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TRADE REFORM ACT OF 1973

THURSDAY, MARCH 28, 1974

U.S. SENATE,
COMMITTEE ON FINANCE,

Washington, D.C. The committee met, pursuant to recess, at 10 a.m., in room 2221, Dirksen Senate Office Building, Hon. Russell B. Long (chairman) presiding

Present: Senators Long, Curtis, Fannin, Packwood, and Roth.
The CHAIRMAN. This hearing will come to order.

Today, we shall hear from representatives of the U.S. chemical industry. These witnesses have graciously agreed to appear as a panel in order to conserve the committee's time. We very much appreciate their cooperation.

The 5-minute rule will be imposed today. Each Senator may have 5 minutes to question the witnesses, and if any Senator has additional questions, he may utilize the executive conference room after the witness has been interrogated by all other members of the committee.

The panel this morning will consist of David H. Dawson, formerly with Du Pont, and now the chemical industry trade adviser; Richard M. Brennan of Union Carbide, representing the Manufacturing Chemists Association; as well as Robert Barnard, counsel for the Synthetic Organic Chemical Manufacturers Association.

We welcome you gentlemen, and we will be very pleased to hear your suggestions regarding this trade bill.

STATEMENT OF DAVID H. DAWSON, CHEMICAL INDUSTRY TRADE ADVISER; RICHARD M. BRENNAN, DIRECTOR, INTERNATIONAL TRADE AND TARIFF, UNION CARBIDE CORP., AND CHAIRMAN, INTERNATIONAL TRADE COMMITTEE OF THE MANUFACTURING CHEMISTS ASSOCIATION, AND ROBERT C. BARNARD, COUNSEL, SYNTHETIC ORGANIC CHEMICAL MANUFACTURERS ASSOCIATION

Statement of David H. Dawson

Mr. Dawson. Thank you, Mr. Chairman.

My name is David H. Dawson. I am a director of the Du Pont Co., and upon retirement late last year as senior vice president of that company, I became a trade adviser to the chemical industry, looking forward to the negotiations scheduled to begin under the GÁTT late

this year.

I am accompanied by Mr. Richard Brennan, director of international trade and tariff for Union Carbide Corp., and chairman of the International Trade Committee of the Manufacturing Chemists Association and by Mr. Robert Barnard, substituting for Harold C. Whittemore, vice president of Sun Chemical Corp., and president of Synthetic Organic Chemical Manufacturers Association. He will present Mr. Whittemore's testimony.

In an effort to establish and maintain a concerted industry point of view, five trade associations established the Office of the Chemical Industry Trade Adviser. These are the Manufacturing Chemists Association, the Synthetic Organic Chemical Manufacturers Association, the Society of the Plastics Industry, the Dry Color Manufacturers Association, and the Fertilizer Institute.

The office of the trade adviser will serve to permit communications between the negotiators and the industry. I have agreed to lead this effort representing the five cooperating trade associations with the hope that my 40 years of experience in the industry and my participation in the frustrating and inadequate coordination between Government and industry in the Kennedy round might lead to better results for our industry and the national interest.

We have a full-time technical adviser, Mr. Myron T. Foveaux, also a participant in the industry's futile attempts to assist in the Kennedy round. A policy committee of 12 top industry executives has been formed, and 14 product group task forces are already active in the development of the detailed data which our negotiators will need.

Although we are fully aware that our negotiators cannot utilize industry advisers in the same intimate ways practiced by their adversaries, we are hopeful that between us Government and our industry can find mechanisms which will mitigate our negotiating disadvantage and allow significant improvements over the Kennedy round experience.

I am sure you are all aware that the chemical industry is an extremely heterogeneous one. It manufactures literally tens of thousands of products varying from commodity chemicals selling for a few cents a pound to highly complex compounds selling for many dollars per gram. This heterogeneity has resulted in a multiplicity of trade associations and you have consequently at times heard a variety of viewpoints, particularly in the trade area.

