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EUROPEAN ANXIETY ON TRADE ACT

Turning to the commercial aspects, Mr. Baas stressed the anxiety among Europeans as to whether the trade act gave a major role to the President or to Congress. Was the outcome of the multilateral negotiations not liable to be jeopardized by a change in the size of the majority in Congress?

He noted in conclusion that the United States was a major exporter of agricultural goods to the community, in particular of soya and maize, and this put the community in a position of dependence vis-a-vis the United States.

In more general terms, it was important to discuss the possibility of concluding worldwide arrangements. The next meeting of the delegations in the United States should provide the opportunity for this. Compared with this problem, the present cheese dispute seemed trivial, even if it was difficult for Europeans to understand the protectionist policy of the United States on this matter.

Mr. Vetrone, who had taken a great interest in Mr. Stephens' statement, asked if the latter had not failed to mention a fundamental difference between the situation in the United States and the community as a whole, namely, the balance-ofpayments situation. The United States had experienced a balance-of-payments deficit, which had led to the historic decision of August 15, 1971, to make the dollar inconvertible, but the situation was now improving. This was not the case in Europe where there had been a sensational deterioration in the balance-of-payments situation since the oil crisis. In Europe there were more likely to be tax increases than the reductions introduced in the United States.

The coordination of credit policies, incurring reciprocal obligations, would represent a positive contribution to restoring equilibrium to the balance of payments.

In this connection he noted that the United States had short-term debts of 110.000 million inconvertible dollars. Should not sanctions be applied in the event of excessive balance-of-payments surpluses or deficit? The mechanisms for the recycling of petrodollars had averted the danger of liquidity shortage. But was there not the risk of these mechanisms creating the reverse situation, i.e., capital surplus? It would be desirable to introduce controls through the IMF. The Germans had considered creating an investment fund for the long-term use of petrodollars.

RELATION OF GATT AND MONETARY RETURN

With regard to trade, the fundamental question was whether it was worthwhile holding GATT negotiations if nothing was done at the monetary level. He supported the views put forward in Mr. Houdet's report on differences in approach as regarded the technical aspects of the negotiations.

Concluding, he stressed the need to create adjusting mechanisms. The United States had not followed up the offer of worldwide agreements at the time of the Kennedy Round. Since then they had had to agree that the Community's Common Agricultural Policy had its advantages.

Were they prepared to discuss world agreements today?

With regard to the specific matter of cheese, he hoped that the Members of Congress would take steps to smooth out the disagreement, rather than the reverse, as seemed to have been the case.

Referring to the report by Mr. Houdet and the statements by Mr. Baas and Mr. Vetrone, Mr. Stanton noted that there was a difference between the European parliamentary situation and the U.S. Congress. The Congress, which had always had responsibility for the budget and taxation, had until the present time been little more than an observer on monetary problems; this made coordination between the two fields difficult. In view of these circumstances, it was difficult to start talking of the coordination of U.S. and EEC credit policies. As regarded monetary reserves, progress could have been made if there had not been a fundamental difference of opinion on the real position of gold vis-a-vis international currencies. He hoped that a compromise on this matter could be reached between Europe and the United States.

U.S. DOLLAR UNDERVALUED

Mr. Gibbons felt the American dollar was undervalued. American investors were still taking advantage of the high interest rates paid in Europe. This would continue as long as the difference in interest rates persisted. He then referred to the problem of export subsidies, on which he thought a common approach should 56-569-75—5

be adopted. As regarded petroleum, he felt that the drop in consumption was due to the recession and that when this had been gotton over the situation would be the same as before.

As regarded the European attitude to the trade act, he himself would have preferred not to see certain provisions included. The provisions were, however. on the whole limited enough not to tie the hands of the American negotiators or the President.

Mr. Lange, like Mr. Baas, felt that it would be useful to give more time at the next meeting to common problems of agricultural policy, provided that greater clarity emerged in the European policy. In view of the general economic problems of inflation, recession, and depression, both sides would have to develop the political will to avoid splitting the problem on geographical lines, as was happening in the NATO Consultative Assembly.

PETRODOLLAR EXAGGERATED

Fears about surplus petrodollars had not been justified. The petroleumproducing countries had realized that it was not in their own interest to harm western industry. There was still, however, the problem of consolidating inconvertible dollars. Rather than trying to fix a short-term exchange value for their dollar holdings, Europeans should, together with the Americans, try to consolidate them through a long-term credit agreement.

