91. Report by the President’s Assistant for International Economic Affairs (Flanigan)1

REPORT OF VISIT TO WESTERN EUROPE

May 30-June 10, 1972

There were three main purposes for my trip to Western European capitals. They were: (1) to get to know some of the key European personalities with whom we will be dealing in the forthcoming trade and monetary negotiations; (2) to express my concern over the development of a spirit of economic isolationism or turning-inward on both sides of the Atlantic which, if left unchecked, could drift toward a new kind of dangerous political isolationism which neither side could afford, and (3) to report on the status of the commercial negotiations in Moscow,2 while emphasizing that these talks in no way diminished the importance of the US-European ties.

In each of my discussions with European leaders (list attached),3 I made the above points and asked for comments. The following report breaks down my talks into sets of issues which arose out of these talks.

I. Blocism: European vs. Atlantic

Concerns

As examples of the kind of policies which Americans see as moves by Europeans to opt for strictly regional, Europe-oriented solutions rather than to attempt to find more broadly-based, worldwide answers, I cited the Common Agriculture Policy and the developing web of special preferential deals which the EC was working out with non-member European states, the countries in the Mediterranean basin and, according to some recent indications, even with some East European states (e.g., Romania). I made it clear that we were not concerned with generalized preferences for LDC’s, though we did object strongly to the system of reverse preferences which the EC worked out with many of them.

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In virtually every case, the response was that the EC was forced into these arrangements for either domestic socio-political reasons (the CAP) or for reasons related to economic or, mainly, foreign policy concerns. Typical of these was my talk with Raymond Barre, Commissioner for Financial and Monetary Policy at the EC Commission.

On agriculture, Barre’s defense was that Europe was just now going through the agricultural revolution which the US had undergone during the 1930s. In about 10 years, this process would be complete. Meanwhile, the US and Europe were talking past each other on different levels of understanding about the nature of the problem. On preferences, he (as did others) emphasized the political importance to both Europe and the Atlantic Alliance of keeping the Mediterranean countries closely associated with the West. In Europe, the deals with the EFTA non-applicants were the inevitable consequence of British entry. The new EC could not erect new barriers to trade among the different categories of EFTA countries where trade had previously been free. He thought we should re-examine the problems this creates for outsiders on a reciprocal basis, adding that, even if reciprocity is not full, there needs to be some overall concept of “global reciprocity” to guide the next round of negotiations.

I responded to him, as to others, by noting that the solution to a political problem in one country inevitably creates a political problem for those at whose expense the solution has been imposed. This was especially true in agriculture. I said I’d rather try to find an intrinsically free trade solution rather than to continue to appeal to each side’s comprehension of the other’s political problem. I said we were not seeking to destroy the CAP, only asking that it be transformed into another kind of common policy which would be fairer politically and more rational economically.

On preferences, I argued in all capitals that, while we understood (even if we did not always accept) the rationale behind any particular deal, what concerned us was the total implication of these deals taken as a whole. Here is a clear case of the whole being greater than the sum of its parts. I stressed that Americans see them as a conscious effort by the EC to discriminate against us commercially to Europe’s advantage while calling upon us to accept these disadvantages on the grounds that they serve our common political and security interests. I said that this kind of argument is no longer acceptable in the US, and that Europe should be aware of the fact that the days when we were able to accept almost any commercial costs for political reasons are over.

The response to this line of argument varied among the capitals. My talk with Giscard d’Estaing was frank and not discouraging. However, I cannot be optimistic about a forthcoming French response. [Page 224]In Belgium, Davignon was positive, Fayat non-committal. The EC Commission was divided, but not encouraging. (Mansholt, for reasons of his own, was not only indifferent but actually hostile. See the attached report of my talk with him.)

The British clearly recognize the dangers involved if the trends I discussed above are allowed to go unhindered. They agree on the need to redress the imbalance between internal European preoccupations and external relations. However, it is also clear they feel a constraint as new members not to move out in front of the Six either too far or too fast.

Within the Six as such, Schiller was most encouraging. While he said Germany was determined to keep the EC outward-looking, even he cautioned against expecting too much. However, he assured me that Germany would work hard within the EC to prevent the rise of blocism in both trade and monetary relations.

The Italians all make sympathetic statements about the problem and were conscious of the need to avoid an Atlantic split. However, the internal situation of political (and Ministerial) uncertainty led me to conclude that, at the moment at least, the best we can expect from Italy is support for someone else’s initiative, but certainly no disposition to share a leadership role for an outward-looking reorientation of EC foreign policy.

