Foreign Relations of the United States, 1961–1963, Volume IX, Foreign Economic Policy

227. Paper Prepared by the President’s Special Assistant (Petersen)⁰

Washington, October 4, 1961.

PROPOSALS FOR 1962 UNITED STATES FOREIGN TRADE AND TARIFF LEGISLATION

The President’s authority to enter into trade agreements with other countries for the reciprocal reduction of tariffs and other import restrictions will expire in June 1962. The trade agreements program has always rested on two quite distinct bases: on the need for buttressing our international political and security aims with suitable economic meas-ures; and on the grounds of increasing this country’s economic well-being through international trade.

The relevance of the trade program to our political and security aims is more direct and immediate than it has ever been in the program’s 27-year history. The creation and enlargement of the European Economic Community pose a basic issue: whether the tremendous economic potential of this area will be used in harness with the resources of the United States, Japan and the other free world countries toward common political and security aims; or whether, despite the desires and intentions on both sides of the Atlantic, the newly created preferential trading area will draw the enlarged EEC and its overseas associates into a separate political force.

This memorandum concentrates upon the trade issue,¹ taking the larger political and security considerations as given. Even on these more restricted economic grounds, however, four major questions are involved.

1. How does the US propose to ensure reasonable access to the European Economic Community for its exports and those of other countries in whose well-being we have a major interest?

2. In this process, how can trading opportunities be widened in the other markets of the free world?

3. How do the industrialized nations propose to promote a constantly growing market for the exports of the less developed countries?

4. And, finally, how does the US propose to secure the benefits of increased foreign trade without serious injury to segments of the domestic economy?

Major Changes Proposed

We propose that the President receive renewed authority over a five-year period to negotiate trade agreements reducing present rates of duty by as much as 50 per cent. The authority should be sufficient to enable a broader type of bargaining with the European Economic Community. It will be necessary to change the peril point procedure. To avoid serious injury to domestic producers, an appropriately revised escape clause should be supplemented with a program of trade adjustment assistance. With these basic modifications, the main outlines of the legislation would go on unchanged. The principle of reciprocity in the negotiation of trade agreements and gradualism in putting reductions into effect would remain. While the general approach would involve broad reductions, the problems of certain groups of producers would receive special consideration. Domestic industry will continue to have an opportunity to be heard.

The Basic Negotiating Authority

On its present timetable, the European Economic Community will have eliminated substantially all its tariffs and other import restrictions on trade among its members at an early date, no later than 1969 and probably much sooner. From now on, goods from outside the Community will face a growing measure of discrimination. This will develop even though it is anticipated that the EEC will in the 1961 GATT negotiations make a 20 per cent reduction in its external tariffs on manufactures without equivalent reciprocal grants by the US. Now the United Kingdom has declared its intention to enter the EEC and gain tariff-free access to the markets of the Continent. Probably most of the other members of the OEEC will eventually join, increasing the effective discrimination against the outside world. The resulting union will have a population 43 per cent greater than that of the US and exports more than twice as large. Last year the US sent one third of her merchandise exports, nearly $6.7 billion, including $2.1 billion of agricultural products, to the OEEC countries. The external tariff of the EEC thus affects access to what is potentially the world’s largest single market.

If we fail to protect our access to Europe’s markets, we risk a shrinkage of our favorable merchandise trade balance which was $4.7 billion in 1960. Moreover, we would not diminish the incentive to a large flow of US direct investment in Western Europe provided by the existence of a high tariff wall. Both considerations would aggravate our vexing balance of payments problem and propel us toward the last resort of import restrictions, which would induce retaliation and permanently cost us the economic leadership of the free world. If we fail to achieve reciprocal tariff reductions with the EEC, we cast away a powerful tool for restraining inflation and encouraging innovation in the American economy.

The timetable of EEC is not absolutely fixed, and the evidence is that the process of internal tariff reduction may well be completed in three to four years. The faster the pace of internal reduction, the greater the degree of tariff discrimination. The President’s authority to negotiate tariff reductions and the period within which he is authorized to do so should relate to these basic considerations. To insure some time flexibility on the part of the United States the President should have authority to enter into trade agreements over a five-year period although in fact, with the acceleration of the internal tariff reductions of the EEC, negotiations may have to be completed within two or three years. To insure a minimum of discrimination against our products, the President must have authorization to reduce all US duty rates by 50 per cent. Even this authority may not be sufficient to achieve a “tolerable” level of discrimination and a larger quantum of authority may be needed. (The authority here recommended is thought to be the maximum politically possible of achievement.)

Any negotiation sufficient to accomplish our objectives will probably have to involve commitments on both sides to cut tariffs broadly on large groups of products. As for the EEC, that organization would find it impossible to reach agreement among its six countries on a single list of offers and demands in individual products. On the side of the US, we are pushed toward the same pattern. Our broad objective is to ensure that the EEC market is available to the export interests not only of this country but also of other nations not in a position to bargain effectively, such as those of Latin America. Even if the interests of domestic exports were our sole concern, it would be hard to pick the products critical to our exporting interests. The EEC offers a new, dynamic opportunity for US exporters, whose full implications will not generally be understood until the US has tested the market.

This negotiating authority could provide the vehicle for major enlargements of the market opportunities of the less developed countries in the industrialized areas. The need for this enlargement is critical. Foreign aid is a costly substitute for foreign trade. Furthermore, the development of the EEC raises the possibility that goods of the associated territories of its members will enter the Community duty-free while competing products of other less developed countries face the external duties of the EEC. The United States should use its trade agreements authority in seeking multilateral agreements among the industrialized countries to promote access for products such as those of tropical agriculture and the growing volume of manufactures likely to come from the developing areas.

