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

9. Memorandum From the Assistant Secretary of the Treasury for International Affairs-Designate (Bergsten) to Secretary of the Treasury Blumenthal¹

Washington, March 16, 1977

SUBJECT

• Trade Policy Strategy—Meeting on March 17 with Schultze, Strauss and Cooper

Issue

Our trade policy faces five fundamental problems:

(1) Japan is running a trade deficit of $20 billion annually with OPEC and other resource producing countries, and a services deficit with all countries of about $7 billion. Hence it must run sizable trade surpluses with the U.S., Europe, and other LDC’s. Both aggregate and sectoral (presently, steel and color TV) problems are thus inevitable for the indefinite future.

(2) The LDCs are coming (textiles, shoes). They are the real threats in more labor intensive industries. But they must keep going if their developmental plans are to have any hope, and massive debt problems avoided.

(3) Our own failure to develop a domestic program of structural adjustment, as you have been discussing in the broad context of fighting inflation.

(4) Our half-hearted implementation of the anti-dumping and countervailing duty statutes. Virtually every industry complaint centers on “unfair” competition by foreign governments, and present law provides ready remedies whenever such situations can be demonstrated.

(5) Our MTN strategy has not been geared effectively toward dealing with our domestic problems. Its focus on agriculture is no help in dealing with problems of government intervention—notably export subsidies—in the industrial sector.

A Proposed Strategy

(1) A whole new program of structural reform must be at the center. History indicates that such a program can be worked out. It has been done in many specific cases outside the trade area—Studebaker, Armour Packing, and numerous Department of Defense cases.

Three features are necessary:

—More money, though not necessarily a huge amount.

—An aggressive individual to manage the program, or perhaps different individuals for each key industry (starting with shoes).

—A focus on communities, rather than on firms or workers per se, as is done by the Defense Department.

(2) A tough Treasury stance on anti-dumping and countervailing. This might diffuse much of the pressure on steel, and some on shoes.

(3) Reorientation of our MTN strategy to downplay agriculture and focus instead on export subsidies and other government interventions. Such a reorientation could be announced at the summit, and provide major help for our domestic effort.

(4) Where necessary, until the adjustment program becomes effective and credible, limited resort to import restraints.

—Firming up of Japan’s commitment to reduce its color TV exports by 0.5 million sets in 1977. I could call Tokyo on this personally, to follow up the commitment made to me during the Mondale trip,² and the Japanese are now maximally willing to compromise to defuse the issue prior to Fukuda’s visit.

—A straight tariff increase on shoes (and perhaps color TVs), to be phased down over two years as the structural adjustment reforms phase in.

—An international sugar agreement to deal with that product via floor prices, buttressed by direct U.S. subsidies and higher tariffs is necessary.

(5) Continued vigilance in minimizing Japan’s intervention in the exchange markets.³ Appreciation of the yen resolved the U.S.–Japan trade war of 1969–1972, and is a necessary condition for keeping that problem under control now.

(6) Negotiation with key LDC’s, such as Brazil, of overall understandings concerning the breadth and depth of their export subsidies. We can accept such subsidies only if they are limited in extent and phased down over time.

Recommendation:

That you advocate all or part of this proposed program to our colleagues. I would be glad to elaborate on each, if you like the basic approach.⁴

1. Source: National Archives, RG 56, Records of Assistant Secretary of the Treasury for International Affairs C. Fred Bergsten, 1977–1979, Box 1, BP–4–1 Briefing Memos—WM Blumenthal 1977. No classification marking. A copy was sent to Solomon.
2. Bergsten discussed his observations while accompanying Mondale on his trip to Western Europe and Japan in a February 2 memorandum to Blumenthal. On the issue of Japanese TV exports, Bergsten reported that “Fukuda assured us that they will keep color TV exports under control. MITI gave me the details: a 10 percent cutback from 1976 via “administrative guidance.” But we will have to watch them like hawks, on this and steel.” (National Archives, RG 56, Records of Assistant Secretary of the Treasury for International Affairs C. Fred Bergsten, 1977–1979, Box 1, POL–5 Visits 1977) For the results of Mondale’s trip to Western Europe and Japan, see Document 5.
3. In a February 22 memorandum to Blumenthal, Bergsten noted the appreciation of the yen during Carter’s 4 weeks in office and suggested “that there is an intimate causal relationship, based on what must look to the Japanese like a carefully orchestrated American offensive.” (National Archives, RG 56, Records of Assistant Secretary of the Treasury for International Affairs C. Fred Bergsten, 1977–1979, Box 1, POL–5 Visits 1977)
4. Blumenthal did not indicate his preference with respect to Bergsten’s recommendation. No minutes of Blumenthal’s March 17 meeting were found.