INTER-AGENCY MEETING: MEXICO

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP89G01321R000700020003-1
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 43
• Document Creation Date: December 23, 2016
• Document Release Date: January 4, 2013
• Sequence Number: 3
• Publication Date: February 2, 1988
• Content Type: MISC

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2 February 1988
"1EKORANDL'M FOR: Distribution
SUBJECT: Inter-Agency Meeting
TYPE OF MEETING Economic Policy Council
DA T E Fr;day~ 5 February 1988
TIME
PLACE
CHAIRED BY
~~~ ? `~ ~ 5
I~rt. 20 ~.l~i~D~~~!~
Baker
ATTENDEE(S) (probable) NIO/Eton
SUBJECTIAGENDA
~~ ~~ X~'l~x-~~.
PAPERS EXPECTED
Agenda. by COB 3 Feb
INFO RECEIVED Per Cabinet Affairs, 1100
DCI
DDCI
ExDir
DDO
DDI
Ch/NIC
D/Exec Staff
ES
SDO/CPAs
- ER
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The Director of Central Intelligence
Washington. D.C. 20505
National Intelligence Council
NIC 00472-88
5 February 1988
MEMORANDUM FOR THE RECORD
SUBJECT: EPC Meeting, 5 February on Mexico and the US-USSR Long-Term
Grain Agreement
1. The Economic Policy Council (EPC) agreed to recommend that President
Reagan suggest to President de la Madrid that the countries discuss
bilateral trade initiatives (options lA or 16 in the attachment). The EPC
decided against changes in steel quotas or US tariff reductions in exchange
for Mexican tariff "bindings". Secretary Herrington argued for the United
States to ask Mexico to open its energy sector to foreign investment.
Secretary Baker said that was not possible. Baker asked for the CIA view,
and I agreed with him. NSC also agreed with Baker, and the issue was
dropped.
2. The EPC agreed to seek anew Long-Term Grain Agreement .with the
USSR. There was no discussion of the issue.
Deane E. Hoffmann
Attachment:
Agenda and Background Material
cc:
DCI (w/o attach)
DDCI
D/DCI-DDCI Exec Staff
DD/ALA
DD/BONA
C/OGI/SRD/EM
C/OGI/ECD/IF
AC/NIC
NIO/LA
NIO/BONA
CL BY SIGNER
DECL OADR
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February 3, 1988
MEMORANDUM FOR THE ECONOMIC POLICY C~OjU,~NCIL
FROM: EUGENE J. McALLISTER~~I
SUBJECT: Agenda and Papers for the February 5 Meetincr
The agenda and papers for the February 5 meeting of the Economic
Policy Council are attached. The meeting is scheduled for 9:15 a.m.
in the Roosevelt Room.
The first agenda item will be Mexico. In the State of the Union,
the President highlighted trade as one of the top items on his
agenda for his talks with President de la Madrid, scheduled for
February 13. The Council till consider several options for trade
initiatives within the existing framework agreement. The TPRG
has prepared the attached paper outlining these options.
The second agenda item will be the Long-Term Grain Agreement.
The current 5-year U.S.-U.S.S.R. agreement expires September 30,
1988. The Council will discuss the possible renewal of the
agreement. A paper. prepared by the TPRG is attached.
CONFIDENTIAL ATTACHMENTS
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ECONOMIC POLICY COUNCIL
February 5, 1988
9:15 a.m.
The Roosevelt Room
AGENDA
2. Long Term Grain Agreement with the Soviet Union
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OFFICE OF THE UNITED STATES
TRADE REPRESENTATIVE
EXECUTIVE OFFICE OF THE PRESIDENT
WASHINGTON
20506
February 3, 1988
MEMORANDUM
T0: THE ECONOMIC POLICY COUNCIL
FROM: THE TRADE POLICY REVIEW GROUP
SUBJECT: U.S.-Mexico Trade Relations
ISSUE
President Reagan has requested an examination. of the prospects for
establishing a special trade and investment relationship with
Mexico. He has similarly requested an examination of trade and
investment issues that affect the U.S.-Mexico border. The aim is
-to determine possibilities for building on our currently good
trade relations. On January 28, President De la Madrid called
the current structural adjustment process accompanied by trade
liberalization that has been initiated and implemented by his
Administration the most significant achievement in the last 50
years of Mexican history. He called GATT accession and the
bilateral framework agreement the two most important actions
taken by Mexico during this process. He also stated that the
development of a constructive working relationship with the U.S.
has been one of the major achievements of his Administration.
RECOMMENDATIONS
1. That the U.S. utilize the recently signed bilateral framework
agreement as the mechanism for managing the bilateral trade
and investment relationship and for seeking incremental
improvements in market access, foreign investment policy,
and intellectual property protection. (The first round of
f ormal consultations under the "framework agreement are
~,~, already scheduled for February 22-23 in Mexico.)
2. That the EPC provide guidance as to whether the U.S. should
seek to negotiate any of four limited trade initiatives with''
Mexico (see pages 4-9).
3. That the U.S. use the February 13 meeting of the two Presidents
and the February 22-23 framework agreement consultations in
a coordinated manner to seek certain modest improvements in
Mexican f reign investment regulation.
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CO~~FIOENiIq~
2
4? That the EPC consider reaffirming Administration o
to modification or elimination of U.S. tariff
806.30/807.00? PPosition
provisions
BACKGROUND
-- Mexico is our fourth largest trading partner
Japan and West Germany) and third lar est a after Canada,
Total trade between the two countries in 1987 was about
billion. The U.S, xP?rt market.
1982, with a 1987 defic tnof overe$6ebillionith Mexico since
third largest supplier of crude oil. Mexico is our
-- Mexican trade policy has undergone an important evolut'
during the De la Madrid Administration.
To move Mexico away
from economic development based on import substitution ion
oil export earnings and towards e
Madrid Administration has stimulatedothe process of structuand
adjustment through a reduction in domestic growth, the De la
opening of the domestic market to import competition,andrav
respect to trade, substantial liberalization has taken lace
in the level of tariffs and in the use of import lice With
official reference rices: P
in the P the three tools used b nses and
post WWII period to control imports. Y Mexico
-- At the end of 1983, all of the more than 8,300 Mex'
tariff categories were subject to import licensin re
now onl scan
Y 329 categories (mainl g quirements;
pharmaceutical sectors, some agricultural ng the auto and
firearms, and some luxury items Products
329 categories represent 3.9$.of the Mexicanctariff~, drugs,
but covered 27.2$ of total Mexican imports b (These
1987. schedule
tariff cat gories two rence prices, which coveredyover 1 500
the end of 1987. Years ago, were totally eliminated at
recently as April 19861ffs were as high as 100
applied rate of 20$ as ofbDecember 15 n reduced toparmaximum
import tax, applied on top of the normall dut~ The 5$
on December 15 general
is now 5,6$. ' 1987' The average weight d"Mexican mtariff
the trade liberalization haslbeen implemen is 3.1$.
__ ted since July 1985 E
Mexico has complemented these measures by accedin to
GATT on August 24, 1986, and by signing on November 6 the
with the U.S, a bilateral framework agreement for trade
investment. ' 1987,
The significant reduction in Mexican licensing
requirements and the elimination of official refere
prices have fulfilled commitments made b nce
GATT accession negotiation. Y Mexico during its
implemented by Mexico go well beyond Mexicoes GATT commauctions
fitments.
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The framework agreement was an important psychological step
forward for Mexico. Its primary result was the establishment
of a consultative mechanism which can be invoked by either
side at any time to clarify respective trade policies,
resolve specific disputes, or negotiate the removal or
reduction of trade and investment barriers.
The U.S. market is, with a few important exceptions, open to
imports from Mexico. Over 80$ of Mexican exports to the
U.S. enter at a duty rate between 0 and 5 percent. There
are no section 301 measures against Mexico, while quotas on
stainless steel imports are the only section 201 measures
affecting Mexico. (These quotas have, in practice, not
proven particularly restrictive for Mexico.) The steel and
textile quotas have recently been increased, and the meat
embargo is under technical review. The embargo on fresh
avocados appears to be technically justified because of seed
weevil infestation in Mexico. The sugar quota has had little
impact since Mexico consumes almost all its sugar production
domestically.
Mexico should benefit by the graduation of Korea, Taiwan,
Hong Kong and Singapore from the U.S. GSP in January 1989.
Mexico is now the fourth largest beneficiary of the U.S. GSP
program, entering over $1.5 billion of products into the
U.S. duty free under the program's provisions, and will
become the program's leading beneficiary after the removal
of the four Asian countries.
On the whole, the U.S. and Mexico are now enjoying good and
cooperative trade relations. The substantial trade liberaliza-
tion in Mexico since July 1985, much of it unilaterally
implemented for Mexico's own economic development, has
reduced or eliminated many of the longstanding bilateral
trade irritants with respect to market access. In fact, the
amount of trade liberalization has gone beyond what any
observer expected.
