Foreign Relations of the United States, 1977–1980, Volume III, Foreign Economic Policy

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

Washington, March 26, 1977

SUBJECT

• Shoes: EPG Meeting, March 28

The EPG will hold a “principals only” meeting on Monday, March 28 at 2:15 p.m., with the President, on the footwear import relief case.² The President must decide before April 9 whether to grant or deny import relief as recommended by the US International Trade Commission (ITC). I strongly recommend that you support Option I, calling for no import restrictions.

You are familiar with some of the details of this case from my previous memorandum (Tab II).³ After innumerable interagency discussions, a number of options have been rejected. No agency recommends implementation of the tariff rate quota system proposed by the ITC; it is simply too restrictive. Other recommendations for import quotas, voluntary restraint agreements or tariff increases were also considered unacceptable or unworkable. All agencies recommend that the President announce a program of expanded adjustment assistance, regardless of whether he also decides to provide import relief. Thus, it all boils down to two options:

I. No import restrictions; with special adjustment assistance.

II. Tariff rate quota; with special adjustment assistance.

State, Treasury, CEA and HUD support Option I. The details are set forth in Tab A.⁴ In brief, under this option the President, on April 9, would announce:

—establishment, by Executive Order, of an Office of Structural Adjustment to coordinate and oversee programs to assist workers, firms and import-impacted communities adjust to import competition. This office would use existing legislative authority under the Trade Act, the Public Works and Economic Development Act, manpower and employment training programs, and other programs under the Small Business Administration and DOD to stimulate productive economic activity in areas suffering from import competition.

—plans to introduce new legislation to facilitate adjustment. These would include a Trade Adjustment Bank, tax relief and/or subsidies for US shoe firms, and additional amendments to the Trade Act to improve existing programs.

STR, OMB, Commerce, Labor and Agriculture (all largely for domestic political reasons) support Option II (Tab B).⁵ This would establish a tariff rate quota which would increase duties on imports above 322 million pairs (1976 imports amounted to 370 million pairs). This option:

—establishes as its base the average of 1974–76 imports (306.6 million pairs).

—provides for a special growth basket of 15.3 million pairs (5% of 1974–76 imports) open to all foreign suppliers.

—sets quotas for 18 countries plus the EC with an “all other” basket category for the smaller suppliers.

—imposes a 40% duty on above quota shipments.

—calls for a program lasting 3 years with the possibility of one 3-year extension.

There are numerous arguments against import relief. We would expect Blumenthal and Schultze to emphasize the domestic aspects of the problem, e.g. that relief would be inflationary, hit low income consumers hardest, give the most efficient domestic producers windfall profits, and do little to help the domestic industry improve its competitive position against imports.

From a foreign policy standpoint, trade restrictions would:

—invite emulation on the part of our trading partners (many of whom face severe domestic economic difficulties and have governments too weak to resist an assault by protectionist forces.)

—have especially adverse political repercussions in Italy, Spain and Brazil (although Option II is not harsh in restricting exports from these countries, their peoples will miss the technical nuances and see this as a threat to a key export sector); endanger economic recovery in a number of countries.

—have a highly negative effect on the Summit and North/South relations.

Those who favor protection will likely emphasize the domestic political and Congressional considerations, and downplay the foreign reaction. They will stress that the law exists to deal with such trade injury situations, that the shoe industry has a prima facie case for relief, that Congress expects prompt and effective action to restrict shoe imports, and that failure to provide import relief could lead to a Congressional override with possible adverse implications for the President’s programs in other areas. They may also argue that Option II allows for an increase in Italian shoe exports and only a slight decrease in exports from Brazil, Spain, etc.

On balance, the costs of restricting imports in terms of our broader foreign policy objectives coupled with the cost in terms of the President’s domestic economic goals far outweigh any benefits that might accrue to the domestic shoe industry from reduced import competition. Moreover, there are important domestic political benefits—viz. all consumers. Thus, I strongly recommend that you support Blumenthal, Schultze, and State in opposing import restrictions.

Talking Points

—This is the single most important decision in the area of foreign economic policy that the President will have to make in the first year of his Administration. The stakes are extremely high.

—It impacts on our relations with key allies, on the Summit, on our relations with the developing nations, and on the international financial and trading system. If the US turns towards protectionism at this critical stage of Western economic recovery, we can expect others (with weaker economies and governments too shaky to resist protectionist pressures) to follow suit. The liberal trading regime that we have nurtured since the end of World War II may not be able to stand the strain. If the US cannot hold the line against domestic pressures, we can hardly expect the Italians, British and others with payments problems to do so.

—Import restrictions will hit the developing countries in East Asia and Latin America hardest. These are the newest entrants to the US footwear market. They took seriously our advice to diversify exports and seek out new product lines to promote their development. Now that they have done so, and quite effectively, we threaten to shut the door. Our credibility in the North/South dialogue will suffer as a result. Since we are about to renew important discussions in the CIEC, the timing would be most unfortunate.

—(If it is argued that there would be no cutback in Italian exports, and only a slight cut in imports from Brazil, Spain and other LDCs.) This misses the emulation point. Also even if our restrictions are relatively mild, they will be seen as a blow to key industries in these countries, and will stimulate other countries to impose restrictions which will have a more severe impact on the shoe exports, and other exports, of these countries.

—We cannot ignore the impact that trade restrictions will have on our own export sectors. By limiting imports, we are not only asking our consumers to pay higher prices, but also to the extent that our trading partners retaliate or demand compensation we are forcing other US industries and workers to bear the financial burden for protecting the shoe industry.

—Also, the supposed gains in domestic jobs in the shoe industry may be less than expected. The lawyers representing the Mexican footwear manufacturers have gathered data showing that there is a high correlation between Mexican shoe production and movement of illegal aliens into the US. They assert that if we limit Mexican shoe exports, the workers will simply move across the border and market their skills in Los Angeles and elsewhere. A certain percentage of domestic jobs supposedly gained by import restraints would thus be lost to illegal aliens.

1. Source: Carter Library, National Security Affairs, Brzezinski Material, Subject File, Box 63, Special Representative for Trade Negotiations (STR): 3/77–3/80. Confidential.
2. The meeting took place in the Roosevelt Room of the White House on March 28 from 2:45 until 4 p.m. (Carter Library, Presidential Materials, President’s Daily Diary) No minutes of the meeting were found.
3. Tab II, attached, is printed as Document 10. It sets out the options discussed here.
4. Tab A, attached but not printed, is an undated paper entitled “Option I (No Import Restrictions, Special Assistance Program).”
5. Tab B, attached but not printed, is an undated paper entitled “Option II (Three Year Tariff Rate Quota).”