162. Paper Prepared in the Department of Agriculture1
Agriculture in Multilateral Trade Negotiations
The Department of Agriculture favors freer trade for all sectors of the international economy. The Department believes that trade in farm products as well as trade in nonagricultural goods should be carried on under conditions where competition, market orientation, and comparative advantage prevail. A world in which all trade moves freely would mean more effective international allocation of agricultural resources—which would benefit American farmers by allowing increased utilization of the unique natural, technological, and organizational assets which this country possesses. Furthermore, liberalization of agricultural trade would reduce underemployment in rural areas, decrease living costs for domestic and foreign consumers, and produce sorely needed U.S. balance of trade benefits.
In looking forward to trade negotiations, we assume that a free trade philosophy will guide Administration programs and policies. We assume that the Administration will continue to seek market oriented programs in the new farm bill,2 while taking action to reduce direct government outlays for farm price stabilization. We will work hard, beginning now, to persuade other exporting areas, especially the European Community, to eliminate their export subsidies now that we have terminated all of our own direct U.S. subsidy programs, except barter. We assume that there will be continued expansion of agricultural production, as necessary, to meet increasing domestic and foreign requirements.
As for trade legislation, we assume that agriculture and industry will be treated alike—that each will be subject to the same tariff cuts, the same ad referendum authority to negotiate nontariff barriers, and [Page 613]the same mechanism for dealing with import relief. We assume that the Administration will not buy the kind of protectionism that is exemplified by the Burke–Hartke bill. Rather, we assume that the Administration will put tremendously increased pressures on our trade surplus partners, such as Japan, to import more U.S. goods—a vastly better way of correcting trade imbalances than would be the setting up of protective walls against imports—a course that would inevitably lead to ruinous retaliation. In short, we assume that the United States, in both industry and agriculture, will be going as far as is possible to deal with those major roadblocks that inhibit trade expansion, but in ways that are harmonious with the direction of our own domestic programs.
In moving more and more to a market oriented agriculture with a minimum of government intervention, it is of utmost importance to the United States that real progress be made as soon as possible in reducing agricultural protectionism around the world—particularly in Western Europe where substantial expansion of trade is possible and where the level of border protection is the most absolute. Access to such markets that are measurable and dependable will be crucial to the success of our domestic policy of greater freedom for farmers to produce, with less dependence on government for income, relying more and more on markets for prices and profits. There is the very real danger of protectionism stagnating world demand, thus drying up the basic support for a U.S. market oriented farm policy.
To bring about desired results, we believe, basically, that multilateral trade negotiations must be directed at the substantial reduction of tariffs and the complete elimination of all other forms of border protection and export subsidies. This thrust is consistent with GATT rules, which are based on the principle that the only protection at the border should be tariffs, that these tariffs should be nondiscriminatory, and that they should be as low as possible. Stubborn adherence to this principle is the necessary condition for achieving complete removal of artificial barriers that hamper the movement of goods and prevent the economic response of supply and demand to price. When governments find that they cannot dump surpluses on foreign markets at low prices or cannot prevent price competition at home, countries will automatically be forced to bear directly the costs of whatever domestic support programs they deem necessary without transferring these costs abroad. We believe that cost considerations alone would force major producing countries to reduce production incentives if surpluses got out of hand and prices fell very low. Under these circumstances we believe that negotiations on the specifics of international support measures would be unnecessary.[Page 614]
We recognize that there are some who believe that there cannot be real trade benefits without renegotiation on internal measures as well as on border protection. But what forces changes in domestic programs? Clearly, the thrust of much that we are doing domestically in agriculture—the releasing of stocks, the easing of import barriers, the ending of export subsidies, and larger plantings for 1973—originate not only because of expanding exports but for domestic reasons as well.
