280. Memorandum From Guy Erb of the National Security Council Staff to the President’s Assistant for National Security Affairs (Brzezinski)1

SUBJECT

  • PRC Meeting on the Negotiations on a Common Fund, 4 November 1977, 3:30–5:00 p.m.

Summary of Main Issues

The US is involved in a complicated negotiation with developing countries on a common fund for commodity price stabilization. The PRC meets to consider these negotiations on 4 November 1977. The main question before the PRC will be: (1) is the US prepared to continue the negotiations and contemplate compromises which may be necessary to bring them to a successful conclusion? If the answer to (1) is yes, other important questions are: (2) can possible changes in the US nego[Page 856]tiating position be examined during November, (a) on foreign policy grounds (given the importance of the negotiation to the overall North-South relationship) and (b) in relation to the credibility of the OECD proposals and the viability of a common fund itself; and (3) should consultations with the Congress be undertaken on US objectives and proposals within the negotiations.

If the PRC answers question (1) negatively we will have to consider urgently a series of steps that might minimize the damage to US relationships with other OECD members and the LDCs.

Background

The PRC has received a discussion paper on the negotiations on a common fund (Tab A). The negotiations, which will take place from 7 November through 2 December,2 are the fourth major North-South encounter on the common fund: previous meeting occurred at UNCTAD IV in Nairobi in 1976, at an UNCTAD meeting in March of this year; and at the CIEC meeting last June when it was decided that a common fund “should be established.”

President Carter has referred twice to the US intent to negotiate a common fund. The proposed mechanism has become, for better or worse, the touchstone of the UNCTAD commodity proposals and a critical factor in the overall North-South relationship.

Since April 1977 the USG has worked with other OECD countries to develop an OECD proposal to make to the Group of 77 developing countries. The US approach has been guided by an April 1977 EPG submission of recommendations on common fund issues (Tab B).3 At that time, the President approved the following paragraph in which you summarized the EPG recommendations:

Issue 1. All agencies agree that the US should support a common fund which permits pooling of the fund of various buffer stocks and includes a provision for World Bank lending to supplement these funds. This will be seen as a demonstration of US flexibility, although it will not meet all the demands of the LDCs. (See your memorandum to the President, April 14, 1977, No. 2059.) (Tab C)4

With considerable ingenuity, US officials have followed up that Presidential guideline by crafting a proposal for a pooling arrangement which has become the basis for an OECD opening position for the negotiations.

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The US Proposal

The US proposal is summarized on pp. 1–3 of the discussion paper. In my view, the pooling concept on which it is based has serious technical and political shortcomings:

My critique of the financial viability of the pooling proposal includes the following points:

—a pooling arrangement without a back-up facility based on direct government contributions or guarantees would not offer a significant incentive to producer/consumer commodity agreements to join the pool;

—a common fund without its own financial resources would not be able to convince private bankers of its credit-worthiness and consequently would have a weak borrowing capacity on private capital markets. Note: The World Bank lending proposed by the EPG was an attempt to respond to this issue.

—the pooling mechanism envisages a complex way of using the callable capital of commodity agreements and some existing agreements might not be able to participate in the pool as presently defined.

On political grounds the pooling proposal:

—risks splitting the group of developed countries in November since some of the smaller European countries are not satisfied with the proposal as it stands.

—may well provoke a confrontation with developing countries because it falls far short of the Group of 77 proposals.

The Proposal of the Developing Countries

The common fund proposals of the Group of 77 now include: (1) creation of a central source of funds for international commodity price stabilization agreements between producers and consumers; (2) support by a common fund for “other measures” which would include improvements in productivity, marketing and diversification; (3) financing for stocks and other measures for commodities not covered by international commodity agreements.

Only the first of the above proposals offers us a reasonable prospect for compromise. This is so because the US cannot at this time responsibly support a new institution for financing “other measures” when we must still deliver on commitments of $800 million to existing international development lending institutions. Moreover, support by a common fund for commodities not covered by agreements would only be possible if the US and other developed countries had agreed with producers to international guidelines which were comparable to those in formal international agreements.

The Group of 77 is not united solidly behind their proposals, a factor which lends considerable uncertainty to interpretations of their possible reaction to the OECD proposal. My best guess is that the LDC [Page 858]moderates will not be able to contain sharply critical LDC statements during the early stages of the November meeting. The ability of the US to respond constructively to that criticism may determine whether or not we will be able to channel the common fund negotiations toward technical working groups following the November meeting. Such groups would be preferable to another high-level, highly politicized negotiating session.

