INTELLIGENCE MEMORANDUM SCANDINAVIA AND THE EUROPEAN COMMUNITY: CURRENT ECONOMIC ISSUES

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• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001700030049-4
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 20
• Document Creation Date: December 22, 2016
• Document Release Date: May 20, 2010
• Sequence Number: 49
• Publication Date: April 1, 1972
• Content Type: IM

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Z,'77 7.2-517 Confidential
DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
Scandinavia and the European Community:
Current Economic Issues
Confidential
ER IM 72-49
April 1972
Copy No.
7J
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WARNING
This document contains information affecting the national
defense of the United States, within the meaning of 't'itle
18, sections 793 and 794, of the US Code, as amended.
Its transmission or revelation of its contents to or re-
ceipt by an unauthorized person is prohibited by law.
GROUP I
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CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
April 1972
INTELLIGENCE MEMORANDUM
SCANDINAVIA AND THE EUROPEAN COMM(JNITY:
CURRENT ECONOMIC ISSUES
Introduction
1. In June 1970 the United Kingdom renewed its bid for membership
in the European Community (EC), setting in motion negotiations aimed
at considerably enlarging the EC's membership on 1 January 1973 and
eventually changing the economic and political face of Europe. Following
the lead of their most important trading partner, Denmark and Norway
(as well as Ireland) also resumed membership talks with the Six (Belgium,
France, Italy, Luxembourg, the Netherlands, and West Germany).
2. Owing to the .Importance of intra-Nordic(') trade, Sweden,
Finland, and Iceland - supported by Denmark and Norway - have pressed
the Community to negotiate preferential free-trade agreements with them.
However, Nordic membership in - or close association with -- an expanded
EC is not a foregone conclusion. There is strong socio-political opposition
in Scandinavia to any link with the Community that could, at the last
moment, seriously transcend the economic realities of remaining outside
the Community. This memorandum notes the present status of the
Scandinavian-EC negotiations, indicates the likely form of the Nordic
countries' relationships with the Community, and assesses the economic
impact on Scandinavia of the possible new ties.
1. Throughout this memorandum, the terms Scandinavian and Nordic are used
interchangeably to refer collectively to Denmark, Finland, Iceland, Norway, and Sweden.
Note: This memorandum was prepared by the Office of Economic Research
and coordinated within the Directorate of Intelligence.
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V V1N 1 11J.GIN I 11-Lu
Discussion
Background
3. Europe's evolving economic relationships are of vital interest to
the Scandinavian states because few countries are so dependent on foreign
trade. With only 20 million people - 0.6% of the world's population -
Scandinavia accounts for 5.3% of total world exports. Exports equal almost
one-quarter of combined Nordic gross national product (GNP), compared
with 4% for the United States, 16% for the United Kingdom, 10% for Japan,
and 18% for the Six.
4. Constrained by meager natural resources and small domestic
markets, Scandinavia has developed into a major processing center. It
imports industrial raw materials and semi-manufactures and exports
semi-manufactures and, increasingly more important, highly specialized,
sophisticated manufactures. Such products sell largely on quality rather than
price-competitiveness, owing to high Nordic labor costs. Exports now absorb
62% of Denmark's industrial output, 58% of Norway's, 49% of Finland's,
and 47% of Sweden's. Industrial goods account for 70%-77% of total
Finnish, Norwegian, and Swedish exports (see Table 1). Although Denmark
has industrialized only within the last decade, manufactured products now
provide more than half of its annual export earnings. Iceland is the exception
with fish still accounting for approximately four-fifths of its exports.
5. Scandinavia's rapid industrial growth since 1960 has been
sustained by a strong West European demand for Nordic industrial raw
materials and manufactures. The Community and the European Free Trade
Association countries(2) (see the map) together took almost 70% of total
Nordic exports from 1960 to 1970. However, the shares of both the United
Kingdom and the EC declined. The United Kingdom, traditionally
Scandinavia's single largest market, saw its share of total Scandinavian
exports fall from 20% in 1960 to 16% in 1970 in spite of EFTA preferences
(see Table 2). The proportion of food and forest products in Scandinavia's
exports was especially large in the case of exports to Britain. Such exports
have grown relatively slowly as the Nordic countries have industrialized.
