183. Paper Prepared in the Department of Agriculture1
EEC AGRICULTURE AND U.S. TRADE
We are headed for a major confrontation with the European Community regarding its agricultural trade policy. This confrontation will certainly be ignited if the Community applies the proposed taxes on oilseed products. We have been building up to this confrontation for some time, and unless the Community agricultural policies change, these issues will flare into open trade warfare.[Page 472]
The root of the problem is that the Community has spent the last eight years perfecting an agricultural policy which is completely insular, and consequently incompatible with the objectives of expanding world trade. It is a policy which does not recognize the principle that the most efficient producers should be the dominant suppliers in international trade. On the contrary, it is a policy that has sought to solve the social and economic problems of its agriculture through high price supports, the encouragement of unlimited production of any product that can be cultivated in the Community and the reservation of its home market for domestic production to the exclusion of outside suppliers. In short, it is a policy of self-sufficiency. Not only that, but it also assumes the right to export their surpluses in world commerce through heavy subsidization.
Up to the present time, the Community has failed to take international trade interests into account in framing its policies and programs. On the contrary, it has sought to influence trading arrangements to accommodate their domestic policy. As a consequence, there were only very limited negotiations in agriculture between the EC and the U.S. and other countries in the Kennedy Round. Moreover, the influence of the highly protective variable levy scheme employed by the EC is spreading to other countries. Time and again where we have sought the removal of quota restrictions against U.S. exports, we succeeded only to have them replaced by equally protective variable levy systems. The U.K., a major market for U.S. agricultural exports, has already adopted a minimum import price scheme for grains and is currently discussing an extension of this system to other sectors of agriculture to replace its support system of deficiency payments.
The EC is the largest dollar market for U.S. farm products. In 1967 our exports were valued at $1,460 million. With some important exceptions, our agricultural exports have held up well despite the trade restrictive provisions of the Common Agricultural Policy. This was due primarily to an increase of our exports of oilseeds, protein meal, feedgrains, tobacco and fruits and vegetables. These products are normally in deficit supply in the Community and some of them such as oilseeds and oil cake are subject to duty-free treatment. This situation is not expected to continue. The outlook is particularly uncertain for oilseeds (soybeans and soybean products), feedgrains, tobacco and canned fruits. These products make up over 60% of our total agricultural exports to the EEC in 1967.
The Community has under active consideration a plan to place a tax of $60 per metric ton on vegetable and marine oils, and $30 per ton on meals. Oilseeds and high-protein meals now enter duty-free without restriction pursuant to the trade agreement between the U.S. and the EC. [Page 473]This trade concession is the one bright spot in the limited number of trade concessions in agriculture that we have been able to obtain in two major trade negotiations over the last ten years. Under this concession, we have built up a trade of nearly $500 million and it should expand. Impairment of this concession would have a serious impact on farm incomes and on the U.S. balance of payments.
We consider this proposed action to pose the most serious trade problem that has arisen in agriculture between the U.S. and the EC. If implemented, it could lead to a most serious trade policy confrontation between the Community and the U.S. with commercial and political implications extending beyond agriculture.
Our grain trade is constantly threatened under the EC system of varying the support levels and the corresponding import levies which already are subject to daily changes. The plain facts are that the EC grain price structure is too high and is encouraging uneconomic production in the Community. The adverse impact on imports, and especially on U.S. trade with the Community, are now beginning to appear more clearly.
The Community has successively increased its guaranteed price to its producers on grain, especially for corn and feedgrains. They have not only expanded their own production, thus reducing imports, but have given unusually heavy subsidies to their exports. Now the Community is talking about more protection on imported dehydrated alfalfa because its use has been increasing as a result of high feedgrain prices in the Community. Further, they have a subsidy on barley exports to Japan that is greater than our farmers get for producing barley. They have succeeded in knocking us out of the Japanese market.
The Commission is considering a proposal for a common agricultural policy for tobacco which includes market guarantees and price incentives for Community producers, export subsidies and advance deposit systems and provisions for the suspension of imports. If implemented, it could adversely affect U.S. tobacco exports to the Community valued at $149 million last year.
They are talking about a minimum import price system on fruit and vegetable products because apparently they do not get enough protection from fixed tariffs bound in the negotiations with the U.S. This will also hurt our exports.
