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The original documents are located in Box 56, folder "1976/02/06 - Economic Policy Board"
of the James M. Cannon Files at the Gerald R. Ford Presidential Library.
Copyright Notice
The copyright law of the United States (Title 17, United States Code) governs the making of
photocopies or other reproductions of copyrighted material. Gerald Ford donated to the United
States of America his copyrights in all of his unpublished writings in National Archives collections.
Works prepared by U.S. Government employees as part of their official duties are in the public
domain. The copyrights to materials written by other individuals or organizations are presumed to
remain with them. If you think any of the information displayed in the PDF is subject to a valid
copyright claim, please contact the Gerald R. Ford Presidential Library.
Digitized from Box 56 of the James M. Cannon Files at the Gerald R. Ford Presidential Library
EPB MEETING
February 6, 1976
8:30 a.m.
Roosevelt
Cav. Room didn't attend
RECEIVED
1976
GENTRAL FILES
ECONOMIC POLICY BOARD
EXECUTIVE COMMITTEE MEETING
AGENDA
8:30 a.m.
Roosevelt Room
February 6, 1976
PRINCIPALS ONLY
1.
Report of the EPB/NSC Task Force on
Treasury/State
Commodities
2.
Establishment of Labor Negotiations
Seidman
Committee
3.
Administration Position on S. 1248
Treasury/Justice
RECEIVED
APR $1975
DERALD R.
FILES
OF
DEPARTMENT THE TREASURY
THE
THE SECRETARY OF THE TREASURY
WASHINGTON 20220
1789
February 5, 1976
MEMORANDUM TO: Economic Policy Board
FROM:
Secretary Simon
SUBJECT: Title V of S.1284 (premerger notification and stay provision)
The Antitrust Improvements Act of 1975 (S.1284) has been scheduled
for markup by the Senate Judiciary Committee on February 18 and 19. At
hearings before the Subcommittee on Antitrust and Monopoly, the Justice
Department generally supported the provisions of Title V of the bill
relating to premerger notification and stay procedures. Senator Scott
has asked the Attorney General for a clarification of the Administration's
position on Title V.
Title V would enable the Antitrust Division or the Federal Trade
Commission (FTC) to hold up a planned merger for an extended period with-
out any review by a court. It does so in two ways:
1. By requiring the parties to give notice of a planned merger and
barring the merger for 30 days while the Antitrust Division and FTC
evaluate it. The Antitrust Division or the FTC could hold up the merger
for another 45 days by asking for additional information about the mer-
ger or the parties.
2. By requiring a court to hold up the proposed merger when suit
is filed if the Antitrust Division or the FTC certifies to the court
that the public interest requires that the merger or acquisition not be
completed until a final judgment is rendered.
Since the subcommittee reported the bill and. since the EPB meeting
on this bill on December 19, there have been discussions between the
Justice Department, Treasury Department and various representatives of
the business community concerning Title V. As a result of these discus-
sions, the Justice Department has suggested a revision to Title V that
would: (1) retain the premerger notification procedures; and (2) limit
the period in which a merger could be held up pending notification liti-
gation of the Justice Department's or FTC complaint challenging the mer-
ger to 30 days unless the court granted a 30-day extension of the stay
"for good cause shown.'
- 2 -
Title V would have the effect of creating a new regulatory scheme
for all significant acquisitions. Mergers could be held up for extended
periods unless the Antitrust Division and the FTC permitted them to go
forward. This kind of new or additional governmental interference with
business transactions should not be undertaken without a clear demon-
stration that it is necessary to achieve legitimate antitrust enforce-
ment objectives, and that attainment of these objectives outweighs any
adverse effects on the economy. Title V cannot be justified under
either of these criteria.
Title V would discourage healthy, efficient, competitive change of
ownership of businesses in response to economic conditions, decrease the
availability of capital to firms and promote inefficient allocation of
capital resources. It would give the Antitrust Division and the Federal
Trade Commission the ability to hold up a proposed acquisition or merger
for an indefinite period of time without having to make any showing in
court that the transaction violates the antitrust laws. Even under the
Justice Department's suggested revision of Title V, the government would
have the ability to hold up an acquisition or merger for over 135 days
without effective judicial review. The mere existence of this discre-
tionary power in the antitrust enforcers could significantly deter law-
ful mergers and acquisitions to the detriment of the economy. More
importantly by exercising this discretionary power, the Antitrust
Division and the FTC could prevent -- not merely delay -- proposed acqui-
sitions or mergers since the economic reasons for such transactions could
well pass during the period of delay.
