INTELLIGENCE MEMORANDUM AN EXPANDED EUROPEAN COMMUNITY: SOME ECONOMIC IMPLICATIONS FOR THE UNITED STATES

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001700020011-6
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 33
• Document Creation Date: December 22, 2016
• Document Release Date: May 18, 2010
• Sequence Number: 11
• Publication Date: August 1, 1971
• Content Type: IM

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25X1
Confidential
DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
An Expanded European Community.-
Some Economic Implications For The United States
Confidential
ER IM 71-158
August 1971
Copy N2 129
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WARNING
This document contains information affecting the national
deicnse of the United States, within the meaning of Title
18, sections 793 and 7 9.1, of the US Code, as amended.
Its transmission or revelation of its contents to or re-
ceipt by an unauthorized person is prohibited '~y law.
F'j,-,,.j;"u and
1. ..__drdaulLmYun
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CONFIDENTIAL
CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
August 1971
An Expanded European Community:
Some Economic Implications For The United States
Introduction
1. An expanded European Community 1/ (see the
map) will pose new economic challenges and oppor-
tunities for the United States. Community commer-
cial policies already affect US economic interests,
and claims of EC protectionism have grown. More-
over, the Community's Common Agricultural Policy
(CAP) is said to have adversely affected our trade
in an area where we have a clear competitive
advantage. The almost certain extension of Com-
munity policies to a larger group of countries,
the continued proliferation of preferential trading
arrangements, and the planned increase in the
degree of economic integration in the Community
may impair US economic interests, but the dynamic
affects of enlargement could offset resulting US
Losses.
1. The term European Community (EC) is used as a
coZZective for (1) the group of six countries con-
stituting the European Community, and (2) the
three treaty organizations now referred to as the
European Commz.:nities -- the European Economic
Community (EEC), the European Coal and Steel Com-
munity (ECSC), and the European Atomic Energy
Community (EURATOM).
Note: This memorandum was prepared by the Office
of Economic Res.;arch and coordinated within the
Directorate of Intelligence.
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2. This memorandum surveys in a general way
the economic implications for the United States of
an expanded EC. It considers the impact Community
policies have had to date, and the likely impact
of an enlarged Community on US agricultural and
non-agricultural exports, US overseas investment,
and our role in the international monetary system.
The memorandum also assesses the impact on US
economic interests of an extension of preferential
trading arrangements to the European Free Trade
Area (EFTA) 2/ non-applicant countries, and to the
developing Commonwealth countries in Africa and
the Caribbean.
Discussion
Background
3. It is highly likely that the EC will soon
be enlarged. The EC-UK accession negotiations
are virtually concluded and negotiations with
the three other applicant countries -- Denmark,
Ireland, and Norway -- are well advanced. Despite
continuing opposition in Britain and opposition
in Denmark and Norway, where referendums on the
issue are planned, the EC probably will be enlarged
to a Community of ten, on or near 1 January 1973.
4. This opens up prospects of eventual far-
reaching changes in the international economic
balance of power. Even now the Community of six
carries a substantial economic clout. In 1970 the
ten had a gross national product (GNP) of $628 bil-
lion (see Figure 1), roughly 65% of our GNP and
about three times larger than Japan's, the next
largest Free World economic power. The entire
group's trade (including intra-group trade) --
$226 billion in 197U -- was about 38% of total
world trade, compared with the US share of 14%.
2. The present EFTA members are Austria, Denmark,
Finland, Iceland, Norway, Portugal, Sweden, Switzer-
land, and the United Kingdom. Of the EFTA members,
only Denmark, Norway, and the United Kingdom have
applied for membership in the European Community.
- 2 -
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Expanded Community and Its Preferential Trading Partners
ICELAND
Community of Ten
Present EC Members
0 Co
BERMUDA
A T L A N T 1 C
O C E A N
Present EC Associates and Preferential Trade Partners
The Community of Ten will also have preferential trade relations with Fiji,Tonga,
Western Samoa. and member state dependent territories and overseas possessions.
511691 0.71
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EC and US: Relative Economic Saze,*1970 Figure 1
Population (Millions)
Community of Ten**
Total Trade (Exports Plus Imports)
International Reserves **** Note: Change in scale
*In billion US dollars unless otherwise Indicated
**EC, UK, Denmark, Ireland, and Norway
"'Includes antra-EC trade
****April 1971. Golf, SDR's, reserve position In the IMF and foreign exchange
511886 8.71
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GNP
250 '-
Figure 2
EC: Growth in GNP and Inorts from the US, 1960-1970
1960
Total Imports from the US
250 r
100 I I 1 I I I I I
1960
Imports of Manufactures from the US
200
250
-
1
1970
Imports of Agricultural Products from the US
200 r-
100 1 I I I I I I I I I
1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970
-Except for Imports of agricultural products, where 1988-170, the GNP Index for that year.
1988 was the last year before widespread Implementation of the CAP.
511687 8.71
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The ten's international reserves now exceed $40 bil-
lion, a sum more than 2.8 times the US level.
