222. Paper Prepared in the National Security Council Staff1
[Omitted here are Parts I and II of the Analytical Summary, with prefatory material and discussion of the military bases issues.]
III. Issue: What posture should the U.S. adopt with respect to the forthcoming Spain-EC negotiations?
The European Communities Council of Ministers has agreed to negotiate with Spain for reciprocal trade preferences (both industrial and agricultural goods). Spain is willing to accept such an arrangement as advancing its objective of closer ties with Europe and an agreement is possible by mid-1970. At present, the EC has offered a weighted average tariff reduction of about 60 percent to Spain, and Spain has offered a reduction of about 21 percent to the Community (whereas the Community has asked for 40 percent). Spain might see our objection to such preferential arrangements as a block to closer Spanish relations with Europe. Our objections could adversely affect US-Spain relations possibly jeopardizing our base rights and resulting in Spanish retaliation against US economic interests.[Page 573]
Our objections, however, are based on our established policy seeking to develop a multilateral system of trade and payments based on non-discrimination. This is the basic element of the General Agreement on Tariffs and Trade (GATT). A preferential agreement between the EC and Spain would encourage proliferation of such agreements which would be inimical to our economic interests and would severely damage the multilateral system of trade which has been built up. The proposed Spain-EC agreement would be contrary to the GATT (Article 24) which provides for an exception only for arrangements leading, under a definite time schedule, to a free trade area or custom union covering substantially all trade between the participants.
The options are:
Option I—Remain silent.
—This would eliminate the major irritant in US-Spanish relations, but would (a) encourage proliferation of such agreements possibly leading to a vast preferential trading bloc, (2) by condoning a clear violation of the GATT make it impossible for us to oppose other such arrangements.
Option 2—Raise proforma objection; reserve right to take the matter to the GATT.
—This might avoid prejudicing our economic and other interests in Spain and would avoid condoning a violation of GATT, but would not deter Spain-EC agreement or subsequent proliferation of such agreements against our interests.
Option 3—Oppose the arrangement making clear our intention to challenge in GATT and consider US action against the EC to restore trade balance.
—This might dissuade the EC (but not Spain) from making the arrangement and give us a basis to argue that our action is directed at EC and not at Spain, but Spain probably still will consider our action as interference with their attempt at closer European ties and retaliate against our interests in Spain. Moreover, any US action against the EC alone not authorized by GATT would risk EC retaliation.
Option 4—Do not object to EC granting preference to Spain but ask the EC either (1) to forego preferences for EC goods in Spain or (2) to compensate US and others by tariff reductions; selectively retaliate against the EC if it does not agree.
—This would (1) strengthen our argument that our action is directed at the EC violation of GATT and not at Spain, thereby lessening danger of Spanish retaliation against us and (2) generate some support from other GATT members who would benefit from lower tariffs; but the EC is unlikely to accept our proposal and Spain may still see our action as interference; moreover, some US exports (e.g. citrus) to the EC would be adversely affected.
Option 5—Seek EC modification of agreement with Spain to make it consistent with GATT (Article 24).
—This would maintain integrity of GATT and—even if unsuccessful—support our argument that the EC, not the US, is the barrier to full Spanish integration and provide basis for US counter action against the EC; but (1) might result in an agreement not genuinely consistent with GATT but which others will accept, (2) could be interpreted as US willingness to agree to any EC agreement consistent with Article 24 whether leading to full membership in the EC or not, and (3) effects on our trade would be uncertain.
The United States has historically championed the most-favored-nation (MFN) principle as a guiding principle to govern international trade. We have done so because our global political interests (a) make it difficult for us to favor one nation over another in our own trading relationships, and (b) prompt us to discourage regional blocs elsewhere. Because we have avoided giving preferential treatment, most non-MFN deals are likely to develop among other countries—and thus hurt US trade. Our economic and foreign policy interests thus have dovetailed to convince administrations of both parties and the Congress to adhere strongly to MFN. The MFN rule is the basis of the GATT structure which has governed international trading relationships in the postwar period. The one permissible exception to the MFN rule is for customs unions or free trade areas, on the grounds that countries which wish to harmonize their economic policies extensively should be permitted to do so.
The MFN principle has come under great stress in the past few years, however, mainly due to the spate of preferential arrangements already developed by the EC. All of them so far have been with LDCs—the former French and Belgian colonies, Nigeria, the former British colonies in East Africa, Tunisia and Morocco. (Greece and Turkey also have gotten preferences but they are first steps in eventual full membership after a 22-year transition period.) The arrangements obviously help their economic development and the trade effects on outsiders have been small, so it has been both difficult and relatively unimportant to oppose them.
Now, however, the Community is negotiating preferential arrangements with several much more important countries—not only Spain but Israel, Austria, Yugoslavia, the UAR, Lebanon, and even Argentina. Many other non-EC members, including Switzerland and Sweden, seek preferences as well. And it is quite possible that the United Kingdom and other applicants for full membership in the EC will seek “associate status” and hence trade preferences if their bids for full membership bog down.
The United States is not completely clean when it comes to implementation of the MFN rule. We do not extend such treatment to the [Page 575]Communist countries, except for Yugoslavia and Poland, but this departure has a security rationale. We continue to give special preferences to the Philippines, although these are being phased out. Our most important departure is that we have now joined the other industrialized countries in offering trade preferences to all LDCs; however, a major reason for doing so is to redefine the MFN rule rationally by retaining it for trade among the industrialized countries and apply similar preferences on all LDC exports to all industrialized countries.
