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

248. Memorandum From Secretary of Commerce Klutznick and the United States Trade Representative (Askew) to President Carter¹

Washington, July 29, 1980

SUBJECT

• Decisions on Export Promotion and Disincentives

Section 1110(a) of the Trade Agreements Act of 1979 requires you to review export promotion programs and export disincentives and to report the results of that review to Congress. This report was to have been submitted to the Congress by July 15, 1980, but due to the complexity of the policy issues we have just now completed this review. The project involved very extensive private sector input, including some 250 letters from trade associations, individual exporters, labor unions, and others, six conferences on topics affecting our export posture, and input from Commerce’s field offices and about 50 Foreign Service posts. Finally, we met with the President’s Export Council leadership of Reginald Jones, George Busbee, C. William Verity, and Harry Gould.²

U.S. exports have grown strongly over the last decade and our share of industrial country exports rose in real terms, even though our share declined somewhat in value terms because of the depreciation of the dollar. Our export growth was not adequate to keep up with rising oil import costs, so we ended the decade with a 1979 trade deficit of $24.7 (f.a.s.) billion. The prospect for continuing price-induced increases in our oil import bill—even if we reduce the volume of oil—makes it imperative we improve our export performance in the future.

Our review found that certain Government programs are having a serious detrimental effect on the ability of American companies to compete in global markets. While this impact cannot be precisely quantified, it is our best judgment that the ability of American companies to compete in world markets is being weakened substantially by the implementation of measures to achieve other policy objectives. What is needed is to tailor the operation of these measures and programs so they do not have excessive or unintended effects on our exports.

During the course of our review, we found a great deal of skepticism in the business community about whether the Administration is actually concerned with exports. Most are of the view that the Administration does not consider exports significant, and that the National Export Policy statement of September 1978³ constituted a statement of worthy objectives which the Administration has not pursued effectively. The business community and most interested legislators were critical of your February 1980 interim report on export disincentives⁴ as having avoided the tough issues. In releasing that report you said you would consider additional actions and would convey your views on export promotion and disincentives in your July report to Congress.

Thus while the wording of Section 1110(a) of the Trade Agreements Act does not require you to make any recommendations as to how to improve our export performance, we believe that you should announce some specific steps designed to help U.S. exports when you submit your report to Congress. We propose that you submit a brief signed report, to which would be attached the lengthy and comprehensive review of export promotion and disincentives. Your report would contain the actions you are taking or plan to take on the basis of the major findings of this review. We have attached a draft of your report,⁵ which was written on the assumption you would act favorably on all our recommendations.

We recommend that you announce significant export-oriented actions in four areas: (1) taxation of foreign earned income; (2) Export-Import Bank funding; (3) uncertainties regarding the Foreign Corrupt Practices Act; and (4) export controls. These are the major issues of concern to the exporting community and are the areas in which we believe feasible actions are possible without sacrificing other major policy objectives.

This memorandum and the accompanying report have been circulated to all agencies on the Trade Policy Committee, and we have worked very closely with the agencies having primary jurisdiction over each issue. All relevant agencies concur with the recommendations in this memorandum.

RECOMMENDATIONS

A. TAXATION OF FOREIGN EARNED INCOME

In comments received from trade associations, companies, and U.S. embassies, the taxation of Americans working abroad was the issue most frequently identified as an export disincentive. The export community regards the Administration’s position on this issue as a key indicator of the seriousness of the Administration’s commitment to export expansion. The President’s Export Council leadership considers this to be the number one issue and the “litmus test” of your report to Congress.

Most of our competitor nations exempt from tax all or many of their nationals who reside and work abroad. Hence the tax liability of American citizens employed abroad frequently makes it more costly to hire Americans where the local income tax is lower than the U.S. tax. Various segments of the exporting community argue that these additional costs have some or all of the following consequences:

(1) U.S. companies are replacing many of their American personnel with foreign personnel.

(2) If American companies engaged in engineering or construction work abroad hire Americans in spite of the greater cost—because the companies are more confident of the skills and reliability of American employees—the companies risk losing contracts for overseas projects because of the higher cost of employees, and U.S. exports are lost.

(3) If the companies hire nationals of other countries instead of Americans, they may gain the contracts, but the valuable follow-up exports of supplies and equipment will be lost, because foreign nationals favor more familiar foreign suppliers.

(4) A number of foreign operations by American companies tend to create exports from the United States and also generate substantial earnings which help the United States balance of payments. Some U.S. companies feel they can be more successful in these beneficial foreign operations if they are able to use American employees rather than foreign employees, without having U.S. tax laws make this practice more costly for them.

