90. Memorandum From the Special Representative for Trade Negotiations (Strauss) to President Carter 1

SUBJECT

  • Steel Decisions

Two important steel decisions were not dealt with by the Solomon Task Force—(1) the question of continuing specialty steel import quotas and (2) our disposition of a complaint by the steel industry under section 301 of the Trade Act against the EC/Japanese voluntary agreement that restricts Japanese steel exports to the EC. Both of these issues have been reviewed through our interagency process and the attached memoranda present recommendations for your review on the respective cases. If you accept our recommendations, I would plan to announce the decisions simultaneously in order to minimize any adverse reactions domestically or internationally. The specialty steel recommendation would be favorably received domestically but not internationally. The section 301 case recommendation would generate the opposite reaction.

[Page 281]

Attachment

Memorandum From the Special Representative for Trade Negotiations (Strauss) to President Carter 2

SUBJECT

  • Section 301 Complaint by the American Iron and Steel Institute

Background

In October 1976, the American Iron and Steel Institute (AISI) filed a formal complaint with the Office of the Special Representative for Trade Negotiations (STR) under section 301 of the Trade Act of 1974. The complaint alleges that the European Community (EC) and Japan had entered an agreement on steel that restricted steel exports from Japan to the EC and resulted in a substantial deflection of Japanese exports to the United States. In June 1977, the AISI proposed that quantitative restrictions be imposed on U.S. steel imports from both Japan and the EC as the appropriate remedy for the deflection problem.

Section 301 of the Trade Act of 1974 confers a right to petition the President through the Special Trade Representative for the elimination of unfair practices of foreign governments that burden U.S. commerce. Under the authority of this section you may take whatever retaliatory action (e.g. quotas, tariffs) you think is appropriate to achieve removal of such unfair practices. In general, there is no internationally accepted framework for such actions, as there is in the case of “escape clause” cases like footwear and color television receivers. Thus, retaliation would most often be contrary to our international commitments, and could result in counter measures being taken against U.S. trade.

We have reviewed the AISI allegations on the basis of publicly available data (including briefs filed in this case) and private discussions with representatives of the EC and Japanese Government. Our findings have been reviewed by the interagency Section 301 Committee consisting of the Departments of State, Treasury, Commerce, Labor, Interior, Agriculture, and Defense.

The length of time taken to prepare recommendations on this case reflects a fundamental dilemma as to how to cope with both the measurement as well as the remedy for a deflection problem. Despite the logic of the case we have been unable to clearly establish a causal relationship between the EC/Japan understanding and the surge in Japa[Page 282]nese steel exports to the United States. We communicated our concerns informally to the AISI last spring and indicated that dumping appeared to be the industry’s major problem. While the causal relationship could not be established, we were reluctant to discontinue the case on the basis of insufficient evidence because that finding would seriously undermine our continuing criticisms of the EC’s efforts to do similar deals with other countries and in other product areas and we were not certain that we would not have to resort to some action under section 301 in the face of the worsening steel situation.

Findings

1. The AISI allegation that an agreement exists between the EC and Japan to restrict Japanese steel exports to the EC is essentially correct. While there is no formal or written agreement there is a clear understanding between the two governments. This understanding was reached originally in late 1975 during their regular semi-annual steel consultations, and has been extended regularly in ensuing consultations. It called for a 5% cutback from 1975 shipments by Japan to the EC. On November 28, 1977 the two governments agreed to extend the restriction through 1978 at the same level as the previous two years (1.22 million metric tons). The restriction is implemented through a Japanese cartel approved by the government, consisting of the six largest Japanese steel companies (which account for about 70% of Japanese steel exports). The small Japanese companies are not directly restricted although the large companies and the government probably try to influence their behavior.

2. The AISI allegation that this restriction has caused a substantial deflection of Japanese steel exports to the U.S. market cannot be substantiated. Japanese steel exports to the United States did increase dramatically in 1976 and have remained at those record high levels in 1977. However, Japanese steel exports to the world have behaved in the same fashion, principally reflecting the internal pressures to produce for export because of large overcapacity in relation to depressed domestic steel demand in Japan. Further, Japanese steel exports to the United States of the products covered by the restriction to the EC generally did not increase more rapidly than U.S. demand for those products. Finally, the Japanese cartel shipped substantially less than the agreed amount to the EC suggesting the understanding did not have a substantial restrictive effect. Our conclusion is that if there was any deflection as a result of the understanding, it was very minor. The surge of Japanese exports to us was basically the result of dumping and stronger demand conditions here as compared with other markets.

