SEGREI SBC 5721 THE WHITE HOUSE WASHINGTON MEMORANDUM OF CONVERSATION SUBJECT First Main Plenary Session of the 16th Economic Summit of Industrialized Nations PARTICIPANTS George Bush President of the United States James A Baker Secretary of State Nicholas F Brady Secretary of the Treasury Richard McCormack Under Secretary of State for Economic and Agricultural Affairs Francois Mitterrand President of the French Republic Roland Dumas Minister of Foreign Affairs Pierre Beregovoy Minister of Economy Finance and Budget Jacques Attali Special Counsellor to the President of the French Republic DECLASSIFIED PER EaO 12958 AS AMENDED cot -1 '13 - F 1t J IID Margaret Thatcher Prime Minister of the United Kingdom Douglas Hurd Secretary of State for Foreign and Commonwealth Affairs John Major Chancellor of the Exchequer Nigel L Wicks Second Permanent Secretary to the Treasury Helmut Kohl Chancellor of the Federal Republic of Germany Hans-Dietrich Genscher Vice Chancellor and Federal Minister for Foreign Affairs Theo Waigel Federal Minister of Finance Ho st Kohler State Secretary Ministry of Finance Brian Mulroney Prime Minister of Canada Joseph Clark Secretary of State for External Affairs Michael Holcombe Wilson Minister of Finance Derek Burney Ambassador to the United States Gullio Andreotti President of the Council of Ministers of Italy Gianni De Michelis Minister of Foreign Affairs SECRE1' Declassify on OADR SE6RE-r S GRET Guido Carli Minister of the Treasury Umberto Vattani Diplomatic Counsellor to the Prime Minister Toshiki Kaifu Prime Minister of Japan Taro Nakayama Minister for Foreign Affairs Ryutaro Hashimoto Minister of Finance Kabun Muto Minister of International Trade and Industry Koji Watanabe Vice Minister of Foreign Affairs Jacques Delors President of the Commission of the European Communities Frans Andriessen Vice President of the Commission of the European Communities for External Relations Henning Christophersen Vice President of the Commission of the European Communities for Economic and Financial Affairs Pascal Lamy Chief of Staff to the President DATE TIME AND PLACE 1 Tuesday July 10 1990 9 00 a m -12 03 p m O'Conner Room Herring Hall Rice University Houston Texas Political Declaration The President I gather that we have an agreement ad ref on the political declaration Secretary Baker will read the political declaration covering other issues I We want to get this matter cleared away and move on to discussion of the Soviet issue and language relating to it for the communique 7 2 China If we get through all that then we can move on to trade Now let's get moving on China Prime Minister Kaifu hands the President a new sentence regarding China for inclusion in the political declaration I'd like to raise now the Japanese amendment 1- Prime Minister Kaifu Regarding paragraph 4 on China the present formulation is too tough on China The second sentence gives the impression that sanctions will continue until next year This will send the wrong signal to China ¢ We must be ready to adjust our positions if China makes progress We will keep the sanctions under review so that we can respond to further positive developments in China That is the essence of the language I have proposed t Prime Minister Thatcher I support Prime Minister Kaifu 8EGRET Chancellor Kohl I also support the Japanese proposal but I will have something to say about the USSR later Prime Minister Andreotti I too support the amended text President Mitterrand I support the text The initial draft was amended considerably last night by the Sherpas China is the object of commercial interests That may be guiding some of us in our policies Personally I think the language is too weak but I will go along Prime Minister Mulroney The President I do too I support the text ¢ y Unidentified Speaker possibly Secretary Baker If we are not careful then this exercise could be counterproductive but we'll go along with the Japanese We thus have approval for the whole political declaration t Secretary Baker I would like to offer a proposal on the wording in the China paragraph of the declaration however to replace for example It should be the reverse For example should replace however U 3 Soviet Union The President I would like to turn to the USSR Gorbachev has sent me a letter asking for a large-scale assistance program But the Soviets have not been very specific in saying what they would do with this money Gorbachev identified long-term credit assistance attraction of foreign capital transfer of managerial experience and personnel training as among his reasons for seeking Western aid to create a competitive economy He also suggested a sustained economic dialogue with the G-7 I have said publicly that I wish to help the Soviets' reform process and that the U S has a major stake in seeing perestroika succeed Without reforms there will be no growth Substantial Western foreign assistance to him at this time when market-based reforms are not in place would not be effective would not further productivity and growth and would not increase the Soviet ability to service Western loans n Even though we may assess the situation in the Soviet Union somewhat differently and may decide to respond to Gorbachev's request in varying ways I believe we should act in concert as much as possible We share enough common ground to build a general G-7 framework to demonstrate to the Soviets a unified Western policy Z I would propose then