The past three years have been the most active ever in the
bilateral trade relationship. In addition, the bilateral
subsidies understanding, Mexico's GATT accession negotiation,
the GSP General Review, and the framework agreement have
moved the focus of the trade relationship away from any
concessionary approach by the U.S. to a mutually accepted
approach of reciprocity. The recent steel/beer/wine/distilled
spirits agreement and even the new textile agreement reflect
this.
Mexican foreign investment policy and certain intellectual
property issues are now the major difficulties in the bilatera`Y'
trade and investment relationship.
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In a speech to the Mexican Importers and Exporters Association
on January 28, De la Madrid stated that an FTA
ith
w
the U.S.
would be premature at this time due to both the current
difficulties in the Mexican economy and the disparity in the
levels of economic development.
POSSIBLE BILATERAL TRADE INITIATIVES
lA. Offer to increase Mexico's GSP benefits through the annual
view rocess in return for improvements 'n Mexico's patent
aw. Specifically, offer to grant a substantial number of
redesianations of product eligibility for Mexico and waivers
rom competitive need limits in return for the implementation
within 2 or 3 years of (1) product pat protection for
pharmaceuticals. chemicals and alloys and l2) process patent
protection for biotechnology.
ros
Cons
In effect, would reinitiate GSP General Review negotiation
between U.S. and GOM. Uses part of limited U.S.
negotiating leverage (GSP benefits, steel quotas and
textile quota levels) to obtain concessions of commercial
importance to U.S.
GSP waivers for Mexico might stimulate investment in
Mexico.
If successful,,would resolve one of major outstanding
bilateral trade problems.
Such an agreement would commit next U.S. Administration
to follow through. Perhaps too late in political life
of both Administrations to pull off.?
Could create problems with private sect
o
Difficult to promise GSP benefits which would become
effective in July 1989 in return for changes in Mexican
patent law which would have to be approved by Mexican
Congress in fall of 1988. (Mexican Congress only
convenes during September-December each year).
r or other
beneficiaries if deal became public,
Mexican interest perhaps diminished by upcoming removal
of Korea, Taiwan, Hong Kong and Singapore from U.S. GSP.
18. Offer to increase Mexico's GSP benefits as soon as this'
Mexican Congress approves improvements in Mexico's patent
w. Specifically offer to grant a substantial number of
... ~,
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redes~anations of product eligibility for Mexico and waivers
from com>,etitive need limits in return for the implementation
within 2 or 3 years of (1) product Datent protection for
armaceut Gals chemicals and alloys and (2) process tiatent
~rotectio for biotechnology.
os
Cons
Provides more negotiating flexibility than first option
by offering to have U.S. President increase Mexico's
benefits as soon as Mexican Congress acts rather than
waiting until July 1989. Uses part of limited U.S.
negotiating leverage (GSP, steel, and textiles) to
obtain concessions of commercial importance to U.S.
Would make clear to everyone the special nature of the
U.S.-Mexico relationship. (Such a grant of GSP benefits
outside the normal annual GSP review cycle has never
been done before.)
Would set a precedent that would greatly complicate the
administration of GSP program, specifically the GSP
Annual Review procedure that is based on a "due process"
procedure. The hundreds of private sector and other
beneficiary country petitioners that have relied on the
predictability of the year long Annual Review process
would now have clear grounds to ask for the same
"special treatment".
Would send a clear signal to all our trading partners
in the midst of the Uruguay Round that in administering
the GSP program, the U.S. has no regard for our GATT
obligations in how we administer the GSP. Specifically,
we would be violating the principles of "non-
discrimination" and "non-reciprocity" that are a
central component of the GATT waiver allowing for GSP
programs.
Would send the wrong signal to those in the GOM that
deal directly with the GSP program. The GOM is notorious
for submitting poorly prepared petitions that do not
meet the regulations governing the submission of
petitions in the GSP Annual Review.
Following so soon after our decision to graduate the
four Asian beneficiaries, this will not send a signal
that we are looking to redistribute GSP benefits to~~
other developing countries. It will send a signal that
we are interested in giving "special" treatment to
Mexico. Since we cannot do the same thing for all
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other beneficiaries, this decision would potentially
complicate our relations with a number of developing
countries.
GSP BACKGROUND
As part of the GSP General Review exercise in 1986, the U.S.
offered Mexico an increase of several hundred million dollars in
GSP benefits if Mexico would make substantial improvements in its
patent and trademark law. The De la Madrid Administration did
submit, and the Mexican Congress did approve, comprehensive
amending legislation. However, it fell short on several key
points of primary interest to the U.S. In particular, the length
of a patent term was only increased from 10 to 14 years, instead
of the U.S. requested 17 years. Also, implementation of product
patent protection for pharmaceuticals and chemicals and process
patent protection for biotechnology was delayed until January
1997. The U.S. had proposed a two year phase-in (January 1989).
As a result of these shortcomings the U.S. removed $200 million
of GSP benefits from Mexico as of July 1987.
It should be noted that the President has, with few exceptions,
broad discretionary authority .in adding or deleting items or
countries from the GSP program. One requirement is that he must
obtain economic advice from the ITC before taking any such action.
2. Offer to negotiate additional increases in the U S steel
2uotas for Mexico in return for bound tariff reductions in
Mexican steel tariffs combined with other bound tariff
eductions erha s certain chemical a er canned fruit
raisin, and chocolate confectionary items) or increase in the
length of the Mexican patent term.
Pros
Uses one of few U.S. negotiating chips (GSP benefits
and steel and textile quotas) to obtain concessions of
commercial importance to U.S.
Mexicans have insufficient capacity to increase exports
of items in shortage in U.S. (semi-finished steel).
Would thus need to offer increases in items where no
domestic shortages reported.
U.S. industry accepted earlier steel deal with Mexico
in order to obtain restraints on Boren amendment items,
but will oppose any further increases. Industry likely
to mobilize Congressional Steel Caucus in opposition to,,
any deal.
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-- The U.S. has already been generous with Mexico with
respect to steel quotas. Aside from the recent increase,
the VRA negotiated with Mexico contains two provisions
not contained in any other arrangement. One provides
for an upward adjustment to Mexico's export ceilings
based on U.S. steel exports to Mexico. The other
provision permits currently unrestrained imports of
steel (except for one specific product) entered under
TSUS item 806.30. Imports under this provision have
increased significantly.
BACKGROUND ON STEEL
The two governments formalized an agreement under the framework
agreement in late December which provided Mexico a 12.4$ increase
in its 1988 steel quotas in return for adding three wire products
to quota restraints, elimination of the Mexican beer, wine and
distilled spirits quotas, and elimination of the import licensing
requirement on 38 tariff categories.
3. Offer bound U.S. tariff reductions for TSUS cate ories
where Mexico is the r'nci al or a substantial su ier in
return for a binding of recent Mexican tariff reductions and
~moort licensing eliminations.
Other VR.A countries accepted U.S.-Mexico steel deal in
hopes of getting Boren amendment eliminated. Any
additional deal will lead to demands for similar treatmen~.
ros
Provides opportunity to lock-in large part of recent
Mexican trade liberalization. Could prove very important
to U.S.commercialinterests once Mexican economy rebounds.
Would provide impetus to trade credit concept in Uruguay
Round.
Would, in effect, represent Uruguay Round tariff nego-
tiation with fourth largest U.S. trading partner.
Could provide incentive to other LDCs to implement
trade liberalization measures.
Tariff concession list could possibly be tailored to
avoid giving too many other suppliers a free ride.
Negotiated concessions would require congressional,.,,
approval.
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Could involve giving too many other countries a free
ride and, thus, lose some leverage for Uruguay Round
tariff exercise.
Preliminary analysis shows that TSUS items for which
Mexico is principal or substantial supplier are heavily
weighted in high duty agricultural items, high duty textile
items, and petroleum.. These would all be politically
sensitive items.
BACKGROUND ON TRADE CREDIT OPTION
The idea of a "trade credit" has considerable support from
the World Bank, including the Development Committee and
President Barber Conable. Although there has been no detailed
discussion as to the specific conditions under which these
concessions would be negotiated, the concept is under study
by the Uruguay Round Working Group on Developing Countries.
A practical precedent exists in the U.S.-Philippine Section
124 Negotiations held in 1981. At the suggestion of the
World Bank, the Philippines approached the United States
asking for trade negotiations in which they would bind
tariff cuts and licensing changes made as part of a structural
adjustment loan in return for U.S. tariff cuts made with
residual authority left over from the Tokyo Round. The
negotiation was not completed before U.S. tariff authority
ran out.
In the case of Mexico, there are two structural adjustment
loans worth $1 billion that, are already being disbursed. As
part of the loans, Mexico pledges to remove items from their
licensing list and reduce tariffs to 30~ MFN on $40 million
in trade. These concessions are technically only good for
the life of the loan and can be easily reversed after that.
To create permanent change in the- trading system, Mexico
would have to bind these cuts in the GATT on an MFN basis.
Mexican quantitative restrictions could be removed and
converted to GATT-bound tariffs as part of the negotiations.
