90. Memorandum From the Special Representative for Trade Negotiations
(Strauss) to President Carter1
Washington, December 27, 1977
SUBJECT
Two important steel decisions were not dealt with by the Solomon Task Force—(1) the question of
continuing specialty steel import quotas and (2) our disposition of a
complaint by the steel industry under section 301 of the Trade Act against
the EC/Japanese voluntary agreement that
restricts Japanese steel exports to the EC.
Both of these issues have been reviewed through our interagency process and
the attached memoranda present recommendations for your review on the
respective cases. If you accept our recommendations, I would plan to
announce the decisions simultaneously in order to minimize any adverse
reactions domestically or internationally. The specialty steel
recommendation would be favorably received domestically but not
internationally. The section 301 case recommendation would generate the
opposite reaction.
[Page 281]
Attachment
Memorandum From the Special Representative for Trade
Negotiations (Strauss) to
President Carter
2
Washington, December 27, 1977
SUBJECT
- Section 301 Complaint by the American Iron and Steel
Institute
Background
In October 1976, the American Iron and Steel Institute (AISI) filed a formal complaint with the
Office of the Special Representative for Trade Negotiations (STR) under section 301 of the Trade Act of
1974. The complaint alleges that the European Community (EC) and Japan had entered an agreement on
steel that restricted steel exports from Japan to the EC and resulted in a substantial deflection
of Japanese exports to the United States. In June 1977, the AISI proposed that quantitative
restrictions be imposed on U.S. steel imports from both Japan and the
EC as the appropriate remedy for the
deflection problem.
Section 301 of the Trade Act of 1974 confers a right to petition the
President through the Special Trade Representative for the elimination
of unfair practices of foreign governments that burden U.S. commerce.
Under the authority of this section you may take whatever retaliatory
action (e.g. quotas, tariffs) you think is appropriate to achieve
removal of such unfair practices. In general, there is no
internationally accepted framework for such actions, as there is in the
case of “escape clause” cases like footwear and color television
receivers. Thus, retaliation would most often be contrary to our
international commitments, and could result in counter measures being
taken against U.S. trade.
We have reviewed the AISI allegations
on the basis of publicly available data (including briefs filed in this
case) and private discussions with representatives of the EC and Japanese Government. Our findings
have been reviewed by the interagency Section 301 Committee consisting
of the Departments of State, Treasury, Commerce, Labor, Interior,
Agriculture, and Defense.
The length of time taken to prepare recommendations on this case reflects
a fundamental dilemma as to how to cope with both the measurement as
well as the remedy for a deflection problem. Despite the logic of the
case we have been unable to clearly establish a causal relationship
between the EC/Japan understanding and
the surge in Japa
[Page 282]
nese steel
exports to the United States. We communicated our concerns informally to
the AISI last spring and indicated
that dumping appeared to be the industry’s major problem. While the
causal relationship could not be established, we were reluctant to
discontinue the case on the basis of insufficient evidence because that
finding would seriously undermine our continuing criticisms of the
EC’s efforts to do similar deals
with other countries and in other product areas and we were not certain
that we would not have to resort to some action under section 301 in the
face of the worsening steel situation.
Findings
1. The AISI
allegation that an agreement exists between the EC and Japan to restrict Japanese steel
exports to the EC is essentially
correct. While there is no formal or written agreement there is
a clear understanding between the two governments. This understanding
was reached originally in late 1975 during their regular semi-annual
steel consultations, and has been extended regularly in ensuing
consultations. It called for a 5% cutback from 1975 shipments by Japan
to the EC. On November 28, 1977 the two
governments agreed to extend the restriction through 1978 at the same
level as the previous two years (1.22 million metric tons). The
restriction is implemented through a Japanese cartel approved by the
government, consisting of the six largest Japanese steel companies
(which account for about 70% of Japanese steel exports). The small
Japanese companies are not directly restricted although the large
companies and the government probably try to influence their
behavior.
2. The AISI
allegation that this restriction has caused a substantial deflection
of Japanese steel exports to the U.S. market cannot be
substantiated. Japanese steel exports to the United States did
increase dramatically in 1976 and have remained at those record high
levels in 1977. However, Japanese steel exports to the world have
behaved in the same fashion, principally reflecting the internal
pressures to produce for export because of large overcapacity in
relation to depressed domestic steel demand in Japan. Further, Japanese
steel exports to the United States of the products covered by the
restriction to the EC generally did not
increase more rapidly than U.S. demand for those products. Finally, the
Japanese cartel shipped substantially less than the agreed amount to the
EC suggesting the understanding did
not have a substantial restrictive effect. Our conclusion is that if
there was any deflection as a result of the understanding, it was very
minor. The surge of Japanese exports to us was basically the result of
dumping and stronger demand conditions here as compared with other
markets.
3. Even if it could be clearly established that the
EC-Japanese understanding had
created substantial deflection to the U.S. market, given the facts
in this particular situation a more appropriate remedy would be
antidumping
[Page 283]
procedures. The Treasury Department has already concluded that
there is sufficient basis to believe there is a pervasive dumping
problem in steel trade to justify implementation of a trigger price
system on all steel imports. It is likely therefore that any trade
restriction, such as the Japanese cartel for exports to the EC, would only increase the likelihood of
dumping in other markets. If the dumping is stopped, there would be
little basis for a claim of deflection since one would expect U.S.
imports to increase from more competitive producing countries, whether
or not other markets are restricted.