We believe that we have largely reconciled these variations in point of view and we can speak with one voice in urging passage of the bill before you and simultaneously urging some important modifications in it.

The chemical industry is a $66 billion industry employing over one million workers. Last year it had a $3.3 billion trade surplus. For many years it has been one of the largest contributors to our export surplus and even during the dark years of 1971 and 1972, when many of our products were not priced competitively with those of some of foreign manufacturers, succeeded in maintaining a substantial surplus.

Since the Congress first started consideration of this trade bill the whole character of world trade has changed dramatically and with great suddenness. Oil embargoes, sharp price increases in oil and oil derived products, the need to protect our imports rather than our exports, and the changed power position of many underdeveloped countries, all of these have radically altered established trading relations which had existed for many years,

The effect on the chemical industry has been even more profound than on most others, in that we are dependent on oil and gas resources not only for the energy needed to operate our plants, but for the overwhelmingly large part of the raw materials from which we manufacture plastics, fertilizers, and other chemicals. The impacts of these radical changes on world chemical trade are still confused and unclear.

However, it's safe to predit that in any negotiations our trading partners will be seeking to obtain access both to our raw materials and to our markets in order to produce and sell the goods required to earn the vastly increased financial resources required by them to purchase oil. Stakes will be high in such talks, and the possibility of a major disruption of our economy will be great unless we obtain a fair, reciprocal agreement.

International competitive relations which have been relatively stable are being drastically changed. The consequences are still largely unpredictable, but it is not beyond reasonable possibility that some countries may find themselves with excess and unused chemical plant capacity and others requiring rapid expansion.

We cannot now clearly foresee the equilibrium conditions which will finally prevail. It is obvious though that a new aspect of international trade has been introduced and that future trade negotiations must consider freedom of access to raw materials, as well as to markets.

It is clear that the control of energy materials outside of a mechanism for international multilateral negotiations is fraught with great danger. Finally, it is clear that this bill, we believe, should be further amended to provide the requisite mechanisms for grappling with these problems.

Apart from this new dimension, which today seems overwhelming, we have based our recommendations on our experiences of the past 10 years and particularly on our admittedly largely unhappy ones in the Kennedy Round.

I repeat that we are in full support of most of the concepts and provisions in the Trade Reform Act. We continue to urge, however, as we did when this bill was being considered by the House, that four important modifications be incorporated.

One, that the maximum tariff cuts provided for in section 101 be limited to 50 percent rather than the 60 percent and 75 percent provided in the House bill. Also that tariffs now over 25 percent ad valorem not be reduced below 15 percent.

Our experience in the Kennedy Round leads us to believe that there is a high probability that our negotiators will employ the maximum permissable tariff reductions and these we would consider in the chemical sector at least to be excessive.

Two, that provisions be included which will insure full employment of industry advice and consultation and full consideration of industry recommendations during the negotiations. We are hearing encouraging words from the administrators.

We feel, however, that they should continue to have strong pressures in this direction. We feel, as we have in the past, that the more effective industrial consultations provided other negotiating govern

ments, particularly Japan and the common market countries, have been of inestimable value to their negotiators and as a consequence, to their industries.

Three, that any agreement on the American selling price system of valuation which is negotiated should be subject to review by, and should require the affirmative approval of, the Congress; and furthermore that products subject to the American selling price system of valuation should not be singled out for larger tariff cuts than other major product categories.

Four, that sector-by-sector bargaining and reciprocity be required for tariff negotiations as well as for nontariff barrier agreements, as provided in the House bill.

With that introduction, I would like to turn the microphone over to Mr. Brennan, who will discuss further two of these four points and provide additional specifics regarding our recommended changes.

Statement of Richard M. Brennan

Mr. BRENNAx. Mr. Chairman, my name is Richard M. Brennan. I am chairman of the Manufacturing Chemists Association International Trade Committee, and I am also director of international affairs for one of its major companies. As Dr. Dawson had indicated, I would like to address myself to two key matters of interest to the chemical industry; namely, tariff cutting authority and industry liaison with our trade negotiators.

