Washington, August 29, 1972.

/1/Source: National Archives, Nixon Presidential Materials, NSC Files, VIP Visits, Box 926, Tanaka Visit 31 Aug-1 Sept. Top Secret; Sensitive. A stamped notation on the memorandum indicates that the President saw it.

[Omitted here are Section I on Purpose, Section II.A, Background, and subsections II.A.1, II.A.2, and II.A.3 on Reaffirmation of the Alliance, Japan's Normalization of Relations with the PRC, and US China Policy, respectively.]

4. US-Japan Bilateral Economic Relations. Although Japanese leaders now recognize Japan's major responsibility for reducing the massive trade deficit, they are reluctant to commit themselves to the kind of decisive, short-term ameliorative action we want. They fall back rather on projections that Japan's new economic recovery supplemented by Japanese government fiscal policy and other economic trends now underway will resolve the problem in about two years.

The problem at Honolulu will depend on the progress made in our current economic negotiations following up on Eberle's meetings in Hakone and Ingersoll's discussions preparatory to Honolulu. In these the Japanese are moving to develop a concrete package to meet the Tanaka Government commitment to reduce to below $3 billion the trade deficit by the end of this Japanese Fiscal Year (next March 31). There is greater reluctance to commit Japan to another billion reduction by the end of the following JFY.

We understand that the Tanaka Government's inability to agree at Hakone, and subsequently, on additional measures to reduce the trade gap further has probably been due to the unexpectedly strong resistance of mid-level bureaucrats in the economic ministries. These officials are loyal to Japanese business and industry interests. Nevertheless, past experience has indicated that we can be most effective by pressing the Japanese Government quietly but firmly to specific commitments that are politically feasible for it domestically. Indeed, US pressure is one of the most effective levers available to a Japanese Prime Minister and the Foreign Office to use with recalcitrant economic bureaucrats. Tanaka, with his currently strong political position (he is supported by over 70% of the people in opinion polls) is by virtue of this and his decisive temperament in a position to use such leverage.

[Omitted here are sections on Participants, Press Plans, and the Schedule.]

Tab C/2/

/2/Secret; Sensitive. Tabs A-I are attached to Kissinger's memorandum. The others are: A. Talking Points; B. Japan's Normalization of Relations with the PRC; D. Korean Peninsula; E. Relations with the Soviet Union; F. US Military Presence in Japan; G. Biography of Tanaka; H. Memorandum to you from Secretary Rogers; and I. Memorandum to You from Secretary Laird.

Economic Issues

The Problem

For the U.S. to: (a) allay protectionist pressure which could be troublesome next year, (b) successfully conclude monetary reform negotiations, and (c) obtain Congressional support for trade negotiation legislation, we must substantially improve our balance of payments position. Realistically, a major part of the improvement must come vis-a-vis Japan. However, our bilateral trade deficit, which was $3.2 billion in 1971 is projected by us to be about $3.8 billion in 1972. (The Japanese are now predicting $3.6 billion.) Japanese Foreign Exchange Reserves rose by over $10 billion in 1971 and today are above $16 billion.

Japan, for its part, recognizes in principle the necessity of reducing its trade and payments surplus which has made it the target of protectionist pressure in Europe and the U.S. However, the Government and the business community are extremely reluctant to translate this principle into concrete actions which are harmful to specific interests in Japan.

Japan's Position

Prime Minister Tanaka has stated that his target is reduction of the trade deficit to below $3 billion by the end of the current Japanese fiscal year (March 31, 1973). [This was the target agreed on in the Tanaka/Kissinger meeting.]/3/

/3/See Document 96. Brackets in the source text.

Tanaka has put substantial pressure on his bureaucracy to come up with an acceptable package. His objective was to have this ready prior to the Summit so that detailed economic issues would not have to be discussed, and in order to avoid the appearance that Japan had made concessions at Hawaii under pressure from the U.S. Tanaka also did not wish to bring with him his Minister of International Trade and Industry, Nakasone.

In the package put together as the result of Ambassador Eberle's meetings with the Japanese at Hakone and Ambassador Ingersoll's follow-up the Japanese have agreed to purchase $320 million in uranium enrichment services, $320 million worth of civil aviation equipment including wide-bodied aircraft, $20 million worth of helicopters and aviation related facilities, and $26 million worth of special agricultural purchases. Total value: $686 million.

In addition Japan projects an estimated increase in agricultural purchases, over last year's level, of $270 million and in purchases of fishery and forestry products of $120 million, plus $24 million in additional purchases of U.S. feed grain resulting from a reduction in sales from Japan's stockpile of feed rice. Total value: $414 million.

Japan has also agreed to allow 100% foreign-owned investment in retail operations totaling up to 11 stores and in limited import-processing activities such as film and cosmetics; also, to permit an increase in the U.S. share of the Japanese computer market. The AEC and the Japanese have agreed to use their best efforts to set up a working group to examine feasibility of a joint-venture uranium enrichment facility to be built in the U.S.

Japan wants to make the announcement of these specifics in a separate press release./4/

/4/The trade package was announced at the conclusion of the talks in Honolulu on September 1. See Department of State Bulletin, September 25, 1972, pp. 332-333.

The Japanese allege that--aside from the above and some minor steps to liberalize imports--the Japanese political situation presently precludes a) removal of quotas (34 GATT illegal quotas are still retained) although there is some possibility that the quota levels on oranges, juices, beef, and feeder cattle will be reduced, or b) special budget increases for procurement from the U.S. They argue that last December's yen revaluation, projected Japanese economic growth with an attendant increase in import demand, and orderly exporting practices will with time move us closer to equilibrium. They might argue that beyond present commitments, it will be difficult at this time to make any formal commitment on specifics or targets for the next Japanese fiscal year.

U.S. Position

This package--containing the purchase of U.S. goods and services of over $1 billion--while helpful in reducing our trade and payments imbalance, contains some items--uranium enrichment, wide--bodied aircraft, helicopters--which are being prepaid. These represent real sales for now and the future but except for agricultural purchases these do not help our trade balance this year. The package is an indicator of our mutual effort to turn around the growing imbalance in U.S.-Japanese trade. But its significance in this regard is diminished without a Japanese commitment to reductions in the trade imbalance. Accordingly, it is important that we receive in the joint statement a commitment that Japan intends to reduce by March 31 its trade surplus with the U.S. to below $3 billion, or by an amount of roughly $1 billion from the present projected surplus of $3.8 to $4 billion. Further, we want to receive an additional commitment to continue to work for additional concrete measures to reduce the imbalance and, on a longer-term balance of trade objective, that Japan will exert its best effort to reduce the trade deficit by at least an additional $1 billion in the next Japanese fiscal year beginning on April 1, 1973./5/

/5/No separate press release has been found. The Joint Statement is printed ibid., pp. 331-332.

We also want to:

--Stress the importance we attach to cooperation with Japan in multilateral trade negotiations and monetary reform.

--Reach agreement with Japan to hold future meetings at a high level to review evolving economic relationships.

--Agree to hold a meeting of the Ministerial-level Committee on Trade and Economic Affairs (ECONCOM) in the first half of CY 1973./6/

/6/These three objectives were affirmed in the Joint Statement.

[If Tanaka does not agree to commit himself to reduce the deficit by an additional $1 billion during the next fiscal year, you may wish to get a commitment that we will work to develop concrete measures to further reduce our trade imbalance and that we will review progress toward this end at ECONCOM and other high level meetings to be held next year.]/7/

/7/Brackets in the source text.

Should the Japanese raise the issue of the Smithsonian Agreement in such a way as to seek our agreement that the rates are unalterable or to get our support to help defend the present yen rate to prevent another yen revaluation (which Tanaka and Japanese businessmen wish to avoid because it would cut into Japanese competitiveness), our position is that the Smithsonian Agreement was a propitious beginning and we should now work to achieve fundamental reform. We should avoid a commitment to any specific yen-dollar rate in the future. [George Shultz' attached memorandum explains this position in detail.]/8/

/8/See Document 97. Brackets in the source text.

99. Memorandum of Conversation/1/

Oahu, Hawaii, August 31, 1972, 1 p.m.

/1/Source: National Archives, Nixon Presidential Materials, NSC Files, VIP Visits, Box 926, Tanaka Visit 31 Aug-1 Sept. Secret; Sensitive. The meeting was held in the Presidential Suite of the Kuilima Hotel. According to the President's Daily Diary, the meeting ended at 3:15 p.m. and was followed by a meeting of the principals with their official delegations. Kenzo Yoshida, Director General of the Asian Affairs Bureau, Ministry of Foreign Affairs, participated on the Japanese side in Ambassador Ushiba's place. (Ibid., White House Central Files)

PARTICIPANTS

Prime Minister Kakuei Tanaka of Japan
Ambassador Nobuhiko Ushiba
Hidetoshi Ukawa, Chief, Second North American Section, American Affairs Bureau, MOFA (Interpreter)

President Richard Nixon
Mr. Henry A. Kissinger, Assistant to the President for National Security Affairs
Mr. James J. Wickel, American Embassy, Tokyo (Interpreter)

SUBJECT
Prime Minister Tanaka's Call on President Nixon

[Omitted here are an exchange of pleasantries and discussion of the Emperor's visit to Alaska and of former Prime Minister Sato.]

