not understand it all, is that in 1973 excessive world demand overshadowed the price changes caused by the exchange rate movements. And because the Germans simply have a heavily industrialized economy with lots of productive potential, when there were order backlogs in similar industries here, in Japan, and everywhere else, the Germans kept selling goods simply because they were the only people who had the productive capacity to turn out those goods.

I look for a significant decline in that German trade balance over the next 2 or 3 years.

Mr. GARDNER. For another reason, Senator. It is not just the exchange rate changes. We have two other corrective factors working for us in the long run. Labor costs are going up very rapidly in Europe and Japan. We are going to see much more aggressive trade union bargaining in Europe and Japan during the next few years.

Fiat was just forced, as a result of government intervention, to make a wage settlement which Umberto Agnelli, the president of the company, said may force Fiat to become a ward of the state in a few years. And in Germany and elsewhere we are going to see a lot of wage increases as a result of trade union bargaining.

The second factor is the energy situation which has been a much greater shock to our European partners and Japan than to us. They will face rapidly escalating raw materials costs, much more than the United States, which is relatively more self-sufficient in raw materials. So I think the prospect in the next decade, both on the wage front and on the raw material front, is profoundly favorable to American industry.

Mr. BERGSTEN. The proof of the pudding looks different when one considers Japan which, even before the energy crisis had seen a $6 billion decline in its trade surplus in the course of a year as a result of the exchange rate changes.

Senator MONDALE. Thank you very much for a most useful presentation.

[The prepared statement of Mr. Gardner and a speech of Senator Mondale's follows. Hearing continues on p. 1662.]

PREPARED STATEMENT OF RICHARD N. GARDNER,' COLUMBIA UNIVERSITY

I am grateful for this opportunity to testify before the Senate Finance Committee on the Trade Reform Act of 1973. In accordance with your request, I shall focus on the so-called "Mondale amendments" and then go on to offer some specific suggestions for strengthening the legislation in other respects.

Let me state at the outset that I consider the Trade Reform Act of 1973 to be, on the whole, a good piece of legislation. I believe its enactment this year to be highly important to the national interest of the United States, for two main reasons:

First, the rules and institutions governing world trade are in dangerous disarray. They must be revised and strengthened-soon-if we wish to preserve and enlarge the benefits of a cooperative world trading order and avoid a further drift toward economic conflict. Without the negotiating authority provided in this bill, the United States will be powerless to work for a new trading order in its own and the general world interest.

As this Committee is well aware, major changes are required in our trade relations with every part of the world-with the developed non-Communist

1 Richard N. Gardner, Professor of Law and International Organization at Columbia University, served as Deputy Assistant Secretary of State for International Organization Affairs in the Kennedy Administration and was a member of President Nixon's Commission on International Trade and Investment Policy in 1970-71.

countries, with the Communist nations, and with the developing areas. If we do not pass a trade bill this year, it will be difficult to pass one before 1977. Thus we may lose our last clear chance to reform the world trading system in this decade and avoid an irreversible deterioration in our relations with these three key groups of nations.

Second, the energy crisis has added an even greater urgency to world trade negotiations. Face with large trade deficits from sharply higher oil costs, virtually all the world's major nations will be under severe pressure to resort to trade restrictions or trade-distorting measures to protect their trade positions and push the burden of adjustment onto others. This would be a serious problem even in a world with strong institutions for trade cooperation and clear and equitable ground rules covering resort to tariff and non-tariff barriers. It could prove an unmanageable problem in the world in which we now find ourselves-a world with a debilitated GATT and with outmoded, ambiguous, and, on some subjects, non-existent trading rules. Without this bill, one would have to view with profound pessimism the prospects of finding cooperative solutions for the trade problems caused by the energy crisis.

THE MONDALE AMENDMENTS

Last fall, in a statement before the National Foreign Trade Convention, I urged that the Trade Reform Act of 1973 should be revised to focus on access to supplies as well as access to markets. Senator Mondale has introduced a number of amendments to the bill to accomplish this purpose. They deserve the most careful and sympathetic consideration. Our national interest, and the interest of the world community generally, would be served by the adoption of amendments along the lines which Senator Mondale has proposed.

