America’s China Policy Is Not Working
The Dangers of a Broad Decoupling
Trouble is no stranger in Brussels. From the beginning, the European Economic Community has lived from crisis to crisis. One ought not, therefore, to conclude, simply because the Community is now confronted by rapidly mounting agricultural surpluses and a serious disequilibrium between the French franc and the German mark, that this resourceful institution is in serious trouble. And conversely, one should not assume that President de Gaulle's retirement will put things right.
In recent years the Community's problems have indeed worsened. Basic assumptions previously unquestioned, such as the irreversibility of economic integration, have been overtaken by events. The morale of that formerly optimistic and uniquely creative organization, the Commission, has declined. The "Community spirit" has deteriorated. The "Community method" no longer seems to work. Few qualified observers believe any longer that the ultimate creation of the "single market" or economic union, contemplated by the Rome Treaty, is a reasonably sure thing.
Certainly, de Gaulle's negative attitude toward the Community and toward its underlying aim of political unification contributed to this state of affairs. But the Community has problems more fundamental than de Gaulle. Conflicts of economic interest among the member governments have sharpened, while the Community's ability to compromise differences and get on with economic unification has diminished. In consequence, economic integration in Western Europe may have reached its high-water mark. Increasing difficulties and, possibly, retrogression are likely.
During its first years, the Community enjoyed economic conditions peculiarly favorable to progress toward the goals set by the Rome Treaty. These were years of rapid, uninterrupted economic expansion in Western Europe. The Community's first task under the Treaty was to create a customs union to eliminate tariffs and other barriers to the international flow of industrial products within the Community and to erect a common external tariff. The expansive economic environment meant that the problem of competitive adjustment to trade liberalization was far less serious than had been anticipated.
A second favorable factor was that the members of the Community all had large overall surpluses in their international payments. This was in the main the result of American military spending in Europe and the massive inflow of U.S. direct investment into the Community (attracted by the opportunity to exploit a six-country, tariff-free market), coupled with relatively low interest rates in the United States and the undervaluation of some European currencies relative to the dollar. With their official reserves of gold and dollars growing rapidly, it did not much matter whether or not the members' payments with each other were in balance.
In its early years, therefore, the Six were able to avoid the thorny problem of monetary integration-the problem of harmonizing domestic economic policies to minimize payments imbalances within the Community. Earlier it had been expected that as trade barriers came down, serious payments problems would arise. Escape clauses were accordingly written into the Treaty, but until the French crisis last year, they were never invoked.
Thus, two major economic obstacles to integration of industrial markets foreseen when the Rome Treaty was signed-protectionism and payments problems-failed to materialize.
Unlike industry, agriculture could not be integrated simply by removing trade barriers. Each of the member governments supported most agricultural prices and restricted imports to the extent necessary to prevent price supports from being undermined. The alternatives were, therefore, either to leave agriculture out of the "single market," or to unify agricultural markets by creating a common system of price supports with unified target prices, jointly financed by the member governments and buttressed by controls on imports from non-member countries. The Community boldly chose the second course.
Setting common support prices proved to be a thorny problem. The separate support prices in the member countries differed greatly, reflecting gross inequalities in the efficiency of their agricultural sectors. To get agreement on unified prices, it was necessary to set them rather high-well above the average level prevailing in the Community before the common agricultural policy, as it came to be known, was established.
Agreement on the key wheat price, finally achieved in December 1964 in a marathon session of the Council of Ministers, was facilitated by the fact that the Community as a whole was a net importer of the principal agricultural products. Thus, the higher price level could initially be achieved mainly by raising the level of protection against imports from the rest of the world by means of import levies. The levies are so administered as to keep imports from undermining the target prices. If the Community had been initially self-sufficient-worse, if output of major agricultural products had initially exceeded consumption-a larger increase in the members' budgetary outlays for price support would have been required. The problem of sharing the financial burden would have been correspondingly more difficult.
