support of the United States, reform is impossible. As the preeminent world economic power we must exercise a leadership role.

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 Ministerial 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 United States negotiators receive from the Congress will, in effect, determine the progress which can be made in these negotiations. The movement towards a more equitable and open trading world is dependent on the prompt enactment of the Trade Reform Act of 1973.

The 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 elminiation 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 United States 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 fast 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 longterm and more stable solution.

The fourth major objective is to provide the necessary permanent authorities to effectively manage United States 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 with. drawal 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 duty-free tariff treatment for ten years to LDC imports. Authority is also provided to grant nondiscriminatory treatment to the products of the Soviet Union and other non-market 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 will discuss these with the Committee.

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 governmental export controls can only be alleviated through intergovernmental 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 independence of economic action, except in the special cases where such international cooperation directly increased their economic security and national welfare. In most of these cases the cooperative agreements have proved short-lived when the underlying economic conditions have changed. The problem today is not different, only more acute.

In considering legislation directing the President to seek an international agreement assuring equitable access to the world's raw materials, the Congress must address two basic issues. As a practical matter, the benefits to the participating countries obtaining security of supply must equal the benefits they could obtain by retaining independence of action. This has special meaning to the United States as a major world supplier. In asking for national and nondiscriminatory treatment from others, we must examine the impact of such rules on our practices. Secondly, if the Congress mandates the President to seek international agreement to prevent governments from unilaterally introducing export barriers for political reasons, we must be careful that the language is such that it is consistent with our own laws and policies.

The issue must be squarely faced. The Congress and the Administration must decide whether the trade policy we are to follow is to be based on agreed rules of behavior or whether we and other nations will abide by such rules only if they are convenient to us. The choice ought to be clear but we must understand that it is not easy. The United States, along with many other nations, has occasionally used our 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.

The Trade Bill in its present form provides basic authority for the President to deal with these problems internationally. We are receptive to the proposals that have been made in the Senate. We will be putting forward additional proposals to amend both the Trade Bill and the Export Administration Act. I believe we can work together to find an acceptable formula to cover this serious problem.

Trade policies are a difficult balancing of interests. While some workers, farmers, and businessmen want open international trade, others want a protected national market. The perceived benefits of protective trade policies are very important to those businesses and workers receiving this assistance; consequently, they are well organized to push their case. However, the costs of such policies are spread throughout the economy in the form of higher prices to consumers for the products protected and higher costs to producers of competitive goods through inefficient use of available resources. It should also be remembered that trade negotiations work on the basis of reciprocity and mutual advantage, so that each U.S. industry that receives special protection from world competition, reduces our opportunity to eliminate other naion's barriers to our exports.

As I pointed out earlier, monetary policies impact decisively on trade policies. In the last two years many of the world's major trading nations, including the United States, have moved away from inflexibly fixed exchange rates. Nevertheless, when financial policy makers see a weakening in their nation's payments balance, they may still exercise the option of allowing the exchange rate to move downward to make exports cheaper and imports more expensive and thereby bringing their trade balance into equilibrium.

The fact that a country may adjust its trade balance by small changes in the exchange rate has tremendous implications on the traditional practice of trade policy. If a nation establishes high tariff barriers to protect its domestic industries, the monetary adjustment mechanism which is driven by supply and demand forces of the exchange market will move the price of its currency up. As its currency upvalues, its exports become less competitive and the imports of its trading partners become cheaper and might even become competitive in its internal market despite the high tariffs. Imposing import restrictions in a world of flexible exchange rates will cause an upvaluing of one's currency so that the protection from imports afforded some domestic industries will be done at the

real expense of making domestic export industries less competitive in the world market. They would be robbing from Peter to pay Paul.

The dislocations from major economic events, such as the oil crisis, poses 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, which are not caused by a fundamental imbalance or foreign competition, by restricting imports or by restricting exports of needed raw materials.

This is 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 be sure to 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 realistic exchange rates, as determined by the market, be an important component. 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.

The introduction of the market principle in the monetary area has a liberalizing impact on trade. In the same way, the movement towards a more equitable and open trading system will have a positive impact on monetary adjustments. It is obvious that rationalization of the world economic system cannot succeed with restrictive policies in one area and liberal policies in another.

The introduction of the market principle in the monetary area has a liberalizing impact on trade. In the same way, the movement towards a more equitable and open trading system will have a positive impact on monetary adjustments. It is obvious that rationalization of the world economic system cannot succeed with restrictive policies in one area and liberal policies in another.

This is equally true of investment. 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.

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 supply 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 towards a pattern of independent action, not only the U.S. but the world will be poorer for it. As is often the case in important negotiations, the only way to keep from sliding backwards 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.

The CHAIRMAN. Thank you, Mr. Flanigan. In line with the committee's procedure of occasionally reversing the order of questions, I will call on Mr. Roth. I will also suggest that we abide by the 10-minute rule and I will ask the staff to keep time on it in the first round of questioning and we will see where we stand after we make the first round.