that we try to reach agreement on certain basic principles which could guide our individual decisions on assistance for the USSR These principles are sufficiently flexible to permit some to move ahead faster than others SECRE SEGRE r -oC J 1 C I 4 For our part we remain concerned about Soviet aid to Cuba and continued high military spending in relation to GNP These principles would rest on shared views about the Soviet Union and its participation in the world economy The Soviet economy does indeed face serious challenges We want Soviet political and economic reform efforts to succeed -- It is in our interest to have a reformed fully functioning and market-oriented Soviet economy integrated into the world economy The three principles I would offer are the following 1 Any Western assistance technical or financial should be linked to an economic system and the USSR's integration into the world economy 2 Soviet steps to reduce the proportion of their economic output devoted to the military will have an effect on our decision to provide assistance 3 Equally Soviet decisions to provide foreign aid to regimes that consistently act contrary to the objectives of the international community of states will also affect our willingness to offer assistance The Soviets should make goodfaith efforts to build a cooperative and stable international environment 1 If we could reach agreement on principles similar to these we could ask for our Foreign Ministers to work out acceptable language for the communique Note uncertain from Sherpa's notes whether following was used To be more specific we could ask the IMF and World Bank acting on our behalf to assess the Soviet economic reform program While we may each go our own way on financial assistance I propose we agree in the communique to consult regularly among ourselves on this issue keeping in mind these principles as a general guide In response to Gorbachev's request in his July 4 letter we could also pledge to consult with the Soviets on their reform program 1 For our part we could take several steps to reinforce our interest in perestroika's success and normalize our economic relationship with the Soviets Initially these might include -- Step up the pace of our negotiations with the Soviets on the Tsarist and Kerensky debts to the U S Government An agreement would overcome one of our legislative restrictions and SEeREF prr -_ GRE'¥ i - j 5 would allow the Soviets to gain access to our private financial markets for loans and to sell Soviet debt instruments in the u s Accelerate current negotiations on the Bilateral Investment and Tax Treaties A successful conclusion to both would provide more favorable conditions for our firms and would encourage them to do more business in the USSR -- Agree to a Soviet request to extend the repayment period for Lend-Lease claims totalling $674 million owed to the U S upon successful conclusion of a trade agreement -- Expand our existing technical cooperation program with the Soviets in which we provide private and public sector advice and exchange programs to assist in the transformation to a market economy But movement towards considering lifting restrictions' on our ability to provide government guarantees and direct credits will await further Soviet actions to liberalize their economy and to address the various political concerns we have ¢ We need to give the Soviets an incentive to reform to shift resources from the military This approach would be in our mutual interests It is impossible for the U S to loan money to USSR at this time - I know however that others won't agree President Mitterrand The argument put forth for helping China is just the reverse when we are dealing with USSR We are too timid in this text regarding aid to the USSR We have a chicken or egg problem -- whether to provide aid first or demand reform first Which comes first One could lead to the other Much has been achieved in the USSR in past months Yes the Soviet economy is closed but -it is because they lack the manpower to carry out reform We should be more optimistic We need to prime the Soviet engine The Soviets will not understand our reluctance to aid Gorbachev The EC which is not unanimous wants to contribute aid to the USSR I am reluctant to endorse the specific text before the group since the EC has already gone ahead farther than this I worry that Gorbachev will fail A reaction could occur This is an historical turning point for the USSR We need to weigh in I am reluctant to adopt this text because it is too reticent too hesitant In the third paragraph of the text the concerns expressed are standard and straight-forward In our language these represent harsh political conditions as a preliminary to extending aid ' The IMF reference is also a question The U S language is too brisk too much like an ultimatum The USSR is already unstable and we are sending the wrong -- and too harsh -- a message to the USSR It is too patronizing in tone We can't proceed like this It would be pointless irritating and patronizing to the 8E6REf -8 GRE USSR I strongly oppose the IMF reference The IMF reference sends the wrong message We need to mention the IMF and World Bank but also the OECD and the EBRD I cannot support this text f Chancellor Kohl I understand President Bush's position I welcome the opportunity we have to speak so openly about controversial matters like this I do not support the text either and request the Foreign