281. Action Memorandum From Robert Hormats, Harold Saunders, and Helmut Sonnenfeldt of the National Security Council Staff to the President’s Assistant for National Security Affairs (Kissinger)1
- How to Deal with EC Trade Arrangements with Spain and Israel
Flanigan’s staff has submitted for your clearance the memorandum for the President at Tab B proposing a US position for dealing with EC trade agreements with Spain and Israel. This covers Deputy Secretary Irwin’s October 20 memorandum to the President on this subject at Tab C.2 We urge your attention to this issue since how we handle it will significantly affect our political relationship and our negotiation strategies with Europe, Spain and Israel.
The US has expressed opposition to the EC’s preferential trading arrangements with non-member countries often and forcefully. We have argued that these arrangements are incompatible with the Most-Favored-Nation provisions of the GATT Treaty and fail to qualify for an exemption—which has been granted to customs unions and free trade areas like the EC and the European Free Trade Area—since they allow free trade only in particular products. The agreements also hurt our exporting interests (e.g., citrus, paper products, tobacco). A GATT working group studied the issue in 1971 but made no findings on the consist-ency of the agreements with the GATT Treaty. Our opposition has so far done little good—the EC has made such agreements with the EFTA non-applicant states such as Austria and Sweden and is now doing so with the Mediterranean countries.
The economic agencies of the USG have felt for a long time—and especially since the summer of 1971—that it is time to get the EC and the countries involved either to make these agreements conform to the GATT or to compensate us for the impairment of trade benefits which they cause. Last year we stated that we would seek compensation under [Page 710]Article 23(1) of the GATT, which says that when one party believes that a trade benefit accruing to it under the GATT is nullified or impaired by failure of another contracting party to carry out its obligations, it may with a view to satisfactory adjustment of the matter make proposals to the party or parties concerned and they must give “sympathetic consideration” to such proposals. Because of a year-long wrangle within the USG, we have not yet taken formal action under Article 23(1), however.
State (Irwin), Treasury (Volcker), Eberle and the CIEP staff have recently agreed that we should soon make the long overdue approach to the Israelis, Spaniards, and the EC. They believe this is consistent with the President’s recent guidance, contained in CIEPDM No. 14 (at Tab D),3 which tells Eberle to pursue “for the present” a policy of Ô’modified confrontation” with the EC, exerting pressure on behalf of trading principles and our specific commercial interests but bearing in mind the overriding importance of our political relationship with Europe.
Operating under this directive and on the basis of our position that these arrangements are inconsistent with the GATT, the agencies would tell the parties involved that our trade has been impaired by (a) the special preferences which the EC accords to Israeli and Spanish products and (b) the “reverse preferences” which these two countries accord imports from the EC.
Flanigan has drafted negotiating instructions (at Tab B with Flanigan’s draft memorandum) which instruct our negotiators to (a) tell the Spaniards and Israelis that their agreements with the EC should either be renegotiated or changed to remove their discriminatory character and (b) ask the three participants for compensatory adjustments (duty reductions) covering approximately $750 million of trade. This is an arbitrary figure. (It does not mean we are paid this amount or that our trade will increase by $750 million, but that tariffs on $750 million worth of US exports going to the EC, Spain, and Israel would be reduced.)
All agencies (except perhaps Treasury) recognize that we can never get such a large amount of compensation. But they argue that a claim of this size will impress the three parties with the seriousness of our objections and with the need to change the discriminatory nature of such agreements. They believe that our levying a claim of this magnitude will: [Page 711]
- —Deter the EC from concluding this type of arrangement with other countries (although most such agreements which the EC intends to conclude are already in place so that there is not much to deter).
- —Maintain the pressure on the EC in order to show our determination to bring about reform in the rules and practices which discriminate against us (this could be done in the 1973 trade negotiations).
- —Impress upon the three participants the seriousness of our objections and make it known to the EC that agreements of this nature will entail their paying high compensation to the US to offset their discriminatory aspects. (The agencies feel that unless we take strong measures soon, the EC will doubt that we are serious, since more than a year has elapsed since we first made known our objections in the GATT.)
- —In the end get some offsetting trade concessions from the three parties.
Treasury argues that a successful negotiation with the three parties is “vital” to stopping extension of the EC preference system, which in turn is necessary to constructing a new world economic system, as outlined by the President to the IMF meeting.4
Irwin and Flanigan point out in their memoranda that there are political problems and risks involved. As we see them the risks are:
- —With Israel. If handled in isolation, this will become a negative issue in our broader relationship with Israel, complicate our efforts to work toward an Arab-Israeli peace, and lead to an atmosphere of confrontation which will be interpreted in Israel as a diminution of US support. Also, if handled in isolation, anything we may do to meet Israel’s concerns will gain us no credit in our broader relationship. Finally, we would be throwing away an opportunity to ask Israel to help us on an issue important to us—agreeing to generous compensation arrangements which we can use as a precedent with other countries. If Israel refused, we would have established justification for asking consideration in other areas.
- —With Spain. Liberal Spaniards regard a closer association with the EC as the key to Spain’s modernization. They will resent what will appear to be an effort to block this trend and as a consequence may prove less cooperative in negotiation with us on base rights. (Ideology apart, it is in fact sensible over the long run to have Spain closely associated with Europe and us.)
