239. Memorandum From the Special Representative for Trade Negotiations (Dent) to President Ford 1

SUBJECT

  • Trade Policy—Six Months Projection

Overview

Over the next six months the Administration will be required to make decisions on petitions by some key U.S. industries for remedial trade action under the escape clause, countervailing duty, antidumping, and unfair trade practices provisions of U.S. law. Most of these cases are the result of efforts by U.S. private sector interests to test provisions of the Trade Act of 1974 relating to potential remedial actions.

These potential actions come at a sensitive time. Domestically, we have a continuing concern over unemployment, which is expected to [Page 832]remain relatively high despite the modest recovery of the U.S. economy which has been forecast. At the same time, as the U.S. economy proceeds in its gradual recovery, the U.S. trade balance is expected to decline, going from a $3.8 billion surplus on a CIF basis last year to a possible deficit this year.

The current political and economic situation is even more delicate abroad. The recovery of the major foreign economies is expected to lag behind that of the U.S. economy and this can be expected to make them quite defensive in their reactions to what they perceive as a shift to a protectionist trend in the U.S. This attitude is likely to be reinforced by exchange rate instability of some major currencies.

The convergence of a series of potential U.S. trade actions under U.S. domestic laws and heightened foreign sensitivity is likely to strain international cooperative efforts such as the multilateral trade negotiations in the GATT and the pledge of OECD countries to avoid trade restrictive actions. At the same time, it will be more necessary than ever to achieve positive results in these efforts as an effective demonstration that the world is not going protectionist.

Trade Act Remedies

The most pressing of our problems during the next six months will be in the area of managing bilateral trade problems under the relief provisions of the Trade Act.

Automobile Dumping Case. By far the largest pending case is the antidumping complaint against all major foreign producers of automobiles, involving $7.5 billion in U.S. imports. The tentative decision of the Secretary of the Treasury due May 11 is whether foreign producers have sold automobiles in the United States at less than fair value. Before any dumping duties are imposed, the U.S. International Trade Commission (USITC) would have to find injury (at the latest by November 11). While any public determinations on May 11 will thus not be final, appraisement will be withheld, and the decisions will have a sizeable effect on our trading relations. This issue is complicated by the existence of a massive backlog of customs entries which could get caught by an eventual dumping finding, with extremely grave consequences for some manufacturers. Customs is working on this problem.

Import Relief—Shoes. The President must decide by April 20 whether to impose restrictions on $1.1 billion of shoe imports, the largest escape clause case ever brought. The USITC was unanimous in its finding of injury. The EC is the largest supplier by value, with $380 million in exports to us in 1975. Taiwan is the largest supplier by volume. Depending on what kind of relief is given, the impact would fall unevenly on Italy, Spain, Brazil, Taiwan, and South Korea. This case has the potential of being a major irritant in our relations with any or all of these countries, not to mention smaller suppliers.

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Import Relief—Specialty Steel. At the same time as the above matters are being dealt with, we will be attempting to negotiate orderly marketing agreements with the major suppliers of specialty steel, to avoid the imposition of quotas no later than June 14 for three years on $200 million of trade (primarily from Japan, the EC, Sweden and Canada).

Import Relief—Other. On February 28, the USITC found injury to domestic producers of stainless steel flatware. You must decide by April 30 whether to provide relief. Imports of $52 million (1975) are involved. The major suppliers are Japan, Taiwan, and South Korea. ———On March 17, the USITC found that imports are causing injury to domestic producers of mushrooms (1975 imports, $41 million). Only adjustment assistance can be provided to mushroom growers, as this is the remedy recommended by the USITC. Your action is due on this case by May 15. ———The next large cases which are coming up are shrimp (1975 imports, $346 million; USITC decision due May 17) and stainless steel wire (1975 imports, $39 million; USITC decision due June 12). Major suppliers of shrimp are Mexico, Panama, India and Ecuador, and of stainless steel wire are Japan, Sweden, West Germany, and France.

Section 301 Cases. The Trade Act also provides for a new complaint procedure under which U.S. exporters can seek remedial action against unfair foreign trade practices. Cases filed with STR are now pending against many EC agricultural practices, including subsidization into foreign markets in which the U.S. and EC compete, minimum import prices, and other EC agricultural restrictions. It is likely that a case will be filed against the EC’s recently instituted nonfat drymilk mixing regulations, estimated to cause a loss to U.S. soybean exports of approximately $90 million per year. The EC has so far refused to discuss section 301 cases, rejecting the legitimacy of this process. Action in any of these cases can be particularly acrimonious due to the very fact that there is Presidential discretion as to how and when to exercise this authority.

Countervailing Duty Law. The implementation of our countervailing duty law, which now has a time limit on Treasury action, is for the first time fully responsive to legitimate domestic complaints against foreign subsidization. It also provides us with a major irritant in our relations with other countries, particularly as we do not require an injury finding as a prerequisite.