It's important to note that Mexico has now gone substantially
beyond the conditions attached to the World Bank loans. The
U.S. would aim for bindings at the new lower tariff levels
(maximum Mexican tariff is now 20 percent).
There are 147 TSUS items which are not GSP-eligible and for
which Mexico is the principal or a substantial supplier. 40
of the items are in the 0-5 percent duty range, 47 in the 5-
10 percent, 43 in the 10-20 percent, and 17 over 20 percent.
Total value of imports from Mexico under the 147 TSUS items
is $4.2 billion, or 29.5 percent of total U.S. imports of those ~-
items. Of the $4.2 billion in imports from Mexico, $3.2
billion enters under the 0-5 percent duty range, $414
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million in the 5-lo percent range, $409 million in the 10-20
percent range, and $83 million over 20 percent.
If GSP eligible items are added to the list of possibilities,
there are 395 TSUS items for which Mexico is the principal
or a substantial supplier. Of that 395, 158 are in the 0-5
range, 134 in the 5-10 range, 75 in the 10-20 range, and 28
over 20 percent. Total imports from Mexico in the 395 items
is $8.5 billion, or 29.5 percent of total imports of those
items. Of those imports, $5.9 billion ent
i
ers
n the 0-5
percent duty range, $1.8 billion in the 5-10 percent range,
.$626 million in the 10-20 percent range, and $156 million
over 20 percent.
4. Nevotiate a U S.-Mexico Auto Pact.
A small TPRG sub-group has reviewed this option and found
such a sectoral trade arrangement to be premature. Further
study of the implications for U.S. employment and production
and the relation to the U.S.-Canada Auto Pact is needed. In
addition, sectoral arrangements are GATT incompatible and
would require a GATT waiver.
IMPROVEMENTS IN MEXICAN INVESTMENT REGIME
During the February 13 meeting in Mazatlan, the President and
1T.S. cabinet officers could point to the benefits to Mexico should
conditions for foreign investors be eased. While recognizing the
difficulty in obtaining major legislative changes in the Mexican
Foreign Investment Law at this late stage of the De la Madrid
Administration, U.S. reps could point to certain small improvements
which could help Mexico and improve the bilateral investment
climate. Suggested improvements could include an increase in the
threshold (currently $8 million) which defines small and medium
size companies which are allowed to have 100 percent foreign
ownership without Foreign Investment Commission approval. Other
improvements could be a standstill on the use of export performance
requirements, or a lowering of the 55 percent tax on dividends.
It could then be suggested that details be worked out during the
formal framework agreement consultations on February 22-23 in Mexico.
BACKGROUN ON INVESTMENT
The U.S. is by far the largest source of foreign investment
in Mexico. Total U.S. direct investment in Mexico is $5.9
billion (1986 estimate), or 68.2$ (1985) of all foreign
investment in Mexico. This $5.9 billion represents only
2.5$ of total U.S. foreign investment, with Mexico ranked
12th among countries receiving U.S. foreign investment (but
2nd among LDCs).
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In most cases foreign investment is limited to 49$ of equity,
although majority ownership can be negotiated with the
.Foreign Investment Commission. In those latter cases,
majority ownership is authorized only in return for commitments
on local content, export performance,, location, and R&D
requirements. In addition to these general rules regarding
foreign investment, Mexico has developed sectoral programs
in automobiles, electronics and pharmaceuticals. In each
case, all investment approvals are dependent upon commitments
for local content, technology transfers, export performance
and net foreign exchange earnings.
These restraints on foreign investors are now, in light of
the significant progress made in the last two years on market
access issues, the single largest area of disagreement in
our bilateral trade and investment relations. We believe
these obstacles to investment are not just irritants to the
U.S., but counterproductive to Mexico's own economic
development.
BACKGROUND ON 806 30/807.00 RECOMMENDATION
-- At the request of the House~Ways and Means Committee, the ITC
conducted a study on the economic effects of TSUS items
806.30 and 807.00. These duty classification numbers cover
- products which have been exported from the United States for
processing abroad. Upon their re-entry into the United
States, the importer pays duty only on the value-added abroad.
-- The study, released on January 26, found that plant relocation
outside of the U.S. is not being spurred by 806.30/807.00 tariff
concessions, but by lower labor costs abroad, especially in
Mexico. In addition, Mexico has additional factors making
it attractive - the maquila program, quality workers, low
transportation costs and ease of communications. As such,
the ITC concluded that the elimination of preferential duty
treatment will not result in the return of assembly jobs to
the United States. The ITC also concluded that items 806.30
and 807.00 "appear" to have improved the competitiveness of
U.S. firms vis-a-vis foreign manufacturers of products
containing no U.S. components.
-- The House Ways and Means Trade Subcommittee recently requested
public comment on a bill introduced by Cong. LaFalce to
eliminate 806.30 and 807.00. The administration opposed
similar legislation in 1986.
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-- Consideration of the issue in 1987 was put on hold pending
the outcome of the ITC report. U.S. private sector groups
along the U.S.-Mexico border have called for assurances from
the Administration that it will continue to oppose changes
in these tariff provisions.
T~i.ADE OPTIONS FOR MEETING OF THE PRESIDENTS
President Reagan could acknowledge the substantial progress
made by President De la Madrid in liberalizing trade and
eliminating or reducing subsidies.
Particular attention could be drawn to the framework agreement
which was signed by Mexico and the U.S. in November 1987.
The signing of the framework agreement fulfilled the Presidents'
August 1986 pledge to dedicate their administrations to
strengthening trade and investment ties between the two
countries. To reinforce the commitment of both nations to
continuing progress in that regard, the Presidents could
express their continuing commitment to progressively reduce
barriers to bilateral trade and investment, using the framework
agreement and the GATT process as mechanisms for achieving
this. Particular attention could be drawn to possible
improvements in the investment area which could be discussed
during upcoming framework agreement talks.
President Reagan could point out the benefits to Mexico of
his decision to remove four Asian countries from the U.S. GSP.
President Reagan could reaffirm his opposition to a
protectionist trade bill and to oil import fees.
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CONFIDENTIAL
U.S.-USSR LONG TERM AGREEI~NT
Issue
The United States currently has a five-year grain trade agreement
with the Soviets (Attachment A) which will expire September 30,
1988. Secretary Shultz and Soviet Minister of Foreign Affairs
Shevardnardze agreed last fall that we would explore the merits
of renewing the agreement early in 1988. At a January 5 meeting
in London, the Soviets suggested that the U.S. should extend an
invitation to the USSR to begin such talks.
Recommendation
The Trade Policy Review Group reviewed this issue on January 26.
The Groups unanimous recommendation was that the U.S. should
attempt to negotiate a new agreement.
The EPC should accept the TPRG recommendation.
Background
1. TPRG Discussion
The TPRG discussed a number of issues relating to the agreement.
The principal issue was whether a formal arrangement on grain trade
with the Soviets should be pursued to replace/extend the present
agreement. The TPRG unanimously favored the continuation of an
arrangement. With regard to whether this should be the negotiation
of a new agreement or simple extension of the current agreement,
the TPRG concluded that our primary objective should be the
negotiation of a new agreement. However, the group expressed the
sense that an extension of the current agreement could be an
acceptable fall-back position if efforts to renegotiate are not
productive.
The TPRG addressed a number of additional issues but agreed that
these should be decided by the U. S . negotiating team or resubmitted
for policy guidance as the negotiations proceed. Those issues
include:
a. The time frame covered by the agreement..
o The Soviets have indicated that they would prefer
a period shorter than 5 years to bring the agreement
into conformity with the USSR five-year plan.
CJNFIDEN?ia~
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b. The price provisions to be included in the agreement.
o. The present agreement states that sales will be
made at prevailing market prices. This could be
interpreted as prevailing U.S.or world market prices.
In recent years, world prices have been significantly
below U.S. prices.
G7NFIDENTIAL
c. Products covered by the agreement.
o There is considerable interest among U.S. commodity
groups in bringing more products into the agreement.
d. What quantities should be included, and should
trade-offs between commodities be permitted in
determining compliance with the minimum purchase
provisions?
o The Soviets have suggested that they wquld like
lower minimum purchase requirements and total
flexibility in shifting between products.
e. Role of non-agricultural issues in the negotiations.
o The Soviets may want to bring shipping issues or
non-agricultural trade matters into the agreement.
USTR will lead the negotiations for the new agreement, in close
coordination with the Departments of Agriculture and State. This
is an economic agreement, but cannot be considered outside the
scope of the overall bilateral relationship. Therefore, throughout
the negotiations USTR will seek appropriate guidance from interested
departments and agencies on foreign policy and national security
considerations.
2. Status of Current Agreement?
The current agreement provides that the Soviet Union will buy a
minimum of nine million tons of grain during each agreement year.
Of this amount, at least four million tons must be wheat and at
least four million tons must be corn. The remaining million tons
may be corn or wheat or may be soybeans/soybean meal. Soybeans
and soybean meal are counted at a 2:1 ratio (1/2 ton of soybeans
is the equivalent of 1 ton of grain for the purposes of this
agreement.)