As in the case of Israel, we should also consider how to fit the EC preference issue with Spain into a broader negotiating strategy. Spanish agreement to compensate us would help our cases with other non-EC [Page 712]countries in Europe; Spanish refusal to do so might conceivably establish an obligation on the part of Madrid to treat us well when base negotiations begin, probably little over a year from now.
—With the EC . Member nations may interpret this as a sign of our overall hostility toward the Community. Coming as (a) one of the first post-election acts in the trade field by an Administration which has signaled that it wants to put US-European relationships on a new, more constructive basis, and as (b) one of our first policy reactions to an EC Summit which indicated a willingness to negotiate with us constructively on trade and monetary matters, a claim of this magnitude will be criticized if not derided. The EC will say that rather than attempting to seriously discuss outstanding problems, we are making outrageous demands. It might make the Europeans considerably less cooperative in next year’s negotiations on trade and monetary reform.
Irwin thinks that these risks can be reduced by quiet diplomacy, a skillful negotiator, and our falling back when necessary from the three-quarter billion demand.
There is a disagreement between State on the one hand and Treasury, Eberle, and Flanigan on the other, concerning a fallback. The latter group does not want to have the President authorize a specific fallback in advance. Thus, Flanigan’s draft memorandum to the President makes no mention of a fallback and requests that he (Flanigan) be designated to coordinate one as necessary. Treasury and Eberle agree. In either case, political considerations as well as economic should enter consideration of when a fallback is authorized and under what conditions.
The Political Context
Unless this matter is handled carefully, there may be reactions from the EC, Israel, and Spain which will damage the “overriding political relationships” to which the Flanigan CIEPDM refers.5
On the other hand, we should not delay this too long. Arguments within the bureaucracy have already dragged on for a year. The agencies are all lined up on this one and adduce strong arguments for proceeding. Most importantly, we must demonstrate to the Europeans that we will not hesitate to pursue our legitimate economic interests.
To make certain that our political relations are not jeopardized, we should do several things:
- —Send Eberle with Irwin to the parties involved so that the economic reas-ons for our initiative can be presented in a political context and so that the countries are reassured that this represents an attempt to deal with legitimate US [Page 713]economic interests and is not a hostile political act. 6 Flanigan’s memorandum provides for Irwin to accompany Eberle. In the case of Israel at least, this might be supplemented with a direct general approach from the White House.
- —Work our integrated approach for use by Irwin and Eberle in the context of our economic, political and security relations with Europe and the other parties involved. This can help make clear that we do not see this as a political confrontation. Also, a well controlled approach would enable us to use a turn down in our request for compensation as an added chip to cash in to get these countries to do something which we want in another area. For instance, if Israel turned down a private request to be helpful in this field that would give us one more claim—if our relationship is to be genuinely reciprocal—on Israel’s consideration of serious US suggestions on the Arab-Israeli front. This also cuts the other way—we could put our request for compensation in the context of a defense of trade principles and our legitimate trading interests, but indicate also that these countries could strengthen our relationship by giving us appropriate compensation. (Flanigan’s memorandum does not provide for a scenario such as this.)
Flanigan’s draft memorandum and negotiating instructions are appropriate—but only if we can inject a greater political element. Your chief tasks now are twofold:
- To get Flanigan to hold off until the President has decided how to deal with the whole range of US, Europe and Israel relations in a political-economic context.
- To impress on him the view that asking for compensation on $750 million worth of trade—while defensible economically in principle and in terms of negotiating strategy—may be counterproductive in political and perhaps economic terms. All three parties might see this as an outrageous demand, not to be taken seriously. Moreover, were we to back down quickly from such a demand—as we would surely have to—the credibility of our position in next year’s monetary and trade negotiations would be suspect.
The memorandum to Flanigan at Tab A makes these two points.7
That you sign the memorandum for Peter Flanigan at Tab A.[Page 714]
- Source: National Archives, Nixon Presidential Materials, NSC Files, Agency Files, Box 219, CIEP. Secret. The signed original of this memorandum is attached to Document 282. On that original Haig wrote: “Flanigan has asked that this be returned for reconsideration.” (National Archives, Nixon Presidential Materials, NSC Files, Subject Files, Box 402, Trade, Volume V 1/72-4/7/73)↩
- Document 280.↩
- Document 277.↩
- See footnote 2, Document 280.↩
- Document 277.↩
- This Irwin-Eberle advance mission was proposed in the draft CIEPDM at Tab B; see footnote 8 below.↩
- Not printed. There is no record that Kissinger signed the memorandum.↩
- Confidential. Flanigan considered this paper, which is double-spaced, a draft and requested that it be returned to him (see footnote 1 above). A draft covering memorandum dated November 1 and an accompanying draft CIEPDM are not printed. For Flanigan’s revised memorandum to the President, see Document 282. These draft negotiating instructions are almost identical to those that the President approved pursuant to an April 18, 1973, memorandum from Kissinger and Shultz. (National Archives, Nixon Presidential Materials, NSC Files, Subject Files, Box 322, European Common Market, Volume IV 10/72-7/73)↩