APPENDIX III

EXCERPTS FROM SUMMARY AND ANALYSIS OF H.R. 10710-THE TRADE REFORM ACT OF 1973

(Prepared by Senate Finance Committee Staff for the use of the Committee on Finance February 26, 1974.)

INTRODUCTION

The Trade Reform Act of 1973, passed by the House of Representatives by a vote of 272 to 140 on December 11, 1973, would delegate to the President greater tariff and trade authorities than the Congress has ever delegated before to any President. Under Article I, Section 8 of the Constitution, the Congress has the plenary constitutional authority to "lay and collect taxes, duties, imposts," etc., and to "regulate trade with foreign nations." Since 1934 Congress has periodically delegated specific and limited trade agreement authority to the President for the purpose of negotiating reciprocal tariff and trade concessions with foreign nations. The last major delegation of authority to the President to negotiate trade agreements was contained in the Trade Expansion Act of 1962.

Six long rounds of multinational negotiations have taken place in the post World War II era. Without question, these negotiations have whittled down tariff barriers to the point where, in most commodities and for most countries, tariffs are not considered to be the most significant form of protection. A comparison of tariff levels among major industrial countries is provided in Appendix A.

Since the end of the Kennedy Round the term "nontariff barrier" has been very much in vogue. A "nontariff barrier" or "distortion," as the more sophisticated experts term it, literally refers to any trade barrier or trade distorting device other than a tariff. Thus a quota would be a nontariff barrier (NTB). But the term is so broad, it can be construed to include automobile emission standards, health and safety codes, licensing and distribution systems, investment restrictions, competitive bidding procedures and restrictions, discriminatory taxes and a whole host of government or private actions which affect trade and investment. Each nation literally has thousands of practices which other nations consider "nontariff barriers." A summary of major tariff and nontariff barriers appears in Appendix B.

The Subcommittee on International Trade, following the lead of the full Committee in the stillborn Trade Act of 1970, requested the Tariff Commission to do a complete study on nontariff barriers by sector. That study is now available. It appears to be the most thorough study of its kind ever undertaken in this country. The next round of multinational GATT negotiations are intended to attack nontariff trade barriers. Unquestionably, this is an ambitious undertaking as the negotiations are bound to get into the domestic laws and regulations of major nations which bear little or no relation to international trade. Any law or regulation which may affect trade (even though they might deal with an environmental or health matter) could be an object for negotiation. Thus the House bill grants authority to the President to modify U.S. laws and regulations as part of any trade agreement, subject to a congressional veto procedure.

As of this date, there seems to be little consensus among the major trading nations as to what the major nontariff barriers are or how they should be negotiated. The GATT secretariat has completed an inventory of nontariff barriers based on each member country's submission of complaints against other members. There was an attempt to categorize the complaints into five broad areas-(1) government participation in trade; (2) customs and administrative entry precedents; (3) standards; (4) specific limitations on trade; and (5) charges on imports. Each category is so broad it covers a multitude of practices deemed to be non-tariff barriers. Negotiating in sensitive areas will be slow and difficult. The European Community still seems preoccupied with internal problems and (1176)

has not shown much enthusiasm for the GATT talks. The French have suggested that the trade negotiations should await a satisfactory renegotiation of the IMF rules, a twist on the U.S. position that a change in the monetary rules would be incomplete without a change in the trading rules. Thus, the negotiations may be very slow in getting off the ground. Based on previous rounds, one can expect a long period of jockeying for positions in the inner councils of governments with the critical tradeoffs coming in the last hours of the negotiations. There was an original hope that the round may finish by 1975 but few feel this is still possible. In the two or more years that have transpired since the Trade Reform Act was conceived by the Executive and considered, amended, and passed by the House of Representatives, the world economy has suffered severe shocks. There have been two official devaluations of the American dollar, a new international monetary system (or nonsystem) of fluctuating exchange rates and an energy crisis that threatens the economies of the western world as well as the political cohesion of the major nations.

Traditional trade problems have usually been associated with rising imports and their effect on industries, firms and jobs. Such "traditional" problems often were caused by oversupply. Current trade problems are more typically due to shortages food and fiber, energy, metals and many others. We have moved into an era of resource scarcity and accelerated inflation-an era in which producing countries are increasingly tempted to withhold supplies for economic or political reasons. It's a totally new ball game, which was not envisaged in the planning and conception of the Trade Reform Act.

