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

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

Washington, May 14, 1970.

SUBJECT

• Tariff Preferences for Less Developed Countries—Chairman’s Report

NSDM 29 of October 31, 1969² recorded your decision that the U.S. participate in a system of tariff preferences for developing countries, subject to Congressional approval.

The decision in NSDM 29 set forth the following conditions to govern U.S. participation:

1. The scheme should be liberal, conferring the maximum range of benefits on the developing countries. Preferential duties should be set at zero.

2. For manufactured and semi-manufactured products, the scheme should except from preferential treatment only textiles, shoes, and petroleum and petroleum products.

3. The scheme should be simple, relying on the standard escape clause and adjustment assistance as safeguards for domestic industry.

4. All major developed countries must adopt a common scheme.

5. If duty-free treatment cannot be achieved, we should exclude from our preferences countries which receive selective preferences in developed country markets for products covered by the scheme.

6. Developing countries should eliminate reverse preferences which discriminate against the United States to become beneficiaries of U.S. preferences.

In your speech on Latin America last October 31,³ you announced your support for granting generalized preferences to the less developed countries. Subsequently, we have engaged in discussions with the European Community (EC) and other major developed countries in an effort to persuade them to adopt a common scheme incorporating the major elements of our proposal. We have concentrated our effort largely on the EC, since what we and they do is likely to set the pattern for the other donor countries.

The EC has proposed a tariff-quota (or “preferential ceiling”) scheme providing for duty-free treatment of manufactured and semi-manufactured products without exceptions but with an annual ceiling on the quantity of any item that may be imported at the preferential rates. Beyond the ceilings MFN rates would apply. The EC has told us informally that it intends to administer its system flexibly, i.e., the ceilings would be applied from the outset only on a list of sensitive products and would be applied on other products only when preferential imports cause or threaten injury to domestic producers. It is unwilling, however, to consider changing the basic framework of its scheme and adopting a non-ceiling type approach—on the grounds that in the circumstances of the Community, its scheme is the one best calculated to be administered in a liberal fashion. Japan has adopted a more rigid ceiling-type approach and seems firmly committed to it. We have concluded, therefore, that we will be unable to achieve our goal of adoption by all major donors of a common scheme along the lines of the U.S. proposal.

The LDCs tend to favor our non-ceiling approach but are not inclined to oppose openly the EC proposal. In general, the LDCs are urging donors to liberalize their respective proposals, to implement them promptly, and to rely on review procedures to determine any desired modifications in the light of operating experience. This appears to be the view of some of the major developed countries as well.

In view of this situation, a working group under Deputy Under Secretary Samuels’ chairmanship has reviewed possible courses of action.⁴ The agencies differ as to the course we should follow. The two basic options are:

• Option 1. Obtain agreement among the donors to permit those who wish to do so to proceed with their individual schemes and simultaneously to set up review machinery in the OECD which will ascertain whether the various schemes are achieving in practice an equitable sharing of burdens. Under this option, we would maintain the essential elements of our present proposal, except for commonality, as the basis for an approach to the Congress. (State, STR, and CEA favor this option.)
• Option 2. Seek adoption by all major donors of a liberalized version of the EC scheme through a more generous formula for calculation of the preferential ceilings. Our basic exceptions list would be retained but its contents might be reduced because of the safeguard provided by the availability of the preferential ceilings. These ceilings would be invoked automatically only on sensitive products, with the escape clause being used to invoke the ceilings on other commodities. If it were not possible to secure a liberalized ceiling formula, we would nevertheless accept the EC’s basic preferential ceiling approach. (Treasury, Interior, Commerce, and Labor favor this option.)

In supporting Option 1, State, STR, and CEA believe that you should adhere to your previous decision to adopt a liberal scheme without ceilings but should give up the requirement for adoption of a common scheme by all major donors—a position strongly supported by the Peterson Task Force. In the view of these agencies:

• —There is a serious risk of dissipating the good will of the LDCs if we hold up the implementation of a generalized preference system by continuing to insist on commonality.
• —A common scheme is not attainable in any event. The U.S. could not accept the EC scheme and it is unlikely the Japanese would liberalize their scheme sufficiently to meet the criterion of commonality. Some of the other donors have serious reservations about the tariff quota approach.
• —The Administration is effectively barred by domestic political considerations from abandoning our exceptions list and escape clause procedures. Thus, the only realistic alternative we have to maintaining our present non-ceiling proposal is to add quantitative ceilings to our other safeguards (our exceptions list and escape clause procedures)—thereby moving from our present proposal to a position more restrictive than that of the EC.
• —If we should now move to a more restrictive position, we would have no leverage to persuade other donors such as the EC and Japan to liberalize their schemes. We would also risk bearing the onus for a generally more restrictive preference system if the EC should use the U.S. action as an excuse to add an exceptions list to its present scheme.
• —For the United States to move to a more restrictive scheme by embracing tariff quotas would cause sharp disappointment among LDCs, notably in Latin America, and would be viewed as a retreat from our role of leadership on this issue.
• —The arguments that were put forward against the tariff quota approach last fall are still persuasive. In particular, it would be dangerous for the Administration to lend support to the concept of tariff quotas as a useful trade policy device by advocating a preference system based on them.
• —The U.S. scheme will require Congressional approval and the Administration is therefore unable to give other donors assurances that any commitments we might enter into will be carried out. Furthermore, Congress would undoubtedly be extremely critical of any international agreement negotiated in advance without Congressional authorization.
• —Adoption of Option 1 would not preclude the possibility of reconsidering Option 2 at a later date if this were essential to securing Congressional approval of a generalized preference scheme.
• —Congress is likely to look closely at the question of burden sharing. In this connection, a common approach may have presentational value but it would not ensure equitable burden sharing. It is not possible to estimate with any precision in advance the actual trade impact on individual donors. The EC scheme, if administered flexibly, as EC officials indicate they intend, may well yield results roughly comparable to our own. The proposed OECD review procedures would enable us to observe over time the strengths and weaknesses of each system and to draw conclusions about the desirability of continuing in this framework.
• —The Ministerial Council of the Organization for Economic Cooperation and Development (OECD) will meet in Paris on May 20-22 and preferences will be one of the major topics on the agenda. The Secretary-General and some of the LDCs are urging the donors to announce a policy decision on implementation of generalized preferences at this meeting. It would be highly desirable for our representative to announce at that meeting (a) that we are prepared to support the idea of early implementation of individual schemes and do not insist on commonality, and (b) that we intend to consult with Congress at the earliest appropriate time on a legislative proposal based on our present non-ceiling approach.

