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245. Decision Memorandum From the Chairman of the Trade Policy Committee (Askew) to President Carter 1

SUBJECT

  • U.S. Trade Relations with Japan: Trade in Light Trucks

Issue

On May 23 the U.S. Customs Service announced, as the result of a quasi-judicial process, that cab chassis (lightweight truck chassis with the cab attached but without cargo boxes) which are dutiable at 4 percent will be reclassified as unfinished trucks dutiable at 25 percent. You need to decide whether a) to leave the higher duty in place, b) to use it as a negotiating lever to gain trade concessions from Japan, or c) to lower it unilaterally.

Background

A 1979 court decision, which reversed the rationale of an earlier ruling on which Customs had relied, prompted the review of cab chassis classification. Customs made its decision to reclassify on the legal and technical merits.

Reclassification will affect the so-called “mini-pickups,” an item of major trade interest to Japan. Heavier trucks from Europe without cargo boxes are not now affected. In 1979, approximately 389,000 mini-pickups valued at $1.4 billion were imported from Japan: roughly half by Toyota and Nissan, and half by GM, Ford and Chrysler. In the first quarter of 1980, imports of these trucks rose to a projected annualized rate of 480,000 valued at $1.8 billion.

The currently applied 25 percent rate was proclaimed in 1963 as a penalty duty directed against EC truck exports as part of U.S. retaliation for European import restrictions on U.S. poultry. (Before that the tariff was 8.5 percent.) The increased tariff curtailed Volkswagen exports to the U.S. of its cargo vans and trucks. (Ironically, VW is now the only firm producing comparable small trucks in the U.S.—30,000 to be produced in 1980—although GM and Nissan have announced plans to start U.S. production, and Ford is expected to do the same.)

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In the early 1970s the Japanese began shipping cargo boxes and cab chassis separately for assembly in the U.S. to take advantage of the low 4 percent duty on cab chassis. Customs found this practice acceptable for about 10 years until a recent court decision caused it to reconsider. In making its decision to reclassify lightweight cab chassis as substantially complete trucks, Customs noted that U.S. assembly involved less than 3 percent of the parts and 7 percent of the value of the completed trucks.

Following normal practice, the reclassification will become effective 90 days after the May 23 announcement, i.e., on August 21. Before or after August 21 you have authority to reduce the 25 percent duty on trucks: (a) unilaterally to 8.5 percent either temporarily or permanently; (b) by a combination of unilateral action and agreement with Japan, to any rate of duty between 25 percent and 6.8 percent or possibly a tariff-rate quota with a higher rate of duty on imports over a certain quantity; and (c) by an agreement with Japan which is approved by Congress to any rate of duty between 25 percent and free.

During the MTN the U.S. offered to reduce its truck tariff from 25 to 3.4 percent. The EC offered only minimal payment and we withdrew the offer. Separately the U.S. indicated to Japan in the MTN that, in view of the controversy concerning the classification of cab chassis, the U.S. would be willing to consider a reduced tariff for mini-pickups. Japan did not show much interest, and the U.S. also withdrew this offer. Last December we again offered to negotiate a reduction in the truck duty, but Japan was not interested.

Reclassification comes at a difficult moment for the Japanese politically. The Ohira Government fell May 16 and Mr. Ohira died on June 12. Elections were held June 22, but until the establishment of a new government in mid-July at best, it is unlikely the GOJ could negotiate a major tariff reduction. Although any new government in Japan will maintain close ties with the U.S., it will face increasing pressure from business circles—which were instrumental in the LDP’s smashing victory—to retaliate against a six-fold increase in the duty on a major Japanese export.

So far, the GOJ reaction to the reclassification announcement has been low-key. Japanese Embassy officials met with representatives of several USG agencies to express the GOJ’s great regret that Customs decided to reclassify, to indicate, from their point of view, that we owe them because the U.S. raised a duty 21 percentage points, to state that reclassification will be a problem in the context of GATT, and to reserve the GOJ’s GATT rights. (The GATT issues are complicated and without precedent; however USTR lawyers believe that a sound GATT defense can be made by the U.S.) The GOJ has reminded us of its recently an[Page 709]nounced auto package,2 indicated reclassification will create difficulties for these efforts, and urged the USG to reduce the truck tariff to avoid disruption to trade. (Japan acted unilaterally in taking the initiatives contained in the auto package. While we told the GOJ it would be given credit for eliminating duties on auto parts in any subsequent dealing on automotive products, we made it very clear that we were not committed to initiating discussions or reducing the tariff on trucks.)

Domestically this issue cannot be isolated from the problems currently facing the U.S. auto industry and its workers. In your May 14 meeting with them, Caldwell of Ford, Meyers of AMC, and Fraser all stressed the importance of maintaining the 25 percent truck tariff at this time of drastically declining sales and employment in the industry.3 May truck production was off 67 percent from last year, while May car output was off 44 percent. The 31 percent import penetration (from January to April) of the U.S. light truck market, moreover, is higher than the 27 percent import share of the car market. Additionally, the industry is concerned that a reduction in the 25 percent duty (which applies to cargo vans as well as trucks) would result in huge increases in the presently negligible cargo van imports further depressing U.S. motor vehicle sales. (None of the options below contemplates a reduction in the tariff on cargo vans nor have the Japanese requested such a reduction. If you approve an option to reduce the tariff for mini-pickups it will be done without reducing the tariff on cargo vans.)

