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

281. Action Memorandum From Robert Hormats, Harold Saunders, and Helmut Sonnenfeldt of the National Security Council Staff to the President’s Assistant for National Security Affairs (Kissinger)¹

Washington, November 14, 1972.

SUBJECT

• How to Deal with EC Trade Arrangements with Spain and Israel

Flanigan’s staff has submitted for your clearance the memorandum for the President at Tab B proposing a US position for dealing with EC trade agreements with Spain and Israel. This covers Deputy Secretary Irwin’s October 20 memorandum to the President on this subject at Tab C.² We urge your attention to this issue since how we handle it will significantly affect our political relationship and our negotiation strategies with Europe, Spain and Israel.

The Issue

The US has expressed opposition to the EC’s preferential trading arrangements with non-member countries often and forcefully. We have argued that these arrangements are incompatible with the Most-Favored-Nation provisions of the GATT Treaty and fail to qualify for an exemption—which has been granted to customs unions and free trade areas like the EC and the European Free Trade Area—since they allow free trade only in particular products. The agreements also hurt our exporting interests (e.g., citrus, paper products, tobacco). A GATT working group studied the issue in 1971 but made no findings on the consist-ency of the agreements with the GATT Treaty. Our opposition has so far done little good—the EC has made such agreements with the EFTA non-applicant states such as Austria and Sweden and is now doing so with the Mediterranean countries.

The economic agencies of the USG have felt for a long time—and especially since the summer of 1971—that it is time to get the EC and the countries involved either to make these agreements conform to the GATT or to compensate us for the impairment of trade benefits which they cause. Last year we stated that we would seek compensation under Article 23(1) of the GATT, which says that when one party believes that a trade benefit accruing to it under the GATT is nullified or impaired by failure of another contracting party to carry out its obligations, it may with a view to satisfactory adjustment of the matter make proposals to the party or parties concerned and they must give “sympathetic consideration” to such proposals. Because of a year-long wrangle within the USG, we have not yet taken formal action under Article 23(1), however.

Agency Recommendations

State (Irwin), Treasury (Volcker), Eberle and the CIEP staff have recently agreed that we should soon make the long overdue approach to the Israelis, Spaniards, and the EC. They believe this is consistent with the President’s recent guidance, contained in CIEPDM No. 14 (at Tab D),³ which tells Eberle to pursue “for the present” a policy of Ô’modified confrontation” with the EC, exerting pressure on behalf of trading principles and our specific commercial interests but bearing in mind the overriding importance of our political relationship with Europe.

Operating under this directive and on the basis of our position that these arrangements are inconsistent with the GATT, the agencies would tell the parties involved that our trade has been impaired by (a) the special preferences which the EC accords to Israeli and Spanish products and (b) the “reverse preferences” which these two countries accord imports from the EC.

Flanigan has drafted negotiating instructions (at Tab B with Flanigan’s draft memorandum) which instruct our negotiators to (a) tell the Spaniards and Israelis that their agreements with the EC should either be renegotiated or changed to remove their discriminatory character and (b) ask the three participants for compensatory adjustments (duty reductions) covering approximately $750 million of trade. This is an arbitrary figure. (It does not mean we are paid this amount or that our trade will increase by $750 million, but that tariffs on $750 million worth of US exports going to the EC, Spain, and Israel would be reduced.)

All agencies (except perhaps Treasury) recognize that we can never get such a large amount of compensation. But they argue that a claim of this size will impress the three parties with the seriousness of our objections and with the need to change the discriminatory nature of such agreements. They believe that our levying a claim of this magnitude will:

• —Deter the EC from concluding this type of arrangement with other countries (although most such agreements which the EC intends to conclude are already in place so that there is not much to deter).
• —Maintain the pressure on the EC in order to show our determination to bring about reform in the rules and practices which discriminate against us (this could be done in the 1973 trade negotiations).
• —Impress upon the three participants the seriousness of our objections and make it known to the EC that agreements of this nature will entail their paying high compensation to the US to offset their discriminatory aspects. (The agencies feel that unless we take strong measures soon, the EC will doubt that we are serious, since more than a year has elapsed since we first made known our objections in the GATT.)
• —In the end get some offsetting trade concessions from the three parties.