II. Trade and Monetary Links

My trip took place after the OECD Ministerial session, Paul Volcker’s speech to it and the decision that, while the link was recognized by all, there should be no special mechanism created in which to discuss it.4 I found OECD Secretary General Van Lennep satisfied that the organization has been given a mandate to deal with the link, even if the specific forum proposal was rejected. He advised us to be relaxed on the problem for now and to have another look at it after the Rey Group had submitted its report in late June.

The alleged French opposition, he said, was mainly directed against the Schweitzer proposals for terms of reference for the Group of 20, to be created as the main monetary reform body at the September Fund meeting. The French tended to confuse these with the Van Lennep proposal.

During my talks in all the capitals, I found that no one questioned the basic thesis of the Volcker speech that there was need for consistency between trade and monetary rules. All agreed on the fact of the link, that this fact had to be addressed and that, in all probability, the OECD was as good a place as any to do so.

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In London, Barber apologized for what he admitted may have seemed to us to have been a British let down at OECD. He said he was originally inclined to favor the creation of a special group but, on seeing the clear opposition developing against it, simply had to reverse himself to accommodate to reality.

III. Timing of Monetary Reform Negotiations

During my talk with Barre, it became apparent that the EC, as a unit, is still a long way from any kind of consensus concerning the objectives which “Europe” should seek in reform negotiations. The first meeting at which the Finance Ministers of the 10 will discuss this question has just been scheduled for July 17 and 18 in London. The most optimistic expectation for the emergence of a consensus, according to Barre, would be at or after the September IMF meeting. A more realistic estimate would be not before October or November, at best.

Barre doubted that the October EC Summit would give much attention to this issue. Its main preoccupations, he said, would be on “consolidating” the internal EC system and the development of coordinated economic and social policies linked to monetary union. Thus, the definition of a European position on reform would probably be left in the hands of Finance Ministers for the foreseeable future.

I asked each of the Finance Ministers I saw after the Brussels stop to comment on this scenario. All agreed that it would not be realistic to expect a fully coordinated EC position before year-end, if then. The British even remain skeptical that there will ever be a fully common EC position short of the point of final agreement internationally.

I used these admissions to remind the Ministers that, given the lack of a common EC position, I hoped they no longer believed that it was the U.S. which was dragging its feet on initiating reform negotiations. All agreed that the fault was not ours.

Barber used the occasion of our talk to emphasize his interest in hearing from us any ideas we may have about the kind of reformed system we would like to see come out of the negotiations. He said it would be very useful to him in his talks with both the Europeans and the Commonwealth Ministers. He particularly wanted to avoid the development of a situation later this year in which, in the absence of clear signals from the U.S., the U.K. and others began to find themselves being locked in to a “European” consensus which would prove to be unacceptable to us. He urged us to use him as a sort of honest broker and assured me that he would respect the confidentiality of any ideas which were passed to him that we wished to be so treated. I agreed he deserved a response to his proposal, even if it were non-committal.

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IV. External Relations at the EC Summit

I am inclined to agree with Barre’s assessment that, at least as of now, external relations is not likely to be an item of great concern to the Europeans at the Summit. Institutional and internal issues are expected to loom much larger by comparison. On external relations, attention seemed to be about equally divided among three areas: relations with developed countries, relations with LDC’s and East-West issues.

In countries where I thought it would be useful (UK, Germany and Belgium), I suggested that a declaration from the Summit, recognizing that EC enlargement imposed special responsibilities on members toward their partners outside (and especially toward those in the Atlantic Alliance) and stating the intent of the 10 to move toward major reform of the international system and external liberalization would be very helpful to us in stemming the tide in the US toward the kind of economic and political isolationism of which I warned them earlier.

The response to this proposal was positive from the British, Schiller and Davignon. While I did not make the suggestion as such with the EC Commission, it was clear from the conversations that there was little or no disposition on their part to push for such an outcome. Mansholt in particular had neither sympathy nor comprehension of the problem.

Despite Giscard’s attentiveness to the problem and his apparent sympathy with it, I remain skeptical that the French would endorse it unless substantial pressure (and, probably, concessions on other issues) were forthcoming from her EC partners. However, I believe the Italians would support such an initiative if others pushed it, and I was given to understand that the Dutch would do likewise. I have no feel for the Norwegians, Danes, Irish and Luxembourg.

While there are some risks involved, I believe the proposal should be followed up with those who were responsive and I plan to do so.