The same kind of inflationary pressures that in part led to our actions are heavily present in all of Western Europe today and are certainly present in the food sector in Japan. Prime Minister Heath is under strong attack because of the rise in beef prices in his country and the prospect of further rises once the full effect of Common Market membership takes hold. In Western Europe the Common Market is again in a heavy surplus situation on dairy products which adds to the strong demands already present in the Community to hold down food prices. Also, as a result of higher prices for imported raw materials, earnings from levies in Europe should be sharply reduced as time goes by. All these factors make it extremely unlikely that either Europe or Japan will continue to pay the high cost of supporting surplus production for very long.
From a negotiating standpoint, we could make the point that farm programs themselves are the cause of all the trade problems and try to remedy the farm programs in international negotiations. But to do so, we would have to ask our Congress for authority to negotiate away our farm legislation at the very time we are seeking its extension. We do not believe such a course of action is wise or politically possible of attainment. Furthermore, Western Europe has been telling us for years that the Common Agricultural Policy is sacred, that it cannot be negotiated. If we say at the outset that we want to negotiate away the price support programs which are the heart of the CAP, we believe we will fail.
The EC may still argue that fixing the protective level of variable levies, as we would wish to do, will affect the income of Community producers adversely. That is not necessarily true, because every country retains the right to support prices and incomes to its farmers if it wants to pay the bill through its national treasury rather than through prices maintained at artificial levels by overt import protection. Our approach to negotiations is a "back door" one whereby we will attempt to negotiate down and hopefully negotiate away the instruments of protection and relief at the border which hide the true costs of uneconomic farm programs—anticipating that other countries will not choose to continue paying that cost for very long if they must bear it directly.
Negotiating on this basis means that we as well as others must be willing to give up our rights to subsidize exports and protect uneconomic domestic farm programs through import quotas. The notion of [Page 615]reciprocity involved is one which would bring all countries equally near the goal of minimum interference with the flow of world trade. If all parties to the negotiation sought to achieve this goal, the trade and economic benefits resulting from liberalization in both agriculture and industry would be reciprocal. We believe it is this idea, and not any technical formula for measuring the value of concessions granted in exchange for concessions received (formulas which are bound to be obsolete by the time staged concessions have taken full effect), which should govern U.S. views toward reciprocity in the proposed multilateral trade negotiations.
We must make it abundantly clear at the outset that we will not be diverted during the course of the negotiations by proposals to use multilateral commodity arrangements that seek to deal with prices. Experience has proved beyond the shadow of a doubt that international arrangements dealing with prices—and that do not and cannot deal with production and trade policies affecting exports and imports—are bound to fail, because these policies are the primary determinants of price. The price ranges of agreements often have proved to be inconsistent with the underlying supply and demand situation, therefore they could not accommodate to sudden changes in the supply-demand picture.
For example, weaknesses in the 1967 International Grains Arrangement eventually led to its abandonment as a means of organizing world wheat markets. The schedule of minimum prices, expressed at export positions on our Gulf of Mexico and Pacific Coasts, proved in the end to be disadvantageous to the United States because (1) our competitors could make special arrangements resulting in actual freight costs lower than those used in calculating the minimums, (2) the basing point system distorted competitive conditions in certain markets when prices were at the minimum, and (3) the basic Gulf position price relationships, which attempted to make allowance for normal differences in market values among types and qualities of wheat, did not necessarily reflect actual conditions at any particular time or in any particular market. Also, consultation procedures provided for in the Arrangement proved to be ineffective. But the fatal flaw was in the existence of very large world supplies of wheat, which put strong downward pressure on prices. Before long, all major exporters—bowing to realities—had made varying price adjustments which brought the general level of world prices to a point substantially below the Arrangement minimums. This, of course, ended the effectiveness of the trade part of the Agreement to all intents and purposes.
The current International Wheat Agreement, negotiated in 1971 as a successor to the International Grains Arrangement, contains no price provisions and imposes no commitments on either exporters or importers. The usefulness of the IWA consists largely of maintaining the [Page 616]International Wheat Council as a forum for discussing current problems in wheat trade, for collecting data, and for seeking understandings leading to greater discipline in the international buying and selling of wheat.