2. The Stockholm Convention establishing EFTA was signed by Austria, Denmark,
Norway, Portugal, Sweden, Switzerland, and the United Kingdom in November 1959.
An agreement of association between EFTA and Finland was signed in March 1961
giving Finland the benefits of membership; Iceland joined in March 1?'..' EFTA is
a free trade area and differs from a customs union -- for example, the Co? amunity --
in that it does not have a common external tariff.
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Table 1
Scandinavia: Composition and Direction of Major Exports
1970
Agricultural products
Of which:
Livestock and animal products
Fish and fish products
Inedible crude materials and fuels
Manufactures
Of which:
Machinery and transport equipment
Chnmicale
As a Share of
Total Exports Trading Partners: Market Share
DENMARK
European
Community
European Free Trade Association
Total
West
Germany
Total
United
Kingdom
Sweden
Norway
United
States
Othe:
23
12
51
55
10
2
12
14
10
9
52
45
4
1
15
15
47
30
40
11
17
2
6
7
3
2
47
0
29
6
5
45
20
11
51
10
20
11
6
23
20
10
42
11
15
7
5
33
22
10
43
7
16
9
7
28
Agricultural products
Inedible crude materials and fuels
Of which:
Wood, lumber, and cork
Pulp and waste paper
Manufactures
Of which:
Paper, paperboard, and manufactures
thereof
Wood and cork manufactures
(excluding furniture)
Machinery and transport equipment
Agricultural products
Of which:
Fish, fresh, chilled, or frozen
Meat meal (including tankage) and
fish meal, unfit for human
consumption
Inedible crude materials and fuels
Manufactures
Of which:
Aldminum
European
Community
European Free
Trade Association
West
United
Total
Germany
Total Kingdom Sweden
USSR
Other
4
13
4
52 5 24
17
10
26
30
12
40 20 4
9
13
10
37
11
40 35 4
--
15
13
40
9
31 26 Negl.
7
22
70
19
11
44 13 19
15
22
27
20
16
30 10 3
12
30
5
13
8
65 45 13
1
21
17
6
3
41 3 24
33
20
ICELAND
European
Community
European Free
Trade Association
West
United
United
Total
Germany
Total Kingdom Denmark
States
USSR Other
80
13
7
34 10 9
36
8 9
6
3
70 21 20
--
-- 24
29
19
56 10 8
6
-- 9
35
20
56 32 3
4
5 --
3 -
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Scandinavia, Composition and Direction of Major Exports
1970
(Continued)
Agricultural products
Of which:
Fish and fish preparations
Inedible crude materials and fuels
Manufactures
Of which:
Machinery and transport equipment
Chemicals
Paper, paperboard, and manufactures
thereof
Iron and stool
Non-ferrous metals
Agricultural products
Inedible crude materials and fuels
Wood, lumber, and cork
Pulp and waste paper
Metalliferous ores and metal scrap
Machinery and transport equipment
Paper, paperboard, and manufactures
thereof
Iron and steel
Chemicals
As a Share of
Total Exports
Trading Partners: Market Share
NORWAY
European
Community
European Free Trade Association
West
United
Total
Germany
Total
Kingdom
Sweden
Denmark
Other
20
7
45
21
14
5
35
18
4
37
16
11
3
45
39
23
49
26
14
6
12
30
19
47
16
17
8
23
29
18
36
9
16
6
35
11
6
71
18
28
18
18
32
20
34
21
2
7
34
35
19
57
24
17
10
8
47
32
39
22
12
2
14
European
Community
European Free Trade Association
Total
West
Germany
Total
United
Kingdom
Norway
Denmark
Other
29
12
50
17
12
11
21
50
21
38
20
8
6
12
40
14
50
22
14
11
10
52
19
33
23
3
2
15
74
40
18
13
3
Negl.
