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

332. Memorandum From the Acting Special Representative for Trade Negotiations (Roth) to President Johnson¹

Washington, February 15, 1967, 4:30 p.m.

SUBJECT

• American Selling Price System of Customs Valuation

Recommendation

For the reasons given below, I recommend that you authorize me, as the Acting Special Representative for Trade Negotiations, to offer in the Kennedy Round of trade negotiations the elimination of all the present ad valorem rates of duty subject to the American selling price (ASP) system of customs valuation and the substitution of those new ad valorem rates of duty based on normal methods of customs valuation which are set out in the last column of the table attached at Tab A.² This offer would apply to the four categories of products now subject to ASP—benzenoid chemicals, rubber-soled footwear, canned clams, and wool-knit gloves.

Such an offer would be subject to the following basic conditions: (1) any agreement involving such an elimination of the ASP system must be entirely separate from the overall Kennedy Round agreement; (2) such an agreement must contain reciprocal benefits for the United States, including concessions on tariffs and, if at all possible, non-tariff barriers; and (3) such an agreement will be subject to your express approval before signature and, if signed, will require enactment by the Congress of implementing legislation before it can enter into force.

The Departments of Agriculture, Commerce, Defense, Interior, Labor, State, and Treasury all concur in this recommendation.

Statement of Reasons

1. Undesirability of ASP. ASP—whatever its original justification—is, in our judgment, not a legitimate system of customs valuation. It subjects an exporter to a two-fold uncertainty. He does not know at the time of exportation whether his product will be subject to duty according to its own value or according to the value of a domestic competing product. In addition, if his product is found to be dutiable on the latter basis, he does not know what the price of the domestic product will be and hence what amount of duty he must pay—a duty which is usually very high and often prohibitive. The ASP system has long been criticized by other countries and would be illegal under the General Agreement on Tariffs and Trade (GATT) but for an exception for certain legislation in existence at the time the GATT was negotiated. It is especially damaging to our liberal trade position since it has considerable similarity to the variable levy system which the EEC has imposed on a number of agricultural imports and to which we have made strenuous objections over the last several years.

2. Need to Make Offer on ASP in Kennedy Round. As we enter the critical phase of the Kennedy Round, one issue dominates the industrial sector of the negotiations—ASP as it relates to benzenoid chemicals. The Europeans, and especially the EEC, U.K., and Switzerland, regard ASP as a serious obstacle to their exports of benzenoid chemicals to the United States, as well as a symbol of American protectionism. As a result, these countries have made the elimination of the ASP system an express condition of any reduction in their tariffs on most of our chemical exports, as well as an implied condition of liberalizing trade generally throughout the industrial sector. Failure to offer the elimination of ASP would, in our judgment, seriously jeopardize the entire Kennedy Round and could be used as a pretext for placing the blame for its collapse on the United States.

3. Nature of Proposed Offer on ASP. The proposed offer is designed to eliminate the ASP system and yet retain adequate tariff protection for the benzenoid chemical industry and the other industries which benefit from that system. Drawing upon the advice and data furnished by the Tariff Commission after extensive hearings, as well as our own sources of information, we have made an intensive inquiry into the economic conditions of the industries concerned and the probable impact of eliminating the ASP system. In the case of the benzenoid chemical industry, viewed in its entirety as well as in terms of its basic subdivisions, we have concluded that the proposed ad valorem components of the duties, which range from 4% to 40%, should give both the large and small firms sufficient tariff protection to avoid any serious dislocation. With respect to the rubber footwear industry, we believe that the high rate of 47–1/2% which we are proposing should permit that industry to cope with imports from Japan and several other Far Eastern countries. In the case of canned clams and wool-knit gloves, we are proposing that the same amount of duty protection now afforded to the domestic industries under the ASP system be continued under the new rates.

4. Congressional Views on Elimination of ASP. The ASP issue is not only critical to the successful conclusion of the Kennedy Round, it is also the trickiest political issue we face in the negotiations.

Committee Views on ASP

In the House Ways and Means Committee, there appears to be no general support for the ASP system and a willingness to consider an agreement eliminating ASP on its merits. This was confirmed with Chairman Mills on February 13. Moreover, conversations with most of the senior Democratic and Republican members indicate either outright approval of, or at least no objection to, the manner in which we would propose to eliminate ASP. This is true, in particular, of King, Byrnes, and Curtis.

In the Senate Finance Committee, there seems to be no strong feelings that the ASP system should be retained for its own sake. During Senate consideration in 1965 of a bill to eliminate ASP on protective rubber footwear,³ Smathers, Hartke, and Ribicoff stated that they were opposed to the ASP system. Moreover, Smathers said that he believed that Long, Gore, and Carlson were also against ASP.

