Foreign Relations of the United States, 1981–1988, Volume I, Foundations of Foreign Policy

194. Memorandum From Secretary of State Shultz and Secretary of the Treasury Regan to President Reagan¹

Washington, May 11, 1984

SUBJECT

• London Summit: Scope Paper

I. YOUR OBJECTIVES

You have three main objectives at the London Economic Summit:

— To send a message to the rest of the world that, under U.S. leadership, world economic recovery has taken hold;

— To strengthen the emerging consensus among Summit countries on policies which will assure that non-inflationary recovery endures and spreads to other countries; and

— To forge new partnerships and broaden the basis for future cooperation with our Summit partners in such areas as space, East-West relations and combating terrorism.

II. SETTING OF LONDON SUMMIT

Since the beginning of your Administration, you have consistently argued that the basis for a smoothly functioning international economy rests on policies to reduce inflation and expand the scope for individual initiative. Your policies have been directed toward reducing obstacles caused by government intervention in the marketplace. The thrust of your message has been that the proper role of the government must be to remove domestic economic rigidities (e.g., excessive taxes, government regulation and planning), to facilitate, rather than frustrate, adjustment to changing circumstances as the best way to create new jobs and durable prosperity.

Your message, strongly reinforced by the conspicuous success of your economic policies, is now broadly accepted by our Summit partners. The change of European attitudes since Ottawa (or even Williamsburg) has been striking. While reduction of market rigidities in Europe will be slow and painful, all now agree that it must begin. Thus, for the first time in the experience of your participation in these Summits, all will be starting from a basis of generally shared analysis and agreement on the facts (recovery has taken hold) and on the objectives of national economic policies (to sustain non-inflationary recovery and to remove obstacles to structural adjustment).

With that fundamental agreement, London offers the opportunity to look beyond current problems and lay the foundations for a forward-looking international economic strategy that will carry our countries and the world toward actions, to be implemented in your second Administration, that will consolidate recovery and advance our objectives of more open world markets. Likewise, in the political area, there now is a broad consensus among Summit leaders supportive of your approach to the crucial East-West issues. This, for us, is therefore a transition Summit, validating the policies we have implemented over the last three years and defining our broad international economic goals for the next term.

III. ECONOMIC AND POLITICAL ISSUES FOR LONDON

A. ECONOMIC

Economic Outlook and World Recovery

All Summit countries are agreed that the major theme of this Summit should be to stress our confidence that economic recovery has taken hold and is developing into a sustainable economic expansion. The task is to pursue policies that assure that recovery endures and spreads to the rest of the world. There is broad, but nuanced, agreement that those policies must embrace more openness of trade and capital markets, and that national economic policies (especially in Europe) should be designed to keep (or bring) inflation down.

The Europeans and Canadians in particular are likely to concentrate discussion on the need to promote structural adjustment. (In fact, the Canadians introduced a specific proposal² on this into the Summit preparatory process.) This will play directly to your strong suit and give you the opportunity to:

— Underline the need to remove obstacles to change in our individual economies in order to provide opportunities for growth and new job creation;

— Stress our desire to cooperate with others in advancing our collective understanding of the potential of market-oriented adjustment; and

— Emphasize the need to manage better our international economic policies (trade, finance, monetary) in ways that reinforce domestic strategies to enhance flexibility and growth.

Concerns will be expressed about high U.S. budget deficits and the fear that they will produce higher interest rates that could choke off recovery and reignite inflation. We suggest that rather than dwelling on our differences over the effect of budget deficits on interest rates, you should stress our agreement on objectives (i.e., to reduce structural deficits by reducing government spending and bring interest rates down), while emphasizing that progress on the first depends on agreement with Congress, and on the second, on convincing markets that we (and others) are serious in our commitment to keep inflation under control.

Debt, Finance, Monetary

We expect discussion to center on the interrelated issues of debt and finance (with the usual reminder from the French on the need for monetary reform). Our objective in the discussions on debt is to confirm that our strategy for managing LDC debt problems on the flexible, case-by-case basis is working and requires no fundamental change.