The Prime Minister then recalled telling Dr. Kissinger recently that constant contact, both official and unofficial, is very important.

Dr. Kissinger noted that the Prime Minister said this is important in both the political and economic fields.

The Prime Minister recalled, in connection with economics, that he also said Japan must have a strong American economy. The fundamental view of the GOJ is that American prosperity means Japanese prosperity. While the current economic problems could not be resolved in one move, he expressed the belief that constant communication, with meetings between officials and experts every month if necessary, while keeping watch on long-term trends would lead to a smooth solution satisfactory to both sides.

The President noted that one of the reasons he appointed Ambassador Ingersoll is that we need in Japan a businessman with a good economic background. The Prime Minister, he noted, has not only achieved success in business but has the further qualification of having served as Finance Minister and Minister of International Trade and Industry.

The Prime Minister said that he appreciated the appointment of Ambassador Ingersoll, who could foresee problems in all aspects of the relationship, not just economic ones. It was, he said, a happy choice, since he is an expert in economic affairs. The Prime Minister said that he knew Ambassador Ingersoll many years before, having met him through David Kennedy, when he was still head of Continental Illinois. He noted that he had, as Finance Minister some years ago, approved the establishment of Continental Illinois' branches in Tokyo and Kobe.

The Prime Minister cautioned that trade negotiations through government channels only tended to develop into item-by-item negotiations, and pointed out that it is more effective to have consultations between specialists, with a view toward expansion of long-term balanced trade to the mutual advantage of both countries. Therefore, he appreciated the fact that Ambassador Ingersoll does not confine himself to official contacts with himself and the Foreign Minister, but also speaks broadly to the business community in Japan, which understands him so well.

The President said that he knows negotiations to resolve the great imbalance in our trade are difficult. He is glad to hear there is some progress. He also understood that the counterparts are discussing the technical points in the other meeting./2/ He emphasized that a skilled and experienced politician would understand that the present trade imbalance might appear to be advantageous to Japan, but if allowed to grow could lead to rising protectionism in the Congress. We should understand, he said, that it is in our mutual interest to resolve this trade imbalance as much as possible so as to prevent any move toward restriction issues, but rather to provide for freer trade, which is in the interest of both Japan and the United States, which are great economic powers. He realized that some Japanese businessmen, like our own, would tend to take a negative attitude toward any actions taken which they thought would result in a detriment to their own short-range interests. However, in viewing the long-term, he stressed that we as political leaders must create conditions which encourage the reduction of barriers. This, he said, we can do only if the members of the Diet and of our own Congress are convinced of the long-term interest to both countries of redressing the balance. Japan's businessmen and manufacturers are competitive and efficient, he said, and our own businessmen and manufacturers have that reputation. Therefore, we should welcome competition, and as political leaders he said both of us should do all we can to see that barriers are not raised. Therefore the GOJ moves to reduce the present trade imbalance would have, he believed, a salutary effect on both public opinion and in the Congress.

/2/The results of the trade negotiation were announced in Honolulu on September 1; see footnote 4, Document 98.

The Prime Minister said that an excessive imbalance in trade did not serve either nation, and is undesirable. Therefore, he wished to do his best to reduce the current imbalance. Japan would make specific efforts to reduce the imbalance, in order to continue to benefit from expanding trade. However, he did not believe this matter could be solved in half a year, or a year. Having served as Minister of Finance some three years, as an LDP policy-maker, and also as Minister of International Trade and Industry for a year, he felt he is qualified as an expert. While in office, therefore, he said he wishes to bring about an "ideal situation." While continuing to consult between governments, he said the Government of Japan would also continue its efforts to persuade business to accept necessary measures.

The Prime Minister added that the President's term of office is four years, but his own term as LDP President is only three.

The President said that he is young, the youngest to serve as a Minister and also to serve as Prime Minister.

The Prime Minister said that he was also the youngest man to serve as a Diet member, but pointed out that long life does not depend on chronological age. While the President could serve eight years, he could serve as LDP President only six years (two three-year terms).

The President asked if that is all he could serve.

The Prime Minister replied that this is all, unless LDP party regulations are amended, or unless he stepped down after two terms and later ran for another term.

The Prime Minister said that he views Japan-U.S. economic problems as being important. Therefore, he has been meeting with Ambassador Ingersoll, and Ambassador Eberle, and wishes to bring about some conclusion. Japan's entire post-war economic recovery has been based on the dollar, he said, and therefore the maintenance of the value of the dollar and continued growth of the American economy are also in the interest of Japan, insomuch as these contribute to the maintenance of world peace and the position of the free world. Japan, he said, wishes to cooperate in the interest of expanding the American economy.

The President said this is mutual. A strong, healthy Japanese economy is in our interest. He realized that Japan has a special problem with respect to playing a military role in the Pacific and Asia, but Japanese economic influence could be decisive in many areas. Therefore, it is in our interest that there be a strong, vigorous Japanese economy, so that Japan could play a vital role in Southeast Asia, which would help develop the whole region, and would be decisive. He commented that the Prime Minister would read in the press statements reflecting the feeling by some of our political leaders and businessmen that Japan is a serious competitor to be dealt with, but noted that he does not share their feelings. Healthy competition benefits both nations, he believes, except, of course, when the trade imbalance is too great.

The Prime Minister said that he wished to discuss the healthy balance of trade noted by the President. Within two or three years Japan wishes to restrain its surplus on current account to one percent of GNP, which would be used to finance economic aid of one percent of GNP to the LDCs. Moreover, of that amount the Government of Japan wishes to reach the ideal level of 0.7% of governmental developmental assistance as soon as possible. It is said by some that Japan has attained economic affluence, he said, but this is not true. There is an excessive concentration of population in urban centers, such as Tokyo and Osaka, which gives rise to many problems like pollution and inadequate housing. Japan lags behind the United States in social capital formation, he said, and great investments are needed for social capital and to improve living conditions. Thus, great domestic investments must be made, as well as large contributions to economic assistance to the LDCs. He said that the Government of Japan hopes to move forward toward realizing both goals.

In this connection, the Prime Minister added that Japan should cooperate with the Southeast Asian nations and the ROK in providing both aid and investment. When the tensions in Vietnam have been reduced, he said that Japan should also provide aid and investments to help stabilize the lives of the people. He noted Japan's promise at UNCTAD/3/ to attain the goal of governmental aid of 0.7% of GNP by the end of the decade. This would equal the entire budget to support the Government of Japan Defense Forces. While this is a difficult objective, he said the Government of Japan should tell the people this aid is essential, and gain their understanding. With the cooperation of the United States over the past quarter of a century Japan has achieved great economic progress and Japan now wishes to assume a larger burden in contributing to peace and the development of the LDCs, on the basis of full consultation with the United States.

/3/UNCTAD III convened in Santiago, Chile, in April 1972.

[Omitted here is a discussion of relations with the EEC, Vietnam, and China.]

100. Memorandum of Conversation/1/

Washington, September 11, 1972, 10 a.m.

/1/Source: National Archives, Nixon Presidential Materials, NSC Files, Agency Files, Box 219, CIEP. Secret. Drafted by Hormats; an attached NSC Correspondence Profile sheet indicates it was approved September 18. The meeting was held in the Cabinet Room. A tape of the conversation is ibid., White House Tapes, Cabinet Room. Another record of this meeting, apparently drafted in the CIEP, is attached to a November 3 memorandum from Flanigan to Kissinger on U.S.-European relations. (Ibid., NSC Files, Agency Files, Box 219, CIEP) Background material for this meeting, circulated to the President and CIEP members, is ibid. According to the President's Daily Diary, the meeting ended at 11:06 a.m. (Ibid., White House Central Files)

PARTICIPANTS
The President
Secretary Rogers, State
Secretary Shultz, Treasury
Secretary Peterson, Commerce
Secretary Butz, Agriculture
Deputy Secretary Rush, Defense
Caspar Weinberger, OMB
Herbert Stein, CEA
Ambassador William D. Eberle, STR
General Haig, NSC
Peter M. Flanigan, Executive Director, CIEP

SUBJECT
CIEP Executive Committee Meeting

President: This meeting will be devoted to the trade issues relating to the European Community. It will cover these in general but not be specific on particular trade matters. Peter, would you like to start off.

Flanigan: It has been the basic tenet of US foreign policy to support strongly the formation and enlargement of the EC. This was primarily for political reasons. The economic problems which were raised by the establishment of the EC were not enough to pose a specific threat to us although in the examination of the Rome Treaty several years ago we raised, and still maintain, a variety of objections concerning its compatibility with GATT. But recent EC enlargement and spread of preferences are more questionable legally and more damaging to our trade interests. Bill Eberle has strongly defended our interests. The atmosphere has been one in which the US has been engaged in a growing sense of confrontation with the EC. These can escalate. We are challenging the EC in an effort to limit damage to our interests and obtain cooperation in a broader area. The strategy we engage in has implications for the forthcoming monetary negotiations and our multilateral trade negotiations with Europe next year. We should agree on appropriate responses in dealing with the EC.

There are three examples of how problems will develop:

--The Ten will have to effect a common tariff. We sell $125 million worth of grain to the UK. The EC will argue that we have been compensated by a reduction of their tariff on industrial products. We say "no."

