Foreign Relations of the United States, 1977–1980, Volume III, Foreign Economic Policy

10. Memorandum From Robert Hormats of the National Security Council Staff to the President’s Assistant for National Security Affairs (Brzezinski)¹

Washington, March 21, 1977

SUBJECT

• EPG Meeting on March 21: Footwear

The EPG will meet on Monday, March 21 at 2:00 p.m. to review, among other things, a draft options paper (Tab A) to the President on the footwear import relief case.² This will probably be the last interagency meeting on shoes because the President must take action before April 9. In view of the extreme importance of this case for our foreign and economic relations, I strongly recommend that you attend the meeting and strongly oppose shoe import restrictions.

Background

The STR memo points out that this is the largest case of its type in trade history. It involves $1.4 billion in imports from 75 countries. The domestic footwear industry employs 170,000 workers in 36 states. Shoes account for 1.4% of the Consumer Price Index. In 1976 imports (in volume terms) accounted for 46% of domestic consumption as opposed to 22% in 1968.

Interest in this case is running high both at home and abroad. The New York Times and Washington Post both had editorials on March 18 arguing against a protectionist US trade policy.³ The US footwear industry and labor unions see this as a do-or-die proposition and demand import relief. Congress, particularly the Senatorial contingent from the Northeast, wants the President to restrict imports; they may attempt to override his decision if he fails to do so. My best Congressional sources say there are likely to be insufficient votes to override, but a Presidential turndown on import relief would certainly sour the President’s relations with Congress.

On the other hand, our trading partners are worried about rising protectionism in the US and would find it difficult to resist similar demands from their own industries if we show them the way. We could be opening a Pandora’s Box of protectionism—which would have extremely adverse political repercussions. More specifically, key friends and allies such as Italy, Spain, Korea, Taiwan and Brazil are major shoe exporters to the US. And, a decision to restrain imports would clearly have an adverse impact on the London Summit and the North-South dialogue.

Options

The US International Trade Commission (ITC) has unanimously recommended that the President establish a “tariff rate quota” system calling for a stiff (40%) increase in duties on all imports above 1974 levels.⁴ In 1974, the US imported 266 million pairs of shoes; in 1976, imports totalled 370 million, so the potential trade impact is significant.

The STR memo outlines three broad policy options:

I. Adjustment assistance (to help workers who have lost jobs as the result of imports, to help those businesses either become more competitive or move into some other line, or to help communities attract new industries) but no import restrictions.

II. The ITC recommendation.

III. A modified (more liberal) version of the ITC tariff rate quota. It also mentions several other possible options including an increase in duties and orderly marketing arrangements. STR recommends Option III (modified tariff rate quota). This option would call for use of a three-year base period (1974–76) rather than the one (1974) recommended by the ITC. The effect would be to enlarge country allocations and give newer suppliers (Taiwan and Korea) a larger share of the market that better reflects the recent increase in imports from these countries.

Previous interagency meetings on this subject have been inconclusive—with much needless debate about the intricacies of various options. Aside from CEA, which favors adjustment assistance and no import relief, no other agency has yet been willing to reveal its hand. State and, perhaps, Treasury might be prepared at this meeting to table proposals for a comprehensive and expanded program of adjustment assistance, which will be a significant departure from the old, ineffective programs. However, they are working separately on this project, and their programs may not dovetail. The Treasury plan will likely call for the establishment of a Trade Adjustment Bank, a development bank for the domestic economy. The State proposal would entail grants and loans on the order of $50 million. Both see the need for a “footwear czar” with overall responsibility for the assistance programs. DOD and Agriculture may support such a proposal. Strauss, Labor, and Commerce will probably argue for some form of import relief.

RECOMMENDATION

Option I (enriched adjustment assistance) is the only option that would not require a significant cutback in imports, would not penalize the American consumer and would deal with the real problem in this case (i.e., the inefficiency of certain sectors of the footwear industry). We recommend that you support this option as articulated by Cooper and, perhaps, Blumenthal (although Blumenthal might combine it with an option to moderately restrict imports).