The major European countries have been informed of the possibility that the US might have to revise its position in the light of events during the November meeting. An improved US response might:

—force the Group of 77 to react to a constructive proposal rather than maintain their maximum demands in a confrontational manner.

—enable the US to resist pressure to make more changes in its proposals.

RECOMMENDATIONS

The following are my recommendations related to the main questions posed at the beginning of this memo:

Question 1:

Is the US prepared to continue the negotiations and contemplate compromises which may be necessary to bring them to a successful conclusion?

The President has approved your suggestion of a US approach to the LDCs based on cooperation and shared responsibility. That approach justifies a serious US intent to negotiate a common fund.5

Question 2:

Can possible changes in the US negotiation position be examined during November, (a) on foreign policy grounds (given the importance of the negotiation to the overall North-South relationship) and (b) in relation to the credibility of the OECD proposals and the viability of a common fund itself?

We should seek from the PRC policy guidelines which authorize the serious exploration of improvements in the US position, for example those found in paragraphs 9–15 of the discussion paper. A PRC request to explore urgently those, and other, possible changes in the US position could aim at providing our representatives in Geneva with the negotiating flexibility that they may use as needed.6

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Question 3:

Should consultation with the Congress be undertaken on US objectives and proposals within the negotiations?

As we determine the substance of possible changes in the US position, the Congress should be consulted on the evolving US position. In our consultations on Capitol Hill the objective of price stabilization (not price rigging, not more foreign aid) must be continually borne in mind.

Tab A

Discussion Paper Prepared for the Policy Review Committee 7

THE COMMON FUND

November 4, 1977 The Situation Room

The Setting

1. The UNCTAD negotiations on a common fund have become a principal focal point in the North/South dialogue. The March 1977 negotiating conference made little progress in bridging the major differences seen at the Fourth UNCTAD in Nairobi in 1976. At CIEC the industrialized and developing countries agreed in principle to establish a common fund. It was clear on both sides, however, that the type of common fund the major industrialized countries were willing to consider was a much more limited and modest mechanism than that sought by the LDCs.

2. Since CIEC the US has led an effort in the OECD to develop a common fund proposal for the 4-week negotiating conference that begins November 7. The US has proposed a common fund that would facilitate the financing of commodity buffer stock operations by pooling the cash resources of International Commodity Agreements (ICAs) and borrowing in the market against commodity stock warrants and callable capital pledged by governments through the ICAs. The proposed fund would not receive direct contributions from governments and would not have financial resources independent of the participating ICAs. Latest indications are that this approach is acceptable to other OECD countries as an opening position.

3. The LDCs want the common fund to be a global commodity institution that would act as a central source of financing for ICAs with [Page 860]financial contributions made directly to it by national governments. Many of them also want the fund to finance non-stabilization measures—diversification, infrastructure investment, research and development, product improvement and market promotion. Inclusion of “other measures” is basic to LDC cohesion because it offers benefits to LDCs who would not gain from buffer stocking. We and most other industrialized countries believe these non-stabilization needs are in large part already being addressed or could be addressed through existing financial institutions (IBRD, UNDP, regional banks), bilateral assistance programs, and ICAs themselves. Finally, the LDCs want the fund to be a new international institution with its own resources under their control. We seek to limit the scope of the fund’s activities, prevent control by the LDCs as a bloc, and preserve the autonomy of ICAs.

4. We cannot be sure how the LDCs will react to our current proposal in November. In view of the distance we have come, in the last year, the LDC moderates may be willing to work with our approach and attempt to move us along in November and further negotiating sessions next year. On the other hand, given the fundamental differences between our concept of a common fund and that demanded by the LDCs, we must be prepared for a contentious and politicized session that could end in a stalemate and sour the general negotiating environment on North/South issues. The common fund negotiations occur at an important moment in the dialogue, being the first major “economic” event after CIEC; preceding an upcoming series of difficult North/South negotiations; and coming before and during the President’s trip.8 The Group of 77 developing countries (G–77) are likely to use the opportunity provided by the trip to increase pressure on the US.

