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

396. Action Memorandum From the Acting Assistant Secretary of State for Economic and Business Affairs (Larson) to Secretary of State Shultz¹

Washington, April 16, 1988

SUBJECT

• International Coffee Agreement: Renegotiation

ISSUE FOR DECISION

Whether to enter into negotiations toward a new International Coffee Agreement (ICA).

BACKGROUND

The U.S. was a principal architect of the first ICA in 1962, and we have remained a member largely for foreign policy reasons. The Fourth ICA expires September 30, 1989. Formal ICO consultations on renegotiation probably will begin between the April 25–29 meeting of the ICO’s governing council² and its next session in late September. The Trade Policy Staff Committee will meet April 21 to consider the following options on how we should proceed: A) decide now to renegotiate the ICA, B) decide now not to participate in the ICA after September 1989, or C) delay a decision on whether to renegotiate.³

Coffee is an extremely important export for many developing countries of interest to the U.S. Central American and other producers’ dependence on coffee export earnings is high and they consider stability in coffee prices encouraged by the ICA vital to their social and economic development. Because they acknowledge that the ICA could not function without effective U.S. participation, the ICA is an important factor in our relations with them.

Our withdrawal from the Coffee Agreement would cause the ICA to collapse because the U.S., with about 30% of the market, would no longer enforce export quota provisions. The U.S. would be blamed for disregarding the economic plight of developing countries. Many would experience an export earnings decline, which would exacerbate debt-servicing, reduce ability to import merchandise and encourage requests for additional balance of payments assistance. U.S. withdrawal would complicate the Administration’s Central American, CBI and other regional initiatives.

At the same time, key consumer country governments and the U.S. coffee trade believe that serious weaknesses in the present Agreement preclude extension of the current ICA and require renegotiation. At a minimum, the following issues must be resolved to conclude an acceptable Agreement: A) supply must be made more responsive to demand for the specific types of coffee consumers prefer and industry requires; B) the incentive for producers to sell outside their quotas to non-member countries at discount prices must be eliminated.

In addition, ICA reliance on negotiated export quotas has shortcomings in terms of overall Administration policy on commodity agreements. In all other cases we have opposed economic provisions involving any restraint of trade or production. The ICA’s negotiated export quotas do not fully reflect supply availability nor do they allow much adjustment in response to changing market conditions.

ESSENTIAL FACTORS

The U.S. National Coffee Association (NCA) supported U.S. participation in past Coffee Agreements but this year resolved that “the interests of the U.S. coffee consumer and industry are best accommodated by free and unrestricted trade in coffee.” The NCA Resolution also stated that, should the USG nonetheless decide to remain a member, a new Agreement must address serious weaknesses in the current ICA, i.e. discount sales to nonmembers and nonavailability of the types and origins of coffee sought by consumers. Although the U.S. trade in fact is almost equally divided on the question of continued membership, it is nearly unanimous in agreeing that, at least, solutions must be found to these two specific problems. Preliminary views of key European governments and coffee trade also emphasize the importance of tackling these issues in the renegotiation.

We have not yet sought agreement among interested bureaus, or with other agencies, on specific USG objectives for negotiations toward a new ICA. However, until ICA members formally have begun to exchange views on the shape of a new ICA, it would be premature to limit our options regarding whether or on what terms we would be willing to participate in a new Agreement. This month’s ICO Council session will provide a clearer picture of the forces at play, information on which we can base a more realistic interagency appraisal.

There is general agreement within the USG that, although future U.S. participation should not be a foregone conclusion, the importance of the Coffee Agreement to friendly producing nations requires at least a good-faith effort to make it work. Most important now is our commitment to discuss the possibility of a new ICA. Any indication that the U.S. might do otherwise would be extremely hard to defend after 25 years of U.S. support for the Agreement. In conveying a decision to enter negotiations toward a new Agreement, we would make clear our dissatisfaction over the terms of the current ICA, and our refusal at this time to consider its extension. This decision, however, would also convey our willingness to work within the ICO toward an Agreement which satisfies our industry’s needs as well as our foreign policy objectives.

RECOMMENDATION

I recommend that you support the U.S. entering negotiations toward a new ICA.⁴

1. 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.” Drafted by Clayton Rubensaal (EB/TDC/OFP/FPD) on April 13; cleared in EB/TDC/OFP/FPD, EB/TDC/OFP, EB/TDC, E, ARA, EAP/EP, NEA/ECON, AF/EPS, and EUR/RPE. The initials “RWM” are stamped and written at the top of the memorandum. Tab A, USTR’s TPSC Paper, and Tab B, the text of the 1983 International Coffee Agreement, were not found attached.
2. The ICO Council was scheduled to meet in London April 25–29.
3. In a May 25 memorandum to Baker, Mulford reported that the TPSC had been unable to decide whether the United States should participate in renegotiation of the ICA. Treasury opposed U.S. participation in renegotiation of the ICA on economic grounds, but Mulford recommended that Treasury ultimately accede to State’s position on foreign policy grounds, provided that: “(1) Negotiating instructions clearly hold U.S. negotiators to positions that would remove the worst features of the current ICA; and (2) it is understood that, if our positions prevail in the negotiations, we will be expected to join the agreement and Executive Branch approval should be routine.” McPherson initialed his agreement with the recommendation and wrote: “Mr. Sec this is my position—I went through the 1983 discussions but I wanted you to see it before it went back to David Mulford.” Baker wrote “PmP: I agree” at the bottom of the memorandum on June 6. (National Archives, RG 56, Records of the Office of the Secretary of the Treasury, Congressional Correspondence, 1988, UD–10, 56–10–1, Box 38, Memos to the Secretary, International Affairs, May/June 88)
4. Maura Harty drew a line through the recommendation, wrote “X per GPS” on the “Approve” option line and under the recommendation wrote: “The recommendation should read: ‘I recommend that you support the U.S. entering negotiations toward a sound, new ICA that eliminates present defects.’ Per Harty-Wong telecon 4/19/88.” At the end of the Reagan administration, the ICA renegotiations were ongoing and the issue of U.S. participation had not been resolved.