As a fallback, but only as a desperation fallback, adjustment assistance coupled with a brief (2–3 year), liberalized, tariff quota system would be tolerable. Thus, while not giving up on Option I, you should attempt to ensure that Option III is fashioned in a liberal way—i.e. that the quota level is relatively high [a 1974–76 base period (306 million pairs) with a growth factor of more than the 5% (15.3 million pairs) in the STR option to give some latitude for the newer entrants into the market (mostly developing countries) and to avoid cutbacks for older exporters such as Italy, Spain and Brazil]. All three are politically important, have large trade deficits, and face difficult financial situations. To limit their exports below 1976 levels would be both politically and economically harmful to our interests. The STR option (III) increases Italy’s market share from 47 million pairs in 1976 to 54 million in 1977, which is excellent; but it cuts Spain from 38 to 37 million, and Brazil from 27 to 25 million. You should accordingly argue for a larger overall quota level—above STR’s proposed figures of 322 million pairs—to avoid cutbacks in these countries and raise the level for others as well. [You should not, in this argument, imply support for this option, but point out that you are simply trying to improve it to make it more acceptable if selected by the President.]⁵

BASIC TALKING POINTS

—I take it that we are not going to make a decision here, but are merely trying to refine options for the President.

—(After Cooper presents State’s adjustment assistance option)—Clearly from a foreign policy point of view this version of Option I is preferable; and it also has appeal as a means of aiding adjustment among workers, businesses and communities.

—The ITC decision is too restrictive. It would trigger not only retaliation—but worse, emulation—we would risk a sudden burst of protectionist measures. Other nations would clearly see this as an excuse for imposing protectionist barriers for which these workers and industries are pressing hard. Callaghan and others have warned the President of this risk; and Mondale was also warned of it. The London Summit and relations with our allies and friends would be severely harmed, and there would be serious financial consequences due to curtailed capacity from such countries as Italy, Spain and Brazil.

—The STR option would likely have a similar effect, and I am not convinced it can be modified to avoid triggering emulation or retaliation. I would, however, like to see the quota of 322 million pairs raised so that Spain and Brazil are not rolled back below 1976. Both have financial difficulties and both are extremely important politically. Clearly, it makes no economic or political sense to cut back their exports; they should have a higher level than 1976. This would improve Option III.

Tab A

Draft Memorandum From the Special Representative for Trade Negotiations-Designate (Strauss) to President Carter ⁶

Washington, undated

SUBJECT

• Nonrubber Footwear Import Relief Case

Under the Trade Act’s provisions, you must decide by April 9 whether to grant relief to the domestic footwear industry in the form of restrictions on shoe imports, as recommended by the U.S. International Trade Commission (USITC). The Commission recommended that a tariff of 40 percent be imposed on most nonrubber footwear imports above the 1974 level.

The law allows you the option of deciding that such relief would not be in the national economic interest. A decision not to grant relief, or to grant relief different from that recommended by the USITC, can be overridden by Congress by concurrent resolution.

Background

This is the largest case of this type in trade history, involving $1.4 billion in imports from 75 countries, shoe firms employing around 170,000 workers in 36 states, and a product accounting for 1.4 percent in the consumer price index.

The shoe industry has been attempting to get Government action to stem imports for almost a decade. Five separate investigations have been conducted, with relief denied as recently as last year. During this period the number of firms in the industry has declined by about 40 percent (from 600 to 378), and employment by 30 percent (from 233,000 to 164,000). Unemployment in the industry is at 11 percent compared to a national rate of 8 percent.

During the same period, 1968–1976, while domestic production of shoes declined by almost one-third (with a slight recovery in 1976), imports doubled, moving from a U.S. market share of one-fifth to almost one-half. In 1968 most of these imports were leather, primarily from Italy and Spain, with a substantial volume of vinyl shoes from Japan, and a lesser amount from Taiwan. Now the market positions have shifted so that by volume Taiwan is the largest exporter to the United States (156 million pair), followed by Italy (47 million), Korea (44 million), Spain (39 million), and Brazil (27 million). Japan has ceased being an important supplier. Some developing countries and Eastern European countries are beginning to increase their shipments here.

The trend in the domestic industry is toward concentration, with the 21 largest firms producing over half of domestic output. The larger firms are generally profitable and can compete with the imports. Many of the smaller firms cannot. The greatest difficulty the U.S. industry has is the differential in wages between developing countries and our own (from $.59 total compensation per hour in Korea to $4.33 in this country). Since shoe production is very labor intensive, the import share of the U.S. market is likely to grow.

Factors Favoring Granting Relief

Trade Act criteria met. The industry has clearly been injured by imports. There have been large declines in production and employment in the past decade, soaring imports, and numerous firms with losses or low profits.