STRUCTURAL CHANGES IN WORLD ECONOMY

The U.S. and world economies have passed through several phases since the last large grant of trade negotiating authority was delegated to the Executive in the Trade Expansion Act of 1962. During the early 1960's the U.S. economy moved from stagnation to respectable growth without significant inflation. Begin ning in 1965 a deep rooted inflationary trend developed which has not abated. Indeed inflation in the United States has reached unprecedented proportions in peacetime. Underlying this inflation have been the largest budget deficits since World War II. The endemic inflation led to extraordinary balance of trade and payments deficits betwen 1970 and 1972 which in turn created massive runs against the dollar. After the U.S. could no longer maintain a fixed parity between the dollar and gold, the fixed exchange rate structure collapsed on August 15, 1971. Several dollar devaluations have occurred since that date. By making imports more expensive and exports relatively less expensive, the dollar devaluations probably added significantly to the inflationary pressures in the economy, creating shortages of raw materials and leading to the imposition of export controls on those products for which we had the largest comparative advantage (e.g. soybeans). Unquestionably, the imposition of such controls complicates the U.S. negotiating position in the forthcoming round of trade negotiations. While the last returns on the effects of the dollar devaluations are not yet in, there are some signs that the U.S. trade performance is improving. In 1973, U.S. exports buoyed by large agricultural sales reached $70.8 billion while U.S. imports (f.o.b.) were $69.1 billion. Since the second quarter of 1973, the dollar has gained strength in the foreign exchange market in relation to the yen, the deutche mark, the French franc, and the British pound. It is now valued at close to the parities established at the Smithsonian agreement. A historical statistical overview of the U.S. trade and balance of payments performance is provided in another staff briefing document.

As the U.S. economy underwent significant internal changes during the 1960's and early 1970's, the U.S. economic position in the world economy declined vis-avis Western Europe and Japan. The European Community, born in 1958 under the Treaty of Rome, has become the world's most important trading bloc, with exports and imports exceeding $300 billion. The Community's share of world GNP, world trade and world reserve assets has grown markedly since the 1960's and this trend has accelerated in the 1970's.

Japan's growth on all fronts has even outstripped that of the European Community. Real growth in Japan grew at the phenomenal rate of 10.5 percent a year for the period of 1960 through 1972, as compared with 5.0 percent in Italy, 4.5 percent in West Germany, 4.1 percent in the U.S. and 2.7 percent in the United Kingdom. In almost every international economic indicator of growth, Japan has been the leader. In terms of military or tax burden, however, Japan is at the

bottom of the list. Yet the achilles heel of the Japanese economy-its overwhelming dependence on foreign oil-may rupture the record of remarkable growth of the Japanese economy. Japanese economic planners are now forecasting a real economic growth rate of only 2.5 percent for the coming year.

Less developed countries as a whole have done fairly well in terms of economic growth, and trade and balance of payments performance. Between 1960 and 1972 real economic growth in the "LDC's" averaged over the 5 percent target set for the "decade of development." By the fall of 1973, these countries had accumulated $40.6 billion in international reserve assets compared to $10 billion in 1960. Of course, these overall figures mask wide divergence in performance. Some socalled LDC's-the Arab oil producing nations-are now in effect holding the Western economies at bay through selective boycotts and massive price increases. One of the most serious and challenging facts facing the world is that at present consumption levels, world imports of petroleum will jump from $45 billion in 1973 to about $115 billion in 1974, or by about $70 billion. Oil exporting countries' revenues will increase in 1974 to nearly $100 billion or three-and-a-half times the 1973 levels. Other LDC's sitting on other important mineral resources, may be tempted to form their own producers' cartel to seek a maximum rate of return on their assets. This bill does not deal with the problem of raw material shortages, export embargoes and price gouging by producer cartels. Rather, it grants LDC's "general tariff concessions" to improve their competitive position in manufactured goods.

INTERRELATIONSHIPS: TRADE, AID, INVESTMENT, MILITARY

There is a large body of opinion in this country, as well as abroad, that trade issues cannot be divorced from monetary, energy, and investment issues which have been considered by various subcommittees of the Senate Committee on Finance. For example, "multinational corporations" are the largest and most powerful force in the international movement of goods, services, money, technology. In short, they generate national wealth. Each nation seeks to maximize the advantages of having these corporations operate within its borders and minimize any dislocations created by the shifts of capital, goods and technology or the alleged disadvantages of foreign ownership and control. Such corporations are both coveted and condemned according to whether they meet the goals and rising expectations of the multiple nations in which they operate.

