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

354. Memorandum From the Executive Secretary of the Economic Policy Council (McAllister) to Secretary of the Treasury Baker¹

Washington, February 7, 1986

SUBJECT

• Fiftieth Meeting of the Economic Policy Council—February 7, 1986

The Economic Policy Council will hold its 50th meeting at 2:00 p.m. in the Roosevelt Room.² Secretary Baldrige, John Poindexter, Jim Miller, and Clayton Yeutter will join you as principals. John Norton will represent Secretary Block; Tom Moore will represent Beryl Sprinkel; and Allen Wallis will represent Secretary Schultz.

The Council will consider two items: a report of the Working Group on Sugar and the export enhancement program. We would like to take these issues to the President on Tuesday.³

1. Report of the Working Group on Sugar

As a result of the new Farm Bill, the Administration is again facing a dilemma on the sugar quota. You may recall that the President approved in September 1985 the EPC’s recommendations that the quota be reduced by an amount less than the amount necessary to balance domestic supply with demand.⁴ This angered the Hill whose intent was that the quota be used to ensure that the very costly domestic sugar program be run at no visible cost to the taxpayers.

The new Farm Bill virtually removed the President’s discretion in setting a quota by giving him only two options in the current year—both causing an aggregate reduction in imports of 425,000 tons—and requiring that in the out years the domestic sugar program be administered at no cost to the Government.

In signing the Farm Bill, the President stated that the Administration would seek to change the provision of the sugar program requiring a reduction in the sugar quota.⁵

The Working Group focused on: (1) mitigating the harm caused by the Farm Bill to U.S. national security interests and; (2) in the longer term, reforming the sugar program. Only one of the options can be done administratively—the remainder require legislation. The options are as follows:

Mitigating the Effect of the Sugar Quota

1. Reallocate country quotas;

2. Establish a compensation program providing CBI and other lesser developed countries with $102.5 million in offsetting assistance (50 percent in-kind; 50 percent in cash);

3. Establish a compensation program providing $102 million in cash;

Reforming the Sugar Program

4. Propose legislation repealing the “no forfeiture” provision of the domestic sugar program;

5. Reintroduce our Farm Bill proposal to gradually reduce the loan rate to 12 cents;

6. Propose legislation basing the loan rate on market prices; and,

7. Propose legislation controlling domestic sugar supplies.

Last night the State Department and OMB raised two new options:

A. Providing in-kind assistance to the CBI countries through the EEP and Sec. 416.

B. Purchasing sugar from the CBI countries and reexporting it to EC Third World sugar markets.

Secretary Shultz supports option B which has the virtue of targeting the EC. It however also has the apparent drawback of increasing budget outlays.

OMB likes option A because it wouldn’t cost anything.

The Administration is very frustrated by what Congress did in the Farm Bill with regards to sugar and the export enhancement program. Like it or not, however, we must recognize three facts:

1. We do not have any good options left with regards to sugar.

2. We are extremely unlikely to get any legislation changes to the sugar program or any funding for mitigating the effects of the sugar quota on the CBI countries; and

3. As perplexing as these Congressional policies are, there is a logic to them. We are caught up in an agricultural policy spiral with the EC. The EC subsidizes its agriculture and dumps overproduction in the world market. That dumping, in turn, affects our exports, causing U.S. stockpiles to increase. The Administration is, in a sense, caught between the Congress and the EC.

Given these facts, I suggest we change tactics and stop confronting Congress on these issues (as our choices today illustrate, we are not going to win and our responses will become increasingly feeble). Rather we should specifically acknowledge Congress’ concerns, asking that the sugar question remain open to being revisited again next year. In practical terms, this approach would mean:

1. Adopting either option A or B. These may not fully offset the foreign exchange earning losses of CBI countries, but the CBI countries will benefit greatly from our textile initiative. USTR estimates that over the next decade, CBI textile exports to the U.S. would increase five to two-fold.

2. We should not seek legislation to reform the sugar program this year. We should let Congress know that we are hearing what they are saying.

3. We should aggressively pursue consultations with the EC to look at our agricultural policies (not just with regards to trade subsidies or in the context of GATT.)

Dan Amstutz, USDA Under Secretary for International Affairs and Commodity Programs, will make the presentation.

[Omitted here is information on the Export Enhancement Program.]

1. Source: Reagan Library, Eugene McAllister Files, Sugar—Folder 1. No classification marking. Copies were sent to Kingon and Darman.
2. See Document 355.
3. February 11.
4. See footnotes 5 and 6, Document 344.
5. In his statement on signing the Food Security Act of 1985 (P.L. 99–198) on December 23, 1985, Reagan stated that “the legislation includes several highly objectionable features that must be changed.” One of those features was “a mandatory reduction in the size of the sugar quota that threatens to severely disrupt the economics of the Caribbean Basin countries and the Philippines. This provision is inconsistent with the foreign policy objectives of our country and may also be violative of our obligations under international trade agreements.” This provision and other others that Reagan found objectionable “represent the worst in the way of policy,” Reagan concluded. “My administration will seek modifications of these programs next year.” For the full text of the statement, see Public Papers: Reagan, 1985, Book II, pp. 1502–1503.