5. The Comymunity is not a supra-national state
with the ability to marshal all its economic re-
sources in support of supra-national objectives.
It is, however, a virtually complete customs union
with a common external tariff (CXT) , complete
internal free trade among members, and a Common
Agricultural. Policy. It has also gone part way
toward becoming a common market and since July
1968 the free movement of labor has been guaran-
teed. After a five-year transitional period the
four new members would be fully integrated.
6. In addition to broadening geographically
the EC plans to substantially deepen the degree of
its economic integration. The six have embarked
on programs to harmonize their indirect taxation
systems, to abolish restrictions on capital move-
ments, and to insure the right of establishment
and to provide services. The members are also
seeking to develop European-wide industrial poli-
cies and to harmonize their energy policies.
The Community hopes to ultimately achieve the
long-range goal, agreed to at the Hague Summit
in December 1969, of economic and monetary union.
Bonn's decision to float the mark, however, has
temporarily halted progress in the latter area,
although some of the parallel steps toward co-
ordination of policies for business cycles have
been initiated.
How American Interests Have Fared
7. Intra-EC trade grew from $20.3 billion in
1960 to $86.1 billion in 1970, or from 10% to 18%
of Community GNP. Trade with non-Community members
has also grown rapidly. Community imports from
the United States grew from $3.8 billion in 1960
to $9 billion in 1970 (see Figure 2). The Com-
munity's share of world trade, excluding intra-EC
trade, has remained relatively constant at about
17%.
8. How American non-agricultural exports --
crude materials and fuels and manufactured prod-
ucts -- to the six member states would have fared
in the Community's absence cannot be determined,
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but it does not appear that a substantial trade
loss has occurred. Community tariffs on minerals
and fuels are generally very low, and for many
products the member states have little productive
potential. US mineral and fuel exports conse-
quently have probe.bly not been adversely affected
by the Community's formation.
9. US manufactured exports -- about 65% of
our sales to the six -- clearly benefited from
rapid, growth in the six, which may, in part, be
attributable to the existence of the Community.
They grew from $2 billion in 1960 to $4.5 billion
in 1969 -- a substantially faster growth than for
total US manufactured exports. As a consequence,
the EC's share of our exports of manufactures
rose from 15% in 1960 to 17% in 1969.
10. The strong US export performance for manu-
factures also reflects tariff reduction in the
six member states. The relatively high French
and Italian tariffs were adjusted downward to con-
form with the requirement of Article 24 of the
General Agreement on Tariffs and Trade (G.ATT) that
a customs union's external tariff be no higher
than the weighted average of the pre-union tariffs
of the member states. For non-agricultural prod-
ucts, the CXT itself was reduced by about one-half
as a result of the Dillon (1958-60) and Kennedy
Rounds (1962-67) of tariff negotiations. When
the very substantial Kennedy Round cuts become
fully effective in January 1972 the CXT for non-
agricultural items will average only about 8% --
approximately the US level and about 2 percentage
points less than UK tariffs. Moreover, Community
tariffs also tend to be concentrated in the range
below 10%. Only 17% of the Brussels Tariff
Nomenclature (BTN) product categories will be
covered by Community tariffs higher than 10%,
once the Kennedy Round cuts are fully implemented,
and only 0.2% of the product categories will be
covered by tariffs above 20%. In contrast, 32%
of the BTN product categories will be covered by
US tariffs in excess of 10%, and 7% will be
covered by US tariffs above 20%.
11. EC policy has had a marked impact on US
agricultural exports. The CAP, implemented for
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most products by 1967 although continuing to be
expanded, provides a high level of protection for
most temperate zone agricultural products, but
without production controls. For most of these
products, particularly grains, there is a complex
system of internal support prices. Import levies
apply, to most CAP products to shield the domestic
market from competition. These levies essentially
raise import prices to a level well above world
market prices. Although general inflation and an
implicit freeze in the support prices for the
three-year period 1967/68-1970/71 reduced the
spread, Community prices are still substantially
above UK and world market prices (see Figure 3).
Moreover, the Community increased prices for the
1971/72 crop year, and the spread will again widen.
The effect of high support prices is to raise farm
income, increase output, reduce imports, and shift
consumption patterns. Community surpluses are
often disposed of through subsidized export in
normal commercial channels.
12. According to one estimate, US agricultural
exports to the Community were about $250 million 3/
smaller than they would have been if the existing
national systems had continued. EC agricultural
imports from the United States declined from $1.3
billion 4/ in calendar year 1966 to $1.1 billion
in calendar year 1969. Although exports recovered
in 1970 to the 1966 level, this was largely due
to unfavorable weather conditions in Europe. US
exports to the United Kingdom and other developed
countries also declined in the period as subsidized
EC exports displaced US sales.
13. The CAP's effect on our agricultural ex-
ports has been concentrated in a few products.
US grain exports were hard hit, declining from
3. This widely quoted estimate was developed in
a Brookings Institution study.
4. Standard International Trade Classification
(SITC) sections zero, one, and four; excludes
certain products classified by the Department of
Agriculture as agricuZturaZ products. The Depart-
ment of Agriculture estimates that US exports of
agricuZturaZ products to the EC declined from $1.6
billion in 1966 to $1.3 billion in 19G9.
