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

SUBJECT

  • Common Fund

Attached are memoranda from Secretaries Vance and Blumenthal concerning the Common Fund.2 They differ about its merits and the form that it would take, but agree that there are serious Congressional obstacles. Under the circumstances, I believe the most useful next step would be intensive Congressional consultation about the advantages of the type of Fund that Cy proposes, in the course of which variants such as Mike proposes could also be explored. After that consultation we can judge better whether changes in US policy are feasible and desirable. Accordingly, I recommend that:

1. You authorize us to proceed with intensive Congressional consultation about the Common Fund as soon as the foreign aid bill has been passed (probably in late September). This timing will leave little time for fixing the U.S. position before negotiations begin in early October; we will try to accelerate consultations.3

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2. You direct that U.S. representatives at informal international meetings in the meantime indicate that we will consult intensively with the Congress about the unresolved issues and will frame our positions on these issues in light of the results of that consultation and of on-going international discussions.

3. You direct that the results of Congressional consultations be reported to you and that the PRC be asked promptly to give you agreed or divergent recommendations as to U.S. policy, in light of these results.

Attachment

Memorandum From Secretary of State Vance to President Carter 4

SUBJECT

  • Common Fund

I believe it is politically important in the North/South context to move the Common Fund negotiations toward a timely, successful conclusion. The developing countries see the Fund as the touchstone of industrial countries’ attitudes toward their aspirations and our support for it as an important indication of our commitment to a constructive North/South dialogue. The Bonn Summit and statements by you, Mike and me during the ASEAN Ministerial meeting5 have increased expectations that the U.S. will take the initiative at expected negotiations on the Fund this November.

I believe that we should make a vigorous effort to move forward. Our taking a major step towards the LDCs—with a view to breaking the impasse in the next round of negotiations—would be a positive political gesture. It would strengthen the climate in the UN, UNCTAD [Page 996]and other forums. On the other hand, failure to move forward will sour our relations with the LDCs in multilateral forums.

Negotiating an agreement with the LDCs on this issue, however, poses considerable difficulties, which merit careful consideration:

—We will have major difficulties securing Congressional approval—a treaty will be involved—and may not succeed.

—The Common Fund will compete for Congressional support and financing with other foreign economic policy issues which Mike Blumenthal and others consider to be of greater substantive economic importance to us and the LDCs.

—The contribution of a Common Fund to world economic welfare would be modest.

Issues

Differences between developed and developing countries revolve around four issues: (1) direct contributions to the Fund versus cash deposits via individual commodity agreements, (2) need for a “second window” to finance development-type measures, (3) the precise terms of reference of the Fund, and (4) voting arrangements.

The U.S.—together with other industrialized countries—has proposed a Common Fund financed through pooling of the assets of individual commodity agreements. We have argued that the Fund does not need a second window because the financing of non-stabilization measures is best handled by existing international institutions—though we have agreed the Common Fund could play a coordinating role. Finally, we want voting shares that reflect our stake in commodity trade and equity in the Fund.

The G–77 say there can be no Common Fund without direct contributions, although limited possibilities for compromise may exist. The G–77 position on voting may be more flexible, and they may agree that contributions to the second window can be voluntary.

Direct Contributions for Price Stabilization (First Window)

The LDCs, particularly ASEAN, see direct contributions (the U.S. share probably amounting to $50–100 million) as the sine qua non of the Common Fund. This level represents a scaling down of earlier demands. While direct contributions may not be essential to the financial viability of the Fund, the LDCs view them as: 1) symbolic of our political support for the Common Fund and for their objective of greater participation in the international economic system, 2) a means of shifting the burden of financing commodity agreements from developing to developed, socialist, and OPEC countries.

Our agreement to “up front” direct contributions would significantly improve prospects for the success of the negotiations, but it would not remove all obstacles. For instance, our insistence on voting [Page 997]arrangements satisfactory to us would run counter to the basic G–77 desire for a new institution controlled by the developing countries.

Second Window

We could now agree to a second window based on voluntary contributions to finance such measures as commodity productivity improvements, research and development, and new product usage, without agreeing to contribute to this window. Some other developed countries are likely to contribute. The U.S. will be under increasing pressure to do so as well. Many African countries and the Indian Subcontinent believe they will not benefit from buffer stock financing arrangements. To them the second window will be more important than the first. Our willingness to make a contribution to it would significantly improve prospects for success in the negotiations, and might make it easier to reach agreement in a first window closer to our objectives.

