Foreign Relations of the United States, 1961–1963, Volume IX, Foreign Economic Policy

290. Memorandum From the Under Secretary of State (Ball) to President Kennedy⁰

Washington, November 12, 1963.

SUBJECT

• United Nations Conference on Trade and Development

Mr. Bundy has called my attention to your interest in the United Nations Trade Conference which is scheduled to last for three months in Geneva beginning in March of next year.

We have been concerned about this conference for some time since it may provide a forum in which some well-intentioned people—encouraged by others less benign—can do considerable mischief.

On the other hand—wisely managed—the breakage could be minimized and a degree of useful education achieved.

Background

The conference is the resultant of two forces: the discontent of the less developed countries with the GATT, which they regard as an institution run by and for the benefit of the great trading nations; and the tactical interest of the Soviet Union in undermining the GATT primarily for political purposes.

The dislike of the less developed countries for the GATT has been fermenting over a period of years. There has long been talk of a competing organization based on a rejection of the orthodox ideal of a multi-lateral, non-discriminatory trading world that would focus on the special requirements of the less developed countries. At the same time state trading does not fit comfortably with multi-lateralism, and the Kremlin has seen possible paydirt in an effort that might create discomfort for the West.

These forces first came together in support of a common objective during the 1961 General Assembly of the UN when the idea of a world trade conference began to acquire momentum.

At the July 1962 ECOSOC meeting—following an Afro-Asian Bloc meeting on trade in Cairo—the US delegation decided that such a conference could not be blocked. It, therefore, used its discretionary authority to move from frontal opposition to an acceptance of the inevitable—in the hope of gaining some influence over the content and timing of the conference. In spite of US delaying tactics, it did not prove feasible to postpone the conference beyond 1964.

In its preparatory stage, Dr. Prebisch¹ has been the most determined and articulate promoter of the conference. During the past year there have been several sessions of a preparatory committee consisting of representatives of 32 nations. The Soviet Union made a diligent effort to assure that the conference agenda would include East-West trade, disarmament and other Bloc propaganda interests. But for the time being it has apparently concluded to accept the indications that the conference would concentrate on the trade problem of the less-developed countries.

The conference agenda as it now stands puts major emphasis on measures to increase the export earnings of the developing countries. The most serious questions likely to emerge concern proposals to use commodity agreements to improve earnings from the sale of raw materials and a proposal that the economically advanced countries extend preferential treatment to the imports of manufactures from the developing countries. This latter device—which is the newest steed in the LDC stable of hobby horses—could turn out to be a particularly fractious beast.

In addition to these substantive measures we shall also need to cope with efforts to supplant GATT by a new UN trade organization that would include the Bloc and be heavily biased to serve the interests of developing countries. Alternatively the LDCs may seek to create a separate organization to compete with GATT.

All of these proposals will need careful watching.

Commodity Agreements as a Subsidy Mechanism

During recent years the LDCs have clamoured for a widening range of commodity agreements as the panacea for their foreign exchange problems. Early in your Administration, you shifted the traditional U.S. position from doctrinaire opposition to measured support of commodity agreements.

There is, however, an irreconcilable difference between the LDCs view of commodity agreements and our own. We look upon commodity agreements—in the limited number of cases where they are feasible—as a device to avoid cyclical price fluctuations for raw materials and thus as a means to help assure stability for the foreign exchange income of primary producing countries. This is not, however, the favored view of the developing countries, which tend to look on commodity agreements as devices to peg world prices well above existing levels and thus provide the producing countries with a subsidy—which they might use to finance their development requirements. (On the domestic scene we do, of course, accept that philosophy in our own agricultural price support programs.)

This conflict in philosophy holds the seeds of embarrassment for us. At a recent conference in Geneva for the purpose of drafting a commodity agreement on cocoa the United States could have been caught in a serious bind if the producing countries (led by Ghana) had not insisted upon demanding a ridiculously high minimum price. Had the developing countries been less foolish, we would have been under heavy pressure to agree to a minimum price that would have been violently opposed by our industrial cocoa consumers. In that event, we might have been left with an agreement that Congress would have refused to ratify.

