ECONOMIC POLICY COUNCIL MEETING ON US-EC TRADE RELATIONS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP87M00539R002303820005-6
• Release Decision: RIPPUB
• Original Classification: T
• Document Page Count: 36
• Document Creation Date: December 22, 2016
• Document Release Date: June 4, 2010
• Sequence Number: 5
• Publication Date: June 14, 1985
• Content Type: MEMO

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TOP SECRET NOFORN
ROUTING AND RECORD SHEET
SUBJECT: (Optioned)
Economic Policy Council Meeting on US-EC Trade Relations 0,1;
EXTENSION NO
FROM: .
NIC 03069-85
David B. Low
DATE
National Intelligence Officer for Economics
14 June 1985
TO: (Officer designation, room number, and
building)
DATE
OFFICER'S
COMMENTS (Number each comment to show from whom
REalvED
FORWARDED
INITIALS
to whom. Draw a line across column after each comment.)
1.
EXECUTIVE REGISTRY
13 JUN
1985
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FORM AM19r
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NOFORN
The Director of Central Intelligence
1 Washington, D.C. 20505
National Intelligence Council
NIC 03069-85
14 June 1985
MEMORANDUM FOR: Director of Central Intelligence
A Deputy Director of Central Intelligence
FROM: David B. Low
National Intelligence Officer for Economics
SUBJECT: Economic Policy Council Meeting on US-EC Trade
Relations
1. There is presently scheduled on Monday, 17 June 1985 at 10:45
a.m. a meeting of the Economic Policy Council to review US-EC trade
relations and to discuss specifically a Section 301 action in response to
the EC's practice of discriminating against US exports of citrus
products. This meeting is scheduled to be chaired by the President.
2. A preliminary meeting was scheduled for 4:30 p.m. today but was
cancelled because Treasury Secretary Baker could not attend.
3. While you have not been invited to the meeting on Monday morning,
if it occurs (and this is still somewhat up in the air) I believe it is
important that you attend. Accordingly, attached are materials as
follows:
OL)
David B. Low
This Memorandum Classified SECRET
When Removed from Attachments
TOP SECRET
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. TED STATES TRADE PE---,RESENTATIVE ATTACHMENT C
2050,E
May 30, 1985
MEMORANDUM FOR THE PRESIDENT
FROM: Michael B. Smith, Acting
SUBJECT: Determination Under Section 301 of the Trade Act of
1974 Regarding Discriminatory Tariff Treatment by
the European Economic Community on Imports of U.S.
Citrus Products
You must decide by June 20 what action, if any, to take in
response to the European Community's (EC's) practice of discrim-
inating against U.S. exports of citrus products. An interna-
tional dispute settlement panel found that this practice distorts
conditions of competition in the EC market with respect to trade
in oranges and lemons and recommended that the EC reduce its
most-favored-nation tariff rate, thus reducing the degree of
discrimination. However, the EC has refused to accept the
panel's finding or recommendation or to negotiate a compromise
solution.
Section 301 gives you broad discretionary authority to respond to
foreign practices which deny benefits to the U.S. arising under a
trade agreement or which are otherwise unreasonable or discrimi-
natory and restrict U.S. commerce. For the reasons set forth
below and described more fully in the attached background docu-
ment, I am recommending that you exercise this authority in a
moderate way by imposing increased duties on U.S. imports of
pasta pro.iucts from the EC until such time as the citrus issue is
resolved or the EC provides adequate compensation. This measure
will restore the balance of concessions in U.S.-EC trade and will
dembristrate a firm yet flexible response to unfair trade prac-
tices. The EC will react adversely to this duty increase. More-
over, because the EC has blocked acceptance of the panel's
findings, our action will be taken without GATT authorization.
Nevertheless, I believe action is necessary both to re-balance
the level of U.S.-EC trade concessions and to meet your commit-
ment to respond to unfair trade practices especially in the agri-
cultural sector.
This reco=endation has the support of the Departments of
Agriculture, Commerce, Justice, Labor, and Treasury as well as
the Office of Management and Budget and the Council of Economic
Advisor. The Department of State has not taken a position on
the recor-enation.
ON FILE USTR RELEASE INSTRUCTIONS APPLY
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If you approve this recommendation, we will prepare a proclama-
tion to implement Your decision.
Approve (Sign Memorandum at Tab A)
Disapprove
11
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Sacknround
Based on petitions filed in 1976 by the Florida Citrus Commis-
sion, California-Arizona Citrus League, Texas Citrus Mutual, and
Texas Citrus Exchange, USTR initiated an investigation concerning
the EC's tariff treatment of U.S. citrus exports. As a result of
this investigation, we have found that as part of broad preferen-
tial ,tradinc agreements, the EC has, since the late 1960's,
levied a lower duty on imports of citrus from the Mediterranean
countries, than that levied on imports from the U.S. The level
of discri7ination is sicnificant. In some cases the U.S. pays a
tin.es :reater than that paid by other suppliers. This
discriminr,:ory tariff treatment has impaired the ability of U.S.
citrus exporters to market their fruits in the EC and, in our
view, is inconsistent with the EC's obligations under interna-
tional trading rules. ?
Nevertheless, recognizing the political importance to the EC of
the EC-Mediterranean agreements, the U.S. made extensive efforts
over a period of years to resolve this issue through bilateral
discussion rather than mount a legal challenge to EC practices.
The EC, however, rebuffed all such efforts.
The Trade Policy Committee therefore decided, in November, 1981,
to challenge the EC's citrus preferences under the rules and
procedures of the pertinent international trade agreement, the
GATT. In January, the panel of experts appointed by the GATT to
examine the U.S. complaint found unanimously that the EC prac-
tices had distorted competitive conditions with respect to two
key U.S. exports, oranges and lemons. The panel recommended that
the EC reduce the most-favored-nation rate of duty on these
items. The EC, however, has refused to accept the findings and
has effectively blocked further action on the matter in the GATT,
The U.S. made further efforts to resolve the issue bilaterally:
Secretary Brock personally urged Willy De Clercq, the EC Commis-
sioner for External Relations and Commercial Policy, to seek a
compromise solution, and Secretary Schultz sent letters to his
counterparts in the EC Member States indicating our willingness
to negotiate 4 reasonable solution and warning of the likelihood
of unilateral action by the U.S. if no resolution is reached.
