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

53. Minutes of a Cabinet Council on Economic Affairs Meeting¹

Washington, October 1, 1981, 8:45 a.m.

Attendees: Messrs. Regan, Brock, Weidenbaum, Anderson, Porter Lyng, Davis, Trent, Wright, Lovell, Sprinkel, Gray, Hormats, Leland, McPherson, Dederick, Bailey, Denoon, Gribbin, Hopkins, Kass, Nau, Schneider, Tyson, Ms. Kirkpatrick and Ms. McLaughlin

1. Cancun Summit

The Council reviewed a series of papers on potential initiatives for the Cancun Summit.² Secretary Regan outlined the background of the Cancun Summit and the drive for Global Negotiations, and the schools of thought regarding various approaches to the Summit. He emphasized that the purpose of this meeting was not to discuss the merits of different approaches to Global Negotiations, but rather to systematically review possible U.S. initiatives relating to investment, foreign assistance, and trade.

The initial discussion focused on the thrust of the President’s remarks at the IMF and World Bank meetings,³ the foreign reaction to the President’s speech, the need to strengthen existing international agencies, the importance in expanding private sector investment of protecting against exploitation and expropriation, the need to articulate better the U.S. record in aiding developing countries, and the fact that international cooperation and economic growth depend on sound domestic policies.⁴

2. Cancun Summit: Investment

The Council reviewed three papers on possible investment initiatives including cofinancing, multilateral investment insurance arrangements, and incentives under bilateral tax agreements for investment in developing countries.⁵

The discussion focused on the need for additional arrangements to increase the flow of private investment in developing countries, the role multilateral investment institutions can play as catalysts in generating greater private investment through cofinancing programs with commercial banks, and the impact of U.S. tax treatment on LDC investment tax incentives.

There was general agreement that a major constraint to the flow of direct investment to the LDC’s is investors’ perceptions of high political risk.

Decisions

The Cabinet Council approved recommending further development of a multilateral insurance arrangement,⁶ such as an International Investment Insurance Agency (IIIA), within the framework of the World Bank or its affiliate, the International Finance Corporation (IFC). The Council supported the concept that tying such an insurance arrangement to the World Bank could significantly increase its effectiveness since the potential loss of World Bank funding should prove a powerful deterrent to expropriation.

The Council requested Mr. McPherson to prepare a paper developing additional details of such a proposal including dispute settlement and arbitration mechanisms, financial obligations, and control mechanisms (weighted versus non-weighted voting rights).

The Council approved recommending active U.S. support for increasing substantially the level of private cofinancing activities of the World Bank and the International Finance Corporation.

The Council determined that it was premature to endorse any specific tax proposals but approved recommending that the U.S. express a willingness to discuss new arrangements without supporting any specific changes in advance.

The Council requested the Department of Treasury Office of Tax Policy to review a Department of Commerce suggestion to eliminate the loss recapture rules under Section 904(f) for U.S. investments in selected foreign countries. Most foreign investments have losses the first few years and, if conducted by a U.S. branch, can be offset against U.S. profits. Under 904(f) later incorporation of such a branch cannot be used to get a complete tax credit for the investment in profitable years—in effect, the prior losses reduce the complete availability of the foreign tax credit.

3. Cancun Summit: Energy Assistance

The Council reviewed a paper on energy assistance programs prepared by the Department of State and A.I.D.⁷ The discussion focused on past A.I.D. energy assistance programs, the usefulness of energy feasibility studies and whether they should be undertaken exclusively by the private sector or also be funded through assistance programs, the value of training foreign nationals in the U.S., the use of energy assessment programs, the fact that half the countries in the world have energy prices below world market prices, the level of interest abroad in a World Bank Energy Affiliate, the amount of World Bank funding already committed to energy projects, the prospects for an OPEC oil facility, and the need to refocus U.S. bilateral aid on programs which provide technical assistance and concentrate on training.

Decisions

The Council approved encouraging sound LDC policies that promote development and that strengthen the private sector emphasizing the important role of market forces, especially in pricing policies; and continuing to support existing multilateral institutions and to honor our commitments to them.

The Council approved refocusing U.S. bilateral aid on programs which provide technical assistance and concentrate on training.

The Council approved placing increased emphasis in energy programs on technical assistance for energy assessment and training, reforestation, and research and development where our aid complements the private sector.

The Council requested Mr. Hormats to prepare a paper analyzing the energy assessment program to date.

4. Cancun Summit: Agricultural Assistance

The Council reviewed a paper on agricultural assistance programs prepared by the Department of State and A.I.D.⁸ The discussion focused on the steady U.S. emphasis on agriculture in its foreign assistance programs (it accounts for over half of U.S. foreign assistance), past priorities in aid programs, the impact of food price policies in developing countries undercutting production, the need to avoid an emphasis on small farms, and the attainability of self-sufficiency in food production for many developing countries.

Decision

The Council approved supporting continuing efforts to improve agricultural technology, encouraging LDC’s to establish market pricing policies, and placing increased emphasis in agricultural programs on expanding food production.

5. Cancun Summit: Trade

The Council reviewed a paper, prepared by USTR, on trade policy for the Cancun Summit. The discussion focused on the U.S. record in an absolute and comparative sense in providing markets for LDC exports, the effect of a change in interest rates for selected LDC’s, and the need to challenge other developed nations to join in strengthening the GATT in ways that encourage the further adoption of market-oriented, outward looking policies by developed and developing countries.⁹

Decisions

The Council supported recommending seeking at a 1982 GATT Ministerial a reduction in the barriers against LDC goods and services, pressing for strong discipline on safeguard actions to reduce arbitrary, secretive, inter-industry trade restraints, and supporting extending the Generalized System of Preferences, in some form, beyond its scheduled termination in 1985.

The Council requested Mr. Porter to prepare a paper for Mr. Deaver, the U.S. coordinator for the Cancun Summit, summarizing the Council’s review of possible initiatives for review with the President.¹⁰

The Council also requested Mr. Porter to oversee redrafting the papers prepared for today’s session to make them more concise.

Council members were also requested to provide their suggestions for the President’s opening remarks at Cancun to the State Department within the next two days.

1. Source: Reagan Library, Ralph Bledsoe Files, Office of Policy Development, Cabinet Councils, Other Cabinet Councils, Cabinet Council on Economic Affairs III. No classification marking. Drafted by Porter. The meeting took place in the Roosevelt Room at the White House.
2. An unknown hand underlined “reviewed a series of papers.” The papers are attached but not printed.
3. See footnote 3, Document 38.
4. An unknown hand wrote “R/O” in the left margin.
5. In the left-hand margin next to this sentence, an unknown hand wrote “R/O” and crossed it out.
6. An unknown hand underlined “approved recommending” and wrote and circled an “S” in the left-hand margin.
7. An unknown hand wrote an “S” in the left-hand margin next to this sentence.
8. An unknown hand wrote an “S” in the left-hand margin next to this sentence.
9. An unknown hand wrote “S” in the left-hand margin next to this sentence.
10. The October 3 memorandum from Porter to Deaver summarizing the CCEA’s review of possible initiatives undertaken and conclusions reached during the October 1 CCEA meeting is in the Department of State, Bureau of Economic and Business Affairs, Investment Policy Files, 1981–1984, Lot 85D193: Cancun Summit—Initiatives.