Foreign Relations of the United States, 1969–1976, Volume IV, Foreign Assistance, International Development, Trade Policies, 1969–1972

214. Memorandum From the Chairman of the National Security Council Under Secretaries Committee (Richardson) to President Nixon ¹

Washington, October 8, 1969.

SUBJECT

• Tariff Preferences for Less Developed Countries (NSSM 48)

CHAIRMAN’S SUMMARY

I. The Problem

Tariff preferences have become a major issue in the relations between less developed (LDCs) and developed countries (DCs).

LDCs see such preferences as a major step DCs should take to assist them in promoting their exports and economic growth. For some years, they have engaged in a concerted and mounting campaign to that end.

At the second United Nations Conference on Trade and Development (New Delhi, 1968) the United States made a moral commitment to join in “… the early establishment of a mutually acceptable system of generalized, non-reciprocal and non-discriminatory preferences …” The details of the system were to be settled this year.

The Organization for Economic Cooperation and Development (OECD) has been studying various preference plans and has agreed to complete a report on the DCs’ position later this year. Your negotiators need instructions on the general approach they should follow. This is urgently needed for an OECD meeting of October 13.

The preference issue will also be a major topic at the November meeting of the Inter-American Economic and Social Council, which is to lay the groundwork for a “new policy to strengthen hemispheric cooperation.” Latin Americans are giving top priority to a system of generalized preferences, and expect a statement at that meeting as to our intentions to carry out our UNCTAD commitment.

Therefore, it is important that you now decide:

• —Whether the United States should formally declare its intent to negotiate and participate in a system of generalized tariff preferences (depending, of course, on the scheme’s ultimate acceptability and Congressional approval);
• —If so, what sort of guidelines should govern the work of our negotiators.

II. The Political Issues

While the substance is economic, the basic issues are political—domestic and foreign.

At home there exists qualified support for preferences from business, labor and Congressional leaders. But many will oppose preferences because of a fear that their jobs or profits—or those of their constituents—would be adversely affected through increased low-wage imports and “run-away” plants.

Support will come from those who see it as a means to help the LDCs and as a supplement to foreign aid, as well as from those companies and internationally minded groups which see the advantages to U.S. exports and foreign investment. Few will see that preferences help the American consumer by permitting lower prices. (A more detailed discussion of these domestic aspects is contained in Annex A.)²

Abroad, the political issues are even sharper:

• —The LDCs, especially the Latin Americans, definitely expect some kind of arrangement. Were we to refuse our participation now, their reaction would be one of anger and shock. In Latin America, a negative decision would be viewed as a severe blow to hemispheric cooperation.
• —Generalized preferences are a realistic way of assisting Latin American exports to the United States and Europe. Without a world-wide scheme, the major European countries would maintain, and possibly expand, their present preferences which discriminate against Latin American and U.S. exports.
• —Possibly excepting Canada and Japan, other DCs might well go ahead on generalized preference without us. We would be isolated.

III. The Economic Issues

The economic issues are also clear:

• —The export expectations of LDCs are, by and large, in manufactured and semi-manufactured goods—the commodities which would be covered by a preference scheme. The LDCs’ traditional exports—raw materials and agricultural products—have been lagging and have only limited growth potential.
• —Preferences will stimulate LDC exports—initially, perhaps, on the order of $1 billion a year to all DCs under a liberal scheme. While modest in terms of the LDCs’ total foreign exchange needs, this is significant in terms of their exports of manufactures (currently some $5 billion annually).
• —The over-all economic “burden” on the U.S. would be small. Preferences might mean additional imports of up to $300 million a year initially, depending on the liberality of the scheme. At present total U.S. imports are at a rate of over $30,000 million annually.
• —Problems might be created for individual American industries. Also, additional low-cost imports from low-wage countries may stimulate protectionist pressures.
• —The principal beneficiaries would be initially the larger, more advanced LDCs—such as Mexico, India, Brazil.

IV. Recommendations

The NSC Under Secretaries Committee, in accordance with your directive of August 16,³ has reviewed this issue and recommends:

1. That the United States now declare its intent to participate in a system of generalized tariff preferences.

2. That, in pursuing agreement with other DCs on a preference scheme, our negotiators be guided by the following principles:

• —All the major developed countries must be participants and do their fair share. (A common scheme would be the most desirable.)
• —Preferences would be accorded, in principle, on manufactured and semi-manufactured products and on a selective list of agricultural and fishery products.
• —There should be adequate safeguards to avoid significant damage to domestic industry as a result of preferential imports.
• —Preferences should be temporary, i.e., no longer than 10 years.
• —Preferences would be entirely voluntary, i.e., we would have the unilateral right to deny preferential access to any product or country.
• —To the extent feasible, all LDCs should have equal access to DC markets. (This would benefit Latin American exports to Western Europe.)
• —The United States should have access to all LDC markets on equal terms with other DC suppliers.

