Washington, April 24, 1969.

TO
The Secretary of State
The Secretary of the Treasury
The Secretary of Agriculture
The Secretary of Commerce
The Secretary of Labor
The Director, Bureau of the Budget
The Chairman, Council of Economic Advisers
The Special Representative for Trade Negotiations

SUBJECT
U.S. Trade Policy in the 1970's

The President has directed the preparation of a study on U.S. trade policy over the next several years which:

a. includes a discussion of trade issues in the broad context of U.S. foreign policy objectives,

b. considers the relationship of trade to United States objectives vis-a-vis both the developed and the less developed countries,

c. examines alternative possible evolutions in broad patterns of international trade in the absence of major U.S. initiatives, and

d. considers possible alternative U.S. approaches.

The paper should also:

a. explore the whole range of problems which must be faced during that period including:

(1) tariffs,

(2) non-tariff barriers,

(3) agriculture, and

(4) foreign production by U.S. corporations.

b. consider the alternative responses to those problems and include the economic and political costs and benefits to the United States involved in both the overall approaches which might be conceived and the specific components of those approaches;

c. deal with the methods, both domestic and international, through which the various approaches could be pursued as well as the substance of the approaches; and

d. include the domestic and political aspects of the problem.

To prepare the paper, the President has directed the creation of an NSC Ad Hoc Group chaired by the Special Representative for Trade Negotiations and including representatives of the Secretary of State, the Secretary of Commerce, the Secretary of Agriculture, the Secretary of the Treasury, the Secretary of Labor, the Council of Economic Advisers, the Director of the Bureau of the Budget, and the Assistant to the President for National Security Affairs. The Chairman may invite representatives of other agencies to attend particular meetings. He may also create subcommittees, chaired by whomever he may appoint, to deal with any or all of the specific issues to be studied.

Henry A. Kissinger

Washington, April 24, 1969.

SUBJECT
Tariff Preferences for Less Developed Countries

Attached at Tab A is a memorandum from Secretary Rogers/2/ recommending that:

1) The US submit, to the OECD Working Group on Preferences, several illustrative lists of items to which generalized tariff preferences from the United States to the less developed countries might apply if such a scheme were adopted globally./3/

2) State be authorized to initiate consultations on the preferences issues with key Congressmen. Both steps would be undertaken with the clear understanding that the US has made no final decision on whether to participate in a preference scheme.

The US is the only major country not to have submitted its illustrative product lists to the Working Group, which is studying the variety of complex issues which would be involved in any preference scheme. We held off pending our review of over-all US trade and aid policies, now completed. As a result, a number of LDCs have complained about our slowing down the work program. It will still take a week or two to prepare the lists, but a decision now to proceed would enable us to maximize the political payoff by announcing our decision at UNCTAD beginning on April 28. (Paul McCracken disagrees. He argues at Tab B that we should go ahead with interagency preparation of the lists, but believes we should make no official announcement because the LDCs would take it as a statement of US intention to work for a preference scheme.)/4/

You have indicated that you want to see the results of the study directed by NSSM 48/5/ before deciding whether the US should support a preference system but that you wish the work on it to proceed urgently. Submission of our lists and initiation of Congressional consultations are necessary prerequisites to a final judgment. There is some risk, as McCracken says, that our submission of lists will imply a commitment to ultimately proceed with a scheme and increase the political repercussions if we eventually back away, but the submission of multiple lists instead of a single list and a clear statement that we have not yet made up our minds should keep the record straight.

That you approve Secretary Rogers' proposals./6/

Washington, April 28, 1969.

PARTICIPANTS
The President
Maurice H. Stans, Secretary of Commerce
Henry A. Kissinger
Carl Gilbert, Special Representative for Trade Negotiations
C. Fred Bergsten

SUBJECT
Report on Trade Mission to Europe

The President began the meeting by welcoming Mr. Gilbert to the Administration and asking whether he planned to accompany Secretary Stans on the forthcoming trade mission to the Far East. Mr. Gilbert replied that he was uncertain, given the need to remain in Washington to obtain Senate confirmation of his appointment. In view of this factor, and also to enable Mr. Gilbert to retain more running room in the future, the President decided that it would be better for him not to take this trip. (After the meeting, Secretary Stans asked Mr. Gilbert whether he could speed his hearings so that he could make the trip after all.)

Secretary Stans then reported on the European trip. Five major areas were discussed: the economic policy of the Nixon Administration; its trade policy; his "open table" proposal for examination of non-tariff barriers to trade; U.S. concern over agricultural protectionism in Europe; and textiles.

The Secretary reported that the Europeans greatly appreciated the fact that the trip had occurred and had made numerous favorable comments on the President's own visit./2/ The President affirmed his view that such contacts were highly desirable. Dr. Kissinger agreed.

The Secretary reported that the Europeans welcomed the U.S. commitment to freer trade. They stated that only the U.S. could take major initiatives in this area and stressed the need for the U.S. to repeal ASP. The Secretary also felt that progress had been made in conveying to the Europeans the depth of our political and economic concern over threats to our agricultural exports. Mr. Gilbert noted that the European Finance Ministers opposed the EEC farm policy, but the integrationists would not abandon it lightly in view of its effect on European unity. A discussion of agricultural problems ensued and the President reiterated his interest in rationalizing agricultural policy around the world. He noted that agriculture was our greatest domestic success and the Point IV program one of our greatest foreign policy failures. The Secretary reported that Prime Minister Wilson had told him that the proposed commercial arrangement between the UK and the EEC was dead.

On textiles, Secretary Stans explained in detail his proposal for a GATT meeting to consider a multilateral agreement and listed the nine arguments against that approach voiced in Europe./3/ He reported that Belgium has since agreed "to support us" (sic: Belgium has agreed to a meeting but has made clear that it may oppose us on substance) and that he received sympathetic responses from the three Prime Ministers (in Germany, Italy, and the UK) with whom he discussed the subject. The President noted that Kiesinger should be responsive since textiles were really the only request we were making of Germany.

The President then noted that we should keep open the option of approaching the textile problem on a bilateral basis. Other items, including purely political ones, will have to be included if we are to achieve help in meeting our problem. Dr. Kissinger commented that, if the textile request were to be our only trade initiative, we would probably succeed only through bilateral approaches linking the issue to other non-trade matters. On the other hand, we might confine the negotiations to trade if textiles are subsumed in a broader U.S. trade initiative. Secretary Stans preferred the multilateral approach since it would provide us with a lever against countries which did not agree to bilateral restraints. Mr. Gilbert noted that the bilateral approach would enable other countries to claim compensation from the U.S., whereas no such compensation would be required under a multilateral arrangement and emphasized that the GATT organization wished to avoid deterioration into a debating society a la UNCTAD.

The President decided that a full meeting of the NSC, attended by the members of the Cabinet Committee on Economic Policy,/4/ should be devoted to the trade issue before the mission to the Far East. He noted that foreign policy was basic to the over-all problem. Secretary Stans should report to the group on the European trip, and the meeting should then focus on Japan. The trade issue must be considered in the context of our over-all relations with Japan, which Dr. Kissinger noted are currently before the NSC. It was agreed that the NSC meeting on May 7 would be devoted to trade and that Okinawa would be considered on April 30.

The President also stated that, with the demise of de Gaulle, the U.S. should take the initiative on trade policy. The U.S. does have an obligation to lead and the French political change may push us toward doing so. We should see if Europe will unite now, as so many people have said would occur if only de Gaulle were not present.

Finally, Secretary Stans mentioned the desirability of reversing the recent decline in commercial personnel in our foreign posts. He also repeated his recommendation that the U.S. send the C 5-A to the Paris air show;/5/ the President directed Dr. Kissinger to look into the matter with the Defense Department.

In Spring 1969 the Nixon administration was considering its overall approach to U.S.-Japan relations in the context of NSSM 5, "Japan Policy," January 21, 1969. In late April 1969 it was decided that the security aspects of the relationship would be discussed by the National Security Council on April 30, and the economic aspects on May 7 on the eve of Commerce Secretary Stans' mission to the Far East. See Foreign Relations, 1969-1976, volume III, Document 20.

On May 1 NSC Staff Secretary Jeanne Davis distributed a paper entitled "U.S. Trade Mission to the Far East" for consideration at a meeting of the Review Group on May 2. She noted that the subject was also on the agenda for the May 7 NSC meeting. (National Archives, RG 59, S/S Files: Lot 71 D 175, 5/7 NSC Meeting)

On May 2 Joseph Greenwald sent Richard Pedersen a memorandum for his use at the Review Group meeting. Greenwald noted that the background and trade sections of the NSC paper had been "lifted completely from NSSM 5." "The section on textiles resembles the discussion in NSSM 16 on trade policy. The section on foreign investment is new." Greenwald commented that the issues the paper raised did not require decision prior to Stans' mission to the Far East. He thought the options on textiles were not realistic and that it was not necessary at that time to decide on a multilateral versus a bilateral approach. Greenwald believed that Stans should make clear that the textile problem was serious, but should not push so hard on the preferred multilateral approach that it would be difficult to pursue alternatives if it proved impossible to negotiate the multilateral approach. (Ibid., S/S Files: Lot 80 D 212, NSSM 16)

No record of the May 2 Review Group meeting has been found, but a May 2 memorandum from Pedersen to John Irwin and Nathaniel Samuels reported on the meeting. Pederson noted that a slightly revised paper would be available for the May 7 NSC meeting. On the issues, he reported: "The sharpest sparks still arise on the textile quotas which are clearly unpopular among most of the economists except the Commerce people," but there seemed to be "general agreement that the Japanese are not doing their share in the U.S.-Japanese economic relationship in general." Pedersen commented that it was agreed that Stans should indicate a preference for the multilateral approach, but not pursue it too hard, and that no decisions on next steps were required before Stans' trip. (Ibid., S/S Files: Lot 71 D 175, 5/7 NSC Meeting)

On May 3 Staff Secretary Davis distributed a revised paper for the May 7 NSC meeting under cover of a May 3 memorandum to the Offices of the Vice President, Secretaries of State and Defense, and Director of Emergency Preparedness (with copies to the Secretaries of the Treasury and Commerce, the Special Trade Representative, and other agency heads). (National Security Council, Secretariat, Box 84, 5/7/69 Joint NSC/Cabinet Committee on Economic Policy Meeting-FE Trade Mission)

On May 5 John Petty sent Secretary of the Treasury Kennedy a briefing memorandum for the May 7 NSC meeting. Petty commented that "the paper does not adequately reflect the basic difference between the factors which influence U.S. and Japanese policies regarding their trade relationship. Military and political objectives predominate in the formation of U.S. policies while economic and financial factors primarily determine Japanese policies. . . . you might say that the present allocation of costs and benefits of our relationship with Japan is not viable from the U.S. side. The present large and growing U.S. trade deficit with Japan, in the context of Japan's flagrant restrictions on imports of manufactured goods and undervalued exchange rate is simply unacceptable."

