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

94. Paper Prepared in the Council on International Economic Policy¹

Washington, undated.

U.S. OBJECTIVES FOR TRADE NEGOTIATIONS AND MONETARY REFORM

I. Premises

A. The primary United States objective in the comprehensive trade and monetary negotiations is to maintain a thrust toward a liberal trading and payments order in a manner that supports our efforts to restore and sustain an external economic equilibrium and equity or fairness in our trading relationships, real and perceived. This objective grows out of the fundamental goals of encouraging competitiveness and efficiency in American enterprises and open, harmonious political and economic relations with other nations, thus offering improvement in our standard of living in a context of the growth and cohesion of the Western world. On the premise that expanded world trade on an equitable basis and monetary and balance of payments equilibrium can benefit all parties through more efficient use of resources, and promote the close economic and political integration of Western economies, the basic goals are in the interest of, and attainable for, all participating countries.

B. Specifically, these interests would be served by an international economic system providing an environment which—

i. facilitated international trade and capital flows among nations; subject only to such safeguards as may be necessary against shifts so rapid as to undermine the stability and sustainability of the system;

ii. involved a minimum of governmental restraints and subsidies on international economic transactions and a maximum of market-directed U.S. and world trade and investment;

iii. preserved the habit of cooperation which has become established in international economic affairs.

C. In the complex task of reshaping the world’s economic system, a balanced “package” approach must necessarily be employed in judging specific proposals affecting the system and the adjustment process; the implications of parts of the proposed system cannot be judged fully until the broad outlines of the whole package are in view; in order ultimately to reach an agreement embracing all major trading nations, the U.S. may have to accept less than full achievement of some objectives.

II. Objectives

1. A Revised Set of International Trade and Monetary Rules—

a) which will both enhance economic competition and efficiency and promote international payments equilibrium through reduction in governmental barriers and subsidies which distort international trade;

b) which will preserve needed freedom of action in domestic macro-economic policies;

c) which will confine use of discriminatory trading arrangements to clearly defined circumstances in which such discrimination is related to broader political economic requirements;

d) which will avoid discrimination against or among investors from abroad while providing host governments with adequate control over business activities within their territories;

e) which will minimize restrictions for balance of payments purposes by industrialized countries generally on long-term capital flows and avoid their use by the U.S.;

f) which will limit distortion of international transaction by tax and other forms of governmental incentives affecting the location of economic activities and the selection of markets for production;

g) which will promote coordinated consideration of trade and monetary problems, and improved institutional arrangements with and among international organizations as well as national governments providing for continuing high level consultation with respect to the operations of and inter-relations among the international monetary and trading systems and national laws and regulations affecting international trade and finance;

h) which will while leaving necessary scope for national and international consultation and decision-making be clearly spelled out in international agreements.

2. To Help Achieve These Ends, the Monetary System² Should—

a) encourage the use of price-oriented measures and adequate financing facilities to deal with volatile short-term capital flows;

b) encourage the phasing out of gold as a reserve asset;

c) more symmetrically apply pressure to adjust on surplus as well as deficit countries;

d) encourage countries in surplus on current and overall official account to liberalize trade more rapidly than deficit countries as one acceptable means of adjustment.

3. Trade Liberalization

a) We have agreed internationally to seek authority for trade negotiations “on the basis of mutual advantage and mutual commitment with overall reciprocity.” The President has defined our general objective as “progress toward free and fair trade” which requires both rule changes and institutional improvements and a more detailed set of objectives for trade negotiations per se.

b) The “free and fair trade” concept must extend to agricultural trade as well as to trade in industrial goods and raw materials. It requires elimination or harmonization of NTBs as well as tariffs. It postulates that the enlargement of the EC and the negotiations of preferential arrangements including those with EFTA non-applicants will further adversely affect our trade, and that we should seek to reduce the trade-restricting effects of the Common Agricultural Policy, the new discrimination against our exports resulting from the preferential arrangements, and the ability of the EC or other areas to extend such preferential arrangements.