Recommendations
I recommend that STR
announce discontinuance of its review of the AISI section 301 complaint on
the grounds that the Treasury Department’s trigger price system to deter
dumping will eliminate any unfair burden on the U.S. steel industry
which may be resulting from the EC-Japanese understanding.3 I would indicate that while we
were able to determine that such an understanding exists, we were unable
to measure its impact. We had kept the case under review, however,
because significant diversion would have posed a threat in the
deteriorating domestic steel situation. As it became clear that
widespread dumping was the central trade problem, we turned to
antidumping remedies. With the trigger price system, we believe that any
unfair burden in U.S. trade due to the EC-Japanese understanding will be remedied. I would
announce further that we continue to believe that such informal
arrangements are not in the interests of the world trading system and
should be brought under better international discipline.
The Departments of State, Treasury, Commerce, Agriculture, Interior,
Labor, and the Council of Economic Advisers concur in the above
recommendation. Eizenstat and
NSC also concur.
There may be some adverse reaction from the domestic steel industry and
the Congress to discontinuing this case, however, it may be riskier not
to dispose of it. There are already legislative proposals to put
statutory deadlines on our handling of section 301 cases, which would
limit our flexibility to achieve solutions in these cases, because they
usually involve extended negotiations. The adverse domestic reaction
should be ameliorated by the implementation of the trigger price system
by Treasury.
The EC and Japan would, of course,
welcome dropping the case. It is regrettable that we have no better
international rules available to us to cover the arrangement in which
they have participated. We are working on a safeguard code in the
Multilateral Trade Negotiations
[Page 284]
which may bring greater discipline to the use of such voluntary
export restraints.
RECOMMENDATION: Discontinuance of section 301 case complaining of adverse
impact of EC-Japanese steel restraint
agreement.
Approve4
Disapprove
Please discuss with me
Other
Attachment
Memorandum From the Special Representative for Trade
Negotiations (Strauss) to
President Carter
5
Washington, December 27, 1977
SUBJECT
- Review of Specialty Steel Import Relief Program
Background
In May 1977, you decided to review the existing specialty steel import
relief program and to initiate the procedures required by law prior to
reducing or terminating import relief.6 On your behalf, I
requested that the U.S. International Trade Commission (USITC) and the Secretaries of Commerce
and Labor provide you with advice on reduction or termination of import
relief. The statute requires that you have this advice before making a
decision to modify the quotas, but the advice is not binding. Also, your
decision to review the quotas does not commit you to modifying them.
The USITC reported to you in October
the results of its study of the probable economic effect on the domestic
specialty steel industry of reducing or terminating import relief.7 Two of the four USITC
Commissioners who voted on this issue advised against reduction or
termination of relief. A third Commissioner advised that termination of
relief
[Page 285]
would not have a
substantial adverse impact on the domestic specialty steel industry. The
remaining Commissioner advised that moderate (6.7%) increases in the
second and third year quotas for each product category would not have a
serious adverse economic effect.8
In December, the Secretaries of Commerce and Labor reported to you their
advice regarding reduction or termination of relief.9 The Secretary
of Labor determined that such action would have a deleterious effect on
domestic specialty steel employment, and thus advised that no change be
made in the status of import relief. The Secretary of Commerce also
recommended that the existing import restraints not be terminated or
modified at this time, stating that such action would have a detrimental
effect on the domestic industry.10
The picture that emerges of the recovery of the domestic industry from
the 1975 recession is mixed, with some segments showing substantial
improvement and others remaining depressed. Employment increases have
generally lagged behind gains in shipments and production. Price
performance has also been mixed with some products showing no downward
flexibility while others have moved up and down in line with demand
conditions. Profits have improved but remain low relative to earlier
peaks and the overall manufacturing average. There have been substantial
increases in investment by the industry since the quotas were put into
effect.
While there has been considerable grumbling by other countries about the
quotas, there is little expectation that the quotas will be eliminated
in view of the overall domestic U.S. steel problem. At the moment, the
major concern abroad is with the trigger price system for carbon steel
(specialty steel will not be covered).
There is no provision for a Congressional override of your decision on
this issue. However, there has been considerable Congressional interest
in this case, especially from representatives of steel-producing states
such as Pennsylvania, Ohio, New York, and Maryland. At least 100 members
of the Congress have written you or me on this issue and they almost
unanimously support no modification of the quotas. In addition, there
have been submitted to us petitions signed by over 100,000
Pennsylvanians as well as petitions and resolutions from numerous other
communities urging no change in the quotas.
[Page 286]
Recommendations
The interagency Trade Policy Staff Committee (TPSC) has reviewed the USITC, Commerce, and Labor advice regarding reduction or
termination of relief. The TPSC
(acting on behalf of the Cabinet-level Trade Policy Committee) has a
statutory responsibility to make recommendations to you on import relief
actions. Set forth below for your decision are the options recommended
by one or more TPSC agencies.
