ECONOMIC POLICY COUNCIL MINUTES

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP90G01353R000400400010-7
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• Document Page Count: 138
• Document Creation Date: January 4, 2017
• Document Release Date: August 19, 2013
• Sequence Number: 10
• Publication Date: February 2, 1988
• Content Type: MEMO

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Exec I e Secretary
4 Feb 88
Date
3637 (10-81)
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Confidential Attachment
THE WHITE HOUSE
WASHINGTON
CABINET AFFAIRS STAFFING MEMORAN
Date: Feb. 2, 1988 Number: 490,725
Subject:
Economic Policy Council Minutes
Executive Regist
88-0384X
Due By:
ALL CABINET MEMBERS
Vice President
State
Treasury
Defense
Justice
Interior
Agriculture
Commerce
Labor
HHS
HUD
Transportation
Energy
Education
Chief of Staff
OMB
UN
USTR
CEA
Action
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GSA
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Bauer
Dawson (For WH Staffing)
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REMARKS:
RETURN TO:
The minutes from the Economic Policy Council
meetings held on September 10, 15, 16, and 17, 1987
are attached for your information.
[iNancy J. Risque
Cabinet Secretary
456-2823
(Ground Floor, West Wing)
o Associate Director
Office of Cabinet Affairs
456-2800
(Room 235, 0E0B)
8-$d Y-/r
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TI L
MINUTES
ECONOMIC POLICY COUNCIL
September 10, 1987
11:00 a.m.
Roosevelt Room
Attendees: Messrs. Baker, Brock, Miller, Yeutter, Sprinkel,
Smart, Whitehead, Taft, Burns, Myers, Burnley,
Martin, Cribb, Bauer, McAllister, Crippen, Danzanskv,
Dyer, Gibson, Greenleaf, Hoffman, McPherson, Murphy,
and Stephens, and Ms. Risque, Ms. King, Ms. Range,
and Ms. Arsht.
1. Canada FTA
Mr. Murphy stated that the negotiations with Canada for a Free
Trade Agreement (FTA) have stalled, mainly because of a failure
to make progress in the dispute settlement mechanism and
subsidies areas. He suggested that the United States make a
further offer in dispute settlement, but at the same time impress
upon the Canadians that they must place greater discipline on
their subsidies. He cautioned that if the Administration goes
too far by establishing a dispute settlement mechanism not based
on U.S. law, Congress may reject the entire FTA.
The Council's discussion focused on the need to respond to the
Canadian request for more flexibility on dispute settlement; the
importance of reciprocal Canadian action on subsidies; and the
appropriate timing for any action on dispute settlement.
Mr. Murphy also described the progress WP are making in other
areas of the FTA, such as autos, services, and investment.
The Council also discussed several alternative formulations for a
new dispute settlement mechanism proposal. Secretary Baker
emphasized the importance of stating that the United States has
offered a second proposal on dispute settlement.
2. Outstanding Section 301 Cases
Ambassador Yeutter reviewed the status of several outstandinc or
potential Section 301 cases. He explained that on January 1,
1988, EC regulations forbiddina the use of stimulants in beef
products will go into effect. He stated that the United States
has taken these regulations to the GATT arguing that there is rc
scientific basis for the regulations. He suggested that the
Administration pursue the following approach: communicate to the
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Minutes
Economic Policy Council
September 10, 1987
Page Two
EC that they must either agree to establish a scientific panel on
the issue or extend the implementationdate, or the United States
will self-initiate a Section 301 case. Mr. Myers agreed that if
the EC action takes effect, it would be a severe shock to the
U.S. industry and urged that we act soon. Secretary Baker
suggested that before we take action we discuss the issue with
Senators from meat exporting states.
Ambassador Yeutter noted that we are not making the necessary
progress in opening up Kansai Airport and other major Japanese
construction projects to U.S. bidders. He stated that both trade
bills require the United States to take a Section 301 case
against the Japanese. He pointed out that Prime Minister
Nakasone, who earlier made a personal pledge to resolve the
issue, will be in the United States in late September.
Ambassador Yeutter suggested this would be a good opportunity to
raise the ante on this issue. Mr. Smart noted that construction
is a highly politica] issue for Japan.
Mr. Whitehead suggested that a Section 301 case would not be
productive, arguing that there are not many U.S. construction
firms interested in the Japanese market. Mr. Smart noted that
U.S. firms are looking for design and specification contracts,
which would also help open markets for U.S. equipment
manufacturers.
Secretary Baker, noting that the trade bill conference is not
likely to get started before October 1, suggested that we take
advantage of this time to urge Prime Minister Nakasone to take
strong measures in opening up the market for U.S. construction
firms.
3. Telecommunications
Ambassador Yeutter sumrarized the potential for a Section 301
case on telecommunications. He noted that the GATT procurement
code does not require open telecommunications markets. He
explained that we could take a case outside the GATT process or
make the case for telecommunications being a service, a somewhat
more difficult proposition. He stated that there iS language in
both House and Senate trade bills calling for Section 301 action
on telecommunications. Ambassador Yeutter noted that our best'
case for a Section 301 case would be against Germany, which wcuic:.
be an extremely difficult case.
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Minutes
Economic Policy Council
September 10, 1987
Page Three
Mr. Whitehead cautioned against a "generic" Section 301 case that
would apply to a number of countries at the same time. He noted
that the United States has only recently opened its market, and
that many countries are beginning to consider breaking up their
monopolies. He also noted that the U.S. telecommunications
industry is against any Section 301 cases.
Ambassador Yeutter stated that he would not recommend a Section
301 case at this time. The Council agreed.
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criNtr--) IAL
MINUTES
ECONOMIC POLICY COUNCIL
September 15, 1987
3:00 p.m.
Roosevelt Room
Attendees: Messrs. Baker, Brock, Miller, Yeutter, Smart, Myers,
Burnley, Martin, Carlucci, Cribb, Bauer, McAllister,
Crippen, Danzansky, Gibson, Greenleaf, Holmer,
Hoffman, McMinn, McPherson, Stephens, Stucky, and
Woods, and Ms. Risque, Ms. King, and Ms. Turner.
1. Trade Legislation
Secretary Baker asked that each of the four subcommittees report
on their efforts. He explained that the Banking Subcommittee,
which he chaired, tried to accomplish three goals at its first
meeting: (1) assess whether developing compromise language would
help or hurt the Administration's objectives; (2) identify
outside groups with an interest in the issues; and (3) agree upon
a tentative opening position on many of the issues. He noted
that some of the banking issues in the trade bills that warrant
significant opposition include: (1) the Foreign Agricultural
Investment Reform (FAIR) provisions; (2) MIGA proposal; (3)
Representative Shumer's "options menu"; (4) the international
debt facility; (5) the House exchange rate requirements; (6)
primary dealer reciprocity; and (7) Representatives Bryant and
Florio's investment screening provisions.
Secretary Brock reported that the Commerce, Labor, and
Government Operations Subcommittee agreed upon the appropriate ,
Administration position on the issues and focused on establishing
priorities. He noted that in the areas reviewed by his
subcommittee, most of the Administration comments would be
negative. He pointed out that it is very important for the
Administration to make sure that the Worker Adjustment Program
and the Trade Adjustment Assistance program are considered at the
same time.
Ambassador Yeutter stated that the Trade Subcommittee spent its
time establishing a preference for either the Senate or House
formulation or identifying provisions: in which both House and
Senate formulations are unacceptable. He also pointed out that
there are instances in which one bill contains an objectionable
provision and the other bill is silent.
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Minutes
Economic Policy Council
September 15, 1987
Page Two
The Council discussed the wisdom of sending separate letters
dealing with the Subcommittee issues. Secretary Baker suggested
that any letter that is sent must fit into our larger strategy on
the trade bill.
Mr. Myers reported that the Agriculture Subcommittee had agreed
that the Administration should oppose all of the agricultural
provisions except two: MTN authority and automatic marketing
loans. He explained that the Subcommittee would do more work in
identifying priorities and interest groups that could support our
position. Mr. Woods urged that the Administration should get the
private sector involved early, which would be especially helpful
in informing Congress of the practical consequences of some of
the well-intentioned provisions. Mr. Burnley suggested that the
cargo preference provisions would warrant a veto recommendation.
Secretary Baker asked the White House Office of Public Liaison to
draw up a list of interest groups that have a stake in the trade
bill. Mr. Woods reported that the Assistant Secretaries for
Legislative Affairs have assigned to each Cabinet member specific
Senators with whom they should discuss the Administration's
concerns about the trade bill. Mr. Woods also cautioned that
because the Administration is well organized we may help the
Congress get organized if we move too aggressively.
The Council also discussed the importance of the trade'balance
numbers. Secretary Baker asked Mr. Sprinkel and Mr. Smart to
determine if we can issue numbers based on trade volumes, not
just value.
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MINUTES
ECONOMIC POLICY COUNCIL
September 16, 1987
11:00 a.m.
Roosevelt Room
Attendees: Messrs. Baker, Miller, Yeutter, Sprinkel, Smart,
Whitehead, Myers, Whitfield, Burnley, Martin,
Carlucci, Cribb, Bauer, McAllister, Crippen,
Danzansky, Dawson, Dyer, Fitzwater, Greenleaf,
Hoffman, McPherson, Mulford, Stephens, Stucky,
and Tuck, and Ms. Risque and Ms. Range.
1. Canada FTA
Mr. Murphy explained that a working group chaired by the State
Department had determined that the United States must offer
benefits similar to those extended to Canada under the Free Trade
Agreement (FTA) to roughly eight nations with whom we have
treaties of Friendship, Commerce, and Navigation (FCN). He noted
that these countries did not exercise these rights under the
Israel FTA, and we do not expect them to do so under the Canada
FTA. Mr. Burnley pointed out that exempting Canada from the
Jones Act could create MFN obligations of up to $1.6 billion.
The Council expressed satisfaction that entering the FTA would
not create unmanageable demands by other countries for similar
benefits.
Mr. Murphy summarized the status of the negotiations with Canada.
He noted that the U.S. private sector is interested in helpina
support an ambitious agreement. He also suggested that Congress
will likely support an agreement as long as it does not go too
far in establishing a dispute settlement mechanism that may go
beyond U.S. trade laws. Mr. Murphy stated that some of the key
areas in which the United States is seeking action include:
tariffs, investment, financial services, insurance, autos, films,
discipline on subsidies, intellectual property, and access to
energy.
Mr. Murphy briefly described the dispute settlement proposal he
put on the table, explaining that he made it clear to the
Canadians that the Economic Policy Council had not yet considered
the proposal. Mr. Smart stated that the Commerce Department
supports Mr. Murphy's idea. Mr. Murphy explained that the
Canadians place considerable weight on the dispute settlement
proposal because they believe U.S. trade laws are capricious and
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Minutes
Economic Policy Council
September 16, 1987
Page Two
biased against them. The Council discussed various aspects of
the proposal, including whether the mechanism would be binding
and the importance of explicitly excluding the lumber finding
from the reach of the mechanism.
Mr. Martin stated that the United States is seeking
predictability in pricing and access to Canadian energy. He
explained that Canada is seeking access to Alaska North Slope
(ANS) oil. He stated that the Canadians also want the ability
to export uranium to the United States without restrictions. The
Council discussed the possibility of mitigating the opposition to
opening up the ANS oil, even partially, by requiring that such
exports be carried on U.S. ships. Mr. Burnley expressed concerns
about exporting ANS oil under any circumstances, particularly in
light of the President's decision to permit exports from Cook
Inlet. Mr. Martin emphasized that the United States has the
potential to gain a great deal on energy in the FTA. Mr. Burnley
expressed reservations that including ANS or maritime issues in
the FTA would jeopardize the entire agreement.
The Council discussed the process for transmitting the agreement
to Congress as well as the opportunities for consulting with
Congress on the more controversial items. Ambassador Yeutter
stated that the agreement must be sent to Congress by October 4,
1987.
The Council also discussed the investment aspects of the FTA.
Mr. Murphy noted that an agreement on investment would be a
milestone in U.S. econoric relations and would establish a
,welcome precedent for the GATT Round. Secretary Baker raised some
of the implications of the Canadian practice of screening
investment in Canadian firms. He suggested that it would be
difficult for the United States to assent to screening of U.S.
investment and urged Mr. Murphy to pursue alternatives such as
ceasing all screening on some date certain.
n eTh r?.
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IAL
MINUTES
ECONOMIC POLICY COUNCIL
September 17, 1987
2.:00 p.m.
Roosevelt Room_
Attendees: Messrs. Baker, Lyng, Brock, Wright, Smart, Sprinkel,
Burnley, Martin, Smith, Cribb, Bauer, McAllister,
Crippen, Danzansky, Darby, Dyer, Greenleaf, McMinn,
McPherson, Merkin, Mulford, Murphy, Powell, Stucky,
and Whitfield, and Ms. Risque, Ms. Range, and Ms.
Eckhart.
1. Canada FTA
Secretary Baker stated that the deadline for notifying Congress
of our intent to enter into an agreement with Canada is October
4. He asked that the TPRG develop a paper for the Council and
the negotiators outlining: (1) what the United States is
achieving; (2) what Canada is achieving; and (3) what issues
remain unresolved. He suggested that rather than have the
President call Prime Minister Mulroney in the next few days, we
wait until we have engaged in more substantive negotiations
before making a judgement on whether direct Presidential
intervention is needed.
Ambassador Smith stated that the TPRG is presenting several
options for covering the Auto Pact in the FTA. He explained that
the basic issue is whether we seek to eliminate the Auto Pact rr
attempt to alter it in a manner that increases U.S. employment
and opportunities. Mr. Smith stated that the United States and
Canada, while agreeing on eliminating tariffs on auto parts,
disagree on the speed with which the tariffs would be eliminated;
the United States wants immediate elimination.
Mr. Murphy stated that the Canadians will strongly resist any
attempt to eliminate the Auto Pact. The Council discussed the
U.S. interest in reshaping the Auto Pact; the Canadian political
difficulties in eliminating the auto pact; and possible charges
to the Pact that would meet the U.S. interests. Several Courril
members stressed the importance of making some inroads in the
Auto Pact.
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Minutes
Economic Policy Council
September 17, 1987
Page Two
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2. Steel Pensions
Secretary Brock stated that the Department of Labor has developed
a new approach to the steel industry pension problems. He
explained that the ERISA Coordinating Committee had done some
work on additional alternative approaches that would not require
direct Federal outlays. He stated that some sort of special
provisions for the steel industry may be necessary for achieving
our larger pension reform proposals in Congress: increasing
funding requirements and risk-related premiums.
Secretary Brock suggested that the Administration explore the
possibility of signaling to Congress what we might be willing to
accept as special exceptions for the steel industry. He outlined
four principles for any steel program: it must reduce the
Federal Government's ultimate loss; Congress must enact reforms
that prevent the Government from becoming a large unsecured
creditor to other industries; it must not affect future capacity
decisions; and must not alter the intra-industry competitive
balance. Mr. Bauer suggested several additional principals
regarding budget neutrality.
Mr. Sprinkel expressed opposition toward any special treatment
for the steel industry. He offered three objections: the steel
industry does not need assistance -- profits are improving; such
an action would establish a harmful precedent; and special
assistance would be a step in the direction of an industrial
policy.
The Council discussed the likelihood of obtaining our pension
reform proposals without having tc provide special assistance to
the steel industry. Secretary Brock emphasized that many in
Congress have already drawn such a linkage. Secretary Baker
summarized the discussion by suggesting that Secretary Brock
discuss pension reforms with the steel industry based on the
principles cited earlier. He stated that these discussions
should not commit the Administration to providing Federal funds.
fin
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Remarks
Exec we Secretary
9 Sept '87
Date
3637 (10-81)
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CONFID.FILTIAL?AT-TA
THE WHITE HOUSE
WASHINGTON
Executive Re
87-4221X/1
CABINET AFFAIRS STAFFING MEMORANDUM
Date: 9/8/87
Number: 490,689
Due By:
Subject: Economic Policy Council Meeting -- September 10, 1987 -
11:00 a.m. in the Roosevelt Room
Action
ALL CABINET MEMBERS 0
Vice President
State
Treasury
Defense
Justice
Interior
Agriculture
Commerce
Labor
HHS
HUD
Transportation
Energy
Education
Chief of Staff
OMB
UN
USTR
EPA
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The papers and revised agenda for the September 10, meeting
of the Economic Policy Council are attached. The meeting
is scheduled for 11:00 a.m. in the Roosevelt Room.
'Nancy J. Risque
Cabinet Secretary
456-2823
(Ground Floor, West Wing)
o Associate Director
Office of Cabinet Affairs
456-2800
(Room 235,0E0B)
s--6yz /4
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THE WHITE HOUSE
WASHINGTON
September 8, 1987
MEMORANDUM FOR THE ECONOMIC POLICY COUNCIL
FROM: EUGENE J. McALLISTERE
SUBJECT: Agenda and Papers for the September 10 Meeting
The papers and revised agenda for the September 10 meeting of the
Economic Policy Council are attached. The meeting is scheduled
for 11:00 a.m. in the Roosevelt Room.
The first agenda item will be a discussion of the U.S.-Canadian
FTA. The Council will examine whether in exchange for greater
Canadian discipline on subsidies at the Federal and provincial
level, the U.S. will commit to explore some possible approaches
for increasing the role of binding dispute settlement. A paper
prepared by USTR and the Commerce Department is attached.
The second agenda item will be a discussion of whether the
Administration should self-initiate a Section 301 case on
telecommunications. At a previous meeting, the Council requested
that the TPRG undertake a review of the feasibility of
self-initiating such a case. A paper outlining the justification
for a Section 301 case, as well as potential candidate countries,
is attached.
The final agenda item will be a discussion of outstanding Section
301 cases, such as Korean insurance practices. The TPRG has also
prepared a paper outlining the possibility of self-initiating a
Section 301 case on Kansai airport.
CONFIDENTIAL ATTACHMENTS
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ECONOMIC POLICY COUNCIL
September 10, 1987
11:00 a.m.
Roosevelt Room
AGENDA
1. Canada FTA
2. Section 301 on Telecommunications
3. Outstanding Section 301 Cases
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NT1AL
UNITED STATES-CANADA FREE TRADE AGREEMENT NEGOTIATIONS:
SUBSIDIES AND THE U.S. COUNTERVAILING DUTY LAW
ISSUE
The subsidies/countervailing duty (CVD) law issue could scuttle
the FTA talks with Canada, or lead Congress to reject the FTA.
The U.S. and Canada are far apart. Canada's key FTA demand is to
substitute agreed rules enforced by binding dispute settlement for
U.S. application of its CVD law to Canada. The U.S. has maintained
that we must keep our CVD law, but has offered to address Canada's
major CVD law concerns if Canada undertakes credible subsidies
discipline.
Given the importance of the issue, our negotiators need EPC
guidance on how to proceed.
BACKGROUND
The Economics of Subsidies and CVD Cases
In relation to the real world of Canadian subsidies and U.S. CVD
cases, the issue is overblown:
o The U.S. has only five outstanding CVD orders on Canadian
products with a total 1986 import value of $180 million (see
attached chart). The six other cases filed against Canada
since 1980 resulted in negative subsidy or injury determinations
or withdrawals of U.S. petitions. Two of the cases, however,
were on lumber, where a negotiated settlement involving trade
of some $2.7 billion was reached in the Lumber II case.
o Although Canada has a wide variety of federal and provincial
subsidy programs, the subsidy margins have been small.
(Under outstanding orders, the highest margin is 5.8%; two
cases had margins under 1%.) The exception was a 15% margin
we preliminarily found in Lumber II; nearly the entire 15%
was due to Canadian pricing of rights to remove trees from
government lands ("stumpage programs").
o Canada's only CVD case against the U.S., a 1986 corn case
filed following Lumber II, led to high margins. Few U.S.
manufacturing industries, however, would be vulnerable to
Canadian CVD cases.
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Canadian Political Views
The Canadian Government has made the CVD issue into the primary
political FTA issue in Canada.
o The immense importance of the CVD issue to Canada stems from
the lumber cases. In 1983, in Lumber I, the U.S. found
that Canadian stumpage programs were not subsidies. In
1986, in Lumber II, the U.S. preliminarily found stumpage
countervailable. Lumber II led to a U.S.-Canada agreement
under which Canada imposed a 15% lumber export tax and
committed to revise stumpage practices in exchange for
withdrawal of the case.
o Because forest-based industries (and resource-based industries
generally) are central to Canada's economy, the cases and
settlement were highly visible in Canada. The lumber decisions
led to a widespread Canadian view that the U.S. uses the CVD law
to harass, and interprets and applies its CVD law arbitrarily
and inconsistently. Canada also fears that the Congress will
legislate protectionist changes in the CVD law, particularly
on natural resources.
U.S. Congressional and Private Sector Views
It is impossible now to gauge Congressional flexibility to accept
U.S. concessions on the CVD law in an FTA. Considerations:
o The subsidies/CVD issue is likely to be the major FTA issue
for the trade community on the Hill. A misstep by the
Administration in giving Canada too mach on the CVD law for
too little Canadian subsidies discipline could embroil the
FTA in the trade bill debate and have serious trade bill
consequences. On the other hand, if the talks fail over
this issue, some may charge the Administration with
lacking the vision and creativity to reach an historic FTA
benefitting U.S. industry.
o U.S. industry's right to invoke, and the U.S. Government's
right unilaterally (within broad GATT constraints) to
interpret and apply unfair trade laws is sacrosanct to
much of the Congress. The Congress is also wary of
countries' "commitments" to eliminate subsidies, unless we
can enforce the commitments. Senator Bentsen, among others,
wants to guard against weakening our CVD position multi-
laterally.
? A few members (e.g., Senator Moynihan) have publicly favored
the Canadian dispute settlement approach, but most members
who have reacted to Canadian demands stress that we cannot
give up our CVD law or subject our CVD determinations to a
binational tribunal's override.