Regarding textiles, Petty endorsed a preference for a multilateral solution, but preserving a bilateral option. He noted that "the only viable position that we have with regard to textiles is that it is basically a political problem. Unless an international solution can be found, the Congress will enact restrictive legislation. Such legislation would undoubtedly be more restrictive than a multilateral agreement. Once the dam is broken, there is also the danger that sentiment for protectionist legislation will snowball and result in additional import restrictions." Petty concluded that there was no need for a final decision on U.S.-Japan relations prior to Stans' trip. (Washington National Records Center, Department of the Treasury, Secretary's Memos/Correspondence: FRC 56 74 A 7, Memo to the Secretary May-June 1969)

In a May 6 memorandum to President Nixon, Kissinger briefed the President on the upcoming NSC meeting. Among other things Kissinger wrote: "The basic issue is that we cannot expect Japan to meet all of our requests fully and quickly, since we are not offering them anything on the economic front," unless the administration overtly threatened Japan with harsh economic sanctions if it refused, which would "seriously damage" the overall relationship. "We could enhance the likelihood of Japanese cooperation by providing concrete evidence of our commitment to further trade liberalization, e.g., by early submission of the trade legislation already decided perhaps sweetened with additional concessions tailored to specific Japanese interests." He believed, however, that the administration was not yet to the point where its priorities among economic requests from Japan had to be determined, and he suggested that "any position taken now should leave us complete flexibility in setting those priorities in the future. A low-key exploratory approach by Secretary Stans on his trip would be most consistent with this conclusion." Attached to this memorandum is an "Analytical Summary" of the NSC paper and an "Issues for Decision" paper. (National Security Council, Secretariat, Box 84, 5/7/69 Joint NSC/Cabinet Committee on Economic Policy Meeting-FE Trade Mission)

The National Security Council met with the Cabinet Committee on Economic Policy on May 7 from 11:16 a.m. to noon. (National Archives, Nixon Presidential Materials, White House Central Files, President's Daily Diary) No record of the meeting has been found beyond Alexander Haig's handwritten notes. (National Security Council, Secretariat, Box 84, 5/7/69 Joint NSC/Cabinet Committee on Economic Policy Meeting-FE Trade Mission)

Washington, May 19, 1969.

SUBJECT
Your Meeting at 11:00 a.m. with Secretary Stans

Secretary Stans will report to you on his Asian trip, from which he has just returned. He visited Japan, Korea, Taiwan and Hong Kong.

The major result of the trip was the unanimous rebuff to our textile request from the Asians. All flatly refused even to attend a GATT meeting to discuss a multilateral arrangement to cover voluntary controls by textile exporters./2/

The main issue is thus how we should pursue the textile issue. You may wish to ask the Secretary for his views on this subject.

The Japanese also made it clear that they related our textile request to our requests that they liberalize their treatment of imports from the U.S. and U.S. investment in Japan. We thus made no progress on these other issues either.

Washington, June 5, 1969.

SUBJECT
Minimum Trade Legislation Package

The drafting process for new trade legislation, the responsibility for which has been assigned to this office, is proceeding well. My participation in this process thus far, not having been aboard when the decision was made on the contents of a "bare minimum" package,/2/ leads me to urge the consideration and inclusion of three further matters./3/ These are:

In view of the fact that the United States has laid such great emphasis on the importance of nontariff barriers (NTBs) here at home, in Secretary Stans' two missions, and in the GATT, I believe it would be a mistake not to seek some form of negotiating authority to deal with NTBs in this legislation. Any Administration proposals at this time which do not include some provisions in this area, moreover, will face Congressional criticism, there being many on the Hill who feel this is the principal area for future trade liberalization.

Failure to seek authority to negotiate or in some other way to begin to pave the way for future efforts would indicate both at home and abroad that we are less concerned about NTBs than our previous action and talk have indicated. Moreover, coming to grips with this problem rather than putting it off indefinitely would be a clear affirmation of your own determination to move ahead toward freer trade.

Finally, it is conceivable that a "minimum" package might be the only feasible trade legislation which could be obtained during the first term of your Administration. As such, it should be adequate to carry out your policies over this period.

As a practical matter, authority of some sort should also be easier to obtain in a package bill appealing to a wide variety of interests than as a separate bill. We could determine the specific form of authority to be sought only after consultation with Ways and Means Committee and Finance Committee leaders. It could involve, for example, legislative agreement that the Executive should negotiate for reduction or elimination of nontariff barriers on an ad referendum basis, or it could involve a delegation of power to enter into agreements subject to legislative veto. I have already mentioned to Chairman Mills and to Senators Long and Talmadge that this problem of legislative authority to negotiate on matters other than tariffs would eventually be a problem on which I would like to return to them for advice.

This issue, while posed in the NSC background paper on trade policy, was not in the end put before you when trade legislation was reviewed. I recommend that it be reconsidered and that I be authorized to consult with key Congressmen with a view of developing a legislative proposal.

I find that your earlier decision on tariff-cutting authority is now generally interpreted that any new authority would be limited to providing compensation when required. I visualize the possibility that limited use of this authority for other purposes could prove to be invaluable, e.g., to round off reciprocity in an NTB negotiation. I, therefore, believe it would be wise to limit the use of the authority sought only by a provision that it was not to be employed as authority for a general, multilateral negotiation. I see no need to further limit your options in advance in this area.

I recommend that this limitation be clarified or reconsidered in the light of the above comments.

It has always troubled me that the President had no power to withhold MFN and that our trading partners knew this to be the case. I understand that the Japanese took advantage of this situation along toward the close of the Kennedy Round.

The exercise of the power by the President might require a GATT waiver and certainly would be exercised only with restraint but to leave the President's hands tied so that he had no power to withhold MFN has seemed to be a mistake.

Incidentally, I believe that a provision of this sort would also add some political appeal to the legislative package.

I recommend that the inclusion of such a provision in the trade bill be considered by the NSC task force preparing the proposed legislation.

Carl J. Gilbert

Washington, June 24, 1969.

SUBJECT
Request for Recommendations on Carl Gilbert's Memorandum of June 5, 1969--Minimum Trade Legislation Package

That the Administration submit promptly a message requesting minimum foreign trade legislation for "housekeeping" purposes and establishing a "blue ribbon" commission to make recommendations with respect to longer-term policies and legislation./2/

Carl Gilbert has suggested that the minimum foreign trade legislation package be modified to include (1) non-tariff barrier negotiating authority, (2) permission to cut tariffs for other than "housekeeping" purposes, and (3) authority to withhold most favored nation (MFN) treatment from countries which fail to participate fully in reciprocal negotiations./3/

In my view, the best course of action is to proceed expeditiously with the package agreed in the NSC: minimum tariff authority to pay compensation for increases in our duties; relaxation of the escape clause and adjustment assistance provisions of the present Trade Expansion Act; authority to eliminate the American Selling Price system of valuation; and establishment of a "blue ribbon" commission to study foreign trade policy including non-tariff barriers and the relation of trade to production and investment./4/ I believe that this program will demonstrate, both at home and abroad, your commitment to move toward freer trade with a modest short-term program and a longer-term, broad examination of foreign trade policy.

For the following reasons, I believe the proposals put forward by Carl Gilbert are neither necessary nor desirable:

1. Authorization for Negotiations on Non-Tariff Barriers

Everyone agrees that non-tariff barriers can be a significant impediment to trade and that they have not been adequately covered in previous negotiations. But these trade barriers are much more difficult to deal with than tariffs and we do not yet know enough about them to tell the Congress exactly what kind of negotiating authority we need. The study of non-tariff barriers is going forward within the U.S. Government as well as internationally. Stimulated by Secretary Stans' visit to Europe, the General Agreement on Tariffs and Trade (GATT) is currently accelerating its preparation for serious international discussion of non-tariff barriers. In Washington this week, Olivier Long, GATT Director General, estimated that the proper preparation for the next round of trade negotiations, including non-tariff barriers, will not be completed until the end of 1970. In these circumstances, it seems premature to be asking the Congress for negotiating authority.

At the same time, I do not think we can or should play down the non-tariff barrier issue. I would urge the inclusion in the message transmitting the proposed "housekeeping" legislation of a major section on the work being done to clarify the non-tariff barrier question and to lay a sound foundation for future negotiations in this field. I would hope that the importance of negotiating successfully on non-tariff barriers would also be reflected in the Congressional Committee reports. But at this stage, I do not think we are in a position to present a non-tariff barrier negotiating program to the Congress and, in the present state of knowledge and understanding, there is a real risk that the legislation itself or the legislative history will lay down requirements for non-tariff barrier negotiations which we will find we cannot comply with when the domestic and international studies have been completed. We have run into difficulty in the past by obtaining Congressional authority before having adequate consultations with our trading partners. Moreover the President has broad constitutional authority to conduct negotiations, as distinguished from his general inability to put into effect agreements modifying United States law, and any discussions with the Congress should be careful not to imply that Congressional authorization is legally necessary for the negotiation of agreements relating to non-tariff barriers.

As far as our international posture is concerned, the best evidence of our desire to move ahead in the non-tariff barrier field will be Congressional authority to carry out the chemical agreement left over from the Kennedy Round by eliminating the American Selling Price system. The Europeans in particular look upon American Selling Price as the test of our good will with respect to non-tariff barriers.

2. Use of Proposed Tariff Cutting Authority

When presenting our request for a modest extension of authority to reduce tariffs, the Administration should, in my view, commit itself to use that authority only to pay compensation or make minor adjustments in cases involving escape clause actions or other tariff modifications. We should also make clear that the authority will not be used for any broader negotiations.

