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

192. Memorandum From the General Counsel, Office of the Special Representative For Trade Negotiations (Rivers) to the Special Representative for Trade Negotiations (Strauss) and the Deputy Special Representative for Trade Negotiations (Wolff)¹

Washington, January 16, 1979

SUBJECT

• DISC in the Subsidies Code

As this issue may boil up during my absence from the office this week, I have prepared the following memo explaining how DISC has been handled in the negotiation of a code on subsidies and countervailing duties:

Trade Act Mandate: Congress in the Trade Act of 1974 and its legislative history mandated the President to negotiate new rules on the use of subsidies affecting international trade, particularly export subsidies.

DISC and the European Tax Practices: Meanwhile, the EC brought a GATT complaint against the U.S. alleging DISC to be an export subsidy in violation of the present GATT Article XVI.² The U.S. “counterclaimed” against Belgium, France, and the Netherlands alleging that their income tax practices (failure to tax income from exports that were run through paper tax-haven subsidiaries; non-arm’s length pricing between such subsidiaries and their parent companies) were likewise violations of the present GATT Article XVI.

Panel Discussions: The GATT panels found the DISC to be an export subsidy and a violation of present obligations. The panels also found against the European tax practices. In the latter cases, however, the panels may have gone further than was necessary and wrote opinions directly calling into question a keystone of European tax systems (the “principle of territoriality”, i.e., European tax systems do not purport to tax income generated abroad).

Congress and DISC: Meanwhile Congress in the tax legislation of 1977–78, expressly declined to repeal DISC, despite Administration recommendations.

Problem: In the light of these developments, how does one negotiate a code on subsidies and countervailing duties, especially one which prohibits export subsidies and asks developing countries to accept an obligation to eliminate their export subsidies? Keep in mind that the DISC has been found to be a violation of the present rules. Keep in mind also that Congress is not about to repeal the DISC under the present circumstances. Predictably, our trading partners made the repeal of DISC a pre-condition for the negotiation of a code on subsidies and countervailing duties.

Tactical Solution: A year ago, we told our negotiating counterparts that we would repeal DISC when they agreed to adopt the panel reports on the European tax practices in toto, (something we knew they could not agree to) thereby creating a deadlock on the issue. A year passed, during which we negotiated a subsidies code containing, among other things, a flat ban on export subsidies on industrial products. Export subsidies are identified in the code both by means of a general definition, and by an “illustrative list”. Two months ago, we told our negotiating counterparts, ‘Wouldn’t it be a pity if our work of the past year were to be lost because of our inability to resolve this DISC/direct tax practice issue? What we need is some language in the illustrative list saying, in effect, signatories are concerned about the relation between direct tax practices and trade and agree that there should be a post-MTN conference on direct tax practices with a view to supplementing this illustrative list.’ This has resulted in two alternative formulations in the attachment.³ Both versions: (1) freeze the present situation and put the DISC issue in abeyance; (2) set the stage for an international tax conference that Conable and others have sought for so long, and (3) sets the precedent of amending and supplementing the subsidies code.

DISC Lobby: The DISC lobby is angry because:

(1) Some of them think the subsidies code repeals DISC. (It does not; this is not a self-executing agreement. Even after the subsidies code is accepted by the Congress, the DISC will remain in place until it is specifically repealed by the Congress.)

(2) They say the Code “puts another nail in the coffin of DISC”;

(3) They fear it changes the politics of DISC (e.g., Kennedy can make another GATT argument as to why DISC should be repealed); and

(4) Probably, because they view the subsidies code as effectively deterring any additional export tax incentives.

Counter-arguments:

(1) The subsidies code does not materially affect the legal standing of the DISC, either as a matter of domestic law (it will not be repealed) or under the GATT (the panel report on the DISC is a fact of life and we go no further toward incriminating the DISC).⁴

1. Source: National Archives, RG 364, 364–80–4, Special Trade Representative Subject Files, 1977–1979, Box 3, DISC 1977. No classification marking.
2. Article XVI of the General Agreement on Tariffs and Trade deals with “Subsidies.”
3. Attached but not printed is an undated paper entitled “Annex A—Illustrative List of Export Subsidies.”
4. DISC lawyers make an argument that if Version 1 is adopted in approving the subsidies code, Congress will be implicitly accepting the panel report on DISC. I believe any such objection can be met by a disclaimer in the legislative history of the implementing legislation. [Footnote in the original.]