One final thought. Codes of conduct by themselves are not enough. We will not get new rules and procedures assuring reasonable access to supplies from developing countries except in a much broader context involving a fundamental restructuring of international economic relations. The developed countries are rightly concerned about secure access to supplies controlled by developing countries. But the developing countries, in their turn, are rightly concerned about other kinds of access-access to markets, to capital, to technology, to management skills and to an adequate voice in decisionmaking in international economic forums.

The challenge facing our economic foreign policy is to fashion the world order bargain that will make access to resources a negotiable element in a new system of collective economic security that works in the interest of developed and developing countries alike.

I will not say more because you have a long witness list. I will just add that at the end of my prepared statement I have suggested six specific ways the bill could be improved on other matters, including the tariff and nontariff authority, the escape clause, countervailing duties, renegotiation of GATT, and preferences for developing countries.

Senator MONDALE. Thank you very much. If the committee agrees. we will now go to Fred Bergsten and then we can ask questions.

Statement of C. Fred Bergsten

Mr. BERGSTEN. Thank you, Mr. Chairman.

As you well know, the committee is really involved in quite a historic task right now because you are writing a major piece of trade legislation, which happens about once a decade at the most frequent these days. Therefore, one has to take a very fundamental look at the purpose of U.S. trade policy over the longer run in developing a bill such as is before you. And I would submit at the outset of my statement today that the purposes of U.S. trade policy must now be viewed in a very different light than we have traditionally viewed them in the past.

Inflation has replaced unemployment as the cardinal economic problem facing the United States, and it may have become our primary political problem as well. Prices continue to rise rapidly despite the downturn in economic growth and the increase in unemployment. There is little sign that even the rate of price increase will abate significantly in the future. There is widespread fear from observers from a variety of schools of economic and political thought that the United States may soon join the growing ranks of countries suffering from double-digit inflation.

Traditional policies of restraining demand and applying direct controls to prices and wages have not checked inflation, and would now probably make it worse. Thus U.S. economic policy is much more difficult to conceive and manage than at any previous time in the postwar period. Even if one does not agree that inflation has become our most important economic problem, it is clear that it is here for the indefinite future and is being caused by new and perhaps structural, rather than simply cyclical, factors.

The objectives of U.S. foreign economic policy are dramatically altered by this new internal economic situation. In the past, like most other countries, the United States has sought to use its external policies primarily to avoid increases in domestic unemployment. Barriers were erected to protect industries threatened by imports. Exports were subsidized. Övervaluation of the dollar has been opposed, since August 1971 with a vengeance.

But now that inflation has become so serious, and so resistant to traditional policy measures, U.S. foreign economic policy must be geared at least in large part in that direction. Such a policy would facilitate imports, to increase the supply of products available in our economy to check price rises. It would reject any new barriers to imports. It would end subsidies to exports, which drain resources away from our economy. In short, it would reverse much of the thrust of our previous foreign economic policy. Fortunately, the dramatic improvement in our balance of trade and overall balance of payments positions, and the strong outlook for both despite the sharp increase in oil prices, permit pursuit of such approaches without fear of falling again into the costly pitfalls of an overvalued dollar a la 1969–71. Such a use of nontraditional policies to fight inflation is particularly important at this time. The traditional resort to restraining aggregate demand could raise unemployment to unacceptable levels, and as in 1970-71-would probably not even curtail inflation much, since the root of the problem lies elsewhere than excess demand. Wage-price controls have also failed, at least in the ways tried recently, and probably in fact made things worse. So there is an urgent need to adopt a whole series of more selective policies to fight inflation without raising unemployment. The foreign economic policy I advocate today could be an important element in any such strategy. The administration has taken a number of steps in this direction, in recognition of the new economic situation. Import quotas on petroleum and meat have been lifted, and the quotas on dairy products significantly raised. Subsidies on agricultural exports have terminated. The appreciation of the dollar has been supported by official intervention, and its depreciation resisted.

