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foreign and American selling prices for the same products. The following chart shows that in 1971 foreign invoice prices were up to 56% lower than the U.S. prices on equivalent products. Changes in exchange rates have decreased but not eliminated, these differences. Any lowering of protection for products such as dyes (the most important finished product import) will enable foreign producers to increase their sales at the expense of domestic producers. Benzenoid chemicals: Comparison of duitable value and invoice price, 1971 [Percent difference between dutiable value and invoice price of competitive materials] Product group
Percent Subparts B and C (403.0200-409.0000)
-44.0 Subpart B (403.0200_.9000) -
-43. 1 Cyclic compounds, n.s.p.f. (403.6000).
-48.1 Subpart C (405.0400-409.0000)
-45. 1 Dyes (406.0200_.600 and 406.8000)
-53. 4 Dyes, n.s.p.f. (46.5000)--
-55.9 Explosives (405.0400 and 405.0600)Flavor and perfume materials (408.0500-408.8000)
-47.9 Medical chemicals (407.0200_,9000).
-42. 1 Drugs, n.s.p.f. (407.8500).
-40.0 Pesticides (405.1500)
--37.8 Pigments (406.7000)
-45.5 Plastics materials (405.2500) -
-34. 6 Miscellaneous finished chemicals (405.1000, 0.2000, 0.3000-5500, and 409.0000)
-36.2 1 Excluding entries of 1 atypical product.
Source : Report of U.S. Tarift Commission, Customs Valuation, p. 172 (Senate Finance Committee print, Mar. 14, 1973).
The impact of large tariff cuts on our industry, and, for that matter, the effect on the balance of payments, could be considerable. While the President must have adequate negotiating authority, we believe that the Congress must retain the right to review tariff reductions of more than 50%. Additional advance authority is simply unwarranted. C. The discriminatory multiple reduction on benzenoid products
While the protection against dumping and other advantages of ASP obviously cannot be translated into a tariff, ASP based rates can be converted into foreign value based rates which provide substantially equivalent tariff protection as of the date of the conversion. However, the President is requesting authority not only to eliminate ASP but also to eliminate most of the tariff protection on benzenoid products.
Section 102 as presently drafted permits a greater reduction in protection on benzenoid products and rubber soled footwear than on many other products.
First, the bill authorizes the elimination of the benefits afforded by ASP. This is a reduction since the Tariff Commission has found that other methods of valuation do not provide equivalent protection.
Second, the bill in addition authorizes a double tariff cut: (1) The elimination of the so-called “tariff equivalent" of ASP, and (2) A cut under section 101 in the remaining level of protection. Let me illustrate the double duty cut. Assume the statutory rate of a product is 20% but that ASP valuation today results in tariff protection equivalent to 35% on the basis of foreign value. The double cut arises because Section 102(g) authorizes (1) the immediate elimination of the difference between 35% and 20%—the 15 percentage points of effective tariff protection attributable to ASP, and (2) as if that were not enough, it permits the 20% statutory rate to be subject to the full reduction under the section 101 tariff cutting authority applicable to all products. In our example, the 20% could be reduced to 8%. Thus, the tariff protection could be reduced from an effective rate of 35% to 8%, a cut of 77%. Furthermore, the President does not have to inform the Congress of the additional cuts he proposes to make under section 101 at the time he submits an ASP agreement for approval unless the trade agreement itself provides for the conversion of ASP based rates.
Because of this double cut the tariff rates in major basket categories will be subject to reductions of from 76% to 81% (see table on facing page) compared to 60%-75% on all other products.
1 Based on 1966 Tariff Commission study (T. C. 181) with converted rates reduced by 4 to reflect 50 percent duty cuts made in Kennedy round. Specific duties have been omitted;cuts in them would also be authorized under the House formula.
