Washington, February 9, 1972.

ISSUES FOR CONSIDERATION REGARDING THE
OECD HIGH LEVEL GROUP

The paper circulated by Jean Rey has several shortcomings./2/ However, it is most deficient in its treatment of tariff dismantlement (and the related issues of preferences and safeguard arrangements), agriculture and non-tariff barriers. To prepare for our further work in the Group, it would be helpful if we could discuss and agree upon the substance of what we would want to see in the final report and our strategy for achieving it over the next two months.

There is a theme in the Eberle paper of December/3/ which it would be highly desirable to see adopted as the unifying concept of the HLG report. This is the idea that the future world trading system should be based on the principle that the costs, damages or other trade distorting effects of agricultural, industrial or commercial policies should be borne, to the maximum extent possible, by those nations (or economic groupings) which determine such policies and should not be transferred to other countries except on terms and to an extent mutually agreed by the interested parties.

Implementation of this principle should be the ultimate objective for far reaching, long-range reform of the trading system. The report of the HLG to be of value should define the specific ultimate objectives and suggest, in general terms, the process by which the world can arrive at the goal of "fair trade."

In terms of the issues which are of key concern to us, the principle translates into policy objectives as follows:

1) Tariffs and Preferences. As outlined in the Eberle paper, our objective should be elimination of all industrial tariffs by the major developed countries over a 10 or 15 year period. Ultimately, this assures that countries excluded from the EC preferential system will no longer have to bear the discriminatory cost of this European (and, as applicable, Mediterranean, African and Caribbean) policy.

The Rey paper does not define the ultimate objective, limiting itself just to a 50 percent cut to be achieved by 1980. This part-way approach naturally leads him to an irrelevant concern about extra-high duties and how to deal with them. The only satisfactory way to break through a sterile argument about tariff disparities/4/ is to accept elimination as the goal from the outset. Only in this context can the disparities issue be disposed of in a way which all must recognize as fair.

2) Safeguards. The Eberle paper outlines a general concept for dealing with necessary exceptions to the free trade principle and safeguards which will be needed. We should consider whether we should press for discussion of an orderly marketing system modeled along the Eberle outline in the HLG report, or some alternative to it. The Rey treatment of this issue (p. 21 of his paper) is very general and vague.

3) Agriculture. The implications of the general principle of non-transfer of costs in the agriculture trade sector are clear. It means, in effect, organizing world trade in agriculture mainly according to factors of comparative advantage. It is also clear that this concept has met with heavy resistance from most of the Europeans in the Group. Rey's proposed "Code of Good Behavior" contains several elements of a first-stage cut of the problem which go beyond most European thinking to date. The issue here is how hard should we press for full acceptance of the principle now and what, if any, compromises should we consider in the interests of a more unanimous report? As an alternative to compromise, how do we ensure that our viewpoint is adequately expressed in the report and what should we do to get support for it from other members of the Group?

4) Non-Tariff Barriers. The application of the general principle to non-tariff barriers is explicitly discussed in the Eberle paper (p. 24). Do we need to be more explicit regarding particular NTB's or other trade-distortions? Should we try to get the report to identify a list of NTB's of particularly great importance and suggest specific ways of handling them? Rey's breakdown of NTB's seems overly simplified, ignoring the fact that many NTB's are not susceptible to elimination but only harmonization with a view to reducing their trade-distorting side effects.

Against the probability that the Group will remain divided on one or more key issues (e.g., agriculture), we have two general options:

1) To accept the Rey deadline of a final report to the May Ministerial meeting and try to rally as much support as possible within the Group to our views. The Report would thus contain perhaps several majority/minority explicit splits.

2) To seek to postpone submission of a final report until later this year./5/

The choice of options should be determined mainly by our judgment of how the timing and content of the Report is likely to affect our efforts to get public and Congressional acceptance of bold new international trade legislation. We should discuss whether a weak Report in May would be more damaging than a weak one next December or vice-versa.

Another strategic consideration which we should discuss is the advantages and disadvantages involved if Bill Eberle were to take a very firm position now (or later) on certain key issues, indicating that he could not subscribe to a report which did not meet certain minimum criteria (e.g., agriculture, tariffs, NTB's). If this tactic seems desirable, what specific criteria should determine this posture?

In a March 6, 1972, briefing paper for Henry Kissinger's March 7 meeting with Treasury Secretary Connally, the NSC Staff noted that the stalled Canadian trade negotiations were not a problem unless the United States undertook unilateral actions to redress the adverse trade balance. The paper suggested that Kissinger tell Connally that mutual retaliatory actions during the President's April 13-15 visit to Canada would not be helpful. The paper recommended that Kissinger ask Connally to develop a negotiating scenario for after the Canadian elections that spring. (National Archives, Nixon Presidential Materials, NSC Files, Agency Files, Box 290, Treasury, Volume III) Kissinger and Connally met for lunch at the Treasury Department on March 7. (Library of Congress, Manuscript Division, Kissinger Papers, Box 438, Miscellany, 1968-1976, Record of Schedule) No record of their meeting has been found.

A March 28 briefing memorandum prepared for Kissinger's March 29 luncheon meeting with Connally informed Kissinger that the Canadian Government had been taking a hard, critical line on the U.S. stand in the trade negotiations and that Prime Minister Trudeau had criticized the U.S. position on changes in the 1965 automobile pact. Secretary Connally reportedly was working on recommendations for the President's April 13-15 trip. The paper noted the "passion" Connally evoked in Canada and questioned whether he should accompany the President. (National Archives, Nixon Presidential Material, NSC Files, Agency Files, Box 290, Treasury, Volume III) Connally was not present on the President's flights to and from Canada. (Ibid., White House Central Files, President's Daily Diary)

The March 28 briefing memorandum reminded Kissinger that Prime Minister Trudeau hoped President Nixon would announce a "Declaration of Canadian economic independence" during the visit but noted that, in view of the President's remarks on the state of the trade negotiations during a March 24 press conference (Public Papers of the Presidents of the United States: Richard Nixon, 1972, page 496), this was unlikely. Nevertheless, in President Nixon's April 14 address to a Joint Meeting of the Canadian Parliament, the President said: "Canada is the largest trading partner of the United States. . . . Our economies have become highly interdependent. But the fact of our mutual interdependence and our mutual desire for independence need not be inconsistent traits. No self-respecting nation can or should accept the proposition that it should always be economically dependent upon any other nation. And so, let us recognize once and for all that the only basis for a sound and healthy relationship between our two proud peoples is to find a pattern of economic interaction which is beneficial to both our countries--and which respects Canada's right to chart its own economic course." (Ibid., page 538)

On March 27, 1972, Peter Flanigan, in his capacity as Executive Director of the Council on International Economic Policy, sent a memorandum to the members of the Council informing them that the President had requested that preparatory work for the coming trade negotiations be undertaken, with specific responsibilities assigned to interested agencies. The Special Trade Representative would have overall responsibility for coordinating and reporting to the CIEP on inter-agency activities related to trade negotiations in both the preparatory and negotiating phases, as well as ensuring that the CIEP's guidance was implemented. Flanigan attached a seven-page paper, "Preparation for 1973 Negotiations," setting out assignments. Among the tasks assigned were data preparation on trade flows by country and "economic" sector as well as by BTN (Brussels Tariff Nomenclature) and TSUS (Tariff Schedule of the United States) basis, tariff averages, GATT bindings and non-tariff barriers (NTBs); providing for computer requirements; dealing with EC enlargement; setting export and import priorities; and intelligence collection. (Washington National Records Center, Department of the Treasury, Files of Under Secretary Volcker: FRC 56 79 A 15, CIEP Study Memoranda)

Work on some issues was already underway, pursuant to several Council on International Economic Policy Study Memoranda in 1971. Aside from CIEPSM No. 8 regarding tariff preferences (Document 257), a number of additional Study Memoranda had been issued in October: Adjustment Assistance (CIEPSM No. 9, October 7); Contingency Plan for Possible 1971 (and 1972) Trade and Investment Legislation (CIEPSM No. 10, October 10); U.S. Policies Toward International Agricultural Trade (CIEPSM No. 12, October 12); U.S. Export Expansion (CIEPSM No. 13, October 13); and GATT (CIEPSM No. 15, October 18). (All in National Archives, RG 59, S/S Files: Lot 82 D 126, CIEP Study Memoranda) The last (No. 15) was to examine the role and effectiveness of GATT as an institution.

Two of these items were on the table for the January 3 CIEP meeting: preferences and adjustment assistance; see Document 264. Preferences were also taken up at a January 7 CIEP Review Group meeting; see Document 265. Adjustment assistance was slated for a January 12 Review Group meeting, based on a paper provided by Under Secretary of Labor Silberman. (Washington National Records Center, Department of the Treasury, Files of Under Secretary Volcker: FRC 56 79 A 15, CIEP Meetings)

Washington, May 11, 1972.

SUBJECT
Trade Negotiation Objectives

Attached for your information (Tab A) is a memorandum from Secretary Rogers forwarding a report from Under Secretary Irwin on US-EC consultations in Brussels last month. In his report, Irwin cautions that we not underestimate the serious difficulties ahead with the EC and points to their insistence that the forthcoming trade negotiations involve reciprocal concessions.

In this regard, Irwin refers to a draft Treasury memorandum on trade negotiating objectives/2/ suggesting a non-reciprocal basis for those negotiations and the possible avoidance of general industrial tariff reductions. Irwin fears that such an approach might jeopardize the present "state of relative calm" in our relations with the Europeans.

I am reworking the draft memorandum, based on discussions with Treasury, STR, State and OMB. When we have either reached agreement or narrowed the areas of disagreement I will report to you.

REPORT BY UNDER SECRETARY IRWIN ON US-EEC
CONSULTATIONS IN BRUSSELS
APRIL 27-28, 1972

Our consultations with the EEC Commission concluded this morning with a discussion of trade relations. We were impressed with the signs of growing strength and sense of purpose on the part of the Community institutions which now feel that the success of the enlargement negotiations has shown that the EEC has the capability of achieving over time the fullest potential. Dahrendorf and others stressed that we should not mistake this sense of accomplishment for greater progress than has really been achieved. The Community--in the fullest sense of political, economic and monetary integration--has a long road to travel, but the members sense they are now well embarked.

Both the representatives of member states and Dahrendorf stated that the Community meant what it said in the December declaration of intent when it came out strongly for major trade negotiations beginning in 1973./4/ They want to negotiate trade issues and in the process achieve both liberalization and the alleviation of trade problems for third countries which may flow from the new agreements.

As background to our talks on specific issues, I stressed that the Europeans should not underestimate the psychological as well as real effects of their actions on the US, pointing out that, while Community moves toward EFTA neutrals and LDCs might appear justified and commendably motivated to them, their agreements could easily affect adversely the climate in the US despite the basic support the President and the American people generally have for the objectives of European unification. This is particularly true at a time when the US is looking for some sign of sensitivity from Europe to our particular economic concerns.

