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North Star. Price is a problem. Only the prices of gold and natural gas remained unchanged since the thirties. Now both have increased. You will have to resolve the price problem. There is no problem on our side.

Is the Soviet Union still insisting on fixed interest rates on credits from American private banks?

So far, yes. Our planners like to know in advance what things are going to cost. All the loans for the Kama River truck project carry fixed rates. But the financing terms for the fertilizer project have not been decided.

Don't fixed rates mean that you probably have to pay more than you would with fluctuating rates ?

Well, of course, we would prefer very low fixed rates. But for some reason, your banks don't see it that way.

Reportedly, the Ex-Im Bank wants more information on the Soviet balance of payments, monetary reserves, and foreign debt before granting large additional credits. Will this be a problem?

This is a misunderstanding. We publish good trade statistics. For the last 20 years our balance of trade was positive, except in 1964, when we had a deficit of about $50-million, and last year, when the deficit was $800-million or so. We had to sell gold to cover it. We produce gold, but we manage our balance of payments very carefully to minimize the use of gold. The problem of our reserves is not of great importance. What criteria should one apply, anyway? Your gold reserves have dropped from 25,000 tons to 10,000 tons. If we published our reserves you might say we don't need credit, or if our reserves decreased you might say we are not reliable.

Of course, when it comes to these very big projects, we will need special assurances, both ways, that commitments will be honored. But this is not a bookkeeping problem. It is up to our government to decide what information it can properly give to the Ex-Im. But it won't act under threats.

Vneshtorgbank, the foreign trade bank, does all the Soviet Union's borrowing abroad, but U.S. banks are limited in the amount they may lend to one client. Could that put a ceiling on trade?

In the debt agreement between us and the Ex-Im, the two governments designated the Vneshtorgbank, or other bodies, as Soviet borrowers. We have our trading companies, too. This can be settled easily.

What of the periodic reports that the Soviet Union may apply to join the International Monetary Fund?

It is up to our treasury. I know they don't like some of the IMF's procedures, such as its system of voting. We have our own system of international banks, the Comecon Investment Bank and Settlements Bank, which wouldn't be easy to mesh with the IMF. But I wouldn't rule it out forever.

Senator TALMADGE. The next witness is Mr. Ralph Cross, the chairman of the Government Relations Committee, National Machine Tool Builders' Association, accompanied by Mr. James A. Gray, executive vice president.

The full statement will be inserted in the record, Mr. Cross, and you will summarize it for 10 minutes.

STATEMENT OF RALPH CROSS, CHAIRMAN, GOVERNMENT RELA

TIONS COMMITTEE, NATIONAL MACHINE TOOL BUILDERS ASSOCIATION ACCOMPANIED BY JOHN KOCH, COUNSEL

Mr. Cross. Mr. Chairman, Mr. Gray is not here this morning. In his place, we have Mr. John Koch, who is legal counsel for the Machine Tool Builders' Association.

We have prepared a written statement, which I assume will be made a part of the record.

Senator TALMADGE. It will be inserted in full, sir.

Mr. Cross. In the interest of saving time, I would like to limit my remarks, therefore, to the highlights of this statement.

We testify today in basic support of the Trade Reform Act, other than title IV. The world military, political, and economic situation has changed considerably since the cold war days, in which some of our present trade laws were developed, including the prohibition against the grant of nondiscriminatory tariff treatment to Communist countries.

The administration has slowly and cautiously encouraged the expansion of trade with both the Soviet Union and the Peoples Republic of China, but the ability of Communist countries to purchase from the West depends to a considerable degree on their ability to sell here. We strongly oppose, therefore, title IV of the bill passed by the House, which would constitute a significant backward step in our efforts to normalize and expand international trade.

As businessmen, we look upon the Soviet Union and other Eastern bloc countries as important markets, markets that will enable us to expand our exports and thereby, besides increasing domestic employment and contributing positively to the balance of trade, strengthen our industrial base. But the benefits of expanded trade with the East are not solely economic. Both as businessmen and as citizens, we strongly share the administration's conviction that expanded world trade and resulting economic interdependence are perhaps the most promising assurance of continued world peace.