There has been a court challenge to a negative Treasury determination in connection with border tax remissions on steel imports from the EC. There is also likely to be an appeal to the courts from a negative determination with respect to exports of approximately $1 billion of electronic products from Japan. Both of these cases involve the broader question of treatment of indirect tax rebates. There is also a [Page 834]challenge to the Treasury’s decisions on the extent to which regional development schemes should be countervailable. Each of these issues is potentially explosive. While court decisions will not be reached for some time, the cases will be a source of continuing concern to our major trading partners.

Another serious problem is a number of countervailing duty cases involving Brazil. Decisions have been reached on footwear, leather handbags and castor oil, and petitions are pending on scissors and shears, and cotton yarns. Other petitions may follow. This is the most significant issue in U.S.-Brazil trading relations. A major question in the coming months will be whether the countervailing duty waiver provision will be exercised in these cases.

International Cooperative Efforts

Multilateral Trade Negotiations. The MTN is in an early stage of the negotiating process. The more difficult decisions will generally not have to be made until early 1977. Early decisions will be required, however, with respect to tropical products and a general tariff cutting formula.

  • Tropical Products. On March 1, the U.S. offered to cut tariffs on $1 billion of our imports, in exchange for appropriate trade commitments by developing countries. Decisions on a final tropical products agreement will be required in the course of the summer, though the agreement is not expected to be implemented until later.
  • Tariffs. On March 23, the U.S. is tabling an initial U.S. proposal for an across-the-board tariff cutting formula. Our goal is to achieve international agreement on such a formula within a six month period.

OECD Trade Pledge. During the last two years, the United States and other OECD countries agreed to avoid trade restrictive actions to deal with disruptions caused by large oil price increases and the world recession. The current OECD trade pledge will expire in May, and a decision will be required on whether or not it should be renewed. Mr. Van Lennep, the head of the OECD, has suggested that restrictive U.S. trade actions are likely to lead to foreign resistance to a renewal of the pledge.

Other Trade Issues

DISC . On March 16, a GATT Panel first met to review a complaint by the EC against the DISC (Domestic International Sales Corporation) provisions, alleging a violation of GATT rules governing subsidies, and counter-complaints by the United States against similar tax practices of France, Holland and Belgium. The work program of the GATT Panels currently calls for final deliberations beginning July 26, which would be likely to result in a finding (to be referred to the Contracting Parties) by the fall. Given domestic industry support for the DISC, the [Page 835] GATT review will generate considerable interest. If the panel finds that the DISC violates the GATT, there will be a serious inconsistency between U.S. practice and the international rules.

Jackson–Vanik Waiver. The key Trade Act issue with respect to non-market economies during the next six months will be the renewal of the waiver provision of the Jackson/Vanik amendment, which expires on July 4. In the absence of the renewal, it is possible MFN would have to be revoked from Romania, and there would be little possibility under the Trade Act freedom of emigration requirements to extend MFN to other communist countries. The President must request renewal of the waiver no later than June 3. The Economic Policy Board recommends that an extension be sought. The issue is being prepared by the East-West Trade Board for your consideration in early May. While the extension may be non-controversial, it may also develop into a major political fight affecting our relations with Eastern Europe.

Textiles. The Multifiber Arrangement (MFA) expires on December 31, 1977. Extension of the MFA is strongly supported by the U.S. textile industry and the Administration has decided in favor of seeking renewal. Efforts to build international support for extension of the MFA must begin shortly.

The Peoples Republic of China has a growing export trade in textiles to the United States, particularly in cotton (for which it is the second largest supplier). This has been a matter of increasing concern to the U.S. domestic industry, the Congress, and the Administration. At its February 4 meeting, the Textile Trade Policy Group agreed that Ambassador Dent should raise the matter with Secretary Kissinger with a view to finding a solution satisfying our domestic interests, our bilateral trade relations with the PRC, and our equity obligations with third countries under the MFA. I have raised the matter by memorandum to Secretary Kissinger and the problem is now under consideration.

Generalized System of Preferences. GSP is now in effect, covering some $2.5 billion of LDC exports to the United States. The granting or denial of duty-free treatment can be the subject of public petition. Requests for reviews of individual items are likely to result in recommendations to you for removal of a few items from GSP in the near future, with another general review by July 1. There has so far not been a broad domestic reaction against the program, however. A GSP issue that may become significant is whether the Trade Act will be amended to allow the OPEC non-embargoers (primarily Venezuela and Ecuador) to receive GSP.

Palm Oil Imports. Increasing shipments of palm oil to the U.S. have caused concern among U.S. producers and processors of oilseeds, as well as strong Congressional concern. Imported palm oil now accounts for about 8 percent of the U.S. market for edible oils. However, there [Page 836]already exists productive capacity in Malaysia and Indonesia, the major producing countries, to double shipments by 1980. A substantial amount of developing country productive capacity has been financed by the international lending institutions, which derive major financial support from the United States.

