SIGNIFICANCE OF RECENT EEC FARM AND TRADE AGREEMENTS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP79-00927A004300110004-1
• Release Decision: RIFPUB
• Original Classification: S
• Document Page Count: 11
• Document Creation Date: December 19, 2016
• Sequence Number: 4
• Content Type: REPORT

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,%W IWFPK
7 February 1964
OCI No. 0317/64C
Copy No. 73
CENTRAL INTELLIGENCE AGENCY
SIGNIFICANCE OF RECENT EEC FARM AND TRADE AGREEMENTS
SPECIAL REPORT
OFFICE OF CURRENT INTELLIGENCE
S-lOP.I/:0
SECRET
GROUP I Excluded from automatic
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7 February 1964
SIGNIFICANCE OF RECENT EEC FARM AND TRADE AGREEMENTS
The agricultural and trade policy agreements
reached at Brussels in December by the six members
of the European Economic Community have imparted
fresh momentum to the integration process envisaged
by the Common Market treaty. The agreements--con-
cluded after arduous negotiation--are vague on im-
portant details, subject to varying interpretations,
and still incomplete. Nevertheless, they have
averted another community crisis over conflicting
basic interests and have restored some of the sense
of common purpose which De Gaulle nearly destroyed
a year ago with his veto of Britain's bid for mem-
bership. Prospects for some further strengthening
of community institutions are favorable, and the
belief is current once more that increased economic
unity will itself necessitate some form of unified
political control. The goal of European political
union remains elusive, however, and proposals for
some kind of federal or confederal arrangement still
face serious difficulty.
The December meeting in
Brussels was largely the result
of a German attempt to "synchro-
nize" further progress toward
a common agricultural policy,
which will open up wider markets
primarily for French products,
with decisions of vital conse-
quence for the others--notably the
uermans and the Dutch--affecting
their trade relations with non-
members. As the 31 December
deadline approached for agree-
ment on the working program,
both the French and the Germans
stood firm on their respective
national interests, and the fi-
nal compromise gave no clear
victory to either. The imple-
mentation of the agricultural
regulations agreed upon is likely
to be delayed longer than the
French desire. On the other
hand, the Germans will be forced
to await the Kennedy Round
tariff negotiations, scheduled
to get under way in May, before
they will know how much success
they had in gaining acceptance
for a liberal approach on trade.
On the agricultural side,
the "package" deal arrived at
included regulations establish-
ing common markets for beef and
veal, rice, and dairy products,
and a proposal for a regulation
on vegetable fats and oils. The
meeting also discussed a pro-
posal regarding cereal prices,
agreed on regulations govern-
ing a community-wide agricul-
tural support fund, and issued
a statement of intention regard-
ing European parliamentary super-
vision of the support fund's
management.
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The trade policy package
includes EEC positions on the
extent to which tariffs on in-
dustrial items should be cut
in the Kennedy Round negotia-
tions, and on exceptions to
this cut. The trade package
also contains a formula for
determining so-called "dispari-
ties" in tariff levels, and a
special formula proposed by the
EEC Commission for dealing with
agricultural products in the
Kennedy Round.
Dairy Products
The problem of devising a
regulation to establish free
trade in dairy products in the
EEC was complicated by the exist-
ence of large dairy surpluses
in some EEC countries and the
reliance of others on imports
from nonmember countries to
meet their large and growing
demands.
The arrangement worked out
to meet this problem calls for
gradual adjustment of national
milk prices toward a single EEC
price by 1970. Germany and
Luxembourg are permitted to con-
tinue direct subsidies during
the transition period to ease
the impact of their high-cost
producers. The EEC Commission
was directed, however, to "rec-
ommend" the gradual replacement
of producer subsidies based on
market prices with indirect "so-
cial" subsidies which do not en-
courage inefficient farmers.
The effect of these arrangements
will be to delay the opening of
German markets to other member
states, and Germany is permitted
to continue its imports of Dan-
ish butter. France and the Neth-
erlands, however, will benefit
immediately from increased com-
munity subsidies to finance ex-
ports of dairy products.
Arriving at agreement on
the dairy products regulation
was made more difficult because
the competing interests of the
various producers of edible oils
had to be considered. Producers
of milk and butter in Italy and
France have insisted that the
community surplus in these prod-
ucts could be reduced if consum-
ers were not offered margarine
at prices one third that of but-
ter.