Accordingly, in the interest of both liberal trade policy and detente, we urge the committee to report a trade bill that does not attempt to tie the questions of nondiscriminatory tariff treatment and ExportImport Bank financing to the unrelated issue of Soviet emigration policies.

At this point, I would like to say a few words about the individuals and organizations we have traded with in the U.S.S.R. Personally, I have been trading with the U.S.S.R. for over 40 years, going back to 1934. And in all of this time, we have never had an order cancelled; we have never had an official of the Soviet organizations that we deal with go back on their word. They have always paid their bills on time. They have dealt with us openly and honestly. They have told us in advance what things we could expect when we came into the negotiation, what things were not negotiable, and our trade has been of the highest order.

There are two other matters that are appropriate subjects for comments at these hearings. One is the issue of taxation of foreign source income. The other is the U.S. tax treatment of capital investment here at home.

We are gratified that the trade bill passed by the House and pending before this committee does not include provisions that disturb existing U.S. tax policy applicable to foreign investment. As the Secretary of the Treasury testified before the House, and as various private and Government studies have shown, foreign investment by U.S. firms has been beneficial to the American economy and has, in fact, improved the U.S. balance of trade and added jobs to the U.S. economy.

As an example, I would like to tell you about what has occurred in our own company. We decided to build a plant in Germany in 1960.

30-229 0 - 74 - pt, 4 -- 30

Prior to that time, our export business was less than $1 million a year. Since we have built that plant, our export business has expanded, over a 14- or 15-year period, by 600 percent and has provided jobs for 250 people in our company for 15 years. We look, therefore, very highly on this type of business.

With respect to taxes, first we do not believe that U.S. corporations should be taxed on earnings of foreign subsidiaries operating in countries offering inducements to new investment.

Second, we do not believe there is any justification for taxing the foreign earnings of a controlled corporation which operates in a country with significantly lower income tax rates than the United States and whose exports to the United States exceed 25 percent of its total production, as the administration has proposed.

Third, we are opposed to any new restrictions or limitations on the availability of foreign tax credit, at least as applied to manufacturing industries generally.

It is provisions such as these that would operate to disadvantage U.S. corporations in relation to their foreign competitors. If the tax laws of country X operate to give companies located there an undue advantage with respect to the U.S. market, the problem, if there is one, calls for a tariff solution which would apply equally to all companies operating in country X, not solely to the subsidiaries of U.S. corporations.

With respect to U.S. tax treatment of laws applicable to capital investment, we do not believe that our tax laws should be used as a club to inhibit foreign investment. On the other hand, it is our firm conviction that the United States remain the industrial leader of the world, a Nation with an industrial plant sufficient to supply its basic peace and wartime needs and a provider of ample and rewarding industrial job opportunities.

To achieve these goals, we must be able to compete in world markets on an equal basis. As an example of how not to achieve these goals, let me tell you what has happened to the machine tool industry.

Up until a few years ago the American machine tool industry dominated the world machine tool business. We had the largest machine tool industry in the world. That no longer exists. We are now in third place, behind West Germany and the Soviet Union. And, in my judgment, this was brought about largely because of our export control laws which kept us from being able to participate in the markets in the Eastern countries.

Without minimizing in any way the importance of new and enlightened international trade legislation, I wish to emphasize our conviction that in the long run, America's success in world markets, its ability to attain its economic goals at home, and its future as an industrial nation, depend most importantly on one thing: its productivity. Winning the productivity war means lower unit cost, lower prices, and more industrial job opportunities.

So how are we doing in this productivity war?
Let me cite a few facts.

The amount of money being spent on machine tools and related equipment per American worker is declining. This means the American worker will not be able to maintain his present standard of living unless the trend is reversed. The ability of the American worker to produce depends entirely on the quantity and quality of the tools at his disposal.

Second, the United States spends a smaller part of its Gross National Product on machine tools and related equipment than any other industrial nation.

