total of almost two and one quarter billion dollars in aid over and above aid given by France and other Member states. V. EFFECTIVENESS OF U.S. POLICY TO DATE In sum the advantages in terms of the growth of our industrial trade and investment as well as in terms of trade liberalization have thus far outweighed the disadvantages to our agricultural exports and the disadvantages of the several preferential arrangements negotiated with the developing countries. On the political side, as has been discussed above, the Community has played a vital role in the post-war resurgence of Germany and in establishing a viable and more rational system of relationships among its members-notably between Germany and France. The greatest tribute to the political success of U.S. policy is the stake which the nations of Western Europe have developed in the cause of unity. While none expects complete political unity to develop quickly following de Gaulle's departure from the scene, all the governments of Europe have displayed a clear determination to get on with the process of integration by tackling the complex problems of economic union. That all political parties in the U.K. are clearly determined to pursue accession in the face of initially high economic cost is a further testimony to the political vitality of the Community enterprise. The drive towards unity is a natural reaction in a bi-polar world dominated by two super powers in which the American presence and American power overshadow the once principal powers of the world. It is to be expected that these countries should seek to achieve the economic and political benefits of unity and a greater voice in world affairs. It has been a great strength of the European policy of the United States that it has actively fostered this movement and that the United States is identified as being for rather than against European unity. At times U.S. espousal of unity has led to active American intervention which may have been tactically counterproductive-so that European unity was actually equated with American hegemony. However this may be, the support for unity has been an over-all source of strength to Atlantic policy, and the Western posture vis-a-vis the Soviet bloc. VI. IMPACT ON U.S. TRADE AND INVESTMENT OF The enlarged Community of Ten, which will attempt economic integration, has an aggregate GNP of $550 billion, roughly 60% that of the U.S. The aggregate GNP of all full and associated members, both present and potential, would total about $700 billion. The Ten's annual exports of $102 billion, nearly 50% representing intra-group trade, constituted 43 percent of total world trade in 1969, compared with a U.S. share of 16 percent. As a share of world industrial production the United States has 33 percent, the Community of Ten 24 percent, the Soviet Union 18 percent, Japan 5 percent, and all others 20 percent. The Department of State has recently completed a study of the effect on U.S. trade and investment of enlargement of the Community. Trade In analyzing the implications for U.S. industrial trade of an enlarged Community, we distinguish between the short-run transitional effectslargely through tariff changes-and the longer run dynamic effects stemming mainly from increases in productivity and higher rates of economic growth. We have attempted to estimate the likely impact on U.S. trade of the shorter run transitional effects of an enlarged Community although a wide margin of error exists and the results should be considered only as very rough indicators. We have, however, tried to err on the side of pessimism and make estimates of the probable maximum impact of these transitional effects. The net transitional effect on U.S. non-agricultural trade is likely to be small to moderate for several reasons. -European tariffs after the Dillon and Kennedy Rounds of trade negotiations are relatively modest-the average level of 8-10 percent is, in fact, only about half as high as it was when the EEC was formed a decade ago. -The bulk of the discriminatory tariff effect on U.S. trade of European integration took place with the formation of the EEC and the EFTA during the 1960's; eliminating tariffs now between the two blocs is of relatively lesser importance (although particular American industries may be significantly affected). -There are some offsetting factors, principally the expected reduction of the higher average U.K. tariff to the level of Community tariff and the phasing out of preferences to the developed Commonwealth countries. The tariffs of some other EFTA countries would however, increase. Taking all of these factors into account, we estimate a maximum net adverse effect on U.S. non-agricultural exports—including an acrossthe-board free trade arrangement with all the EFTA neutrals—of about $300 million. This represents 4 percent of total U.S. non-agricul tural exports to these countries in 1968 (less than 1 percent of total U.S. exports) and compares with an average annual growth of U.S. exports to the EC and EFTA (1961-1968) of 7.6 percent. If no special arrangement is made for the EFTA neutrals-which would mean among other things raising tariffs among the existing EFTA countries— If a customs union between the enlarged Community and the EFTA neutrals is agreed (viz. the EFTA neutrals adopt the CXT) this estimate rises from $57 million to $103 million. the maximum overall tariff effect on U.S. exports drops to $70 million. A summary of these estimates by geographic market is as follows: Moreover, during this transitional period, the adverse tariff effects on U.S. non-agricultural trade are likely to be offset to some extent by the inflationary effect in the U.K. of higher food prices directly related to adoption of the common agricultural policy. There may also be an initial increment in the U.K. growth rate that precedes the longer run structural changes in the economy-which if not offset by other policies (see below) could add to the level of U.K. imports from all sources. Finally, association arrangements with other countries-the Mediterranean countries, the African Commonwealth countries, the Caribbean Commonwealth countries-will produce some additional adverse effect on U.S. trade. Any estimate of this effect is especially difficult since we do not yet know what these arrangements are likely to be in some cases. The best figure we can come up with is a range of possible loss to U.S. exports