Japan: Citrus Fungicide Regulations. Japanese health and sanitary regulations currently prohibit the use of fungicides (TBZ and OPP) which have been utilized on shipments of U.S. citrus to Japan. These fungicides are necessary to inhibit deterioration of the fruit shipped to Japan, and are generally accepted for use internationally. Results from a testing program on the fungicides now underway in Japan are due in May or June. If Japan does not approve these fungicides for use at that time, the industry will be likely to request retaliatory action under Section 301 of the Trade Act of 1974. The U.S. market for fresh citrus in Japan is currently about $80 million.

EC: Cognac–Poultry. If negotiations with the EC to improve access for U.S. turkey and turkey parts are not completed by June 30, the U.S. could take action to restore the penalty tariff rates on imported cognac. This action, which would require a Presidential proclamation, could exacerbate already tender U.S./EC relations in the trade area.

Tariff Items 806.30 and 807.00. Under these items, U.S. goods are shipped abroad for further processing or assembling, and the U.S. components are exempted from duty upon re-importation. U.S. labor strongly supports repeal of these provisions. On Wednesday, March 24, the Administration will be testifying before the Green Subcommittee on items 807.00 and 806.30. On March 17, the Trade Policy Staff Committee agreed on a policy statement supporting retention of these items and opposing the numerous bills which have been introduced to abolish or amend them. The basis for this position is that elimination or amendment of these items will result in a net economic loss for the United States, particularly in regard to the number of jobs affected.

U.S. Meat Imports. The U.S. is currently attempting to negotiate voluntary restraint agreements to limit shipments of beef to the U.S market in 1976. The VRA approach is designed to prevent beef imports from exceeding the trigger level set by the Meat Import Act of 1964. A number of the countries concerned, particularly Australia and the Central American countries, have objected to the size of their export allocations, and it is not clear at this time whether negotiation of agreements will be possible. Imposition of quotas under the Meat Import Act would place us in violation of our GATT obligations and have an adverse effect on our efforts to resist protectionism and expand trade through the MTN.

Relations With Developing Countries. Over the next six months, our relations with LDCs can be expected to be characterized by their increased [Page 837]frustration with what they regard as the rigidities of the international trading system. The system does not provide the special and differential treatment that they feel is their due. Our longer run solution is to negotiate in the Multilateral Trade Negotiations limited special and differential treatment in exchange for the most advanced developing countries accepting increased obligations in the trading system. The increased economic opportunities and the reduction of pressure for import barriers resulting from the expected upturn in the economy may ameliorate, but will not eliminate, this problem.

Conclusion

Despite the favorable outlook for economic recovery in the United States, the next six months will present a series of trade problems which must be dealt with carefully in order to avoid serious repercussions. This problem is aggravated by the fact that economic recovery abroad is lagging behind our own. In addition, there is the continuing danger that monetary conditions, which have a strong influence on trade flows and public attitudes toward trade, will be used abroad as a reason for restrictive trade measures or avoidance of trade liberalization.

There are several actions that can be taken to assist in managing these trade problems:

  • —Administration spokesmen should take full advantage of opportunities to explain to the American public the importance to our economy of trade—the advantages derived from our exports as well as the essentiality of our imports (e.g. 25% are petroleum products).
  • —Consideration should be given to holding public hearings through the mechanism of the interagency Trade Policy Committee to investigate the broad aspects of U.S. foreign trade policy. Such hearings could serve to place the issue of trade policy into a broad national perspective, rather than being dominated by an accumulation of individual grievances which leave an impression of growing protectionism.
  • —We can reinforce the belief abroad that expanding U.S. imports are an important aid to the economic recovery of our trading partners. For example, as our monthly trade statistics are announced, we should note the countries enjoying expanded sales to the U.S. as well as the products involved. Moreover, the Department of Commerce, in reporting monthly on the U.S. Balance of Trade, should stress the balance based on a CIF valuation (i.e. cost includes the value of freight and insurance) of imports rather than the FAS (i.e. free along ship at foreign port) balance which would also be reported. This would more accurately reflect comparisons with our trading partners, and would correct an overstatement of a surplus U.S. trade position.

In what promises to be a trying period of bilateral trade problems, it is important that the United States continue its strong world leadership for continuing an open and free market oriented trade policy. We must at the same time continue to carry out the mandates of the Trade [Page 838]Act in order to sustain public and Congressional support for this policy.2

  1. Source: Ford Library, L. William Seidman Papers, Box 91, Economic Policy Board Subject File, Special Trade Representative, 3/21–31/76. Confidential.
  2. Attached but not printed are two annexes. One describes two upcoming meetings where trade issues would be discussed (the May UNCTAD meeting in Nairobi and the June OECD meeting in Paris); the other consists of charts outlining pending escape clause actions, pending antidumping cases, pending Section 301 cases, pending countervailing duty actions, unfair competitive practices in import trade, and the principal suppliers affected by pending trade actions.