8
39
18
38
20
2
10
23
31
16
41
13
6
B
28
16
9
58
12
13
15
26
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Scandinavia: Geographic Distribution of Exports al
European Free Trade Association b/ European Community
United Other
Year Total Scandinavia Kingdom EFTA
Denmark 1960 44
1970 50
16 26
27 19
Finland 1960 34 9
Iceland 1960 38 19
1970 38 18
Norway 1960 46 21
1970 47 26
Sweden 1960 39 20
1970 44 27
West United Other
Total Germany States Countries Total
2 28 19 9 19 100
4 23 13 8 19 100
24 1 28 12 5
17 3 23 11 5
16 3
12 8
23 2
18 3
16 3
13 4
14 7 14
17 11 30
26 14 7
30 18 6
32 15
28 12
33 100
29 100
34 100
15 100
21 100
17 100
6 23 100
6 22 100
20 4 29 16 8 23 100
25 12 11 20 100
a. Data for 1970 are provisional.
b. Data for 1960 for EFTA include Finland and Iceland.
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Moreover, rising production of livestock products in the United Kingdom
held down demand for imports of such products. At the same time, the
share of the EC countries in total Nordic exports declined from 29% in
1960 to 25% in 1970 as Scandinavian exporters faced increased difficulty
in selling to EC markets protected by the Common External Tariff (CXT).
6. antra-Nordic trade has been the most dynamic element in each
Scandinavian country's total trade, particularly in manufactures. Stimulated
by the formation of EFTA, this trade grew nearly three-fold between 1960
and 1970 (almost twice as fast as these countries' total exports) and
increased from 16% to 24% of the total. A lively pan-Scandinavian trade
in components has developed, adding impetus to Nordic specialization.
7. The expansion of intra-Nordic trade reflects more than the
establishment of EFTA. Since World War II, the Scandinavian countries
have cooperated closely in a number of economic fields - principally
banking, aviation, shipping, industrial research, labor policy, and
hydroelectric development. By pooling their resources, they have been able
to promote their industrial development.
Economic Motivation for Association with the EC
8. Although the Nordic countries have adjusted fairly well to the
trade discrimination caused by formation of the EC, they are concerned
about the added discrimination that EC expansion would bring. Britain's
EC accession would subject a further 16% of Nordic exports to the CXT
and thus could accelerate the downward trend in the British market's share
of Nordic exports. It would bring an end to EFTA and thereby greatly
hamper Scandinavian trade with such still small, but rapidly developing,
markets as Switzerland and Austria. Even more serious to any Nordic
country not acceding to or becoming associated with the EC would be
the accession of other Nordic countries. Sweden, for example, could be
seriously hurt if Denmark and Norway were to join the Community and
intra-Nordic preferences were thereby eliminated.
9. The principal cost to the Nordic countries of remaining outside
the EC, however, probably is not best measured by the economic damage
that might be experienced. Nordic exports of many foods and most raw
materials probably would not be much affected by increased foreign
competition. Neither is foreign demand for many of the highly specialized
Nordic manufactures likely to be much affected if some former EFTA
partners are charged higher prices. More important is the likelihood that
EC membership or association would provide a substantial impetus to
Scandinavia's economic development, which would be forgone by remaining
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outside. The strategy of industrialization through a high degree of
specialization requires a broadening foreign market for small countries like
those of Scandinavia. Only EC access or association can provide such a
market.
10. Accommodation between the Six and all five Nordic countries
would preserve Scandinavia's intra-regional economic relationships. Denmark
and Norway assured the Community last December that they would not
allow Nordic obligations to undermine their future relationships with the
EC. Nordic cooperation could, therefore, be jeopardized should the Nordic
non-applicants not reach an EC agreement concomitant with Danish and
Norwegian membership.