--EC preferential arrangements violate the GATT. There is an issue over dealing with arrangements with Spain and Israel. We have already filed our objections. The issue now is whether we escalate our objections. Or, should we deal with these as part of a broader agreement?

--In January it will be a GATT "open season". Our tariffs are bound for a three-year period. On January 1 of next year we have the right to change them or we can suspend them and see what the EC will do. We need guidance. We must keep in mind our broader objectives which are to reduce barriers to trade and contribute to a reduction in tension in our economic, political, and security interests in Europe.

The STR paper/2/ provides 4 options--from doing a little to an out and out confrontation.

/2/Not further identified.

--A. Downplay confrontations and concentrate on a few things that we can solve such as a standard code for products. We would postpone any development of any major negotiating position until after the election. This assumes that France has maximum leverage at this point and the CAP is popular in certain quarters of Germany. We would wait until the climate is better and not develop a strategy at this time.

--B. Atlantic cooperation approach. Under this we would lay the groundwork in the economic and political area for a possible major political initiative next year. Unlike Option A, this adds a definitive positive cost to the way we move over the next few months. We would ease off of confrontations which are harmful to the climate and avoid rocking the boat, but this would allow current actions by the EC against our trade interests to proceed unchecked.

--C. Modified confrontation. Continue to defend interests strongly and bring many problems to a head but stop short of bringing issues to a GATT vote, which we would probably lose. We could deal with major issues at a Summit. We would press for solution of some issues even at the risk of damaging relations. This could be combined with Option B. In our negotiations on EC enlargement we would attempt to get compensation on grain or we could unilaterally unbind tariffs.

--D. Precipitate a crisis. This is based on the premise that meaningful solutions cannot be reached unless there is an atmosphere of impending crisis. This would obviously bring us into major confrontation with the EC and spill over into other aspects of our relationship if we cannot get the solutions we want.

In interagency discussions all parties felt we should vigorously promote US interests. Some felt we should do so to the point of confrontation. Others preferred combining Option B and Option C, which was to work more toward a cooperative approach. All felt this should be developed as part of a broader US-European relationship.

President: What do you think of this, Bill?

Eberle: It is imperative for us to carry the major share of the initiative. The EC is not able to do so. We cannot step back. We must carry things through if anything is to be done. Option C permits us to do this and get a major feel for the atmosphere in which these negotiations will proceed.

President: How will the Europeans react?

Eberle: I am "bearish" about prospects now but see hopeful opportunities on the horizon. The German Minister of Finance/3/ says that the CAP costs more than the total contribution of agriculture to Europe's GNP. The Germans and French have made "backdoor" suggestions that we all agree in Article XXIV negotiations that there is some trade damage from the CAP and then carry over this agreement to the comprehensive negotiations in settlement. There are forces starting to build up. We should keep pressure on. There is hope. The Europeans feel we should not back away. If we back away, it takes away support from those in the EC who agree with us.

/3/Helmut Schmidt replaced Karl Schiller as German Finance Minister in July.

President: Will the new EC be lined up against us?

Eberle: We should assume this. Today the EC is isolated in the GATT on the question of enlargement. The key issue is whether they will accept more economic cooperation with North America or whether they will back away.

President: Nationalism in Europe is stronger than nationalism in the US and it is damned strong here. They enjoy kicking the US around. Eighty-eight percent of all the European media is violently anti-US. They will cut their own throats economically to take us on politically. We cannot get a very liberal trade program through the US. On these issues our people are very nationalistic.

Eberle: Nationalism is stronger in Europe against Japan than against the US.

President: We need to consider possible Congressional reaction to our failure to press our trade interests. Nationalist pressures are strong pressures in Congress. The Foreign Affairs and Foreign Relations Committees are unrepresentative. They only represent their own Committees. The Foreign Affairs Committee is a little more representative. But they do not represent the feelings of the country. We can't get too far out in front of our constituents. They are very tough on trade. These feelings are strong not only in the labor movement but among a large segment of the business community.

Shultz: In Europe there are different nationalisms--German, French, and British nationalisms, and on monetary policy they sometimes differ. There are different opinions in different countries.

Rogers: It is sort of a mixed-up nationalism. The question is, are they supporting the EC or individual nations. Trade questions will be decided on what is good for everybody. Our position has to be the one that Bill Eberle outlined. Elements of Option B could be combined with C. If we offer to liberalize, it will have a domestic problem. Our dairy policy is the same as the CAP. If we appear willing to make concessions on agricultural policy the dairy farmers would go up in smoke.

President: Let there be no doubt that our position before the election is one of protectionism. We should not indicate that we are preparing any concession not in the interest of the US. If anyone does, we will repudiate it.

Rush: The Europeans protect their domestic interests and their bloc interests. Both European and individual country nationalism is against the US.

President: What is your opinion of the nature of the EC nationalism--European or individual.

Flanigan: When they can do something to protect their national interests they will. When they can't do it on their own (e.g. the development of aerospace industry) they will do it as a group. For instance, they are developing an industrial policy. We should resist the EC effort to subsidize particular industries or develop high technology industries through preferential arrangements.

Peterson: We should confront the Europeans. If we appear to be liberalizing now, Burke-Hartke pressure is likely to develop. We must recognize that there is a security aspect to our relationship. On security and military, the Europeans have the best of both worlds. Trade issues will have to be related to larger issues including our military relationship. They need to be played at the Presidential level. If they fear we will abandon our military support, it will affect the way they deal on trade matters.

Rogers: They are not about to change the CAP. To change the CAP would cause serious problems for them as governments. Likewise, there are preferential trade issues and relations with the EFTA non-applicants which are important to them. At the moment they are only problems of principle for us, but do not hurt us badly. The question of a trade bloc, however, is a serious problem. It will have to be dealt with in the larger context of trade negotiations.

The question is how much do we want to threaten them with them in public. Do we want to go so far as to threaten withdrawal of concessions. This causes many problems. We should not do this in the next two months. We have a strong case but they have some problems with us too. It is not fair to assume they do not have complaints too. Our policy should be tough without any specific threats. We should hit them with a general position but without specific threats. We should also get them to adopt a structure in which we can negotiate with them on a regular basis.

President: In the following months we should not say anything forthcoming on trade. For example, my speech to the IMF meeting will not be forthcoming on trade matters./4/

/4/For text of the September 25 address, see Public Papers of the Presidents of the United States: Richard M. Nixon, 1972, pp. 907-911.

However, more is involved here than just questions of "horse-trading" between soybeans and cheese. The question is what Europe wants its position to be vis-a-vis the US and the Soviet Union. We hear about Finlandization of Europe. If Europe should adopt a trade policy which is anti-US, it could affect attitudes in the US--bring about an unenthusiastic attitude toward Europe--and will carry over into the political area. There will be pressure to withdraw divisions and NATO would come apart. The idea that Europe can defend itself without the US is "bull". If NATO comes apart, they will be an economic giant but a military and political pigmy. The USSR will encroach on them. It will not be in the traditional way but a new-style invasion. European leaders are terrified at that prospect. European leaders want to "screw" us and we want to "screw" them in the economic area.

But political relationships should be overriding for us and for them. What will matter in trade is its relationship to the total problem--what we want our relationship with Europe to be. Between now and the election we should say nothing, but we should give careful thought about how trade relations fit in the context of our overall relations. We should examine what price we might have to pay on the trade side for this political relationship, and they should do so as well. We should not allow the umbilical cord between the US and Europe to be cut and Europe to be nibbled away by the Soviets. We need to strengthen the bonds of trade, monetary relations, exchanges, etc. As an example of what I mean, you recall that when the Soviet runner won the 100 meter race in the Olympics he said that the race marked the end of an era and now the Europeans are the best. Basically this is just racism, since they are white and our sprinters are black, but the idea of Europe versus the US is a Soviet line. This was an example of a new style, with the Soviets trying to identify themselves with the Europeans and against the US. Brezhnev and Kosygin say almost the same things.

All non-Communist countries in Europe do not want to come under that influence. They know we have divisions and nuclear weapons. It is easy for us to say we will take them out of Europe, but it is definitely not in our interest to do so. Chayes goes around Europe talking about removal of troops, and every time Americans see us take a bad rap in basketball or something they remember. This contributes to the growing sentiment in the US such as "damn the Europeans" and the "foreigners are doing us in". It is true that the foreigners are doing bad things to us and we should do some bad things to them. But we must be under no illusions. We cannot turn isolationist in the broader context.

If we were only looking at trade, we could get along without the Europeans or the rest of the world since trade is much less important to our GNP than to theirs. Trade is the froth on top of the beer, but beer without froth does not taste too bad. But we need to look at the bigger picture. For instance, we should treat Japan with tender loving care because what Europe would become to the Soviets, Japan to China would be even more. Trade is important politically. Trade relationships can benefit political relationships, although wars have been fought between countries with trading relationships with one another. Our interests are served by being as tough as we can without going over the line where anti-US sentiment will cause them to turn against us and break with us. The Europeans recognize that they do not matter in the world any more. They know it. Economic issues are the things they now concentrate on. They are big for them and small for us. That means we will probably have to give more than our interest, strictly construed, would require. However, for the moment we should let the Europeans know that there are a lot of Americans who would welcome our getting out of Europe, and Japan. But we are fighting this. The Europeans should realize why. It is not because our economic survival is at stake but rather because we have a major interest in our overall relations with them, which we value highly, and in the interest of world peace.