Terms of Reference

There is still a substantial difference of view over the appropriate terms of reference for the Common Fund. Some LDCs would like it to be very broad, permitting the Fund, for example, to intervene directly into commodity markets even when there is no agreed International Commodity Agreement for the Commodity in question, or permitting the Second Window to finance manufacturing activities that use primary products. The developed countries want a much narrower term of reference with respect to both windows. This can probably be worked out in the negotiations.

Decision-making

Some LDCs see the Common Fund as a key element in the New International Economic Order, as “their” institution which they will control. Needless to say, the developed countries want to maintain at least a blocking minority. Moderate LDCs have indicated that the LDC position here is negotiable, but at best we can expect some tough negotiations on this.

Congressional Considerations

In view of the precedent of individual commodity agreements (all of which have been treaties), the need for appropriations, and the nature of the Fund as a major “umbrella” commodity institution, it seems likely that the Senate would insist that it be presented as a treaty requiring advice and consent to ratification. Some members of Congress have told us recently that a Common Fund would be rejected by the Congress. I do not share that view if we properly prepare the ground. A major campaign on the Hill, supported by your strong personal involvement, would be necessary. Even so, it might not succeed.

[Page 998]The question of timing is also important. The 1979 legislative calendar will be crowded with other initiatives of great importance to the LDCs and ourselves, viz the MTN, IMF quota increase, aid legislation, and a World Bank capital increase. The Common Fund would compete with these initiatives for Congressional support and funds, and success in obtaining Congressional support for the Fund might come at the expense of these initiatives. On the other hand, to put off submission of any Common Fund agreement until 1980 would involve another set of problems, since 1980 will be a short session, shadowed by the election.

If, however, we stick to our present position, the negotiations are likely to fail, and the onus of failure will likely be on the United States. Acrimony in the North/South dialogue would be inevitable, though how damaging or enduring the fall-out might be is open to question since—with the exception of a few countries (e.g., Venezuela)—the Common Fund has not been a problem in our bilateral relations with LDCs.

Most other developed countries are anxious to move for political reasons and will join us if we move in a positive direction. The exception so far has been Germany. Schmidt has argued that a global export earnings stabilization scheme would be preferable to a Common Fund. In fact a similar scheme has been in existence for some time—i.e. the IMF’s Compensatory Finance Facility, which lends substantial sums to countries suffering export shortfalls. We are now looking for ways to improve this Facility. Schmidt’s argument also ignores the political significance of the Common Fund to the LDCs.

There is obviously considerable room for trade-offs among the four major issues discussed above. Highly satisfactory decision-making arrangements would allow us to be more flexible on the terms of reference, for instance, and a willingness to make a contribution to the second window might permit successful negotiations on the basis of a very tight position on the first window. We will be working with Treasury and others during the next month to establish a detailed negotiating position if you give us the general go ahead now.6 You will have an opportunity to review the position before we begin negotiations.

Recommendation

That you approve our moving forward to achieve a timely and successful conclusion of the Common Fund negotiations. This will al[Page 999]most certainly require some form of direct U.S. contribution to the Fund. We should only take a firm position on this issue, however, after Congressional consultation (which we would undertake immediately after passage of the aid bill) has given us some view as to the chances of Congressional ratification.7

  1. Source: Carter Library, Records of the Office of the Staff Secretary, Presidential File, Box 100, 8/28/78. Confidential. Carter wrote at the top of the page: “Be cautious w/Congress. J.” Brzezinski also initialed the memorandum.
  2. Blumenthal’s memorandum is printed as Document 313.
  3. Carter indicated his approval of all three recommendations in this memorandum.
  4. Secret. Cooper sent a draft of this memorandum to Vance for his signature under cover of an August 15 memorandum. (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 3, Common Fund—1978)
  5. The Ministerial meeting between the Association of Southeast Asian Nations and the United States took place in Washington August 2–4. For Vance’s statement at the opening session, the transcript of a post-meeting news conference, and a joint statement issued at the end of the meeting, see the Department of State Bulletin, September 1978, pp. 19–25. For a statement issued by the White House on Carter’s participation in the meeting, see Public Papers of the Presidents of the United States: Jimmy Carter, 1978, Book II, pp. 1378–1379.
  6. In an August 29 memorandum to Vance, Cooper noted “that the President took favorable note of Secretary Blumenthal’s position that we could fashion a more limited approach to a Common Fund based on contributions to a contingency reserve fund.” (National Archives, RG 59, Office of the Secretariat Staff, Official Working Papers of S/P Director Anthony Lake, 1977–January 1981, Lot 82D298, Box 17, S/P-Lake Papers—Sensitive 7/1–9/30/78) For Blumenthal’s position, see Document 313.
  7. Carter indicated his approval of this recommendation and wrote: “See H Owen Memo. J.”