Carl Gilbert's suggestion that we not foreclose the possibility of using the tariff reducing authority in non-tariff barrier negotiations seems to me likely to be unacceptable to the Congress. I am sure the present view on the Hill is that other people have more non-tariff barriers than we do. In these circumstances, they are certain to ask why we would have to be paying tariff concessions for the reduction or elimination of other people's non-tariff barriers.

The reasoning behind this suggestion is probably right: that we will not be able to mount a successful negotiation limited only to non-tariff barriers. But the conclusion I draw is that the entire question of non-tariff barrier negotiating authority and the broader use of tariff cutting authority should be left over for the next major trade negotiation which will follow the "blue ribbon" commission report and international preparation, both of which should be finished in the course of 1970. This timetable would envisage our major trade legislation request being presented to the Congress in 1971.

3. Authority to Withhold Most Favored Nation Treatment/5/

This recommendation appears to be relevant only in the context of a major trade negotiation. And Carl Gilbert himself does not propose such a negotiation at this time. Since 1778 most-favored-nation treatment has been the cornerstone of our trade policy, particularly since 1923 in its unconditional form, and it is a basic principle of the GATT. Furthermore, MFN has been one of the fundamental rules of all the post-war negotiations. I do not think we should abandon this policy of non-discrimination without very careful consideration. Therefore, I believe that Carl Gilbert's third suggestion should be put on the agenda of the "blue ribbon" commission. Another factor which should be taken into account is that the granting of this authority would place us under substantial additional pressure from the Congress to use it in a wide variety of circumstances and that the net effect might be the providing of the restrictionist forces with another weapon.

WPR

Washington, July 10, 1969.

Dear Henry:

This is a follow-up to our hasty conversation of Monday afternoon on the subject of the sought-after voluntary international arrangement to limit manmade and woolen textile imports.

I see little prospect of success in this effort by proceeding further along the present route. The key to success, of course, lies in cooperation by the four principal exporting countries in the Far East--Japan, Taiwan, Hong Kong and Korea. An unfortunate result of Secretary Stans' European visit was that in each of the Far Eastern countries subsequently visited, the public, the industry and governments were completely forewarned as to his purposes through the press, industry sources, and diplomatic sources.

Thus forewarned, positions were taken before his arrival (as by the Japanese Diet) from which the governments could not withdraw in the face of U.S. threats (the Mills telegram)/2/ and pressure. There is no reason to expect this situation to change absent a change in approach by the United States. Furthermore, an inflexible resolve to proceed on the present course also seems to involve a tacit decision to proceed irrespective of the costs both direct to U.S. trade and indirectly to U.S. policy. These costs do not appear to me to have been considered or weighed in the choice of methods of achieving the President's purposes.

In Europe, the national governments and international institutions were unenthusiastic (to put it mildly) about the proposal for an international textile conference under GATT auspices for a variety of reasons. They were reluctant on principle to see the GATT used as a purely trade restrictionist vehicle. For practical reasons, they were reluctant to participate in a GATT effort of this sort to which they did not attribute any substantial chance of success. They identified the problem as a U.S.-Far Eastern problem (as did Secretary Stans) and repeatedly asked why they should be involved at all in such a problem.

The enclosed Memorandum of Conversation with Minister Yoshino of the Japanese Embassy, Washington, is, I think, very interesting./3/ (No copies have been made or circulated other than the one enclosed.)

From informal conversations with EEC Commissioners I have the clear impression that if the United States were to arrange suitable bilateral agreements with the four Far Eastern countries and were then to suggest an international conference under GATT auspices for the purpose of bringing the various bilaterals together into an international arrangement to operate under GATT surveillance, we would then find Europeans receptive to such a conference. A similar suggestion has been made unofficially by the British.

To follow this proposed route would require a selective approach as to the products to be covered. There would also have to be a provision in each of the agreements for periodic review of the U.S. market for such textiles and consultations looking toward inclusion by agreement of the parties of any other products the market for which in the United States should show similar disruption.

Negotiations for such bilaterals between the United States and the Far Eastern countries, if they are to be successful, must be conducted without fanfare or publicity. We should use high-level influence only to the extent necessary to convince the countries involved, particularly Japan, of the seriousness of the U.S. determination to find a solution. We should advise them that the President will shortly be sending a trusted emissary to open negotiations./4/ Pretty clearly, Japan should not be approached again on the subject of textiles except in the broadest terms until after agreement had been reached with the other three (the effectiveness of each agreement could well be conditioned on execution of similar agreements with the other three).

At the Joint U.S.-Japanese Ministerial meeting in Japan the latter part of this month/5/ it would seem to me wise (a) to exclude textiles from discussion at the plenary sessions, and (b) to include textiles among the other items of importance which concern the United States because they contribute to the unacceptable level of the current, adverse trade balance in U.S.-Japan trade. It seems clearly predictable that textiles will be the subject of press inquiries in Tokyo and a uniform answer to such inquiries should be determined in advance--one which does not minimize the importance of the problem but which does not put textiles as the number one problem.

The multilateral discussions under GATT auspices to which I have referred as a second step could eventually be consolidated with the efforts due to commence in the autumn looking toward a renewal of the Long Term Textile Arrangement, which expires in 1970.

In short, I believe that there is a basis for genuine hope that a major step toward accomplishing the President's objective can be achieved by quiet negotiation with the Far Eastern countries concerned, and that conclusion of this first step can reasonably be expected to pave the way for further broadening of the arrangements by multilateral discussion at a later date. I doubt that this route would produce the watertight restrictions which Secretary Stans has been contemplating, but I am inclined to believe that enough can be accomplished via this route to satisfy the President's commitment. The present course of action seems destined to lead into quota legislation as its inevitable end and no one can predict or control how broad a field such legislation would cover--shoes, steel, electronics, etc. Somehow or other I find it hard to believe that the President's commitment to the textile industry/6/ is such that he could contemplate being responsible for dismantling the entire pattern of trade agreements built up over the past 30 years or so.

Sincerely,
Carl J. Gilbert

Washington, July 14, 1969.

SUBJECT
Request for Recommendations on Emergency Committee for American Trade Memorandum of May 19, 1969--Amendment of Section 252 of Trade Expansion Act

The following are the Department's comments on the ECAT proposal that the President seek authority to impose discriminatory restrictions against imports from a country which restricts foreign direct investment:/2/

1. While we agree that restrictions on foreign investment affect the flow of trade and that we should seek to reduce barriers confronting both trade and investment, we believe that the relationship between investment abroad and U.S. imports and exports varies greatly from country to country and industry to industry. We think the entire investment-trade relationship is an important matter for careful study by the "blue ribbon" commission being established to make recommendations on our long-range policy and trade legislation.

2. We do not believe enough is yet known to justify proposing at this time such a highly controversial and important amendment of the Trade Expansion Act. Labor and agriculture are particularly sensitive to U.S. investment abroad which sometimes directly results in increased imports into this country. For example, Mexico has given incentives for establishing assembly plants along the border to take advantage of a special provision of our tariff. The AFL/CIO has attacked such industrialization as constituting an export of American jobs./3/ Similarly, melons, tomatoes and strawberries grown on U.S.-financed farms in Mexico have been protested by agricultural interests in California, Florida, and Oregon. The Automotive Products Agreement with Canada contains measures which encouraged expansion of Canadian operations. Our automotive exports to Canada have increased since 1965 but imports are up even more sharply resulting in a diminution of our net favorable auto trade surplus with Canada. Europe has been generally open to American investment for many years. In the case of the automotive industry, an example cited in the ECAT memorandum, imports from Europe of automotive products in 1968 totaled over $1.3 billion compared with U.S. exports of only $160 million. A fair amount of our current textile import problem stems from investments abroad by U.S. interests. These examples suggest, we believe, that a proposal to use trade retaliation as a club to secure liberalization of investment restrictions by others would be a source of intense conflict in the Congress.

3. Furthermore, other countries' attitude toward U.S. investment is ambivalent. While the need for and usefulness of U.S. investment is widely recognized, there is also resentment of the economic control that supposedly results from heavy U.S. investment in a country. Fear of the "American challenge" would increase if the U.S. Government were to sponsor and protect U.S. foreign investment in the way proposed by the ECAT memorandum.

4. There would also be serious problems with such a provision in terms of international agreements. The GATT deals almost exclusively with the treatment to be accorded to goods rather than persons. When tariff concessions are negotiated under its provisions there is no guarantee, implicit or otherwise, that nationals or companies of the country concerned will be permitted to establish themselves inside a foreign market. We consider it extremely doubtful that the GATT Contracting Parties would agree with ECAT's rationale on GATT Article XXIII and that it would be virtually impossible to win a case on that basis.

5. The proposal if adopted could also probably have the effect of inhibiting further U.S. trade negotiations. Before negotiating with us on trade matters foreign countries might want some kind of guarantee that the proposed amendment would not be invoked against them to force changes in their domestic laws regarding investment and the right generally of aliens to do business in their country. Alternatively, they could quite properly take the position that they are willing to negotiate only on trade matters.

6. We agree with the ECAT proposal to delete the limiting references to agriculture from Section 252(a) thereby permitting use of its provisions in the case of unjustified foreign restrictions against either U.S. agricultural or industrial products. However, this amendment is already included in the draft trade bill now under interagency consideration.

Dirk Gleysteen/4/

Pursuant to the President's authorization for submission of illustrative tariff preference lists to the OECD Working Group on Preferences (see Document 200), the Department of State sought to get interagency concurrence for the submission. In a July 17, 1969, memorandum to the Acting Secretary of State, Philip Trezise and Charles Meyer reported that they had been unable to conclude the lists because "Commerce has been unwilling to do other than put in impossibly long exceptions lists." They recommended that Elliot Richardson convene a meeting with the Under Secretaries of Commerce, Agriculture, and Treasury; Kissinger or Bergsten; and Gilbert to argue the case that the Commerce Department position was politically unacceptable and to obtain agreement on a submission. (National Archives, RG 59, S/S Files: Lot 80 D 212, NSSM 48)

The submissions were expected before the end of July, and Richardson convened a meeting on July 25. In a memorandum to the Acting Secretary, with the handwritten date "c. 7/24/69," Trezise reported there had been opposition in all the agencies but the primary problem was with the Commerce Department. (Ibid.) No record of the July 25 meeting has been found, but on the July 17 memorandum to Richardson is the notation by Hartman: "Mtg. took place July 25 and position agreed. E is preparing transmittal to OECD."