(5) American companies operating abroad sometimes pick up or develop valuable technology in the course of their foreign operations. If this technology is in the hands of foreign employees, it is more likely to be lost to foreign-owned companies as these employees change employers than would be the case if the technology is in the hands of American employees.

(6) The detrimental effect on exports involves not only present competitiveness, but also a snowballing effect on future competitiveness as foreign companies gain strength at our expense.

(7) The special deductions allowed for foreign living costs and hardship conditions under present law are insufficiently generous and too complicated.

On the other hand, the cornerstone of U.S. tax policy has always been that all U.S. citizens share in the obligation to finance their government. That principle would normally govern tax policy in the absence of a countervailing national interest. It is of course difficult to quantify the effect of U.S. tax policy on exports in the aggregate. Not all Americans working abroad have an effect on exports. Many pay high foreign taxes, so have little or no U.S. tax after the foreign tax credit. And of course other factors such as increased foreign competition affect the success of U.S. exporters. Thus, taxation of U.S. employees working abroad is not solely responsible for the difficulty exporters are encountering.

The U.S. tax is most likely to be significant for employees in a position to influence exports, working in places where the foreign tax is low (so the foreign tax credit does not eliminate the U.S. tax liability), compensation is necessarily high to offset hardship conditions, costs are high (so the tax bracket is also high), or in labor intensive industries (so the tax cost of U.S. personnel overseas is a significant component of total costs). The U.S. tax could also be significant where only some of these factors, or other factors, are present. The AFL–CIO believes in the principle that Americans should be taxed similarly everywhere in the world.

You last considered this issue in January 1980 when you announced that the operation of the 1978 law should be studied for at least its first year (1979) before further changes were proposed.⁶ The 1979 returns were generally due in June 1980 (some in October) and will not be processed for analysis until March 1981.

In the meanwhile, a number of bills have been introduced in Congress to exempt all or most foreign earned income. Tentative revenue cost estimated for these bills is roughly $500 million. In testimony before a subcommittee of the Senate Finance Committee on June 26, Assistant Treasury Secretary Lubick⁷ indicated that the Administration had an open mind on this issue, but believed that any further relief should be targeted to the extent possible to those areas where further relief is considered necessary.

On balance, although the tax data on the 1978 changes are not yet available, the Secretary of Commerce and the U.S. Trade Representative believe that the evidence gathered in preparing this report is so persuasive that some further relief is appropriate and that your announcing that conclusion now would be helpful in overcoming the view of the export community that the Administration does not care about exports. There is widespread support in both tax-writing Committees of Congress for further relief.

We recommend that you state that the review conducted for Congress indicated that U.S. taxes on the earned income of U.S. individuals abroad do adversely affect the ability of U.S. exporters to compete in some markets, and that you will give early and favorable consideration to appropriate measures to deal with this in the Administration’s 1981 legislative program.

If you accept this recommendation, work would commence to formulate the specifics of the changes.⁸

B. EXPORT FINANCING

Eximbank financing is the most important official incentive for U.S. exports. Recent Congressionally-determined Eximbank budget levels, however, have not fully met U.S. export needs. These needs depend essentially on: (1) foreign official export credit competition; and (2) the availability of private sources of financing for U.S. exports. In the near-term, a strong Eximbank is needed to meet highly subsidized foreign official export credit competition. Meeting this competition head-on not only would support U.S. exports directly, but also would greatly enhance the U.S. position in the negotiations to reduce official export credit subsidies. It would put pressure on our trading partners to follow through on the intent of the Venice Summit Communique,⁹ which recognized that a more market-related system of export credit interest rates should be negotiated by December 1, 1980.

You requested an increase in Eximbank loan authority to $4.1 billion and an additional $1 billion through the Federal Financing Bank for FY 1980. Some members of Congress wished to raise the FY 1980 authorization level for Eximbank direct loans to about $5 billion; however, no FY 1980 appropriation has passed and Eximbank therefore remains at its FY 1979 level of $3.75 billion. This presents problems for both U.S. exporters and our negotiating efforts to reduce export credit subsidies.

To solve the short-term budget problem, all of your principal economic advisers have agreed that we should urge Congressional approval for an increase in Eximbank’s program activity. In order to bring the Bank’s budget up to the requested level, an additional $1.35 billion is needed—up to $350 million in direct credits and the balance in financial guarantees. This would bring the FY 1980 Eximbank budget up to the $5.1 billion level you originally requested. The appropriations committee has already acted, and the full Congress may take action to increase the Eximbank’s funds for FY 1980 before recessing at the end of July. The wording in your report will be adjusted to reflect the status of this issue at the time the report is actually sent to Congress.