So let us be firm in our resolve not to go through another "agreement" exercise aimed at organizing world trade in wheat and possible other commodities along rigid lines. As we have learned, agreements are not the answer to trade problems. The real answer lies in giving exporting countries a maximum opportunity to sell their efficiently produced commodities at world prices. That is the answer we must insist on finding in any new trade negotiations.
Our negotiating objectives, consistent with the basic purpose of freeing up trade, can be outlined as follows:
- A traditional tariff-cutting exercise limited only by the extent and degree of the authority granted in the trade legislation. For this purpose, any of the authorities now under consideration would be suitable, namely an unlimited authority to reduce, increase, or eliminate tariffs; an authority to reduce or increase tariffs by 50 percent and to eliminate low or nuisance rates; and an authority to reduce the general incidence of tariffs by 50 percent. Because of the greater degree of flexibility they allow, we prefer the first and the third to the second.
- Elimination of all preferences, whatever their nature. With a flexible tariff authority, it may be possible to accomplish this objective within the context of negotiations on other tariff and nontariff barriers to trade. If necessary, however, the doing away with preferences should be sought as an end in itself.
- Conversion of variable levies and all other pricing devices usable for protection at the border to fixed duties and movement of these duties up or down to an agreed upon maximum level of protection for all commodities now subject to nontariff barriers.
- Phased increase and eventual elimination of all quotas, regardless of whether or not they are consistent with GATT. Replacement of these quotas with fixed duties at not more than an agreed upon maximum level of protection for all commodities now subject to nontariff barriers.
- Phased elimination of export subsidies, defined as any price-related measure which results in the sale of a product in a foreign market more cheaply than at home.
- Elimination of mixing regulation, monopolies, and restrictive licensing and prior deposit practices.
- Negotiation of codes on technical barriers such as valuation and standards.
- Negotiation of multilateral safeguards consistent with whatever new domestic safeguard procedure is enacted, covering both agriculture and industry.
The most important of these objectives is to fix and reduce the unlimited protection afforded by variable levies in the EC. If we cannot obtain at least the benefit of the consumption response for variable levy commodities like grain, we have no real opportunity to solve the basic problems inhibiting the growth of world agricultural trade.
The EC stands to gain by fixing and reducing the unlimited protection of the variable levies. By moving to do away with export subsidies and seeking agreement from other countries to do likewise, we have already undercut the EC argument that a variable levy system is needed to counteract the distortion of world prices caused by export subsidies. Furthermore, we would be offering in negotiations to replace our import quotas with tariff protection at a level not exceeding 25 percent ad valorem, a far more liberal form of border protection than absolute quotas. In terms of the concept of reciprocity discussed earlier, our request on variable levies would be just as feasible as the removal of our own Section 22 quotas3 or a Canadian commitment to give up the Wheat Board’s monopoly right to regular imports of most grains.
All three of the proposed tariff authorities are flexible enough to allow for the negotiation of tariffs resulting from the conversion procedures proposed for variable levies and quotas. The unlimited and 50-percent cut in general tariff incidence authorities are flexible enough in themselves, and the 50-percent authority as now proposed contains a clause allowing for greater increases or reductions in special circumstances which could be used if needed. Our negotiating partner, particularly the EC, may, however, point to our authority as the limit of what they would be prepared to do. Thus, the 50-percent authority might be cited by them as a reason for not bringing down the ad valorem equivalent of existing nontariff border devices by more than 50 percent, even though substantially greater reductions would be needed in many cases for them to reach a 25-percent maximum.
Most important barriers to trade are applied by a country against both agricultural and industrial products. Quantitative restrictions, export subsidies, restrictive trade practices, and technical codes and procedures are all used along with tariffs to protect both agricultural and manufacturing industries against foreign competition. The only technique used exclusively to restrict agricultural trade is the variable levy, [Page 618]and even this technique is one with possible applicability to industry as well (e.g., the American Selling Price system of customs valuation).
