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

374. Memorandum From the Under Secretary of State for Economic and Agricultural Affairs (Wallis) to Secretary of State Shultz¹

Washington, December 16, 1986

SUBJECT

• The International Coffee Agreement (Cont’d)

We have a news item since you approved my suggestion for using tough tactics to end the practice of discount sales to non-member countries of the International Coffee Agreement (ICA). Despite our warnings after previous similar instances, a group of coffee exporting countries have agreed to restrict exports to firm up the price of coffee. (See Tab 1.)² Any such restriction is a direct violation of the ICA. This, time a group of Central American countries and Colombia joined with Brazil in the announced plan.

Superficially it appears that the U.S. has no immediate recourse, other than withdrawing outright from the ICA. The economic provisions of the ICA are suspended, due to high prices, and furthermore, Congress has not yet acted on our request for an extension of the implementing authority. The latter means that technically we are not in compliance with the agreement ourselves, although at the moment that is either inconsequential, or more realistically is a source of leverage.

I am also concerned about the systematic drag on supply that results from the African and Latin American habit of paying coffee growers an average of less than half the world price. Unlike the rubber agreement, the ICA has no “supply assurances” provision that would permit us to question this habit, as we did (successfully) in the case of rubber. Although those governments follow that practice for most agricultural products, regardless of any international agreement, there can be no doubt that the dominant producer countries in the ICA manage the quota with a view to blocking or discouraging the expansion of supply. The present process, with its favoritism toward Brazil and the Francophone African countries, serves our political and economic interests very poorly. We should not sit still for it; we do our friends in Central America, as well as our own consumers, a disservice to the extent that we acquiesce in these practices.

Therefore, we have the following responses to the news and to the fundamentals of the ICA:

(1) ARA has privately told the governments involved that if U.S. congressional committees hear of the attempt to rig the market, we will be in for a rough time trying to justify extension of the implementing legislation. That could change, ARA said, if the other governments stopped hurting their own cause and worked with us, as suggested in President’s Reagan’s letters to various heads of state, to improve the ICA. However, under the present circumstances the U.S. cannot support the calling of a meeting of the ICO Council, nor attend one if called, to discuss reinstating the economic provisions of the ICA. Finally, ARA said, we are bound to take another look at our support for the extension of the implementing legislation unless the countries involved rescind their proposed export limitation. (See Tab 2.)³

(2) Assuming, as seems likely, that the producers cancel or disown their market-rigging arrangement, we will see to it that in the next round of negotiations (probably in January), our delegation insists on economic provisions that facilitate ample, reliable supplies of coffee, to the extent permitted by the scope of the present ICA. Events since the last time we tried to get such provisions have strengthened our hand, in that we will now have a much better chance of getting the needed cooperation from other consumer countries.

(3) In particular, we will see to it that our delegation leans hard on the producing countries to reform the quota allocation process, and in so doing to call Brazil’s bluff on its threats to withdraw from the ICA. The objective is to make the allocation system more transparent and to base it on sound economic criteria, so as to minimize the damage of the combination of policies affecting supply. We will also push hard for the other reforms that we failed to get just over a year ago.

(4) Besides all this, I will want to set things in motion well in advance of the 1988 renegotiation to take a hard look at the option of ending our participation in the ICA when the present agreement expires. It is necessary to look not only at the abuses and violations we have been seeing, and at the fundamental flaws in principle of a marketing cartel. Our review of the advantages and disadvantages of continued participation needs to be realistic about how poorly such agreements work out in all respects, compared to what they are supposed to do, on paper.

Allen Wallis⁴

1. Source: Reagan Library, George Shultz Papers, Executive Secretariat Sensitive (12/05/1986–12/18/1986); NLR–775–16–43–3–4. Confidential. Quinn’s initials are stamped on the memorandum.
2. Attached but not printed is telegram 16864 from Bogota, December 3.
3. Attached but not printed is telegram 383825 to multiple Latin American diplomatic posts, December 11.
4. Wallis initialed “AW” above his typed signature.