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$503 million in 1966 to $316 million in 1969.
Poultry exports have dried up, and like wheat,
third market sales were hurt by subsidized EC
exports. US soybean sales, however, have been
sustained since high Community grain prices en-
courage the substitution of high-energy feed and
protein supplements such as soybean for grain in
animal feed. There is no internal support price
for soybeans (the Community produces few soybeans)
and duty free entry is guaranteed under a GATT
binding. US soybean exports to the Community
were approximately $277 million in '1969.
14. In the aggregate, our trade, current
account, and basic balances with the Community
have been favorable (see Table 1) . In 1970 the
United States had a merchandise trade surplus
with the six of over $1.7 billion, compared with
a $1.2 billion deficit with Japan and a $1.4 bil-?
lion deficit with Canada (see Figure 4). 1 The
US current account balance with the Community was
not as large as the cik.3e balance because of US
deficits on transportation and travel accounts
and US military expenditure in Europe, which more
than offset investment earnings of over $1.1 bil-
lion. The current account surplus with the six
accounted for 52% of the total US current account
surplus in 1970. The flow of US investment to
the Community has ?,`aper..ed off in recent years, in
part because of US controls, and in 1970 there
was a net inflow of long-term capital from the
Community to the United States. The US bilateral
basic balance with the Community consequently
showed a surplus in 1970 of $532 million, in con-
trast to our very substantial world-total basic
balance deficit of $2.3 billion.
15. It is very difficult to arrive at a net
judgment as to the past impact of the EC on US
eco::omic interests. Estimating the future impact
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Figure 3
Selected Agricultural Prices, UK, EC Official, and French Producer
UK Price
Barley
6 -
------....__.,French Producer Price
01 1 I I I 1 I I
1965/66 72/73
Beef
40 r-
01
1965/66
Milk
6 r-
01 I 1 I I I I 1
1965/66 66/67 67/68 68/69 69/70 70/71 71/72 72/73
'EC target price. Absence of an entry in earlier years indicates that single market stage
not yet begun.
"EC Commission proposal. not yet approved by EC Council
511688 8.71
72/73
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US Trade, Current Account and Basic Balances,
World-wide and with EC, UK, Japan, and Canada,,* 1970
Trade Balance
2,468 World-wide
Current Account
Balance
"CIA Estimates
511689 8.71
Figure 4
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US Balance of Payments with the European Community
Million US $
1966
1967
1968
1969
1970
1,305
803
150
1,045
1,718
Exports
5,412
5,278
6,066
6,873
8
369
Imports
-4,107
-4,475
-5,916
-5,828
,
-6,651
Transportation (net)
-227
-211
8
15
39
Travel and passenger fares
(net)
-303
-283
-497
-582
-676
Investment earnings (net)
70
15
290
164
314
Other service receipts
and transfers (net)
665
694
414
484
387
Current account balance,
excluding military
1,510
1,018
365
1,126
1,782
Military expenditure (net)
-1,127
-1,109
-1,087
_1,172
-1,285
Current account balance
383
-91
-722
-46
497
Long-term capital (net)
-369
-240
1,641
1,771
35
Basic balance
14
-331
919
1,725
532
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of Community enlargement is, of course, even more
difficult. Some forces set in motion by enlarge-
ment are likely to hinder, whereas others are
likely to help US exports, investment, and other
interests.
Impact of Enlargement on US Trade
16. As a consequence of enlargement, the United
Kingdom and the three other applicant countries,
will adopt the commercial policies and regulations
of the EC. Tariffs among the United Kingdom,
the three other applicants, and the EC, will be
reduced in stages and complete internal free
trade will exist in a Ccommunity of ten by 1978.
Simultaneously, British external tariffs will be
adjusted downward to the generally lower CXT;
Danish, Irish, and Norwegian tariffs will be
adjusted upward; and some further adjustment may
be made in the CXT itself to conform with the
GATT Article 24 requirement that a customs union's
tariff ne no higher than the average of the pre-
union tariffs. The British will also phase out
their Commonwealth preferences and lose the re-
ve-se preferences they now receive in the de-
veloped Commonwealth countries. With enlargement,
the CAP will also be extended to a Community of
ten and the applicants will adopt the agricultural
prices and import levies of the EC
17. The problem in estimating the impact of
these changes on US trade is that the magnitude,
and even the direction, of some of the more impor-
tant potential changes is unknown. The principal
clearly defined commitments of the new members
concern tariffs and acceptance of the CAP. History
and economic anaJysis indicate that the net impact
of these well defined changes on US exports (see
Table 2) will probably be relatively small. For
US exports of crude materials and fuels there
should be little if any impact, because EC tariffs
on such products are generally very low. For
manufactured products it is unclear whether the
net impact will be positive or negative, although
some machinery and chemical exports may be hard
hit.. For agricultural. products the impact will
be more serous, but still not large in the aggre-
gate. The trade loss will likely be concentrated
in grains and possibly tobacco. EC enlargement
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US Balance of Trade with the European Community,
the United Kingdom, and Community of Ten a/
1969
Million US $
EC
United
Kingdom
Community
of Ten
Total US exports (f.o.b.)
