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

347. Memorandum From the Assistant Secretary of the Treasury for International Affairs (Bergsten) to Secretary of the Treasury Miller¹

Washington, July 21, 1980

SUBJECT

• Common Fund for Commodities

Introduction

Articles of Agreement for a Common Fund for Commodities were concluded on Friday, June 27. These Articles represent the culmination of four years’ of international negotiations on an issue which, for a time several years ago, was the centerpiece of LDC demands in the overall “North/South Dialogue.” At the behest of the White House and State, Treasury played a key role in the final stages of the negotiations and will be deeply involved in (a) presenting the necessary legislation to the Congress in 1981 and beyond, and (b) managing the institution. This memo describes briefly the purpose, structure and operation of the Common Fund.

Main Elements

The Common Fund will be an international financial institution whose aim is to improve the functioning and effectiveness of primary commodity markets. To achieve its purposes, the Common Fund will have two separate accounts. The First Account will assist in the financing of buffer stocking operations undertaken by International Commodity Agreements (ICAs) to stabilize primary commodity prices. The Second Account—to which the United States has indicated it will not contribute—will provide finance for commodity development measures such as research and development, productivity improvements and market promotion.

ICAs which associate with the First Account of the Fund will deposit with the Fund, either immediately or over time, one-third of the estimated cost of their buffer stocking needs in cash and provide guarantees to the Fund from their participants for the remaining two-thirds of this amount. In addition, member countries of the Common Fund will provide $470 million in direct contributions to the Fund, of which $370 million will be in the form of paid in shares, and $100 million will be in the form of “payable” (i.e., callable) capital. This $370 million of paid in shares is scheduled to be paid in three installments: a $111 million cash payment upon entry into force, a payment of $74 million in cash plus $37 million in promissory notes at the beginning of the second year, and a $148 million deposit of promissory notes at the beginning of the third year. The payable capital of $100 million is to be subscribed upon entry into force, but will be called only in a default situation. The U.S. share of direct contributions is $73.85 million, the first cash installment of which is $15 million to be paid upon joining. One year later, a payment of $10 million in cash plus $5 million in promissory notes would be due, with $20 million in promissory notes due at the beginning of the third year. The payable capital of $23.85 million would be subscribed upon joining. The direct contributions will be used to meet the liquidity needs of the Fund, to secure its creditworthiness and to provide revenues to meet administrative expenses.

The First Account will secure resources to finance associated ICAs’ buffer stocking needs through the use of the pooled cash deposits of the associated ICAs and by market borrowing on the basis of the government guarantees provided by ICA participants. Pooling of ICA cash deposits permits the use of the cash deposit of an ICA not in a buying phase to meet the buffer stocking needs of another ICA which is. This “pooling effect” will reduce the average level of borrowing the Fund as a whole will need to undertake by comparison with the individual agreements operating alone. The direct contributions, by enhancing the Fund’s creditworthiness, will also serve to reduce the interest rate charged the Fund on its borrowings.

In the early 1970s the LDCs (unrealistically) envisaged the Common Fund as a financial institution with sizable resources (several billion dollars) which would finance the creation of ICAs for the individual commodities, end-running the opposition of several DCs (notably the United States) to ICAs and their resultant unwillingness to finance same. This objective was mooted when the Carter Administration indicated its support for ICAs, and subsequently negotiated U.S. participation in (and financing for) several of them—tin, natural rubber, sugar, and coffee. At the same time, we indicated we could only accept a Common Fund based on the pooling of the resources of ICAs—a concept which basically survived the final negotiation. Hence the institution which now emerges is a far cry from the original LDC idea, representing only a modest financial backstop to existing ICAs (though also something of a political victory for the “South”).

The major carry-over from the original LDC idea of a Common Fund with its “own resources” is the Second Account which will be financed by voluntary contributions. Governments may allocate part of their direct contributions to the Second Account; $70 million is expected to be so allocated. In addition, $280 million in additional voluntary contributions are expected from members. To date, pledges have been already announced for around $220 million. The U.S. has decided not to contribute to the Second Account, on the view that its activities will duplicate those of existing MDBs.

The Common Fund will have a Governing Council and an Executive Board. The U.S. is assured a seat on both bodies. Votes will be allocated to countries on the basis of an initial schedule based upon universal membership. However, adjustments will be made in the voting system to account for less than universal membership with the aim of securing a voting breakdown in which the developing countries, as a group, will have about 47 percent of the total votes, and the developed countries around 42 percent. The U.S. will have 10–12 percent of the total vote. The most important decisions of a constitutional or financial nature will be subject to a 75 percent majority. The U.S., the UK, the FRG, Canada, and Japan will together account for at least 25 percent of the vote based on the initial schedule. Other decisions, depending on their importance, will require a two-thirds or simple majority.