The EC again rejected the U.S. overtures.
As a result of the EC's unfair practices on citrus products, the
level of trade concessions between the U.S. and EC is no longer
in balance. Secause the EC will not implement the dispute set-
tlement panel's recommendation or otherwise provide adequate
compensation, the U.S. must act to re-balance the level of trade
concessions. This can be accomplished by imposing increased
duties on imports of EC products equivalent to the damage our
.exporterss incur from the EC discriminatory tariffs.
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I therefore recommend that you proclaim an increase in duty on
pasta imports from the EC to a level of 40% ad valorem on. pasta
not containing egg and 25% ad valorem on Pasta containinc egg.
This duty increase is a very moderate response to the EC's unfair
practice. The value of concessions being withdrawn (approxi-
mately $30 million) is conservative compared with the $48 million
estimated annual trade damage to the U.S. citrus industry result-
ing from EC preferences. Moreover, the duty increase could be
rescinded at such time as the EC modifies its practice with
respect to citrus or otherwise compensates the U.S. The selec-
tion of pasta for this action is appropriate because Pasta was
the subject of an earlier U.S.-EC trade dispute in which the EC
also blocked a GATT decision favorable to the U.S. E.-cause the
EC has blocked further action in GATT, the U.S. does not have
GATT authorization to take this measure. Thus we run the risk
that the EC will accuse the U.S. of ignoring our own interna-
tional obligations, or that the EC will retaliate by restricting
imports of other U.S. products.
However, we believe we have no choice but to take that risk. We
cannot credibly defer action to allow further time for negotia-
tion, because the EC has consistently, clearly and publicly
rejected the possibility of a negotiated solution. In these
circumstances, failure to act will have adverse implications for
both domestic and international trade policy. An essential cor-
ollary of our efforts to resist protectionist pressures is our
commitment to combat unfair foreign trade practices and to seek
improved international rules. While actual trade levels involved
in the citrus case are relatively small, failure to act will
impair the credibility of an approach dependent on international
rules and could be used domestically as a symbol of our unwill-
ingness to respond to unfair practices and will encourage those
in Congress who prefer to administer trade policy through legi-
slation. Inaction in the face of the EC's refusal to respect
panel findings will also encodrage other countries to flout
international rules.
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??-."
Memorandum of Determination Under Section 301
of the Trade Act of 1974 ?
Memorandum to the United States Trade Representative
Pursuant to Section 301(a) of the Trade Act of 1974, as
amended (19 U.S.C. 2411(a)), I have determined that the preferen-
tial tariffs granted by the European Economic C? -- unity (EC) on
imports of lemons and oranges from certain Mediterranean coun-
tries deny benefits to the United States arising under the
General Agreement on Tariffs and Trade (GATT), are unreasonable
and discriminatory, and constitute a burden and restriction on
U.S. commerce. I have further determined that the appropriate
course of action to respond to such practices is the withdrawal
of equivalent concessions with respect to imports from the EEC.
I will therefore proclaim an increase in duties on pasta products
classified in items 182.35 and 182.36 of the Tariff Schedules of
the United States imported from the EEC. This action has been
necessitated by the unwillingness of the EEC to negotiate a mutu-
ally acceptable resolution of this issue. At such time as the
United States Trade Representative makes a determination that a
---=
mutually acceptable resolution has been reached, I would be pre-
pared to rescind this measure.
Reasons for Determination
;..
Based on petitions filed by the Florida Citrus CommisSion,
the California-Arizona Citrus League, the Texas Citrus Mutual
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the Texas Citrus Exchange, the United States Trade Representative
initiated an investigation in November, 1976 concerning the EC's
preferential tariff treatment with respect to citrus imports from
certain Mediterranean countries. The petitions alleged that
these discriminatory tariffs, which are granted in the context of
broader trade agreements with the Mediterranean countries, are
inconsistent with the most-favored-nation principle of the GATT
and placed U.S. exporters at a competitive disadvantage in the EC
market. Similar complaints had been filed by the U.S. industry
in 1970 and 1972 under Section 252 of the Trade Expansion Act of
1962.
As a result of this investigation, we have found that since
the 1960's, the EC has levied a higher duty on imports of citrus
from the U.S. than that levied on imports from certain Mediter-
ranean countries. The level of discrimination is significant.
In some cases the U.S. pays a duty 5 times greater than that paid
by other suppliers. This discriminatory tariff treatment has
impaired the ability of U.S. citrus exporters to market their
fruits in the EEC and -is, in the view of the U.S., inconsistent
with the EEC's obligations under the GATT.
Nevertheless, recognizing the political importance of these
preferential tariffs to the EEC, the United States made extensive
efforts over the course of a number of years to resolve the mat-
ter through bilateral consultations rather than mount a legal
challenge a3ainst the EEC in the GATT. The U.S. also tried to
-resolve this issue
in the context of tariff concessions granLA
during the Tokyo Round of Multilateral Trade Negotiations. With
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the exception of a few minor tariff reductions resulting from the
Tokyo Round, these efforts were without success. Following the
conclusion of the Tpkyo Round, the U.S. initiated consultations,
under the provisions of the GATT, but the EEC again rebuffed all
efforts to reach a compromise solution.
With any possibility of a negotiated settlement thus ruled
out, the U.S. invoked the dispute settlement procedures of the
GATT as the only alternative means of seeking a redress of our
complaint. In 1983, a panel was established to review the U.S.
complaint. Throughout this procedure, the U.S. has continued to
demonstrate its willingness to seek a mutually acceptable solu-
tion to this problem. For example, the U.S. agreed to the.
unusual step of allowing the Director-General of GATT to attempt
to arbitrate the dispute before pressing its request for forma-
tion of a dispute settlement panel. Unfortunately, the attempt
failed. The EEC rejected all efforts at compromise.
