Foreign Relations of the United States, 1969–1976, Volume IV, Foreign Assistance, International Development, Trade Policies, 1969–1972

244. Memorandum From the Acting Chairman of the National Security Council Under Secretaries Committee (Samuels) to President Nixon¹

Washington, August 28, 1970.

SUBJECT

• Tariff Preferences for Less Developed Countries (LDCs)—Chairman’s Report

1. The Problem

In the next few weeks a series of international meetings will take place to present and discuss the “final” donor country proposals for extending generalized tariff preferences to developing countries. The OECD countries will meet September 7-9 to prepare a report to UNCTAD which will include the “final” offers of the donor countries. The UNCTAD Special Committee on Preferences will meet on September 21 to discuss the proposals and to prepare its final report to be submitted to a special session of the UNCTAD Trade and Development Board. The UNCTAD Board plans to submit a report to the United Nations General Assembly before the launching of the UN Second Development Decade in connection with the UN’s 25th anniversary celebrations in October.

Before the United States can present its definitive proposals at these meetings, several decisions need to be made. The Under Secretaries Committee, under Deputy Under Secretary Samuels’ chairmanship, has reviewed the issues and presents the following recommendations and options for your decision.

2. Beneficiary Countries

NSDM-29 of October 31, 1969² did not deal with question of which countries would be offered preferences except to specify two conditions whereby otherwise eligible countries would lose the opportunity to benefit from preferences in our market: LDCs that grant reverse preferences or LDCs which benefit from special preferences on products covered by the generalized preference system at other than a duty free rate would be excluded from preferences.

In international discussions the United States has joined other developed countries (DCs) in stating that, in general, we accept the “self-election” formula originally developed by the OECD Group of Four in 1967. Under this formula donor countries would in general—subject to an exception for compelling reasons—grant preferences to any country, territory, or area that puts forward a bona fide claim to LDC status. This DC position has sufficient qualifications with respect to any particular LDC. The donors have, by mutual agreement, refrained from discussing the specifics of the question in the OECD meetings and even informal comments have been carefully hedged.

There are three “problem areas”: (1) borderline countries such as Cyprus, Greece, Israel, Malta, Portugal, Spain, Turkey, Kuwait and Yugoslavia; (2) dependent and trust territories (the principal question here is Hong Kong); and (3) communist countries (other than Yugoslavia).³

—Borderline Countries

Although there was reluctance on the part of several agencies to continue to support the self-election principle, all agencies agreed that all the borderline countries indicated above should be considered eligible for beneficiary status, subject to the conditions on reverse and special preferences. (Agriculture stated its agreement was based on the assumption that no additional items would be added to the positive list of agriculture items for which preferences would be offered.)⁴

—Dependent Territories (Hong Kong)

All agencies agreed that we should announce that the United States will exclude Hong Kong from beneficiary status because other major donor countries are not granting Hong Kong beneficiary status. For us to grant preferences to Hong Kong unilaterally would be inconsistent with the burden sharing principle. We would also announce that if the situation should change, i.e. if other major donor countries grant generalized preferences to Hong Kong, we would reconsider our position. (The Commerce Department, although voting for this resolution of the Hong Kong problem, wanted it recorded that it could not conceive of any circumstances under which Hong Kong could be given preferences in the U.S. market. This view was based on the obvious ability of Hong Kong to compete in our market at present tariff levels.) We would grant beneficiary status to other dependent territories on the assumption that other major donors do likewise.

—Communist Countries (other than Yugoslavia)

All agencies agreed that we should not grant preferences to communist countries, other than Yugoslavia, at the outset. However, this position would be subject to review if additional communist countries are eventually granted MFN treatment by the United States.

All agencies agreed that the subject of beneficiaries should be reviewed from time to time and consideration given to the removal from our approved list countries which have reached developed status. In that event, efforts would be made to get such countries to join the donor group.

3. Special Preferences

NSDM-29 contains the following condition concerning LDC participation in the U.S. preference system.

“If duty free treatment cannot be achieved, we should exclude from our preferences countries which receive selective (special) preferences in developed country markets for products covered by the scheme.”

The question is, given the various offers which are now proposed by the prospective donors, does this condition need to be invoked against any LDC?

