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

4. Paper Prepared in the Office of the Special Representative for Trade Negotiations¹

Washington, January 21, 1977

Major Trade Issues

During the coming months, a number of difficult international trade issues are likely to command considerable attention both in the United States and abroad. Concern will likely focus on (1) the general trade climate and increased pressures for protectionism, (2) specific trade actions which will be presented for decision (in particular, a series of trade complaints under the Trade Act of 1974),² (3) progress in the Multilateral Trade Negotiations (which has been painfully slow to date) and (4) the trade aspects of the North-South Dialogue.

General Climate

The industrialized countries and LDCs are hoping that steady expansion of the United States, West German, and Japanese economies will generate worldwide recovery. While the United States is committed to sustained economic expansion and has been willing to accept the resulting trade deficit, Japan, in particular, has continued to maintain large trade surpluses both with the United States and the rest of non-OPEC world. While the United States has shifted from a surplus trade balance in 1975 of $4.2 billion to a deficit of $14.3 billion in the first 11 months of 1976 (annual rate on a CIF basis), Japan continues to run a large trade surplus with ourselves and the rest of the non-OPEC world.

There is a significant danger over the next six months that the combination of the slow economic recovery of the Western countries and their growing oil-related trade deficits will result in an increasing number of protectionist trade measures being imposed. The first substantial movement in this direction has taken the form of requests by the European Community (EC) for Japanese export restraints.

The Japanese surplus, and its concentration in certain products, such as automobiles, consumer electronic products, and steel, has led to near hysteria in Europe. The EC Commission has wrung from the Japanese export restrictions on steel and inter-industry discussions on curbing other Japanese exports. The dangers to U.S. trading interests are that the limitations on access to the European market will result in diversion of these products to the U.S. market in injurious quantities, that the Japanese will open their market in a way which discriminates in favor of European exports at the expense of our trade, and that the maintenance of an open trading system is threatened by the EC-Japanese arrangements.

Strenuous U.S. efforts will be required to rebuild the commitment of Europe and Japan to cooperate with us to manage bilateral trade problems responsibly and to move now toward improving the framework of the international trading system. A further Japanese response to the EC on concrete trade advantages (and export restraints) is due in just over a month. U.S. concerns must be made known to the EC and Japan soon and forcefully, if we wish to avoid having bilateral arrangements take the place of broader solutions.

Specific Trade Actions

A number of specific problems which have been raised by petitions under the Trade Act of 1974 will have to be dealt with over the next few months. These petitions have generated concern abroad about the general direction of U.S. trade policy. United States leadership in the effort to avoid a drift towards protectionism is greatly complicated by the very real domestic legal and political considerations which, in each case, will have to be taken into account.

a. Escape Clause Cases

In the first two months of the new Administration, a Presidential decision will be required on whether to place import restrictions on shoes as recommended by the U.S. International Trade Commission. The domestic industry is clearly injured. Last year President Ford decided that the impact on consumers was too great to provide relief. The $1.4 billion in annual U.S. imports is primarily supplied by Italy, Spain, Taiwan, Korea, and Brazil. Onerous import restrictions would be reacted to strongly by exporting countries, especially the EC, Spain and Brazil, any of which could retaliate against U.S. exports.

Import relief decisions will also more than likely have to be made with respect to imports of televisions (1976 imports $800 million) and sugar (1974 imports approximately $1 billion). These cases are likely to be presented for Presidential action during March–May, 1977. A Presidential decision on mushrooms (1976 imports $71 million) is due by March 11. Under the Trade Act, Presidential decisions in any of these cases can be overridden by a vote of both Houses of Congress.

b. Countervailing Duty Litigation

Perhaps of even greater concern than the above cases are two legal actions which have been brought to require the Secretary of the Treasury to countervail against the exemption of exports from taxes normally borne by products abroad. The Zenith Radio Corporation contends that additional duties should be applied equal to the Japanese commodity tax (ranging from 10 to 20%) on imports of $3 billion of consumer electronic products from Japan. If, as is not unlikely, the Customs Court sides with Zenith under language contained in two old Supreme Court cases, bonds will have to be posted by importers for the potential additional duty. This will have an immediate restrictive impact on trade. A court decision is expected soon.