We should not underestimate the serious difficulties ahead. It seems clear that the Europeans expect trade negotiations to cover all outstanding areas including tariffs and that they would oppose negotiations which do not involve reciprocal concessions. This point may be important at the moment because Secretary Connally has drafted a Memorandum for the President which suggests more of a non-reciprocal basis for future negotiations and possibly avoiding tariff cuts./5/ We have the impression on the basis of our talks here that these concepts are so at variance with the thinking of the Europeans and with the preliminary thinking of experts in the Department and, I am told, in other agencies, that they should be carefully considered within the Administration before the President commits himself to proposals which may close some or all of his options in this crucial area. We now have a situation where our political and economic relations with our European allies are in a state of relative calm, largely as a result of the successful conclusion of the Smithsonian Agreements./6/ It would be too bad to jeopardize this development by the adoption of a proposal which had not been adequately discussed and refined.

Bill Eberle has asked Peter Flanigan to request that this memorandum be held in abeyance until we can have an opportunity to discuss it.

At the same time I talked with Secretary Connally about the Chile debt negotiations and my talk with Allende,/7/ we agreed, along with 2 or 3 staff members on each side, to meet and talk about State and Treasury views on the monetary and trade negotiations. I understand this meeting is set for May 3. At that time, I would expect to discuss the issues raised by Treasury's draft.

There obviously are legitimate connections between monetary and trade policy. What we would like to explore is whether these can be dealt with in a way which will both benefit our long-term economic interests and avoid an unnecessary strain on our alliance relationships.

Washington, May 17, 1972.

A delegation of ten footwear industry people visited STR on May 17th./2/ The discussion started on a relatively low key, with their three concerns being stated as hides, suspension by the Price Commission of any further consideration of requests for price increases, and imports.

Most of the opening presentations concerned the first two issues. It was only after we pointed out that STR had a minor role in hides, had little if any relation to the Price Commission, and was only directly involved in trade matters, that the delegation began to stress footwear imports. It did not appear that the ten had previously coordinated their position, nor was there any organized effort to present a factual case that imports are causing serious injury. Rather, this fact was alleged in a variety of individual ways by various members.

Several members appeared at the outset to favor some restraint arrangement at about current levels of imports and to stress the need for some scheme which, in the future, would prevent sudden changes or disruptions. By way of illustration, however, they referred only to the recent disruption caused by hides prices rather than to any recent import activity. Several stated flatly that they could live with the present degree of import penetration and were concerned primarily with future uncertainties.

After we had explored these ideas for a while, several others joined in for the first time to argue that the industry could not possibly live with the present situation. Given this range of views, we attempted to find a consensus by asking the hypothetical question: If hides prices returned to more normal levels and if the Price Commission approved pending price-increase requests, what level of imports could they really live with?

From this point on the meeting resembled a negotiating session. Some argued that a 1965 base was necessary. Others allowed that the "industry" had accepted the base period of the Mills Bill./3/ By the end of the meeting no one was voicing any acceptance of something near current levels. If there was any consensus among those still expressing a view, it seemed to be in favor of a 1968-69 base. It also seemed likely that the group was going back to the Association to try to come up with a position. Our efforts to explain that our hypothetical question was not intended to be a request for a position were of little avail. Some seemed shocked, despite the obvious differences aired amongst themselves, at the suggestion that views seemed to differ within the "industry."

Among other points, they stressed the inadequacies of seeking restraint only from Spain,/4/ arguing at length that the new countries to which U.S. and other producers would then shift was legion. Much was made, for example, of the attractive terms now being offered U.S. producers in British Honduras.

After the possibilities of a tariff quota were rather painstakingly explained, most felt that, given the over-quota rate, it would not be of any value to them. Regarding a rollback, they asserted there would be no trouble whatsoever in quickly replacing the lost imports with domestic-made footwear at comparable prices.

The dominant impression was that opinions in this group were diverse and that little coordination or agreement had been reached prior to the meeting. Those whose company situations or policies would permit a larger volume of imports were initially quite outspoken, but pulled in their horns as others in the delegation subsequently voiced different views. The open discussion of acceptable imports levels ended up with those initially admitting to being able to live with higher levels becoming silent.

A second dominant impression is that some scheme which provides some assurance for the future, some "orderly sharing" as several put it, is perhaps more important than any other feature of a solution. The "need to be able to plan" was a recurring phrase.

Tokyo, July 29, 1972, 11 a.m.-noon.

PARTICIPANTS

Japan
Honorable Kakuei Tanaka, Prime Minister of Japan
Mr. Kiyohiko Tsurumi, Deputy Vice Minister of Foreign Affairs
Mr. Akitano Kiuchi, Secretary to the Prime Minister
Mr. Hidetoshi Ukawa, Ministry of Foreign Affairs (Interpreter)

United States
Ambassador William Eberle, Special Representative for Trade Negotiations
Ambassador Robert Ingersoll, U.S. Ambassador to Japan
Mr. T.G. Tsukahira, Political Officer, United States Embassy, Tokyo (Interpreter)

Ambassador Eberle congratulated the Prime Minister on his election victory and conveyed a personal message from the President. He also conveyed the importance the United States puts on the Japan-U.S. relationship. Mr. Tanaka after expressing thanks said he had just spoken to MITI Minister Nakasone and understood that the Hakone Talks had achieved about 60 to 70 percent of U.S. expectations./2/ Ambassador Eberle replied it was a most useful meeting. The Japanese team, headed by Mr. Tsurumi, had been most cooperative. Both sides had worked well toward reaching understandings. One serious disappointment was the very limited progress made on the question of resolving the U.S.-Japan trade imbalance. Ambassador Eberle said that he did not want to be in a position of requesting or demanding that certain things be done; he wanted the problem thoroughly understood on both sides, and hoped that Japan would come forth with suggestions on our mutual problem.

Mr. Tanaka said that he had made clear from the outset that friendly relations with the United States was a matter of top priority with his administration. If the Hakone Talks had not been as fruitful as hoped he would want to continue to work on the remaining problems in a timely manner. His goal was to see a normal, expanding trade relationship between the United States and Japan.

Ambassador Eberle expressed appreciation for this view. The concern of the U.S. side is the trade imbalance. In our judgment, the trade balance is likely to become worse rather than better in the next two years because of structural factors in the Japanese economy. On this the U.S. and Japanese viewpoints differ. However, we do agree that problems remain to be resolved. It is important to deal with them now, and it would be in our mutual interest to find areas of further progress before the meeting in Hawaii on August 31./3/

Mr. Tanaka said that since U.S.-Japanese relations are so very important it is essential not to allow the trade imbalance to increase and Japan would strive to reduce this imbalance and bring about a more normal relationship. However, it may be difficult to do anything significant by August 31. In the series of meetings held since last year--the cabinet level meeting in September, the San Clemente discussions,/4/ the Eberle visit in May, and now Hakone--there has been some progress each time. The next meeting (in Hawaii) should also show an advance. Mr. Tanaka said that he intends to see that the trade imbalance does not get worse and has already issued instructions that measures should be taken to reduce the balance below the $3 billion level by the end of this Japan Fiscal Year (March 31, 1973). He would point out, however, that looked at from a multilateral point of view, there is a balance of trade as between the four areas: Japan, Middle East, Oceania or Pacific countries, and the United States.

Ambassador Eberle said he completely agreed that the multilateral balance had to be considered, but wanted to stress that the U.S.-Japan imbalance was so great as to constitute a serious distortion of the total market. He said he appreciates the Prime Minister's commitment to go below the $3 billion level in this Japan Fiscal Year. He urged that working party meetings be set up such as the team meetings agreed on enriched uranium, uranium ore, and related matters, and would hope that these could be decided on prior to August 31.

Mr. Tanaka agreed that it was a good idea to expedite meetings in the uranium and aircraft purchase areas. As for other matters, he would encourage maximum opportunities for exchange of views. Meetings between the two Governments should not always be negotiating sessions. Our fundamental aim should be to make the relations between the United States and Japan normal and healthy. Mr. Tanaka said it is fortunate that we have as U.S. Ambassador in Japan such a qualified person as Mr. Ingersoll and he hopes continuous discussion with minimum publicity could be carried on through him and his staff.

Ambassador Eberle said that on our side we agreed with the Prime Minister's high regard for Ambassador Ingersoll. We also agreed with the Prime Minister's view that there should be quiet talks on a continuing basis. The atmosphere or impression of confrontation is created by the press and is not useful. Ambassador Eberle again stressed that his basic aim had been to avoid a posture where the United States would be making demands and requests. He believed that Japanese side should also be making suggestions for solutions to the problem. It was no longer a matter of confrontations, but rather a matter of finding solutions together to our mutual problems.

Mr. Tanaka again said his basic policy was to keep U.S.-Japan relations on good terms and he believed that a continuing series of meetings was essential to deal with problems as they arose. If left too long, as in the case of the Japanese National Railways fare problem with which he is currently faced, problems become bigger, more conspicuous, and politically treacherous. He hopes he could keep continuous contact with Ambassador Ingersoll both official and personal and try to stave off problems before they became too large. Mr. Tanaka suggested that Ambassador Eberle might come to Japan more often, sometimes informally. Once a year visits give the press reason to make a fuss. Normal diplomatic channels should also be used more.

Ambassador Eberle agreed. However, depending on the problem, he pointed out that there is also need for technical discussions. Hence he urged the early organization of special teams for talks on uranium and related matters. Experts meetings in the agricultural field, computers, integrated circuits, and the Japanese distribution system are also desired. These are essential to improvement of our mutual difficulties.

Mr. Tanaka agreed on the desirability of such talks, and said we should keep in frequent touch. For emergencies, he noted, there is even the hot line linking his office with Washington directly.

Ambassador Eberle expressed his great respect for Ambassador Ushiba in Washington and said it would be possible to have continuing communication through him also. He stressed, however, that these normal links should be backed up by technical meetings and political talks on a selective basis as necessary.

Mr. Tanaka said both the possibilities for the United States Government and Government of Japan depend on upcoming elections and therefore understanding and support of the people were needed. These continuing discussions help educate the people, and this is essential. He believed that U.S.-Japan problems should be solved by promoting joint understanding rather than by "negotiation".

Ambassador Eberle expressed agreement with this general philosophy but said there is a problem he believes is non-political. This is in the area of agricultural purchases where previously agreed upon percentages of the Japanese market have not been met, and the U.S. share has been unduly reduced. Increasing the U.S. share could conceivably give rise to international concerns but is not likely to be a domestic problem.

Mr. Tanaka said he agreed generally and would pursue a policy of increasing agricultural purchases from the United States. He said he understands in particular the orange problem, but pressures from local growers is a particularly serious problem. A good example of farmer pressures is the current problem of the rice price where the rice growers have exerted tremendous pressure on the Government. Mr. Tanaka recalled, however, that 15 years ago when it was proposed that Coca Cola and Pepsi Cola be allowed entry into the Japanese market there was powerful opposition from the cider and beer interests, but he had eventually pushed it through. He therefore believed that given time even these problems can be solved.