On August 1 John C. Leary (E/OT/GCP) sent representatives in interested agencies a memorandum to which he attached the U.S. submission on preferences which had been delivered to the OECD Secretariat on July 31. (National Archives, Nixon Presidential Materials, NSC Files, Subject Files, Box 401, Trade General, Volume I)

In an August 26 memorandum to Kissinger, Bergsten set out his ideas on options for a scheduled September 3 meeting of the Under Secretaries Committee and his strategy for steering the Committee on a course that would pose the issues clearly for a Presidential decision. (Ibid., NSC Files, Agency Files, Box 270, Tariff Commission) A note by Kissinger questioned why the issues had to be so polarized, and another note suggested that Kissinger discuss the strategy with Bergsten before he "steers" the Under Secretaries.

On August 29 Trezise sent Richardson a memorandum regarding the Under Secretaries meeting, which was finally held on September 4. Trezise proposed that Richardson press for a recommendation to approve going ahead with the preference initiative, and that the President instruct the Committee "to put together the most liberal preference scheme possible. . . . Nothing short of a nuclear explosion could blast a truly liberal scheme out of the EEC, and Japan is hardly better in this respect. If the U.S. enters the negotiations with a restrictive scheme the result will certainly be little more than a 'political gesture'." (Ibid., RG 59, S/S Files: Lot 80 D 212, NSSM 48)

Washington, September 4, 1969.

SUBJECT
Under Secretary's Committee Meeting on Tariff Preferences for LDC's

The meeting resulted in the following decisions:/2/

1. Unanimous recommendation to the President that the United States participate with other OECD countries in offering tariff preferences to LDC's.

2. The President will not be asked to decide on either such ambiguous policy guidance as "a very liberal" or "very restrictive" scheme or, on the other hand such explicit guidance as the selection of one or more of the alternative detailed schemes presented in the draft NSSM-48. Rather, the President should be given a list of essential criteria or guidelines of an equitably shared OECD offer to the LDC's. On the basis of this formulation and Presidential endorsement of it, interagency negotiating instructions could then be developed without returning to the President.

3. A working group organized by State E will attempt promptly to draft this brief statement of criteria and, to the extent possible, indicate the orders of magnitudes of impact on U.S. industries and of benefits to LDC's.

During the meeting, the Commerce Department gave assurances that it would not press for a very restricted scheme and would consider sympathetically a set of protection mechanisms which would obviate the need for many--or perhaps any--commodity exceptions. Before the meeting, Nat Samuels and I hastily drafted a list of criteria, which we did not recite at the Under Secretary's Committee meeting, which included:

1. Equitable sharing among DC's of the import impact.

2. Uniform treatment of all LDC's, in effect creating a separate most favored national group.

3. Uniform 100% tariff concession on all manufactured goods, i.e., no exception list, but without prejudice to existing QR's.

4. Severe initial quantitative protections with provision for steady growth along the lines of the EEC tariff quota proposal.

5. Limitations on the opportunities for any single LDC to unreasonably exploit advantages, along the lines of the "competitive need" scheme.

6. A time limit on duration long enough to encourage LDC's to gear up for exports but short enough to permit reconsideration of the scheme, its coverage or eligible LDC countries, so as to head off any near term demands for changing it.

I don't know whether Nat would agree to all these hastily enumerated ideas on further reflection, or whether they are all sound. But any opportunities we have to participate in work with Worthington/3/ in the formulation of the paper, these may be helpful to Mike Roemer/4/ as suggestions for consideration. It seems to me that what we want to do is to get the principle of tariff preferences established and a program started and to build into that program both assurances to the LDC's of growing trade opportunities and assurance to U.S. industry of controls on the in-flow of cheap goods both as to quantities and timeframe of the U.S. market adjustment. No scheme which makes a big psychological splash with the LDC's will get through the EEC or the U.S. Congress. No scheme which pretends to offer major economic benefits to the LDC's will in fact sustain this illusion very long. The best approach is to make clear from the outset that this is only a modest stimulus to the LDC's development and a modest contribution by affected industries in the developed countries. There was a general agreement at the meeting that the United States should not be in the headlines as the leading champion of the plan or as a source of publicity creating false expectations among the LDC's.

Rutherford M. Poats/5/

Washington, September 20, 1969.

SUBJECT
Tariff Preferences for Less Developed Countries

The revised draft memorandum on tariff preferences,/2/ in our view, conceals difficult problems this proposal will raise for us in our relations with most of the forty LDCs in Africa. This approach surprises us because Mr. Westerfield raised these issues in the Under Secretary's meeting on September 4 and understood that the proposal would reflect our views./3/ We received the revised draft only a few minutes before the meeting and advised E by telephone that we had reservations and would give you a memorandum explaining them.

Serious problems for U.S. relations with most African countries would result if we set as conditions for a generalized scheme the elimination of special preferences and reverse preferences.

The 25 African countries which enjoy or have negotiated special preferences with the EC would resist fiercely any generalized preference scheme which was conditioned on the abandonment of special preferences. As post-colonial countries whose export crops were built up on the basis of preferences in the metropole, they still depend on preferential access to Europe, although the level of EC preferences has been dropping. In addition, 18 of these countries receive substantial aid from the EC as such (over $918 million is to be provided between now and 1975). These are real advantages which no conceivable generalized system can match, since most African products would not be covered by a generalized scheme. The Africans would almost certainly also regard as unacceptable a U.S. requirement that to qualify for generalized preferences they would have to abandon reverse preferences. They consider these reverse preferences as the price they pay for preferences in the EC, and if compelled to choose between upsetting the special preferences on tropical products and qualifying for generalized preferences on goods which they do not produce they would opt for the former, and resent being forced to do so. The difficult policy problems of special preferences and reverse preferences have no apparent ready solution, but possibly with time and imagination formulas can be worked out which would protect our interests in Africa without impairing the elaboration of a forthcoming generalized preferences scheme.

We believe that the President should be aware of the problems for Africa when he considers recommendations for generalized preferences, and to that end we propose the following two changes in the draft memorandum.

[Omitted here are two specific drafting suggestions geared to insertions or deletions in the September 18 draft memorandum to the President.]

Washington, September 23, 1969.

SUBJECT
Mounting Bureaucratic Problems on Foreign Economic Policy

I have learned from Al Haig and Ken Cole that there is great unhappiness in some quarters about your and my key roles in foreign economic policy:

1. From Arthur Burns, most recently because we are handling the trade bill and message--at Ken Cole's request, which I confirmed last night, and which implements decisions taken at NSC meeting in April./2/

(The trade package came in from STR late Friday night and I have not yet moved it because (a) the message is terrible, (b) we do not yet have President's response to your memo of August 13 on the subject,/3/ and (c) I have not gotten Burns' comments. I am working on the message but I am not likely to get substantive views from Burns without your intervention.)

2. From Secretary Kennedy, with regard to international monetary policy. (I reported to you yesterday on his latest and most blatant effort to end-run you.)/4/

3. From Secretary Stans, with regard to textiles.

These three have apparently discussed the issue together and the situation is obviously unhealthy--especially for me since I am more vulnerable than you. I would guess that their problems are largely (solely in Kennedy's case) bureaucratic but also partly substantive.

I assure you, however, that I have absolutely no second thoughts about the way I have handled any issue, with a limited caveat on the AID bill where I let Burns turn the minor substantive issue of administrative "barnacles" on the program into a major bureaucratic fracas. And I have no qualms about carrying on as heretofore. I did want you to know, however, that the issue could involve you at some point.

That you sign the attached memorandum to Arthur Burns (and Peter Flanigan) requesting their views on the proposed trade bill and message./5/ (This should take care of the only "substantive" problem which exists at the moment.)

Washington, September 29, 1969.

Dear Mr. Gilbert:

I have your letter of September 18, 1969, requesting the U.S. Tariff Commission to undertake the work of updating its report on non-rubber footwear made to former President Lyndon B. Johnson in January 1969 under section 332 of the Tariff Act of 1930./2/ You state that the additional information is needed not later than November 3, 1969, for the use of a Task Force on Non-Rubber Footwear, consisting of senior officials of four agencies under the chairmanship of your office, which has the assignment of making recommendations to the President later this fall./3/

You also request that this Task Force "be given access to certain financial and other data on selected individual firms which the Commission may have assembled in its initial section 332 investigation". You state that, "These data would be made available to the Office of the Special Trade Representative and, through it to the senior members of the Task Force to assist in preparing the report to the President," and that "The confidential nature of such data would be respected and disclosure or access would not be granted to unauthorized persons in accord with 18 U.S.C. 1905".

The fulfillment of your request by the Commission raises certain problems which the Commission desires to call to your attention with a view toward avoiding any possible embarrassment to you and to the President. The problems arise by reason of the provisions of law governing (1) the Commission's expenditure of its appropriated funds, and (2) the release by the Commission to other Federal agencies of confidential business data obtained by the Commission in its investigatory work.

With respect to (1) above, it will be noted that each appropriation law enacted for the Commission beginning with fiscal year 1955 has included the proviso that--. . . no part of the foregoing appropriation shall be used for making any special study, investigation, or report at the request of any other agency of the executive branch of the Government unless reimbursement is made for the cost thereof.

The assistance you request is a special Commission investigation and report for which reimbursement is required by the foregoing proviso. The situation would be different, however, if the investigation and report were to be requested by the President. The proviso has no application to requests from the President under section 332(g) of the Tariff Act of 1930 since Commission compliance with such requests is mandatory under the law.

With respect to (2) above, the Commission's obligations in regard to its handling of business confidential data are prescribed in 18 U.S.C. 1905, which provides as follows:

Whoever, being an officer or employee of the United States or of any department or agency thereof, publishes, divulges, discloses, or makes known in any manner or to any extent not authorized by law any information coming to him in the course of his employment or official duties or by reason of any examination or investigation made by, or return, report or record made to or filed with, such department or agency or officer or employee thereof, which information concerns or relates to the trade secrets, processes, operations, style of work, or apparatus, or to the identity, confidential statistical data, amount or source of any income, profits, losses, or expenditures of any person, firm, partnership, corporation, or association; or permits any income return or copy thereof or any book containing any abstract or particulars thereof to be seen or examined by any person except as provided by law; shall be fined not more than $1,000, or imprisoned not more than one year, or both; and shall be removed from office or employment.

