Foreign Relations of the United States, 1969–1976, Volume IV, Foreign Assistance, International Development, Trade Policies, 1969–1972

192. Paper Prepared in the National Security Council Staff¹

Washington, undated.

NSC MEETING

9 April 1969

Trade

Analytical Summary and Issues for Decision

The paper in the next section of the book, prepared by an interagency working group, describes and analyzes the Administration’s trade policy options.² A summary of the major issues for decisions raised in the paper, also prepared by the working group, precedes it.³ Their point of departure is your announced commitment to free trade and their main focus is how to turn that commitment into policy. After setting the trade policy context, the paper summarizes the major issues which need immediate attention, describes the alternative approaches to general trade liberalization, and discusses five key specific problems. This memorandum highlights the issues for decision; my recommendations follow in parentheses. My recommendations also appear in parentheses in each section of the summary paper which precedes the basic paper.

Present Context

Four major factors underlie the trade policy issues. First, protectionist forces at home have launched a major challenge to our historical policy of freer trade. Second, protectionist forces abroad, especially in Europe, are seriously threatening a significant volume of U.S. exports. Taken together, those forces raise the spectre of a possible trade war between major allies. Third, your decision to seek relief for U.S. textile imports has heightened foreign fears of U.S. protectionism and could well increase the strength of foreign protectionist action. Finally, each of these developments could spill over from the trade field and damage our over-all foreign policy since trade is a major foreign policy issue to virtually every country in the world.

New Legislation

The paper presents three trade policy packages. The first is for a major liberalizing initiative in this session of Congress covering tariffs, non-tariff barriers (NTBs), agriculture, safeguards and tariff preferences for less developed countries (LDCs). It would clearly demonstrate your commitment to freer trade, put our textile request in the best possible light (and maximize its chances for success), and minimize the possibility of a trade war and broader foreign policy difficulties arising from trade problems. But we (and the world) do not really know enough to launch the major parts of it (NTBs, agriculture) and it is hard to envisage sufficient domestic and foreign support developing for a new major push at this time.

The second package rejects the idea of new legislation and calls simply for continuation of the present GATT and OECD studies of the whole range of trade issues. It recognizes the go-slow mood both at home and abroad but in so doing would risk major protectionist successes in both places.

The third package is an intermediate approach which would include some or all of the following: legislation this year including limited tariff-cutting authority, elimination of ASP, and relaxation of the criteria for escape clause relief and adjustment assistance; announcement of an intent to submit broader legislation covering both tariffs and non-tariff barriers to a subsequent session; and commencement of intensive domestic and international efforts, including appointment of a blue-ribbon commission, to prepare for that broader approach. Depending on how much was included, this package could provide sufficient liberalizing initiative to effectively combat domestic protectionism and to assure foreign countries of our commitment to freer trade. On the con side, passage of its legislative component might not be easy—particularly in the context of an announced intent to do more in the future—and it would be criticized as both insufficient and too far reaching. It would be similar to the 1968 proposal of the Johnson Administration.

(My recommendations on each of the specific issues included in these packages are listed below. Taken together, they closely approximate the most complete version of the third package and include all of the elements suggested for possible inclusion in it.)

Tariffs

There are two broad areas of trade barriers: tariffs and non-tariff barriers (NTBs). The relative importance of NTBs has grown sharply as tariffs have been progressively reduced, although some significant tariff levels remain.

At present you have no legislative authority to reduce tariffs. This exposes us to retaliation if we were to raise any of our duties, as a result of escape clause action, for example, since we could not extend compensation by reducing tariffs on other products. The alternatives are:

(1) Simply accept the present situation and seek no new authority;

(2) Request modest “housekeeping” authority to permit compensation if necessary;

(3) Seek major authority with a view toward a major liberalization effort. Only this approach would represent a decisive liberalizing move but neither the bureaucracy, the Congress, nor our major trading partners are ready for it.

Issue for decision: What if any tariff-cutting legislative authority should we seek? (Seek modest “housekeeping” authority this year and announce your intention to seek major authority at a later time, when the tariff reductions of the Kennedy Round are nearer to completion.)⁴

NTBs

NTBs are much more difficult conceptually and practically. They cover a wide range of practices including voluntary export restraints, border tax adjustments (BTAs), Government procurement policies, safety and health regulations, state trading monopolies, and a few remaining quantitative restrictions. Many NTBs are intimately tied to domestic policies, particularly in agriculture. We do not yet have any reliable analysis of their trade effects on us or on others, although a major effort to this end is now underway in GATT.

