Foreign Relations of the United States, 1964–1968, Volume VIII, International Monetary and Trade Policy

351. Memorandum From the President’s Deputy Special Assistant for National Security Affairs (Bator) to President Johnson¹

Washington, May 10, 1967, 11:30 p.m.

SUBJECT

• Your meeting tomorrow on the Kennedy Round (11:15 AM): Vice President; Rusk, Eugene Rostow, Solomon; Freeman; Wirtz; Trowbridge; John Rehm (for Bill Roth); Bator

Where We Stand

It now appears that the negotiations will end Sunday night²—win or lose. The Common Market is having its final ministerial meeting today and tomorrow. We expect to get final instructions to Bill Roth by tomorrow afternoon, our time.

We can now see the outlines of what is possible in terms of a final bargain. Essentially, they are as follows:

World-Wide Balance. In very rough terms, the U.S. will probably:

• —be on about even terms with the EEC and the other continental Europeans, with large tariff cuts all around;
• —give more than we get from Japan (the Japanese sell us so much more than we sell them in industry that arithmetic balance is practically impossible);
• —give more than we get from the UK;
• —with luck, be only slightly behind with the Canadians—after some very hard bargaining;
• —vis-à-vis the rich countries as a whole, be in appreciable deficit in industry (Japan, UK, Canada), but in considerable surplus in agriculture (counting the grains agreement);
• —vis-à-vis the less-developed countries (which all the rich countries have agreed to exempt from reciprocity) we will have offered concessions on some $80 million worth of temperate “competitive” imports and $260 million of non-competitive tropical products.

The calculations on which the above is based are pretty arbitrary. They are based on the value of imports covered by a particular tariff concession, counted at full value for a 50% tariff cut, half-value for 25%, etc. On this basis, our total balance with the advanced countries will be some $600 million in the red. However, in my view, this reflects a strong conservative bias in the method of estimation. Though I cannot be sure, I think that the final numbers on which the public debate will focus will be more favorable to us.

In any case, in terms of the real economic effect on our exports and imports, any such number is terribly misleading. At worst, for example, a $600 million imbalance would only mean that in five years—after the tariff cuts are fully in effect—our total annual export surplus might be reduced by some $25 million on a total now running between $4–7 billion. Nevertheless, there will be a public relations problem, and we shall have to use some skills and good sense in constructing our case.

Key Issues

1. Chemicals. As you know, we have pressed the EEC to accept a two-package approach to the American Selling Price (ASP) problem. They have finally agreed to two packages. They propose that in the first package (which would be part of the Kennedy Round itself) we would cut tariffs on all chemicals by 50% and the EEC would cut by 20%. This would give us “balance” in terms of trade coverage because our chemical exports to the EEC are three times as large as our chemical imports.

In the second package, which would stand on its own feet and require legislation, we would eliminate ASP and cut chemical tariffs further—to a 20% ceiling, with some exceptions for dyes and certain drugs. In return, the Community would cut their chemical tariffs by an additional 30%.

In combination, the two packages would be a good bargain for us. However, the apparent disparity in the first package between our cut of 50% and the Community cut of 20% will cause some trouble on the Hill. Roth will try very hard to narrow the spread to 25 or even 20 percentage points. But we should give Bill guidance tomorrow on whether failure to get EEC to move by Sunday night is serious enough political business to force us to scuttle the negotiations. (I myself certainly do not think so, but you will want to get the views of the others around the table.)³

2. Non-Grain Agriculture. After three years of stonewalling, the EEC has finally offered benefits valued at about $100 million (an average tariff cut of about 12%). This corresponds to cuts on our side of about the same size. (Freeman may offer a complicated argument for further withdrawals on our part; the rest of us believe this would involve a serious risk of a general unravelling.)

The question you should address tomorrow is whether a bargain of this size is enough to avoid a major political war with the farm community. (It is relevant here that the agricultural benefits we stand to receive from others than the EEC are substantial.)

