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

257. Memorandum From Robert Hormats and Roger Hansen of the National Security Council Staff to the President’s Assistant for National Security Affairs (Brzezinski) and the President’s Deputy Assistant for National Security Affairs (Aaron)¹

Washington, February 25, 1977

SUBJECT

• EPG Meeting on North-South Issues; Saturday, February 26 at 10:30 a.m.; Roosevelt Room

This meeting will be the first Cabinet-level look at North-South strategy, particularly with respect to the issues with commodities.² At the meeting you will have the opportunity to:

—Ensure that the various options are discussed within the proper foreign policy framework—which has tended to be overcome at times by the nuances of various economic options at the Deputies level.

—To establish at the outset that you personally view international economic issues—and North-South issues—as major ingredients in US foreign policy and will ensure that they are integrated with other elements.

—To underline the need for formation of a PRC working group to carry out the longer-term political/conceptual effort called for in PRM–8.

Political/Economic Framework

US economic interests in the developing world have changed radically over the last ten years. Among the ranks of the nations who count themselves as part of the Third World are the oil-rich nations, vigorous new trading nations, nations facing the pressures of unmanageable rates of population growth, desperately poor nations, nations wanting to get into the nuclear game and to accumulate conventional arms, nations anxious to reap the benefits of the oceans, and nations demanding a larger share of the world’s economic pie.

The US is likely to become increasingly dependent upon developing nations for raw materials, much as it is now upon their oil. The Commission on Supplies and Shortages estimates that in 1985 the US will import 100% of its tin, bauxite, manganese, cobalt, chromium and platinum, and more than 75% of its nickel, potassium, tungsten and lead. Developing countries account for 40% of US world trade, 26% of its direct investment abroad and 60% of the overseas loans it has provided. A number of semi-industrialized developing nations such as Brazil, Mexico, Iran, Korea and Venezuela make up the largest portions of these figures. A number of developing countries with large balance of payments deficits have the capability of disrupting severely the international financial system. And all of these countries are of great importance in dealing with such “global agenda” issues as the Law of the Sea, non-proliferation and arms control.

Of late, the developing countries have approached an increasing number of issues with extraordinary solidarity. This stems partly from a deep conviction by nearly all of them that in cohesion there is strength. Just as OPEC worked together, so they believe they can likewise achieve positive results by common pressure—and implicitly, the potential use of oil as leverage—on developed nations for more financial resources, for greater control over the institutions of the international economy and for a variety of benefits in various negotiations.

It is important to recognize, however, the major differences which exist among the developing countries and the variety of interests we have in the Third World. Our interests in Africa do not arise from its trade or financial importance but from the potential of its natural resource base and the danger of violent conflict. Our interests in Latin America derive both from its natural resource potential and its growing importance in world trade and finance; our strategic concerns, for the moment, appear to be less compelling, except in the Caribbean area. Our interests in Asia come not so much from its natural resource potential as from its trade, finance and strategic importance.

There are, in addition, divisions resulting from disparate growth performance and natural resources endowments. A dozen or so developing countries, including much of South America, Mexico, Korea, Hong Kong, Saudi Arabia and Iran have experienced remarkable economic growth in the post-war period, surpassing the weaker industrialized countries of Europe. Each of these nations has significant economic interests to defend that are far more important than any benefits they expect to receive from the general LDC call for more concessional aid, preferential treatment and commodity agreements. The very poor countries of Asia and Africa would gain from more aid but, lacking substantial amounts of raw materials, very little from commodity agreements. A number of commodity exporting countries could gain from commodity agreements, but have little real interest in more aid (which would go to poorer nations).

US Interests

The US has a fundamental interest in securing the support for or, failing that, acquiescence in an open multilateral economic system, and orderly change within that system. Further, we have an interest in avoidance and containment of regional disputes and in maximizing logistic support capabilities of our forces. Finally, we have a major interest in constructing new global system in such areas as nuclear proliferation, conventional arms sales, the controlling of terrorism, the use of “global commons” like the oceans, population control and global food production.

Stringent challenges by the poorer countries to the economic system’s equity and legitimacy could undermine the world economy, global political stability and the potential to cope successfully with the new “global order” issue you have written so eloquently about for the last five years.

We are not at present experiencing the same tensions as we did in 1974—with growing radical tactics of the developing countries, a tight alliance between the OPEC cartel and the developing countries. In fact, the developing countries appear, for the time being, to be convinced that they may after all have a place in US foreign policy. Kissinger’s UN and UNCTAD speeches³ made some progress in re-establishing a reasonable relationship with these countries at the multilateral level; they are now waiting to see if Carter delivers on what he implied would be a more forthcoming position.

The Commodity Issue

The only specific North-South issue to be discussed is the US approach to commodities.⁴ The developing countries see commodities as one of the fundamental issues of the New International Economic Order. In particular, they are pressing for direct government intervention in markets and indirect resource transfer through such means as indexation of commodity prices and LDC-controlled Common Fund to finance buffer stocks for a range of commodities. The Group of 77—supported by the UNCTAD Secretariat—has made the Common Fund a major political objective.

The US objective is to redirect the substance of the North-South dialogue into areas that will improve the international economic structure to the benefit of all countries, rather than fundamentally change it—especially because most economists believe that the demands of the developing countries in the commodity area are extreme, and would ultimately redound to the disadvantage of most of them. We have, therefore, rejected direct regulation of commodity markets and stressed instead case-by-case improvement of existing markets, liberalized trade, stabilization of LDC export earnings and more orderly conditions for investment in developing countries. While from an economic point of view this is the soundest approach, we also want to be politically sensitive in this area in order to prevent commodity issues from becoming an obstacle to improved relations with the developing countries—thus we wish to avoid a new confrontation over this issue.

