The Downing Street Years

by Margaret Thatcher

  The more we learnt of the background to what had happened, however, the worse it appeared. President Reagan was personally outraged by what had occurred, believed that the Soviet Union was behind it and was determined to take swift action. I received a message from him on 19 December to this effect. Al Haig sent a parallel message to Peter Carrington pointing out that the Americans were not proposing that the West should now implement the far-reaching measures to meet Soviet military intervention that had already been agreed in NATO. What they wanted were some political and economic measures at once and others in reserve if the situation worsened. Without any further reference to us, the Americans would be announcing sanctions against the Soviet Union later that day. These, we were were glad to note, rightly did not include abandonment of the disarmament talks going on in Geneva. But they did include measures such as the cancellation of Aeroflot landing rights, a halt to negotiations on a new long-term grain agreement (though an existing agreement would remain in place) and a halt to the export of material for the construction of the planned natural gas pipelines on which work had already begun.

  It was this last point which was to be the cause of great anger in Britain and other European countries. British, German and Italian firms had legally binding contracts to provide equipment for the West Siberian Gas Pipeline, which involved components made in the United States or under United States licence. It was not clear at this stage whether the measures announced by President Reagan against the Soviet Union applied to existing contracts as well as new ones. If the ban extended to existing contracts this would deprive British firms of over £200 million of business with the Soviet Union. Worst affected would be a contract of John Brown Engineering for pump equipment for the pipeline project on which large numbers of jobs depended.

  While pressing the Americans on this particular point, I ensured that we gave them the strongest possible backing both in NATO and the European Community for the general line they wanted to take. This was by no means easy. Initially, the Germans were reluctant to take any measures against the Polish Government, let alone against the Soviet Union. The French were pressing hard for continuing the sale of food at special subsidized prices by the European Community to the Soviet Union. But I still felt that if we could persuade the Americans to take a more reasonable line over the pipeline project we would be able to demonstrate a fairly impressive western unity. The trouble was that there were those in the American Administration whose opposition to the pipeline project had nothing much to do with events in Poland. These people believed that if it went ahead the Germans and the French would be dangerously dependent on Soviet energy supplies, which would have damaging strategic implications. There was some force in this argument; but it was exaggerated. Although Russia would be providing just over a quarter of Germany’s and just under a third of France’s gas, this would be no more than 5 per cent of either country’s total energy consumption. But in any case neither the Germans nor the French were going to accede to American pressure. Such pressure would therefore be counter-productive as well as irrelevant to the specific problem we faced in Poland. There was also American talk, which seriously worried the Bank of England, of forcing Poland to default on her international debts, which would have had severe effects on European banks.

  At OD towards the end of January 1982 we discussed these possibilities. I said that there was a clear danger of the American Government’s present policy damaging western interests more than those of the East and provoking a major transatlantic quarrel of precisely the sort that it had long been the main objective of Soviet policy to bring about. Britain had already offered to do more to meet American wishes than our European partners were likely to accept. This was no longer a time for concessions but for some straight talking to our American friends. I decided to approach President Reagan. I also asked other ministers to try to influence their American counterparts. An urgent invitation would be extended to Al Haig to visit London on the way back from his current visit to the Middle East.

  In fact, Al Haig joined me for a late lunch at Downing Street on Friday 29 January. I told him that the single most important aim must be to keep the western alliance together. The most recent meeting of the NATO Council had gone well. But the measures now being proposed by the United States were causing concern. Anything that the West did must be designed to harm the Soviet Union more than ourselves. The reports of possible steps by the US to bring about a default on Polish debts and indeed the debts of other East European countries were worrying: although this would doubtless bring about difficulties for the countries concerned it would also create incalculable problems for the western banking system, which was so important to the reputation of the western world as a whole. I also said that whatever the Americans felt about the matter we had to face the fact that the French and the Germans were never going to abandon their contracts for the Siberian Gas Pipeline. Nearer the bone, I noted that the Americans had not included a grain embargo in their first round of measures because this would clearly hurt their own people. Indeed, few of the measures adopted by the United States would have any serious effect at home — but they would hurt Europe. To say the least there was a certain lack of symmetry.

  I gained the strong impression that Mr Haig basically agreed with my analysis. I also had the sense that he was feeling increasingly isolated and powerless in the American Administration, which indeed he was to leave later in the year. He said that he thought that it would be useful if I sent a message to President Reagan about these matters, which I did later that day. I believe that the pressure I applied had some effect, but unfortunately it proved to be temporary.