V. Economic Content of CESC

Though NATO Secretary General Luns told me he did not think that there would be much emphasis on East-West economic issues at the Conference on European Security and Cooperation, Ambassador Kennedy and his staff believe that, with MBFR excluded, most of the content of the conference will in fact be economic. We will need to keep close watch over the preparations for this meeting for at least two reasons: (1) there are indications that some EC countries may be toying with the idea that special ad hoc preferential arrangements could be worked out to promote closer industrial cooperation between East and West Europe, and (2) there is a danger that France may convince her EC partners to go into the Conference as a bloc with common positions, thus introducing a split into NATO coordination.

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Luns is particularly conscious of the latter danger and emphasized his determination to see to it that the EC as a group does not preempt decisions which should properly be discussed and taken in NATO. He stressed in particular his opposition to the French attempt to set up an EC political institution in Paris separate from the international organizations in Brussels.

VI. Reactions to Moscow Summit

In each conversation, I discussed the results achieved by the President in Moscow, ending with a reference to his speech to the Congress on his return in which he emphasized the need to maintain and strengthen the Atlantic Alliance. Without exception, the Europeans expressed satisfaction with the Summit results, and were appreciative of the President’s speech.

Schiller told me that Gromyko was in Bonn the week before (after the Summit) and mentioned that the Soviets were studying the reaction in the US to the visit. He said it appeared to be “at least 95 percent positive,” which, he told the Germans, was very encouraging to him.

VII. Conclusions

1)
On monetary reform, I believe we should give careful consideration to the best method of preempting the creation of an anti-US European consensus, and with whom we can work toward this end. It is clear that there are significant differences of view among the member states about both overall goals and specifics, and we may be able to use these differences to our advantage if we move rapidly ourselves.
2)
A forthcoming declaration from the October EC Summit, reemphasizing among other things, the importance of strengthening the EC’s economic relations with its Atlantic Alliance partners, would be most helpful to us as we prepare to face the Congress with the need for legislation. Indeed, without a strong statement, we could be in considerable trouble. I will discuss ways to work with our friends in Europe on this with Secretaries Rogers, Shultz and others in Washington.
3)
We must give careful attention to the preparations for the CESC and the economic content thereof. Specifically, we need to assure that the European desire to improve economic relations with the East does not run counter to our broader trade and monetary objectives that we will be working out in OECD, IMF and GATT during the rest of this year and beyond.
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Attachment 2

Conversation with EC Commission President Sicco Mansholt

After a discussion of the President’s trip to Moscow, I concluded by expressing my conviction that, despite our satisfaction with the progress we were making in improving Soviet-American relations, it is the strengthening of the Atlantic system that deserves our highest priority.

While not directly disagreeing, Mansholt responded with a long speech which began by noting what he believed was a growing sentiment in European public opinion and parliaments about the future of relations between the developed and developing countries. He said that, in comparison with the “minor” economic problems among developed countries, those between developed and developing economies were much more serious.

He had made two trips to the UNCTAD meeting at Santiago. He said that the U.S. attitude there was, to say the least, disappointing. He warned that Europe was becoming deeply concerned about the north-south split and its implications for future peace. It seemed clear, from the U.S. performance in Santiago, that this concern was not shared in America. Thus, a serious confrontation between Europe and the U.S. was in the making over trade and aid policies toward LDC’s. He assured me that Europe will meet its obligations, even if the U.S. will not.

Specifically, the EC will begin to develop commercial and industrial policies which will look to the interests of the LDC’s. The problems Europe has with the U.S. are not important. The “Eberle negotiations” earlier this year were a big mistake for Europe. It was “silly” to have spent so much time and political capital on a few million dollars worth of trade in citrus fruit, tobacco, etc., when 20 percent of the world was starving.

He assured me that he was not the least concerned with soyabeans, (“to hell with your soyabeans”) but he was over palm oil because it is an essential LDC export. He said we don’t need free trade or even market-determined trade in such products but rather product agreements specifically designed to organize trade in a way to favor LDC exports. If the U.S. does not join in such arrangements, he was sure Europe will go it alone. He even went so far as to suggest that there should be no tariff reductions among developed countries, since it would reduce the advantage of tariff preferences to the LDC’s.

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On aid, he was highly critical of the U.S. which had consistently failed in recent years to come anywhere near the one percent of GNP aid target. Here again, Europe would meet its responsibilities even if the U.S. did not.

These problems, he suggested, would be the most critical with which the EC summit should deal in its discussion of relations with third countries (implying that relations with the U.S. would be decidedly secondary). He also stated that a large part of the new EC political cooperation talks (“an EC foreign policy”) will be devoted to consideration of strengthening economic links between the EC and all developing countries. He recognized that the past concentration on Africa was disproportionate and that these links had to be broadened to include South America, Asia, etc. He concluded that it was the real world he was talking about, not that which occupied so much of the time of our respective governments. He particularly stressed that the U.S. members of Congress with whom he had talked were not aware of this real world.