The underlying problem, however, is assuring an adequate and reliable amount of Eximbank financing. There are several aspects to consider. Eximbank lending has not kept pace with export growth. Some of your advisors believe that fact is testimony to the strength of U.S. exports and that additional Eximbank lending would not have significantly increased exports. Others believe that U.S. exports would have been significantly higher if there had been more Eximbank financing and that our problems will be exacerbated if the export credit interest rate negotiations are not completed in a wholly satisfactory way. Expanding Eximbank funding to meet foreign competition could, however, have significant budget consequences.

Additionally, Eximbank assistance tends to be most needed precisely at those times when interest rates are highest and the government is most concerned with reducing the Federal Budget. Finally, the application of the Congressional budget process has recently created uncertainty as to the level of Eximbank funding as well as other international programs in the foreign aid appropriation bill well into the fiscal year. By contrast, exporters abroad can avail themselves, by deliberate governmental policy, of ample and competitively-priced credit for exports almost irrespective of domestic fiscal policies in force.

We recommend that you state you have decided on the basis of this review that assuring adequate and predictable Exim financing in coming years has become a significant problem which must be solved. You would state that you will be working with members of the Administration and Congressional leaders this fall to determine how best to resolve this problem, taking into account progress in the international negotiations.

If you approve this recommendation, a working group would be formed which would be chaired jointly by the Treasury Department and OMB and would include appropriate agencies. This working group would develop recommended approaches for assuring adequate and reliable Eximbank financing for the FY82 and subsequent budgets and report to you this fall.¹⁰

C. FOREIGN CORRUPT PRACTICES ACT

Our review indicates that U.S. exporters consider the Foreign Corrupt Practices Act (FCPA) to be the second most significant export disincentive. The Act has two consequences. The first, not unexpectedly, is that some exports are lost because foreign companies can bribe foreign officials while U.S. companies cannot. However, this prohibition was fully intended. As a nation we have decided that bribery in international trade is reprehensible and that American companies must forego exports that can be attained only by illicit payments. Discouraging corruption in international business on the part of foreign firms requires a multilateral agreement. We have been pursuing such an agreement actively in the UN, with only marginal success, but will continue to press the issue. The steps you took at the Venice Summit give this exercise a boost.¹¹

The major problem in the FCPA stems from ambiguities in the law itself and uncertainty in how it will be construed by Justice and the SEC. In a word, what conduct is prohibited and what conduct is not prohibited under the law is unclear. Almost without exception exporters and lawyers we consulted report that ambiguities in the law and uncertainty in how it will be construed by Justice and the SEC cause some businesses to avoid some export markets or export transactions altogether. Among the most ambiguous provisions are: (1) the “reason to know” standard under which companies can be held liable for the actions of foreign partners or agents over whom they have little control, notwithstanding company efforts to assure compliance with the FCPA; (2) the distinction between permissible and unlawful entertainment and gift expenditures; and (3) the boundaries of facilitating or “grease” payments.

The effect of these uncertainties is severe. We found instances in which companies have: (1) withdrawn from joint ventures for fear they may later be held responsible for the acts of their foreign partners; (2) incurred substantial legal and investigative costs to check the backgrounds of their sales agents abroad; (3) lost contracts simply because of the time needed to investigate middlemen and institute safeguards; (4) withdrawn from export markets; (5) declined to enter new markets. One attorney who polled 12 of his clients prior to our conference reported that six said problems associated with the FCPA did not interfere with their operations because they had simply stopped doing business in countries where the FCPA might raise problems. Such phenomena appear especially to involve smaller U.S. companies and exports to LDCs.

In an effort to reduce some of the uncertainties in the law and pursuant to your 1978 National Export Policy, the Justice Department instituted an FCPA Review Procedure. In your February 1980 export disincentives statement you announced the procedure and stated that after a year of operating experience the Attorney General and Secretary of Commerce would review its effectiveness. You stated that Congress may then find it appropriate to conduct its own review of the Act.

Our review indicates that exporters are convinced for several reasons the FCPA Review Procedure will be of very limited usefulness. First, it binds only Justice, not the SEC. While Justice will publish the substance of review letters, it has made clear that they may not be considered as precedents. Even if Justice’s 30-day turnaround target were met, guidance would not be timely for many fast-moving transactions. While publication will provide some guidance, considerable time will pass before the letters cover a broad range of problems. Existing law cannot fully protect business confidential information provided for FCPA review purposes. Finally, many companies simply refuse to involve themselves voluntarily with the Justice Department, fearing that a request for guidance may invite criminal investigation.