Although we do not question the need for our trade negotiators to have congressionally delegated authority to modify U.S. tariffs, we are concerned that too much authority would be provided by section 101 of H.R. 10710.

We would, therefore, respectfully suggest the following modifications in the authority to reduce tariffs:

One, tariff-cutting authority on duties above 5 percent ad valorem should be limited to 50 percent of the rate existing on July 1, 1973.

Two, duties which are above 25 percent ad valorem as of July 1, 1973, should not be reduced below 15 percent ad valorem.

We agree with the authority in the bill permitting elimination of duties below 5 percent ad valorem.

We believe the breadth of authority within this recommendation is still quite substantial and should provide U.S. negotiators with ample latitude to negotiate successfully.

In analyzing the tariff-cutting authority to be utilized in multilateral trade negotiations, we believe it is essential to consider the timeframe when such tariff cuts would become operative and the particulars of each industry.

Turning to the timeframe consideration, it appears to us that we must attempt evaluation of the international economic environment which will prevail during the late 1970's and 1980's. Under the best circumstances, it is extremely difficult to develop such an analytical projection. Under today's unsettled conditions, it seems almost impossible. Let me elaborate on this difficulty by turning to the second point of perspective—the current situation within the chemical industry. Just as the chemical industry was beginning to recover from a period of low profitability, governmental price and profit controls were instituted. The industry has been operating under these abnormal conditions of profit margin controls for over 212 years, and as a result, has been discouraged from making needed expansions.

Now a new, and ostensibly a more far-reaching uncertainty has been added to the investment question—the question of raw material feedstock availability and supply.

The oil crisis has brought into focus several unknowns which will have a significant impact on the international trading world of the future. It is because we are unable, at this time, to evaluate accurately the future impact of these variables that we are recommending the tariff-cutting authority of H.R. 10710 be reduced. I would like to review briefly several of these unknown factors with the committee.

One, undoubtedly the most important unknown factor for the chemical industry is the question of petroleum-based raw material feedstock availability and continuity of supply. We currently estimate that foreign crude oil will be the principal feedstock of the pet rochemical industry in the next decade. However, the stability and security of these crude oil sources are still quite uncertain.

So, too, is the question of where and under what arrangement this crude oil will be refined. These fundamental issues must be resolved before the U.S. petrochemical industry will be able to make needed long-term investment commitments with any degree of confidence. We are not attempting to portray a future of pessimism and despair but are simply emphasizing the industry is in a period of uncertainty and will continue to be so for some time to come.

Two, secondly, consideration must be given to the impact of escalating oil costs on the balance of payments of the United States, the European Community, Japan, and other nations. Although the exact cost is still not known, it appears to be beyond question that the future price of oil will be well above the levels of early 1973. To what extent these higher oil costs will give rise to foreign export subsidies to pay for them is not known.

This potential export subsidization, however, is placed in perspective by analyzing various nations' reliance on exports. For example, in 1972, the United States exported 14.4 percent of its total production, while in the same year Japan exported 32 percent, West Germany 42 percent, and the United Kingdom 46 percent.

The European Community as a whole exported outside the Community 23 percent of its total production; however, if the trade between members is included, the portion exported would have doubled. Obviously, the economies of many of the advanced nations rely heavily on exports, and this reliance exerts great pressure to employ export support measures.

Three, another factor is really the other side of the export subsidy coin; that is, the imposition of barriers to imports. If large expenditures for the import of oil are necessary, then the need to minimize expenditures on other imports grows larger.

Under the extensive tariff-cutting authority provided in the bill, the United States could well be committing itself to sizable tariff reductions at the very time other nations will be under increasing pressure to impose import barriers of one kind or another.

In our opinion, it will take several years for these considerations to be resolved, and for a new equilibrium to be reached. During this

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