duce exported to the United States is from a nationalized company. The 1-year restriction of the Secretary's discretionary authority should be removed from the bill.

Our trading partners are looking to us for leadership in this negotiation. Without U.S. participation and leadership, the multilateral trade negotiations will give way to regional and bilateral arrangements which will be but prescriptions for economic dislocation to the detriment of our producers, traders, and consumers. We cannot let this happen. We will not let it happen if appropriate trade legislation is adopted without delay.

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you very much, Mr. Secretary.

We will now hear Mr. Flanigan's statement.

STATEMENT OF HON. PETER M. FLANIGAN, EXECUTIVE DIRECTOR, COUNCIL ON INTERNATIONAL ECONOMIC POLICIES

NEED FOR REFORMING INTERNATIONAL ECONOMIC SYSTEM

Mr. FLANIGAN. Thank you, Mr. Chairman and gentlemen. I am pleased to be with you today to testify in support of the Trade Reform Act. This bill is the legislative keystone of the President's efforts to reform the international economic system as a whole.

The success of the monetary arrangement in 1944 and the GATT trade rules agreed to in Geneva in 1947 brought fundamental changes in our global economy. The dramatic economic progress which has occurred since then owes much to those agreements. Yet that progress has created a new set of economic relationships in the world. And while the economic world has changed, the institutions and modes of cooperation under which states conduct their economic affairs only began to change in the last several years.

By the beginning of the 1970's it had become clear to all that our present institutions were not meeting the demands placed on them by the increased international flow of goods, services, and capital. The rigidity of the international system and of national practices had exerted an increasing stress on the flow of economic and financial resources with attendant political frictions.

This condition is especially serious when each nation's prosperity is increasingly dependent upon the prosperity of other nations. The recent shortages and dramatic price increases in agricultural products and in petroleum has brought home to all Americans the fact that nations today can no longer isolate themselves from the world's economic events. Economic policies adopted in one country are quickly felt in other nations. Growing specialization in manufacturing and greater dependence on imported goods, especially in critical raw materials, reinforce the world's economic interdependence. What is needed now are changes in the international framework to reflect for the coming decades the new economic conditions.

GOALS OF THE ADMINISTRATION

President Nixon in his annual report on foreign policy states, and I am quoting it:

Our goal is to work with other nations to build a new economic order, to meet the world's needs in the last quarter of this century. We believe these new arrangements should achieve six major objectives:

Continued economic progress from which all nations benefit;

A broader sharing of responsibility commensurate with new economic power relationships and the potential benefits to be gained;

Rules that reflect an equitable balance among the interest of all nations; The widest possible consensus for principles of open economic intercourse, orderly economic behavior, and effective economic adjustment;

Improved methods for assuring that those principles are adhered to; and Sufficient flexibility to allow each nation to operate within agreed standards in ways best suited to its political character, its stage of development, and its economic structure.

The achievement of these objectives can create a new balance between diverse national economic needs and a greater international unity of purpose. Economic relations can become a source of strength and harmony among countries rather than a source of friction.

These are the broad goals which the administration is seeking, in cooperation with the other nations of the world—both rich and poor. Progress will be made if the world's governments believe that their efforts at maximizing the social and economic well-being of their own citizens will be furthered by enhancing order and collective discipline in world economic relations. Any new economic structures must therefore provide sufficient flexibility to allow domestic economies to be managed effectively within the internationally agreed rules. Obtaining the agreement of sovereign nations to abide by common rules and to reduce barriers to the free flow of trade, payments and investments is a difficult task. Unfortunately, the growth of economic power which has occurred in the last 25 years has been combined with a reluctance to remove the barriers nations needed when they were less competitive. The benefits of the market mechanism are heavily discounted by those accustomed to special protections.