Credibility with Congress, import-competing industries and labor. This appears to be the type of case Congress had in mind for import relief. In 1974, the Administration promised import relief for footwear in order to obtain support for the Trade Act. Such relief, however, was not given. Your authority for trade negotiations is implicitly conditioned on granting relief to industries that are injured by imports.

Adjustment assistance is not an effective alternative. No one has been able to design a program of meaningful federal aid to make shoe firms competitive if they are declining, nor to retrain and relocate a work force that consists substantially of women over 50 and of minorities. Import restrictions would have the short term effect of encouraging investment in more efficient methods of production and the development of better marketing programs.

Congressional sentiment. The shoe industry has less political force in Congress than many other industries, but there is much sympathy for this declining “basic” United States industry. Inaction on this case would almost certainly be subject to a vote in each house. The risk of an override is substantial, because of general sympathy for the plight of this industry, and because shoes are produced in 36 states. An override would be seen as a substantial set-back both here and abroad to Presidential leadership in setting U.S. trade policy.

Factors Against Granting Relief

Inflationary impact. The consumer cost of increased protection would be heavy, ranging from about $145 million to over $1 billion the first year, depending on the restrictiveness of the remedy. Shoes account for 1.4 percent of the consumer price index.

Protectionism abroad. Internationally, U.S. leadership against protectionism would be weakened. Other countries will feel more free to protect their own industries, from which actions the world economy and the United States economy would suffer.

Impact on foreign suppliers. Most of the exporters of shoes to this country are in a far worse economic position than we are, many with very severe balance-of-payments and debt positions. Our restrictions could also radicalize developing countries with an important stake in this market, resulting in an adverse impact on our economic relations with those countries generally.

Long-term ineffectiveness of relief. No form of remedy will prevent the longer term contraction of the industry. It is likely that a core of competitive firms will remain even without import relief.

Possible wind-fall benefits. Import relief will benefit mainly the large, integrated firms that account for a major part of production and compete profitably. Legislation providing for effective federal assistance (if an appropriate program could be designed) would help those who are injured, without giving windfalls to healthy firms at the expense of the consumer.

Options

You have various options involving how much stimulus to give to production and employment, if any, and how much added cost consumers should be asked to bear, if any.

I. No import restrictions

A. Adjustment assistance (mainly loans or loan guarantees to firms and supplemental unemployment compensation to workers).

B. A new special program with increased benefits that could be developed to provide effective help to the injured firms, workers and communities.

II. Increase the tariff to 40 percent on imports above the 1974 level (a tariff rate quota) as proposed by the USITC. The 40 percent over quota rate would be phased down in the fourth and fifth year. The quota is allocated among countries on the basis of their 1974 market shares.

III. Modify the tariff rate quota (TRQ) of the USITC (Tab A).⁷

A. Increase the tariff to 40 percent⁸ on imports above the 1974–76 average level and divide the TRQ between imports valued at $2.50/pair or less and those valued over $2.50/pair in order to assure a continued supply of low cost footwear for consumers. Include athletic footwear valued over $8.00/pair, which the USITC excluded. Allocate country quotas according to 1974–76 shares of the U.S. market so as to reflect more recent trade patterns than the USITC formula.

B. Increase the tariff to 40 percent⁹ on imports above the 1974–76 average level plus five percent of 1974–76 imports so as to provide growth for newer suppliers. The over quota rate of 40 percent would be phased down during the five year period (as recommended by the USITC) but the level of imports entering before the over quota rate applied would remain the same throughout the period.

IV. Other import relief options:

A. A straight tariff increase, e.g., to 30 percent as proposed by one Commissioner. The present tariff rates range from 6 to 20 percent and average 8.5 percent.

B. A quota placing an absolute ceiling on imports, e.g., at the 1975 import level of 287 million pairs, as proposed by the industry.

C. Negotiate restraints with foreign suppliers (orderly marketing agreements), based on absolute limits or a tariff rate quota. Under the Trade Act you would have 90 days after April 9 to negotiate such agreements before restrictions would have to enter into force.

Adjustment assistance can be combined with any of the above import relief options.

On balance, the arguments favor some form of import relief. However, to increase the effectiveness and saleability of a less restrictive remedy than proposed by the USITC, it would be desirable to couple any import relief action with a special adjustment assistance program, which could be developed on a priority basis and the necessary legislation obtained before the end of the year.

Among the options, a tariff increase sufficient to generate any significant amount of production and employment is probably ruled out because the European Community, and possibly other suppliers, would retaliate against a large volume of U.S. exports. Agricultural products would be key targets.