The case for such amendments was developed fully in Senator Mondale's statement to the Senate on December 3. But perhaps I may add a few thoughts on the history, the law, and the politics of this difficult and complex subject. In August 1941, Franklin Roosevelt and Winston Churchill met on a destroyer off Newfoundland to draft the Atlantic Charter, a statement of postwar aims which could unite freedom-loving people everywhere in the fight against facism. The fourth paragraph of the Charter proclaimed the principle of "access, on equal terms, to the trade and to the raw materials of the world."

The motivation behind the fourth paragraph of the Atlantic Charter was simple. The leaders of the wartime alliance believed that peace could not be achieved unless it had a sound economic basis. The experience of the first four decades of this century suggested that if countries were denied access to raw materials and markets, they might be tempted to secure them by resort to force or at least would seek to justify aggression on the grounds that they were denied the opportunity to meet their economic requirements through peaceful means.

Cordell Hull, the father of the trade agreements program, was a believer in the theory that "if goods can't cross borders, armies will." This perception of the close relation between economic policies and peace had a profound influence not only on the Atlantic Charter but on other wartime statements and on postwar planning.

Yet despite this background, international economic negotiations from the end of the Second World War to the present time have focused almost entirely on access to markets and have virtually ignored the problem of access to supplies. The reason for this one-sided emphasis is obvious-for most of the postwar period the central problem seemed to be how to avoid depression and unemployment by selling goods to other countries. Now, however, we are moving into an era of resource scarcity and accelerating inflation-an era which requires a new approach to international economic policy, or perhaps we should say a return to the old and forgotten perceptions which lay behind the fourth paragraph of the Atlantic Charter.

Raw material access has acquired a new importance for the United States. By 1985 our country, even if it achieves energy self-sufficiency, will be primarily dependent on imports for nine of the thirteen basic minerals required by a modern industrial economy. As Lester Brown has pointed out, within the relatively brief fifteen year span of 1970-1985, "we will have made the transition from being an essentially self-sufficient country to-at least in terms of raw materials-a have-not country. We do not yet appreciate the economic, social, and political consequences of this historically abrupt transition."

The Arab oil embargo was undertaken with the explicit purpose of forcing the United States and its allies in Europe and Japan to change their policies on the Middle East. It has been lifted, but subject to further review in the light of progress toward a Middle East settlement. Moreover, output is being held well below capacity for economic as well as political reasons.

Other raw material suppliers, encouraged by the success of the oil embargo, now threaten to follow suit. Representatives from 16 East and Central African countries meeting in Dar-Es-Salaam, Tanzania on November 24, 1973, called for diplomatic, economic and other sanctions against the United States, Britain, France, West Germany, Japan and Brazil unless they ceased "support" for white minority regimes in Southern Africa. The Chairman of the conference, Foreign Minister John W. S. Malecela of Tanzania, said the sanctions could include a ban on both exports to and imports from the United States and the other named countries. Although most of the sixteen countries do not possess materials of vital importance to us, some of them, such as Zaire, the former Belgian Congo, clearly do.

What is perhaps more to the point, many developing countries are now tempted to form porducer cartels for the purpose of raising prices and achieving international transfers of wealth that seem otherwise impossible. One well informed observer, Ugandan social scientist Ali Mazrui, sums up their attitude as follows:

"From the point of view of millions of Asians and Africans, the Arab oil sanctions against select Western countries will probably rank in history alongside Japan's victory over Russia in 1905-as milestones in the story of how Asians and Africans discovered their own potential power against Caucasian might... As a lever against the rich, certain Third World resources will become the equivalent of organized labor in the history of the industrialized countries— as a basis for collective bargaining."

Statements to the same effect were made recently by Algerian representatives at a meeting of developing countries in preparation for the forthcoming U.N. General Assembly on raw materials and economic development.

