Foreign Relations of the United States, 1969–1976, Volume III, Foreign Economic Policy; International Monetary Policy, 1969–1972

105. Memorandum From Acting Secretary of State Irwin to President Nixon¹

Washington, October 20, 1972.

SUBJECT

• European Community Trade Agreements with Spain and Israel

The Problem

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

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

The Issues for Decision

The issues for your decision are two:

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

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

Discussion

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

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

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

Meaning of Preferential Arrangements to the Participants

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

Spain has made integration into Europe a prime foreign policy objective. Full membership in the European Community is regarded by the Spanish as essential for promoting modernization and liberalization. The current preferential arrangement is seen as a big step toward full membership. Israel seeks closer ties with the European Community as compensation for its lack of ties with its Middle East neighbors and as a means to promote economic growth.

Action to Date

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

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

Nature and Amount of Our Proposed Claim

The Departments of State and Treasury have reached agreement that the United States should claim that, with limited exceptions, its trade will be adversely affected in cases where the preference margin is four percent or more and U.S. exports to the participants have amounted to $50,000 a year or more. On this basis, we would ask the participants to make adjustments in the agreements or provide compensatory benefits covering approximately $750 million of trade. An initial claim of this magnitude will demonstrate the seriousness of U.S. objections to these and other special and reverse preference arrangements. However, the course we advocate involves serious political risks. Our demands are likely to be met with shock and resentment by the EC, Spain and Israel. Particularly in Spain and Israel our claims will touch sensitive political nerves and sharp reactions are possible. We should also realize there is virtually no chance that the participants will agree to offsetting trade concessions of this size. In part this would be because the other parties would argue that our initial claim was completely “theoretical” and that even a generous estimate of the potential real damage to our trade would have to be far smaller. If we desire to reach agreement on concrete measures of importance to United States exports, we shall have to be prepared to settle for less, and probably substantially less, than the full claim. Even if our main purpose is to maintain pressure on the EC in preparation for the 1973 trade negotiations, it may be advisable, in order to avoid a confrontation getting out of control, to signal at an appropriate moment a willingness to retreat from our initial claim.

Possible Retreat Positions

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

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

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

The Risks Involved

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

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

These risks can probably be reduced or controlled by quiet diplomacy, and by a skillful negotiator, particularly if armed with authority to retreat to the fallback positions described above when he deems it necessary. However, Spain, Israel or the European Community may choose to make a major public issue of the matter. On the other hand, if the United States does not submit a substantial claim, the impression may be created that our objections to special preferential arrangements, while firmly held, will not be backed by determined action.

Recommendation:

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

John N. Irwin II

1. Source: National Archives, Nixon Presidential Materials, NSC Files, Subject Files, Box 322, European Common Market Volume II 1971-72. Confidential. An earlier draft of the memorandum is attached to an October 12 memorandum from Deputy Under Secretary of the Treasury Bennett to Under Secretary Volcker for use at his October 13 lunch with Flanigan. (Washington National Records Center, Department of the Treasury, Files of Under Secretary Volcker: FRC 56 79 15, October 13, 1972 Flanigan Working Lunch) The lunch was also attended by Irwin, Stein, and Eberle. In an October 17 memorandum from Flanigan to Irwin, Volcker, Stein, and Eberle regarding follow-up to the October 13 luncheon, Flanigan noted that there had been no agreement on how the negotiations should be conducted; the State Department would develop a paper for Treasury Department and STR comments, and the issue would then go to the President for decision. (Ibid.)
2. See footnote 3, Document 101.