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

249. Memorandum From the Under Secretary of State (Ball) to President Kennedy⁰

Washington, August 21, 1962.

SUBJECT

• Present State of the Textile Import Problem

As we recognized in our discussion last night,¹ the textile industry is acutely aware of the fact that once the trade bill is passed its bargaining power will be greatly diminished. It is, therefore, using the Senate action on the trade bill as the occasion for a last minute effort to squeeze out maximum concessions to insulate the American market from foreign competition.

The industry is mounting pressure through its Congressional supporters along three lines:

1. It wants the structure of multilateral agreements that has been worked out for limiting cotton textile exports either to be made more rigid or preferably junked in favor of mandatory unilateral quotas;

2. It wants favorable action on its request for a cotton equalization fee now pending before the Tariff Commission; and

3. It wants some form of quota limitation on woolen textile exports as well as cotton.

I

Short and Long Term Cotton Textile Agreements

The short-term agreement worked out at Geneva last year expires September 30. Meanwhile, the member nations have agreed on a new five-year agreement. Apart from Great Britain, none of the nations has definitively committed itself to sign the new agreement, and presumably signatures will not be received until after the Trade Expansion Act is finally passed. The Governments concerned wish to make sure that nothing is done through the Trade Expansion Act or otherwise that would impose further burdens or limitations on cotton textile imports into the United States.

Both the short-term and long-term agreements provide for some administrative discretion in imposing restraints on imports, since, before requesting that imports from a particular country be limited, the Administration must find that additional imports would be market disruptive.

In practice, you have told the industry that the agreements will be so administered as to limit imports to six percent of domestic production. This was explicitly stated in your letter to Carl Vinson.²

During the first few months of the short-term agreement there was a certain amount of slippage primarily for three reasons: First, adequate administrative machinery had not yet been established, and no one had any experience in operating the mechanical arrangements. Second, it was not until June 18, 1962 that Congress provided us with the authority to impose restraints on countries not members of the agreement. Third, the foreign governments themselves did not fully understand how the agreement worked and there were questions about its interpretation which have since been cleared up.

In spite of this slippage, however, which resulted in shipments at an annual rate well over six percent during the early months, we are confident that for the whole year of the short-term agreement imports will not exceed the six percent limit you set in your letter to Chairman Vinson. The Department of Commerce has now perfected its administrative apparatus and by August 6 over 75% of the import movement of cotton textile products had been put under restraint.

There should be no serious problem of slippage under the long-term agreement which comes into effect on the first of October and runs for five years. In the case of one or two of the countries where the base under the long-term agreement has been slightly inflated due to the slippage it may be necessary to negotiate some downward adjustment of that base. However, this should not be too difficult once the long-term agreement has become operative.

In short, I see no reason why we cannot maintain the six percent import ceiling you have promised.

II

Cotton Equalization Fee

The objections to the imposition of any cotton equalization fee are the following:

1. It would have disastrous consequences for our relations with a number of textile producing countries—particularly Japan. The Japanese have made this issue a test of our good faith. They have been among the principal victims of almost every trade action we have taken during the past year and are in a highly sensitive mood. At the same time, they are acutely aware of the fact that US-Japanese trade in 1961 benefitted our balance of payments by a net $700 million.

2. Imposition of the cotton equalization fee would destroy the long-term agreement. There is no question about this. The leading textile-producing nations have put us on notice that, if we impose the equalization fee, they will reject the long-term agreement. (In this connection, we should not be misled by statements of some members of the industry that they would prefer the equalization fee to the long-term agreement. These two devices would not accomplish the same purpose. The equalization fee would principally operate to restrict the import of primary processed textiles such as yarn and grey goods. It would not materially affect the rate of importation of household textiles or of apparel since the raw cotton content is a much smaller proportion of the value of those products. Thus, if we were to impose the equalization fee and let the long-term agreement go down the drain, we would inevitably be confronted with a situation of greatly expanded exports of apparel and finished textiles and anguished demands for the imposition of quotas. In other words, we would be back where we started from eighteen months ago.)