11-111.11\1.,.
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"
o The Hill will judge any concessions on the CVD law by two
measures: (1) how good the whole FTA is for the U.S., and
(2) how good the subsidies/CVD deal is by itself. Private
sector constituencies for other aspects of the FTA, such as
investment, may not counterbalance the unfair trade law
constituencies.
o Lumber, steel, and other industries (especially natural
resources) will lobby against the FTA unless it protects
their ability to obtain unilateral U.S. CVD decisions, at
least until Canadian practices have changed. (The lumber
industry sees a third lumber case as its ultimate
enforcement tool for the lumber agreement.) The Hill is
sensitive to these industries; Senate Finance threatened to
withhold authority for the FTA negotiations because of the
lumber issue.
o There is undoubtedly some Congressional flexibility to
accept a compromise if it (1) ensures very strong discipline
on Canadian subsidies, and (2) maintains unilateral U.S.
rights to use the CVD law, at least so long as Canadian
subsidies are perceived as a problem.
CANADIAN NEGOTIATING POSITION
Canada seeks "predictability" through substitution of agreed
rules enforced by binding dispute settlement for U.S. unilateral
interpretation and application of the U.S. CVD law. Under Canada's
theory, a joint tribunal would interpret CVD-like principles to
decide whether a party had met its subsidies discipline commitments,
and could impose sanctions if it had not.
The EPC addressed the dispute settlement issue after the Venice
Summit, where Prime Minister Mulroney raised it with President
Reagan. The EPC approved a U.S. proposal for binding dispute
settlement only in mutually agreed instances. The President
wrote to Prime Minister Mulroney endorsing that approach.
Canadian negotiators claim that, in exchange for binding dispute
settlement, Canada is prepared to undertake serious discipline on
subsidies. To date, however, Canada has offered no real subsidies
discipline. Canadian proposals would permit subsidies that would
clearly be countervailable under U.S. law. We are pressing them
for effective discipline. Canada's negotiating strategy to date
has been to press us to say what greater discipline we want over
Canadian federal and provincial subsidies, but to reject U.S.
proposals if they would not fall equally on our state and federal
programs.
on
Hi uL_Li
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TIAL
_ 4 -
The fundamental flaw in Canada's approach is the notion -- appealing
though it may seem on the surface -- that the U.S. and Canada can
agree on common rules defining what is a subsidy.
o "Rules" would only give Canada a handbook on how to
subsidize. Canada claims we could base the rules on U.S.
CVD concepts. But most U.S. CVD concepts are not
susceptible of being distilled into clearcut rules; their
interpretation depends on the facts and circumstances of
a particular case. Trying to transform these concepts into
bright-line tests at (or below, in Canada's proposals)
approximately the CVD standard would condone subsidies
countervailable under U.S. law.
o Application of U.S. CVD concepts by a binational tribunal
would lead inevitably to interpretations conflicting with
those of the U.S. Government, the courts, or the Congress.
Such tribunal decisions (binding on the U.S., in Canada's
scenario) could seriously weaken the U.S. posture on
subsidies multilaterally.
U.S. NEGOTIATING POSITION
U.S. negotiators have proceeded on several assumptions:
o Meaningful subsidies discipline commitments by Canada are a
prerequisite to any concessions on the CVD law. Moreover,
subsidies discipline commitments -- although they may have to
look symmetrical for the U.S. and Canada -- must bite Canada
harder than the U.S. Reasons:
The U.S. is willing to accept Canadian CVD cases when
we subsidize, and prefers to continue to deal with
Canadian subsidies through our CVD law. Consequently,
even limited relief from our current CVD practices
would be unacceptable to the Hill unless we obtain in
return increased discipline over Canadian subsidies.
Canadian subsidies frequently are targeted and affect
exports to the U.S. Our subsidies usually are generally
available and rarely affect trade with Canada. (Canada
admits that the only "problem" U.S. subsidies are state
incentives to attract major auto sector investments.)
U.S. states would lobby against an FTA that limits their
subsidies unrelated to Canada.
o An FTA that is good for the U.S. on other issues, such as
investment and intellectual property, is a prerequisite to
any concessions on the CVD law.
o We must maintain our CVD law, unilaterally interpreted,
though we can consider some special treatment for Canada in
the application of that law.
i
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5
CURRENT U.S. OFFER
With these ground rules in mind, the U.S. has made a proposal
that would:
o Keep the CVD law as the enforcement mechanism for subsidies
discipline, but
o In exchange for credible Canadian subsidies discipline,
offer significant substantive and procedural concessions:
Commitments on how we would apply the CVD law to Canada
in key areas: natural resources (the major area of
potential disputes), regional subsidies (some currently
countervailable subsidies would be allowed), and
infrastructure.
Procedural changes to eliminate some CVD cases and
enhance the likelihood of suspending others without
duties.
Although it may be for tactical reasons, the chief Canadian
negotiator has rejected this approach and delayed progress in
other areas.
FUTURE U.S. NEGOTIATING POSTURE
U.S. negotiators now require guidance from the EPC on the U.S.
negotiating posture in the few weeks remaining.
In the view of our negotiators, there are two prerequisites to
either of the options below:
o Increased Canadian subsidies discipline at the federal and
provincial levels, with more stringent discipline applying to
Canada than to the U.S.
o Important Canadian concessions on other FTA issues such as
investment and intellectual property.
Option I: Maintain the current U.S. negotiating position,
improving the offer in minor ways if warranted by
Canadian subsidy commitments.
Assessment. U.S. negotiators believe that the U.S. proposal
offers significant CVD concessions which, as a practical matter,
go a long way toward addressing Canada's major concerns. The U.S.
has not offered such concessions to any other country, including
Israel. The concessions on natural resources and regional sub-
sidies could arouse Congressional concern, but our negotiators
believe these concessions will be acceptable to the Hill if
balanced by Canadian subsidies discipline.
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The current U.S. proposal does not, however, provide the political
optics Canada seeks and may require. Canadian negotiators are
still at the table, despite clear signals from the President and
the U.S. negotiators that the U.S. cannot accept binding dispute
settlement in lieu of the CVD law. On the other hand, without
some U.S. movement toward meeting Canada's political needs, Canada
may not be able to agree to a comprehensive FTA and may have to
end the talks.
Option II: Explore possible compromise approaches with Canada,
involving some immediate or eventual role for binding
dispute settlement. Two examples of the outer limits
of such approaches are described below.
o Agreement to the objective of replacing CVD laws between the
U.S. and Canada with bindinv dispute settlement at the end of
the ten-year transition period if (1) significant lasting
discipline on Canadian domestic subsidies has been demonstrated
by then, and (2) the decision on eliminating the CVD law is
subject to Congressional approval at that time.
Assessment. Such a commitment in the FTA would not bind the
Congress. Any exemption from the CVD law for Canada in
ten years would have to be legislated at that time. If Canadian
subsidies and CVD disputes had largely disappeared by then, the
Congress might agree. If subsidies/CVD cases were still a
problem, Congress could refuse.
Given widespread skepticism, however, that Canada will really
discipline subsidies, the Congress might balk at a commitment
in the FTA that could put pressure on the Congress to give Canada
a CVD exemption in ten years. Moreover, the idea that we would
ever forego our unilateral CVD rights may be more than the
Congress can accept.
Preliminary signals from Canadian negotiators suggest that this kind
of commitment to a ten-year objective could solve Canada's political
problem in the negotiations. Canada would probably want to
reserve the right to withdraw its own commitments in other areas
of the FTA, however, if Congress failed to legislate the CVD law
away after 10 years.
o Contemplating a limited role for binding dispute settlement
on adherence to specific subsidy discipline commitments,
either immediately or before the end of the ten-year
transition period.
For example: Require Canada to agree to subsidies discipline
beyond that required by our CVD laws. Employ dispute
settlement to test whether Canada lives up to its commitments.
U.S. CVD law would remain to apply to other practices or
breaches of the commitment.
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7
Assessment. If a threshold dispute settlement test applied a
higher standard than the CVD law, the U.S. could gain significant
Canadian discipline for little substantive risk that countervailable
subsidies would not be subject to CVD cases. It is doubtful that
Canada would commit to the necessary discipline level to accept
the compromise, but offering it would call Canada's bluff on the
level of discipline they are willing to undertake.
On the other hand, the Congress might reject any role for dispute
settlement, out of concern that tribunal decisions could bar some
CVD cases.
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U.S. COUNTERVAILING DUTY ORDERS AGAINST CANADA
Case
Year
Margin
1986 Import Value*
Live Swine
1985
C$0.0439/1b
56,743,000 (1985)
Raspberries
1985
0.99%
15,588,752
Groundfish
1986
5.82%
44,835,092
OCTG
1986
0.72%
63,227,854
Cut Flowers
1987
1.47%
55,213
$180,449,911
Data are based on TSUSA numbers listed in the orders. The
data may overstate the value of affected imports because
TSUSA categories include basket items, and because some
companies may be excluded from the orders. They may also
understate the imports affected, if CVD cases chill trade.
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CI iENT1L
OFFICE OF THE UNITED STATES
TRADE REPRESENTATIVE
EXECUTIVE OFFICE OF THE PRESIDENT
WASHINGTON
20506
September 3, 1987
MEMORANDUM FOR THE ECONOMIC POLICY COUNCIL
FROM THE TRADE POLICY REVIEW GROUP
SUBJECT: TELECOMMUNICATIONS: POSSIBLE SELF-INITIATION OF 301s
Issue
The Economic Policy Council has requested that we determine
whether certain countries' telecommunications trade and investment
practices would be actionable under Section 301 of the Trade Act
of 1974, in preparation for its review of possible self-initiation
of 301 investigations. In preparing this issue for EPC review, the
TPRG has ranked the countries under review in terms of the
restrictiveness of their practices.
Background
o U.S. industry does not support initiating any section 301
complaints on telecommunications at this time. As indicated in a
meeting with industry reps on August 24, this is true both of
those who support and those who oppose telecom legislation.
-- The former believe current legislation contains a more
positive, clear and productive approach.
-- The latter are concerned that initiation of 301s at this
time will be seen as "caving in" to Congressional pressure
and are concerned about possible limitations on access to
imported equipment.
-- Current telecom legislation requires the Administration to
develop objectives for telecom with industry input, enter
into negotiations, and achieve results or retaliate, generally
within three years.
o The TPRG reviewed 12 countries to determine their significant
barriers, the extent to which practices are unreasonable within
the meaning of section 301, the estimated effect of barriers, the
history of consultations, and advantages and disadvantages of
self-initiation. Individual country reviews are attached.
o The following common themes became apparent in the technical
review at the staff level leading up to the TPRG discussion:
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Bruce Wilson
CO1FNJfAL
DeclassVfy on:
o ADR
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2
-- The Administration's willingness to self-initiate would
demonstrate high priority attention to telecommunications,
partly in response to Congressional and private sector
concerns.
-- On the other hand, self-initiation could be counter-
productive, since many countries are taking or contemplating
steps toward liberalization, and the more confrontational
approach might reverse this trend. Moreover, taking action
against any EC Member State in particular would enable that
country to shift the locus of negotiation to the Commission,
which has no competence over national PTTs.
-- For most countries studied, it could be argued that their
practices are unreasonable within the meaning of section
301, based on lack of national treatment and/or of fair and
equitable market opportunities. Therefore, they would be
actionable under section 301 if they burdened or restricted
U.S. commerce. However, since the U.S. has one of the very
few open telecommunications markets, it may be inappropriate
to label widespread, common foreign practices as unreasonable.
-- Most of the burdensome and potentially unreasonable
practices are nevertheless not inconsistent with countries'
GATT obligations. Were we to retaliate ultimately by
restricting imports of goods, we would likely violate our
own GATT obligations, leaving ourselves open to possible
GATT sanctions.
-- For countries with which we have treaties of friendship,
commerce and navigation (FCN) (e.g., which includes all
countries reviewed, except China and Brazil), those accords
probably do not provide an international legal basis for action,
since communications enterprises are largely excluded from
the key establishment article in such treaties. Were we to
retaliate in such instances, we could also be accused of
breaching the MFN obligations of the FCN.
-- It is not clear that we have the necessary leverage
through taking or threatening 301 action on telecom trade to
open foreign markets. Countries that have the most restrictive
practices (e.g., Germany) may be net telecom importers from
us; countries that have a telecom surplus (e.g., Japan) may
have relatively more open policies. Thus, we would probably
need to restrict import access on non-telecom items if
retaliation were necessary.
-- We need to assess each case carefully in light of current
bilateral and multilateral efforts. Self-initiating in
telecommunications could "poison the well" for achieving
positive results in other on-going issues (e.g., Airbus).
LIITIAL
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3
Moreover, initiation of 301s could result in overt or covert
retaliatory action against U.S. firms based overseas.
-- Achieving only national treatment may be a Pyrrhic
victory in countries with telecommunications monopolies; in
those cases, improvements in market access should be sought.
Interagency Consideration
The Trade Policy Review Group (TPRG) reviewed a number of options
regarding self-initiation.
o There was considerable skepticism about self-initiating 301
action at this time, particularly in light of private sector
opposition. At the same time, there was concern that our current
low profile strategy on telecommunications will continue to yield
only minimal results. Consequently, a more aggressive strategy
short of self-initiating a 301 is needed, although no specific
suggestions for such a strategy were put forward. It was also
agreed that a decision not to take 301 action at this time should
not preclude possible self-initiation at some future date, and
that we should send a clear signal to our trading partners that
future 301s are not precluded.
o The TPRG also considered self-initiation only against
Germany. Agencies generally agreed that Germany's practices are
among the most restrictive and its market among the most significant.
However, it would be difficult to justify singling out Germany's
practices, since they are no more egregious than certain other
countries' barriers. It was also pointed out that there are
certain powerful forces for liberalization in Germany that could
be undermined by self-initiating a 301 at this time. Moreover,
there are certain non-trade factors with regard to Germany that
must be considered at present (i.e., Germany's role in U.S./Soviet
arms negotiations).
Country Ranking
To facilitate EPC consideration of individual countries, the TPRG
ranked them broadly according to the restrictiveness of their
practices. At the same time, the TPRG believes the EPC should
take certain other factors into account in any final "accounting"
of countries, including the significance of the market, the
relative importance of telecommunications on our bilateral trade
agenda, and the chances for the success of a section 301 effort.
Countries are listed below in broad categories of restrictiveness
of barriers. China and India, although reviewed by the TPRG, are
not included on the table, because they were considered entirely
inappropriate for any 301 action.
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C0111,21-TTAL
COUNTRY RANKING
Country Other Considerations
Most Restrictive
Brazil Would complicate efforts to conclude earlier self-
initiated 301 (informatics). Slim chances for
success.
Germany Long history of unsatisfactory consultations.
Should consider relative to importance of non-
trade issues at this time (i.e., arms negotiations).
Korea Consultations only began within past year; going
fairly well. Other priority issues "on our
plate."
Less Restrictive
Austria
France
Italy
Spain
.Non-EC European country (therefore no "competence"
problem). But, have held no consultations.
Has made some moves toward liberalization.
Not as large as other EC markets and not as
influential in policy-setting. Actual practices
more liberal than regulations.
New law being considered would be step in right
direction, although not sufficient.
Least Restrictive
Netherlands Although existing system is undesirable, considering
legislation that would make significant improvements.
United Kingdom U.K. telecom system is the most liberal in Europe.
Japan
From regulatory standpoint, relatively open,
although real market access improvements have not
occurred to the extent we would like. $60 billion
trade surplus with us should be considered.
CON? Li
4TIAI
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CON7
September 3, 1987
MEMORANDUM FOR THE ECONOMIC POLICY COUNCIL
FROM: THE TRADE POLICY REVIEW GROUP
SUBJECT: SECTION 301 DEVELOPMENTS
Summary
This memorandum outlines likely section 301 developments between
now and year's end. The Economic Policy Council may wish to take
them into account in deciding whether to initiate investigations
or recommend action under section 301 to the President regarding
telecommunications, Korean insurance, and Japan Kansai practices.
EC Meat Issues
Third Country Meat Directive. On May 1, 1987, the EC began
implementing its Third Country Meat Directive, which precludes
the importation of meat products from any plant outside the EC
that does not pass EC inspection. The directive establishes
detailed requirements, such as:
o the maintenance of separate rooms for various meat
slaughter and processing operations, and
o a prohibition on the use of wooden pallets, knife handles,
structural beams or fencing.
Of the more than 400 U.S. plants inspected by the EC since 1984,
only 7 slaughter and 3 cutting plants have been certified.
Another 59 slaughter plants are approved only until December 31,
1987, and must be reinspected by EC officials.
In 1986, U.S. meat exports (beef, veal, pork, horse and variety
meats) to the EC exceeded $165 million in value, or about 15
percent of total U.S. meat exports that year. USDA currently
accepts meat imports from over 250 European plants.
Last year we undertook a fact-finding investigation under section
305 of the Trade Act of 1974 on our own motion. The EC offered
to cooperate but never responded to the questions we posed.
On July 22, Ambassador Yeutter initiated a section 301 investigation
in response to a petition filed by the American Meat Institute,
CLASSIFIED BY 1/1'
DECLASSIFIED ON
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e7,t.
2
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Kik
U.S. Meat Export Federation, National Pork Producers Council,
American Farm Bureau Federation and National Cattlemen' s Association.
They charge that the directive denies national treatment (because
its standards are not enforced in trade between EC member states,
and do not apply within member states), and cannot be justified
on the basis of scientific evidence. Because these issues arise
under the GATT and Standards Code, we requested consultations
under Article 23:1, which are scheduled this month.
However, we have no realistic hope of achieving an outcome under
GATT dispute settlement procedures by January 1, when the temporary
approvals of 59 U.S. plants expire. Unless they are certified,
the result will be either a reduction in U.S. meat exports to the
EC, or the incurrence of unnecessary expenditures by U.S. plants
to conform to EC requirements.
EC Hormones. In January 1987, the U.S. asked for consultations
under the Standards Code to complain of the EC's Animal Hormone
Directive. This directive precludes the importation into the EC
after January 1, 1988, of any meat produced from animals treated
with hormones (which is widespread in the U.S.). We believe that
hormones can be used safely under prescribed conditions, and that
the EC should accept our residue testing program as a sufficient
guarantee of the safety of meat from animals treated with hormones.
After the Standards Code Committee was unable to achieve a
mutually satisfactory solution, in July 1987 the U.S. asked for
the establishment of a technical experts group. The EC has
blocked its establishment, interrupting the dispute settlement
process. Unless the EC agrees soon to proceed, we may wish to
consider self-initiating an investigation or acting under section
301. Even if the EC permits dispute settlement to proceed,
however, it could not be completed prior to the implementation
January 1 of the EC directive.
As a result of the Third Country Meat and Animal Hormone Directives,
as of January 1, 1988, we expect U.S. exports of meat products to
the EC to cease abruptly. The issue for the EPC will be whether
and how to act unilaterally absent a satisfactory resolution in
the interim. This issue must be addressed no later than early
November, if public comment on proposed retaliatory measures were
to be obtained and retaliation implemented by January 1.
Araentina Soybeans
The Government of Argentina has maintained higher export taxes on
soybeans than on processed soybean products. This differential
discourages the exportation of beans, puts downward pressure on
the price of soybeans in Argentina, and thus provides a competitive
advantage to the Argentine crushers of soybeans into soybean meal
and oil.
In response to a petition filed by the National Soybean Processors
Association in 1986, we initiated a section 301 investigation.
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IAL
Last May, the President suspended this investigation based upon
the Argentine Government's commitment to eliminate or substantially
reduce all export taxes by October 15.
On July 20 Argentina eliminated or significantly reduced the
export taxes on all products except soybeans and sunflower seeds.
It reduced the differential in taxes on soybeans and processed
soybean products from 12 to 11 percent, which we do not consider
a substantial reduction.
We are pressing the Argentine Government to fulfill its pledge by
October 15. Argentina's Finance Minister will meet with Ambassador
Yeutter at the end of September to discuss the problem. However,
for Argentine domestic political and revenue reasons, we are
skeptical how far the Government will move.
Agencies agree that this export tax differential distorts trade;
despite repeated deliberations within the Section 301 Committee,
they still disagree whether it is unjustifiable, unreasonable or
discriminatory and a burden or restriction on U.S. commerce (the
criteria of section 301). However, breach of Argentina's commitment
to eliminate or substantially reduce all export taxes by October
15 would be independently actionable under section 301 as unjusti-
fiable, if it also burdened or restricted U.S. commerce.
Absent a satisfactory settlement by October 15, the issue for the
EPC will be whether and how to respond to Argentina's breach of
its commitment and maintenance of an export tax differential that
distorts trade. This issue would arise as of October 15, but
there would be no need to act immediately to preserve the status
quo (as in the EC meat matters).
Argentina Air Couriers
In 1984 the Air Courier Conference of America complained of the
Argentine Government's restrictions on the delivery of time-
sensitive commercial documents, which essentially prohibited U.S.
couriers from the international carriage of such items. In
November 1984 the President determined this practice to be
unreasonable and a restriction on U.S. commerce. He directed the
Trade Representative to consult further with Argentina, but to
submit proposals for action under section 301 within 30 days if
the issue were not resolved through consultations.
With the help of this leverage, we persuaded Argentina to eliminate
its restrictions. However, it replaced the restrictions with a
discriminatory tax on international courier operations, which our
industry maintains bore no reasonable relationship to the cost of
any services provided. Recently the Argentine Government allegedly
has harassed the local franchise of one U.S. company, DHL, on the
basis of purported ties to British interests. In addition, the
Government is replacing the clearly discriminatory tax system
with a nondiscriminatory tax system that may operate nonetheless
to the disadvantage of international couriers and to the advantage
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4
of the Argentine monopoly postal authority, ENCOTEL.