11. Nordic industry is particularly concerned over the future of the
common Nordic labor market. Formed in 1954 by Denmark, Finland,
Norway, and Sweden, it provides for reciprocation in social services,
including social insurance. Movement of blue collar labor, primarily Finnish,
into more industrialized Sweden and, to a lesser extent, into Denmark has
been the main labor flow, although a substantial exchange of both salaried
and wage-earning workers has also taken place between Denmark and
Norway as well as between Sweden and Denmark. These intra-Scandinavian
flows now account for about half of the non-nationals employed in the
four participant countries, thereby enabling local labor shortages to be
relieved without the social problems sometimes created by importing labor
from countries with substantially different cultures.
Socio-Political Constraints
12. All five Nordic governments have been prompted by economic
necessity to seek some form of EC agreement, but in every case they face
strong popular opposition. Sweden's individuality and traditional neutrality,
Finland's Soviet-enforced neutrality, and Iceland's protectionist tendencies
are strong enough to limit their prospective Community participation. Not
having achieved full independence before 1905, the Norwegians have been
more protective of their sovereignty and more skeptical of international
unions than have the more psychologically continental Danes. Yet even the
Danes have begun to voice anxiety over preserving their national identity.
Of particular concern to all Scandinavian governments is the threat of
reduced sovereignty over their social policy, a field in which they consider
themselves advanced. Even in the midst of negotiations looking toward
closer economic ties with other West European nations, moreover, there
is a growing Nordic determination to assert independence in foreign policy
matters.
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13. Public resistance in Scandinavia to an EC link is based primarily
on ideological considerations and is especially strong among youth, pacifist,
and radical leftist groups. They see a loss of national identity in the face
of EC bureaucracy and fear an invasion of Scandinavia by foreign financiers
and industrialists, to the detriment of "the honest native trader." To this
ideological critique is added the increasingly negative attitude among many
labor groups, decrying a potential deluge of foreign workers that could
displace domestic workers and lower wage levels. Small shopkeepers and
businessmen are alarmed by the overpowering influence of the EC's retail
giants. Norwegian farmers' and fishermen's unions express a general Nordic
center-rightist fear that the EC's supranational bodies will give little
consideration to Scandinavia's "special" economic problems.
Denmark and Norway Bid for Full Membership
14. Denmark and Norway concluded entry negotiations with the
Community on 14 and 15 January 1972, respectively, and signed the
Accession Treaty(3) in Brussels on 22 January. By this fall, the two
governments must convince their voters that the economic consequences
of remaining outside an enlarged EC will be unpleasant. By early October,
both will have submitted the EC question to referenda, and the outcomes
promise to be close.
Denmark: Issues and Implications
15. Chronic balance-of-payments problems provide a major incentive
for Denmark's membership bid. Danish agricultural exports to the EC's
protected markets steadily lost ground during the 1960s. The decline in
sales to West Germany, traditionally one of Denmark's two most important
agricultural markets, has been especially damaging. Lagging agricultural
exports and growing imports of industrial raw materials and
semi-manufactures have led to deteriorating trade balances and diminishing
foreign-exchange reserves. In 1970 the trade deficit reached a record
$1 billion.
16. EC accession promises to help Denmark's agricultural exports.
According to Danish governmental estimates, such Danish sales will increase
at least 25% in value during the five-year transition period from 1 January
1973 to 1 January 1978. Higher EC Common Agricultural Policy (CAP)
livestock prices would lead to increased production of livestock and animal
3. The Accession Treaty and accompanying documents establish the legal foundation
for Community enlargement and detail the conditions of British, Irish, Danish, and
Norwegian full membership. This treaty will enter into force on 1 January 1973, only
following ratification by the four candidates.
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products - now 68% of Danish farm exports - and to a continued shift
in land use from food grains, despite higher CAP grain prices, to feed grains.
According to a recent Michigan State University study, accession would
result in a 26% increase in Danish pork production during this decade, 23%
in milk, 25% in beef and veal, and 35% in eggs - totaling an additional
$450 million at EC prices.