Reform of the international economic system must take place in all its related major areas-monetary, investment, and trade, and in the case of the latter includes both equitable access to markets and equitable access to supplies. The key to progress in each of these areas is consistency and discipline in the international application of agreed rules. Furthermore, if we are to move toward a world in which market forces are allowed to operate freely, we must achieve substantial progress in all three areas. A piecemeal approach will not work. Progress in one area can easily be offset by restrictions in another. For example, the lowering of tariffs and removal of nontariff barriers will have little effect if nations are allowed to manipulate their exchange rates to restrict imports by undervaluing their currencies. Similarly, flexible exchange rates can readily be frustrated by barriers to capital flows. The solutions to the problems we face lie in a major world effort. The dedication of the United States to this effort will be measured in large part by the shape of the legislation we are discussing today. It is clear that without the full support of the United States, reform is impossible. As the preeminent world economic power we must exercise a leadership role.

MULTILATERAL TRADE NEGOTIATIONS

During the discussions following the Smithsonian Agreement in 1971, the United States, the European Community and Japan agreed to initiate and actively support multilateral comprehensive trade negotiations in the GATT framework. This initiative culminated at a min

isterial level meeting held in Tokyo last September in which 101 countries joined in opening multilateral trade negotiations. The stated purposes of the negotiations are:

To achieve the expansion and ever greater liberalization of world trade through the progressive dismantling of obstacles to trade, to improve the international framework for the conduct of world trade and to secure additional benefits for the international trade of developing countries.

The legislative mandate that the U.S. negotiators receive from the Congress will, in effect, determine the progress which can be made in these negotiations. The movement toward a more equitable and open trading world is dependent on the prompt enactment of the Trade Reform Act of 1973.

FIVE BASIC PURPOSES OF TRADE REFORM ACT

The Trade Reform Act of 1973 is designed to make possible the accomplishment of five basic purposes. The first is to negotiate a more open trading world. Authority is provided not only to engage in reciprocal negotiations on tariffs but also to negotiate the elimination and reduction of non-tariff trade distorting practices, subject to cooperation with the Congress under the veto procedure. With the success of the Kennedy round in 1967 in reducing tariffs among the world's major trading nations, non-tariff practices have become the major impediment to fair competition and the free flow of goods in international trade. Major attention will be given in the multilateral trade negotiations to eliminating and reducing these trade distorting measures. The job will not be easy as many of these practices are imbedded in national laws and policies.

The second major purpose is to guarantee fair treatment for U.S. products in world trade. The trade bill provides authorities to protect U.S. producers from unjustifiable and unreasonable international trade practices. We firmly believe that for trade to be free it must also be fair. Although the basis for an open and equitable trading system is cooperation, experience indicates that cooperation is often enhanced when there is a clear understanding that all parties are firmly committed to protecting their own rights.

The third purpose of the bill is to enable us to act effectively to ease the adjustment of American workers and industries to fair import competition when these imports increase at a rate which causes or threatens serious injury. We must be able to manage surges of imports. There is agreement between the Congress and the administration that the present escape clause and adjustment assistance provisions of the Trade Expansion Act must be substantially liberalized. A revised escape clause, better adjustment assistance, and staging provisions. insure that the benefits which all Americans receive from a more open trading world will not impact unfairly on certain industries and workers in our country.

While it is important that the United States have authority comparable to that which other trading nations have to deal with increased imports, we believe that an effective safeguard mechanism, and, we trust, a new international agreement on the use of safeguards with objective standards, provides a better long-term and more stable. solution.

The fourth major objective is to provide the necessary permanent authorities to effectively manage U.S. trade policy. The bill provides more modern authority to use trade measures as a tool in dealing with the balance of payments, inflation, and national security problems. Authority is also provided to deal with problems of short supply, compensation, renegotiation, termination, and withdrawal related to trade agreements.

The final objective in the trade bill is to open up and take advantage of new trade opportunities with all countries. Authority is provided to institute a system of generalized tariff preferences for less developed countries under which the United States would grant dutyfree tariff treatment for 10 years to less developed country imports. Authority is also provided to grant nondiscriminatory treatment to the products of the Soviet Union and other nonmarket economies. As you know, the administration has strong reservations with respect to the restrictions placed on the granting of nondiscriminatory tariff treatment and the use of export credits in trade with Communist nations. Secretary Kissinger, who will be meeting with you later this week, will discuss these with the committee.