The Section 301 Committee will review the new draft regulations
as soon as they are available and meet with U.S. industry repre-
sentatives and GOA officials. If the Committee concludes that
the Argentine Government simply would be replacing one unfair and
burdensome practice with another, it will recommend any appropriate
action to the Trade Policy Review Group.
Brazil Informatics
President Reagan suspended the procedural and market reserve
portions of this case in December 1986, and the intellectual
property portion on July 1. The latter suspension was based on
passage by Brazil's Chamber of Deputies of legislation that would
provide adequate copyright protection to computer software.
However, Brazil's Senate does not consider this legislation
urgent and may delay its consideration until it completes drafting
the Constitution. More ominously, the Brazilian private sector
opposes the bill's market reserve provisions for software, which
prohibit software imports if a Brazilian company produces a
"functional equivalent." Brazilian software user and producer
associations have asked the Senate leadership to replace this
provision with a tax on imported programs. If the Senate amends
the bill, it will be sent back to the Chamber of Deputies, where
nationalistic deputies are likely to try to derail the entire
bill if they believe that the market reserve policy is threatened.
To further complicate matters, Brazil's Secretariat for Informatics
may shortly approve a pending license application for a Brazilian
clone of the Apple MacIntosh 512 personal computer. Depending
upon these developments, the EPC may have to consider whether to
reopen the intellectual property portion of this case. (The
investment portion remains active.)
Other Current Section 301 Cases
The following are major developments and deadlines in other
active Section 301 cases:
o Canada Fish (concerning Canadian prohibitions on the
export from Canada of unprocessed salmon and herring): We
expect the GATT panel report in October. The deadline for
the Trade Representative's recommendations to the President
is 30 days following the conclusion of dispute settlement.
o India Almonds (concerning Indian licensing requirements
and steep tariffs on imports of almonds): At the Indian
Government's request, a second round of GATT consultations
is scheduled for the week of September 28; and we have asked
for the establishment of a panel in the Licensing Code
Committee. The deadline for the Trade Representative's
recommendations to the President is 30 days following the
conclusion of dispute settlement.
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o Brazil Pharmaceuticals (concerning Brazil's lack of
product or process patent protection for pharmaceutical
products): After three rounds of consultations, the Brazilian
Government indicated it would not grant either product or
process patent protection for pharmaceuticals. Public
hearings are scheduled for September 14. The deadline for
the Trade Representative's recommendations to the President
is July 23, 1988.
Possible Section 301 Industry Petitions in the Wings
In addition to pending cases, we are aware of the following petitions
that could be filed by U.S. industry:
o Canada wine (concerning provincial barriers to the sale of
U.S. wine in Canada) : The Wine Institute submitted a draft
petition this summer, and is likely to file if FTA negotiations
do not resolve this trade barrier.
o Canada printing (concerning various Canadian barriers to the
importation of certain U.S. printed publications): Printing
Industries of America, Inc. submitted a draft petition late
last spring, apparently intended to serve as leverage in the
FTA negotiations.
o UK/FRG/France/Spain Airbus (concerning subsidies and
inducements to the purchase of Airbus aircraft): Boeing and
McDonnell Douglas continue to consider the possibility of
petitions under section 301 and/or the antidumping and
countervailing duty laws.
o EC Soybeans (concerning the EC's domestic subsidies for
soybeans): The American Soybean Association has submitted a
second draft petition which the Section 301 Committee is
reviewing. ASA says it plans to file September 16, and is
determined to proceed regardless of agency comments. This
would be a blockbuster case. In 1986 U.S. oilseed and
oilseed product exports to the EC totaled $2.3 billion,
compared to $4.2 billion five years ago. If filed and
initiated, it presumably would be handled as a GATT case;
therefore, the deadline for the Trade Representative's
recommendations to the President would be 30 days following
the conclusion of dispute settlement.
o Argentina/Chile Pharmaceuticals (concerning those countries'
lack of product patent protection for pharmaceuticals): The
Pharmaceutical Manufacturers Association (petitioner in the
Brazil case) advises us that they plan to file petitions on
Argentina and Chile as well in November.
Another Possible Self-Initiation Candidate
Finally, at some point agencies may be called upon to review
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NtIAL
again Japanese soda ash practices. Several times we have considered
whether to self-initiate an investigation based upon possible
cartel activities among Japanese firms tolerated by the Government,
and U.S. soda ash producers' failure to sell as much soda ash in
Japan as their comparative advantage would warrant. Senators
Wallop and Symms have urged us repeatedly to consider action
under section 301.
To date, however, the Justice Department and some other agencies
have opposed this step based upon insufficient evidence of the
continuation or resumption of an earlier cartel. The Section 301
Committee is monitoring this situation, and will recommend action
to the Trade Policy Review Group if evidence of unfair and
burdensome practices by the Japanese Government develops.
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DEPUTY UNITED STATES TRADE REPRESENTATIVE
EXECUTIVE OFFICE OF THE PRESIDENT
WASHINGTON, D.C. 20506
202-395-5114
September 10, 1987
MEMORANDUM FOR THE ECONOMIC POLICY COUNCIL
FROM : THE TRADE POLICY REVIEW GROUP
SUBJECT: SECTION 301 ACTION AGAINST KOREAN INSURANCE PRACTICES
ISSUE
Should the President determine under section 301 that Korean
practices involving access to its life insurance market are
unfair and direct the development of appropriate and feasible
counteraction.
RECOMMENDATION
There is consensus in the TPRG that the President issue a section
301 unfairness determation and that, absent a satisfactory
negotiated solution, announce retaliation (to be developed by the
TPRG) on October 16, 1987.
THE 1986 SECTION 301 AGREEMENT
o Last year we concluded a self-initiated section 301 action
against Korean insurance practices intended to provide full
market access to that market for U.S. companies. The 1986
agreement (attached) specified that qualified U.S. insurance
firms would be promptly licensed. No reference was made to the
form of establishment -- branch office, subsidiary or joint
venture -- under which U.S. insurance firms would be required to
operate in either the life or non-life insurance markets.
o The United States government consistently maintained its
position that restrictions on the form of establishment for entry
into the Korean insurance market were unacceptable. During April
trade consultations and the July Economic Consultations, the
Koreans were put on notice that failure to allow joint ventures
and subsidiaries in the life market would be viewed by the United
States as a derogation of the agreement.
REMAINING MARKET ACCESS BARRIERS
o Implementation of the agreement to date has produced mixed
results. U.S. firms have been admitted to the compulsory fire
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capffErnAL
pool, two limited life licenses have been approved and numerous
procedural/regulatory issues have been resolved. However, we
have not achieved the objective of full market access to the life
insurance market as a result of Korean limitations on participation
in that segment of the market to branch offices.
LEGAL BASIS FOR ACTION
o Ambiguity in the language of the 1986 agreement makes it difficult
to assert unequivocally that Korea has violated the agreement.
Nonetheless, Korea's pattern of interpreting and implementing the
agreement in an unduly narrow manner has prevented U.S. firms
from gaining full entry to the life market.
o The August 18, 1987 Korean decision to reject a bona fide
joint venture application, as well as its stated intent to reject
future joint venture applications and applications of U.S.
subsidiaries, clearly signal the Korean policy of continued
protection of its life insurance market. Other practices -- such
a delays in the issuance of licenses, limitations on the number
of products that U.S. insurance firms may market and requirements
concerning renewal of licenses every two years-- also underscore
the Korean intention to attempt to implement the 1986 agreement
in a minimalist fashion.
o It is the consensus of the TPSC Korea Subcommittee responsible
for monitoring implementation of the 1986 section 301 agreement
that further technical level consultations under the consultative
mechanism of the agreement will not accomplish the goal of
increased access for U.S. firms. Elimination of restrictions on
form of establishment would require a ministerial level decision
in Seoul. Such a decision is unlikely in the absence of an
unfairness determination and a direction to recommend counter-
measures.
o Because these practices deny national treatment and fair and
equitable market opportunities, they maybe considered unreasonable
under section 301. Because they also burden and restrict U.S.
commerce (by limiting the sale of insurance by U.S. firms in
Korea), they are actionable under section 301.
o In addition, we believe these restrictions violate Article VII
of the 1956 U.S.-Korea Treaty of Friendship, Commerce and Navigation.
Article VII accords national treatment "with respect to engaging
in all types of commercial,...financial and other activities for
gain (business activities)..., whether directly or by agent or
through the medium of any form of lawful individual entity." In
our opinion, the broad scope of this provision covers insurance
services. Consequently, Korean government acts, policies and
practices are also unjustifiable under section 301.
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PRIVATE SECTOR VIEWS
ENTIAL
o The Korean insurance market is the 10th largest in the world with
1986 total life premiums of $6.3 billion. The life market grew
at an average annual rate of 30 percent between 1982-1986.
Industry analysis predicts average annual growth of 20 percent in
the Korean life market over the next five years. Again according
to industry analysis, roughly five years of operation by new
entrants to the market are required before profits are earned.
The International Insurance Council estimated in 1986 that U.S.
firms would be able to capture immediately a 5 percent market
share if allowed to operate without restriction on form of
establishment. We believe this is a conservative estimate given
the industry's interest in pursuing entry into the Korean market
following the 301 agreement, i.e., letters of intent or applications
from six U.S. firms.
o U.S. insurance firms have actively supported our efforts to
aggressively enforce the 1986 section 301 agreement. Preliminary
soundings of the industry indicate that it will support retaliation.
POSSIBLE RETALIATION
o Based on industry analysis, we estimate that the 1986-90
Korean life market will approximate $55 billion in total premiums.
Using an average annual premium level of $11.3 billion, we
estimate that U.S. firms are losing in the range of $550 million
to $1.1 billion in life premiums annually.
o Preliminary interagency discussions have focused on developing
a retaliation package based on imposing prohibitive tariffs on
Korean exports in the $0.5 to $1.0 billion range (1986 Korean
exports to the U.S. were valued at $13.4 billion).
o It is generally agreed that textiles covered by the bilateral
agreement and steel items under restraint should be excluded from
any retaliation package. Products appropriate for consideration
would include, inter alia , automobiles, various consumer electronics,
computers, certain footwear, automobile tires, and processed
agricultural products.
PnA!ri
AL Classitie,d (
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September 3, 1987
MEMORANDUM FOR THE ECONOMIC POLICY COUNCIL
FROM: THE TRADE POLICY REVIEW GROUP
SUBJECT: JAPAN KANSAI AIRPORT CONSTRUCTION PRACTICES
Issue
The Economic Policy Council is to decide whether the Trade
Representative will self-initiate a section 301 unfair trade
investigation of Japanese Government practices in connection with
the construction of the Kansai Airport.
Kansai Airport
The Airport Project: The Kansai International Airport
Corporation (KIAC) is building an over $7 billion airport near
Osaka. KIAC is a "special" company established under the Kansai
International Airport Corporation Law and controlled by the
Ministry of Transportation. For example, the Ministry:
o holds two thirds of KIAC shares;
o authorizes any issuance of additional shares;
o approves KIAC's yearly business plan and any subsequent
changes to it, the appointment and dismissal of KIAC
directors and auditors, and any changes in its articles
of incorporation; and
o in consultation with the Ministry of Finance, can veto
KIAC's access to capital markets.
As a result, we consider KIAC an instrumentality of the Government
of Japan.
Airport construction is scheduled to proceed in four phases: (1)
building sea-walls, landfill and a bridge linking the airport
island to the mainland, which has begun; (2) constructing the
airport (runways and terminal building), expected to begin in
1990; (3) equipping the airport, scheduled to conclude by 1992;
and (4) expanding the airport to include two more runways.
While sizable by itself, the Kansai Airport project is the first
of several major such Japanese undertakings including the Trans-
Tokyo Highway Bay Bridge and Narita Airport expansion projects.
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Particularly in view of the collapse of the Middle East construction
boom and LDC debt constraints, the Japanese market and Japanese-
financed projects in third countries are viewed as good prospects
for the U.S. construction, civil engineering and architectural
design industries outside the U.S. These industries therefore
attach great importance to the Japanese market, particularly
since Japanese participation in the U.S. construction market is
growing (from roughly $1.8 billion in 1985 to $2 billion in 1986
and an estimated $3.4 billion in 1987).
Practices Actionable Under U.S. Domestic Law. KIAC uses
non-transparent, discriminatory procurement procedures; for
example:
o It does not release. specifications and information
necessary for foreign firms to prepare responsive bids
in a timely manner.
o It does not notify unsuccessful applicants of its
decision to award a contract to another bidder, or
provide any right of appeal.
o It has refused even to consider foreign firms for phase
1 of the project (which accounts for two thirds of its
expected costs).
o It decides which firms will be allowed to submit bids
on major construction contracts based upon subjective
criteria, including experience and qualifications in
Japan. This presents a chicken-and-egg problem, since
no U.S. company has been awarded a major Japanese
construction project since 1965.
o Dango, a practice whereby Japanese construction companies
collude on bids and pricing to parcel out construction
jobs to each other (and exclude outsiders), likely
influences KIAC's procurement.
Since we consider KIAC an instrumentality of the Japanese Government,
its practices are actionable under section 301 if they violate or
deny benefits under a trade agreement, or are otherwise unjusti-
fiable, unreasonable or discriminatory and a burden or restriction
on U.S. commerce. These practices probably do not violate the
GATT, Government Procurement Code or U. S . -Japan Treaty of Friendship,
Commerce and Navigation (FCN). However, they may be said to deny
national treatment and fair and equitable market opportunities.
Consequently, they may be considered "unreasonable" and "discrim-
inatory" under section 301. They also burden or restrict U.S.
commerce, since U.S. design, engineering, construction and
consulting experience--particularly in airport design and con-
struction--is so well established that we could fairly assume
that we would be competitive in Japan if given fair access to the
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3
market. Therefore, as a matter of U.S. domestic law, they are
actionable under section 301.
Retaliation and U.S. International Obligations. If we were
unable to settle this case and compelled to retaliate, we are
uncertain how large the retaliation package would be. Commerce's
current best estimate, based on a contracted study, is that U.S.
firms could reasonably expect to win up to $270 million in
equipment and $6 million in services contracts, if given fair
access to Kansai procurement. However, this is a rough guesstimate
that would require refinement as more information becomes available
on Phases 2 and 3 of the project.
We would have difficulty retaliating against Japanese construction
services in our market. Section 301 authorizes restriction of
prospective, federal "service sector access authorizations"
and/or the imposition of fees on services (either against the
country concerned or on a nondiscriminatory basis).
o A "service sector access authorization" is defined as a
license, permit or regulatory approval that facilitates
access by the foreign service industry to the U.S.
market. However, almost all such permits required by
the construction industry are state or local rather
than federal.
o Moreover, imposition of fees or restrictions on "services
of Japan" would require us to determine the origin of
the services provided. Such retaliation could violate
our FCN obligations.
O Neither federal service or construction contracts are
covered by the Government Procurement Code. Therefore,
any such retaliation against services would not be
inconsistent with the Code.
Of course, section 301 also authorizes increased duties or other
import restrictions on imports of products. (Regarding procurement,
our Buy American laws already discriminate in the procurement of
goods used in carrying out a federal construction project.) U.S.
retaliation against products of Japan would violate our GATT and
FCN obligations. Moreover, any retaliation against any procurement
of products covered by the Government Procurement Code would
violate it as well.
The Trade Bill. Both H.R. 3 (sec. 908) and S. 1420 (sec.
310) have precisely identical provisions requiring the Trade
Representative, within 90 days of enactment, to self-initiate an
investigation of Japanese Government barriers to the offering or
performance by U.S. persons of architectural, engineering,
construction and consulting services. (In fact, the original
Murkowski amendment approved by voice vote on the first day of
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4
the Senate's debate on S. 1420 was later amended to parrot the
House provision precisely.) Senator Murkowski moved the Senate
amendment on the floor; on Rep. Ritter's initiative, the House
Energy and Commerce Committee included the amendment as a noncon-
troversial matter in its title of H.R. 3.
Moreover, as amended by Senator Murkowski, the Airport and Airway
Capacity Expansion Act of 1987 (S. 1184) would prohibit the use
of FAA funds for any product or service of a foreign country
until USTR determines that such country has a reciprocal policy
permitting fair and equitable market opportunities for U.S.
firms. This bill has been reported out of the Senate Commerce
Committee and is pending floor action.
Private Sector Views. The industries involved include: (1)
design firms specializing in architecture and engineering, (2)
mainline construction firms and (3) equipment manufacturers.
Their interests diverge. Equipment manufacturers are satisfied
so long as they can sell their products; they currently believe
that pressure on Japan improves their prospects. Two trade
associations (the National Constructors Association and the
Associated General Contractors) have publicly called for action
by the United States to open up the Japanese market. The Inter-
national Engineering and Construction Industries Council will
reportedly soon issue a statement supporting the identical
provision in H.R. 3 and S. 1420. U.S. industry representatives
in Japan agree that a section 301 investigation would not hurt
their efforts to penetrate the Japanese market. However, we
believe that many U.S. construction companies and concerned
Members of Congress may consider a section 301 case primarily as
a vehicle for closing the U.S. market to Japanese competitors.
If so, they are likely to be disappointed, since retaliation
against Japanese construction services would be difficult for the
reasons outlined above.
U.S. and International Air Carriers. Both U.S. and
international air carriers fear that design problems that lead to
inefficient operations at Narita Airport are being repeated at
Kansai airport. Many airlines are prepared to suggest design
alternatives that could improve operations at Kansai but have
been excluded from the design process. U.S. officials have
expressed serious concern to Japanese officials to encourage a
sympathetic hearing of other points of view regarding Kansai's
design, but have not yet met with success.
Recent USG Efforts to Open the Kansai Market. A chronology
of our longstanding efforts to open the Japanese construction
market and in particular develop opportunities at Kansai is
attached at Tab 1. The highlights are the following:
May 1986: Ambassador Yeutter writes the Minister of
Transportation to indicate concern about Japan's
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5
unwillingness to allow U.S. firms to compete for Kansai
contracts.
o June 1986: Murkowski and nine other Republican Senators
request information on Kansai under section 305 of the
Trade Act.
o July 1986: Prime Minister Nakasone assures Secretary
Baldrige that U.S.firms will be permitted to bid on the
latter phases of the project on a "fair and equal"
basis.
o July 1986: TPRG decides to try to resolve Kansai
through continued bilateral efforts under Commerce
leadership.
o August 1986: USTR provides information to Senator
Murkowski and others under section 305.
o August 1986: President Reagan writes Nakasone to thank
him for his offer to sponsor a seminar on the Kansai
project.
o September 1986: Prime Minister Nakasone responds that
he will keep "close personal watch over this issue,"
but warns it should not be given more importance "than
it deserves."
o October 1986: Commerce organizes a Presidential Trade
Delegation with ten industry executives to meet with
GOJ and KIAC officials to discuss U.S. participation.
These executives and some other U.S. business represen-
tatives attend KIAC seminar in Osaka.
o November 1986: Secretary Baldrige writes Ambassador
Matsunaga to reiterate the importance of U.S.participation
in Kansai project.
o January 1987: Assistant Secretary of Commerce Goldfield
negotiates U. S . access with GOJ in Tokyo and KIAC in Osaka.
o May 1987: Commerce Deputy Under Secretary Ferren opens
U.S. pavilion at International Airport Construction and
Engineering Exhibition in Osaka. Over 60 U.S. firms
exhibit their equipment and services.
August 1987: Japanese make "final" offer to Under
Secretary of Commerce Smart that includes:
-- 30-day notification of equipment procurement over
$150,000 SDRs;
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WHEaftAL
6
30-day notification of construction contracts over
$5 million;
40-day notice to prepare bids on equipment contracts;
60-day notice to prepare bids on construction
tenders;
advertising for consulting services contracts over
$500,000;
notification of non-selection by KIAC and reasons
therefor;
acceptance of overseas credit ratings, qualifications,
experience and test data;
specifications for equipment and materials based
on performance rather than generic criteria;
provision of appeals to: (1) the International
Affairs Office of KIAC, and (2) the Kansai Inter-
national Airport Division in the Ministry of
Transportation; and
consideration of international arbitration of
disputes on a contractual basis.
This "offer" applies only to the Kansai project, and not to other
Japanese construction projects. Although this offer represents
some movement by the Japanese Government (which it may consider
quite significant), it falls short of establishing the transparent,
nondiscriminatory procurement system we desire.
Pros of Self-Initiation:
o Increases pressure on Japan and KIAC, without which we
and our construction and design industries believe we
will gain nothing more, and may lose even our modest
gains to date.
o Shows our commitment to open this traditionally closed
Japanese market despite GOJ intransigence.
O Establishes a time limit on negotiations, since the
Trade Representative would be required to recommend
action to the President within one year of initiation.
O Responds to a particularly egregious unfair trade
practice, for which there is no other logical next step
except further negotiations.
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_CDENCIAL
7
o Could build on our track record of concluding procurement
agreements with Japan (NTT, supercomputers).
Cons of Self-Initiation:
o May be too late to reap any political credit for self-
initiating, given identical provisions in both bills
and the broader coverage of those provisions.
o Would be perceived as rejecting Prime Minister Nakasone's
pledge on this matter.
o The Japanese Government may not have sufficient leverage
over the influential construction industry to enforce a
new, nondiscriminatory procurement system.
o Absent a satisfactory settlement, may result in retaliation
that probably would not reduce Japanese participation
in the U.S. construction market, which may be U.S.
construction industry's real aim.
o Could jeopardize potential equipment sales on Kansai
project.
o Picks a big fight with Japan at a time when we're also
juggling the trade bill, Canada FTA negotiations, other
section 301 matters, etc.
o If compelled to retaliate, such retaliation could
provoke a successful Japanese challenge in the GATT or
under the FCN (which calls for submission of disputes
to the International Court of Justice unless some other
agreement is reached).
