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

201. Memorandum From Guy F. Erb of the National Security Council Staff to the Special Representative for Economic Summits (Owen)¹

Washington, February 24, 1979

SUBJECT

• Selective Safeguards and Conditional Most-Favored-Nation Treatment: TPC Meeting, Tuesday, February 27, 1979, 2:00 p.m.

Tuesday’s TPC meeting will take up two very important trade policy issues: conditional application of most-favored-nation (MFN) treatment and selective import safeguards.² TPC decisions on these issues could affect the direction of U.S. trade policy for a generation.

Conditional MFN

For the last several decades the United States and other non-Communist countries have generally applied both trade benefits and trade restrictions on a non-discriminatory basis, an exception being voluntary export restraint agreements. The heart of the General Agreement on Tariffs and Trade (GATT) is its first Article, which establishes the most-favored-nation principle (unconditional MFN in today’s jargon). Unconditional MFN is also embodied in numerous treaties of Friendship, Commerce, and Navigation that the United States has signed.

Despite the weight of tradition and GATT practice, as a negotiating tactic in the MTN the United States and other developed countries have suggested that the rights and benefits agreed to in the trade codes, e.g., on subsidies and countervailing duties, will be extended only to countries that become parties to the codes. This tactic was intended to encourage LDC participation in the codes; there is also a feeling in the Government and in some trade policy circles that only those countries that accept a code’s obligations should benefit from it.

Trade policy officials in the U.S. Government have postponed as long as possible the day when a choice will have to be made between maintaining the tactical position and reaffirming or rejecting unconditional MFN. That day may now be upon us.

The problem arises most clearly in the case of the subsidy code and to a somewhat lesser extent in the Government procurement code. Among LDCs, only Brazil has indicated its willingness to sign the subsidies code and may even decide to put off its adherence until after UNCTAD V.³ We may well have to present the code to the Congress without assurances of LDC support.

Those in favor of conditional MFN ⁴ argue that:

—U.S. acceptance of an injury test in the subsidy code depends on other countries’ acceptance of greater discipline on subsidies. Giving LDCs a free ride on the injury test upsets this balance. It would be difficult to defend to Congress and could undermine chances for approval of the subsidy code and the MTN package.

—The principle that trade negotiations must result in “reciprocal and mutually advantageous arrangements” is as important to the GATT as the MFN principle.

—Without the leverage of conditional application of the injury test, LDCs will have no incentive to accept the rules on subsidies or to participate in the administration of evolution of the subsidy code.

Those against conditional MFN argue that:

—MTN results that are not applied on a most-favored-nation basis will increase, not reduce, the contentiousness in our bilateral trade relations. Discrimination in U.S. law and actions against countries such as Mexico or Korea will be a serious and continuing foreign-policy problem for us.

—Conditional MFN weakens the GATT. It is a clear violation of GATT Article I. Imposition of countervailing duties without an injury test could give rise to claims against us under GATT Article XXIII.⁵

—Countries cannot avoid GATT commitments simply by deciding that the provisions of a code shall apply only between the parties to it.

—If adopted, conditional MFN would become a difficult issue at UNCTAD V and a long-term problem for North/South relations. It would reinforce the LDCs that lean away from the GATT toward UNCTAD.

I recommend that you argue against conditional MFN at the TPC meeting. If it proves impossible to avoid some compromise with proponents of conditional MFN, two options may be considered by the TPC:

Option 1. Apply the injury test on an MFN basis for three years or another limited period. This would permit major LDCs to negotiate their terms of accession as provided for in the codes on subsidies and, perhaps, Government procurement. If key LDCs had acceded to the code by the end of three years, unconditional MFN would be applied to all other LDCs. If key LDCs had still not joined the code at the end of the three years, the U.S. approach should be reexamined.

This option would be easier to present to Congress if some key LDCs such as Brazil, Mexico, Korea, or India would join from the outset. The need for a transition period may be accepted by Congress. Most LDCs have not been involved in the negotiations on the subsidies code and the U.S. itself needs time to phase in the injury test on outstanding countervailing duty cases.