The State Department, AID, and the Council of Economic Advisers, while opposed to special preferences in principle, agree that since the major donors are moving to zero duty on almost all items included in the preference system, the condition quoted above has for all practical purposes been met. State, AID, and CEA believe that if we were to insist on this condition for the very small amount of trade involved we would make the elimination of “reverse preferences” much less likely and might cause some LDCs to opt out of our preference system. It could also cause the European Communities (EC) to reduce the extent of its offer by the elimination of the items in question from its product list. State, AID, and CEA therefore recommend that we not exclude any LDC because of our special preference condition on the understanding that this applies solely to existing special preferences. Alternatively, they would support the recommendation of other agencies that special preferences be phased out, but would recommend in addition that our representatives be authorized to drop the condition if it becomes clear that our insistence on it would jeopardize our objective of eliminating reverse preferences or could cause a reduction in the coverage of preferences of other donors.

On the other hand, Commerce, Labor, Treasury, Agriculture, STR, and Interior believe that we should continue to insist on the elimination of special preferences before a country can participate in preferences in our market. Special preferences work not only against our economic interests but those of Latin America in particular. All LDCs should have equal access to developed country markets for products included in the generalized preference system. The mere moving to zero duties would not eliminate special preferences; tariff quotas applicable to some LDCs (including the Latin Americans) but not to others would be discriminatory. In addition, these agencies believe that yielding on the principle of special preferences would make an already difficult task of obtaining Congressional approval of the generalized system even more difficult. We should therefore maintain the position that we will exclude from United States preferences countries which receive any form of special preferential treatment on products covered by any of the various generalized preference systems. It would be acceptable to these agencies to instruct our representatives to make every effort to obtain agreement on the elimination of special preferences on products covered by the generalized preference system, but if it appeared certain that this agreement could not be reached, to suggest the following compromise. The United States would agree to include developing countries now receiving special preferences on products covered by various generalized preference systems from the outset as recipients of United States preferences, provided the countries concerned would agree to the phasing out of these special preferences by 1975; otherwise your original condition would prevail. (This position would parallel your decision on reverse preferences.)⁵

1. Supported by State, AID and CEA

a. Special preference condition has been met

b. Seek phasing-out of special preferences, but withdraw condition if necessary

2. Supported by other agencies

a. Insist on elimination of all special preferences

b. Continue to require elimination but accept phase-out if necessary⁶

4. Special Measures for the Least Developed of the Developing Countries

There is intense pressure in international organizations (UNGA, UNCTAD, IA-ECOSOC) for the adoption of special measures to benefit the least developed among the developing countries.

In NSDM-37 (January 28, 1970),⁷ you authorized the U.S. Delegate to the IA-ECOSOC meeting “… to indicate that we are studying various possibilities for special treatment for ‘least developed countries’ under a generalized preference scheme… .” Based on the report of the interagency study group formed to consider the question, the Under Secretaries Committee agreed that there was little that could be done to assist the least developed countries through generalized preferences. This matter is complicated by the lack of any generally accepted definition of “least developed countries.” Thus, it is difficult to consider special measures when the potential beneficiaries are not determined.

All agencies agreed the United States should announce that the different proposals put forward by the LDCs were studied and that, while the United States is sympathetic to the problems of the least developed countries, we concluded that the opportunities for assisting them within a system of generalized preferences are very limited. However, in recognition of their special problems and as an indication of our good faith, (1) the USG is adding to its list of products on which preferences will be granted a limited number of products of special interest to the least developed countries (a number of such items are included in the options contained in the IA-ECOSOC memorandum), and (2) the USG will give priority attention to requests by least developed countries for technical assistance in export promotion and in developing new or improved products for export within the system of generalized preferences.

5. Product Coverage

A. Definition of Excepted Petroleum and Petroleum Products

The decision to except “petroleum and petroleum products” from our preference submission was intended to cover crude and refinery products subject to import control for national security reasons. We deferred notifying the OECD and UNCTAD of the items included in this exception because the review of oil import policy had not been completed and it was uncertain what changes, if any, might be made in our control list. We now must clarify our position.

