367. Memorandum From the Under Secretary of State for Economic and Agricultural Affairs (Wallis) to Secretary of State Shultz1
SUBJECT
- Fixing the International Coffee Agreement
Now that we will be pushing the implementing legislation for continued participation in the International Coffee Agreement (ICA), we need to look at the most effective ways to deal with its anti-market character. Primarily, we will simply keep working in the meetings of the Coffee Council to correct the problems, in the same way that we have been doing. However, one of the most serious problems will be fixed only if we use to the fullest the potential leverage of present legislative authority for temporary unilateral suspension of quotas.
The problem of especially great concern is the sales of coffee at deeply discounted prices to non-member countries when the ICA has binding quotas. Although the amount of subsidy involved is difficult to estimate reliably, it has recently run about a hundred million dollars annually, and much of it goes to Soviet Bloc countries.2 These countries then get an even larger indirect subsidy through the benefit of lowered prices in the current period of tight supplies, due to the carry-in of [Page 900] supplies withheld from members earlier. This indirect subsidy will be something like $700 million annually.
Price increases to members simultaneous with price discounts to non-members (sometimes coinciding with other kinds of market manipulation) are an egregious violation of the provisions of the ICA.3 Proposed penalties within the ICA for such discounts are unenforceable, but we have an unused legislative mandate to deal with them quite effectively. The implementing legislation positively requires a temporary suspension of quotas in response to unremedied market manipulation by two or more member countries. Using a temporary suspension of U.S. compliance with the ICA to force an end to sales at discounted prices to the Soviet Bloc would be much less drastic than pulling out of the organization, and fits the punishment to the crime. Moreover, it would improve our leverage in our attempts to correct other antimarket aspects of the ICA. It would also improve our credibility; it has been a major oversight that we have not used this approach to correct past abuses within the ICA.
There would of course be problems in the implementation, and we would have to work these out carefully. Unless you want me to handle this differently, I plan to work with Steve Danzansky and Clayton Yeutter to plan future implementation, including the criteria for invoking the above clause in our legislation, taking into account foreign policy considerations. A more complete statement of the problems we want to remedy is attached.4
- 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: Memoranda for the Secretary July—August—September 1986. Confidential; Nodis. Wallis wrote at the top of the memorandum: “GPS says ‘this is a good idea. Follow thru. Be sure others are on board to start with so that we can carry out threat if we make it.’ Also see his note at end. AW 8/12/86.”↩
- Wallis inserted an asterisk here and wrote at the bottom of the page: “*About double the wheat subsidy to USSR (4 × 106 × $13 = $52 × 106).”↩
- Wallis crossed out “simultaneous” at the beginning of the sentence, capitalized “Price,” and inserted “simultaneous” between “members” and “with.”↩
- The statement is not attached. Shultz wrote in the right-hand margin below this paragraph: “Ok. I presume we would [want?] everyone to know in advance that we plan to follow through. G.”↩
- Wallis initialed “AW” above his typed signature.↩