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APPEN X
1
KANSAI INTERNATIONAL AIRPORT PROJECT
CHRONOLOGY
5/28/86 USTR Yeutter writes to Minister of Transportation Mitsuzuka
saying: (1) Japan is ignoring its international obligations by
restricting participation to domestic designated bidders; (2) the
GOJ holds 2/3 of KIAC and is obliged at a minimum to ensure that
KIAC adopts a system of open competitive bidding; (3) exclusion
of foreign bidders is contrary to Japan's commitment to a more
open market under the Action Program and the Maekawa Report; (4)
USG reserves right to pursue the restrictive bidding issue
bilaterally or in multilateral fora.
Baldrige letter to Nakasone requests open bidding procedures and
cites projects Japanese firms have undertaken here.
Senate Republican Conference Task Force on International Trade
Policy (chaired by Murkowski) requests USTR section 305 inquiry.
6/5/86
6/19/86
7/15/86
7/23/86
Nakasone becomes involved: instructs his cabinet that Kansai
project should not become a source of embarrassment.
Matsunaga letter to Yeutter argues Japan not shirking
national responsibilities, there is no discrimination
foreign companies -- Procurement Code not applicable,
private, foreign participation in Phase I impossible;
designated bidding system.
7/28/86 Nakasone assures Baldrige that U.S. firms will be permitted to
bid on the later (post-landfill) stages of the project on a "fair
and equal" basis. Baldrige warns Nakasone that "Kansai is on the
way to becoming an emotional national issue". Nakasone answers
that there are no international rules for tendering construction
projects, and that the Kansai Airport Project will be carried out
according to the established rules and practices of Japan. These
do not exclude foreign firms, he continues, but do present a
"challenge" which interested parties will have to overcome.
Nakasone conveys his assurances to President Reagan that foreign
firms will be able to compete on a fair and equal footing in the
latter stages of Kansai project.
Iglcstir corOnnnycOrficg:s1XII%ndsTIo(Whensagu equipmentttrad
l
handling facilities will be built and tower control equipment
will be purchased).
7/28/86 Hashimoto Meeting - Transportation Minister Hashimoto promises
Baldrige that he would not permit Japanese firms to form a group
which could exclude foreign participation.
7/30/86 On the basis of Nakasone and Hashimoto promises, TPRG agrees to,,,
CLASSIFIED BaineAut_4211f;_'
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its inter-
against
KIAC is
describes
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2
endorse Commerce-proposed seminar for potential U.S. suppliers,
and to seek GOJ commitment that no contracts for the project
would be let until procedures consistent with Nakasone's commitment
were developed and explained to U.S. firms; Commerce mission
under Smart to pursue equal access in procurement procedures.
8/7/86 Baldrige letter to Hashimoto transmits this expectation, proposing
KIAC Seminar, pressing for open access, and seeking GOJ commitment
that no contracts for the project would be let until procedures
consistent with Nakasone's commitment were developed and explained
to U.S. firms. States "only full and immediate implementation of
this policy will forestall formal trade action by my Government."
Requests written understanding spelling out principles of a non-
discriminatory system to be applied to Kansai and other major
public works contracting.
8/15/86 Section 305 Response - Yeutter sends nonconfidential summary of
available information on Kansai issue to requesting Senators.
Response concludes that GOJ has effective control over the KIAC
and that the KIAC has so far followed "nontransparent, discrimin-
atory procedures."
8/15/86 Pres. Reagan writes to Nakasone thanking him for his offer to
sponsor a seminar for U.S. firms interested in participating in
the Kansai project. As a symbol of the "great value which I
personally place on the effort," President informs Nakasone that
he is sending a Presidential Trade Delegation to participate in
the seminar and to assess "extent of real business opportunities
for us."
8/18- Smart visit to Tokyo; during 4-day visit, Smart unable to
22/86 obtain "set of principles" or other such written commitment to
specific open principles. Letter from MOT Min. Hashimoto states
that details of procedures for contracts other than in initial
phase of project are not decided, and assures that U.S. firms
will receive timely and equal access to information on contracting
methods, procurement plans, bid procedures and award criteria,
and be treated no less favorably than Japanese firms when contracting
methods are developed.
9/3/86 Nakasone Letter to President- Nakasone indicates that he will
keep "close personal watch over this issue," but cautions that
the issue should not be given more importance "than it deserves."
10/6&7/86 Presidential Trade Delegation, 77 high-level representatives from
over 47 U.S. firms in U.S. construction services industry, meets
in Tokyo with GOJ and Japanese industry to discuss KIAC bidding
and procurement procedures, and attends seminar given by KIAC in
Osaka. Seminar provides some information and contacts, but no
clear understanding of content or timing of KIAC procurement.
KIAC points to opportunities in Phase I consulting work and
equipment/machinery supply, but GOJ and KIAC hold firm on closing
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bidding process for Phase I, seem intent upon keeping foreign
involvement in other phases to a minimum.
Nagoya Visit: U.S. del meets with Aichi Prefecture Gov. Reiji
Suzuki to discuss plans for Chubu International Airport project.
10/10/86 Goldfield letter to Vice Min. of Construction Toyokura asks MOC:
(1) to provide all necessary information for U.S. firms to obtain
registration and licenses; (2) to give favorable consideration to
U.S. firms' applications in light of American worldwide exper-
ience; (3) to provide specific information on contract awards,
including characteristics and relative advantages of winning
tenders, and contract prices; (4) to provide U.S. Embassy with a
list of future major projects. Goldfield asks for assurances that
U.S. firms will be able to obtain necessary information to
participate from the start on major Japanese projects, such as
proposed Trans-Tokyo Bay Highway; and asks that MOC establish an
office where U.S. firms can get information and documents necessary
to qualify.
10/10/86 Similar Goldfield letter to MOT Parliamentary Vice Min. Kakizawa
asks MOT to provide all information needed to comply with procurement
requirements. In addition to requesting the major elements
contained in the Toyokura letter, Goldfield asks that MOT provide
immediate and full access to American firms, and asks that MOT
ensure quick responses to questions or complaints from U.S. firms.
10/31/86 Goldfield letter to Dirgen Watanabe of MOFA Economic Bureau
requests list of associated works for the Kansai Airport project
and local government entities supervising procurement; notes USG
expectation that local government procurement procedures will be
guided by principles of the Government Procurement Code, as
stated in Japan's Action Program (July 1985).
10/31/86 Presidential Trade Delegation report concludes, "No discernible
progress was realized on the broader objective of appraising
specific steps taken by the Nakasone government to provide a
'fully open, transparent, and nondiscriminatory' bidding system."
Many participants felt seminar just defended the designated bidding
system, and formal explanation of open and competitive bidding
procedures never happened.
11/2/86 At TPRG meeting, Goldfield states he will provide the TPRG a
detailed list of Japanese bidding opportunities for U.S. firms,
and will review Japanese bidding procedures and get the Japanese
to change them to allow more open and timely access for U.S.
suppliers. TPRG implies need for a commitment from Japanese on
U.S. participation in Phase I subcontracting and equipment
supply. Smith directs 301 Committee to evaluate actionability and
explore retaliatory options.
11/12/86 Kakizawa reply to Goldfield insists that all information required
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4
to comply with procurement requirements was provided to the USG
at the KIAC seminar; directs additional requests for information
on specific NOT projects to the policy division of the Bureau of
International Transport and Tourism. NOT agrees to provide
information about specific projects named by USG, on a case-by-case
basis. NOT provides its Five-Year Plan for Airport Improvements
and the Five-Year Plan for Ports and Harbors Improvement. MOT
recommends that private U.S. firms collect information on major
projects, and make efforts to win confidence of commissioning
entities for each project (an allusion to the Trans-Tokyo Bay
Highway project) on which they wish to bid.
11/17/86 Toyokura reply to Goldfield pledges to treat U.S. firms' applications
in the same manner as Japanese firms', while permitting U.S. com-
panies to list their construction work outside Japan in their
applications. MOC Economic Affairs Bureau designated as liaison
office for U.S. firms to contact for information and consultation
on specific problems. Toyokura declines to provide comprehensive
list of all future major projects, but agrees to provide information
on specific projects on USG request; advises American firms to
gather project-related information and "make a corporate effort
to convince the commissioning organization of their reliability.".
Toyokura notes that commissioning organization itself performs
project surveying, planning, and coordination, and thus has
authority to decide which firms participate in bidding.
11/24/86 Baldrige letter to Amb. Matsunaga - states that he is pleased
that a foreign company was included in consultants asked to draw
up plans for Kansai terminal building, but expresses concern that
the foreign company will not be on an equal footing with its
Japanese competitors. Reiterates U.S. interest in participating
in the island, bridge and associated works portion.
11/28/86 Watanabe reply to Goldfield stresses that MOFA and other national
government agencies must respect local government autonomy, and
therefore cannot supply a comprehensive list of associated works
for the Kansai Airport project. However, Watanabe agrees to make
available, through Embassy Tokyo, translated documents on general
guidelines on transportation and infrastructure around the Kansai
facility. Watanabe states that procurement of construction and other
services is not covered by the GATT Government Procurement Code
or the Action Program.
12/3/86 KIAC designates 31 marine and civil engineering firms for compet-
itive bidding on the seawall; requests proposals for seawall
construction to be submitted by 12/23/86. The 31 firms then
organize themselves into 20 consortia.
12/7/86- Goldfield and interagency delegation meets with GOJ + KIAC for
12/11/86 three days. Goldfield asks Takeuchi for specifics of proced-
ures for phases II and III, timetable for future contracts, and
indication that U.S. companies will be invited to bid on forth-
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12/7/86-
12/8/86
12/23/86
1/9/86
1/20-
24/87
3/11/87
3/16/87
3/18/87
3/19/87
4/24/87
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5
coming contracts for bridge substructure, island reclamation,
design and engineering contracts, and rock crushing equipment;
gives Takeuchi the Baldrige-Matsunaga letter.
Takeuchi agrees to consider worldwide experience of U.S. firms in
assessing bidder responsibility, states new system for announcing
contract awards effective Jan. 1, 1987: however, Takeuchi repeats
that Phase I is off limits. In meetings, MOT shows similar lack
of movement, while giving assurances that MOT will give adminis-
trative guidance to KIAC to ensure that principles of transparency
and fairness are followed. MOC assures Goldfield that MOC will
give guidance to ensure U.S. companies are given equal and fair
treatment in projects under MOC jurisdiction. All ministries
state Phase I is off limits (MOFA refers to deal between GOJ and
construction interests to this effect).
Murkowski tours airport site, meets with Takeuchi; no
positive response.
20 consortia present proposals for seawall construction to KIAC
on 12/23/86. The same day, KIAC announces that construction of
airport seawall, divided into 6 sectors, has been awarded to 6
construction consortia including 20 companies; total contract
value for the 11 km. seawall is V91,320 million ($571 million).
Construction will begin in January after MOC construction approval
is granted.
International Engineering and Construction Industries Council
(IECIC) approves position paper favoring consideration of self-
initiated 301 case.
Smith and Smart visit Tokyo for talks on subjects including Kansai.
Sen. Murkowski testifies at House Energy and Commerce Committee
hearing on Kansai.
Associated General Contractors adopt position paper endorsing
self-initiation of a section 301 case.
Sen. Murkowski and 16 co-sponsors introduce S. 742, barring
foreign firms from federally-funded airport construction unless a
firm is from country that does not discriminate against U.S.
firms in similar construction procurement.
Florio subcommittee of House Energy and Commerce Committee
reports Murkowski language requiring initiation of section 301
investigation on construction and engineering sector trade
barriers in Japan (not just Kansai); language reported out 3/25
by full committee, becomes section 908 of H.R. 3.
Smart meets with Takeuchi and hands him a letter, dated April 21,
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urging that KIAC adopt a list of specific improvements in procurement
procedures (developed by Commerce staff spring 1987 through
Kansai talks). Takeuchi discusses KIAC statement dated April 24,
"Participation of Foreign Companies in the Kansai International
Airport Project" (also published in the Kampo (official gazette)),
which announces:
(1) Thorough non-discriminatory treatment will be given in
designated bidding.
(2) Planned procurement for each fiscal year will be published in
the Kampo (together with an English summary), stating quantities,
type and delivery schedule, right after the yearly plan for work
projects is determined. For contracts over a certain size, the
subject matter, bid dates and names of designated bidders will be
made available at the KIAC reception desk, and the subject
matter, awardee(s) and contract amounts will be made available at
the KIAC reception desk. KIAC will establish an international
affairs office.
(3) KIAC will consult with foreign airport authorities in drawing
up its air terminal design, and will seek cooperation from
prominent foreign consultants in the area of internal airport
systems to be adopted by KIAC in future.
(4) There will be ample opportunities for foreign companies in
equipment procurement if they are competitive on price, quality
and afterservice. Actual orders have already been placed with
foreign companies.
(5) Actual collaboration between foreign and Japanese companies
by joint venture or technical agreements is now in progress.
This is one of the best approaches for enhancing foreign companies'
participation. KIAC will introduce foreign companies to Japanese
companies on request.
5/12- ACE Airport Construction Exhibition held in Osaka. 60 U.S.
5/15/87 companies attend, with facilitation by Commerce Department.
5/20/87 National Constructors Association approves position endorsing
self-initiation of section 301 case on Kansai.
6/15/87 Takeuchi writes back to Smart rejecting essentially all of USG
requests.
6/17/87 Kakizawa letter to Smith endorges Takeuchi letter.
6/19/87 Smart writes to Takeuchi stating that Takeuchi's letter is
unacceptable.
6/25/87 Senate approves Murkowski floor amendment to Senate trade bill by
voice vote (actively supported by NCA).
7/8/87 Takeuchi letter to Smart regrets lack of agreement, looks forward
to seeing Smart in August.
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7
7/15/87 Smart writes to Kakizawa of NOT, Watanabe of MOFA and Inoue of
MOC urging the GOJ to reconsider his suggestions.
8/12/87- Smart and Farren visit Tokyo and Osaka, consult with MOT,
8/21/87 KIAC, MOC and MOFA. KIAC and GOJ make "final offer" to Undersec.
Smart, including:
.11=P IMP
? ?
? ?
OEM Me
UM MN,
^ ,11
30-day notification of equipment procurement over $150,000 SDRs;
30-day notification of construction contracts over $5
million;
40-day notice to prepare bids on equipment contracts;
60-day notice to prepare bids on construction tenders;
advertising for consulting services contracts over $500,000;
notification of non-selection by KIAC and reasons therefor;
acceptance of overseas credit ratings, qualifications,
experience and test data;
specifications for equipment and materials based on performance
rather than generic criteria;
provision of appeals to: (1) the International Affairs
Office of KIAC, and (2) the Kansai International Airport
Division in the Ministry of Transportation; and
consideration of international arbitration of disputes on a
contractual basis.
"Offer" applies only to the Kansai project, and not to other
Japanese construction projects. Although offer represents some
movement by the Japanese Government, it falls short of establishing
the transparent, nondiscriminatory procurement system we desire.
8/17/87 Farren sends Watanabe of MOFA a letter asking for improvement and
clarification of some matters informally promised to us.
8/20/87 USG receives two draft procurement procedures, one each from NOT
and KIAC.
Sept. 1, 1987
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TO:
ACTION
INFO
DATE
INITIAL
1
DCI
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DDCI
3
EXDIR
4
D/ICS
5
DDI
6
DDA
7
DDO
8
DDS&T
9
Chm/NIC
10
GC
11
IG
12
Compt
13
D/OCA
14
D/PAO
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D/PERS
16
D/Ex Staff
X
17
NIO/ECON
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18
19
20
21
22
.,
SUSPENSE
Date
Ex t e Secretary
4 Sep 87
Date
3637 (1?-8')
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FR 4221 Y_P7
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, THE WHITE HOUSE
. rrWrifl Ti rt
WASHINGTON
Date:
CABINET AFFAIRS STAFFING MEMORANDUM
9/4/87 . Number: 4 gn 6RR
Subject: Economic Policy Council Meeting
Due By:
-- September 10, 1987 - 11:00 a.m.
Roosevelt Room
. Action FYI
ALL CABINET MEMBERS 0 0
Vice President V 0
State 2/ 0
Treasury &(,___./ 0
Defense bd_z 0
Justice ilU 0
Interior 0 0
Agriculture GI/ 0
Commerce 12/ 0
Labor V 0
HHS 0 - 0
HUD 0 0
Transportation g/ 0
....,
Energy 0
Education 0 0
Chief of Staff I:4/ 0
OMB V 0
UN 0 0
USTR El/ 0
(g)
EPA
GSA
NASA
OPM
SBA
VA
625
0
0
0
0
CEA
CEQ
OSTP
Action FYI
0
O 0
0
0
O 0
0
O 0
Carlucci
Cribb
Bauer
Dawson (For WH Staffing)
0
00000000:
Executive Secretary for:
DPC
EPC
0
0
0-
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g/
0
REMARKS:
The agenda and papers for the September 10 meeting of the
Economic Policy Council are attached. The meeting is
scheduled for 11:00 a.m. in the Roosevelt Room.
RETURN TO:
EffNancy J. Risque
Cabinet Secretary
456-2823
(Ground Floor, West Wing)
0 Associate Director
Office of Cabinet Affairs
456-2800
(Room 235,0E0B)
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r,r,hirinmierrrin
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THE WHITE HOUSE
WAS H I NG TO N
September 4, 1987
MEMORANDUM FOR THE ECONOMIC POLICY COUNCIL
FROM: EUGENE J. McALLISTER LiY\
SUBJECT: Agenda and Papers for the September 10 Meeting
The agenda and papers for the September 10 meeting of the
Economic Policy Council are attached. The meeting is scheduled
for 11:00 a.m. in the Roosevelt Room.
The first agenda item will be consideration of possible
self-initiation of 301s in the telecommunications area. A
general paper discusses interagency deliberation on this matter
and ranks ten countries in terms of the restrictiveness of their
practices. Separate papers review the current situation in each
of these countries.
The second agenda item will be a report from the TPRG on Kansai
Airport construction practices, focusing on the options for
future U.S. action.
The third agenda item will be a report from the TPRG on Korean
insurance practices, recommending the self-initiation of a
Section 301 action.
The fourth agenda item will be a review .of section 301
' developments including cases which will require future Council
.action:
Papers for all four agenda items are included.
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CONJEMENTIAL
ECONOMIC POLICY COUNCIL
September 10, 1987
11:00 a.m.
Roosevelt Room
AGENDA
1. Telecommunications: Possible Self-Initiation of 301s
2. Japan Kansai Airport Construction Practices
3. Section 301 Action Against Korean Insurance Practices
4. Section 301 Developments
EaRK-FgAL
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LUI LH 1
OFFICE OF THE UNITED STATES
TRADE REPRESENTATIVE
EXECUTIVE OFFICE OF THE PRESIDENT
WASHINGTON
20506
September 3, 1987
MEMORANDUM FOR THE ECONOMIC POLICY COUNCIL
FROM THE TRADE POLICY REVIEW GROUP
SUBJECT: TELECOMMUNICATIONS: POSSIBLE SELF-INITIATION OF 301s
Issue
The Economic Policy Council has requested that we determine
whether certain countries' telecommunications trade and investment
practices would be actionable under Section 301 of the Trade Act
of 1974, in preparation for its review of possible self-initiation
of 301 investigations. In preparing this issue-for =EPC review, the
TPRG has ranked the countries under review in terms of the
restrictiveness of their practices.
Background
o U.S. industry does not support initiating any section 301
complaints on telecommunications at this time. As indicated in a
meeting with industry reps on August 24, this is true both of
those who support and those who oppose telecom legislation.
-- The former believe current legislation contains a more
positive, clear and productive approach.
-- The latter are concerned that initiation of 301s at this
time will be seen as "caving in" to Congressional pressure
and are concerned about possible limitations on access to
imported equipment.
-- Current telecom legislation requires the Administration to
develop objectives for telecom with industry input, enter
into negotiations, and achieve results or retaliate, generally
within three years.
o The TPRG reviewed 12 countries to determine their significant
barriers, the extent to which practices are unreasonable within
the meaning of section 301, the estimated effect of barriers, the
history of consultations, and advantages and disadvantages of
self-initiation. Individual country reviews are attached.
o The following common themes became apparent in the technical
review at the staff level leading up to the TPRG discussion:
pfiggifiz
GlaWied by
Bruce Wilsor
DeaMOYM
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2
-- The Administration's willingness to self-initiate would
demonstrate high priority attention to telecommunications,
partly in response to Congressional and private sector
concerns.
-- On the other hand, self-initiation could be counter-
productive, since many countries are taking or contemplating
steps toward liberalization, and the more confrontational
approach might reverse this trend. Moreover, taking action
against any EC Member State in particular would enable that
country to shift the locus of negotiation to the Commission,
which has no competence over national PTTs.
-- For most countries studied, it could be argued that their
practices are unreasonable within the meaning of section
301, based on lack of national treatment and/or of fair and
equitable market opportunities. Therefore, they would be
actionable under section 301 if they burdened or restricted
U.S. commerce. However, since the U.S. has one of the very
few open telecommunications markets, it may be inappropriate
to label widespread, common foreign practices as unreasonable.
-- Most of the burdensome and potentially unreasonable
practices are nevertheless not inconsistent with countries'
GATT obligations. Were we to retaliate ultimately by
restricting imports of goods, we would likely violate our
own GATT obligations, leaving ourselves open to possible
GATT sanctions.
-- For countries with which we have treaties of friendship,
commerce and navigation (FCN) (e.g., which includes all
countries reviewed, except China and Brazil), those accords
probably do not provide an international legal basis for action,
since communications enterprises- are largely excluded from
the key establishment-article-in such treaties. Were we to
retaliate in such instances, we could also be accused of
breaching the MFN obligations of the FCN.
-- It is not clear that we have the necessary leverage
through taking or threatening 301 action on telecom trade to
open foreign markets. Countries that have the most restrictive
practices (e.g., Germany) may be net telecom importers from
us; countries that have a telecom surplus (e.g,, Japan) may
have relatively more open policies. Thus, we would probably
need to restrict import access on non-telecom items if
retaliation were necessary.