I replied that the real world in which a U.S. Congressman and Senator lives is one of politics. I then said he should bear in mind that the U.S. has been in the aid business—starting with Europe itself—far longer and that the total of that aid over the years was still the highest by far.

I then said that, in assessing responsibilities, he could not overlook the fact that the U.S. bears the main burden of maintaining the defensive shield of the free world. The percentage of GNP which we devote to this responsibility is substantially higher than that of the Europeans. (He attempted to debate this.) He should look at these—aid and defense—together in judging who was meeting whose responsibilities.

He said that, as a Socialist, he did not agree that the war in Vietnam was contributing to the solution of the problems he had outlined. I said that, even excluding our expenditures on Vietnam, what I said still held up. As regards Europe in particular, it was clear that the burden borne by us was more than disproportionate. If Europe felt it could devote a larger percentage of its resources to aid, that was fine, but it should understand that this was made possible largely because it is not as burdened by defense expenditures as we, even for Europe itself.

I went on to point out to him that, for 20 years, we have been running balance of payments deficits, due largely to our military and aid commitments. Europeans tell us this has to stop; that they don’t want any more dollars. Under these circumstances, I didn’t see how we could increase our aid as he suggested in the absence of some fundamental readjustments in the monetary and trade systems—reforms which recognize and take account of the fact that all these issues—trade, aid, defense, finance—are interrelated.

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Concerning preferences, I suggested his argument might be more convincing in the absence of the reverse preferences which the Europeans required from the LDC’s, whose value to the latter I failed to see. Finally, I said I thought we both needed to give at least as much attention to the U.S.-EC relationship as he wanted to give to the developed-developing country problem.

Mansholt agreed that Europe should shoulder more of its own defense burden. However, he said, the real issue is that income from future growth needs to be distributed more extensively to the LDC’s to close the gap. This should be done by heavy new taxation in developed countries (even if it resulted in a decline of standards of living in the developed countries, and in the U.S. in particular as the richest), and by trading arrangements to organize markets in favor of LDC exports. We need, he said, to adapt our agricultural and industrial policies to meet their needs. There is no need for developed countries to produce those things which LDC’s can, even if the former can do it more efficiently.

I said that his suggestion was not only unrealistic politically but also contrary to all past experience. I said it had been my experience that a prospering country with a high standard of living was both a better market for LDC exports and a more generous giver of aid. I asked how we could be expected to import more—from LDC’s or anyone—with falling demand and declining standards of living.

Mansholt did not answer but, reverting to his Santiago experiences, charged that the U.S. was embarked on a deliberate policy of destroying the only democratic regime left in Latin America “in the same way we had destroyed democracy in Cuba.” He said that Allende was faced with a serious challenge from both the left and the right in Chile and that, if he went under, the country would give way to anarchy and, ultimately, become another Cuban-style dictatorship.

I said we had in no way interfered in Chile, and denied flatly that we were embarked on any venture to destroy the Allende Government. He fired back a question about our policy of voting against loans by the international institutions to Chile. I replied that we felt that the Chilean Government should discharge its obligations to the companies it had expropriated before we could justify such loans. I said we were not contesting Allende’s right to expropriate, but we did believe he should offer prompt and adequate compensation.

Mansholt claimed that Chile owed us nothing because companies like Anaconda had exploited Chile for years, contributing nothing while withdrawing only profits. For example, he said that, as a Socialist, he did not believe that capitalism is effective or desirable as a means of promoting development. He had visited El Teniente while in Chile and could find no schools, no housing, no roads built by Anaconda to serve [Page 231]the people in all the years it was there. Instead, there were large latifundia, estates, etc. for the managers, while the peasants toiled in misery.

I asked him how many schools, houses, roads, etc. had been built by the tax money collected from Anaconda by the governments (eg Frei) which he professed to admire. He did not answer, contenting himself with a remark that Allende was right to have not only assessed ex post taxes but to have offered nothing to Anaconda.

Peter M. Flanigan 5
  1. Source: Washington National Records Center, Department of the Treasury, Files of Under Secretary Volcker: FRC 56 79 15, CIEP. Confidential. Attached to a June 23 transmittal memorandum from Flanigan to Rogers, Irwin, Shultz, Volcker, Peterson, Kissinger, Eberle, Shakespeare, the Ambassadors at the posts Flanigan visited, and CIEP Staff members.
  2. These negotiations were undertaken pursuant to the President’s May 22-29 trip to the Soviet Union.
  3. Not printed.
  4. See Document 90.
  5. Printed from a copy that bears this typed signature.