17. At the same time, consumer prices in Denmark need not be greatly
affected by the rise in farm prices. Denmark presently has a two-market
price scheme, whereby internal food consumption is taxed to subsidize farm
exports. Levies on home consumption vary according to the disparity
between the minimum domestic price set by the government and the world
market price for each commodity. Such revenue is then distributed to
farmers largely as income supports. Under the CAP, the subsidy for exports
will come not from taxes on consumption but rather from levies on
agricultural imports and the value added tax.
18. Danish industry is enthusiastically looking forward to duty-free
access to EC markets, where its exports have been losing ground to EC
members. At the same time, the Six probably offers little threat to
Denmark's modern, highly specialized industrial sector. There will be
virtually no overall increase in industrial costs resulting from adopting the
higher CXT, as an expanded Community will include approximately
two-thirds of the suppliers to Denmark's industry, primarily of
semi-manufactures and components.
19. Danish industry, however, wants the preferential trade
relationships with Sweden and Norway established under EFTA to be
retained should these countries not become full members. Sweden takes
20%n of Denmark's industrial exports, and Norway another 11%. A number
of Danish firms have thrived solely by subcontracting for Swedish firms.
20. The agreement that finally was reached with the EC on the
troublesome fisheries issue will allow Denmark, as well as all EC members,
to maintain a 6-mile fisheries limit until 1983. This ten-year exemption
to the Common Fisheries Policy (CFP) - providing for the opening of a
member's territorial waters to the fishermen of all other member states --
will have little effect on Danish trawlermen, who fish primarily offshore
in any case. Few employment opportunities exist for the 18,000 Faeroese
and the 15,000 Greenlanders, however, other than in fishing. Over-fishing
in their coastal waters by EC members could seriously deplete this source
of income. Accordingly, the Community has given the Faeroe Islands,
Greenland, and, unexpectedly, Jutland a 12-mile rather than a 6-mile limit,
subject to review after ten years. Additionally, Denmark understands that
any extension of concessions given Norway after this time will also apply
to Greenland and the Faeroes.
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Norway: Issues and Implications
21. Norway's membership hinges mainly on popular reaction to the
EC concessions to Norway's northern fishermen and farmers, an issue having
major social and strategic implications. Inshore fishing and inefficient hillside
farming are the major means of livelihood in the north. There, the bleak
environment, geographic isolation, and lack of economic opportunities offer
little resistance to the lure of high wages and greater comfort in the south.
To reduce regional income dispa,ities and, thus, to maintain the north's
population, Oslo is committed to heavy subsidies of farming and fishing
through a complex price-and-income support system. Central government
transfers to the agricultural sector amount to approximately 18% of farm
income.
22. On 21 December 1971, Norway accepted the EC's agricultural
proposal with only minor changes. The Community's offer gives Norway
a four-year grace period following accession, after which it is to shift to
the lower CAP price subsidies supplemented by substantial income supports.
Income payments will vary according to region and type of farmer as
determined by Oslo, subject to Community review. At first, these measures
will be largely financed domestically, but eventual Community financing
will be obtained for some of them. Additionally, Norway will be permitted
to continue paying freight subsidies on northern agricultural products.
Without such exceptions from CAP, Norwegian farm incomes would decline
as much as 40% to 50% by 1978 (according to initial Norwegian
governmental estimates) because of both the loss of subsidies and the need
to reduce Norwegian agricultural prices that average approximately 15%
higher than those established by CAP.
23.' With the conclusion of fisheries negotiations between the other
three applicants and the Community, Oslo engaged in intensive last-minute
politicking with Brussels to gain maximum concessions. At issue were the
amount of its coastline to be included in the same special 12-mile zones
given Greenland and the Faeroe Islands and the duration of this safeguard
after entry. Without special treatment by the Six, Norwegian membership
could lead to the rapid exhaustion of carefully conserved fisheries - now
providing one-tenth of all Norway's exports - by foreign, particularly
British, trawlermen. Because Norway's fisheries are concentrated between
6 and 12 miles offshore of its 2,040-mile coastline, definition of the
protected zone was a pivotal issue. Oslo also wanted the Six to recognize
explicitly that its fisheries problem is unique, warranting permanent
exemption from the CFP. The EC members not only were reluctant to
permit any permanent exception to a Community policy but found the
other applicants insisting that they would not accept less favorable terms
than those offered Norway.