6,873
1,970
9,106
Of which:
Exports of crude materials
and fuels b/
1,189
188
1,448
Exports of manufactures
4,501
1,435
6,245
Exports of agri^ultural
products
940
331
1,349
Total US imports (f,o.b.)
-5,828
-2,121
-8,454
Trade balance
1,045
-151
652
a. The European Community, the United Kingdom, Denmark, Ireland,. and
Norway.
b. Standard International Trade Classification (SITC), sections two
and three, including under crude materials certain pr,~ducts classi-
fied by the Department of Agriculture as agricultural products.
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does have potentially serious implications for US
trade (and our other economic interests) but only
in the long term and under certain conditions.
The development of an EC industrial policy, for
example, could seriously impair US exports of high
technology manufactures. These are areas, however,
in which enlargement involves no policy commitment.
Wide differences exist among the present EC members,
and the evolution and influence of UK policy is
uncertain.
Impact gn US Non-Agricultural Exports
18. US exports of many manufactures may be
hurt by the elimination of tariff barriers between
the six and the new members but the overall net
impact will almost certainly be small, probably
even smaller than the past effect of the very sub-
stantial tariff discrimination caused by the for-
mation of the EC and EFTA.
19. US net losses in manufactured exports to
a Community of ten due to the tariff changes
brought about by enlargement are estimated to be
about $150 million annually at the end of the
transitional period. 6/ This low estimate reflects
the low CXT average tariff level, the low inci-
dence of high tariff rates in the CXT, and. the
downward adjustment in UK tariffs as part of the
alignment to the CXT. This adjustment should
stimulate US exports to the United Kingdom just
as the adjustment in French and Italian tariffs
stimulated US exports to France and Italy. The
phasing out of U.Y. preferences to the developed
Commonwealth countries should provide a further
boost to US sales. Danish, Irish, and Norwegian
tariffs, however, will increase with the alignment
to the CXT, and U;t manufactured exports to these
markets will probably be hurt somewhat.
20. The $150 million trade loss estimate does
not include the impact of tariff changes on US
6. This estimate w' prepared by the Department
of State in conjunct-::on with National Security
Study Memorandum (NSSM) 79. Although sensitive
to the assumptions made about the effect of price
changes on the quantity demanded, we believe the
estimate to be reasona-ble.
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manufactured exports to non-EC countries. As
indicated below, US exports to the present EFTA
countries which are not applying for EC member-
ship 7/ could be affected rather severely by a
free trade arrangement for industrial products.
On the other hand, US exports to developed Common-
wealth countries are expected to increase as the
reverse preferences these countries grant the UK
are phased out.
21. The estimate also does not consider the
possibilit`, that EC enlargement will stimulate
growth in the member countries of an enlarged Com-
munity, particularly in the United Kingdom. The
expectation that UK growth will accelerate is
indeed one of the main reasons why the British
government has opted for entry. Higher income
will mean greater total imports of manufactures,
including greater imports from the United States.
US gains from more rapid economic growth in an
enlarged community thus could offset US losses
resulting frommgreater tariff discrimination.
22. Although the net overall effect should be
small, specific US exports will be hard hit.
About half of the estimated trade loss will occur
in the machinery sector, and another 40% in
chemicals. US exports of paper and paperboard
products could also be seriously damaged, depending
on the arrangement worked out with the EFTA non-
applicants.
23. After enlargement, EC competitiveness both
in the United States and in third markets is likely
to grow. The enlarged Community will permit manu-
factures to realize increased economies of scale.
To the extent that the productivity increases re-
sult in decreases in product prices, enlargement
will make European manufacturers more competitive
with US producers in the US market and in third-
country markets. Britain's introduction of a
value added tax (VAT), similar to that employed
in the EC, 8/ should boost British exports because
7. Austria, Finland, Iceland, Portugal, Sweden,
and Switzerland are not applying for membership.
8. Although facilitating entry, the VAT was to
be introduced in the United Kingdom regardless
of the outcome of the accession negotiations.
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the tax, unlike the direct taxes on which Britain
mainly relies at present, may be rebated to ex-
porters under GATT rules. Part of the resulting
stimulus, however, will be offset by the infla-
tionary effect in the United Kingdom of higher
food prices directly related to the adoption of
the CAP.
24. Possible moves of the Community toward a
more integrated system including the development
of an industrial policy could eventually have a
large impact on US exports, particularly exports
of high-technology manufactures. We depend partly
on growing exports of high-technology products
(roughly half of our total world exports), par-
ticularly aircraft and computers, to maintain our
international trade position. The economic size
of an enlarged Community and its enhanced tech-
nical capabilities as a result of enlargement,
will encourage the trend toward greater self-
sufficiency in advanced manufactures. Spokesmen
in the United Kingdom and the six have emphasized
that enlargement will facilitate the development
of European companies with the capability to chal-
lenge American technical superiority.