The Justice Department maintains that it needs greater ability to
stay a proposed acquisition or merger pending antitrust litigation
because divestiture of stock or assets is an inadequate remedy in most
cases. Even accepting this contention, the Department has not demon-
strated that existing procedure for enjoining a proposed acquisition or
merger challenged by the government is inadequate.
Under present law, the Justice Department may obtain a court injunc-
tion barring a merger.pending the outcome of its antitrust. suit, if it
can demonstrate a reasonable probability that it will succeed in estab-
lishing the illegality of the proposed transaction. Pending the hearing
and determination of the Justice Department's request for an injunction,
the court may at any time enjoin the challenged acquisition or merger
for up to 20 days. This 20 days can, and frequently has been, extended
by consent of the parties to give the court an opportunity to hear the
merits of the case. Recent amendments to the Expediting Act have
strengthened the Justice Department's power to secure preliminary injune-
tions by giving the Department, for the first time, the power to appeal
at once from a denial of a preliminary injunction in an antitrust case.
- 3 -
The FTC is similarly authorized to obtain a court order enjoining an
allegedly unlawful acquisition or merger.
Existing law allows the courts discretion to apply traditional
standards of fairness and equity in determining the appropriateness of
injunctive relief in merger cases. There has been no showing that the
government needs the power to demand an automatic stay in order to
guard against acquisitions that may be anticompetitive.
Nor has any demonstration been made of the meed for the premerger
notification requirements of Title V. This provision would permit the
Antitrust Division and the FTC to delay an acquisition or merger for
well over 75 days. Moreover, premerger notification would be required
in any transaction involving two companies with amual sales or assets
over $10 million. Present FTC premerger notification rules have a $250
million threshold and do not prevent the merger from going forward.
Chairman Engman of the FTC testifying before Senator Hart's subcommittee
on this provision, questioned the need for requiring notification of
smaller merger transactions. He stated that the Federal Trade
Commission's own premerger notification program appeared to be
satisfactory.
Title V is inconsistent with the objectives of the Administration's
program for regulatory reform and, therefore, Admiinistration support of
Title V is incongruous with these objectives. Tittle V represents a
clear example of the failure to weigh the benefits of proposed regula-
tion against its costs to the economy. It stands in stark contrast to
the goal of achieving regulatory objectives in a manner that minimizes
the cost impact on the economy generally. Finally, the broad coverage
of the premerger notification requirements conflict with the goal of
eliminating unnecessary government reporting requirements.
In view of these considerations, the Administration should oppose
enactment of Title V, including its premerger notification and stay
provisions.
ASSISTANT ATTORNEY GENERAL
ANTITRUST DIVISION
Department of Justice
Mashington, D.C. 20530
February 4, 1976
MEMORANDUM TO: Economic Policy Board
FROM:
Thomas E. Kauper
Assistant Attorney General
Antitrust Division
SUBJECT:
Title V of S. 1284
Title V of S. 1284 would establish a procedural
framework and substantive standard pursuant to which
courts would evaluate motions for preliminary injunctive
relief in cases brought by the Department of Justice or
the Federal Trade Commission to challenge proposed mergers
or acquisitions. Title V has undergone substantial modi-
fication since introduction of the bill, and this formulation
of the stay provision represents the minimal intrusion upon
business transactions that is consistent with the legitimate
enforcement needs of the Department of Justice and the
Commission.
I. The Need for Legislation
Under present law, there is no established mechanism
by which economically significant mergers or acquisitions
are brought to the attention of antitrust enforcement
agencies. The Department of Justice learns of most pro-
posed acquisitions through the Wall Street Journal and
other such sources, and the Federal Trade Commission's
pre-merger notice system is, as a practical matter, useful
only when agreements to merge are reached substantially in
advance of the proposed consummation date.