3. Even if it could be clearly established that the EC-Japanese understanding had created substantial deflection to the U.S. market, given the facts in this particular situation a more appropriate remedy would be antidumping [Page 283]procedures. The Treasury Department has already concluded that there is sufficient basis to believe there is a pervasive dumping problem in steel trade to justify implementation of a trigger price system on all steel imports. It is likely therefore that any trade restriction, such as the Japanese cartel for exports to the EC, would only increase the likelihood of dumping in other markets. If the dumping is stopped, there would be little basis for a claim of deflection since one would expect U.S. imports to increase from more competitive producing countries, whether or not other markets are restricted.

Recommendations

I recommend that STR announce discontinuance of its review of the AISI section 301 complaint on the grounds that the Treasury Department’s trigger price system to deter dumping will eliminate any unfair burden on the U.S. steel industry which may be resulting from the EC-Japanese understanding.3 I would indicate that while we were able to determine that such an understanding exists, we were unable to measure its impact. We had kept the case under review, however, because significant diversion would have posed a threat in the deteriorating domestic steel situation. As it became clear that widespread dumping was the central trade problem, we turned to antidumping remedies. With the trigger price system, we believe that any unfair burden in U.S. trade due to the EC-Japanese understanding will be remedied. I would announce further that we continue to believe that such informal arrangements are not in the interests of the world trading system and should be brought under better international discipline.

The Departments of State, Treasury, Commerce, Agriculture, Interior, Labor, and the Council of Economic Advisers concur in the above recommendation. Eizenstat and NSC also concur.

There may be some adverse reaction from the domestic steel industry and the Congress to discontinuing this case, however, it may be riskier not to dispose of it. There are already legislative proposals to put statutory deadlines on our handling of section 301 cases, which would limit our flexibility to achieve solutions in these cases, because they usually involve extended negotiations. The adverse domestic reaction should be ameliorated by the implementation of the trigger price system by Treasury.

The EC and Japan would, of course, welcome dropping the case. It is regrettable that we have no better international rules available to us to cover the arrangement in which they have participated. We are working on a safeguard code in the Multilateral Trade Negotiations [Page 284]which may bring greater discipline to the use of such voluntary export restraints.

RECOMMENDATION: Discontinuance of section 301 case complaining of adverse impact of EC-Japanese steel restraint agreement.

Approve4

Disapprove

Please discuss with me

Other

Attachment

Memorandum From the Special Representative for Trade Negotiations (Strauss) to President Carter 5

SUBJECT

  • Review of Specialty Steel Import Relief Program

Background

In May 1977, you decided to review the existing specialty steel import relief program and to initiate the procedures required by law prior to reducing or terminating import relief.6 On your behalf, I requested that the U.S. International Trade Commission (USITC) and the Secretaries of Commerce and Labor provide you with advice on reduction or termination of import relief. The statute requires that you have this advice before making a decision to modify the quotas, but the advice is not binding. Also, your decision to review the quotas does not commit you to modifying them.

The USITC reported to you in October the results of its study of the probable economic effect on the domestic specialty steel industry of reducing or terminating import relief.7 Two of the four USITC Commissioners who voted on this issue advised against reduction or termination of relief. A third Commissioner advised that termination of relief [Page 285]would not have a substantial adverse impact on the domestic specialty steel industry. The remaining Commissioner advised that moderate (6.7%) increases in the second and third year quotas for each product category would not have a serious adverse economic effect.8

In December, the Secretaries of Commerce and Labor reported to you their advice regarding reduction or termination of relief.9 The Secretary of Labor determined that such action would have a deleterious effect on domestic specialty steel employment, and thus advised that no change be made in the status of import relief. The Secretary of Commerce also recommended that the existing import restraints not be terminated or modified at this time, stating that such action would have a detrimental effect on the domestic industry.10

The picture that emerges of the recovery of the domestic industry from the 1975 recession is mixed, with some segments showing substantial improvement and others remaining depressed. Employment increases have generally lagged behind gains in shipments and production. Price performance has also been mixed with some products showing no downward flexibility while others have moved up and down in line with demand conditions. Profits have improved but remain low relative to earlier peaks and the overall manufacturing average. There have been substantial increases in investment by the industry since the quotas were put into effect.