25. A closely related potential problem is
government and quasi-government procurement policy
in the Community. Substituting a "buy Europe"
program for existing "buy national" programs and
implementing plans to provide a technology de-
velopment subsidy in government procurement con-
tracts, would seriously impair US exports of high-
technology manufactures. If an element of dis-
crimination is introduced against European com-
panies that are American owner;, US investment
earnings would also be reduced.
26. But these problems, while potentially
serious, may not become so. In the past, member
states have found it extremely difficult to effec-
tively ce-operate in the production of high-
technology manufactures. Problems have arisen
over the division of responsibility and the allo-
cation of contracts. Even if the organizational
problems are overcome, there is a great difference
between decision and implementation. Relative
technical backwardness will continue to hinder a
European challenge to American technical superi-
ority.
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27. More basically, it is far from certain
how Community policies will evolve. The long-run
impact of Community industrial policy, and the
resulting non-tariff barriers on US exports of
manufactures, will depend on the focus the Com-
munity chooses in the face of US initiatives --
whether it will be outward or inward looking.
An outward-looking industrial policy -- a policy
ghat standardized industrial practices but with-
out discrimination -- would probably benefit US
sales. In the past, the United States has counted
on British accession strengthening the outward-
looking forces in the Community, but this result
is not certain; parr icularly for industrial policy.
28. The Com,,.anity has attempted to allay US
fears over enlargement. The last US-EC consulta-
tion on 10 and 11 June was certainly the most pro-
ductive to date. The EC Commission i--ported on
the status of the proposed EC industrial policy,
emphasizing the non-discriminatory intent and ';on-
tent of the policy being considered. The Commis-
sion also indicated that government procurement
linked to development contracts would only be used
on a temporary and limited basis to foster develop-
ment of an infant industry or specialized product.
Although specific attention in the US-EC consulta-
tion was focused on bilateral problems over agri-
cultural trade, the Community did express a
willingness to negotiate with the United States
on the removal of non-tariff barriers for manufac-
tured goods. The United States has asked that
industrial policy be on the agenda for the next
round of US-EC talks, which will probably take
place this fall, and expects that the new high-
level trade committee of the Organization for
Economic Cooperation and Development (OECD) will
also consider the issue in an effort, to develop a
negotiating strategy (probably within the GATT
framework) for negotiations on the removal of
non-tariff barriers to trade.
act on US Agricultural Exports
29. Extension of the CAP to the United Kingdom
and the three other applicant countries will have
an adverse impact on US agricultural exports during
the transitional period, but over the long run
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the impact will depend on the level and pattern
of Community agricultural prices. The principal
effect will be in grains, where higher Community
prices (see Figure 3) will lead to increased pro-
duction and reduced consumption in the applicant
countries. Although extension of the CAP is also
likely to reduce meat and dairy imports into an
enlarged Community, US exports of these products
are small. Recently adopted EC regulations on
tobacco and inclusion of Greece and Turkey in a
protected market with the United Kingdom could
endanger US sales of tobacco in the important UK
market after enlargement. US fruit and vegetable
exports to the ten are likely to be little affected.
30. The trend in continental Europe since
World War II has been toward increased self-suf-
ficiency in grain and livestock production. The
EC's CAP has perpetuated this trend. Since the
early 1960s, UK policy has been to selectively
expand domestic farm output to displace imports.
The recent British decision to rely more on the
variable import levy for price support, facilitates
the transition to the CAP as well as serving
other objectives. Total grain production has
been rising steadily in the applicant countries
and the EC, and grain imports into the ten will
decline with or without entry. Intra-European
grain trade has increased substantially, especially
exports from France to other European countries.
31. The net annual loss in third-country grain
exports as a consequence of an unadjusted extension
of the CAP to Denmark, Ireland, Norway, and the
United Kingdom is estimated to be about 6 million
metric tons of grain at the end of the transitional
period ($360 million in grain exports, at $60 a
ton;. in the absence of enlargement, the ten
member states would be expected to import about
3 million tons of grain in 1978. With enlargement
the ten will have a grain surplus of about 2 to
3 million tons. The 6-million ton swing in their
net grain trading position as a result of enlarge-
ment is due both to increased production and to
reduced consumption. Because of higher grain
prices, oilseed products will be substituted for
grain in animal feed, and grain consumption will
decline by about 3 million tons.
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32. US grain exports to the ten -- about 7 mil-
lion tons valued at $400 million in 1969 -- will
decline substantially as a result of the projected
shift in the grai- trading position, although the
United States will continue to export some hard
wheat and other specialized grain varieties in
which the enlarged Community will have a production
deficiency. US grain exports to third markets,
particularly in Europe, will also be reduced, as
the Community is likely to seek to dispose of its
surpluses through subsidized export. The United
States will also face increased competition from
other grain exporters.
33. The loss in US grain sales will be partly
offset by gains in sales of soybean and other
protein supplements for use in animal feed. EC
imports of oilseeds are expected to increase by
about 1.3 million tons after enlargement. If US
exports grow in proportion to the present US market
share, the United States will be exporting about
4.8 million tons of soybean, valued at $465 million,
to the ten member states in 1978, compared with
$340 million in 1969.