Third, the United States has the largest Gross National Product in the world, and it must have, in our opinion, the largest and strongest machine tool industry in the world. Of all of the Government policies that bear on our ability to increase productivity, none is more important than tax policy applicable to capital recovery. Tax laws that encourage investment in modern and efficient machinery and equipment constitute, in our judgment, the single most effective way that our Government can assist U.S. companies in their efforts to compete at home and in world markets.

Senator TALMADGE. Mr. Cross, I regret to call the time on you, but the 10 minutes have expired.

Mr. Cross. Thank you, Senator.

Senator TALMADGE. I was interested in your statement that you had been making sales to the Soviet Union for some 40 years and that they had complied completely in all respects with the terms of the contract.

What have you been selling to the Soviet Union for 40 years!
Mr. Cross. Machine tools.

Senator TALMADGE. What do you exactly mean when you say machine tools ?

Mr. Cross. Well, over the years we have sold them all kinds of machine tools. To begin with, in the 1930s we sold them tools for making tractors.

Senator TALMADGE. You say machine tools. Is that a machine that operates itself or tools to maintain the machines ?

Mr. Cross. They are power-driven machines that form and cut metal to make the parts for various products, such as automobiles, trucks, airplanes, and almost any manufactured product. The tools that the former witness was talking about for making ball bearings, for example, are machine tools, and I would like to comment on that, if I may:

Machine tools for making these precision miniature bearings that the witness was speaking about are readily available to the U.S.S.R. in Italy and not from subsidiaries of American companies. They are also readily available to them from Japan so that the Soviet Union is not dependent upon the United States to obtain its machinery to make miniature ball bearings.

Senator TALMADGE. Your principal competitors are American or foreign countries ?

Mr. Cross. We have plants in Germany, England, and Japan, plus the United States. And, of course, we have competitors throughout the world.

Senator TALMADGE. Do you have any figures comparing the imports versus the exports on machine tools?

Mr. Cross. The trade balance of machine tools is—we export more than we import.

Senator TALMADGE. Do you know approximately

Mr. Koch. Senator, there are attached to Mr. Cross' statement some appendices which set forth the balance of trade with respect to the machine tool industry, machine tools generally, and various subcategories.

Senator TALMADGE. I am delighted that is in the record, because I am not aware of what the figures are. I thought we had a favorable balance on machines.

Mr. Cross. If I could make one other comment,

The export restrictions that we have put on machine tools over the last 25 years have made the Soviet Union self-sufficient in the kinds of machines that they need to produce war materials. And restrictions on trade that extend over a long period of time, in my judgment, cannot help but make them self-sufficient. If they cannot rely on us for machine tools, they will find a way to make them for themselves, and they have proven this.

Today they are looking for machine tools to produce goods for civilian consumption. And if we do not participate in that trade, they will become self-sufficient in this area also, and they will be a force in the world machine tool market.

Senator TALMADGE. Any further questions?
Senator BENNETT. I would like to ask one.
Senator TALMADGE. Senator Bennett.

Senator BENNETT. When you say the Russians have made their own machine tools, have they copied those they have imported from abroad, or do they have the capability of designing original and different machine tools?

Mr. Cross. They have the capability of designing original and new types of machine tools. Like all people in business, you borrow ideas from your competitors from time to time. We have borrowed ideas from them, and they certainly have borrowed ideas from us, as well as from other countries in the world.

Senator BENNETT. I will turn the question around. Would it be possible to put any kind of restriction on our export of machine tools to Russia which would interfere with their ability to develop their military capability?

Mr. Cross. To develop their what?
Senator BENNETT. Military capability,

Mr. Cross. Only on a temporary basis. Frankly, they have shown no interest in machine tools for military purposes, and I am positive that they have the capability to make these kinds of machines. In fact, I visited some of their machine tool plants in Russia, and I have seen that they have the capability. I have seen that they have the capability, if they want to, to make the machines that will make these miniature ball bearings also.

Senator BENNETT. Machine tools made in the United States are subject to patent, are they not?

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