The whole area of our economic relations affects our leverage position in the world. In the future our relations will have a larger economic content. This will require more subtlety in the way we conduct our overall relations. We are best to play this game. We are the strongest. However, this is not the time to decide this. After the elections is the time. Then we can do what we have to do. It is going to be very hard to sell trade liberalization to the Congress and the people. We need to make a strong case. We will be prepared to do it because we know that more is at stake than just trade, because our interests require it. But for now we should not talk in public about the political-commercial tradeoff.

Peterson: How do you regard the political-commercial tradeoff?

President: There obviously is a link between economics and political-security issues, but we should not link it openly now.

Peterson: What are the possibilities for a longer term political-security link, and the prospects for selling a liberalization bill to the Congress?

President: We need good results in the election and we can get a lot done. We are looking to get a majority. A majority has not happened since 1956. It is difficult for a Republican to get a landslide; a majority will be important. With that we can make a major move to propose what is best for the country and try to educate the country so that it sees the issues in the broader context. It takes time for people to understand an issue like this, but they will come around. What is at stake here is a major shift in the world balance of power, particularly among ourselves, the Russians, the Chinese, and the Japanese. As regards Europe, they will have one hell of a time acting as a bloc. They do not get along with each other. The French don't get along with the Germans, the Germans don't get along with the British. It will be some time before they can learn to act as a group. This means we have to work with the heads of Government in the various countries and not that jackass in the European Commission in Brussels./5/

/5/Presumably a reference to EC President Mansholt. The other account of this meeting (see footnote 1 above) includes the same characterization.

[To Peterson]/6/ It is important that after the elections we look at the long-range relations. We have to tie this in with the whole problem of what we want our relations with Europe to be. Europeans are used to thinking internationally. They argue about Tanzania and their other relations abroad. We have to think internationally. We are it in the Free World. We would be missing a great opportunity if we do not see the broad picture and have such a picture to guide us. Then we can educate the people to support that kind of policy. But they should see how it affects their own self interests.

/6/Brackets in the source text.

Peterson: We can get something in the economic area by using political-security leverage.

President: Yes.

Rogers: After the elections we can get down to the business of a formal study but for the moment suggestions should be kept private and not reduce things to writing. They should be discussed orally. If we do have a study made, it will get out.

President: Yes, controversial memoranda are likely to leak. Like the grain deal. You remember how hard we tried to keep the amounts secret. Now we are accused of having told the companies. It is ridiculous.

Everyone should be thinking of how we should achieve what we have talked about at this meeting.

101. Memorandum From the President's Assistant for International Economic Affairs (Flanigan) to the Special Representative for Trade Negotiations (Eberle)/1/

Washington, September 12, 1972.

/1/Source: National Archives, Nixon Presidential Materials, NSC Files, Agency Files, Box 219, CIEP. Confidential. A copy was sent to Kissinger.

SUBJECT
Trade Negotiations with the European Community

In the light of the discussions in the Council for International Economic Policy of September 11, 1972 relating to your August 21, 1972 memorandum entitled "US Response to Developing US-EC Trade Confrontation",/2/ the President has decided that for the present you should pursue a policy of modified confrontation exerting controlled but mounting pressures on issues involving both our trade interests and the principles of the present system. This should be done bearing in mind the overriding importance of our political relations with Europe and that our trade problems must be resolved in the context of larger policy considerations./3/

/2/See Document 100 and footnote 2 thereto.

/3/With substantially the same language, Flanigan reissued this text on September 25 as CIEP Decision Memorandum No. 14, with copies to most members of the CIEP. (National Archives, Nixon Presidential Materials, NSC Files, Agency Files, Box 219, CIEP)

PMF

102. Memorandum From the Deputy Secretary of State (Irwin) to President Nixon/1/

Washington, October 7, 1972.

/1/Source: National Archives, Nixon Presidential Materials, NSC Files, Agency Files, Box 219, CIEP. Limited Official Use. Attached to a November 3 memorandum from Flanigan to Kissinger regarding U.S.-European relations.

SUBJECT
Fifth Round of US-EC Consultations, October 5-6

The Fifth Round of US-EC Consultations on October 5 and 6 produced the most candid and in-depth discussion since the initiation of the US-EC Consultations./2/ The US side persistently questioned the Europeans on where the European Community was going, both in its internal development of common agricultural, industrial and monetary policies and in the continued proliferation of preferential trading arrangements going well beyond Europe. We stressed that the seeming lack of concern on the part of Europeans for the difficulties which their actions caused for the United States could have dangerous political repercussions. We particularly voiced concern over the Commission's proposed Mediterranean policy which is to be presented to the Council next Monday. We said that the most important move, both symbolically and practically, they could make to reassure the US was to drop the reverse preference provisions from these and other preferential agreements. We stressed the importance of obtaining positive signals from the Europeans of a willingness to approach these real issues between us in a spirit looking toward cooperative solutions. A most helpful signal, we said, would be a positive declaration on US-European relations at the European Summit.

/2/The series of consultations was inaugurated in October 1970; see Documents 44 and 47.

The EC group was chaired by Commissioner Ralf Dahrendorf in charge of external relations. I chaired the US Delegation which included Bill Eberle, Herb Stein, and representatives from State, Treasury, Commerce, Agriculture and Labor./3/ Bill Eberle was forceful in stating US concerns and in relating them to the many specifics in the trade field for which he is responsible without ever losing sight of the larger political and security contexts which surround all of these issues.

/3/Earlier sessions of the U.S.-EC Consultations had been chaired on the U.S. side by Deputy Under Secretary of State for Economic Affairs Samuels.

The EC side reported on prospects for the Summit which they indicated will probably produce only a "minor" or "passing" reference to the need to work on relations with the United States. They said this would be balanced by statements from individual governments around the Summit which would be more forthcoming. I said the need was for a statement from the Summit itself, not from friends in the corridor, of willingness to work with the United States in reordering economic relations through multilateral negotiations on monetary reform and trade liberalization. I also expressed the hope that the Summit can avoid an inflexible position on continuing EC preferential trading arrangements.

In a discussion of agricultural policy, Carroll Brunthaver of Agriculture expressed our willingness to work towards far-reaching liberalization of agricultural trade but pointed out that recent Community actions on agriculture would make it difficult for us to hold the line against our own protectionist pressures and move toward a liberalizing negotiation. In connection with a discussion of the Community's industrial policy, which the EC side described as not likely to develop rapidly, we expressed concern over plans to restructure the European aircraft industry in a manner which may hurt an important American export. The EC side took note of this position, but referred obliquely to our recent action on the GE-SNECMA case as seeming to preclude the possibility of joint ventures with the United States in the aviation industry and, therefore, forcing them to combine among themselves to achieve sufficient size and strength to compete with US firms./4/

/4/Reference is to the U.S. determination in September 1972 not to license the export of sensitive jet engine technology to France.

Dahrendorf described the proposed EC Mediterranean policy to be considered by the Council of Ministers as required to deal with the economic problems of the Mediterranean countries caused by the enlargement of the Community and as furthering political interests common to Europe and the US. Bill Eberle and I made clear that the US favors strengthening the political and economic ties between the Community and the Mediterranean countries as a contribution to the stability in the area. What the United States objects to is the discriminatory aspects of this policy, especially the reverse preferences which can only be interpreted in this country as the continuation of a policy of forming a large preferential bloc around the Community. As a result of this exchange, Dahrendorf has a clearer picture of the objectionable feature of the proposed Mediterranean policy.

With respect to the Community's free-trade arrangements with the EFTA neutrals, we made clear we expect a thorough examination in the GATT and action to protect American interests. We cited paper and other industries as likely to be injured unless the Community takes offsetting action. Dahrendorf indicated that there was a growing realization in the Community that something would have to be done for the US and other third countries as a result of the Community's arrangement with the EFTA countries.

Finally, the two sides held a useful discussion of preparations for multilateral trade negotiations. Bill Eberle outlined in general terms the state of preparations in this country and the timetable we expect to follow leading towards the opening of multilateral negotiations in September of 1973. He stressed the need for expeditious action on the GATT procedures under Article 24 with respect to EC enlargement so that these issues could be disposed of before the beginning of multilateral negotiations. It was agreed that there would have to be further meetings to consult on the content of the respective negotiating authorities of the US and the Community to insure that they are mutually reinforcing.

The main area we were not able to discuss was energy. Commissioner Haferkamp who is responsible for energy matters was unable to come at the last minute in part because he was still in the process of gaining Commission approval for a new policy on energy. Because I believe this will be a particularly important area for US-EC cooperation in the near future, I hope to be able to meet with Haferkamp to discuss the energy situation sometime in the coming weeks.

In sum, these meetings met the objectives we set for ourselves and provided us with an opportunity--coming before the Summit--to get our views across to the Commission on the main current issues in our relationship. By the end of our meetings the European representatives recognized that the US was seriously disturbed over the manner in which the EC was handling the GATT aspects of enlargement and the preferential trade aspects of arrangements with non-member countries.

John N. Irwin II

103. Memorandum From the President's Assistant for International Economic Affairs (Flanigan) to President Nixon/1/

Washington, October 11, 1972.