The U.S. Steel Company has brought a similar case against the rebate of European value added taxes (VAT). The issue is the same in principle as the Zenith case, and an adverse decision in Zenith would be a precedent for the VAT case. The trial is scheduled for December, 1977.

The rest of the world would view U.S. countervailing against the rebate of indirect taxes (sales and excise taxes, and the VAT), which is a practice expressly sanctioned by the GATT, as an act of completely unwarranted economic aggression. Massive retaliation against U.S. exports would be a real possibility unless the courts or the Congress give the Secretary of the Treasury discretion to avoid countervailing against these common practices.

c. Steel

The domestic steel industry has repeatedly pressed its concerns about adverse effects from import competition. Following a period of improvement during the first half of 1976, the industry is suffering from a setback in production, employment and profits. This follows a very poor year in 1975. Imports are increasing.

A major objective of U.S. steel industry is an international agreement which would regulate “cyclical distortions” in steel trade (in times of reduced demand, foreign producers tend to maintain output and employment and cut price; U.S. producers tend to maintain prices and cut production). Partially in order to bring pressure for negotiation of such an agreement, the industry has pursued a variety of domestic remedies, including a successful import relief action on specialty steel (quotas are now in effect), a major suit under the countervailing duty law against an Italian state-owned steel producer, and an action under Section 301 of the Trade Act³ against the EC/Japanese steel understanding. There is consideration in the industry of bringing a number of additional actions against imports. Further problems are likely to be caused by the EC’s adoption of its Simonet Plan,⁴ which could result in the dumping of European steel here as well as in diversion of non-EC steel exports to this market.

d. U.S. Agricultural Exporters’ Complaints

A series of petitions has been filed with STR against a number of European trade measures fundamental to the EC’s current Common Agricultural Policy (CAP). These apparently valid complaints by U.S. agricultural exporters against EC export subsidies, and a variety of EC import restrictions is a growing and major irritant to the EC. We are trying to resolve the cases, which concern important U.S. interests, through GATT proceedings but some basic accommodation to the U.S. will be necessary in the MTN to avoid a continuing series of conflicts with the EC on this subject. If this problem is not adequately dealt with, it could easily grow into a major political and economic confrontation with the EC, which is already hypersensitive to the existence of the complaints, but which is slow in working toward solutions.

The Multilateral Trade Negotiations (MTN)

The MTN was conceived as a means to further reduce barriers to international trade and improve the rules and procedures that make up the framework for the conduct of world trade. The understandable preoccupation abroad with domestic economic recovery, and with current trade deficits, has prevented dedication of the necessary political will to move the current trade negotiations toward a successful conclusion. There has also been a major obstacle within the MTN to further progress. This has been the deadlock between the U.S. and the EC over what can be accomplished in these negotiations with respect to agricultural trade.

There had been general agreement on an end of 1977 target date for completion of the MTN, but both France and the United Kingdom, neither of which are enthusiastic about a negotiation having substantial results, have emphasized that the deadline can be met, provided that the MTN is downgraded into a mini-negotiation. This position is not justified by European economic difficulties as the MTN will not require any substantial near-term economic adjustments by any participant.

Further movement in the MTN will be dependent upon strong U.S. leadership, and upon our reaching a basic political level understanding with the major participants on what this negotiation is to accomplish.

Trade Relations with Developing Countries

Increased coordination among developed countries of their policies towards developing countries (LDC’s) is necessary in order to avoid developed countries damaging each others’ trade interests. The developing countries seek primarily stabilization of earnings on their exports of commodities, preferential market access in developed countries for manufactured products, and international recognition of their right to more favorable trade treatment from developed countries.

