Foreign Relations of the United States, 1981–1988, Volume XXXVIII, International Economic Development; International Debt; Foreign Assistance

343. Memorandum From Richard Levine of the National Security Council Staff to the President’s Assistant for National Security Affairs (McFarlane)¹

Washington, September 10, 1985

SUBJECT

• EPC Meeting on Sugar Quotas

The EPC will meet on Wednesday, September 11, at 4:00 p.m., to consider the issue of sugar quotas.² The President must announce the exact quotas by September 15.

My previous memorandum to you on sugar (Tab III)³ explains the background of the sugar issue. Briefly, because of declining demand, quotas for imported sugar have been cut back so that farmers have an economic incentive to sell into the marketplace rather than repay their loans to the Commodity Credit Corporation (CCC) with their sugar crop. This program was designed by Stockman to minimize U.S. budget costs, but, in fact, the sugar program has severely hurt the CBI countries and has substantially increased the cost of sugar to the U.S. consumer.

The options paper for the EPC meeting is at Tab II.⁴ It is generally an excellent paper. (Note: Since there are a number of different ways to price out agricultural programs, you should use the numbers in this options paper.)

As the paper explains, the President must make one fundamental decision before September 15: should he lower the quota (which will hurt CBI countries and U.S. consumer interests), or should he maintain the current quota (which will surely anger farm state Senators and cost the USG about $250 million)?

For reasons I will explain, I believe that you should strongly argue in favor of maintaining the current quota.

If the President does decide, however, to lower the quota, he may try to take certain actions to limit the effects of such action on the CBI and other countries. The President could attempt to create an offsetting “Sugar Adjustment Fund” to channel money back to the CBI countries for agricultural development, or he could attempt to allow a large quantity of sugar into the United States, that would otherwise be barred by the quotas, by having it refined into fructose syrup by a private firm as this syrup is not covered by the quotas.

The EPC paper thus presents four options. My informal pulse of the agencies reveals the following tentative positions:

Option 1 Lower Quota	Option 2 Maintain Current Quota	Option 3 Offsetting Fund	Option 4 Allow in Sugar for Syrup
USDA	NSC	USTR
Chief of Staff?	CEA	State
	OPD
	Treasury

(OMB’s position has not been set at the time of this memo.)

Although the above table might look as if the decision is weighted towards maintaining the current quota or creating the adjustment fund, USDA has a disproportionate voice on this issue, and, although I have no direct knowledge of the Chief of Staff’s position, a number of agencies, notably USTR and State, feel that the White House will be compelled to lower the quotas because of congressional pressure. Thus, they feel the best thing the Administration can do for the CBI countries under the circumstances is to create an offsetting fund. In fact, I think that the Chief of Staff and White House Congressional Liaison have not yet formed a set opinion on this issue.

Going through the options, the reasons why Option 2 is our best choice is as follows: Option 1 would be a disaster for the Central American sugar-exporting countries. The economic impact of another sugar quota cut would hurt these countries more than the CBI has helped. As the paper points out, DR stands to lose $60 million; El Salvador, $12 million. The instability such an action would cause would surely make any budgetary savings seem trivial by comparison. Lower quotas will also cost U.S. consumers up to $400 million.

Option 2, although sure to be unpopular with certain influential legislators, will preserve the current export earnings of sugar-exporting countries and save the U.S. consumer up to $400 million over option 1. Sugar growers will still be receiving loan rates from the USG, payable in sugar, that are many times the world market price and higher than the cost of production. Congress cannot veto the President announcing the maintenance of the current quotas. Congress may try to enact legislation, possibly through the Farm Bill, to lower the quota. This option would cost the USG about $250 million because CCC loans would be repaid in sugar and not cash, but this cost will probably be more than offset by consumer savings and, in the context of our multi-billion farm program, the cost of this option is by no means excessive.

Option 3 would allow a lowering of the quota, but set up a new line item account to reimburse poor nations for 75 percent of their lost sugar earnings.

This is a “Rube Goldberg” approach if ever there was one:

— Under the guise of agricultural development aid, this program would push countries to develop alternative crops to sugar, but the clear reason for this market diversification plan is that the USG artificially supports its own inefficient sugar producers. This is blatant hypocrisy and would be seen as such.

— This program would set the example of establishing a U.S. aid program to reimburse other nations for restrictive U.S. trade policies.

— It has high budget costs associated with it, but no consumer savings.

— The program runs directly counter to our aid philosophy in that it denies revenue to the private sector in developing countries by decreasing their sugar exports while it channels aid money back to the governments of such countries, which is highly inefficient.

— The Hill may not support this fund.

Option 4, the fructose syrup option, from a policy standpoint, has much to commend it. Politically, however, this option is not doable since such syrup would compete with corn-based sweeteners. Senator Dole and senior Hill leadership will block any attempt to create competition to corn-based sweeteners.

Noting the complexity of this issue, I recommend the following course of action:

(1) That you strongly support the maintenance of the current quotas at the EPC meeting.

(2) That you discuss the merits of this position and the problems associated with Option 3 (the offsetting fund) with Secretaries Shultz and Baker and Ambassador Yeutter before the EPC meeting.

(3) That you note at the EPC meeting the important point that a position that the President presents to the Hill must be based on our best policy. An Administration can, however, accept Hill policies that are far less perfect. Thus, at a later date, the Administration could press for an offsetting fund if the Hill overrides the President, and mandates lower quotas.

RECOMMENDATION

That you adopt the three-point strategy noted above, and that you use the attached talking points (Tab I) at the EPC meeting.⁵ (Note: CIA is preparing a paper on the effects of lower sugar quotas on CBI countries. I will pass this to you as soon as I receive it.)⁶

1. Source: Reagan Library, Stephen Danzansky Files, International Trade Subject Outline, I. (F) General—Identification 1985–1988; NLR–733–1–11–2–2. Confidential. Sent for action. Copies were sent to Danzansky and Burghardt.
2. See Document 344.
3. Tab III is not attached. A copy of the August 29 memorandum from Levine and Burghardt to McFarlane is in the Reagan Library, Stephen Danzansky Files, International Trade Subject Outline, I (F) General—Identification 1985–1988; NLR–733–1–11–1–3.
4. Tab II is attached but not printed.
5. Tab I is attached but not printed. McFarlane did not indicate his approval or disapproval of the recommendation.
6. Not found.