/1/Source: National Archives, Nixon Presidential Materials, NSC Files, Agency Files, Box 219, CIEP. No classification marking. Attached to a November 3 memorandum from Flanigan to Kissinger regarding U.S.-European relations.

SUBJECT
United States-European Community Relations

1. On Thursday and Friday of last week the annual US-EC consultations were held in Washington between Administration representatives headed by Deputy Secretary Irwin (attached at Tab A is his report) and representatives of the Community headed by Commissioner Dahrendorf./2/ The American positions were based on the decision, reached at recent CIEP meeting, to keep maximum pressure on the Community in respect to U.S. economic interests, short of creating an irresolvable confrontation./3/

/2/The consultations were held October 5-6. Irwin's report is Document 102.

/3/See Documents 100 and 101.

2. The net result of the consultations confirms your conviction that the Community, and particularly its bureaucracy in Brussels, is determined to maximize its economic potential regardless of the cost to the United States and the Atlantic system. While paying lip service to the importance of Atlantic unity, specific decisions are resolved in favor of the Community and contrary to the interests of the United States. Examples of this, that were put forth at last week's meeting, were decisions by the Commission to propose to the Community governments (a) a Mediterranean policy and (b) an industrial policy.

The Mediterranean policy is based on perceived special political and economic interests between the Community and the countries of the Mediterranean basin. The policy would be implemented by special technological and assistance programs and by trade preferences. Clearly the latter exacerbate the discrimination against current U.S. agricultural exports, and potential industrial exports to the Community. Potentially more harmful would be extension of reverse preferences given by developing Mediterranean countries to the Community, which have even less justification.

The Commission's proposed industrial policy uses protectionist devices, such as R&D subsidies, to foster high technology industries in Europe. This is particularly designed to strengthen Europe's commercial airplane and computer industries, both being areas of strong U.S. technological dominance and exports.

3. The current membership of the Commission is clearly dedicated to a course of action contrary to the U.S. economic interest. Happily, with the enlargement of the Community to nine, plus the elections in Germany and Holland, a new Commission will be formed shortly after the first of the year. Sicco Mansholt will be replaced as President by a Frenchman, and any replacement will be an improvement. The new Commissioners from England, Ireland (your meeting with Hillary should be helpful here)/4/ and Denmark, and from Germany should the CDU win, could create a greater awareness of the importance of the Atlantic system and of American opinion. It will be important to schedule a quiet but high level visit to Brussels to meet with all the new Commissioners, especially the new President and the Commissioners for Finance, Trade, and Foreign Affairs very shortly after they are installed.

/4/The President met with Irish Foreign Minister Patrick Hillary on October 6. (National Archives, Nixon Presidential Materials, White House Central Files, President's Daily Dairy)

It will be even more important that the new governments in Bonn and the Hague be visited by high level Administration representatives shortly after their elections to attempt to develop a common position on the economic relationship of the Community to the U.S. Hopefully the makeup of these new governments will be sympathetic. Should the CDU win, both Strauss and Narjes, the proposed German Finance and Economics Ministers, have a reputation for an Atlantic viewpoint. I have preliminary work on such visits underway.

4. If we are to be successful in deflecting the Community from its current course, and in creating a climate in which we can reach meaningful agreement in the broader areas of monetary and trade reforms, we must develop viable solutions to the two major US-EC problems, the Common Agricultural Policy and the Community's growing number of Preference Agreements with non-Community countries.

Regarding preferences, every effort will be made to get agreement from the Community not to extend preferences to additional countries, though this horse is largely out of the barn.

With regard to preferences already granted to developed countries, largely European, our policy should be to (a) in the short run, get special tariff relief where an existing U.S. industry is hurt, such as our wood products industry, whose $600 million of annual exports to the Community are in danger, and (b) in the long run, reduce industrial tariffs multilaterally so that the tariff preferences are ineffective against U.S. exports.

With regard to the Community's preferences for developing countries, these should be subsumed in a multilateral program of generalized preferences, which the U.S. already supports. Reverse preferences, however, which are of no benefit to the developing countries, should be phased out. Several Community members have evidenced sympathy for this position. For these developing countries to which the Community wants to show a special interest, it can undertake a special program of aid, investment and technological assistance. So long as this special program does not include additional trade preferences which discriminate against the United States, this country would have no reason to object--rather it would applaud.

In the area of agriculture, the U.S. could direct its rhetoric more at international agricultural trade than at the Community's overall agricultural policy, which they consider to be an internal matter, though this is only a semantic difference. The Europeans must indicate a willingness, first, to reduce their subsidies to agricultural exports to third markets, and subsequently to reduce the protection in the future against agricultural imports into the Community. These, rather than a Common Agricultural Policy, are our rightful goals and could possibly be attainable.

5. In the broadest context, the strategy for our economic relations with Europe can only be a part of our overall relations with Europe. As agreed in the CIEP meeting, a review of these relations by NSC and CIEP is at the top of the work plan.

104. Action Memorandum From Helmut Sonnenfeldt and Robert Hormats of the National Security Council Staff to the President's Assistant for National Security Affairs (Kissinger)/1/

Washington, October 16, 1972.

/1/Source: National Archives, Nixon Presidential Materials, NSC Files, Agency Files, Box 219, CIEP. Limited Official Use.

SUBJECT
Flanigan's Report to President on US-EC Relations

Bruce Kehrli has requested your comments and/or recommendations on the attached memorandum from Flanigan to the President on US-EC relations (Tab A)./2/

/2/Document 103.

The Flanigan Memo

The memorandum summarizes the salient issues of last week's annual US-EC consultations in Washington./3/ Irwin headed the US side; Dahrendorf, the European side. The US position--consistent with the results of the recent CIEP meeting--was to keep maximum pressure on the EC on economic matters but not create an irresolvable confrontation./4/

/3/See Document 102.

/4/See Documents 100 and 101.

Flanigan feels that the EC is determined to maximize its economic potential regardless of the cost to the US and the Atlantic system. Specific decisions are resolved in favor of the EC and contrary to US interests. Examples are (a) the Commission's proposal for a Mediterranean policy which would include trade preferences and (b) an EC industrial policy. The former exacerbates the discrimination against US agricultural exports and contains provisions for reverse preferences which discriminate against American exports to Mediterranean countries. The proposed industrial policy also contains protectionist devices, particularly in behalf of Europe's commercial airplane and computer industries.

Membership of the Commission--now dedicated to action contrary to the US economic interests--should change. Mansholt will be replaced as President by a Frenchman. Britain, Ireland and Denmark will also have Commissioners. It will be important to schedule a quiet but high-level visit to Brussels to meet with all the new Commissioners shortly after they are installed and visit the new Governments in Bonn and the Hague to attempt to develop a common position on our relationship with the EC.

We must develop viable solutions to the two major US-EC problems: the Common Agricultural Policy and EC preferential arrangements with non-Community countries. On the latter the "horse is largely out of the barn." Our policy should be (a) in the short run to get special tariff relief where a US industry is hurt, (b) in the long run to reduce industrial tariffs multilaterally so that tariff preferences do not discriminate against US exports. Preferences for developing countries should be subsumed under a multilateral program of generalized preferences, which the US supports. Reverse preferences should be phased out. The EC's development contribution to the developing countries should be made through special programs of aid, investment, and technical assistance.

In the area of agriculture the US should concentrate more on international agricultural trade rather than attacking the Community's agricultural policy, which they consider to be an internal matter. The Europeans must indicate a willingness to reduce subsidies to agricultural exports and reduce the protection against agricultural imports into the Community.

The strategy for our economic relations with Europe can be only a part of our overall relations. As agreed in the CIEP meeting, a review of these relations by NSC and CIEP is at the top of the work plan.

Our View

We believe Flanigan's view of European attitudes is oversimplified. There are plenty of people in Europe, if not in the Commission then in top spots in various Western Governments, of whom it cannot be fairly said that they are "determined to maximize economic potential regardless of the cost to the US and the Atlantic system." There are on both sides of the Atlantic important and senior leaders and officials who are eager to find a way to manage our admitted economic problems in ways that will not destroy those common interests we share.

Purely economic "solutions" in most cases (especially regarding fundamental issues such as preferential arrangements and agriculture) may be impossible without a heavy political component. The Mediterranean and Africa are cases in point. It is we, after all, who have urged the Europeans to raise their sights and assume responsibilities around the world which we no longer can or should assume to the extent we used to. However, it is true that so far the Europeans seem bent on doing so almost exclusively by economic and commercial devices, which are discriminatory in nature and are bound to bring them into conflict with those responsible for our economic affairs and with potent US economic interest groups.

Apart from this Flanigan makes a number of valid and constructive recommendations. His general conclusions are consistent with those expressed in Hormats' memorandum to you of October 11, a copy of which is attached (Tab B)./5/ We both agree that a major US effort will be necessary to construct a will and a means of solving our problems with the EC in a way which will strengthen and make more sustainable the US-Europe political relationship. An NSC/CIEP study to develop strategy for this effort is of course a good thing provided that in the interim things are not done that deprive the President of any option but confrontation.

/5/ Not printed.

Recommendation:

That you authorize us to indicate that you have no objection to Flanigan's memo (Tab A) going to the President./6/

/6/Haig initialed his approval of the recommendation.

