Foreign Relations of the United States, 1981–1988, Volume XXXVIII, International Economic Development; International Debt; Foreign Assistance

274. Memorandum From Henry Nau of the National Security Council Staff to the President’s Assistant for National Security Affairs (Clark)¹

Washington, May 3, 1982

SUBJECT

• Full Cabinet Meeting, May 4, 11:00 a.m.

As far as I know, there are two items on the agenda: 1) sugar import quotas (see background paper at Tab I),² and GATT round of trade negotiations with developing countries (see background paper at Tab II).³

SUGAR IMPORT QUOTAS

The Cabinet Council on Food and Agriculture has already recommended that the President impose sugar import quotas.⁴ With world sugar prices falling, USDA can no longer defend the domestic sugar price support program with fees and duties alone. The full Cabinet must decide, in imposing this quota, whether or not to give preference to the Caribbean Basin countries.

As things now stand, prior to implementation of the Caribbean Basin Initiative, Caribbean countries could export this year to the United States up to 180,000 tons each on a duty-free basis under the Generalized System of Preferences (GSP). The three largest Caribbean suppliers—Dominican Republic, Panama and Guatemala—cannot export duty-free since they have exceeded the competitive need limit (180,000 tons) under the GSP system.

With the implementation of the Caribbean Basin Initiative, which will not pass Congress before July in any case, all Caribbean suppliers could export duty-free up to the competitive need limit, and the three largest suppliers could export duty-free up to an absolute quota equivalent to approximately 110% of average annual shipments from these countries over the last three years (Dominican Republic 780,000 tons, Guatemala 210,000 tons and Panama 160,000 tons). The President mentioned the 780,000 ton figure to President Guzman in a letter of March 23 (see Tab III).⁵

The quotas being proposed will reduce the level of sugar exports to the U.S. from all Caribbean suppliers. One scheme advanced by USDA allocates roughly 38% of the quota to Caribbean suppliers on a strictly historical basis. Another proposed by State allocates 52% of the quota to the Caribbean on a preferential basis (see page 4 of Tab I for these numbers). In both cases, the quotas for the big suppliers are less than the amounts they might have shipped without the quotas (e.g. Dominican Republic shipped about 800,000 tons last year and would ship only 640,000 tons this year under the State proposal and 492,000 tons under the USDA proposal).

Under these circumstances, the State proposal should be preferred. USTR and most other agencies, however, strongly oppose applying the quota on a preferential basis. They believe this would violate GATT and make non-Caribbean suppliers such as Australia, Brazil, The Philippines, Mauritius and others very unhappy.

Hence, the USDA proposal is likely to be favored. It accords no quota preference to the Caribbean suppliers and the tariff preference provided by the CBI is not likely to go into effect before the end of this fiscal year. The only way to offset the negative effect of the quota is to administer it so as to minimize the use of fees. Currently, a fee of 4.98¢ per pound is applied to sugar imports at the border. If this fee were waived or reduced over the rest of this fiscal year, as much as $70 million additional revenues would accrue to the Caribbean suppliers. The current memo to the President (Tab I) does not allow for the reduction of these fees.

OMB is said to favor an arrangement by which the fee would be reduced to a minimum of 2¢ per pound, in which case some $50 million worth of fees would still be charged. This amount would then be provided to the Caribbean suppliers in additional foreign aid. Dave Stockman is said to support a request for adding $50 million to the CBI supplemental of $350 million for FY82.

If this alternative were accepted, it would represent a reasonable compromise even though it is unlikely that Congress will approve additional supplemental assistance.

TRADE

Bill Brock is proposing a new round of trade negotiations with developing countries. This proposal is an exceptionally imaginative one. It is directly in line with the President’s Cancun policy which stressed the importance of trade and private investment as essential complements to foreign aid. And it represents a global initiative to go along with the President’s Caribbean Basin Initiative, a program that in practice closely relates trade and aid.

The proposal calls for:

— bilateral negotiations with individual developing countries, particularly the advanced LDCs like Brazil, Hong Kong, India, Israel, Korea, Mexico, etc.

— a reduction from MFN tariffs for developing countries in return for reduction in their tariff rates on other trade barriers, such as quotas or licensing requirements.

— binding these agreements under GATT, even in those cases where the developing country partner is not a member of GATT, thereby drawing more LDCs into GATT.

This proposal was discussed at the Trade Policy Committee meeting yesterday⁶ and received general approval provided it was discussed at the OECD in general terms only and we proceeded to develop some of the analysis indicating what is to be gained through improved access to LDC markets. At the full Cabinet meeting, Labor and Commerce will express the most serious objections. State and AID will strongly support the proposal. I recommend that you also support it, pointing out that it places the President in a leading position on trade issues at a time when the trading system is in serious difficulty.

I have attached talking points on both of these subjects (Tab IV).⁷

1. Source: Reagan Library, Assistant to the President for National Security Affairs Chron File, Case file 8202960; NLR–812–88–15–1–6. Confidential. Sent for information. A stamped notation reads “Noted” at the top of the memorandum.
2. Not attached.
3. Not attached.
4. In an April 22 memorandum to Reagan, Block explained: “Given current conditions in the world sugar market, the only effective means of supporting domestic sugar prices is a quota on sugar imports. Imposition of a quota designed to achieve the specified price support level is inconsistent with this Administration’s free trade policy and will complicate U.S. efforts to challenge restrictive trade practices of Japan and the European Community. While acknowledging these trade policy problems, the Cabinet Council nevertheless unanimously recommends imposing a restrictive quota on sugar imports through the end of the current fiscal year.” (Department of State, Bureau of Economic Affairs, Office of Economical and Agricultural Affairs Files, Official Economic Summit Files, 1975–1991, Lot 93D490: 1982 Versailles Summit Cabinet 1982)
5. Not attached.
6. Sunday, May 2.
7. Not attached. McFarlane wrote at the bottom of the memorandum: “Henry, 1) Dave Stockman came up with a phantom Sec32 slush fund which we can tap to rebate Carib fees. 2) Everyone endorsed Brock’s trade initiative. Bud.”