395. Memorandum From the Under Secretary of State for Economic and Agricultural Affairs (Wallis) to Secretary of State Shultz1
SUBJECT
- The International Coffee Agreement (ICA)
The main damage to U.S. consumers and to the international coffee trade due to past operations of the ICA has been the following:
1. It has created a two-tier market in which U.S. and other member-country consumers, in most years, pay artificially inflated prices for [Page 957] coffee while surplus coffee is dumped at a discount in non-member countries, including the Soviet bloc.
2. It has discouraged production in friendly countries, such as those in Central America, because extra coffee produced would have to be dumped. In general, the quota system tends to freeze production patterns, which is what the present dominant producer, Brazil, intends. Market trends toward higher quality coffees, especially in the U.S., are thereby obstructed.
3. It has probably raised the overall average price of coffee paid by U.S. consumers, even after taking into account the possible price-moderating effects of extra stocks carried into years of poor crops, such as the 1985–86 drought in Brazil.
The main beneficiary of all this is Brazil, which has been able to use its dominant position to get a disproportionately large quota. Several coffee-exporting communist countries (Cuba, Nicaragua, Angola, and Ethiopia) also benefit. It is doubtful whether countries with less generous quotas, such as Colombia and most of the Central Americans, have benefitted.
Although it is theoretically possible to fix all these problems by negotiating a relatively sound new ICA, we have no assurance that it can be negotiated. That is especially true if other countries assume, possibly correctly, that the U.S. would not refuse in the end to sign an agreement with the present defects. In any case, no agreement, no matter how sound its provisions, is better than a free market. As I reported to you earlier, the NCA (the U.S. trade association of coffee roasters and dealers) recommends that the ICA be allowed to expire in 1989 and that the free market should then prevail.2 Clayton Yeutter agrees with them, and so do I.
Although such a decision would generate a lot of political heat, it is the last chance in this administration to get rid of a bad agreement. Assistance to friendly countries, particularly the Central Americans, is much surer and better targeted if we give them cash through bilateral aid. Of course, it is difficult, in the present budget climate, to do what we need to in that area. It is far better to fight for that, however, than to have to negotiate indirect assistance with fifty other countries [Page 958] in the Coffee Council, dominated by Brazil, which is no friend of our economic and political interests.
Note: This memo was drafted under the guidance of Under Secretary Wallis, but he has not been able to edit it.
Economic Adviser
- Source: Reagan Library, George Shultz Papers, Executive Secretariat Sensitive (04/14/1988–04/24/1988); NLR–775–17–38–5–7. Confidential. A stamped notation on the memorandum reads: “Treat as original.” An April 19 handwritten note from Maura Harty at the top of the memorandum reads: “—See GPS comments on action memo (attached).” The April 16 action memorandum is attached and printed as Document 396.↩
- In a February 12 memorandum to Shultz, Wallis reported that the National Coffee Association had just voted to oppose U.S. participation in a new International Coffee Agreement. (Department of State, Executive Secretariat, S/S Files, 1988–1989 Official Office Files for (E) Economic Affairs Allen Wallis, Lot 89D154: Wallis Chron, January/February/March 1988)↩
- Martin Bailey initialed for Wallis above Wallis’s typed signature.↩