There are five separate aspects to the commodity issue:

—With respect to how many commodities will the US agree to, and participate in, price stabilization arrangements, including buffer stocks, as well as other measures to improve the functioning of the market.

—Should the US support further liberalization of arrangements to ensure the stability of export earnings of developing countries heavily dependent on commodity exports?

—Should the US support measures to improve the availability of financing of buffer stocks?

—Should the US encourage or guarantee any investment in commodity production in LDCs?

—Should any new institutional arrangements for dealing with commodities be proposed?

There are four options which touch on these issues:

Option 1: Oppose any significant movement in the commodity field (i.e. continue our case-by-case policy in individual commodities, reflect a disinclination to agree to any international stabilization measures, including any buffer stocks, and oppose all versions of common funding). This would reflect the low priority we attach to commodities as opposed to other aspects of North-South relations, and may induce a greater sense of realism in other countries; but it runs a strong risk of provoking a major blow-up in North-South relations, will be opposed by our developed country allies and get the Administration off on a sour international note.

Option 2: Continue case-by-case approach combined with initiatives on several selective commodities, including a clearing-house arrangement to allow one commodity buffer stock to lend to another. This demonstrates a bit more flexibility and avoids the need to seek Congressional appropriation of funds prior to, and in the absence of, agreement on individual buffer stocks, but it falls far short of the LDC desires, and will probably produce a blow-up.⁵

Option 3: A more integrated approach involving the establishment of a “central depository” into which individual buffer stocks could deposit funds and borrow money, along with a more active effort to identify possibilities for negotiating commodity agreements, including buffer stocks. (This could also include the variant of putting the “central depository” within the IMF-World Bank framework.) This would be a more integrated program than Options 1 and 2, provide a Common Fund type feature by allowing individual buffer stock facilities to borrow from the IMF if funds were required and would thus be reasonably well received by the developing countries and would still enable the US to exercise control over individual commodity negotiations; but it would be criticized as inadequate by the more militant developing nations, be criticized in the Congress as turning the IMF into a development institution, and would be non-negotiable in UNCTAD.

Option 4: Accept the Common Fund and its “anti-market” approach. This would be well received by the developing countries, ease pressure on the US and enable us to make trade-offs in other areas of North-South relations; but by reducing financing constraints, it increases the possibility of ill-conceived buffer stock arrangements, reduces our negotiating leverage with respect to individual commodities, and will be strongly opposed in the Congress.⁶

We recommend that you avoid entering into the debate among these various proposals although you may wish to question whether:

—Each of the options has the correct balance between political and economic considerations.

—Whether by doing more in other (non-commodity) areas of the North-South relationship, we can buy more support among the LDCs for a less forthcoming US position on commodities; how we can gain support from the moderates for an economically reasonable package.

—Whether our indicating in advance our willingness to be forthcoming with respect to negotiation in certain individual commodities (e.g. copper and rubber) would buy support among important countries enough to moderate demands for more extreme generalized measures.

The Broader North-South Issue

The second paper to be discussed at the meeting is the State draft (not yet received by us) of an “overview” to North-South relations⁷ which, at last writing, was almost totally lacking in longer-term conceptualization of North-South relations. It is a source of distress to many bureaus in State and representatives of OMB who are looking for a longer-term analysis and orientation.

Perhaps one exchange—between Dick Cooper and Jules Katz—captures the issue at stake and the need for your presence on Saturday.⁸ When examining all the papers prepared for the EPG early this week, Cooper expressed his mild surprise that there was no paper on Law of the Sea problems, to which Katz responded, “But Dick, that’s not a North-South issue”. This exchange suggests how seriously an integrative and conceptual track—focusing on longer-term political, security, humanitarian and organizational aspects of North-South relations—is needed as a fundamental part of the PRM–8 study, and how appropriate your presence to express this message would be on Saturday morning.

1. Source: Carter Library, National Security Council, Institutional Files, Box 25, PRM–08 (1 of 3) [1]. Confidential. Sent for action.
2. No memorandum of conversation of this meeting was found.
3. For the text of Kissinger’s speech to the Seventh Special Session of the UN General Assembly, which he was unable to deliver but Moynihan read in his stead on September 1, 1975, see the Department of State Bulletin, September 22, 1975, pp. 425–441. The text of Kissinger’s address at UNCTAD IV in Nairobi on May 6, 1976, is in the Department of State Bulletin, May 31, 1976, pp. 657–672.
4. A February 25 paper entitled “Presidential Review Memorandum #8: Commodities Options” is in the Carter Library, National Security Council, Institutional Files, Box 25, PRM–08 (1 of 3) [1].
5. In the margin adjacent to and between Option 1 and Option 2, Brzezinski wrote: “unites radicals/moderates.”
6. In the margin adjacent to Option 3 and Option 4, Brzezinski wrote: “1—consider with JC, explain; 2—political need; 3—divides radicals/moderates; 4—pt. toward a more comprehensive long-term N–S strategy.”
7. Cooper circulated an undated summary of a paper entitled “PRM–8: Institutional, Political and Conceptual Aspects of North/South Strategy” to EPG members under cover of a February 25 memorandum. (Carter Library, National Security Council, Institutional Files, Box 25, PRM–08 (1 of 3) [1])
8. February 26.