Based on our review, we recommend two types of legislative changes: (1) technical amendments to clarify key provisions without weakening the purpose of the act or creating loopholes for bribery; (2) an amendment to eliminate dual enforcement authority by placing all enforcement responsibility over the bribery portions of the Act in the Justice Department. (SEC would retain jurisdiction over enforcement of the accounting provisions of the Act.) While these steps could be taken separately, we recommend both. Acting only to eliminate dual jurisdiction would relieve some uncertainties but would not in itself solve the problems stemming from ambiguities in the Act.

We believe the proper time for such legislation is the next session of Congress. Groundwork is now being laid. Senator Chafee and others have introduced legislation in the last three months. Senator Proxmire, a key figure, has expressed a willingness to explore technical changes that do not create loopholes for bribery, but is likely to oppose taking enforcement jurisdiction away from the SEC. However, since the SEC did not urge the adoption of the foreign bribery provisions in the first instance, it may not strongly oppose elimination of dual jurisdiction. The GAO, SEC, and Chamber of Commerce all have studies of the FCPA underway that will be completed by fall. Proposing amendments to the Act, however, would almost certainly result in some negative publicity. Some would view any action here as a weakening of resolve against bribery. Your statement would have to be clearly and carefully worded to minimize such problems.

Clarity:

We recommend you reiterate your firm opposition to bribery, but stress that uncertainty should not be allowed to hamper exports. You would note the commencement of the FCPA Review Procedure but state that the review just conducted suggests that elimination of uncertainties requires changing the Act itself. You would announce you intend to submit to the Congress early next year amendments to clarify the Act.¹²

Dual Jurisdiction:

We recommend you state you believe enforcement jurisdiction over the corrupt payments provisions of the Act should be consolidated in the Justice Department to provide consistency of enforcement and that you will submit legislation to that effect. You would note that jurisdiction over the accounting provisions would remain with the SEC.¹³

D. NATIONAL SECURITY EXPORT CONTROLS

We identified two substantive changes in national security export controls which we believe should be implemented. The first has already been agreed to by all relevant agencies and is problem-free: We will modify existing reexport controls to stop requiring a reexport license for any case in which we have already approved reexport of the same product as part of the COCOM process.

The second change, however, has a more far-reaching effect. While all relevant agencies and all your advisors are agreed that the action would not compromise our controls or security in any substantive way, there may be some political reactions in taking the action. Hence we are referring it to you for decision.

We propose that national security controls on exports of Commerce-controlled goods and technology to COCOM member countries and to Australia and New Zealand be essentially the same as present procedures for Canada (i.e., basically, no validated license will be required in advance of shipment). Instead, the exporter will be required to file with the Commerce Department, at the time of export, assurances that there will be no reexport unless our reexport licensing requirements have been satisfied. Controls on exports of munitions, nuclear-related items, and items in short supply would not be affected.

Last year the Department of Commerce approved more than 22,000 licenses for export to COCOM countries and to Australia and New Zealand. There were no denials to these countries on national security grounds. These licenses account for nearly one-third of the 72,000 export license applications processed last year. At an average exporter preparation cost per license of at least $100, the total burden to business was over $2 million. All your advisors agree no diminution in the effectiveness of our controls would result from the change. The licenses for exports to these countries now principally serve an informational function. The information needed (and binding legal undertaking) will be available from forms that exporters would be required to complete at the time of shipping. Security objectives might actually be enhanced, as we would be able to concentrate some additional time on the problem countries. Finally, an irritant to our relations with our allies would be removed.

There would, however, be a symbolic effect of “reducing” controls that some may see as reducing their effectiveness. Senators Jackson and Garn in particular may disagree in principle. Accordingly, we will discuss the changes, at least with Senator Jackson, prior to any public announcement.

We recommend you approve the proposed substitution of post-shipment reporting procedures in place of validated license requirements for shipments to COCOM countries and to Australia and New Zealand.