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24. The compromise finally agreed on by Brussels and Oslo -- just
seven days before the signing of the Accession Treaty - recognizes a 12-mile
fisheries limit for the coastline from the Soviet border to Egersund -- almost
70% of Norway's coastline. This represents a moderate concession by the
Community, which had earlier insisted that Stavanger - more than 40 miles
north of Egersund - be the southern limit. Norway, in turn, compromised
on the point of permanent exemption from the CFP. The exemption will
come up for review by 1983, but Brussels assured Oslo that at no time
will it make any decision detrimental to Norway's fishing interests. Norway
can also be certain that, since its "vital interests" are involved, no enlarged
Community proposal is likely to go into effect over its objections -- in
effect, giving Norway's exemption an aura of permanency.
25. Norwegian industry, like Danish industry, is eager for EC entry.
The Community already takes about 30% of Norway's industrial exports.
Membership would eliminate EC tariff quotas on Norway's basic exports --
newsprint, magnesium, ferroalloys, unwrought aluminum, cod, fats and oils,
and zinc. The Community sets these quotas annually, and businessmen have
complained that this year-to-year uncertainty has made long-term
production planning difficult. Industrial leaders believe that easy access to
the broad EC market would permit larger scale operations and help them
reduce their relatively high costs.
Positions of the Scandinavian Non-Applicants
26. Sweden, Finland, and Iceland are not now seeking full EC
membership - mainly for socio-political reasons. They do, however, have
good economic reasons to seek preferential trade arrangements with the
Community. A Community of Ten would take approximately 55% of
Sweden's annual industrial exports, 42% of Finland's, and 72% of Iceland's
fledgling industrial exports.(4) Accordingly, in July 1971 the EC Council
of Ministers agreed to offer the six EFTA non-applicants on request access
to the enlarged Community's preferential trading area. On 8 November
1971 the Council instructed the EC Commission to negotiate separate
free-trade-area (FTA) agreements for industrial products and to explore
li: . d arrangements for certain agricultural goods. These agreements would
be implemented over the same five-year transitional period given the new
members, with up to a maximum of an additional seven-year extension
of the transition period for certain "sensitive" Community products (see
Table 3). Additionally, escape clauses are likely to be added to the
4. According to estimates prepared by the US Department of State in response to
National Security Study Memorandum 79, the combined industrial exports of the Nordic
non-applicants would decline by approximately $450 million annually by 1978 without
an EC arrangement.
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European Community Commission:
Provisional List of Sensitive Products as of 1 February 1972
1. Subject to a 3-year
standstill, then a
5-year period of strict
surveillance and gradual
removal of tariffs
2. Subject to strict EC
surveillance and import
ceilings for a 4-year
period, after which time
tariffs will be gradually
dismantled
3. Subject to flexible,
statistical surveillance
and further commission
recommendations until the
end of 1977
For All EFTA
Non-Applicants
Ferro-alloys
Alumir. _im
Lead
Zinc
Tungsten
Tantalum
Molybdenum
Antimony
Sweden/Finland Sweden Only
Artifical or High-carbon steels
regenerated Tubes for ball bearings
man-made fibers Stainless steel tubes
and pipes
Silicon
Ball, roller, and
needle-roller bearings
Copper products Grinding stones
Natural and artifical
abrasive powders and
granules
Asphalt and similar
products
Stone products and other
mineral substances
Bricks, flagstones, and
blocks
Road tractors
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agreements that can be invoked by individual EC countries when they
consider their domestic production threatened. The agreements may possibly
contain an "evolutionary" clause stating that the contracting parties will
continue to examine the possibility of developing their ties further. The
six separate agreements should be ready for signature by mid-summer.