34. The recent introduction of a tobacco CAP
appears to have damaged US tobacco exports to the
six (319 million pounds valued at $330 million
were exported in 1969; this declined 11 million
pounds in 1970); its extension to an enlarged Com-
munity and inclusion of Greece and Turkey -- two
prime competitors -- in a protected market with the
United Kingdom is consequently viewed with concern.
The Community maintains that the tobacco CAP, which
provides for a buyer's premium on purchases of EC
tobacco, will not lead to increased production.
Evidence indicates, however, that Community tobacco
production, including production of burley tobacco,
is likely to increase significantly in 1971. US-
EC consultations on tobacco have so far failed to
resolve US difficulties with the tobacco CAP.
Although the issue could be resolved before enlarge-
ment, this seems unlikely. The United States has
the option of seeking recourse through GATT. If
the problem is not resolved, and the tobacco CAP
is extended to the United Kingdom, $147 million in
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tobacco exports to the United kingdom will be po-
tentially endangered. 2/
35. Enlargement per se is likely to have little
net adverse impact on US fruit and vegetable ex-
ports -- US sales to the ten totaled $143 million
in 1969 -- although extension of Community pre'A -
erences may damage the US position somewhat. En-
largement is likely to lead to increased US exports
of certain' canned fruit products, since South
Africa and Australia, the United States' leading
competitors in the British market, will lose the
Commonwealth preferences they now receive in the
United Kingdom. US exports of certain fresh fruits
and frozen and dehydrated vegetables, however, are
likely to be reduced, as growing Spanish, Greek,
Turkish, and Israeli competition -- aided by pref-
erential trade arrangements -- displace US exports.
36. The impact on US trade of the CAP's exten-
sion to a Community of ten will depend, over the
long run, on the level and pattern of Community
agricultural prices. British entry will probably
strengthen the forces in the Community that favor
a more open agriculture, with prices closer to
world market prices, although the expected growth
in British agricultural production could generate
increased internal political pressures in the United
Kingdom to maintain farm income. The EC Commission
had, until last year, been relatively successful
in avoiding substantial increases in EC agricul-
tural prices. Therefore, a commission decision
on 16 June to propose that agricultural prices be
increased by about 3% for the 1972/73 crop year
is disturbing. In the long run, however, the
divergence between EC and world agricultural prices
could narrow as the size of the European farm popu-
lation continues to decline and possibly its polit-
ical influence wanes.
9. A hough the British market has a taste pref-
erence for Virginia flue-cured tobacco (grown
primarily in the southern United States and Southern
Rhodesia) prospective changes in UK legislation
will permit the use of additives in non-Virginia
tobacco to duplicate Virginia flue-cured taste.
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Impact of Enlargement on US Investment
37. A Community of ten should boost US invest-
ment earnings. American affiliates in the EC and
the applicant countries are particularly well placed
to take advantage of enlargement. US multinational
firms have existing plants and facilities both in
the United Kingdom and in the EC so they will be
able to realize gains in efficiency through spe-
cialization and exploitation of economies of scale.
US multinational corporations -- firms such as
IBM, Xerox, IT&T, and Ford -- should have a compet-
itive advantage over West European firms in operating
in a larger market.
38. But the greater economic size of an en-
larged Community and its enhanced technical capa-
bility could encourage discrimination against US
investment, and consequently inhibit the growth in
earnings. The French would like the EC to place
restrictions on third-country investment where this
investment does not bring in new technology, and,
as noted above, third-country access could become
a problem in government procurement and the granting
of government development contracts. The EC Com-
miss~cji, however, is challenging third-country
discrimination, and the provision in the Treaty of
Rome -- that all companies duly registered in any
member state (including third country subsidiaries)
be treated equally throughout the Community -- will
be extended to the applicant countries upon enlarge-
ment. British accession will probably reinforce the
Commission's position as well as the relatively
liberal attitude toward foreign investment prevail-
ing in Germany, Belgium, and the Netherlands.
39. Although US investment in the EC and the
applicant countries has continued to grow, the in-
vestment outflow is now more than offset by earnings
from Previous investments. Income from previous
investment, including interest, dividends, and
branch earnings has risen steadily, while the out-
flow of new investment has been inhibited by re-
strictions designed to improve US balance-of-pay-
ments performance. US income on direct investment
in the EC, including fees and royalties, totaled
more than $1.1 billion in 1970, compared with a
net outflow of new direct investment of about
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$850 million (see Figure 5). US income on direct
investment in the United Kingdom totaled $624 mil-
lion, and the net outflow of new direct investment
equaled $642 million.
EC and US: Investment Flows
Million US $
1,500
Figure 5
40. US firms are embark--..,j on a new round of
expansion in Europe, the magnitude of which will
depend partly on the dynamism of the enlarged mar-
ket, and on European attitudes and policies towards
such investment. Although the formation of the
EC stimulated a flow of ';merican investment in the
early 1960s, the situation now is not analogous.