-- We need to assess each case carefully in light of current
bilateral and multilateral efforts. Self-initiating in
telecommunications could "poison the well" for achieving
positive results in other on-going issues (e.g., Airbus).
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-1,"4:7111 iLiLli I IML
3
Moreover, initiation of 301s could result in overt or covert
retaliatory action against U.S. firms based overseas.
-- Achieving only national treatment may be a Pyrrhic
victory in countries with telecommunications monopolies; in
those cases, improvements in market access should be sought.
Interagency Consideration
The Trade Policy Review Group (TPRG) reviewed a number of options
regarding self-initiation.
o There was considerable skepticism about self-initiating 301
action at this time, particularly in light of private sector
opposition. At the same time, there was concern that our current
low profile strategy on telecommunications will continue to yield
only minimal results. Consequently, a more aggressive strategy
short of self-initiating a 301 is needed, although no specific
suggestions for such a strategy were put forward. It was also
agreed that a decision not to take 301 action at this time should
not preclude possible self-initiation at some future date, and
that we should send a clear signal to our trading partners that
future 301s are not precluded.
o The TPRG also considered self-initiation only against
Germany. Agencies generally agreed that Germany's practices are
among the most restrictive and its market among the most significant.
However, it would be difficult to -justify singling out Germany's
Practices, since they are no more egregious than certain other
countries' barriers. It was also pointed out that there are
certain powerful forces for liberalization in Germany that could
be undermined by self-initiating a 301 at this time. Moreover,
there are certain non-trade factors with regard to Germany that
must be considered at present (i.e., Germany's role in U.S./Soviet
arms negotiations).
Country Ranking
To facilitate EPC consideration of individual countries, the TPRG
ranked them broadly according to the restrictiveness of their
practices. At the same time, the TPRG believes the EPC should
take certain other factors into account in any final "accounting"
of countries, including the significance of the market, the
relative importance of telecommunications on our bilateral trade
agenda, and the chances for the success of a section 301 effort.
Countries are listed below in broad categories of restrictiveness
of barriers. China and India, although reviewed by the TPRG, are
not included on the table, because they were considered entirely
inappropriate for any 301 action.
CO T1AL
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4
COUNTRY 'RANKING
Country Other Considerations
Most Restrictive
Brazil Would complicate efforts to conclude earlier self-
initiated 301 (informatics). Slim chances for
success.
Germany Long history of unsatisfactory consultations.
Should consider relative to importance of non-
trade issues at this time (i.e., arms negotiations).
Korea Consultations only began within past year; going
fairly well. Other priority issues "on our
plate."
Less Restrictive
Austria
France
Italy
Spain
Non-EC European country (therefore no "competence"
problem). But, have held no consultations.
Has made some moves toward liberalization.
Not as large as other EC markets and not as
influential in policy-setting. Actual practices
more liberal than regulations.
New law being considered would be step in right
direction, although not sufficient.
Least Restrictive
Netherlands Although existing system is undesirable, considering
legislation that would make significant improvements.
United Kingdom U.K. telecom system is the most liberal in Europe.
Japan
From regulatory standpoint, relatively open,
although real market access improvements have not
occurred to the extent we would like. $60 billion
trade surplus with us should be considered.
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UNCLASSIFIED WITH CONFIDENTIAL ATTACHMENT
SECTION 301: TELECOMMUNICATIONS
COUNTRY PAPERS ATTACHED
1. Austria
2. Brazil
3. China
4. France
5. Germany
6: India
-7. Italy
8. Japan
9. Korea
10. Netherlands
11. Spain
12. United Kingdom_
UNCLASSIFIED WITH CONFIDENTIAL ATTACHMENT
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ONFIDENTIAL
Austria: Possible Self-Initiation of Telecom 301
I. Technical Criteria
A. Significant Barriers to Trade and Investment
1. Terminal Equipment
The Austrian PTT defines the minimum standaids which must be met
by telecommunications equipment utilizing the public switched
network for both basic and enhanced services. The first telephone
instrument and the first telex machine with each subscriber must
be leased from the PTT. All other equipment connected to the
public network, or to private telecommunications systems which
use channels leading to the public networks, must be licensed for
use by the PTT.
Some observers believe that the PTT is becoming more liberal in
approving telecom equipment, as the result of strong industry
pressure. The following examples demonstrate the extent to which
the Austrian terminal market is open to competition:
Cordless Cellular Phones: The PTT has approved cordless cellular
telephones for sale by private companies.
Terminals: Any certified terminal may be attached to leased
lines and to the switched network. Any certified terminal may be
attached to the videotext system, so long as a PTT-supplied modem
is used. This is a recent change. Formerly, the PTT only
permitted the MUPID interactive terminal, whose development was
subsidized by the GOA.
Modems: On most leased linesl, network users can use any modem
offered by a private company, so long as it is approved by the
PTT. On the switched network, competition is permitted for low
speed modems (under 2400 BTS). A PTT supplied modem is still
required for higher speed transmission and for all terminals
attached to the videotext system.
Telex: The first telex machine must be supplied by the PTT. For
subsequent machines, subscribers can now use any compatible
telex/computer terminal. Formerly, only PTT-approved telex
equipment was allowed.
PBXs: Generally PBXs can be obtained competitively for use on
both leased lines and the public switched network. The only
exception is small PBXs in support of the public switched network
1The exception is modems for use on class DDL leased lines
which are used for analog data transmission. Modems on these
lines must be supplied by the PTT.
CO
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oiNitifT1AL
which must be supplied by the PTT.
PTT standards policies are used as industrial policy to encourage
technological industrial advanceg by Austrian-based manufacturers.
This backfired in the case of the MUPID terminal. As mentioned
above, the GOA backed the MUPID as a "smart" terminal for the
Austrian video text system. The GOA adopted the "C-two" CEPT
standard for the terminal, which is more advanced, but also more
expensive, than the "C-zero" system adopted in Germany. The
result was that the MUPID is confined to the small Austrian
market and does not sell in Germany. This makes it impossible
for the MUPID producers to make a profit.
Currently, only companies authorized by the postal administration
are permitted to install communications equipment. By 1988,
subscribers will be able to buy peripheral equipment with a
universal plug which they can attach to the switched network
themselves. The PTT will have a monopoly on distribution of the
new universal plug and will release it only to manufacturers of
certified equipment.
2. Network Equipment
The PTT also uses procurement policies as part of its industrial
policy. The PTT procures almost all of its equipment for the
public switched network from four companies with large manufacturing
facilities in Austria: Siemens, Alcatel (formerly ITT), Kapsch,
and Schrack (the latter two are private-owned Austrian firms).
These four supply also supply a large portion of other telecom
equipment.
The U.S. Embassy notes that entry into the equipment market by
foreign firms is extremely difficult if not undertaken through
joint manufacturing with well-established Austrian companies or
through the establishment of Austrian production subsidiaries.
Enhanced Services
a.) Enhanced Services on the Public Switched Network
Private companies may offer enhanced services over the public
switched network if the PTT approves the service in advance.
Generally, private companies chose not to offer enhanced services
over the public network. This is because the profitability in
enhanced services lies primarily in creating a dedicated network
of leased lines.
b.) Enhanced Services on Leased Lines
Timesharing and remote batch processing: This type of enhanced
services is permitted over leased lines. If the services are
offered within a single company, a base rate is charged. There
CONRDE6L
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CDRDEVAL
are no vplume sensitive charges. If these services are offered
between two different companies over leased lines, the base
charge for the leased lines is increased by 50 percent.
Information type services, data base access and videotext: These
services are subject to the same treatment as timesharing and
remote batch processing. That is, these services can be offered
to third parties, provided that the lessor pays a 50 percent
surcharge on the leased lines.
Value-added enhanced services such as electronic mail, protocol
conversion: A single company can provide this type of service
between its own offices over leased lines, but it cannot offer
such services to other companies.
c.) Other Regulatory Restraints
The major restraints which prevent private companies from offering
enhanced services in Austria are those described above. However,
even if those restrictions-were removed, the Austrian PTT, like
the German Bundespost, maintains a number of restrictions on the
use of leased lines which could prevent private service suppliers
from gaining market access and competing in the future. The
Austrian PTT does not allow its subscribers to tie leased lines
to the switched network. Private subscribers are not permitted
to do the following over leased lines: subchanneling, speed
conversions, data over voice, and voice over data. No line
sharing is permitted between two different enterprises.
d.) PTT Services: Telex and Electronic Mail
The PTT handles international telex and data transmission service
to other western nations. Radio Austria, a government-owned
company operating under PTT license, handles electronic mail to
all foreign destinations except the FRG, Switzerland, and Liech-
tenstein. For these three countries, electronic mail is administered_
by the PTT. Private companies are allowed to set up electronic
mail services using the public switched network. They are not
permitted to offer electronic mail over leased lines.
B. Unreasonableness of Barriers
None of the practices described above are GATT or GATT-Code
illegal and thus none are "unjustifiable" within the meaning of
301. The practices could be considered "unreasonable" within the
meaning of Section 301.
Standards: Austrian standards go beyond U.S. criterion of "no
harm to the network." Foreign suppliers have little or no access
to the Austrian standards development process. In contrast, the
U.S. has an entirely open standards development process, but it
is the only country in the world to have such an open process.
CONFIBENTC
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Testing Certification, and Attachment Procedures The requirement
for PTT approval for all equipment attached to the network is a
major anticompetitive aspect of the Austrian market. The PTT's
role as operator, competitor, and approval authority is inconsistent
with the concept of an open market. In the U.S., the FCC is
responsible for granting equipment approvals and the Bell Operating
companies must separate their operation of the network from their
competitive functions.
The Austrian refusal to recognize foreign test data and manufacturer
self-certification are also trade barriers which do not exist in
the U.S.
Network Procurement: The PTT's preferential procurement policies
are a major disincentive to new suppliers and to U.S. investment
in the Austria. However, the PTT's procurement of network equipment
almost entirely from Austrian sources is not GATT illegal because
PTTs were not covered by the Government Procurement Code.
Enhanced Services: PTT regulations of leased lines are a major
disincentive to private companies wishing to offer value-added
services. The major barrier is the prohibition on the use of
leased lines to provide value-added enhanced services between
different companies. While this prohibition does not exist in
the United States, the Austrian system, patterned on the German
model, is the norm in Europe. Other potential barriers include
the PTT's ability to deny approval for peripherals used to
provide enhanced services. Also, there are no legal constraints
on the PTT to prevent it from using its monopoly profits on basic
services to cross-subsidize its competitive offerings of enhanced
services.
Burdensomeness of Barriers
We do not have an estimate of the size of the Austrian market for
telecommunications. It is one of the smaller European markets.
Some observers would equate it with the Dutch market ($600
million in 1986). U.S. trade with Austria in telecommunications
is small. U.S. exports to Austria in 1986 were $32,000, down
from a peak of $491,000 in 1984. Exports for 1987 through June
were $8,000. Austrian exports of telecom equipment to the U.S.
were $69,000 in 1986 and $15,000 during the first six months of
this year. If Austrian trade barriers were removed, U.S. sales
of telecommunications equipment and services in Austria could
increase significantly.
D. Status of Consultations
The USG has not held any bilateral discussions with the Austrians
on telecommunications trade policies. If we were to initiate a
301 action against Austria, the GOA might complain that they were
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CONFIDENTIAL
not given the same opportunity to discuss their telecom policies
as we have given other trading partners through MAFF and/or other
telecommunications discussions. .
U.S. concerns about Austrian standards for terminal equipment
have been listed in the National Trade Estimates for the last
three years
The U.S. Embassy regularly reports on the status of Austrian
telecommunications policies and their trade effects. Certain
U.S. companies have given us information on enhanced services
which conflicts with some of the Embassy's reporting.
.1=ir
6=1,
Advantages and Disadvantages of Self-Initiation
A. Advantages
Sends a message to the German Bundespost that we are prepared
to take action on Austrian telecom practices which largely
parallel German policies. The advantage to moving against
Austria first are two fold. First, it allows us to send a
message to the Germans without attacking them during the
sensitive period while they are considering the Witte
Commission's recommendations for liberalization of their
telecommunications sector. Second, U.S. companies would be
less exposed to potential retaliation in Austria than in
Germany. (Note possible exception: cellular phones in
Austria are supplied primarily by Motorola.)
Could capitalize on indications of discontent with Austrian
telecom practices within the Austrian business community.
Gives the EPC an alternative European target for a 301 which
does not have the problem of involving the European Community
Commission.
B. Disadvantages
Would draw GOA criticism for discriminatory treatment, if we
were to initiatea 301 before at least an initial round of
bilateral telecom discussions, as we have had with other
trading partners.
Might cause the Austrian PTT to take actions to block U.S.
enhanced service suppliers from serving the Austrian market
by denying its approval for their peripherals.
Could provoke negative reactions which might slow the
liberalization process in Austria.
Might leave the USG subject to the criticism of wasting its
301 ammunition on a small market which does not have the
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CONUDENTIAL.
?=1. .11M.
scale to interest many U.S. companies in making the investment
necessary to sell in Austria.
Could be subject to the ciiticism that a 301 case against
Austria is misdirected. U.S. companies have shown little
interest to date in this small market. Some believe that
taking action against Austria, would have little or no
effect on German policymakers.
COMFEE?L
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IIRL
TELECOMMUNICATIONS: BRAZIL
Any consideration of Brazil's policies and practices in the
telecommunications area and poisible U.S. responses must take
into account the recently suspended self-initiated Section 301
action against the Brazilian informatics law.1 Many of the
barriers U.S. companies face in trying to sell telecommunications
equipment and services in Brazil are based on the same principles
of market reservation and protection of domestic production for
any good containing a "digital technique" which have proven so
burdensome for U.S. computer and related companies. Moreover, to
the extent that we have accepted certain GOB policies, like time-
limited market reserve, for informatics, we will find it difficult
to argue for a more liberal standard for telecommunications.
I. Technical Barriers
A. What are the significant barriers to trade and investment?
Access to the Brazilian telecommunications market is virtually
closed to foreign suppliers as a result of government purchasing
policies, market reserve and import restrictions. The restrictions
in the telecommunications area predate those imposed on the com-
puter-related industries (i.e., on anything containing a "digital
technique") through the informatics policy. In 1978, the Ministry
of Communications enacted Directive 622 to purchase central
telephone processing equipment only from majority-owned Brazilian
firms. The government-owned holding company, Telebras, may only
procure foreign equipment when the product is not available from
Brazilian manufacturers or when delivery time or other technical
considerations make domestic sourcing impractical. Directive 622
also imposed uniform Telebras specification requirements and
restrictions on the number of suppliers per product line.
Under Regulation- 622, Brazilian control of voting-stock was
required, but there were no specific regulations on capital stock
because of Telebras' desire-to increase the capitalization of the
telecommunications equipment sector. With the implementation of
the 1984 informatics law, however, any new investment or new
projects by existing investors must have the 70 percent Brazilian-
owned capital stock requirement provided for in that law. In
addition, decisionmaking agencies have great discretion in
approving these joint ventures.
Domestic equipment manufacture is also protected through high
tariff rates, which range from 30 percent to 185 percent, strict
import licensing requirements, tariff surcharges, local content
'Although the investment portion of our complaint
pending.
CON
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UJyJtjtJ'IIi-\L
2
requirements and financial transaction taxes based on the value
of foreign exchange necessary for the purchase. Generally,
tariffs and other barriers are lower for sophisticated goods not
produced locally (consistent with the GOB's general application
of the Law of Similars). Moreover, U.S. exporters indicate that
tariffs are not the major barrier to telecommunications imports.
As we have seen in other cases, the GOB is willing to waive those
duties in cases where it deems the import essential. The GOB
also forbids payment of royalties from foreign subsidiary to
parent if that subsidiary is producing Telebras-preferred equipment.
Regulation 661 of August 1975 mandated the development of a
family of time-division switching equipment (Digital SPC) by the
Research and Development Center of Telebras (CPqD) and required
that this equipment be employed by the national telecommunications
systems as soon as it was available. Telebras hopes that these
national systems will be the backbone if its telecommunications
systems in the future, replacing foreign switching systems
currently produced by Brazilian companies associated with Ericsson,
Siemens and other foreign firms.
The GOB recently placed fiber optic production under the market
reserve of the informatics law. Therefore, important investment
and import restrictions now apply in that sector.
Regarding services, currently all processing of data must be done
in Brazil. Companies that wish to sell such data in Brazil must
do so through a Brazilian firm. All international data commun-
ications links must be approved by the Special Secretariat for
Informatics (SEI), with criteria for approval of links not speci-
fically defined. Moreover, the approval of links is granted only
for limited periods of time. Under the 1985 Informatics Law's
authorization to the GOB to "establish standards for the flow of
trans-frontier data and to award channels or means for data trans-
missions for interconnection with data banks and---nets- abroad,-"-
restrictions could be further tightened.
Brazil's TBDF policy is most restrictive for commercial uses of
information -flows. The commercial processing of data abroad is
explicitly prohibited. Data access for commercial purposes is
allowed only in cooperation with Brazilian institutions provided
that a copy of the data, to be updated periodically, is kept in
Brazil. Restrictions on intra-corporate data flows are less
explicit. For intra-corporate data flows are less explicit. For
intra-corporate data access, a copy of the parts "necessary for
local use" must be kept in Brazil when possible. Intra-corporate
links for data processing are allowed if no "reasonable" local
alternative exists.
The provision of value added services is also restricted.
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LUINPall I IRL
3
B. Basis on which to consider these barriers unreasonable
Like the more recent, and all-encompassing, informatics policy
that was the subject of the USG's 1985 self-initiated 301 complaint,
barriers in the telecommunications area could be considered
unreasonable and a burden on U.S. commerce. However, it is not clear
that telecommunications barriers are unreasonable under the
section 301 standard. As a matter of U.S. domestic law, Brazil's
government procurement practices are unreasonable because they
deny national treatment. Similar restrictions on investment and
inadequate intellectual property protection in the informatics
area have already been determined by the President to be unreason-
able. Therefore, these practices seem actionable, since they
burden U.S. commerce. However, there is no GATT basis for
challenging these practices. Therefore, Brazil could challenge
under the GATT any U.S. countermeasures against imports of
Brazilian products (as Japan is doing in the semiconductor case.
Brazil's restrictions, e.g., local content requirements, appear
to go substantially beyond those imposed by other developed and
developing countries we have reviewed. Brazil is not a signatory
to the GATT's Government Procurement Code.
C. Effect of barriers on competition
In overseas markets. The Brazilian telecommunications market is
estimated at $576 million. In 1985, Brazilian imports of telecom-
munications equipment approximated $74 million, about 15 percent
of total purchases of these products. The major suppliers were
the United States (33 percent), Japan (25 percent), the United
Kingdom (7.5 percent) and Germany (7 percent). Brazil exported
$272 million in telecommunications equipment in 1985, a two
percent increase over 1984.
Overall, opportunities for foreign investors and exporters to
Brazil in the telecommunications sector are quite limited. In
the telephone equipment?area,--the-opportunities are =virtually_
non-existent. In other areas, such as telex equipment, the
investment possibilities for foreign companies are largely
restricted to licensing and joint ventures. Market opportunities
are restricted to sophisticated equipment incorporating the latest
technology, equipment not locally manufactured or assembled in
sufficient quantities to meet demand, and one-time-only sales.
U.S. suppliers have competed most successfully in test instrumen-
tation, radio communications and radiotelephone equipment, data
communications, and radio and television broadcasting and studio
equipment.
Brazilian trade and investment policies and practices in the
telecommunications area appear to have had a deleterious impact
on U.S. commercial interests. The GOB's buy-national telecom-
munications program has led many foreign-based companies to
divest entirely or take on Brazilian-majority partners. For
CO
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CTh&ENTFAL
4
example, as of 1980, the central telephone exchange business was
dominated in terms of units by Siemens (30 percent of the 2,460
central automatic telephone exchanges), Ericsson do Brasil (23
percent), Philips Electronica do Nordeste (14 percent), ITT's
Standard Electrica (14 percent), NEC do Brasil (10 percent) and
others (9 percent). By 1982, however, as a result of GOB pressure
and restrictions, these foreign manufacturers had transferred the
control of their subsidiaries to Brazilian shareholders. U.S.
firms selling telecom equipment and services, including GTE,
appear to have little or no interest in fighting current barriers
to penetrate the Brazilian market. (AT&T and IBM are extremely
interested in selling computer hardware and software, however,
despite the current informatics-related restrictions.)
Brazil is not an important world supplier of telecommunications
equipment and services. The effects of its telecom programs,
including CPqD's research and development subsidies for Brazilian
companies, on the competitiveness of those firms attempting to
operate in third markets is therefore small.
In the U.S. market. Although Brazil supplies some computer hardware
to the U.S. market, it is not a major player in the telecom area.
Value of damage. Particularly in light of U.S. firms' reduced
presence in the Brazilian telecom- market during the 1980s, no
estimates are currently available on the dollar value of damage
resulting from telecom restrictions. Lost market opportunities
and the adverse impact on U.S. subsidiaries in Brazil which use
telecom goods and services (e.g., financial institutions) could
be great.
D. Status of Consultations
The United States and Brazil have-not held consultations to address
telecom trade and investment barriers specifically. Moreover,
while many of the trade and investment barriers affecting telecom-
munications are identical to those in the informatics area and
were therefore the subject of intensive discussions and 301 action,
our subsequent negotiations with the GOB did not eliminate telecom-
munications -market restrictions per se. We have not held or
scheduled Market Access Fact-Finding discussions on telecom with
the GOB.
