188. Memorandum From Secretary of State Rogers to President Nixon 1
- Your Request for Comments on Item XVIII-4 of the Burns Report—Tariffs and Other Trade Barriers
As you requested, I am giving my reactions to Item XVIII-4 of Arthur Burns’ report and my recommendations for action in this area.2
You have already stressed your support for a liberal trade policy. I agree thoroughly with Dr. Burns about the importance of such a commitment. Stressing freer trade will partially offset negative reactions to our textile move and will also help
- —to cast off the pall of protectionism that is enveloping international economic relations;
- —to conserve the benefits of a 35-year effort to develop a more open trading system; and,
- —to focus attention once again on forward economic movement in the western world.
The U.S. in the past has been virtually the sole source of initiative in foreign trade liberalization. It would be comfortable to think we can now relax and await initiatives from others but we cannot. This gives us an opportunity and imposes an obligation to reassert our leadership.
I am giving my recommendations first followed by specific comments keyed to the Burns Report.[Page 482]
The ground has not been adequately prepared at home or abroad for a major push for bold new trade legislation this year. Further consultation is required—both internationally and domestically—to identify and analyze remaining trade barriers before any concerted attack on them can be planned. At least a year’s intensive exploration of specific questions seems needed.
Nevertheless, some legislation is needed urgently, and not all of it is of the type which would be welcomed by foreigners. Changes in the escape clause may be regarded with some skepticism.
In this situation, the approach commending itself to us is a combination package involving a request to the Congress in the next few months for: (1) modest legislation restoring your authority to make small “housekeeping” cuts in tariffs needed to meet our obligations under various provisions of the General Agreement on Tariffs and Trade; (2) repeal of the American Selling Price (ASP); (3) liberalization of the escape clause and adjustment assistance; plus a simultaneous announcement, perhaps in a transmittal message, that you believe a major international effort must be made to further liberalize trade in the areas of non-tariff barriers (NTBs), tariffs, and agriculture and that you intend to submit such a proposal to a subsequent session of Congress after further consultations with American producers and consumers and our trading partners.
This Year’s Legislation
1. Immediate Tariff Negotiating Authority
A simple extension of the 1962 Trade Expansion Act (TEA) would be of little value because most of the tariff cutting authority contained in it has already been used. Consequently, it would be preferable to request interim authority which would allow immediate cuts by amounts not greater than 25% of the final Kennedy Round rates. You could assure the Congress that this authority would not be used for any major negotiation.
2. Repeal of ASP
The reasons for recommending this step are covered in my comments on point 4D of the Burns report.
3. Liberalization of Escape Clause and Adjustment Assistance
(a) Escape Clause
The present TEA criteria on eligibility of an industry for tariff relief (Sec. 301-b) should be made usable by eliminating the requirement that increased imports be causally linked to past tariff concessions. Since many concessions go back as far as 30 years, the conclusive demonstration [Page 483] of a major causal relationship may be impossible and, in any event, seems unduly burdensome.
Tariff relief in the case of bound duties would require that the U.S. either (1) pay compensation of comparable trade value by reducing duties on other items or (2) accept foreign retaliation in the form of increased restrictions on U.S. exports. We should, therefore, retain a strong injury test.
At present, increased imports must be “the major factor” behind injury. This language has been interpreted by the Tariff Commission to mean the cause greater than all other causes combined and has thus constituted an impossible standard for applicants to meet. A workable test which would still be consistent with liberal trade policy objectives would be a showing that imports are the “primary” cause of serious injury. This should be defined as the cause greater than any other single significant factor.
(b) Adjustment Assistance
In order to deal realistically with the hardships some individual firms and groups of workers have undoubtedly faced as a result of increased imports, the requirement that such imports be caused by a trade concession should be dropped, as proposed above for escape clause relief for an industry. However, since smaller groups are normally involved and the remedies do not have adverse impact on other domestic groups or on our commercial relations abroad (because no new trade barriers are raised), the criteria for adjustment assistance should require that increased imports be no more than a “substantial” cause of serious injury to the petitioners, rather than “the major cause” as at present or “the primary cause” proposed for escape clause cases.
Present adjustment assistance provisions require that an entire firm be injured, whereas the injury from imports could be severe but not extend to all of its component establishments. This is an anomaly since individual establishments, rather than firms, are the units used for determining injury under the escape clause provisions. To make adjustment assistance directly available to those seriously harmed by stiffer import competition, the individual establishments should be allowed to petition for help under the same criteria as would be applied for firms.
