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

287. Action Memorandum From the Assistant Secretary of State-Designate for Economic and Business Affairs (McCormack) to the Under Secretary of State for Economic Affairs (Wallis)¹

Washington, December 22, 1982

SUBJECT

• 1983 International Coffee Agreement

ISSUE

Negotiation of the 1983 International Coffee Agreement was concluded in September 1982. An interagency review of the agreement is underway to establish an Executive Branch position on submitting the agreement to the Senate for ratification. Should the Department of State recommend U.S. participation in the 1983 International Coffee Agreement?

BACKGROUND

Negotiations for the 1983 International Coffee Agreement (ICA) were completed in late September 1982 by the 70 members of the International Coffee Organization (ICO). The U.S., an ICO member, actively participated in the negotiations for the 1983 ICA.

The 1983 ICA is the latest in a series of producer-consumer coffee agreements that began in 1963 (U.S.-Latin American cooperation on coffee dates back to World War II). The 1983 ICA would replace and carry forward most of the provisions of the expiring 1976 ICA with relatively minor modifications. The central economic feature of both agreements is the commitment to attempt to stabilize coffee prices within a range that is fair to consumers and remunerative to producers through individual country export quotas and a control system enforced by the importing members. Quotas are reduced to defend the price floor and expanded or suspended to defend the ceiling.

The United States played a major role in the negotiations of both the 1976 and 1983 agreements, seeking to assure a balance of benefits to producers and consumers. The $1.15–1.50 price range, established in 1980 and unchanged since, provides a reasonable incentive for continued coffee production while allowing prices to react within limits to traditional market factors. Consumers have a direct input in determining the aggregate annual quota and exercise influence over the distribution of that quota among coffee types. U.S. coffee roasters are satisfied that their supply requirements are being met in both quantity and type. Further, our participation in the ICA was conditioned on cessation of unilateral attempts at market manipulation by producers. With 30% of the consumer votes resulting from our trade share, we have a virtual veto on major policy decisions taken under the agreement.

The above features of the ICA apply to nearly 95% of world coffee traded, covering nearly all exporters and 90% of the importing countries. With this broad participation, the agreement can be given some credit for the fact that coffee prices have remained within or near the price range for the two years the economic provisions have been in effect (see annex l).² Experience at the upper end of the range is admittedly limited, but early in 1982 prices exceeded the range, quotas were expanded, and prices dropped. Econometric simulations performed by the Department indicate that in the event of moderate or severe supply disruptions (e.g. a frost in Brazil) the operation of the ICA could save U.S. consumers as much as $400–500 million over five years compared to the situation absent an agreement.

The importance of coffee to the economies of a large number of Caribbean and other producers accounts for their perception of the need for, and importance of, the International Coffee Agreement and our continued participation. Coffee exports account for over 50% of total export earnings for seven countries, including Colombia and El Salvador. Nine others (e.g. Guatemala, Honduras, Costa Rica, Ivory Coast and Kenya) rely on coffee for between 20 and 50% of their export earnings (see annex 2).³ In most of these countries, political and economic stability are closely linked, and economic stability often hinges on a more predictable coffee market such as that encouraged by the ICA. These countries recognize that the economic provisions of the ICA cannot function without the United States, the world’s major coffee consumer. Thus Brazil, Colombia and other coffee producers consider our participation in the ICA a reflection of our overall bilateral relations. In the multilateral context, commodity matters will be a major agenda item for UNCTAD VI in June.⁴ Any indication that the U.S. will not participate in the 1983 ICA will be viewed by a majority of developing countries as a major shift in U.S. policy.

Of the major foreign affairs agencies participating in the interagency review, USTR, Commerce, and Agriculture are expected to recommend that the Administration submit the ICA to the Senate for ratification. Treasury is not expected to oppose the ICA per se, but may use this issue as an occasion to express objections to U.S. participation in commodity price stabilization agreements in general. The U.S. coffee trade and industry have historically taken a strong interest in the ICO, participating actively and cooperatively in ICA negotiations and implementation. Their major representative, the National Coffee Association, has gone on record as favoring U.S. participation in the 1983 ICA. There is not believed to be any significant Senate opposition to ratification of the ICA. The Senate ratified the 1976 ICA unanimously.

RECOMMENDATION

That the Department of State support Senate ratification of the 1983 International Coffee Agreement.⁵

1. Source: Department of State, Files of the Under Secretary of State for Economic Affairs, W. Allen Wallis, Chrons; Memo to the Secretary/Staff and Departmental/Other Agencies; Memos to the Files; White House Correspondence, 1987–1987, Lot 89D378: State/Treasury Working Lunch 1982. No classification marking. Drafted by Stephen Muller (EB) on December 14; cleared in ARA/ECP. Hill initialed the memorandum and wrote: “1/11.” A stamped notation at the top of the memorandum reads: “Received Under Secretary’s Office Dec 28 1982.”
2. Attached but not printed is the graph entitled “Coffee Prices (Cents per Pound).”
3. Attached but not printed is a list entitled “Coffee Exports as a Percent of Total Exports, 1981.”
4. See footnote 9, Document 283.
5. On January 11, Wallis approved the recommendation. In the bottom margin of the last page, McCormack wrote: “Allen: In principle I am opposed to commodity agreements. This may be an exception which we should approve for reasons contained in the memo, Dick McCormack.”