3. The imposition of an equalization fee would require the United States to provide compensation in the form of tariff concessions on other products with respect to over $200 million of annual trade, since cotton tariffs are bound under earlier trade agreements. As a consequence we would begin the operation of the Trade Expansion Act by using up a substantial part of your authority to make tariff concessions without receiving any quid pro quo. On the other hand, if we were to fail to make adequate compensation, our trading partners would be entitled under GATT rules to retaliate against us by increasing tariffs on other products of their own choosing, as they did in the case of carpets and glass.

4. The equalization fee is a logical monstrosity. It does not make sense for the United States Government to maintain high cotton price supports which result in an artificially high price for cotton on the domestic market; pay an export subsidy in order to make it possible for cotton exporters to sell at the world price; and then put a tariff on cotton textile imports to equalize the raw cotton cost to American textile producers. The cotton textile industry would be better advised to terminate its alliance with the large cotton farmers who oppose a compensatory payment system. Even if the textile producers had the protection of an equalization fee, they would be pricing cotton textiles out of the market as against the competition of man-made fibers.

III

Woolen Textiles

There are several reasons why we cannot negotiate a multilateral woolen textile agreement:

1. Unlike cotton textiles, where there are a large number of low-wage countries that export to the United States, our woolen textile imports are concentrated in three countries: the United Kingdom, Italy, and Japan.

Our trade with the United Kingdom is of long standing and reasonably stable. We cannot deal with the United Kingdom as though it were a low-wage producer pouring disruptive imports into our market, as we dealt with the cotton textile-producing countries.

Imports from Italy have been rising over the last two or three years due to the modernization of the Italian industry. But again we cannot treat Italy as though it were Hong Kong.

2. Any attempt to negotiate a wool agreement at this point would mean the death of the long-term cotton textile agreement. When we first began negotiating the cotton textile agreement, the United Kingdom, Italy, Japan and certain other countries put us on notice that they were participating in the negotiations only on the condition that the principle of the agreement would not be extended to other fibers on other products.

Present Rate of Imports. New high import duties became effective on January 1, 1961. These had the effect of imposing restrictions on woolen fabrics imports almost at the level of the Smoot-Hawley Tariff. Since those new duties came into effect, imports have never regained the 1960 peak. They are presently running at an annual rate just slightly above the 1961 level, and one-third under the 1960 level.

Raw Wool Tariff. As in the case of the cotton textile industry, our wool textile producers face the problem of high raw material costs. The United States is the only major manufacturer of wool textiles that imposes a protective duty on raw wool imports. Since we import more than two-thirds of our raw wool requirements, the logical point at which to tackle the problem is the tariff on raw wool. Here again the solution could best be found through some form of compensatory payment to wool producers.

If we go on increasing the tariff on woolen textiles—or if we impose some restrictions that have the same price effect—we shall simply be pricing woolen textiles out of the domestic market by encouraging the development and production of man-made fibers. Unfortunately, the woolen textile industry persists in aligning itself on the side of the raw wool producers. It follows this course not only to improve its political leverage but also because a part of its tariff protection has been justified as a compensation for the raw wool tariff and the industry feels that there is some concealed extra protection for it in this compensatory element.

International Wool Study Group. In order to lay the basis for a fresh approach to this problem, we have arranged a meeting of the International Wool Study Group this coming November. However, in order to induce other nations to attend that meeting we had to assure them that we were not going to use it as the occasion for proposing an international arrangement.

Recommended Course of Action. During the course of the day we shall be in touch with Secretary Hodges and try to work out an agreed position for you to take when you see the textile industry representatives. I would expect that we can report this to you when we meet this evening. Meanwhile, I hope you will not find it necessary to make any firm commitment to Senator Kerr with regard to woolen textile imports since the problem requires more analysis than we were able to give it last night.

George W. Ball³

0. Source: Department of State, Central Files, 411.006/8-2162. Confidential. Drafted by Ball on August 21.
1. On August 20, the President held two off-the-record meetings with Ball and others from 4 to 6:25 p.m. (Kennedy Library, President’s Appointment Book), but no further record of these discussions has been found.
2. For the President’s letter to Representative Vinson, June 27, see the Supplement.
3. Printed from a copy that indicates Ball signed the original.