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

293. Memorandum From the Deputy Special Representative for Trade Negotiations (Roth) to the President’s Special Assistant for National Security Affairs (Bundy)⁰

Washington, December 24, 1963.

SUBJECT

• The Disparities Issue

The Ministerial Compromise

At the May Ministerial Conference,¹ the EEC proposed that tariffs be reduced by 50 percent of the difference between existing rates and certain minimum levels—namely 10 percent for manufactured goods, 5 per cent for semi-manufactures, and zero for raw materials. The U.S., on the other hand, pressed for an across-the-board cut of 50 per cent.

The Community based its objection to a uniform percentage cut on the existence of many more high duty items in the U.S. tariff schedule than in the EEC schedule. There are, for example, over 900 items in the U.S. schedule with rates at least of 30 per cent compared to only a handful for the EEC, even though the median U.S. duty (between 13 and 14 per cent) is about the same as that for the EEC (between 12 and 13 per cent). According to the EEC, the existence of these high U.S. rates raises three major difficulties for a linear rule.

1. An equal cut in high U.S. and middle level EEC rates will increase U.S. exports to the EEC much more than EEC exports to the U.S. (It is simultaneously maintained that cuts in the larger number of low U.S. rates are not worth much in terms of an increase in EEC exports because those duties are already only a minor obstacle to trade.)

2. A larger share of exports from third countries will be diverted to the EEC.

3. The U.S. will end up with many more high rates and thus more bargaining power for future tariff negotiations than the EEC.

The U.S. maintained that there are neither general analytical nor empirical reasons to support these arguments of the EEC. However, the most effective argument against the EEC harmonization scheme was that it greatly reduced the depth of the average cut. A cut on all items of 50 percent between existing rates and a 5 percent floor results, for example, in an average reduction of only 30 per cent for the EEC and 33 percent for the U.S. U.S. negotiators believed that a major (but inarticulated) reason for the Community’s harmonization suggestion was a desire to keep the average tariff cut much less than 50 per cent.

The resolution finally adopted by the Ministers was a vaguely worded compromise between U.S. and EEC views. The negotiations are to “be based upon a plan of substantial linear tariff reductions,” but in cases where “there are significant disparities in tariff levels, the tariff reductions will be based upon special rules of general and automatic application.” It was further specified that the term “significant” means “meaningful in trade terms” and that the purpose of the special rules is to reduce the disparities.

Report of the Trade Negotiations Committee

Little progress has been made since May in settling the disparities issue with the EEC. Most countries other than the EEC have agreed upon a general approach to the problem but the Community has not negotiated seriously on the matter. The views of the majority of GATT members are outlined in a December report of the Trade Negotiating Committee. The main points in the majority position are as follows:

1. As a first step in identifying significant disparities, attention should be given only to items where the high duty is not less than a certain minimum percentage (e.g., 30 per cent) and exceeds the rate on the same item in other countries at least by a certain number of percentage points, (e.g., 10 percentage points). Under a 30-10 rule, the EEC could invoke 850 disparities against the U.S. compared to about 10 that the U.S. could claim against the EEC. The U.S. import value of the items invoked against the U.S. is $484 million ($123 million with the EEC), whereas U.S. exports of these items approximates $800 million ($125 million to the EEC).

2. Only the tariffs of the U.S., the EEC, and the U.K. should be used for the identification of high rate items.

3. Besides cut-off and point spread criteria, most members agreed that additional qualitative criteria were necessary to determine whether a disparity is “meaningful in trade terms.” The following were suggested:

(i) For a significant disparity there must be substantial exports from the high duty country to the low tariff country. (Since the adjustment to disparities is to be a cut of less than 50 per cent by the low tariff country, this criterion is necessary to minimize the trade damage to third country exporters into the low tariff country. It is also the only case where the bargaining power argument has force. Interpretation of this rule to mean that the high duty country must be either the first or second supplier to the low duty country reduces the number of EEC disparities against the U.S. under 30-10 rule by 50 per cent and the volume of U.S. exports to the Community by about 10 per cent.)