105. Memorandum From Acting Secretary of State Irwin to President Nixon/1/

Washington, October 20, 1972.

/1/Source: National Archives, Nixon Presidential Materials, NSC Files, Subject Files, Box 322, European Common Market Volume II 1971-72. Confidential. An earlier draft of the memorandum is attached to an October 12 memorandum from Deputy Under Secretary of the Treasury Bennett to Under Secretary Volcker for use at his October 13 lunch with Flanigan. (Washington National Records Center, Department of the Treasury, Files of Under Secretary Volcker: FRC 56 79 15, October 13, 1972 Flanigan Working Lunch) The lunch was also attended by Irwin, Stein, and Eberle. In an October 17 memorandum from Flanigan to Irwin, Volcker, Stein, and Eberle regarding follow-up to the October 13 luncheon, Flanigan noted that there had been no agreement on how the negotiations should be conducted; the State Department would develop a paper for Treasury Department and STR comments, and the issue would then go to the President for decision. (Ibid.)

SUBJECT
European Community Trade Agreements with Spain and Israel

The Problem

The European Community seems intent on continuing to proliferate preferential trading arrangements with non-member countries which are contrary both to the non-discriminatory trading principles we favor and to specific U.S. trading interests. We have consistently stated that we will object to any of these arrangements which are inconsistent with GATT and that, where our trade interests are damaged, we will seek specific compensation. These arrangements include (1) existing ones with the EFTA non-applicants, (2) existing ones with former colonial states, (3) existing ones with Greece and Turkey, (4) proposed new arrangements with Mediterranean states and others, and (5) existing arrangements with Spain and Israel which are special cases.

On the agreements with Spain and Israel, there is general inter-agency agreement that we should, as we have told the EC, Spain and Israel we would, invoke the procedures of Article 23(1) of the GATT. In doing so we would propose that the EC, Spain and Israel make adjustments to the agreements to eliminate or greatly reduce the discrimination against U.S. exports, and to the extent that U.S. trade continues to suffer damage we would seek compensatory duty reductions on other products of interest to the U.S. The claim of U.S. trade damage resulting from the agreements should be both defensible and substantial enough to demonstrate the seriousness of our concern over this discrimination against U.S. trade interests so to act as a deterrent to the further proliferation of preferential arrangements. Negotiating instructions consistent with the guidance laid down in your decision on controlled confrontation with the EC (CIEP/DM 14 of September 25, 1972)/2/ have been agreed between State, Treasury, STR and the CIEP Staff.

/2/See footnote 3, Document 101.

The Issues for Decision

The issues for your decision are two:

(1) Given the political problems which the course of action we propose will raise, and which are discussed more fully below, we feel we should seek your authorization to proceed. We would propose to do so immediately after the U.S. election.

(2) State and Treasury have agreed on the amount of the initial claim we would present. State, within the context of the policy you set forth in CIEP/DM 14, would leave to the discretion of the negotiator when and how to recede to the fallback positions discussed below. Treasury would not authorize at the outset any fallback position from the original claim.

Discussion

Preferential trade agreements between the European Community and Spain, and between the European Community and Israel went into effect in 1970. Each agreement is composed of two principal elements:

(1) special preferences--by which the European Community, following a brief phasing period, will extend to all but about 15 percent of its imports from Spain and Israel duty reductions of 60 and 50 percent, respectively; and

(2) reverse preferences--by which Spain, after a five year phasing period, will extend to around four-fifths of its imports from the European Community duty reductions ranging from 25 to 60 percent; and Israel, after a similar phasing period, will extend to nearly three-fourths of its imports from the European Community duty reductions of 10-30 percent.

Meaning of Preferential Arrangements to the Participants

The European Community sees its agreements with Spain and Israel as part of its general policy to strengthen its political and economic ties in the Mediterranean. The agreements are intended to promote trade with Spain and Israel and contribute to the latter nation's economic development. Finally, the two trade arrangements are considered to be the inevitable consequence of preferences which the European Community has granted to former colonies (Morocco and Tunisia) and NATO members (Greece and Turkey) in the Mediterranean area.

Spain has made integration into Europe a prime foreign policy objective. Full membership in the European Community is regarded by the Spanish as essential for promoting modernization and liberalization. The current preferential arrangement is seen as a big step toward full membership.

Israel seeks closer ties with the European Community as compensation for its lack of ties with its Middle East neighbors and as a means to promote economic growth.

Action to Date

The United States has taken a firm stand in GATT that the agreements violate GATT rules and are likely to damage our trade. The three participants have been unwilling to accept the contention that the agreements are inconsistent with GATT. Neither side has been able to persuade a sufficient number of the GATT members to support its position. There is little prospect of getting a satisfactory resolution of the legal issue.

We have notified the European Community, Spain and Israel that we will invoke GATT procedures to obtain adjustment of the agreements to reduce the preferential margins or, failing satisfaction, to receive compensation in the form of other trade concessions of interest to the United States.

Nature and Amount of Our Proposed Claim

The Departments of State and Treasury have reached agreement that the United States should claim that, with limited exceptions, its trade will be adversely affected in cases where the preference margin is four percent or more and U.S. exports to the participants have amounted to $50,000 a year or more. On this basis, we would ask the participants to make adjustments in the agreements or provide compensatory benefits covering approximately $750 million of trade.

An initial claim of this magnitude will demonstrate the seriousness of U.S. objections to these and other special and reverse preference arrangements. However, the course we advocate involves serious political risks. Our demands are likely to be met with shock and resentment by the EC, Spain and Israel. Particularly in Spain and Israel our claims will touch sensitive political nerves and sharp reactions are possible. We should also realize there is virtually no chance that the participants will agree to offsetting trade concessions of this size. In part this would be because the other parties would argue that our initial claim was completely "theoretical" and that even a generous estimate of the potential real damage to our trade would have to be far smaller. If we desire to reach agreement on concrete measures of importance to United States exports, we shall have to be prepared to settle for less, and probably substantially less, than the full claim. Even if our main purpose is to maintain pressure on the EC in preparation for the 1973 trade negotiations, it may be advisable, in order to avoid a confrontation getting out of control, to signal at an appropriate moment a willingness to retreat from our initial claim.

Possible Retreat Positions

There are a succession of retreat positions that we could adopt during the negotiations to reduce the amount of our bill and increase the possibility--although limited--for a satisfactory settlement.

The first retreat position would be to drop from our bill commodities covered by the European Community's system of generalized preferences. Exclusion of these commodities would reduce our claim to around $500 million.

The second retreat position would be to limit our claim to the trade damage caused or likely to be caused by reverse preferences (preferences which the EC enjoys in Spain and Israel) and hard-core special preference items, such as citrus, where we can make our most convincing case of actual damage. On this basis, over $300 million of U.S. exports to Spain, around $40 million to Israel and about $22 million to the EC would be listed by the U.S. as adversely affected by the most objectionable feature of the agreements. We would indicate that we would be prepared to settle for tariff adjustments by Spain and Israel to eliminate the discrimination against U.S. goods which benefit the European Community or for compensation benefiting U.S. trade interests through changes in European Community tariffs.

The Risks Involved

There are serious economic and political risks involved in whatever action or combination of actions we might take.

The proposed initial U.S. impairment claim against the European Community, Spain and Israel covering three-quarters of a billion dollars of trade will be seen by these parties and others as a frontal attack by the United States against the agreements. They will think our objective is not offsetting trade concessions but the abrogation of the agreements. The United States is likely to be accused of attempting to block Spain's integration into Europe and of having suddenly reduced its concern for the welfare of Israel. The European Community might become less cooperative on matters of general importance to the United States, such as the forthcoming multilateral trade negotiations.

These risks can probably be reduced or controlled by quiet diplomacy, and by a skillful negotiator, particularly if armed with authority to retreat to the fallback positions described above when he deems it necessary. However, Spain, Israel or the European Community may choose to make a major public issue of the matter.

On the other hand, if the United States does not submit a substantial claim, the impression may be created that our objections to special preferential arrangements, while firmly held, will not be backed by determined action.

Recommendation:

That you authorize us to submit, soon after the November elections, the initial claim indicated above against the parties involved and to seek maximum trade advantage for the U.S. in negotiations, scaling down our initial claim as appropriate.

John N. Irwin II

106. Editorial Note

On November 18, 1972, Kissinger sent National Security Study Memorandum 164, "United States Relations With Europe," to the Secretaries of State, Defense, Commerce, Treasury, and Agriculture, with copies to the Director of Central Intelligence, the Chairman of the JCS, the ACDA Director, and the President's Assistant for International Economic Affairs. NSSM 164 noted that the President had directed the preparation of a basic study of U.S. relations with Europe, particularly Western Europe, setting out goals and priorities for the second Nixon administration. The study was to be completed by January 1, 1973, for consideration by the NSC Senior Review Group.

NSSM 164 concluded: "The existence of this directive and the content of the study must be regarded as extremely sensitive. All officials involved will see to it that proper security precautions are taken to avoid public speculation about changes in our European policy." (National Archives, RG 59, S/S Files: Lot 80 D 212, Box 1113, NSSM 164) For the Department of State's response to NSSM 164, see Document 108.

