Foreign Relations of the United States, 1981–1988, Volume XXXVIII, International Economic Development; International Debt; Foreign Assistance

316. Memorandum From Douglas McMinn of the National Security Council Staff to the President’s Assistant for National Security Affairs (McFarlane)¹

Washington, August 23, 1984

SUBJECT

• Copper Import Relief

Issue

Based on a petition by our domestic copper producers, the United States International Trade Commission (USITC) has found that copper imports are injuring U.S. producers. However, the five USITC Commissioners split three ways in recommending relief to the President:

○ Two voted for a tariff of five cents per pound for five years;

○ Two voted for a quota of 386,000 metric tons for five years; and

○ One voted against giving any relief.

Our copper producers, for their part, want the U.S. to negotiate production restraints with foreign suppliers, i.e., establish a production cartel through orderly marketing agreements (OMA).

The President must, by law, make a decision in this case by September 14.²

As you know, the President has the discretion to decide whether the recommendations of the USITC are in the overall national interest. He has the flexibility to grant no relief or to change the USITC recommendations. Ultimately, the key element in reaching a decision is the weight placed on the overall economic interest of the United States versus the specific interests of our copper producers.

U.S. Copper Industry

Demand for domestic copper is cyclical and currently depressed. Between 1979 and 1983, copper consumption in the U.S. declined from 2.4 million tons to 2.0 million tons. To add to the problems of U.S. producers, imports during this same period rose from 9.4 percent of consumption to 25.7 percent. As a result, U.S. capacity utilization fell from 78 percent to 58 percent. Employment, concentrated primarily in Arizona and Utah, has fallen in recent months to an estimated 23,000 workers—down from approximately 45,000 in 1979.

Although further U.S. and world economic expansion will undoubtedly help our copper producers, we will continue to have higher costs than leading foreign producers because of higher U.S. labor costs and lower U.S. ore grades. U.S. copper producers, themselves, admit that even after making large investments to increase efficiency, they will not be able to produce copper as cheaply as Chile, our largest foreign supplier. Other than from Chile, U.S. imports of copper come mainly from Canada, Peru, Zaire and Zambia.

The U.S. copper industry is also made up of about 200 companies involved in the production of copper fabricated products. Employment in the fabricating sector is about five times greater than the producing segment (approximately 115,000 workers). These “fabricators” are adamantly opposed to the imposition of any import relief under our trade law. Restrictions on imported copper could create a two-tiered price for copper. This would put U.S. copper fabricators at a substantial disadvantage relative to their foreign competitors.

Imports of fabricated products do not present an unusual problem to U.S. fabricators so long as domestic and world prices of refined copper remain in relative balance. However, if domestic prices exceed world prices, U.S. fabricators lose market share to imports.

U.S. fabricators are not opposed to government-to-government negotiations aimed at restraining foreign production levels, provided that they are conducted outside of the pending Section 201 case on copper. They do not want negotiations (OMAs) under Section 201 because if negotiated production restraints were unsuccessful, the law requires that import restrictions be automatically applied. This would create the two-tiered price system the fabricators want to avoid.

Attached at Tab A is a table prepared by CEA³ which lays out the economic and political conditions of the key copper producing and fabricating states.

Domestic and International Considerations of Relief

○ Granting of relief is protectionist and could create the opportunity for foreign claims for compensation or retaliation.

○ Relief would also run contrary to the stated position of the President supporting trade liberalization and freer trade.

○ Any effective tariff or quota relief granted to the U.S. producers could harm U.S. fabricators who employ five times the number of workers found in the producing sector.

○ Negotiated production cutbacks (via OMAs) have the potential for aiding U.S. producers.

— Indications are, however, that Chile would not be prepared to negotiate such an agreement with a gun at its head.

— If negotiations were unsuccessful, the President would be required to impose tariffs or quotas.

— This would harm our own copper fabricators by creating a two-tier price system.

○ Whatever adjustment to increased efficiency the U.S. producers would make during a relief period would still not enable them to produce copper as cheaply as Chile, our largest foreign supplier.

○ The politics seem to weigh heavily against relief (see Attachment A).

○ Relief would hit debt-ridden developing countries very hard.

— LDCs such as Chile, Peru and Zaire earn critical foreign exchange through copper exports.

○ Relief would harm our bilateral relations with Chile and could lead to greater domestic political instability in that country. This has been a front-page issue in Chile for weeks and is viewed as a major test of our relationship.

RECOMMENDATION

In this import relief case, I believe the overall economic interest of the United States far outweighs the case for protection. Moreover, there is no overriding political imperative for relief. The NSC’s position should be to recommend to the President that he decide against granting any import relief for U.S. copper producers.⁴

State, Treasury, Commerce, OMB, USTR and CEA all support the no relief option.

Messrs. Burghardt and Wettering concur.

1. Source: Reagan Library, Douglas McMinn Files, Subject Files, Copper; NLR–369–2–17–1–1. Confidential. Sent for action. A stamped notation reads: “RCM Has Seen.” Copies were sent to Fortier, Levine, and Robinson.
2. A September 5 memorandum from Brock to Reagan presented three options: “Option 1: Provide import relief in the form of: (a) tariff increase of 5 cents/lb. for 5 years; or (b) a 5-year annual import quota of 425,000 short tons; Option 2: Negotiate voluntary production restraints either: (a) in the context of orderly marketing agreements under Section 203; or (b) outside Section 203 pursuant to your inherent Constitutional authority; Option 3: Provide no relief (recommended).” There was no indication of Reagan’s approval or disapproval of Option 3. (Reagan Library, Douglas McMinn Files, Subject Files, Copper; NLR–369–2–19–2–8)
3. Attached but not printed is the table entitled “Copper Producers and Fabricators Summary Data.”
4. An unknown hand indicated approval of the recommendation and wrote “See profs” below the recommendation. In an August 28 PROFS note, McFarlane wrote: “I have seen Doug McMinn’s paper on copper and agree with it. When I met with Regan and Shultz in Dallas we agreed that it might present satisfactory window dressing for someone (STR) to go traipsing around to the two or three leading producers to see if we could negotiate vra’s for a while. If not vra’s then at least to ‘gather information’ which would be a guise for letting the producers let off steam (a smokescreen for us) for a couple of months. I’m not sure that is viable but Doug might listen to any such ideas sympathetically.” (Reagan Library, Douglas McMinn Files, Subject Files, Copper; NLR–369–2–17–2–0)