The U.S. NTB which attracts most foreign reaction is our American Selling Price system of customs valuation (ASP). Our Kennedy Round commitment to such legislative authority to eliminate it was met by the Johnson Administration but that commitment, and the European offer of tariff and non-tariff cuts to reciprocate for its implementation, were renewed late last year. Its repeal would provide us not only with the equal foreign concessions already negotiated but would remove the most egregious symbol of U.S. protectionism.

Our options are:

(1) Simply press forward on the present GATT work, to provide a factual and analytical basis for future negotiations;

(2) Attempt to force the elimination of other countries’ barriers by threatening to retaliate against them;

(3) Negotiate reciprocal reductions—on individual barriers where international balancing is possible (e.g., Government procurement), on a variety of NTBs in order to achieve greater scope for reciprocity, or on a package deal including tariffs and perhaps agriculture to provide the maximum scope for reciprocity and hence coverage.

Issue for decision: What approach to take on NTBs generally and ASP specifically? (Press forward with the GATT study of NTBs and their effects. Launch an intensive U.S. Government study to pave the way for a later initiative to coincide with the major tariff-cutting initiative recommended above, and announce your intent to move in this direction. Ask Congress to eliminate ASP, to complete the Kennedy Round package and clearly signal our commitment to freer trade and interest in reducing NTBs in general.)⁵

Textiles

The question here is how best to pursue your commitment to the industry, within the context of a liberal trade policy. The immediate issue is the approach to be taken by Secretary Stans on his forthcoming European and Far Eastern trips.

The options are:

• —Seek a multilateral agreement in the GATT under which bilateral restraints are negotiated.
• —Seek to negotiate bilateral restraints without a multilateral umbrella.
• —Act administratively on grounds of domestic injury, after achieving relaxation of our escape clause legislation and renewed tariff-cutting authority, to restrict imports and compensate exporting countries bilaterally;
• —Take no action at present, but consult with our trading partners on how best to proceed on the issue.

Issue for decision: Instruction to Secretary Stans concerning textiles for his forthcoming foreign trips. (Consult with the governments he visits concerning the best way to deal with the problem. I urge that he make no specific proposals on these visits because it would be his only specific proposal, because he will not be in a position to offer anything in return, and because we have not yet implemented your consultations pledge in this area, the first in which you are asking something concrete from the Europeans, Japanese, and several less developed countries.)⁶

Agriculture

Agriculture presents a special range of NTBs, all of them closely tied to domestic policies. It is the main area of current and pending EEC restrictions on U.S. exports. The U.S. has a major interest in freeing international agricultural trade in view of our tremendous comparative advantage in this area. U.S.-European agricultural trade is also being studied by a task force set up under Cabinet Committee on Economic Policy.

The options are:

(1) Intensify our present exhortations to others to liberalize;

(2) Seek a fundamental review by all major trading countries of all major agricultural policies, domestic and international, with a view toward bringing agricultural trade under GATT control and then to liberalize in accord with its rules; and/or

(3) Get all agricultural restrictions converted to tariffs.

No Presidential decision is required at this time. (My tentative view is that we are prepared only to seek international agreement to launch an intensified study of domestic and international agricultural policies. Specific recommendations on this subject will be developed by a Task Force of the Cabinet Committee on Economic Policy.)

Border Tax Adjustments

There are two aspects to the border tax issue and they are usually confused. First, there is a structural problem in the GATT rules: indirect taxes (such as excise taxes and taxes on value-added) can be rebated on exports and imposed on imports while direct taxes (such as corporate and personal income taxes) cannot. The trade balances of countries with relatively heavier use of indirect taxes are thus in principle favored. As with other NTBs, however, there is no agreed analysis of these effects in practice. The clearest effect occurs when countries increase their border adjustments without changing their internal tax rates, usually in connection with a shift in their method of taxation.

Second, there is the possibility of using uniform border taxes as a temporary device to help countries adjust their balance of payments positions. Such measures could be legalized without changing the structural rules. The import surcharges used by Canada in 1962 and the UK in 1964-1966 are examples. The Johnson Administration seriously considered such an approach last year.

We could address ourselves to either or both of these problems. The balance of payments aspect is best considered in that context, however, and this trade discussion should be limited to the structural aspects.