Economists disagree as to the probable success of price-raising producer cartels for materials other than petroleum. My own view is that growing resource pressures do promise some additional bargaining power to many developing countries, but that outside of oil the possibilities for successful producer cartels to raise prices are very doubtful-either the producers lack the identity of interest and the necessary foreign exchange reserves for a collective cutback in supply, or the consumers have too many other options in the form of large stockpiles, home-based production, and the availability of substitutes.

Producer cartels may achieve some results for their organizers in the short run, but in the middle and long run they are likely to backfire. The danger is that a policy of confrontation could push developed countries into policies of self-sufficiency, denying developing countries the technical assistance, the capital and the market access without which they cannot meet their development goals. In the economic and political backlash, even the resource-rich developing countries would lose; and the have-not countries would lose most of all. The role of international law and organization, in my view, should be to reinforce cooperative behavior that will serve the long-run interest of all. Specifically, this would mean restricting the right of producer nations to form price-raising cartels except as part of mutually-agreed commodity arrangements in cooperation with consuming countries, as was proposed in the Charter for an International Trade Organization 25 years ago.

Lest we adopt an unduly self-righteous attitude on these matters, we should recognize frankly that the United States itself has been one of the worst offenders in using export controls in ways which have adversely affected other countries. For years we have applied an embargo on trade with Cuba. Last summer, we unilaterally cut off exports of soybeans and other agricultural products to our trading partners in Europe at the very time that we were pressing them to modify policies of agricultural self-sufficiency and become dependent on our production.

It is obvious from these examples that the whole concept of an open and cooperative trading system is under serious attack. International trade is becoming heavily "politicized." This trend is destroying the traditions of reasonably free and non-discriminatory access to markets and supplies that are essential in an increasingly interdependent world.

Since the U.N. Charter, countries are no longer permitted to use force to back up their economic claims. Quite apart from legal prohibition, such actions now entail costs and risks that make them politically undesirable. But if the Atlantic Charter concept of equal access to raw materials cannot be guaranteed by the use of force, we need to consider guaranteeing it in some other way.

There is no easy solution to this problem, but it is certainly in our own and the general interest to try to develop some new international rules and procedures to assure reasonable access to raw materials. The present state of international law in this area is not satisfactory. The General Agreement on Tariffs and Trade does contain a general prohibition on the use of export and import controls (Article XI) as well as a requirement that both export and import controls should not discriminate between countries (Article I). Article XX of GATT permits measures deviating from these and other GATT rules "relating to the conservation of exhuastible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption." The same article also permits measures "essential to the acquisition or distribution of products in general or local short supply; Provided that any such measures shall be consistent with the principle that all contracting parties are entitled to an equitable share of the international supply of such products .. "These authorizations of export restrictions are subject to the requirement that such measures "are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or disguised restrictions on international trade..."

In this tangle of rules, exceptions to the rules, and exceptions to the exceptions to the rules, it is extremely difficult to discern any coherent guidelines for national policy. And, what is more to the point, all of these principles are effectively vitiated by a subsequent GATT article (XXI) which declares that nothing in the GATT shall be construed "to prevent any contracting party from taking any action which it considers necessary for the protection of its essential security interests . . . taken in time of war or other emergency in international relations..."

It seems to me that a major U.S. objective in the forthcoming trade negotiations should be to incorporate some new and stronger rules in the GATT limiting the resort to export controls. At a minimum, the new rules should prohibit the use of export or other controls for political purposes. A country should not be permitted to cut off or threaten to cut off exports in order to change another country's policies (although exceptions would be granted to permit countries to restrict the export of weapons and national security information and also to restrict trade in the course of actual hostilities). The new rules should also seek to define more precisely the economic, conservation and other purposes for which exports can be limited and should place greater emphasis on the need to take account of the interests of others. Most important of all, since the rules on this complex subject will inevitably require interpretation in specific circumstances, new GATT procedures should be created requiring advance notice, consultation, authoritative interpretation of the rules and settlement of disputes by impartial conciliation and arbitration commissions under GATT auspices. Where countries are found to have violated the new principles and fail to adjust their policies in accordance with multilateral decisions, they should face the possibility of multilateral reprisals. If this cannot be done through the GATT, it may have to be undertaken through the OECD or some other multilateral forum. In extreme situations, multilateral sanctions may even have to be applied to countries that are not GATT members, on the theory that their violation of broadly agreed community standards are gravely threatening community interests. If we can propose cutting off air service to countries that give refuge to hijackers, if we can contemplate denying port facilities to nations that pollute the oceans with their tankers, we should certainly explore the possibility of multilateral trade, aid and investment embargoes on nations that threaten the world economy by arbitrarily withholding vital raw materials. None of the Arab oil producing countries is a party to GATT except for Kuwait and many of the sixteen African countries who made the declaration referred to earlier are also outside the GATT. However, a number of these Arab and African countries who are not GATT members (including Saudi Arabia) have committed themselves in bilateral treaties with us to refrain