The present agreement has not operated smoothly. We have had a: ,,
running disagreement with the Soviets about the pricing provisions,
which simply state that the grain must be purchased at market
prices. When U.S. prices were above those of our competitors, -
CONFIDENTIAL
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CONFIDENTIAL
subsidies were made available under the Export Enhancement Program
for four million tons cif wheat during the 1986-87 agreement year
and for even greater amounts of wheat during the current year.
Attachment B shows the status of U.S. sales under the present
agreement.
The USSR also has ongoing supply agreements with Argentina for
corn and soybeans; with Canada for wheat, and with France for
wheat (and possibly barley).
3. Economic Benefits of an Agreement:
The concrete economic benefits of an agreement are difficult to
measure. What benefits do accrue to the U.S. are concentrated in
the wheat sector where there are large surpluses in world markets
and we face strong competition from other suppliers. The competition
in corn and soybeans is more limited; we are by far the major
supplier to world markets.
4. Private Sector Views:
The USSR is the worlds largest importer of grains, and despite
its stated goal of achieving self-sufficiency, the Soviets are
likely to remain major grain importers for the foreseeable.
future. Despite the troubled history of U.S.-USSR grain trade,
the agreement does play an important facilitative role. For that
reason, the agreement enjoys strong and widespread support in the
U.S. agricultural sector. It is generally believed that the
Soviets will buy more U.S. grain when an agreement is in effect
than absent a long-term agreement. This is especially true in
the case of wheat.
5. USSR Interest.:
The Soviets had indicated earlier that they 'might not be interested
in an agreement after the present pact expires. They recently
rejected an Australian approach regarding a grains supply agreement.
During the summit visit, Mr. Gorbachev, in response to a question
from a representative of the Bungs Corporation, was negative on a
new/extended agreement with the U.S. However, during a meeting
with the Soviets on January 5 in London, the USSR delegation
expressed an interest in a new grains agreement with the U.S., and
suggested that the U.S. should send a negotiating invitation to
the USSR.
CONFI~ENTIQL
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A'ItENDIX
A~rNT?Ht ~?t1MNf1
tn. oo~ornn+?nt of eh? unltod ?t?t?ir of aTOri~? .~d
TM Do~MnnNnt of tl+? union of soviet aoetall?t Ilapublk?
entM iuppir of Oraln
Tb~ Cowrt-msat. et the Uaitad 6tatM of Aasarica
("USA") and the Government or the Union of Soviet
iocialiat ltapubliea C'U68R").
lleealllns the "iitsaie Principle. of ltelatioas between the
Uaitad $tatas of America and the Uaion of 6ovtet Aoeial?
ist Rtpublies" of May ZS,10~Z sad other iralwaat a~~
saanta between them;
Dasirias to atrtnRthen Ia+R-terse eaoperation between
the two eeuatrias oa the buss of mutual benefit sad
+q~+alicr:
iliiadful of tM importaaea which the production e! tool,
~artieularly erase, Ass for the p~oplaa of loth eouatrlss;
~ecogrieing tl~e aer~d to stabilise tra& in sacs bstweea
the two eountria; tad
AlYirmias tMir eoavietioa that oooparatioa is the field
of t?de wilt eoatributs to ovtnll improremeat of rela-
tioas bstwsem the two countriss;
I;ara a~~ y follows:
Arliclo 1
The Gewrament et the USA sad the Government of the
USSR hereby eater Into an asreement tot the purchase
and sale of wheat and corn for wpply to the USSR. To
thL cad, during the period that lbts Agreement is in
tore,., eteapt u etharwiaa aRreyd by the Parties, the
8o?iet toreisn trade organisations shall purchase from
privets eemmexial wurcee, !er shipment is each
twelve-mentk passed baginrins Oeteber 1, 1088, mina
million metric bas of wheat and corn proven is the V6A;
la doing so, the 8oeiet foreign trade ergaatsatleas, ii
iistaraated, easy purchase, oo account of the acid yuanti?
tie sosbe~aae and/or soybean meal produced in the USA,
(A the preportiea of one ten of aeybeans andJer aeybean
s-aal tat two font et stain,. la any ease, the mini~nurr~
annual gwatitia of wheat sad corn shall be ao leas than
tear estlUaa metric tees aae>z.
The Satiet foreign trade oesanisatioas may iaer+ease the
tine saiUioa metric tea quantity a~?ntlonad above
without ooasnltations b~ as myth as three million metric
ions at wheat and/or Dora for ahipmaat is each twelve.
saonth psriod bssinaias October 1.1!69.
The Ge+rsrarasnt of the tT9A shall sraplo~ its sood of'ficaa
to taeilitab and eacourasc such salts by private come
fnMriAl M1lrrra PIIMhr1NNlMIM Af MrnrnMliti~a er+rlrr
thL Agraemeat will be made at the market price prevail-
~s to: that's produce at the liar. of purchase/sale and in
aeeerdaaes with soranal aommsrcLl ts:ms.
artloh Ii
Du:iag the term of thin Agreement, sticept ae otherwise
agreed by the parties, the Government o! the USA shall
tot etercbe any dtaentienar3r antherity available to it
wade: United States law to control a:ports of commodl-
tiss purchased lac supply to the USSR it aeeordance
with Article L
ATTACi~r A
Article 111
In earrrind out thsir obli~stioas Hader this Asreeeieat,
the Soviet torei~n trade orsanisstiona shall endeavor to
?~pace theft purchaNS in the USA tad shipm~aa to the
V95R as tvaly at aatibl? over each twalve?month
period.
Artki? rv
The Govsrana?at of the U86R shall assure that, aseept
ae the Parties may otherwise aFne, all eommeditits
Brown is the U6A sad purchased by Soviet foreign trade
oritaai:anon, under this Asr?em?at .hall be ?uppliad for
eoasumptioa is the USSR.
Artless V
Wh?awtr tM Gow:amtat of the V83R wUhte the
6oviet foreign trade organitatione to b+ able to purchaw
raor~ wheat or Dora gown is the USA than the amouaa
ap+cified in Article I, it thsll aotity the Oovsrament of
the USA.
Whenever the Government of the UBA wishes private
ooaimereial sources to be able to Nil to the V85R more
wheat or corn crown in the USA than the tmounte specs.
tied in Article I, it shall aotil~ the Gewrameat of the
LJBSR.
In betk iaetaaees, the Partin wiil eeneult as won ae pose
Bible in osder to Hach agreement on possible quantities
of =rata to be supplied to the U85R pr=o: to
purchase/sale m enne)neion of contacts for the
purcbaeehale of gain to amounts above those speciRad
in Article I.
The Government of the USA la prepared to use its good
oRicaa, as appropriate and within the laws in force to the
USA, to be of sees:lance on Questions of the appropriate
quality of the Frain to ba supplied hoe, the USA to tre
vssR.
Article VII
It is nnd.rstend that the shipment of oommedttte. Aom
the USA to the USSR ender thin Agreement shall ~ in
accord with the provisions of the Amsrican?8oriet Agree.
meat oa Maritime Matzen which is in tone during the
period of shipment Aereaader.
A~tlal? VIII
The lartlse shall hold consuluttons coaearalaa the
irnplen+entation o[ this A6re+ment and related matter
at lulsr?ale ui'sl: u-uull+e, ant al aLy ether lime at lh^
r?aunt of ?!th?r Party,
~nlea ut
This Atr?aenent a>,a11 ante into fovea on s:eeuttaa sad
shall ramaia in force until September S0.3~E?, ualeu
astendad by the Partin for a mutually agree~panod
DONF at Macow this twentyfthh dry of Augvet. 1963,
is duplicate, each is the English and Russian laaguag~s,
both a:ta bains pu.lly autheade.
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,- i . e~tltu.cu?1C1Y1' tS
a
STATUS OF U.S. SALES TO THE USSR UNDER CURRENT LTA
REPORTED AS OF 1/14/88
(1,000 Metric Tons)
ACTUAL SHIPMENTS
TOTAL
SALES
-_
SHIPMENTS
TO DATE
__
AGREEMENT YEAR
(Oct/Sep)
83/84
84/85
65/86
86/87
87
/88
Vbeat
7,593
2,887
153
4,081
4,812
944
Corn
6,476
15,750
6,808
4,102
1,764
.1,666
TONAL -Grains
14,069
18,637
6,961
8,183
6,576
2,610
Soybeans
416
-
1,519
68
800
212
Soybeaa Cake b Meal
-
-
-
-
1,303
291
AGREEMENT MINIIiUM
9,000
9,000
9,000
9,000
9,000
Source: USDA/FAS - U.S. Export Sales
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DP89G01321 8000700020003-1 DATA
- SMITTAL SLIP I ~ ,
TO: D/DCI-DDCI Exec Staff :;
ROOM N0.
BUtLDiNO -
s:-~
REMARKS:
FROM: ~~,~~ ~,~~
ROOM NO.~
~ ~~ s~ I
EXTENSION
i ~ ~' 241 REPLACES FORM 36-8
WFIICH MAY BE USED.