Trade liberalization depended on a stable monetary system. Europeans envisaged a system of fluctuating exchange rates within a preset margin of about 5 percent either way. At the present time certain floating currencies were indeed moving within this margin. The problem was not peculiar to the United States, but also applied to certain EEC countries.

The Community had laid down certain preconditions for the provision of aid to countries with balance-of-payments difficulties. However, the only measure of importance so far had been a bilateral arrangement between Germany and Italy. On the whole, what mattered was to avoid selfish opposition to free trade and to rely on international solidarity to overcome certain national difficulties.

NO RETURN TO GOLD

Mr. Symms agreed with Mr. Vetrone that August 15, 1971, was a historic date. Certainly, there had been no other course for the President to take but there seemed to have been a failure to see the obvious for many years. The United States was now facing a budgetary deficit which could, because of the loans needed to cover it, lead to an increase in interest rates. A major problem was the floating of currencies. Currencies could find their real value if there was no intervention by the central banks. When the dollar had been tied to gold, the exchange system then in force automatically guaranteed a certain orderliness, But it would be impossible to return to gold at the present time. He voted against the tax reduction, which had made the budgetary deficit considerably worse. Contact with the European Parliament, he stated, gave the American delegates. an opportunity to make a useful reappraisal of their ideas.

ECONOMIC NATIONALISM FEARED

Mr. Fithian feared that the world would have to continue to face up to economic problems for several months or even years and hoped this would not lead to a repetition of the economic nationalism of the 1930's. An encouraging sign in this connection was the influence Congress could bring to bear on the decisionmaking process in the United States. In reply to Mr. Baas, who had referred to restrictions on soya exports, he assured participants that the Congress Committee on Agricultural Affairs did not intend to follow a policy of restrictions on exports. As the representative of one sector of agriculture, he felt able to give an assurance that this was the point of view of all agricultural producers. He very much hoped that the delegation would be able to visit the Midwest and the Chicago grain market during a subsequent meeting.

The problem of trade in major agricultural products seemed more important than that of cheese. It would perhaps be useful, with particular regard to cereals, to conclude long-term purchasing agreements, make provision for building up reserves to help stabilize prices and forestall attempts by certain large-scale traders to manipulate the market. This of course presupposed international cooperation, as already referred to in the debate.

DAIRY LOBBY ASSESSED

Mr. Findley stated in connection with the cheese dispute that there were dairy farmers in all the electoral areas and that this perhaps explained the influence of the dairy lobby. He had dissociated himself from these lobbies in Congress and hoped to continue to do so in order to break the vicious circle of action and reaction between the EEC and the United States.

On the conclusion of long-term agreements on food products, he feared that. the United States would continue to show opposition. The situation could be different if the Democratic Party gained control of the White House at the next elections, despite possible difficulties in implementing these agreements, as was at present the case with the Sugar Act.

Mr. Stephens agreed with Mr. Lange that an effort had to be made to coordinate monetary policies and create a stable international system.

INTERNATIONAL MONETARY AND TRADE PROBLEMS

Paper by Roger Houdet

The theme proposed for this meeting between the members of the U.S. delegation and the European Parliament delegation is an extremely board one. The rapporteur has therefore confined himself in the following pages to general remarks merely intended to guide the discussion.

These remarks concern, as regards monetary questions, fluctuations in the value of the various currencies over the last few years, new problems posed by the recycling of certain capital and the return to a genuine international monetary system.

As regards trade questions, these remarks are to be read in the light of the recently opened GATT negotiations in connection with the Trade Act signed by President Ford on January 3, 1975.

And lastly, as regards agricultural questions, they supplement working documents presented by the rapporteur at previous meetings, taking account of the discussions at the World Food Conference in Rome in November 1974, and the possible effects of the latter on the establishment of food stocks. They also deal with a special aspect of bilateral relations between the United States and the European Economic Community.

I. MONETARY RELATIONS BETWEEN THE UNITED STATES AND THE
EUROPEAN COMMUNITY

The rise in oil prices will, no doubt, delay even further a reform of the international monetary system. The return to some semblance of order in this field must, however, remain a prime objective of IMF member countries, particularly the United States and the European Community.

Admittedly, the present system of currencies floating against one another within fixed limits is working out quite well and insures a measure of stability which has allowed the regular development of international trade. The interventions by the central banks on the exchange markets have not, however, prevented a distinct undervaluation of the dollar, which threatens to disturb monetary and trade relations between the industralized countries.