In December, 1984, based on a voluminous record, the panel
found unanimously that the EEC preferences nullified and impaired
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U.S. benefits arising under the GATT with respect to U.S. exports
of oranges and lemons, two of the eight categories of U.S. citrus
exports affected by the tariff preferences. The panel recom-
mended that the EC reduce its MFN rate of duty on fresh oranges
-
and lemons no later than October 15, 1985.
Although, the panel did not rule on this issue, the United
States continues to believe, that-the EEC citrus preferences are
r ineonsistent with the most-favored-nation principle of the GATT,
-
??_ : . .
and thus nullify or impair U.S. benefits with respect to exports
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of the other citrus items as well as lemons and oranges. .Never-
theless, the U.S. has been willing to accent the panel's more
limited recommendation for the following reasons. The sole
interest of the U.S. in bringing this issue to the GATT has been
to obtain the elimination or reduction of a barrier to U.S.
citrus exports. While the panel's recommendation does not call
for the elimination of the barriers, we believe its implementa-
tion by the EEC would significantly increase access for key U.S.
citrus exports to that market. Moreover, the panel's recommenda-
tion does not require the EEC to take action inconsistent with
its preferential trading arrangements; indeed it would result in
lower tariffs for the preference receiving countries as well..
The EEC, however, has been unwilling to accept either the
panel's findings or recommendation and has effectively prevented
a resolution of this Issue in the GATT. Thus, U.S. attempts to
resolve this problem at the bilateral or multilateral level have
not succeeded.
.In light of the results of the USTR's Investigation, I
believe we must recognize that the level of trade concessions
bet-ween the U.S. and EEC is no longer in balance. We estimate
that the value of annual U.S. exports of oranges and lemons would
increase by more than $48 million if the EC had implemented the
panel's recommendation..
The EEC's unwillingness to implement the panel's finding or
to otherwise provide adequate; compensation to the U.S. requires
us to re-balance the level of concessions in U.S.-EC trade.
Increasing the duty on pasta imports from the EC is a Teaser:able '
and appropriate means by which to achieve this.
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? CONFIDE-1\11AL
ISSUE:
In accordance with the TPRG decision of March 27, and
because the U.S. has been unable to resolve the citrus dispute
either bilaterally or through the GATT, USTR is required, no
later than May 30, 1985, to submit a recommendation to the Presi-
dent under Section 301. The recommendation is to call for the
withdrawal of concessions on imports from the European Community
equivalent to the loss in benefits to the U.S. arising from the
EC's discriminatory tariff preferences until such time as a mutu-
ally acceptable resolution to this dispute is achieved. We must
decide which EC products are to be subject to the withdrawal of
concessions.
RECOMMENDATION:
USTR should recommend to the President that he increase the
duty on the following two products as described below. The duty
increase would apply only to imports of these products from the
EC.
Commodity TSUS No.
macaroni, not
containing
egg or egg
products
182.35
macaroni, con- 182.36
taming egg or
egg products
RATIONALE:
Present Duty
.12t/lb.
(.5% AVE)
.1o/lb.
(.25% AVE)
Proposed Duty
40%
(equal to
approx 10e/lb)
25%
(equal to
approx 10C/1b)
Because the tariff preferences have been in existence for so
long, it is difficult to quantify with precision the annual loss in
orange and lemon exports caused by the preferences. We believe,
however, that it is reasonable to assume we would have the same
share of the EC market today that we held in the period prior to
imposition of the preferences. Using a market share analysis, (See
Appendix I) we estimate the trade loss at $48 million per year. In
1984 imports of pasta from the EC under the two categories above
were valued at $29.4 million. (If imports from Spain and Portugal,
who will soon be members of the EC are included, this number
increases to nearly $29.6 million).
Duty increases of the magnitude proposed are expected to
result in a sharp reduction of EC pasta exports to the U.S. How-
esier, this is not expected to have an adverse impact on U.S. con-
sumers tince imports are available form other,sources and U.S.
production accounts for the majority of U.S. consumption.
CLASSIFIED BY
DECLASSIFIED ON CAPE
IONA
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While withdrawing concessions with respect to these products
does not offset the total estimated lost trade, we believe it con-
stitutes an appropriate re-balancing of concessions for several
reasons.
As noted above, the $48 million figure, while a best estimate,
is only an estimate. It is possible the EC could raise credible
arguments for using a lower figure. We wish to avoid a situation
in which the President makes a maximum withdrawal of trade conces-
sions based on a $48 M trade loss figure and then needs to adjust
the withdrawal because of an adjustment to the trade loss figure.
Moreover, our objective in this action is not to be punitive.
Indeed, given the political sensitivity of this issue, a conser-
vative action by the U.S. is appropriate.
By focusing on pasta, we limit the main impact to a single EC
member, i.e. Italy. This should reduce the likelihood of other EC
members, not affected by the pasta duty increase, supporting a
retaliatory action by the EC with all the risks attendant upon an
escalation of the dispute. It is appropriate to focus on Italy
because, as the major EC producer of oranges and lemons, it has
been the major stumbling block to a negotiated reduction of the EC
duties.
Finally, by selecting pasta rather than other products, we are
providing a remedy to an industry which has suffered from EC unfair
trade practices. Despite a panel ruling that EC pasta subsidies
are inconsistent with the Subsidies Code, this industry has also
been denied the remedy to which it was entitled because the EC
blocked adoption of the panel report. Thus action to raise tariffs
on EC pasta exports to the U.S. both provides a remedy to the pasta
industry and signals the EC that we will take reasonable actions to
enforce our rights under trade agreements, when, through an abuse
of process, the dispute settlement procedures of GATT cannot work.