In those instances when either agency believes that
a proposed merger or acquisition violates the antitrust
laws, attempts are made to file a complaint before the
transaction is consummated. Unless the parties agree to
delay consummation pending resolution of the antitrust
issues, our complaint will most frequently be accompanied
by a motion for a temporary restraining order and a motion
for a preliminary injunction. Historically, the purpose
of a temporary restraining order is to assure that the
plaintiff will not suffer irreparable harm until the court
REVOLUTION
ANAF
can rule on a motion for preliminary injunctive relief.
In the merger setting, consummation of a merger itself
constitutes irreparable harm since post-consummation
relief in the form of divestiture has proven ineffective
and a burden to all parties.
Although the Department is generally successful in
obtaining a temporary restraining order, we have found
that district courts frequently are unable to hold a
thorough hearing on our motion for a preliminary injunction
prior to the expiration of the temporary restraining order.
As a practical matter, therefore, companies are able to
consummate a merger or acquisition while the matter is
being litigated simply because the complexity of the anti-
trust issues involved makes it impossible for the district
court to rule on the government's motion for a preliminary
injunction. Given the universal dissatisfaction with
divestiture as an antitrust remedy, the existing procedural
framework for resolving antitrust challenges to proposed
transactions is deficient.
II. The Emergence of a Pre-Merger Stay Provision
As introduced in the 94th Congress, Title V would
have provided for an automatic stay of any proposed
acquisition upon institution of an action by the Federal
Trade Commission or the United States and certification
by the Commission or the Attorney General "that the public
interest requires relief pendente lite." Under this
standard, the district court would have been required to
enter an order prohibiting consummation, which would
remain in effect until the order of the Commission or
judgment became final. The district court was further
directed to expedite the proceeding or action.
The Department of Justice, testifying on behalf of
the Administration, opposed this standard on the grounds
that it was unnecessarily inflexible. Instead, we pro-
posed that the district court be given discretion to lift
a stay upon a showing by the defendant of irreparable harm
or lack of merit of the government's suit. The Senate
Subcommittee on Antitrust and Monopoly largely adopted
this position when it reported the bill to the full Judiciary
Committee on July 28, 1975.
2
Representatives of the investment banking community
have contended that even this modified stay provision is
too disruptive. They objected to the fact that the stay
could be entered without any judicial determination of
the merits of the government's case. To counter this
concern, the Department suggested a standard under which
an injunction would be entered only if a judge found a
reasonable likelihood that the government would prevail
on the merits of the case -- the standard presently
applied by courts. The only condition to this proposal
was that the court be guaranteed an opportunity to rule
on the motion for a preliminary injunction before con-
summation of the merger or acquisition. To assure this
condition, a temporary restraining order would be entered
upon filing of the complaint and would remain in effect
until the court's ruling on the preliminary injunction.
The Department was committed to a timely ruling by the
judge so that mergers or acquisitions would not be unduly
delayed; to that end the judge was directed to give these
matters priority and to expedite his ruling.
This formulation was unacceptable to representatives
of the investment banking community. Although they pro-
fessed to accept the Department's position on the need
to preserve the status quo pending a ruling on the pre-
liminary injunction, they were afraid that judges might
not rule on these motions fast enough. Therefore they
objected to any formulation that did not fix a maximum
time on the temporary restraining order.
III. The Current Formulation
After a careful analysis of the steps necessary to
allow a judge to make an intelligent ruling on a motion
for a preliminary injunction, and in an effort to be as
responsive to the various concerns raised as is consistent
with sound antitrust enforcement policy, the Department
presented the current formulation for a pre-merger stay
provision. Under this proposal:
1. A temporary restraining order would be entered
upon the filing of an antitrust complaint and certification
by the appropriate antitrust official that immediate tempo-
rary relief is necessary.
3
2. The temporary restraining order would remain in
effect for thirty days or until final disposition of the
motion for a preliminary injunction, whichever period is
shorter, unless extended.
3. The temporary restraining order could only be
extended for up to an additional thirty days upon good
cause, or for such period to which all the parties consent.
4. The Chief Judge of the United States Court of
Appeals would be required to designate a District Judge
who is available to hear the action in an expeditious
manner, and that Judge would be directed to hold a hearing
at the earliest possible time and to give the matter priority.
5. The preliminary injunction would be granted only
upon a showing by the government of a reasonable probability
of success on the merits. Even if such a showing is made,
the defendant could have the injunction modified if it
shows that it will be irreparably harmed by the injunction
(except that loss of anticipated profits may not be con-
sidered).