  Meanwhile, the West’s response to events in Poland was becoming increasingly entangled with the wider question of our political and economic stance towards the Soviet Union. President Reagan sent a message to me on 8 March stressing the need to halt or at least restrict the grant of export credit to the Soviet Union, particularly credit subsidized by our Governments. The American argument was that not only was the USSR economically weak, it was suffering from an acute shortage of foreign exchange. European and other governments which provided the Soviet Union with subsidized credit were cushioning their failing system from economic realities which would otherwise have forced its reform. The Administration had a good argument here, though our assessment was that restricting credit would not have the dramatic impact which some US experts imagined. At this time we were receiving conflicting and confusing signals from the US Administration about its intentions. But I hoped that tighter controls by European governments on credit for the Soviet Union might allow us to secure the undertaking we wanted that the US restrictions on contracts for the Siberian Pipeline would not be retrospective.

  Out of the blue, however, the Americans announced on 18 June that the ban on the supply of oil and gas technology to the Soviet Union was to apply not only to US companies but also to their foreign subsidiaries and to foreign companies manufacturing American-designed components under licence. I was appalled when I learnt of this decision. I condemned it in public. The reaction of the Europeans generally was still more hostile.

  Britain took legislative action under the Protection of Trading Interests Act to resist what was in effect the extension of US extra-territorial authority. Then European irritation was increased still further by the news that the Americans were intending to renew grain sales to the USSR on the pretext that this would drain the USSR of hard currency — but transparently because it was in the interests of American farmers to sell their grain. The Administration was somewhat taken aback by the strength of opposition they faced and it was left to the excellent new Secretary of State, George Shultz, to find a way out of the difficulties, which he did later in the year, allowing the existing contracts for the pipeline to go ahead. But it had all been a lesson in how not to conduct alliance business.

  THE VERSAILLES G7 SUMMIT

  I like to think that my own relationship with President Reagan and the efforts I made to try to esta
blish common ground between the United States and the Europeans helped to prevent disagreements over the pipeline and other trading issues from poisoning western co-operation at this critical juncture. Certainly, the summer of 1982 saw some useful international diplomacy. Between 4 and 6 June the heads of government of the G7 countries met amid the splendid opulence of Versailles. The rooms of the Palace itself were used for meetings and relaxation. There was a final banquet in the Hall of Mirrors followed by after-dinner entertainment of opera and fireworks. (In fact, I left early: it would not have been right to stay for all this while our troops were still fighting in the Falklands.)

  President Mitterrand, who chaired the summit, had prepared a paper on the impact of new technology on employment. It quite often happened that the country in the chair at summit meetings felt that they must introduce some new initiatives even at the cost of extra government intervention and increased bureaucracy. This was no exception. For my part, I had no doubt about the attitude to take to technological innovation: it must be welcomed not resisted. There might be ‘new’ technology but technological progress itself was nothing new, and over the years it had not destroyed jobs but created them. Our task was not to make grand plans for technological innovation but rather to see how public opinion could be influenced in order to embrace not recoil from it. Fortunately, therefore, President Mitterrand’s paper was kicked into touch in the form of a working group.

  I had a candid bilateral discussion with Helmut Schmidt while I was at Versailles about the European Community budget — to which West Germany and Britain seemed destined to remain net contributors — and about the CAP on which so much of our money was spent. This was a particularly sore point for me, because only a few weeks before Britain had been overridden in the Agriculture Council when we had sought to invoke the Luxemburg compromise against farm price rises. Helmut Schmidt said that he wanted to maintain the Luxemburg compromise, though he doubted whether it should be applied as we wished. But he added that the CAP was a price which had to be paid, however high, to persuade members like France and Italy to come into the Community from the beginning.

  As it happened, this was Chancellor Schmidt’s last G7 summit. In September his governing coalition broke up when the liberal Free Democrats changed sides and put the Christian Democrat Leader, Helmut Kohl, in as Chancellor. Although I had had serious disagreements with him, I always had the highest regard for Helmut Schmidt’s wisdom, straightforwardness and grasp of international economics. Sadly, I never developed quite the same relationship with Chancellor Kohl, though it was some time before the implications of this became important.

  But my most vivid recollection of the proceedings at Versailles is of the impression made by President Reagan. At one point he spoke for twenty minutes or so without notes, outlining his economic vision. His quiet but powerful words provided those who did not yet know him with some insight into the qualities which made him such a remarkable political leader. After he had finished, President Mitterrand acknowledged that no one would criticize President Reagan for being true to his beliefs. Given President Mitterrand’s socialist policies, that was almost a compliment.

  From Paris President Reagan flew to London for an official visit where he addressed both Houses of Parliament in the Royal Gallery of the Palace of Westminster. The speech itself was a remarkable one. It marked a decisive stage in the battle of ideas which he and I wished to wage against socialism, above all the socialism of the Soviet Union. Both of us were convinced that strong defence was a necessary, but not sufficient, means of overcoming the communist threat. Instead of seeking merely to contain communism, which had been the West’s doctrine in the past, we wished to put freedom on the offensive. In his speech President Reagan proposed a worldwide campaign for democracy to support ‘the democratic revolution [which was] gathering new strength’. In retrospect, however, that speech had a larger significance. It marked a new direction in the West’s battle against communism. It was the manifesto of the Reagan doctrine — the very obverse of the Brezhnev doctrine — under which the West would not abandon those countries which had had communism forced upon them.