Secretary SHULTZ. Does that apply to me, too, Mr. Chairman? [Laughter.]

The CHAIRMAN. It is up to each member to try to keep the witness from filibustering on his time if he wants to do so. Each Senator will have to defend his 10 minutes as best he can.

TRADE REFORM URGENT

Senator ROTH. Well, Mr. Secretary and Mr. Flanigan, in a sense you have addressed my first question but I think it bears repeating. In my opening remarks I mentioned the importance I attached to this legislation being adopted as early as possible this year. Yet I find there are a number of commentators and a number of so-called experts who argue that energy and the other shortages, those in agriculture, and so forth, that the impact of the higher price of oil, the unemployment being experienced not only here but abroad, many other factors, mean that there are not going to be meaningful negotiations in the near future. We are really faced with a threat of protectionism. And I wonder, Mr. Secretary, if you would like to add anything as to why you think it is important now that we get this adopted as early as possible.

Secretary SHULTZ. Well, I think all of the things that you have mentioned argue that we work on this problem more urgently rather than less urgently because we have a structure of monetary, trade, and investment arrangements around the world. They are under great tension and strain and it is important to refresh them and renew them particularly since the strain of the events you mentioned puts a great deal of pressure on us.

I have been interested in two recent international meetings, the one in Rome of people gathered to discuss the monetary system, and the other here in Washington of people gathered to discuss energy. The first was finance-type people and the second was a mixture of finance, energy, and foreign ministry. In both cases there was a clear view that it was extremely important to maintain and develop work on the trade subject and not allow the current very large massive changes in the flows of money around the world to degenerate into a kind of a trade war. So I think that the factors you mentioned highlight the importance of getting on with it rather than suggest that we should hold back and wait and see. I am afraid what we would wait and see is a deterioration.

INEQUITIES SEEN IN GATT

Senator ROTH. One of the basic objectives spelled out in your testimony is, of course, to try to create a more open trading world, and to do it within the framework of GATT. Many feel-I must say I have some concern myself that many of the provisions of GATT make an open world more difficult. Since the current legislation does provide or make provision for renegotiation of some of the GATT provisions, the question I have for you is, is there any evidence, any grounds, to believe that some of the provisions in the GATT can be modified to eliminate what is basic unfairness to this country?

Let me read you the study made by our Finance Committee: "Nondiscrimination is intended to be the cardinal principle of GATT. It is embodied in Article 1 what you give to one you give to all. This principle is aimed at making discriminatory bilateral agreements and special commercial relationships. However, GATT sanctions departure from MFN." The study goes on to spell out some of the things that happened in the Common Market. The same question arises on how to treat different types of taxes. I wonder, Mr. Secretary, or Mr. Flani

gan, are there any grounds for optimum that our trading partners are willing to make GATT a fairer agreement?

Secretary SHULTZ. Yes, I think so. I think there is a willingness to examine the general agreement. There are committees that have already been set up on some items and, of course, we seek in this bill a certain amount or ability to pressure on just the points that you mentioned. For example, the business of setting up reverse preferences and creating a block that way, well, we seek to get at that not only in a negotiating sense but also in the sense of saying that as a restriction on the generalized preferences asked for here that countries that have reverse preferences will not get them from us. So we are trying to break that down, what we regard as a bad practice and to which you referred. So I think, yes, is the answer to your question.

POSSIBILITY OF BENEFICIARIES OF FREER TRADE SUPPORTING
ADJUSTMENT ASSISTANCE

Senator ROTH. Mr. Flanigan in your testimony you mention that the third purpose of this 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.

You also state, as the benefits of trade are shared by the entire country, it is certainly fair that the cost of any adjustments to such trade are also shared.

I wonder if anyone in the administration has given any thought as to how we should try to finance these special benefits. I think that rightly so that the workers who see their jobs possibly disappearing have a legitimate gripe if we don't take care of them. As one who also is somewhat concerned about the balancing of the budget, I am concerned as to how we are going to finance some of these benefits. I am not sure the financing we have in the present legislation is adequate. Why shouldn't those who benefit from trade, both exporters and importers, by some tax mechanism, help finance these benefits. I wonder if any thought has been given to this approach. In other words, if we are going to promote trade, and trade is going to adversely affect some workers, some industries, shouldn't those who particularly benefit from the liberal trade policies have an obligation to carry that burden? We are going to look, I think, in the near future at some of our tax legislation, tax credits. Perhaps it would be wise to let all countries as well know there will be some slight tax of some sort imposed on trade that would be used as a means of financing these benefits. Has any thought been given within the administration to such an approach?

Mr. FLANIGAN. I hate to overburden the Secretary of the Treasury, but financing our expenditures and taxes is his responsibility so I think he is probably the one who should answer your question.

Secretary SHULTZ. Well, I think, first, that everybody benefits. It isn't just people who happen to export or import who benefit from trade, but everybody gains the benefits from trade. They are widely shared, and the difficulties are experienced by a relatively few whose jobs happen to be affected, or businesses. I think we should share this