from the very measures of trade discrimination which they recently aimed in our direction. Moreover, all of these countries voted for U.N. Resolution 2625 of the 25th General Assembly, entitled "Declaration of Principles of International Law Concerning Friendly Relations and Cooperation Among States in Accordance with the Charter of the United Nations." In promulgating this resolution, the General Assembly declared that "the principles of the Charter which are embodied in this Declaration constitute basic principles of international law, and consequently appeals to all States to be guided by these principles in their international conduct and to develop their mutual relations on the basis of their strict observance."

One of the key principles of the Declaration is the following: "No State may use or encourage the use of economic, political or any other type of measures to coerce another State in order to obtain from it the subordination of the exercise of its sovereign rights and to secure from it advantages of any kind."

It was the Afro-Asian group in the United Nations, including the Arab countries, that pressed hardest for the principle quoted above and for the proposition that this principle was already part of international law. Of course, their motive was to prevent the United States and other industrialized countries from using economic power as an instrument of political pressure. It is interesting that not a single voice has been raised in the United Nations to cite this authoritative declaration of the General Assembly since the Arab oil embargo began.

In his speech to the General Assembly in September, Secretary of State Henry Kissinger announced the willingness of the United States to negotiate a new instrument on the "Economic Rights and Duties of States" as proposed by the Government of Mexico. The Department of State has hitherto been reluctant to raise the issue of access to resources in these negotiations because of our own use of export controls. We certainly cannot have it both ways. I believe we should offer to reform our practices in this area in return for reciprocal changes in the practices of others.

In implementing a new international economic policy of access to supplies we should seek to act multilaterally, not bilaterally, for at least three reasons. The first is that in most cases a threat of reprisals against raw material cut-offs will have little practical significance unless we have our OECD partners with us. The second is that unilateral U.S. action will look to others as a destructive act of nationalism unless it is related to multilateral rules and multilateral procedures. The third is that such an effort of "collective economic security" could degenerate into a North-South economic war unless it is based on principles that are acceptable to a substantial number of developed and developing countries. I would hope that the Mondale amendments in their final form would specify that the President should exercise his authority to retaliate in conformity with GATT or multilateral agreements, once these have been renegotiated to deal adequately with supply access. Pending such renegotiation, the United States would reserve the right to retaliate without multilateral approval. It should be understood, however, that the President would use this authority only as a last resort, and in conjunction with other consuming countries wherever possible.

Obviously codes of conduct by themselves are not enough. On both sides of the great economic divide, there will need to be more enlightened perceptions of national interest. In recent years, the developed countries have manifestly failed to discharge the aid and trade obligations that were necessary to make a success of the Development Decade. Partly in response to this failure, partly out of a misguided nationalism, many developing countries enlisted under the banner of "sovereignty over natural resources"-failing to see that developed countries also have "sovereignty" over their capital resources, their technology and their internal markets, and that some mutually agreed limitations of sovereignty are essential to give full possibilities to the sovereignty of all. Ironically, the greatest victims of the "sovereignty" that the OPEC countries exercised in quadrupling oil prices in 1973 were the developing countries themselves.

To sum up, I doubt that new rules and procedures assuring reasonable access to supplies can be negotiated except in a much broader context involving a fundamental restructuring of international economic relations between developed and developing countries. The developed countries are rightly concerned about secure access to raw materials at reasonable prices. But the developing countries are rightly concerned about other kinds of access-access to markets,