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220. Memorandum From the Under Secretary of the Treasury for Monetary Affairs (Solomon) to Secretary of the Treasury Blumenthal 1

SUBJECT

  • The Cost of the MTN: A Short List of “Sweeteners”

In order to liberalize trade in the MTN, we have had to restrict trade in certain sectors. These “sweeteners” were the political price paid by STR and the Administration to gain the support, or at least the non-opposition, of certain industries when the MTN package goes to a vote in Congress.

We break these down into two groups. The first are those paid directly in order to secure agreement to specific elements of the MTN package. An example would be the tax deferral given the spirits industry as part of the negotiation over wine gallon. The second group are those actions which, although not directly related to the MTN, were required to appease protectionist pressures which might have had a spillover effect. An example would be the shoe OMAs. The second are designated (*) below.

We have attached a table prepared by the Office of Trade Research in March, which estimates the costs to the United States of import restrictions by sector.2 It finds that the expense to consumers of import protection was about $80 billion in 1978. A large part of this total represented transfers to U.S. producers, leaving an efficiency loss to the U.S. economy of about $8 billion.

*1) Summer 1977: OMAs were imposed on shoes imported from Korea and Taiwan, and on color TVs from Japan. The latter was extended also to Korea and Taiwan in 1979. The principal cost to U.S. consumers is the long-run dynamic cost of discouraging investment abroad in low-cost production destined for the U.S. market.

2) February, 1978: The Trigger Price Mechanism took effect. Treasury estimates of the price effects of the TPM range from 3.1 to 14 percent. Without the TPM, we would have been under intense pressure to [Page 633]exempt steel altogether from the MTN. In addition, the quotas on specialty steel originally imposed in 1976 will run for another eight months.

3) January 1979: The textile white paper announced that bilateral agreements reached under the MFA will be tightened to eliminate surges, and that future textile trade will be more closely monitored. The cost estimates in the attachment are based on existing quota and tariff restrictions, assuming estimated price differentials of 27% in textiles and 36% in apparel. If monitoring results in further restrictions, costs will of course increase.

4) ASP: On rubber footwear, we converted American Selling Price to AVE levels of protection, but offered no cuts in the resulting tariffs (which run as high as 48%). In chemicals, we excepted a number of basic chemical products from tariff cuts in order to satisfy industry fears of potential import competition.

5) Agriculture: No across-the-board tariff formula was applied. Liberalization was applied only on items specifically requested, and paid for, by our trading partners.

6) Meat: Indications are that Congress will defeat the Administration’s efforts to raise our minimum annual beef import quota from 1.2 billion pounds to 1.3 billion. As a result, beef imports probably will vary from about 5.6% to about 11% of total U.S. consumption over the next ten years.

*7) Sugar quotas: A bill pending in the House would raise the U.S. sugar support price from 15 cents to 15.8 cents per pound. Conventional wisdom has it that every 1 cent increase results in an additional $500 million cost to consumers. The Administration is supporting the growers because Senator Church is holding ISA ratification hostage, but consumer groups are resisting.

8) Wine Gallon: The 15-day deferral of tax payments by the domestic industry will result in lost revenue to the Treasury, but probably not in a cost to consumers.

9) Tariff Exceptions: Textiles, leather goods, consumer electronics, and other sectors benefitted from numerous tariff exceptions which will result in higher prices to consumers, though these are not now quantifiable.

*+fa10) Escape Clause cases: Recent 201 actions3 on nuts, bolts and screws, CB radios, high-carbon ferrochrome, etc. received additional impetus from the need to head off pressures on the MTN agreements.

11) Extended Tariff Authority: Political pressure to exclude entire industries by name (textiles, steel mill products, chemicals, footwear) [Page 634]from this authority led to a decision to drop the whole proposal. We now have less flexibility to negotiate future trade liberalization.

  1. Source: Carter Library, Anthony Solomon Collection, 1977–1980, Chronological File, Box 6, 6/1/79–6/19/79. No classification marking. Printed from an uninitialed copy. Drafted on June 19 by E. Barber (ITT) and reviewed by Ray (ITT), Hufbauer (IT), and Bergsten. The memorandum was forwarded to Blumenthal under cover of a June 19 memorandum from Solomon. (Ibid.)
  2. Attached but not printed is an undated table entitled “Costs to the United States in 1978 of Import Restrictions on US Imports.”
  3. Section 201 of the Trade Act of 1974 deals with escape clause actions.