There is no valid justification for subjecting benzenoid chemical manufacturers and their workers to the abrupt loss of both ASP plus this double cut in effective tariff protection. We therefore urge this Committee to require (1) that if ASP is to be negotiated the ASP rates be converted before negotiations to rates providing substantially equivalent protection and (2) that the tariff cutting limitations and staging requirements in section 101 apply to the new converted rates not the old statutory rates. D. Essential prenegotiation procedures
Since ASP apparently will be a subject of negotiation in the upcoming trade talks, the Tariff Commission must, as an essential prenegotiation step, convert the present ASP based rates of duty to rates of duty applicable to the new valuation method (presumably export value). Section 102(g) of the bill as presently drafted is defective in that it makes this conversion of ASP based rates an optional procedure which can be ignored by our negotiators. Without such a conversion study our negotiators would not even know what they were bargaining away. There is no surer road to a disasterous agreement for our industry, and we therefore urge this Committee to make the conversion under 8 102(g) mandatory before any negotiations on ASP are undertaken.
A thorough conversion study is given more importance if our negotiators are planning on tabling offers in BTN terms since not one but two conversions would then be involved. First, the ASP based rates would have to be converted to foreign value rates. Then these converted rates would have to be converted to BTN rates. This would be a complicated process because the BTN system assigns one rate to each chemical compound while the U.S. tariff system, which classifies products according to use, may provide several different rates for the same chemical product. There is a danger that our negotiators might take short-cuts that have the unintended effect of short changing the U.S. That possibility can be eliminated by simply requiring that agreements on ASP must be negotiated under $ 102(g).
Another negotiation preparatory step which should be included in the law is a requirement that the Tariff Commission publish the new converted rates and prepare a report, after hearings, on the probable economic effect on the U.S. benzenoid industry of their adoption. Section 131 (c) of the bill simply authorizes the Tariff Commission to prepare a report on the probable economic impact of modifications of any barrier. Including ASP, if it receives such a request from the President. We believe Section 131(c) should provide that if ASP is to be negotiated, the Tariff Commission shall prepare such a report. Further, if the President proposes to negotiate based on these converted rates, the list of commodities on which he proposes to negotiate should be published and the Tariff Commission should be instructed to prepare a supplemental report on the probable economic impact of any proposed modifications.
We also urge that the statute specifically direct that the Tariff Commission's reports on the crucial issue of economic impact be published. The last time we sought publication of such a study we were told that confidential and nonconfidential data were intermixed and that the report could therefore not be made public. To overcome that difficulty, section 131 should direct the Commission to segregate confidential data and publish that part of its report which is based upon non-confidential data. There is no justification for cloaking its findings with a veil of secrecy when the simple precaution we propose would overcome the asserted problem.
RECIPROCAL AND SEPARATE CONSIDERATION
The proposed Trade Bill should have two main objectives: to stimulate expansion of fair world trade and to do so without injury to U.S. industry. There are provisions for adjustments where injuries occur, but the objective should be to minimize injury. The obvious way to accomplish this is to provide that so far as practicable reciprocal consideration and benefits should be secured for the industry whose barriers are reduced. The Administration has repeatedly placed considerable emphasis on opening markets for our agricultural products in Europe. This may be sound, but it should not be accomplished by putting the chemical industry or other industries on the block : on the contrary, the only sound objective is to seek reciprocity for each industry affected by the trade negotiations.
Special Trade negotiators in the Kennedy Round recognized that if ASP were negotiated away with substantial tariff cuts, there must be some countervailing reciprocal benefits to the benzenoid industry or it would become a dying, sacrificial industry. The reciprocal benefits which were promised never materialized, but we believe that obtaining reciprocal benefits for industries affected by the negotiation away of a protection is a sound objective.
We are gratified to note that the concept of sector-by-sector reciprocity has been incorporated into the bill by the House in section 102 (c), but for some inexplicable reason it is only made applicable to NTB agreements. It is equally if not more important for tariff negotiations to be conducted on a sector-bysector approach and this provision should therefore be made applicable to both sections 101 and 102.