Ambassador Eberle said that since time was drawing short he would like to raise two final matters. First, he would like to make the point again that increasing the U.S. share of agricultural purchases would not be "abnormal." (Japan would buy these products from abroad anyway.) The second matter was what should be told to the press.

Mr. Tanaka said that the press might be told that he said that the U.S.-Japan relationship is very important and that it was desirable that Japan buy more from the United States. Accordingly, steps would be taken to reestablish normal trading relationships through discussions by specialists in a spirit of common endeavor. He said that the press might be told also that he had noted that the United States had expressed appreciation that Japan had made positive moves at Hakone. A 100 percent solution was not achieved but both countries were constantly working toward a common goal and Japan had agreed to make efforts to improve the trade imbalance between the United States and Japan by increasing purchases to the extent possible and by other measures. Mr. Tanaka added that another point might be that he had mentioned the possibility of taking measures to stimulate the domestic economy so that Japanese imports would increase.

Ambassador Eberle said he would like to have it stated that Mr. Tanaka had made a commitment that Japan would work toward bringing the trade balance down. The U.S. press, he pointed out, feels that there is a lack of commitment to do this on the part of the Government of Japan.

Mr. Tanaka said to tell the press that his administration would devote its best efforts in that direction. He added, off the record, that he would want Ambassador Eberle to be assured that the Tanaka Government has just begun, but plans to be around for a long time, and it will work to improve the trade balance. He thanked President Nixon for his greetings and said he looked forward to his meeting with the President in Hawaii to renew a ten-year old friendship.

President Nixon and Japanese Prime Minister Tanaka met in Hawaii August 31-September 1, 1972, to discuss a wide range of topics of mutual concern. In addition to political and security issues, the two leaders exchanged views on monetary, trade, and other economic matters. They reaffirmed, for example, the February 9, 1972, joint statement (Document 268) to begin and support trade negotiations on industry and agriculture in 1973. "In this connection," the joint statement issued at the end of the Hawaii meeting read, "they noted the need in the forthcoming trade negotiations to lay the basis for further trade expansion through reduction of tariff and nontariff barriers as well as formulations of a multilateral non-discriminatory safeguard mechanism." The statement also indicated that Prime Minister Tanaka agreed to try to promote U.S. imports and "to reduce the imbalance [of trade] to a more manageable size within a reasonable period of time." For full text, see Public Papers of the Presidents of the United States: Richard Nixon, 1972, pages 844-846.

For documentation on the economic aspects of the Summit, see Foreign Relations, 1969-1976, volume III, Documents 97-99.

Washington, September 25, 1972.

MEMORANDUM FOR
Special Representative for Trade Negotiations

FROM
Peter M. Flanigan

SUBJECT
Trade Negotiations with the European Community

The President in the light of the discussions in the Council on International Economic Policy of September 11, 1972 relating to your August 21, 1972 memorandum entitled "US Response to Developing US-EC Trade Confrontation"/2/ has decided that for the present you should pursue a policy of modified confrontation exerting controlled but mounting pressures on issues involving both our trade interests and the principles of the present system. This should be done bearing in mind the overriding importance of our political relations with Europe and the probability that our trade problems cannot be satisfactorily resolved except in the context of larger policy considerations.

On September 11, 1972, President Nixon met with members of the CIEP Executive Committee to discuss trade issues relating to the European Economic Community. A record of that meeting is printed in Foreign Relations, 1969-1976, volume III, Document 100. Following that meeting CIEP Executive Director Peter Flanigan sent William Eberle a memorandum on September 12 informing him that, pursuant to the meeting, the President had decided Eberle should pursue a policy of "modified confrontation exerting controlled but mounting pressures on issues involving both our trade interests and the principles of the present system . . . bearing in mind the overriding importance of our political relations with Europe." (Ibid., Document 101) A copy of Flanigan's memorandum was sent to Henry Kissinger.

Flanigan, using essentially the same language, reissued his September 12 memorandum on September 25 as CIEP Decision Memorandum No. 14, Document 277. Presumably he had in mind the consultations with the EEC scheduled for early October in Washington, because a copy of the CIEPDM was sent to the Department of State where it would be available to Deputy Secretary of State John Irwin who would head the U.S. delegation to the bilateral consultations with the EEC.

The U.S.-EEC consultations were held in Washington October 5-6, 1972. For reports on the results of those consultations, see Foreign Relations, 1969-1976, volume III, Documents 102-104. A follow-up October 20 memorandum from Irwin to President Nixon regarding European Union Trade Arrangements with Spain and Israel is ibid., Document 105. Flanigan, in his October 11 report on the consultations to the President (ibid., Document 103) and Irwin, in his October 20 recommendation to the President regarding Spain and Israel, essentially repeat the President's language on the negotiating strategy set out in the CIEP Decision Memorandum.

By 1969 the United States, the unipolar economic and military power in the early postwar world, now shared economic power, and to a degree military power, with Western Europe and Japan. The Nixon administration believed, however, that the members of the European Community, Japan, and the other industrial democracies in the G-10 and the OECD were not bearing their share of the responsibility for managing adjustments to economic imbalances and for providing international assistance and international security.

In the U.S. view, correcting balance-of-payments imbalances was as much the responsibility of the surplus as the deficit countries. See, for example, Foreign Relations, 1969-1976, volume III, Documents 1, 2, 161, and 236. Trading practices (e.g., preferences, quotas, the CAP, border tax adjustments), exchange rate adjustments, military expenditures, and foreign assistance programs were all linked and were to be the subject of intense negotiations among the United States, the EEC, Germany, France, the United Kingdom, and Japan, and more widely throughout the G-10 and the OECD democracies. This was the foreign economic policy dimension of the Nixon Doctrine whereby the United States should and would remain engaged, but with others taking greater responsibility in economic and military affairs.

In view of the close linkage of the balance-of-payments, exchange rate, trade, and military burdensharing issues, the documents in Foreign Relations, 1969-1976, volume III and the documents on trade and commerce policies presented in this volume should be consulted in tandem for a comprehensive overview of the foreign economic policy of the Nixon Doctrine in relations with the industrial democracies. This is the case throughout the 4-year timeframe of the volumes, but is probably most explicit in the documentation dating from the fall of 1971 as negotiations progressed on all fronts on balance-of-payments issues, exchange rate adjustments, trade issues, and military burdensharing. It is not by coincidence, for example, that as new foreign exchange parities were worked out and the surcharge was lifted (see Documents 259-263) that a new offset agreement was negotiated with the Federal Republic of Germany, a burdensharing agreement was agreed to in NATO, and burdensharing discussions were underway with Japan (see Foreign Relations, 1969-1976, volume III, Documents 82, 84, and 86).

Secretary of State Rogers, in a December 2, 1971, memorandum to President Nixon put resolution of the economic issues in the context of other foreign policy issues, particularly the President's wish for a series of Summit meetings with European and Japanese leaders prior to his visits to the People's Republic of China and the Soviet Union in February and May 1972. (See ibid., Document 83.) Rogers' memorandum came at the conclusion of the G-10 Ministerial in Rome, where a framework for resolving the economic crisis that fall seemed to be falling into place. (See ibid., Documents 210-213.) C. Fred Bergsten, during a May 13, 2002, seminar at the Woodrow Wilson International Center in Washington, opined that the foreign leaders would only agree to the Summits if the economic crisis was resolved, a development that gave Henry Kissinger the opening to seize the international economic agenda from Secretary of the Treasury John Connally, and led to Kissinger, not Connally, conducting the monetary and trade agreement negotiations with President Pompidou at the Azores Summit December 13-14, 1971. (See ibid., Document 219.)

Washington, October 11, 1972.

SUBJECT
An Alternative Legislative Approach on Trade Authorities

STR proposes to approach the Congress with a package consisting of a request for authority to go to zero duties staged over an extended period of time, authority to negotiate reductions in NTB's which would be approved by Congress under a veto-type procedure, a mandate to negotiate free trade in grain-feed-livestock, and a combination of liberalized escape clause and adjustment assistance.

The possibility that a specific bill along these lines could be passed is founded principally on two considerations: (1) a strong Presidential initiative could put a liberal trade program through Congress, and (2) a liberal trade program will be made economically viable by improvements in the international monetary system.

There are grounds for questioning this approach and the Negotiating and Legislative Steering Groups have asked us for a fuller explanation of an alternative approach. It is true that a strong Presidential initiative could have a major impact, but it is worth remembering that the President himself, both on August 15 and in his Fund speech,/2/ emphasized the need for fairness in international trade rules. Important segments of Congress are very receptive to the fairness argument and are likely to insist on results in making the rules fair before giving broad authority to reduce U.S. trade barriers.

The legislation would be introduced next January against a background of a record United States trade deficit. This background will make it very difficult to obtain liberal trade legislation and reinforce the arguments of those seeking restrictions on imports.

Moreover, the Congress is skeptical of the ability of the Executive Branch to negotiate trade agreements advantageous to the United States. This concern is reinforced by a general desire to avoid ceding broad Congressional powers to the Executive.

Further, the STR proposal seems to run some very grave tactical risks. While it proposes to get strong negotiating authority in the tariff area, it would only obtain a mandate to negotiate in the NTB and agricultural areas with separate packages in these areas being brought back for Congressional approval. This would give our trading partners a wrong sense of priorities. They may be reluctant to negotiate with the United States in these two important areas of agriculture and NTB's which are so important to the President's concept of fairness and may only be willing to negotiate seriously in the areas where we have authority. On the other hand, if all segments of the negotiation were treated equally, there may be a better chance for a successful negotiation in all segments.

Judging from the ASP experience, even if we were able to reach agreements there is a high risk that the separate packages will generate a strong reaction from the specific industries affected and could be rejected by Congress. This judgment may also be made by our partners thereby weakening their willingness to negotiate seriously on these issues.

The STR proposal opens us up to the serious risk of Congressionally legislated highly restrictive import relief provisions that may vitiate the possibility of fruitful international negotiations.

Instead of requesting specific authority from Congress for trade negotiations, we could seek a general resolution supporting broad trade negotiations. The basic objectives of reduction of tariffs to zero over a period of years and adequate agreements in the nontariff barrier and agricultural fields as well as on making trade rules fair could be spelled out in an accompanying Presidential message. The Congress would be informed that the results of any negotiations would be brought back as a package--and the package would be negotiated so that Congress would have to accept it or reject it as a whole.

This proposal has significant advantages. It would put the Congress on record in favor of major trade negotiations and allow the President a vehicle for expressing his view of how the world should develop in the trade field. It would give maximum leverage to our negotiators to require meaningful agreements not only in the tariff area but also on nontariff barriers and agriculture because any agreement had to be sufficiently attractive to be approved by Congress. If foreign countries refuse to negotiate on this basis, they would take the onus for the failure of the negotiations. It would also provide the greatest leverage for negotiating changes in trade rules.

Furthermore, it would assure that the negotiations could begin on schedule in October 1973 and that there would be no long delays due to Congressional unwillingness to enact specific trade legislation. It would also avoid the possibility that trade negotiating authority would be hamstrung by protectionist import restriction legislation. It would avoid the need for the Executive to decide its position on import relief and adjustment assistance.