On November 27 Secretary of Commerce Peterson sent a memorandum to Kissinger and Shultz entitled "Some Thoughts on the Dual Position of (1) Ambassador to NATO and the European Community Operating as a Senior Representative to Europe and (2) The Official Responsible for East-West Trade." Peterson noted there were two phases to dealing with the challenges the U.S.-European relationship would pose in the President's next term: planning the strategy, and then implementing it. He referred to the NSSM 164 exercise as kicking off the first phase, which must be carried out in Washington, and concluded "that we are putting the cart before the horse in talking about an assignment now in Brussels to act as the President's man in Europe before we have decided what it is we plan to propose to the Europeans."

At several points in his November 27 memorandum Peterson pointedly noted that Kissinger and Shultz were the President's key advisers. He recommended a small European Planning Group, with close liaison with them, to work out a strategy on military, political, economic, and other matters before turning to implementation. Peterson included the following summary of a proposed 10-year strategy on security, economic, and political issues for the Planning Group to consider, which would "reflect the President's-Kissinger's-Shultz's views":

"1. It must originate with and address itself to the highest level of government where we must generate the political will to solve our growing economic problems. It must, in all likelihood originate with the President of the United States.

"2. The strategy must take a long-term view in order to give the relationship a sense of durability and permanence. We might seek a long-term, perhaps 10 years, compact or covenant of a cross-sectoral nature in which agreements on trade, defense, energy, monetary and other policies would be pulled together and which we would articulate a new set of principles to govern our relationship--a new Atlantic Charter, as it were.

"3. In putting together any such comprehensive agreement, we must play our negotiating cards where they have the greatest impact--not administrative cubby holes. I suspect that our best trump card could be long-term security agreements.

"4. Our strategy should also involve a realistic ordering of economic priorities so that, when the trading starts, we will be in a position to get the trade-offs which maximize the return to us. In the past, we have scattered our economic negotiating shots too much.

"5. Our strategy should be to seek agreement on some joint policies for dealing with the growing energy shortage. The incentive for such agreement should be strong since the United States and Europe both have interest in avoiding cut-throat competition either for energy or for foreign exchange earnings to pay for the energy.

"6. Our strategy must take note of the danger that our new commercial relationships with Eastern Europe and the Soviet Union could serve as a wedge between us and our traditional Western European allies. Participations for European capital in some of our Soviet energy ventures could help avert this. Using additional trade with Eastern Europe as a political lever to achieve joint objectives is still another thing we should do.

"7. The strategy might look toward far broader forms of cooperation between the U.S. and Europe, cooperation in areas such as medicine, drug control, crime, transportation and pollution abatement.

"8. Finally, in our approach, we must examine closely the need for new institutions and new methods of consultation to meet the problems of the 1970s and avoid the apathy and even hostility that is building up on both sides."

Peterson's memorandum then developed each of the eight points in greater detail. On the economic side he thought U.S. and European economic interests were not in conflict in the long run, but that in the short term Europe sought trade advantages and responded to political needs that were frictions in the relationship. He expressed his concerns about a coming energy crisis with "massive" U.S., European, and Japanese energy trade deficits that could have "traumatic effects on the international monetary system" and a "cannibalistic scramble not only for energy but for export earnings to pay for it," which would hardly contribute to stability in the Western Alliance.

In the implementation phase Peterson saw three possibilities for an Ambassador. First, the Ambassadors to NATO, the European Communities, and the OECD could be combined in a super-ambassador based in Brussels. Another possibility would be an Ambassador at Large stationed in Europe with coordinating responsibilities for NATO, the EC, and the OECD. Finally, should the President and European leaders decide a conclave of "wise men" would be helpful in resolving problems, an Ambassador at Large or another designee could assume this role. (National Archives, Nixon Presidential Materials, NSC Files, Agency Files, Box 214, Commerce Volume IV July-December 72)

On November 30 Haig forwarded to Shultz a paper entitled "Peterson Assignment," under cover of a memorandum indicating the paper was to be delivered in a sealed envelope. (Ibid., Box 290, Treasury Volume III) The paper outlined Peterson's prospective duties as the "President's European Representative": Ambassador to the OECD, NATO, and the EC with responsibility for coordinating the U.S. role in and relations with these institutions. He would report to the President through Kissinger and Shultz. His deputies would have day-to-day operating responsibilities for the three missions and would report to Washington agencies on day-to-day matters in the normal way.

No "super-ambassador to Europe" was appointed. During the second Nixon administration each of the three missions continued to have its own Chief of Mission, and no Ambassador at Large with coordinating responsibilities for Europe was designated.

107. Editorial Note

On December 1, 1972, in Key Biscayne, Florida, Press Secretary Ron Ziegler announced on the President's behalf that George Shultz would remain as Secretary of the Treasury in the second term. The President also named Shultz an Assistant to the President to be "the focal point and the overall coordinator of the entire economic policy decisionmaking process, both domestically and internationally." Shultz' duties as Assistant to the President would include chairing a new Cabinet-level Council on Economic Policy. (Weekly Compilation of Presidential Documents, Volume 8, No. 49, December 4, 1972, page 1711)

In remarks following Ziegler's announcement, Shultz noted that the primary membership of the Council on Economic Policy would be the Departments of Labor, Commerce, Agriculture, and Transportation and in the field of international economic policy the Department of State. Within the Executive Office of the President, the OMB Director, the CEA Chairman, the CIEP Director, and the Cost of Living Council Director would be key members. Shultz noted that the Council on International Economic Policy and the Cost of Living Council were examples of "continuing working groups that worry about essential aspects of policy." (Ibid., page 1712)

On December 22 Clay T. Whitehead, Director of the White House Office of Telecommunications Policy, sent a memorandum to Shultz proposing that OTP be a member of the new Council. Melvin Laird, in a letter to Shultz and a January 5 memorandum to the President, also proposed the Secretary of Defense as a member of the new Council. (Washington National Records Center, Department of the Treasury, Records of Secretary Shultz: FRC 56 80 1, GPS, Dam, Kenneth 1971-1974)

108. Paper Prepared in the Department of State/1/

Washington, undated.

/1/Source: National Archives, RG 59, S/S Files: Lot 80 D 212, Box 1113V, NSSM 164. Secret. The paper was prepared as a response to NSSM 164; see Document 106. A December 18 transmittal memorandum from Stoessel to Kissinger forwarding the 53-page NSSM Response indicates the paper was discussed in the NSC Interdepartmental Review Group for Europe and took into account views of its members and other recipients of NSSM 164. The paper and Stoessel's memorandum are attached to a January 29, 1973, memorandum from Stoessel to Deputy Secretary-designate Rush, explaining that the paper was drafted in EUR taking into account other agency views but it did not represent interagency consensus.

NSSM RESPONSE

Part I

II. The US and Europe in Transition: Background for the Future

[Here follows discussion of subjects unrelated to economic policy.]

Developments in the US, meanwhile, create uncertainties and concerns among the Western Europeans: Congressional efforts to reduce US forces in Europe, increased preoccupation with domestic issues, balance of payments problems, budgetary stringencies, and the appearance of growing isolationism and protectionism are seen as affecting US policies toward Europe.

[Here follows discussion of subjects unrelated to economic policy.]

Economic problems on both sides of the Atlantic, deriving in part from domestic concerns, exert serious pressure on US-European relations generally and US-EC relations specifically. In the United States, there is major concern about unemployment, and many fear that the US is losing its competitiveness in international markets, that US corporate giants are exporting jobs through their investments in Europe, and that American industry will suffer from waves of cheap goods from Asia. There is growing sentiment that other countries have been dealing unfairly with us in the economic field to their own advantage. The conclusion by the EC of preferential trade agreements with a widening circle of countries has fed this sentiment. An important complaint also has been the Community's protectionist agricultural policies.

European economic concerns also are affecting our relationships. While Europe experiences unabated strong inflation, some countries and regions continue to suffer from economic stagnation. Europeans, too, are chafing under the accumulation of unneeded and inconvertible dollars, which add to inflationary pressures and nullify monetary policies. Resentment over American private investment is rising. Europeans see the US as adopting aggressive foreign economic policies. They complain about our tough application of anti-dumping and countervailing duty provisions. More importantly, they continue to fear that the US seeks to extort unilateral trade concessions by our preponderant leverage in the monetary field.

[Omitted here is discussion of subjects unrelated to economic policy.]

Part II

IV. Issues and Goals

The following are specific issues confronting us in the economic, political, security, military, scientific and technological fields. Many of these issues will require additional detailed study before decisions relative to them can be taken, and goals established. Each should be examined in its specific terms, with consideration carefully given to its impact in other fields.

A. Economic

US policy has been to:

--support Western European economic integration as a means to strengthen Western European ability to share responsibility for maintaining a stable and prosperous world order.

Americans and Western Europeans both have the same overriding economic goal of maximizing their prosperity. The open, interdependent economic system, with free movement of goods and services has been an important element of Atlantic economic prosperity. It is important to restate this basic goal because government policies which affect economic conditions on one side of the ocean will also affect the other. An atmosphere of orderly international cooperation is as important to maintain business confidence as is a climate of sound domestic management.

American business has done well within this open system and now has a very large economic stake in Western Europe. US direct and indirect investment assets in the enlarged EC amount to some $36 billion. Western Europe is also our largest customer. Our exports to the enlarged EC and its Western European associates in 1971 were about $13 billion or 30% of our total exports.

