232. Memorandum From the Chairman of the Economic Policy Group (Miller) to President Carter 1
- Administration Steel Policy
As you know, United States Steel is threatening to file broad-based antidumping petitions against European and Japanese steel producers, unless the Government offers the industry relief from imports, environmental regulations and wage-price guidelines, and provides incentives to capital formation. Other steel companies would probably follow suit.2[Page 675]
Declining economic activity, particularly in the automotive and construction sectors which are major steel consumers, and increases in costs are now putting pressure on U.S. steel companies. We are sensitive to this short term problem, to the industry’s long run need to modernize, and to their difficulties with generating sufficient capital for modernization. We have indicated a willingness to work with the industry to improve government policies.3
It is important to emphasize, however, that this Administration already has a substantial program of measures in place to help the steel industry. Those measures include the Trigger Price Mechanism (TPM),4 an EDA loan guarantee program, a reduction in the depreciation guideline life for steel plant and equipment, and a steel industry-EPA review of environmental regulations. This program has been operating since 1978, and significant progress has been made.
Imports for 1979 accounted for approximately 15.2 percent of domestic steel consumption as compared to an 18.1 percent share in 1978. However, in the last quarter of 1979 imports were running at a rate equal to 17.5–18.5 percent of domestic steel consumption.
After suffering losses in 1977, the industry recorded a $1.3 billion profit in 1978. Industry profits continued to climb in the first nine months of 1979, but because of U.S. Steel’s record losses in the fourth quarter, the industry’s annual profits in 1979 will be close to the 1978 level. At this level industry profits as a percent of capital will remain at about half the average for all manufacturing industries. The average rate of utilization of steel industry plant and equipment in 1979 was 87 percent, as compared with rates of 78 percent for 1978 and 77 percent for 1977. In 1980 the utilization rate is expected to fall back into the 80–83 percent range. The industry’s cash flow increased by 72 percent from 1977 to 1978. We expect the industry’s cash flow to remain roughly constant in 1979, but it will drop in 1980, as profits decline.
In light of our existing program and current industry conditions, new initiatives of the kind the industry is requesting are not appropriate since they would require an unacceptable level of subsidization and would conflict with anti-inflation and trade policies.
1. Your principal advisors on this issue recommend the following policy:[Page 676]
a. The Administration is sensitive to the concerns and conditions of the steel industry, steel workers and affected communities, and will continue to try to improve government policies in this area.
b. This Administration is taking actions to assist the industry.
1. The Trigger Price Mechanism (TPM) appears to have eliminated the injurious effect of dumping and has reduced imports. The Administration consulted regularly with the industry on how the operation and methodology of the TPM could be improved.
2. A maximum reduction of depreciation guideline lives for steel plant and equipment, consistent with our statute, contributed in part to the substantial improvement in the industry’s cash flow. We recognize, however, that the industry still has a cash flow deficiency. At some later time, if the overall economic situation permits a tax cut, we will propose actions designed to improve cash flow and stimulate investment. Such action would particularly benefit capital intensive industries such as steel.
3. There is an intensive steel industry-EPA review of environmental regulations affecting the industry to determine if our environmental goals can be achieved at a lower cost. This cooperative process, which is of substantial benefit to both the industry and the EPA, and resulted in the adoption of the bubble concept for air pollution control, will continue.
4. The Tripartite Committee, consisting of industry, labor and government officials, will continue to review issues of interest to the steel industry and steel workers.5
5. Given our trade and anti-inflationary policies and the situation under which the Trigger Price Mechanism (TPM) was initiated, the Administration will adhere to its policy, as stated repeatedly to the industry, labor, the Congress, and the public, and suspend the TPM if major steel antidumping cases are filed. We would be prepared, however, to reactivate the TPM if the dumping cases were withdrawn or resolved in an appropriate manner.
2. Should the U.S. Steel Company and other U.S. companies file their threatened antidumping petitions against European and Japanese producers (because the Government refused to grant their requests) we recommend the Administration suspend the Trigger Price Mechanism (TPM) for several reasons:
—If we don’t suspend TPM now, we are contradicting our stated policy of not running a dual antidumping system, and the credibility of our trade and anti-inflationary policies could be seriously affected.
—The filing of the petitions suggests that the industry does not believe the TPM, which was instituted as a temporary measure, is now adequately addressing the problem of dumping.[Page 677]
—This is particularly true if petitions are brought against Japanese producers, whose average costs are the basis of trigger prices.
