Foreign Relations of the United States, 1964–1968, Volume VIII, International Monetary and Trade Policy

309. Letter From the Special Representative for Trade Negotiations (Herter) to Secretary of the Treasury Fowler¹

Washington, April 1, 1966.

Dear Joe:

Since our last meeting of the principals of the Cabinet Balance of Payments Committee, I have given the question of import restraints for balance-of-payments reasons much serious thought.

It is clear that we could design an import quota or surcharge system which would have a major direct impact on the level of imports. However, the attached memorandum shows that existing legislation does not make this possible and that new legislative authority would be required. I am doubtful such legislation could be enacted quickly, and you of course recognize the problem of speculation during the time in which legislation would be pending. I have attached a memorandum setting forth the nature and limitations of our domestic authority.

Whether we would benefit substantially from the imposition of import restraints now seems very doubtful to me, at least under present circumstances. I believe we must first of all accept the almost unanimous judgment of economists that the imposition of broad import restraints would have an inflationary impact on the domestic economy. We are already in a period in which we are running at full capacity and such a move would therefore prove counter-productive.

I have considered the possible implementation of import restraints under the GATT and should like to make the following general observations. Under the GATT, the United States could impose quotas because of balance-of-payments problems upon its own unilateral determination that the preconditions prescribed by the GATT do in fact exist. It would not need to obtain any prior finding or authorization from any country or international organization, but a finding by the IMF on the need for quotas would be ultimately required and would be binding, in the sense of defining our rights under the GATT, and the rights of others to retaliate. We would, in other words, have to demonstrate to the IMF that our balance-of-payments problems were of the requisite severity.

Under the GATT, the United States could not impose tariff surcharges because of balance-of-payments problems. If it did so, a GATT country affected by the surcharges could bring an action under Article XXII and this could lead to retaliatory action against the United States. However, in theory at least, a waiver of the GATT could be sought.

Quotas could be limited to a selected list of imports without violating the GATT. Criteria which, for example, singled out “nonessential” or “luxury” products could provide a basis for selection. For domestic economic reasons it might be considered desirable to allow free access to raw materials and semi-finished products, so as to prevent bottlenecks at the early stages of manufacture. However, the curtailment of a broad list of “nonessential” or “luxury” imports alone would still provide domestic inflationary pressure.

I have also considered whether we might not select a product list which discriminated as among exporting countries, in order to focus the effects on those who give us most trouble in terms of gold flows. It is unlikely that this would help, since the GATT authority does not allow us to discriminate among suppliers without penalty of retaliation.

Import quotas or surcharges would probably trigger objections among many exporters to the U.S. who in turn might find ways to retaliate against our exports. It may, of course, be argued that foreign retaliation would be very limited if the import restraint action were seen to be a necessary condition for maintenance of the value of the dollar. If the dollar were under very heavy speculative attack, a drastic series of measures, including import controls, might be just what was required. But in situations short of an international crisis of dollar confidence, we should he hard put to gain general agreement among our trading partners that our situation was serious enough to warrant this type of action.

But, putting these problems aside, further reflection leads me to wonder whether the United States would gain any advantage from an improved trade account which resulted from the imposition of import restrictions. I recognize that one of our immediate objectives is to provide a stronger U.S. bargaining position for the negotiation of international monetary reform. But looking at this closely, I question whether our bargaining position would be much changed by the achievement of balance by means of direct controls on trade. For example, I noted in this regard the recent experience of the U.K. in its import surcharge consultations in Working Party III of the OECD, and elsewhere. The U.K. has been repeatedly informed by other nations that a return to equilibrium must be defined as a return to equilibrium without the surcharge.

Our long run basic objective is of course to maintain world confidence in the value of the dollar. I now question whether trade restraints would increase confidence in the dollar except under circumstances in which we were in real desperation, and unless coupled with stringent measures taken with respect to our domestic economy.

I must therefore conclude that the imposition of import quotas or surcharges involves many complications and appears more likely to boomerang than provide a useful aid in our present balance-of-payments difficulties.

Most sincerely yours,

Christian A. Herter ²

Attachment³

DOMESTIC AUTHORITY TO IMPOSE QUOTAS AND SURCHARGES

The President has no existing authority unilaterally to impose quotas or surcharges on imports generally. Instead, he has the authority unilaterally to impose such import restrictions only on an article-by-article basis and upon a specific finding related to each article.

The broadest of these authorities are the national security provision and the escape clause. However, neither authority can be invoked without an investigation by either the Office of Emergency Planning or the Tariff Commission, which typically takes a number of months and becomes public knowledge, whether a public hearing is held or not. In addition, and more importantly, neither authority can be invoked with respect to any article unless a specific finding is made with respect to that article. In the case of the national security provision, the Director of OEP must find that a given article is being imported into the United States in such quantities or under such circumstances as to threaten or impair the national security. In the case of the escape clause, the Tariff Commission must find that tariff concessions have been the major cause of increased imports of a given article and such increased imports have caused or threatened serious injury to a particular domestic industry.

The necessity to impose import restrictions under either of these provisions with respect to particular articles and upon specific findings with respect to such articles would appear to prevent the President from moving rapidly to impose import restrictions upon a broad range of imports. In other words, the President has no existing authority to impose general import restrictions for balance-of-payments reasons.

1. Source: Johnson Library, Bator Papers, Balance of Payments, 1966 [2 of 2], Box 15. Secret. An attached covering letter from Herter to Bator, April 5, states that “at the last meeting of the Cabinet Balance of Payments,” Herter “suggested a review of the possibility of imposing import controls for balance of payments reasons.” In the attached copy of his letter to Fowler, Herter was “giving my conclusions after further study of the subject.” Herter was referring to the March 25 meeting; see Document 88.
2. Printed from a copy that bears this typed signature.
3. Secret.