A favorable factor more critical, perhaps, than any of those mentioned was the transformation of France's economic situation, which happily coincided with the coming into effect of the Rome Treaty. During the 1950s, the French economy had made rapid strides in productivity and internal growth, but it had suffered from chronic inflation and serious payments problems. Although the Common Market was primarily a French conception, it appeared at the time the Treaty was signed that France would be unable to participate without extensive resort to escape clauses. The devaluation of the franc in December 1958 and Jacques Rueff's accompanying stabilization measures did just what was needed. Exports surged, the French economy continued to grow satisfactorily despite restrictions on domestic demand, and the franc changed from the weakest currency in Europe to one of the strongest. The structural improvements in French industry in the 1950s began to pay off in a competitive vigor which French industry had hardly known since the nineteenth century. The sudden strengthening of France's balance of payments and competitive position in 1959 made it possible to go wholeheartedly into the Common Market.
But the economic conditions which favored European integration in the early and mid-sixties were, in part, temporary. France's competitive position and balance of payments gradually weakened as wages in France rose faster, relative to labor productivity, than wages in Germany and Italy. Germany and Italy have overcome a tendency to inflation and have enjoyed remarkable price and cost stability in the last two or three years, while wages in France have continued to move up a good deal faster than labor productivity. The resulting disequilibrium within the Common Market reached critical proportions last year, because of massive wage increases in France growing out of the general strike in May-June 1968.
The emergence of this particular payments disequilibrium within the Community unfortunately coincided with a deterioration of the general international payments system. The climate of international monetary ease which helped the Market through its early years has now given way to a "tight" international monetary environment, which magnifies the problems of countries with payments deficits. The result is that the currencies of deficit countries are frequently under speculative pressure. Deficit countries are strongly tempted to resort to exchange controls and even to import controls.
This has happened within the Common Market as well as outside it. Last November, France reimposed comprehensive exchange controls, raised border taxes on imports and even imposed certain temporary import quotas-all of which applied to trade and payments within as well as outside the Market. The belief that trade and payments liberalization within the Community had passed the point of no return (as was frequently asserted in Community circles in the past) was rudely upset.
The Community is now up against the problem of monetary integration. Either the members' fiscal, monetary and wage policies will somehow have to be harmonized, or exchange rates will have to be readjusted from time to time. Otherwise, freedom of trade and payments within the Community will be subject to periodic abrogation by trade and exchange controls. Of these policy alternatives, only the most difficult-harmonization of domestic economic policies-is consistent with the aim of the Rome Treaty. For an economic union presupposes fixed exchange rates (if not a common currency) and complete freedom of trade and payments on current and capital account.
The common agricultural policy, too, has run into serious difficulty. Not surprisingly, high prices have stimulated agricultural output and led to large surpluses over and above what can be consumed within the Community. The surpluses must either be dumped on external markets at prices far below the support price or allowed to pile up in storage. The financial cost of the common agricultural policy is skyrocketing. In the 1968-69 fiscal year, the cost of price supports will be $1.8 billion, of which less than half is provided by the proceeds of levies on agricultural imports. The balance is a direct budgetary outlay. If the target prices are not lowered sharply, the cost of price supports could go as high as $8-9 billion by 1980, as production increasingly outstrips consumption and surpluses pile up. As output rises, agricultural imports from the rest of the world will decline, so that import levies will make a diminishing contribution.
Under the cost-sharing arrangements, each member makes contributions to, and receives reimbursements from, a common fund. The members' contributions are fixed on a proportional basis, under an agreed formula, while each country is entitled to be reimbursed for the expenses of supporting agricultural prices within its own territory. As a result, some countries are net contributors and others net receivers. Germany, for example, is the largest net contributor and France the largest net beneficiary. Germany's total farm output is a good deal smaller than France's; it therefore costs Germany less than France to support prices. Also, Germany is a much larger importer of agricultural products and accordingly contributes more import levies than France to the common fund. As farm output rises and the total cost of price supports grows, such differences in the balance of costs and benefits under the system raise divisive questions, as is now happening.