The quota option interferes most with market forces and at any level acceptable to the industry would entail huge costs to consumers.

Orderly marketing agreements would prolong the agony of imposing restrictions. Pressure could arise for another textile-type agreement. Practical considerations (e.g., the 90 day statutory deadline) would probably prevent negotiation with all of the countries involved. The EC would not negotiate and others would resist and resent any cut-back from current levels. The industry would oppose any negotiable level of restraints.

A tariff rate quota offers the flexibility needed to provide relief acceptable to the Congress at lower costs than other import relief options. The USITC remedy, however, requires certain modifications as summarized in Option III above and spelled out in Tab A.

The modified TRQ has the selling point on the Hill of being the same form of relief as that of the Commission. The variations are defensible because:

1. A 1974–76 base would provide adequate relief. The 1974 USITC base was the lowest level of imports since 1970.

2. Country allocations should reflect more recent trade patterns than 1974. The 1974–76 average shares make better provision for newer suppliers. 1976 should not be used because the EC would be cut back, thus generating major frictions jeopardizing broader trade objectives.

3. Introduction of a price break for footwear valued at $2.50 pair and under will avoid shifts in imports to higher priced models and maintain a large supply of less expensive footwear. The alternative of excluding the lower price footwear would make the remedy applicable to only 57 percent of imports and give no remedy to domestic production in competing retail price brackets (about 26 percent of total domestic production).

4. Addition of a “growth basket” of 15 million pairs would allow for some growth from newer suppliers whose quota allocation was below their 1976 shipments. This growth basket would be very important in countering foreign countries’ claims for compensation or retaliation. Including the basket, the TRQ would allow a level of imports at regular duties that is approximately half way between that of the USITC and the 1976 import volume.

5. While consumer costs would be increased, the burden would be less than under other saleable import relief options.

The interagency Trade Policy Staff Committee and Trade Policy Review Group have considered the USITC report and various op-tions. The agencies represented on these bodies take the following positions:¹⁰

Decision

Option I. No import restrictions

A. Existing adjustment assistance

B. Special adjustment assistance program

Option II. Trade Commission remedy

Option III. Modified version of Commission remedy

Option ________ amended as noted

See me¹¹

1. Source: Carter Library, National Security Affairs, Brzezinski Material, Brzezinski Office File, Subject Chron File, Box 89, Economic Policy Group: 1977. Confidential. Sent for action.
2. No minutes of the March 21 EPG meeting were found. On April 16, 1976, Ford denied import relief to the footwear industry, opting instead to rely on adjustment assistance. For Ford’s memoranda to the Special Representative for Trade Negotiations and to Congress on adjustment assistance for the footwear industry, which were released on April 19, see Public Papers of the Presidents of the United States: Gerald R. Ford, 1976–77, Book II, pp. 1134–1137.
3. The editorial in The New York Times entitled “U. S. Tariffs, Global Risks” appeared on page 19 of the March 18, 1977, edition. The editorial in The Washington Post entitled “The Price of Protection” appeared on page A26 of the March 18, 1977, edition.
4. On January 6, the USITC decided by a 4 to 2 vote in favor of recommending the imposition of a tariff rate quota on shoe imports. The Commission forwarded its recommendation to Carter on February 8. (Edwin L. Dale, Jr., “New Curbs Asked on Shoe Imports; Move Is Least Costly for Consumer,” The New York Times, January 7, 1977, p. D1; Jane Hinkle, “Shoe Industry Seeks Carter’s Protection,” The Washington Post, March 9, 1977, p. E1)
5. Brackets in the original.
6. Confidential.
7. Tab A, attached but not printed, is an undated paper entitled “Modified Version of ISITC Tariff Rate Quota (TRQ).” Also attached, but not printed, are Tabs B through F. Tab B is an undated paper entitled “Considerations the Trade Act Directs the President to Take Into Account.” Tab C is an undated paper entitled “Adjustment Assistance Given to Firms.” Tab D is an undated paper entitled “Adjustment Assistance Given to Workers.” Tab E is an undated paper entitled “The Effect of Import Relief on U.S. Trading Partners.” Tab F is an undated paper entitled “Key Non-Rubber Footwear Data.”
8. This option could be made more or less restrictive by adjusting the over quota rate. [Footnote in the original.]
9. This option could be made more or less restrictive by adjusting the over quota rate. [Footnote in the original.]
10. The various agency positions were not included in this draft memorandum.
11. No decision is indicated on this draft memorandum.