I foresee no need to change our established position at the Geneva Conference. We should continue to support commodity agreements at reasonable price levels where appropriate for stabilization purposes.

The Stickiest Issue—The Preference Question

The basic economic argument underlying the preference proposal is, abstractly stated, sound enough. In an almost perfect world, the economically-advanced countries should progressively concentrate on the production of sophisticated and capital-intensive industrial products, leaving an increasingly wide area of simple labor-intensive products to be supplied by countries in the early stages of industrialization. Under a regime in which the principle of comparative advantage could operate freely, the less-developed countries would thus be able to exploit what is in most instances their sole advantage—an abundant supply of low-cost labor—while the economically-advanced countries exploited their advantages in capital, technology, and skilled labor.

The purpose of the Trade Expansion Act is to move toward this kind of regime, but it implicitly recognizes that we do not live in an almost perfect world. Progress in this direction must therefore be kept within the bounds of political reality and it cannot always be in a straight line. Experience has shown that domestic pressures accumulate in direct proportion to the increasing share of our domestic market claimed by the LDCs. I need only recall our experience with cotton textiles, electronic equipment, etc. to make the point.

In their preoccupation with their export problem, spokesmen for the less-developed countries have been deflected from the objective of gaining increasingly liberal access for their goods in the markets of the industrialized countries. They are demanding preferential treatment particularly for their manufactures. How should we deal with this demand?

I believe we have little to gain and much to lose by encouraging them to pursue a manifestly unrealistic objective. Experience should have taught us by now that the way to create bitterness is to permit the burgeoning of aspirations that are ultimately frustrated. The Biblical observation that “hope deferred, maketh the heart sick” applies as much to countries as to individuals. Already we have incurred considerable enmity by our need to administer in a rigid manner a cotton textile agreement that we had originally merchandised to the developing countries as a device for assuring the measured growth of their exports.

I have concluded, therefore, that we should be reasonably candid with our less-developed friends. This is contrary to bureaucratic instincts, for there is a strong prejudice against saying things that may create even temporary unhappiness. But if we were to behave in too bland a manner with this issue, we would diminish our credibility on other issues.

More than that, we would run grave risks of embarrassing the Kennedy Round on the home front. Already the trade associations have gotten wind of the United Nations Trade Conference. They are uttering increasingly loud cries of alarm. I can think of nothing the protectionists would like better than the opportunity next Spring—just before the beginning of the Kennedy Round and at the start of a Presidential campaign—to be able to accuse the Administration of lending a sympathetic ear to proposals that would grant preferences in the American market for “the cheap labor products of Asia”—or that would give Hong Kong a preference over New England in the markets of third countries. What kind of a spectacle would we make, if—at the moment we were trying to dampen down the fires in the United Nations meeting at Geneva—we felt compelled to assure the United States Congress that we abhorred preferences?

All of this does not mean, of course, that we should turn a deaf ear to the concerns of less-developed countries. On the contrary, we should do them the honor of regarding them as adult by raising the discussion to the plane of political reality. The problem after all is basically one of education and persuasion. In this spirit I have arranged with Dr. Prebisch to have conversations in depth with him on my return to Washington. I hope also, between now and the end of the year, to have a series of quiet talks with the principal moving spirits behind the UN conference. Most of these men are likely to be in New York during this period in connection with UN business.

I intend in these discussions to lead away from the preference proposal toward more fruitful approaches to the problem of industrial exports. I am helped in this endeavor by the fact that this problem has not come to me as a fresh idea. I have been beating the drum on the issue for years. During 1961, for example, I made at least five speeches to call attention to this critical problem. Dr. Prebisch told me the other day that my views on this issue were well known and deeply appreciated by the economists in the developing countries.