c) We seek acceptance of the principle that, ultimately, tariffs should be eliminated or at least made the only form of protection at the frontier. If the European Common Agricultural Policy continues to frustrate our ability to exploit our clear comparative advantage in some agricultural products we may be forced to impose countervailing restrictions, or to adjust exchange rate relations, which measures, however, would be costly as they would adversely affect our terms of trade.

d) Fair trade implies three related ideas:

1) There must be no discrimination among outside suppliers to any given customs area. This means, in particular, that we seek the end of special preferential arrangements, including reverse preferences, which fall short of full economic unions. Generalized preferences for LDCs should be the only exception, and the exception will be less important as tariffs are progressively reduced.

2) Countries in determining their own economic, commercial agricultural, and industrial policies should endeavor insofar as possible, not to transfer the costs of such policies to other countries, except to the extent to which other countries agree to accept such costs. This principle is particularly important with respect to agriculture, NTBs in general, and export subsidies. A foreseeable exception would be the new orderly marketing/market disruption mechanism (see e(2) below) which contemplates mutually agreed use of safeguards. Unilateral invocation of safeguards would be permitted if agreement could not be reached, but compensation or retaliation would also be authorized in that event.

Unfair advantages, conferred on its exporters by a nation’s tax system, domestic subsidy programs or other arrangements should be eliminated or harmonized internationally through agreed rules. Similarly, advantages conferred on domestic industry or agriculture, whose effect is to introduce a barrier to imports other than a defined tariff, should also be progressively eliminated.

e) Exceptions

In moving toward free trade we and other countries will need defined and acceptable arrangements:

1) to govern and restrict the use of trade or capital controls for balance of payments purposes;

2) to safeguard markets temporarily against disruption by an excessively rapid buildup of imports while domestic adjustment is given time to work with reasonable smoothness;

3) to control indefinitely imports which could compromise national security, health, environment, etc.;

4) to phase reductions in some tariff and non-tariff barriers over longer periods to provide time for easier adjustment; and, perhaps—

5) to maintain moderate tariffs in agriculture since the elimination of barriers to imports of some agricultural products might pose excessively difficult adjustment problems.

f) Constraints

The major constraints on our negotiators—as on others—will be political and balance of payments considerations.

1) The political constraint arises largely because import pressures are specific and vocalized whereas the benefits of trade are general and under-represented in the absence of a strong executive attitude. Realistically, a precondition for Congressional enactment of substantial trade negotiating authority probably is declining or low unemployment. Congressional realities also demand that trade liberalization authority result in clear progress in dealing with what we have seen as inequities for U.S. producers.

2) The balance of payments constraint requires that the process of multilateral trade liberalization support to the extent possible an overall equilibrium in our balance of payments and strength in our current account, which are essential to re-establish confidence in the strength of the dollar and monetary stability.

g) Scope

The scope of negotiations concerning trade and related matters should be sufficiently broad to make allowance for the overall conditions of doing business internationally and to assure that concessions gained by liberalization in one area, e.g., tariffs, are not offset by new restrictions elsewhere. Thus, variations in tax treatment, policies toward foreign investment, regulation of industrial production and sales activity, and industrial and regional policies which distort competition should be negotiated as well as direct trade restrictions.

1. Source: Washington National Records Center, Department of the Treasury, Files of Under Secretary Volcker: FRC 56 79 15, NSDMs. Confidential. Attached to a November 30 memorandum from Flanigan to the Secretaries of State, Defense, Commerce, Treasury, and Agriculture, which indicated the paper was prepared “last summer in cooperation with your departments.” Flanigan’s transmittal memorandum suggests the paper was prepared in the CIEP, but parts of it are identical to the paper that Treasury Deputy Under Secretary Bennett prepared for the Volcker Group Alternates on June 5; see Document 230.
2. The mechanics of a system meeting these criteria including the exchange rate regime, convertibility requirements, and the reserve role of the dollar are not addressed in this “Objectives” paper. [Footnote in the source text.]