The basic question is whether there is any advantage to be gained by seeking interim trade legislation. Our efforts in 1970 to relax the escape clause led to results that would have been disastrous if the Mills Bill had passed. The relaxation of the escape clause in that Bill would have resulted in an enormous amount of new restrictions that would have set off a trade war. In any case, the Tariff Commission, by interpretation, has already relaxed the escape clause, and particularly adjustment assistance criteria. It would, of course, be highly desirable to eliminate ASP, but given the difficulties attendant upon seeking new legislation now, action could well be deferred until comprehensive new legislation is sought.

The lack of authority to provide tariff concessions for new escape clause actions which might be taken in the next year or so is troublesome, but, if necessary, we can live with it.

There is one measure which we are under an international obligation to present to Congress—the generalized preference scheme for developing countries. The precise timing and tactics of submission of this legislation must be carefully worked out.

If we should decide to seek interim legislation, the most likely elements would be:

1. Relaxing the adjustment assistance and escape clause provisions of the Trade Expansion Act.

2. Minor tariff reduction authority essentially to permit us to grant comprehension [compensation?] for our escape clause actions.

3. Repeal of ASP.

III. A New International Economic Initiative

A major international initiative should cover the whole gamut of economic issues of the 70’s, although trade, agriculture, and monetary issues will likely be among the most predominant. The major areas for consideration are: agriculture, non-agricultural trade, foreign investment, international finance and assistance to the developing countries. These are briefly described below.

1. Agriculture

Governments of all countries use a wide range of domestic support programs and trade restrictions to help their farmers. The United States has suffered from agricultural policies of other countries, particularly the Common Market and Japan. We are an efficient agricultural producer. Thus, measures to put agricultural trade on a more liberal basis would be in our interest. We also would have to permit an increase in agricultural imports.

In preparing for negotiations which would likely have to deal with the whole range of domestic agricultural programs as well as agricultural trade policies, we should consider the desirability of pursuing the following topics:

a. Stand-still agreements to prevent further restrictions or changes in support programs pending comprehensive negotiations.

b. Internationally negotiated price support levels.

c. Internationally negotiated production controls.

d. Income support programs for families in lieu of conventional price-production-marketing programs.

e. Measures to stimulate demand for farm products. Surplus disposal policies, including food aid. Export subsidies.

f. Other trade barriers.

Since U.S. agricultural exports would expand more than our imports if more efficient agricultural policies were adopted, reciprocity would likely require U.S. concessions on industrial goods as well as agricultural goods.

2. Industrial Tariffs

We have two main reasons for wanting to bring about the reduction of industrial tariffs:

• —The enlargement of the European Community in the short run will likely cause some deterioration in the competitive position of American exports. A lowering of the common external tariff of the European Community would ameliorate this problem,
• —Foreign governments, especially Japan, and including Canada, have high barriers against products with a large technological component where the American comparative advantage is unusually great.

The Europeans can be expected to insist that some formula be adopted to bring the tariff structures of the major industrialized countries more in conformity with each other.

We will need to consider a formula that would result in both tariff reduction (to satisfy our demands) and tariff harmonization (to satisfy the Community’s demands). We might also consider a virtual phasing out of tariffs in certain sectors or under certain conditions.

3. Quantitative Restrictions (Including Voluntary Restraints)

Japan is the major sinner as far as American exports are concerned. Liberalization of Canadian quotas would also benefit our exports.

Japan, in turn, can be expected to insist on a definite schedule for the elimination of discriminatory measures against Japan and the reduction of other quantitative restrictions, including our voluntary restraints.

4. Other Trade Restrictions

Foreign governments have a multitude of other trade restrictions. Their significance in potential trade terms varies greatly. We need to identify those which are the most significant and on which we could make headway. Government procurement policies form one such area. Japan, with a multiplicity of controls on imports, and Canada, with various practices to encourage investment at the expense of imports, would be our major targets. The Europeans also have a number of restrictions that should be included in the negotiations.

Foreign governments will press the U.S. on a number of our own restrictions—including the absence of an injury clause in our countervailing duty law and our failure to abide by the terms of the anti-dumping code—and we must carefully assess our overall interests in this area at an early date.

5. International Investment

The investment issue among developed countries is a composite of assertions with political and economic content. Possible problem areas include:

• —European and Japanese fear of loss of control over the direction of domestic economies when decision-making for large enterprises is in the hands of foreigners.
• —The sovereignty issue also arises when the U.S. seeks to assert extraterritorial control, such as in commercial dealings of firms under its control with Communist countries; and in connection with United States anti-trust proceedings as they relate to operations in foreign countries.
• —Fear that multinational corporations limit competition.
• —Fear that firms go where labor is cheap to the detriment of workers in high wage countries.
• —Suspicion that intra-company pricing is based more on tax structures than on market considerations.