In implementing this change, the Department of Commerce would consult with the Department of Justice and other relevant agencies to devise procedures under the modified system that will provide for effective enforcement and maintain safeguards against diversion.¹⁴

1. Source: Carter Library, White House Central Files, Subject File, Box TA–8, TA 3 7/31/80–8/31/80. For Official Use Only. A typed notation at the top of the memorandum reads: “Final Draft.” Neither Klutznick nor Askew initialed the memorandum.
2. Reginald H. Jones was the Chairman and Chief Executive Officer of General Electric. George D. Busbee served as the Governor of Georgia. C. William Verity, Jr., was the Chairman and Chief Executive Officer of Armco, Inc. Harry E. Gould, Jr., was the Chairman and Chief Executive Officer of Gould Paper Corp.
3. See footnote 2, Document 164.
4. The interim report was included in Carter’s February 27 statement on the reduction of export disincentives. See footnote 4, Document 230.
5. Not attached.
6. Carter made this announcement in identical letters to the Speaker of the House of Representatives and the Chairman of the Senate Foreign Relations Committee, both dated January 24. The text of these letters is in Public Papers of the Presidents of the United States: Jimmy Carter, 1980–81, Book I, pp. 206–207.
7. Donald C. Lubick was the Assistant Secretary of the Treasury for Tax Policy.
8. Carter did not indicate his preference with respect to this recommendation. On September 9, Carter submitted to Congress a “Review of Executive Branch Export Promotion Functions and Potential Export Disincentives.” In the message accompanying the review, Carter asserted that “the evidence gathered in preparing this report does illustrate the importance that the export community attaches to this tax issue. U.S. taxes on the earned income of U.S. individuals abroad do clearly have an adverse effect on the ability of some U.S. exporters to compete in some markets. Accordingly, I will propose to the Congress, in my 1981 legislative program, revisions of the current law in order to deal with this problem.” (Public Papers of the Presidents of the United States: Jimmy Carter, 1980–81, Book II, p. 1693)
9. See footnote 5, Document 247.
10. Carter did not indicate his preference with respect to this recommendation. In his September 9 message to Congress (see footnote 8, above), Carter announced that he would “be working with Congressional leaders and members of my Administration this fall to determine how best to ensure adequate and reliable Eximbank financing in the years ahead, taking into account progress in international negotiations.” (Public Papers of the Presidents of the United States: Jimmy Carter, 1980–81, Book II, p. 1692)
11. In his September 9 message to Congress (see footnote 8, above), Carter said that at the Venice G–7 Summit he had “urged that these seven industrial democracies renew efforts to work in the United Nations toward an agreement to prohibit illicit payments by their citizens to foreign government officials; and, if that effort falters, to seek an agreement among themselves, open to other nations, with the same objective. While we did not set a time by which an agreement should be reached in the United Nations, I believe that one further year of negotiations should be sufficient. Accordingly, if an agreement has not been obtained in the United Nations General Assembly, I intend to ask the other heads of government at the 1981 Economic Summit to direct the prompt negotiation of such an agreement among our seven nations, but open to others.” (Public Papers of the Presidents of the United States: Jimmy Carter, 1980–81, Book II, pp. 1693–1694) Carter’s statement is in line with a recommendation offered in an August 27 memorandum from Eizenstat and Owen to Carter. (Carter Library, White House Central Files, Subject File, TA–8, TA 3 7/31/80–8/31/80)
12. Carter did not indicate his preference with respect to this recommendation. In his September 9 message to Congress (see footnote 8, above), Carter announced that he had “directed that the Attorney General and the Secretary of the Commerce report to me by March 1, 1981, not only their assessment of the first year of operation of the FCPA Review Procedure, but also their recommendations of whatever actions may then be necessary to remove any ambiguities in the Act. Uncertainties should not be allowed to hamper exports, but in no event will I propose nor will I support any amendments which would weaken the Act’s proscription of bribery or which would result in loopholes for bribery of foreign government officials.” (Public Papers of the Presidents of the United States: Jimmy Carter, 1980–81, Book II, p. 1694) Carter’s statement is in line with a recommendation offered in an August 27 memorandum from Eizenstat and Owen to Carter. (Carter Library, White House Central Files, Subject File, TA–8, TA 3 7/31/80–8/31/80)
13. Carter did not indicate his preference with respect to this recommendation.
14. Carter did not indicate his preference with respect to this recommendation. In his September 9 message to Congress (see footnote 8, above), Carter reaffirmed his February 27 statement that “[i]n considering new export controls to achieve foreign policy objectives and in reassessing current sanctions—except in the field of arms exports—my Administration would be highly selective in the use of controls where the affected country has access to alternative supply.” He also announced that the United States would “stop issuing a separate U.S. reexport license in cases where we have already approved reexport of the same product as part of the COCOM process.” (Public Papers of the Presidents of the United States: Jimmy Carter, 1980–81, Book II, p. 1694) Carter’s statement is in line with a recommendation offered in an August 27 memorandum from Eizenstat and Owen to Carter. (Carter Library, White House Central Files, Subject File, TA–8, TA 3 7/31/80–8/31/80)