The options are:

(1) Increase our own border taxes unilaterally, either legally and in small amounts to adjust for U.S. indirect taxes not now rebated, or illegally and in larger amounts to cover some of our direct taxes;

(2) Apply countervailing duties against foreign rebates on their exports and subsidize our exports to countries which apply border taxes;

(3) Propose changes in the GATT rules to allow for border adjustment for direct taxes;

(4) Propose undercompensation of indirect taxes by countries which rely heavily on them;

(5) Seek agreement that countries will not increase their adjustments even when they change their domestic tax rates, without international consultation.

No Presidential decision is required at this time. (My tentative view is that we should seek agreement only on changes in adjustments as per last-mentioned option, since any of the unilateral approaches would probably generate foreign retaliation and launch a trade war, and intensify international and internal study of the effects of BTAs as part of the over-all effort on NTBs outlined above, with a view toward including them in a major trade negotiation in a year or so. We can gain very little from negotiating on BTAs alone since we have nothing to offer in return for foreign concessions.)

Trade Preferences for Less Developed Countries (LDCs)

At the UNCTAD meeting in 1968, the U.S. accepted a moral commitment to proceed toward the establishment of a system of trade preferences for the LDCs and to settle the details of the scheme in 1969. Discussions in the OECD have been held up for six weeks pending determination of the policy of your Administration.

There is tremendous interest in preferences throughout the underdeveloped world and our responsiveness carries important political implications. The fact is, however, that the economic gains for any LDC are likely to be small even under an ideal preference scheme—and any scheme which emerges from negotiations among the industrialized countries could be far from ideal. Furthermore, the LDC gains which do result are likely to be focused in a small number of the most developed of them such as Hong Kong, Israel, and Mexico. However, we do not yet have adequate analyses of any of these effects and little consultation with Congress has taken place.

Our options are to:

• —Announce a decision to grant preferences, subject to certain conditions, through either a meaningful approach in which exceptions are kept to a minimum and unlimited access at a zero preference rate is accorded, or with a more circumscribed scheme;
• —Continue the ongoing international discussions but reserve final judgment;
• —Delay further participation until we can reach a definitive judgment on whether to support or abandon the approach.
• —Abandon the approach.

Issue for decision: U.S. position toward the discussions currently underway in the OECD on trade preferences for LDCs. (Delay U.S. participation in the OECD discussions until we can complete an analysis of the probable effects of a preference scheme on us and on the LDCs, and consult meaningfully with Congress. Such action could be completed in 2-3 months, if kept under strong pressure. We will take some political heat by thus delaying, but we would need at least one month to prepare our contribution to the ongoing talks anyway. I recommend this course because we simply do not have enough information to proceed intelligently.)⁷

Safeguards for Domestic Industry

A major trade issue is how to safeguard domestic industry and labor against the transitional effects of trade liberalization, when these effects cause justifiable difficulties. The basic principle is that the economy as a whole should share the cost of any such problem since trade liberalization promotes the general welfare. Safeguards have generally been limited to transitional problems and have not sought to provide ongoing protection. Effective devices are a necessary condition for defusing pressure for protectionist legislation.

The options are:

(1) Legislated quotas.

(2) Voluntary restraints by foreign suppliers.

(3) Improvement in the escape clause for industries, which has been inoperative since 1962 since its requirements are too rigid.

(4) Relaxation of the criteria for extension of adjustment assistance to individual firms and workers, which has also been inoperative for the same reasons.

Issue for decision: How to provide adequate but non-protectionist safeguards against damage from imports? (Seek legislation relaxing the criteria for escape clause relief and adjustment assistance.)7

1. Source: National Security Council, Secretariat, Box 83, 4/9/69 NSC Meeting-US Trade Policy. Limited Official Use. Prepared by the NSC Staff for the President’s use at the April 9 NSC meeting on trade policy. The meeting was held in the Cabinet Room from 10:08 to 11:53 a.m. Attendees were Nixon, Agnew, Laird, Lincoln, Richardson, Wheeler, Helms, Kissinger, Hardin, Stans, Volcker, Samuels, McCracken, Gates, Haig, Bergsten, and Cooper. (National Archives, Nixon Presidential Materials, White House Central Files, President’s Daily Diary)
2. See footnote 2, Document 189.
3. Document 189.
4. Next to this paragraph is the handwritten notation: “HK Recommendation.”
5. Next to this paragraph is the handwritten notation: “HK Recommendation.”
6. Next to this paragraph is the handwritten notation: “HK Recommendation.” A final sentence to the paragraph, which reads: “See my separate memo on this subject to you, a copy of which is attached,” has been crossed out.
7. Next to this paragraph is the handwritten notation: “HK Recommendation.”