Foreign Relations of the United States, 1969–1976, Volume E–12, Documents on East and Southeast Asia, 1973–1976

331. Memorandum From the Executive Secretary of the Department of State (Springsteen) to the Deputy Assistant to the President for National Security Affairs (Scowcroft), Washington, July 3, 1974.¹ ²

Washington, July 3, 1974

DEPARTMENT OF STATE
Washington, D.C. 20520

July 3, 1974

MEMORANDUM FOR MAJOR GENERAL BRENT SCOWCROFT
THE WHITE HOUSE

Subject: Realignment of US-Philippine Bilateral Economic and Security Relationships

The expiration of the Laurel-Langley Agreement on July 3 of this year and the Philippine interest in renegotiating our 1947 Military Bases Agreement have set the stage for revising the basic U.S.-Philippine bilateral economic and security relationships. We have been undertaking to do this in accordance with the terms of reference set forth in the response to NSSM 155 and in NSDM 209 of March 27, 1973.

Dimensions of the Problem

On the economic side our immediate interests include both investment and trade. The Philippine Constitution and statutes contain various restrictions on foreigners’ business activities, from which U.S. firms have been exempt under Laurel-Langley and the coterminous “Parity” Amendment to the Philippine Constitution. They include: prohibition of land ownership by foreigners or by firms owned more than 40 percent by non-Filipinos; prohibition of any foreign involvement in retail trade (broadly and vaguely defined); and restrictions on foreign participation in corporate management. Of the estimated $1 billion (market value) of U.S. investment in the Philippines, our Embassy has estimated that perhaps $70 million worth could be directly affected by the termination of the “Parity” Amendment and the Laurel-Langley Agreement, while the entire amount could be adversely affected should the overall investment climate deteriorate as a result of failure in our negotiations.

In the current negotiations, our most urgent need is the easing of transitional problems for the immediately affected investment, while we also hope to obtain the maximum feasible protection for U.S. firms against possible future actions by the Philippine Government (GOP) designed to restrict foreign business in favor of Philippine companies. The GOP seeks to retain an attractive climate for foreign investment, compatible with a substantial measure of economic nationalism. It has adopted certain measures to ease the adjustment problems of U.S. firms and has announced plans for others. In late May President Marcos declared a one-year moratorium on actions affecting U.S. land titles, issued a decree permitting land leases to foreigners, and stated publicly his intention to issue further decrees clarifying the definition of retail trade and amending restrictions on company management. However, the latter actions have not yet been taken and many companies hope (perhaps unrealistically) to be able to retain title to land already acquired.

The GOP actions and commitments described above were undertaken on the understanding that a U.S. negotiating team would be in Manila in June to negotiate a new treaty and trade agreement, and to hold preliminary discussions on items which might be subject to Most Favored Nation (MFN) tariff reductions, in accordance with the necessary U.S. legislative authority when it is obtained. While any agreement on investment protection would be reciprocal, Philippine investment interests in the U.S. are minor and GOP concerns re Laurel-Langley expiration focus on the loss of bilateral tariff preferences, which have been phased out under that Agreement. Specific GOP desires, in addition to a request for the benefits of any Generalized System of Preferences (GSP) , involve reductions in U.S. MFN tariff rates on certain exports of particular interest to the Philippines, including coconut oil, abaca cordage, and products of Philippine mahogany.

As regards security questions, the Philippine Government has long sought changes in the increasingly outdated provisions of the 1947 Military Bases Agreement, (which expires in 1991). Technical talks on a number of articles were held in 1971 and 1972, producing agreement on several proposed revisions. However, certain key issues, relating to criminal jurisdiction, taxes, customs, and immigration, were not resolved. In 1973 President Marcos told Ambassador Sullivan that all the outstanding “technical” issues could be easily solved, including criminal jurisdiction, but he indicated that problems remain in regard to “tenure and mutuality.” While these problems have not been clearly defined, the Philippine Government may desire to move away from a specific expiration date in the revised MBA, and toward making it coterminous with the 1951 Mutual Security Agreement. The latter Agreement has no specific expiration date but provides for termination on one year’s notice by either party. (Reversion to the GOP of part of Clark Air Base is also under consideration.)