The U.S. Proposal

5. We have argued in the OECD that our proposal would offer the following benefits:

a. it would provide economies from the pooling of substantial cash resources;

b. it would substantially reduce the financial outlays of government for each ICA by relying on commercial borrowing to enable participating ICAs to obtain financing up to 100% of their negotiated financial requirements;

c. it would be able to borrow more effectively and at lower costs than individual ICAs by consolidating their financial operations;

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d. it would enhance the fund’s standing on the market over time through the financial solidarity derived from the participation of major industrialized countries.

6. In advancing our arguments in the OECD we have brought along the major industrialized countries to the point where—despite some misgivings on the part of the UK and France—they are now willing to support our approach as a credible opening position, although LDC pressure could result in a breakdown of OECD cohesion during the course of the November session.

7. The scheme has been criticized, even within the USG, on the grounds that its credit worthiness could be strengthened; that—aside from the economies derived from pooling cash resources under ICAs—the fund would not provide any benefits beyond those the ICAs could obtain on their own; and that since it would have no resources of its own, it is no more than a useless financial intermediary. In this view, tabling of such a proposal would be viewed by the LDCs as a failure by the industrialized countries to live up to their commitment at CIEC and could, therefore, lead to a major confrontation.

Negotiating Strategy

8. An immediate issue is whether a common fund of the sort outlined above is of sufficient scope to be a valid basis for negotiations throughout November and beyond. The basic conceptual difference between the US and G–77 centers on the provision of direct financial contributions to the common fund and whether such contributions can be used for purposes other than price stabilization through international buffer stocks. The following paragraphs discuss a number of proposals that have been put forward as possible additions to our current proposal:

Producer/Consumer Co-financing of ICA Buffer Stocks

9. Link the proposal to an explicit statement by industrialized countries accepting the principle of consumer participation in the financing of buffer stocks negotiated by producers and consumers. Although The Executive Branch has already accepted this principle, further consultations with the Congress will be necessary. The Germans, in a major policy reversal, have endorsed this principle as well. The British are referring it to Ministers and the Japanese have not yet accepted it. A joint industrialized country statement on this issue would represent a genuine step forward in assuring adequate financing of buffer stocks. It would also significantly enhance the credibility of a pooling arrangement.

Support for Backup Mechanisms

10. Provide government contribution(s) to the fund as a backup reserve, either directly or through each ICA for the purpose of enhancing [Page 862]the fund’s ability to borrow. Such funds could not be withdrawn by individual ICAs. From a financial point of view the desirability of such contributions is related to the deposit ratio issue discussed below. The lower this ratio the greater the desirability of such contributions. This approach has the attraction of offering a limited compromise on the central source issue—still the major conceptual gap between our approach and that of the G–77—and providing the fund with minimal direct resources to assure its continued operation in the event of default by a participating ICA or participating members of an ICA. Unless we could convince the Congress that such resources were essential to the fund’s operations and would not be used for the benefit of ICAs of which we were not a member, such support would probably not be authorized. And even if we could provide such assurances, the need to obtain Congressional support would be a major constraint in introducing the proposal. And were Congress to go along, we might expect that these appropriations would be at the expense of other foreign assistance programs.

11. Lower the proportion of cash ICA resources which must be deposited with the fund. By thus reducing initial budgetary outlays, this step would make the fund more attractive to members of ICAs. But there is then a risk that if support for the back-up mechanism ever shifted from callable capital pledged through ICAs to direct contributions, we could end up with a fund that a) required substantial amounts of direct resources and b) required participating countries to support borrowing on behalf of ICAs of which they are not members. To avoid this problem, we would have to seek agreement on the nature of the back-up mechanism before settling the deposit ratio and other basic issues.

12. Endow the fund with an overdraft within the World Bank or IMF that would be activated in the event of an IMF-certified recession and if the common fund had exhausted its commercial borrowing capacity. This step would be consistent with our position that there are benefits to all countries in sustaining production and employment by propping up commodity prices in the event of a severe decline. When this idea was raised earlier this year with other industrialized countries, it was generally opposed and we have not discussed it further in the OECD framework. The objections raised to the proposal were:

a) the existence of such a facility would tend to reduce the incentive for ICAs to raise the appropriate amount of their own financing when the agreements are negotiated;

b) the ICAs themselves might have to be amended in order to obtain financing significantly in excess of 100% of their negotiated financial requirements;

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c) an overdraft with the Bank or IMF would require changes in their respective Charter and Articles of Agreement; such changes could be difficult to obtain and would risk further undesirable amendments;

d) establishment of such an overdraft facility could result in drawing away funds for economic development purposes in the case of the Bank and for anti-recessionary balance of payments financing in the case of the IMF, when the need for such financing would be greatest.

