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102. Memorandum From the Special Representative for Trade Negotiations (Strauss) to President Carter 1

SUBJECT

  • Escape Clause Case on Bolts, Nuts, and Large Screws

Background

On December 12, 1977 the U.S. International Trade Commission (USITC) reported to you under section 201 of the Trade Act of 1974 its findings that the domestic bolt, nut and large screw industry was injured or threatened with injury due to increased imports. Three of the four Commissioners participating in this case recommended that you proclaim increased tariffs for a five-year period. These tariffs would be 30 percent in the first two years, phasing down to 20 percent in the fifth year (current duties are less than one percent on nuts and bolts and 9.5–12.5 percent on screws). If you do not accept the USITC remedy, your decision will be subject to Congressional override by joint resolution of a majority of those present and voting in both houses—in which case the USITC remedy would take effect.

Action Required

By February 10, 1978 you must decide and announce whether import relief for the domestic nut, bolt, and large screw industry is in the national economic interest. If you decide relief is appropriate you must also announce at the same time what form of relief will be given. Relief must then be proclaimed within 15 days of the announcement, unless you decide to negotiate orderly marketing agreements in which case you have 90 days to proclaim relief.

Key Factors

This is the second escape clause case filed by the domestic industry in the last three years. In 1975, the USITC found that the industry was not being injured or threatened with injury due to increased imports by a 3–2 vote. Subsequent developments leading to the present case persuaded one Commissioner to switch his vote, resulting in a 3–1 decision in favor of the industry.

U.S. imports of bolts, nuts, and large screws have increased their share of the U.S. market in each year since 1969, rising from a 21 percent share in 1969 to 44 percent in 1976. Imports of nuts now account for [Page 320]more than half of U.S. consumption. The value of imports involved was $229 million in 1976.

Japan is the largest foreign supplier to the U.S. market, representing about three-fourths of total imports. Canada is the second largest supplier with about eight percent of the total (Note: Canada also ships a substantial volume of these products under the bilateral Automotive Products Trade Agreement2 which is not covered by the USITC injury finding). Other sources of imports are the European Community (EC), Spain, Taiwan, and India.

The domestic industry consists of a large number of small and medium sized firms operating about 180 plants. These operations are concentrated in Ohio, Illinois, Michigan, Pennsylvania, and Connecticut. More than two-thirds of the industry’s shipments are to original equipment manufacturers (OEMs) and the remainder to distributors. About one-fourth of the total U.S. market and a higher proportion of domestic shipments is accounted for by the automotive industry where there is very little import competition. Domestic fastener producers also have little import competition in sales of specialized fasteners to other OEMs.

Domestic production and shipments by the industry are off substantially in the last three years as compared with the 1969–74 period. There has been some improvement since 1975 due mainly to strong automotive demand. Employment is also down significantly and has not recovered. Since 1974 about 4,500 production worker jobs have been lost, representing about one-quarter of industry’s production worker employment (which is now approximately 13,000 persons). Many unemployed fastener workers are now receiving Trade Adjustment Assistance benefits. According to Department of Labor data, over 4,000 bolt, nut, and large screw workers had received adjustment assistance funds, through September 1977. The Department of Labor predicts continuing erosion in employment if relief is not granted.

Despite these setbacks, the industry remains reasonably profitable with a return on sales in excess of the average for all manufacturing, although it should be noted that a number of firms have ceased operations. According to the industry, the most profitable segment of its business is the automotive industry and returns are much lower in other markets where import competition is more severe. Firms that do not serve the automotive industry are said to be much worse off than those who do.

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The implementation of the trigger price system for steel imports by the Treasury Department this month is expected to have an adverse impact on the domestic bolt, nut, and large screw industry. It is estimated that 25 percent of the steel used by the fastener industry is imported and that the trigger price system could increase import prices by about 20 percent. Depending on the assumptions used, this could raise total costs of production of bolts, nuts, and large screws by 10–16 percent for firms relying solely on imported steel.