Option 2. Apply the injury test only to code signatories until such time as all of a selected group of key contries had signed the code, after which the MFN rule would apply.

I strongly recommend Option 1 if it proves necessary to compromise.

Selective Import Safeguards

The European Community advocates a safeguards code that would allow a country to apply import restrictions selectively to those countries whose exports were causing severe problems. The United States has resisted this approach, although Bob Strauss has told the Europeans that, at the end of the day, we could accept some carefully defined selectivity, provided that the LDCs accepted it as well.

There are now indications that the United Kingdom—hitherto one of the strongest proponents of selectivity—could accept an MTN agreement that left the selectivity issue open. France has also proved susceptible to LDC pressure against selectivity and French officials have not lately pressed U.S. negotiators to accept the EC approach. In short, our decision to let the EC take the heat from the developing countries seems to be working. A standoff between the EC and the developing countries and a postponement of this issue would meet our objectives and probably temper LDC criticism of the MTN at UNCTAD V. We therefore should not now take any action that would diminish the prospects for an EC decision to temporize on selectivity.

Al McDonald has long been willing to strike a deal with the Europeans on selectivity, which he and Howard Samuel⁶ regard as a selling point for the MTN on Capitol Hill. Moreover, GATT Director-General Long has just released a draft text on selectivity.⁷ Long’s encouragement of negotiations on selectivity might lead Al McDonald to argue that we should now line up with the developing countries.

I recommend that we continue to stand back from the EC–LDC negotiations. Furthermore, we should not agree to Long’s suggestion to broaden the negotiations on selectivity since his approach could well lead to confrontation between the United States and the developing countries.

Final Considerations

A TPC decision to accept conditional MFN or selective safeguards would make it considerably more difficult than it already is for the President to inform Lopez Portillo that we have taken adequate account of LDC interests in the MTN. The TPC’s decision could well influence Mexico’s approach to the GATT, an issue of overriding importance for our relations with that country.

Acceptance of conditional MFN or selective safeguards would amount to a reversal of long-standing U.S. trade policies. In a system that requires the President to decide whether or not to restrict imports of clothespins, we can legitimately argue that decisions of this magnitude also require Presidential review. If the TPC seems likely to endorse either conditional MFN or selective safeguards, I strongly recommend that you request that a decision memo go to the President.

1. Source: Carter Library, National Security Affairs, Brzezinski Material, Brzezinski Office File, Subject Chron File, Box 108, North-South Policy: 1979. Confidential. On February 24, Erb sent a copy of the memorandum to Brzezinski; in his cover memorandum, he noted his recommendation that Owen “and the NSC staff oppose a ‘conditional’ most-favored-nation policy as well as selective safeguards. In my view, a US decision to adopt either of these policies would require Presidential approval.” Brzezinski underlined the phrase “either of these policies” and wrote “I agree” below it. (Ibid.)
2. No memorandum of conversation of this meeting was found.
3. See footnote 2, Document 148.
4. On February 26, Bergsten sent Cooper a Treasury Department memorandum entitled “Unconditional MFN and the Codes.” According to Bergsten, both Blumenthal and Solomon felt “very strongly that we must go conditional on the subsidy code, and we would want to discuss it at very high levels if you were to support any other course of action.” (Memorandum from Bergsten to Cooper, February 26; National Archives, RG 59, Office of the Secretariat Staff, Records of the Under Secretary of State for Economic Affairs, Richard N. Cooper, 1977–1980, Lot 81D134, Box 4, Trade—MTN—Jan–Mar, 1979)
5. Article I of the General Agreement on Tariffs and Trade deals with “General Most-Favored-Nation Treatment.” Article XXIII deals with “Nullification or Impairment.”
6. Howard Samuel was Deputy Under Secretary of Labor for International Affairs from 1977 until 1979.
7. Telegram 2946 from Geneva, February 21, discussed Long’s effort to effect a compromise on the selectivity issue; telegram 2951 from Geneva, February 21, transmitted his proposed text. (National Archives, RG 59, Central Foreign Policy File, D790081–0095 and D790081–0400, respectively)