The Italians wished to link
the dairy market with the fats
and oil market--a draft regula-
tion for which was also agreed
upon--in such a way that taxes
on margarine would. finance dis-
posal of dairy surpluses. This
was not agreed to, but a tax on
both community-produced and im-
ported margarine was instituted,
the proceeds of which will be
used principally to support
Italian producers of olive oil.
EEC sources anticipate that
the tax will not raise the price
of margarine enough to make but-
ter more competitive. If mar-
garine consumption declines, how-
ever, US interests could be hurt
since the bulk of American soy-
bean exports go to the Common
Market for the production of
margarine.
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The conflict of interests
between producing and import-
ing countries was also the crux
of the problem in the rice reg-
ulation, which establishes a
clear preference in community
markets for Italian and French
rice. Implementing regulations
still to be worked out will de-
termine the exact degree of
protection against US and other
exporters. At German insist-
ence, the members agreed to in-
clude in all agricultural mar-
ket regulations a reference to
an article in the EEC treaty
which promises that interests
of foreign exporters will be
safeguarded.
In the negotiations re-
garding the beef and veal mar-
ket, the French and Dutch hoped
to assure for themselves an in-
creased share of the growing
Italian and German markets. The
latter countries, however, sought
to protect their own livestock
raisers and maintain their im-
ports from non-EEC producers.
The protection agreed upon is
at a higher level than origi-
nally proposed by Germany and
Italy, but the Italian inter-
est in preserving Latin Ameri-
can exports of frozen meat was
satisfied. Concessions were
made in the case of German im-
ports of Danish beef. The US
has been concerned that in-
creased protection of the EEC
market might force major world
exporters of beef to find other
customers, thus exerting more
pressure on US markets.
On the key agricultural
question in the Common Market--
the unification of the various
national grain prices--the Brus-
sels negotiators -ostponed ac-
tion until next April.
Under the terms of the EEC
treaty, the establishment of
.one price for each grain is not
mandatory until 1970. However,
the plan submitted by EEC Com-
missioner Mansholt last fall ac-
celerates the timetable and would
establish a common grain market
now by unification of prices at
a level about midway between cur-
rent German and French price
levels. Because of domestic po-
litical considerations, Bonn
has rejected any such move be-
fore 1966 at the earliest, but
the Erhard government may yet
agree in principle to the Man-
sholt plan provided implementa-
tion is delayed.
While postponement of a
decision on the Mansholt plan
thus leaves unresolved a matter
of major political as well as
economic import to both the EEC
and its trading partners, it
also avoided the possibility of
a major break between France and
Germany.
Technical considerations
will be important in settling
the issue--e.g., the effect of
the price level proposed by Man-
sholt in expanding French out-
put and discouraging the higher
cost German production. Con-
siderations of political bargain-
ing will also be important; Ger-
many may exploit France's
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interest in getting the agri-
cultural issue settled to pro-
mote French agreements to tariff
reductions in the Kennedy Round.
The Mansholt proposal raises
difficult questions for the EEC's
foreign grain suppliers. To the
extent that European grain pro-
duction expands under the Man-
sholt Plan, it threatens the in-
terests of the US and other grain
suppliers of the EEC. The higher
the prices set by the community,
the greater the encouragement
to European grain production at
the expense of foreign suppliers.
Moreover, early unification of
grain prices would affect such
exporters more suddenly than
unification at the final stage
of market integration in 1970.
On the other hand, price levels
in Europe are trending upward,
and the prices proposed by Man-
sholt now are probably lower than
those which would be set if price
unification is delayed to a
later date.
The Agricultural Fund
Completing the agricultural
package are the decisions which
will set into operation the Euro-
peanOrientation and Guarantee
Fund. Established in 1962, but
inactive up to now, the fund will
provide community-wide financing
for the disposal of surpluses
and for the reorganization and
modernization of community agri-
culture.
Contributions to the fund
are to be made both from national
budgets and, increasingly, from
the accumulated levies on im-
ports from nonmember countries.
Since West Germany is the largest
importer of foodstuffs in the
EEC, these arrangements will
in effect result in substantial
German support for the market-
ing of France's export surpluses.
Germany succeeded, however, in
obtaining a reaffirmation of
the treaty provision that its
total contributions to the com-
munity's budget shall not ex-
ceed 31 percent of the total
budget.
