INTERNATIONAL ECONOMIC & ENERGY WEEKLY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP97-00771R000807780001-2
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 34
• Document Creation Date: December 22, 2016
• Document Release Date: September 13, 2010
• Sequence Number: 1
• Publication Date: November 15, 1985
• Content Type: REPORT

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Directorate of
Intelligence
Inter
Welly'
15 xouer 1985
Seeret
DI MEW 85.46
13 November 1985
CaDY Ka9Z
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Secret
1 Perspective-China: Reaching Out
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nopsis
International
Economic & Energy Weekly
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3 China and Mexico: Potential GATT Members 25X1
i XF 25X1
The Tin Market Collapse: Update and Fallout
Pakistan: High Hopes for US Aid
Europea Community: Pressures for Trade Protectionism Against LDCs
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19 / Cuba: Seeking New Trade Ties To Latin America
Energy
International Finance
Global and Regional Developments
National Developments
Comments and queries regarding this publication are welcome. They may be
Secret
DI IEEW 85-046
15 November 1985
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Directorate of Intelligence, 25X1
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International
Economic & Energy Weekly
Synopsis
1 Perspective-China: Reaching Out
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As part of wide-ranging economic reforms since the late 1970s, China has
become a more active international economic player, expanding its trade and
investment linkages and participating more in international economic organi-
zations.
China and Mexico, the two largest nonmembers aside from the Soviet Union,
would be the most important new members since Japan joined in 1955. While
the size and market potential of these two countries would complicate
accession negotiations, their addition could promote Mexican and Chinese
trade liberalization.
7 The Tin Market Collapse: Update and Fallout
We believe the International Tin Council will soon begin to default on its large
debts to traders, causing solvency problems for several banks and London
Metals Exchange traders. Moreover, we foresee several years of low tin prices
that will cause economic and political problems for several tin-producing
countries.
11 Pakistan: High Hopes for US Aid
Pakistan hopes to secure an unprecedented six-year $6.5 billion military and
economic aid package. Any US aid package below the previous $3.2 billion
level will be seen by Islamabad as a lack of US commitment to Pakistan and a 25X1
result of Indian pressure.
15 European Community: Pressures for Trade Protectionism Against LDCs
The European Community, faced with persistently high unemployment at
home and industry lobbying for more protection, is coming under increasint25Xl
pressure to enact additional import barriers against LDC products. In the
multilateral trade negotiations expected to begin in mid-1986 the Community
probably will use current barriers and the threat of further protection as
bargaining chips to open restricted LDC markets for EC exports and services.
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19 Cuba: Seeking New Trade Ties to Latin America
Cuba recently has stepped up efforts-through increased trade ties-to build
its regional influence, renew diplomatic ties to some of its neighboring
countries, and open the doors to new markets in Latin America. While Havana
has had some success politically, it is unlikely to achieve a significant trading
presence in the region because of the need to reduce imports to save scarce
hard currency, a limited export menu of mineral and agricultural products,
and commitments to supply CEMA with a large proportion of the country's
exports.
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International
Economic & Energy Weekly
Perspective China: Reaching Out
As part of wide-ranging economic reforms since the late 1970s, China has
become a more active international economic player, expanding its trade and
investment linkages and participating more in international economic organi-
zations. The past few years have seen many firsts for China: foreign loans,
joint ventures, and enterprises wholly owned by foreigners. Beijing's plan for
economic development for the rest of the century calls for even greater
international involvement and the use of foreign technolo v investment, and
trade to help stimulate domestic economic growth.
Over the past five years, the Chinese have undertaken several steps to increase
foreign participation in their economy:
? Opened several cities to foreign investment, offering more liberal business
terms than offered elsewhere in China.
? Passed laws governing taxation, liability, patent protection, trademarks, and
investment procedures for foreign firms.
? Expanded the array of products of joint Chinese-foreign firms that may be
marketed within China.
? Held many investment conferences to publicize hundreds of projects for
which the Chinese want Western technology, equipment, capital, manage-
ment, and marketing.
? Negotiated tax, investment, and other cooperation accords with several
countries to clarify such issues as expropriation policy, arbitration proce-
dures, repatriation of profits, and labor compensation
Beijing has tried to diversify its trade partners and its export product mix, but
textiles, clothing, and petroleum continue to dominate its sales. Partly because
of the weak oil markets and increasing protectionism against textiles in most
developed nations, China has pressed harder over the past two years to develop
new export markets.F____1
As China raises its profile in the global economy, it will generate frictions.
Many of China's export products compete directly with those of other labor-in-
tensive economies; if China displaces the exports of those suppliers, tensions
will rise. For example, because China's oil price is lower than OPEC's,
Indonesia has lost a share of its traditional oil market in Japan. China's desire
to increase its participation in world economic organizations may also be
viewed as potentially detrimental to smaller nations. The World Bank and the
Asian Development Bank are cases in point: many countries worry that the
Chinese demand for funds will squeeze smaller borrowers out. Nonetheless,
Chinese participation in such organizations as GATT will enhance its image as
a responsible trade partner and provide a forum to resolve multilaterally any
trade problems
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At the same time, China is increasing its interaction with Eastern Europe and
the Soviet Union. Because trade with the nonmarket economies is largely
barter, China is able to conserve foreign exchange for purchases from Western
suppliers. As part of a broader rapprochement, Beijing has signed long-term
trade arrangements with the USSR and several East European nations.
Despite some potential for increased trade and economic cooperation with
these countries, they cannot supply the technology and equipment Beijing is
seeking to modernize its economy or the hard currency markets needed to
provide the earnings to pay for these imports. As a result, most of China's
trade over the next five years will continue to be with Hong Kong and the
OECD countries, perhaps with marked expansion of ties to the Pacific Basin.
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China and Mexico:
Potential GATT Members
A number of LDCs are exploring membership in
the General Agreement on Tariffs and Trade
(GATT)-accession negotiations would likely be
part of a new round of multilateral trade negotia-
tions expected to begin in mid-1986. Of the group,
China and Mexico, the two largest nonmembers
aside from the Soviet Union, would be the most
important new members since Japan joined in
1955. While the size and market potential of these
two countries would complicate accession negotia-
tions, their addition could promote Mexican and
Chinese trade liberalization.)
Mexico and China:
Major GATT-Member
Trading Partners, 1984
Canada
Brazil
2.6
2.2
Countries wanting to join GATT often conduct
accession negotiations as part of a trade round.
Candidates include China, Mexico, Morocco,
Tunisia, Paraguay, and possibly Saudi Arabia.
Potential members generally offer trade conces-
sions to their major GATT-member trading part-
ners ' in return for benefiting from previous conces-
sions exchanged among GATT members. In
practice, and especially in the case of developing
countries that receive special treatment under the
GATT, the trade concessions on the part of the
acceding countries have often been very small.
Modest concessions probably would be demanded
of the smaller developing countries that may also
join before or during a new round. Accession of
Mexico and China, however, will not be routine due
to their market size, export potential, and, in the
case of China, its nonmarket economy.
GATT members, especially the United States, have
repeatedly urged Mexico to join GATT. Mexico
declined to become a charter member in 1947 in
a Hong Kong accounts for 18.5 percent of China's trade but is not a
GATT member. It is represented in GATT by the United King-
dom. The United Kingdom on behalf of Hong Kong would have
little leverage to demand concessions due to Hong Kong's lack of
significant import barriers and the scheduled transfer of sovereign-
ty in 1997.
favor of retaining extensive trade protection. In
1980 Mexico negotiated an accession package, but
the Mexican Cabinet rejected it due to opposition
from manufacturers, unions, and the left. Last
February government officials, including President
de la Madrid, indicated that the government was
again studying membership, but many observers
predicted such a move only at a late stage of the
government's new trade liberalization program.