While there has been considerable grumbling by other countries about the quotas, there is little expectation that the quotas will be eliminated in view of the overall domestic U.S. steel problem. At the moment, the major concern abroad is with the trigger price system for carbon steel (specialty steel will not be covered).

There is no provision for a Congressional override of your decision on this issue. However, there has been considerable Congressional interest in this case, especially from representatives of steel-producing states such as Pennsylvania, Ohio, New York, and Maryland. At least 100 members of the Congress have written you or me on this issue and they almost unanimously support no modification of the quotas. In addition, there have been submitted to us petitions signed by over 100,000 Pennsylvanians as well as petitions and resolutions from numerous other communities urging no change in the quotas.

[Page 286]

Recommendations

The interagency Trade Policy Staff Committee (TPSC) has reviewed the USITC, Commerce, and Labor advice regarding reduction or termination of relief. The TPSC (acting on behalf of the Cabinet-level Trade Policy Committee) has a statutory responsibility to make recommendations to you on import relief actions. Set forth below for your decision are the options recommended by one or more TPSC agencies.

No TPSC agency recommended that you terminate specialty steel import relief. All TPSC agencies recommend that you remove chipper knife and RM 81 (band saw) steel from coverage under the alloy tool steel quotas. These two minor products are available only in limited quantities from American manufacturers, and shortages are currently endangering the operations of domestic firms which consume these materials. The domestic specialty steel industry supports exclusion of chipper knife steel and only two firms might oppose exclusion of band saw steel. Sweden has expressed particular interest in the exclusion of chipper knife steel from the quotas.

All TPSC agencies further recommend that, to compensate for the removal of chipper knife and band saw steel from quota coverage, the Swedish and EC third year quotas be reduced. We would consult with the EC and Sweden before making such an adjustment. This adjustment would be small in relation to the total specialty steel quotas due to the small import volume of these two products in the base period but would reduce adverse domestic reaction to the exclusions.

Option I:*t1 The TPSC recommends the following action:11

Retain the specialty steel quotas for all product categories at their current levels.

I support this recommendation along with the Departments of Treasury, Commerce, Labor, Interior, Defense, and Agriculture. Eizenstat concurs.

The TPSC recommends no increases in quotas for the following reasons: (1) domestic specialty steel employment conditions have not fully recovered from depressed 1975 levels; (2) most of the domestic industry economic recovery has occurred during the first half of 1977 and this recovery was not sustained in the third quarter of 1977; (3) production levels in the third quarter of 1977 were the lowest since 1975 and [Page 287]unused capacity ranged from one-fourth to three-fifths of total capability depending on the segment of the industry; (4) increased imports resulting from modifying the quotas could significantly reduce the profitability of domestic firms, many of whom are making efforts to adjust to import competition; (5) we would get little credit internationally for modest quota increases and the anti-inflation benefits would be limited; (6) the reactions of the industry, union, and the Congress to even small quota increases would be highly critical. The domestic reaction could well lead to efforts to legislate limits on the President’s ability to modify import relief, and (7) a decision against reduction or termination of relief would not endanger the positive climate on steel created by the Solomon program in the Congress, domestic steel firms, the steel workers union and steel communities.12

Option II:*t1 The Department of State and the Council of Economic Advisers recommend the following action: as do OMB and NSC:13

Increase the second year quotas for stainless sheet and strip, bar, and rod by seven percent. Increase the third year quotas for these three products by an additional ten percent (which includes the three percent growth factor already contained in the current third year quota levels). Leave the quota for stainless steel plate at its current levels.

Agencies favoring Option II recommendations argue that these moderate quota increases (1) are warranted due to the recovery in the domestic industry that has occurred since the imposition of the quotas; (2) would demonstrate our concern about inflationary impact of domestic specialty steel pricing developments; and (3) would generate some favorable international reaction by demonstrating our willingness to relax restrictions as economic conditions improve.14

For your information, I am attaching a copy of the analytical paper upon which the TPSC based its recommendations (Tab A). I am also attaching copies of the USITC, Commerce, and Labor advice regarding reduction or termination of import relief (Tabs B, C, and D).15

Once you have reached a decision, I will prepare the necessary papers to announce and implement your decision.