Treasury argues that a successful negotiation with the three parties is “vital” to stopping extension of the EC preference system, which in turn is necessary to constructing a new world economic system, as outlined by the President to the IMF meeting.⁴

The Risks

Irwin and Flanigan point out in their memoranda that there are political problems and risks involved. As we see them the risks are:

• —With Israel. If handled in isolation, this will become a negative issue in our broader relationship with Israel, complicate our efforts to work toward an Arab-Israeli peace, and lead to an atmosphere of confrontation which will be interpreted in Israel as a diminution of US support. Also, if handled in isolation, anything we may do to meet Israel’s concerns will gain us no credit in our broader relationship. Finally, we would be throwing away an opportunity to ask Israel to help us on an issue important to us—agreeing to generous compensation arrangements which we can use as a precedent with other countries. If Israel refused, we would have established justification for asking consideration in other areas.
• —With Spain. Liberal Spaniards regard a closer association with the EC as the key to Spain’s modernization. They will resent what will appear to be an effort to block this trend and as a consequence may prove less cooperative in negotiation with us on base rights. (Ideology apart, it is in fact sensible over the long run to have Spain closely associated with Europe and us.)

As in the case of Israel, we should also consider how to fit the EC preference issue with Spain into a broader negotiating strategy. Spanish agreement to compensate us would help our cases with other non-EC countries in Europe; Spanish refusal to do so might conceivably establish an obligation on the part of Madrid to treat us well when base negotiations begin, probably little over a year from now.

—With the EC. Member nations may interpret this as a sign of our overall hostility toward the Community. Coming as (a) one of the first post-election acts in the trade field by an Administration which has signaled that it wants to put US-European relationships on a new, more constructive basis, and as (b) one of our first policy reactions to an EC Summit which indicated a willingness to negotiate with us constructively on trade and monetary matters, a claim of this magnitude will be criticized if not derided. The EC will say that rather than attempting to seriously discuss outstanding problems, we are making outrageous demands. It might make the Europeans considerably less cooperative in next year’s negotiations on trade and monetary reform.

Irwin thinks that these risks can be reduced by quiet diplomacy, a skillful negotiator, and our falling back when necessary from the three-quarter billion demand.

There is a disagreement between State on the one hand and Treasury, Eberle, and Flanigan on the other, concerning a fallback. The latter group does not want to have the President authorize a specific fallback in advance. Thus, Flanigan’s draft memorandum to the President makes no mention of a fallback and requests that he (Flanigan) be designated to coordinate one as necessary. Treasury and Eberle agree. In either case, political considerations as well as economic should enter consideration of when a fallback is authorized and under what conditions.

The Political Context

Unless this matter is handled carefully, there may be reactions from the EC, Israel, and Spain which will damage the “overriding political relationships” to which the Flanigan CIEPDM refers.⁵

On the other hand, we should not delay this too long. Arguments within the bureaucracy have already dragged on for a year. The agencies are all lined up on this one and adduce strong arguments for proceeding. Most importantly, we must demonstrate to the Europeans that we will not hesitate to pursue our legitimate economic interests.

To make certain that our political relations are not jeopardized, we should do several things:

• —Send Eberle with Irwin to the parties involved so that the economic reas-ons for our initiative can be presented in a political context and so that the countries are reassured that this represents an attempt to deal with legitimate US economic interests and is not a hostile political act.⁶ Flanigan’s memorandum provides for Irwin to accompany Eberle. In the case of Israel at least, this might be supplemented with a direct general approach from the White House.
• —Work our integrated approach for use by Irwin and Eberle in the context of our economic, political and security relations with Europe and the other parties involved. This can help make clear that we do not see this as a political confrontation. Also, a well controlled approach would enable us to use a turn down in our request for compensation as an added chip to cash in to get these countries to do something which we want in another area. For instance, if Israel turned down a private request to be helpful in this field that would give us one more claim—if our relationship is to be genuinely reciprocal—on Israel’s consideration of serious US suggestions on the Arab-Israeli front. This also cuts the other way—we could put our request for compensation in the context of a defense of trade principles and our legitimate trading interests, but indicate also that these countries could strengthen our relationship by giving us appropriate compensation. (Flanigan’s memorandum does not provide for a scenario such as this.)

Flanigan’s draft memorandum and negotiating instructions are appropriate—but only if we can inject a greater political element. Your chief tasks now are twofold:

1. To get Flanigan to hold off until the President has decided how to deal with the whole range of US, Europe and Israel relations in a political-economic context.

2. To impress on him the view that asking for compensation on $750 million worth of trade—while defensible economically in principle and in terms of negotiating strategy—may be counterproductive in political and perhaps economic terms. All three parties might see this as an outrageous demand, not to be taken seriously. Moreover, were we to back down quickly from such a demand—as we would surely have to—the credibility of our position in next year’s monetary and trade negotiations would be suspect.

