Foreign Relations of the United States, 1977–1980, Volume III, Foreign Economic Policy

136. Discussion Paper Prepared for the Economic Policy Group¹

Washington, undated

MTN AND THE BONN SUMMIT

I. Overview

We, the EC and Japan are committed to reaching political agreement on a comprehensive MTN package by July 15. We are also working to have Canada join such a consensus. Our aim is to enable the participants at the Bonn Summit on July 16–17 to endorse such a package as part of an overall program for economic cooperation.

The negotiations in Geneva have been making progress on most negotiating issues over the past few months, and the outlines of possible agreements in the various areas of the negotiations have begun to emerge. Nevertheless, a considerable amount of work remains to be completed, and the possibility remains that a political impasse may develop on one of the key issues in the negotiations, such as market access for U.S. agricultural products, the development of satisfactory disciplines for agricultural and industrial subsidies, or the achievement of a substantial cut in tariffs.

The possibility also remains that one of the summit participants may link agreement on a key issue in the MTN to other topics on the Summit agenda. While we have no evidence at this point that such linkages will be established, France in the past has made a major issue of a link between trade liberalization and reform of the international monetary system.

II. Using the Summit context for maximizing the MTN package

Inclusion of the MTN on the Summit Agenda makes it possible to place MTN issues into the broader context of economic and political relations among the major countries. It may be useful to pursue the following themes:

1. The rapid growth of trade has been a major engine of growth during the past 30 years. We should achieve a credible result in the liberalization of trade in the MTN in order to ensure that expanded trade will continue to be a dynamic element of our economies over the next decade or two. On the other hand, even a tariff cut in the range of 35–40 percent would be unlikely to create difficulties of economic adjustment, since the existing levels of most tariffs are already low, key cuts are expected to be spread out over 8 years, and the possibility will remain for postponing a portion of the cut should economic circumstances worsen.

2. The tendency of governments to intervene in our economies to achieve a variety of social and economic goals has grown considerably in recent years. While this trend has made possible an improved social environment, it has also introduced some rigidities and inefficiencies in our economies that retard growth. The guidelines we are seeking to develop in areas such as subsidies, standards, and agriculture should help us in achieving a balance in our economies between the achievement of social goals and avoidance of the more excessive forms of intervention in our economies that can prove costly for economic growth.

Government policy measures involving subsidies, standards and the stabilization of agricultural income can also have a major impact on the trade interests of other countries, and thus tend to create political friction among countries. A stable economic and political relationship is, therefore, not possible without the means for minimizing the distortion to trade that can result from such policies and without the means for resolving any disputes that arise before they assume major political proportions.

III. Scope of a likely MTN package

Negotiators in Geneva have been working on an MTN package encompassing the following elements:

1. Offers to cut industrial and agricultural tariffs.

2. Offers to remove or to reduce specific non-tariff barriers affecting both industrial and agricultural items.

3. Agreements (or Codes) covering subsidies, safeguards, government procurement, standards, customs valuation, licensing, export restrictions, dispute settlement, use of trade measures for balance of payments purposes, and right/obligation of developing countries in the GATT.

We expect that by July 15 the countries participating in the Summit will have been able to achieve agreement on a technical level on all but a few key issues and that Ministers will have found appropriate political solutions for those issues. Further technical discussions will be necessary after July 15 in order to translate such political solutions into concrete technical language.

IV. Relationship to other countries participating in the MTN

While our negotiators in Geneva have concentrated on achieving agreement on individual negotiating issues among the key countries, efforts have continued to expand the number of countries who would be able to endorse such agreements.

By July 15, we would hope that most of the other developed countries participating in the MTN will be able to support the major elements of the agreements reached. It is likely that substantive negotiations with the developing countries will need to continue after July 15 in order to accommodate their interests.

Appendix

Paper²

Washington, undated

Key Objectives on Critical Issues

The following is a discussion of key issues in the MTN, including those points which may require political-level resolution early in July.

Agriculture.—Agricultural issues are the most difficult in the MTN. We are committed to Congress and the U.S. agricultural community to conclude agreement of substantial benefit for U.S. agricultural trade.

The primary interest of our agricultural community is to achieve improved market access for specific U.S. commodities. It has become apparent, however, that even modest results in this area will require a major negotiating effort.

Another objective of the United States is to achieve a better basis for international cooperation on issues involving agricultural trade. Since the GATT has been totally ineffective in this area, and since disputes over agricultural policy usually involve powerful political interests, we see progress in this area as vital for a harmonious re-lationship between the U.S. and Europe in the future. However, our agricultural community does not see progress in this area as an adequate substitute for improved market access.

The basic interest of the European Community in agriculture is to achieve, in addition to market access for EC exports, greater price stability in world markets in order to reduce the pressure exerted by the world markets on the common agricultural policy. In the EC, some share our desire to establish a better basis for cooperation on agricultural issues, most notably Finn Gundelach, EC Commission Vice President in charge of agriculture. However, as in the United States, this is not a popular issue politically.

The following are major agricultural policy issues which remain to be resolved. They are listed in order of priority and negotiating difficulty.

(1) Response by the EC, Japan and Canada for improved access for U.S. exports of key commodities.

(2) Nature of discipline to be developed on the use of agricultural export subsidies.

(3) U.S. response to EC requests for improved access to the U.S. dairy market.

(4) With respect to commodity arrangements being negotiated:

(a) Wheat—

1. Role and nature of the notional floor and ceiling prices in the agreement.

2. Level of stocks which would be held.

3. Nature of subsidy disciplines in the agreement.

(b) Coarse grains—extent of economic provisions, if any, to be included in the coarse grains agreement.

(c) Dairy—

1. Degree of U.S. participation in a commodity arrangement on dairy products, particularly degree of U.S. commitment to adhere to minimum export prices.