GATT IMPLICATIONS:
. Because the dispute settlement process has been deadlocked, we
do not have GATT authorization to raise the duty on pasta. Without
that authorization, the U.S. action could be successfully chal-
lenged as GATT inconsistent. We have retaliated without GATT auth-
orization on only one previous occasion (1974 Cattle War with
Canada). The U.S. believes it is nevertheless justified in taking
this action in part because the panel unanimously ruled in our
favor. Thus, we should not be surprised if other countries, faced
with a situation in which a favorable panel report is blocked, take
unilateral action.
_ We should also be prepared to decide whether further action by
the U.S. (including possible retaliation) is needed in the event
the EC 'retaliates against the U.S. for this action.
Despite these implications, the proposed action is appro-
priate. Inaction by the U.S. establishes the precedent that panel
CONFIDENTIAL
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reports can be blocked with impunity, thus undermining the inte-
grity of the GATT system. It also invites Congressional action to
deal with barriers to U.S. exports.
BACKGROUND:
Origin of the Dispute and Efforts to Negotiate a Solution
The EC's preferential tariffs on Mediterranean citrus imports
have been the subject of several complaints by the U.S. industry.
The first two complaints were filed in 1970 and 1972 under Section
252 of the Trade Expansion Act of 1962. The last was filed in
1976, under Section 301, alleging that EC preferences on oranges,
tangerines, lemons, grapefruit, pectin, grapefruit segments, and
orange, lemon, and grapefruit juice, were inconsistent with the MFN
obligation of Article I.
Although the industry sought the elimination of the prefer-
ences, the U.S. followed a strategy of seeking MFN tariff reduc-
tions as a means of narrowing the preference. Through these
efforts, the U.S. obtained some temporary duty reductions in the
early 1970's and permanent duty reductions were obtained in the
1974 enlargement. The U.S. obtained further minor reduction in
1979 during the Tokyo Round. Since that time nine bilateral dis-
cussions were held during which the U.S. unsuccessfully offered
tariff concessions in return for citrus tariff reductions.
Our extended bilateral efforts with the EC to resolve this
issue have taken place in the context of the Casey-Soames under-
standing; which attempted to address U.S. trade problems in citrus
caused by the preferences while recognizing the importance of the
preferences to the EC. Among other things, this understanding
called for: 1) the EC to eliminate reverse preferences with speci-
fied LDC's; 2) the U.S. to agree not to question the Article XXIV
consistency of the EC arrangements; and 3) the EC to seek solutions
where the preferences caused problems for U.S. trade interests.
Because of this accommodation, the U.S. for years resisted a direct
GATT-challenge of the preference agreements, relying instead on
multilateral negotiating opportunities and bilateral discussions
under the Casey-Soames understanding to resolve the problem. In-
deed, the U.S. stretched the interpretation of the time limits
added to Section 301 in 1979 nearly to the breaking point in order
to avoid breaching Casey-Soames.
During consultations under Article XXII and XXIII, the EC
rebuffed all efforts at compromise. The EC took the position that
the preferences had not, in fact, caused problems. The EC Corals-
sion maintained also that it did not have, and would not seek,
negotiating authority on thii issue from the Member States.
Initiation of GATT Dispute Settlement Procedures
With any chance of a negotiated settlement thus ruled out, the
TPC, on November 12, 1981, decided to pursue dispute settlement in
t Jr} [id \?' --
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the GATT as the only alternative. A last-ditch effort to arbitrate
this dispute was made by the Director-General of GATT in August-
September 1982. However, the EC rejected all offers of compromise.
A panel was established in 1983 and in December, 1984 ruled unani-
mously that the EC preferences had nullified U.S. benefits under
GATT with respect to exports of oranges and lemons.
In January 1985, prior to submission of the panel report to
the GATT Council, the EC informed the U.S. that it intended to
block adoption. On the fringes of the Kyoto Quadrilateral meeting,
the USTR again suggested to EC Commissioner De Clercq that a solu-
tion be negotiated. De Clercq rejected the proposal.
When the GATT Council took up the citrus report on March 12
and April 30 the U.S., supported by some other CP's, proposed adop-
tion of the panel report and recommendation. The EC and preference
recipients strongly criticized the report and opposed adoption.
U.S. offers to drop the report if the EC carried out the recommen-
dation met with no response. Moreover, further diplomatic efforts
to resolve the issue, including a letter from Secretary Schultz to
foreign ministers of the EC member states, have been unsuccessful
in convincing the EC to negotiate.
The EC's view is colored by its commitment to maintain a
special trade relationship with the Mediterranean preference reci-
pients for economic and political reasons. In the face of the
erosion of the value of the current preferences by Spanish acces-
sion to the EC in 1986, the present EC members have accepted the EC
reasoning that further concessions to the U.S. are impossible. The
dispute settlement procedure has thus reached an impasse and cannot
resolve the dispute.
TPRG ACTION:
On March 27, the TPRG considered what action to take in the
citrus case. The TPRG noted that in the panel's view the EC pre-
ferences had, in effect, upset the balance of trade concessions
between the U.S. and EC and that under such circumstances the U.S.
would be entitled to re-balance the level of concessions by with-
drawing specific concessions to the EC. The TPRG also recognized
that because the EC was blocking the GATT process, the U.S. did not
have specific GATT authorization to withdraw concessions and that
the EC could therefore challenge the legitimacy of a U.S. with-
drawal such as that proposed with respect to pasta. In such cir-
cumstances, the EC would likely receive a fairrable panel finding.
If so, we would link the two panel findings, not allowing one to be
adopted without the other. The EC could, of course, also immedi-
ately retaliate against the U.S. without GATT authorization (in
doing so, it would lack not only GATT approval but also the moral
support of a favorable panel finding). Nevertheless, the TPRG
believed that reasonable action to re-balance the level of conces-
sions was appropriate to enforce U.S. rights under the GATT if the
EC would not negotiate a solution. In the TPRG's view, lack of
action would be detrimental to our interests because it would sig-
rnriivinct\T!'