EXPORT RESTRICTIONS ON VITAL RAW MATERIALS

Legislative proposals introduced by Senators Mondale, Ribicoff, and Chiles indicate congressional concern about the problem of export restrictions of vital raw materials. The administration shares these concerns that have led to these proposals and will work with the committee on appropriate legislation. The problems of short supply induced through export controls imposed by government can only be alleviated through cooperative action. Internationally agreed procedures and principles to help assure equal access to the world's scarce resources are urgently needed.

There are currently few effective international restrictions on governmental export practices. Nations have historically refused to relinquish their complete independence of economic action in this area.

In considering legislation directing the President to seek an international agreement assuring equitable access to the world's raw materials, the Congress must address a basic issue. In asking for nondiscriminatory treatment from others, we as a major supplier must examine the impact on our own practices.

INCONSISTENT TRADE POLICIES

The choice is clear, but not easy. The United States, along with many other nations, has occasionally used trade policy inconsistently. We as a nation must be willing to accept internationally agreed constraints on our freedom to act unilaterally for domestic or other political purposes in exchange for other nations accepting identical constraints.

We are receptive to the proposals that have been made in the Senate. We will also be putting forward additional proposals to amend both the trade bill and the Export Administration Act.

The dislocations from major economic events, such as the oil crisis, pose the danger of a new protectionism. The economic uncertainties triggered by shortages and price increases of basic commodities are causing dramatic and rapid shifts in demand. The new protectionism

would seek to ameliorate the effects of these shifts by restricting imports or by restricting exports of needed raw materials. This would be a prescription for chaos in an interdependent world. We, therefore, need now, even more than a year ago, to press forward on this legislation and the trade reform negotiations, in order to prevent the certain catastrophe that protectionism would produce.

We believe that our commitment to the principle of strengthening the role of the market in the monetary, trade, and investment areas is the right one. Our proposals on monetary reform suggest that the market be a major component in the determination of realistic exchange rates. Our trade proposals suggest that we lower barriers and create a system in which there is a freer flow of goods allowing the market to determine which are bought by whom and where. In the investment area, we are working for removal of distortions so that the flow of capital can be predominantly decided by market forces. It is obvious that rationalization of the world economic system cannot succeed with restrictive policies in one area and liberal policies in another.

Restrictive or coercive trade policies lead to distortions in investment flows and away from the efficient allocation of resources. While one distortion breeds another, it is also true that the reduction of distortions must be approached comprehensively in all areas of international economic activity in order to prevent nullification of the benefits to be gained from such action.

POSSIBLE GAINS FOR THE UNITED STATES

The United States, with its comparative advantages, has clearly much to gain by reliance on the market in the trade area. Given the recent oil and food crises, our trade negotiations take on even greater importance. We must not only remove barriers to our exports but we must also reach new international understandings with respect to export controls so that all importing countries will have a greater sense of security of suppy and a greater stake in cooperating to make an interdependent world economy work.

If the international economic system, because of the stresses imposed on it by these crises, begins to move away from cooperation toward a pattern of independent action, not only the United States but the world will be poorer for it. As is often the case in important negotiations, the only way to keep from sliding backward is to keep moving forward. It is for this reason that I urge this committee to give prompt and favorable consideration to the Trade Reform Act of 1973. Upon your actions hinge the fate of our efforts to speed the international economic reform which is vital for both the prosperity and security of our country.

Thank you, Mr. Chairman.

[The prepared statement of Mr. Flanigan follows:]

TESTIMONY OF HON. PETER M. FLANIGAN, EXECUTIVE DIRECTOR, COUNCIL ON INTERNATIONAL ECONOMIC POLICY

I am pleased to be here today to testify in support of the Trade Reform Act of 1973 (H.R. 10710). The bill is the legislative keystone of the President's efforts to reform the international economic system.

The success of the agreements reached on monetary arrangements at Bretton Woods in 1944 and on the GATT trade rules in Geneva in 1947 has brought fun

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