Caldwell has reversed his company’s previous request that the effective date of reclassification be delayed for 2½ years (until Ford’s planned U.S. small truck capacity is in operation). He claims that immediate imposition of the 25 percent duty would increase U.S. truck sales by up to 200,000 units and auto employment by up to 20,000 jobs during the 1981 model year. (There is general agreement, even by individuals in the industry, that these estimates are highly exaggerated.) GM believes the higher tariff should be enforced but that it could be used as a bargaining chip and reduced over time to induce production in the U.S. Nissan has asked that implementation of the reclassification be delayed for 2½ years when its U.S. truck plant will be in operation. Chrysler suggests the increased tariff be phased in but does not believe [Page 710]it will result in significant sales or employment benefits. Toyota has requested that the tariff be reduced to 6.8 percent and that implementation be delayed for a reasonable period of time.

Estimating the impact on the U.S. truck market of an immediate 21 percentage point increase in the duty is difficult. The impact depends largely on assumptions of how much of the duty increase would be passed through to retail. Toyota has announced a price increase of $800 per truck. Toyota believes the 25 percent tariff will result in a 30 percent decrease in all imports of mini-pickups. Toyota claims it could be subject to dumping charges if it absorbed a substantial portion of the 25 percent duty. The recent erosion of the yen/dollar exchange rate has considerably narrowed profit margins and could further support such dumping charges.

U.S. Government estimates indicate that the price increase could range from $800 (or 16 percent) to $400 (or 8 percent) per truck. In the former case imports would fall by approximately 26 percent and in the latter by 13 percent. In view of the recent appreciation of the yen vis-à-vis the dollar, it is likely that the price increase would be closer to the high side of these estimates.

Some consumers will shift to domestic pickups and station wagons, others to imported small cars and station wagons, and others will defer purchases. To the extent that the higher duty on mini-pickups would lead to increased sales of domestic trucks, there could be a small increase in oil imports. The mini-pickups are more fuel efficient than the nearest, comparable U.S.-made pickup (half-ton) by an average of about 5 mpg when not loaded. However, the fuel economy advantage of the imports decreases as the pay load increases. The new Corporate Average Fuel Economy requirements will force fuel economy improvements on U.S.-made trucks thereby reducing fuel economy as a distinguishing feature in the next few years.

Projections indicate that the total U.S. production of mini-pickups will remain at the 30,000 units made by Volkswagen until model year 1982 even if the 25 percent reclassification occurs. GM will at that time have a plant in operation with a capacity of 250,000 to 300,000 mini-pickups. In 1983 Nissan’s U.S. production will enter the market with 120,000 units. It is anticipated that Ford will announce plans to build mini-pickups.

Customs and Nissan officials indicate that exporters and importers will have difficulty finding a new loophole to circumvent reclassification. Toyota is reviewing the possibility but doubts that it will be economically feasible. Ford, Chrysler and GM indicate they are not exploring a new loophole. In order to be dutiable at the cab chassis rate manufacturers could increase substantially the U.S. value added, labor or parts, or they could remove the cab entirely. Customs will rule on [Page 711]particular configurations on a case-by-case basis. Customs has not yet received a formal request for a new ruling.

Options

Option I: Seek to negotiate the best possible package of concessions from Japan before reclassification is implemented August 21, 1980. Whatever concessions are obtained will be accepted as adequate. Before reclassification is implemented, the 25 percent tariff would be permanently reduced or suspended for 2–3 years to 8.5 percent. Suspension for 2½ years would give Nissan time to complete its U.S. truck plant and keep the pressure on Toyota to build in the U.S. In reducing the duty your proclamation would: a) note Japan’s recent liberalization of automotive standards and auto parts tariffs; b) note that a six-fold increase in the tariff on this $1.4 billion item would aggravate inflation and provide only minor immediate benefit to U.S. industry or labor; and c) note that the 25 percent penalty duty was directed at the EC, not Japan. (Given the large volume of trade, if the 25 percent truck tariff is maintained, reclassification would result in an increase of the average U.S. tariff on dutiable imports of all Japanese products of 1.08 percentage points, eliminating almost half of the 2.2 percentage point reduction which will result from tariff cuts agreed to in the MTN.)

Pros

  • —Avoids the inflationary effects of reclassification.
  • —Reduces political and trade friction with Japan during a time of political transition in Japan.
  • —Consistent with the open market position you have taken on auto imports.
  • —A suspension for 2½ years would help Nissan in moving production to the U.S.