In supporting Option 2, Treasury, Interior, Commerce, and Labor believe that we should now strive for adoption by all major donors of a liberalized version of the EC preferential ceiling approach. They would indicate to the EC and other OECD countries that the United States is prepared to consider adopting the EC scheme. In so doing, they would favor exploring the possibilities of agreement with the EC and Japan to liberalize the formula for determining the preferential ceiling.

Under this plan it is proposed that ceilings on preferential imports would be automatically invoked only for a limited number of sensitive U.S. commodities; the escape clause would be used to invoke the ceilings on the other commodities. However, it should be noted that the EC method of merely accepting any EC country’s claim of injury in imposing a ceiling is not so rigorous as the U.S. escape clause.

With respect to exceptions, they believe that although we cannot allow unlimited preferential access for textiles, shoes, petroleum and petroleum products, it may be possible to reduce the contents of our present exceptions list through application of the ceiling safeguard. In the case of textiles many items will have to be excepted from a U.S. scheme. On the other hand, crude petroleum could be excluded from the scheme as a primary product, and shoes and petroleum products, as well as certain textile items, might be handled by placement on the sensitive list. There are also other possibilities for liberalizing within the context of an EC-type scheme so as to offset the need for an extensive exceptions list. In any event, the EC is unlikely under any circumstance to add an exceptions list to its proposal.

In the view of these agencies:

• —A common scheme along these lines is attainable. There is little doubt that if the United States were to adopt the EC scheme or some variation on it, the other major donor countries would quickly go along.
• —A decision to adopt this approach would improve the prospects for persuading the EC and Japan to liberalize their schemes. Total benefits to the LDC would be greater from universal adoption of a liberalized EC scheme than from adoption of the individual schemes currently contemplated by major donors. While the LDCs would undoubtedly have preferred adoption of a common scheme based on the U.S. proposal, you would nevertheless be applauded by the LDCs for achieving liberalization of the EC scheme.
• —Reduction of the contents of our basic exceptions list would also be acclaimed by the LDCs.
• —A common scheme is essential to alleviate Congressional and public concern about burden sharing. The Administration would be accused of playing a “numbers game” if we tried to justify equitable burden sharing under two completely different types of schemes by references to trade impact data.
• —Congressional rejection or substantial modification of an individual U.S. scheme would create significant LDC disappointment and embarrassment—a risk not worth taking.
• —The availability of a mechanism to trigger preferential ceilings automatically on sensitive products would substantially improve the changes of favorable Congressional action with a minimum of delay.
• —Ceilings on preferential imports of sensitive items would avoid, to a large extent, difficult political decisions required in ad hoc escape clause cases.
• —Once different national schemes are put into effect, there will be little real chance of obtaining changes necessary to equalize burden sharing.

Agriculture does not feel called upon to take a position on these options since, in general, agricultural commodities would be given separate and special treatment under all schemes.

All agencies agree that we should continue to insist on the elimination of reverse preferences but, if necessary, we could agree to the phasing out of these preferences over the life of the Yaounde Convention, which terminates in 1975. (Our preferential arrangements with the Philippines under the Laurel-Langley Agreement terminates in 1974.)

Action Requested⁵

A. Basic Approach:

Approve Option 1

Approve Option 2

B. Reverse Preferences:

May U.S. negotiators, while continuing to insist on the elimination of reverse preferences, concede reasonable phase-out periods not to extend beyond 1975 to achieve this goal?

Approve

Disapprove

ELR

1. Source: National Archives, RG 59, S/S Files: Lot 73 D 288, Box 837, NSC/USC Memos. Confidential. Drafted by Leary (E/ITP), and cleared in E, S/PC, and D and in Commerce, Treasury, CEA, Interior, Labor, STR, and USDA. The memorandum was forwarded to Kissinger under cover of a May 14 memorandum from Richardson informing him it pertained to the OECD Ministerial of May 20-22, at which the Secretary General would press for a resolution of the issue. Richardson urged Kissinger to obtain a Presidential decision by May 20.
2. Document 218.
3. Reference is to the President’s speech to the annual meeting of the Inter-American Press Association. See Public Papers of the Presidents of the United States: Richard Nixon, 1969, pp. 893-901.
4. A draft of a paper prepared pursuant to this review had been circulated to members of the Working Group under cover of a May 8 memorandum from Samuels informing them he planned to submit it to the President on May 12. (National Archives, RG 59, S/S Files: Lot 83 D 305, NSSM 29)
5. None of the options is checked, but a cover note indicates that Davis informed R.L. Brown that on May 20 the President approved Option I under A. Basic Approach and B. Reverse Preferences. She noted that appropriate White House documentation would follow; see Document 234.