Escape clause relief and adjustment assistance should be clearly understood as temporary measures to give industries or firms time to adjust to import competition. Therefore, there should be built-in time limitations and a requirement for action programs to make the special measures unnecessary.
4. Support for the Package
If it is to succeed, the foregoing package will need strong backing in the form of counter-pressures to offset the protectionist sentiment at [Page 484] large in the country. Consequently, you should direct your staff immediately to begin drafting the interim trade legislation and formulating plans for building support for it in the Congress and with the public. At the same time, your trade policy officials should continue working to develop a consensus on the next major step in trade liberalization through consultations with key public and Congressional figures at home and with our trading partners abroad.
Reaction to Item XVIII-4 of Arthur Burns’ Report:
Section 4(a)—Non-Tariff Barrier Initiative
Non-tariff barriers must form part of our next major effort at trade liberalization. Public attention has focused on this area, and action is expected. The work presently underway in this field should continue. But it probably will not be possible to mount a negotiation on non-tariff barriers alone. Chances of success are better in the context of a broad negotiation which also includes tariffs and agricultural trade liberalization.
The principal non-tariff barriers effectively restricting U.S. exports are quotas and variable levies on agricultural products. We have just begun work seeking new approaches to agricultural trade liberalization with a series of special studies in the GATT, the establishment of a policy group in the OECD and the initiation of a series of high-level bilateral consultations with the European Community and others. The potential advantages to the U.S. from forward progress in this area are very high, but achieving this progress is likely to be one of our most difficult trade problems. In most countries the trade barriers are an integral part of domestic agricultural programs, which will not be easily changed.
Developed countries continue to maintain a few effective quotas on industrial products, particularly fuels. Developing countries make much wider use of quotas on the whole range of traded goods, but they are justified on balance-of-payments grounds. In addition, American companies have specifically singled out for complaint foreign countries’ government procurement practices, border tax adjustments, heavy specific taxes on products such as large cars, motion picture screen time quotas and some sanitary and safety regulations.
To make progress in this field, we shall have to be willing to reduce our own non-tariff barriers, many of which will be difficult to put on the negotiating table. Most foreign complaints against our barriers have focused on: The American Selling Price system, our countervailing duty law, valuation provisions of the Tariff Act, U.S. marks of origin and labeling requirements, our wine gallon method of assessing taxes on whiskies, state and federal procurement regulations favoring domestic [Page 485] producers, and the manufacturing clause of the copyright law limiting the importation of English language books printed abroad.
Legislation would be required to change most if not all of these practices and they have long resisted all previous challenges. Congress would certainly not consent to amending them without receiving very rich plums in return from other countries, and it is far from certain that these plums can be obtained.
Section 4(b)—Tariff Negotiating Authority
Modest new authority is needed now in order to offer compensation should the U.S. increase a tariff rate bound under the GATT. This could happen because of an escape clause action, a customs court case or a law changing any particular tariff rate. In the absence of means to compensate, countries affected by the duty increase have the right to retaliate by raising their rates on U.S. exports.
This legislation could be an extension of the provisions of the Trade Expansion Act of 1962 which lapsed in 1967. However, there is not much tariff cutting authority left over in this Act. Most of it was used up in the Kennedy Round. What is left applies mainly to sensitive items, where we might wish to avoid making duty reductions, or to items supplied mainly by countries to which we have no tariff obligations.
Section 4(c)—Border Tax Adjustments
Border tax adjustments (BTAs) have become an important issue. A number of U.S. companies assert that the adjustments made by most European countries have the same effect as increased tariffs. This is a very complicated issue, and the impact of border tax adjustments remains unclear in spite of all the international work done on it. We have argued that the existence of full border adjustments for high European sales or value added taxes harms the trade of countries such as the U.S. that rely less heavily on such taxes. There is no agreement on this point. However, a stronger case can be made that increases in border adjustments do damage trade when not accompanied by equal increases in domestic taxation. The Europeans have been bringing their border taxes up to the level of their domestic rates. No matter how justified Europeans may claim these increases are on the basis of equity, they mean that our exports are competing on a less favorable basis than previously. However, there are knotty theoretical problems in quantifying any damage. The most significant increase, which was made by Germany a year ago, was more than reversed in a November change made for balance of payments purposes.
I do not agree, however, that the answer to this problem is for us to make a unilateral increase in our border adjustments. We now make full [Page 486] border adjustments for the direct effect of our own excise and state and local sales taxes. We could go slightly further on grounds that our adjustments do not fully provide for the secondary effects of these taxes, e.g. calculating and adjusting for the expense to our exporting firms of the gasoline tax they pay to keep their trucks running. If we should make such a case, which might allow our border adjustments to be some 2% higher than currently, some other countries could easily make similar higher adjustments based on the same grounds, with little or no net gain for us. The previous Administration considered such a move but decided against it on the ground that we would gain little from it in trade terms.