Take the case of wheat, for example. Germany is the high-cost producer and France the low-cost producer. To Germans, the question is whether it makes sense to go on making larger and larger net contributions to France in order to help maintain unified wheat prices at a level lower than German farmers want. The German Government is therefore inclined to ask for a ceiling on its contributions. From France's standpoint, the question is whether it makes sense to support wheat prices at a level considerably higher than the French Government would like-and which yields rapidly growing surpluses-unless France can count on a German financial contribution which increases as France's wheat output grows. France therefore takes the position that joint financial responsibility (on the present basis) and unified prices stand or fall together.
In short, with the common prices at their present levels and surpluses growing, the principle of joint financial responsibility gives rise to serious conflicts of interest among the members. Logically, the way out is to lower the prices sharply. But the governments have been unable to agree even to the modest reductions the Commission has proposed.
The conflicts of economic interest among the Six are, then, sharper than they were. But this does not wholly explain why the Community is in trouble. What also needs to be explained is why the Community was able to deal creatively with conflict in its earlier years, while now it seems increasingly unable to do so. The question is essentially political.
It should be recalled that the Community has always been considered by its founders and principal supporters as a political enterprise. The building of a customs union and then an economic union was seen more as a means to the end of political union than as an economic measure. The prevailing view in Community circles was that in the process of creating an economic union, a kind of supranational economic government would arise, which (so it was argued) would in time acquire functions in the fields of defense and foreign policy. Whether or not this expectation was realistic, it was powerfully effective in motivating the Community's activities in the early years. The commitment of the six governments to the goal of political union (however remote and ill-defined) made it possible to move ahead rapidly, for a time, with economic integration.
Perhaps the customs union could have been accomplished primarily on its economic merits, but this was not true of the common agricultural policy. The economic benefits of this sort of agricultural integration were too uncertain and the conflicts of interest involved too serious, even at the start, for the policy to stand on its economic merits. Much the same may be said of other provisions of the Rome Treaty which go beyond the customs union, such as tax harmonization, common transport policy and the other provisions whose purpose is to harmonize the "conditions of competition" within the Market. Here, too, the economic benefits are marginal. The motivation and justification for the immense effort spent in trying to carry out these provisions of the Treaty have been political.
A "single market" complete in all these respects was deemed essential-not because the Six could not prosper economically within a simple customs union, but because it was assumed that the more thoroughly integrated their economies became, the more likely they would be to move on from economic integration to political union. In sum, the Community's progress beyond the customs union toward the goal of economic union has depended critically on a common commitment to-and a sense of movement toward-European political unity. It is therefore not surprising that progress has slowed down and threatens to go into reverse. For the commitment of the Six to the European idea has been greatly weakened.
The European idea, whose aim was to build a powerful grouping of European nations organized supranationally and able to play a major role on the world stage, has lost much of its relevance. As long as the goal remained remote and largely undefined, it served to unify the Six and to provide a political raison d'être for economic unification. But as concrete steps were proposed to give it institutional form, divisive questions were raised- about the external purpose, the membership, and the internal political structure of the "Europe" the Six would create. The Six have been divided on whether or not the external orientation should be "European" or "Atlantic"-whether Europe should be unified in order to be independent of the United States, as de Gaulle always insisted, or whether a unified Europe should remain associated with the United States, as Germany and the others desired.
The Six have also been at odds on the question of supranationality. Moreover, their views were internally contradictory. De Gaulle, whose aim was a "European Europe," ought logically to have favored a tightly organized supranational union, capable of mobilizing the combined economic and technological resources of the members for military purposes. Yet he had nothing but contempt for supranationalism. The members of the Community who gave general support to the idea of a supranational Europe-Italy, Belgium and the Netherlands-rejected the goal of European independence, thereby cutting the ground from under the argument for supranationality. For why trouble to create a European superstate unless full independence and a great-power role are the purpose of unifying?
