130. Memorandum From Robert Hormats of the National Security Council Staff to the President’s Assistant for National Security Affairs (Scowcroft)1


  • Economic Storm Warnings

In both the monetary and trade areas there are major storm warnings on the horizon. Volatility in currency markets, reflecting major internal problems in Britain and Italy, has contributed to a deteriorating psychological and political climate in Europe. The US decision on relief for the specialty steel industry,2 and prospects for additional use of the escape clause, countervailing duty, anti-dumping and unfair trade practices provisions of the Trade Act are being characterized as a manifestation of overt protectionism in the US at a time when European recovery is lagging behind that of the US, and levels of unemployment remain high. The resulting strain on international cooperative efforts, prospects for increasing international protectionism and a deterioration in the economic and political situations in the UK, Italy, and Spain warrant urgent high-level USG attention to the problems at hand.

With respect to monetary policy, the lira, which had been held at a rate of 680 to the dollar at the cost of $1.5 billion worth of intervention by the Italian Central Bank has now dropped roughly 20%, to approximately 850 to the dollar. While this will strengthen Italian exports, it will also worsen Italian inflation and could contribute to a further lack of confidence in the Christian Democrats. Sterling has now dropped to roughly $1.90 in a two-week period again helping British exports but worsening inflation. Both Italy and Britain, plagued by domestic inflation, are unlikely to achieve in coming months the domestic economic stability required to stabilize their exchange rates. And the required adjustment from an economy based on foreign borrowings to [Page 466] one forced to live more within its means will require a discipline which could cause major internal political difficulties.

The French franc (whose weakness has resulted from higher rates of inflation in France than in Germany and the fall of the lira and sterling) has fallen by roughly 5% since January 1. This has forced Giscard to suffer the political embarrassment of having to withdraw from the European “snake”3 which France had entered last summer as a political symbol of its commitment to stabilize fluctuations among European currencies and which the French Central Bank had spent over $1.7 billion in the last week to remain in.

Although order may return to foreign exchange markets as speculation decreases, underlying internal economic instability in Italy and France, and a speculative psychology which feeds on continued internal instability, may cause outbreaks of currency volatility. From the point of view of US exports, the drop in value of the franc, pound, and lira, which has roughly paralleled increases in internal prices in those countries reflecting differential rates of inflation, will probably not harm the competitive position of US producers.

With respect to trade, we face a potential disaster:

  • —On May 11 Treasury must decide whether foreign auto producers have sold in the US at less than fair value. If they do so (and it is expected that they will find this to be the case for a substantial percentage of the $7.5 billion worth of autos imported into the US affected by the complaint), the issue would go to the ITC to determine by November 11 if injury to US producers or consumers has taken place. In the interim, appraisement of all imported autos affected by the Treasury finding will be withheld, i.e., importers would not know how much duty they would have to pay and thus not know the final price of the foreign car in the US. This would inject enormous uncertainties among importers and potential buyers of imported cars.
  • —The President must decide by April 20 whether to impose restraints on $1.1 billion of shoe imports. The largest supplier of shoes is the EC (with $380 million exports to us in 1975), and Italy within the EC. Spain, Brazil, Taiwan, and South Korea would also be affected.
  • —The President must decide in April whether to provide relief on stainless steel flatware (suppliers are Japan, Taiwan, and South Korea), shrimp and stainless steel wire.
  • —A number of unfair trade practices cases are also pending which affect the EC and other US trading partners.
  • —And there have been court challenges to a negative Treasury determination with respect to border tax remissions on steel imports from the EC and $1 billion worth of electronic product imports from Japan. There are also countervailing duty complaints against Brazilian leather handbags, shoes, cotton yarns and castor oil.

The EPB discussed the monetary situation on Wednesday4 and trade will be discussed on Thursday or Friday.5 I have privately discussed the trade issues with Fred Dent and his people and the monetary problems with Yeo.

Yeo is going to meet with German and British officials this weekend in London (highly sensitive). Greenspan and I will meet with him before he departs to explore potential remedies to the problem including ways we can work more closely with the Germans (since US/FRG cooperation will be essential in any solution). The EPB will also examine policy options next week in preparation for a meeting with the President.

Dent is preparing a paper listing upcoming trade issues—the picture is not pretty and doubtless will shock the EPB with the enormous magnitude of the trade vulnerable to import restrictions under the 1974 Trade Act. We shall have to work quickly (before the shoe decision) to develop an overall approach to take to the Hill and the American public in order to convince the parties involved that restraint in our implementation of the provisions of the law is in the US interest. If we do not have an “umbrella” approach, we could be “ad hoced” into protectionist responses on each item which comes before the International Trade Commission, the Treasury or the President.

  1. Source: Ford Library, National Security Adviser, NSC International Economic Affairs Staff Files, Box 5, Presidential Subject File, General Economic. Secret; Sensitive; Eyes Only.
  2. On March 16, the Ford administration determined that U.S. specialty steel producers had been injured by imports; however, it delayed the imposition of quotas for 90 days to provide time for the negotiation of restrictive import arrangements with foreign suppliers.
  3. The French Government permitted the franc to float freely outside the EC snake on March 15. (The New York Times, March 15, 1976, p. 1)
  4. March 17, the date of this memorandum, was a Wednesday. It is unclear whether Hormats was referring to a discussion earlier that day or to one the previous week on March 10.
  5. Thursday, March 18, or Friday, March 19.