For this reason, Agriculture supports a line-by-line approach to trade negotiations, without distinction between agriculture and industry, or between tariffs and nontariff barriers. Each participating country would be expected to table a request list showing by individual BTN 4 number what tariff and nontariff concessions it wishes to obtain and a list showing by individual BTN number what commodities on which it is willing to negotiate reductions in its border protection. Both the U.S. requests and the U.S. offers would be drawn up so as to conform with the negotiating objectives outlined earlier. Negotiations could then proceed on each line item until the objectives of all participating countries on the line had been achieved or until a satisfactory compromise had been reached. Trade-offs could take place from any line to any other line and from one kind of barrier to another.
The advantages of an integrated line-by-line approach to negotiations are several. We believe that for both agriculture and industry this approach will encourage effective coordination of negotiations on commodities and products affected by more than one kind of trade barrier; that it will help to prevent the deterioration of negotiations into a tariff exercise for industry and a nontariff exercise for agriculture; that it will afford the United States the best possibility for obtaining meaningful concessions in exchange for those it is willing to offer; and that it will allow us to focus on border devices affecting commodities of major importance to us without being deflected from our free trade goal, as would happen if we accepted the EC’s commodity agreements approach.
Although recognizing that trade-offs are an essential part of the negotiating procedure, we would not necessarily expect the final negotiating package to be fully balanced in this sense. Beyond meeting the arithmetic requirement of any tariff-cutting formula that may finally be agreed upon, we believe, as already stated, that reciprocity should be assessed only in terms of the extent to which countries are conforming to basic GATT principles and the distance they need to go to arrive at complete conformity. Countries with a substantial degree of border protection still remaining would be expected to give more than countries which are already quite liberal in their trade policies.
The United States has just devalued the dollar another 10 percent. It must be recognized that this action was necessary because of a substantial balance of payments deficit that in large measure is a result of [Page 619]a large U.S. trade deficit. In order for currency realignments to work over time to correct such imbalances, the types of border protection that negate its effect on trade (e.g., variable levies and quota restrictions) must be ameliorated. Thus, reciprocity has relevance only in an overall context embracing both trade and monetary negotiations with the two tied closely together.
An indication of the degree to which the United States and three of its most important agricultural trading partners—the EC, Japan, and Canada—protect their markets against imports and subsidize their exports is given below.
Characterization of U.S. Agricultural Tariffs, Quotas, and Export Subsidies
The United States maintains high tariffs (above 15 percent ad valorem) for only a few major categories of agricultural imports, namely dairy products, fresh and preserved fruits and vegetables, certain milled grain products, wines and leaf tobacco (see list attached).5 The United States maintains seasonal duties on certain fresh fruits and vegetables. The United States accords preferences to the Philippines which are scheduled to expire on July 3, 1974. The EC and Japan would both have indirect interests in tariff reductions by the United States.
A description of quotas maintained by the United States is attached—these include Section 22 quotas on cotton, wheat, peanuts, and dairy products, and Sugar Act quotas on raw sugar and confectionery. A list comparing the relative values of subsidies maintained by the United States and the EC in 1970–71 is likewise attached. Although the United States has now suspended all direct export subsidies, our subsidy practices could still be a subject for negotiation along with those of the EC and other countries. Both the provisions of Section 326 and of statutes governing the operations of the Commodity Credit Corporation allow the United States to subsidize exports under certain sets of circumstances. According to some definitions, U.S. exports under P.L. 480 could also be classified as subsidized exports. It is conceivable that agricultural exports could become eligible at some point for DISC benefits. If so, such benefits might also be classified as export subsidies.