Indeed, the wholeheartedness of these three governments' support for a supranational Europe has long been doubtful, although this was largely hidden while de Gaulle was there to keep the question from being seriously raised. The German Government, which earlier gave some general support to the idea of a supranational Europe, has apparently changed its mind. In their increasing preoccupation with their Eastern problem, Germans are now inclined to see a tightly organized Europe as a hindrance to their freedom of man?uvre in the East.
The idea of political union still hangs in the European air as an attractive vision of power and autonomy. But it has ceased to be a strong moving force in European politics and in the work of the Community. Thus the Community is living largely on momentum. Deprived of its unifying political purpose, its efforts to move further down the road to economic union are frustrated by growing conflicts of economic interest. Indeed, there is a real question whether all the ground won can be held.
This conclusion may seem premature, in view of de Gaulle's resignation and indications that his successor may be more "European." Certainly, it is not easy to judge the relative importance of de Gaulle and the other more objective factors which have blocked European unity. The French President's policies undoubtedly helped bring to consciousness, and make respectable, national interests and attitudes inconsistent with the European idea. Nevertheless, other obstacles would probably have been effective-although the outcome would have differed in detail-even if de Gaulle's opposition had been less.
The disagreements and the divisions which have undermined the European idea have not been simply the product of one man's stubborn will. Rather, they reflect the European nations' objective situation. National states which have found themselves adequate to deal with their economic problems without supranationality are reluctant to contemplate the transfer of their economic power to supranational authorities. Former great powers which have again become used to the exercise of independent diplomatic influence have learned again to prize an independent foreign policy. Countries so long protected by the American nuclear umbrella are reluctant to undertake the costs and accept the risks of reaching for the kind of independence which only political union could provide.
It is, then, unrealistic to assume that the change of government in France will make possible a rebirth of the European idea and such a rekindling of the Community spirit as to give the Common Market a major lift on its way to economic union.
The Community's changed political environment, together with its new economic problems, will affect profoundly the Market's internal development. But all the Community's activities will not be affected equally. Some depend more than others on the political impulse. Those achievements like the customs union which are essentially completed will be affected least. Those like the common agricultural policy which require continual readjustment to changing circumstances, and whose economic value is dubious from the standpoint of some member governments, are likely to run into increasing difficulty and to be greatly modified.
The twin principles on which the common agricultural policy rests-unified prices and joint financial responsibility-are increasingly incompatible, because the high prices lead to growing surpluses which make the problem of cost-sharing politically unmanageable. In theory, there are several ways of preserving the present system.
First, the common prices could be cut drastically. The rest of the world would applaud, but the large differences in production costs within the Community make this solution improbable.
Second, lower common prices might be rendered more acceptable to the high- cost countries if direct income subsidies were paid to less efficient farmers in lieu of higher prices. For example, the common wheat price might be reduced to the level of wheat prices prevailing in France before the common price was set, and German wheat farmers might be paid a subsidy out of the common fund to make up their loss of income. As a permanent arrangement, this expedient would raise major political difficulties. European governments and agricultural organizations have traditionally preferred price supports to subsidies. Moreover, it would make the common prices somewhat fictitious. It would raise the fundamental question whether or not Germany (in our example) might not prefer a system of national wheat price supports. For what economic purpose is served by maintaining unified wheat support prices, unless those prices are the effective determinants of farmers' incomes and economic decisions?
Production controls are a third possibility for saving the common agricultural policy. But, except in the case of sugar, production controls have traditionally been opposed by European governments and farm organizations.
Reflections such as these led the Commission to propose in January 1969 a far-reaching program for restructuring European agriculture. The Mansholt Plan, as it is known, calls for accelerating the outflow of labor from agriculture and greatly increasing the efficiency of farm units. The aim is to lay the groundwork for reducing prices and surpluses while at the same time raising farmers' living standards. But the plan, which calls for joint financing, would cost many billions of dollars. It would be years before the plan would make it possible to lower prices and reduce surpluses. For several years at least, its cost would be on top of the cost of price supports. It would also disturb European farmers' traditional ways. The Mansholt Plan, in sum, is a radical attempt to preserve the "single market" in agriculture, but at a political and financial cost which seems to be far in excess of what the governments will be willing to pay.