The strategy has been criticized for lacking a medium-term dimension. This is not true (both adjustment and more open markets are essentially medium-term objectives). However, this Summit offers an opportunity to expand and clarify these aspects of the strategy by stressing four major elements:

— The need for continued adjustment efforts by debtor countries with the support of the IMF and increased lending by commercial banks;

— The need to expand trade between developed and developing countries to promote growth in both and to assure that heavy debtors will be able to earn foreign exchange sufficient to service their debts and validate increased commercial bank lending;

— The need for developing countries to stimulate increased foreign direct investment to earn foreign exchange to service their debts, without further increasing indebtedness, while enhancing growth potential (and the desirability of strengthened IBRD role in acting as a catalyst for such new investment); and

— The need for closer coordination between the IMF and IBRD in order to make the role of the Bank more consistent with that of the IMF in promoting adjustment in LDCs, and in strengthening the IBRD’s contribution to longer-term development.

While these elements have received general support from our Summit partners, it is likely that France and others will want to put heavier emphasis than we on the need to increase resources available to the World Bank, IDA and other institutions; perhaps attacking us for our positions on IDA VII funding³ and the World Bank’s Selective Capital Increase. We should emphasize that we are supporting appropriate levels of funding for these institutions, that these resources are limited, that the proposed increases are adequate if properly used and distributed among those in most need and willing to follow effective policies. An increase in official flows alone will not solve the long-range problem if we and the LDCs do not take the actions we have stressed to make the market work more effectively.

You can also expect that concerns will be raised in this connection about the adverse effects of high U.S. interest rates on debtor developing countries’ ability to service their debts.

Unlike last year, we do not expect Mitterrand to press hard for agreement on the need for an international monetary conference. Progress has been made in following up the Williamsburg commitment to study ways of improving the international monetary system, and the French do not have any basis to criticize us or the other Summit countries on that front. However, Mitterrand will probably recall his interest in monetary reform and underline again his analysis of why it is necessary. As with last year, we expect him to be in the minority on this.

Trade

Prime Minister Nakasone has publicly called for a new round of trade-liberalizing negotiations.⁴ We assume he will take the lead on this at London, with you in support. We expect most to be supportive of a Summit conclusion that a new round is needed and that governments should intensify consultations, in GATT and elsewhere, to permit a decision to launch a new round in 1985 (or “by mid-decade”). It is important to gain agreement at London that a new round is an essential stimulus to the future growth which our domestic strategies are designed to achieve.

You should be aware that all participants are concerned by what they perceive to be increased protectionist pressures in the United States in election-year 1984. They point to the Administration’s actions last year on specialty steel (quotas on foreign imports) and textiles (a tightening-up on implementation of our current quota system). The extraterritorial aspects of our Export Administration Act proposals may also be in the forefront of our Summit partners’ concerns, along with the question of unitary taxation.

Manned Space Station Program

Our overall goal for the London Summit is to build confidence in the current recovery and to lift the sights of Summit countries beyond the present and to prepare our societies to enter the 21st Century. Agreement to participate with us in development of the manned space station will be a concrete symbol of this goal, as well as a practical demonstration of the Summit countries’ determination to prepare the technological base for the future. While our invitation is open to all, eventual participation by all is not crucial to success.

Although agreement to commit resources to the program by the time of the Summit is unlikely, a general agreement to study cooperation may be attainable. You should reiterate your invitation to participate but also confirm your intention to proceed with whichever partners wish to join us.

Environment

Germany and Canada will argue for a Summit commitment to introduce new technologies immediately to control sulfur dioxide emissions and acid rain. We have doubled our budget for research in this area, but are not prepared to take immediate and costly measures on the basis of as yet inadequate information. Japan will seek Summit endorsement for its initiatives on cooperation in “life sciences” and may urge convening a meeting of Summit-country Science Ministers to consider cooperation in research on projects too large for single countries (both of which we can support, as long as the latter does not include the space station, which we wish to keep on a separate track). France will press for continued Summit attention to the technology cooperation projects launched at Versailles.

East-West Economic Relations

While there is little enthusiasm among our Summit partners for a review of East-West economic relations, none will oppose reference to the work underway in various fora and the need to continue our efforts to broaden the consensus which we began to build last year.