National conflicts have occurred and are likely to continue to occur when the multinational corporation satisfies the demands of one nation at the expense of another, or when the national policies of the sovereign nations themselves are at variance. For example, the United States forbids any of its citizens-including U.S. corporations operating from a U.S. base or a foreign subsidiary-from trading with certain nations, such as Cuba. We also have certain restrictions over the exportation of technology which is considered important for our national security. A conflict will develop when a U.S. foreign subsidiary, which may be jointly owned by a foreign person or state, has to satisfy U.S. laws and foreign laws when the laws themselves are in conflict. This is but one of the many issues raised by multinational corporations operating in a nation-state system. This document does not pretend to describe the other complex issues arising out of multinational corporations. That has been done in other documents published by the Senate Finance Committee and its subcommittees.' The salient point raised by H.R. 10710 is that the ground rules established as a result of a new multina tional trade negotiation will determine how the players of the game will operate, and that means jobs, money flows, balances of trade and payments et al. for all countries.

Trade flows cannot be realistically divorced from money flows and investment. Nor can they be totally separated from military and aid burdens. Some would suggest that the assymetry between economic and trade growth on the one hand, and military and aid burdens on the other has been fundamentally responsible for the persistent structural imbalance in the world's monetary and trading system. The net government account deficit in the U.S. balance of payments since 1950 has been $135 billion, about equal to the growth in foreign country

1 U.S. Senate Finance Committee. Subcommittee on International Trade. "The Multinational Corporation and the World Economy", Washington, D.C., February 26, 1972.

monetary reserve assets over this period. Thus, trade reform, monetary reform and burden sharing of aid and defense costs are interrelated issues which must be dealt with in a coordinated and comprehensive manner. The Trade Reform Act is intended to give the Executive authority to negotiate structural changes in the world trading system, which will be related to negotiated changes in the international monetary system. Presumably, there is, or will be high-level planning within the Administration on the coordination of trade, monetary aid, investment and military goals.

2. AUTHORITY WITH RESPECT TO NONTARIFF BARRIERS (SECTION 102) General Authority.-Section 102 would authorize the President, during the five-year period beginning on the date of enactment of the bill, to negotiate trade agreements with other countries providing for the reduction or elimination of nontariff barriers and other distortions of international trade. The President would be urged to achieve equivalent reductions in each product sector for manufactured goods and within the agricultural sector as a whole. The President would be required to report to the Congress on the extent to which the objective is achieved.

No specific limits would be placed upon the President's authority to negotiate modifications in nontariff barriers and, in fact, no such barriers are delineated anywhere in the bill. It is understood that, except in those areas where the President has inherent international as well as domestic authority to negotiate and implement changes in nontariff barriers without legislation, any trade agreements negotiated under this section would be submitted to Congress along with any implementing proclamations and orders. What is not clear is precisely which alleged U.S. nontariff barriers would the President feel he has authority to change without submitting any agreement to Congress. Most alleged U.S. nontariff barriers are laws or regulations drawn to implement congressional intent. Under this bill, the President could negotiate changes in these laws and regulations subject to a congressional veto procedure described below.

Veto Procedure.-The President would be required to submit, not less than 90 days before the day on which he enters into any such trade agreement affecting nontariff barriers, notification to the Senate and House of Representatives of his intention to enter into such an agreement. There is no requirement in the bill that the notice include a substantial description of the proposed agreement itself. After he enters into the agreement, the President would be required to deliver to the Congress for appropriate referral, a copy of the agreement, a copy of the implementing proclamations and orders with an explanaton of how they would affect existing law, and a statement as to how the agreement serves the interests of the United States and why each implementing order is required to carry out the agreement.

The agreement, along with any implementing orders, would enter into full effect, with respect to U.S. domestic law as well as internationally, 90 days after submission to Congress, unless within the 90 day period either House adopts by an affirmative vote of the majority of those present and voting, a resolution of disapproval with respect to the agreement. Sections 151 and 152 stipulate the procedural rules according to which such resolution would be introduced and dealt with in each House of Congress. The rules would be quite strict. If the committee to which the resolution had been referred has not reported it at the end of 7 days, it could be discharged of the resolution or of any other resolution which has been referred to the committee. There would also be strict limits on debate and amendments to the resolution.

