221. Memorandum From the Special Representative for Trade Negotiations (Gilbert) to Secretary of State Rogers 1

SUBJECT

  • New Preferential Trade Agreements Between the EC and Other Countries

Summary

The purpose of this memorandum is to call to your attention the serious attrition that is taking place in the observance of most-favored-nation treatment by some of our major trading partners and the threat that this poses to the postwar international trading system. By deciding global trade policy issues solely in the context of bilateral negotiations with such countries as Spain, we run the danger of accelerating that attrition. Since its formation, the European Communities have, through association agreements, progressively departed from the GATT rules prohibiting discrimination. The EC, in its plans for negotiations with Spain and Israel, clearly are planning a selective exchange of preferences that are explicitly proscribed by the GATT. Our attitude toward these agreements needs urgent examination before precedents are established which may make future resistance impossible and which may lead to the dissolution of the GATT.

Action Proposed

1.
The general question of the proliferation of reciprocal preferential trade arrangements should be raised with our major trading partners bilaterally at the highest political levels and multilaterally in the GATT. Our concern and our intention to act if further preferential [Page 569]arrangements are concluded could be conveyed to the EC in a letter from President Nixon to the President of the Commission of the European Communities, Jean Rey, and to the Chiefs of State or of Governments of the six EC countries. Such a letter could stress that the United States has been and is willing to accept limited economic disadvantages stemming from preferential arrangements among EC member states because of the offsetting political advantages to it from European unity, but that such a balance cannot be expected to accompany preferential arrangements with Spain, Israel and other countries.
2.
Agreement among the agencies concerned should be obtained before consideration of NSSM 462 so that the decisions with regard to Spain will be consistent with overall United States trade policy on this question.

Discussion

The postwar international trading system has been constructed on a basic rule—unconditional most-favored-nation treatment (MFN). Applied to the member countries of the GATT, any advantage granted by one country to products from another country shall be accorded immediately and unconditionally to similar products from all member countries. The two most important exceptions to this principle are preferential arrangements in effect at the time the GATT was negotiated (1947) and preferential arrangements granted by members of a customs union or free trade area to each other. The six major multilateral rounds of tariff negotiations in the postwar period were based on the MFN rule, as is the network of rights and obligations of each GATT member state.

Preferential arrangements in effect at the time of establishment of the European Economic Community between some of its member states (principally France) and their colonies or former colonies in Africa were incorporated and expanded to all EEC countries in the Yaounde Convention between the EEC and 18 African countries. The United States expressed its opposition to this Agreement as inconsistent with the GATT rules but took no action to make the opposition effective. The EEC also concluded association agreements with Greece (1961) and Turkey (1963) providing for reciprocal preferential arrangements but, unlike the Yaounde Convention, these agreements anticipate eventual full accession to the EEC after a long transitional period.

Preferential trade agreements between the European Communities (EC) and Morocco and the EC and Tunisia went into effect earlier this year. A Working Party has been established in the GATT to examine the [Page 570]consistency of these agreements with GATT rules. In an effort to diminish the discriminatory effects of the agreements with Morocco and Tunisia on some of the other major citrus suppliers, the EC granted further discriminatory preferential treatment to Spain and Israel, for certain citrus fruit. In the face of vigorous opposition and announcement of intention to retaliate by the United States, and a clear indication that the EC’s request for a GATT waiver would be denied, the EC has announced its intention to withdraw the citrus preferences for Spain and Israel. Two observations on this series of events are relevant here: First, discriminatory trade agreements will lead to further discriminatory agreements; and Second, to the surprise of many, the EC cannot necessarily count on the support either of the EFTA countries requesting entry or some of the potential beneficiaries of preferential agreements for support when the basic MFN rule is violated in such a gross manner.

The EC has also concluded other preferential trade agreements, which are not yet in effect, with East Africa (Kenya, Tanzania and Uganda) and with Nigeria.