B. POLITICAL

Our objectives for the political talks at London can be summarized as follows:

West-West Relations

Bring others to think increasingly in terms of their convergent, global interests and need for increased consultations and coordinated actions; build confidence in European-American-Japanese “trilateralism”.

East-West Relations

Strengthen support for realistic approach to East-West relations, including primacy of effective defense/deterrence and vital role of Allied firmness and solidarity.

Reinforce confidence in U.S. commitment to secure more balanced, constructive and stable relationship with Soviets and in ultimate success of our approach.

Arms Control

Broaden agreement on arms control, including new MBFR and chemical weapons initiatives and need for Soviets to resume negotiations on strategic and intermediate-range nuclear forces.

Secure support for placing arms control in proper perspective— i.e., not an end in itself but a means to strengthen security—and for sustaining defense efforts necessary to give Soviets incentive for significant, equitable and verifiable reductions.

Middle East/Iran-Iraq

Stress our continued interest in promoting reconciliation both in Lebanon and as regards the broader Arab-Israeli problem.

Ensure continued efforts to share information on Iran-Iraq war and to prepare for effective response to any widening of the conflict.

Terrorism

Advance Allied thinking, particularly with regard to state-supported terrorism, including need for close consultations and, where appropriate, coordinated action.

Central America

Deepen understanding of our approach to stability and security in the region, focusing on our efforts to strengthen democracy and local economies, and concomitant necessity of military shield if these efforts are to bear fruit.

Push for more active Allied contribution to achieving shared objectives.

1. Source: Reagan Library, Executive Secretariat, Trip File, Summit File, London Economic Summit 1984; NLR–755–19–26–4–1. Confidential. Drafted by Robert Morris (E) on May 7; cleared in draft by Holmes, Arnold Croddy Jr. (EAP/J), Ruth Gold (EB), Douglas McMinn (NSC), and Sprinkel. Morris initialed for all clearing officials. A typed notation in the top left hand corner of the memorandum reads: “Advance LDX’ed to WH per S/S on 5/11. CB.” Wallis sent the memorandum to Shultz under a May 9 covering memorandum, indicating that Regan had signed it. He added, “The paper, fully cleared by the Sherpa team and interested offices in the Department, identifies our main objectives and discusses the general approach we are recommending the President take in addressing the main economic and political issues in London.” (Ibid.)
2. In telegram 2224 from Ottawa, March 28, the Embassy conveyed information concerning the Government of Canada’s planning for the London G–7 Economic Summit meeting, noting: “GOC officials indicate that the GOC has suggested particular emphasis on structural adjustment. Sylvia Ostry [Canadian Sherpa] is spearheading work within the GOC on a possible paper for the Sherpa meeting—proposing increased cooperation among the IMF, World Bank and OECD. The Canadians want both developed and developing nations involved in the longer-term process of structural adjustment and they also want the economic costs of government intervention to effect adjustment more clearly understood.” (Department of State, Central Foreign Policy File, Electronic Telegrams, D840207–0022)
3. Reference is to the seventh replenishment of the IDA. Negotiations began in November 1982 and continued to the end of May 1984.
4. In a joint statement released at the conclusion of the November 10, 1983, meeting between the President and Nakasone in Tokyo, the Prime Minister stated: “I stressed the importance of promoting the preparations of a new round of multilateral trade negotiations in order to consolidate the free trading system and to inject renewed confidence in the world economy. I am very glad that the President has strongly supported my view. We intend to call on other countries to join in our efforts.” (Telegram 22074 from Tokyo, November 11, 1983; Department of State, Central Foreign Policy File, Electronic Telegrams, D830662–0635) In telegram 2264 from Tokyo, February 6, 1984, the Embassy reported that it had obtained advance copies of Nakasone’s and Abe’s speeches to be delivered before the Diet on February 6. Regarding Nakasone’s remarks, the Embassy indicated that Nakasone “repeats his call for new trade talks to stem protectionism.” (Department of State, Central Foreign Policy File, Electronic Telegrams, D840078–0029) See also Leonard Silk, “London Talks: Getting Ready,” New York Times, April 25, 1984, p. D2.