This provision merits comment on two points: (1) It does not constitute an absolute prohibition against disclosure--only disclosures "not authorized by law" are made actionable; and (2) it refers in terms to disclosures by an "officer or employee of the United States or of any department or agency thereof". The Commission believes that the penal sanctions specified in section 1905 would apply to individual Commissioners participating in an official Commission decision to disclose confidential business information, regardless of the source of the request, unless such disclosure, as required by the statute, is "authorized by law".

As far as the Commission is aware, the only general authority in law for the Commission to release business confidential data to another Federal agency is found in the Federal Reports Act (44 U.S.C. secs. 421-427). This Act, however, relates only to disclosure of information obtained by questionnaire from 10 or more persons and is otherwise circumscribed in its application. In this connection, section 4(b) (44 U.S.C. 423(b)) provides:

Information obtained by a Federal agency from any person or persons may, pursuant to this chapter, be released to any other Federal agency only if (1) the information shall be released in the form of statistical totals or summaries; or (2) the information as supplied by persons to a Federal agency shall not, at the time of collection, have been declared by that agency or by any superior authority to be confidential; or (3) the persons supplying the information shall consent to the release of it to a second agency by the agency to which the information was originally supplied; or (4) the Federal agency to which another Federal agency shall release the information has authority to collect the information itself and such authority is supported by legal provision for criminal penalties against persons failing to supply such information.

These severe limitations on disclosure of information, the Commission believes, eliminate any possibility that the Federal Reports Act may be used as authority for the Commission to disclose to your agency the business confidential data you have requested.

Again, as with the matter of appropriations, the limitations on disclosure of information do not apply when in individual cases the President requests the Commission to provide such information to him under authority of section 332(g). Section 332(g) provides in pertinent part that--

The Commission shall put at the disposal of the President of the United States, . . . whenever requested, all information and its command, and shall make such . . . investigations and reports as may be requested by the President . . . .

The Commission regards this language as sufficiently broad to include the furnishing to the President of any confidential business data which he might request. In other words, a disclosure of such information to the President would be "authorized by law" and therefore not prohibited by the penal sanctions of 18 U.S.C. 1905.

In addition to the legal questions involved in the disclosure of confidential information, the Commission through the years has been keenly aware of the practical considerations involved in making such disclosures. In conducting its investigatory functions, the Commission has enjoyed the confidence of the many business interests with whom it comes in contact, by scrupulously fulfilling its obligations to protect from disclosure business data received from them.

In view of the foregoing, I am certain you can appreciate the reasons which require the U.S. Tariff Commission to deny your request as contained in your letter of September 18, 1969.

Sincerely yours,
Glenn. W. Sutton

Washington, October 8, 1969.

SUBJECT
1969 Trade Bill and Presidential Message

Ambassador Carl Gilbert, with the support of all relevant agencies, proposes at Tab A that you approve the trade legislation at Tab C for Presidential submission to Congress under cover of the Presidential trade message at Tab B./2/ He reports broad Congressional support for the proposed package.

The bill embodies your April 9 NSC decisions./3/ (The delay in submitting the bill to you was due to Gilbert's long confirmation delay/4/ and the need to consult with Congress after the summer recess.) The message states your trade policy, explains the provisions of the bill, and announces that you will appoint a Commission on World Trade to devise a trade program for the seventies. I have checked the bill and message with Arthur Burns, Peter Flanigan, and Bryce Harlow. Harlow wants to submit the bill by November 18./5/

The bill contains the following provisions, which you decided at the NSC:

1. Modest tariff cutting authority of 20 percent or 2 percentage points, whichever is greater, to be exercised primarily to compensate for any U.S. tariff increases. Your presentation would make clear that the authority would not be used for major tariff negotiations.

2. Relaxation of the escape clause, which has been inoperative since 1962 and has forced injured industries to seek quota legislation. The new law would permit U.S. tariff increases when imports are the "primary cause" of injury to domestic industry, rather than the "major cause" as at present. There would no longer be a need to attribute the increased imports to a previous tariff concession.

3. Relaxation of adjustment assistance for firms and groups of workers, which provide them with direct payments and tax benefits to move into other endeavors. The present rules have also been virtually inoperative. Determinations of injury, previously made by the Tariff Commission, will now be made for your disposal by an interagency board.

4. Repeal of the American Selling Price system of customs valuation on benzenoid chemicals and a few minor items. Repeal would implement the supplementary Kennedy Round chemical agreement, under which the U.S. would gain substantial tariff reductions on chemicals and plastics and some important non-tariff barrier concessions. Elimination of ASP will also permit us to start negotiating on other non-tariff barriers, since the Europeans regard implementation of the supplementary Kennedy Round agreement as the key symbol of our real interest in moving ahead.

Because ASP will be the most contentious element of the 1969 bill, Gilbert has prepared an amendment to meet industry objections, if necessary, by allowing an especially lenient transitional escape clause on ASP items.

5. In addition to the items decided earlier, the draft bill, with full interagency concurrence, provides specific Congressional authorization for U.S. contributions to the GATT. These have previously come from State Department travel and conference funds.

A trade message worked out by Ray Price and my staff, which has been cleared with all interested parties, is at Tab B. It explains the provisions of the bill and sets forth the main elements of your trade policy:

--that the U.S. remains committed to freer trade;

--but that new features of the world economy justify thorough investigation by a Commission on World Trade before the U.S. decides on any broad new trade policy for the 1970s;

--that our trade policy must be in our own interest--defined as our larger interest and not a cover for special interests;

--that our reduced trade surplus heightens the need to move toward freer trade;

--that textiles are a special problem, which should not deflect us from our larger goals.

The bill contains no request for authority to negotiate on non-tariff barriers (NTBs), but the message calls for a clear statement of Congressional intent to support U.S. efforts to reduce them. Gilbert has discussed this with key members of Congress and has prepared a draft joint resolution, which will be offered by a member.

NTBs are the next obvious area for trade negotiations, and Gilbert --along with Secretary Stans and all other relevant officials--believes that business concern forces us to make an effort to get Congressional support to pursue the matter.

Two further provisions of the draft bill go beyond your earlier decisions. The agencies disagree and your decision is needed.

First, your present retaliatory powers are extremely broad against unjustified foreign barriers to our agricultural exports but are less explicit on barriers to our industrial exports.

Gilbert, with the concurrence of Commerce, Labor, Interior and CEA recommends that you propose an increase in your retaliatory power on industrial products to make it as broad as your power on agricultural products. They argue that this would give you the same power enjoyed by other heads of state and would add to U.S. credibility in trade disputes. Their main argument, however, is that it will generate support for the overall bill.

State and Treasury argue that such a proposal could lead Congress to pass mandatory legislation which would encourage trade wars and which may conflict with our international obligations. Burns, Flanigan and I believe that State and Treasury are too cautious on this measure, which has attracted much business support.

Recommendation: That you approve inclusion of the proposal to increase your powers to retaliate against foreign barriers to our industrial exports.

Approve/6/
Disapprove

2. Gilbert also recommends that you ask for powers to raise our own import barriers to retaliate against countries whose subsidies damage our exports in third markets. Gilbert's support and arguments are similar to those above, especially that it will help get the bill passed.

The State-Treasury objections, in addition to the above, are that the measure has been insufficiently studied and that our own agricultural export subsidies mean we might lose from the trade conflict which could be encouraged. They recommend that the Commission on World Trade consider this thoroughly before we seek legislation.

There is greater risk in this proposal than in the one above. However, the objections are based mainly on use of the authority whereas we would only be seeking the authority to bolster our negotiating strength. It would indicate more clearly than any other part of the bill that your Administration plans to pursue a tougher trade policy than did its predecessors--within the continued context of a policy of freer trade. Burns, Flanigan, and I therefore recommend that you approve Gilbert's proposal.

Approve/7/
Disapprove

3. I recommend that you approve the bill at Tab C, subject to the above decisions, for submission from the White House. It is important that the bill and message go from the White House, as the first general statement of your trade policy.

Approve/8/
prefer submission by Gilbert
No submission at this time

4. I recommend that you approve the Presidential message at Tab B, which will be edited to conform to your decisions at 1 and 2 above.

Approve/9/
Disapprove--resubmit with suggested revisions
Disapprove--no Presidential message

Washington, October 8, 1969.

SUBJECT
Tariff Preferences for Less Developed Countries (NSSM 48)

CHAIRMAN'S SUMMARY

I. The Problem

Tariff preferences have become a major issue in the relations between less developed (LDCs) and developed countries (DCs).

LDCs see such preferences as a major step DCs should take to assist them in promoting their exports and economic growth. For some years, they have engaged in a concerted and mounting campaign to that end.

At the second United Nations Conference on Trade and Development (New Delhi, 1968) the United States made a moral commitment to join in ". . . the early establishment of a mutually acceptable system of generalized, non-reciprocal and non-discriminatory preferences . . ." The details of the system were to be settled this year.

The Organization for Economic Cooperation and Development (OECD) has been studying various preference plans and has agreed to complete a report on the DCs' position later this year. Your negotiators need instructions on the general approach they should follow. This is urgently needed for an OECD meeting of October 13.

The preference issue will also be a major topic at the November meeting of the Inter-American Economic and Social Council, which is to lay the groundwork for a "new policy to strengthen hemispheric cooperation." Latin Americans are giving top priority to a system of generalized preferences, and expect a statement at that meeting as to our intentions to carry out our UNCTAD commitment.

Therefore, it is important that you now decide:

--Whether the United States should formally declare its intent to negotiate and participate in a system of generalized tariff preferences (depending, of course, on the scheme's ultimate acceptability and Congressional approval);

--If so, what sort of guidelines should govern the work of our negotiators.

II. The Political Issues

While the substance is economic, the basic issues are political--domestic and foreign.

At home there exists qualified support for preferences from business, labor and Congressional leaders. But many will oppose preferences because of a fear that their jobs or profits--or those of their constituents--would be adversely affected through increased low-wage imports and "run-away" plants.

Support will come from those who see it as a means to help the LDCs and as a supplement to foreign aid, as well as from those companies and internationally minded groups which see the advantages to U.S. exports and foreign investment. Few will see that preferences help the American consumer by permitting lower prices. (A more detailed discussion of these domestic aspects is contained in Annex A.)/2/

Abroad, the political issues are even sharper:

--The LDCs, especially the Latin Americans, definitely expect some kind of arrangement. Were we to refuse our participation now, their reaction would be one of anger and shock. In Latin America, a negative decision would be viewed as a severe blow to hemispheric cooperation.