Because it is unclear how
the fund will work in practice
and because of the huge sums
involved--perhaps $800 million
by 1970--the Dutch insisted
that the fund be placed under
the control of the European
Parliament. This will be dis-
cussed later this month in con-
nection with the problem of re-
inforcing that body's budgetary
powers.
While these decisions on
agricultural questions have im-
portant implications for the
American farmer, the main US
interest in the year-end agree-
ments at Brussels focuses on
decisions regarding the EEC's
position in the coming tariff
bargaining at Geneva. The mem-
ber states approved as a "work-
ing hypothesis" the US objective
of a 50-percent linear cut in
tariffs as set forth in the US
Trade Expansion Act (TEA). How-
ever, few European officials
really expect this objective
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will be realized. Despite the
efforts of the Dutch and Germans
to induce a liberal EEC attitude
on trade matters, the positions
adopted at Brussels on specific
TEA issues reflect to a consider-
able extent the protectionist
views of France.
On agricultural trade, the
members agreed that farm products
should be included in the Kennedy
Round, but on the basis of a
proposal--the "second Mansholt
plan"--which has raised serious
objection in Washington. Under
this plan an attempt would be
made to calculate and to com-
pare total amounts of agricul-
tural support, subsidization,
and protection among the various
countries. The technical dif-
ficulties involved in this ap-
proach would be formidable. The
Common Market's level of protec-
tion, which would in principle
be the subject of bargaining in
the Kennedy Round, will not be
determined until 1970. The US
has also taken the position that
such matters as price and income
supports should be treated apart
from customs protection in sep-
arate negotiations on nontariff
obstacles to trade. In sum, it
remains unclear whether the
EEC intends only io oiler non-
members some assurance that their
present EEC markets would be
preserved rather than to nego-
tiate an expansion of trade in
accordance with the general aim
of the tariff conference.
The directives given the
EEC Commission for negotiating
on industrial products are also
unclear in several important
respects. The central issue
is whether the tariff cut on
industrial products shall be as
deep as 50 percent or something
less. Closely related, however,
are the problems of the number
of exceptions to be allowed from
any linear cut agreed upon; the
terms and conditions for nego-
tiating nontariff barriers to
trade; and how to deal with
tariff "disparities," i.e.,
sizable differences in levels
of protection for the same prod-
uct in different countries.
Largely because of the
.intense French interest in it,
the disparities question has
tended to predominate in the
discussions. The EEC now is
proposing to define as a dispar-
ity and treat as an exception
to any linear tariff reduction
those tariffs which in one
country--say the US--are twice
as high as those in the EEC and
separated by at least ten per-
centage points. Although the
number of disparity items so
identified would be reduced
somewhat by certain additional
"qualitative" criteria, the US,
British, and other observers
believe the EEC's formula would
permit it--in a substantial num-
ber of cases--to claim justifi-
cation for a smaller reduction
in its tariffs than it would
expect of others.
Whether the opposition of
the other Kennedy Round partici-
pants will be sufficiently strong
to compel the EEC to retreat
from this approach is far from
certain. France's support of
the disparity formula is based
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to some extent on its desire to
reduce the scope of any over-all
tariff reduction. The prospects
thus do not seem bright that
France would compromise on this
point, except as part of a pack-
age which would include the other
outstanding questions.
Implications for
Community Institutions
The great difficulty which
the EEC countries had in reach-
ing the year-end agreements has
drawn attention once more to the
problem of the future develop-
ment of the community's institu-
tions. The manner in which
agreement was finally reached
has resulted in a further ex-
tension of the effective influ-
ence and authority of the EEC
Commission. This trend seems
likely to continue because the
Commission's arbitral role in-
evitably carries with it a meas-
ure of political authority.
Community observers have
been impressed by the great
skill with which the Commission
played this role in the end-of-
year conference. This was demon-
strated in its handling of the
Mansholt grain price unification
plan, which even though it has
not yet been accepted, helped
reduce growing tension over this
problem. Moreover, the Commis-
sion's agricultural-trade pack-
age as a whole was evidently
so well prepared and realistic
in terms of the conflicting
interests involved that the
French accepted it almost imme-
diately and the Germans did so
after only short deliberation.
The enactment of further
common regulations in pursuit
of closer economic integration
has made it more difficult and
expensive for any member to
disrupt the Common Market. This
is especially true in the case
of France. By insisting on a
further integration of agri-
culture, Paris has formalized
its dependence on the other five.