of $50-$100 million. The dynamic effects of an enlarged Community on non-agricultural trade are probably far more important than the transitional trade impact, although a quantitative appraisal of these dynamic effects is virtually impossible. In simplest terms, productivity increases stemming from economic union will make European products more competitive with U.S. products on world markets, while a faster rate of economic growth in European economies will lead to a higher level of total imports. These two effects tend to offset each other and it is not possible to predict whether the overall net effect on U.S. trade will be favorable or unfavorable. Much will depend on factors outside the Community, especially our own level of competitiveness. Our industrial exports to the Community of Six have on the whole done well to date, earning us a surplus of over a billion dollars in our merchandise trade balance with the Community. Over the longer run, some of the internal policies which the enlarged Community will adopt may directly or incidentally adversely affect im=ports from non-member countries. For example, the Community may eventually foster, through subsidies, European computer and aircraft industries. There are also fears that the enlarged Community may someday introduce a formal "Buy European" policy for certain high technology sectors. Since we do not yet know what precise measures if any may be taken, a quantitative estimate of this effect is also not possible, although the direction in this case would clearly be unfavorable to U.S. exports. In sum, the transitional effects on U.S. non-agricultural trade are likely to be relatively less important than the longer run dynamic effects of an enlarged Community. The principal grounds for concern at this -point are: -new obstacles to EC imports that may result from further moves toward economic union; -the longer run relative competitveness of a more integrated European economy; -potential trade problems for particular U.S. industries. How U.S. agricultural exports will fare with an enlarged Community is even more difficult to quantify than industrial trade. The prospects both are more threatening and offer more opportunity for gain. We do not know where Common Agricultural Policy prices will be fixed at the time of U.K. entry or later. The burden of existing surpluses and the British interest both argue for lower price levels. If prices are not lowered substantially, British and Danish production will mushroom. There is strong resistance in Germany, however, to lowering prices. Extension of the Common Agricultural Policy to the U.K. and the other three applicant countries could have significant adverse effects on U.S. agricultural exports to these countries. Our studies indicate that these exports, which are now running at slightly over $600 million annually, might be reduced by about $100 million if present CAP prices remain unchanged. The principal effect would be in feedgrains. The outcome would be quite different if the negotiations should result in a substantial reduction of the feedgrain price, the keystone of the high-cost structure of the present CAP. Our estimates suggest that if feedgrain producer prices in the enlarged Community were established midway between present EC and U.K. levels (an unlikely prospect at present), the favorable effect in stimulating consumption and discouraging production increases in the Community of Six would more than offset the adverse effect of higher prices in the applicant countries— increasing our total exports to the enlarged EC by over $100 million. Although we do not have data to estimate its effect, we do not believe that recently adopted EC regulations on tobacco would signifi cantly endanger U.S. sales of tobacco to the U.K. (where the preference for Virginia is long standing). In any case, U.K. policy on imports of tobacco from Rhodesia (which competes directly with Virginia tobacco) will have a greater effect than EC regulations on US tobacco exports to the U.K. We expect that U.S. exports of fruit and vegetables to the Ten would be little affected by enlargement. It should also be pointed out that there will be important effects for other third country agriculture. To the extent CAP prices in an enlarged Community move in either direction sufficiently to affect the world grain trade, Argentine and Canadian grain would be affected along with our own. To the extent downward price movements in the Community bring about increased grain utilization and hence greater increases in production than consumption of meat in the Community there may be greater pressure for enlarged access to our own meat market from displaced third country meat exports. Similarly, enlargement may have some adverse effect on third country dairy and sugar exports from the U.K.'s traditional suppliers. While the United States has effectively insulated itself in beef, dairy products and sugar, we would be under pressure to enlarge or alter quotas. Investment We are unable to make a quantitative prediction of the effects of enlargement on U.S. investment. Arguments pro and con can be cited as to whether there will or will not be an important new surge in American direct investment in Europe and in the U.K. in particular. American affiliates in the present Common Market and the U.K. may well move to rationalize operations to take advantage of the enlarged market. Since many large American companies have operations throughout the area of the enlarged Market (the book value U.S. investments in the Ten now total over $16 billion), it is reasonable to conclude that American industry in Europe will benefit from enlargement. At the present, it appears that American companies are embarking on a new round of expansion of plant and equipment investment in Europe. The latest Commerce Department survey of intensions indicates an expected increase of such investment in 1970 of 37 percent. Whether or not this trend will continue will depend in part on the dynamism of the enlarged Market and in part on European attitudes and policies toward such investments. VII. ELEMENTS OF U.S. STRATEGY TOWARDS THE EC Our strategy towards the enlargement of the Community and its further development is part and parcel of the overall U.S. strategy of supporting the emergence of an enhanced Western Europe that will eventually share more equitably with us the burdens and responsibilities |