Ministers to take it up and modify it The Germans have provided support to the USSR but clearly this is not a long-term way to do business We need to coordinate our approach if possible I do not think that a decision can be taken today After the USSR finishes its long-term plans by the end of the year then we can collectively take broad decisions We need to start the process of a study so that we can make decisions in December We act as if reforms were taking place in China and none in the Soviet Union Think of the butchery in China last year This sort of thing is not happening in the USSR now We need a yardstick that applies uniformly both to China and the USSR 7 What do we really want from the USSR We all want Gorbachev to succeed His successor is likely to be much worse We Germans are closer to the USSR than all of you We are mindful of America's Cuban problem I want to express my thanks for help on reunification But we also have an opportunity to arrive at restructuring of the USSR If Gorbachev succeeds then the USSR will be much better in the future This is a fact We need to use the opportunity to influence positive developments Gorbachev's letter represents a positive development We should not treat it as we would a letter from the Congo We cannot reply in a discouraging way to Gorbachev I support President Bush's point that our aid should not be mindlessly thrown at the USSR It must be addressed at a concrete program of reform Experts specialists must be provided We should make our response positive I support a market philosophy and am committed to the EC decision on USSR aid Solidarity is a two-way street but I see an historical opportunity and don't want us to miss it The Eastern European countries Poland and Hungary in particular have problems If the USSR does well economically then this will help Eastern Europe We need to think about this linkage e1 I would ask the Foreign Ministers to draft a statement pointing out that there are elements in common and some differences in this statement Let's not pretend we are all in full agreement ¢ I am more than ready to agree to send experts to the USSR SE6RE l vt - - 4 The President There are differences between China and the USSR The export of revolution from China has stopped or at least improved China does not target U S cities with nuclear weapons We are concerned about decisions taken at the EC Summit two weeks ago We need to take some decisions at this meeting where we are all present We don't want to send a negative message Let's have the Foreign Ministers draft a text that encourages reforms But the U S would be prepared to stand alone if need be on the issue of aid to the USSR 1 Finance Minister Carli There are three points we should consider 1 reforms in the USSR have the possibility of success 2 lack of success has consequences 3 there are steps we should take despite uncertainty ' ¢ Look at the present group running the USSR The average Soviet citizen expected a convertible ruble in the recent past But there is no meaningful price system in the USSR Production is not done by planners but by price signals The Soviets don't know how to respond to price signals or to organize an economy that is based on this principle They lack educated personnel to lead a market economy They need help and advice Italy is a neighbor of Eastern Europe and is concerned about a failure of reform in the region The lack of success in the USSR would be a terrible blow to the rest of the region All of these facts should allow us to conclude that we should help Gorbachev cjJ There is value in close dialogue with the USSR We must take some risks in helping Gorbachev It is necessary as requested by Gorbachev to have a close dialogue a direct dialogue not just through the international organizations Maybe the IMF will not understand the full complexity of the USSR situation Mr Delors' visit to the USSR could provide useful information We need a dialogue to help us think about what kind of aid would be needed and well used by the USSR There is the risk of misuse but we need to run it Prime Minister Mulronev Gorbachev personally knows all of us at this table CNN is covering the world We watch him he watches us He knows that we 'Know that he is on the ropes He is waiting to see how we will respond Gorbachev will not forget it if we stiff him now We need to get a dialogue going It would help to convey hope to Gorbachev and his people The G-7 position is a desire to be helpful The question is whether to help now or study the question first Cuba is a problem There are political and military problems for the U S with the Cuban situation It is a hostile regime being helped by Gorbachev which creates problems for President Bush n The G-7 position should be to establish a good relationship with Gorbachev Gorbachev is using our potential friendship to help him with his political situation inside the USSR We need to help Gorbachev design an engine that will work with his economy We should use the IMF in consultation with the EBRD to help him SEe l' fiECRBT fix his economic design We should be saying yes to Gorbachev's request for an economic dialogue All of us should respond in a different way to the request but we should be more forthcoming with our statement I support Chancellor Kohl in that regard Prime Minister Kaifu The USSR has embarked on efforts to build new relationships based on cooperation with other countries The introduction of