Under a mandate from the EC Council, the EC Commission is currently negotiating preferential trade agreements with Spain and Israel. The Council has authorized exploratory preferential trade agreement discussions with Lebanon and the UAR, and similar discussions can be expected in the near future with Austria, Yugoslavia and several other European and Mediterranean countries.

While the United States has objected to certain features of these arrangements and has occasionally expressed its opposition in principle, it has not thus far energetically opposed the trend. Our policy was expressed in 1967 as follows: “consistent with overall U.S. policy objectives, we intend to oppose all new EC associations except those with European countries leading to full EC membership within a reasonable period of time and which will result in internal free trade in both industry and agriculture, adoption of a common external tariff and joining in common agricultural systems. We cannot therefore condone any association arrangement whose purpose is principally a preferential trading relationship.” (CA-5638, Jan. 30, 1967)3

This has been a good statement of policy, but in the absence of some countervailing action it has apparently been ineffective. The Commission’s negotiating mandate for Spain indicates that the prospective agreement will not aim at full EC membership (because of Dutch and Belgian political objections to entry of Franco’s Spain) and [Page 571]that a preferential trading relationship will be formed. The same pattern is likely in future agreements with other countries and may be accelerated by the forthcoming U.K. entry negotiations. In the case of Austria, for example, the neutrality obligations under the State Treaty suggest that a tie with the EC may result in no more than a preferential trade agreement. Other historic neutrals such as Sweden and Switzerland would likely follow suit. The United States would have to expect that virtually all of Western Europe, Africa and much of the Middle East and Asia would be involved in a vast network discriminating against the United States. Even parts of Latin America could be drawn in as evidenced by Argentina’s recent overtures to the EC for some kind of trade agreement providing guaranteed access of certain Argentine products to EC markets.

United States trade and prospects for improving our balance of payments would be severely affected. Congressional reaction to any increase in discrimination against U.S. products could involve significantly increased protectionism which in turn would likely disrupt the framework for global cooperation with Europe in the political, economic, financial and military areas.

This issue is raised by the draft NSC paper “U.S. Policy Toward Spain—NSSM 46.” The paper considers certain trade policies the U.S. might adopt toward Spain in an effort to maintain the most extensive base rights possible or alternatively to maintain a lesser military capability. These include acquiescence in a preferential trade agreement between the EC and Spain. Although this draft paper recognizes that such policies would affect U.S. trade interests worldwide, the discussion is presented largely only in terms of U.S. policy toward Spain. I understand a similar paper on U.S. policy toward Israel is in the early stages of preparation.

If the European Communities conclude preferential trade agreements with Spain and Israel, the Administration would have no choice but to react vigorously. Otherwise, in the face of the political reaction that can be expected in the United States, it would have great difficulty in continuing our own adherence to the postwar trading system, including MFN. The trade coverage of the preferential agreements is likely to be so broad, and the damage to U.S. trade interests so extensive, that an offer by the EC (and Spain) to make compensatory tariff reductions could hardly compensate for the damage done. The United States should make it clear now that it opposes such agreements, that it is prepared to act—unilaterally if necessary—if such agreements go into effect, that the wholesale violation of the most basic GATT rule is noncompensable, and that the EC would bear the major burden of any retaliatory action by the United States.

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In taking action against the spread of preferential arrangements, the U.S. would probably incur the displeasure of some LDC’s. However, implementation of a generalized preference system should assist them in achieving their objective of expanded export earnings and would not be at the cost of exports from other LDC’s who have not concluded preferential arrangements with the EC. The United States has made it clear that the elimination of existing reverse preferences (preferences granted by an LDC to products of certain developed countries) would be a sine qua non for an LDC to obtain beneficiary status in the U.S. under a generalized preferences scheme

  1. Source: National Archives, RG 59, S/S Files: Lot 80 D 212, NSSM 46. Confidential. Sent through Trezise, who forwarded it to the Secretary under cover of a December 31 memorandum that expressed the hope that consideration of policy toward Spain could be deferred until the administration had adopted a position on EC preferential trading relationships. A copy of Gilbert’s memorandum was sent to Kissinger.
  2. See Document 224.
  3. Not printed.