—With the new antidumping statute,6 the TPM fast track procedure offers no saving in time once an investigation is started.
—Petitions against EC producers would mean that roughly 43 percent of current U.S. steel imports (33 percent EC, 10 percent Canada) need not be monitored by the TPM. If the petitions also include Japanese producers, then 76 percent of current U.S. imports would not require TPM monitoring.
—With a petition against Japanese steel producers, the Japanese can be expected to refuse to supply cost of production data which is the basis of the TPM.
—We do not have sufficient staff to simultaneously administer the TPM and process major antidumping cases; nor do we believe the TPM should be applied selectively.
3. The filing of antidumping petitions may lead to a serious disruption of U.S.–EC trade relations. (The Japanese are less concerned, since they are not as vulnerable to dumping charges.)
In order to mitigate the damaging effects of these petitions on U.S.–EC relations, we should instruct Ambassador Enders to inform Commissioner Davignon immediately when the petitions are filed, and he and other Administration officials should—through intensive consultations—endeavor to explain to the EC that:
—We cannot deflect these cases in the absence of a more restrictive import regime which would be more detrimental to the EC, and/or unacceptable subsidization of our steel industry which conflicts with our MTN Subsidy/CVD Code obligations and our macroeconomic policies.
—The MTN provides increased discipline in our trading relationships. New rules were negotiated and it is natural that they should now be used.
—We should urge the Community not to overreact, and to recognize that the U.S. Government has no legal right to refuse to process these cases. They are private legal actions which should not trigger protectionist actions by governments.
—The dumping petitions will take time to complete (at least 160 days) and the outcome, both with regard to findings of sales at less than fair value and injury, is uncertain. European retaliation prior to any determination of these cases could trigger a U.S. counter-action, precipitating an unwarranted trade war.[Page 678]
—We urge the EC to cooperate with us as we seek information overseas. It is in all our interests to see these cases disposed of as quickly as possible. We will of course stay in close touch with the Commission.
—The TPM assured access to our market and was of particular benefit to EC steel producers. We have deliberately avoided abolishing the TPM. We have suspended it, and will be ready to reinstate it.
Heads of governments also should be involved, since broader U.S.-European relations are at stake. We want not only to avert European retaliation; we also want to prevent this issue from damaging these relations, at a time of grave external crisis. Henry Owen will submit to you draft letters to European leaders on this issue.7
- Source: Carter Library, Staff Office Files, Council of Economic Advisers, Charles L. Schultze Subject Files, Box 81, [Steel] . No classification marking. Carter wrote at the top of the page: “Bill—ok—Carefully orchestrate our PR effort—Here & in Europe/Japan. J.” The memorandum was sent to Miller for his signature under cover of a February 7 memorandum from Solomon, who reported that Hormats, Cooper, Owen, and Commerce Department officials agreed to the memorandum; a handwritten note on Solomon’s memorandum indicates that comments received from Schultze and Kahn had been incorporated into the memorandum for Carter. (Carter Library, Anthony Solomon Collection, 1977–1980, Chronological File, Box 8, 2/1/80–2/14/80)↩
- In a February 12 memorandum to Eizenstat, McDonald characterized this memorandum as “quite disturbing. It places this extremely complex problem on the President’s desk prematurely, offers no reasonable set of options for Presidential review, accepts as inevitable a major confrontation internationally and domestically, and inadequately describes the dire consequences of following this course.” McDonald urged making “every effort to work out an amicable solution with the industry and the Europeans.” (Carter Library, Staff Office Files, Domestic Policy Staff, Eizenstat Files, Box 283, Steel (CF, O/A 731) (2))↩
- In a February 15 memorandum to Carter, Miller reported on a meeting the previous day between EPG members and steel industry representatives. (Carter Library, Staff Office Files, Council of Economic Advisers, Charles L. Schultze Subject Files, Box 80, Steel )↩
- See footnote 3, Document 79.↩
- Establishment of the Tripartite Advisory Committee was one of the recommendations of the Steel Task Force; see Document 79.↩
- The Trade Agreements Act of 1979 revised the way in which anti-dumping petitions were investigated and assessed.↩
- No draft letters were found.↩
- Miller signed “Bill” above this typed signature.↩