Moreover, it would be likely that the trade package would be brought back in an atmosphere of an improved U.S. trade position and an improved international monetary system.

On the other hand, it can be argued that this proposal has major disadvantages.

First, there is a problem of the credibility of our negotiators. It can be argued that without explicit Congressional authority to reduce tariffs other countries would not negotiate with us. However, a strong Congressional resolution endorsing trade negotiations plus the provision that the negotiated package had to be accepted or rejected by Congress as a whole would appear to give strong negotiating credentials to our representatives. Moreover, it must be remembered that even under the STR scheme specific authority would be obtained only in the tariff field and a general mandate for NTB's and agriculture. Finally, our trading partners would probably be reluctant to refuse to negotiate because they would bear the onus of this course of action.

Second, it would be argued that the requirement of returning to Congress for approval of the trade package would allow the forces of those who had been injured by tariff and other concessions to mobilize against the bill. Moreover, those who had gained from trade liberalization would not be a strong lobbying force in favor of the bill. Thus, it would be doomed to defeat. On the other hand, it can be argued that the package approach puts great pressure on Congress to accept the negotiated result. Moreover, the President could put the issue as one crucial to the survival of a peaceful Western world. Surely the chances for success in this atmosphere would be very great and would be further strengthened by a background of improved U.S. balance of trade performance and a strengthened international monetary system. Certainly there are great risks in this approach, but they may be more than compensated for by the dangers of asking Congress for trade legislation in 1973.

A final criticism is that the resolution approach could also serve as a lightening rod for Congressional provisions to restrict trade. On the other hand, the President could argue forcefully that no restrictions should be legislated until the Congress saw the results of the negotiations which would be brought back to them for approval. Since no specific authority would be given in advance no restrictions should be legislated in advance. To do otherwise would severely impair the ability to negotiate.

Washington, November 14, 1972.

SUBJECT
How to Deal with EC Trade Arrangements with Spain and Israel

Flanigan's staff has submitted for your clearance the memorandum for the President at Tab B proposing a US position for dealing with EC trade agreements with Spain and Israel. This covers Deputy Secretary Irwin's October 20 memorandum to the President on this subject at Tab C./2/ We urge your attention to this issue since how we handle it will significantly affect our political relationship and our negotiation strategies with Europe, Spain and Israel.

The US has expressed opposition to the EC's preferential trading arrangements with non-member countries often and forcefully. We have argued that these arrangements are incompatible with the Most-Favored-Nation provisions of the GATT Treaty and fail to qualify for an exemption--which has been granted to customs unions and free trade areas like the EC and the European Free Trade Area--since they allow free trade only in particular products. The agreements also hurt our exporting interests (e.g., citrus, paper products, tobacco). A GATT working group studied the issue in 1971 but made no findings on the consist-ency of the agreements with the GATT Treaty. Our opposition has so far done little good--the EC has made such agreements with the EFTA non-applicant states such as Austria and Sweden and is now doing so with the Mediterranean countries.

The economic agencies of the USG have felt for a long time--and especially since the summer of 1971--that it is time to get the EC and the countries involved either to make these agreements conform to the GATT or to compensate us for the impairment of trade benefits which they cause. Last year we stated that we would seek compensation under Article 23(1) of the GATT, which says that when one party believes that a trade benefit accruing to it under the GATT is nullified or impaired by failure of another contracting party to carry out its obligations, it may with a view to satisfactory adjustment of the matter make proposals to the party or parties concerned and they must give "sympathetic consideration" to such proposals. Because of a year-long wrangle within the USG, we have not yet taken formal action under Article 23(1), however.

State (Irwin), Treasury (Volcker), Eberle and the CIEP staff have recently agreed that we should soon make the long overdue approach to the Israelis, Spaniards, and the EC. They believe this is consistent with the President's recent guidance, contained in CIEPDM No. 14 (at Tab D),/3/ which tells Eberle to pursue "for the present" a policy of Ô'modified confrontation" with the EC, exerting pressure on behalf of trading principles and our specific commercial interests but bearing in mind the overriding importance of our political relationship with Europe.

Operating under this directive and on the basis of our position that these arrangements are inconsistent with the GATT, the agencies would tell the parties involved that our trade has been impaired by (a) the special preferences which the EC accords to Israeli and Spanish products and (b) the "reverse preferences" which these two countries accord imports from the EC.

Flanigan has drafted negotiating instructions (at Tab B with Flanigan's draft memorandum) which instruct our negotiators to (a) tell the Spaniards and Israelis that their agreements with the EC should either be renegotiated or changed to remove their discriminatory character and (b) ask the three participants for compensatory adjustments (duty reductions) covering approximately $750 million of trade. This is an arbitrary figure. (It does not mean we are paid this amount or that our trade will increase by $750 million, but that tariffs on $750 million worth of US exports going to the EC, Spain, and Israel would be reduced.)

All agencies (except perhaps Treasury) recognize that we can never get such a large amount of compensation. But they argue that a claim of this size will impress the three parties with the seriousness of our objections and with the need to change the discriminatory nature of such agreements. They believe that our levying a claim of this magnitude will:

--Deter the EC from concluding this type of arrangement with other countries (although most such agreements which the EC intends to conclude are already in place so that there is not much to deter).

--Maintain the pressure on the EC in order to show our determination to bring about reform in the rules and practices which discriminate against us (this could be done in the 1973 trade negotiations).

--Impress upon the three participants the seriousness of our objections and make it known to the EC that agreements of this nature will entail their paying high compensation to the US to offset their discriminatory aspects. (The agencies feel that unless we take strong measures soon, the EC will doubt that we are serious, since more than a year has elapsed since we first made known our objections in the GATT.)

--In the end get some offsetting trade concessions from the three parties.

Treasury argues that a successful negotiation with the three parties is "vital" to stopping extension of the EC preference system, which in turn is necessary to constructing a new world economic system, as outlined by the President to the IMF meeting./4/

Irwin and Flanigan point out in their memoranda that there are political problems and risks involved. As we see them the risks are:

--With Israel. If handled in isolation, this will become a negative issue in our broader relationship with Israel, complicate our efforts to work toward an Arab-Israeli peace, and lead to an atmosphere of confrontation which will be interpreted in Israel as a diminution of US support. Also, if handled in isolation, anything we may do to meet Israel's concerns will gain us no credit in our broader relationship. Finally, we would be throwing away an opportunity to ask Israel to help us on an issue important to us--agreeing to generous compensation arrangements which we can use as a precedent with other countries. If Israel refused, we would have established justification for asking consideration in other areas.

--With Spain. Liberal Spaniards regard a closer association with the EC as the key to Spain's modernization. They will resent what will appear to be an effort to block this trend and as a consequence may prove less cooperative in negotiation with us on base rights. (Ideology apart, it is in fact sensible over the long run to have Spain closely associated with Europe and us.)

As in the case of Israel, we should also consider how to fit the EC preference issue with Spain into a broader negotiating strategy. Spanish agreement to compensate us would help our cases with other non-EC countries in Europe; Spanish refusal to do so might conceivably establish an obligation on the part of Madrid to treat us well when base negotiations begin, probably little over a year from now.

--With the EC. Member nations may interpret this as a sign of our overall hostility toward the Community. Coming as (a) one of the first post-election acts in the trade field by an Administration which has signaled that it wants to put US-European relationships on a new, more constructive basis, and as (b) one of our first policy reactions to an EC Summit which indicated a willingness to negotiate with us constructively on trade and monetary matters, a claim of this magnitude will be criticized if not derided. The EC will say that rather than attempting to seriously discuss outstanding problems, we are making outrageous demands. It might make the Europeans considerably less cooperative in next year's negotiations on trade and monetary reform.

Irwin thinks that these risks can be reduced by quiet diplomacy, a skillful negotiator, and our falling back when necessary from the three-quarter billion demand.

There is a disagreement between State on the one hand and Treasury, Eberle, and Flanigan on the other, concerning a fallback. The latter group does not want to have the President authorize a specific fallback in advance. Thus, Flanigan's draft memorandum to the President makes no mention of a fallback and requests that he (Flanigan) be designated to coordinate one as necessary. Treasury and Eberle agree. In either case, political considerations as well as economic should enter consideration of when a fallback is authorized and under what conditions.

Unless this matter is handled carefully, there may be reactions from the EC, Israel, and Spain which will damage the "overriding political relationships" to which the Flanigan CIEPDM refers./5/

/5/Document 277.

On the other hand, we should not delay this too long. Arguments within the bureaucracy have already dragged on for a year. The agencies are all lined up on this one and adduce strong arguments for proceeding. Most importantly, we must demonstrate to the Europeans that we will not hesitate to pursue our legitimate economic interests.

To make certain that our political relations are not jeopardized, we should do several things:

--Send Eberle with Irwin to the parties involved so that the economic reas-ons for our initiative can be presented in a political context and so that the countries are reassured that this represents an attempt to deal with legitimate US economic interests and is not a hostile political act./6/ Flanigan's memorandum provides for Irwin to accompany Eberle. In the case of Israel at least, this might be supplemented with a direct general approach from the White House.

--Work our integrated approach for use by Irwin and Eberle in the context of our economic, political and security relations with Europe and the other parties involved. This can help make clear that we do not see this as a political confrontation. Also, a well controlled approach would enable us to use a turn down in our request for compensation as an added chip to cash in to get these countries to do something which we want in another area. For instance, if Israel turned down a private request to be helpful in this field that would give us one more claim--if our relationship is to be genuinely reciprocal--on Israel's consideration of serious US suggestions on the Arab-Israeli front. This also cuts the other way--we could put our request for compensation in the context of a defense of trade principles and our legitimate trading interests, but indicate also that these countries could strengthen our relationship by giving us appropriate compensation. (Flanigan's memorandum does not provide for a scenario such as this.)

Flanigan's draft memorandum and negotiating instructions are appropriate--but only if we can inject a greater political element. Your chief tasks now are twofold:

1. To get Flanigan to hold off until the President has decided how to deal with the whole range of US, Europe and Israel relations in a political-economic context.

2. To impress on him the view that asking for compensation on $750 million worth of trade--while defensible economically in principle and in terms of negotiating strategy--may be counterproductive in political and perhaps economic terms. All three parties might see this as an outrageous demand, not to be taken seriously. Moreover, were we to back down quickly from such a demand--as we would surely have to--the credibility of our position in next year's monetary and trade negotiations would be suspect.

The memorandum to Flanigan at Tab A makes these two points./7/

That you sign the memorandum for Peter Flanigan at Tab A.

