286. Memorandum of Conversation1

PARTICIPANTS

  • Secretary Shultz, Treasury
  • Secretary Rogers, State
  • Secretary Peterson, Commerce
  • Peter Flanigan, CIEP
  • Ambassador Eberle, STR
  • Under Secretary Volcker, Treasury
  • Under Secretary Casey, State
  • Ken Dam, OMB
  • Chairman Stein, CEA
  • Chairman Burns, FRB
  • Deputy Secretary Simon, Treasury
  • Robert Hormats, NSC

Shultz: The purpose of this meeting is to discuss strategy and political considerations for submission and timing of trade legislation. It is to permit an airing of views, but we will not attempt to reach any conclusions. Let’s discuss this today and come back again. Peter Flanigan has done a great deal of work on this, so I shall turn it over to him.

Flanigan: The Hill is already aware of this meeting. It appears to be open information, but this is not necessarily bad.

Rogers: The Hill knows not only about the meeting but what the views are.

Flanigan: The purpose is to get thoughts for you (Shultz) to have when you consider the schedule of legislation before the Ways and Means Committee including the timing of trade legislation. But first we must consider what kind of legislation we want. There are two possibilities: [Page 730]

  • —A full blown trade bill.
  • —A sense of Congress resolution which would not commit Congress to accept what our negotiators agree on.

We should focus first on which option is desirable and then we can talk about timing, since the two are interrelated questions. If we want a sense of the Congress resolution we could go up early and hope for a favorable response. We must also consider whatever the President may be thinking about in the foreign policy area. This will be an important component in the “Year of Europe”. We must see if he has any plans and reflect these in whatever proposals we send to Congress. We can submit a sense of Congress resolution alongside of anything we do on the “Year of Europe”. Any trip the President makes will certainly focus on these issues and political issues as well.

There are three considerations:

  • —Could we get a detailed bill through the Congress?
  • —Could we have meaningful negotiations without a bill?
  • —Could we realistically expect what is negotiated to be passed by the Congress if we don’t have prior authorization?

I have talked generally with the Congress and in particular with Jimmy Burns. He believes that with a very substantial Presidential push we can get the bill through. He feels it is a leadpipe cinch to get a sense of Congress bill through but that it will be difficult to get the Congress to buy in whole the results of the negotiation. Of course, it will also be difficult to get through the Congress what we negotiate on NTBs.

The problem abroad is that foreigners would not negotiate based on a sense of Congress resolution. Congressional staffers who went to Europe have reported to me that on this basis we would not have realistic negotiations. The Europeans—who are not enthusiastic about negotiations and are concentrating on completing the work of integrating and developing the institutions of the EC—would like an excuse not to negotiate. However, the US probably could carry on negotiations with just a sense of Congress vote.

The fate of the negotiated package is also an important consideration. We will have to submit it to Congress eighteen months to two years after negotiations start and this is an optimistic schedule. This will put the package to the Congress at the time of the ′74 or ′76 elections. That is an inauspicious time. Although, it is true that in any case we will have to go back to the Congress anyhow to bring our NTB and agricultural successes, or hoped-for successes, before the Congress.

We should discuss these first and then go to the question of timing.

Volcker: The crucial difference seems to be whether you have authority or you don’t.

[Page 731]

Flanigan: Yes. The sense of Congress resolution could be a detailed bill.

Rogers: I believe we have to go get a bill. We have such things as MFN, Preferences, etc., and negotiations will not be meaningful unless the President has authority. This need not necessarily be the same kind of legislation as the Kennedy Round, but authority to make a deal that will stick. The Europeans remember that we did not implement the American Selling Price agreement in the Kennedy Round and say to us that if you are not about to get authority we do not trust you.

The Europeans have said that it will be difficult for them to negotiate without authority. We do not have much choice, we must bite the bullet. All Congressional staffers have said that if the President puts his weight behind it we could get this legislation.

And this is essential not only for trade matters, but also for foreign policy reasons since we can’t resolve these trade problems with Japan and Europe unless we have these negotiations.

We need a comprehensive bill and we should draft it as quickly as possible. We must rally support because the opposition will be tough. Labor will oppose but we can make sure that labor is not too difficult. They have other things they want.