In other words, despite some important problems and irritants, we have had and have a highly profitable economic relationship overall with Western Europe, and the opportunity exists to enhance this relationship in the long term.

Issues to be Addressed

--how to deal with the series of new and emerging economic problems which are creating pressures on both sides to restrict the open economic system. These are now being addressed in various US fora, such as CIEP and STR.

1. Monetary:

US policy has been to:

--press major surplus countries to revalue or to take other measures to bring their payments balances into equilibrium;

--develop a new multilateral monetary system based on a more symmetrical adjustment process that facilitates freer trade and capital flows;

--favor EC movement toward a closely integrated monetary union consistent with the foregoing US aims.

The 1971 monetary crisis represented the culmination of several major trends, especially the serious, long-term balance of payments problem. That crisis was brought to an end by the Smithsonian agreement, but the international payments imbalance persists despite the fact that the US now has better control over its inflation than Europe. The Western Europeans at present have the choice of continuing to accept non-convertible US dollars, changing their exchange rates in our favor, and/or instituting capital controls. The US economy is not seriously hampered by the continued payments deficit. However, progress towards a new system must be made to avoid further financial crises which could seriously undermine business confidence and lead to governmental restrictions on trade and capital movements. In order for the US to restore some form of convertibility, however, all the other elements of the system must be compatible. Most importantly, it must provide for satisfactory adjustment by surplus and deficit countries.

Here is perhaps the single most important area of potential tension between the US and Europe. The Western European countries, which are more dependent on exports than the United States, have been accustomed to growth based upon increased exports and would tend to resist measures or rules that would erode their export surplus, which has ensured high levels of employment. Yet they will have to move in this direction if they wish to end the present situation which is so psychologically frustrating to them.

Because we are dealing with an area of extreme domestic sensitivity to Western Europeans and Americans alike, such as jobs and farm income, the task of constructing a new and equitable monetary system will require skill. A complicating feature is that the EC members have committed themselves to the goals of achieving economic and monetary union (EMU), but are only on the threshold of this development. In the short run, EC moves towards EMU may complicate the task of achieving a new world system. In the longer run, if the EC members can adopt a genuine single currency area through harmonization of policies, it may facilitate the adjustment process between the US and them.

Issues to be Addressed

--how to achieve US-Western European agreement on an adjustment process in which surplus and deficit countries have symmetrical responsibilities.

--construction of a new and equitable monetary system that facilitates free trade and capital flows, while permitting the EC to form a monetary union. Like economic issues, these are being addressed today in various fora of the US Government.

2. Trade:

US policy has been to:

--exert controlled but mounting pressure to obtain Western European cooperation on both specific trade problems and the 1973 multilateral trade negotiations.

The vast bulk of our trade moves in a liberal, open system. More than ever trade flows are responsive to economic and business conditions on both sides of the ocean.

The most important exception, of course, is agriculture where the Community's Common Agricultural Policy has been protectionist and restrains the development of our exports. Though our agricultural exports to the enlarged EC were at an all-time high totalling $2.4 billion in 1971, it has been estimated that these exports could amount to $5-7 billion in 1980 if the major agricultural producers and importers including Western Europe and Japan were to follow more liberal policies. This of course means that the Community would have to find a way to meet the political interests of their inefficient grain producers in Germany and we would have to override the interests of our dairy lobby.

However, the whole open trading system is jeopardized by the accumulation of tensions over developments, policies and practices. These tensions generate much heat and feed protectionist forces which seek to pressure governments to take restrictive actions. There is an important danger of an escalation of restrictive measures and counter-measures which added together would constitute a "trade war," leading to a significant erosion of the open, interdependent system and threatening economic prosperity.

A priority task, therefore, is to move to control these pressures by solving some of the troublesome short-term issues, but more importantly to move into a major new round of trade negotiations which will subsume many of the problems and provide an effective counter-thrust to protectionist pressures. In doing so, it must be borne in mind that the trade problems are disparate. Some have more economic impact than others, while some generate more political heat than others. This argues for a sound appraisal of our priorities in the trade field.

Obtaining a long-term liberalization of agriculture is in our interest both on economic grounds (a large balance of payments pay-off) as well as in terms of political advantages (the farm bloc is important to maintaining a liberal trade posture).

Lowering the common external tariff of the EC in reciprocal trade negotiations is important on both economic and political grounds. It would reduce the tariff discrimination inherent in the enlarged Community, and its free trade arrangements with EFTA and preferential arrangements with others. It would heighten the real and perceived interdependence of the two areas and would confirm that the two continents are being tied closer together rather than drifting apart.

The US and other countries not members of the enlarged EC will be engaged in the GATT in renegotiating with the enlarged EC the trade concessions accorded them in the past 25 years by the UK, Denmark and Ireland. The dissolution of the British Commonwealth trading system and the lowering of the UK tariff to the level of the EC's common external tariff will provide us benefits. However, accession of the UK to the Common Market will have some important unfavorable consequences, particularly for exporters of agricultural commodities. It will be a delicate matter to obtain enough for US agriculture in these GATT renegotiations to maintain US agriculture's support for further trade liberalization without jeopardizing Western European willingness and ability to include agriculture in the multilateral trade negotiations.

Eliminating the reverse preferences of the Community in non-European areas is more important politically than economically. While the trade impact may be small, the reverse preferences create the impression in this country that the Community is carving out a vast discriminatory trading bloc, and therefore undermine public and Congressional support both for our European political and security objectives and liberal trading policies. We have had some success in counteracting the spread of reverse preferences in the Mediterranean, and we must keep up the pressure.

There are many other issues in the trade field that require management both in the short run and during the negotiations, but the above are the immediate priorities.

One may wish to build up pressure through some of the short run issues, e.g. by taking GATT action on the EC agreement with Spain and Israel, or in the negotiations on EC enlargement, but we must keep the priorities in mind and not permit the pressure on short-run issues to get out of hand and interfere with these priority objectives.

Issues to be Addressed

--solving or controlling short-term trade problems.

--obtaining industrial and agricultural concessions from Western Europe in 1973 multilateral reciprocal trade negotiations.

3. Other Economic Issues

US policy has been to:

--seek to protect US economic interests on an ad hoc basis or in discussion of these issues in multilateral organizations.

Another potentially important area of confrontation involves investment and industry. At present, US investment in Western Europe enjoys non-discriminatory treatment and a generally favorable climate. But it is a sensitive issue and looms large in key sectors like computers and aircraft. The Western Europeans want to encourage the development of European firms which can match the efficiency and financial power of the giant American-based multinationals. Some would subsidize research and development on a broad scale in Western Europe and adopt "Buy European" policies which might adversely affect US exports and/or either limit or control US investment in favor of European-owned companies.

Given these dangers and our economic stake in Western Europe, we must choose our tactics carefully. Fortunately, the climate for US investment is still relatively favorable despite the vague and possibly mounting resentment over the large American investment. We have begun an exercise in the OECD to examine this whole area of policies and practices affecting investment including also the practices of multinational corporations. The object of this exercise should be to move towards sensible common rules of the game which will guide the major industrial powers in the investment field so as to minimize distortions to the international adjustment process and the rational allocation of resources.

Important to dealing with these problems should be the realization that the European governments identify their access to advanced technology as a crucial element of their economic strategy. This clearly affects their policy toward trade and investment.

Energy policy, too, is a potentially divisive issue between the US and the EC. The Western Europeans are concerned about security of supply and the EC is developing a common energy policy. Given the large US stake in the European energy market in both trade and investment terms, it is in our interest to avoid a competitive scramble for limited oil resources and to reach a broad understanding with the Western Europeans on a cooperative approach to the long-term energy problem and on arrangements to share supplies in the event of an emergency.

A coordinated policy should include not only agreement on supply policies but also an agreed approach to technical solutions to the energy question, i.e., the development of alternate energy sources, the improvement of environmental control, the increased efficiency of power production and utilization and the institution of methods to conserve energy. The United States is negotiating an agreement with the USSR for cooperation in some of these energy technologies. Western European nations will undoubtedly demand at least equal treatment, and we might wish to consider this in the context of energy programs being developed in the European Community and OECD.

In the environmental sphere, the US should continue the cooperation on environment already begun in the NATO Committee on the Challenges of Modern Society (CCMS), the OECD and bilaterally with individual states and the EC. By developing similar environmental standards, similar methods of environmental control, and common rules of the game on handling the costs of environmental control (the "polluter pays" principle), we may prevent either side from interpreting the environmental protective actions of the other as disguised trade barriers.

The Federal Water Pollution Control Act Amendment of 1972 requires that the President undertake to enter into international agreements to apply uniform standards of performance for the control of pollutants from new sources, toxic pollutants, and discharge of pollutants into the oceans. One of the principal objectives of this provision is to avoid handicapping US industry, to which stricter and more costly environmental control requirements might be applied. Problems may arise where European priorities and interests differ from ours.

[Omitted here is the remainder of Section IV dealing with political, security, military, and science and technology issues; the conclusion of Part II; Part III, "The U.S. Role: Priorities, Interrelationships, Institutions and Their Implications for the US"; and Part IV, "Issues and Goals."]