The Department of Justice believes that any standard
providing a shorter time period cannot assure the district
court an opportunity to rule on the motion for a preliminary
injunction before expiration of the temporary restraining
order and would be unacceptable as a matter of antitrust
enforcement policy. The steps a court must undertake in
ruling on a motion for a preliminary injunction are numerous
and include: pretrial conferences, evaluation of prehearing
briefs, an evidentiary hearing, evaluation of posthearing
briefs and proposed findings of fact and conclusions of
law, and preparation of a written opinion. Historically,
these proceedings have averaged about 50 days, although a
significant number have taken over 100 days. Any period
shorter than that contained in the present formulation is
neither warranted by the concerns expressed nor consistent
with affirmative enforcement efforts.
Under these circumstances, the only acceptable options
for the Administration are: (1) continued support of the
present bill, as amended pursuant to the Administration's
suggestions; (2) suggest to the Judiciary Committee a
substitute provision such as the current formulation; or
(3) to withdraw Administration support for the concept of
a stay procedure and express our preference for current
law and procedure. The Department would favor these options
in the order listed.
4
Notwithstanding which of these options is ultimately
deemed preferable, the Department would support statutory
language mandating the selection of a judge by the Chief
Judge of the Circuit in which the case is filed, and
requiring that such cases be given priority treatment.
It is our understanding that, on this point, there is no
disagreement among any of the interested parties.
FOR IMMEDIATE RELEASE
February 2, 1976
Office of the White House Press Secretary
THE WHITE HOUSE
EXECUTIVE ORDER
MEMBERSHIP OF THE ECONOMIC POLICY BOARD
By virtue of the authority vested in me by the
Constitution and laws of the United States of America,
and as President of the United States of America, it is
hereby ordered as follows:
Section 1. Section 2 of Executive Order No. 11808,
as amended, is further amended by adding thereto "The
President may, from time to time, designate additional
members to serve on the Board. "
Sec. 2 Section 4 (a) of Executive Order No. 11808,
as amended, is further amended by adding thereto "The
President may, from time to time, designate additional
members of the Board to serve on the Executive Committee. "
GERALD R. FORD
THE WHITE HOUSE,
February 2, 1976
# # # # #
CONFIDENTIAL ATTACHED
THE WHITE HOUSE
WASHINGTON
February 5, 1976
MEMORANDUM FOR ECONOMIC POLICY BOARD
EXECUTIVE COMMITTEE
FROM:
ROGER B. PORTER RBP
SUBJECT:
EPB/NSC Task Force on Commodities Report
The EPB/NSC Task Force on Commodities has completed an analy-
sis of the Third International Coffee Agreement which is at-
tached. This analysis will be reviewed at the Friday, Febru-
ary 6, 1976 EPB Executive Committee meeting.
CONF IDENT IAL
THE THIRD INTERNATIONAL COFFEE AGREEMENT
An Analysis
Background
The original 1962 International Coffee Agreement (ICA)
was a joint initiative of the U.S. and Brazil. The Agree-
ment has historically been regarded by the USG as a way
of improving our relations with a number of key Latin
American countries (particularly Brazil, Colombia, and
Central America). The first Agreement, and to a lesser
degree, the 1968 Agreement, were both signed in periods
of low coffee prices and surplus production. They were
presented as instruments of our foreign policy, comple-
mentary to the Alliance for Progress.
Those Agreements worked reasonably well at holding
a floor price, until a series of Brazilian frosts and
disease problems beginning in 1969 cut Brazilian pro-
duction. It became increasingly difficult for consumers
and producers to agree on mutually satisfactory imple-
mentation of the Agreement and the economic provisions
of the second Agreement were officially suspended in
December of 1972. A major cause of disagreement was
producing countries' demands that the price range should
take into account the U.S. dollar devaluations. Pro-
ducer countries, led by Brazil, attempted for a time to
unilaterally stabilize world prices at a high level by
limiting supplies on the market, but this effort failed.
With prices on the downswing by early 1975, producing
countries were expressing strong interest in a new
Agreement. In July Brazil was hit by a disastrous frost
which destroyed 60-70 percent of its next year's crop
(1976/77), and coffee prices jumped from around 50 cents
to over 80 cents a pound.