The United States and other developed countries have differed in their approaches to the LDC’s. The U.S. has been more wary of commodity agreements. We have not been willing to negotiate preferential access for LDC’s to the U.S. market (nor to extend discriminatory preferences to individual LDC’s). We have also insisted on receiving some concessions for the more favorable market access that we are willing to commit to in the trade negotiations. The LDC’s recognize, however, that we are more willing to consider making specific concessions than are other developed countries. Detailed consultations with Europe and Japan on LDC policy should be an early priority.

Textiles

The Multifiber Agreement (MFA), which governs most of world trade in textiles, will expire at the end of this year.⁵ The MFA provides for the orderly expansion of textile trade without market disruption. Its existence has reduced conflicts over textile trade that were very disruptive to political and economic relations in the past. The United States has pressed for renewal of the MFA without amendment, avoiding a major DC/LDC struggle. The EC and Canada favor modifications which will give them a freer hand to restrict imports. The renewal of the MFA will be a major international issue in 1977, especially if changes must be negotiated.

Trade Pledge

During the last few years, OECD countries have pledged to use maximum restraint in the use of restrictive trade measures to deal with economic problems related to the increased cost of oil and the worldwide economic recession. The current pledge expires in June.⁶ The Trade Committee is scheduled to discuss the future of the pledge in March. Well before that meeting, the United States is committed to providing a paper on alternative approaches that could be taken with respect to a possible pledge in the future.

East-West Trade

The freedom of emigration amendment to the Trade Act⁷ continues to inhibit the expansion of U.S. trade with the non-market economy countries. The U.S. has proposed in the OECD that a study be conducted leading to a common approach to a number of problems shared by Western countries in their trade with the East. This study is being carried out by the OECD secretariat with the assistance of experts from capitals. It should have an important bearing on the future evolution of the trade relationship between the East European non-market economies and the OECD countries.

1. Source: Carter Library, Staff Office Files, Council of Economic Advisers, Charles L. Schultze Subject Files, Box 88, Trade Policy Committee. Confidential. Sent to the Trade Policy Committee (Vance, Blumenthal, Brown, Attorney General Griffin Bell, Secretary of the Interior Cecil Andrus, Bergland, Kreps, Marshall, and Schultze) under cover of a January 21 memorandum from Acting Special Representative for Trade Negotiations Clayton Yeutter. (Ibid.)
2. President Ford signed the Trade Act of 1974 into law on January 3, 1975. For information on the provisions of the act, see Foreign Relations, 1969–1976, vol. XXXI, Foreign Economic Policy, 1973–1976, Document 223.
3. Section 301 of the Trade Act of 1974 deals with the U.S. response to unfair foreign trading practices.
4. On January 1, 1977, the EC implemented a common policy designed to deal with its declining steel production; the policy was based on a plan named for EC Commission Vice President Henri Simonet. In December 1976, U.S. and EC officials discussed steel issues, including the Simonet Plan, in Brussels. The following month, the United States delivered an aide-mémoire to the EC outlining its concerns with the plan. (Telegram 11929 from USEC Brussels, December 6, 1976; telegram 12551 from USEC Brussels, December 20, 1976; telegram 3260 to USEC Brussels, January 7; and telegram 490 from USEC Brussels, January 18; National Archives, RG 59, Central Foreign Policy File, D760450–0890, D760467–0401, D770006–0918, and D770019–0224, respectively)
5. The Multifiber Arrangement regulated the international trade in clothing and textiles from 1974 until 1994. It set quotas on products developing countries could export to developed countries.
6. Rising oil prices after the October 1973 Arab-Israeli war resulted in growing trade deficits for oil-importing countries. On May 30, 1974, OECD members pledged to adopt a cooperative approach to the troubles besetting the global economy and to eschew for one year unilateral actions, such as import restrictions, intended to protect their balance of payments; see Foreign Relations, 1969–1976, vol. XXXI, Foreign Economic Policy, 1973–1976, Document 209. The pledge was subsequently renewed on an annual basis.
7. The Jackson-Vanik amendment to the 1974 Trade Act denied most-favored-nation trade status and trade credits to countries with non-market economies that restricted emigration.