Less than a comprehensive bill with authority will not be meaningful and others will not negotiate with us.

Eberle: One important fact which should be remembered is that there are a whole series of “housekeeping provisions” which we should put into effect today. They are necessary for the management of our trade program. We do not even have authority to make minor deviations in tariffs. If we had minor authority we could solve some of our trading problems. And a new system of safeguards could allow us to move in and be responsive to particular domestic problems.

Also, we will have a fight on the Hill anyway and as long as you have to fight, you may as well go up with your bill and fight for it.

I feel strongly that we need authority. It is a question of credibility. Without authority the Europeans will negotiate but will not be serious about negotiating. On the other side, if we have authority, we can implement a whole series of things in the farm area which we can negotiate. General legislation has already given us authority to implement certain things which we negotiate with regard to agriculture.

Rogers: Does the President have authority to make changes in the farm field?

Eberle: Yes. He can phase out certain farm practices. If we are to manage domestically and resolve our problems with Europe and Japan we need this legislation. We must put these problems in an overall format [Page 732]in which they can be solved. Specific bilateral problems can be solved in a multilateral context. If you do not have authority, no matter what concessions you make, those injured by them will protest. And it could be the next Congress which would receive the package we brought back. Our partners will not negotiate seriously on this basis. The momentum is now with us and we have a good chance. We can also fit this into the “Year of Europe”.

Rogers: There is no assurance that the Congress will act at the end of the road.

Flanigan: However, even if we do get authority, remember that the last time the Market had to go back and have reviewed what they negotiated.

Eberle: With authority we can ask them to get an equivalent mandate.

Volcker: You will not get this anyhow.

Eberle: You can insist.

Peterson: The ability to manage and deal with problems is critical. And, we must improve our credibility abroad. We should have a safeguard system which we can implement which is developed internationally. On labor, they are committed to fighting this, but some negotiations with labor about other things they want and things they want to avoid in Phase III can ameliorate the situation.

The President has an enormous foreign policy mandate. We have done great things with the Soviet Union and in SALT. We must show how this bill was part of peace over the next ten years. Trade is small potatoes compared to building the alliance over the next ten years.

Consultations with the Congress will be important. They are still mad and they are asking if we are tough enough. Is there a new way of involving the Congress—either a mandate or specific legislation must involve them. Could we set up a group which works with the negotiating groups?

Eberle: In July and August I met with the Ways and Means Committee on that subject. They are torn between participating and getting too involved. They would like to be associated but how much further to go is the question. There is no real hope that they will get involved.

Volcker: If we need housekeeping legislation, let’s go ahead. The issue is do we have full implementing authority on tariffs or do we want to treat tariffs and NTBs on the same basis—i.e., you have to go back to the Congress.

If we get authority on tariffs it is not in our interest. The whole momentum will go in the direction of tariffs. We want at least as [Page 733]much pressure on NTBs as we do on tariffs. We should treat these in parallel recognizing that we cannot get authority outside of the tariff area.

Let us put this in Peterson’s setting. We are interested in total reform—the relationship to monetary reform, NTBs, new rules, etc., and look at it in a comprehensive way. The focus that you are trying to create is undercut if you concentrate only on tariffs and you will cause a squabble in Congress over this issue.

Other areas—NTBs, agriculture—will be more difficult.

Rogers: We should not call this liberalization but an attempt to reduce our disadvantage in trade.

Eberle: I see it as attempting to achieve a fair system opening up more markets on a continuous basis.

Flanigan: (To Volcker) Asking for authority does not necessarily mean the President has to implement what is decided. The President can say, I won’t implement the reduction in tariffs unless I get what I want some place else.

Volcker: In theory you are right but in practice you are wrong. The least obnoxious of barriers are tariffs. The most obnoxious are NTBs. We will make progress in the most benign areas at the expense of the worst barriers. And part of the pressure from reduced tariffs would be to put on NTBs.

Eberle: Most people know these are tied together. On the question of tariffs being least obnoxious, we must recognize that tariff lowering is one way of lowering preferences. This cuts the differential down so that we can be more competitive.