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The D entra me igence
irec or of C
Washington, D.C. ?OSOS
National Intelligence Council
MEMORANDUM FOR: Director of Central Intelligence
NIC 00460-88
4 February 1988
FROM: Deane E. Hoffmann
National Intelligence Officer for Economics
SUBJECT: Economic Policy Council Meeting, Friday, 5 February
1. Action: Possible attendance at an Economic Policy Council Meeting,
Friday, 5 February from 9:15 to 10:15 in the Roosevelt Room at the White
House.
2. The Economic Policy Council will meet tomorrow to discuss a series
of policy initiatives on Mexico. It will also decide on whether to
negotiate a renewal of the long-tern grain agreement with the Soviet Union.
The initiatives taken toward Mexico will be modest and non-controversial.
The CIA will have no role in the discussion. The renewal of the grain
agreement is largely a political issue. The Intelligence Directorate did a
background paper on the grain agreement, and you could have talking points
on this issue.
3. Because both issues are more broad .guage__than the normal trade
trivia covered by the. Council,youu-might like to make an appearance to see
the~-Ctsunc-1=-operate--and,_ perhaps say _a few- words on Soviet -grain. -
Attachment:
As stated
CL BY SIGNER
DECL OADR
SEC ET
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` x.
January 14, 1988
PARTICIPANTS
Secretary Baker, Chairman Pro Tempore
Secretary Lyng
Secretary Verity
Secretary Burnley
Director Miller
Chairman Sprinkel
Deputy Attorney General ]3urr..s
(Representing Attorney General Meese)
Deputy Secretary Martin
(Representing Secretary Herrington)
Under Secretary Wallis
(Representing Secretary Shultz)
Ambassador Holmer
(Pepresenting Ambassador Yeutter)
T. Kenneth Cribb, Jr., Assistant to the President f.or Domestic
Affairs
Nancy J. Risque, Assistant to the President and Cabinet Secretary
Eugene McAllister, Executive Secretary
For Presentation
James C. Fletcher, Administrator, NASA
Dale Myers, Deputy Administrator, NASA
Robert H. Brumley, Acting General Counsel, Department of Commerce
Additional Invitees
James W. Dyer, Deputy Assistant to the President for Legislative
Affairs
Dan L. Crippen, Deputy Assistant to the President-
Rebecca Range, Deputy Assistant to the President and Director o~
the Office of Public Liaison
Jay Stephens, Deputy Counsel to the President
B. Jay Cooper, Special Assistant to the President and Deputy
Press Secretary
Stephen I. Danzansky, Special Assistant to the President and
Senior Director for International Economic Affairs, NSC
Michael Driggs, Special Assistant for Policy Development
William Graham, Science Advisor to the President and Director of
the Office of Science and Technology Policy
C. Bot~den Gray, Counsellor to the Vice President
Deane Hoffman, National Intelligence Officer for Economics, C;A
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" ROUTING SL[P
ACTION
INFO
DATE
INITIAL
1
DCI
2
DDCI
3
EXDIR
4
D/ICS
5
DDI
6
DDA
7
DDO
8
DDSBT
9
Chm/NIC
10
GC
11
IG
12
Compt
13
D/OCA
14
D/PAO
15
D/PERS
16
D/Ex Staf
g
~ ~ ~
17
NIO/ECON
g
18
19
20
21
22
Execu rve Secretary
4Feb'88
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CONFIDENTIAL ATTACHMENT
THE WHITE HOUSE
WASHINGTON
CABINET AFFAIRS STAFFING MEMORANDUM
Date: Feb. 3, 1988 Number: 490 , 726 Due By: -----
Subject: Economic Policy Council Meeting -- Friday, February 5, 1988
Roosevelt Room -- 9:15 a.m.
AI.L C,~81~IET Et~I3ERS
Action FYI
^ ^
Action
CEC~ ^
FYI
^
Vice President
(~ ^
OSTP ^
^
State
[~ ^
^
^
Treasury
~ ^
^
^
Defense
J
ti
~
^
^
us
ce
[
^
Interior
^ ^
^
^
Agriculture
~ ^
....... ..............................................................
..........
Commerce
~ ^
Powell
Labor
~ ^
Cribb (~
^
HHS
Bauer [~
^
HUD
~ ~
Dawson (ForWHStaffing) ~
^
Transportation
[~ ^
^
^
Energy
[~ ^
^
^
Education
^ ^
Chief of Staff
~
^ '-
^
^
OMB
[~' ^
^
^
UN
^ ^
^
^
CEA
~ ^
Executive Secretary for:
..................................................
CIA
.......................................
(~ ^
DPC ^
EPC [~
[v~
^
EPA
^ ^
?
^
GSA
^ ^
AID ?/
^
NASA
^ ^
^
^
OPM
^ ^
^
^
SBA
^ ^
VA
^
^
^ ^
REMARKS:
RETURN TO:
The conomic,,,_Polic_y._Council Zw-1l? meet- on F.riday_, --~
Feb-.u`a~y==5; -i98-8;~ at 9:15 -a.m._ in the. Roosevelt Room.
The'`agenda"and background materials are attached
for your review.
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February 3, 1988
MEMORANDUM FOR THE ECONOMIC POLICY COUNCIL
FROM: EUGENE J. McALLISTER
SUBJECT: Agenda and Papers for the Febr~zarv 5 Meetincr
The agenda and papers for the February 5 meeting of the Economic
Policy Council are attached. The meeting is scheduled for 9:15 a.m.
in the Roosevelt Room.
The first agenda item will be Mexico. In the State of the Union,
the President highlighted trade as one of the top items on his
agenda for his talks with President de la Madrid, scheduled for
February 13. The Council will consider several options for trade
initiatives within the existing framework agreement. The TPRG
has prepared the attached paper outlining these options.
The second agenda item will be the Long-Term Grain Agreement.
The current 5-year U.S.-U.S.S.R. agreement expires September 30,
1988. The Council will discuss the possible renewal of the
agreement. A paper. prepared by the TPRG is attached.
CONFIDENTIAI~ P.TTACHMENTS
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I
i
i
ECONOMIC POLICY COUNCIL
February 5, 1988
9:15 a.m.
The Roosevelt Room
AGENDA
2. Long Term Crain Agreement with the Soviet Union
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OFFICE OF THE UNITED STATES
TRADE REPRESENTATIVE
EXECUTIVE OFFICE OF THE PRESIDENT
WASHINGTON
20506
February 3, 1988
MEMORANDUM
T0: THE ECONOMIC POLICY COUNCIL
FROM: THE TRADE POLICY REVIEW GROUP
SUBJECT: U.S.-Mexico Trade Relations
ISSUE
President Reagan has requested an examination of the prospects for
establishing a special trade and investment relationship with
Mexico. He has similarly requested an examination of trade and
investment issues that affect the U.S.-Mexico border. The aim is
to determine possibilities for building on our currently good
trade relations. On January 28, President De la Madrid called
the current structural adjustment process accompanied by trade
liberalization that has been initiated and implemented by his
Administration the most significant achievement in the last 50
years of Mexican history. He called GATT accession and the
bilateral framework agreement the two most important actions
taken by Mexico during this process. He also stated that the
development of a constructive working relationship with the U.S.
has been one of the major achievements of his Administration.
RECOMMENDATIONS
1. That the U.S. utilize the recently signed bilateral framework
agreement as the mechanism for managing the bilateral trade
and investment relationship and for seeking incremental
improvements in market access, foreign investment policy,
and intellectual property protection. (The first round of
formal consultations under the framework agreement are
already scheduled for February 22-23 in Mexico.)
2. That the EPC provide guidance as to whether the U.S. should
seek to negotiate any of four limited trade initiatives with
Mexico (see pages 4-9).
3. That the U.S. use the February 13 meeting of the two Presidents
and the February 22-23 framework agreement consultations in
a coordinated manner to seek certain modest improvements in
Mexican foreign investment regulation.
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Vin'"~'~n[PlTINL
4. That the EPC consider reaffirming Administration opposition
to modification or elimination of U.S, tariff provisions
806.30/807.00.
BACKGROUND
Mexico is our fourth largest trading partner
Japan and West German (after Canada,
Total trade between the) two countries in 1 87e wasr about ket .
billion. The U.S. has run a trade deficit with Mexico since
1982, with a 1987 deficit of over $6 billion. Mexico is our
third largest supplier of crude oil.
Mexican trade policy has undergone an important evolution
during the De la Madrid Administration. To move Mexico away
from economic development based on import substitution and
oil export earnings and towards export-led growth, the De la
Madrid Administration has stimulated the process of structural
adjustment through a reduction in domestic subsidies and an
opening of the domestic market to import competition. With
respect to trade, substantial liberalization has taken place
in the level of tariffs and in the use of import licenses and
official reference prices: the three tools used by Mexico
in the post WWII period to control imports.