democracy and a market economy would be meaningful and we should not minimize their importance U The USSR is in a mess Gorbachev's opponents have been strengthened recently We need to provide intellectual support for perestroika -- training advice etc We have sent two economic survey missions to the USSR But large-scale credits to the USSR and long-term agreements on investment are something that I am doubtful about I doubt that financial support will be effective in helping the USSR The USSR is still a military superpower Financial support will help them to maintain their military machine And we still have our problem with the Northern territories ' It would not be appropriate to provide financial assistance to the USSR at this time The OECD's center for transition can be helpful The G-7 must respond positively in tone to Gorbachev's letter President Bush should write the response himself It should be encouraging in tone The Foreign Ministers should review the text n Prime Minister Thatcher There are no real parallels between China and the Soviet Union In China we are offering small changes in World Bank aid With the USSR we are thinking of massive assistance in some cases We are thinking of ways of helping the Soviet Union with technical assistance We can all agree to this Management courses are already being done Germany is offering substantial bilateral aid because of reunification That entails honoring contracts with the GDR We are already doing a lot of good and different things to help Gorbachev But it is a huge task 200 million people over thousands of miles can only be helped if they help themselves There are no statistics in the USSR it's a mess U The Soviets haven't a clue as to what needs to be done to get a social market economy organized Reads the language on the USSR from the political declaration This is good language We have a good basis for facing the public and Gorbachev with this kind of language How much debt does the Soviet Government have There are $48 billion in loans outstanding Credit lines to the USSR are already in place $1 3 billion in debt is owed to the UK The UK has offered other export credits which have not been taken up by the USSR That $48 billion debt puts other things in perspecti ve 1 The USSR is rich in raw materials It should be a rich country but it is horribly mismanaged There e different conditions in §ECRB'f' c r- €EGRE' P- different parts of the country All decisions must go to Moscow There are no shortage of materials in the USSR just an absence of knowledge on how to manage these resources U We need to talk up the IMF We helped Poland We provided grants not loans But on larger aid we insisted on an IMF program first Aid to the USSR not accompanied by reform will accomplish nothing except to accumulate new debts We need to recognize that our aid must be limited and we need to target our aid skillfully food processing transportation system reform accountancy arrangements statistics The EBRD must be involved too somehow We've all had a dialogue with the Soviet Union over the past five years We need a broad-based dialogue with the USSR -- people-to-people -- to change attitudes The McDonalds example in Moscow is good Economic prosperity is harder to achieve than political liberty You just can't hand it out it must be worked for over a sustained time t The President We have a consensus U Prime Minister Mulronev interrupts McDonalds of Canada has opened up a Moscow store It took seven years to get the thing set up 20 000 people applied for the Moscow McDonald's 700 job openings U The President President Mitterrand has the floor U President Mitterrand Our ministers have a lot of work before them Practical assistance could be offered to the USSR if the Soviets cleaned up their act in regional conflicts « The President We need to craft a statement that is positive and that allows individual flexibility We have mentioned certain principles I agree that Foreign Ministers must now go to work They should do it after lunch 7 Secretary Baker 4 We will have something done after lunch U Trade The President Trade is an important issue An ambitious GATT round must succeed Barber Conable of the World Bank wrote to ask for help in the GATT round If we lifted the barriers to LDC trade then they derive more benefits than from increased official aid U There is a need for movement in agriculture to save the round We don't want a detailed negotiation here we should establish goals We must make sure that our negotiators confront the issue in Geneva in two weeks De Zeeuw did his report on his own authority because the negotiators could not agree The de Zeeuw report should be a basis for negotiation I would like to ask for your help If we can't do anything about agriculture let's be up front in this meeting and admit that this will kill the Uruguay Round U SECRE'f' Unless we get movement on agriculture the Economic Summit won't be seen as a success U Commissioner Andriessen We need to make a real effort to bring the -round to a successful completion In public discussion there is mainly a focus on agriculture but there is much more in the Round We are trying to bring goods and services intellectual property and other important matters into the GATT In goods trade the negotiators have two problems -- agriculture and textiles Both are of interest to the Third World Both agriculture and textiles are now outside the rules of GATT We need to implement