U.S. offers consistent with the negotiating objectives outlined above would involve only two really serious problem areas—horticulture and dairy. In horticulture we have a problem because our high tariffs [Page 620]for these items protect U.S. growers against Mexican produce which is available at competitive prices because of a wage scale that produces a very low standard of living for the poorly paid Mexican laborers who do most of the real work involved in growing and harvesting vegetables and fruits for export. Also, we have fruit and vegetable marketing order agreements with Mexico which would not be consistent with the objectives we are proposing, but which have helped us keep the horticultural market in the United States stable until now.
In dairy, removal of Section 22 quotas may mean some decline in prices for manufactured products, more imports, a slow down in domestic production and perhaps adjustment problems for some farmers shifting to alternative lines of output. However, the effect of liberalizing dairy import protection should be much less troublesome to the United States than has been generally feared. Changes would be phased in over a period of years. We would still retain tariff protection of up to 25 percent. Border protection on dairy products would also be lowered and liberalized in Europe, Japan, Canada, etc. Export subsidies on products from Europe and elsewhere would be eliminated. Taking this into consideration, the pressure of imports on our dairy industry would be much less than if we simply took unilateral action.
Removal of quotas on peanuts could also be a problem. Except for Japan, virtually none of the developed industrialized countries grow peanuts. This means that in liberalizing our import protection on peanuts a heavy burden of additional exportable supplies from other producing countries will likely come to the United States. With this in prospect, we would no doubt have to change our domestic peanut program to make it more in line with what we have done on wheat and cotton.
Removal of quotas on cotton and wheat will pose no problems. There is a question as to whether the processors’ certificates on wheat are consistent with our negotiating philosophy. Because the certificates are not applicable to imported flour, which under our proposal would no longer be subject to quota, continuing to require the certificates from domestic processors would create an artificial price disparity between domestic and imported flour. For this reason, the full burden of paying for the wheat support program should probably be shifted to the general Treasury.
Sugar could be a problem, but we expect that other producers will not want the issue raised because most of them benefit more from the existing high price structure for their quota sales in the United States than they would from free trade. Sugar production and trade is highly controlled by almost all developed country producers and importers, and the U.S. program by comparison is not unduly restrictive. The EC, which is self-sufficient in sugar and does not want to take on all of the [Page 621]U.K.’s past commitments to import sugar from Commonwealth countries will almost certainly prefer that the United States expand its quotas rather than eliminate them.
To help us deal with whatever problems may come up, we support inclusion in the trade bill of a safeguards procedure which would be just as applicable to agriculture as to industry. Emergency import relief provisions to cover cases of undue market disruption caused by imports will be essential. We can accept any kind of measure—tariffs, quotas, orderly marketing agreements—so long as it is available promptly. This is necessary if the provisions are to be of any help to agriculture. In industries like horticulture and dairy, unless relief is available promptly, it will come too late. We assume that the relief afforded by such provisions would be only temporary. But if the time allowed for adjustment is sufficient, we believe such provisions will provide adequate protection for agriculture.
Characterization of Tariffs and Nontariff Practices in the EC, Japan, and Canada
The principal protective device employed by the EC is the variable levy. The only items on which high tariffs act as restraints on trade are certain fresh and processed fruits and vegetables, margarine, and unmanufactured tobacco. Japan and Canada also maintain high tariffs on a variety of items (see lists attached).
Discriminatory tariff practices, nontariff charges, quotas, export subsidies, and monopolies in the EC, Japan, and Canada are as follows:
Seasonal duties apply to certain fresh fruits.
Preferences discriminate against a wide variety of U.S. agricultural exports.
Variable levies (see attached list).
Reference prices are used to control the imports of fresh fruits and vegetables, seed corn, and wine.
Compensatory taxes are applicable in the fats and oils sectors.
National quotas have been retained on certain fresh and processed fruits and vegetables. An EC quota applies to beef and veal for processing. Emergency restrictive licensing can be applied to almost any product and has been to fresh apples and tomato concentrates.
Export subsidies (see attached list).
State trading affects tobacco and alcohol.