Moreover, despite De Gaulle's
distaste for supranational in-
stitutions, he achieved his ob-
jective in this instance with
the assistance of the supra-
national Commission, and in the
process enhanced its prestige.
Further strengthening of
the institutional framework of
the European community is also
the objective of the plan to
merge the executives of the EEC,
the Coal-Steel Community, and
EURATOM, which is to be dis-
cussed by community ministers
in late February. A move to-
ward a formal merger of the com-
munities themselves at a later
date, the plan would combine
the three councils, the two com-
missions, and the High Authority,
and establish all of them in a
single location. If approved,
such a merger would increase the
prestige of the community exec-
utives, enable them to attract
personnel of a higher caliber,
and improve coordination among
the three communities. This re-
organization would strengthen
the executive's hand particularly
in dealing with problems such
as the common energy policy which
now span the competencies of the
three existing communities.
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However, inasmuch as the
present community administra-
tions or "technocracies" in
the eyes of some European po-
litical leaders tend already
to usurp national powers, an
even more centralized executive
would probably give rise to
new demands that it be brought
under some form of control.
Some of the pressures to "con-
trol the technocrats" have in
the past come from those who
feel that the primacy of the
member states is endangered.
Others are genuinely interested
in assuring that the European
bureaucracy is in fact con-
trolled by the European Parlia-
ment.
Chancellor Erhard in par-
ticular has recently stressed
the need to strengthen the Euro-
pean Parliament, but he has of-
fered no specific proposals.
In practice, the parliament has
been increasingly given to de-
bating issues under considera-
tion by the Common Market Coun-
cil of Ministers. These de-
bates have tended to reinforce
rather than limit the three com-
munity executives because of
the strong federalist bias which
prevails among the parliamentary
members. There is at present
no consensus on the need for
direct election of members--a
project the federalists have
long attempted to push. The
best prospect, therefore, for
enhancing the presently weak
role of the parliament is in
the budgetary field, notably
in connection with the adminis-
tration of the agricultural
fund.
European Political Union
Apart from these specific
moves to strengthen existing
community institutions, there
has been much talk in the capi-
tals of the Six in recent months
about possible new initiatives
toward a more general European
political arrangement. There
has been a general feeling, re-
inforced by the Brussels com-
promises, that renewed progress
in economic integration is creat-
ing a more favorable climate for
political discussions. Many
European observers believe that
the international role which De
Gaulle foresees for Europe and
for France cannot be achieved
without political ties among
the Six--ties going beyond those
the Common Market is forging.
Nevertheless, all the old ob-
stacles to political unity con-
tinue to exist, and it is still
questionable whether recent events
have made them less formidable.
The negotiations on a po-
litical union treaty foundered
in the so-called Fouchet Commit-
tee in 1962, in part because the
other five feared that France
wanted to subordinate the exist-
ing community institutions to
the new ones--in which Paris
would retain a veto. De Gaulle
has since acquiesced in the strength-
ening of the Brussels institu-
tions, but he has given them no
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credit for the year-end agree-
ments, and in his 31 January
press conference, he harked
back to his political union
proposals of two years ago.
The 1962 talks also foun-
dered on the question of Brit-
ain's participation in the dis-
cussions. De Gaulle referred
in his 31 January press confer-
ence to the question of Britain
as one of the problems which
has lost its "virulence." Since
December when rumors of some
new initiative toward political
union began to be heard, how-
ever, the British Government
has made a concerted effort
among France's five partner
to assure Britain's participa-
tion in any such negotiations.
Moreover, while none of the five
has any confidence that London
would contribute anything posi-
tive to such political negotia-
tions, the Netherlands seems
to have assured the British of
its support.
The main reason that agree-
ment on a European political
union still seems distant, how-
ever, is that the prospective
participants fear they may
have to accept Gaullism as the
price of unity. They are dis-
puting not so much how the
union should be organized as
they are over the policies
the union will follow--espe-
cially inits relations with
the US. In a federal union,
or in league with Britain,
they would feel relatively
certain of not being obliged
to follow where De Gaulle
might lead should they
choose not to do so. The
other five will be grati-
fied that De Gaulle now
feels the EEC is in a bet-
ter position to proceed with
the Kennedy Round. They will
be less comforted, however,
that De Gaulle still sees
European political coopera-
tion as the alternative to
"surrender of Europe to con-
trol by America." (CONFIDEN-
TIAL NO FOREIGN DISSEM)
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