In the process of extending and perfecting this self-centered system for agriculture, the Community has not only become self-sufficient, but has indiscriminately dumped its surpluses on world markets to the detriment of U.S. trade and trade interests of other major exporters of farm products.[Page 474]
The United States is the most efficient producer of broilers in the world. Yet, because of that self-sufficiency policy, we have not only lost our market for broilers in the EC, we have suffered severe damage to our trade interests in third markets because of Community subsidies. This has not only hurt us, but Denmark as well.
We used to have a large market in the Community, especially West Germany, for lard and pork bellies. Today, we have not only lost that market, but the Community is paying heavy subsidies on lard exports to our major historical market, the United Kingdom. Again we have suffered heavily in that third market.
We used to have a small but important commercial market for flour in Holland. That is now gone. And we are faced with the competition of heavily subsidized EC flour all over the world.
But that is only the beginning. Subsidy has been piled on top of subsidy as one bad action breeds another. The French and the Italians put export subsidies on tomato products into European and U.S. markets. Countervailing duty action was required by our Treasury Department.
The Community put heavy subsidies on canned ham exports to the United States. They did it not because the subsidies are needed to compete with U.S. production, but in order to compete with hams coming from other countries, like Denmark. Here again, countervailing duties may be necessary at some point.
They complain about the low price of edible oil in the world, but with their dumping of lard and butter on the world markets, they have led the way in depressing oil prices. At the same time the USDA is faced with cutting the support price on soybeans because the present level is too high.
In order to shore up the weak parts of their highly protective trade system, they want to put taxes on oilseed products like soybean meal and soybean oil. They say they want to raise the price of meal to encourage the use of their own grain. They say they want to raise the price of oil in order to encourage the consumption of their own butter. Actually, they want to raise the price of oil to build up funds to support their own costly agricultural program, particularly for olive oil and rapeseed. What they are saying in total is, if the price of your soybeans were higher, we’d like it better. So would we. But the world market says the price of soybeans is already too high. It is only low in their eyes because all their prices are too high.
But this is how their crazyquilt system works. Beginning three years ago, the Community started to increase the internal price of corn in relation to other grains. This action has not only increased the Community production of corn, but it has discouraged the use of [Page 475]imported corn. Because the internal price of corn was sheltered from import competition by a variable levy while other feed materials were not so protected from import competition, the use of the unprotected feed materials tended to increase. Among these are such feed as sugar beet pulp, dehydrated alfalfa and soybean meal. We can export soybean meal to Europe and have it compete with and be substituted for corn in the feeding ration. This is a most distorted situation. In the U.S., soybean meal generally sells from 50% to 60% more per ton than corn. The Community would complete its crazy quilt by raising the price of meal through a tax. The rational solution would be to reduce the price of corn.
Neither the U.S. nor its trading partners can afford the economic price the Community is asking them to pay to support its agricultural policy. It is a policy which fails to recognize that Europe’s advantage does not lie in agricultural expansion but in industrial expansion. It is a policy which says, if we produce a surplus, let’s dump it on our neighbors at whatever price it will bring. It is policy which today is becoming bankrupt—even in European eyes. The United States has a tremendous advantage in the use of machinery in agriculture. It can produce feedgrains, soybeans, poultry, tobacco and rice at a much lower cost than the Community. We have tried to persuade our farmers that in the end, a market-oriented economy—that is, one where farmers produce at world market prices—will bring rewards in the way of increased trade. The Community policy rejects that thesis. If the acceptance of that thesis does not bring rewards to the American farmers, then we will have a massive confrontation. And in order to have the Europeans understand what it is all about, our target will have to be European industry which, in many areas, has an advantage over U.S. industry. In this way, the burden of supporting the present EC agricultural policy will be shifted from outside suppliers to the Community industries.
- Source: National Archives, Nixon Presidential Materials, NSC Files, Agency Files, Box 196, Agriculture Volume I 69-70. No classification marking. Attached to a February 13 memorandum from Secretary of Agriculture Clifford M. Hardin to Kissinger indicating the paper was for the President’s information and use during discussions during his forthcoming trip to Europe (February 23-March 2). A 7-page paper of talking points on trade issues, prepared by the Office of the Special Representative for Trade Negotiations for the President’s European trip, February 14, is ibid., RG 364, Transition Papers, 1968-1969, Box 1.↩