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
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
Washington, August 18, 1978
SUBJECT
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
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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
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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.
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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
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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