Dam: On the question of Congress, an up or down vote would be difficult to arrange when you go back. At the beginning it is difficult to see who’s the winner and who’s the loser. When you come back, those who are hurt will complain but exporters not lobby very hard because the benefits they will get are uncertain.

On NTBs, we will probably have the same problem and on agriculture we can use the Agricultural Act which can allow us to do something. My point is that if we do want to reduce tariffs, it will be difficult to do so when you come back.

Peterson: A lot depends on what the climate is when you come back. Now people say there is nothing you can do to reduce the imbalance. Later, the Monetary Agreement may be in hand and the climate may be better.

Rogers: These may take longer than two years. They could be delayed until Ô76, which would be a bad year.

Volcker: What if you are defeated?

[Page 734]

Rogers: Then you can fall back to a sense of Congress resolution.

Flanigan: You could get a comprehensive bill without authority.

Rogers: In my talks with foreign ministers it is clear that no one will take us seriously if we don’t have authority.

Peterson: The Europeans are not excited about negotiations and will use our not getting authority as an excuse for not moving.

Rogers: If we want these to succeed the President must convince them we are serious.

Volcker: What is your definition of success?

Eberle: If the EC is left alone on the economic side, by nature of its decision-making process it will exclude more of our products. We need a forum in which they are required to discuss these things. They need an out. Negotiations can stop further deterioration, and lower some barriers. In addition, we can open up the EC agricultural policy. The French have said that if you can open this up it will be great progress. There is hope for progress. If you don’t have credibility, they will stall and they will stall on the monetary side.

Rogers: They want us to take the lead. If we do we will be successful.

Volcker: On the question of a definition of success—if it is to get some balance of favor for us and not lose ground on the tariff side that will be difficult. The tendency is to make a deal for net tariff reduction and leave it at that.

Peterson: Why do you contemplate not getting anything on agriculture and NTBs?

Volcker: Tariff authority gives them a good position.

Peterson: Generalized tariff preferences is a built-in way of getting rid of reverse preferences. You have more bite if you have a tariff cutting authority.

Eberle: Europeans do not want to put emphasis on cutting tariffs. By legislative history we can show that these things will be tied together. We will have flexibility and negotiating strength.

Peterson: On the question of timing, this should be part of our major foreign policy initiatives. They will determine whether you go up in January or take two-three months to get moving.

Rogers: It is probably unwise to go up in January, but we should not delay too long. We should think it through. We must do a lot of selling in advance, and discuss this with labor. We must convince them that adjustment assistance means something. We could probably go up in February.

Flanigan: That is the earliest we could be ready. We could go up at the end of February. We need an education process if we want to do this. [Page 735]We must take into account the President’s actions. If the President goes abroad early, we should use this and can submit the bill and call for early hearings.

Or we could submit the bill and not hold hearings and then the President would report back after his trip to explain the foreign policy significance of the bill.

Eberle: We need to be in at the beginning or we will lose control. The first of March through the end of April would be fine. If not, there will be another bill and we will lose momentum. We should submit at the end of February and hold hearings in March, but this depends on whether the President goes to Europe. If we do not submit the bill before he takes his trip, it will weaken the President abroad.

Rogers: The President must put himself strongly behind this bill when it is submitted. He must make a strong Presidential commitment.

Shultz: Who is optimistic about a satisfactory outcome if we get authority?

Rogers: I am. I believe that the Europeans recognize the importance of a satisfactory conclusion. Their security dependency on us is important.

Flanigan: I would put this in another way. Who is confident that the results of negotiations will be better if we have authority than if we do not. This is the important point.

Burns: It is our business to come out of these negotiations with a clear advantage. We have the cards. They understand the facts of life. They have to be sensible and recognize the facts of life as far as our trade position is concerned.

Eberle: We can come out with a net balance, but it will be piecemeal and will come in over time. There are four areas where if we don’t negotiate we will be hurt. If we don’t negotiate we will be hurt by actions which they will take.

Rogers. On reverse preferences there is increased opposition to EC policies among their people.

Shultz: As I see it, the big problems on trade are:

  • —The Europeans are making things worse—making them more difficult.
  • —Japan has NTBs which they are reluctant to get rid of.
  • —The Canadians have made special deals with us in the past which we now do not like but they are reluctant to do anything to improve them.

