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

357. Memorandum From Stephen Danzansky of the National Security Council Staff to the President’s Assistant for National Security Affairs (Poindexter)¹

Washington, February 10, 1986

SUBJECT

• Update for EPC Meeting, 11 a.m., February 11, Cabinet Room

This will bring you up to date on the state of play re the sugar issue:

— On Friday, I attended the EPC meeting where sugar was first addressed.² I spoke on behalf of Richard Levine’s recommendation that the NSC favored reallocation of sugar quotas to give preference to Caribbean nations. Mac Baldrige was very supportive and, after some discussion, Baker indicated that he might bring Treasury on board if the dividing line between countries subject to losing allocations could be set higher, i.e. from per capita incomes of $1500 or below to $2250 and below. Baker wanted to preserve the allocations of major debtor nations such as Brazil, Mexico, etc. The State Department was NOT in favor of allocations but rather of seeking alternative forms of compensation for CBI et al. Wallis said that in light of the seeming division between the security agencies, State would be looking at the matter over the weekend.

— Over the weekend, numerous regional bureaus made strong demands on Shultz and Wallis for preservation of their quotas in lieu of reallocation.³ Hardest hit by reallocation would be Australia, Canada, Gabon, Taiwan, Uruguay and, if you go to a $1500 per capita, Brazil, Argentina and Fiji. Especially hard hit would be South Africa which, according to Phil Ringdahl, is presently considering making some rather important changes which could easily become untracked by a U.S. announcement of a reallocation which discriminates against Pretoria. Also Australia is a problem since any discrimination could provoke retaliation and a further strain on ANZUS.

— Since reallocation is essentially GATT illegal and, for the aforementioned reasons, Shultz and Wallis decided against reallocation and notified us this morning hoping we would join in their decision. State is advocating instead an exception which provides the CBI and other lesser-developed countries commodity assistance through the Export Enhancement Program and the CCC. That would make up the shortfall in revenues lost as a result of the Farm Bill (approximately $102.5 million in foreign exchange). In addition, the Administration would commit or recommit to support the CBI in textile promotion through:

1. Quota free access (the so-called 807 program) for CBI apparels made with fabric produced and cut in the U.S.

2. Realigning quotas in favor of the CBI countries during the upcoming Multifiber Arrangement (MFA) negotiations.⁴ This would be done by providing a “standstill” for the largest exporters (Taiwan, South Korea, Hong Kong) with their quota allocations being given to the CBI countries. These could provide revenues of over $150 million per year, thereby ultimately exceeding sugar dollars.

— The EPC met today and endorsed that proposal⁵ and I feel that it’s the best we can do at this point, given Shultz’ decision over the weekend. There are real problems with reallocation both precedential, procedural and political, and without any help from State, I don’t think the sentiment will allow us to prevail on the issue if we press. The EPC also agreed in that context to move immediately to prepare as a longer term strategy, a resubmission of the Farm Bill which will gradually reduce the sugar loan rate so as to eliminate deficiency payments by 1991 and thereby allow imports and market prices to prevail.

— What we must ensure tomorrow is that the decision is set in a positive tone, i.e. that the President understands that we are recommending a commitment to:

1. Change the Farm Bill to eliminate the loan rate by 1991.

2. In the short term, we will help the little guys by providing them commodity in-kind assistance to make up for the shortfalls in revenue which they will experience.

3. That we will commit to help the CBI further by granting quota free access under the 807 program and realign quotas in favor of the CBI during the upcoming MFA negotiations.

— Some talking points (Tab I)⁶ and the latest data on sugar are attached FYI (Tab II).⁷

1. Source: Reagan Library, Stephen Danzansky Files, Chronological File, Danzansky Chron February 1986; NLR–733–20–34–8–0. Confidential. Sent for action.
2. February 7. See Document 355.
3. The Department of State discussion and explication of the regional bureau positions on this matter is in a February 8 memorandum from McMinn, Wolfowitz, Crocker, and Abrams to Shultz. (Reagan Library, George Shultz Papers, Official Memoranda (02/10/1986))
4. Documentation on the Multifiber Arrangement negotiations is scheduled for publication in Foreign Relations, 1981–1988, vol. XXXVII, Trade; Monetary Policy; Industrialized Country Cooperation, 1985–1988.
5. See Document 356.
6. Tab I is attached but not printed.
7. Tab II is attached but not printed. Tab III, a memorandum from Levine regarding the February 10 and 11 EPC meetings, was not found.