• —In light of the decision on oil import policy, all agencies agreed that our definition of excepted petroleum and petroleum products should include all items under import control.
• —Benzenoid chemicals (TSUS items 403.02-409.00 inclusive) are petroleum products in that they are based on hydrocarbon molecules found in crude oil but they are not under import control. They are subject to protection by the American Selling Price (ASP) system of customs valuation. If the ASP system is repealed, as the Trade Bill (H.R. 18970) reported out by the House Ways and Means Committee would provide, benzenoid chemicals would lose this protection. Were the Administration to indicate that benzenoid chemicals are to be included in the U.S. preference offer, State, Labor, Interior, Commerce, Treasury, and STR believe the prospect of ASP repeal or the chances for favorable Congressional reaction to an Administration proposal for generalized preferences would be jeopardized. Accordingly, State, Labor, Interior, Commerce, STR, and Treasury recommend that these items also be excepted from the U.S. preference offer as “petroleum and petroleum products.”

B. Definition of Primary Products in BTN Chapters 25-99

An interagency working group has drawn up a list of primary products in BTN Chapters 25-99. The list (Annex A)⁸ contains a total of 454 items. All agencies agree that this list constitutes an appropriate and defensible definition of primary products. (Note: All other items in BTN Chapters 25-99, except for the items on our exceptions list, would be granted preferences.)

C. Positive List of Primary Products in BTN Chapters 25-99

There is no consensus in the OECD on how to treat primary products in BTN Chapters 25-99. Japan will not limit its preference offer to manufactures and semi-manufactures but will grant preferences on all products in BTN Chapters 25-99 except petroleum. The UK and the Nordic countries seem to be leaning in the same direction. The EC has not committed itself. The United States has stated that its proposal does not automatically cover primary products, but that it would consider tabling a positive list of such products on which it would be prepared to grant preferences.

The agencies have agreed that, of the 290 dutiable items on the list at Annex A, the 95 items denoted by a double asterisk should be included in a “positive list” for which preferences would be offered. These items are not particularly sensitive domestically and, in many cases, their inclusion on the positive list is considered necessary to offset the disadvantage domestic producers, who use the primary products in their manufacturing process, might face in competing with LDC producers benefiting from our preferences on finished products. Of the 95 items, 14 items are of special interest to the Latin Americans.

D. Additions to Positive List Agriculture and Fishery Products in BTN Chapters 1-24

The Latin Americans and other LDCs have requested a substantial number of additions to the positive lists of agriculture and fishery products tabled by the United States and other donor countries last November. The agencies have reviewed these requests to determine those products on which it would be desirable and/or feasible for the United States to respond affirmatively. Recommendations and options on these items are included in the IA-ECOSOC memorandum.

In addition to the items of special interest to Latin America, there are 18 items requested by other LDCs. A list of these 18 items is attached at Annex B. No agency objects to adding these items to the positive list if it is decided that the list should be extended.

While Agriculture does not take issue with the additional items to be added to our positive list, it does believe that such action is inconsistent with the principle of burden sharing as applied to agriculture. The current U.S. offer is much better than those made by other donors in product coverage and depth of cut. Adding to our list widens the disparity.

NS

1. Source: National Archives, RG 59, S/S Files: Lot 83 D 305, NSDM 29. Confidential.
2. Document 218.
3. The issues involved in country eligibility for tariff preferences were discussed in a May 21 memorandum from Trezise to Samuels. On that memorandum the Approve option is checked to exclude Communist countries other than Yugoslavia; the Approve option is checked to include Israel (and by extension Kuwait); and the Exclude option is checked regarding Hong Kong. (National Archives, RG 59, S/S Files: Lot 83 D 305, NSDM 29)
4. None of the Approve/Disapprove or other options in the memorandum is checked. For the President’s decisions, see footnote 5 below and Document 245.
5. See Document 234.
6. On September 24 Davis sent Executive Secretary Eliot a memorandum informing him the President had disapproved inclusion of countries that still received special preferences. The memorandum indicated that the President wanted their elimination but would permit a 5-year phase-out. (National Archives, RG 59, S/S Files: Lot 73 D 288, NSC/Misc.)
7. Entitled “U.S. Position for Special Meetings of the Inter-American Economic and Social Council.” (Ibid., S/S Files: Lot 83 D 305, NSDM 37)
8. Neither Annex is printed.