rules for both topics progressively There are major problems for textiles and agriculture and also dispute settlement A well-functioning dispute settlement mechanism can work only if people renounce unilateral measures We need to agree on an early objective for the Uruguay Round There must be an increase in disciplines on all kinds of subsidies that have a direct and indirect impact on trade U Farming in the EC is different than elsewhere We have many small farms I would like to see our agricultural system incorporated into a GATT framework We will not move to zero reduction in support levels as an ultimate goal This meeting should give only a clear political message to negotiators on the political importance of the negotiations and the necessity to make progress We don't want to repeat the OECD clash I want to reconfirm our determination in preparing for the TNC meeting to reach objectives on the Punta Del Este level and avoid getting into deeper levels of detail U Minister Muto Japan supports Andriessen's suggestion We want to bring the negotiations to a successful conclusion On all 15 items a maximum effort must be made to achieve a profile for negotiation at the TNC meeting in Geneva U Japan wants to stress the need for broader participation by the developing countries in the Round We need to get them into this process for it to be successful Therefore as Andriessen mentioned we must get a successful dispute settlement procedure that will make unilateralism no longer necessary In intellectual property and investment we need progress For example take the Trade-Related Intellectual Property Rights TRIPS In one LDC there are only five patent examiners Transitional measures will be needed to bring them up to speed Textiles are important for the Third World Prime Minister Mulroney Andriessen has pointed out some numbers on trade that are interesting In Europe on 1000 hectares 70 people are employed In Northern America on a similar farm only 8 people are employed This symbolizes the problem that the Europeans have It also indicates the specific problem we have today with this kind of inefficiency That is why we have trade and comparative advantage EC productivity in agriculture is abysmal f £BCRE'f _ '4'_ '3 11 We understand your political problems including those in Germany but if productivity is the name of the game then there is a problem of productivity in agriculture in Japan and the EC Let's be frank Those countries that are productive should not be penalized t I believe that we need to be statesmen and solve the agriculture subsidy problem U Let me read from the communique of the Cairns Group from their recent meeting in Chile This group accounts for 25 percent of world agricultural exports In the Cairns communique Ministers expressed a sense of crisis U They asked that the Houston Summit consider the situation and that the de Zeeuw text be used as a basis for negotiation in the TNC U Canada supports this view U Australia has made real progress in reducing trade subsidies We need to eliminate export subsidies over time Then we need an appropriate blend of language in our Communique to make a meaningful step forward I ask your support for a world trade organization U We spend a lot of money in the Third World to help developing countries then we ambush them by over-subsidizing our own farmers too much France for example is guilty of this We don't expect miracles We understand the political problems in Europe but we hope to make some real progress here to avoid the collapse of the Uruguay Round which is now threatened Prime Minister Thatcher I agree with Prime Minister Mulroney on some matters And I support President Bush's comment on the whole cost of agriculture U S $46 billion EC $93 Japan $ 68 billion U Let's consider the cost of agricultural support and protection Take the percentage of farmer income According to the OECD the percentage of farmers' income that comes from government subsidies in Japan is 70 percent For others it's about half that level So we have got to carry out what we have agreed to do about these things U Agriculture reform should be based on an aggregate measure of support Let's all reduce agricultural support based on such a measure emphasizing export subsidies A highly technical discussion of the negotiating process with the aggregate measure of support offers a compromise We should not be overly negative in the communique Distributes proposed language for communique President Mitterrand I support the EC intervention by Andriessen The policy of the EC on agriculture is not harmful -- 12 -SEeM to the developing world The Lome agreement helps the Third World The EC is the leading importer of food products U I want to defend the EC point of view All of us must act together We must adopt a global approach Export subsidies and internal supports all hang together We must reduce support Reductions must be fair and balanced and ultimately substantial U Farming is different in different parts of the world but the situation must be addressed globally We don't need experts we need to come to some agreement Let us find a compromise I will agree to any compromise that includes a global approach so long as it recognizes that in individual countries there are different conditions I support the British approach U Foreign Minister Nakayama We want the Uruguay Round to succeed with a maximum package Food is a problem Japan imports lots of food