No TPSC agency recommended that you
terminate specialty steel import relief. All TPSC agencies recommend that you remove chipper knife and
RM 81 (band saw) steel from coverage under the alloy tool steel quotas.
These two minor products are available only in limited quantities from
American manufacturers, and shortages are currently endangering the
operations of domestic firms which consume these materials. The domestic
specialty steel industry supports exclusion of chipper knife steel and
only two firms might oppose exclusion of band saw steel. Sweden has
expressed particular interest in the exclusion of chipper knife steel
from the quotas.
All TPSC agencies further recommend
that, to compensate for the removal of chipper knife and band saw steel
from quota coverage, the Swedish and EC
third year quotas be reduced. We would consult with the EC and Sweden before making such an
adjustment. This adjustment would be small in relation to the total
specialty steel quotas due to the small import volume of these two
products in the base period but would reduce adverse domestic reaction
to the exclusions.
Option I:*t1 The TPSC recommends the following action:11
Retain the specialty steel quotas for all product categories at their
current levels.
I support this recommendation along with the Departments of Treasury,
Commerce, Labor, Interior, Defense, and Agriculture. Eizenstat concurs.
The TPSC recommends no increases in
quotas for the following reasons: (1) domestic specialty steel
employment conditions have not fully recovered from depressed 1975
levels; (2) most of the domestic industry economic recovery has occurred
during the first half of 1977 and this recovery was not sustained in the
third quarter of 1977; (3) production levels in the third quarter of
1977 were the lowest since 1975 and
[Page 287]
unused capacity ranged from one-fourth to
three-fifths of total capability depending on the segment of the
industry; (4) increased imports resulting from modifying the quotas
could significantly reduce the profitability of domestic firms, many of
whom are making efforts to adjust to import competition; (5) we would
get little credit internationally for modest quota increases and the
anti-inflation benefits would be limited; (6) the reactions of the
industry, union, and the Congress to even small quota increases would be
highly critical. The domestic reaction could well lead to efforts to
legislate limits on the President’s ability to modify import relief, and
(7) a decision against reduction or termination of relief would not
endanger the positive climate on steel created by the Solomon program in the Congress,
domestic steel firms, the steel workers union and steel
communities.12
Option II:*t1 The Department of State and the Council
of Economic Advisers recommend the following action: as do OMB and NSC:13
Increase the second year quotas for stainless sheet and strip, bar, and
rod by seven percent. Increase the third year quotas for these three
products by an additional ten percent (which includes the three percent
growth factor already contained in the current third year quota levels).
Leave the quota for stainless steel plate at its current levels.
Agencies favoring Option II recommendations argue that these moderate
quota increases (1) are warranted due to the recovery in the domestic
industry that has occurred since the imposition of the quotas; (2) would
demonstrate our concern about inflationary impact of domestic specialty
steel pricing developments; and (3) would generate some favorable
international reaction by demonstrating our willingness to relax
restrictions as economic conditions improve.14
For your information, I am attaching a copy of the analytical paper upon
which the TPSC based its
recommendations (Tab A). I am also attaching copies of the USITC, Commerce, and Labor advice
regarding reduction or termination of import relief (Tabs B, C, and
D).15
Once you have reached a decision, I will prepare the necessary papers to
announce and implement your decision.
[Page 288]
Tab A
Paper16
TAB A—Section 301 Complaint
The Treasury Department supports discontinuance of
the steel industry’s complaint against the EC/Japanese agreement, but objects
to Strauss’ statement that the
Administration’s new trigger price system “will eliminate any unfair
burden on the U.S. steel industry.”17
STR and Treasury have since worked out
mutually acceptable language for announcing this decision, according to
Stu.18
Tab B
Paper19
TAB B—Specialty Steel Quotas
Option I:
Eizenstat
concurs with Strauss
et al, and cites this additional argument:
• liberalization of the quotas would again subject the Administration to
charges of inconsistency in our economic actions—on the one hand, we
develop a trigger price system to protect the domestic steel industry
from foreign competition in basic steel, and on the other, we re
[Page 289]
duce the amount of protection
the steel industry has against foreign competition in specialty
steel.
Eizenstat recommends,
in addition, that you instruct Ambassador Strauss to reflect our concern about inflationary price
increases either in his formal announcement of this decision or in
private communications with specialty steel manufacturers.20 We should let the industry
know that we expect its continuing economic recovery to be based on the
expansion of production—and not just inflationary price increases.
Option II:
OMB
and
NSC
concur with State and CEA.
•
OMB: “the recommended
relaxation would be a positive indication to domestic and foreign
observers alike that the Administration is serious about eliminating
unfair imports and minimizing restrictions on imports entering
fairly.”
•
NSC: According to ITC Commissioner Minchew, a moderate increase in quotas
would not have an adverse impact on the
domestic industry, and would show our trading
partners that the US is prepared to reduce import relief when economic
conditions improve. Firms producing stainless steel sheet and strip,
bars and rods have substantially recovered from the 1975 recession.
