TREASURY DEPUTY SECRETARY KIMMITT'S DISCUSSIONS

C O N F I D E N T I A L SECTION 01 OF 03 BERLIN 000273 SIPDIS SIPDIS E.O. 12958: DECL: 02/10/2017 TAGS: EFIN ETRD PREL ETTC PTER GM SUBJECT: TREASURY DEPUTY SECRETARY KIMMITT'S DISCUSSIONS WITH GERMAN ECONOMICS STATE SECRETARY PFAFFENBACH ON DOHA, TRANSATLANTIC INITIATIVE, SANCTIONS, AND ERP Classified By: EMIN Robert F. Cekuta for reason 1.4 (b) and (d) ¶1. (C) Summary -- Meeting with Economics Ministry State Secretary Bernd Pfaffenbach February 7, Treasury Deputy SIPDIS Secretary Kimmitt discussed moving forward on the SIPDIS Chancellor's transatlantic economic initiative, the Doha Development Agenda, the importance of implementing strong financial measures to convince Iran to step back from terrorist and proliferation activities, and USG concerns about the planned restructuring of the Economic Recovery Program funds. Pfaffenbach said the German Presidency, the Commission, and the U.S. should be able to pursue the Chancellor's transatlantic initiative as a deliverable for the April U.S./EU Summit. He reviewed the state of play with Doha, suggesting there needs to be simultaneous movement by the U.S. and EU on agricultural issues and by major emerging market countries on NAMA and services. On Iran sanctions, Pfaffenbach said Germany shares the USG's interest in getting Iran to reverse course on proliferation and that in implementing the UNSCR 1737, Germany and the EU have gone beyond the letter of the resolution. German trade with Iran is dropping and so is the amount of Hermes credit guarantees. However, a complete halt to export credits might lead to Iran stopping all repayments and also undercut groups opposed to the regime. Pfaffenbach agreed Germany needs to consult with the U.S. before making changes in the use of ERP funds and said the funds are going to German SME's, "not Airbus." End Summary. Merkel's Transatlantic Initiative ¶2. (C) Treasury Deputy Secretary Kimmitt began the discussion by saying that Merkel's initiative is supported at the highest levels of the USG. He said the Chancellor's transatlantic economic initiative, which focuses on non-tariff barriers, does not compete with Doha, which continues as a time-sensitive high priority. Rather than looking at tariffs, the initiative focuses on other areas where governments have not done as much to open markets. State Secretary Pfaffenbach noted there are various working groups in the German Government engaged in the Chancellor's initiative, including a climate change/energy group chaired by the Environment Ministry. The Economic Ministry is doing the bulk of the staff work for the initiative with Knut Brunjes, Deputy Director General for Trade Policy, heading the effort there. The first important date is the April 30 Summit, and we need to see how much progress we can make by that point. He agreed there needs to be a clear work plan on how the U.S. and the EU will continue the effort past the Summit. The State Secretary noted TABD and U.S. Chamber of Commerce support for the initiative and said EU Trade Commissioner Mandelson was struck during the discussion with business groups in Davos by the Chancellor's personal passion for seeing her initiative realized. Doha Development Agenda ¶3. (C) Reacting to Deputy Secretary Kimmitt's point that Germany needs to show leadership now, Pfaffenbach stated his full agreement that the Doha Development Agenda's success will be the most important international economic policy issue for the coming months. He said expiration of TPA is one reason why time is short, but noted as well that the President has called for Congress to renew this authority. Pfaffenbach reported he had met with WTO Director General Lamy in Geneva and with other senior figures in Davos who are involved in the talks. One key to success is France. Pfaffenbach noted French Trade Minister Lagarde may personally see reasons to be more flexible, but said she is held in close check by the French President's office. She is also "in a struggle with Peter Mandelson" to keep his mandate limited. Pfaffenbach noted Chirac had written the Chancellor saying the EU should not move further on agriculture. It is against this background that the EU Trade Ministers will soon hold their informal meeting with German Economics Minister Glos in the chair and Pfaffenbach representing Germany. ¶4. (C) After noting he is trying to bridge these gaps, Pfaffenbach set out three points where he thinks the key players need to move -- and move concurrently -- if the Round is to succeed. The first is the U.S. and the new farm bill; the high prices prevailing for agricultural products should give the U.S. room to drop levels of support. The second is the need for Brazil, India, and other large emerging market economies to move on nonagricultural market access. He thinks Brazil may be ready to move, but