NEGOTIATING INSTRUCTIONS ON EC-SPAIN AND
EC-ISRAEL TRADE AGREEMENTS

The main objective we seek in the GATT Article XXIII consultations with the EC, Spain and Israel concerning their preferential trade agreements are to establish a record of contesting the conclusion of special preferential agreements by the Community which discriminate against our trade and to make it clear that we will acquiesce in interpretations of GATT rules that permit the proliferation of such agreements only if the parties are prepared to pay sufficient compensation to us and thus to serve as a deterrent to the proliferation of such agreements with the EC. While we have made clear for years our opposition to this kind of arrangement, these consultations will mark the first time that we have taken direct action to insist on compensation. We are initiating such action on these two agreements because they were the first to come to a head in GATT after we took the decision in August of 1971 to begin movement toward a major reform of the international economic system. One of our objectives in this reform, over the longer term, is to reach a satisfactory solution which will involve:

1) negotiating new GATT rules governing preferential arrangements and

2) reducing the EC's external tariff and those of other participants in preferential arrangements.

These objectives will most likely only be achieved in the context of the major multilateral negotiations scheduled to begin next year. In the meantime, our strategy is to create and maintain pressure on the EC and its preferential partners, present and prospective, sufficient to impress on each of these parties a sense of both the seriousness with which we view this problem and our determination to bring about reforms of rules and practices which discriminate against us. At the same time, it is not our intention to precipitate a breakdown in the conduct of these consultations or to prevent progress toward finding mutually acceptable solutions to such problems while preserving intact satisfactory overall relations. As part of the latter concern, our negotiator should bear in mind that the U.S. retains substantial security and political interests in the countries concerned, and that these are particularly acute as regards our military bases in Spain and the promotion of an economically viable Israel as an essential ingredient to peace in the Middle East. These two constraints--the need to maintain pressure for change and the need to preserve a climate of cooperation to bring it about--establish the limits within which these specific Article XXIII negotiations must be kept.

To meet these strategic requirements, it may be useful to employ tactics which distinguish among the parties with whom we are consulting. For example, in presenting our case to Spain and Israel, we could begin by noting that we are concerned by the issue of principle which the agreements raise and that we intend to make this a major point in our discussions with the EC. However, with Spain and Israel, our main pressure in asking for the consultations is to negotiate satisfactory solutions to our specific trade problems in accordance with GATT rules as laid down in Article XXIII. It is our hope, indeed our intention, that any arrangement we can work out with Spain and Israel will compromise neither their own essential trade interests nor their future commercial or political relations with the European Community. We would indicate our understanding that Spain and Israel were motivated to seek the EC agreements out of concern for their trade positions in the Community, that it is our belief that these positions can be maintained in ways which do not damage the interests of others, and that we would hope that they would understand our trade concerns.

With the EC, we would make clear our concern over our trade position as it may result from these agreements which we believe are contrary to GATT rules and to the spirit of MFN. We would stress the point that the Community's habit of concluding special trade arrangements for so-called "political or historical relationship" reasons is no longer an acceptable basis for organizing the future international economic system. If the EC feels it must pay special attention to certain countries for such reasons, it should seek means other than discriminatory trade arrangements to accomplish this purpose. These include, for example, a general reduction in trade barriers on an MFN basis, an increase in economic assistance, investment, etc. Thus while we intend to negotiate in these consultations for the compensation due to us from such discriminatory arrangements, our main purpose is to begin the process of a common search for more satisfactory ways of dealing with trade problems of both its agreement partners and outsiders, making it clear that our concern extends to all such arrangements, both past and future.

Our negotiators should therefore be guided by the consideration that these consultations should be conducted as a preliminary move to lead into the major multilateral negotiations. While we would accept a particular settlement from any one or more of the parties to these arrangements, involving adjustment or compensation which we believe is sufficient to be a deterrent to the further proliferation of such preferential and trade agreements by the EC, we could not expect such results in the short run and anticipate that we will eventually move from these consultations into the multilateral negotiations where the chances of a more satisfactory arrangement may be better.

With the above objectives and strategy in mind, the U.S. position should be developed as follows:

We should continue to make clear in GATT and elsewhere our view that the present Trade Agreement between Spain and the European Community is not compatible with the GATT.

We should attempt both to protect our trade interests and reassure Spain concerning our continued "sympathetic understanding of Spain's objective of full integration" in the European Community.

We should, therefore, inform Spain that we would accept an arrangement which Spain and the European Community might work out which in our judgment is consistent with GATT rules for formation of a customs union, on the understanding that such an arrangement would be most nearly compatible with the objective of full integration. However, if it appears that a customs union is not possible for the foreseeable future, we would be prepared to examine without prejudice an arrangement for a free trade area consistent with GATT rules, strictly construed, which could be regarded as an interim step toward the objective of "full integration."

In either case, these rules require a definite plan and schedule for elimination of barriers on substantially all trade between the Community and Spain. We would inform Spain that in keeping with our declaration of "sympathetic understanding" we are prepared, publicly, to indicate that this is our position and, if Spain considers this desirable, to so advise the European Commission and the Member States of the Community in diplomatic conversations. We would make this offer to Spain as an indication of our willingness to carry out both the letter and spirit of our 1970 Agreement for Friendship and Cooperation with the expectation that Spain would reciprocate by consulting with us on trade problems in an equally cooperative manner.

In subsequent Article XXIII consultations, we would begin by indicating our belief that the present EC-Spain agreement is not compatible with GATT obligations, and that it should either be renegotiated (as above) or changed by a reasonable date to remove its preferential and discriminatory character. Regardless of whether there was an agreement to change or renegotiate, we would indicate our belief that the U.S. is entitled in principle to adjustment or compensation for impairment of benefits for the total amount of our exports to the parties which are affected during the time the present agreement remains in effect.

However, we recognize that reasonable differences of opinion could arise over this claim, particularly as regards some products on which the preferential margin or volume of trade is not significant. Therefore, we are willing to accept a de minimis criterion and drop claims for adjustment or compensation in those cases where the margin of preference is less than 4 percentage points and U.S. exports are less than $50,000.

We would suggest adjustments to the preferential rate for certain products where we expect particularly significant problems. To the extent that we do not receive adequate adjustments, we should seek compensation in the form of tariff concessions on other products, or a small across the board reduction of the EC and Spanish tariffs could be an acceptable means of redressing the situation.

The negotiator should seek a full examination of our claim by the parties involved, on an item-by-item basis if necessary. If the EC and/or Spain reject either all or part of these claims, the negotiator should request further instructions, indicating where he believes possibilities for action by the EC and Spain may exist as a result of the consultations and his recommendations concerning further instructions.

If the negotiations can be successfully concluded on the basis outlined above, they should also be accompanied by a commitment to consult with the United States, once a year or whenever we deemed it necessary, concerning future compensation due for products on which unforeseen trade damage arises because of the de minimis or other exclusion.

The United States regards the present agreement as incompatible with the GATT obligations of the parties to the agreement. Accordingly, our basic view is that this agreement should be changed, by reasonable date, to remove its preferential and discriminatory character.

In the meantime, pending these changes, the United States in its Article XXIII consultations with the parties should seek adjustment and/or compensation for trade impairment on a basis closely following that outlined above with respect to the Community and Spain.

Washington, undated.

SUBJECT
EC Trade Agreements with Spain and Israel

Attached for your approval (Tab A) is a Decision Memorandum and instructions to our negotiators governing the conduct of the consultations concerning the impairment of trade benefits to us which arises out of the preferential trade agreements now in effect between the European Community on one hand and Spain and Israel on the other./2/

There is inter-agency (State, Treasury, Defense, Commerce, Labor, Agriculture, CEA, and STR) agreement that we must take positive action to back up our stated opposition in GATT to the Community's proliferation of these preferential agreements. The consultations will be the first occasion on which we will have presented a specific request for adjustment or compensation to the EC or any of its preferential partners for what we regard as an illegal preferential arrangement.

Our strategy is to maintain pressure on the European Community and its preferential partners, present and prospective, sufficient to impress on each a sense both of the seriousness with which we view preferential trading practices and of our determination to bring about reform of the rules and practices involving discrimination against us. This strategy conforms with the interim strategy approved by you at the most recent CIEP meeting./3/

In the short run, our objective is either to obtain adjustment of the agreements to make them consistent with GATT or to obtain sufficient compensation to serve as a deterrent to the further proliferation of such agreements by the European Community. Over the longer term, our objectives are to negotiate new rules governing preferential arrangements and to reduce the European Community's trade barriers and those of other participants in preferential arrangements. We recognize that these objectives will most likely only be achieved in the context of the major multilateral trade negotiations scheduled to begin next year.

Though all concerned agencies agree to the need for this action, your endorsement is desired in view of the potential domestic and foreign political risks involved. The foreign risks are:

1) A probable adverse reaction in the EC which France in particular is likely to try to exploit to our disadvantage.

2) The possibility of a strongly negative reaction in Israel and Spain. The latter could increase our difficulties in getting better cooperation on our military base problems in Spain.

The main domestic risk arises from the possible reaction to an action which Israel might seek to interpret here as unfriendly to Israel's national interests.

While I recognize these potential risks, I believe we are justified in running them in the interests of the credibility of our international economic policy stance of firm opposition to illegal preferences, and to show domestic and Congressional opinion that we are ready to act to defend our legitimate trade interests. Moreover, these risks will be minimized by skillful negotiation which NSC and CIEP will monitor. Henry Kissinger agrees that this is possible and will coordinate with me in preparing our negotiators so that their presentation will be conducted in a way that takes account of our overall strategies concerning Europe and the Middle East. There is also agreement that we will spin out the negotiation rather than move to retaliation, if agreements are not reached.

There is disagreement between State and Treasury (Tab B)/4/ concerning the need now for fallback positions. State proposes alternative fallbacks which the negotiator would be authorized to accept at his discretion. Treasury opposes such authority now. I believe we should not authorize any specific fallback at this time. When we know exactly the reactions to our initial position, we will be better able to determine the desirability and content of alternative positions than we can in advance. Thus, the instructions are drafted to require the negotiator to report back to me on his conclusions for further review.

That you approve the attached Decision Memorandum and instruction, and authorize me to coordinate any necessary follow-up action without further reference to you unless there is disagreement among CIEP agencies over a major point. Henry Kissinger concurs.

Approve/5/
Disapprove
See me

Washington, December 1, 1972.

SUBJECT
EC Trade Agreement with Spain and Israel

Peter Flanigan (Tab A)/2/ indicates that "it is agreed" that you and he should discuss the appropriateness of the scenario he outlines for dealing with trade arrangements between Spain, Israel, and the EC. He has prepared a proposed memorandum to the President on this issue which has not yet gone forward.

On November 14 we sent you a memorandum containing our views and recommendations on this matter,/3/ along with a proposed memorandum from you to Flanigan asking that we reconsider the amount of our claim and attempt to integrate our approach on the EC-Spain and Israel problem with a more total approach to dealing with the whole array of concerns we have with the three parties involved.