(ii) A disparity is not significant unless the total imports into the low country from all sources are substantial. (A requirement that total imports exceed $250,000 reduces EEC disparities against the U.S. by 40 per cent, but cuts the volume of U.S. exports only a negligible amount.)

(iii) A disparity is not significant in trade terms if there already are substantial imports into the high duty country. (A requirement that total imports on any item be less than $1 million reduces EECdisparities against the U.S. by 13 per cent and the volume of U.S. imports by 73 per cent.)

(iv) Disparities are not significant if the low country does not produce the item. (There are only a few dozen of these items in the EECdisparity list against the U.S.)

(v) Disparities are not significant if the low country maintains quota restrictions.

(vi) Disparities are significant only if the low country is a principal supplier to the high tariff country. (A first or second supplier interpretation of this rule reduces the number of EEC disparities against the U.S. by 34 per cent and the volume of U.S. import trade involved by 45 per cent.)

Comment

The advantage of a high cut-off level (the U.S. has pushed for 60 per cent) coupled with an arrangement whereby the low rather than the high duty country departs from the linear cut is that the trade coverage subject to special treatment is minimized. It is precisely in high duty items that the U.S. does not have a comparative advantage and, therefore, the volume of U.S. exports on which less than the linear cut is made tends to be small. For example, if the EEC cuts only 20 per cent on all the U.S. disparities it can claim under the unqualified 30-10 rule and 50 per cent on all other items, its average cut will still be 48 per cent. Securing the accept-ance of such criteria as (i), (iii), and (vi) above not only would reduce the direct trade effects of the disparity issue substantially more but also would minimize the possibility of restrictive actions by third countries who are adversely affected by the Community’s smaller cut on disparity items.

EEC Council Decisions on Disparities

At the Council meeting just concluded² the EEC rejected the cut-off criterion. Instead, it adopted an arithmetic criteria whereby for manufactures and raw materials the high rate must be at least twice the low rate and also be separated from the low rate by at least 10 percentage points. For semi-manufactures, only the 2 to 1 ratio would apply. However, the Council did agree to the notion that disparities should be identified only with reference to the U.S., the EEC, and the U.K. On the matter of the six qualitative criteria the results appear to be as follows:

(i) Rejected the general application of the “substantial exports from high to low” rule but offered to deal with third countries adversely affected on an item-by-item basis.

(ii) Accepted the rule that disparity not significant if total imports into low country not substantial.

(iii) Rejected the general application of the “substantial imports into the high country” rule. However, the EEC agreed to examine cases where there are substantial imports from the EEC into high country that represent important fraction of domestic consumption in high country.

(iv) Agreed to exclude disparities where low [country] has no current production but added qualification that no production must be planned.

(v) Rejected the rule that low country must not have quantitative restriction in order to claim a disparity.

(vi) Rejected the “low must be a principal supplier to high” rule, but apparently willing to exclude items where there is large intra-EEC trade.

Preliminary analyses of the 2-1 plus 10 points rule indicates that, even without the special treatment for semi-manufactures, the EEC could invoke about 1100 disparities against the U.S. The U.S. could, however, claim 550 against the EEC. Trade coverage data on these items is not yet available but it is likely to be considerably greater than that involved in the 30-10 rule. Furthermore, the total number of disparities that can be invoked against the U.S. may be much larger than 1100. There may be hardly a U.S. (or EEC and U.K) item on which some GATT member does not have a duty that is less than one-half of it as well as below it by at least 10 percentage points.

By the same token, the value of U.S. exports on which a less than 50 per cent cut will be made is likely to be considerably larger, especially since no longer will just high duty industries be involved. In addition, the qualitative criteria accepted will make much of the identification procedure an item-by-item hassle. It thereby will prolong the negotiations and complicate the “end-of-the day” balancing procedure. Finally, the special treatment for semi-manufactures (merely 2 to 1 without a 10-point spread) seems tailor-made to provide an additional element of protection for such sensitive EEC industries as aluminum, paper, and steel.

William M. Roth³

0. Source: Kennedy Library, Herter Papers, Subject Files, Disparities (Tariff), Box 8. Confidential.
1. See Document 282.
2. The EEC Council meeting was held in Stockholm September 11-12.
3. Printed from a copy that bears this typed signature.