--Generalized preferences are a realistic way of assisting Latin American exports to the United States and Europe. Without a world-wide scheme, the major European countries would maintain, and possibly expand, their present preferences which discriminate against Latin American and U.S. exports.

--Possibly excepting Canada and Japan, other DCs might well go ahead on generalized preference without us. We would be isolated.

III. The Economic Issues

The economic issues are also clear:

--The export expectations of LDCs are, by and large, in manufactured and semi-manufactured goods--the commodities which would be covered by a preference scheme. The LDCs' traditional exports--raw materials and agricultural products--have been lagging and have only limited growth potential.

--Preferences will stimulate LDC exports--initially, perhaps, on the order of $1 billion a year to all DCs under a liberal scheme. While modest in terms of the LDCs' total foreign exchange needs, this is significant in terms of their exports of manufactures (currently some $5 billion annually).

--The over-all economic "burden" on the U.S. would be small. Preferences might mean additional imports of up to $300 million a year initially, depending on the liberality of the scheme. At present total U.S. imports are at a rate of over $30,000 million annually.

--Problems might be created for individual American industries. Also, additional low-cost imports from low-wage countries may stimulate protectionist pressures.

--The principal beneficiaries would be initially the larger, more advanced LDCs--such as Mexico, India, Brazil.

IV. Recommendations

The NSC Under Secretaries Committee, in accordance with your directive of August 16,/3/ has reviewed this issue and recommends:

1. That the United States now declare its intent to participate in a system of generalized tariff preferences.

2. That, in pursuing agreement with other DCs on a preference scheme, our negotiators be guided by the following principles:

--All the major developed countries must be participants and do their fair share. (A common scheme would be the most desirable.)

--Preferences would be accorded, in principle, on manufactured and semi-manufactured products and on a selective list of agricultural and fishery products.

--There should be adequate safeguards to avoid significant damage to domestic industry as a result of preferential imports.

--Preferences should be temporary, i.e., no longer than 10 years.

--Preferences would be entirely voluntary, i.e., we would have the unilateral right to deny preferential access to any product or country.

--To the extent feasible, all LDCs should have equal access to DC markets. (This would benefit Latin American exports to Western Europe.)

--The United States should have access to all LDC markets on equal terms with other DC suppliers.

(This implies a phased elimination of existing discriminatory "reverse" preferences granted by some former European colonies to the Common Market and British Commonwealth and may create serious problems with almost all the African countries, as well as with some LDCs in other parts of the world.

More particularly, the Africans might consider our position as inconsistent with a policy under which we encourage them to rely on their former metropoles as the primary source of development aid. In the past, the Western Europeans frequently have insisted on reverse preferences as a condition of such aid. It would be anomalous for us to require the elimination of reverse preferences, if this would cost them their primary source of aid, while refusing to provide substitute aid ourselves.)/4/

V. Unresolved Issues: Decisions Required

The agencies were unable to reach agreement on the specific proposal the United States should support in the international negotiations. The differences focused on the kind of safeguards needed to protect American industry against injurious import competition.

Implicit was a more basic difference among the agencies:

--Some wanted to be forthcoming both for foreign policy reasons, and because the benefits to the LDCs would at best be modest and possible injury to U.S. producers correspondingly small. These agencies also started with the presumption that increased imports are beneficial and not harmful to the American economy.

--Other agencies accepted the principle of preferences, but were concerned about possible damage to domestic industry and Congressional reaction to such threats.

To resolve these agency differences, we need your guidance on the following interrelated questions:

1. To what extent should sensitive commodities be excluded from any preference scheme?

2. What other safeguards should there be to protect domestic industry?

3. How responsive should the United States be to LDC desires?

The issue is whether some manufactured or semi-manufactured goods should be exempted altogether from the preference scheme.

From a foreign relations standpoint, no exceptions would be best. Furthermore, it can be argued that no exceptions are needed even for sensitive commodities like cotton textiles and petroleum, since these commodities are already subject to quantitative limitation and preferences would have no effect on U.S. imports.

Nevertheless, it might be difficult to get a bill through Congress unless certain sensitive items were excluded from the preference scheme. But the longer the list is, the more individual Congressmen will be under pressure to add to it products produced in their districts.

State, the Council of Economic Advisers, the Budget Bureau, STR, Treasury, and AID favor providing for few exceptions, if any. For STR and Treasury, this is based on the assumption that more automatic safeguards, discussed below, will make exceptions unnecessary.

The Commerce, Labor, Agriculture, and Interior Departments prefer excepting a more extensive list of commodities. The actual number would depend on the type of other safeguards used.

What should the Administration try to achieve:

a) no exceptions, or an exceptions list limited to those commodities, like cotton, wool, and synthetic textiles, already recognized by the Administration as requiring special protection;

b) a more extensive exceptions list.

There are two general types of safeguards. One is an escape clause (which would withdraw the preference if a U.S. industry is hurt) and adjustment assistance for injured parties.

These provisions operate only when there is evidence of injury. They are now in the U.S. law and are expected to be made more effective by the proposed trade legislation. Moreover, they could be further strengthened to deal with market disruption caused by preferential imports.

The second type of safeguard would limit the quantity of imports accorded preferential treatment. This type of safeguard would operate before injury is felt by the American producer. It would not require an administrative determination, but would require administrative machinery.

State and CEA favor reliance on a strengthened escape clause and adjustment assistance. They consider that these safeguards:

--would be sufficient to deal with any significant threat to domestic industry;

--would represent no basic policy departure;

--would avoid the considerable political and administrative problems inherent in other safeguard mechanisms. These agencies fear that once an administrative apparatus to control the importation of LDC manufactures has been established, it will be difficult to resist pressures to apply the apparatus to all imports.

Commerce, Labor, STR, AID, Agriculture, and Interior, however, favor an "automatic"--i.e., built-in, quantitative--limit on the amount of imports which could enter at preferential duties, in addition to an escape clause and/or adjustment assistance.

These agencies feel that:

--there will be some American firms and industries which will be injured by competition from LDC exports of manufactured goods;

--the escape clause and adjustment assistance have not worked well in the past, and can not work well in the future because they operate only after damage is done;

--additional safeguards which set a limit on the quantity of imports receiving preferential treatment, and therefore prevent injury from developing, are required;

--the public and Congress will demand such additional safeguards;

--the LDCs should be helped to make their exports competitive; but where they are--or become--competitive such assistance should be terminated.

The international negotiating situation has a bearing on the choice of safeguards. The European Communities (EC), having reached agreement among the six member countries, are firmly committed to a scheme with built-in, automatic safeguards (a tariff quota plan). The other key DCs are keeping their options open and looking to the U.S. for guidance. They would probably accept the EC approach if we did, but would be prepared to support us if we opt for the escape clause approach.

Agreement on a common scheme would be desirable, not necessarily as an end in itself, but because it would be strong prima facie evidence of equitable burden-sharing and would facilitate Congressional acceptance of preferences. Indeed, some agencies feel that a common scheme is an absolute necessity.

Given the EC's inflexibility, adoption of automatic safeguards appears to offer the only real possibility of negotiating agreement on a common scheme. The alternative is to accept two preference systems (the EC with automatic safeguards; the U.S. and others without them) and try to arrive at comparable results by adjusting other elements, such as the depth of the preferential tariff cut.

In the light of all these considerations, we should:

a) use only an escape clause and/or adjustment assistance;

b) use automatic safeguards (such as the "competitive need" formula or the "tariff quota" described in Annex B,/5/ which set quantitative limits on the amount of imports eligible for preferential treatment) in addition to an escape clause and/or adjustment assistance.

The final issue is how forthcoming we should be to the LDCs.

As noted earlier, preferences might result in additional U.S. imports of at most $300 million a year initially. The result could well be considerably less, depending on the liberality of the scheme. Even so, the gap between the feasible maximum and minimum is quite small. The choice is, therefore, less an economic one and more a political-psychological one.

Leaving aside the technicalities, any preference scheme can be made to yield somewhat larger or somewhat smaller trade benefits by altering the depth of the tariff cut and the restrictiveness or liberality of an automatic safeguard formula, if there is one.

There are, furthermore, a number of advantages to eliminating all duties on LDC exports of commodities receiving preferences:

--it would meet LDC desires for zero duties;

--it would leave no room for further demands for reduction in duties;

--it would facilitate the elimination of the discrimination against Latin America and others left out of existing preferential schemes.

State favors seeking the upper range of the feasible benefits. A meaningful offer is essential in terms of the Administration's new Latin America policy. The overall adverse impact on U.S. industry would be small, and might be more than offset by the benefits of more trade. Moreover, there would also be protection against excessive imports in any given sector by the safeguards used. The Scandinavian countries, Canada, and the United Kingdom also favor a program providing generous benefits to the LDCs.

Commerce, Labor, STR, and some other departments believe that the amount of benefits to the LDCs is not an issue, but that automatic safeguards for U.S. industry from low-wage foreign competition are needed in order to get Congressional approval.

Nevertheless, the specific formulas these agencies currently advocate might result in very limited benefits to the LDCs. Commerce's "competitive need" formula would exclude from the outset over three-quarters of all U.S. imports of manufactures and semi-manufactures from LDCs--on grounds that these LDC suppliers have already achieved competitive positions in the U.S. market or that the products involved are too sensitive. The bulk of imports of manufactures from such countries as Mexico, Peru, Brazil, Hong Kong, Taiwan, Korea, and the Philippines would have to be excluded as a result.

The United States should seek to attain:

--the upper range of benefits;

--the lower range of benefits.

A more comprehensive interagency report, prepared in response to NSSM 48, is attached (Annex C)./6/

This memorandum represents the Chairman's summary of the Committee's conclusions and recommendations. In addition to the Committee's regular members, the following departments and agencies participated in the discussion: Treasury, Commerce, Agriculture, Interior, Labor, Council of Economic Advisors, the Special Trade Representative, Agency for International Development, United States Information Agency, and Bureau of the Budget.

ELR

Washington, October 9, 1969.