We believe that if presented properly Flanigan's scenario need not lead to confrontation. In fact, if handled properly it can be used constructively. However, proper presentation requires that it be explained in a political context and that the parties involved understand that it is not an effort to undermine the political relationship between Spain, Israel, and the Community. Moreover, such an approach on this matter would be more effective if it is part of an overall relationship with these countries and the EC. Our true interests will be served only if we put the proposed approach into the context of our overall interests with these countries, so that we might be able to use a less than adequate response on trade to get them to make progress in other areas of interest to us. Our view, therefore, is that we should delay our approach until we have Presidential decisions on our future overall policy toward Europe, Spain and the Middle East and then handle this economic problem within that context./4/

We are not arguing for interminable delay; we are arguing for putting this issue in a context where both the President's economic and political policies could be served at the same time. Unless this is done, we could end up with the worst of two worlds.

That you meet with Flanigan in the near future to discuss this matter. (Our earlier memorandum, a copy of which is at Tab B,/5/ outlines our views in greater detail.)/6/

During the final months of 1972, representatives of the footwear industry continued to try to persuade the Nixon administration to support relief for the industry from foreign competition. In a September 13, 1972, memorandum to Special Trade Representative William Eberle, Assistant Special Representative Theodore R. Gates provided background for Eberle's meeting the following day with a footwear delegation. Gates wrote: "No one seems to know just what they want. My experience has been that this industry seldom agrees," and he summarized the "confusion" and disagreement among the industry delegation which had come to STR in the spring. Regarding that meeting, see Document 274. Gates also suggested searching questions on the prices of shoes and hides and the effects of currency revaluations that Eberle might put to the delegation. (National Archives, RG 364, Office of the Special Representative for Trade Negotiations: Lot 78 B 1, Correspondence 1972) No record of the meeting has been found.

Subsequently, in a December 5, memorandum to Peter Flanigan, Secretary of the Treasury Shultz, commenting on a CIEP options paper on shoe imports and hide exports (which has not been found), argued that there was "no convincing economic case for restricting imports" of shoes. He noted, for example, that the yearly rate of import growth was falling and that increased import protection would probably not save the small, inefficient firms but would be a "windfall" for the large ones and be inflationary. He also strongly opposed resubmission of the case to the Tariff Commission, and he agreed with the CIEP study on the hide export issue that "not much can be done aside from quietly urging Japan to reduce its purchases" and suggested that Eberle might take up the issue once again with Japan. (Ibid., Nonrubber Footwear--Options Papers)

On December 29 Mark E. Richardson, President of the American Footwear Industries Association, wrote separate letters to Shultz, Eberle, Flanigan, John D. Ehrlichman, Assistant to the President for Domestic Affairs, and Congressmen James A. Burke and Wilbur D. Mills of the House Ways and Means Committee urging them to take immediate steps to alleviate the import problem of the shoe industry which affected nearly 300,000 workers. In the absence of supportive action by the administration, he indicated his Association's support for the pending Burke-Hartke bill providing for import protection. Copies of Richardson's letters to Shultz, Eberle, Flanigan, and Ehrlichman were forwarded under cover of January 8, 1973, letter, which also presented the case for relief, from Eli G. White, chairman of the Association, to President Nixon. (Ibid.)

Washington, December 14, 1972.

SUBJECT
European Strategy and Trade Legislation

The decision on whether or not to submit the trade legislation, and on the character of any legislation we might submit will be made in the near future--probably this weekend. That decision will have a critical effect on our relationship with Europe and Japan and on any Presidential initiatives towards either. It is essential that you discuss this matter with Shultz and Flanigan as soon as possible.

Trade problems have been an extremely divisive element in our relationships with Japan, Canada and Europe. One of the early arguments for comprehensive trade legislation was to enable us to negotiate, in a multilateral context, solutions to many of the trade issues which could not be solved bilaterally after last year's August 15 decisions. It was also seen as an alternative to the Burke-Hartke protectionist legislation--which will have strong support from the labor unions next year--the passage of which would surely touch off a disastrous trade war.

Over the past year the US has provided most of the initiative for an international commitment to major multilateral trade negotiations beginning in 1973. The negotiations would deal with fundamental problems of the world trading system including tariff and non-tariff barriers and preferential trade agreements. They would also aim at developing a new set of trading rules.

The President can enter into trade negotiations, but lacks legislative authority to implement their results (i.e., the concessions we commit ourselves to make.) A decision must soon be made as to a) what type of authority will be sought by the President and b) what the timetable for submission will be.

There are three options:

1. Submit comprehensive trade legislation asking Congress for specific authority to reduce tariffs and for a less specific mandate supporting the reduction of non-tariff barriers, with authority to improve safeguard and domestic adjustment assistance programs to assist firms and workers injured by imports.

--The Presidential authority to cut tariffs strengthens our ability to press other nations to get an extensive negotiating mandate.

--Demonstrates the President's personal commitment to negotiate on trade, which would help to elicit a similar commitment--perhaps at Summit meetings--from the leaders of our trading partners.

--Comprehensive negotiations in themselves would serve as a useful counterpoise to the demonstrated tendency of the EC to institute--in its internal bargaining process--policies which insulate Europe's markets at the expense of its trading partners, and establish a forum for our applying effective pressure against such tendencies.

--Allows us to take the highroad for solving particular trade problems and to point to negotiations to counter ad hoc demands of specific domestic interest groups for protection.

--Being too specific and comprehensive may tempt the Congress to temper with the legislative proposals, thereby restricting the President's flexibility, and to append protectionist alternatives to each of the major sections of the bill.

--Greater Presidential effort and a more extensive educational campaign may be necessary to explain and secure passage of comprehensive legislation.

2. Request a joint Congressional resolution endorsing negotiations on trade (giving the President no authority to reduce tariffs), with all negotiations being conducted on an ad referendum basis. (Shultz apparently favors this approach.)

--May require less of a Presidential effort on the Hill.

--Minimizes risk of Congressional tampering with specifics.

--The assumption on which this is based--that two or three years hence, after the negotiations are complete, Congress will accept the results as a package--is an extremely doubtful proposition. The Europeans in particular would consider such a very weak mandate.

--The weakness of our mandate would give our trading partners the excuse to get a similarly weak mandate and thus mean that negotiations would probably fail to solve the most important trading problems. (This in effect means that the momentum which has been built up would be lost and the possibility of negotiating a resolution of trade issues would be severely diminished.)

--Calls into question the seriousness of the President's commitment to negotiations and thereby damages his credibility in the economic area and in other areas as well.

--Weakens our friends in Europe who have pressed very hard for a forthcoming and constructive European response to our initiatives for trade negotiations.

--Constrains the President's ability in whatever Summitry takes place to discuss a resolution of trade issues--the most important source of friction in our relationship with Europe--since he will have no authority to make concessions as a quid pro quo for concessions which he might press others to make. (Thus, the President's discussion of trade would be substantially limited to our pressing others to make non-reciprocal concessions--which the Europeans would consider unacceptable.)

--Gives other heads of state the excuse not to commit themselves personally to resolving trade problems and monetary problems as well.

--Means that as the EC develops new arrangements we would be extremely limited in our ability to engage in negotiations aimed at liberalized trade.

3. Request no mandate or Congressional action at this time but begin negotiations and then refer everything back to the Congress when the negotiations are completed.

Considered by some to be the best way to avoid bringing trade to the fore and therefore stimulating a protectionist effort in the Congress.

All of the cons of Option 2.

We have made considerable progress in securing from our trading partners a commitment to negotiations. The Summit meeting of the European Community/2/ constituted a major breakthrough for us in that the Europeans set a timetable for these negotiations and stressed their intent to move quickly. Nearly every European official with whom I spoke--and Ambassadors Hillenbrand and Greenwald/3/--emphasized a) the importance of these trade negotiations as a means of dealing with and managing major trade issues and preventing trade from becoming a divisive force in US-European relations and b) the necessity of our securing authority to cut tariffs if we want the Europeans to get a forthcoming negotiating mandate. Failure to submit, and work hard to secure, comprehensive legislation will make it virtually impossible for us to deal meaningfully on trade with Europe and Japan, damage severely the credibility of the President, render us increasingly vulnerable to protectionist legislation, and virtually eliminate our ability to resolve in the next several years the politically divisive trade issues which confront us and will do so in the future as the EC evolves. It could deal a lethal blow to any Presidential initiatives with Europe and Japan next year. It is therefore essential that the President submit legislation as described in Option 1.

/2/October 19-20. In an October 27 memorandum Sonnenfeldt and Hormats informed Kissinger that at the Conference the Community reaffirmed its intent to negotiate trade on the basis of reciprocity and acknowledged that trade and monetary relations were linked. They concluded that the European leaders, unlike the Community's officials in Brussels, were putting their economic relations with the United States in an overall political context. (Ibid., Box 322, European Common Market, Volume II 1971-72)

/3/Hormats traveled to Europe for a special OECD Ministerial December 4-5. He then had bilateral meetings in capitals with European officials. Hormats summarized his conversations in a December 18 memorandum to Kissinger, which is attached to a January 6, 1973, memorandum from Hormats to Kissinger calling it to the latter's attention. (Ibid., Volume III 10/72-7/73)

As I understand it Flanigan and Shultz intend to talk to Wilbur Mills in the very near future to determine whether he wants to take trade legislation first (as I understand he does) or whether he wants to hold it off until after he considers such other matters as tax reform. After this we will have to make a decision on the timing of submission.

--Arguments for early submission: Our trading partners would be given greater incentive to move quickly to prepare for negotiations with the knowledge that the President regards this as a priority item, the results of the November election give impetus to legislation submitted early in the session, gives us a better chance to have authority by September (when negotiations are scheduled to begin), delay might appear to reflect uncertainty or lack of priority trade, failure to take advantage of Mills' apparent willingness to take this legislation first may cause him to be less cooperative in scheduling hearings later, if we do not move quickly the AFL-CIO Burke-Hartke bill may capture the initiative on trade issues.

--Disadvantages to early submission: Would be insufficient time for the development of broader foreign policy initiatives (which are a necessary backdrop to trade legislation), for consultations with Members of the Congress, and for developing public support, and present levels of trade imbalance and unemployment may harm the bill's chances.

--My Opinion: On balance I lean toward submitting the bill early in the year, if our "Year of Europe" and other foreign policy initiatives are far enough along and visible enough to allow us to put the trade bill in a broader foreign policy context--which is essential for the bill's success--and if the President makes a strong commitment to it in the State of the Union Message and elsewhere. This would minimize foreign concerns about the President's commitment to negotiations, give us the domestic initiative, and allow the Congress to see the bill as part of the President's broader foreign policy strategy. And there is no guarantee that our trade and domestic positions would improve significantly in three-four months.

Based on the above considerations I have prepared a set of Talking Points/4/ which I recommend you use with Shultz and Flanigan as soon as possible. In your discussion with them, you should be aware that the most important single factor in selling this bill will be the degree to which we can link it to the President's overall foreign policy strategy vis-à-vis Europe, and to a slightly lesser extent, Japan. In particular, the timing of submission of this legislation will depend in very large part on whether we are far enough along in our foreign policy initiatives to present this legislation at an integral part of those initiatives. If you think that we will be ready by late January, then the legislation should go up at that point. If we will not be sufficiently far down the road by that time, it may be better to wait a few months. My strong preference, however, as noted above, is to submit this legislation as early as possible if we can construct the necessary foreign policy backdrop.