The authority to negotiate and implement agreements on nontariff barriers would be by far the greatest delegation of authority which the Congress has ever made to any President in the trade area. Although the President did have the authority to negotiate agreements on import restrictions other than duties under section 201 of the Trade Expansion Act, it was never utilized, nor intended to be utilized, to the extent contemplated under section 102 of the proposed bill. Under this section, the President could negotiate agreements with respect to any and all nonduty measures affecting trade. Such measures could include, for example (1) ASP; (2) marketing provisions: (3) standards codes; (4) wine gallon/ proof gallon: (5) final list; (6) health and sanitary requirements; and (7) customs classifications, etc.

30-229-74-pt. 4—10

APPENDIX IV

SOME RECENT TRADE TRENDS

In 1973 and 1974, the United States faces new problems as money and trade shocks continue to reverberate. The U.S. economy is now distorted from past trade deteriorations. The sudden surge of farm and raw material exports and inflows of added capital goods imports in 1972 and 1973 have compounded past problems. The facts show the need for a new look at the needs of the U.S. economy so that the U.S. can seek an effective route to negotiations about where it is going.

Despite the shift in the trade balance in 1973, the U.S. still failed to achieve a surplus in exports of manufactured goods over imports, according to government statistics. Imports of manufactured goods were $44.8 billion, while exports were $44.7 billion. Trade deficits in certain categories of consumer goods continued as the U.S. imported more than it exported-$1.9 billion more imports than exports in consumer electronics products, $3.4 billion in textiles, clothing and footwear, $3.8 billion in motor vehicles and parts, and $1.8 billion in steel products, according to official Administration reports.

Moreover, there are growing trade problems in categories of goods where the U.S. now has a trade surplus. For example, the import of the products needed to make an industrial nation grow-capital equipment-surged forward in 1972 and October 1973 stated that "the inflow of capital goods soared by onethird (in 1972) to $6.7 billion, a substantial acceleration from the 10 percent increase reported in 1971. Imports of machinery grew 32%, as imports of agricultural machinery, farm tractors and business machines increased. Aircraft and parts almost doubled in value in 1972 and continued up in 1973. Power machinery and switch gear imports increased by over one third.

Thus, despite the talk of dollar devaluation's making "America more competitive," despite trade restraints by Japan in 1973, and other national and international trade actions, the consumer goods industries are impacted, and the capital equipment industries are experiencing increasing import penetration. In fact, in 1973, according to the President's International Economic Report, "The only major category of imports from Japan which continued to increase rapidly was in capital goods."

Turning to exports in 1973, what America shipped abroad most rapidly was what America needed. Food prices soared in 1973. Part of the reason for this has been the fantastic rise of exports of farm products-up to a surplus of $9.3 billion more exports than imports in 1973. The total value of U.S. farm exports in the fiscal year ended June 30, 1972, was $8 billion. In June, 1974, farm exports are expected to reach $20 billion-or 21⁄2 times as much, according to the U.S. government experts.

The value of U.S. farm exports almost doubled in 1973 over 1972, according to the President's International Economic Report-up 88% or twice as fast as the 44% rise in all exports. U.S. exports of non-farm crude materials-scrap steel and logs in the lead-rose 40% in the one year alone.

In 1972-73, the U.S. exported 72.3% of its wheat production, 20.5% of feed grains, 51.9% of oil seeks, 42.3% of cotton, and 61.0% of rice produced in this country. No nation can afford not to recognize that its own people must be fed and housed and clothed and find jobs in productive industry-and that all of these tasks are related. Thus American farmers who want foreign sales, also want fertilizer that was in short supply. American industries, clamoring for more government help to export, wanted the non-farm crude materials needed for them to produce.

The President has the power to curb these exports, but he has only applied panic controls and then sometimes taken them off in a panic reaction. It is not power he needs, but a program.

America did not gain economic strength from its increased trade and payments showing in 1973. America was weakened at home as she sent her products into the world like a developing nation in the theory books which ships primary products in return for imports ever more sophisticated manufactures.