Developments since June indicate that there is 25X1
much interest in the Mexican executive branch in
joining GATT. In June, de la Madrid and Com-
merce Secretary Hernandez announced in Bonn
that Mexico will participate in preparations for a
new GATT round. Embassy sources report that in
August Hernandez told members of the Mexican
Congress that Mexico would be a GATT member
by mid-1986 and would actively participate in the
new round of trade negotiations. Mexican observers
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at GATT are closely following new round develop-
ments and are analyzing the tariff structures of
many GATT members robably in anticipation of
accession negotiations.
We believe Mexico is seeking to join GATT pri-
marily to earn large amounts of foreign exchange
for debt service. With a weak oil market, Mexico is
exploring all avenues to improved export perfor-
mance, including trade liberalization. In contrast to
the pressures on Mexico City by international
financial institutions to liberalize trade unilaterally,
participation in GATT negotiations would move
the debate to a multilateral forum where Mexico
can receive trade concessions for its efforts. Also,
joining GATT could be held out as a gesture to
improve trade relations with the United States and
would open a new forum in which to promote
Mexican access to the US market.
Although some top Mexican officials are pushing
GATT entry, we believe the government as a
whole, as well as affected interest groups, probably
are just as opposed to entry as they were in 1980.
We expect Mexico's highly protected industry
again to lead the opposition. In light of his low level
of support from the private sector, we believe de la
Madrid and other pro-GATT officials are con-
cerned about being embarassed as they were in
1980. At that time Hernandez was chief negotiator
for the accession package, and de la Madrid, then
planning secretary, is reported to have voted in
favor of membership. They are trying to win over
opponents but could be forced to reconsider mem-
bership at the last minute.
Industrial country GATT members probably will
request substantial concessions, primarily on tar-
iffs, and perhaps will demand trade liberalization
commensurate with Mexico's role as a newly indus-
trializing country. Mexico probably would reply
that, because the GATT grants special treatment
to LDCs, Mexico should not be required to give up
infant industry protection. It would also probably
attempt to have its July 1985 plan to replace import
licenses with tariffs and its April 1985 agreement
with the United States to phase out export subsidies
counted as part of any accession package. F__1
The key question for GATT members is whether de
la Madrid will be able to sell an accession package
brought back from Geneva. Mexican negotiators
may point to domestic opposition to GATT entry in
an effort to obtain lenient terms from the United
States and other trading partners. According to US
officials, Mexico probably will also propose that
results of its 1980 accession negotiations be adopt-
ed, instead of conducting new negotiations. Its
major trading partners, however, are virtually cer-
tain to seek more extensive concessions based on
the assumption that Mexico's ability to compete in
world manufactured goods markets has improved
since 1980.
A replay of Mexico's experience in the Tokyo
Round is also possible. Mexico participated actively
in discussions on nontariff barrier codes, GATT
reform, and tariffs. Mexican political leadership
lobbied internally for joining GATT. In the end,
however, Mexico backed off and "pocketed" con-
cessions made by the United States bilaterally.
We believe China is interested in participating in
the new round and is investigating the benefits of
membership in GATT. It initially considered mem-
bership in 1981, but first opted to join the Multi-
fiber Arrangement (MFA) under the GATT in
January 1984. China became an observer in GATT
in November 1984. At last month's special GATT
Contracting Parties' meeting, Chinese officials pri-
vately sounded out major trading partners on ac-
cession, according to Embassy reports
A potentially thorny issue is whether China should
be considered a new member. Careful crafting of
Beijing's 1984 request for observer status avoided
prejudicing its claim to the old "China seat"
vacated by the nationalist government in 1950;
Taiwan reaffiliated with GATT in 1965 as an
observer but was removed in 1971 when China
became a UN member. Last month in informal
discussions with US officials, Chinese trade offi-
cials asserted that the China seat formula is the
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Secret
only acceptable means of accession but also noted
that they are otherwise willing to enter into acces-
sion negotiations on tariff concessions and take on
other obligations consistent with China's status as a
developing country. Despite these assurances, it is
still possible that Beijing may argue that, as an old
member reassuming its seat, it should make smaller
initial concessions. The United States has reserved
its position on the China seat issue.
In pursuing GATT membership, we believe Beijing
is primarily interested in greater access to Western
markets. As a GATT member it would be:
? Better positioned to watch over its interests in
maintaining industrial country market access.
? Closer to obtaining preferential tariff treatment
(GSP) from the United States-GATT member-
ship fulfills one of the conditions required by US
law to make a Communist country eligible. Mem-
bership would also allow Beijing to exercise politi-
cal influence as an LDC leader in a new forum.
On the other hand, Beijing probably feels no
urgency to join GATT. Textiles and clothing are
currently the most important Chinese exports and
are regulated by the MFA, which China has
already joined. To protect its textile interests,
China would not need to join GATT unless the
MFA is folded back into GATT, which is improba-
ble before the 1990s. However, agreement on the
future handling of textiles in GATT could be
reached during a new GATT round, and China
probably would want to participate in such deliber-
ations.
The Problem of China's Nonmarket Economy
Industrial country officials worry whether GATT
rules-not designed to deal with nonmarket econo-
mies (NMEs)-can integrate a large NME such as
China into the world trading system. Although
many GATT members are also wary of China's
potential to greatly expand exports, we believe they
would not oppose Chinese membership for this
reason
The key question is whether Beijing's tariff regime
is a sufficient base for productive accession negotia-
tions. According to US officials, Chinese officials
argue that in the future Beijing will rely mainly on
"economic measures," such as tariffs, exchange
rates, and bank credit, to regulate foreign trade.
We believe there is truth to Beijing's claim that
import duties have a function in the Chinese econo- 25X1
my. Since 1979 China has sharply reduced tight
central control over foreign trade-currently about
40 percent of foreign trade decisions are being
made by independent enterprises. Because these
enterprises are largely responsible for their own
profits and losses, tariffs affect costs and, therefore,
decisions to import. F___1 25X1
It is unclear, however, how the Chinese would react
to the alternative types of trade concessions that it
might be asked to offer in combination with tariff
cuts:
? Import Commitments. When Poland and Roma-
nia joined, their GATT-member trading partners
felt tariff cutting would be pointless because 25X1
imports, prices, and foreign exchange allocation
are centrally controlled. Instead, they demanded
pledges of increased shares of imports from
GATT members. Such a commitment would
serve little purpose in China's case because its
trade share with GATT members is already
high-94 percent in 1983.
? Market Disruption Agreement. The Hungarian,
Polish, and Romanian accession protocols contain
market disruption mechanisms that go beyond
GATT rules in providing safeguards to other 25X1
members. We believe China will fight a tough
market disruption commitment-Beijing was so
displeased with the US textile market disruption
criteria announced in December 1983 that it
refused to acknowledge their validity-but indus-
trial countries are certain to demand some com-
mitment due to China's huge export potential.
? NTB Codes. China could be asked to sign some of
the Tokyo Round nontariff barrier codes. We
believe Beijing would seriously consider signing
the technical codes on licensing, customs proce-
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dures, and standards but probably would balk at
other codes, such as subsidies.
? Hong Kong. Beijing might be asked to grant
Hong Kong autonomy in foreign trade and allow
it to become a full GATT member, but we believe
Beijing probably would refuse to involve Hong
Kong in accession talks.