Finally, changes in exchange rates, which are probable from time to time within the Community, will put further strains on the fabric of agricultural integration. When the main outlines of the common agricultural policy were laid down in the Community's early years, it was tacitly assumed that after the common prices had been set, the relative value of the members' currencies would remain fixed indefinitely. The common prices were accordingly expressed in terms of a common unit of account whose value in terms of the members' currencies was fixed. The effect was to place a considerable obstacle in the way of exchange-rate adjustments. This was thought at the time to be advantageous, since it underlined the need for monetary integration.
If now the German mark is upvalued (as seems probable soon), the German Government will probably have to pay a subsidy to German wheat farmers to compensate them for the reduction in the prices they receive (expressed in marks). Similarly, if the French franc is devalued, the common wheat price expressed in francs will rise. The French Government, to prevent a further unwanted stimulus to production, may therefore have to tax away the farmers' windfall gain from devaluation. Thus changes in exchange rates within the Community will tend to make the common prices increasingly fictitious.
The ultimate outcome is likely to be modification or outright abandonment of unified agricultural prices and joint financial responsibility, and a return to separate national systems of support. Agricultural coöperation among the Six, including preferential access to each others' markets, is likely to continue, however-over the objections, no doubt, of competing suppliers such as the United States. It would not be surprising to see the Community's present system give way to a system like that which preceded the unification of prices. In that period, the members had different target prices. Price supports were financed nationally and buttressed by national import levies which applied to imports from other members as well as from the rest of the world. The levies were so administered as to give the members a margin of preference over outside suppliers in each others' markets.
As for monetary integration in the Community, the desirability is obvious but the will is not likely to be sufficient. The members of the Community are anxious to maintain stable exchange rates and to avoid trade and exchange controls within the Community. Their mutual dependence in trade and financial terms is so great that the incentive to avoid the disturbing effects of controls and changes in parities is strong. Yet this common economic interest is not likely to be sufficient to make possible an effective procedure for coördinating domestic economic policies. That would presuppose a common will to subordinate vital domestic economic objectives (full employment, industrial peace, price stability) to the Community's larger interests to a degree unlikely in the absence of an overriding political objective.
Still, consultation on domestic economic policies, exchange rates and balance-of-payments problems is likely to grow within the Community. It is probable, too, that the member governments and central banks will develop new means of mutual financial accommodation in exchange crises, although doubtless far short of a pooling of reserves. Thus, the Commission's proposals along this line, put forward last year, may in time be implemented in some form. Given the general shortage of international liquidity, measures of this kind are likely to be accepted and even welcomed by the larger international community.
As the Community loses its political momentum and changes internally, its external relations will also change. For example, the question of British membership will assume a different aspect.
A plausible argument can be made that General de Gaulle's retirement, in combination with prospective changes in the Community, make British membership more likely. In its present form, the common agricultural policy is a formidable obstacle to British membership. It would involve large additional foreign-exchange costs for Britain, which sterling could hardly bear. Britain would have to replace a large part of its food imports from North America and Oceania with higher-priced food from the European continent. Also, Britain would be a large net contributor to the common agricultural fund-a further burden on the British balance of payments.
The changes foreseen in the common agricultural policy would lessen these obstacles. A simple agreement to give French wheat, Dutch butter and Italian fruits and vegetables some degree of preferential access to the British market, in exchange for British membership in the customs union, would be much easier for Britain to swallow than the present system. Indeed, the prospective internal changes in the Community suggest that the problem of British participation might be dealt with in a much simpler way. EFTA and the Community might be linked in a free-trade area limited to industrial products. The continental countries would no doubt ask as a quid pro quo agricultural preferences in the British market.
