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United States Tariff Commission

Washington

Memorandum On H. R. 12591, 85th Congress, A Bill To Extend The AuthorIty, Of The President To Enter Into Trade Agreements Under Section 350 Of The Tariff Act Of 1930, As Amended, And For Other Purposes

Short Title

Section 1 of the bill states the short title of the legislation as "Trade Agreements Extension Act of 1958."

Extension Of Phesident's Authority To Enter Into Trade Agreements

Section 2 of the bill provides for the extension of the President's authority to enter into foreign-trade agreements under section 350 of the Tariff Act of 1930, as amended, from the close of June 30, 1958 (when his present authority expires), to the close of June 30, 1963. The Trade Agreements Act of June'12, 1934, originally authorized the President to enter into foreign-trade agreements for 3 years. This authority has been extended since then 10 times, for periods ranging from 1 to 3 years. This extension of authority is necessary only to permit the negotiation of new trade agreements; it is not necessary for the purpose of continuing existing trade agreements. Existing trade agreements, and duty rates ?reclaimed to carry them out, will continue in force regardless of whether the 'resident's authority to enter into trade agreements is extended bevond the close of June 30, 1958.

NEW BATE-CHANGING AUTHORITY

Rate increasing authority.—Section 350 (a) (2) (A) of the Tariff Act of 1930 limits the President's trade-agreement rate-increasing authority to 50 percent above the rates existing on January 1, 1945. Section 3 (a) (1) of the bill would change the base date from January 1, 1945, to July 1, 1934. This would mean that, with the few exceptions where changes in duties were made between June 18, 1930, and June 30, 1934, the base rates for the purposes of the 50-percent limitation on the rate-increasing authority would be the rates originally established in the Tariff Act of 1930.

Between July 1, 1934, and January 1, 1945, a great many tariff reductions were made pursuant to the trade-agreements authority, many of them maximum reductions (50 percent below the original tariff-act rates). Thus the change in the base date proposed in the bill for the rate-increasing limitation would permit greater rate increases on a large number of commodities—in many instances much greater increases—than are permissible under the existing law. On the other hand, because of rate increases that occurred under the "flexible tariff" provision (sec. 336 of the Tariff Act of 1930) between July 1, 1934, and January 1, 1945, the proposed amendment would in a few instances result in a lessening of the amount of permissible increase.

Under the Trade Agreements Act the rate-increasing authority is to be utilized when "required or appropriate" to carry out a foreign trade agreement. This authority has rarely been utilized in connection with normal trade-agreement negotiations. Its use has been significant only in connection with the escapeclause procedure, where the authority has been utilized to increase duties to reflect modifications of trade-agreement concessions pursuant to the escape-clause procedure. It is in this latter area that the rate-increasing authority would have significance in the future, and it is understood that it is in connection with the administration of the escape-clause procedure that the proposal for change in the base date is being made. Experience under the escape-clause procedure indicates that on occasion, particularly where specific rates are involved, the maximum permissible increase in duties under existing law may not provide an adequate remedy for the serious injury that is found to exist in a particular case. Whenever this should be the case, it is necessary to report to the quota authority. Authority to make greater increases in duties in connection with escape-clause action than is now permitted by law would in some cases reduce the need for resort to quotas.

In the case of products whose duty-free status has been bound in a trade agreement, there is no authority for imposing a duty under the escape clause procedure by reason of the prohibition in section 350 against the transfer of any article between the duiable and the free list. Thus, where a case for escape action is made with respect to a duty-free commodity, the only remedial action the President has authority to take is to impose a quota. There is increasing concern regarding import competition from certain articles on the free list. Xhis is recognized in section 5 (c) of the bill, which amends section 7 of the Trade Agreements Extension Act of 1951 (the escape clause procedure) so as to permit the imposition of a duty of not more than 50 percent ad valorem on duty-free items under the escape clause procedure.

Rate-reducing authority.—The President's new rate-reducing authority is set forth in section 3 (a) (4) and (8) of the bill. The details of the new authority are set forth in the proposed new paragraph 4 of subsection (a) of section 350 (beginning on line 11, p. 3, of the bill). The additional rate-reducing authority is expressed by way of prohibition against rate reductions below the lowest rates resulting from any of three alternatives.

Subparagraph (i) of proposed new paragraph 4 of section 350 (a) limits reductions to 25 percent below the rates existing on July 1, 1958. Subparagraph B (i) provides that the 25 percent reduction may be made in not more than five annual stages, but that the amount of reduction in each stage shall not exceed 10 percent of the rate existing on July 1, 1958. In other words, the 25 percent reduction niay be made over a period as short as 3 years (e. g., 10-10-5) up to a period of 5 years, regardless of the amount of reduction in each stage, so long as in no stage does the the amount of reduction exceed 10 percent of the July 1, 1958 rate.