Peril Point Provision

For the United States to win the necessary general reductions in the EEC’s external tariffs, we shall have to agree to equally general cuts. These might involve significant average reductions in large groups of our tariff rates, with some limits on the way in which we (and other nations in the agreement) achieve the average. We must change both the substance of our peril point and the escape clause provisions and the procedure by which we apply them if we are to enter upon this kind of negotiation.

Under the present procedures and criteria, the peril point findings of the Tariff Commission have ended any hope of further substantial reductions. This blockage grows from procedures and criteria which are basically unreliable and illogical. The Commission must make findings on a great number of products in a relatively short period of time. These findings involve difficult predictions subject to a low degree of accuracy even if the Commission had full information. It must pretend to set the peril points on particular products of integrated industries, independent of what happens to tariffs on other products. It must estimate the threat of injury to an industry without knowing what new exporting opportunities may be created for that same industry by the international bargain to come. It is natural that, in the absence of a clearly defined tariff reduction goal, the Commission feels free to resolve all areas of ignorance and uncertainty about the effects of imports in favor of a finding that a rate below the existing level may result in injury.

In addition, however, the possibility of broad negotiations renders the definition of serious injury which governs peril point and escape clause provisions, inappropriate in any case, especially incongruous. At present, the peril point and the escape clause require the US to take account of the domestic production of every individual product, even if the industry is a multi-product industry. In negotiations of broad scope, however, many US industries can anticipate a broad liberalization in their export opportunities even as they face a like liberalization in import competition; significant shifts in the composition of production, therefore, are bound to occur. Some of these shifts will take place within industries and some across industries. The critical question is and ought to be whether, on balance, US labor and US productive facilities will be or have been idled in the process. The thrust of our proposed amendments would be to find injury only where such idling of labor and facilities occurs and to offer adjustment assistance of various kinds to speed the necessary shift.

The following sequence illustrates the negotiating procedures which could be employed under the proposed authority of the President:

1. A proposal would be framed under which the US would agree tentatively with the EEC, Japan and other industrial countries to reduce our respective tariff rates, for instance, by some average percentage. To deal with some of the “hard core” trade problems of which we are already aware, we and the other countries would reserve a limited number of products for special treatment. The average reduction, according to the agreement, might have to be reached separately for each of a number of broad categories of products.

2. Subsequent to the negotiation of this tentative agreement, a suitable schedule of rate reductions would be fixed tentatively after hearings, and the Tariff Commission would determine whether serious injury would ensue for a US industry if these particular rates were adopted. The criteria of injury applicable in peril point proceedings would be the redefined criteria of the escape clause.

3. Peril point findings by the Tariff Commission might indicate that the tentative weighted average reductions could not be reached for some groups without threat of injury. These findings would then be taken into account by (a) reducing these items no further than was possible under the peril point finding, (b) reducing the items beyond the peril point with or without instituting an investigation which may lead to a program of adjustment assistance for the vulnerable portions of the affected industry, (c) proposing other tariff reductions to the Tariff Commission for peril point findings to serve as offsets to deleted items, or (d) renegotiating the targets of the tentative international agreement to conform with the peril point restraints.

This procedure plus the new criteria for injury would greatly improve the peril point process. In the process of fixing a peril point for each individual commodity, the Commission would examine the effect of the whole tentative bargain on each industry or segment of the economy, i.e., the effects of specific proposed reductions on all competing imports and the new opportunities for exports created by the reciprocal concessions of other countries.

Escape Clause and Adjustment Assistance

A new test of serious injury, the idling of an industry’s capital and labor directly and substantially due to increased imports, would govern the Tariff Commission’s deliberations in escape clause proceedings. The present practices of taking an increase of imports as itself an indication of injury and defining the facilities producing a single product as an industry should be discarded. Neither feature reflects the conditions of true economic injury, nor the way in which American industry typically responds to economic change. However, there should be more remedies available than just tariff increases when the Tariff Commission finds that injury has occurred under this more appropriate standard. The President should be authorized to accept or reject the Commission’s recommendations as at present, but he should also be able to invoke adjustment assist-ance for the injured industry, either with or without the temporary relief of import restrictions.

Adjustment assistance, administered by the Departments of Commerce and Labor and any other appropriate agencies, should include such types of aid to firms in affected industries as assistance in labor retraining programs, low interest loans for financing new equipment, and special amortization privileges. Workers should be aided through the provision of moving expenses, retraining and extended unemployment benefits and early retirement privileges.

The above proposals cover the major ingredients of the recommendations for the trade agreements legislation. Many subsidiary aspects of this legislation have not been covered in this paper. Moreover, it is expected that the proposals with respect to trade agreements legislation will constitute only a part, albeit the most important, of a broader set of policies in the field of trade some of which may require legislative action independent of the trade agreements legislation.

0. Source: Department of State, Central Files, 411.004/10-461. Confidential; Limited Distribution. Transmitted to Ball under cover of an October 4 memorandum from Petersen, which indicated that several other agencies also received copies of the paper (Kennedy Library, Petersen Papers, Trade Policy, 1961)
1. It does not deal directly with problems of trading with the Soviet Bloc or maintaining orderly commerce among the Western nations in the face of Soviet economic aggression. However, the contribution it proposes to the general strength and solidarity of free world trade would serve as a vital indirect influence. [Footnote in the source text.]