It is noteworthy that numerous other countries, faced similarly by a steady acceleration of inflation and unable to cope with it by traditional policies, have taken similar steps. Several countries (e.g., Germany, Netherlands, Australia, Norway) have revalued their exchange rates explicitly to fight inflation, even when their payments positions were not in surplus. Several (e.g., Japan, Canada, Australia) have unilaterally cut their tariffs for the same purpose, despite the imminence of a multilateral trade negotiation in which they are to trade concessions on a reciprocal basis and hence would have traditionally husbanded their import barriers with great vigilance. And a great number, ranging from the United States on soybeans through Brazil on cotton and leather to the United Kingdom on iron and steel, have embargoed or severely limited exports.

Thus there clearly is scope to use foreign economic policy to fight inflation. In addition, it is clear that the United States must be prepared to counter the efforts of other countries to export their infla

tion to us through such measures as export quotas. We must also be prepared to counter the inflationary effects on us of the policies of other countries, even when adopted for other reasons-as with the cutbacks in production, and selective embargo, by the oil producers.

Because this set of problems is so new, however, it is virtually ignored in both the legislative basis for U.S. trade policy and the international arrangements which seek to regulate world economic relations. The Trade Reform Act cannot ignore needed improvements in dealing with the traditional problems of trade policy, such as adjustment assistance for workers dislocated by imports, and I will comment briefly on some of those issues later in my statement. But the primary goal of any new legislation should be to enable U.S. trade policy to cope with the primary international economic problems of today: inflation at home, and the inflationary impact on us of the policies of other countries.

There are several ways in which the Trade Reform Act should be amended to this end. Some changes would deal with the risk that other countries will seek to deny us access to their resources, and some would deal with our own policies which might impede such access.

First the Mondale-Ribicoff amendments should be added to the legislation. The basic purpose of these amendments is to foster the negotiation of new international rules to govern export limitations, just as international rules have governed import limitations throughout the postwar period. If the import precedent were followed, countries would have to justify internationally any resort to export limitations, apply them only for temporary periods, and provide compensation to countries injured by the move or accept retaliation from them which is why the amendments quite properly would also authorize the United States to retaliate against unfair export controls levied by others. No international rules could be expected to work perfectly, of course, but their existence would almost certainly deter precipitate action in resort to export controls.

As a result, the United States would face less risk from the actions of other countries. That risk is real, as long as inflation continues and shortages tempt suppliers to limit exports, both to permit domestic consumption of their own resources and to raise world prices for their output. At the same time, such rules would lessen our own temptation to resort to export controls except when they were clearly and justifiably needed.

In short, the world should negotiate new rules and institutional arrangements to prevent trade wars of export controls, just as it negotiated the GATT after World War II to prevent trade wars of import controls. National efforts to export inflation are no more likely to succeed in the long run than past national efforts to export unemployment, but they could wreak havoc in the interim and raise major problems for both national economies and overall relations among countries. The negotiations of such new arrangements should be a priority U.S. objective in the forthcoming multilateral trade negotiations, as called for by the Mondale-Ribicoff amendments.

Second, section 123 of the act, which authorized the President to suspend import barriers to restrain inflation, should be expanded.

As already noted, both the United States and numerous other countries have taken a number of ad hoc measures in this direction. Such steps make imminent sense. They increase the supply of available goods and hence counter inflation in a fundamental way-unlike the artificial restraint of inflation through price controls, and opposite from the shortages of goods and acceleration of inflation triggered by import controls.

In the United States, barriers to imports were raising our consumer prices by at least $20 billion as recently as 1971. Fortunately, that cost has been reduced by the lifting of the oil and meat quotas. But sizable costs remain from the whole array of tariffs plus the remaining quota restrictions on textiles, steel, dairy products and several smaller items.

Section 123 of the bill would authorize the President to reduce tariffs and increase the level of import quotas to restrain inflation. This is a major and highly desirable innovation in U.S. trade law. However, the authorization is limited to 30 percent of total U.S. imports at any given time and a duration of 5 months for any product, and excludes any agricultural products under import quota.