The last part of subparagraph B (i) reading "or in any case in which the rate has been increased since that date," etc., appears to deal with the possibility that after July 1, 1958, and before the conclusion of a new trade agreement a rate may be increased. Such an increase might occur, for example, where the present rate is a reduced rate under a bilateral trade agreement, and before entering into the new trade agreement under the new authority, such bilateral trade agreement is terminated, resulting in the restoration of a higher statutory rate on the product in question. This portion of this subparagraph apparently means that in such a case the staging shall be by annual reductions, each not exceeding 10 percent of the July 1, 1958, rate, or one-third of the "total amount of decrease under the new trade agreement," whichever is the greater. For example, if the July 1, 1958, rate was 20 percent and increased to 40 percent in October 1958, and the newtrade agreement provided for a decrease in the rate to 15 percent (25 percent of 20 percent), an annual-stage reduction of 10 percent of the July 1, 1958, rate (20 percent) would be 2 percentage points. One-third of the total amount of the reduction (25 percentage points)—40 percent less 15 percent—would be ffri percentage points. Thus the stating of the total reduction would require a limit of not more than the reduction by 8,H percentage points in any stage (one-third of the amount of decrease under the trade agreement—25 percentage points).

This alternate-staging rule may cause difficulty in application. For example, what is meant by the "total amount of the decrease under the foreign trade agreement"? Assume that at the time negotiations are initiated, a statutory rate of 40 percent ad valorem had been reduced in a bilateral trade agreement to 20 percent, and the 20-percent rate was in effect when the negotiations were initiated. Would the "total amount of the decrease under the foreign trade agreement" be from 20 percent to 15 percent, or from 40 percent to 15 percent? If it should be held that the "total amount of the decrease under the foreign trade agreement" is to be determined as of the date of the signature of the agreement, then suppose that the 20-percent rate was still in effect on the date of the signature of the agreement, but the bilateral agreement pursuant to which the 20-percent rate was in force was terminated prior to the proclamation' of the new trade agreement. The staging provided for in the new trade agreement would be, let us say, 18 percent, 16 percent, and 15 percent under the basic-staging rule. If, by reason of the termination of the bilateral trade agreement an increase in the rate to 40 percent results, the rule of maximum decreases in any one stage by not more than one-third of the "total amount of the decrease under the foreign trade agreement" would require the 3 stages to be 31 lA percent, 23^ percent, and 15 percent. In other words, the first two stages would both exceed the rate which was the basis of the negotiations, and the proclamation of these rates would be inconsistent with the rates specified in the trade-agreement schedule. This additional staging requirement would be likely to cause some difficulty.

The second alternative "limitation on rate reduction is set forth in subparagraph (ii) of proposed new paragraph 4 of subsection (a) of section 350. This rate-reducing-authority limitation means that a rate could be reduced by 2 percentage points below the rate existing on July 1, 1958. This alternative limitation would be effective with respect to rates which on July 1, 1958, are less than 8 percent ad valorem or equivalent, and would thus be effective only with respect to low-duty commodities. This limitation is subject to subparagraph 2 (B) of subsection (a) of section 350, which prohibits transfers between the dutiable and the free list, and would thus preclude elimination of a duty by the exercise of this second alternative.

1 Changes in United States rates of duty under the Trade Agreements Act are only effective when proclaimed.

Decreases under the 2-percent authority may be made effective in not more than 5 annual stages, with no decrease in any stage exceeding 1 percent, but subject to the rule referred to above in the case of articles on which the rate has increased after July 1, 1958 (that the reduction will be staged in a manner which will limit each annual-stage reduction to not more than one-third of the "total amount of the decrease under the foreign-trade agreement").

The third alternative limitation on rate reduction is set forth in subparagraph (iii) of proposed new paragraph 4 of subsection (a) of section 350. This permits a reduction to the rate of 50 percent ad valorem or equivalent in the case of articles which are subject to a duty at a higher ad valorem or equivalent rate. Total decrease under this alternative may be made in not more than five annual stages, but with no single-stage reduction exceeding one-third of the total amount of decrease under the foreign trade agreements.