SUBJECT
Tariff Preferences for Less Developed Countries (NSSM-48)

I have just received Under Secretary Richardson's memorandum of October 8, submitting to you a summary of the views of the Under Secretaries Committee on the preference issue./2/

Commerce, without reservation, supported the recommendation that the U.S. should match other major developed countries in participating in a system of generalized preferences. However, I feel I must provide you some additional comments on the "Unresolved Issues" section of the summary because it does not fully reflect our views.

First, the subsection on "The Potential Trade Benefit" (pp. 10-11) characterizes Commerce's "competitive need" safeguard formula as one which would give LDCs "the lower range of benefits". From this, it might be inferred that the escape clause or tariff quota safeguards would yield "the upper range of benefits", and therefore should merit your support. Each of the three basic types of safeguards can be made to yield similar results by varying the product coverage, the depth of tariff cut and the exceptions. We believe that there are overriding advantages to the "competitive need" approach and want to be sure that it will continue to receive full consideration.

The competitive need safeguard would only withhold preferences on those products from an LDC where it has proved by capturing a fair share of our imports that it can compete successfully without preferences. Withholding preferences on such products does not, in our view, take away any benefits from LDCs if the purpose of preferences is to help them where help is needed. It would be very difficult to justify to American producers and the Congress why we are giving any country an additional and unnecessary advantage in our market on products that they can export to us successfully without preferences. Hong Kong is a good case in point. It is significant that one-third of our imports from LDCs that would be excluded by the competitive need formula comes from Hong Kong.

My general feeling about the subsection on "Safeguards" (pp. 7-10) is that State's proposal to use only the escape clause and adjustment assistance is not negotiable with the EEC and, even if it were, would not be acceptable to American industry or the Congress, given their increasing concern about import competition. I am convinced that the only prospect for reaching agreement on a common system, or at least similar (but not identical) systems, which the Congress will accept, is to incorporate automatic safeguards, such as the competitive need formula, tariff quotas, or some combination of the two.

Finally, with respect to the subsection on "Exceptions" (pp. 6-7), I think we all understand that you will want the U.S. list of exceptions to be kept as short as possible. How short it can be kept, however, is directly related to the need to provide adequate protection to American industry and to share the burden of preferences equally with other countries. This in turn will depend in large part on the safeguards that are selected and the depth of tariff reductions that are made by the U.S. and other countries. Thus we believe that your decision on the U.S. exceptions list should be made in terms of a general principle rather than the specific alternatives contained in the memorandum.

I therefore recommend that:

(a) On the selection of exceptions (page 7), rather than direct us to try to achieve: "no exceptions/limited exceptions" or "a more extensive exceptions list," you direct us to keep the U.S. list of exceptions as short as possible, consistent with the principles of equal burden sharing and adequate protection for American industry.

(b) On the selection of safeguards (page 10), you approve the use of automatic safeguards.

(c) On the selection of a range of benefits (page 11), rather than select an upper or lower range of benefits, you direct us to seek to maximize benefits for LDCs, consistent with the principles of equal burden sharing and adequate protection for American industry.

Maurice H. Stans

Washington, October 9, 1969.

SUBJECT
Tariff Preferences for Less Developed Countries (NSSM 48)

REF
NSC Under Secretaries Committee--Memorandum to the President--Chairman's Summary--October 8, 1969

I have just seen the final version of the Memorandum (Chairman's Summary) under reference./2/ Two points which I have made are not, I feel, reflected in the memorandum with sufficient clarity and force:

1. There must be United States access to less developed country markets on equal terms with other developed countries as a prerequisite to United States participation with other developed countries in a preference scheme. The United States should make it clear that it would not give preferences to other countries which discriminate against U.S. exports in favor of other developed countries. It is costly for developing countries to buy from preferred suppliers rather than from those which are most competitive. It is not reasonable for the United States to defer to the principle and practice of those West Europeans which have in the past insisted on preferences for their products as a condition for their aid. There is now an opportunity to negotiate an end to these "reverse preferences," to the mutual benefit of the developing countries and of the developed countries (including the United States, Japan, Switzerland, etc.) now suffering net disadvantage from discrimination. Switzerland and the Nordic countries have made their preference offers conditional on a satisfactory solution to this problem. The United States can hardly fail to do the same. Above all, the Administration should recognize in advance the extreme difficulty--if not the impossibility--of obtaining Congressional approval for preferential reduction of United States tariff duties in favor of countries which themselves practice systematic tariff discrimination against United States exports.

2. As a second United States prerequisite to participation in a preference scheme, all LDC's should have equal access to DC markets for all preferential imports under the scheme. Since the UK, the EEC and the Nordic countries have proposed to extend duty-free treatment to all LDC's for all or nearly all products included in a general scheme, United States agreement to accord zero-duty preferential entry would contribute an important common element to the scheme. Duty-free entry for LDC products would meet the LDC's request for the elimination of tariff handicaps in DC markets, would leave no room for further LDC requests for duty reductions, and would tend to limit tariff discrimination against Latin Americans and others excluded from British Commonwealth and EEC preferential arrangements. I do not advocate a zero-duty preferential scheme in the belief that it would give greater trade benefits to LDC's than some other scheme. It might or might not do so, depending upon the trade-restrictive effects of initial exclusions and of other measures applied to safeguard American industry. (Here it is important to take into account the trade and investment effects of preferences and the probable aggravation of the "runaway plant" problem with Mexico.) I consider that it will be important for the Administration to be able eventually to go to the Congress with a scheme that can be advocated not only as conferring benefit on LDC's but also as

--a common effort by DC's to coordinate and rationalize their trade relationships with LDC's;

--an internationally accepted decision to eliminate discrimination against the United States and other developed countries in many LDC markets for manufactures and semi-manufactures; and

--a common effort to reduce discrimination by DC's and groups of DC's against LDC's not associated with them in special preferential relationships.

I make these two points here because I feel that the policy recommendations expressed in Section IV (pp. 4-5) of the Chairman's Summary do not express the two principles in the form in which your decision should ultimately guide our negotiators and be presented by them to other governments.

Carl J. Gilbert

Washington, October 23, 1969.

SUBJECT
Timing on Submission of the Trade Bill

In my memorandum of October 8 to the President on the trade bill,/2/ I said that after his decision on substance you wished to consult with Congress on timing.

I understand that you wish to delay submission until after the New Jersey gubernatorial election because of the effect on the chemical industry of our asking for elimination of ASP./3/ I cannot of course make a judgment on that election, but I urge early Presidential submission of the bill for the following reasons:

1. We have not gotten far on textile restraints. Much of the foreign opposition lies in fear that textiles is only the beginning of our restraint efforts and that other products will soon follow. The bill and the message will dispel that as no diplomatic statements can, and will thus make a major contribution to getting a textile agreement. In addition, the message will make crystal clear that the President is serious on textiles. Sato meets the President in November and our best chance to line up the Japanese is between now and then.

2. Business is angry over foreign non-tariff barriers. This Administration must show that it takes this issue seriously. The message does that. More important to the timing issue, we have now brought GATT consideration to a head. If at the October 20 GATT meeting on NTB's we cannot show that the U.S. intends to move on this, momentum will be lost and our position will lose all credibility.

3. The ASP agreement will lapse unless we get foreign concurrence before January 1 for its further extension. If the bill is not submitted well before that time--and we are already within three months of the deadline--our arguments for getting this extension will be weak, since it will not look as though the Administration is serious. This is the most serious U.S. trade barrier in foreign eyes and would seriously hurt our overall foreign policy, especially in Europe. A collapse of ASP will also wreck our NTB efforts.

4. Early this spring, Secretary Stans promised European leaders that the President would be submitting a bill soon. The President instructed the Secretary to do so at the NSC meeting on trade. Our credibility with the European Governments is thus at stake. Continued delay is also allowing European protectionists to argue effectively that this country is lapsing into protectionism so Europe may as well move in the same direction. We must reverse that direction soon, or moves and counter moves in trade will jeopardize our exports, especially of agricultural products, and poison our relations with a number of countries.

5. Delay in forming a Trade Study Commission to work on our future trade policy will delay its report. We cannot move on this until the President announces it in his message. UK accession to the Common Market and basic changes in the Market's protectionist Common Agricultural Policy may require U.S. decision in the late spring. These have major foreign policy implications. Without a Commission report and a decision on how we are to take advantage of these changes, the U.S. also stands to lose heavily in its exports--again, especially in agriculture.

6. The President and the Congress have no credible response to quota pressures until submission of this bill proves that the Administration intends to relax the escape clause and adjustment assistance. The resultant pressures for quotas jeopardize our foreign relations with numerous key countries in Europe, Japan, Korea, Taiwan, etc.

7. The new retaliatory provisions in the bill will give strong public evidence that this Administration will adopt a new and tougher stance in defense of our trade rights. We need this now to retain business and labor confidence.

Washington, October 31, 1969.

TO
The Secretary of State
The Secretary of Treasury
The Secretary of Agriculture
The Secretary of Commerce
The Secretary of Labor

SUBJECT
Tariff Preferences for Developing Countries

The President has approved U.S. participation in a system of tariff preferences for developing countries, subject to Congressional approval.

The President has made the following decisions on the U.S. position on preferences, to supplement the Under Secretaries' guidance to our negotiators:/2/

1. The scheme should be liberal, conferring the maximum range of benefits on the developing countries suggested by the Under Secretaries. Preferential duties should be set at zero.

2. For manufactured and semi-manufactured products, the scheme should except from preferential treatment only textiles, shoes, and petroleum and petroleum products.

3. The scheme should be simple, relying on the standard escape clause and adjustment assistance as safeguards for domestic industry.

4. All major developed countries must adopt a common scheme.

5. If duty-free treatment cannot be achieved, we should exclude from our preferences countries which receive selective preferences in developed country markets for products covered by the scheme.

6. Developing countries should eliminate reverse preferences which discriminate against the United States to become beneficiaries of U.S. tariff preferences.

Henry A. Kissinger

During meetings in Washington November 19-21, 1969, Japanese Prime Minister Sato and President Nixon discussed a wide range of matters of mutual concern, including bilateral trade and textiles. See Foreign Relations, 1969-1976, volume III, Document 30. Additional documentation on the Summit is scheduled for publication in a forthcoming volume of Foreign Relations.