Major negotiations were held in London in April,
July, and November. General agreement on a new ICA
was reached November 26, 1975. Prior to the last
negotiating session, the President decided the United
States would pursue an activist negotiating role. The
U.S. negotiating team was authorized to seek an agreement
which, as in previous Agreements, relies on export
quotas as its main instrument, but with:
DECLASSIMED
CONFIDENTIAL
E.O. 12958, Sec. 3.5
NSC Memo, 11/24/98, State Dept. Guidelines
By WHM. NARA, Date 5/15/10
CONF IDENTIAL
- 2 -
"improvements in the traditional agreement
which will provide more substantial protection
of consumer interests, among others the
upside risk. One important mechanism for
improving the Agreement in this manner is the
introduction of incentives to put any accumulated
stocks on the market when the market is firm,
through such devices as penalties or quota
reductions for undershipments. 11
The Agreement is open for signature until July 31,
1976 and will go into effect October 1, 1976. For the
Agreement to be implemented, countries representing at
least 80 percent of world exports and 80 percent of
world imports of coffee must join. As the United
States accounts for more than one-third of the world's
coffee imports, there can be no agreement without U.S.
participation (unlike the Tin and Cocoa Agreements).
If the United States decides to join, Senate consent
is required, and implementing legislation will have
to be passed by both House and Senate.
Analysis
Basic Mechanism
The new Coffee Agreement, as the previous ones, relies
on export quotas as its basic operating mechanism. All
operating decisions are by two-thirdsdistributed majority
vote, giving the United States an effective veto. In
contrast to earlier ICA's the Agreement will enter into
force with quotas suspended and provides for periods
when quotas would not be in effect.
After quotas are imposed the International Coffee
Organization's (ICO) Council would each year determine a
target price range based on its estimation of current and
longer term trends. On this basis it would determine a
global quota of coffee which would be shipped by all
producer member countries. This global quota would
then be divided among producer member countries, based
on their automatically determined market shares (see
below). When quotas are in effect, the ICO would issue
member exporting countries stamps equal to their annual
quota, and member importing countries would not accept
coffee from member producing countries unless it is
accompanied by such stamps.
CONFIDENTIAL
CONP IDENTIAL
-3-
The Council would establish rules whereby if the world
coffee indicator prices move above the target price range
for a certain number of market days, the global quota would
be enlarged by a predetermined percentage established by
the Council. In addition to the original quota entitlements,
stamps representing the increment would be distributed
to member exporting countries. If the indicator price
drops below the target price range for a certain number
of days, the global quota would be reduced by a predetermined
percentage, and member country export quotas would be
reduced proportionately. The number of times such quota
enlargements or reductions could be made in a calendar
year would also be set by the Council. Such adjustments
are not intended to achieve or modify major shifts in
market conditions, but to smooth out shorter term price
variances.
Target Price Range
In the first two Agreements, members agreed that the
general level of prices should not "decline below the
level of coffee prices in 1962, or about 31 cents
a pound. The Brazilians, with some support from other
producers, argued during the recent negotiations for some
new formula which would automatically set or index annual
target price ranges. The United States and other con-
suming countries rejected any automatic formula. Agree-
ment was ultimately reached that target price ranges
should be set annually by the Council based on current
market conditions, with no reference to any base price
period or indexation. This is a plus over previous
Agreements.
Quota Imposition and Suspension
The Agreement will begin on October 1, 1976 with
quotas suspended. Quotas will be imposed when for 20
consecutive market days:
(1) prices fall to within a price range
established by the Council; or, in the absence
of Council decision on a price range when
(2) indicator prices drop 15 percent below
the average price for the previous coffee year
(beginning October 1, 1977), or
CONF IDENTIAL
CONF IDENT TAL
- 4 -
(3) they drop below the average price of
coffee for calendar year 1975 (about 63 cents
a pound).
Under the second condition, however, the formula
would not come into play unless prices drop at least
below a price 22.5 percent above the 1975 average (or
about 77 cents a pound). Thus, for example, if prices
for a coffee year average $1.00, a 15 cent drop would
not trigger quotas. After the initial imposition the
Executive Director could establish the global quota
for four quarters, or less, subject to Council review.
Quotas would be suspended when prices rise for 20
market days by 15 percent over the ceiling of the price
range set by the Council for the current year or, in the
absence of such price range, when prices rise by 15 percent
over the average price for the previous calendar year.