The memorandum to Flanigan at Tab A makes these two points.⁷

Recommendation:

That you sign the memorandum for Peter Flanigan at Tab A.

Tab B⁸

NEGOTIATING INSTRUCTIONS ON EC-SPAIN AND EC-ISRAEL TRADE AGREEMENTS

I. Objectives and Strategy

The main objective we seek in the GATT Article XXIII consultations with the EC, Spain and Israel concerning their preferential trade agreements are to establish a record of contesting the conclusion of special preferential agreements by the Community which discriminate against our trade and to make it clear that we will acquiesce in interpretations of GATT rules that permit the proliferation of such agreements only if the parties are prepared to pay sufficient compensation to us and thus to serve as a deterrent to the proliferation of such agreements with the EC. While we have made clear for years our opposition to this kind of arrangement, these consultations will mark the first time that we have taken direct action to insist on compensation. We are initiating such action on these two agreements because they were the first to come to a head in GATT after we took the decision in August of 1971 to begin movement toward a major reform of the international economic system. One of our objectives in this reform, over the longer term, is to reach a satisfactory solution which will involve:

1) negotiating new GATT rules governing preferential arrangements and

2) reducing the EC’s external tariff and those of other participants in preferential arrangements.

These objectives will most likely only be achieved in the context of the major multilateral negotiations scheduled to begin next year. In the meantime, our strategy is to create and maintain pressure on the EC and its preferential partners, present and prospective, sufficient to impress on each of these parties a sense of both the seriousness with which we view this problem and our determination to bring about reforms of rules and practices which discriminate against us. At the same time, it is not our intention to precipitate a breakdown in the conduct of these consultations or to prevent progress toward finding mutually acceptable solutions to such problems while preserving intact satisfactory overall relations. As part of the latter concern, our negotiator should bear in mind that the U.S. retains substantial security and political interests in the countries concerned, and that these are particularly acute as regards our military bases in Spain and the promotion of an economically viable Israel as an essential ingredient to peace in the Middle East. These two constraints—the need to maintain pressure for change and the need to preserve a climate of cooperation to bring it about—establish the limits within which these specific Article XXIII negotiations must be kept.

II. Tactics

To meet these strategic requirements, it may be useful to employ tactics which distinguish among the parties with whom we are consulting. For example, in presenting our case to Spain and Israel, we could begin by noting that we are concerned by the issue of principle which the agreements raise and that we intend to make this a major point in our discussions with the EC. However, with Spain and Israel, our main pressure in asking for the consultations is to negotiate satisfactory solutions to our specific trade problems in accordance with GATT rules as laid down in Article XXIII. It is our hope, indeed our intention, that any arrangement we can work out with Spain and Israel will compromise neither their own essential trade interests nor their future commercial or political relations with the European Community. We would indicate our understanding that Spain and Israel were motivated to seek the EC agreements out of concern for their trade positions in the Community, that it is our belief that these positions can be maintained in ways which do not damage the interests of others, and that we would hope that they would understand our trade concerns.

With the EC, we would make clear our concern over our trade position as it may result from these agreements which we believe are contrary to GATT rules and to the spirit of MFN. We would stress the point that the Community’s habit of concluding special trade arrangements for so-called “political or historical relationship” reasons is no longer an acceptable basis for organizing the future international economic system. If the EC feels it must pay special attention to certain countries for such reasons, it should seek means other than discriminatory trade arrangements to accomplish this purpose. These include, for example, a general reduction in trade barriers on an MFN basis, an increase in economic assistance, investment, etc. Thus while we intend to negotiate in these consultations for the compensation due to us from such discriminatory arrangements, our main purpose is to begin the process of a common search for more satisfactory ways of dealing with trade problems of both its agreement partners and outsiders, making it clear that our concern extends to all such arrangements, both past and future.

Our negotiators should therefore be guided by the consideration that these consultations should be conducted as a preliminary move to lead into the major multilateral negotiations. While we would accept a particular settlement from any one or more of the parties to these arrangements, involving adjustment or compensation which we believe is sufficient to be a deterrent to the further proliferation of such preferential and trade agreements by the EC, we could not expect such results in the short run and anticipate that we will eventually move from these consultations into the multilateral negotiations where the chances of a more satisfactory arrangement may be better.