I recommend that all of these restrictions be struck from the Trade Reform Act. All imports should be subject to elimination of all tariff and nontariff impediments, for a period to be determined by the President to fight inflation. If time limits are deemed necessary, they should run for at least 2 years to encompass the boom phase of the normal business cycle. Domestic groups which might be injured by such actions are fully protected by section 123(b) (1), which requires the maintenance of existing import barriers for any products where injury might result from their reduction.

Third, section 331 should be amended to require injury to a U.S. party before countervailing duties must be levied against the export subsidies of a foreign government.

As already noted, the use of export subsidies is declining around the world as countries seek to export their inflation rather than their unemployment. Nevertheless, some export subsidies remain and the United States needs a clear policy to cope with them.

However, in an inflationary climate there will be many instances in which the United States should welcome the benefits to its consumers provided by foreign export subsidies. Hence it should countervail against the subsidies only if they injure the workers and firms which compete with the subsidized imports. Such a policy has traditionally been followed with regard to dumping of products by foreign firms, which also subsidize U.S. consumers.

Regrettably, chapter 3 of title III of the Trade Reform Act does not incorporate an injury test for the application of countervailing duties. In fact, for the first time it would authorize countervailing against duty-free imports, with an injury test only when required "by the international obligations of the United States." I recommend that an injury test be required for any application of countervailing duties, on dutiable and nondutiable goods, so that U.S. inflation can be reduced by foreign export subsidies except where U.S. producers of competitive products would be injured in the process.

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Fourth, Title V should be liberalized to further facilitate imports from the developing countries.

The developing countries are a major potential aid to U.S. efforts to fight inflation. Unlike virtually all industrial countries, many of them have unutilized labor which could be profitably employed if markets existed for their output. Thus there is a natural fit between our need for more goods and their need for jobs.

In addition, many of these developing countries control the supply of key primary products. They are much more likely to seek to raise the price of these commodities, increasing our inflationary problem, if they are unable to meet their own needs for jobs and export earnings by developing their manufacturing sectors. Hence our own antiinflationary effort could be doubly boosted if we increase our imports of manufactures from the Third World. And recent international discussions suggest that we and the other industrial countries may have to provide more access to our markets for the manufactured goods of the developing countries if we are to win their acceptance of new rules to govern our access to their primary products.

Title V of the act seeks to do so by authorizing generalized tariff preferences for such products. However, several key limitations to that authorization are now included. The President is required to take into account a number of factors in determining whether imports from particular developing countries are even eligible for preferences, including their actions toward U.S. investments. At least 35-50 percent of the value of the imported product must be produced in the beneficiary country itself. Products subject to import quotas would not be eligible. Preferences would be lifted wherever eligible imports reached a level of $25 million or 50 percent of total U.S. imports of the item-both tiny amounts of U.S. consumption of virtually every product-unless the President explicitly decides "that it is in the national interest" to continue the preferences.

I recommend that all of these limitations be eliminated. Any valueadded requirement should at least encompass value added in all eligible developing countries, not just the country exporting the final product. Products subject to import quotas, such as textiles, should be eligible for preferences; indeed, these preferences would run less risk of causing injury to domestic interests than preferences on any other products by virtue of the existence of the quantitative limits. Most important, any ceilings on preferential imports should be much higher-and it would be far better to avoid ceilings altogether, as in the original U.S. preference plan proposed by President Nixon in 1969. The standard escape clause, particularly as modified by this act, would provide the needed safeguards against injury to U.S. workers or firms resulting from an excessive growth of preferential imports— which brings me to my final point.

Fifth, Further improvements in the adjustment assistance program are needed to maintain the antiinflationary trade policy which I have

1 See C. Fred Bergsten, "The Threat From the Third World," Foreign Policy 11 (Summer 1973) and "The Threat is Real," Foreign Policy 14 (Spring 1974).