Variable levies were instituted in place of quotas to restrict imports of live swine, pigmeat, ham, and bacon.[Page 622]
Quota restrictions still affect imports of the following items of export interest to the United States:
- Certain prepared meat items
- Processed cheese
- Dried peas
- Other pulses (navy, pinto, great northern, lima)
- Wheat, rice, barley, flour and groats
- Peanuts, other than for oil extraction
- Fruit puree, pastes, pulp
- Canned pineapple
- Roasted peanuts
- Fruit juices (excel. lemon)
- Tomato juice
- Tomato ketchup and sauce
- Mixed seasonings
- Ice cream powder, prepared milk powder for infants, and other preparations consisting mainly of milk
- Preparations based on rice or wheat
Export subsidies are not employed.
State trading is used to control imports of most agricultural goods, but is not applied restrictively.
Import calenders in the form of seasonal duties are used to restrict entry of fresh fruits and vegetables during the Canadian harvest.
Commonwealth preferences discriminate against U.S. exports, particularly processed fruit items such as raisins and canned peaches.
A blanket minimum price authority can be used to apply variable levies. None are now in effect, but they have been used against four commodities of export interest to the United States, namely potatoes, corn, turkeys, and strawberries.
Restrictive licensing amounts to a virtual embargo on their importation of evaporated, condensed, and dried milk, butter, and Cheddar cheese, and imports of oleomargarine, and animal feeds containing dry milk solids are prohibited.
A state trading agency, the Canadian Wheat Board, restricts imports of wheat, barley, oats and certain other grains, and subsidizes wheat exports as necessary. (The feed freight subsidy, which prevents the United States from supplying corn to Eastern Canada, is not a border device.)[Page 623]
A blanket authority can be used to form producer marketing boards which will have monopoly control of the domestic market for any commodity.
This characterization of import barriers and export subsidies maintained by four of the most important agricultural trading entities is indicative of the kinds of trade practices affecting world agricultural trade which are inconsistent with the negotiating principles and objectives set forth in this paper. We recognize that from a practical standpoint, not all such practices will prove negotiable. But we strongly believe that in certain key areas such as the fixing and reduction of the EC’s variable levies, the conversion of Japan’s import quotas to tariffs, and a U.S. willingness to convert all of its nontariff instruments of border protection for agriculture to reasonable tariff levels, our proposals could pave the way for meaningful liberalization by all parties to the multilateral negotiations. Unless this is achieved, the promise which a new round of multilateral negotiations holds out for expanding trade and economic growth will not be realized.
- Source: National Archives, RG 56, Records of Secretary of the Treasury George P. Shultz, 1971–1974, Entry 166, Box 6, GPS Flanigan Peter M., 1974. For Official Use Only. Sent to Rogers, Shultz, Dent, Brennan, Kissinger, Stein, Ash, and Eberle under cover of a March 5 memorandum from Flanigan that explained that Assistant Secretary of Agriculture for International Affairs and Commodity Programs Carroll Brunthaver had sent him the paper "with the statement that it ’represents the position of the U.S. Department of Agriculture.’" Flangian requested agency concurrences or comments by March 12.↩
- On February 15, President Nixon proposed legislation, to be known as the Agriculture and Consumer Protection Act of 1973, that would revamp Federal agricultural production controls and the Federal subsidy support system for American farmers; see Public Papers: Nixon, 1973, pp. 94–103.↩
- Reference is to Section 22 of the Agricultural Adjustment Act, as amended (7 U.S.C. 624), which governs the imposition of quotas or fees on imports found to impede or interfere with U.S. agricultural programs.↩
- The Brussels Tariff Nomenclature was a customs classification system for traded goods.↩
- None of the attachments is printed.↩
- Reference is to Section 32 of the Act of August 24, 1935 (7 U.S.C. 612c), which sets aside 30% of all U.S. tariff receipts for the Department of Agriculture to use "to encourage exportation and domestic consumption of agricultural products."↩