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

197. Memorandum From the Special Representative for Economic Summits (Owen) to President Carter ¹

Washington, February 6, 1979

SUBJECT

• MTN (U)

Introduction. You asked about the importance of the MTN to the U.S., France and others. This is a key question in the wake of the message that I brought back from my last meeting with French Trade Minister Deniau: that Giscard would veto the MTN argument if it were not altered in ways more favorable to France.² (C)

Positive Effect. The MTN reduction in trade barriers will help over the longer term to create jobs and reduce inflation in the industrial countries, and to hasten economic growth in the developing world. This effect will be blunted, at least in the short term, by the fact that (1) the MTN trade in barrier reductions will be smaller than some had hoped; (2) these reductions will be offset, to some extent, by concessions that we will probably have to make to certain U.S. industries (e.g., textiles), to get their support. (C)

Negative Effect. But there is more to it than this. British World War II infantry manuals advised troops that the best way to avoid mortar fire was by going forward, and somewhat the same principle applies in trade. It is difficult to mobilize anti-protectionist forces to resist the myriad of protectionist proposals that pop up every year in major trading nations. (C)

These forces can be mobilized, however, in support of efforts to achieve a wide-ranging trade agreement. Which is why major new trade negotiations are periodically undertaken to push back the frontiers of protectionism, or at least arrest their advance. These negotiations thus acquire a symbolic importance out of all proportion to their immediate economic effect. Their outcome shapes the climate for trade policy decisions across the board. (C)

If MTN negotiations fail, a large number of protectionist bills will almost certainly be introduced in the Congress; we are told that about twenty five are waiting to be thrown into the hopper within days, if MTN collapses. In the ensuing environment such bills would be hard to defeat. European and Japanese retaliation would surely follow. (C)

A few countries, including the United States and France, might gain for a short time by imposing trade barriers. But the spread of protectionism would quickly convert this modest gain into a major loss—by fueling inflation and curtailing economic activity. The statisticians say that a 10% increase in import prices could cause nearly a 5% decrease in world trade in two years, and that this would cause real economic growth in the OECD countries to fall by 0.6 percent. (C)

This slow growth would lower the profitability of US firms, and hence reduce their ability to make the innovative investments needed to increase productivity. This reduction would make the United States less competitive and less able to adapt to the changes taking place in the world economy, much as the UK is now. (C)

We would be particularly hard hit by the developing countries’ diminished capacity to buy our goods in the face of rising trade barriers. With less export earnings, these countries’ ability to buy US farm and industrial products would decline; they now absorb about 40 percent of our exports (25% if you don’t count the OPEC countries). (C)

It is hard to see how an economic setback of this magnitude could occur without political repercussions. Resentment and recrimination would drive the US, Europe, and Japan apart. Antagonism between the West and the Third World would sharpen. The Soviet Union would be tempted to exploit resulting disarray, and East/West relations might worsen as a result. (C)

France. The French probably see some of the more immediate MTN implications described above. That is why they want an MTN agreement. But they also want to be sure that this agreement does not cause them too much domestic political pain, and they threaten to veto the negotiations in bargaining to this end.³ (C)

We don’t know how much this threat is a bluff, because we don’t know how clearly they see the wider consequences of failure. To make sure that they do, we need to make evident, without threat or pressure, our view as to the heavy costs that they would have to bear if they were to cause the negotiations to fail. (C)

To this end, if you approve, I will send the attached letter (which has been cleared by State, STR, and Treasury) to French Trade Minister Deniau.⁴ For us to remain silent in the face of the threatening message that the French have sent would, I believe, be taken as a sign of weakness—thus compounding the risk that the MTN will fail, more by French miscalculation than deliberate intent. Since the French message comes from Giscard, the answer should explicity reflect your views. But since the message was delivered by Deniau, we should not escalate this exchange above the Ministerial level.⁵ (C)

1. Source: Carter Library, National Security Affairs, Brzezinski Material, Brzezinski Office File, Subject Chron File, Box 90, Economics/International: 1979. Confidential. Sent for action. Both Carter and Brzezinski initialed at the top of the page.
2. Owen met with Deniau, as well as other U.S. and French officials, in Paris on January 23. A memorandum of conversation of the meeting is in the Carter Library, National Security Affairs, Staff Material, Special Projects File, Henry Owen, Box 22, Memcons: 1–4/79.
3. In the margin beneath this paragraph, Carter wrote: “It still seems to me that other nations who are more heavily dependent on exports would be hurt worse than U.S.—but we appear to be the supplicant. J.”
4. Not attached.
5. Carter checked the option to approve sending the letter and initialed “J.” Telegram 37790 to Paris, February 13, transmitted Owen’s letter for delivery to Deniau. In the letter, which is dated February 9, Owen related Carter’s views on the economic and political implications of a failure of the MTN and his desire for a quick conclusion of the U.S.–EC MTN negotiations. (National Archives, RG 59, Central Foreign Policy File, D790069–0310)