The Federal Preparedness Agency (FPA) has just completed a staff study of fastener requirements during a national emergency.3 The scope of the study is broader than the products covered by the escape clause case and the results are preliminary. It concludes that under certain conditions, notably restricted access to foreign supplies, the U.S. would face serious shortages of fasteners in a wartime emergency. These findings have become publicly available and a number of Congressmen have already written to you stressing national security aspects of the case.

We have been contacted by about 50 Congressmen and 12 Senators, almost all of whom have expressed support for the industry’s case. The Congressional delegations from Ohio, Michigan, Illinois, Pennsylvania, Connecticut, Indiana, and Missouri account for most of these contacts.

Recommendations

The Trade Policy Staff Committee (TPSC), acting on behalf of the Cabinet level Trade Policy Committee (TPC), recommends without any agency dissent that you direct the Secretary of the Treasury to undertake an expedited national security investigation on iron or steel bolts, nuts, and large screws under section 232 of the Trade Expansion Act of 1962. Such an investigation would define our national security interests in this industry and could lead to appropriate actions by the U.S. Government (including trade actions) to protect those interests.

I recommend that you approve this TPSC recommendation.4

The Trade Policy Staff Committee split on the question of granting import relief in this case. Labor, Commerce, Interior, and STR recommend that you grant import relief in the form of a tariff rate quota. State, Treasury and Defense recommend that you deny relief on the grounds of national economic interest. Agriculture has not taken a position on this case.

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Option 1: Tariff Rate Quota

Labor, Commerce, Interior, and STR recommend that you proclaim a three-year tariff rate quota based on 1976 import quantities for three product categories—nuts, bolts, and large screws (including lag screws). Imports up to the 1976 level would be dutiable at the present tariff rate (less than one percent for nuts and bolts; 9.5–12.5 percent for large screws) while imports in excess of that level would be charged a 30 percent duty on bolts and large screws and a 40 percent duty on nuts (see Attachment 1 for details).5

These agencies feel that if the domestic industry has not already been seriously injured, it is certainly threatened with serious injury. The proposed remedy is not designed to roll back the situation but to prevent further deterioration. In conjunction with the recommended national security investigation, this relief would prevent any erosion of domestic industry production capability that we might find costly to our national security interests as a result of that investigation. By applying additional duties only to volumes in excess of the 1976 import level (which is only slightly less than the 1977 level), the costs to consumers through inflation is minimized. Imposition of this tariff rate quota system could create some additional jobs although fewer jobs would be created than under USITC’s proposed remedy. Adjustment assistance, in the form of income maintenance, has already been made available to many of the unemployed workers in this industry alleviating pressures on those who would remain out of work. The foreign policy implications of this proposal are judged to be much less serious than under the USITC recommendation. The Japanese Government has in fact informally indicated it would probably not retaliate against a moderate remedy such as this one.

The proposed tariff rate quota remedy falls far short of the domestic producers’ expectations. However, their criticism would be much harsher if no relief were given and the receptivity of Congress to the industry’s case would be much greater in the absence of relief.

I am personally very concerned about the political sensitivity of this case. To deny relief to the industry on its second attempt while at the same time substantially increasing its costs through the steel trigger price system, could be perceived as unfair by many members of Congress. With the additional element of national security concerns in the background, the industry might find considerable support in the Congress for an override. By granting the moderate relief provided by the tariff rate quota, these pressures would be substantially defused [Page 323]and the climate in the Congress for trade agreements we hope to bring back from the MTN would be more favorable. (Note: The Chairmen of both the House and Senate Trade Subcommittees have substantial fastener production in their areas.)

State and Treasury have indicated that they believe this approach would minimize the adverse domestic economic and foreign policy costs of relief, although it would weaken our general commitment to reject protectionism.