Suggested Tactics for Dealing with Preference Issue

Meanwhile, we must be prepared to discuss this question during the OECD Ministerial meeting next week. We must also develop a tactic for the conference itself.

1. At the OECD meeting, we shall make clear that the US Government has long taken the lead in searching for means to solve the difficult problem of increasing the exports of the developing countries. We can do this persuasively since I have taken a strong line on this question during the last two ministerial meetings of the OECD.

2. We shall also demonstrate that the US record on this issue is, in comparison with most other NATO countries, quite respectable. We are having figures prepared to show that the US has discriminated far less against industrial exports of the developing countries than have the countries of the European Community. (In spite of the special preferences that France extends to the French Community countries, her record, in statistical terms, is bad.)

3. While urging the NATO countries to improve their acceptance of the LDC imports we shall make it clear that we do not regard industrial preferences as a fruitful approach to the problem. One must distinguish, of course, between two quite distinct kinds of preferences: (a) those accorded by a metropolitan power to a specific group of countries that formed part of an earlier colonial system and (b) preferences that are extended impartially to all developing countries. The former is, of course, a relic of colonialism, and it is not what the developing countries are talking about.

4. This point is fundamental and we shall insist that there be no ambiguity with regard to this distinction.

5. In discussing the general principle of preferences we shall point out that they are both undesirable and unnecessary. If industry is to have a healthy growth in a developing country, it must be of a kind that will make use of that country’s natural advantages. For most developing countries the sole natural advantage consists of an ample supply of low-cost labor. In most cases this should be adequate to assure markets for labor-intensive goods—provided only that the advanced countries would eliminate restrictive and discriminatory measures.

6. The prime responsibility of the advanced countries should, therefore, be to hasten the erosion of that framework of discrimination which has been built up against imports from developing countries, and we shall advocate that the NATO nations make an effort to improve their record with regard to discrimination before the Conference next spring.

7. At the same time, we shall suggest that the NATO nations encourage regional arrangements among developing countries. The advantage of such regional arrangements—whether customs unions, free trade areas or even regional preferential systems—is that they permit the building of mass markets for the developing countries. They can thus provide conditions for efficient industrial growth at a minimum cost in economic dislocation. To achieve useful results, however, we shall have to recognize that such regional arrangements require a considerable measure of common planning to avoid redundant production and to achieve an intelligent allocation of industrial tasks.

8. I propose to emphasize regional arrangements because I have considerable mistrust of encouraging another idea put forward by Dr. Prebisch—that each developing country accord preferences to the industrial goods of all others. I do not believe that this would be likely to result in an effective allocation of resources; on the contrary it could seriously distort investment patterns with little benefit to anyone.

9. Obviously, these are only some of the measures that are available to broaden the markets for industries and developing countries and I would not rule out other approaches. I am, however, suspicious of gimmicks—particularly when the problem should be soluble by a rigorous adherence to the principles of non-discrimination in which we have invested so much time and effort for the last three decades.

The Conference and Its Relations to the GATT

It is too early to put forward a detailed plan of action for the American delegation at the Conference. The line to take will depend, in considerable part, on the attitude not merely of the developing countries but also of our NATO allies. At the moment I can recommend only one controlling principle: that we display patience but do not talk nonsense.

We must, of course, be concerned to preserve the GATT against efforts to transform it into a debating forum for special interests or to supplant it with a more diffuse organization. Fortunately, I think this problem is manageable. Already there are signs that the more stable leaders in the developing countries are having second thoughts on the value of the GATT, and I am confident that with a steady American policy we should have little difficulty in saving it from serious impairment.

George W. Ball²

0. Source: Kennedy Library, National Security Files, Subjects Series, 11/8/63-11/20/63. Confidential. A handwritten notation on the source text reads: “Taken from President’s week-end reading 11/16-18/63 Tab 6.”
1. Raul Prebisch, Argentine economist; Director General of the Latin American Institute for Economic and Social Planning.
2. Printed from a copy that bears this typed signature.