“Other Measures”

13. Seek a commitment by developed countries to support increased attention by the World Bank to commodity problems in connection with the proposed general capital increase. This step—together with agreement by the developed countries that the objectives of ICAs could include financing of product improvement and R&D programs—would be a defensible answer to LDC insistence that a common fund finance other measures. The disadvantages are: a) we are not in a position to “earmark” a future general capital increase; b) the LDCs will argue they are destined to receive the benefits of a general capital increase in any event and that there is, therefore, no additionality; and c) they will view this step as a ploy to subvert their concept of a common fund, which directly addresses “other measures” and, therefore, contains something of interest to virtually every LDC.

14. Provide for an advisory role for the fund on other measures. Here, the fund’s membership would issue “recommendations” to other institutions to undertake “other measures” where traditional price stabilizing agreements are not feasible. While this might seem better than nothing to some LDCs and innocuous to many developed countries, it accepts a definite role for the fund on other measures, thus paving the way for pressure to move from “advising” to “financing,” and would almost certainly result in a new large international bureaucracy.

15. Provide for voluntary contributions to a second window for the financing of other measures. This would provide an outlet for any voluntary contributions, including those from OPEC, and also perhaps satisfy the LDCs that the fund would have a financing role on other measures. On the other hand, in addition to the disadvantages cited in 14) above, it would be difficult for the US to resist the inevitable pressure on us to contribute to the second window, which would become in effect a new aid institution requiring periodic replenishment. A second window is thus inconsistent with our position, and that of most OECD countries, that there is no economic justification for common fund financing of non-stabilization measures.

16. We should bear in mind that there is no certainty that changes in the US approach would bridge the wide gap between the industrialized countries and the LDCs. An arduous negotiation thus appears inevitable. Moreover, our support for consumer-country participation in [Page 864]buffer stock financing—which is a central element in our commodity policy—has not really been tested yet on the Hill. In determining our position, tactics and strategy, we must weigh the desirability of a possible short-term political gain against our own preferred approach to commodity issues and the major Congressional constraints that loom in the background.

Timing

17. The timing of possible introduction of any of the above changes is a matter of judgement with respect to negotiating strategy and tactics in UNCTAD.

18. Introduction of some changes fairly early in the negotiations could reduce the risk of our immediately being thrown on the defensive and enhance our ability to make the OECD proposal the basis for discussion in November.

19. The nature of the North/South dialogue and the entire history of negotiations between the developed and developing countries suggest that the latter quickly snatch any concessions made and then up the ante. Given the conceptual gulf between the two sides on the common fund—even with the US in its most forthcoming possible posture—there is every reason to suspect history will repeat itself in November. This argues for a conservative opening position with some flexibility held in reserve and used only when absolutely necessary. The limitations on that flexibility, however, argue for stretching out whatever changes we may be able to make over the longest possible period. We cannot realistically hope in November to change the nature of negotiations in UNCTAD. Despite the obvious risks involved, we may want to sensitize the LDCs early in the negotiations to the real limits in our position and to the fact that, while we hope for some progress in November, we do not expect all major issues to be resolved.

  1. Source: Carter Library, National Security Council, Institutional Files, Box 66, PRC 042 11/4/77 Common Fund Negotiations. Confidential. Sent for action. Copies were sent to Owen and Thornton. In a November 3 note to Brzezinski, Thornton indicated his concurrence in Erb’s memorandum. (Ibid.) In another note to Brzezinski, also dated November 3, Owen wrote that he had “not followed this as closely as Guy. In general he seems to me to be on the right track.” (Ibid.)
  2. For more information on this second session of the UN Negotiating Conference on a Common Fund, see Yearbook of the United Nations, 1977, p. 472.
  3. Tab B was not attached. For more information, see Tab A to Document 263.
  4. Printed as Document 263.
  5. Brzezinski did not indicate his preference with respect to any of the recommendations. On Question 1, the Disapprove option includes the action to “Prepare steps to contain damage to US relations with OECD countries and LDCs.”
  6. The Disapprove option under Question 2 includes the query “other action?”
  7. Confidential.
  8. Carter was scheduled to travel to nine countries November 22–December 3, but the trip was postponed in early November. (Charles Mohr, “Carter Postpones Foreign Tour To Deal With Energy Legislation,” The New York Times, November 5, 1977, p. 1)