Comment
Suspension
The formula to suspend quotas automatically is a major
improvement over the old Agreement, which foundered on this
issue. In the case of a major Brazilian frost or other dis-
aster, prices would quickly rise, with or without an Agree-
ment. Under past Agreements the Council's inability to
agree to greatly expand or suspend quotas in response to
a tight market exacerbated the price problem, because
countries able to supply coffee could not make up for
those that could not. In the new Agreement, the automatic
suspension of quotas is intended to assure that all available
supplies can come on the market and that the Agreement will
not increase prices above the level determined by the market.
The formula would have been triggered by every Brazilian
frost in the past 25 years.
Imposition
The Department of Agriculture projects that with favorable
conditions world production of coffee could be back to long
term trend levels by 1979-80 at the earliest. By that time
if the rehabilitation program in Brazil is successful and there
is no major frost, production would likely be close to con-
sumption requirements. If there is any addition to stocks by
1979-80 it would be small and carryovers would not be excessive.
CONF IDENTIAL
CONFIDENTIAL
-5-
The study group agreed that quotas are not likely
to be triggered before late 1978 or early 1979. It was
noted that unless the United States signifies its in-
tention to remain a member of the new Agreement before
September 30, 1979, the United States would automatically
cease to be a member of the Agreement for the final
three year period.
The group was not able to agree on the most pro-
bable price levels at the time of initial quota imposition.
As stated earlier, the automatic quota imposition formula
in the absence of Council action will occur between 63 cents
and 77 cents a pound. Some members of the group felt
that as production is restored prices would drop sharply
from their historic highs (just as they rose sharply in
anticipation of coffee scarcity). Such a price drop
would likely trigger quotas at a price above 70 cents.
Some members further argued that because of the market
power of Brazil, it could take actions to help trigger
quotas at a high level. -
Others felt that when production is restored there
would be no large surpluses available to rebuild stocks
from historically low levels, leading to a slower price
erosion and the initial triggering of quotas at a
mid-60 cents price level. Still others felt that it
was too soon to assess the success of the Brazilian
planting program and expansion in other areas and to
make an accurate forecast of the most probable scenario.
Treasury representatives argued that producers would
attempt to defend price levels at which quotas are re-
imposed and that psychologically producers would regard
the 63 cents figure as an absolute floor price. Commerce
representatives believe that the 63 cents figure may give
the appearance of a floor price and may be used by the
producers to pressure the U. S. and other consumers in
the Council to establish and maintain any price above
this level, although the consuming countries legally
are not obligated to treat it other than as a trigger
price. State felt that it was clear from the negotiating
history that 63 cents was not a floor price and pointed
out that in the annual negotiation of target price ranges
the United States has a veto which in the past it threatened
to use in order to move price ranges down as well as up.
CONFIDENTIAL
CONFIDENTIAL
-6- -
The Setting of Quotas
The Agreement comes into effect with quotas in
suspense. The Council may at any time, by two-thirds
distributed majority vote, establish a price range
and/or quotas. Whenever prices are within a price
range established by the Council, quotas are in effect.
If quotas and price ranges have not been previously
established by the Council, and quotas are triggered
by the automatic mechanisms in the Agreement, they would
be introduced no later than the beginning of the next
quarter of the coffee year in the following manner:
(a) The Executive Director would set a quota
on the basis of disappearance of coffee in quota
markets estimated in accordance with criteria
established in Article 34 and whatever regulations
are issued by the Council.
(b) The Executive Director's quota would be
fixed for a period σf four quarters.
(c) In the first quarter after quotas come
into effect, the Council shall be convened in order
to establish price ranges and to review and, if
necessary, revise the Executive Director's quota.
(d) If the Council does not agree on price
ranges, the Executive Director's initial quota
remains in effect for one year, but with no pro-
vision for automatic adjustment upward or downward
to reflect further changes in market prices.
(e) If during the first year of quotas the
Council cannot agree on its own quota, the quota
would be suspended after the four quarters until
the triggering mechanism would again be activated.