Britain, it will be recalled, proposed an industrial free-trade area to the Six in 1956, while the formation of the Community was under consideration. At that time, the British Government was unwilling to consider full membership. The proposal was resisted on the Continent, not only by de Gaulle but also by the Commission and the "Europeans," because they saw it as a danger to the Community's political aim. More recently Britain, too, has been unwilling to consider anything but full membership, on the ground that anything less would imply a second-class status in the political Europe which was expected to follow. But if political union is no longer a real objective-if the Community becomes in time little more than an industrial customs union-these Continental and British objections may disappear.
Yet the elimination of certain obstacles, not least the General's personal veto, does not guarantee Britain's entry. That depends on whether British participation has sufficient positive support on both sides of the Channel- which is doubtful.
Both in Britain and on the Continent, much of the original support for British membership was political. Britain hoped to play a major role in the political entity that seemed to be forming. Those on the Continent who favored British membership did so because they believed that without Britain, Europe would be too small to play a world role or because Britain's presence was desired as a counterweight to Germany and France and to insure Europe's democratic character.
But if the prospect of political union has faded, these considerations, too, have lost much of their relevance. On the Continent, strong official support for British membership is largely confined to the Dutch, with some assistance from the Belgian and Italian Governments. But this support seems to be mainly a reflection of anxieties raised by Germany's strength, now increased by de Gaulle's departure and France's economic troubles. As such, it can hardly provide common ground between Germany and the other members to welcome Britain in. France's positive political interest in British membership is also hard to see, if the Community is now becoming essentially an economic enterprise.
The economic interest of the Six in British membership is also somewhat doubtful. France, with its balance of payments weakened and its competitive position impaired, is hardly interested in intensified British competition. The persistent weakness of sterling makes Britain a less attractive candidate, since membership raises a presumption, under the Rome Treaty, of mutual financial responsibility.
On Britain's side, too, with sterling's problems at the top of Whitehall's agenda, economic considerations seem likely to weigh against rather than for immediate participation. No doubt British industry would benefit substantially in the longer run from secure access to continental markets and from more competition at home. But with sterling weak, joining a tariff- free market of this size would probably aggravate, for a time at least, the balance-of-payments problem. A government whose monetary reserves are completely mortgaged and which lives perforce from one set of monthly trade figures to the next may have neither the energy nor the heart to take important financial risks for the sake of longer-term gains.
Furthermore, American policy on the question of British membership in the Common Market is also likely to change. As long as the EEC was seen in Washington as the growing point of a European political union, the United States lent strong support to British membership. Three Administrations consistently supported British participation on the ground that it was essential to create the kind of European political entity with which the United States could live comfortably. Americans, like many Britons, considered British participation essential to balance Germany and France, to strengthen democratic institutions on the Continent and to help keep Europe "Atlantic" and "outward-looking."
But if there is to be no political union in Europe, this reasoning loses much of its relevance, and the question of British entry becomes for the United States primarily an economic problem. With our competitive position in world markets weakened and our trade balance in trouble, it would be surprising if the United States failed to raise objections to the inclusion of Britain in a preferential trading system which excluded the United States, especially with preferences for agricultural products involved. Given Britain's growing financial dependence on the United States, Washington's objections would probably weigh heavily in London.
Thus, in the matter of British membership as in the Common Market's own development, the weakening of the political raison d'être, along with changes in the economic scene, have altered prospects fundamentally. From this perspective, the lifting of de Gaulle's veto on political unification and British membership seems almost incidental.
The prognosis for the Common Market sketched here may seem unduly pessimistic to those who still see the Community as the first step toward a new political order in Europe. Yet if one can divorce one's thinking from this hope, which once fired the imagination of so many Americans and Europeans, and see the Community as it is today and as it seems likely to be tomorrow, the outlook is not entirely discouraging. Europe has prospered economically and its trade has expanded enormously as never before, although the Community has not developed much beyond a customs union. Europe has remained secure and democratic without political union. Problems there are aplenty, but is it unreasonable to hope that these blessings can continue, despite the troubles of the Common Market?