there are no signals of flexibility yet from India. The third is the need for the EU to move on agricultural market access. France will be opposed, but if there is movement on all three fronts at the BERLIN 00000273 002 OF 003 same time -- something he intimated Lamy and others can be quietly arranging -- then the pressure will be on the GOF to back down. He said Germany would be prepared to push Paris hard at that point to allow the needed concessions. Deputy Secretary Kimmitt also pointed to the need for progress in SIPDIS liberalization in services, in the wake of an agreement on agriculture, adding that developing countries need to understand that movement on this front is in their interest as well. Iran Sanctions and Export Credits ¶5. (C) Noting the statement that came out of the EU Foreign Ministers' meeting on UNSCR 1737 and appreciating the role he understood German Foreign Minister Steinmeier played in achieving that positive result, Deputy Secretary Kimmitt stressed it is important now for the Commission and member states to take the necessary steps to implement the resolution. He was particularly pleased with the GAERC's language on banning transactions with prohibited entities. Action is needed now in Brussels and at the national level. The focus is on implementing 1737, but governments should not feel constrained in taking further steps that would make the sanctions on Iran more effective. ¶6. (C) Pfaffenbach said "we totally share your interest" and that Germany also wants to push Iran to move in the right direction. Germany had gone beyond what was called for in 1737 in deciding how to implement it. Turning to Treasury Deputy Secretary Kimmitt's concerns regarding export credits for Iran, the State Secretary said Germany had "dramatically cut the volume of export credits in the past year." At the moment, export credit decisions are made on a case-by-case basis, and dual-use items cannot qualify for Hermes credit guarantees. If Germany completely stopped export credit guarantees, Pfaffenbach continued, the Iranians might stop all repayments on amounts owed. The Treasury Deputy Secretary emphasized that Germany needs to look at the bigger SIPDIS picture. In Iran, it is nearly impossible to know your customer. Furthermore, the German taxpayer should not be asked to pay subsidies on risk created by the Iranian regime. Pfaffenbach noted that a complicating factor is payments outstanding with Iranians. There is concern that if credits are reduced to zero, the possibility of payment would also be reduced significantly. ¶7. (C) Pfaffenbach noted that he had received questions from the press about Commerzbank and asked for Deputy Secretary Kimmitt's advice on how to respond. Deputy Secretary Kimmitt said that Treasury, after contacting governments, has been in touch with major bank with operations in the U.S. to make them aware of the risks to their U.S. business based on their international financial activities with Iran. The Iran Sanctions Act, he noted, which the USG had not invoked, gives the Secretary of State the authority to require companies to choose whether to do business with the U.S. or Iran. Treasury Deputy Secretary Kimmitt also pointed out that other banks, such as Credit Suisse and UBS, have made public statements about scaling back their business with Iran voluntarily. ERP ¶8. (C) Deputy Secretary Kimmitt stated his appreciation for receiving the German draft legislation and the access to the Bundestag discussion on the proposed changes in the European Recovery Program funds (ERP). He noted the USG position that we need to agree before Germany makes changes in the uses of the funds. Pfaffenbach replied "absolutely." "You have every right to ask questions because it was your money." Germany's aim has been to do nothing that causes problems for the U.S. and Pfaffenbach added that ERP money is not going to Airbus, but to small and medium enterprises. He agreed to make sure the funds were strictly separated from the parts of the Kreditanstalt fuer Wiederaufbau used for holding the German Government's shares of state-owned or formerly state-owned companies such as Deutsche Telekom or Deutsche Bahn. The Treasury Deputy Secretary pointed out the possibility, however, of public confusion -- and political problems resulting -- from moving the funds to the KfW. Even if ERP funds are used for their intended purposes, the added leverage to KfW's balance sheet might create opportunities for controversial uses. Pfaffenbach agreed to look into the issue. He also noted the differing views between the Finance and Economics Ministries over changing the current arrangement with the ERP funds as well as the parochial interests of various Bundestag members in making the proposed changes. BERLIN 00000273 003 OF 003 ¶9. (U) Treasury Deputy Secretary Kimmitt has cleared this message. TIMKEN JR