? Supply of Trade-Related Data. GATT members
might ask China to provide breakdowns of tariff
revenue, subsidies, or trade conducted by inde-
pendent enterprises, as well as information on
prices, costs, and market opportunities. This
could be used to monitor the development of
market mechanisms in China and promote trade
between China and GATT members. Beijing
supplies large amounts of financial data to the
IMF and may agree to provide much production
and trade data to the GATT Secretariat.
Overall, whether Mexico or China will join GATT
is a close call. While we believe there is some
support in both countries to participate in a new
GATT round as a way to open industrial country
markets, both countries can get along well without
being GATT members. Because of this, both will
be hard bargainers, and the major trading partners
have no guarantee of obtaining the market opening
concessions they desire. In particular, US interest
in tariff cuts on high-technology products or better
access for service industries might be thwarted.
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The Tin Market Collapse:
Update and Fallout
The tin crisis will not be resolved soon. Nearly all
trading has been halted since the International Tin
Council announced on 24 October that it could no
longer support prices, and reports of unofficial
trading indicate prices are about 20 percent below
the precrisis level. We believe the Council will soon
begin to default on its large debts to traders,
causing solvency problems for several banks and
London Metals Exchange (LME) traders. More-
over, we foresee several years of low tin prices that
will cause economic and political problems for
several tin-producing countries.
The tin market collapsed because of actions by the
International Tin Council-a 22-member organiza-
tion of producer and consumer countries, which has
been in operation since 1956 to stabilize world tin
prices. Because of increasing output by nonmem-
bers and continuing weak demand, the Council in
recent years has had to support prices by limiting
tin exports from member countries and by purchas-
ing tin on the open market. Because tin on the
LME is priced in sterling, the weakness of the
pound over the last several years has helped buoy
tin prices. As the pound began to rise earlier this
year, however, tin prices began to fall. As a result
of heavy buying and borrowing by the Council
bufferstock manager, Council support funds were
rapidly depleted. Finally, in late summer the Coun-
cil's credit started to dry up and the Council turned
to the Association of Tin-Producing Countries
(ATPC) -an independent, seven member, research
and marketing group-for financial help. The
ATPC promised to ante up an additional $60
million but by late October failed to deliver. On 24
October an emergency meeting of the Council in
London failed to solve the liquidity problem. With-
in minutes after the meeting, the price of tin on the
LME plummeted.
Tin trading has been suspended on the LME and
the Kuala Lumpur market-the only major tin
exchanges-since the crisis began on 24 October.
To put pressure on the Council, banks, and credi-
tors to solve the crisis, the LME has announced it
will resume tin trading on Monday. Press reports
indicate some off-market, unofficial tin trading is
occuring at prices of $8,400 to $9,900 per metric
ton-roughly 20 to 30 percent below the precol-
lapse LME price. The lack of organized markets
for tin has caused many mines in Thailand and 25X1
Malaysia to begin closing.
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Uncertainty about the tin market has affected
trading in other metals as well. Copper prices fell
10 percent in the first week of the tin crisis, while
aluminum, lead, nickel, and zinc prices fell 5 to 10
percent because of large-scale dumping of these
metals by LME traders trying to accumulate cash
to cover their possible tin losses. The weakened
confidence in the LME by world metals traders has
caused trading volumes to be slashed-copper trad-
ing fell 60 percent-and some large mining compa-
nies have quit using LME prices to set their own
selling prices.
The financial impact produced by the tin market
collapse is aggravated by the complexities of the tin
market's financial linkages:
the loans.
? The Council financed its bufferstock purchases
with contributions from its members and by
borrowing. The bufferstock owned 52,500 tons of
tin valued at $700 million just prior to the crisis,
and owed $490 million to banks. The banks and
traders are holding the Council's tin as collateral.
With a 20-percent price drop, for example, the
value of the tin would barely exceed the value of
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LME Tin Prices,
January 1984-October 1985
US cents per pound
600
0 1984 85
Projected
price when
trading
resumes
Indonesia 15
? The bufferstock manager had committed the
Council to purchase 61,000 tons of tin over the
next three months at an average price of 8,900
pounds sterling per ton-a commitment of
roughtly $770 million at current exchange rates.
The Council, however, has the option to pay the
sellers the difference between the contract price,
and the prevailing market price at the time the
contract must be executed-the so-called broker
differential. The lower the tin price, therefore,
the more the Council owes traders. Moreover,
because the value of the bank's tin collateral has
fallen, the Council now has "residual debt" to its
LDC Dependence in Tin Exports, 1982
Bolivia
Rwanda
Malaysia
Thailand
Indonesia
Share of World Tin Export Market
creditors-debt that the collateral no longer cov-
ers-which also rises as the price of tin falls.
According to Tin Council estimates, a 30-percent
drop from the 24 October price would produce a
residual debt of over $300 million.
The legal obligations of the players is unclear. The
agreement that allows the Council to operate in
London subjects the Council to British law-mean-
ing banks and traders could sue the Council. Most
of the Council member governments do not consid-
er themselves liable, however.
Thailand 12
Malaysia 30
a 12
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Council Likely to Default
There have been no solid rescue plans put forth to
resume tin trading and solve the Council's debt
problem. Both Britain and the banks proposed that
the Council's member governments repay the out-
standing debts and slowly reduce the tin buffer-
stock. In return, the banks have offered to postpone
any interest or principal payments for one year. As
in most commodity-trading industries, there are
many rumors about other possible proposals, but we
put little weight in these. Reporting from a wide
variety of sources indicates there will be little
money forthcoming from the Council members.
As a result, we believe the Council will ultimately
default on its debts to traders and banks in a matter
of months. These creditors will then be forced to
liquidate their tin collateral-probably causing a
30- to 50-percent collapse in tin prices from their
precrisis levels. The current efforts by the banks to
seek cooperation from the Council members may
shift, however, to an effort to collaborate with the
LME traders-who also control large quantities of
tin-to bring down the price of tin slowly and
perhaps sue the Council governments to recoup
their losses. There are press reports that the British
Government could bail out some creditors who have
heavy exposure to the Council.
Because the Council members' unwillingness to
cooperate in a rescue effort probably is not fully
appreciated by the creditors, negotiations are likely
to continue for a few more weeks. There is an
outside chance that the creditors could persuade
the Council to make some concessions in this
period. Time is against them, however. The legal
ambiguities, the amount of money involved, the
usual problems of negotiations, and the slowness of
consultations with the respective home capitals will
combine to bog down any resolution process.
Country Impacts
Overall, the drop in tin prices is another blow to
LDC commodity exporters already battered by
debt and earnings problems
will not affect all producers equally, however:
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? Bolivia, which depends on tin sales for roughly a
third of its export earnings, will be hard hit. As a
result of the price collapse and lower production,
annual tin earnings could drop by $100 million.
According to the US Embassy, most private
mines will close-adding 40,000 to the total
unemployed. This will increase the leftist threat
to the new government. The price drop may,
however, provide a scapegoat for the president's
already-formulated plans to slash employment in 25X1
the public mining sector. As a result, Bolivia has
approached the IMF for compensatory financing.
? Malaysia should be in a good position to weather
the transition. Because of existing export quotas,
many inefficient operations have already been
trimmed.
0 only 22 of the 400 mines could survive a 50-
percent drop in tin prices-throwing 17,000 out
of work. Because tin accounted for only 3 percent
of total export revenues in 1984, this will not pose
a serious economic problem, but the political risks
may be considerably steeper. Most of the small
producers who are likely to fail are ethnic Chi-
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nese-politically important to the current 25X1
government.