27. Responding to increasing political pressures to protect Sweden's
traditional neutrality, the Social Democratic government of Olof Palme
announced in March 1971 that Sweden would not apply for full Community
membership. Stockholm hoped, instead, to persuade the Six to grant it
a limited form of membership - wide participation in Community affairs
and decision-making without imposing concomitant political responsibilities,
especially an acceptance of EC political goals. The Swedes envisioned an
industrial customs union plus some agricultural arrangements. Furthermore,
Stockholm was prepared to coordinate its commercial and, to some extent,
monetary policies with Brussels and to cooperate in other areas.
28. Economic pressure on Stockholm to reach agreement with the
Community is strong. About 28% of Sweden's total exports go to the EC,
and another 33% to the four applicant countries. The Community purchases
22% of Sweden's industrial exports, the United Kingdom 10%, Norway 12%,
and Denmark 11%. Therefore, exclusion from the Community could
threaten Swedish export industries. Failure to negotiate an EC link would
also re-establish trade barriers between Sweden and its Nordic neighbors --
should they reach an EC agreement - and jeopardize the common Nordic
labor market with a reversal of postwar Nordic cooperation.
29. The Six have made it clear that they will not accept any formula
for limited Swedish membership. The EC is opposed to any dilution of
the Community's political objectives and does not wish to set attractive
precedents that might dissuade Norway and Denmark from joining as full
members. Because the economic importance of Sweden to the Six is minor
(less than No of total EC trade is with Sweden), the Community probably
cannot be persuaded to make., special arrangements beyond the FTA offer.
30. Approximately 20% of total Swedish exports might be excluded
from the five-year tarriff-dismantling process under an FTA arrangement.
The Six's growing list of "sensitive" items already includes such important
Swedish exports as special steels and ball bearings. Of primary concern to
Stockholm is the EC Commission's negotiating mandate calling for a 12-year
transition period for paper - about one-tenth of Sweden's total exports.
Not only would the present EC tarriff on paper be frozen for three years,
but a 5% tariff duty would also be introduced before 1978 by the four
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new Community members against the EFTA non-candidates. Both would
remain in effect until January 1981, and they would then be reduced
gradually to zero by 1 January 1985. In addition, the benefits to Sweden
of an FTA agreement could be seriously reduced if the EC were to mainta;,i
its hard position on rules of origin, similar to its Yadunde Convention (used
in dealing with its African associates), rather than the more liberal EFTA
system.(5 )
31. Neither tile government nor industry nor labor find the
Community offer acceptable. Palme continues to push for a limited custom's
union arrangement, while industry and labor leaders, though generally
supporting the government, prefer full membership. Thus, while initially
settling for a free trade arrangement, Sweden may perhaps opt for full
membership by the end of the five-year transition period in 1978.
Finland
32. Helsinki is also far from happy with the present EC Commission's
negotiating mandate, primarily its stance on paper. Forest products
constitute 58% of Finland's total exports, and approximately 70% of its
total paper sales are destined for the enlarged Community. Helsinki argues
that Finland does not - as the Six claim - benefit from plentiful access
to cheap raw materials and low operating costs. Finland increasingly imports
rough or roughly squared wood; its potential for installing cheap new
hydroelectric power is virtually exhausted; and wages in Finland are no
lower than in central Europe. EC tariffs on Finnish pulp and paper exports
would not be completely lifted until 1985, while vulnerable domestic
industries - such as shoes, glass, and textiles - would have just five years
to adjust to increased competition from the Six. Plywood and fiberboard
may also cause an additional problem since the Commission is now calling
for an eight-year transition for these products. In all, more than 70% of
Finnish exports could be included in the growing list of the Community's
"sensitive" products.
33. On the positive side, approximately two-thirds of Finnish industry
is export-oriented and eventually will gain substantially from free access
5. Under present EFTA rules of origin, 50% of the value of a good exported duty-free
between EFTA associates must be a result of EFTA transformation. If successive stages
of the transformation of a raw material into a finished product have been performed
in different EFTA countries, the contributions of each country can be added together
to attain the 50%% minimum. This has been essential to Scandinavia, which is increasingly
more dependent on a lively intra-Nordic components trade and subcontracting. Under
the Yaounde Convention, only stages of transformation taken by the exporting country
alone may be counted in determining whether a good may be exported free of duty.