If you are not able to discuss this with Shultz and Flanigan in the near future, I recommend that you authorize me to make the points contained in this memorandum to Flanigan and an appropriate member of Shultz's staff and to indicate that you favor Option 1. With regard to the timing question, however, I will need to get your judgment on whether we will be far enough down the road on our foreign policy approach to submit legislation at the end of January.

1. That you discuss these matters with Shultz and Flanigan using the Talking Points at Tab A.

Approve, set up meeting with Shultz and with Flanigan/5/

2. If you do not have time to do this, that you authorize me to:

(a) Convey the position that you favor Option 1.

Approve

Prefer Option 2

Prefer Option 3

(b) Indicate whether you think we will be far enough along in the foreign policy area to submit legislation in January.

Will be far enough along, submit in January

Will not be far enough along, submit later

Washington, December 15, 1972, 6 p.m.

PARTICIPANTS
Secretary Shultz, Treasury
Secretary Rogers, State
Secretary Peterson, Commerce
Peter Flanigan, CIEP
Ambassador Eberle, STR
Under Secretary Volcker, Treasury
Under Secretary Casey, State
Ken Dam, OMB
Chairman Stein, CEA
Chairman Burns, FRB
Deputy Secretary Simon, Treasury
Robert Hormats, NSC

Shultz: The purpose of this meeting is to discuss strategy and political considerations for submission and timing of trade legislation. It is to permit an airing of views, but we will not attempt to reach any conclusions. Let's discuss this today and come back again. Peter Flanigan has done a great deal of work on this, so I shall turn it over to him.

Flanigan: The Hill is already aware of this meeting. It appears to be open information, but this is not necessarily bad.

Rogers: The Hill knows not only about the meeting but what the views are.

Flanigan: The purpose is to get thoughts for you (Shultz) to have when you consider the schedule of legislation before the Ways and Means Committee including the timing of trade legislation. But first we must consider what kind of legislation we want. There are two possibilities:

--A full blown trade bill.

--A sense of Congress resolution which would not commit Congress to accept what our negotiators agree on.

We should focus first on which option is desirable and then we can talk about timing, since the two are interrelated questions. If we want a sense of the Congress resolution we could go up early and hope for a favorable response. We must also consider whatever the President may be thinking about in the foreign policy area. This will be an important component in the "Year of Europe". We must see if he has any plans and reflect these in whatever proposals we send to Congress. We can submit a sense of Congress resolution alongside of anything we do on the "Year of Europe". Any trip the President makes will certainly focus on these issues and political issues as well.

There are three considerations:

--Could we get a detailed bill through the Congress?

--Could we have meaningful negotiations without a bill?

--Could we realistically expect what is negotiated to be passed by the Congress if we don't have prior authorization?

I have talked generally with the Congress and in particular with Jimmy Burns. He believes that with a very substantial Presidential push we can get the bill through. He feels it is a leadpipe cinch to get a sense of Congress bill through but that it will be difficult to get the Congress to buy in whole the results of the negotiation. Of course, it will also be difficult to get through the Congress what we negotiate on NTBs.

The problem abroad is that foreigners would not negotiate based on a sense of Congress resolution. Congressional staffers who went to Europe have reported to me that on this basis we would not have realistic negotiations. The Europeans--who are not enthusiastic about negotiations and are concentrating on completing the work of integrating and developing the institutions of the EC--would like an excuse not to negotiate. However, the US probably could carry on negotiations with just a sense of Congress vote.

The fate of the negotiated package is also an important consideration. We will have to submit it to Congress eighteen months to two years after negotiations start and this is an optimistic schedule. This will put the package to the Congress at the time of the '74 or '76 elections. That is an inauspicious time. Although, it is true that in any case we will have to go back to the Congress anyhow to bring our NTB and agricultural successes, or hoped-for successes, before the Congress.

We should discuss these first and then go to the question of timing.

Volcker: The crucial difference seems to be whether you have authority or you don't.

Flanigan: Yes. The sense of Congress resolution could be a detailed bill.

Rogers: I believe we have to go get a bill. We have such things as MFN, Preferences, etc., and negotiations will not be meaningful unless the President has authority. This need not necessarily be the same kind of legislation as the Kennedy Round, but authority to make a deal that will stick. The Europeans remember that we did not implement the American Selling Price agreement in the Kennedy Round and say to us that if you are not about to get authority we do not trust you.

The Europeans have said that it will be difficult for them to negotiate without authority. We do not have much choice, we must bite the bullet. All Congressional staffers have said that if the President puts his weight behind it we could get this legislation.

And this is essential not only for trade matters, but also for foreign policy reasons since we can't resolve these trade problems with Japan and Europe unless we have these negotiations.

We need a comprehensive bill and we should draft it as quickly as possible. We must rally support because the opposition will be tough. Labor will oppose but we can make sure that labor is not too difficult. They have other things they want.

Less than a comprehensive bill with authority will not be meaningful and others will not negotiate with us.

Eberle: One important fact which should be remembered is that there are a whole series of "housekeeping provisions" which we should put into effect today. They are necessary for the management of our trade program. We do not even have authority to make minor deviations in tariffs. If we had minor authority we could solve some of our trading problems. And a new system of safeguards could allow us to move in and be responsive to particular domestic problems.

Also, we will have a fight on the Hill anyway and as long as you have to fight, you may as well go up with your bill and fight for it.

I feel strongly that we need authority. It is a question of credibility. Without authority the Europeans will negotiate but will not be serious about negotiating. On the other side, if we have authority, we can implement a whole series of things in the farm area which we can negotiate. General legislation has already given us authority to implement certain things which we negotiate with regard to agriculture.

Rogers: Does the President have authority to make changes in the farm field?

Eberle: Yes. He can phase out certain farm practices. If we are to manage domestically and resolve our problems with Europe and Japan we need this legislation. We must put these problems in an overall format in which they can be solved. Specific bilateral problems can be solved in a multilateral context. If you do not have authority, no matter what concessions you make, those injured by them will protest. And it could be the next Congress which would receive the package we brought back. Our partners will not negotiate seriously on this basis. The momentum is now with us and we have a good chance. We can also fit this into the "Year of Europe".

Rogers: There is no assurance that the Congress will act at the end of the road.

Flanigan: However, even if we do get authority, remember that the last time the Market had to go back and have reviewed what they negotiated.

Eberle: With authority we can ask them to get an equivalent mandate.

Volcker: You will not get this anyhow.

Eberle: You can insist.

Peterson: The ability to manage and deal with problems is critical. And, we must improve our credibility abroad. We should have a safeguard system which we can implement which is developed internationally. On labor, they are committed to fighting this, but some negotiations with labor about other things they want and things they want to avoid in Phase III can ameliorate the situation.

The President has an enormous foreign policy mandate. We have done great things with the Soviet Union and in SALT. We must show how this bill was part of peace over the next ten years. Trade is small potatoes compared to building the alliance over the next ten years.

Consultations with the Congress will be important. They are still mad and they are asking if we are tough enough. Is there a new way of involving the Congress--either a mandate or specific legislation must involve them. Could we set up a group which works with the negotiating groups?

Eberle: In July and August I met with the Ways and Means Committee on that subject. They are torn between participating and getting too involved. They would like to be associated but how much further to go is the question. There is no real hope that they will get involved.

Volcker: If we need housekeeping legislation, let's go ahead. The issue is do we have full implementing authority on tariffs or do we want to treat tariffs and NTBs on the same basis--i.e., you have to go back to the Congress.

If we get authority on tariffs it is not in our interest. The whole momentum will go in the direction of tariffs. We want at least as much pressure on NTBs as we do on tariffs. We should treat these in parallel recognizing that we cannot get authority outside of the tariff area.

Let us put this in Peterson's setting. We are interested in total reform--the relationship to monetary reform, NTBs, new rules, etc., and look at it in a comprehensive way. The focus that you are trying to create is undercut if you concentrate only on tariffs and you will cause a squabble in Congress over this issue.

Other areas--NTBs, agriculture--will be more difficult.

Rogers: We should not call this liberalization but an attempt to reduce our disadvantage in trade.

Eberle: I see it as attempting to achieve a fair system opening up more markets on a continuous basis.

Flanigan: (To Volcker) Asking for authority does not necessarily mean the President has to implement what is decided. The President can say, I won't implement the reduction in tariffs unless I get what I want some place else.

Volcker: In theory you are right but in practice you are wrong. The least obnoxious of barriers are tariffs. The most obnoxious are NTBs. We will make progress in the most benign areas at the expense of the worst barriers. And part of the pressure from reduced tariffs would be to put on NTBs.

Eberle: Most people know these are tied together. On the question of tariffs being least obnoxious, we must recognize that tariff lowering is one way of lowering preferences. This cuts the differential down so that we can be more competitive.

Dam: On the question of Congress, an up or down vote would be difficult to arrange when you go back. At the beginning it is difficult to see who's the winner and who's the loser. When you come back, those who are hurt will complain but exporters not lobby very hard because the benefits they will get are uncertain.

On NTBs, we will probably have the same problem and on agriculture we can use the Agricultural Act which can allow us to do something. My point is that if we do want to reduce tariffs, it will be difficult to do so when you come back.

Peterson: A lot depends on what the climate is when you come back. Now people say there is nothing you can do to reduce the imbalance. Later, the Monetary Agreement may be in hand and the climate may be better.

Rogers: These may take longer than two years. They could be delayed until Ô76, which would be a bad year.

Volcker: What if you are defeated?

Rogers: Then you can fall back to a sense of Congress resolution.

Flanigan: You could get a comprehensive bill without authority.

Rogers: In my talks with foreign ministers it is clear that no one will take us seriously if we don't have authority.

Peterson: The Europeans are not excited about negotiations and will use our not getting authority as an excuse for not moving.

Rogers: If we want these to succeed the President must convince them we are serious.

Volcker: What is your definition of success?

Eberle: If the EC is left alone on the economic side, by nature of its decision-making process it will exclude more of our products. We need a forum in which they are required to discuss these things. They need an out. Negotiations can stop further deterioration, and lower some barriers. In addition, we can open up the EC agricultural policy. The French have said that if you can open this up it will be great progress. There is hope for progress. If you don't have credibility, they will stall and they will stall on the monetary side.

Rogers: They want us to take the lead. If we do we will be successful.

Volcker: On the question of a definition of success--if it is to get some balance of favor for us and not lose ground on the tariff side that will be difficult. The tendency is to make a deal for net tariff reduction and leave it at that.

Peterson: Why do you contemplate not getting anything on agriculture and NTBs?

Volcker: Tariff authority gives them a good position.

Peterson: Generalized tariff preferences is a built-in way of getting rid of reverse preferences. You have more bite if you have a tariff cutting authority.

Eberle: Europeans do not want to put emphasis on cutting tariffs. By legislative history we can show that these things will be tied together. We will have flexibility and negotiating strength.

Peterson: On the question of timing, this should be part of our major foreign policy initiatives. They will determine whether you go up in January or take two-three months to get moving.