? Indonesia, which together with Malaysia ranks as
the world's most efficient tin producer, also
should fair reasonably well. Over the last few
years, Indonesia has followed a policy of phasing
out its smaller, older, and less efficient land-
based dredges in favor of new, large capacity,
offshore dredges. As a result, since 1980 the
number of onshore dredges has declined from 19
to 10 with the process being accelerated by tin
export controls.
? Thailand, which earned nearly $200 million from
tin sales in 1984, has begun shutting down many
of its mines, according to a recent Embassy
report. In the longer run, however, mine owners
believe that Thailand can recover more quickly
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than its competitors because of low labor costs
and high-grade ore. The widespread smuggling of
Thai tin is likely to cease, however.
? Brazil, which has tripled tin production to 21,000
tons since 1980, will also feel the effects of lower
prices. Brazil, however, is still expanding its tin
exports-mainly to the United States-and may
be able to offset lower prices with increased
export volume.
? China is the large unknown in the export equa-
tion. It has doubled tin exports in the first half of
1985 over the same period last year. Most observ-
ers believe the Chinese will continue to boost
exports even in the face of lower prices because of
its hard currency needs.
Britain, which has expanded tin production in
recent years, could find the going tough for its
industry because of its high cost production. This
could further worsen the unemployment problems
in the mining regions. Canada, which recently
placed in operation the East Kemptville open pit
mine, will consume most, if not all, of the tin it
produces and thereby will be isolated to a large
extent from price changes.
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Pakistan: High Hopes
for US Aid
Pakistan hopes to secure an unprecedented six-year
$6.5 billion military and economic aid package at
next week's consultative group meeting with the
-United States. Despite an improved economic per-
formance this year, Pakistan wants a large aid
package, in part, to cushion against expected future
downturns. Islamabad, in particular, anticipates a
continued decline in remittances as job opportuni-
ties in the oil-producing states dwindle. Nonethe-
less, they probably will hold out against many of
the economic reforms the United States and the
IMF are advocating. Any US aid package below
the previous $3.2 billion level will be seen by
Islamabad as a lack of US commitment to Pakistan
and a result of Indian pressure. It will also provide
ammunition to those in Pakistan who question the
wisdom of close ties to Washington. We judge
Islamabad would accept a US aid package in the
$3-4 billion range that is weighted toward econom-
ic assistance and contains highly concessional mili-
tary aid.
Pakistan has requested a more than doubling of the
level of US assistance in the second multiyear aid
package. Compared with the $1.6 billion each for
economic and military aid in the first package (FY
1981/87),' Islamabad wants some $3.9 billion in
economic aid and $2.6 billion in military assistance
for FY 1988/93.
Islamabad claims that it needs increased economic
aid to sustain economic growth, avoid foreign fi-
nancial problems, and maintain political stability
during a transition to a more representative form of
government. It wants the economic aid divided
between quickly disbursed PL 480 assistance-to
' The Pakistani request is based on its fiscal year, which runs from
1 July to 30 June. The first package was based on the US fiscal
year-the economic portion was for six years and the military
portion for five.
Economic Backdrop
Islamabad's request for increased aid comes during
a temporary respite from foreign payments prob-
lems that have been aggravated by rapid economic
growth. Over the past seven years, Pakistan's econ-25X1
omy has grown by an average of more than 6
percent annually in real terms, and we estimate a
record 8.4-percent growth rate in FY 1985.
Reserves had been as high as $2 billion in late 25X1
1983, but, in FY 1984, faced with a disastrous
cotton crop, a steady decline in worker remittances,
and a reluctance to institute politically unpopular
import and spending cuts, Pakistan drained its
foreign exchange reserves to "buy" economic sta-
bility and modernize the military. Also, increased
debt service payments in recent years have added to
the precarious financial positioni -1 25X1
Fortuitous economic circumstances and creative
financial maneuvering have more than doubled 25X1
foreign exchange reserves since mid-August to
$750 million, and also financed the public deficit:
? Export earnings-primarily raw cotton and cot-
ton-based manufactures-increased more than
28 percent, while imports dropped 7 percent in
Secret
DI IEEW 85-046
15 November 1985
bolster Pakistan's foreign payments position-and
grants and soft loans for enere riculture, and
irrigation projects. 25X1
Pakistan's defense assistance requests have varied
from a high of $3.4 billion to the most recent $2.6
billion, according to the US Embassy and press
reports. The current request encompasses increased
air defense systems, armor, naval surveillance
equip c-
tion.
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Pakistan: Economic Indicators a, 1978-86
Real GDP Growth
Percent
Foreign Exchange Reservesc
Billion US $
Imports, Remittances, Exports, and
Current Account Balance
Billion US $
8
Imports
- Remittances
-Exports 6
Current
account
_1L_ 1 t 1
-2 1978 79 80 81 82 83 84 85 86h
?~ Fiscal sear ending June 30.
Estimated.
Position as of June 30.
value terms in the first quarter of FY 1986,
according to US Embassy reporting.
? A lower US dollar has stimulated remittance
earnings-September totals were 16 percent
higher than the same month last year.
? Sales of Special National Fund Bonds (SNFBs)
designed to tap the nation's vast reserves of
"black money"-estimates vary from 20 to 50
percent of GDP-have netted over $1 billion,
more than five times the expected amount.
? New high-interest foreign exchange bearer certif-
icates (FEBCs) have attracted more than $52
million-mostly from expatriates-since August,
adding to Pakistan's reserves.
We believe that foreign exchange reserves probably
are sufficient to cover about two months of imports,
enabling Pakistan to forgo an IMF loan for awhile.
The improvement in Pakistan's domestic finances
and foreign payments position is likely to provide
Islamabad only temporary relief from longstanding
economic problems. The boost in export earnings
was largely in highly competitive areas-such as
textiles and cotton-that are dependent on import
quotas and volatile world commodity prices. The
new bond schemes will provide only short-term help
and add to inflationary pressures because they
allow the government to cover the budget deficit by
borrowing heavily from the domestic banking sys-
tem. The high-interest FEBCs may well raise the
country's debt service burden and increase the
opportunity for capital flight, if purchasers decide
to claim their interest or cash in their certificates
during periods of economic or political instability.
Moreover, nearly $200 million in US Foreign Mili-
tary Sales repayments are due this fiscal year, and
we estimate that at least 25 percent of earnings
from exports of goods and services will be required
to meet growing debt service payments. Also,
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Secret
strong economic growth is likely to increase import
demand while remittance levels decline and the
prospects for export growth are uncertain.
Citing political difficulties, the Zia regime is reluc-
tant to institute economic reforms recommended by
the United States and multinational lenders. Since
FY 1981, Islamabad has been unwilling to slash
spending, reduce subsidies, or raise taxes to control
the deficit. Pakistan has strongly resisted IMF
recommendations to narrow the trade deficit by
currency devaluation but has been more willing to
discuss deregulation and an increased role for the
private sector in the economy.
Implications for the United States
We believe Islamabad took into account its percep-
tion of Pakistan's strategic importance to Washing-
ton and its calculations of the severity of financial
problems down the road when it proposed the $6.5
billion figure. At the same time, Pakistan, in our
view, is well aware of the fiscal and political
difficulties involved in securing such a large pack-
age from Washington. While we have no indication
of a fallback position, we believe Islamabad is
prepared to accept something close to $3-4 billion,
with a higher proportion of economic aid. Still, we
believe that Pakistan will insist on expensive air
defense systems and military aid on highly conces-
sional terms.
