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

361. Memorandum From the Under Secretary of State for Economic and Agricultural Affairs (Wallis) to Secretary of State Shultz¹

Washington, April 1, 1986

SUBJECT

• The International Coffee Agreement

At last we have the opportunity to stop bothering you about this, due to the coming lapse of legislative authority for customs enforcement of the International Coffee Agreement (ICA). Although you know all the facts and arguments and are probably tired of seeing them, I will summarize the reasons why I think we should withdraw from the ICA.

U.S. participation in the ICA poses a policy dilemma because this administration’s market-oriented philosophy runs head-on into its concern for economic and political developments in Latin America, especially Central America. The ICA is a cartel and therefore violates our preference for free and open markets. Moreover, when the U.S. government has made exceptions for certain commodity agreements, it has generally insisted that any agreement we join should be symmetrical in its provisions affecting producer and consumer economic interests. Also, any such agreement should avoid resisting or changing average, long-run price trends. On its face, the ICA violates, or attempts to violate, both these policy imperatives. We should not accept such violations of a sound administration policy unless there are strong, valid reasons for doing so. None of the arguments in the attached memo and papers comes up with such reasons.²

On the contrary, from a long-run point of view the political considerations point toward withdrawing just as strongly as do the economic considerations. For some years we have been downplaying the “New International Economic Order”, “Global Negotiations”, the “Common Fund”, and related ideas. Many developing countries have continued to argue that the developed countries owe it to them to transfer a big share of their wealth to them, and that commodity agreements are one of the main ways to do it. To cool off that idea, last year we announced that we would not ratify the Common Fund,³ and we have been more and more openly skeptical of commodity agreements. Withdrawing from the ICA would make it clear that we mean it, and would help to move developing country governments toward more realistic thinking. Although in the short run it means some static, in the long run it’s a plus.

Here, in summary, are some of our technical findings that bear on the economics of the question.

1. The ICA has not in fact stabilized coffee prices in the past. Although it could in principle be operated so as to stabilize them, there is no reason to expect that it will in the future.

2. Over the long run, the ICA may or may not transfer income to coffee producers from consumers. Producers believe the agreement supports the price of coffee, and they are probably right. Since 1980 the prices of most major commodities have declined by one-third, whereas coffee prices have risen by almost 50%. Transfers from consumers to producers in that period have been sizeable, and both sides see these as “aid”. Unlike foreign assistance, they are not conditioned on the adoption of sound economic policy or directed to specific purposes.

3. Furthermore, this aid is indiscriminate: it goes not only to our friends but also to Cuba, Nicaragua, Angola, and Ethiopia. There is also indirect aid: when the ICA does support the coffee price, producers dump some of their accumulating unsold stocks in the non-member market. The ICA at such times will subsidize the Soviet Bloc through this dumping. (A figure based on the past four years shows upwards of $110 million a year for this subsidy. The basis for this figure, in detail, is set out in Tab 1.)⁴

4. The dumping in the non-member market draws off supplies that would otherwise be available to benefit consuming countries when there is a poor crop, if governments of the producing countries maintain unchanged incentives to coffee growers.

5. The method of allocating export quotas favors Brazil at the expense of Colombia, Central America, and other producers. (Brazil is hostile to us in in all international trade and finance matters; it is the last country we should reward in this way.) A free market would help shift production toward these more efficient producers (which we would wish to favor on other grounds, also.) That would benefit consumers both in terms of lower coffee prices on the average and in terms of more stable supply. Almost all of the variability of world supply is due to frost and drought in Brazil.

6. The ICA’s pricing policy may well be contrary to the long-term interests of producers. Since 1962, when the U.S. joined the ICA, coffee consumption per capita in the U.S. has declined more than forty percent. Tea consumption, in contrast, has not changed, and soft drink consumption has more than tripled.

7. The detailed operation of the ICA makes prices vulnerable to misjudgments and deliberate manipulation by Brazil. We have tried and failed to remedy this defect.

8. Our attempts to make the ICA more market-oriented in its operation have been stymied and, after a partial success in 1984, rolled back in 1985. If we remain in the agreement after this defeat, the other members will know that they can disregard our wishes with impunity; there is therefore no reasonable hope of liberalization or technical improvement of the ICA.