  I remember the speech for another reason as well. I was full of admiration that he seemed to have delivered it without a single note.

  ‘I congratulate you on your actor’s memory,’ I said.

  He replied, ‘I read the whole speech from those two perspex screens’ — referring to what we had taken to be some security device. ‘Don’t you know it? It’s a British invention.’ And so it was that I made my first acquaintance with Autocue.

  THE BONN NATO SUMMIT, JUNE 1982

  The NATO summit of heads of government in Bonn on 10 June was generally linked to the Versailles summit. At Versailles the G7 had demonstrated that with one or two exceptions, such as France, the major countries were committed to a return to sound economic policies. At Bonn the West was similarly able to demonstrate its commitment to strong defence.

  Of course, all of us wanted both strong defence and successful negotiations with the Soviet Union to reduce the level of armaments. But there was a real question about which should come first. There continued to be a muted but important argument about the ‘dual track’ policy. Some countries hoped to be able to delay virtually indefinitely the implementation of the decision to deploy Cruise and Pershing missiles. For example, in the dying days of the Schmidt Government there were strong voices in Germany arguing that deployment would jeopardize the prospect of successful negotiations. By contrast, the Americans and we in Britain felt that a strong defence posture is an absolute prerequisite for any constructive relationship with the USSR and therefore deterrence is the condition for détente. Indeed, the original idea for the Bonn summit had come from us in Britain because we believed that it was vital to demonstrate the unity of purpose of NATO at this time. The result more or less fulfilled that intention.

  But there continued to be Soviet pressure, supported by demonstrations by the so-called ‘peace movement’ and encouraged by the appeasement of the left-wing politicians in Europe right up to the moment when Cruise and Pershing were deployed. We were never able to rest our argument or relax our efforts.

  HONG KONG AND CHINA

  By the time I visited the Far East in September 1982 Britain’s standing in the world, and my own, had been transformed as a result of victory in the Falklands. But one issue on which this was, if anything, a drawback was in talking to the Chinese over Hong Kong. The Chinese leaders were out to demonstrate that the Falklands was no precedent for dealing with the Colony. I was well aware of that myself, both from the military and the legal viewpoints.

  On the morning of Wednesday 22 September I and my party took off from Tokyo, where I had been visiting, for Peking. Fifteen years remained of the lease to Britain of the New Territories which constitute over 90 per cent of the land of the Colony of Hong Kong. The island of Hong Kong itself is British sovereign territory, but, like the rest of the Colony, dependent on the mainland for water and other supplies. The People’s Republic of China refused to recognize the Treaty of Nanking, signed in 1842, by which the island of Hong Kong had been acquired by Britain. Consequently, although my negotiating stance was founded on Britain’s sovereign claim to at least part of the territory of Hong Kong, I knew that I could not ultimately rely on this as a means of ensuring the future prosperity and security of the Colony. Our negotiating aim was to exchange sovereignty over the island of Hong Kong in return for continued British administration of the entire Colony well into the future. This I knew from my many consultations with politicians and business leaders of Hong Kong was the solution which would suit them best.

  The immediate danger, which had already been illustrated by reaction in Hong Kong to the provisions of our Nationality Bill and to various remarks by the Chinese communists, was that financial confidence would evaporate and that money and in due course key personnel would flee the Colony, impoverishing and destabilizing it well before the lease of the New Territories came t
o an end. Moreover, it was necessary to act now if new investment was to be made, since investors would be looking some fifteen years or so ahead in judging what decisions to make.

  I had visited Peking in April 1977 as Leader of the Opposition. The ‘Gang of Four’ had been deposed a few months before and Hua Guo Feng was Chairman. Deng Xiaoping, who had suffered so much during the Cultural Revolution, had been ousted by the ‘Gang of Four’ the previous year and was still in detention. But on the occasion of this, my first visit as Prime Minister — indeed the first visit of any British prime minister while still in office — Deng Xiaoping was indisputably in charge.

  On the afternoon of Wednesday 22 September I had my first meeting which was with the Chinese Prime Minister, Zhao Ziyang — whose moderation and reasonableness proved to be a great handicap to him in his subsequent career. We had a discussion of the world scene in which, because of the Chinese hostility to Soviet hegemony, we found much to agree about. However, the Chinese Prime Minister and I were aware that the following morning’s meeting we were to have on Hong Kong would be a very different matter.