Only 30 percent of the grain we use is domestic In that regard I want to stress the importance of food security U secretary Baker We need a positive approach not the OECD approach We have got to do more than cite our differences There are fundamental problems going back a long time We are not much further along And we are running out of time in the Uruguay Round U We need to deal with this problem at a political level not a technical level We have the basis of an approach with the de Zeeuw report The good news is that none of us agree with it Maybe it has some merit for bridging a difficult gap U The Uruguay round is threatened Let's try-to avoid getting bogged down in detailed language by supporting the de Zeeuw report as the basis of negotiations If we do this we will have taken a major step forward Let's ask the Sherpas to take a look at the de Zeeuw report Are there any comments U Foreign Minister Nakayama I support Baker's suggestion U President Andreotti 'Maybe we could have a few moments to consult with experts Let's have the Commission speak Commissioner Andriessen We have some problems with the de Zeeuw report We must study its implications We have not made a decision yet and I cannot take such a decision on behalf of the Community The report is a fact and it will be studied I don't exclude that we can find a few words to express our view U Prime Minister Thatcher I am more optimistic than Mr Baker The de Zeeuw report has a lot of useful things in it I would ask Mr Andriessen to be optimistic in tone U I -5ECRE'f - - z •• ' - ' '• • J - - J 7 _ 13 Commissioner Andriessen I don't want to go into the merits of the de Zeeuw paper at this meeting I hope we can find some words to describe the de Zeeuw report U Chancellor Kohl This is a difficult moment On agriculture positions have hardened over the years but we have the will to find a solution I endorse Mrs Thatcher's proposal U Let's see if we can't use Mrs Thatcher's suggestion and take something from the American suggestion and see if the Sherpas cannot integrate these things into a positive document U President Mitterrand I insist on this point I want a compromise Mrs Thatcher's proposal is acceptable or almost acceptable but we can't do much more Let the Sherpas do some work U President Bush Prime Minister Andreotti has the floor U Prime Minister Andreotti We need to remember that not only agriculture is on the table The reform of GATT is also on the table We need to deal with such things as unilateral measures too U The de Zeeuw report could be a basis not the basis for negotiations I want to consult Rome for advice U 5 Regional Political Issues The President I would like to turn to regional political issues I invite Prime Minister Kaifu to speak about Asia U Prime Minister Kaifu Let me explain how Japan views Asia The South Koreans asked me to inform the Summit about the sincere efforts of that nation In Asia there are fears that interest in the region is slackening in comparison with other parts of the world Asia has special problems Japan has had problems with Korea because of the war and before But we are working on improving our relations We hope that Korea will be reunited before the end of the century The Koreans want this too U Cambodian leaders asked me to host a meeting in Tokyo on Cambodia The talks were successful but the Khmer Rouge did not participate I hope they will do so later Regarding southwest Asia I appeal to potential belligerents for peace in Kashmir The South Asian Regional Council should be more open Problem with translation The President Let me briefly ment on the discussion between Gorbachev and the Koreans Gorbachev wants to improve his relationship with South Korea Korea was happy with the meeting On the other hand the North Koreans have not cut back on their armed forces We are there in a peacekeeping role encouraged by Soviet behavior regarding Korea SECRET 14 ' Prime Minister Andreotti I would like to ask Prime Minister Kaifu whether Soviet discussions with South Korea for a large loan are conditional on legal and diplomatic recognition of South Korea rf Prime Minister Kaifu President Woo wants to establish relations with the Soviets The Soviets have said this might take some time but are not moving in this direction The Soviets have said so in public Diplomatic recognition is likely at some point but I don't know if there was a financial sweetener in the package The head of Laos carne to Tokyo recently Things are looking up in Burma and the Philippines v President Mitterrand A word about Cambodia France has cochairmanship of the group trying to find a solution to the Cambodian war If the USSR and China were to decide to stop their support for both camps we would have reached a settlement long ago The question is how to put pressure on Soviets and China at the same time to stop their assistance to various factions and let peace corne n The Khmer Rouge have denounced the possibility of an agreement arranged in Tokyo Sihanouk has said that he would not agree to a solution unless he is part of the next government So we are stuck on that front The Soviet Union and China hold the keys to peace in Cambodia They are waging a proxy war in Cambodia China is the main culprit helping the Khmer Rouge It used to be the USSR that was the main problem but now it is China How do we put pressure on China 1 The President I believe we should adjourn now -- End of Conversation -- - j s f U