III. Advantages and Disadvantages of Self-Initiation
A. Advantages
o Shows the Administration is serious about pursuing
telecommunications trade and investment objectives.
o Would be a reasonable "follow-on" to the informatics
301, since the restrictions are similar and equally
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5
burdensome on U.S. commerce.
o Would make clear to the GOB and other developing
countries, particularly in Latin America, that telecom
is a key sector and that the USG will not be "scared
off" by the difficulties we encountered in attempting
to resolve the informatics dispute.
B. Disadvantages
o Self-initiating another 301 case at this time
could seriously jeopardize progress we have achieved to
date on the trade and intellectual property-related
aspects, in particular, in the informatics case.
o A self-initiated telecom case could jeopardize any
hope for progress (however slim) in the current pharma-
ceutical 301 case.
o Highlighting telecom could force a national debate
on the subject in Brazil and result in even tighter
restrictions and formal incorporation of these barriers
into the constitution now being drafted.
o Self-initiating another 301 case against Brazil
could enable the GOB to rally other LDCs around Brazil
in the GATT and elsewhere, by claiming we are singling
out that country for especially tough treatment.
o GOB could claim it was unfair for USG to self-
initiate a 301 when no bilateral consultations have
been held on this issue specifically.
o Were we to limit our
practices that have not been
301 case, we would greatly
positive outcome from such a
complaint only to those
covered in the informatics
diminish the value of any
case.
o Prospects for a positive outcome are not great .
Drafted by:USTR:M.Barell 8/17/87, rev. 8/24/87, 8/31/87
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FRANCE
I. Technical Criteria
A. Significant Barriers
The U.S. government has a number of market access concerns with regard
to the telecommunications environment in France. The primary concern is
that, at least at present, there is no institutional separation of the
regulatory and operational responsibilities of the French telecommunications
administration. The Direction General des Telecommunications (DCT) is part
of the Ministry of Posts and Telecommunications. Therefore, there is a
fundamental question of whether U.S. firms can compete fairly in an
environment in which the OCT not only retains a monopoly over
telecommunications services, but can effectively operate as both participant
and referee. The U.S. government also has more specific concerns, however,
in each of the following three areas: (1) terminal equipment; (2) network
equipment; and (3) services.
1. Terminal Equipment
a. Testing and Certification
As is the case in many otherEuropean countries, the standard for
terminal equipment registered in France exceeds the "no harm to the network"
standard adopted by the FCC in the United States. This may serve to limit
access by U.S. terminal equipment manufacturers to the French terminal
equipment market. Moreover, testing of customer premises equipment must
be performed by the Centre National D'Etudes (CNET), which is part of the
DGT.
Certification of customer premises equipment includes: (1) type
approval for both technical and functional specifications and (2) assurance
that the equipment will be manufactured in France within a certain time
frame. Testing of installed equipment is required in limited cases.
Equipment manufacturers must also assure ?the availability of follow?up
service and maintenance for their equipment sales. In addition, financial
liability of the manufacturer must be adequately accounted for.
2. Network Equipment
The French telecommunications market is relatively closed to U.S.
suppliers of network equipment. U.S. government concerns include: (1) rigid
product standards; (2) discriminatory procurement; and (3) "Buy French"
policies that serve to exclude foreign suppliers. Simply put, the OCT
procures almost all network equipment in France through a closed bidding
process that favors French manufacturers.
DiEIDERAL
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Procurement of some equipment is open to competitive bidding, but it
is almost always limited to products that are not produced in France.
Therefore, while the French government contends that its telecommunications
market is among the most open in the world, Cie. Generale d'Electricite
(CCE), whose acquisition of ITT's worldwide telecommunications operations
gave CCE control of the second largest telecommunications company in the
world (Alcatel NV), has a predominant share of the French market for
important network equipment items, such as switches (reportedly as high as
84% of the switching market). Moreover, the French government decision to
select the Swedish firm Ericsson to purchase Compagnie Generale de
Construction Telephonique (CGCT), which is expected to provide Ericsson with
access to the remaining 16% of the French market for switching equipment,
effectively removed the possibility of U.S. access to this market for the
foreseeable future.
3. Services
The DCT retains a monopoly over the provision of what the United States
would term "basic services." The French government is considering the
possibility, however, of separating the regulatory and functional operations
of the telecommunications administration and establishing some form of
independent oversight over the provision of network services. Nevertheless,
the current status even of providers of value added services in France is
unclear. While it is our understanding that certain firms may well provide
value added services in France, it appears that they do so under a
questionable legal or "de facto" status.
DCT officials have told U.S. government officials that the Ministry of
Industry, PTT, and Tourism will issue a decree within the next several weeks
to establish a legal regime for the competitive provision of value added
services. French government officials state that this regulatory decree
will distinguish between "telematique" and basic services, with
"telematique" services essentially defined as "value-added" services offered
to third parties, excluding pure resale and voice services. Furthermore,
French government officials suggested that the decree would also distinguish
between general and specific telematic services, with general service
providers subject to a requirement to obtain a license from the Ministry
of Industry, PTT and Tourism. Moreover, both general and specific telematic
service providers could be subject to a surcharge of as high as 30% of the
charge levied for their leased lines.
B. Basis on Which These Barriers are Considered Unreasonable
1. Terminal Equipment
In 'the United States, FCC rules provide for the submission of test
data for certification of equipment under Part 68 and the testing can be
performed within the manufacturer's own laboratory or in independent
laboratories, domestic or foreign. Moreover, the FCC processes 95% of all
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Part 68 registration applications within two months. Furthermore, FCC
requirements are limited to requiring "no harm to the network" and no
testing is required for installed equipment. The U.S. government is
concerned that French regulations govercing the attachment, testing and
certification of terminal equipment may prevent, delay or increase the cost
of terminal equipment that U.S. manufacturers wish to sell in France.
In discussions in July, however, the DGT officials stated that the
French government had abolished the-so?called primary instrument
requirement. The U.S. experience demonstrates that this constitutes a
significant policy change that could lead to greater opportunities for U.S.
equipment manufacturers and enhanced service providers. Although the
French national standard for terminal equipment and the present failure to
accept U.S. test data make the French market for terminal equipment more
restrictive than the U.S. market, if one factors the removal of the primary
instrument requirement into a comparative assessment, current French
regulations would be less restrictive than a number of other markets in
Europe, including the Federal Republic of Germany, and might even be
considered less restrictive than certain "liberal" countries, such as the
Netherlands, which continues to have a primary instrument requirement
pending the adoption of new legislation. Therefore, while the French
national standard for terminal equipment and the French failure to accept
U.S test data could be considered unnecessary and a burden on U.S.
commerce, GOF policies on terminal equipment are, in fact, more liberal
than many other European countries. As a result, should a 301 action
provoke retaliation under the GATT or the FCN treaty, it might actually
serve to close to U.S. equipment manufacturers a market that has been
increasingly open to U.S. firms.
2. Network Equipment
The closed procurement practices of the DGT and the absence of an
opportunity to participate in'the French standards setting process
effectively preclude U.S. participation in the French telecommunications
network equipment market, except to the extent that such equipment is not
available in France. The DGT, however, as is the case with other
government?owned PTTs, is exempt from the GATT Procurement Code.
Therefore, although extending'code coverage to PTTs is a major U.S.
objective in the current GATT round, present French procurement practices
do not constitute a violation of international trading obligations or any
other international laws.
The non?transparent standards setting process and closed procurement
process could be considered to discriminate against U.S. firms, and deny
them national treatment. The difficulties created for U.S. switch
manufacturers could in turn be considered a burden on U.S. commerce.
However, the DGT is exempt from Procurement Code obligations, and it could
be argued that signatories to the Code implicitly accepted restrictive PTT
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practices. Again, initiation of a 301 action could result in retaliation
under the GATT or FCN treaty.
3. Value Added Services ?
The U.S. government is also concerned that the absence of a clear
legal regime for the provision of value-added services in France, and the
possibility that certain U.S. value-added service providers could be subject
to licensing requirements and large surcharges, may serve as a barrier to
the provision of value-added services in France. While such barriers do
not represent a violation of any international or bilateral obligations,
the U.S. government believes that such French government policies may limit
the ability of U.S. firms to compete in France and internationally.
It is difficult to make an assessment of the reasonableness of current
GOF policies regarding value added services in view of their "de facto"
status. Moreover, although U.S. industry has concerns with several of the
requirements that the DCT has proposed for a forthcoming decree establishing
a legal regime for the competitive provision of value added services, we
have not received confirmation that this decree has been approved at the
ministerial level. Absent such confirmation, and a text of the decree, it
is not possible to assess the reasonableness of future-French, policies for
the provision of value added services in France.
C. Effect of these Barriers on Competition
1. Terminal Equipment
The effect of these French policies vary across the three sectors
discussed. The size of the French telecommunications equipment market was
estimated to be $5.0 billion in 1986. The customer premises equipment
market, an estimated $892 million market, is among the more competitive CPE
markets in Europe, with the DCT purchasing only about 10% of the CPE sold
in France in 1986. French testing and certification requirements can result
in delays, however, that may serve to reduce the level of U.S.
participation in this market.
2. Network Equipment
_ - - -
The network equipment market, an estimated $3.7 billion market, is
effectively closed to U.S. network equipment suppliers. U.S. exports in
1986 accounted for only 1.1 percent of all telecommunications equipment
procurement in France.
3. Value Added Services
French regulations governing the provision of value-added services
may serve to limit U.S. firms from freely establishing French and
international networks. It has been estimated, however, that the value-
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added services market in France at present is only $100 million, with
public access to some 3,400 data bases.
D. Status of Consultations
In July, FCC Chairman Dennis Patrick led an interagency delegation to
Paris. U.S. industry officials in Paris told this interagency delegation
that it is unlikely that the French government will pass a major new law on
telecommunications before the French presidential elections next spring.
Therefore, consideration of major changes, such as the separation of
regulatory and operation functions and the possibility of privatization of
the DCT, is unlikely in the near future. The French government has shown
interest, however, in moving forward on modest measures to liberalize the
provision of value-added services in France, to permit a somewhat more open
approach for the certification of terminal equipment, and to provide for
competition in the provision of cellular services.
II. Advantages and Disadvantages of Self-Initiation
A. Advantages
1. Might encourage the COF to accelerate liberalization.
2. France is a significant market in Europe, and one where the
U.S. has had serious problems. A 301 action would serve as a clear
illustration of U.S. resolve to deal aggressively with such problems.
3. French policy changes as a result of a 301 action might
lead to greater liberalization in other countries in Europe.
4. Would respond to Congressional concern over the loss by
AT&T of the opportunity to purchase CCCT.
B. Disadvantages
1. The U.S. government has limited leverage to apply to the
French in telecommunications.
2. With the approaching presidential elections, the French
government is unlikely to be in a position to, or wish to, respond
favorably to the initiation of a Section 301 action.
3. It appears that the present conservative leadership would
like to liberalize the telecommunications sector over time, but is faced
with political opposition by the DCT and the socialists that would be
strengthened by the initiation of a 301 action.
4. The initiation of a section 301 action might divert
attention to the symptoms of our concerns and therefore not promote broader
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objectives --that is, the transfer of regulatory authority to an independent
regulatory body, the promotion of a fair and impartial administrative
process and consequent substantive changes over time that facilitate the
entry of U.S. terminal equipment manufacturers and value-added service
providers.
5. A 301 action now would leave the U.S. open to charges that
such action is an unwarranted act in retaliation for losing what the French
characterize as a fair contest for CGCT.
6. A 301 action could cause a withdrawal of goodwill that would
jeopardize U.S.-France relations in a variety of areas, including ongoing
negotiations in other sectors.
drafted by: R.Milkman/FCC/632-4047 rev. 8/24/87; rev. 8/31/87
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CONE!
Section 301 Analysis: Germany
I. Technical Criteria
A. Trade & Investment Barriers
1. Terminal Equipment
o Standards
The Bundespost impedes access to the German
market by imposing regulations that go beyond
ensuring against harm to the network. These
regulations are intended to assure a high
level of performance. In addition, the
German definition of terminal equipment is
unnecessarily broad in order to maximize the
extent of the Bundespost's monopoly. Under
the German system, the first instrument on
each customer's premises must be owned and
maintained by the Bundespost. In effect,
this discourages or prohibits the
installation and use of "intelligent"
terminal equipment at the customer's
premises.
Other Bundesnost Procedures
Draft Bundespost regulations for attaching
terminal equipment to the network are not .
notified to the GATT or subject to comment
from suppliers,as required by the_GATT- -
Standards Code. In addition, the Bundespost
does not recognize foreign-generated test
data, nor does it permit manufacturers' self-
certification. The Bundespost also fails to
allow minor changes in certified equipment
without requiring recertification, and it
mandates unnecessary maintenance and
installation requirements.
2. Network Equipment
o Procurement Procedures
Bundespost procurement procedures do not
allow fair and open competition by interested
foreign suppliers. The Bundespost makes
long-term contracts with no more than two
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suppliers, preferably suppliers with
manufacturing facilities in the FRG.
Central-office switching equipment has never
been purchased from a non-German
manufacturer.
o Specifications Development Process
Foreign suppliers are not allowed the same
access to the Bundespost specifications
development process as are German suppliers,
who have preferred access to Bundespost
procurement plans and related technical
information. This is a denial of competitive
opportunities comparable to those available
in the U.S.
3. Value-Added Services
Volume-sensitive pricing of leased lines is
at some of the highest rates in Europe and is
applied to competitors of the Bundespost but
not the Bundespost itself. Despite German
claims that leased lihe usage would be
liberalized when volume-sensitive pricing was
introduced, certain restrictions remain on
the use of leased lines connected with the
public switched network.
B. Possible Unreasonableness of These Barriers
Many of the telecommunications policies and practices
of the German government run counter to international
practices and trends, as evidenced by practices in the
U.S., Japan, Canada and the United Kingdom, as well as
EC Commission proposals. The following discusses
whether these German practices could be considered
unreasonable under the legal requirements of Section
301, in that they deny national treatment and/or fair
and equitable market access to U.S. firms.
. Terminal Equipment
o Standards
German performance criteria go beyond the "no
harm to the network" criteria adopted by the
U.S., Japan, Canada, and included in the
Netherlands draft telecommunications law.
The no harm to the network criteria allows
market forces, rather than the network
.0
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C TIAL
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operator, to decide which terminal equipment
best satisfies the customer's requirements.
The EC Commission seems to support the U.S.
approach; for example, one direction of EC
policy on terminal equipment is "gradual but
complete opening up of the market to
competition." Therefore, when compared to
the standards of a number of other developed
countries, the German criteria deny U.S.
firms fair and equitable market access, and
could be considered unreasonable. However,
it should be noted that Germany's stricter
standards are not in violation of its
Standards Code commitments.
o Standards Development Process
Foreign suppliers have little or no access to
the German standards development process.
U.S. standards development and other
regulatory procedures allow the participation
of all interested parties, whether domestic
or foreign. Changes in U.S. standards are
notified to the GATT and subject to comment
from all interested parties. Therefore,
German standards setting policies deny U.S.
firms national treatment and fair and
equitable market access, and could be
considered unreasonable. However, it should
be noted that, although Japan's standard
setting process is more open than Germany's,
most countries do not permit foreign
suppliers access to the standards development
process. Also, Germany's standards
development procedures, with the-possible
exception of its failure to notify the GATT
of changes in standards, are not in violation
of its Standards Code commitments.
o Testing. Certification. & Attachment
Procedures
Unlike the U.S. and Japan, Germany fails to
recognize foreign generated test data, permit
manufacturer's self-certification, or allow
the free market to determine maintenance and
installation requirements. These policies
deny U.S. firms national treatment and/or
fair and equitable market access, and could
therefore be considered unreasonable.
However, it should be noted that most
developed countries have restrictive policies
UNDENTIAL
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? in these area's.
2. Network Equipment
o Procurement Procedures
The Bundespost's preference for two domestic
suppliers is in contrast to the open and
competitive procurement procedures of most
USG agencies and all RBOCs. Therefore,
restrictive German procurement requirements
deny U.S. firms national treatment and fair
and equitable market access. However, the
Bundespost is exempt from Procurement Code
obligations; it could be argued by the
Germans that this exemption represents an
implicit acceptance by all signatories of
restrictive PTT procurement practices. Also,
the U.S. is the only developed country to
have such fair and open procurement
procedures for network equipment.
o Specifications Development Process
Unlike the civilian USG specifications
development process, the German process does
not allow foreign suppliers the same access
as domestic suppliers. In the U.S, foreign
suppliers are allowed access to U.S. network
operators' specifications development
process, which is facilitated by Bell
Communications Research. Therefore, the
German practice denies U.S. firms national
treatment and fair and equitable market
access, and could be-considered unreasonable.
However, it should be noted that most
countries do not permit foreign suppliers
access to the specifications development
process. Also, Germany's specifications
development procedures are not in violation
of its Standards Code commitments.
3. Value-Added Services
Leased-Line Pricing
The Bundespost requires private value-added
service vendors to pay volume-sensitive
prices that are some of the highest in Europe
and that can exceed prices under a flat rate
system. This discourages foreign firms from
investing in Germany by increasing the cost
EgNFECAL
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1..1)
of their operations there. In addition, the
Bundespost does not charge itself the same
volume-sensitive prices, putting private
vendors of value-added services at a handicap
in competing with the Bundespost's own value-
added services. In contrast, cost-based
leased-line pricing, which is based on the
cost to the network operator of installing
and maintaining the line, and is not affected
by the volume of traffic using the line, is
available at flat rates in the U.S. and most
other developed countries. Private vendors
in the U.S. pay the same flat rates as
network operators. Therefore, Germany's
pricing practices deny U.S. firms fair and
equitable market access, and could be
considered unreasonable.
o Usage Restrictions
Germany continues to restrict third party
usage of leased lines, even after introducing
volume-sensitive pricing, which was intended
to serve the same purpose as the
restrictions. In contrast, the U.S., the UK,
and Japan have no restriction on third party
usage. Furthermore, the EC Commission has
stated that its objective is the free
provision of all services, including value-
added services, within member states.
Therefore, Germany's restrictions deny U.S.
firms fair and equitable market access, and
could be considered unreasonable. However,
it should be noted that many developed
countries continue to-restrict third party-
access to leased lines.
U.S.-FRG Treaty of Friendship. Commerce and
Navigation (FCNI
The FCN (signed in 1954) between Germany and
the U.S. guarantees national treatment to
U.S. firms in Germany, but specifically
exempts the area of "communications" from
this guarantee. The FCN may require each
parties state enterprises to make procurement
decisions solely on commercial
considerations, which would make present
German telecommunications procurement
practices inconsistent with the FCN.
However, this provision could be interpreted
to provide only MFN rather than national
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6
treatment, as has Article XVII of the GATT,
on which it is based.
The FCN does clearly require MFN treatment
of imported goods, unless other treatment is
permitted by the GATT. Therefore, any
retaliatory action under Section 301 would be
inconsistent with the FCN unless it were
first sanctioned by the GATT.
C. Burdensomeness of these Barriers
1. In overseas markets
The German market for telecommunications equipment
is estimated to have been valued at $5.5 billion
in 1986. Terminal equipment accounts for $1.4
billion of this and network equipment $3.7
billion. No estimate is available for the size of
the German market for value-added services. U.S.
exports of telecommunications equipment to the FRG
were valued at $109 million in 1986, approximately
2 percent of the German market for these products.
German trade barriers impose burdensome costs and
delays on foreign suppliers and sometimes close
the German market entirely for products until they
are available from domestic suppliers. For
example, the FRG has never imported a central
office switch and Germany's radio paging equipment
specifications prevent U.S. suppliers from
competing in the FRG.
In addition, Germany's protected domestic market
could be viewed as providing a subsidy to German.
manufacturers. This could give German suppliers
an advantage in third country markets, to which
one-third of German telecommunications production
is exported. German suppliers benefit from
preferential access to their domestic market, 60
percent of which is accounted for by the
Bundespost alone, where prices are considerably
higher than elsewhere.
2. In the U.S. domestic market
The U.S. market for telecommunications equipment
is estimated to have been valued at $28 billion in
1986. German market access barriers provide
German suppliers a competitive advantage in the
U.S. market because German suppliers can rely on
the lucrative German market to establish economies
of scale and profits.
If-
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3. Value of damage to U.S. industry
No estimate is available concerning the value of
the damage to U.S. domestic industry that results
from these German barriers. However, there is no
question that elimination of these barriers would
provide an important stimulus to U.S. industry,
which enjoys a comparative advantage in many
telecommunications products and in value-added
services.
D. Status of consultations
Starting in December 1985, the U.S. has held six Market
Access Fact Finding talks with German officials. These
talks have concentrated primarily on the eight
liberalization measures which the German Government
announced in December 1985. There has been some
progress to date, for example, authorization of low-
speed modem competition, electronic supply of bidding
information, an offer to conduct seminars for U.S.
industry to explain German procedures and market
opportunities, elimination of the 50% domestic data
processing requirement, and the drafting of more
liberal PBX specifications. We believe that progress
has been painstakingly slow. The publication in
September of a report by the German Government
Telecommunications Commission might speed up
liberalization.
11. Advantages and Disadvantages of Self-initiation
A. Advantages
1. Germany is the largest European market in which
the U.S. has had serious telecommunications trade
problems, and is influential in international
telecommunications developments. 301 action
against Germany could have a positive affect in
opening other markets.
2. We have already discussed our market access
concerns during eighteen months of
telecommunications consultations with German
officials. Little progress has been made. 301
action might indicate that the U.S. will not
continue this type of dialogue indefinitely.
3. The historical record shows that Germany responds
positively to threats of 301 action. The most
recent case involved domestic data processing
rt
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8
requirements.
4. Siemens and other German investors in the U.S.
market would not welcome the trade friction caused
by 301, and might pressure the German government
to remove the basis for 301 action.
B. Disadvantages
1. The German movement toward telecommunications
liberalization has a growing group of supporters.
Self-initiation would weaken the position of these
supporters.