At the end of 1983, all of the more than 8,300 Mexican
tariff categories were subject to import licensing requirements;
now only 329 categories (mainly covering the auto and
pharmaceutical sectors, some agricultural
firearms, and some luxury items) are still covereds~ drugs,
329 categories represent 3.95 of the Mexican tariff schedule
but covered 27.2$ of total Mexican imports by value in
1987.) Official reference prices, which covered over 1,500
tariff categories two years ago, were totally eliminated at
the end of 1987. Tariffs were as high as 100 percent as
recently as April 1986, but have been reduced to a maximum
applied rate of 20$ as of December 15, 1987.
import tax, applied on top of the normal dut The 5$ general
on December 15 1987. Y. was eliminated
The average weighted Mexican tariff
is now 5.6$. (The comparable U.S. tariff is 3.1$.
the trade liberalization has been implemented since July 1985E
Mexico has complemented these measures by acceding to the
GATT on August 24, 1986, and by signing on November 6, 1987,
with the U.S. a bilateral framework agreement for trade and
investment. The significant reduction in Mexican licensing
requirements and the elimination of official reference
prices have fulfilled commitments made by Mexico during its
GATT accession negotiation. However, the tariff reductions
implemented by Mexico go well beyond Mexico's GATT commitments.
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The framework agreement was an important psychological step
forward for Mexico. Its primary result was the establishment
of a consultative mechanism which can be invoked by either
side at any time to clarify respective trade policies,
resolve specific disputes, or negotiate the removal or
reduction of trade and investment barriers.
The U.S. market is, with a few important exceptions, open to
imports from Mexico. Over 80$ of Mexican exports to the
U.S. enter at a duty rate between 0 and 5 percent. There
are no section 301 measures against Mexico, while quotas on
stainless steel imports are the only section 201 measures
affecting Mexico. (These quotas have, in practice, not
proven particularly restrictive for Mexico.) The steel and
textile quotas have recently been increased, and the meat
embargo is under technical review. The embargo on fresh
avocados appears to be technically justified because of seed
weevil infestation in Mexico. The sugar quota has had little
impact since Mexico consumes almost all its sugar production
domestically.
Mexico should benefit by the graduation of Korea, Taiwan,
Hong Kong and Singapore from the U.S. GSP in January 1989.
Mexico is now the fourth largest beneficiary of the U.S. GSP
program, entering over $1.5 billion of products into the
U.S. duty free under the program's provisions, and will
become the program's leading beneficiary after the removal
of the four Asian countries.
On the whole, the U.S. and Mexico are now enjoying good and
cooperative trade relations. The substantial trade liberaliza-
tion in Mexico since July 1985, much of it unilaterally
implemented for Mexico's own economic development, has
reduced or eliminated many of the longstanding bilateral
trade irritants with respect to market access. In fact, the
amount of trade liberalization has gone beyond what any
observer expected.
The past three years have been the most active ever in the
bilateral trade relationship. In addition, the bilateral
subsidies understanding, Mexico's GATT accession negotiation,
the GSP General Review, and the framework agreement have
moved the focus of the trade relationship. away from any
concessionary approach by the U.S. to a mutually accepted
approach of reciprocity. The recent_'steel/beer/wine/distilled
spirits agreement and even the new textile agreement reflect
this.
Mexican foreign investment policy and certain intellectual
property issues are now the major difficulties in the bilateral
trade and investment relationship.
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In a speech to the Mexican Importers and Exporters Association
on January 28, De la Madrid stated that an FTA with the U.S.
would be premature at this time due to both the current
difficulties in the Mexican economy and the disparity in the
levels of economic development.
POSSIBLE BILATERAL TRADE INITIATIVES
lA. Offer to increase Mexico's GSP benefits through the annual
review process in return for improvements in Mexico's patent
law. Specifically offer to grant a substantial number of
redesianations of product eligibility for Mexico and waivers
from competitive need limits in return for the implementation
within 2 or 3 vears of (1) product patent protection for
pharmaceuticals, chemicals and alloys and (2) process patent
protection for biotechnoloay.
In effect, would reinitiate GSP General Review negotiation
between U.S. and GOM. Uses part of limited U.S.
negotiating leverage (GSP benefits, steel quotas and
textile quota levels) to obtain concessions of commercial
importance to U.S.
GSP waivers for Mexico might stimulate investment,_in
Mexico.
If successful, would resolve one of major outstanding
bilateral trade problems.
-- Difficult to promise GSP benefits which would become
effective in July 1989 in return for changes in Mexican
patent law which would have to be approved by Mexican
Congress in fall of 1988. (Mexican Congress only
convenes during September-December each year).
-- Such an agreement would commit next U.S. Administration
to follow through. Perhaps too late in political life
of both Administrations to pull off.
-- Could create problems with private sector or other
beneficiaries if deal became public.
_ -- Mexican interest perhaps diminished by upcoming removal
of Korea, Taiwan, Hong Kong and Singapore from U.S. GSP.
1B. Offer to increase Mexico's GSP benefits as soon as the
Mexican Congress approves improvements in Mexico's patent
law. Specifically offer to grant a substantial number of
~ t !~
.~ i~
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redesianations of product eligibility for Mexico and waivers
from competitive need limits in return for the implementation
within 2 or 3 years of (1) product patent protection for
pharmaceuticals, chemicals and alloys and (2) process patent
protection for biotechnoloay.
Provides more negotiating flexibility than first option
by offering to have U.S. President increase Mexico's
benefits as soon as Mexican Congress acts rather than
waiting until July 1989. Uses part of limited U.S.
negotiating leverage (GSP, steel, and textiles) to
obtain concessions of commercial importance to U.S.
Would make clear to everyone the special nature of the
U.S.-Mexico relationship. (Such a grant of GSP benefits
outside the normal annual GSP review cycle has never
been done before.)
Would set a precedent that would greatly complicate the
administration of GSP program, specifically the GSP
Annual Review procedure that is based on a "due process"
procedure. The hundreds of private sector and other
beneficiary country petitioners that have relied on the
predictability of the year long Annual Review process
would now have clear grounds to ask for the same
"special treatment".
Would send a clear signal to all our trading partners
in the midst of the Uruguay Round that in administering
the GSP program, the U.S. has no regard for our GATT
obligations in how we administer the GSP. Specifically,
we would be violating the principles of "non-
discrimination" and "non-reciprocity" that are a
central component of the GATT waiver allowing for GSP
programs.
Would send the wrong signal to those in the GOM that
deal directly with the GSP program. The GOM is notorious
for submitting poorly prepared petitions that do not
meet the regulations governing the submission of
petitions in the GSP Annual Review.
Following so soon after our decision to graduate the
four Asian beneficiaries, this will not send a signal
that we are looking to redistribute GSP benefits to
other developing countries. It will send a signal that
we are interested in giving "special" treatment to
Mexico. Since we cannot do the same thing for all
r- r. ? ! i 1!_.
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other beneficiaries, this decision would potentially
complicate our relations with a number of developing
countries.
As part of the GSP General Review exercise in 1986, the U.S.
offered Mexico an increase of several hundred million dollars in
GSP benefits if Mexico would make substantial improvements in its
patent and trademark law. The De la Madrid Administration did
submit, and the Mexican Congress did approve, comprehensive
amending legislation. However, it fell short on several key
points of primary interest to the U.S. In particular, the length
of a patent term was only increased from 10 to 14 years, instead
of the U.S. requested 17 years. Also, implementation of product
patent protection for pharmaceuticals and chemicals and process
patent protection for biotechnology was delayed until January
1997. The U.S. had proposed a two year phase-in (January 1989).
As a result of these shortcomings the U.S.'removed $200 million
of GSP benefits from Mexico as of July 1987.
It should be noted that the President has, with few exceptions,
broad discretionary authority in adding or deleting items or
countries from the GSP program. One requirement is that he must
obtain economic advice from the ITC before taking any such action.
2. Offer to necrotiate additional increases in the U S steel
ctuotas for Mexico in return for bound tariff reductions in
Mexican steel tariffs combined with other bound tariff
reductions (perhaps certain chemical paper canned fruit
raisin, and chocolate confectionary items) or increase in the
lenctth of the Mexican patent term.
Uses one of few U.S. negotiating chips (GSP benefits
and steel and textile quotas) to obtain concessions of
commercial importance to U.S.
Mexicans have insufficient capacity to increase exports
of items in shortage in U.S. (semi-finished steel).
Would thus need to offer increases in items where no
domestic shortages reported.
U.S. industry accepted earlier steel deal with Mexico
in order to obtain restraints on Boren amendment items,
but will oppose any further increases. Industry likely
to mobilize Congressional Steel Caucus in opposition to
any deal.
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Other VRA countries accepted U.S.-Mexico steel deal in
hopes of getting Boren amendment eliminated. Any
additional deal will lead to demands for similar treatmen~.
The U.S. has already been generous with Mexico with
respect to steel quotas. Aside from the recent increase,
the VRA negotiated with Mexico contains two provisions
not contained in any other arrangement. One provides
for an upward adjustment to Mexico's export ceilings
based on U.S, steel exports to Mexico. The other
provision permits currently unrestrained imports of
steel (except for one specific product) entered under
TSUS item 806.30. Imports under this provision have
increased significantly.