2. Nature of subsidy discipline in the agreement.

Subsidies/Countervailing Duties.—The issue of subsidies is one of the most sensitive issues in the MTN. Other countries consider U.S. acceptance of an injury test prior to the imposition of countervailing duties as one of their major objectives. The United States, in turn, is interested in achieving greater international discipline in the use of subsidies.

Although progress has been made on this issue in recent weeks, including the development of a joint U.S.–EC negotiating paper,³ a number of critical issues remain outstanding. They include:

(1) Agreement on guidelines for use of domestic industrial subsidies;

(2) The extent to which countries can take unilateral actions against illegal subsidy measures (nullification and impairment under Article XXIII of the GATT);⁴

(3) We also need appropriate disciplines for agricultural export subsidies, as indicated earlier.

Tariffs.—1. Level of Tariff Cuts.—The United States has actively supported a substantial tariff reduction under the assumption that (a) lower tariffs would reduce the degree of discrimination inherent in regional preferential arrangements such as those currently existing in Europe and (b) that a substantial overall cut would provide the means for bringing down the higher tariffs of Japan and Canada to the level of U.S. tariffs. Even though the current economic situation will make reaching agreement on a substantial tariff cut difficult, economic adjustments required will not be great since existing tariffs are already low, any cuts will be spread over 8 years, and part of the cut could be delayed if warranted by economic circumstances.

The U.S. tariff offer, as tabled in January would result in 42.2 percent average reduction in our tariff rates.

The EC has offered a 37.8 percent reduction in items of interest to the United States. If the EC were to implement a list of withdrawals that it has tentatively distributed, the depth of cut offered would drop to 31.1 percent. Since that time, the EC Council of Ministers has approved an additional list of withdrawals that would lower their depth of cut further.

The Japanese offer amounts to a 20 percent reduction of applied rates and a 47.4 percent reduction of legal rates. We have received indications that they are willing to increase that offer to a 28 percent reduction from applied rates.

The Canadian offer amounts to a 40.9 percent cut on GATT rates, and a 26.7 percent cut on applied rates.

2. Composition of Tariff Reductions.—In order to achieve a satisfactory tariff package, we must achieve adequate tariff reductions in key U.S. export industries. The offers now on the table from our major trading partners fall short in key U.S. industries such as paper, electronic products, chemicals, construction equipment and photographic film.

Government Procurement.—There is currently a strong presumption against foreign procurement by publicly-owned entities, much of it high technology items in which the U.S. is strongly competitive. Given this fact, plus the current trend of greater public ownership in many foreign countries, we feel that negotiation of a government procurement code is particularly important.

The two main issues in the government procurement area are:

(1) The degree to which governments will provide the information necessary to judge whether new rules for greater access by foreign suppliers are being followed.

(2) The public entities, commodities, and type of contracts which are to be subject to the rules (coverage) of a new code.

Standards.—The standards code which is under negotiation will contain international guidelines for the development of product standards to assure that they do not unnecessarily distort trade. Major issues in the standards area which remain are:

(1) The extent to which a standards code would apply to state, local, and private standards setting bodies;

(2) Access by outsiders to regional certification and standards-making systems.

Safeguards.—A safeguards code would provide updated rules for the temporary imposition of trade restraints when a surge of imports threatens to disrupt domestic markets.

The major question to be resolved in this area is the degree to which it should be permissible to apply safeguard measures selectively against individual countries, rather than on an MFN basis against all countries. International legitimization of selective application of safeguards is a key objective of the European Community. While we have agreed that a safeguard code may need to permit limited use of selective safeguards, it should be reserved for only the most extraordinary circumstances and should be circumscribed by strict rules and international surveillance.

Customs Valuation.—It would appear at this point that there will not be issues on customs valuation which will require political-level attention between now and mid-July. In exchange for acceptance of a new system of valuation, however, the United States has continued to insist upon adequate reciprocity and compensation in other areas of the negotiations.

Role of Developing Countries.—

(1) Provisions for a legal basis for special treatment for developing countries in the form of an “enabling clause” to be added to the General Agreement. The critical issue on this topic is whether GSP should be covered by this clause.

(2) Reciprocity/Graduation—This topic deals with obligations in the trading system the developing countries would assume as they reach more advanced stages of economic development.

Use of trade measures for balance of payments purposes.—The U.S. supports a general commitment by developed countries to avoid the use of such measures. The EC Commission is sympathetic to our approach, but faces opposition from the UK, France, and Italy.

Dispute Management.—We are seeking to negotiate improved and, to the extent possible, uniform rules whereby disputes that arise between contracting parties are settled.

Export Restrictions.—The United States is seeking improved guidelines for the use of export restrictions by governments, in order to recognize their disruptive impact on trade. The EC and Japan generally support our approach, but Canada, Australia and most developing countries have consistently opposed our efforts to develop an agreement in this area.

1. Source: National Archives, RG 59, Office of the Under Secretary for Economic Affairs, 1978–1980 Files Pertaining to International Monetary Affairs, OECD, Documents, External Research, Etc., Lot 81D145, Box 1, Trade. No classification marking. Forwarded to Hessler under cover of a June 7 memorandum from Feketekuty, which indicated that the paper was for a June 8 EPG meeting on the MTN and the Bonn G–7 Summit. (Ibid.) No record of the EPG meeting was found.
2. No classification marking. An unknown person made several marginal notations throughout this paper.
3. Telegram 8161 from Geneva, May 26, discussed the U.S.–EC draft “non-paper” on subsidies and countervailing duties. (National Archives, RG 59, Central Foreign Policy File, D780226–0718)
4. Article XXIII of the General Agreement on Tariffs and Trade deals with “Nullification or Impairment.”