There have been persistent suggestions for formulation of a set of rules or a code dealing with foreign investment issues. There is, in fact, in existence the Capital Movements Code of the OECD, as well as various bilateral treaties, which provide for national treatment of foreign investments, with certain escapes. We doubt that an attempt at more precise formulation of a code at this time would improve the present position, and it might well worsen it.

No matter how we decide to deal with the broad issue, we should try to mitigate problems which are unnecessarily abrasive, such as sovereignty issues related to our trade control with Communist countries and specific taxation issues which need settlement among countries. We should also be alert to potential EC restrictions as a common industrial policy is developed.

We need a) to depoliticize the subject, b) to assure that no nation’s major goals are seriously eroded by the international mobility of firms, c) to avoid conflicting jurisdictions over multinational firms, and d) to assure equitable treatment for the firms.

The U.S. may not need to press this subject since on most of these issues it is hard to see what we have to gain—but we must be prepared to respond if other countries put foreign investment on the agenda.

6. International Monetary Relations

Various issues in this field are being examined:

• —The IMF is continuing (with all deliberate speed) its examination of limited exchange rate flexibility.
• —The SDR system is in being, although there may be a problem about a year hence in connection with the appropriate amount to be created in the next basic period beginning in 1973 (and it is probably unwise for us to attempt to raise this issue now).
• —The two-tier gold system, despite some increase in the price of commodity gold, is functioning well.

The major problem which now exists relates to the continuing U.S. deficit, stimulated most recently by interest rate disparities between the United States and various European countries, chiefly Germany, and the resulting large short-term capital flows.

In addition, there is substantial European concern stemming from recent articles by U.S. academics advocating a “passive” policy or U.S. “benign neglect” of its balance of payments, which Europeans take as meaning less cooperation with them and an attempt by the U.S. to force them to take the remedial action instead of trying to work out with them an acceptable joint solution.

We will need to achieve four things:

• —Creation of an amount of SDR’s in 1973 and after that will assure a continuation of the system.
• —Stronger programs to control short-term capital flows, preferably through U.S. unilateral action but perhaps on a joint basis with other countries.
• —A clear recognition of responsibilities by both surplus and deficit countries, including the relationship of more flexible exchange rates to the adjustment process.
• —Better coordination of the domestic monetary policies of the major countries.

7. Aid

Development of constructive policies for relations between developed and less-developed countries requires agreement on priorities and actions among the developed countries. To some extent this has been accomplished:

• —The developed nations have all agreed to seek a system of generalized preferences to help LDC exports.
• —There is general agreement that aid flows through multilateral institutions should be augmented, but with some reservations.
• —The United States has not endorsed a specific aid target; however, the President has proposed that the downward trend in U.S. aid appropriations be reversed.
• —Insofar as it is beneficial to developing countries, a reciprocal untying of bilateral aid would be desirable. We are attempting to negotiate such an arrangement in the OECD, although France remains a holdout to agreement at this point.

Any initiative for the 1970’s should give a prominent place to development issues; and this must build on the major areas of agreement, particularly in the trade field.

8. U.S. Legislation

Any program will require public and Congressional support. The question of when we ask for legislation and what type of legislation is desirable has to be carefully considered as we progress in our international and domestic consultations.

It is particularly important that we keep Congress fully involved in the international discussions. This could be achieved by having Congressional representation on our delegations to various international meetings. Whether we do this or not, frequent and close consultations with Congress is essential.

Clearly, we will need legislation at some stage in the game. The questions of what and when cannot be decided until we get a clearer view of what we want and what foreign governments are prepared to do.

In any case, legislation probably will be needed to provide authority to reduce tariffs and non-tariff barriers, to negotiate about domestic agricultural support programs, and to repeal ASP.

An imaginative new adjustment assistance program is essential if we are to embark on a major trade liberalization initiative, and such a program will also likely require legislation. We have already submitted suggestions to you on the possible form such an adjustment assistance program might take.

1. Source: National Archives, RG 59, Central Files 1970-73, E 1. Confidential. Drafted by A. Reifman and J. Renner (E), A. Katz (EUR), and E. Preeg (S/PC) on March 16. Sent to Peterson under cover of a March 16 memorandum from Samuels who indicated it responded to Peterson’s request in CIEPSM No. 1 (Document 55).