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to an enlarged Community representing about 401/v of the Finnish market
for manufactured exports. The largest benefits promise to accrue to
Finland's growth industries - woodworking, chemical, and basic metals --
with appreciable gains going to the machinery, electrochemical, rubber,
textile, and plastics industries. According to the Economic Council of
Finland, the average annual growth rate of the volume of industrial
production between 1970 and 1980 will be approximately 2 percentage
points higher - 6% rather than 4% - with an industrial FTA arrangement.
34. Finland's highly sensitive relationship with the Soviet Union could
be a serious obstacle to an agreement with the Community. The Soviet
Union, which accounts for more than 12%n of Finnish trade, is disturbed
by the decline in its market share during Finland's association with EFTA
and expects an acceleration of this trend should Finland reach an agreement
with the Community. A protocol signed in July 1971, reaffirming Finland's
close ties with the Soviet Union and extending the 1948 Treaty of
Friendship, Cooperation, and Mutual Assistance for ten years, increased
Finnish maneuverability in the EC negotiations. In return, Helsinki assured
Moscow of continued most-favored-nation treatment, even with a Fenno-EC
agreement. Nonetheless, Moscow continues to oppose Community
enlargement on political grounds and could yet undermine a Fenno-EC
agreement.
35. Iceland's leftist-nationalist coalition government, unlike its
conservative predecessor, is only half-hcartedly seeking even an FTA
arrangement with the EC. Fisheries account for four-fifths of Iceland's total
exports and 23% of GNP. Iceland will be satisfied with a simple agreement
to protect its fish exports to West Germany, the United Kingdom, Denmark,
and Sweden, which together purchase almost 50^/% of Iceland's fish catch.
36. Any agreement with the Community, however, has been made
extremely difficult if not impossible by Reykjavik's announced intention
to extend unilaterally Iceland's territorial waters from 12 to 50 miles by
1 September 1972. Bonn has warned that this action could completely
break down Community negotiations with Iceland; both German and British
trawlermen would be hurt by exclusion from Iceland's rich fishing grounds.
Reykjavik, however, apparently believes a larger protected fishing area would
be more valuable than tariff concessions. Iceland believes that insufficient
additional fish can be sold in EC markets to offset an expected large inflow
of EC imports. Moreover, Icelandic exports to non-EC countries, particularly
the United States, are growing rapidly, thereby reducing Icelandic
dependence on the enlarged Community.
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Conclusions
37. Scandinavia has no alternative to accommodation with the EC
if it is to avert a potential loss of foreign-exchange earnings and probably
a slowdown in economic growth. Trade tie; with the Six and the United
Kingdom together account for about two-fifths of Scandinavia's total foreign
trade. Although intra-Nordic trade is the most dynamic part of the total,
it is not a viable substitute for free access to an enlarged Community.
38. Danish and Norwegian industry and Danish farmers stand to gain
substantially from full Community membership. With the pivotal agricultural
and fisheries issues resolved, the last major obstacle to their EC accession
on 1 January 1973 is the ambivalent state of domestic public opinion.
Intensive, governmental pro-EC campaigns, however, should go far to
convince the man in the street of the economic disadvantages of remaining
"outside."
39. An industrial free-trade area with the EC is the most likely course
for Sweden and Finland. Sweden probably will accept an initial arrangement
that will be less than the de facto membership desired but may opt for
membership before the end of this decade. The FTA provisions for forestry
products will undoubtedly come into effect over a prolonged transition
period, thus largely delaying the full benefits to Finland of an EC agreement.
Acceptable EC arrangements, if any, for Iceland remain problematical.
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ICELAND
'ArykjavIN
Q European community (EC)
EC-Applicant Countries
European Free Trade Association
rooro. Islands
(Din.)
NO R 'r ii
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