ILit it
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CONFIDENTIAL
nal GATT members that Panel reports can be blocked with impunity
and would revive Congressional efforts to make 301 action
mandatory.
Therefore, the TPRG agreed to deem dispute settlement ended
(and thus trigger the 30-day statutory deadline for a recommenda-
tion to the President) at the April 30 GATT Council meeting if the
EC continued to block the report. It also directed that maximum
efforts be made to negotiate a solution with the EC. Finally, it
directed the 301 Committee to propose withdrawals of concessions on
appropriate EC products.
As noted above, all diplomatic efforts to resolve the issue
have failed and the April 30 GATT meeting ended in a deadlock.
On May 10, USTR held a public hearing on the issue of what
ft recommendation should be made to the President. Testimony in favor
of withdrawal of concessions was given by the California-Arizona
Citrus League, Sun-Diamond and the National Pork Producers' Coun-
cil. The Florida Citrus Commission advocated establishment of an
international commodity arrangement for citrus to deal with a wide
range of citrus issues, including preferences. The Commission
stated it would not oppose a withdrawal of concessions if efforts
to negotiate such an agreement failed. USTR also received testi-
mony favoring withdrawal of concessions from the American Farm
Bureau Federation, the International Apple Institute, the Northwest
Horticultural Council, and the National Pasta Association and the
National Association of Growers and Processors for Fair Trade, the
California Farm Bureau Federation, the Cling Peach Advisory Board
and a number of Members of Congress.
Testimony in opposition to withdrawal of trade concessions
with respect to specific products has been received from the
National Association of Beverage Importers and the French Federa-
tion of Wine & Spirits Exporters (wine, spirits and beer); Mars,
Incorporated, Commerce Foods Inc., the Food & Confectionery Group
of the American Association of Exporters and Importers, and Peter
Paul Cadbury, Inc. (candy); the International Bottled Water Associ-
ation and the Perrier Group (mineral water); the Apple Group of the
Association of Food Industries (apple juice); and the National
Association of Specialty Food Trade (specialty food items, wines &
candy). Only the last group opposed restrictions on pasta on the
grounds that its members, as importers, would be adversely affected
by import restrictions.
COI\IFIONTIL
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APPENDIX
Citrus Case: Withdrawal of Concessions
Calculation of Lost Trade
Using a market share approach as described below, the trade
loss resulting from EC preferences is 17,499,000 for oranges and
30,707,500 for lemons for a total trade loss of $48,206,500.
EC Imports of Oranges
TOTAL U.S. Preference Countries
(Vol.) Vol. % Vol. %
(000 MT) (000 MT) (000 MT)
1966-69* 2039 67 3 1,684 83
1981-83 1622 18 1 1,349 83
If U.S. had maintained 3% share of 1981-83 market, it would have
sold a total of 48,700 MT's or an additional 30,700 MT's over the
18,000 actually sold. Assuming a price of $570/MT, the trade
loss on these additional tons amounts to $17,499,000.
EC Imports of Lemons
TOTAL U.S. Preference Countries
(Vol) Vol. % Vol %
(000 MT) (000 MT) (000 MT)
1966-68 117 45 38 66 56
1981-83 267 15 6 228 85
If U.S. had maintained 38% share of the 1931-83 market, it would
have sold a total of 101,500 MT or an additional 36,500 MT over
the 15,000 actually sold. Assuming a price of $355/MT, the trade
loss would be $30,707,500.
*1968 was excluded because it was a freeze :year.
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,
THE WHITE HOUSE
WASHINGTON
June 14, 1985
MEMORANDUM FOR THE ECONOMIC POLICY COUNCIL
FROM: ROGER B. PORTER.W
SUBJECT: Agenda and Papers for the June 17 Meeting
The agenda and papers for the June 14 meeting of the
Economic Policy Council are attached. The meeting is scheduled
for 10:30 a.m. in the Cabinet Room.
The first agenda item is an overview of U.S.-E.C. trade
relations. At the June 5 meeting, the Council requested the
Department of State and the Office of the U.S. Trade Represen-
tative to prepare a strategy paper for U.S.-E.C. trade relations.
A copy of that paper was circulated to Council members on
June 11.
The second agenda item concerns the Section 301 Citrus
case. The President must decide by June 20 on what action,
if any, to take in response to the European Community's
practice of discriminating against U.S. exports or citrus
products. A memorandum on this issue was circulated to
Council members on June 3 and discussed at the June 5 meeting.
The third agenda item concerns the status of the Presi-
dent's steel program announced on September 18, 1984. The
Office of the U.S. Trade Representative has prepared a paper
on the President's Steel Program which reviews the status of
steel trade negotiations, the recent pattern of imports,
and the options the Administration faces on four specific
issues. This paper has not yet been reviewed by other
departments and agencies. It lays out the central issues
and options for discussion and is not intended to serve as
the basis for reaching any decisions at this_meeting,_
Attachments
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THE WHITE HOUSE
WASHINGTON ?
ECONOMIC POLICY COUNCIL
June 17, 1985
10:30 a.m.
Cabinet Room
AGENDA
1. U.S.-E.C. Trade Relations
2. Citrus Section 301 Petition
3. Status of the President's Steel Program
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June 14, 1985
President's Steel Program
Issue: The President's steel program is at a critical juncture.
The Administration needs to decide what additional
measures, if any, need to be taken to ensure full
implementation of the program.
This paper reviews the status of steel trade negotiations
the U.S. Trade Representative has held, the recent pattern of
imports, and the options the Administration faces on four
specific issues:
1. The substantial increase in imports of "consultation
products" from the European Community (EC);
2. The greater-than-expected shipments from Canada;
3. Surges from new suppliers that have not previously been
significant exporters to the U.S.;
4. Complaints about the adequacy of the semifinished steel
target.