We are now well into a U.S. initiated GATT examination of BTA practices and their effects on trade. We are trying to persuade other countries that the present system is inequitable and that border adjustments must be more strictly controlled. So far we have not found much support even among countries with taxation systems similar to ours for changes in the rules, though some foreign officials have indicated we do have a point.
Should the GATT effort not improve the situation we will have to consider whether taking unilateral action is a satisfactory substitute. Such a move at this time, however, is premature.
Section 4(d)—American Selling Price
It is important that we make a vigorous effort to get legislation to permit the United States to eliminate the American Selling Price method of determining value for customs purposes. The Europeans, and to a lesser extent Japan, continue to place major importance on our removing this barrier, applied principally to certain chemical imports. These countries consider action on ASP a test of U.S. willingness to relax non-tariff barriers. Continued failure to implement the conditional agreement worked out on chemicals during the Kennedy Round will make it difficult to negotiate in the trade field.
In a Kennedy Round conditional agreement, the United States undertook to shift from ASP to the normal basis of valuation (export value) in exchange for significant concessions by the Europeans on chemicals duties and on some non-tariff barriers. These concessions would provide substantial export opportunities for U.S. industry. The new U.S. rates of duty on chemicals would still be substantially above those in other countries and would provide adequate protection for our producers who are a strong and efficient industry with a demonstrated record of international competitive ability.
Authorization to implement the U.S. undertaking on ASP was included in the principal trade bill submitted by the previous [Page 487] Administration to the last Congress. Hearings were held by the Ways and Means Committee but no further action was taken on any part of the bill. The domestic chemical industry is almost totally opposed to losing ASP protection and questions the value to it of lower duties abroad.
Section 4(e)—Escape Clause and Adjustment Assistance
The escape clause provisions of existing law do need liberalizing. U.S. trade legislation has for years incorporated the principle that the cost of injury resulting from our trade policy should be shared by the nation’s economy as a whole. The existing provisions, however, have proven patently ineffective.
Under the escape clause, Title III of the Trade Expansion Act of 1962, not a single industry has been able to satisfy the eligibility criteria for tariff relief. Similarly, no firm or group of workers has succeeded in obtaining from the Tariff Commission an affirmative finding of existing or threatened serious injury, which is required before adjustment assistance can be given.
With Title III a dead letter, business and labor have turned to Congress for relief. Members of Congress who might otherwise be reluctant to support quota bills have found it difficult to resist the pressures in the absence of other meaningful alternatives.
There has been substantial public discussion of the need to liberalize both the escape clause and adjustment assistance criteria and, in principle, no serious opposition is apt to arise. Soundings taken last year when interim trade legislation was sent to Congress bear out this expectation.
The problem we may well face in this area is a protectionist end run to loosen the escape clause criteria to a degree that would damage rather than strengthen our ability to secure international cooperation in moving toward freer trade. Foreigners would have little incentive to negotiate with us if our concessions could be revoked under an easy test of injury, and relations would be strained by the ensuing retaliation.
With regard to adjustment assistance, generous criteria would not have an adverse impact in the trade field. Such criteria, however, will involve budgetary costs.
Liberalization of Title III criteria would bring back to the ranks some members of Congress who have recently supported restrictive bills because no administrative relief for injury from imports was in fact available. We also stand to win back some labor groups if adjustment assistance becomes workable.
We should not fool ourselves, however, that we will make serious inroads on hard-core protectionists, whose basic philosophy and objectives [Page 488] seek to contain foreign competition on a broad front, not merely to provide remedies for the occasional cases of real injury from an otherwise sound trade policy.
Section 4(f)—Quota Bills
I agree fully that there is real danger to our exports from enactment of quota legislation and that it should be strongly opposed. Despite strong domestic pressures for such controls, the U.S. record in avoiding new restrictions on imports has so far been good. We have, it is true, persuaded others to restrain their exports of cotton textiles and a few other minor products and more recently steel and meat. We have done this and so far managed to escape retaliation.
The situation would change drastically, however, if the threat of quota legislation should become a reality. A year and a half of keeping our partners on tenterhooks about the prospects of quotas has created a good deal of friction in the trade field. Uncertainty over the U.S. commitment to liberal trade has frayed their nerves and they would rapidly boil over if quota laws were enacted. It would be quite difficult to restrain a cycle of retaliation and counter-retaliation possibly leading to a trade war that could undercut our major political interests in Europe.