III. U.S. Position

With the above objectives and strategy in mind, the U.S. position should be developed as follows:

1. The European Community-Spain Agreement

We should continue to make clear in GATT and elsewhere our view that the present Trade Agreement between Spain and the European Community is not compatible with the GATT.

We should attempt both to protect our trade interests and reassure Spain concerning our continued “sympathetic understanding of Spain’s objective of full integration” in the European Community.

We should, therefore, inform Spain that we would accept an arrangement which Spain and the European Community might work out which in our judgment is consistent with GATT rules for formation of a customs union, on the understanding that such an arrangement would be most nearly compatible with the objective of full integration. However, if it appears that a customs union is not possible for the foreseeable future, we would be prepared to examine without prejudice an arrangement for a free trade area consistent with GATT rules, strictly construed, which could be regarded as an interim step toward the objective of “full integration.”

In either case, these rules require a definite plan and schedule for elimination of barriers on substantially all trade between the Community and Spain. We would inform Spain that in keeping with our declaration of “sympathetic understanding” we are prepared, publicly, to indicate that this is our position and, if Spain considers this desirable, to so advise the European Commission and the Member States of the Community in diplomatic conversations. We would make this offer to Spain as an indication of our willingness to carry out both the letter and spirit of our 1970 Agreement for Friendship and Cooperation with the expectation that Spain would reciprocate by consulting with us on trade problems in an equally cooperative manner.

In subsequent Article XXIII consultations, we would begin by indicating our belief that the present EC-Spain agreement is not compatible with GATT obligations, and that it should either be renegotiated (as above) or changed by a reasonable date to remove its preferential and discriminatory character. Regardless of whether there was an agreement to change or renegotiate, we would indicate our belief that the U.S. is entitled in principle to adjustment or compensation for impairment of benefits for the total amount of our exports to the parties which are affected during the time the present agreement remains in effect.

However, we recognize that reasonable differences of opinion could arise over this claim, particularly as regards some products on which the preferential margin or volume of trade is not significant. Therefore, we are willing to accept a de minimis criterion and drop claims for adjustment or compensation in those cases where the margin of preference is less than 4 percentage points and U.S. exports are less than $50,000.

We would suggest adjustments to the preferential rate for certain products where we expect particularly significant problems. To the extent that we do not receive adequate adjustments, we should seek compensation in the form of tariff concessions on other products, or a small across the board reduction of the EC and Spanish tariffs could be an acceptable means of redressing the situation.

The negotiator should seek a full examination of our claim by the parties involved, on an item-by-item basis if necessary. If the EC and/or Spain reject either all or part of these claims, the negotiator should request further instructions, indicating where he believes possibilities for action by the EC and Spain may exist as a result of the consultations and his recommendations concerning further instructions.

If the negotiations can be successfully concluded on the basis outlined above, they should also be accompanied by a commitment to consult with the United States, once a year or whenever we deemed it necessary, concerning future compensation due for products on which unforeseen trade damage arises because of the de minimis or other exclusion.

2. The European Community-Israel Agreement

The United States regards the present agreement as incompatible with the GATT obligations of the parties to the agreement. Accordingly, our basic view is that this agreement should be changed, by reasonable date, to remove its preferential and discriminatory character.

In the meantime, pending these changes, the United States in its Article XXIII consultations with the parties should seek adjustment and/or compensation for trade impairment on a basis closely following that outlined above with respect to the Community and Spain.

1. Source: National Archives, Nixon Presidential Materials, NSC Files, Agency Files, Box 219, CIEP. Secret. The signed original of this memorandum is attached to Document 282. On that original Haig wrote: “Flanigan has asked that this be returned for reconsideration.” (National Archives, Nixon Presidential Materials, NSC Files, Subject Files, Box 402, Trade, Volume V 1/72-4/7/73)
2. Document 280.
3. Document 277.
4. See footnote 2, Document 280.
5. Document 277.
6. This Irwin-Eberle advance mission was proposed in the draft CIEPDM at Tab B; see footnote 8 below.
7. Not printed. There is no record that Kissinger signed the memorandum.
8. Confidential. Flanigan considered this paper, which is double-spaced, a draft and requested that it be returned to him (see footnote 1 above). A draft covering memorandum dated November 1 and an accompanying draft CIEPDM are not printed. For Flanigan’s revised memorandum to the President, see Document 282. These draft negotiating instructions are almost identical to those that the President approved pursuant to an April 18, 1973, memorandum from Kissinger and Shultz. (National Archives, Nixon Presidential Materials, NSC Files, Subject Files, Box 322, European Common Market, Volume IV 10/72-7/73)