Rogers: It is probably unwise to go up in January, but we should not delay too long. We should think it through. We must do a lot of selling in advance, and discuss this with labor. We must convince them that adjustment assistance means something. We could probably go up in February.

Flanigan: That is the earliest we could be ready. We could go up at the end of February. We need an education process if we want to do this. We must take into account the President's actions. If the President goes abroad early, we should use this and can submit the bill and call for early hearings.

Or we could submit the bill and not hold hearings and then the President would report back after his trip to explain the foreign policy significance of the bill.

Eberle: We need to be in at the beginning or we will lose control. The first of March through the end of April would be fine. If not, there will be another bill and we will lose momentum. We should submit at the end of February and hold hearings in March, but this depends on whether the President goes to Europe. If we do not submit the bill before he takes his trip, it will weaken the President abroad.

Rogers: The President must put himself strongly behind this bill when it is submitted. He must make a strong Presidential commitment.

Shultz: Who is optimistic about a satisfactory outcome if we get authority?

Rogers: I am. I believe that the Europeans recognize the importance of a satisfactory conclusion. Their security dependency on us is important.

Flanigan: I would put this in another way. Who is confident that the results of negotiations will be better if we have authority than if we do not. This is the important point.

Burns: It is our business to come out of these negotiations with a clear advantage. We have the cards. They understand the facts of life. They have to be sensible and recognize the facts of life as far as our trade position is concerned.

Eberle: We can come out with a net balance, but it will be piecemeal and will come in over time. There are four areas where if we don't negotiate we will be hurt. If we don't negotiate we will be hurt by actions which they will take.

Rogers. On reverse preferences there is increased opposition to EC policies among their people.

Shultz: As I see it, the big problems on trade are:

--The Europeans are making things worse--making them more difficult.

--Japan has NTBs which they are reluctant to get rid of.

--The Canadians have made special deals with us in the past which we now do not like but they are reluctant to do anything to improve them.

Lower US tariff barriers are not of great interest to foreigners. They care about our military shield and the fact that they are piling up dollars. The only way they can do something about the latter is to have negotiations to improve the balance so that they will stop accumulating dollars.

The question I have is will we get enough in these negotiations to justify the risk that Congress will give the President additional leverage. Remember during the textile negotiations we claimed that we could not impose quotas. The Congress may give the Executive power to impose quotas. We are discussing tariffs, but the things which give problems are not in the tariff areas.

Burns: Suppose you put in legislation that US negotiators should attend to NTBs.

Volcker: Domestically there are protectionist problems. Dampening these threats would be an achievement. It could be more important than a positive step. The joint resolution could dampen these pressures, and there is more certainty that it would do so.

Flanigan: You could take out of the broad bill authority to implement tariff cuts and use that bill against the threat of protectionism here.

Negotiations which brought about a lowering of barriers on both sides would be a success.

Shultz: That's right.

Flanigan: Even if we didn't get an advantage, if we got safeguards that would be a success.

Shultz: What are the real levers in negotiations? Tariff barriers are not particularly high on the list, yet we are arguing about authority to implement tariff cuts.

Flanigan: They are only important in that they allow us to argue for other things. They strengthen our credibility.

Burns: Other countries need a handle so that if there is any willingness to make concessions to us they can do so under this.

Eberle: That is correct. They will help us in Canada on wheat, etc. Whether authority is 50 percent or is 0, it will allow the Europeans to move on NTBs. They want us to lower our high tariffs. Some of these high tariffs are high on their priority list but low in terms of what it costs us to give them up.

Peterson: The security issue is an important lever or carrot. It will be helpful here to get burden sharing and a monetary settlement, etc. We are talking about tariffs before we know the President's strategy for Europe.

Rogers: Japan will be able to reduce NTBs in this process. We have the upper hand. They are nervous about what we might do. They are worried about our position.

Flanigan: We have a security lever, and that will be especially important in MBFR discussions.

Eberle: We should put this in an interrelated content at the highest levels. We can pull out the economic side but we should recognize the real tradeoffs. We should not focus on any one issue but recognize that a trade package is related to the total package, and should not allow them to come out of context.

Rogers: There is no need to tell them about the security relationship. They know it.

Burns: That is right. The financial people talked to me about it. The problem is with Congress. Should the President be defensive with respect to Burke-Hartke? It is better to come forward with a positive program. And 1973 will be a good year. The economy is moving forward. Protectionist forces may weaken. This is as good a year as I can visualize.

Eberle: We can go in on a composite basis and everything will be with us.

Shultz: I am glad to have had your thoughts and we can come back again on this. As I see it, the consensus is that we go forward with a general comprehensive bill with authority to implement. We should push hard to make sure that we are ready to do this at the earliest date and that it contains such things as adjustment assistance.

Flanigan: We have done a lot of work but there is much work ahead. The issues must be resolved whether we have a resolution or authority.

Washington, December 19, 1972.

SUBJECT
Your Breakfast with Secretary Shultz on Wednesday, December 20/2/

I assume the major topic which Shultz will raise is trade legislation and its relationship to your European strategy. My memorandum of December 14 (Tab B)/3/ deals in detail with this issue. Essentially there are two issues: a) whether the President's trade legislation requests authority to reduce tariffs or does not (in which case all negotiations on tariffs would be conducted on an ad referendum basis), and b) when legislation should be submitted. At the meeting on December 15 (minutes at Tab A)/4/ Shultz tilted toward requesting no authority and Volcker advocated this course. All others favored seeking authority and going forward early in the year if our foreign policy initiatives are sufficiently advanced.

The arguments in favor of the "no authority" position are that it would require less Presidential effort on the Hill than legislation including tariff cutting authority, minimize the risk of Congressional tampering with specifics, and improve our negotiating position to seek removal of non-tariff barriers (which we could not receive prior authority to cut and which are an important barrier to trade) since negotiations would not focus on tariffs at the expense of NTBs. There are a number of problems with this approach:

--The assumption on which this is based--that two or three years hence, after the negotiations are complete, Congress will accept the results as a package--is an extremely doubtful proposition. The Europeans (who remember that after the Kennedy Round the Congress did not approve the agreement on the American Selling Price for chemicals) would consider this a very weak mandate.

--The weakness of our mandate would give our trading partners the excuse to get a similarly weak mandate and thus mean that negotiations would probably fail to solve the most important trading problems. (This in effect means that the momentum which has been built up would be lost and the possibility of negotiating a resolution of trade issues would be severely diminished.)

--Calls into question the seriousness of the President's commitment to negotiations and thereby damages his credibility in the economic area and in other areas.

--Weakens our friends in Europe who have pressed very hard for a forthcoming and constructive European response to our initiatives for trade negotiations.

--Constrains the President's ability in whatever summitry takes place to discuss a resolution of trade issues--the most important source of friction in our relationship with Europe--since we will have no authority to make concessions as a quid pro quo for concessions which he might press others to make. (Thus, the President's discussion of trade would be substantially limited to our pressing others to make non-reciprocal concessions--which the Europeans would consider unacceptable.)

--Gives other heads of state the excuse not to commit themselves personally to resolving trade problems and monetary problems as well.

--Means that as the EC develops new arrangements we would be extremely limited in our ability to engage in negotiations aimed at liberalized trade.

The argument in favor of requesting legislation with tariff cutting authority is that it is the only basis on which the Europeans will negotiate seriously with us. It also strengthens our ability to press other nations to get an extensive negotiating mandate and demonstrates the President's personal commitment which in turn will help elicit a similar commitment from other leaders. In addition, the very fact of comprehensive negotiations would serve as a useful counterpoise to the demonstrated tendency of the EC to institute policies which insulate European markets at the expense of its trading partners and establish a forum for our applying effective pressure on such tendencies. The disadvantages to this approach are (in Volcker's view) that it would focus trade negotiations to a greater degree on tariffs than on non-tariff barriers, we would be causing a stir with the Congress on tariffs which are less important than NTBs, and greater Presidential effort and a more extensive educational campaign may be necessary to explain and secure passage of a bill containing tariff cutting authority. Treasury may also have the view that the more attention focused on the trade problem the more intense the domestic protectionist rhetoric will become and the more of a problem it will be in our relations with Europe.

My view of the situation is that the bill set up must contain tariff cutting authority. We have made considerable progress in securing from our trading partners a commitment to negotiations. The summit meetings of the European Community constituted a major breakthrough for us in that the Europeans set a timetable for these negotiations and stressed their intent to move quickly./5/ Nearly every European official with whom I spoke--and Ambassadors Hillenbrand and Greenwald--emphasized a) the importance of these trade negotiations as a means of dealing with and managing major trade issues and preventing trade from becoming a divisive force in US-European relations and b) the necessity of our securing authority to cut tariffs if we want the Europeans to get a forthcoming negotiating mandate.

The argument that having authority to cut tariffs would focus negotiations away from NTBs can be countered by ensuring that our negotiators press equally hard on NTBs, and unless we have authority to cut tariffs it is doubtful if we will have a negotiating framework which will permit a negotiated reduction of NTBs or agricultural barriers. And, to argue that we should not focus attention by submitting this legislation ignores the fact that the EC--by its very decision making process--will continue to come up with policies which harm our interests and protectionists in this country will continue to raise issues and press for harsh restrictions.

What Shultz will need from you is a view on whether we will be far enough along in the "Year of Europe" to put the trade bill in a foreign policy context--which is essential to the bill's success.

There are a number of arguments for early submission: Our trading partners would be given greater incentive to move quickly to prepare for negotiations with the knowledge that the President regards this as a priority item, the results of the November election give impetus to legislation submitted early in the session, give us a better chance to have authority by September (when negotiations are scheduled to begin), delay might appear to reflect uncertainty or lack of priority trade, failure to take advantage of Mills' apparent willingness to take this legislation first may cause him to be less cooperative in scheduling hearings later, if we do not move quickly the AFL-CIO Burke-Hartke bill may capture the initiative on trade issues.

Disadvantages of early submission: Would be insufficient time for the development of broader foreign policy initiatives, for consultations with Members of the Congress, and for developing public support, and present levels of trade imbalance and unemployment may harm the bill's chances.

If Heath comes in early February, and additional summits are announced during February and March, these could--along with suitable statements in the State of the Union and State of the World Messages--provide the backdrop necessary. (The President could formally state his intention to submit this legislation in the Heath communiqué.) If we are far enough along, it is most desirable to submit the bill early to minimize foreign concerns about the President's commitment to negotiations and give us the domestic initiative. Moreover, there is no guarantee that our trade and domestic positions would improve significantly in three or four months.

With regard to future planning for coordinating the economic with the foreign policy scenario, you might suggest setting up a working group within the EOB including Ken Dam (who will be Shultz' new deputy in the White House), myself and Hal Sonnenfeldt, and Deane Hinton from CIEP. This group could coordinate the range of issues involved and attempt to pull together some of the details as the scenario unfolds./6/

[Omitted here is discussion of the U.S.-Soviet Commercial Commission, Gas Group, Polish Commercial Commission, and Peterson's Trip.]