I recommend that you proclaim the tariff rate quota proposed by Interior, Commerce, Labor, and STR.6

Option 2; No Import Relief

State, Treasury, and Defense recommend that you determine import relief is not in the national economic interest. They argue that there is insufficient economic justification for import relief. The industry has remained quite profitable despite depressed production and employment. The costs of relief to consumers would be substantial. It is estimated that relief would result in a net job loss to the overall economy due to the drain on consumer expenditures for other goods and services. A significant portion of the industry does not face serious import competition and might receive windfall profits if relief is given. The 20 percent appreciation of the yen during 1977 is expected to alleviate competitive pressures from Japan. (Note: Import prices for a small sample of items were found by the USITC to range from 43 to 93 percent of U.S. producers’ prices in the first half of 1977.) Finally, it is not clear that the industry would undertake major adjustments during a period of import relief to improve its competitiveness.

The foreign policy consequences of granting relief are judged by these agencies as adverse. The U.S. Government would be seen abroad as moving away from its general commitment to reject protectionism. Benefits to developing countries under the Generalized System of Preferences (GSP) would be removed if relief is given (though these benefits are nominal due to low tariffs on the products involved). The Governments of Japan, Canada, Australia, India, and the EC are opposed to relief and the Canadians have threatened retaliation if action is taken.

These agencies support a national security investigation under section 232 as the appropriate way to determine our national security interests and feel the industry will not deteriorate so rapidly that we cannot wait on the results of that investigation.

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For these reasons State, Treasury and Defense recommend you determine relief is not in the national economic interest.7

Views of Other Agencies

Three agencies outside the TPSC structure have expressed an interest in this case. CEA and OMB support Option 2 (No Relief). FPA supports import relief.

Implementation

Attached are drafts of the necessary documents you would need to direct the Secretary of the Treasury to initiate a national security investigation (Attachment 2);8 and to report your decision to the Congress and in the Federal Register should you choose the tariff rate quota option (Attachments 3 and 4).9 We have prepared documentation for option 2 should you choose it.

If you decide to grant relief we will prepare the necessary Presidential Proclamation for your signature within 15 days of your decision.

Also attached for your staff is the TPSC report on this case.10

  1. Source: National Archives, RG 364, 364–80–4, Special Trade Representative Subject Files, 1977–1979, Box 4, Fasteners. Confidential.
  2. The 1965 Automotive Products Trade Agreement, also known as the Auto Pact, governed trade in cars, trucks, buses, and automotive parts and facilitated the integration of the U.S. and Canadian automotive industries.
  3. Not found.
  4. Carter did not indicate his preference with respect to the recommendation.
  5. Attachment 1, attached but not printed, is an undated chart entitled “Three-Year Tariff Rate Quota System.”
  6. Carter did not indicate his preference with respect to the recommendation.
  7. Carter did not indicate his preference with respect to the recommendation. On February 10, however, he notified Strauss, Blumenthal, and Congress of his decision against the provision of import relief on economic grounds. He also directed the launching of an investigation into U.S. fastener imports from the point of view of national security. For the texts of Carter’s memorandum to Strauss and letters to Blumenthal, the Speaker of the House, and the President of the Senate on his decision, see Public Papers of the Presidents of the United States: Jimmy Carter, 1978, Book I, pp. 299–302.
  8. Attachment 2, attached but not printed, is an undated and unsigned draft letter to the Secretary of the Treasury.
  9. Attachments 3 and 4 are attached but not printed. Attachment 3 consists of two undated and unsigned draft letters, one to the Senate and one to the House of Representatives, submitting the President’s report on “Import Relief Action.” Attachment 4 is an undated and unsigned draft memorandum to the Special Representative for Trade Negotiations.
  10. Attached but not printed is a February 6 Trade Policy Staff Committee Action Record, Document 78 10, on the “Review of the USITC Section 201 Report on Bolts, Nuts and Large Screws of Iron or Steel,” which covers a 39-page report.