Status and Effects of Negotiations
Since September 18, 1984, the U.S. Trade Representative has
held negotiations with 16 countries aimed at concluding voluntary
restraint agreements. (Table 1 summarizes the status of these
negotiations as of June 13, 1985.) Thus far, the U.S. has
reached agreements with 14 countries, of which 12 have been
formally signed and implemented.
These agreements cover about 58 percent of total imports
and, everything else being equal, will reduce the 1984 finished
steel import level from 26 percent by about 4.6 percentage
points. The EC steel arrangements cover another 22 percent of
total imports. With the negotiation of strengthened provisions
on pipe and tube imports, total imports from the EC should fall
by about 0.7 percentage points to about 5.2 percent. It should
be noted that the 100,000 ton exception for EC line pipe recently
provided for the All American Pipe Line will increase imports by
about 0.1 percentage points. Thus, all of the agreements should
reduce imports by a maximum of about 5.3 percentage points and
would likely reduce them by about 5.1-5.2 points. Such a
reduction would result in imports still being about 2 percentage
points above the 18.5 percent target.
The agreements are gradually having an effect on imports as
shown by the following table:
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Imports as a Percentage of
Apparent Consumption
Including
Semifinished
Excluding
Semifinished
1984
- Year
26.6
25.8
1984
- Fourth quarter
28.5
27.2
1985
- January
30.9
29.6
?
February
27.1
26.0
March
24.5
24.1
April
23.0
n.a.
As
exports
period,
a number of suppliers -- including Japan -- reduce
to compensate for overshipments in the October-March
import penetration should fall even further.
Surge of Imports
Despite the effectiveness of the agreements in reducing
imports, these reductions have been partially offset by surges of
imports from three major sources:
o European Community. Imports of unlicensed "consultation
products" in 1984 were 224 percent above the 1981 benchmark
and further increases have occurred this year (see Table 2).
This increase has added about 0.4-0.5 percentage points to
the finished steel import level. The decision to aim for an
18.5 percent target assumed a 4.9 percent share for the EC.
The pipe and tube arrangement would reduce the 1984 5.9
percent level to about 5.2 percent.
o Canada. The decision not to seek a voluntary restraint
agreement from Canada resulted from a combination
of two factors: (1) its steel producers are not very
vulnerable to antidumping and countervailing duty charges;
and (2) as an exporter of numerous small overland
shipments, it would be uniquely affected by any formal
restraint agreement. (As the program has evolved, the
licensing requirement would minimize the Customs clearance
problems that concerned the Canadians.) Despite several
assurances that Canada will not exploit the restraints of
others, Canadian shipments continue at the 2.9-3.2 percent
level, well above the historical level or the 2.4 percer.
level originally assumed in the program.
o New Suppliers. There has been an explosion of new suppllerc
to the U.S. market in recent years, including unlikely
suppliers like Thailand, Algeria, Portugal, and Zimbabwe.
In some cases, the rate of increase has been dramatic with
countries reaching a significant market share in a limited
number of products in just one or two years. (Table 3
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summarizes some of the most dramatic examples.) The program
originally assumed no or insignificant imports from new
suppliers, which now account for approximately 2-211 percent
of domestic consumption.
Policy Options
Issue 1: Europe: How should the Administration address the
substantial increase in imports of "consultation
products" from the EC?
Secretary Baldrige has succeeded in establishing a framework
for negotiation of a comprehensive solution to our steel trade
dispute with the EC. The framework comprises three major
elements:
1. Negotiation by July 15 of a solution to the dispute
over the "consultation products" that were not
specifically limited by the 1982 Arrangement.
2. Agreement by October 31 on extending the scope and
duration of the Arrangement (which expires December 31,
1985) to make it consistent with the other voluntary
restraint agreements under the program.
3. Immediate release of 100,000 tons of line pipe to
permit the uninterrupted construction of the All
American Pipe Line.
The Administration clearly prefers a negotiated settlement
to a confrontation over the consultation products. However, the
Administration should consider now what action, if any, to take
if the U.S. and EC cannot agree by July 15 on a solution to the
dispute over the consultation products. There are strong
indications that a badly fragmented EC industry will stoutly
resist Commission efforts to implement the burden-sharing
required by any solution. Hence, the Administration may well
face the decision of what action to take after July 15.
Option A: Communicate during the negotiations that if an
agreement is not reached by July 15, the
Administration will unilaterally enforce the provision
on consultation products in the 1982 Arrangement.
Advantages
o Communicating a decision to take unilateral action as a
last resort would bolster the Administration's position
in the current negotiations.
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o This approach increases the prospects for success in
the current negotiations, which in turn would make it
more likely that the Administration will reach the 18.5
percent target. Without a reduction in the
consultation product imports from their 1984 level,
which was twice the 1981 benchmark for finished
products and seven times the 1981 benchmark for
semifinished products, it is difficult to see how the
18.5 percent target can even be approximated.
The prospect that the Administration would take
unilateral action if an agreement is not reached by
July 15 increases the likelihood that the EC Commission
would explore a quasi-negotiated settlement based on a
U.S. unilateral action to which the EC could acquiesce.
Disadvantage
o The EC has threatened to retaliate if the U.S. takes
unilateral action. However, it may acquiesce to the
action if the U.S. action were sufficiently limited.
Option B: Decide now that if an agreement is not reached by July
15, the Administration will fold the issue into the
broader renegotiation of the Arrangement.
Advantages
o This approach would avoid confrontation with EC at a
time when there are numerous other contentious issues
on the agenda (e.g., agricultural exports).
o The EC would not retaliate ?against the U.S.
Disadvantages
o Avoiding any action now would seriously jeopardize the
Administration's credibility in negotiations across a
wide range of issues since we have already conceded to
allowing the conditional entry of 100,000 tons of line
pipe.
? A delay in resolving this problem makes it more likely
that imports of these products will continue to surge,
making it more difficult for the Administration to come
close to meeting the 18.5 percent target.
Issue 2: Canada: How should the Administration address the
greater than expected shipments from Canada?