(This implies a phased elimination of existing discriminatory “reverse” preferences granted by some former European colonies to the Common Market and British Commonwealth and may create serious problems with almost all the African countries, as well as with some LDCs in other parts of the world.

More particularly, the Africans might consider our position as inconsistent with a policy under which we encourage them to rely on their former metropoles as the primary source of development aid. In the past, the Western Europeans frequently have insisted on reverse preferences as a condition of such aid. It would be anomalous for us to require the elimination of reverse preferences, if this would cost them their primary source of aid, while refusing to provide substitute aid ourselves.)⁴

V. Unresolved Issues: Decisions Required

The agencies were unable to reach agreement on the specific proposal the United States should support in the international negotiations. The differences focused on the kind of safeguards needed to protect American industry against injurious import competition.

Implicit was a more basic difference among the agencies:

• —Some wanted to be forthcoming both for foreign policy reasons, and because the benefits to the LDCs would at best be modest and possible injury to U.S. producers correspondingly small. These agencies also started with the presumption that increased imports are beneficial and not harmful to the American economy.
• —Other agencies accepted the principle of preferences, but were concerned about possible damage to domestic industry and Congressional reaction to such threats.

To resolve these agency differences, we need your guidance on the following interrelated questions:

1. To what extent should sensitive commodities be excluded from any preference scheme?

2. What other safeguards should there be to protect domestic industry?

3. How responsive should the United States be to LDC desires?

1. Exceptions:

The issue is whether some manufactured or semi-manufactured goods should be exempted altogether from the preference scheme.

From a foreign relations standpoint, no exceptions would be best. Furthermore, it can be argued that no exceptions are needed even for sensitive commodities like cotton textiles and petroleum, since these commodities are already subject to quantitative limitation and preferences would have no effect on U.S. imports.

Nevertheless, it might be difficult to get a bill through Congress unless certain sensitive items were excluded from the preference scheme. But the longer the list is, the more individual Congressmen will be under pressure to add to it products produced in their districts.

State, the Council of Economic Advisers, the Budget Bureau, STR, Treasury, and AID favor providing for few exceptions, if any. For STR and Treasury, this is based on the assumption that more automatic safeguards, discussed below, will make exceptions unnecessary.

The Commerce, Labor, Agriculture, and Interior Departments prefer excepting a more extensive list of commodities. The actual number would depend on the type of other safeguards used.

What should the Administration try to achieve:

a) no exceptions, or an exceptions list limited to those commodities, like cotton, wool, and synthetic textiles, already recognized by the Administration as requiring special protection;

b) a more extensive exceptions list.

2. Safeguards:

There are two general types of safeguards. One is an escape clause (which would withdraw the preference if a U.S. industry is hurt) and adjustment assistance for injured parties.

These provisions operate only when there is evidence of injury. They are now in the U.S. law and are expected to be made more effective by the proposed trade legislation. Moreover, they could be further strengthened to deal with market disruption caused by preferential imports.

The second type of safeguard would limit the quantity of imports accorded preferential treatment. This type of safeguard would operate before injury is felt by the American producer. It would not require an administrative determination, but would require administrative machinery.

State and CEA favor reliance on a strengthened escape clause and adjustment assistance. They consider that these safeguards:

• —would be sufficient to deal with any significant threat to domestic industry;
• —would represent no basic policy departure;
• —would avoid the considerable political and administrative problems inherent in other safeguard mechanisms. These agencies fear that once an administrative apparatus to control the importation of LDC manufactures has been established, it will be difficult to resist pressures to apply the apparatus to all imports.

Commerce, Labor, STR, AID, Agriculture, and Interior, however, favor an “automatic”—i.e., built-in, quantitative—limit on the amount of imports which could enter at preferential duties, in addition to an escape clause and/or adjustment assistance.

These agencies feel that:

• —there will be some American firms and industries which will be injured by competition from LDC exports of manufactured goods;
• —the escape clause and adjustment assistance have not worked well in the past, and can not work well in the future because they operate only after damage is done;
• —additional safeguards which set a limit on the quantity of imports receiving preferential treatment, and therefore prevent injury from developing, are required;
• —the public and Congress will demand such additional safeguards;
• —the LDCs should be helped to make their exports competitive; but where they are—or become—competitive such assistance should be terminated.