We view Islamabad's public disclosure of the $6.5
billion aid request as a means to lay the blame on
the United States if lower assistance requires un-
popular austerity measures. A cut in US aid from
current levels probably would result in charges that
the US commitment to Pakistan has been reduced
in an effort to woo India. This would also give
Islamabad an excuse to reduce its assistance to the
Afghan refugees and provide additional ammuni-
tion to those who are wary of Pakistan's close ties
to the United States.)
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European Community:
Pressures for Trade Protectionism
Against LDCs
The European Community, faced with persistently
high unemployment at home and industry lobbying
for more protection, is coming under increasing
pressure to enact additional import barriers against
increasingly competitive LDC products. The newly
industrializing countries (NICs),' whose high quali-
ty, low-cost products are taking growing shares in
an increasing number of EC import markets, are
the primary targets. Already in effect are import
restrictions against such products as steel, textiles,
and video recorders; the next trouble area is likely
to be high technology. In the multilateral trade
negotiations expected to begin in mid-1986 the
Community probably will use current barriers and
the threat of further protection as bargaining chips
to open restricted LDC markets for EC exports and
servicesa
Developing countries, especially the NICs, have
been diversifying their exports and moving into
markets that directly challenge the West Europe-
ans. In 1975 manufactures accounted for 26 per-
cent of EC nonenergy imports from LDCs com-
pared with 42 percent for foodstuffs. Last year the
share of manufactures reached 41 percent while
that of foodstuffs slipped to 35 percent. Much of
the increase came from the NICs, who boosted
their share of EC imports of LDC manufactures
from 56 to 67 percent over the period. The NICs
have made their greatest inroads in such products
as toys, watches, and consumer electronics, taking
full advantage of their lower labor costs.
EC manufacturers view the NICs as a major
problem because they have successfully penetrated
traditional industry markets-despite the presence
' In this article, we have defined the NICs as South Korea,
Singapore, Hong Kong, Taiwan, Mexico, and Brazil.F__
of import barriers-and are becoming a threat in
other selected areas, petrochemicals, and video
cassette recorders (VCRs), for example. Most re-
strictions take the form of voluntary restraint
agreements (VRAs), but quotas and tariffs are also
used.
Textiles. The EC limits imports of textiles from
LDCs through the Multifiber Arrangement
(MFA), as well as through voluntary agreement by
exporters. As a result of protection and moderniza-
tion, EC textile firms in West Germany, France, 25X1
and Italy are regaining market shares-the LDC
import share of the EC clothing market has
dropped slightly since 1981. New VRAs on textiles
and clothing exports from Morocco and Tunisia
were negotiated earlier this year.
Steel. The EC maintains stringent trade restric-
tions on all imported steel, relying primarily on
annually negotiated VRAs with foreign suppliers.
Limits have been tightened on its Iwo major LDC
suppliers, South Korea and Brazil. This year South
Korean steel is limited to 205,700 metric tons and
Brazilian imports to 150,000 tons, compared with
1984 levels of 200,000 and 210,000 tons, respec-
tively.
Petrochemicals. Imports from the Gulf Coopera-
tion Council (GCC) nations-Saudi Arabia, Ku-
wait, Qatar, Bahrain, Oman, and the United Arab
Emirates-have grown rapidly and now account for
roughly 5 percent of the EC's petrochemical mar-
ket, up from zero in 1983. Modern Saudi petro-
chemical plants are far more efficient than EC 25X1
plants, and the GCC nations in general are now
moving away from basic petrochemicals into the
more advanced products the EC produces. Last
June, the EC Commission elected to maintain a
previously imposed 13.4-percent duty on Middle
East exports of linear low-density polyethylene and
methanol. In spite of this, many EC firms, current-
ly operating at the break-even point, are likely to
Secret
DI IEER' 85-046
15 November 1985
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European Community: Economic Indicators, 1980-85
s/ow GDP growth ...
Percent
And a high unemployment rate ...
Percent
50 1980 81 82 83 84 85- -1 1980 81 82 83 84 85, 0 1980 81 82 83 84 85a
have to reduce capacity further and face losses or
shutdown. Petrochemical products from modern
complexes in East Asia, Mexico, and Brazil are
also hurting EC firms)
Consumer Goods. Trade restrictions have been
imposed on VCRs and quartz watches in recent
months as the EC attempts to stem the tide of NIC
imports. Last July the Community raised the tariff
rate on imported VCRs from 8 to 14 percent.
Directed primarily at Japan's 90-percent share of
the EC VCR market, the move will hurt South
Korea more because Japanese producers have es-
tablished assembly operations within the EC. Dur-
ing the same month, the EC imposed quotas on
indirect imports of quartz watches from Japan,
China, and Taiwan, which effectively prohibit any
further imports for the remainder of 1985. Earlier
in the year France-after receiving EC authoriza-
tion-restricted its imports of digital watches from
Hong Kong, Macao, South Korea, and Taiwan for
the next three years.
Prospects
The next major contentious issue between the EC
and the LDCs will likely be high-technology im-
ports, which include microelectronics, telecom-
munications, and informatics. South Korea is pro-
ducing computer chips and targeting research and
development projects in advanced semiconductors,
office automation systems, and telecommunications
equipment. Taiwan and Brazil also regard semicon-
ductor production as a priority program. The EC is
investing heavily in R&D programs in high-tech-
nology industries, counting on them to stimulate
economic growth and to help close the technology
gap separating Western Europe from the United
States and Japan. As a result, the Community-led
by France-is moving carefully on high technology
in the new GATT round and prefers at this point to
keep specific references to high tech out of the
negotiations, thereby enabling it to better control
access to Community markets.
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European Community: Nonenergy
Imports From LDCs, by Category
Food 42.3
Other 1.7
Manufactures 25.6
Raw materials 30.4
Other 5.3
The EC is presently undertaking a midterm review
of its Generalized System of Preferences (GSP) and
is likely to limit preferences for the advanced
LDCs. Other EC preferential trade arrangements
with LDCs, however, would not be affected. The
European Community: LDC Share of
Selected Imports, 1975 and 1984
Radios
Toys
Watches
Transistors
Footwear
Miscellaneous
consumer goods
Tele-
communications
Office machines
Community's GSP, renewed unilaterally in 1981
for 10 years, offers LDCs duty-free access for most
industrial products (with exceptions for sensitive
items) and for more than 20 percent of agricultural
products; the remaining agricultural products come
in at reduced tariffs. Once imports reach a speci-
fied level, however, customs duties are imposed.
Under an EC Commission proposal, exclusions
from preferences would be enacted for products
from countries that have achieved a 20-percent
share of EC imports of the respective products.
Should the EC Council approve the Commission's
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European Community:
Preferential Trade Agreements With LDCs
Lome Convention III 66 African, Caribbean, and Pacific (ACP) Nonreciprocal duty-free access to EC markets for all
countries raw materials and industrial goods and 96 percent of
agricultural goods. (Rice, corn, and oranges are
excluded.) An expansion of the Yaounde Convention
originally signed in 1963 with 18 African countries.
Lome III was signed this year and expires in 1990.
Maghreb Algeria, Morocco, and Tunisia Duty-free access for raw materials and industrial
products except textiles. For agricultural goods tariff
concessions of 20 to 100 percent excluding products
covered by the CAP. Signed in 1976, unlimited
duration.
Mashreq Egypt, Jordan, Syria, and Lebanon Duty-free access for most industrial goods with the
EC reserving the right to introduce import ceilings on
certain products if necessary. Tariff concessions of 40
to 80 percent on most agricultural goods. MFA
applied to Egypt. Signed in 1977, unlimited duration.