Cons

  • —At a time of falling auto sales and increased auto unemployment, would be criticized by the UAW, most of the domestic auto industry, and many Congressmen; would increase pressure for restrictive legislation on autos.
  • —Reduces the negotiating leverage that the 25 percent duty provides.

Option II: Use the bargaining leverage to negotiate a significant package of acceptable concessions from Japan in return for lowering the 25 percent duty on trucks. Any concessions package would be submitted to you for approval. If negotiations are successful, then reduce the duty from 25 percent to a lower level—not less than 6.8 percent. The reclassification would go into effect if no agreement were reached by August 21, 1980.

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Pros

  • —Utilizes the leverage of reclassification to seek trade concessions we have been seeking unsuccessfully from the Japanese.
  • —Congress would probably support the 25 percent duty as leverage if we get meaningful concessions.
  • —Would be responsive to Congressional and public concern over rising U.S. trade deficit with Japan and continuing Japanese import barriers.
  • —Reduces friction with Japanese by agreeing to negotiate now.

Cons

  • —Negotiations might yield minimum results which would anger industry and labor and endanger our earlier decision not to seek voluntary restraints on Japanese car imports. Short of an OMA limiting Japanese autos, it is highly unlikely we could get sufficient concessions in the auto sector to satisfy the U.S. auto industry. An OMA is a possibility only after the USITC finds injury in its Section 201 investigation.
  • —If the concessions are primarily in non-auto sectors, it might appear that a negotiating chip that could have helped the troubled U.S. auto industry had been wasted.
  • —May cause political problems with the Japanese who may resent being asked to pay for removal of a penalty duty levied against the EC at a time when we continue to need their close support on Iran and Afghanistan. They believe that under the GATT they are entitled to 8.5 percent, a position we are prepared to contest.
  • —If we are unable to reach a satisfactory agreement with the Japanese, we would be left with a 25 percent duty on an item not now in significant production in the U.S. although comparable models could be available as early as model year 1982.

Option III: Implement reclassification and hold the truck tariff at 25 percent for the time being. Inform the Japanese that in the current political and economic climate in the U.S., we do not believe that negotiations would prove successful. We will continue to consult with the Japanese on the situation and will be willing to negotiate a reduction in the truck tariff when it becomes feasible and appropriate.

Pros

  • —Would be responsive to demands of many in the U.S. auto industry who seek some protection from imports in a recession, even though it does not affect passenger cars.
  • —Would minimize the chance of negotiations that might yield minimum results which would anger industry and labor and endanger our earlier decision not to seek voluntary restraints on Japanese car imports. Short of an OMA limiting Japanese autos, it is highly unlikely we could get sufficient concessions in the auto sector to satisfy the U.S. auto industry. An OMA is possible only after the USITC finds injury in its Section 201 investigation.
  • —Would be responsive to Congressional and public criticism that we do not deal firmly enough with Japan and that we are not sufficiently concerned with our growing trade deficit with Japan.
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Cons

  • —May cause serious political problems with the Japanese affecting not only auto issues but possibly broader cooperation as well.
  • —Would place a 25 percent duty on an item not currently produced in significant quantity in the U.S. although comparable models could be available as early as model year 1982.
  • —Would have inflationary impact.

Decision

Option I: Negotiate the best possible package of concessions before reclassification is implemented August 21, 1980. Accept whatever is negotiated and reduce or suspend the duty to 8.5 percent before it is applied.

Supported by: State.

Option II: Negotiate a reduction in the truck tariff from 25 percent to 6.8 percent or anywhere in between in return for Japanese concessions large enough to offset significantly domestic political opposition. The package of concessions would be submitted for your approval. If unsuccessful, the 25 percent duty will be applied.

Supported by: Treasury, NSC, CEA, Justice, Agriculture.4

Option III: Inform the Japanese that we are unable to negotiate a reduction in the 25 percent truck tariff until the domestic political and economic climate improves.

Supported by: USTR, Commerce, Labor, Transportation.

  1. Source: Carter Library, Records of the Office of the Staff Secretary, Presidential File, Box 195, Trip to California, Florida, Georgia, Detroit, Alaska, and Japan, 7/3/80–7/17/80 [2]. Confidential.
  2. See Document 242.
  3. Carter met with automotive industry and UAW representatives in the Cabinet Room on May 14 from 1:12 p.m. until 2:58 p.m. (Carter Library, Presidential Materials, President’s Daily Diary) No memorandum of conversation of this meeting was found. A report on the meeting was published in the May 15 edition of The New York Times. (Reginald Stuart, “Carter Promises to Act on Autos,” The New York Times, May 15, 1980, p. D1) Philip Caldwell was Chairman of the Ford Motor Company, Gerald Meyers was Chairman of the American Motors Corporation, and Douglas Fraser was President of the United Auto Workers.
  4. Carter indicated his approval of this option and initialed “J.” On August 21, the cab chassis tariff was increased to 25 percent. In response, Japan announced that it would seek bilateral consultations with the United States under the auspices of the GATT. (“Higher Truck Duties Draw Japan Protest,” The New York Times, August 23, 1980, p. 32)