American firms already have substantial resources
in Europe, and will probably make use of their
retained earnings to expand plant capacity.
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41. Enlargement is likely to reduce the flow
of investment from the Community of ten to the
United States as European firms seek to consolidate
their position in an enlarged market. In the long
run, however, the experience these firms acquira
in multinational operation could increase their
interest in investing hire.
Impact of Enlargement on the US Role
in the International Monetary System
42. The impact of enlargement on the US role
in the international monetary system will depend
on the specific accords still to be reached by
the United Kingdom and the six and on the subse-
quent course for monetary integration charted by
an enlarged Community. During the transitional
period the principal monetary consideration is
whether sterling will be able to withstand the
short-run balance-of-payments cost of UK entry.
In the long run the decline in the reserve role
of the dollar could be accelerated by moves toward
a common Community currency.
43. If sterling should come under pressure be-
cause of the foreign-exchanga cost of entry --
Ithe United Kingdom would
have to consider defensive measures, both external
and internal, which would affect US, as well as
Community, interests.
44. In the long run, enlargement will create
international pressure for monetary reform. 10/
London has agreed in the enlar-ement negotiations
to gradually run down foreign, officially held,
sterling balances, now totaling about $6 billion
(less than 7% of total official world liquidity),
although sterling's role as a reserve currency
25X1 would decline in any event. A successful with-
drawal of sterling as a reserve currency could in-
crease the demand for dollars but it also could
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generate added pressure to devise a new monetary
system not dependent on either sterling or the
dollar.
45. The EC rinc embarked upon a program designed
to attain economic and monetary union by 1980.
Under the program, money and capital markets are
to be integrated, a common currency (de facto or
de jure) developed, and possibly a federal central
bank created. Difficult problenvs remain, however,
since monetary union involves close economic
coordination and a consequent lose of national
autonomy. An enlarged Community, making use of
the facilities and expertise of the British finan-
cial market (the City), could probably operate a
common reserve currency at least within the EC and
associated states. The ultimate merging of the
City and the financial markets of the six member
states, will create a large European market, with
facilities rivaling those available in the United
States. Any common currency unit that would be
constructed on this broader economic base would
compete with the US dollar as an international
transactions currency as well as a reserve currency.
Moreover, an enlarged Community -- if it speaks
with one voice -- will be even a more powerful
influence in international negotiations to reform
the monetary system. A major question will be how
to reconcile increased monetary integration in the
Community with the apparent need for greater flexi-
bility in the international monetary system.
EC Enlargement and the EFTA Non-Applicants
46. Enlargement of the Community to include
the United Kingdom, Denmark, Ireland, and Norway
would break up EFTA. Barring special arrangements,
new Community members would raise duties against
their former partners, and thus some kind of special
accommodation between an enlarged EC and the EFTA
non-candidates has been envisioned from the outset
of the enlargement negotiations.
47. The EC Council of Ministers almost certainly
will elect to establish free trade with the EFTA
non-applicants, although a.decision is not likely
until fall. The free trade arrangement would prob-
ably include industrial products, but exclude
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arrangements in the agricultural sector, harmoniza-
tion of commercial and economic policies, and any
institutional links. The arrangement would run
for five years at which time it would be reviewed.
48. To establish free trade, agreements will
be negotiated between the enlarged Community and
the non-applicants. Special arrangements could be
made to deal with the specific trade interests of
each of the non-applicants. Several of the non-
applicants, particularly Sweden and Switzerland,
had hoped for an agreement with broader scope, so
it is likely that further special arrangements
outside the industrial trade field may also be
negotiated on an individual basis. The EC and
several of the non-applicants are particularly
interested in establishing preferential arrange-
ments for agriculture.
49. US manufactured exports would be adversely
affected by a free trade arrangement for industrial
products. The net adverse effect on US manufac-
tured exports to a Community of ten of the tariff
changes concomitant with enlargement and the
establishment of an industrial free trade area is
estimated to be about $300 million annually at the
end of the transitional period, 11/ nearly twice
Vie trade loss as in the case of enlargement alone.
US exports to the present Community members would
decline the most as tariffs are eliminated for the
first time between the six and the non-applicants.
US exports to the EFTA non-applicants would also
decline, because the exports of the six would have
preferred access in the Austrian, Finnish, Ice-
landic, Portuguese, Swedish, and Swiss markets.
US losses resulting from greater tariff discrimi-
nation, however, could be offset in part by US
gains from more rapid economic growth.
50. A free trade arrangement for industrial
products would have little or no adverse impact on
US exports of agricultural products and of minerals
and fuels, on US investment earnings, and on the US
role in the international monetary system, because
the existing policies and attitudes of the EFTA non-
applicants, in this area, would probably be unaffected.
11. This estimate was prepared by the Department
of State in conjunction with NSSM 79.
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An industrial free trade arrangement, however, could
generate pressure for even closer economic ties between
the non-applicants and an enlarged Community, particu-
larly in agriculture. If closer economic ties were to
develop, this could impose additional osts on the
United States.