To take a concrete example, if ASP classified as an NTB and negotiated away, we should certainly receive in return the 30% cut in EEC chemical tariffs which we already paid for with our 50% cut during the Kennedy Round. In addition, we should receive a reciprocal reduction in the non-tariff barriers such as the border-tax export rebate mechanism that have effectively nullified our trading partners' Kennedy Round tariff concessions. Any further cuts in converted tariff rates should be matched by reciprocal cuts in foreign chemical tariffs.
GENERALIZED SYSTEM OF PREFERENCES
Title V of the proposed act contains a 10-year program to give tariff preferences to goods from underdeveloped nations. While we fully support the general purposes of this title, we must point out that past experience indicates that such a tariff preference can be easily abused by industrialized countries which simply use the country granted the preference as a transhipment point. This problem is recognized, but not adequately dealt with in section 503 (b) and (c) of the bill which require that not less than 35% but not more than 50% of the appraised value of the preference goods represent costs or value added in the developing country. We believe that the Act should require that not less than 50% of the value of the goods represent actual value added by operations in the developing country, not a mere mark-up in price. A lower percentage would permit the purpose of the title to be subverted.
Secondly, the bill provides (8 504(c)) that the preferences will not apply if imports of an article from the country represent 50% of our total imports of the article or $25,000,000 on an annual basis. These limits are in the right direction, but do not deal adequately with the problem of plants put into underdeveloped areas to supply the U.S.
In recent months Japan had a balance of payments deficit for the first time. This is due in no small part to the greatly expanded investment abroad by Japanese industry. Under the present bill's limits, a chemical plant could be set up in an underdeveloped country by a Japanese concern with Japanese advanced
• Speech of General Counsel of STR, November 10, 1966.
technology to export to the U.S. With a little care in marketing, a wide range of products could be sold to the U.S. without surpassing the 50% limit and $25,000,000 restriction. The same is true for other multi-product plants in other industries.
We believe that additional safeguards are needed to deal with this situation. The EEC preference system applies to a limited list of products and has a quota limit restricting annual growth in preference imports. A similar rule should be applied here to prevent the setting up of plants in underdeveloped countries to supply the U.S. market during the 10 year preference period.
Such a rule would also stem underdeveloped countries being used as "pollution havens” by corporations seeking to evade the anti-pollution laws of the U.S. and other industrialized nations.
BORDER TAXES One of the major non-tariff barriers affecting our trade is the border taxexport rebate device used by many of our trading partners. A solution to this problem should receive high priority in the forthcoming negotiations, and we therefore applaud the provision added by the Ways and Means Committee directing the President to seek revision of the GATT articles dealing with border tax adjustments (section 121(a)(5)). But that is not enough to insure prompt redress of the unfair competitive disadvantage which U.S. exports face. It is essential that our negotiations also be instructed that any trade agreements reached under the five year authority granted by this bill must be made contingent upon either an appropriate revision of GATT or compensatory foreign concessions.
The Border Tax Problem The problem arises because of the different way in which countries are allowed under GATT to adjust at the border for an indirect tax as distinguished from a direct tax. The U.S. fiscal system depends primarily on the direct tax-the income tax—while our trading partners' tax systems are based primarily on indirect taxes, the most common being the value added tax or VAT. Measured by percentage of GNP or percentage of tax collected, the burden of the VAT is much larger than that of income taxes for our major European trading partners. In the U.S. the income tax is the major burden.
Under an interpretation of the GATT apparently agreed to by the United States, although the agreement has never been published, an indirect tax is treated as a tax on the product and may be assessed on imports at the border and rebated on exports. A direct tax, on the other hand, cannot be assessed on imports or rebated.
The trade impact is obvious. To take an over-simplified example, assume a product is sold in the U.S. at $1,000 and the same product is sold in Europe with all taxes paid for $1,000. When the U.S. exporter ships to Europe his product bears the full U.S. tax load and at the border in Europe is assessed a tax of 15% (the harmonized rate objectives). If the U.S. manufacturer wants to sell in Europe in competition with the $1,000 price charged by the European companies, he will have to absorb this $150 tax.
