Foreign Relations of the United States, 1969–1976, Volume XXXI, Foreign Economic Policy, 1973–1976

153. Memorandum From the President’s Assistant for International Economic Affairs (Flanigan to Secretary of the Treasury Shultz¹

Washington, January 3, 1973.

SUBJECT

• “Why Trade Legislation”

1973 has been characterized as “The Year of Europe.” Clearly international economic problems are one of the major open points of discussion between the US and Europe. At the time of the Smithsonian Agreement in December 1971² the European Community and Japan, at our urging, agreed that multilateral trade negotiations should begin in 1973. At the World Bank and Fund Meeting in September of 1972 the US again called for trade negotiations.³ At the EC Summit in October of 1972 “the Nine” restated their readiness to negotiate, and the President welcomed their statement.⁴ As a result of these actions, formal negotiations are slated to be launched in GATT late this year, with preparatory talks currently underway. Unless some authority is requested of the Congress there will be broad disbelief in the degree of US interest in these negotiations.

The specific arguments in favor of Trade Legislation in 1973 are that it is necessary:

• —to sustain the impetus of the international economic reform process launched by the President on August 15, 1971;⁵
• —to maximize our chances of breaking down existing tariffs and non-tariff obstacles to expansion of our industrial and agricultural exports;
• —to neutralize new discriminatory tariffs before they are fully in effect in Europe, with their trade distorting and adverse investment effects;
• —to arm ourselves to act unilaterally, if necessary, to correct inequities, prevent market disruption, and protect our balance of payments;
• —to support our political and security negotiations in Europe and the Far East by at best maximizing our leverage and at worst containing in a negotiating forum the politically damaging impact of competitive trade disputes;
• —to offer in Congress a constructive Administration alternative to the extreme protectionism of Burke–Hartke;⁶
• —to maintain foreign policy credibility by fulfilling the President’s commitment to seek generalized preferences for developing countries and MFN for Romania and the USSR.

The underlying arguments for trade legislation leading to negotiations are some even more basic considerations:

• —The national security of the United States requires us to play a leading world role, but our economic capacity to do so is being constrained by the present imbalance in the world monetary and trading system;
• —While domestic prosperity is less heavily dependent on trade than most other countries, we have an immense political, security, banking, investment, and trading stake in the international environment as well as growing reliance on imported raw materials;
• —We could not slip into protectionist economic policies and long avoid a relapse into an isolationist foreign policy.

Thus, the true choice before Congress will not be a narrow one concerning trade policy, but a basic issue of national direction for the United States. The task for the Administration is to cast trade legislation in the broad context of the President’s foreign policy. The legislative question is what response will be forthcoming from Congress to an initiative put in this global context by a President who has won an overwhelming mandate from our citizens. It is argued that Congress—despite its generally protectionist bias and the AFL–CIO defection from liberal trade—can most readily be persuaded when the economy is strong, unemployment is declining, inflation is held in check, the trend of the trade accounts is reversed, and peace is achieved in Vietnam. Early 1973 should see this unique set of conditions prevail.

To be successful, the Trade Bill must be seen as meeting real problems and not just as a warmed-over Kennedy Round.⁷ It must provide authority for aggressive action to protect our position if need be. This will also provide negotiating leverage to the President who most of all needs flexibility, up and down, if he and his team are to succeed.

Such a bill would contain needed and important trade policy management provisions, but would be distinguished from past trade legislation in four major respects:

1) Boldness and flexibility for both trade liberalization and restriction, by:

• —Authority to reduce tariffs, if others do likewise, or to raise tariffs as needed to achieve equity;
• —Authority to negotiate non-tariff barriers, including agriculture,⁸ subject to Congressional veto of results;
• —Eased access to safeguard procedures and strengthened Presidential authority for dealing with problems, including market disruption.
• —Authority to act, protectively or liberally, depending on circumstances, for balance of payments reasons.

2) Geographic coverage beyond principal trading partners, by:

• —New authority to negotiate and implement trade agreements with Communist countries, including the PRC, citing the Soviet agreement as a model;
• —Temporary generalized tariff preferences for LDCs designed both to improve LDC earnings (within the limits of a tight competitive need formula and an exclusion list, e.g., textiles) while putting pressure on to break down the European Community system of reverse and special preferences.

3) Extending scope of bill beyond traditional trade problems by:

• —Authority to negotiate on international investment rules and business practices to assure a fairer system for United States business abroad;
• —Possibly tax reforms to reduce somewhat incentives for overseas investment and operations;
• —Possibly some relaxation of anti-trust laws on overseas business and exports;
• —Limited authority to suspend protection for anti-inflation purposes.

4) Reform of out-dated statutes relating to unfair business practices [(Section 337),⁹ Antidumping, and countervailing] to clarify policies and to strengthen our hand in negotiating fairer international rules.

To win needed labor or labor influenced votes, the bill would provide improved employment upgrading mechanisms compatible with present and prospective Administration manpower policies, as well as limited tax reforms and strengthened safeguards.

The main thrust of the bill would be to provide the Administration the tools needed to fashion a more equitable and—if others agree—a more open world economic system.

The Congressional debate will be hard. Enactment will require a major Presidential commitment, high priority, and all-out Administration support.

1. Source: National Archives, RG 56, Records of Secretary of the Treasury George P. Shultz, 1971–1974, Entry 166, Box 6, GPS Trade—Volumes I & II 1973/74. No classification marking.
2. See footnote 4, Document 3.
3. See Document 1.
4. For President Nixon’s October 27 remarks, see Public Papers: Nixon, 1972, p. 1049.
5. See footnote 9, Document 3.
6. Representative James Burke (D–Massachusetts) and Senator Vance Hartke (D–Indiana) had introduced legislation calling for import quotas and tax law changes designed to reduce the appeal of U.S. investment abroad.
7. The Kennedy Round GATT multilateral trade negotiations was held in Geneva from 1964 to 1967.
8. We might also seek authority for implementing negotiated changes in domestic agricultural policies in the 1973 Farm Bill. [Footnote is in the original.]
9. Section 337 of the 1930 Tariff Act deals with “Investigations of Unfair Practices in Import Trade.” Brackets are in the original.