Imp ct of Enlargement on Preferential Trade 12/
51. The EC has entered into preferential trade
agreements with a widening group of developing countries
(see the map). Agreements are now in effect with 30
states (see Table 3). Under the agreements, the sig-
natory nations mutually reduce tariffs and quantita-
tive restrictions applicable to trade between them.
The United States has opposed most of these agree-
ments on the grounds that they are inconsistent with
the most favored nation (MFN) principle -- a key tenet
both of GATT and of US trade policy.
52. The Community denies that its preferential
arrangements conflict with GATT and has indicated that
it will maintain the current agreements and continue
to make new ones. No formal GATT Council decision has
been taken on the legality of any EC preferential
agreement. Working parties' reports and GATT Council
discussions concerning the agreements have only taken
note of various countries' criticisms and reservations.
Working party reports on the Spanish and Israeli agree-
ments are now being prepared for the GATT Council's
consideration, but only the US and a few others are
likely to raise strong objections to continued pro-
liferation.
53. Thus far, the preferential trade agreements
have not led to widespread or serious dislocation
of US trade. The special preferences have not sig-
nificantly reduced total US sales to the EC, since
the United States competes against the present pre-
ferential trading partners with regard to only a few
products. US sales of items subject to damage from
EC special preferences and the reverse preferences
the EC receives, it is estimated, accounted for less
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European Commun''..y: Preferential Agreements
AASM a/ (18 independent African
countries that were colonial
dependencies in 1958)
Date of Initial Agreement
Provided for in Rome
Treaty
Netherlands
Surinam
Greece
Antilles
9
Jul
1961
Turkey
12
Sep
1963
Morocco
31
Mar
1969
Tunisia
31
Mar
1969
East Africa
(Kenya, Uganda
26
Jul
1969
,
and Tanzania)
Israel
29
Jun
1970
Spain
29
Jun
1970
Malta
5
Dec 1970
Candidates for Agreements
Barbados
Botswana
Fiji
The Gambia
Guyana
Ghana
Jamaica
Lesotho
Malawi
Under Terms of UK Accession
Mauritius
Nigeria
Sierra Leone
Swaziland
Trinidad and Tobago
Tonga
Western Samoa
Zambia
a. Associated African States and Malagasy; Burundi,
Cameroon, Central African Republic, Chad, Congo (Kinshasa),
Congo (Brazzaville), Dahomey, Gabon, Ivory Coast, Malagasy
Republic, Mali, Mauritania, Niger, Rwanda, Senegal, Somali
Republic, Togo, and Upper Volta.
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than $1.3 billion in US sales to the EC and its cur-
rent Preferential trading partners in 1969. 13 The
actual US trade loss has been significant only for a
very small portion of the items potentially affected
by preferences.
54. The special preferences granted by the en-
larged Community will not significantly reduce total
US sales to the ten, since the United States competes
against the preferential trading partners with re-
spect to only a few products. Only US exports of
semi-tropical agricultural products, particularly
citrus, are likely to be damageed. Moreover, the
Community has made special arrangements favorable
to US citrus fruit during the US export season. A
problem for US trade interests, however, would arise
if the enlarged Community insisted on receiving re-
verse preferences from its new preferential trading
partners. Our exports -- mainly manufactures and
temperate zone agricultural produ--ts -- to the
Commonwealth Caribbean countries total about $500
million annually, and are growing. If the exports
of an enlarged Community received discriminatory
preferences in this market, traditional US sales cf
manufactures and temperate zone agricultural products
would probably be damaged.
Conclusions
55. The impact on the United States of an EC
expanded to include the United Kingdom, Denmark,
Norway, and Ireland will largely depend on the long-
term evolution of European policies, and can be in-
fluenced by the United States. The economic changes
to which the new members will be committed should
not in themselves have much overall effect on US
trade. Particular US exports, however, may be
adversely affected, notably grain, perhaps tobacco,
and possibly a variety of machinery and chemical
products.
56. EC expansion is unlikely to cause serious
economic problems for the United States in the next
13. CIA estimate.
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few years. As has been the case since the Treaty
of Rome was signed, the impact of European integra-
tion will be mixed. Tariff discrimination will hurt
some US exports, but if the Community grows faster,
this will help US exports. The extension of the
Community's Common Agricultural Policy will induce
shifts in production and demand, the net affect of
which will be to reduce US agricultural exports some-
what.
57. The economic implications of a deepening
of the degree of economic integration in an enlarged
Community are potentially serious but may not become
so. Clearly, however, development of a common EC
industrial policy could impair US exports of high
technology manufactures. Financial cooperation
among Community members will doubtless play a role
in further reducing the international role of the
dollar. Moreover, the very size and strength of
an expanded Community will encourage other policies
designed to achieve greater independence from the
United States.
58. Community enlargement will contribute sub-
stantially to the proliferation of Community pre-
ferential trade agreements. A free trade area for
industrial products will probably be established
with the EFTA non-applicants, and special preferences
will be extended to the developing Commonwealth
countries in the Caribbean and Africa. Aside from
weakening the MFN principle, this proliferation will
probably impair some US trade interests.
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