Next Steps

The Common Fund will enter into force when at least 90 countries accounting for two-thirds of the direct contributions and half of the $280 million in voluntary contributions have ratified the agreement. The major developed countries, the U.S., the UK, the FRG, Japan, Canada and probably France, are likely to coordinate their joining the Fund. Even without the French, the major countries acting together will be able to block adverse decisions in the Fund in its initial stages.

Our current thinking is to seek Congressional concurrence in 1981. Our full share of direct contributions will be included in the FY 82 budget. Assuming Congressional acceptance, we would plan to join the Fund after October 1, 1981, when we would have received our appropriation. Treasury and State will play the major roles in seeking Congressional approval as we have in Hill consultations during the extensive process of negotiation. (Our hope is that Foreign Affairs and Foreign Relations will handle the authorizing legislation, but several committees—especially in the House—may seek to assert jurisdiction because of the financial and commodity characteristics of the institution.) Our basic approach is that the modest price tag is justified by the modest economic and major foreign policy benefits of participation. Since the Common Fund is an international financial institution, State and the White House (Henry Owen) have agreed that Treasury should have management responsibility.

Congressional Outlook

Although the Administration has sought to take account of Congressional concerns on key issues in negotiating the final package, there is uneasiness in Congress with respect to the Common Fund—and Congressional approval of the Agreement is by no means assured.

In the Senate, Chairman Church² has been skeptical that the Common Fund will ever get off the ground because he believes that many of the individual commodity agreements do not want to participate. His position might be to defer consideration of any legislation until after a suitable number of ICAs, say three, indicate their intention to enter the Common Fund. However, his view that commodity agreements will not wish to join the Common Fund does not take account of the political commitments which major commodity-producing countries, e.g., the ASEANs, have made to the Common Fund during both the Common Fund negotiations and negotiation of the recently-ratified Natural Rubber Agreements,³ which explicitly calls for association with the Common Fund.

Senator Sarbanes has complained that the legislative circuit has become overloaded with international financial institutions in recent years. He does not want to take on added responsibilities as Chairman of the Senate Foreign Relations Subcommittee on Economic Policy when the MDBs and other economic programs are having great difficulties already.

Finally, there is concern that creating the Common Fund will give foreign aid opponents another target to go after, whereas the individual commodity agreements (e.g., rubber, tin, sugar) go through the Congress basically unnoticed except by the industries directly involved. The customary “anti-bureaucracy” argument that we are creating a “modest” agency which will eventually grow to enormous size will also undoubtedly be used against the Common Fund.

On the House side, there are likely to be additional problems because there will probably be many Committees involved (i.e., at least House Foreign Affairs, House Banking and House Appropriations Committees). As with the Senate, our supporters in the House are not anxious to take on another project.

The President made a political commitment in 1977 at the London Summit, reaffirmed at the Bonn Summit, to establish a Common Fund. The negotiating process is now complete. However, if we cannot demonstrate a clear need for creation of the Common Fund and distinct advantages to U.S. interests which will result from the Common Fund legislation, we may well not be able to convince Administration supporters to take up the issue. In short, the burden is on the Administration to convince Congress that the Common Fund will yield substantial foreign policy benefits, along with its more modest economic benefits, in return for a modest budget outlay.

1. Source: Department of the Treasury, Office of the Secretary, Executive Secretariat, 1980 Files, 56–83–05. No classification marking. Drafted by Department of the Treasury staff member Robert Blake on July 17; reviewed by Department of the Treasury staff member Steve Canner (per Blake) on July 17. Printed from a copy that bears Bergsten’s stamped initials.
2. Frank Church served as the Chairman of the Senate Foreign Relations Committee from 1979 until 1981.
3. In October 1979, an international agreement was concluded that was designed to stabilize the price of natural rubber. (Telegram 16376 from Geneva, October 5, 1979; National Archives, RG 59, Central Foreign Policy File, D790457–0638; telegram 16493 from Geneva, October 9, 1979; National Archives, RG 59, Central Foreign Policy File, D790462–0624) In January 1980, the United States signed the International Natural Rubber Agreement; the Senate consented to the agreement’s ratification in May 1980. (Telegram 6518 to multiple posts, January 8; National Archives, RG 59, Central Foreign Policy File, D800017–0222; telegram 135747 to multiple posts, May 23; National Archives, RG 59, Central Foreign Policy File, D800253–0819)