One argument we hear from people in the coffee trade is that if we withdraw and bring about the collapse of the ICA, the producers will form their own cartel, as they have tried to do in the past. If that happens, the desirable shift of production from Brazil to more efficient producers will be hastened, to the long-run advantage of consumers, as happened in the past when Brazil engaged in large-scale market manipulation. Any new effort of that kind would collapse quickly, in fact is not likely to be attempted, and gives us little to fear if it is attempted.

To withdraw will clarify the Administration policy on commodity agreements and avoid the need to expend political capital to get Congressional approval of implementing legislation for an agreement we don’t really want.

As you have remarked to me, if we are going to pull out, now is the time to do it. Due to the drought in Brazil, high prices have led to the suspension of quotas for what is expected to be two years or more; in the meanwhile, our withdrawal would have little or no economic effect. If we don’t, the U.S. will almost certainly be stuck with the ICA indefinitely. Clayton Yeutter strongly supports withdrawal, though the rest of his agency, like this Department, opposes it. The reaction from producers, while negative, will be relatively subdued. There has been widespread press speculation regarding our possible withdrawal. We have time to present carefully and clearly our reasons for withdrawing.

I suggest that you authorize me to work with Yeutter to develop a strategy for withdrawal. However, if you do find yourself leaning toward staying in, let’s have a word about how to get the most mileage possible out of your decision.⁵

(Incidentally, the paper attached to EB’s memo is one of the products of your new mini-CEA, and along with their other recent work it shows the value of having such a group. The paper is probably too detailed, technical, and inconclusive to warrant your reading it, but if you do you may also want to look at Martin Bailey’s comments on it at Tab 2.⁶ You might also be interested in my speech on commodity agreements, given before the National Coffee Association in February; it is at Tab 3.)⁷

Allen Wallis⁸

1. Source: Department of State, Executive Secretariat, S/S Files, 1986 Official Office Files, Action/Briefing/Information/Through Memoranda,/Chron Files/Memoranda to the Secretary Handled by (E) Economic Affairs Allen Wallis, Lot 89D156: Through Memoranda, April 1986. Confidential. A stamped notation reading “GPS” appears on the memorandum, indicating Shultz saw it. Platt also initialed the memorandum and wrote “4/1.”
2. The memorandum and papers are not attached.
3. See Document 340.
4. Not attached.
5. On April 1, Shultz approved the recommendation of a March 31 decision memorandum from McMinn that the administration seek implementing legislation for the remaining 3 years of the ICA. McMinn argued that the political case for continuing membership in the ICA and strong foreign policy considerations made a compelling argument to remain in the agreement and seek the necessary implementing legislation. (Department of State, Executive Secretariat, S/S Files, 1986 Official Office Files, Action/Briefing/Information/Through Memoranda,/Chron Files/Memoranda to the Secretary Handled by (E) Economic Affairs Allen Wallis, Lot 89D156: Through Memoranda, April 1986) An April 17 memorandum from Baker to the Economic Policy Council communicated Reagan’s decision “to continue our participation in the International Coffee Agreement and seek implementing legislation.”(Reagan Library, Stephan Danzansky Files, International Trade Subject Outline, II (L) Commodity—Coffee 03/31/1986–08/04/1986)
6. Wallis placed an asterisk at the end of this sentence and wrote “*I urge you to read Bailey’s memo at Tab 2” at the bottom of the memorandum. Tab 2 is not attached. A copy of Bailey’s memorandum is in Department of State, Executive Secretariat, S/S Files, 1986 Official Office Files, Action/Briefing/Information/Through Memoranda,/Chron Files/Memoranda to the Secretary Handled by (E) Economic Affairs Allen Wallis, Lot 89D156: Through Memoranda, April 1986.
7. Tab 3 is not attached. For Wallis’s February 11 speech, “Commodity Markets and Commodity Agreements,” see Department of State Bulletin, April 1986, pp. 71–74.
8. Wallis initialed “AW” above his typed signature.