Generalized System of All LDCs (excluding Taiwan, which is not The least preferential arrangement for LDCs. Offers
Preferences (GSP) recognized by the EC) duty-free access for industrial and agricultural goods;
however, 150 products are subject to quotas. Re-
newed in 1981 for another 10-year period. Subject to
revision in 1986, which may result in the removal of
preferences for the NICs.
proposal, new exclusions would have the greatest
impact on Hong Kong, South Korea, Brazil, and
Singapore
Despite the tightening in trade policy, the EC will
seek solutions to most of its trade problems with
LDCs in the proposed GATT multilateral trade
negotiations (MTNs). Community members have
both time and leverage on their side. The new EC
trade restrictions applied now can be negotiated
away later in the GATT in return for better EC
access to LDC markets, particularly in services. A
small group of LDCs, headed by Brazil and India,
wants the talks confined to removing barriers to
trade in goods alone.
We believe one of the EC's major objectives in the
GATT sessions will be to improve its access to
LDC markets but will only offer reduced barriers
on products where there is virtually no EC-based
industry left to protect, such as black and white
TVs. Replacement of EC nontariff barriers, such as
quotas, with tariffs under GATT auspices-along
with small concessions on the MFA-could also be
used to induce developing countries' active partici-
pation in the new GATT round. In a July meeting
of trade ministers from the developed nations, the
EC Commissioner for Foreign Affairs, de Clerq,
reaffirmed the Community's position that exclusion
of services and reciprocal handling of concessions
from negotiations would greatly reduce the capaci-
ty and willingness of developed countries to im-
prove market access for LDC exports of manufac-
tured products. Should the EC not achieve its goal
in the MTN, it is likely that the Community will
undertake bilateral trade negotiations and continue
to selectively implement nontariff barriers. The 25X1
admission of Spain and Portugal to the EC in
January 1986 will continue to fuel protectionist
sentiments, in any case, because many Iberian
products compete directly with those of the LDCs.
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Cuba: Seeking New Trade Ties
to Latin America
Cuba recently has stepped up efforts-through
increased trade ties-to build its regional influence,
renew diplomatic ties to some of its neighboring
countries, and open the doors to new markets in
Latin America. While Havana has had some suc-
cess politically, it is unlikely to achieve a significant
trading presence in the region because of the need
to reduce imports to save scarce hard currency, a
limited export menu of mineral and agricultural
products, and commitments to supply CEMA with
a large proportion of the country's exports. Despite
these efforts, Cuba's principal economic links will
remain with the Soviet Bloc
In our view, President Castro's attempts to renew
or increase commercial ties in Latin America are
motivated by a desire to reintegrate Cuba into
regional political affairs as well as to alleviate
domestic economic problems. Castro probably
views the new more broadly based civilian govern-
ments in Latin America as an opportunity to
reduce Cuba's regional isolation. Havana probably
believes that an improved image would reduce the
concerns of its neighbors that upgraded ties might
jeopardize their relations with the United States.
Renewing Trade Ties
After President Sanguinetti repealed a 21-year-old
decree prohibiting negotiations with Cuba, Uru-
guay and Cuba signed a bilateral trade agreement
in July and resumed diplomatic relations on 17
October. In addition,
25X1
25X1
These renewed trade ties, however, probably will
not produce any major increase in bilateral trade-
to date, only one sale to Havana has been arranged. 25X1
Montevideo's exports compete with goods that
Cuba imports from the USSR and China
Colombia and Cuba have agreed in principle to
open official commercial representations,
Castro presumably hopes that
commercial ties will lead to official diplomatic
relations, but President Betancur is reluctant,
based on past Cuban inter erence in
Colombia's affairs and the low level of trade and
cultural relations that existed before the 1981
break.
unofficial basis.
Brazil does not have formal diplomatic relations
with Cuba and conducts only minimal trade on an
Brazil is also a major
sugar exporter and Havana lacks the foreign ex-
change to purchase Brazilian industrial goods.
Secret
DI IEEW 85-046
15 November 1985
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25X1
25X1
25X1
25X1
25X1
25X1
25X1
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Increasing Existing Trade
Argentina's exports to Cuba last year rose by nearly
75 percent over 1983 levels to $165 million as a
result of a $200 million annual line of credit
extended by Argentina to Cuba for 1984-86.
Cuban exports to Argentina, however, are
negligible, in part because Argentina is a sugar
Mexico and Cuba are trying to expand bilateral
trade and have set a short-term annual trade goal
of $300 million in goods and services, according to
the US Embassy in Mexico City. While Cuba's
imports from Mexico have been on the rise, its
exports to Mexico have been declining since 1980.'
Limited demand for Cuba's exports-Mexico is
largely self-sufficient in sugar-a modest cooling in
political relations, consistent with President de la
Madrid's generally moderate foreign policy, and
both countries' need to restrain import spending
will likely thwart their ambitious goal of tripling
bilateral trade this year.
Mexico and Cuba, nonetheless, have taken some
steps to boost commercial ties. Havana and Mexico
City recently agreed to grant each other most-
favored-nation status, lowering respective import
duties by 25 to 75 percent. Mexico and Cuba also
opened lines of credit amounting to $150 million
and $20 million, respectively, to finance their bilat-
eral trade. Agro-industrial, sugar, metal-mechani-
cal, and pharmaceutical trade agreements have
recently been signed.
Ecuador's President Febres-Cordero signed a bilat-
eral trade agreement and discussed the potential
for trade in agricultural goods during his April visit
to Cuba. Although Febres-Cordero tried to play
down the significance of the trip, Castro's image in
' Cuba's exports to Mexico fell by over 95 percent to $12 million
between 1980 and 1984 and continued to decline in the first half of
1985. Havana's imports from Mexico grew by over two and one-
half times between 1980 and 1984 to $82 million and are still
rising.
Cuba: Foreign Trade, 1984
Imports and Exports
Billion US $
[ Imports, (c.i.f.)
Exports, (f.o.b.)
0
USSR
Other
Argentina
Mexico
Exports by Community Group
Percent
Sugar products 75.5
Other 4.5
Mineral products 5.5
Fuel re-exports to USSR 8.9
8 10
Latin America probably was improved by the visit.
Ecuador's Ambassador at Large, who led a busi-
ness delegation to Cuba in March, signed a recipro-
cal line of credit agreement, amounting to an initial
$3.6 million.
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Secret
bilateral trade in May
Currently, bilateral trade is minimal,
largely Cuban pharmaceutical products for Boliv-
ian tin. Cuba is also assisting Bolivia, one of Latin
America's poorer countries, in technical training,
health, mining, and agro-industry. Bolivia estab-
lished an Embassy at the Charge level in Havana in
the final weeks of the leftist Siles administration.
New President Paz Estenssoro, however, distrusts
the Castro regime and probably will rebuff any
overtures to further normalize relations with Cuba.
Outlook and Implications for the United States
Although Cuba has been successful in improving
trade ties to several Latin American countries, we
believe that trade levels are not likely to increase
substantially in the near future. Havana's ability to
export is constrained by its reliance on a few
commodities-sugar, minerals, and citrus prod-
ucts-most of which are obligated for Communist
countries and face limited demand in Latin Ameri-
ca. At the same time, with continued tight finances
Havana would find it difficult to boost imports
from these countries.
Despite the limitations Cuba faces in becoming a
major Latin American trader, Castro may believe
that it is important to establish a commercial
presence in these Latin American nations. This
presence will likely be used as a base to lobby for
renewal of diplomatic relations or to exert influence
in the future.