The international negotiating situation has a bearing on the choice of safeguards. The European Communities (EC), having reached agreement among the six member countries, are firmly committed to a scheme with built-in, automatic safeguards (a tariff quota plan). The other key DCs are keeping their options open and looking to the U.S. for guidance. They would probably accept the EC approach if we did, but would be prepared to support us if we opt for the escape clause approach.

Agreement on a common scheme would be desirable, not necessarily as an end in itself, but because it would be strong prima facie evidence of equitable burden-sharing and would facilitate Congressional acceptance of preferences. Indeed, some agencies feel that a common scheme is an absolute necessity.

Given the EC’s inflexibility, adoption of automatic safeguards appears to offer the only real possibility of negotiating agreement on a common scheme. The alternative is to accept two preference systems (the EC with automatic safeguards; the U.S. and others without them) and try to arrive at comparable results by adjusting other elements, such as the depth of the preferential tariff cut.

In the light of all these considerations, we should:

a) use only an escape clause and/or adjustment assistance;

b) use automatic safeguards (such as the “competitive need” formula or the “tariff quota” described in Annex B,⁵ which set quantitative limits on the amount of imports eligible for preferential treatment) in addition to an escape clause and/or adjustment assistance.

3. The Potential Trade Benefit:

The final issue is how forthcoming we should be to the LDCs.

As noted earlier, preferences might result in additional U.S. imports of at most $300 million a year initially. The result could well be considerably less, depending on the liberality of the scheme. Even so, the gap between the feasible maximum and minimum is quite small. The choice is, therefore, less an economic one and more a political-psychological one.

Leaving aside the technicalities, any preference scheme can be made to yield somewhat larger or somewhat smaller trade benefits by altering the depth of the tariff cut and the restrictiveness or liberality of an automatic safeguard formula, if there is one.

There are, furthermore, a number of advantages to eliminating all duties on LDC exports of commodities receiving preferences:

• —it would meet LDC desires for zero duties;
• —it would leave no room for further demands for reduction in duties;
• —it would facilitate the elimination of the discrimination against Latin America and others left out of existing preferential schemes.

State favors seeking the upper range of the feasible benefits. A meaningful offer is essential in terms of the Administration’s new Latin America policy. The overall adverse impact on U.S. industry would be small, and might be more than offset by the benefits of more trade. Moreover, there would also be protection against excessive imports in any given sector by the safeguards used. The Scandinavian countries, Canada, and the United Kingdom also favor a program providing generous benefits to the LDCs.

Commerce, Labor, STR, and some other departments believe that the amount of benefits to the LDCs is not an issue, but that automatic safeguards for U.S. industry from low-wage foreign competition are needed in order to get Congressional approval.

Nevertheless, the specific formulas these agencies currently advocate might result in very limited benefits to the LDCs. Commerce’s “competitive need” formula would exclude from the outset over three-quarters of all U.S. imports of manufactures and semi-manufactures from LDCs—on grounds that these LDC suppliers have already achieved competitive positions in the U.S. market or that the products involved are too sensitive. The bulk of imports of manufactures from such countries as Mexico, Peru, Brazil, Hong Kong, Taiwan, Korea, and the Philippines would have to be excluded as a result.

The United States should seek to attain:

• —the upper range of benefits;
• —the lower range of benefits.

A more comprehensive interagency report, prepared in response to NSSM 48, is attached (Annex C).⁶

This memorandum represents the Chairman’s summary of the Committee’s conclusions and recommendations. In addition to the Committee’s regular members, the following departments and agencies participated in the discussion: Treasury, Commerce, Agriculture, Interior, Labor, Council of Economic Advisors, the Special Trade Representative, Agency for International Development, United States Information Agency, and Bureau of the Budget.

ELR

1. Source: National Archives, RG 59, S/S Files: Lot 83 D 276, NSC-U/DM 19c. Confidential. Drafts of this memorandum, dated September 18, 23, and 26, are ibid. An earlier draft was circulated by Staff Director Hartman on September 13 to members of the Under Secretaries Committee, informing them it would be discussed at a Working Group meeting on September 15 to prepare general guidelines for U.S. negotiators and to work out any remaining differences in agency views for Presidential review. (Ibid., NSC-U/DM 17) NSSM 48 is Document 198.
2. Undated; not printed.
3. Memorandum from Kissinger to Richardson, in his capacity as Chairman, August 16. (National Archives, RG 59, S/S Files: Lot 80 D 212, NSSM 48)
4. None of the Approve or Disapprove options in the paper is checked or initialed.
5. Undated; not printed.
6. Dated September 13; not printed.