Pursuant to NSDM 29 (Document 218), during the week of November 3, 1969, the United States presented its preference proposal in the Development Assistance Committee of the Organization for Economic Cooperation and Development. In a November 13 memorandum reporting on that initiative to Under Secretary of State Richardson, Philip Trezise noted that the U.S. proposal was far more liberal than others had expected. He indicated that the Trade Committee Report, with the U.S. and other proposals, would be delivered to the UNCTAD Secretariat on November 15, and the United States would release its proposal in Washington at the same time. Trezise reported that there would be a high-level meeting at the OECD in early December to attempt to reconcile divergent views. (National Archives, RG 59, S/S Files: Lot 83 D 305, NSDM 29)

On November 28 Trezise sent a memorandum to Nathaniel Samuels recommending that he discuss the U.S. preference proposal with EC Ambassadors in Washington. A notation on this memorandum suggests that Samuels approved a luncheon meeting on December 18. (Ibid.)

In his December 12 Weekly Activities Report to Secretary Rogers, Elliot Richardson, Alexis Johnson, and Samuels, Trezise noted that Ambassador Greenwald at the OECD reported some progress toward a common preference scheme at an informal meeting on December 11, and that a supplementary paper reflecting common ground would be prepared for UNCTAD. (Ibid., E Files: Lot 71 D 164, December 12, 1969) He also reported that Samuels would lunch with the EC Ambassadors the coming week. No record of that luncheon meeting was found.

The proposed "U.S. Illustrative Generalized Tariff Preferences for Developing Countries," revised November 3, which was tabled in the OECD Trade Committee the week of November 3, reads as follows:

"The U.S. is prepared to participate, subject to Congressional approval, in a system of tariff preferences for developing countries, which should be liberal and should confer the maximum range of benefits on the developing countries. We consider that all the major developed countries must participate in the system and do their fair share.

"The U.S. proposal contains the following elements:

"1. Preferential duties set at zero.

"2. Preferences granted on manufactured and semi-manufactured products in BTN Chapters 25-99, excepting only textiles, shoes, and petroleum and petroleum products. Preferences also granted on a selective list of agriculture and fishery products.

"3. A simple scheme, without ceilings on preferential imports, relying on the standard escape clause and adjustment assistance as safeguards for domestic industry.

"4. A temporary scheme, i.e. not more than ten years, which would not constitute a binding commitment and would not impede future tariff reductions on a most-favored-nation basis.

"5. A common scheme to be adopted by all major developed countries.

"6. Developing countries which receive special preferences in developed country markets for products covered by the scheme would be excluded from preferences.

"7. Developing countries which grant reverse preferences to developed countries would be excluded from preferences.

"8. The U.S. has reached no judgment regarding beneficiary countries. In general, preferences to be granted to all developing countries.

"9. With respect to agricultural and fisheries products in Chapters 1 to 24 of the Brussels Nomenclature, preferences would apply to a positive list of items. The final identification of the items to be included in the positive list will be influenced by the nature of the agricultural provisions of the preference scheme to be adopted and can only be determined after further international discussion and domestic consideration. An illustrative positive list of agricultural and fishery products is attached." (Ibid., S/S Files: Lot 83 D 305, NSDM 29)

Washington, December 23, 1969.

SUBJECT
New Preferential Trade Agreements Between the EC and Other Countries

The purpose of this memorandum is to call to your attention the serious attrition that is taking place in the observance of most-favored-nation treatment by some of our major trading partners and the threat that this poses to the postwar international trading system. By deciding global trade policy issues solely in the context of bilateral negotiations with such countries as Spain, we run the danger of accelerating that attrition. Since its formation, the European Communities have, through association agreements, progressively departed from the GATT rules prohibiting discrimination. The EC, in its plans for negotiations with Spain and Israel, clearly are planning a selective exchange of preferences that are explicitly proscribed by the GATT. Our attitude toward these agreements needs urgent examination before precedents are established which may make future resistance impossible and which may lead to the dissolution of the GATT.

1. The general question of the proliferation of reciprocal preferential trade arrangements should be raised with our major trading partners bilaterally at the highest political levels and multilaterally in the GATT. Our concern and our intention to act if further preferential arrangements are concluded could be conveyed to the EC in a letter from President Nixon to the President of the Commission of the European Communities, Jean Rey, and to the Chiefs of State or of Governments of the six EC countries. Such a letter could stress that the United States has been and is willing to accept limited economic disadvantages stemming from preferential arrangements among EC member states because of the offsetting political advantages to it from European unity, but that such a balance cannot be expected to accompany preferential arrangements with Spain, Israel and other countries.

2. Agreement among the agencies concerned should be obtained before consideration of NSSM 46/2/ so that the decisions with regard to Spain will be consistent with overall United States trade policy on this question.

The postwar international trading system has been constructed on a basic rule--unconditional most-favored-nation treatment (MFN). Applied to the member countries of the GATT, any advantage granted by one country to products from another country shall be accorded immediately and unconditionally to similar products from all member countries. The two most important exceptions to this principle are preferential arrangements in effect at the time the GATT was negotiated (1947) and preferential arrangements granted by members of a customs union or free trade area to each other. The six major multilateral rounds of tariff negotiations in the postwar period were based on the MFN rule, as is the network of rights and obligations of each GATT member state.

Preferential arrangements in effect at the time of establishment of the European Economic Community between some of its member states (principally France) and their colonies or former colonies in Africa were incorporated and expanded to all EEC countries in the Yaounde Convention between the EEC and 18 African countries. The United States expressed its opposition to this Agreement as inconsistent with the GATT rules but took no action to make the opposition effective. The EEC also concluded association agreements with Greece (1961) and Turkey (1963) providing for reciprocal preferential arrangements but, unlike the Yaounde Convention, these agreements anticipate eventual full accession to the EEC after a long transitional period.

Preferential trade agreements between the European Communities (EC) and Morocco and the EC and Tunisia went into effect earlier this year. A Working Party has been established in the GATT to examine the consistency of these agreements with GATT rules. In an effort to diminish the discriminatory effects of the agreements with Morocco and Tunisia on some of the other major citrus suppliers, the EC granted further discriminatory preferential treatment to Spain and Israel, for certain citrus fruit. In the face of vigorous opposition and announcement of intention to retaliate by the United States, and a clear indication that the EC's request for a GATT waiver would be denied, the EC has announced its intention to withdraw the citrus preferences for Spain and Israel. Two observations on this series of events are relevant here: First, discriminatory trade agreements will lead to further discriminatory agreements; and Second, to the surprise of many, the EC cannot necessarily count on the support either of the EFTA countries requesting entry or some of the potential beneficiaries of preferential agreements for support when the basic MFN rule is violated in such a gross manner.

The EC has also concluded other preferential trade agreements, which are not yet in effect, with East Africa (Kenya, Tanzania and Uganda) and with Nigeria.

Under a mandate from the EC Council, the EC Commission is currently negotiating preferential trade agreements with Spain and Israel. The Council has authorized exploratory preferential trade agreement discussions with Lebanon and the UAR, and similar discussions can be expected in the near future with Austria, Yugoslavia and several other European and Mediterranean countries.

While the United States has objected to certain features of these arrangements and has occasionally expressed its opposition in principle, it has not thus far energetically opposed the trend. Our policy was expressed in 1967 as follows: "consistent with overall U.S. policy objectives, we intend to oppose all new EC associations except those with European countries leading to full EC membership within a reasonable period of time and which will result in internal free trade in both industry and agriculture, adoption of a common external tariff and joining in common agricultural systems. We cannot therefore condone any association arrangement whose purpose is principally a preferential trading relationship." (CA-5638, Jan. 30, 1967)/3/

This has been a good statement of policy, but in the absence of some countervailing action it has apparently been ineffective. The Commission's negotiating mandate for Spain indicates that the prospective agreement will not aim at full EC membership (because of Dutch and Belgian political objections to entry of Franco's Spain) and that a preferential trading relationship will be formed. The same pattern is likely in future agreements with other countries and may be accelerated by the forthcoming U.K. entry negotiations. In the case of Austria, for example, the neutrality obligations under the State Treaty suggest that a tie with the EC may result in no more than a preferential trade agreement. Other historic neutrals such as Sweden and Switzerland would likely follow suit. The United States would have to expect that virtually all of Western Europe, Africa and much of the Middle East and Asia would be involved in a vast network discriminating against the United States. Even parts of Latin America could be drawn in as evidenced by Argentina's recent overtures to the EC for some kind of trade agreement providing guaranteed access of certain Argentine products to EC markets.

United States trade and prospects for improving our balance of payments would be severely affected. Congressional reaction to any increase in discrimination against U.S. products could involve significantly increased protectionism which in turn would likely disrupt the framework for global cooperation with Europe in the political, economic, financial and military areas.

This issue is raised by the draft NSC paper "U.S. Policy Toward Spain--NSSM 46." The paper considers certain trade policies the U.S. might adopt toward Spain in an effort to maintain the most extensive base rights possible or alternatively to maintain a lesser military capability. These include acquiescence in a preferential trade agreement between the EC and Spain. Although this draft paper recognizes that such policies would affect U.S. trade interests worldwide, the discussion is presented largely only in terms of U.S. policy toward Spain. I understand a similar paper on U.S. policy toward Israel is in the early stages of preparation.

If the European Communities conclude preferential trade agreements with Spain and Israel, the Administration would have no choice but to react vigorously. Otherwise, in the face of the political reaction that can be expected in the United States, it would have great difficulty in continuing our own adherence to the postwar trading system, including MFN. The trade coverage of the preferential agreements is likely to be so broad, and the damage to U.S. trade interests so extensive, that an offer by the EC (and Spain) to make compensatory tariff reductions could hardly compensate for the damage done. The United States should make it clear now that it opposes such agreements, that it is prepared to act--unilaterally if necessary--if such agreements go into effect, that the wholesale violation of the most basic GATT rule is noncompensable, and that the EC would bear the major burden of any retaliatory action by the United States.

In taking action against the spread of preferential arrangements, the U.S. would probably incur the displeasure of some LDC's. However, implementation of a generalized preference system should assist them in achieving their objective of expanded export earnings and would not be at the cost of exports from other LDC's who have not concluded preferential arrangements with the EC. The United States has made it clear that the elimination of existing reverse preferences (preferences granted by an LDC to products of certain developed countries) would be a sine qua non for an LDC to obtain beneficiary status in the U.S. under a generalized preferences scheme.