286. Letter From the Director of the Office of Commodity Policy, Department of the Treasury (Gale) to the Director of the Office of International Commodities, Department of State (Hollick)1
The Department of Treasury has reviewed your paper “Commodity Policy—a Look Ahead”2 and offers the following comments.
The paper characterizes our current case-by-case approach to international commodity problems, sets forth the economic and policy justification for it, and outlines future issues. In Treasury’s view the policy in the paper should not continue to be pursued without a thoroughgoing reassessment.
Treasury disagrees with the premise that the United States should continue to support commodity agreements on a case-by-case basis. The concept that internationally negotiated arrangements provide significant market efficiencies that justify coordinated market intervention is at sharp variance with this Administration’s views. In light of this and of experience to date, the operating thesis that commodity agreements offer overriding economic benefits to both consumers and producers as a result of greater price and supply stability needs to be reexamined. A review should encompass U.S. policy with regard to several issues: U.S. membership in the new Coffee Agreement and the Common Fund; U.S. membership in current agreements; participation in renegotiations; our attitude toward other measures agreements; and new arrangements for financing stabilization of export earnings. The possibility of global economic benefits from price stabilization has been demonstrated in theory under highly restrictive assumptions, but the equitable distribution of these benefits must rely on a bargaining process which often bears little relation to economic justice. Even when the economic implications support opposition to producer proposals in commodity governing councils, overriding political concerns often foreclose an economically rational decision. In addition, any global economic benefits can be quickly dissipated by the large amounts of international capital required to finance adequate stabilization agreements.
[Page 710]In the same vein, the view that commodity agreements contribute to foreign policy goals needs to be reexamined in the light of experience. Commodity agreements may in fact produce more rancor than cooperation. Rubber producers have resisted and effectively thwarted a major downward revision of the price range of the Rubber Agreement, and some are threatening to act outside the Agreement to limit rubber supplies. The Sugar Agreement has had virtually no economic effect in part because it does not cover a major portion of sugar trade, in part because it has inadequate stabilization provisions, and in part because it has been ignored and undermined by the EC. The Coffee Agreement has had perhaps the most noticeable economic effect and may have provided benefits to producers, but at the cost of rigid export quotas which have limited access to types of coffee needed by U.S. industry and which can only be changed by heated negotiations. The Cocoa Agreement, as expected, has been ineffective in defending an unrealistic price range, despite spending over $200 million in the effort. The Tin Agreement has accumulated over 50,000 tons of tin and imposed export quotas, yet disgruntled producing country members are exploring cartel action outside the Agreement. The Wheat Agreement has had no economic provisions since 1972, after the previous agreement’s price and trade regulations were widely ignored by its members.
Treasury recognizes that certain foreign policy objectives might be furthered by membership in a commodity arrangement and those considerations may carry the day. But in our view the arguments will have to be strong indeed to overcome the likely detriment from official intervention in international commodity markets.
In short, the meager benefits possible from stabilization of commodity prices are far outweighed by the likely excessive financial costs, the possibility of consumer cooperation in fixing prices and the frequent erosion of any initial foreign policy benefits.
As a result of these views, we find deficient many of the economic arguments supporting U.S. participation in renegotiation of the sugar and cocoa agreements.
With respect to jute, it has no economic provisions so there are no significant economic benefits to be derived by the U.S.—which is a major importer. There may be other justifiable objectives for such “other measures” agreements but market stabilization is not one of them.
Since the Treasury Department cannot support commodity agreements, we also see no need for a Common Fund. Nevertheless, we recognize that the Common Fund Agreement was negotiated and signed by the United States, that it is important to a number of countries, and that it could be a major item on the agenda at UNCTAD VI. Therefore, [Page 711] we propose that the U.S. position be carefully reviewed during the next several months.
Turning to the subject of earnings stabilization, in your paper you indicated Treasury would prefer to cut back access in percentage terms, which I interpret to mean a reduction in allowable drawings from 125 percent of quota to 100 percent. Although this idea, together with others has been discussed, no such proposal has been put forward and Treasury has no position on it. The U.S. Government would agree to a review of the IMF’s Compensatory Finance Facility at an appropriate time, but we emphasize that the review need not necessarily result in a further liberalization of the CFF.
The U.S. Government should continue to oppose the UNCTAD proposals for a complementary financing facility; these are nothing more than massive resource transfer schemes which in many cases also delay sectoral adjustments which many countries should undertake to correct fundamental weaknesses in their economies. If the State Department wishes to review the idea of a global “stabex,” it should be raised at the Cabinet or Sub-cabinet level in the near future. As you know, past analytical work has suggested such a scheme would be enormously expensive besides having the drawbacks of other proposals. In view of the difficulties the Administration is having in obtaining appropriations to cover U.S. obligations in the major financial institutions, the prospects for U.S. support of a new and larger financing scheme are dim at best.
Considering the views expressed above and the operational commodity policy the U.S. representatives have been espousing at several international meetings, we believe it is necessary to have an interagency review and a restatement of Administration policy. We intend to pursue such a review in the near future.
Sincerely yours,
- Source: Department of State, Bureau of Economic and Business Affairs, General Commodity Subject Files, 1965–83, Lot 84D247: Commodities General 1982. No classification marking.↩
- A copy of the paper is in the Department of State, Bureau of Economic and Business Affairs, General Commodity Subject Files, 1965–83, Lot 84D247: Briefing Book for Mr. O’Mahoney December 1982.↩