[Page 288]

Tab A

Paper 16

TAB A—Section 301 Complaint

The Treasury Department supports discontinuance of the steel industry’s complaint against the EC/Japanese agreement, but objects to Strauss’ statement that the Administration’s new trigger price system “will eliminate any unfair burden on the U.S. steel industry.”17

STR and Treasury have since worked out mutually acceptable language for announcing this decision, according to Stu.18

Tab B

Paper 19

TAB B—Specialty Steel Quotas

Option I:

Eizenstat concurs with Strauss et al, and cites this additional argument:

• liberalization of the quotas would again subject the Administration to charges of inconsistency in our economic actions—on the one hand, we develop a trigger price system to protect the domestic steel industry from foreign competition in basic steel, and on the other, we re[Page 289]duce the amount of protection the steel industry has against foreign competition in specialty steel.

Eizenstat recommends, in addition, that you instruct Ambassador Strauss to reflect our concern about inflationary price increases either in his formal announcement of this decision or in private communications with specialty steel manufacturers.20 We should let the industry know that we expect its continuing economic recovery to be based on the expansion of production—and not just inflationary price increases.

Option II:

OMB and NSC concur with State and CEA.

OMB: “the recommended relaxation would be a positive indication to domestic and foreign observers alike that the Administration is serious about eliminating unfair imports and minimizing restrictions on imports entering fairly.”

NSC: According to ITC Commissioner Minchew, a moderate increase in quotas would not have an adverse impact on the domestic industry, and would show our trading partners that the US is prepared to reduce import relief when economic conditions improve. Firms producing stainless steel sheet and strip, bars and rods have substantially recovered from the 1975 recession.

  1. Source: National Archives, RG 364, 364–80–4, Special Trade Representative Subject Files, 1977–1979, Box 7, Steel File #1. Limited Official Use. A stamped notation reads: “The President has seen,” and Carter wrote at the top of the page: “cc Strauss. JC.”
  2. Limited Official Use.
  3. A typed notation in the margin adjacent to this sentence reads: “See Tab A.” See footnotes 15 and 16 below.
  4. Carter indicated his approval of this recommendation and initialed “JC.”
  5. Limited Official Use.
  6. See Document 29.
  7. The USITC decision on the specialty steel case was announced on October 11. (Brendan Jones, “U.S. to Push Trade Talks And Attempt to Aid Steel,” The New York Times, October 12, 1977, p. D1)
  8. Carter wrote “2 Keep, 1 Term[inate], 1 reduce” in the margin adjacent to this paragraph.
  9. These reports were not found.
  10. Carter wrote “Labor Keep, Com[merce Keep]” in the margin adjacent to this paragraph.
  11. A typed notation in the margin adjacent to this sentence reads: “See Tab B.” See footnotes 15 and 16 below.
  12. Carter indicated his approval of this option and wrote: “Why not remove quotas on chipper knife & band saw steel? JC.”
  13. A typed notation in the margin adjacent to this sentence reads: “See Tab B.”
  14. Carter did not indicate his preference with respect to this option.
  15. An unknown person struck through the word “attaching” both times it appears in this paragraph. Tabs A–D are not attached.
  16. No classification marking.
  17. In a December 28 memorandum to Carter, Solomon explained Treasury’s opposition to this statement: “We have found no such burden resulting from the agreement. Rather, our recommendation that this review be discontinued is based on the fact that the U.S. steel industry has been unable to substantiate its allegation that the EC/Japanese agreement has caused substantial deflection of Japanese steel to the U.S. market. This was agreed at the staff level and conveyed to the steel industry last spring, well before the trigger price system had been developed. I therefore recommend that, in discontinuing this review, STR simply explain that investigation has shown the industry’s allegation of injury to be unfounded. I recommend against making any connection between discontinuance and the Administration’s new trigger price system.” (Carter Library, Anthony Solomon Collection, 1977–1980, Subject File, Box 8, Acting Secretary—Signatures)
  18. Carter wrote “ok. J” below this paragraph.
  19. No classification marking.
  20. Carter drew an arrow to this sentence and wrote “ok. J.”