258. Memorandum From Secretary of State Rogers to President Nixon1
SUBJECT
- European Community Trade Agreements with Spain and Israel
We need further guidance from you on how to proceed with respect to the Common Market’s preferential trade agreements with Spain and Israel. Unless we proceed prudently, we probably will have a major row with the parties to these agreements that will be counterproductive from the point of view of protecting our trade interests and have undesirable political side effects.
In accordance with your decision (NSDM 45),2 we have stated our opposition to these agreements both in the GATT and to the parties. We have also made clear that we would accept any arrangements between the EC and Israel and between the EC and Spain consistent with the GATT rules such as one which provides a definite plan and schedule for the formation of a free trade area or customs union within a reasonable length of time.
[Page 659]We have also invoked the procedures of the GATT (Article XXIII:1) on complaints about nullification and impairment of benefits caused by these agreements. Briefly, these procedures provide for consultation by the interested parties on the basis of written proposals. If no satisfactory adjustment is effected, the matter may be referred to the contracting parties who may authorize the aggrieved party to retaliate by withdrawing trade concessions.
Spain and Israel resent this action. The Spanish Foreign Minister, upon learning of our action, sharply protested to our Embassy, calling it an “unfriendly act” and stressing that this procedure had never been invoked in the case of other EC agreements (Greece, Turkey, Morocco, Tunisia, Malta and twenty-one black African countries).
Spain aims at full EC membership as a fundamental long-term policy objective to promote modernization and to bring Spain into Europe. Israel seeks the closest possible integration with the Community as a means of breaking its isolation and as being important to its continued economic growth. In both cases the Common Market could not agree to commit itself at this stage to providing for full customs union or free trade area relations for political reasons—Belgian and Dutch opposition to France, and French policy towards Israel. Spain and Israel therefore feel the United States should not penalize them for the imperfect nature of their agreements with the Common Market, especially since we have in the past stood still or actually encouraged similar agreements for other countries. The strength of their reaction and that of the Common Market, however, will depend on how we press our case further.
The Departments of the Treasury, Commerce, and Agriculture want to use the GATT consultations to attack the agreements in principle, to press Spain, Israel, and the European Community to terminate the agreements, and, failing satisfaction, to demand compensation across the board for all the trade covered by the preferential agreements.
Such actions would be regarded as an overt attack on the fundamental foreign policy objectives of the countries concerned. We would immediately be at loggerheads with the EC, Spain and Israel on an issue of vital importance to them.
A confrontation on this issue would cause serious problems with the EC, Spain and Israel.
- —It would worsen our relationship with Europe, already under strain. Rather then be seen as a tough-minded defense of U.S. trade interests, our action would be read as an attack on an important Community interest—its Mediterranean policy—and would coalesce European views against legitimate U.S. trade objectives. The French in particular would see this action as an attack on their vital interests.
- —Spain would see the US action as an attack on its fundamental objective of Europeanization and contrary to the spirit of the recently signed Agreement of Friendship and Cooperation. Spain might move against specific US economic interests such as our oil companies and might take actions impairing the usefulness to us of our bases in Spain.
- —The proposed course of action would put an additional strain on US-Israeli relations at a time when our intensive Middle East peace efforts make it essential that we seek to retain to the maximum extent possible Israeli confidence in US friendship and support. It does not make sense at a time when we are seeking Israeli policy changes to compound our problems.
If we were to follow the course advocated by the other agencies, the result would be predictable. We would have a nasty series of confrontations in the GATT that could end in a stalemate. Then we would have the worst of both worlds; we would have antagonized friendly countries without effectively having protected our export interests.
On the other hand, these agreements do violate the most-favored-nation principle and affect adversely the trade interests of the United States and other third countries although to a limited extent.
The State Department considers that the American purpose should be to protect our exports while forwarding our foreign policy objectives. We would do this best by seeking specific adjustments to protect American exports. We propose to do this by identifying those products where American exports are substantial, the preference is significant, and the price differential arising from the preference probably would have a significant impact on trade. With respect to such products, the United States would urge Spain, Israel, and the European Community to make adjustments to eliminate or reduce the discrimination against American exports. If the parties to the arrangements were unwilling to modify the preferences with respect to these products, the United States would seek compensation. Failing to obtain satisfactory compensation, we would have to consider whether to request authority from the GATT Contracting Parties to retaliate.
If we applied this formula in a reasonable fashion, making clear that we are protecting our trade interests and not trying to undermine the agreements, Spain, Israel, and the European Community probably would seriously examine our case. The Spaniards have previously told us that they were willing to consult on any specific problems we may have with their agreement with the EC. The Community has demonstrated—in the citrus case—that it is prepared to consider our case with respect to specific problems.
In addition to pressing our specific claims, we will be consulting with the Europeans both bilaterally and in the OECD on how we can [Page 661] move together towards a more sensible system of trade relationships with the developing countries.
I believe that if we follow this pragmatic course we will more effectively protect our trade interests and mitigate the adverse political consequences of our actions. To attack the agreements themselves by across-the-board demands for compensation or demands for wholesale revision will not succeed, will only aggravate the international economic climate, and will have the unfortunate political consequences mentioned.
Recommendation:
That we pursue our nullification and impairment action against the EC/Spain and EC/Israel agreements by proposing adjustments or compensation in cases of actual or probable injury to specific American exports.
In the GATT Article XXIII:1 consultations with the European Community, Spain, and Israel we should claim that the agreements impair GATT benefits we paid for. We should then identify those products where American exports are substantial, the preference is significant, and the price differential arising from the preference probably would have a significant impact on trade. With respect to such products, the United States would urge Spain, Israel, and the European Community to make adjustments to eliminate or reduce the discrimination against American exports. If the parties to the arrangements were unwilling to modify the preferences with respect to these products, the United States would seek compensation.
- Source: National Archives, RG 59, S/S Files: Lot 83 D 305, NSDM 45. Confidential. A copy of the memorandum was forwarded to Haig under cover of a November 23 memorandum from Davis reporting that the State Department had requested that the memorandum be staffed by the NSC and not automatically be passed to Peterson. Davis reported that Peterson was aware of the memorandum, and she recommended passing it to the CIEP for action. Haig initialed an attached memorandum to Huntsman, dated November 26, transferring action to Peterson and calling his attention to the important political implications that caused the State Department to want Kissinger’s comments on staffing the issue for the President. Both memoranda are in the National Archives, Nixon Presidential Materials, NSC Files, Subject Files, Box 402, Trade, Volume IV 7-12/71.↩
- Document 227.↩