We believe that Castro's efforts to increase ties to
its Latin American neighbors will not change their
attitudes toward Havana. Most Latin American
leaders will continue to remain suspicious of Cuban
interference in domestic affairs and support of
insurgents. Nonetheless, Cuba's neighbors would
welcome any increased hard currency earnings 25X1
from trade with Havana and are being pushed by
leftist interests to reestablish or increase ties to
Cuba. Improving relations with Havana also pro-
vides a means for Latin American governments to
assert their independence from the United States.
We believe, however, that these countries would 25X1
limit commercial or diplomatic ties to Cuba to
avoid serious damage to their relations with the
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Secret
J Spot Oil
Market Trends
/t
hinese Offshore Oil
Lease Awards
zican Financial
Energy
Spot oil prices remain firm despite increased OPEC production. Arab Light
prices, which reached the official $28 per barrel mark for one day in early No-
vember, have remained within 15 cents of that level for the past week. Both
North Sea Brent and Forties prices are above $29 per barrel, the highest levels
this year. The continuing low level of Soviet exports to the West, record low in-
ventories, and the start of a seasonal increase in oil demand have cushioned the
impact of sharply higher production. The real test of market strength,
however, probably will come over the next few weeks as the crude oil sold by
the Saudis under product pricing arrangements reaches US and European
markets. Over the longer term, most analysts continue to predict that prices
will weaken by spring unless production is cut substantially.
consortium will bear the full cost of exploration and split any oilfield
development costs with the Chinese. Beijing received bids from 23 foreign oil
firms in 10 countries for the second round, and further awards should be
announced shortly. The Chinese were forced to improve the terms because oil
firms were threatening to null out after little oil was discovered offshore in the
China began awarding its second round of offshore oil leases on 8 November.
A consortium of three Japanese companies was awarded the first contract for a
5,100-square-kilometer block located about 200 kilometers off Hong Kong.
The consortium plans to begin exploration in January. As in previous deals, the
first-round blocks.
25X1
25X1
Mexico City, facing nearly $14 billion in budget overruns this year, is
financing its deficit largely through domestic borrowing rather than cutting 25X1
spending. A 90-percent reserve requirement on banks imposed in July has
assured government access to funds but has essentially cut off money for
private-sector investment loans, according to the US Embassy. The domestic
money supply has risen by 65 percent this year, according to the Embassy,
adding to an inflation rate of at least 60 percent-the IMF target is 45
popular backlash from new austerity measures. He appears to be counting on
an IMF agreement to pave the way for new foreign loans to help finance the
deficit next year. A growing sense of desperation may cause de la Madrid to
la Madrid is likely to continue using stopgap measures rather t an risk a
Secret
DI IEEW 85-046
15 November 1985
!resident de
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agree to a strict IMF program that he knows Mexico cannot meet. While new
borrowing may provide some temporary breathing room, as long as de la
Madrid remains unwilling to cut the government deficit, Mexico will experi-
ence another year of tight domestic credit conditions, high inflation, and
capital flight.
Slowdown in Argentine
Stabilization Program
Panama Gains
Financial
Breathing Space
Secret
15 November 1985
Despite well-publicized success on inflation-prices rose only 1.9 percent in
October-Buenos Aires apparently has failed to comply with other binding
IMF targets, according to the US Embassy. The Fund is considering extending 25X1
Argentina's standby agreement for three months, because the Central Bank
deficit is still too large and import restrictions have not been eased. President
Alfonsin has made little progress toward his goal of reducing the role of the
public sector through deregulation and attracting increased foreign invest-
ment. Opposition from the bureaucracy and infighting among economic
ministers have hampered Alfonsin's plans to secure more foreign participation
in the oil and telecommunications industries. Argentine businessmen are
complaining that the administration has neglected to carry out consistent,
predictable trade policy. They fear that tight money and obligatory loans by
business to the government may force several large firms into bankruptcy. The
IMF may delay disbursements of new money, but Argentina has only narrowly
missed its targets and probably will return to compliance. The President still
appears committed to major reform, but further delays in putting controversial
economic measures in place would be a sign that Alfonsin has decided to trade
timely reform for short-term political gains. Such a choice would soon
jeopardize Buenos Aires's IMF program and dim the prospects for long-term
growth and political stability. 25X1
After months of delay, Panama signed an $850 million agreement with
international commercial banks on 31 October. The deal provides a $60
million long-term loan and $80 million in trade credits and refinances $580
million in 1985-86 debt obligations. In addition, the banks promise to maintain
$130 million in deposits with local subsidiaries. While the first $20 million
drawing is scheduled for mid-November, continued drawings are tied to
economic policy changes that the new Delvalle government is unlikely to be
able to implement. Even though Panamanian financial authorities are telling
bankers that labor, industrial, and agricultural reforms recommended by the
World Bank will be made soon, Delvalle-according to US Embassy report-
ing-has not formulated an economic program and, like his predecessor,
almost certainly lacks the muscle to push through tough reforms. Meanwhile,
Panama City is trying to meet reserve targets of the two-year IMF standby
agreement signed last Jul b borrowing against its 40-percent equity in the
transisthmian oil pipeline.
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Secret
Global and Regional Developments
probably will grant the EC an organizing role on some projects.
will further define EUREKA's structure before the meeting in May and
Foreign and research ministers of the West European countries approved 10
research projects for EUREKA-most with the aim of developing specific
commercial products-but they did not establish a funding plan at their 25X1
meeting in West Germany last week. The projects, nine of which involve
French firms, include research on high-speed computers, sophisticated lasers,
microchips, data transmission, and pollution control. Meanwhile, industrialists
expressed skepticism about EUREKA, and France remains the only country to
pledge major funding. The ministers will meet again on EUREKA next May
in London. Even with the selection of projects, EUREKA will not be viable un-
til funding and management issues are settled. Because budgets are already
tight, the West European governments are unlikely to come through next year
with the necessary funds to stimulate industrial interest. They almost certainly
Fjknce Rejoining
uropean Fighter
Project V
Pre ure on Japan
F Airbus Purchase
President Mitterrand announced, following talks with Chancellor Kohl in
Bonn last week, that France will rejoin the European Fighter Aircraft
program. Paris expects its financial share in the project to be between 5 and 10
percent of the total-considerably less than the 40-percent share it insisted on
earlier. At the same time, Mitterrand also announced that he invited other
European governments to join France's own new fighter project-the Rafale.
Mitterrand is touting the decision as an indication of his personal commitment
to European cooperation. In practical terms, it is probably more to provide 25X1
access for French industry to other European technology and markets. The
specifics of France's participation remain to be worked out, however, and its
continuing commitment to the Rafale probably will keep French financial and
industrial involvement at token levels. This decision may reduce R&D costs for
both aircraft and buy access to the EFA market for French component
manufacturers.
West European leaders, particularly the French, are putting pressure on Tokyo
and All Nippon Airways to pick Airbus over Boeing in a deal that could total
$1.5 billion. According to the US Embassy in Tokyo, EC officials attending
the Japan-EC ministerial meeting in Tokyo next Monday are likely to push the
issue. All Nippon Airways has decided to delay a decision at least until after
the meeting and perhaps for as long as two months. The delay may be designed
to wring greater concessions out of both Airbus and Boeing and allow Prime
Minister Nakasone time to seek a solution that will not disrupt relations with
the United States or jeopardize the atmospherics for the Economic Summit in
Tokyo next may decide to su rt the purchase of aircraft
from both
25 Secret
15 November 1985
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 'apanese Purchase of
US Equipment
I
Japan Capturing
Industrial Laser
Japan's New Space
Use Organization
Secret
15 November 1985
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National Developments
Developed Countries
Japanese industrial firms will establish the Space Environment Utilization
Center in December to coordinate Japanese efforts on the commercial uses of
space. The center's initial funding will come from private donations totaling
$250,000, and contributions are expected to rise to $2.2 million in two years.