The Executive Director must set his quota based
on coffee disappearance. Disappearance is defined in
Article 34 and is basically the sum of the gross imports
of green coffee of all importing countries; less re-exports,
less changes between visible opening and closing in-
ventories (i.e. a negative change in inventory has an
CONF IDENTIAL
CONFIDENTIAL
-7-
increasing effect on disappearance; a positive change
the opposite). Disappearance of coffee in member countries
is a similar calculation except imports by non-members
must be deducted.
Comment
There likely will be a lag of at least six months
between the introduction of quotas and the establishment
of an effective system of import controls. This lag is
due to the lead time necessary for importing nations
to apply import control measures and the time it takes
coffee sold before the establishment of a quota to work
its way through the system. Exporting nations are
likely to temporarily. boost exports to beat the quota
deadline, which will exert additional downward pressure
on prices.
Some members argued that disappearance over the next
few years will reflect a period of tight supplies, steady
consumption growth rates and high prices, and a global
quota derived from such data would produce a higher price.
This was of particular concern since the Executive
Director's quota could only be altered with a two-thirds
distributed majority of the Council. The U. S. could
not therefore force a change in this situation (although
we could block a change in quota if it should be in
our interest).
Other agencies argued that disappearance was well
defined in the ICO and that the Council could adequately
instruct the Executive Director so as to assure that
he would set an appropriate global quota. Furthermore,
the continued price declines after quotas are imposed
will put pressure on producers to obtain a price range
by the Council ( a range that may be defended by quota
cuts if necessary) rather than accept the Executive
Director's estimate of disappearance (which may be reduced
only with Council approval).
The Setting of a Price Range
The Council, in addition to setting a global quota,
may also set a price range (as it did in the previous
Agreements), and a mechanism to defend that range. Guide-
lines for setting the price range are outlined in Article 38.
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Among them are the prevailing level and trend of coffee
prices, the levels and trends of consumption, production
and stocks, as well as other relevant factors.
Comment
The criteria include all the logical variables
which should be taken into account, but as in the old
Agreement, different countries will weigh and interpret
these variables differently. The Agreement and the
criteria in Article 38 offer the potential for flexi-
bility and a following of market trends. Some agencies
noted that the annual negotiating process to determine
quota levels and a price range is a political as well
as an economic process (as well as a test of delegation
stamina). They argued that the criteria in the Agreement
for setting the price range and especially the global
quota may tend to favor maintenance of the status quo.
Although no definite predictions can be made at
this time these same agencies also argued that if the
global quota established tends to maintain the status
quo, prices could potentially be placed above market
trends since quotas would come into effect after a
period of high prices rather than a low price-surplus
scenario as in previous Agreements. Other members
noted that a similar formulation in past Agreements
resulted in price ranges that proved to be flexible
both upward and downward.
Market Shares
Previous Agreements set market shares which determined
how much coffee each producer can annually supply. Market
shares were established at the beginning of the 1962 and
1968 Agreements and held constant throughout the Agreements.
African and Central American countries correctly argued that
this system was biased in favor of Brazil and against the
producers which were capable of increasing their production
and exports beyond what their shares allowed, at competitive
prices. The U. S., along with other consuming countries, the
Africans, and Central Americans, argued strongly that the
new Agreement should provide market share flexibility.
The new Agreement adopts a United States proposal
which will divide market shares for producing countries
into two parts - fixed and variable:
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-- 70 percent of the annual global quota would be
based on market shares fixed for the six year
life of the Agreement. These fixed shares will
be calculated on a basis of either (a) the
average annual volume of each producer's ship-
ments during the last. four years of the old
Agreement while economic provisions were in
force (1968-1972), or (b) shipments during the
first year or two of the new Agreement (while
quotas are suspended). When the quotas are
triggered and the fixed market shares must be
calculated, countries may opt for using as
their base either option (a) or (b) above.
Thus we would expect that Brazil will select
option (a), which will be higher, while most
other countries will choose option (b), because
they will be shipping as much coffee as possible
over the next two years in response to high prices
and the opportunity to increase their market share.
Comment
This mechanism gives dynamic producing countries an
opportunity to gain a market share reflecting recent pro-
duction capacity. The net effect would be a redistribution
of market shares under the Agreement to African and Central
American producers at the expense of Brazil. This redistri-
bution could lower Brazil's market share from 38% in the
previous Agreements to 31% of the total market when quotas
are restored under the new Agreement.