The Congress

We should decide tomorrow how and when to bring key people on the Hill into the picture. We should probably include the leadership, Bill Roth’s Congressional advisers (Senators Smathers, Talmadge, Ribicoff, Williams (Del.) and Carlson; Congressmen King and Curtis), and other leading people on Ways and Means and Finance. You may want to chair a meeting on Friday or Saturday, with the Vice President, Rusk, et al. to back you up. Alternatively, you may prefer to have us speak to a very few key individuals now, and to leave the general consultations for later when we have a more precise package to sell. (In any case, it will be almost impossible to make any major changes in the bargain at this stage without risking the whole negotiation.)

Because of the history of ASP (the rubber footwear war, etc.), we should expect a fair amount of heat on chemicals even if we get the EEC to move somewhat more in our direction. In my judgment, we have enough ammunition to counteract it. But you will want to go over this ground carefully tomorrow with the Vice President and Trowbridge.

Apart from the general problem of agriculture, textiles will be the other hot issue. The details of our present textile offers are at Tab B.⁴ We are presenting a very small target on cotton and wool. However, on man-made fibers, our offer—while small and defensible—will trigger some flack. I telegraphed Roth this morning to hold back everything on man-mades that can be withdrawn without pulling the house down.⁵ In fact, however, I don’t expect that he will be able to take much off the table without risking wholesale unravelling. My own view is that we can also manage this issue—the industry is now crying wolf, but they simply do not have a case that they are in serious trouble. As you know, however, they have a lot of friends on the Hill.

Procedure

Tomorrow morning I will give you an agenda for the meeting with some key questions you may want to ask. I don’t think any of your advisers will recommend that we scuttle the negotiations on any of the above issues. Orville Freeman may be worried about the non-grain package and the relatively toothless grains agreement. He may advise that we insist upon a ministerial meeting in Geneva to exert maximum political leverage on the EEC and others and to make a show to the home folks. The Secretary of State and Bill Roth believe—and I very much agree—that a ministerial would be a mistake except perhaps as a very last resort. It would give the French an excellent opportunity to subvert the negotiation and it might well result in disintegration of all we have hammered out over the last four years. I don’t know how Wirtz and Trowbridge will vote if this issue comes up, but I doubt that either will be very strongly in favor of a meeting.

Recommendation

In summary, my vote is that we push as hard as we can between now and Sunday but that, in the end, we initial the bargain Sunday night even if the more pessimistic assumptions about the EEC position prove out.

In economic terms, failure of the Kennedy Round could lead to the kind of commercial warfare in which we, as a trade surplus nation, have a great deal to lose.

The central point here is not primarily the level of tariffs. Rather, it is holding to a reasonable set of trade rules without which international trade would become jungle warfare, commodity by commodity, and country by country. I think that the failure of the Kennedy Round would risk just that kind of deterioration into spiraling protectionism, with parliaments holding the whip hand (e.g., the present sugar situation).

The direct political implications of Kennedy Round failure would, in my judgment, be even more serious. It would encourage strong forces now at work to make the EEC into an isolationist, anti-US bloc, while, at the same time, further alienating the poor countries. None of the above issues are worth these risks. Nor would they give us a plausible public basis for blowing up the negotiations.

But this is one man’s view, and I am not the one who will have to face most of the music.

Francis

1. Source: Johnson Library, National Security File, Subject File, Trade Negotiations, Kennedy Round, “Potatoes” [2 of 2], Box 47. Confidential. Rusk’s copy of this memorandum bears the handwritten note: “Eyes Only for Sec Rusk (thru Mr. Read)” and bears Rusk’s handwritten initials.
2. May 14.
3. An attached paper, Tab A, entitled “Chemicals,” provides additional details on the negotiations on this subject.
4. Not printed.
5. Telegram 191229 to Geneva, May 10. (Department of State, Central Files, FT 13–2 US)