The disadvantage is as obvious if we reverse the transaction. When the European ships to the U.S., he gets a tax rebate of $130, an amount that more than offsets the average U.S. duty on chemicals. His product is free of the major European tax burden and bears none of the direct U.S. tax burden. The U.S. manufacturer, on the other hand, must bear the full U.S. tax burden.
This trade distorting mechanism is apparently sanctioned by GATT on the theory that all indirect taxes are passed on to the consumer and all direct taxes are absorbed by the producer. That economic theory has virtually no supporters today. As this committee's staff study points out, economists are agreed that both direct and indirect taxes are passed along to the consumer in varying degrees depending on market conditions ("Summary and Analysis of H.R. 10710—The Trade Reform Act of 1973," p. 103–104). You could not find a businessman in the U.S. or in Europe who did not regard income taxes as a cost of doing business. To the extent market conditions allow, he will treat the taxes as a cost and pass them forward to the consumer.
Likewise, the VAT is, in economic terms, borne in part by a business which is forced to reduce its price and thus lower its net income. The reduced net income throws the tax burden on the business, not the consumer.
There has been considerable economic discussion of the extent of shifting forward and, while there is no complete agreement as to the speed or extent of shifting forward of income taxes, there is no doubt that the income tax is shifted forward to a large extent. As professor Dan Thorp Smith of Harvard has pointed out in some theoretical studies, an entire tax increase and possibly more can be passed forward.
As a consequence of our failure to take border taxes into account during the Kennedy Round negotiations, we are now faced with the fact that in most of the Common Market countries the barrier to our exports will actually be higher after the Kennedy Round reductions than they were before the agreement. Moreover, the EC's increased export rebates, when combined with our tariff reductions, will result in a situation in which their rebates will completely offset the total amount of our remaining tariffs.
The German Example Germany, our principal trading partner in the European Community provides a good example of the workings of this border tax-export rebate mechanism. Prior to 1968, Germany had a turnover tax which resulted in a border tax-export rebate in the 4-5% range. In 1968, Germany shifted to a value added tax of 11%. Because the turnover tax was applied to each sale in a cascade manner, the 11% value added tax did not increase the total domestic tax burden, but it significantly increased both the border tax and rebate. The tax was scheduled to increase to 12% effective January 1, 1974, and will increase to around 15% when the EEC tax harmonization program is complete.
Because the trade advantage which this increased border tax gave the Germans was criticized in light of the German balance of payments position, Germany adopted in November 1968 the temporary expedient of granting importers a rebate of only 4% of the border tax. This rebate was eliminated in the Fall of 1969 with the float of the German mark.
The effect of this increasing border tax and export rebate on trade is shown in the following charts. For purposes of simplification, these charts do not take into account the fact that EEC duty rates are assessed on the c.i.f. value of imports, which is higher than the f.o.b. value used by the United States, or the fact that the border tax is assessed on landed value duty paid rather than c.i.f. value. We have also left out U.S. sales and excise taxes. The net effect may be to change the foreign advantage somewhat but the major impact of the border tax-export rebate remains.
Chart I, based on data released by the EEC, shows that the increasing border tax will have the effect of raising the total barrier to U.S. chemical exports from 15.5% in 1967 to 26.7% when tax harmonization is accomplished. It is interesting to note that the German tariffs actually increased slightly after the Kennedy Round "reductions” because of internal adjustments within the European Community to achieve a common external tariff.
Chart II shows the impact of the export rebate in U.S. markets. The chart shows, for the same period as Chart I, how the declining U.S. tariff, when combined with the increasing export rebate, will soon result in a negative U.S. barrier to German exports.
Charts III and IV show the same data for U.S. exports generally to Germany. Chart III demonstrates that the total barrier to U.S. products has increased, although tariffs have been reduced. The border tax barrier has increased so that the total barrier of tax plus tariff is greater after the edy Round cuts than the combined tax and tariff barrier was before the Kennedy Round.
Chart IV shows that the increased export rebate, when combined with U.S. tariff cuts, results in a negative U.S. barrier to imports from Germany.
7 This increase has been deferred.