STAGING OF REDUCTIONS

The principle of staging of rate reductions was introduced in the Trade Agreements Extension Act of 1955. There may be a question as to whether any benefits that might be gained from gradualism in the reduction of duties are worthwhile in view of the complications that result from the incorporation of this principle in the rate-reducing authority. In connection with the 1955 act authority, the Commission did not consider it to be feasible to make peril-point determinations on the basis of the staging principle. This was recognized by Congress, as is indicated in the committee reports on the 1955 extension bill wherein it was stated: "In connection with the Tariff Commission's determination of peril points where the gradual reductions required by the bill are involved, the bill contemplates that the Commission will determine the peril point for an article on the basis* of the total permissible reduction rather than on the basis of the application of the total permissible reduction on a gradual basis." (House Rept. No. 50, 84th Cong., 1st sess., p. 15.) The staging principle in the 1955 act required myriad computations and the introduction of three rate columns in the trade-agreement schedules, with often bidicro'isly small gradations in rates without significant benefit to anyone.

Presumably the purpose of gradualism in rate reduction is to enable domestic industries affected to adjust themselves to the reductions. If this be the purpose, then is the Commission to assume that domestic industries are to be expected to adjust themselves to the reductions by increasing their efficiency or diversifying production? If industries are expected to adjust to the reductions, then it would seem that in applying for escape-clause relief with respect to a product on which the rate reductions were gradualized an industry should be expected to show that it was not possible or practicable to transfer its operations to other commodities or to otherwise attempt to avoid the adverse effect of the rate decreases. The Commission has not heretofore adopted this principle in administering the escape clause, but the continuance of the staging principle in the new extension act raises the question as to whether it is the intent of Congress that efforts of an industry to turn to the production of other commodities or to otherwise adapt to the rate reductions should be considered by the Commission in determining whether escape-clause relief is justified. Legislative expression of intent with regard to this would be helpful.

"peril, Point" Procedure Amendments

Section 4 (a) of the bill would extend the time within which the Tariff Commission should report to the President its peril-point determinations from 120 days to 6 months. Section 4 (b) of the bill proposes the amendment of the perilpoint provisions to provide that whenever, on the basis of a peril-point investigation, the Tariff Commission finds, with respect to an article on which a tariff concession has previously been granted in a trade agreement, that increased import restrictions are required to avoid serious injury to the domestic industry concerned, the Commission shall promptly institute an escape-clause investigation with respect to the commodity. 27C2!)— 38—pt. 1 10

Under the existing peril-point procedure, where the Commission determ: with respect to an article listed for consideration in proposed trade-agreert negotiations that additional import restrictions are required in order to prei serious injury to a domestic industry, the President must either negoliat" additional restrictions in the projected trade agreement or report (o the Caaf his reasons for failing to dp so. Instances where the CommiaBion has determi a peril point above the existing rate of duty have been rare in the past. In i four instances has this occurred. The inclusion of one of these instances is do, fill in view of the division within the Commission on the peril point. Ano1 should not properly be included in this group because the peril point actm involved the reestablishment of treatment previously established pursuant to •escape-clause procedure but which had been nullified by a court decision. T there are in reality only two instances where the Commission determined p< point rates above existing rates. In both of these instances the President did negotiate the peril-point rates and reported to the Congress bus reasons for 1 ing to do so. In so reporting, the President advised the Congress that his foil to negotiate the increased duties did not preclude the industries concerned fi filing an escape-clause application. This was followed by the filing of an e*-i clause application by one of the domestic industries concerned, and after inv« gation a majority of the Commission found that escape-clause relief was warran! and so recommended to the President. The President, however, did not acr the Commission's recommendation and no change in the customs treatment the commodity occurred.

The proposed amendment to section 3 (b) of the 1951 Extension Act *c make it mandatory upon the Commission to institute immediately an esrs clause investigation on anv commodity on which it found a peril-point rate big than the existing rate and if the commodity was already the subject of & \n agreement concession. If this had been done in the case referred to abow, institution of the investigation for escape-clause purposes would have be*l months earlier than it actually did occur. However, the result would presums have been the same.

It is possible that a reason for the proposed amendment is that it is recogni that it would be most unusual for a foreign country with which we are negot ing for the granting of reciprocal concessions to be' willing to accept a cono?ss in the form of an increase in duty, particularly in a case where there has previd been granted a reduction in duty. Apparently it is thought that since this f •cedure would not be likely to result in obtaining a negotiated increase in duty purpose could be accomplished by having an escape-clause investigation, whi if culminating in a justification for an increase- in duty, could be accompli-' •unilaterally, without negotiation excepting for compensation purposes.

A peril-point determination is made after an investigation under sectkn •of the Trade Agreements Extension Act of 1951 and public hearings in connect therewith. While a peril-point investigation usually involves many items,: the determinations are made by the Tariff Commission in a relatively sb time, the determinations are nevertheless considered sufficient by the Conp to justify Presidential decreases in duties on the basis thereof, as well as incmi in duties where increased restrictions are found to be necessary. The fact t the negotiation of an increased duty might not be feasible does not alter the i that Congress considers it to be appropriate to bring about an increase in the d on the basis of a peril-point determination.