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ft After the EC, Canada is the only source that by itself could
0 disrupt the program. Both the Canadian Government and its steel
producers have repeatedly assured the U.S. Government that they
want to cooperate, but on several occasions have told the U.S.
steel industry that they are not obligated to do anything at all.
The nature of U.S.-Canada trade is complex, with significant
tonnage traded between steel producers on both sides of the
border. Even accounting for such trade though, Canadian
shipments of such products as pipe, wire products, and cold
finished bar appear to have increased substantially.
Option A: Seek to negotiate a voluntary restraint agreement with
Canada at the 1981-1983 level (2.4 percent) or higher.
Advantages
o This option would treat Canada on the same basis as
other major steel exporters to the U.S., including some
countries which can also claim to not dump or subsidize
exports.
o A formal restraint would be more effective than the
status quo in reducing overall imports by as much as
0.8 percentage points.
Disadvantages
o The political fallout from the U.S. pressuring Canada
for a voluntary restraint agreement could be
considerable.
o Canada would likely object that it should be excluded
from the program because its producers trade fairly.
o Canada would argue that a formal restraint presents
unique customs clearance problems for small, overland
Canadian shipments.
o This restraint could disrupt certain intracompany trade
across the border.
o The U.S. will have little leverage to encourage Canada
to agree"to voluntary restraint because of their
relative invulnerability to unfair trade complaints.
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Option B: Continue to express concern over the level of current
shipments especially in sensitive products and seek to
enhance customs cooperation to minimize transshipments
and fraudalent practices by third countries.
Advantages
o This option would avoid the political fallout that
would result from the U.S. pressuring Canada for a
voluntary restraint agreement.
o This option avoids substantially complicating trade
between steel producers across the U.S.-Canadian
border.
Disadvantages
o This option is unlikely to reduce Canadian steel
imports significantly.
o Continuing to exempt Canada from the program maintains
resentment by other "fair traders" which have had to
sign formal restraint agreements.
Issue 3: New Suppliers: How should the Administration address
the surge in imports from new suppliers?
Certain domestic steel brokers have sought to stay one step
ahead of the program by finding new suppliers as other suppliers
cut back their exports. It is difficult to control the inflow of
a new supplier because our negotiating leverage over it is
visible only after it has exported a significant quantity of
dumped or subsidized steel. An importer is able to attract new
suppliers by moving large quantities of steel rapidly into the
market, with the expectation that the worst outcome would be a
voluntary restraint agreement guaranteeing the exporter a market
share it never had before.
The result may be that for the forseeable future, the
Administration will have to pursue new suppliers one by one using
recently filed cases as leverage. Ultimately, there will have to
be many agreements, instead of the few initially expected.
Moreover, these new suppliers can force the Administration to
retreat from the overall 18.5 percent target because the market
share guaranteed by each new agreement must be added to the
market share already guaranteed to suppliers under the original
program.
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Option A: While imports from new suppliers are at relatively low
levels, aggressively pressure new suppliers to agree
to restrain shipments and/or self-initiate unfair
trade actions against them (including Section 301
petitions).
Advantages
o Only by addressing the imports from new suppliers at
low levels can the Administration hope to come close to
the 18.5 percent target.
o Some steel producers, led by Bethlehem, prefer this
approach in which surges could be controlled before
they rise to high levels.
Disadvantages
o It may be difficult to persuade new suppliers
to agree to restrain shipments at the current levels at
which they are exporting to the U.S.
o Some steel producers, particularly wire rod producers,
generally oppose further voluntary restraint
agreements, preferring remedies under the unfair trade
statutes. These producers believe they are cost
competitive with any producer and have been pressured
to drop their current cases (20 or more) as part of the
agreements reached to date.
In most of these rod cases, remedy under an unfair
trade statute would have severely curtailed imports.
In the case of Argentina, this remedy has totally
eliminated its rod exports to the U.S. for an entire
year.
Option B: Continue to rely on the leverage generated by domestic
industry unfair trade cases and wait for foreign
governments to request negotiations to settle them.
Advantages
o Given the likely reluctance of new suppliers to agrne
to restrain shipments, this may be the only realistic-
approach.
o This approach focuses the Administration's response
this surge in imports on unfairly traded steel.
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Disadvantages
? This approach is likely to result in eventually
negotiating voluntary restraint agreements with new
suppliers only after they have attained a significant
market share, with dozens of restraint agreements and
total imports significantly above the 18.5 percent
target.
o This approach runs the risk that otherwise acceptable
agreements with foreign countries could be blocked by
some domestic producers refusing to withdraw their
unfair trade cases.
Issue 4: Semifinished Steel: How should the Administration
address the apparent inadequacy of the semifinished
steel target?
At the insistence of the major integrated producers, the
Administration agreed to a target of 1.7 million tons of
semifinished steel: ingots, billets, blooms, and slabs, all of
which are subsequently rolled into intermediate or final shapes.
While that target would represent a record level of imports, it
is viewed by some producers as inadequate given the needs of the
industry over the next 5 years.
Estimates of demand for semifinished imports run as high as
5 million tons with the next 2-3 years. Reports suggest that if
semifinished imports are limited to the 1.7 million ton target, a
number of domestic producers will be forced to curtail operations
they otherwise would have had running.
Semifinished steel is imported for several reasons:
o For competitive reasons, no producer wants to rely for its
raw material supply on a direct domestic competitor.
o Continuously cast slabs and certain types of billets will
not be readily available in the U.S. until considerable
additional investment has taken place.
o Where steelmaking and finishing facilities are not balanced,
semifinished imports permit the fuller utilization of
rolling mills, helping to drive down unit costs.
o During start-up or modernization, individual mills need
external sources of semifinished steel to stay in business.