However, there is considerable opposition in the Finance Committee to the signature of a trade agreement ad referendum to the Congress. The opposition stems largely from the fear that such an agreement would present the Committee and the Senate with a fait accompli. Last year, the Finance Committee reported out and the Senate passed (with only a handful of Senators on the floor) S. Con. Res. 100.⁴ This resolution, which died in the House, expressed the sense of the Congress that no agreement should be concluded in the Kennedy Round which could not be implemented pursuant to the TEA. We believe we can allay this fear by continuing to make clear in the Congress and in Geneva that any ASP agreement must be totally unrelated to the Kennedy Round agreement.

Among the interested members in both Committees—and the Congress as a whole—there is a widespread concern that elimination of the ASP system might result in serious economic dislocation. It is our impression that most of these Congressmen are not necessarily wedded to ASP but will insist that sufficient tariff protection be maintained—as we think our proposals will do.

Congressional Support for Rubber Footwear

About 40 members of Congress from 12 states have written letters generally urging the retention of ASP on rubber footwear. Twenty-one are from the four New England states—Connecticut, Maine, Massachusetts, and Rhode Island—which together have the greatest interest in rubber footwear.

The leader of the New England bloc, as well as the rubber-footwear association, is Ribicoff. On the basis of a conversation with him on February 9, we believe that he might agree to the elimination of ASP and the substitution of a fairly high rate.

In the Finance Committee, only Hartke, Talmadge, and Dirksen, in addition to Ribicoff, have expressed concern over the elimination of ASP on rubber footwear. We are reasonably sure, however, that if we can reach agreement with Ribicoff, the rest of the Finance Committee will come along.

Congressional Support for Benzenoid Chemicals

About 140 members of Congress from 12 states have written letters generally opposing the elimination of ASP on benzenoid chemicals. The benzenoid chemical industry is significant in 10 of these states—Alabama, Illinois, New Jersey, New York, North Carolina, Ohio, Pennsylvania, South Carolina, Texas, and West Virginia.

In many of these states, however, a substantial number of workers are engaged in the production of non-controversial chemicals or chemicals like low-value intermediates which are the least vulnerable to import competition. This is true, for example, of Illinois, North Carolina, Pennsylvania, Texas, and West Virginia. Moreover, we have reason to believe that many of the Senators and Congressmen who have signed letters are prepared to consider an ASP agreement on its merits. For example, Congressman Rodino, dean of the New Jersey Delegation, told us this was his position in a conversation on January 31, although New Jersey is the leading producer of benzenoid chemicals.

Most Senators on the Finance Committee have some benzenoid chemical production in their states, but in only two states—Georgia and Illinois—is there any portion of production at all involved in the controversial areas. This may explain why only Talmadge and Dirksen have written letters opposing the elimination of ASP, although when we saw Dirksen this afternoon and raised ASP, he did not seem concerned. Dirksen has no more than 1300 intermediate and dye workers in Illinois, and Talmadge about 200 dye and other benzenoid chemical workers in his state. Just today, in a conversation with Joe Bowman of Treasury, Long indicated he was not committed to ASP. However, because of large chemical firms in Louisiana which may have an interest in ASP in other states, Long may not be easy to bring around, and we intend to meet with him early next week.

Conclusions

This discussion leads me to the following conclusions:

1. We must make an offer on ASP in the Kennedy Round. Otherwise, there is a serious risk that the negotiations will collapse.

2. Any separate ASP agreement we negotiate must contain important export concessions for the chemical industry, which exports over $2 billion worth a year. This should make it harder for the benzenoid chemical segment to oppose the agreement.

3. The ASP agreement must also contain reductions in European non-tariff barriers that are of interest to other American industries. This would help bring into play interests outside the chemical area.

4. Such an ASP agreement—if it contains substantial benefits for American industry—would not, we believe, encounter serious problems in the Ways and Means Committee or the House.

5. There would still remain a difficult problem in the Senate but not an unsurmountable one, depending principally on Long’s position. If the rubber footwear industry is largely taken care of, this would leave only the benzenoid chemical industry, whose strength in terms of consistent interest in the Finance Committee is not great.

6. We would make it quite clear to the Europeans that in offering to take a negotiated agreement back to the Congress, we are not guaranteeing that the Congress will approve it. The offer to do so, however, is an essential ingredient to a successful conclusion of the negotiations.

There is attached at Tab B a background memorandum which deals with all the principal aspects of the ASP issue.⁵

William M. Roth

1. Source: Johnson Library, White House Central Files, Confidential File, TA, Bator to President, 2/21/67, Tab A. Confidential.
2. Not found.
3. See footnote 5, Document 295.
4. Reference is to S. Con. Res. 100, 89th Cong., introduced by Senator Russell B. Long on June 28, 1966.
5. Not found.