Analysis indicates that the basis for quota division
also provides an incentive in addition to high prices for
producing countries to increase shipments to member
markets over currently projected levels during the next
two years. In effect, the new Agreement will reward pro-
ducing countries that supply the United States and other
consuming members during the impending period of shortage.
The analysis indicates that the primary effect of the
incentives would be the adoption of governmental policies
that expedite the flow of coffee on the market, such as
elimination of restrictions on exports (the coffee re-
tention requirement in El Salvador was abandoned shortly
after the negotiations ended in London) or measures
that allow easier access to imported fertilizer.
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-- 30 percent of the annual global
quota will be allocated on a variable
basis in proportion to the percentage
of verified world coffee stocks (all
coffee except in the hands of farmers)
held in producing countries. No country
will be allowed more than 40 percent of
this quota (to protect against Brazil's
ultimately dominating this quota share).
Comment
This system is an improvement over the old Agree-
ment, in that it does permit dynamic producers to gain
a larger market share when quotas are in effect. By
accumulating stocks, they can further increase their
variable market shares during the time quotas are in
force and simultaneously build a reserve against future
shortfalls in harvests. A wider distribution of stocks
is an additional consumer safeguard against future frosts.
There are some drawbacks. There are difficulties
involved in achieving an accurate count of stocks, and
there will be a temptation to try to circumvent the
verification process. Basing 30 percent of the quota
on stocks may encourage governments in those Central
American countries which historically have notinter-
vened in their coffee trade to do SO. A producer could
decide prices were too low, build its stocks instead of
shipping its quotas, and gain a larger market share the
following year when prices might be higher. However,
the magnitude of the price increase necessary to make this
action profitable would automatically suspend quotas.
This part of the quota allocation system would have been
improved if a country's variable quota could not be
increased in a year following an undeclared shortfall.
Undershipments and Shortfalls
The old Agreements urged exporting members to notify
the ICO in advance of anticipated shortfalls (reductions
in harvests), but provided no penalty for not doing SO.
It made no mention of undershipments (failure to ship one's
quota, regardless of available supply in country). This
was a defect the United States was particularly interested
in remedying, as indicated in the negotiating instructions.
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In the new Agreement, the distinction between short-
falls and undershipments is eliminated. The difference
between a producer's actual exports and its export entitle-
ment, for whatever reason, is defined as shortfalls. Pro-
ducers have an obligation to declare anticipated short-
falls. Producers are urged, but not required, to notify
the ICO within the first six months of the coffee year
if they will not ship their full quota (for whatever
reasons). In such cases the shortfall would be redistri-
buted to other producers, primarily of the same type of
coffee. A country that declares a shortfall in the first
six months would be rewarded the following year with a
quota increase by 30 percent of the declared shortfall.
This increased quota would be deducted from countries
which made up for the undershipment the previous year.
Thus producers have an incentive to announce shortfalls
in advance.
In setting annual global quotas the ICO is also to
take into account a pattern of undeclared shortfalls by
one or more producers This institutionalizes a practice
in the old Agreement in which importing members forced
artificially large global quotas to compensate for a
pattern of Brazil not shipping its quota allotment after
frosts (either because it couldn't, or because it chose
not to in order to boost prices).
Comment
Although they are not as strong as the United States
hoped to get, the new mechanisms to deal with shortfalls
are a definite improvement over the old Agreement. The
negotiating instructions state that the United States
should seek "the introduction of incentives to put any
accumulated stocks in the market when the market is firm,
through such devices as penalties or quota reductions for
undershipments. " The Agreement does not contain penalties,
although it does contain incentives. The best protection
against sizeable undershipments by one or more producers
is the quota suspension formula which would have operated
in each case of significant Brazilian undershipment
during the old Agreements.
Voting
As in previous Agreements, all decisions of the
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Council regarding economic provisions must be made by
distributed two-thirds majority vote. Under Article 15,
the United States, joined by one other member, can block
any action requiring such a vote. Where an action must
be taken by Council in order to bind members (e.g. estab-
lishment of a global annual quota or price ranges), and
the required majority cannot be obtained, then no member
is bound (e.g. no quotas or prices ranges). However,
under certain circumstances, when quotas are initially
imposed the Executive Director may establish a quota,
based on estimates of disappearance, for a meximum of
four quarters.
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