Options 1 and 2 in effect acquiesce in the agreement. But there are strong reasons why the United States should not acquiesce and should continue to champion the MFN principle, redefined to include generalized preferences for the LDCs:
- —A continuing series of EC preferential arrangements will significantly hurt our trade—by hundreds of millions of dollars if they were eventually to cover all of the countries cited above.
- —No single preferential deal will damage our trade severely but it is already clear that one deal begets many more, often because any given deal hurts the legitimate interests of other countries.
- —Congressional criticism of both our overall policy toward Europe and our generally liberal trade policy will clearly intensify if we do not vigorously oppose the proliferation of special preferences by the EC. They will rightly point to the complete illegality of such arrangements under the GATT and claim that we have failed to defend our legitimate interests.
- —It therefore will become increasingly difficult to maintain a political basis for our support for expansion of the EC.
- —A degeneration of international trading relationships between the United States and Europe will also poison our political relations in due time.
The Spanish deal alone would probably not have all of these dire effects if we could hold the line on further deals. But it would be virtually impossible to do so in the future if we do not do so now. Israel is the next case and it will be difficult enough to oppose anyway. Austria feels that it cannot seek full membership in the EC because of the State Treaty. We want to help Yugoslavia move westward and it would even be difficult to oppose UK association.
US opposition to the EC-Spain deal (Option 3) probably would succeed. We just succeeded in blocking EC preferences to Spain and Israel on citrus fruits alone and it is doubtful that the EC wants to help Spain so badly that it would jeopardize its trade with the United States and other GATT members to do so. But Spain probably would see our opposition as a block to closer Spain-EC relationships with resulting adverse effects on our political, security and economic relationships.[Page 576]
We obviously need to reconcile our overall trade policy with our overall interests in Spain in this case. If the EC relationship issue cannot be dissociated from our political and security relationships, the two considerations could be reconciled if we:
- —Inform the EC and Spain that we cannot condone their present plans and will retaliate against both if they pursue them. The preferential arrangement they are considering is illegal under GATT. It would jeopardize our trade. It would set an unacceptable precedent and its political effects are uncertain.
- —However, we could condone a more ambitious scheme which would amount to a “free trade area” between the EC and Spain and hence be legal under GATT. (Option 5.) (This would mean freeing the bulk of industrial and agricultural trade between EC and Spain rather than partial tariff cutting on industrial products only as presently contemplated.) Such an arrangement might have economic advantages for us—such as an attraction for US investment and greater economic growth leading to increased Spanish imports from us—which might even offset the economic drawbacks over time. More importantly, it would imply a much greater political association between the EC and Spain, which we support. And it would not represent an unfortunate precedent because there are obviously fewer candidates for such an arrangement than for ad-hoc preferential deals.
It would be difficult for either Spain or the EC to oppose such a US position. We would appear to be promoting Spain’s desire to “enter Europe” which they have repeatedly asked us to do. It would have the rules of GATT on its side and would therefore be difficult for the EC to oppose—this is particularly true because the main EC opponents of full Spanish membership are the Dutch and Belgians, who are generally the staunchest defenders of GATT (for good reasons, given their economic reliance on international trade). And if the EC and Spain could not agree to go this route, it would be much easier for us to oppose (as per Option 3) the more limited type of arrangement they are contemplating. In short, it would be a positive position which would provide the basis for a negative one if it failed.
There are two additional steps we could take, either in addition to the foregoing or as alternatives in case we decided to be completely negative toward the preferential agreement at the outset:
- —We could inform Spain that we would support its eligibility for tariff preferences under the generalized preferences scheme now being negotiated. Spain wants badly to be treated as an LDC for this purpose but we have never indicated that we agree. In fact, Spain would not be eligible under the conditions we have announced if it extended “reverse preferences” to the EC, as it now plans. Spain [Page 577]would probably come out about as well economically from the global preferences (which would of course include some preferences in the EC) as from the special deal with the EC. However, this would eliminate any “special” move toward Europe and would not have the political benefits envisaged by the Spanish government. (This is probably the overriding drawback to Option 4, which would have us condone EC preferences to Spain now as an “advance” on the generalized scheme but oppose Spain’s preferences to EC goods. State, however, probably supports Option 4.)
- —We could give Spain better treatment under our program for controlling foreign direct investment by US firms—which they have repeatedly sought. (Spain is now treated like the rest of Western Europe.) It is undesirable to let political considerations affect this program, and Treasury will vigorously oppose doing so. But the program is being phased out anyway and the damage would be limited.
Treasury and Commerce strongly oppose acquiescence in the preferential agreement or the granting of relief from restraints on US foreign investment for Spain (Annex D, NSSM 46). They support Option 3.
- Source: National Security Council, Secretariat, Box 92, 1/16/70 Review Group Meeting-Spain. Secret. The text printed here comprises pages 9– 15 of the Analytical Summary of the NSSM 46 Response paper, prepared as part of the briefing material for Kissinger’s use at the January 16 NSC Review Group Meeting. The paper is attached to a January 5, 1970, covering memorandum from Sonnenfeldt which informs Kissinger that Lynn, Bergsten, and Kennedy collaborated in assembling the briefing book. See Document 224.↩