In a peril-point investigation interested parties are given notice of the invest! tion and hearings and are given opportunity to appear and be heard in conneri •with the items listed for consideration in proposed trade-agreement negotiatK They may appear and testify either for a redaction in duty or for an increas duty, and the Commission's determination is based on the evidence oblaii in the investigation, including the hearing.

The adoption of the proposed amendment would require the Commission, a! having made an investigation including a public hearing, and having arrived .a determination regarding the need for increased import restrictions, to instil immediately another investigation and to hold another hearing for the purp of determining the very same question. This appears to be anomalous i implicitly suggests that peril-point determinations are inadequate for the purp •of justifying an increase in duty, but are adequate for the purpose of justif* a decrease in duty.

If a peril-point determination of an increased rate of duty is considered adequate basis for an increase in duty, it seems that it should also be consido Adequate for the purpose of escape action. There is no obligation on the p ofjthe United States as to the length of time in which a determination for the purposes of the escape clause should be made or as to how extensive an investigation should be. The Congress may therefore wish to consider whether, instead of requiring the Commission to institute an escape-clause investigation immediately upon the conclusion of a peril-point investigation, it should provide that whenever the Commission finds under the peril-point procedure with respect to an article on which a tariff concession has been granted that increased restrictions are necessary, the determination should be considered as though it had been made under section 7 of the Trade Agreements Extension Act of 1951, as amended and require the publication of its findings and the basis therefor and appropriate recommendation to the President for escape action.

ESCAPE-CLAUSE PROCEDURE AMENDMENTS

Section 5 (a) of the bill amends the escape-clause procedure (sec. 7 of the Trade Agreements Extension Act of 1951, as amended) by specifying that an organization or group of employees shall be considered an interested party eligible to file applications for escape-clause investigations. Organizations or groups of employees are considered by the Commission to be interested parties for the purposes of filing an escape-clause investigation under the existing law. However, like any other applicants, they are required to conform to the pertinent rules of the Commission governing applications for escape-clause investigations. This amendment will not, therefore, result in any change in practice.

Section 5 (b) of the bill reduces from 9 months to 6 months the time within which the Commission must complete an escape-clause investigation. The bill provides that this reduction in time will not apply to applications pending at the time of the enactment of the amendment.

Section 5 (c) would authorize the President, in carrying out the escape-clause procedure, to impose a duty not in excess of 50 percent ad valorem on any article not otherwise subject to duty. This amendment was discussed earlier in this memorandum.

Section 6 of the bill would add new provisions to subsection (c) of section 7 of the Trade Agreements Extension Act of 1951 (the escape-clasue procedure) which would enable Congress to override a decision of the President not to fully carry out an escape-clause recommendation of the Tariff Commission.

The presentprovisions of subsection (c) are that, upon receipt by the President of the Tariff Commission's escape-clause report, the President may make such adjustments in rates of duty, etc., as are found and reported by the Commission to be necessary to prevent or remedy serious injury. If the President does not take such action within 60 days, he must merely report to the Committee on Ways and Means and to the Committee on Finance, stating why he has not done so. No provision is made for any further action.

Under the bill, if the President does not take the action recommended bv the Tariff Commission, and if within 60 days following the date on which the President's report to the congressional committees of reasons for not taking the action recommended by the Tariff Commission, the Congress, by concurrent resolution by a two-thirds vote of both Houses, approves the action recommended by the Commission, the President is mandatorily required to put into effect the changes in customs treatment recommended by the Commission within 15 days after the adoption of such resolution. Privileged status would be given to such resolutions.

"national Security" Amendment

Section 8 of the bill deals with the so-called national security amendment. Section 2 of Public Law 464, 83d Congress (the 1954 Trade Agreements Extension Act), provided as follows:

"No action shall be taken pursuant to such section 350 [of the Tariff Act of 1930] to decrease the duty on any article if the President finds that such reduction would threaten domestic production needed for projected national defense requirements."

This section was amended by the Trade Agreements Extension Act of 1955 by designating the above provisions of section 2 as subsection (a) and adding a new subsection (b) reading as follows:

"In order to further the policy and purpose of this section, whenever the Director of the Office of Defense Mobilization has reason to believe that any article is being imported into the United States in such quantities as to threaten to impair the national security, he shall so advise the President, and if the President agrees that there is reason for such belief, the President shall cause an im

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