BACKGROUND ON STEEL
The two governments formalized an agreement under the framework
agreement in late December which provided Mexico a 12.4$ increase
in its 1988 steel quotas in return for adding three wire products
to quota restraints, elimination of the Mexican beer, wine and
distilled spirits quotas; and elimination of the import licensing
requirement on 38 tariff categories.
3. Offer bound, U.S. tariff reductions for TSUS categories
where Mexico is the principal or a substantial supplier in
return for a binding of recent Mexican tariff reductions and
import licensing eliminations.
Provides opportunity to lock-in large part of recent
Mexican trade liberalization. Could prove very important
to U.S.commercialinterests once Mexican economy rebounds.
Would provide impetus to trade credit concept in Uruguay
Round.
Would, in effect, represent Uruguay Round tariff nego-
tiation with fourth largest U.S. trading partner.
Could provide incentive to other LDCs to implement
trade liberalization measures.
Tariff concession list could possibly be tailored to
avoid giving too many other suppliers a free ride.
Cons
Negotiated concessions would require congressional
approval.
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Could involve giving too many other countries a free
ride and, thus, lose some leverage for Uruguay Round
tariff exercise.
Preliminary analysis shows that TSUS items for which
Mexico is principal or substantial supplier are heavily
weighted in high duty agricultural items, high duty textile
items, and petroleum. These would all be politically
sensitive items.
BACKGROUND ON TRADE CREDIT OPTION
The idea of a "trade credit" has considerable support from
the World Bank, including the Development Committee and
President Barber Conable. Although there has been no detailed
discussion as to the specific conditions under which these
concessions would be negotiated, the concept is under study
by the Uruguay Round Working Group on Developing Countries.
A practical precedent exists in the U.S.-Philippine Section
124 Negotiations held in 1981. At the suggestion of the
World Bank, the Philippines approached the United States
asking for trade negotiations in which they would bind
tariff cuts and licensing changes made as part of a structural
adjustment loan in return for U.S. tariff cuts made with
residual authority left over from the Tokyo Round. The
negotiation was not completed before U.S. tariff authority
ran out.
-- In the case of Mexico, there are two structural adjustment
loans worth $1 billion that are already being disbursed. As
part of the loans, Mexico pledges to remove items from their
licensing list and reduce tariffs to 30% MFN on $40 million
in trade. These concessions are technically only good for
the life of the loan and can be easily reversed after that.
To create permanent change in the trading system, Mexico
would have to bind these cuts in the GATT on an MFN basis.
Mexican quantitative restrictions could be removed and
converted to GATT-bound tariffs as part of the negotiations.
-- It's important to note that Mexico has now gone substantially
beyond the conditions attached to the World Bank loans. The
U.S. would aim for bindings at the new lower tariff levels
(maximum Mexican tariff is now 20 percent).
-- There are 147 TSUS items--which are not GSP-eligible and for
which Mexico is the principal or a substantial supplier. 40
_ of the items are in the 0-5 percent duty range, 47 in the 5-
10 percent, 43 in the 10-20 percent, and 17 over 20 percent.
Total value of imports from Mexico under the 147 TSUS items
is $4.2 billion, or 29.5 percent of total U.S. imports of those
items. Of the $4.2 billion in imports from Mexico, $3.2
billion enters under the 0-5 percent duty range, $414
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million in the 5-10 percent range, $409 million in the 10-20
percent range, and $83 million over 20 percent.
If GSP eligible items are added to the list of possibilities,
there are 395 TSUS items for which Mexico is the principal
or a substantial supplier. Of that 395, 158 are in the 0-5
range, 134 in the 5-10 range, 75 in the 10-20 range, and 28
over 20 percent. Total imports from Mexico in the 395 items
is $8.5 billion, or 29.5 percent of total imports of those
items. Of those imports, $5.9 billion enters in the 0-5
percent duty range, $1.8 billion in the 5-10 percent range,
$626 million in the 10-20 percent range, and $156 million
over 20 percent.
4. Necrotiate a U.S.-Mexico Auto Pact.
A small TPRG sub-group has reviewed this option and found
such a sectoral trade arrangement to be premature. Further
study of the implications for U.S. employment and production
and the relation to the U.S.-Canada Auto Pact is needed. In
addition, sectoral arrangements are GATT incompatible and
would require a GATT waiver.
IMPROVEMENTS IN MEXICAN INVESTMENT REGIME
During the February 13 meeting in Mazatlan, the President and
U.S. cabinet officers could point to the benefits to Mexico shoug.d
conditions for foreign investors be eased. While recognizing the
difficulty in obtaining major legislative changes in the Mexican
Foreign Investment Law at this late stage of the De la Madrid
Administration, U.S. reps could point to certain small improvements
which could help Mexico and improve the bilateral investment
climate. Suggested improvements could include an increase in the
threshold (currently $8 million) which defines small and medium
size companies which are allowed to have 100 percent foreign
ownership without Foreign Investment Commission approval. Other
improvements could be a standstill on the use of export performance
requirements, or a lowering of the 55 percent tax on dividends.
It could then be suggested that details be worked out during the
formal framework agreement consultations on February 22-23 in Mexico.
BACKGROUND ON INVESTMENT
The U.S. is by far the largest source of foreign investment
in Mexico. Total U.S. direct investment in Mexico is $5.9
billion (1986 estimate), or 68.2$ (1985) of all foreign
investment in Mexico. This $5.9 billion represents only
2.5~ of total U.S. foreign investment, with Mexico ranked
12th among countries receiving U.S. foreign investment (but
2nd among LDCs).
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In most cases foreign investment is limited to 49$ of equity,
although majority ownership can be negotiated with the
Foreign Investment Commission. In those latter cases,
majority ownership is authorized only in return for commitments
on local content, export performance, location, and R&D
requirements. In addition to these general rules regarding
foreign investment, Mexico has developed sectoral programs
in automobiles, electronics and pharmaceuticals. In each
case, all investment approvals are dependent upon commitments
for local content, technology transfers, export performance
and net foreign exchange earnings.
These restraints on foreign investors are now, in light of
the significant progress made in the last two years on market
access issues, the single largest area of disagreement in
our bilateral trade and investment relations. We believe
these obstacles to investment are not just irritants to the
U.S., but counterproductive to Mexico's own economic
development.
BACKGROUND ON 806.30/807.00 RECOMMENDATION
At the request of the House Ways and Means Committee, the ITC
conducted a study on the economic effects of TSUS items
806.30 and 807.00. These duty classification numbers cover
products which have been exported from the United States .for
processing abroad. Upon their re-entry into the United
States, the importer pays duty only on the value-added abroad.
The study, released on January 26, found that plant relocation
outside of the U.S. is not being spurred by 806.30/807.00 tariff
concessions, but by lower labor costs abroad, especially in
Mexico. In addition, Mexico has additional factors making
it attractive - the maquila program, quality workers, low
transportation costs and ease of communications. As such,
the ITC concluded that the elimination of preferential duty
treatment will not result in the return of assembly jobs to
the United States. The ITC also concluded that items 806.30
and 807.00 "appear" to have improved the competitiveness of
U.S. firms vis-a-vis foreign manufacturers of products
containing no U.S. components.
The House Ways and Means Trade Subcommittee recently requested
public comment on a bill introduced by Cong. LaFalce to
eliminate 806.30 and 807.00. The administration opposed
similar legislation in 1986.
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Consideration of the issue in 1987 was put on hold pending
the outcome of the ITC report. U.S. private sector groups
along the U.S.-Mexico border have called for assurances from
the Administration that it will continue to oppose changes
in these tariff provisions.
TRADE OPTIONS FOR MEETING OF THE PRESIDENTS
-- President Reagan could acknowledge the substantial progress
made by President De la Madrid in liberalizing trade and
eliminating or reducing subsidies.
-- Particular attention could be drawn to the framework agreement
which was signed by Mexico and the U.S. in November 1987.
The signing of the framework agreement fulfilled the Presidents'
August 1986 pledge to dedicate their administrations to
strengthening trade and investment ties between the two
countries. To reinforce the commitment of both nations to
continuing progress in that regard, the Presidents could
express their continuing commitment to progressively reduce
barriers to bilateral trade and investment, using the framework
agreement and the GATT process as mechanisms for achieving
this. Particular attention could be drawn to possible
improvements in the investment area which could be discussed
during upcoming framework agreement talks.
President Reagan could point out the benefits to Mexico-of
his decision to remove four Asian countries from the U.S. GSP.
President Reagan could reaffirm his opposition to a
protectionist trade bill and to oil import fees.
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CONFIDENTIAL
The United States currently has a five-year grain trade agreement
with the Soviets (Attachment A) which will expire September 30,
1988. Secretary Shultz and Soviet Minister of Foreign Affairs
Shevardnardze agreed last fall that we would explore the merits
of renewing the agreement early in 1988. At a January 5 meeting
in London, the Soviets suggested that the U.S. should extend an
invitation to the USSR to begin such talks.