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A number of U.S. producers are heavily dependent on imported
semifinished steel, for example, California Steel, Tuscaloosa
Steel, Cyclops, and Raritan River. Other producers, including
Bethlehem and LTV, import at least some semifinished steel and
are reported as having approached Brazilian, Venezuelan, and EC
producers for more. Even U.S. Steel is reported to have
discussed importing semifinished steel from South Korea.
Some observers may find hypocritical the pressures by
integrated producers to keep the 1.7 million ton semifinished
target while importing such products themselves. When pressed,
senior management of integrated producers will declare that they
would cease all semifinished imports if necessary, although their
purchasing managers continue to explore the possibility of
increasing imports.
Thus far, USTR has allocated about 1.5 million tons ?to the
countries with voluntary restraint agreements. Imports from the
EC (666,000 tons annual rate) and Sweden (300,000 tons annual
rate) continue to be strong. But imports from Canada, the only
other unrestrained foreign supplier, have declined sharply to
about 70,000 tons per year. However, without a sharp reduction
in the EC level of at least 50 percent, it will in all likelihood
not be possible to keep close to the target of 1.7 million tons.
Option A: Attempt to maintain the 1.7 million ton target through
a combination of voluntary restraint agreements and
the filing of unfair trade cases.
Advantages
o Maintains commitment the Administration made to
industry leaders in September.
o Such a restriction would help producers (e.g.,
Bethlehem) investing in new steelmaking equipment.
Disadvantages
o Such a restriction would severely curtail operations of
smaller producers who want to increase finished steel
production with the aid of semifinished imports.
? Maintaining this target would make it harder to reach
agreement with the EC given the rate at which it has
thus far exported semifinished steel to the U.S.
o It would also pose a problem for Brazil whose minimum
contractual commitments already exceed the 700,000 ton
limit agreed to in December.
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o This limit places the U.S. Government in the awkward
position of having to allocate semifinished imports
among domestic companies and thus determining which
particular firm will be able to operate at desired
levels.
Option B: Raise the limits negotiated to a level closer to
predicted peaks.
Advantages
o Such an increase in limits would enable some domestic
producers to continue to produce finished steel.
o An increase in the semifinished target would provide
the Administration additional leverage with countries
wishing to export finished steel to the U.S.
Disadvantages
o Some integrated producers may object that the
Administration has reneged on its commitment to the 1.7
million ton target.
Option C: Impose a tariff on all semifinished imports.
Advantages
o Although the price of semifinished imports would be
higher than it otherwise would be, domestic producers
would at least be able to import any quantity they need
to meet demand.
A tariff system would obviate the need for the U.S.
Government to allocate shares of semifinished imports
among domestic companies.
Disadvantages
o Some integrated producers would likely object that the
Administration has reneged on its commitment to the 1.7
million ton target.
o If the tariff is not at a high enough level, large
semifinished imports would jeopardize the modernization
efforts of a number of integrated producers.
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Option D: Impose a tariff-rate quota on all semifinished
imports, with tariff-free quantities based on the
voluntary restraint agreements already negotiated and
on historical levels for other suppliers (principally
Canada, Sweden, and the EC).
Option D would have the same advantages and disadvantages as
Option C except the following.
Advantages
o A tariff-rate quota would permit importers to enjoy
some benefit from the limits they have already
negotiated.
Disadvantages
o Unlike a simple tariff, the Administration would be
forced to take action against specific countries, in
particular Canada and Sweden, which have thus far
expressed no interest in negotiating voluntary
restraint agreements.
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TABLE 1
STATUS OF VRA TAW
Implemented
Pending
Signature
Under
Negotiation
Import
lai
Penetration
YEA
Japan X
7.05
5.80
Korea
X
2.48
1.90
Brazil
X
1.42
.80
Spain
X
1.45
.67
S. Africa
X
.59
.42
Mexico
X
.83
.36
Finland
X
.30
.22
Venezuela
X
.51
.20
Australia
X
.20
.18
Romania_
X
.28
.16
E. Germany
X
.29
.11-12
Poland
X
.14
.10
Czechoslovakia
X
.07
.04
Hungary
X
.04
.04
Austria
X
.34
Argentina
X
.31
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TABLE 2
IMPORTS OF CONSULTATION PRODUCTS FROM
THE EUROPEAN COMMUNITY
(000 OF NET TONS)
Benchmark
(1981) 1984
1985*
Finished
331
632
888
Semifinished
112
809
848
TOTAL
* Three months,
443
annualized.
1,441
1,736
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TABLE 3
ILLUSTRATIVE _SURGES FROM NEW SUPPLIERS
(000'S OF TONS)
1212
1211
1985 (annualized)
Romania**
9
272
693
Sweden
214
639
615
Venezuela**
154
.491
562
Austria*
35
326
498
E.Germany**
13
274
296
Taiwan
177
160
234
Portugal
0
55
135
Norway
2
61
81
Trinidad-Tobago
66
67
75
Israel
2
9
31
India
8
10
20
Chile
o
8
15
Singapore
0
1
14
Thailand
0
0
4
TOTAL
680
2,373
3,273
% CHANGE
+249
+38
* Negotiations under way
** Restraint agreement concluded
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TALKING POINTS: ECONOMIC POLICY COUNCIL
Deficiencies:
14 June 1985
Issues are too specific for principals only Cabinet?level meetings,
compared with review of overall strategy. Should be refined by more
staff work.
Staff work preceding the meetings is too narrow--it excludes the
traditional IG process and it excludes the entire national security
community (NSC, CIA, DOD).
-- Meetings exclude CIA.
The meetings mix domestic and international issues--this is a waste
of time. The agendas should separate these issues, or subgroups
should be established to consider domestic and international issues.
Agenda formulation is unclear--for example, why have the very serious
issues relating to Argentina/Peru debt problems not been considered
in the last two weeks? (Possible answer: Treasury keeping this to
itself.)
-- Relationship of the EPC to the NSC undefined.
Requirements:
EPC must broaden participation (CIA, NSC, DOD) and take steps to meet
each of these problems. The present approach is untenable.
CONFIDENTIAL
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