The Philippine Government has complicated our approach to these two sets of negotiations by seeking to link them in some fashion, partly, it appears, in order to improve the GOP bargaining position on the economic side. President Marcos has made it clear that he regards the security and economic issues as related, and essential, elements of an updated Philippine-U.S. relationship, one based on the traditional close ties but without its previous preferential and one-sided character. (The House of Representatives’ rejection of the Sugar Bill also complicated matters by removing one of the stabilizing factors and material benefits in our bilateral trade, on which the GOP had counted.)

U.S. Response

A U.S. delegation is now in Manila to begin negotiations on a Treaty of Economic Cooperation and Development, with an annexed agreement on trade. This Treaty is intended to provide:

a. Protection of the legal (personal and property) rights of U.S. citizens, in the Philippines;

b. Guarantees of non-discriminatory treatment for U.S. investors vis-a-vis Filipinos, subject to specific exception, and protection against future nationalistic limitations;

c. Assurances that trade will be conducted on an MFN basis with only such exceptions as permitted under GATT, and other protection along the lines of the GATT. (The GATT allows departure from MFN in certain cases; e.g., measures for extension of GSP, for the U.S.-Canada auto agreement and for Free Trade Areas and Customs Unions.)

d. Assurance that the Philippines will benefit from any U.S. Generalized System of Preferences for developing countries.

The Annexed Agreement on Trade Measures, which has been drafted to be implemented under the authority of the proposed Trade Reform Act (TRA), would:

a. Specify the GATT-type undertakings in greater detail;

b. Contain a schedule of trade concessions to be applied on an MFN basis to trade items of special interest to both parties;

c. Provide protection against new barriers to trade in items included in the schedules.

As regards specific trade items, we are considering MFN reduction in tariffs, under the terms and procedures set forth in the TRA, on the following items, for which the Philippines is (with one or two minor exceptions) the chief supplier:

a. Coconut oil and coconut meat;

b. Philippine mahogany veneer, panels, and lumber;

c. abaca yarn and certain other fiber products, excluding cordage;

d. products of shell, glycerin, and a few other minor Philippine export items to the U.S.

U.S. import of these items in 1972 totaled $142 million, and our assessment on the basis of preliminary studies is that such reductions would have no adverse economic effects in the U.S.

In our negotiations regarding tariff reductions, we would seek a measure of reciprocity, particularly in Philippine tariffs and other trade barriers affecting U.S. agricultural exports, in addition to the desired investment benefits. Noting that the GOP has recently lowered its tariffs on soybeans, soybean oil, and other vegetable oils, we would seek some further reductions on such products or at least bindings, and would seek guarantees against new non-tariff barriers. Our Embassy has indicated that we could probably expect a reasonably cooperative Philippine response along these lines, and possibly some informal undertakings regarding continued purchase levels or market shares.

Agreement to negotiate bilaterally with the Philippines on trade and investment matters does not represent a departure from the basic U.S. position that trade concessions should normally be dealt with in the Multilateral Trade Negotiations, and should be offered in exchange for other trade concessions. While these principles remain valid, the exceptional circumstances present in our relations with the Philippines, including our national security and foreign relations interests, make the case unique and thus do not establish a precedent for bilateral trade agreements in our relations with other countries.

Because of the proposed trade agreement’s dependence on the authority provided in the Trade Reform Act and the procedures required under that authority, the negotiations could not be concluded by July 3 in any case, but we and the GOP have regarded it as politically important to start them before that date. We have already completed, with satisfactory results, an extensive series of consultations with the Congress on these plans, and gave our draft Treaty and agreement to the GOP for consideration on June 15.

On the security side, we have told the GOP of our readiness to resume technical talks on the Bases Agreement whenever they choose. While our position on tenure is not yet determined, we have developed working drafts for most of the MBA articles to be revised. We are prepared to conduct negotiations parallel with our economic negotiations if necessary. However, we do not intend to trade economic interests for military benefits or vice versa. We expect, rather, that each negotiation will proceed on its own merits, although we recognize that the success of one may well affect progress on the other.

[signed for]
George S. Springsteen, Jr.
Executive Secretary

1. Source: National Archives, Nixon Presidential Materials, NSC Institutional Files (H-Files), Box H–239, NSDMs, NSDM 209, Philippines. Confidential. On April 17, 1975, the NSC staff logged this memorandum and marked it OBE.
2. Springsteen reported on bilateral economic and security negotiations with the Philippines.