The center will coordinate Japanese commercial and industrial experiments
flown on the US space shuttle and other spacecraft as well as Japanese uses of 25X1
the US space station. According to the Japanese press, both MITI and the Sci-
ence and Technology Agency (STA) support the new group. We believe
industry views it as one way to resolve the developing feud between the two
agencies. MITI has challenged STA's primacy in space policy-which in-
cludes responsibility for space-related R&D for launch vehicles and space-
craft-by claiming authority to oversee a anese commercial ventures, 25X1
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secret
F/recast of Broader Recent forecasts-including the joint forecast of West Germany's five major
Lifidon Pushing To
peed Privatization
economic research institutes and our own econometric model of the West
German economy-agree that West German economic growth next year will
not only increase but also be broader based. In particular, personal consump-
tion and construction are expected to revive combining with the export surge
that has been the mainstay of growth over the past two years. The consensus
foresees 3-percent real growth in 1986, up from 2.2 to 2.5 percent this year. An
important projection for the Kohl government, as the January 1987 election
approaches, is that the unemployment rate should edge down 0.2 to 0.3
percentage points-the first decline since 1979-to just over 9 percent. Despite
slower growth in real exports, next year's trade surplus probably will surpass
even this year's expected record of $30 billion. West German officials are
concerned that the rapidly mounting surplus will intensify calls from abroad to
boost the economy but will cite the forecasts as evidence that stimulative 25X1
London is seeking to offset overruns in public spending and to deliver promised
tax cuts by doubling its projected sales of nationalized companies next year.
The Treasury reportedly wants to increase the privatization program to
roughly $5.8 billion in 1986, compared with $3.2 billion originally planned.
Since the Treasury records privatization as negative public spending rather
than revenue, increased sales would enable the government to "meet" its
planned spending totals for the 1986-87 financial year, despite budget overruns
in a number of departments. The Queen's speech opening Parliament last week
revealed plans to introduce legislation to privatize four major entities-British
Gas Corporation, the Atomic Energy Authority, the British Airports Author-
ity, and the Royal Naval Dockyards-but did not specify government
estimates of the proceeds from the sales. The bill probably will obtain
Parliamentary approval, despite misgivings about selling off state assets as a
short-term way of raising mone
Belgian Labor Proposes Belgium's Catholic and Socialist labor federations are not likely to receive
Jobs Program much support from the Marten's government for their demands to increase
employment, restore purchasing power, and safeguard social security. The
Catholic federation's plan includes government stimulation of the economy, an
active employment policy, generalization of the 38-hour workweek, maintain-
ing full social security benefits, and restoring wage indexation based on the
cost of living. It also recommends a European-wide program to cut unemploy-
ment in half by 1990 through fiscal and monetary expansion, job-creating 25X1
investments by employers, and moderation of union wage demands. The
Socialist memo largely echoed that of the Catholic unions, but with an even
stronger call for cancellation of the government's decision to suspend the 1986
indexation of wages and social benefits. They are also calling for renewed
cooperation between the two federations to present a united front to the
government. In response, Prime Minister Martens has said his new govern-
ment will continue to implement deficit reduction measures, which are at odds
with labor's proposals.
Secret
15 November 1985
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Portuguese Current
Account Deficit
Improves
Impending Layoffs
in Suriname
Soviet Shortage of
Hard Currency
Secret
15 November 1985
on the external account as the economy opens to European competition.
Although it has eroded outgoing Prime Minister Soares' popularity, Portugal's
painful austerity program has reduced the current account deficit to $259
million in the first half of 1985, from $640 million a year earlier. The
improvement reflects a 40-percent decline in the trade deficit. Sluggish
domestic demand contributed to a 10-percent decrease in the dollar value of
imports while a favorable competitive position-particularly in textiles and
apparel-helped boost exports by 3 percent. The services deficit also im-
proved-partly a result of increased tourism-falling 12 percent from the first
half of 1984. These developments more than offset the 17-percent drop in
worker remittances. Lisbon projects a yearend deficit of only $150 million, a
70-percent decline from the 1984 level. This would be a welcome prospect in
view of the probable short-term effects of Portugal's forthcoming EC accession
Less Developed Countries
firms are likely to also press for similar layoffs.
Plans by two large Surinamese companies to implement large-scale layoffs
present a serious economic dilemma to the Bouterse military regime. Suralco,
a US-owned aluminum company and Suriname's largest foreign exchange
earner, has announced plans to eliminate at least 500 jobs, while the Kersten
Company, a local retailing conglomerate, intends to lay off over 800 workers.
The government-which, by law, must approve any layoffs-probably will try
to strike a compromise between concerns for the precarious financial condition
of both companies and job losses. Higher unemployment, however-estimated
by the Embassy to be 30 percent currently-increases the prospect for labor
unrest. Moreover, if these companies successfully trim their work forces, other
1986-90 plan period seem untouched thus far
The USSR has asked that all Western suppliers of large-diameter pipe
renegotiate contracts to substitute long-term credits for cash on deliveries
scheduled for fall 1985 through spring 1986. These requests resulted from a
temporary suspension of fund allocations because of hard currency problems
plus the need to make down payments on large r li rs are delaying
shipments until negotiations are resolved. the USSR
has not completed negotiations on contracts generally concluded at this time of
year. Western statistics show that the Soviet debt to Western banks has risen
by about $3 billion since December, while assets in the West have fallen by
more than $2 billion. Moscow appears to be treating its recent decline in hard
currency earnings-primarily from reduced oil exports-as a temporary
problem, financing important imports and reducing or postponing less essential
products. Negotiations for large, expensive projects with Western firms for the
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N
Tougher Soviet
Construction
Materials Standards
Vietnam's Proposed
Indonesian Rice
Purchase
Tougher quality standards demanded by the Soviet leadership are having an
impact on the construction materials industry. In September a branch of the
Noril'sk combine-the Soviet's largest nonferrous metals producer-reported-
ly refused to accept the products of the combine's concrete plant because they
failed to meet standards set by the State Committee of Construction Affairs.
This action-taken despite a grace period for accepting lower quality materials
until mid-1986-could lead to a temporary halt of all construction at the
combine. The plant expects to have its products up to standard upon
completion of a new crushing facility next year. Enforcement of higher quality
standards is another indication of the emphasis Gorbachev is putting on
improving efficiency of construction in his aggressive modernization program.
It follows a call in early September for the reevaluation of all construction pro-
jects in the nonferrous metallurgy industry for the 1986-90 period to ensure
they are consistent with plans for the introduction of newer, more modern 25X1
production equipment.
repayment soon.
25X1
Vietnam has asked Indonesia for 200,000 to 300,000 metric tons of rice to
make up for typhoon damage to its cro Hanoi
is seeking two- to three-year credit terms for its purchases. The proposed sale
follows the recent signing of a bilateral trade agreement. It would improve ties
between Jakarta and Hanoi and offer Jakarta a means of disposing of surplus
rice at a good price. Indonesia, nonetheless, is unlikely to supply the full
amount. Jakarta's ASEAN partners officially oppose large-scale trade with
Hanoi because of Vietnam's occupation of Cambodia. Jakarta almost certainly
will be hesitant to supply large credits since Vietnam is already $635 million in
arrears on its hard currency debt of $1.6 billion, with little prospect of
Secret
15 November 1985
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Secret
Secret
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