Lower US tariff barriers are not of great interest to foreigners. They care about our military shield and the fact that they are piling up dollars. The only way they can do something about the latter is to have [Page 736]negotiations to improve the balance so that they will stop accumulating dollars.

The question I have is will we get enough in these negotiations to justify the risk that Congress will give the President additional leverage. Remember during the textile negotiations we claimed that we could not impose quotas. The Congress may give the Executive power to impose quotas. We are discussing tariffs, but the things which give problems are not in the tariff areas.

Burns: Suppose you put in legislation that US negotiators should attend to NTBs.

Volcker: Domestically there are protectionist problems. Dampening these threats would be an achievement. It could be more important than a positive step. The joint resolution could dampen these pressures, and there is more certainty that it would do so.

Flanigan: You could take out of the broad bill authority to implement tariff cuts and use that bill against the threat of protectionism here.

Negotiations which brought about a lowering of barriers on both sides would be a success.

Shultz: That’s right.

Flanigan: Even if we didn’t get an advantage, if we got safeguards that would be a success.

Shultz: What are the real levers in negotiations? Tariff barriers are not particularly high on the list, yet we are arguing about authority to implement tariff cuts.

Flanigan: They are only important in that they allow us to argue for other things. They strengthen our credibility.

Burns: Other countries need a handle so that if there is any willingness to make concessions to us they can do so under this.

Eberle: That is correct. They will help us in Canada on wheat, etc. Whether authority is 50 percent or is 0, it will allow the Europeans to move on NTBs. They want us to lower our high tariffs. Some of these high tariffs are high on their priority list but low in terms of what it costs us to give them up.

Peterson: The security issue is an important lever or carrot. It will be helpful here to get burden sharing and a monetary settlement, etc. We are talking about tariffs before we know the President’s strategy for Europe.

Rogers: Japan will be able to reduce NTBs in this process. We have the upper hand. They are nervous about what we might do. They are worried about our position.

Flanigan: We have a security lever, and that will be especially important in MBFR discussions.

[Page 737]

Eberle: We should put this in an interrelated content at the highest levels. We can pull out the economic side but we should recognize the real tradeoffs. We should not focus on any one issue but recognize that a trade package is related to the total package, and should not allow them to come out of context.

Rogers: There is no need to tell them about the security relationship. They know it.

Burns: That is right. The financial people talked to me about it. The problem is with Congress. Should the President be defensive with respect to Burke-Hartke? It is better to come forward with a positive program. And 1973 will be a good year. The economy is moving forward. Protectionist forces may weaken. This is as good a year as I can visualize.

Eberle: We can go in on a composite basis and everything will be with us.

Shultz: I am glad to have had your thoughts and we can come back again on this. As I see it, the consensus is that we go forward with a general comprehensive bill with authority to implement. We should push hard to make sure that we are ready to do this at the earliest date and that it contains such things as adjustment assistance.

Flanigan: We have done a lot of work but there is much work ahead. The issues must be resolved whether we have a resolution or authority.

  1. Source: National Archives, Nixon Presidential Materials, NSC Files, Agency Files, Box 290, Treasury, Volume III. Secret; Nodis. The meeting was held in Shultz’ office. Drafted by Hormats and forwarded to Kissinger under cover of a December 18 memorandum, in which Hormats noted: “The consensus of the meeting was that we should go forward with a comprehensive trade bill giving the President the authority to implement tariff reductions. The dissent from the consensus was Volcker (Treasury) and Shultz tilted towards his position. Timing of submission will depend in large part on the timing of the President’s foreign policy initiatives—specifically the ÔYear of Europe’.” Earlier on December 15 Sonnenfeldt and Hormats sent Kissinger a memorandum marked “urgent action” regarding that evening’s meeting, indicating their understanding that Shultz might be inclined not only to forego enabling legislation, but also to postpone trade negotiations for at least a year. Hormats and Sonnenfeldt thought Kissinger should give Shultz political input on the importance of moving ahead in 1973 with negotiations based on a firm legislative mandate. (Ibid.) Kissinger apparently was unable to attend the meeting and Hormats attended for the National Security Council.