THE RECYCLING OF CAPITAL

After a great deal of parleying, the monetary authorities have succeeded in setting up several mechanisms for facilitating the recycling of the surpluses of the petroleum exporting countries (PEC). These instruments, notably the IMF's Special Fund, the Solidarity Fund created by the OECD and the mechanism of Community loans, supplemented by the enlargement of the IMF's credit facilities and by the agreement on the use of the gold holdings of the central banks, will probably enable an acute shortage of international liquidities to be avoided.

The recycling mechanisms created within the framework of international organizations will thus take over, to a large extent at least, from the private markets, which in 1974 were preeminent in this field but have now reached the limit of their possibilities.

The creation of recycling instruments is undoubtedly necessary, but it must not be forgotten that all these facilities are liable to produce an excess of interna tional means of payment and thus stimulate inflation in a future period of high activity. It will, therefore, be necessary to insure that the mass of international liquidities does not exceed the needs of the international economy. Only an international body possessing real powers will be able to make the necessary adjustments. The strengthening of the IMF, called for by the European Parliament as long ago as June 5, 1973,1 is, therefore, more necessary than ever.

1 OJ No. C 49/73, p. 15.

When the establishment of the various mechanisms for the recycling of capital and the extension of international credit facilities represent real progress, the fact remains that they must be supplemented by the creation of instruments which can meet the needs of the PEC for long-term capital investment. To this end, the establishment of an investment fund, as proposed by the German Government, deserves consideration.

MONETARY RESERVES

It is desirable that special drawing rights (SDR) should become the principal component of montary reserves. On this point, there is full agreement between the United States and the European Community. To hasten the general adoption of SDR, an extension of the possibilities of using this instrument must be considered. This question is obviously linked to that of the future role of monetary gold and the convertibility of SDR into national currencies.

As to the role of the gold holdings of the central banks, the differences between the American and European points of view have narrowed considerably. It has been agreed that monetary gold may be used at near market price, to guarantee loans between central banks, and that gold reserves may also be evaluated in calculating monetary reserves at new market price. The question still to be settled concerns the right of the central banks to exchange gold among themselves and to purchase it on the market. A revision of the IMF's provisions on the matter is necessary in order to progressively eliminate the remaining restrictions while ensuring that heavy fluctuations in the mass of metallic reserves, and in the price of gold on the free market, are avoided.

As regards the gold reserves of the IMF, it should be possible to arrive at a compromise between the position of the U.S. Government and the European point of view. While the American Government would like to authorize the IMF to sell its metallic stock to bring about a fall in the price of the precious metal on the free market, the European monetary authorities tend to consider the IMF's gold as an excellent guarantee for loans raised by the Fund.

The solution proposed by the President of the Group of Ten, which consists in authorizing the IMF to issue medium-term certificates made out in gold, on the understanding that the value of these certificates would vary according to the current price of gold, could perhaps win the acceptance of the two delegations.

RESTORATION OF THE EQUILIBRIUM OF PAYMENT BALANCES

The return to a true international monetary system is only conceivable on the basis of strictly equal obligations among all the countries concerned, including those whose currencies are used as reserve currencies. In this connection, it is a matter of concern that U.S. debts to the central banks continue to increase and now stand at $110,000 thousand million. If a start is to be made on reform of the monetary system, it is essential at the very least that these debts should not increase.

The same requirement of symmetry must apply to restoring the equilibrium of payment balances, that is a surplus as well as a large balance of payments deficit must lead, if necessary through sanctions, to modification of the central rate of exchange.

The increase in the mass of floating capital gives an even greater importance to the level of the rate of interest as a factor influencing the rate of exchange. For this reason, close coordination of credit policies between the United States and the countries of the Community is more necessary than ever.

Any policy aimed at artificially maintaining a rate of exchange at an excessively low level must be condemned. As regards relations between the United States and Europe, such a policy would find no support in objective fact: In 1974, the EEC had a trade deficit of some $3 thousand million with the U.S.A.

MONETARY REFORM AND GATT NEGOTIATIONS

The problem of international monetary relations and that of the GATT negotiations now taking place are very closely linked. Indeed, the liberalization of international trade can only be conceived in a climate of relative stability of exchange

2 Whose value at the official price totals $85,000 million-four times as much at the free market price.

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