327. Letter From Secretary of Commerce Connor to President Johnson1
Dear Mr. President:
The Special Representative for Trade Negotiations is recommending that you terminate the escape clause action on watch movements. Pursuant to section 351(c)(1)(A) of the Trade Expansion Act of 1962, I have been requested to furnish you with advice as to whether such a termination would be in the national interest. Accordingly, I wish to concur with the recommendations of the Special Representative to terminate the escape clause action, and I further believe that this would be in the national interest.
[Page 868]The recommendation is the result of an investigation instituted by the Tariff Commission in accordance with section 351(d)(2) of the Trade Expansion Act. The Tariff Commission was to report on the probable economic effect on the industry concerned at the reduction or termination of the increase in duties which was imposed on watch movements in 1954. The report, submitted by the Tariff Commission on March 5, 1965,2 was studied by a special interagency task force created under the Office of the Special Representative for Trade Negotiations and was reviewed by the Office of the Special Representative.
I believe the following factors are significant to the determination as to whether the termination of this escape clause action would be in the national interest.
The probable effect of the recommended action of our national security was of serious concern to me. In this regard, at the request of the Office of Emergency Planning, the Department of Commerce conducted an extensive survey on the capacity of the domestic watch industry to produce goods for civilian and military uses in time of national emergency. The results of this survey were reported to the Office of Emergency Planning and were reviewed by that Office and by the Department of Defense. On the basis of their review and the current and planned activities of the Department of Defense, I am assured that the possible idling of productive facilities due to a further shift to imports by domestic watch manufacturers does not pose a significant problem and that increased imports of watch movements do not now or in the future threaten to impair the national security.
From the economic standpoint, it appears that termination of the escape clause rates of duty would not have a serious adverse effect on the domestic producers. The domestic industry producing watch movements is composed of two segments: a pin-lever segment and a jeweled-lever segment.
The U.S. Time Corporation is the only producer of pin-lever wrist watch movements in this country. The firm has successfully developed the market for inexpensive, quality watches and has become the sole domestic producer of pin-lever wrist watches. Through extensive advertising and aggressive sales promotion, the company has achieved a strong hold on the market for its Timex brand. It has enjoyed a good record of consistently rising sales and excellent earnings.
The Bulova, Hamilton, and Elgin watch companies constitute the jeweled-lever segment of the industry. During the period of escape clause protection, these firms have not increased their production of jeweled-lever movements. On the contrary, they have shifted to increased [Page 869] imports of 17 jewel movements, principally in the men’s sizes and have concentrated their domestic production on the more profitable lines, notably women’s watches and electric-powered watches. All three firms now import far more than they produce in the United States, and their rate of profit from imports exceeds that from their domestic production.
During the period of escape clause protection, these firms have been unable to increase their domestic production of jeweled-lever movements. They have adjusted to import competition principally by increasing their overseas investments. Bulova, for example, is the largest single manufacturer of watches in Switzerland.
While domestic output of jeweled-lever movements has remained fairly stable in recent years, the U.S. market has been expanding. Despite the escape clause rates, imports of watch movements have increased over the past twelve years. Since 1958, the domestic producers themselves have accounted for most of the increase in imports of jeweled-lever movements.
It is extremely unlikely that further continuance of the escape clause action would enable the jeweled-lever segment of the industry to increase domestic output to pre-1954 levels.
The companies have asserted that if the escape clause rates were terminated they would be compelled to abandon their domestic watch manufacturing facilities and shift entirely to imports from foreign plants. In the event that the companies do resort to such action, they could suffer short-run capital losses and a number of production workers in their watch manufacturing establishments could be laid off. According to statements of officials of the companies, however, the long-run profitability of the companies likely would be improved. Furthermore, under the present level of economic activity in the affected areas, reemployment prospects appear good for the workers who may become unemployed.
Given the strong competitive position of the pin-lever producer and the fact that domestic jeweled-lever production already is concentrated in movements other than those subject to escape clause protection, it does not appear at all clear to me that all domestic production of watch movements would be discontinued if the rates of duty were rolled back.
The escape clause action in 1954 resulted in negotiation of compensatory concessions with Switzerland, the principal supplying country. In this regard, your acceptance of the recommendation will enable us to withdraw the compensatory concessions or to negotiate equivalent concessions for the benefit of U.S. exports. Acceptance of the recommendation would enable the Swiss to maintain current offers in the Kennedy Round of interest to United States exporters. The Swiss on many occasions have indicated that without termination of the escape clause action [Page 870] on watch movements, it would be necessary to withdraw substantial tariff reduction offers of direct interest to this country.
At the time relief was granted to the domestic industry it was understood that the escape clause action was temporary and would be terminated when conditions warranted. A rollback in these rates, which have been in existence longer than any other escape clause measure, would remove a long-standing irritant in our otherwise excellent relations with Switzerland.
Based on the above facts together with the findings and data submitted by the Special Representative it is my opinion that the national interest would best be served by termination of the escape clause action on watch movements. Accordingly, I concur with the recommendation for termination of the escape clause rates of duty and restoration of the 1936 trade agreement rates.
Respectfully yours,
- Source: Kennedy Library, Herter Papers, Memoranda to the President, August 11, 1964–August 8, 1966, Box 10. Confidential.↩
- See footnote 5, Document 278.↩