2. There are strong U.S. business interests in
Germany which would oppose 301 initiation, since
retaliatory action which would adversely effect
their interest could be taken by the German
Government.
3. The German Telecommunications Commission report is
due to be released in September. It is expected
to recommend telecommunications liberalization
within the constraints set by history, -social
requirements and political reality. 301 self-
initiation is likely to weaken the chances of the
German Government's moving to implement the
recommendations made by the Telecommunications
Commission.
4. 301 self-initiation would be viewed as highly
confrontational by the German Government, could
move the locus of this issue to the EC Commission,
and could lead to retaliation and counter-
retaliation on other sensitive products.
5. Likely to be ineffective: U.S. leverage on
Germany is limited because of our bilateral trade
surplus in this sector and the strong investment
position of German telecommunications companies in
the U.S.
6. Confrontation over Germany could negatively affect
progress towards liberalization in other European
countries as well as terminate MAFF talks.
7. 301 action in regard to telecommunications could
detract from our efforts to make progress in
Airbus negotiations.
Dick Beaird/Dave Macuk 377-1304
Myles Denny-Brown 377-4466
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SECTION 301 ANALYSIS
ITALY
I. Technical Criteria
A. Significant Barriers to Trade and Investment
1. Terminal Equipment
o Procedures for certification, type approval and
attachment to the network are restrictive. These
procedures lack transparency, are unusually, long, and
new approvals must be sought for insignificant product
changes.
? The PTT uses equipment attachment criteria which go well
beyond those required to protect the network.
o. The PTT does not accept test data generated by foreign
manufacturers or any sources other than Italian PTT
testing facilities.
o Foreign firms must comply with restrictive requirements
in order to establish legal representation or
distribution networks in Italy.
o Users, user groups and foreign firms have only a limited
ability to participate in the standards-making process.
2. Network Equipment
o Foreign suppliers are not allowed access to the PTT's
specifications development process as are Italian-based
suppliers, who have preferred access to PTT procurement
plans and related technical information.
The PTT does not practice open international competitive
.bidding for all network equipment. GOI
telecommunications procurement entities use private
negotiation almost exclusively for major purchases. The
PTT allocates market share by selecting from among
Italian-based equipment manufacturers for expansion and
modernization programs.
3, Value-added Services
o Value-added services provided by the monopoly cannot be
offered by private companies.
o Service providers in Italy are prohibited from selling
leased line space to third parties.
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B. Basis on Which Barriers are Considered Unreasonable
The following discusses whether these practices could be
considered unreasonable within the meaning of Section 301,
in that they deny national treatment and/or fair and
equitable market access to U.S. firms:
1. The policies and practices of the Italian Government and
its telecommunications franchisees run counter to
international practices and trends as evidenced by
regulations in the U.S., Japan, Canada and the U.K., and
proposals by the EC Commission. For example, the EC
Commission has called for competition in the terminal
equipment market and for European PTT's to maintain
jurisdiction over a limited number of basic services
narrowly defined, as is the case in the U.S.
2. Italy maintains restrictive procedures for certification
and type approval, requirements for legal representation
and distribution networks, discriminatory procurement
practices for network equipment and restrictions on the
provision of value-added services.
3. By these standards, Italian practices deny fair and
equitable market access comparable to those available in
the U.S. and a number of other developed countries, and
therefore could be considered unreasonable under Section
301.
Terminal Equipment
o Unlike the Italian market, the U.S. terminal
equipment market is open to sales by foreign
suppliers. Restrictions imposed by the GOI on the
purchase of terminal_equipment_effectively deny__ _
national treatment. It should be noted that the
Italian PTT is exempt from the GATT Government
Procurement Code.
o The standards-setting process in the U.S. is open to
participation by foreign suppliers. This practice
is unique to the U.S. Restrictive practices in
Italy effectively deny foreign suppliers national
treatment.
The USG and Japan recognize foreign-generated test
data, permit manufacturers' self-certification and
allow minor changes in FCC-registered equipment
without requiring re-certification. .It should be
noted, however, that most developed countries have
restrictive policies in these areas, and that
Italy's policies are not in violation of its GATT
Standards Code commitments.
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o Criteria for equipment attachment are limited to
"no-harm-to-the-network" in the U.S. and Japan. Few
other countries follow this practice, however, and
stricter Italian standards are not a violation of
the Standards Code.'
Network Equipment
o USG telecommunications procurement entities practice
open international competitive bidding for network
equipment. The U.S. is unique in this respect. The
GOI allocates the market for network equipment which
effectively denys national treatment to foreign
suppliers. The Italian PTT is not, however,
obligated by the GATT Government Procurement Code.
o Unlike the civilian USG specifications development
process, the Italian process does not allow foreign
suppliers the same access as domestic suppliers.
Foreign suppliers are therefore denied national
treatment. It should be noted, however, that most
countries do not permit foreign suppliers access to
specifications development processes.
Value Added Services
o There are no restrictions on the offering of
valued-added services by private companies on the
public switched network in the U.S.
o There are no restrictions on third party use of
leased lines connected to the public switched
network in the United States, the U.K. and Japan.
However, many developed countries continue to
restrict third party access to leased lines.
The FCN Treaty between Italy and the U.S., Signed in
1948, provides for national and MFN treatment to
nationals, corporations and associations of the other
party with respect to engaging in commercial activities
within its territory. It provides for fair and
equitable treatment with respect to purchases and tales
by certain state enterprises, and provides a modified
form of MFN treatment with. respect to government
purchases and contracts'.
Monopolies or agencies granted exclusive privileges to
provide services are required to provide fair and
equitable treatment with respect to transactions
.involving such services. The exception is made for
postal services, but telecommunications is not
specifically mentioned.
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The FCN also calls upon each party, upon request, to
take such measures as it deems appropriate to eliminate
any harmful effects on bilateral commerce caused by
anticompetitive practices, including practices which
limit market access or foster monopolistic control.
The FCN clearly requires MFN treatment of imported
goods, unless other treatment is permitted by the GATT.
Therefore, any retaliatory action under Section 301
would be inconsistent with the FCN unless it were first
sanctioned by the GATT.
C. Effect on Competition
The size of the Italian market for telecommunications
equipment was estimated at $2.933 billion for 1986, and is
expected to grow at a rate of 16.4% through 1989. Terminal
equipment accounts for $293 million (10%) of this and
network equipment accounts for $1.994 billion (68)%. Total
imports in 1986 were estimated at $442 million, and are
expected to be approximately $673 million by 1989._ Imports
of U.S. manufactured equipment in 1986 totaled $35.9
million, or about 1.2% of the total market.
In 1984 the U.S. enjoyed a $28.1 million surplus in
telecommunications trade with Italy. In 1985 the surplus
was halved to $14.5 million. U.S exports to Italy declined
from $36.1 million in 1985 to $35.9 million in 1986.
It is not possible to estimate the amount of U.S. sales lost
as a result of these barriers. Limited experiende with the
more open markets of Japan and the U.K., and the lack of
access to other major markets, preclude comparative market-
share analysis. These practices affect the ability of U.S.
suppliers to competein the Italian telecommunications .
market and could therefore be considered a burden on U.S.
commerce.-
D. Status of Consultations
Market Access Fact-Finding talks were held with the Italians
in April and December of 1986. A letter from Secretary
Baldrige to PTT Minister Antonib Gaya summarizing U.S.
-concerns was sent in March. Minister Gava's reply to this
letter emphaSized limited steps toward liberalization of
certain parts of the terminal equipment market but showed
little indication of further changes. The Italians have
expressed an interest in further discussions with the U.S.
on market access issues.
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Legislation to liberalize maintenance of terminal equipment
was passed in March of 1987. Legislation to liberalize
private networks and legislation calling for the
reorganization of the GOI telecommunications sector have not
yet been reintroduced in the new legislature. Prospects for
the reorganization bill appear dim due to resistance from
unions and other political forces.
II. Advantages and Disadvantages of Self-Initiation
A. Advantages
1. 'Could cause the GOI to reintroduce legislation aimed at
liberalizing the telecommunications sector.
2. 301 action against Italy could have a positive effect in
opening other markets.
B. Disadvantages
1. Italy would not be a good test case for 301 action .
because the Italian telecommunications market is not as
large as that of other European countries, and Italy is
not as influential in European telecommunications
policy-making. Moreover, Italy may protest that its
policies are not as unreasonable as other developed
countries' policies.
2. 301 action could be counterproductive, unlike less
confrontational initiatives, causing liberalizing
elements within the Italian Government to reject
"external demands."
3. 301 action at this time could impede progress, i.e. it
could send the wrong signal following the passage of
modest liberalization legislation in March, 1987, and .
could negatively influence potential legislation aimed
at further liberalization.
4. Confrontation over Italy could negatively affect
progress towards liberalization in other European
countries as well.
5. Would move the locus of the issue to the EC Commission
which is less likely to obtain short term results; and
could lead to rounds Of retaliation and
counterretaliation on other sensitive products.
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6. Is unlikely to result La more open Italian
telecommunications market. Given the small amount of
Italian telecommunications exports to the U.S. and the
current U.S. trade surplus in telecommunications with
Italy, we have little leverage in this sector.
7. Many of the recent Section 301 disputes with the EC
(i.e., canned fruit, citrus and pasta) have involved
Italian trade interests disproportionately. Italy would
view a Section 301 case on Italian telecommunications
policies as an indication that the U.S. is singling out
Italy in its trade disputes with the EC, and the GOI
would be likely to respond in an antagonistic manner.
Drafted by: R. Paddock ITA/TD/SE/OT (377-4466)
F. Lamoriello ITA/IEP/OECA (377-5276)
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SECTION 301 ANALYSIS
TELECOMMUNICATIONS BARRIERS IN JAPAN
Prior to 1981, Japan's telecommunications market was virtually closed to
foreign participation. Since that time, it has undergone a substantial
transformation, and is now, in a regulatory sense, one of the most open
in the world. Starting with the bilateral agreement to open up NTT
procurement (which took effect in 1981), Japan has taken extensive
measures to revise its regulatory framework for telecommunications
equipment and services. The MOSS talks, which were held in 1985-1986, '
affected all major aspects of Japan's regulation of wired and wireless
equipment and services.
The result of the MOSS talks was to revise most regulations that
negatively affected the ability of foreign firms to compete fairly in
Japan's telecommunications market. Although some problems have appeared
in the implementation of these measures, most have been resolved
satisfactorily, and virtual parity has been achieved with U.S.
procedures. Currently, there are only two areas that can be categorized
as significant barriers for the purposes of this paper. These include
foreign participation in groups offering international telecommunications_
services in competition with KDD, and Japanese government policy
concerning its procurement of foreign communications satellites. Because
these two problems are unrelated and very specific, we are analysing them
separately.
FCN Treaty
The U.S.-Japan Treaty of Friendship, Commerce and Navigation, signed in
1953, provides national treatment to nationals and companies of one party
engaging in commercial activities within the territory of the other
party. However, there is a specific exception for public utilities,
which are understood in the Protocol to include enterprises which provide
communications services. The FCN treaty also requires state enterprises
to make procurement decisions on solely commercial considerations, and
provides modified MFN treatment with respect to government or state
enterprise procurement (although there is a limited exception to the
latter provision for PTTs).
The FCN Treaty provides MFN treatment with respect to goods, with the
exception of actions specifically permitted by the GATT. Therefore, any
retaliation taken against Japan as a result of a Section 301 proceeding
which is not sanctioned by the GATT would violate the FCN Treaty.
SECOND KDD
I. Technical Criteria
A. Trade and Investment Barrier
Japan's Telecommunications Business Law, which was revised
extensively in 1985, allows for new Type I companies (common
carriers) to enter into competition with KDD, a monopoly company
that serves as Japan's international telecommunications carrier.
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The law specifies that foreign firms may have up to one-third
ownership in any Type I group approved to offer international
services.
Following passage of this law, two consortia formed in hopes of
winning approval from Japan's Ministry of Posts and
Telecommunications (MPT) to compete with KDD. One group, called .
ITJ, consists entirely of Japanese companies (Mitsubishi, Mitsui,
Sumitomo, etc.). The other group, called IDC, includes one third
foreign equity (Pacific Telesis, Cable and Wireless of Britain, and
Merrill Lynch).
MPT originally indicated that it felt that there was room for only
one competitor to KDD, and urged the two groups to merge.
Prolonged merger talks between the groups got bogged down over such
questions as the extent of foreign participation in core management
of a merged group. The key sticking point was whether or not the
merged group would build a new trans-Pacific cable or simply use
existing KDD transmission facilities. IDC favored a separate
cable, while ITJ opposed it. The merger talks broke down on August
4 due to disagreement over this issue.
Each consortium in now expected to submit separate applications to
MPT for approval. Although MPT's official position is that it will
review both applications fairly based on the Telecommunications
Business Law, it has indicated informally in the past that if the
merger talks broke down, it would have to study IDC's application;
indications are that this could take up to 3 months. The
ostensible purpose for studying the IDC application is to determine
whether sufficient demand exists to support IDC's request for a
separate trans-Pacific cable. However, IDC has already conducted a
feasibility study supporting construction of a separate cable.
KDD's recent interest in expanding its capacity also indicates
recognition of sufficient demand.
B. Basis for Determining Barrier Unreasonable
If MPT approves both groups' applications expeditiously, no problem
will exist and free and fair competition will have been fostered.
If, however, it either disapproves IDC's application or delays
approval so long as to put it at a significant competitive
disadvantage, it Could be argued that it is denying IDC's U.S.
members national treatment and fair and equitable market access,
and this action could be'considered unreasonable under section
301. It would. also violate the spirit of ,the revised .
Telecommunications Business Law and send -a signal to other foreign
firms wishing to compete in Japan's telecommunications services
market that MPT will determine the degree of competition allowed.
It should be noted that trade in services is not currently covered
by the GATT.
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C. Effect on Competition
KDD's estimated revenues for international services are $1 billion
per year. It is not possible to estimate the damage that would
result to U.S. industry if the IDC application is not approved, or
if it is delayed significantly. The financial projections of the
affected U.S. firms are not available to us. U.S. firms would hold
about 13 percent equity in IDC.
D. Status of Consultations
This issue has been raised with Japanese officials numerous times.
Letters have been sent from the President, former Secretary
Baldrige, and other high level officials. It has been discussed in
numerous meetings with MPT and other officials, and will be raised
at the upcoming U.S.-Japan Trade Committee meeting at the end of
August. We will continue this approach until the issue is resolved.
II. Advantages and Disadvantages of Self-Initiation
A. Advantages
1. Demonstrates U.S. resolve in fighting Japanese backsliding in
implementing past measures.
2. Might stimulate approval of IDC's application.
B. Disadvantages
1. Japan has not yet made a decision against U.S. suppliers in
this case.
2. Japan's law does not guarantee any foreign participation in
this type of business.
3. Might jeopardize numerous gains achieved in MOSS.
4. President and Prime Minister have exchanged letters on this
subject, and consultations at other levels are continuing.
301 case prior to conclusion of these would be premature.
SATELLITES
I. Technical Criteria
A. Trade and Investment Barrier
In 1983, Japan's "Long-range Vision on Space Development"
articulated a policy of autonomously developing a satellite and
associated launch service industry. The policy included a
prohibition against procuring foreign satelites.
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?
HIAL
In response response to U.S. concerns, Japan has clarified this policy.
Private Japanese companies may .buy imported telecommunications
satellites but government entities may not if such a purchase
interferes with indigenous development objectives. Three joint
ventures have been established to sell or lease U.S.-made
telecommunications satellites to private entities.
B. Basis for Determining Barrier Unreasonable
Because Japanese policy requires that satellite procurement by
public organizations including NTT must be "consistent with the
national development policy," NTT is effectively, precluded from
buying foreign satellites, probably through 1992. Although U.S.
firms have supplied many of the components going into Japan's
telecommunications, broadcast, and weather satellites, they would
prefer to sell complete satellite systems.
Japan's policy is more restrictive than that of the U.S., as most
U.S. Government agencies that procure satellites use open
international bidding procedures consistent with the Government
Procurement Code. Japan's National Space Development Agency (NSDA)
the only other major Japanese public entity which procures
satellites, does not follow these guidelines. NTT and NSDA are not
Code-covered entities. Japanese satellite procurement policies
deny U.S. firms national treatment and fair and equitable market
access, and could be considered unreasonable under Section 301. It
should be noted, however, that the National Space Development
Agency is not covered by the Government Procurement Code.
C. Effect on Competition
? U.S. satellite manufacturers are world leaders in terms of quality
and advanced technology. If allowed to compete in this market,
U.S. firms should recieve a significant share of an expanding
market. The Government of Japan accounts for less than half of the
$1 billion plus Japanese communications satellite market. Japan's
policy provides a protected home market as a springboard to
effective competition with U.S. firms both in the U.S. and third
countries.
D. ? ' Status of Consultations ?
In MOSS Electronics negotiations and .other discussions, the United
States has repeated its serious concern about this Japanese
? policy. The United States has sought assurances that U.S.
companies will be allowed to compete in Japan's government
satellite market. Thus far Japan has refused to let its government
entities buy U.S.-built satellites. In light of Japan's adamant
position, the U.S. has not raised this issue recently.
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II. Advantages and Disadvantages of Self-initation
A. Advantages
1. Would signal U.S. resolve to act against explicit Japanese .
policy prohibiting foreign satellite purchases by government
entities.
2. Would penalize Japan for policy designed to protect its
developing indigenous satellite industry.
B. Disadvantages
1. May not be supported by U.S. industry, which is more
interested in selling to larger Japanese private sector.
2. Might endanger gains achieved in MOSS.
3. U.S. has not raised this issue with Japan recently.
Initiating 301 without prior consultations may be considered
by the Japanese to be unfair treatment.
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Traci and Investment Barriers
in the Korean Telecommunications Market
Although the Koreans have begun to liberalize their
telecommunications policy, significant barriers still remain to
U.S.-Korean telecommunications trade. The most significant of
these are: restrictions on foreign equity investment in VAS
ventures; limited implementation of the type approval process for
telecommunications equipment; and high tariffs on telecommuni-
cations equipment.
Korea is launching an effort to gain market share in the
U.S. and in developing country markets. Within the U.S. domestic
market, the Koreans already have widely established distribution
channels for their consumer electronic and computer products.
These will facilitate the export of PBX's, keyphones, carrier
transmission and other equipment to the U.S. market.
The Koreans are also expanding their sales efforts to the network
equipment markets of the developing countries.
I. Technical Criteria
A. Sianificant Barriers to Trade and Investment
1. Terminal Equipment:
a. Terminal equipment is, in most cases, subject
to lot-approval rather than type-approval.
b. Manufacturers are not allowed direct access
to the standards setting process. Trade
associations are allowed to participate in
the formulation of standards, but their input
is seen as ineffective.
_ - - - - -
c. Foreign and manufacturer-generated test data
is not accepted by the ROKG in its approvals
process. Only test data from official ROKG
test centers is accepted during the approvals
process; other test data can be submitted as
supporting data only.
d. Self-certification is not allowed in Korea.
e. The first telephone set must be provided by
the Korean Telecommunications Authority.
f. Tariffs remain high on terminal equipment,
within the 15% range.
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2. Network Equipment"
a. Foreign suppliers for any public sector
procurement in Korea are encouraged to submit
"voluntary" local content proposals as part
of the bid. The ROKG will reportedly not
consider bids unless a local content proposal
is included.
b. U.S. companies seeking to set up
manufacturing operations in high-tech areas,
such as fiber optics, digital switching
systems, cellular communications equipment,
etc., are restricted to joint ventures with
existing Korean firms. The establishment of
joint ventures is often dependent on the
transfer of technology to the Korean party.
c. Although many tariffs on telecommunications
equipment were lowered in July, 1987, tariffs
for public exchange digital switching
equipment are slated to increase from 10
percent in 1987 to 15 percent in 1988.
3. Services
a. The provision of value-added services is
restricted to companies which have at least
50 percent ownership and where the local
investor maintains management control.
b. Competition in value-added services is
restricted to intra-corporate value-added
networks. The only services exempted from
this restriction are "data communications
services," i.e., data management, Computer
hardware and software services.
c. The ROKG prohibits the resale and/or shared
use of leased lines outside of the intra-
corporate networks.
B. Basis Upon Which Barriers Considered Unreasonable
We recognize that Korea is a newly industrialized
country and that international trends towards the
liberalization of telecommunications are being led by
the major industrial nations. However, Korea's goal to
be a net exporter of data by the year 2000, combined
with its advanced telecommunications infrastructure,
require that the USG judge Korea by the same standards
as the more industrialized nations. Therefore, we are
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comparing Korea to standards found in both the United
States and other major industrial nations.
The following discusses whether the practices
could be considered unreasonable under the legal
requirements of Section 301, in that they deny national
treatment and/or fair and equitable market access to
U.S. firms.
1. Terminal Equipment:
a. The use of lot approval by the ROKG could be
unreasonable as it denies U.S. firms fair and
equitable market access. Terminal equipment
is subject to the type-approval process in
the U.S. and the U.K. Use of type approval
for terminal equipment varies within the
European countries; however, the European
Commission has proposed adoption of a
comprehensive and expedited type-approval
process by 1992.
b. Limited access to the Korean standards
setting process denies national treatment and
fair and equitable market access to U.S.
firms. Participation in the Korean
standards-setting process is restricted to
Korean trade associations (which can include
foreign member companies). Therefore, this
practice could be considered unreasonable
because both domestic and foreign
manufacturers openly participate in the U.S.
standards setting process. While the
transparency of the standards setting process
varies by country, the U.S. is the only one
that has an entirely open standards
development process. Korea's standard
setting procedures, however, do not seem to
violate its GATT Standards Code commitments.
c. Foreign and manufacturer-generated test data
are not accepted by the ROKG in its approvals
process, as such data are in the U.S. Only
test data from official ROKG test centers are
accepted during the approvals process; other
test data can be submitted as supporting data
only. Therefore, ROKG testing requirements
may deny U.S. firms fair and equitable market
access and could be considered unreasonable.