Recommendation
The Trade Policy Review Group reviewed this issue on January 26.
The Group's unanimous recommendation was that the U.S. should
attempt to negotiate a new agreement.
The EPC should accept the TPRG recommendation.
Backqround
1. TPRG Discussion
The TPRG discussed a number of issues relating to the agreement.
The principal issue was whether a formal arrangement on grain trade
with the Soviets should be pursued to replace/extend the present
agreement. The TPRG unanimously favored the continuation of an
arrangement. With regard to whether this should be the negotiation
of a new agreement or simple extension of the current agreement,
the TPRG concluded that our primary objective should be the
negotiation of a new agreement. However, the group expressed the
sense that an extension of the current agreement could be an
acceptable fall-back position if efforts to renegotiate are not
productive.
The TPRG addressed a number of additional issues but agreed that
these should be decided by the U. S . negotiating team or resubmitted
for policy guidance as the negotiations proceed. Those issues
include:
a. The time frame covered by the agreement.
o The Soviets have indicated that they would prefer
a period shorter than 5 years to bring the agreement
into conformity with the USSR five-year plan.
CONFIOENTii_
;~'=ASSIFyED BY _ ~'~` ~ _11~"
n,?CLASSIFIED ON __~~~~-----
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CONFIDENiiAL
b. The price provisions to be included in the agreement.
The present agreement states that sales will be
made at prevailing market prices. This could be
interpreted as prevailing U.S.or world market prices.
In recent years, world prices have been significantly
below U.S. prices.
c. Products covered by the agreement.
o There is considerable interest among U.S. commodity
groups in bringing more products into the agreement.
d. What quantities should be included, and should
trade-offs between commodities be permitted in
determining compliance with the minimum purchase
provisions?
o The Soviets have suggested that they would like
lower minimum purchase requirements and total
flexibility in shifting between products.
e. Role of non-agricultural issues in the negotiations.
o The Soviets may want to bring shipping issues or
non-agricultural trade matters into the agreement.
USTR will lead the negotiations for the new agreement, in close
coordination with the Departments of Agriculture and State. This
is an economic agreement, but cannot be considered outside the
scope of the overall bilateral relationship. Therefore, throughout
the negotiations USTR will seek appropriate guidance from interested
departments and agencies on foreign policy and national security
considerations.
2. Status of Current Agreement:
The current agreement provides that the Soviet Union will buy a
minimum of nine million tons of grain during each agreement year.
Of this amount, at least four million tons must be wheat and at
least four million tons must be corn. The remaining mill-ion tons
may be.~ corn or wheat or may be soybeans/soybean meal. Soybeans
and soybean meal are counted at a 2:1 ratio (1/2 ton of soybeans
is the equivalent of 1 ton of grain for the purposes of this
agreement.)
The present agreement has not operated smoothly. We have had a
running disagreement with the Soviets about the pricing provisions,
which simply state that the grain must be purchased at market
prices. When U.S. prices were above those of our competitors,
COP~FIDEN?IAL
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~~NFIDENTiGL
subsidies were made available under the Export Enhancement Program
for four million tons cif wheat during the 1986-87 agreement year
and for even greater amounts of wheat during the current year.
Attachment B shows the status of U.S. sales under the present
agreement.
The USSR also has ongoing supply agreements with Argentina for
corn and soybeans; with Canada for wheat, and with France for
wheat (and possibly barley).
3. Economic Benefits of an Agreement?
The concrete economic benefits of an agreement are difficult to
measure. What benefits do accrue to the U.S. are concentrated in
the wheat sector where there are large surpluses in world markets
and we face strong competition from other suppliers. The competition
in corn and soybeans is more limited; we are by far the major
supplier to world markets.
4. Private Sector views:
The USSR is the world's largest importer of grains, and despite
its stated goal of achieving self-sufficiency, the Soviets are
likely to remain major grain importers for the foreseeable
future. Despite the troubled history of U.S.-USSR grain trade,
the agreement does play an important facilitative role. For that
reason, the agreement enjoys strong and widespread support in the
U.S. agricultural sector. It is generally believed that the
Soviets will buy more U.S. grain when an agreement is in effect
than absent a long-term agreement. This is especially true in
the case of wheat.
5. USSR Interest:
The Soviets had indicated earlier that they might not be interested
in an agreement after the present pact expires. They recently
rejected an Australian approach regarding a grains supply agreement.
During the summit visit, Mr. Gorbachev, in response to a question
from a representative of the Bunge Corporation, was negative on a
new/extended agreement with the U.S. However, during a meeting
with the Soviets on January 5 in London, the USSR delegation
expressed an interest in a new grains agreement with the U.S., and
suggested that the U.S. should send a negotiating invitation to
the USSR.
~OMRDENTii1L
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A"~NDIX
Apra~entant Xetwa~en
Tha Ootrerrttrent of the Unltsc! ?latee of Ama-!ca and
Trig QO~arnttlanl of the Union tat soviet ioclallat Ilap~ublfca
on the supply of Qraln
The Govsrament of the Vaited 6tatcs of Amsrica Article I11
("USA") and the Goveraa~tnt of the Union of Soviet In tarrying out their obligttioas under this Agreement,
iSocialiat Republica ("Uii6R"), the Soviet foreign trade organisations shall endeavor to
a ace their purchases in the U6A and ~hipmena w the
Recalling the "Basic Principles of Relations between the ~~ ae evenly as voesible owr each twelve-month
United States of America and the Union of 6oviet 8ocial? 1>ari~?
Lt Republica of May Z9, 1992 and other relsvaat agree
manta between them; Attkle IV
The Government of the USSR shall users that, except
Dssiring to etrenRthen long-term tooperetion between as the Partite may otherwise net's!, all commodities
the two eouatrias on the buss of mutual benefit and grown in the U6A and purchased by Bovist foreign ends
sq~tyt organltatloaa under this Agreement shall be supplied for
eoasumption in the USSR.
1ldindful of the importann which the production of food.,
partlevlarly Brain, hu for the psoplsa of both eouatriee; Article V
Whenwer the Government of the U88R wishes the
Rtcognieing the need to stabilise trade in Grain batwtea Soviet foreign trade organs:ationa to be able to punhast
the two couatrisa; and more wheat or coca gown in the USA than the amounu
specified is Article I, it shall notify the: Government of
A1'Rrmitig their conviction that cooperation in the field the U6A.
of trade will eoatribute to overall improvement of rela-
ttons b+twsan the two cotu-trisa; Whenever the (fovernmeat of the U8A wishes private
commercial sources to be able to sell to the V85R more
Have agreed as follows: wheat or corn grown in the USA than the .amounts epe~~~
fled in Article I, it shall notify the Gowrnment of the
Arttcl~ 1 tJBSA.
The Coverament of the U8A and the Government of the
USSR hereby inter into an aeretmsnt for the purchase In both inrunces, the I'artita wilt consult as noon as poe?
and gale of wheat and corn for supply to the USSR- To Bible in order to ranch agreement on possible Quantities
thin cad, during the period that this Agreement L i? of Brain to be supplied to the U85R prior to
force, aseapt as othetwriee agreed by the Parties, the purchase!safe or eeneTue;on of contracts for the
$ovist foreign trade organisations shall purchase loom purchase/sale of grain in amounts above those specified
private eetnmercial eourcee, for ahipmeat is each in Article I.
twelve,-month period berinning October 1, 1988, Hint
million metric tore of wheat and corn grown in the U6A; Artbla VI
in doing se, the Soviet foreign trade orrnaieatioae, if The Government of the USA la prepared to use ire rood
iatArratad, :nay purchatw, on account of iht raid yeasts- offices, ae appropriate and within the Iawe in force in the
ty, wybeans and!or soybean meal produced is the USA, USA, to be of auistnnce on Questions of the appropriate
sits the proportion of one ton of aoybcatu gad/or soybean quality of the grain to ba supplied from the USA to the
meal f~ two teas of grain. In and ease, the minimum U35R?
annual quaatitiea of wheat and Dora shall be no lean thaw
(tour ssilllon metric tone aaeh. Artlt:le VII
The S~iet fore trade or anisations inn facreaae the It ie und?.ntnnd that the shipment of cemmoditie. from
~ e Y the USA to the USSR under this Aerament shall ba in
nine million metric ton quantity mentioned above accord with the provisions of the American-Soviet Agree-
withont consultations b~ as much as thin million metric meat oa Maritime Matwrs which is in force duriae the
tone of whoat and/or corn for ahipmeat in each twelve- period of ahipmeat hereunder.
month period beginning October I. 1589.
The Oo~vernraant of the L18A shall am loy its good officse ~ -' - - - -
p '!'he lartiea aha11 hold conauluclons coacaralag the
to faeilitat and encourage such gales by private coin- irnpltmentation of thin Agreement and related matters
mrrriei anttrrra Pttrrhntwt/tutlrn of rnntntnrlit,irn ttntlrr at iuler.dlr uP el: uiviil,Ls, au1 ^t guy vlhrr lime at th^
thin Agreement will be made at the maz)