While acceptance of foreign and manufacturer-
generated test data is rare today, the U.S.
and Japan do allow such data in their
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approvals process.
d. Self-certification is not allowed in Korea.
The U.S. allows manufacturers to register
their products with the FCC based on
manufacturer-generated test data, as does
Japan. Although most other countries do not
allow self-certification, Korean practices
may deny fair and equitable market access to
U.S. firms and could therefore be considered
unreasonable.
e. The first telephone set must be provided by
the Korean Telecommunications Authority; the
U.S., U.K., and Japan allow customer, choice
of all terminal equipment. Although support
for customer choice among EC members is
unclear, the EC has proposed customer choice
including the first telephone set as a long-
term objective. Therefore, Korean attachment
policies deny fair and equitable market
access and could be considered unreasonable.
f. Tariffs remain high on terminal equipment,
within the 15% range; this contrasts with
international trends towards lower tariff
rates in other developed countries.
Therefore, Korean tariff practices may deny
fair and equitable market access to foreign
firms, and could be considered unreasonable.
However, Korean tariff practices do not seem
to be in violation of its GATT commitments.
2. Network Equipment
a. Foreign suppliers for any public sector
procurement in Korea are encouraged to submit
"voluntary" local content proposals as part
of the bid. The ROKG will reportedly not
consider bids unless a local content proposal
is included. This practice is not in
evidence in any of the major telecommuni-
cations markets; it thus denies national
treatment to U.S. firms and fair and
equitable market access to foreign firms and
could be considered unreasonable. Korea,
however, is not a Signatory to the GATT
Government Procurement Code, so this practice
does not seem to violate its GATT
commitments.
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5
b. Korean joint venture restrictions in high-
tech areas, along with technology transfer
requirements, creates hurdles to U.S.
investors which Korean investors do not face
in the U.S. market. These restrictions deny
U.S. firms national treatment and/or fair and
equitable market access, and therefore could
be considered unreasonable.
c. The raising of tariffs on public exchange
digital switching equipment is contrary to
international trends towards lower tariff
rates in other developed countries.
Therefore, Korean tariff practices deny fair
and equitable market access to foreign firms,
and could be considered unreasonable.
However, Korean tariff practices do not seem
to violate its GATT commitments.
3. Services
a. Korean investment restrictions on the
provision of value-added services are in
contrast to the more open policies of the
U.S., the U.K., and Japan. The degree of
investment restrictions on provision of
value-added services varies among the
European countries; the EC, however, proposes
lifting such restrictions. These Korean
restrictions deny national treatment and fair
and equitable market access to U.S. firms and
could be considered unreasonable. Trade in
services is not currently covered under the
GATT.
b. ROKG restricts the provision of value-added
services to intra-corporate value-added
networks, whereas, the U.S., the U.K., and
Japan allow greater competition in this area.
While some restrictions remain in several
European countries, the EC has proposed ?that
the provision of value-added services should
be unrestricted. These Korean restrictions
deny, fair and equitable market access to U.S.
firms and thus could be considered
unreasonable. Korean restrictions on
services, however, do not seem to violate
its GATT commitments.
c. The ROKG prohibits the resale and/or shared
use of leased lines outside of the intra-
corporate networks. There are no
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restrictions-on third-party use of leased
lines connected to the public-switched
network in the United States. While other
countries still maintain restrictions on
third-party use, there is a growing trend
among countries to reduce such restrictions,
including Japan and the U.K. Korean
restrictions, therefore, may deny fair and
equitable market access to U.S. firms and
thus could be considered unreasonable.
However, Korean regulations governing the
resale and/or shared use of leased lines do
not seem to violate its GATT commitments.
4. U.S.-Korea Treaty of Friendship. Commerce. and,
Navigation (FCN)
The FCN signed in 1956 between Korea and the
United States guarantees national treatment to
U.S. firms in Korea, but specifically exempts the
area of "communications" from this guarantee. The
FCN may require each party's state enterprises to
make procurement decisions solely on commercial
considerations, which would make reported Korean
telecommunications procurement practices
inconsistent with the FCN. However, this
provision could be interpreted to provide only MFN
rather than national treatment, as has Article
XVII of the GATT, on which it is based.
The FCN does clearly require !all treatment of
imported goods, unless other treatment is
permitted by the GATT. Therefore, any retaliatory
action under Section 301 would be inconsistent
with the FCN unless _it-were-first-sanctioned by - -
the GATT.
C. Effect of Barriers on Competition
The size of the Korean market for
telecommunications equipment was estimated at $3.7
billion in 1986. Customer premises equipment accounts
for about $1.4 billion of this amount and network
equipment about $1.5 billion. Figures are not
available on the size of the market for value-added
services. U.S. exports to Korea in 1986 totaled $104
million, approximately 3 percent of the overall Korean
market for telecommunications equipment.
It is not possible to estimate the amount of U.S.
sales to Korea which have been lost due to localization
of production through local content requirements,
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foreign investment, technology transfer, and
maintenance of tariff and non-tariff barriers. Korea's
aggressive localization programs have led to a Korean
telecommunications industry that has used its protected
home market as a springboard to effective competition
with U.S. firms both in the U.S. and third countries.
Korea has already done this in the less advanced
telecommunications technologies, i.e., telephone
handsets, radio paging equipment, etc.
D. Status of Consultations
USG-ROKG telecommunications consultations began in
January, 1987. As of July, 1987, USG officials had met
with ROKG officials three times. These consultations
have been successful in conveying USG concerns
regarding the closed nature of the Korean
telecommunications market. The ROKG has moved on a
number of these concerns and has made positive steps
towards opening its market.
The tangible results of these consultations can be
seen in the expanded use of type-approval by the ROKG,
tariff reductions on telecommunications equipment, and
the decision to allow intra-corporate value-added
networks. Ministry of Communications officials have
stated that they intend to further liberalize the
value-added services market and allow the
interconnection of intra-corporate value-added networks
to the public-switched network. They have also
asserted that they will further expand the use of the
type-approval process to cover keyphones, and almost
every kind of modem at a variety of speeds. In
addition, the Koreans have shown interest in U.S.
procedures for accepting foreign test data.
The USG has offered to host the next round of
discussions in September. No definite plans have been
announced at this writing.
II. Advantages and Disadvantages of Self-Initiation
A. Advantages
1. Recent Section 301 actions undertaken against
Korea have largely resulted in successful
resolution of the issues.
2. Very little progress has been made on some key
market access issues (e.g., agriculture,
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8
cigarettes) which-have not been the subject of 301
actions.
3. Taking a 301 action would serve as an example to
both NICs and developing countries that they
cannot both protect their home market and expect
to export fully to foreign markets.
B. Disadvantages
1. A self-initiated Section 301 against Korea would
be premature, as the issue has not been
sufficiently discussed in bilateral consultations.
2. The Koreans have announced their intentions to
liberalize the telecommunications sector. Since
May, they have announced several steps to
liberalize policies concerning type approvals and
VAS provision. Taking a 301 action now could
reverse recent progress already achieved.
3. Korea is undergoing major, rapid political
transformation at this time. A self-initiated
Section 301 action against Korea would politicize
the issue at a time when Korean Government
flexibility to respond would be limited due to the
domestic political situation.
4. Several agencies would argue that other issues,
e.g., agriculture, would stand in line before
telecommunications for consideration of a 301
action. The USG has communicated the priority of
other issues to the ROKG; to place telecommuni-
cations before those issues already targeted for
?301-actions-would undermine USG credibility.
Drafted by:
Scott Goddin/DOC/ITA/IEP/Korea
Tim Shea/DOC/ITA/TD/SE/OT
Diane Steinour/DOC/NTIA/OIA/377-1304
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I _ _
THE NETHERLANDS
I. Technical Criteria
In 1986, the Dutch Parliament approved a plan to liberalize
telecommunications in the Netherlands. A bill encompassing this plan is
under consideration and is expected to be presented to the Parliament by the
end of this year. According to this plan, the legislation will transform
the PTT from a government department to a public corporation on January 1,
1989. Moreover, regulatory functions will be transferred from the PTT to
the Ministry of Transport and Public Works. Under this new regime, draft
regulations will be published, and there will be an opportunity to comment
for both domestic and foreign firms.
A. Significant Barriers to Trade
1. Terminal Equipment
The Dutch PTT, which is a government administration under the
Department of Transport and Public Works, has traditionally had a monopoly
over the provision of telephone and telex equipment and services in the
Netherlands. At present, subscribers to the public telephone network may
use only terminal equipment, such as key systems and Private Branch
Exchanges (PBXs) that are supplied by the PTI. The PTT develops standards
for and certifies terminal equipment and presently uses a standard that
exceeds the U.S. "no harm to the network" standard. Moreover, the Dutch
PTT does not currently provide for self?certification based on test data
from U.S. or U.S.?owned laboratories. We anticipate, however, that once the
draft legislation has been passed, the only remaining barrier will be the
non?acceptance of U.S. test data.
2. Network Equipment
At present, the Dutch PTT often uses selective bidding procedures,
accounting for approximately eighty percent of total consumption.
Generally, the Dutch PTT limits its procurement of network equipment to
firms that have manufacturing facilities in the Netherlands. The Dutch PTT
has completed its digital switch purchasing plans through 1989. The firms
chosen to supply the initial procurement include the joint venture between
AT&T and Phillips (APT), Ericsson, and ITT, with APT awarded the largest
--that is, sixty percent-- share. Moreover, the U.S. has a favorable
telecommunications trade balance of nearly $70 million with the Netherlands.
Indeed, U.S. exports of telecommunications equipment to the Netherlands
increased by 443% since 1981 (from a base of $19 million) -- a much larger
increase than U.S. telecommunications exports to the rest of the world.
CDPENTIAL
f
tecl'Cbssified by: S. Bruce
Wil son
as0?Y on: OADR
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3. Services
The Dutch PTT has a monopoly over the provision of what are considered
"basic" services in the United States. ,The Dutch railroad and electric
utilities are permitted, however, to maintain their own private networks,
although these networks may not interconnect with the PTT's telephone
network. Under the draft legislation that is to be submitted to the
Parliament, there will be a distinction made in the Netherlands between
"concessionary" services---- that is,-services the PTT will retain a monopoly
over and will be obligated to provide -- and non-concessionary services --
that is, services that will be open to competition.
The PTT's concession will be confined to telephone, telex and
telegraph, and data transport. Functions that involve merely routing and
charging calls will be considered basic, while additional functions, such as
protocol conversion and store and forward will be considered as enhancements
that can be provided on a competitive basis. In addition, the PTT will not
have an exclusive concession for cable television -- a service that
presently reaches close to seventy percent of the homes in the Netherlands
with television. Finally, while the PTT will be permitted to provide non-
concessionary services, it will be required to separate the two
organizations that provide concessionary and non-concessionary services over
a five year period.
B. The basis on which we consider these barriers unreasonable
It is difficult to determine at this point which, if any, barriers to
trade and investment that may remain after the adoption of the proposed
Dutch law the U.S. government would find unreasonable. At this point, it
would be fair to suggest that we may well have fewer market access concerns
with regard to the Dutch telecommunications market than any other market
in continental Europe. Simply put, the concerns that have been raised by
U.S. firms focus on two areas: (1) terminal equipment and (2) value added
services. In both of these areas, the proposed Dutch legal regime appears
to be more liberal than most, if not all, other continental European
countries.
Dutch PTT officials have stated that the proposed legislation would
'provide for changes 4n7standA-r-d-s-y-certification procedures, transparency of
process, and procurement. Specifically, the-Dutch have said they plan to
implement a "no harm to the network" standard Comparable to the approach
used by the U.K. and Sweden, although the standard may include a minimum
-performance requirement. In addition, Dutch officials observed that the
legislation would provide for self-certification and acceptance of data from
accredited labs from other EC countries. Under this approach, proposed
Dutch terminal equipment standards will be published in the CON State
Gazette, with a two month comment period, and the CON will notify the GATT
Standards Code of new specifications. Finally, Dutch government officials
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stated that they support an EC recommendation to open procurement for
terminal equipment by 1992.
Therefore, post-legislation, the only remaining barrier in the area
of terminal equipment will be non-acceptance of U.S. test data. This is not
a violation of the GATT or GATT Code. As with the U.K., it would be
difficult to characterize this action as "unreasonable" within the terms of
Section 301. No European country currently accepts U.S. test data.
Moreover, in light of the 443% increase in U.S. exports of
telecommunications equipment into the Netherlands since 1981, it would be
hard to argue that U.S. commerce has been burdened or restricted. Thus, it
would be very difficult to make a convincing argument that practices
regarding terminal equipment are unreasonable. Similarly, the approach
planned for the provision of value added services in the Netherlands appears
to address the primary market access concerns the U.S. has voiced in
discussions with other countries. Therefore, again it would be very
difficult to characterize proposed Dutch treatment of value added services
as unreasonable.
C. Status of Consultations
There have been two FCC-led interagency discussions with Dutch
government officials this year. The first set of discussions, which took
place in Washington in February, focused primarily on the U.S. experience
and the possible lessons that Dutch officials may be able to glean from the
U.S. experience. The second set of discussions, which took place in the
Hague in June, focused on the proposed Dutch legislation and Dutch plans for
liberalization. Dutch government officials promised the U.S. delegation
that we would be provided with copies of the draft legislation that is
provided to the Parliament later this year and that it would be considered
entirely appropriate for the U.S. government to provide input on the draft
legislation at that time.
II. Advantages and Disadvantages of Self-Initiation
? A. Advantages
1. A 301 action might encourage greater liberalization in
network procurement.
B. Disadvantages
1. Upon adoption of its proposed legislation, the Netherlands
will have among the most, if not the most, liberal telecommunications policy
on the continent.
2. The restructuring of the PTT is an historic change and
privatization remains a possiblity for the future.
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3. The prospect of significant liberalization in the
Netherlands has served, and will continue to serve, as an example and a
potential competitive threat to other continental European countries.
4. A 301 action might freeze or delay the process ?of
liberalization in the Netherlands.
drafted by: R.Milkman/FCC/632-4047 rev. 8/24/87; rev. 8/31/87
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1 AL
SECTION 301 ANALYSIS
SPA-IN
(NOTE: The Spanish Government is in the final stages of considering
a draft Law on Telecommunications that would establish -- for the
first time -- a formal policy on telecommunications. Approval is
expected this fall. Formulation of the implementing regulations has
already begun.)
I. Technical Criteria
A. Significant Barriers to Trade and Investment
1. Terminal Equipment
a. Procurement
The Spanish PTT, Compania Telefonica Nacional de
Espana (CTNE), has exclusive control over the
connection of terminal equipment to the public
network. During technical discussions between U.S.
and GOS representatives in April 1986, Government
officials expressed optimism that customer premises
equipment (CPE) would be liberalized in the future.
The draft Law on Telecommunications (LOT) notes that
the implementing regulations, will determine the rate
of "free acquisition" of terminal equipment. On the
other hand, the LOT states that "certain types of
terminals may be maintained" under a monopoly (CTNE).
b. Testing and Certification/Standards
CTNE maintains burdensome telecommunications .
standards and time-consuming certification processes
for CPE. In mid-1986, the Ministry of Industry
announced new industrial standards for telephone
-terminals, automatic dialers, answering machines,
and modems. . Under this Royal Decree, telephone
. terminals and transmission modems must be adjusted
to the standards of the Ministry of Transport,
Tourism and Communications. Homologation costs will
almost certainly be increased for small and
'medium-sized exporters of this equipment to Spain.
Importers previously had problems with identifying
the appropriate laboratories For certification.
Often labs had not been established for this
purpose. Earlier this year, the Directorate General
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rn,MEr
for Telecommunications (DGT) announced it was setting
up its own laboratories to analyze equipment proposed
fon interconnection to the system.
. Network Equipment
a. Procurement
CTNE accounts for two-thirds of all telecommunications.
purchases in Spain. The PTT buys over 75 percent of
its equipment from Spanish companies, many of them
CTNE subsidiaries. The GOS intends to increase this
share to 80 percent in 1989.
ITT (through Standard Electrica) and Ericsson supply
the central office switching equipment. In a meeting
with Assistant Secretary Sikes last December, CTNE
President Solana indicated that his company was
looking for a third supplier but predicted that a
final decision on this would not come soon.
CTNE is actively seeking out foreign companies to
establish joint ventures in advanced technologies. So
far, the company has interests in such ventures with
AT&T, Corning, Pacific Telesis, as well as European
and Japanese companies. AT&T and CTNE are negotiating
a joint venture to produce network plant gear
including connectors, distribution boxes, and other
equipment. The AT&T/Philips venture (APT) has taken
over Marconi and may use the company to produce
switching equipment.
3. Services
a. Competition
CTNE has an effective monopoly over all public
telecommunications services. ._,Certain public utilities--.
operate their own distribution systems. The Only open
competition is in radio paging.
The LOT will deterMine the future prospects for value
added services offerings by foreign companies. The
Law appears to reserve some enhanced services for the
monopoly (CTNE) and creates the possibility of
eventually re--regulating those services initially
opened to competition.
The LOT also limits foreign ownership in
telecommunications services to 25 percent. U.S.
companies believe the LOT provisions on services would
be a major investment disincentive.
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,
B. Criteria for "Unreasonable" Barriers
Many of the policies and practices of the Spanish Government
run counter to international practices and trends as
evidenced by regulations in the U.S., Japan, Canada and the
United Kingdom, as well as the proposals of the EC
Commission. The following discusses whether the Spanish
practices -- both current and prospective -- could be
considered unreasonable within the meaning of Section 301,
in that they deny national treatment and/or fair and
equitable market access to U.S. firms.
1. Terminal Equipment
o Procurement
Both Japan and the U.S. allow for free competition in
terminal equipment. The European Commission recently
called for the phased opening of the terminal market.
Spain's liberalization in this sector has been limited and
could be viewed as unreasonable in denying free and
equitable market access.
The extent and timing of further liberalization of
terminal equipment in Spain will be determined by the LOT
and its implementing regulations. The final version of
the LOT and these regulations will determine if Spanish
liberalization policy in this area is unreasonable in the
context mentioned above. It should be noted that most
countries do not allow self-certification or accept
foreign manufacturer-generated test data.
o Testing and Certification
Self-certification is not allowed in Spain, but is allowed
in the United States and Japan. Foreign and
manufacturer-generated test data isnot_ accepted by .CTNE
in its approval process. The United States and Japan- -
accept foreign-generated tet data. Given these current
trends in easing testing and certification standards,
Spanish policy could be construed as unreasonable in that
it does not provide fair .and equitable access to its
telecommunications market.
2. Network Equipment
o Procurement
USG telecommunications procurement entities practice open
international competition bidding for network equipment.
To date, Spain has limited procurement of network
equipment to select suppliers, many off which are CTNE
EDI
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AL
subsidiaries. Thus, CTNE's procurement policy could be
viewed as unreasonable in its denial of national treatment
and fair and equitable market access. However, the'United
States is the only developed country to have fair and.open
procurement procedures for network equipment. Further,
CTNE is exempt from Procurement Code obligations. CTNE
also has shown some inclination toward working with U.S.
firms on joint ventures. These ventures could result in
major business opportunities in the future.
3. Services
o Competition
The United States and several other countries do not
restrict the offering of value-added services by private
companies on the public switched network. The EC
Commission has called for substantial opening of the
services market to open competition, restricting
telecommunications administrations to voice telephony
only. In contrast, CTNE is the sole provider of
telecommunications services in Spain. If enacted, the LOT
would appear to maintain CTNE's predominant role in this
area and thus would deny U.S. firms fair and equitable
access to the Spanish market.
o The LOT's restrictions on foreign ownership of value-added
services represents a major investment disincentive for
U.S. companies. The U.S. does not have similar
restrictions in this area. Spanish policy in this area,
if retained in the LOT, could be viewed as unreasonable in
denying national treatment to U.S. firms.
4. FCN Treaty
A cursory reading of the Treaty of Friendship and General
Relations between the United States and Spain (signed in
1903) seems to indicate that the pact has little or no
? bearing on this issue.
C. Effect of. Barriers
1. Overseas
The ?effect of Spain's telecommunications trade barriers
on U.S. -trade- is difficult to.determine. ,Although CTNE
subsidiaries have been active in Latin America and other
areas- in supplying rural telephone systems, switching
networks and telephone sets, Spain's protected domestic
market does not appear to provide Spanish suppliers with
a competitive advantage in third country markets. This
assessment is. based on the Fact that Spain has not vet
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developed large quantities of advanced
telecommunications equipment and that U.S. products are
comparable or superior to Spanish technology.
2. U.S. Market
Imports of Spanish telecommunications products play no
significant role in the U.S. market. No industry
allegations or complaints regarding Spanish subsidies
and/or dumping have been received.
3. Damage to U.S. Industry
It is difficult to quantify any loss in sales as a
result of Spanish trade barriers in telecommunications.
However, according to the latest National Trade'Estimate
report, major liberalization of Spanish
telecommunications policies could significantly affect
U.S. sales by opening an additional market of $50-75
million annually.
U.S. exports of telecommunications equipment amounted to
$21.3 million in 1986, down from $30.8 million in 1985.
The United States maintains a surplus in
telecommunications trade with Spain ($7 million in
1986), although it has diminished in recent years.
Liberalization would probably have greater impact in CPE
than in network equipment. Figures are not available on
the size of the market for value-added services.
D. Status of Consultations
U.S. technical experts met with Spanish Government and
industry.representatives in April 1986, The talks centered
on the LOT and the U.S. experience with deregulation. The
GOS declined a second meeting this past spring but
discussions are possible in October or November. If the LOT
has been approved by that time, the talks will focus on the
Law's implementing regulations.
II. Advantages and Disadvantages ,of "301" Self-initiation
A. Advantage
1. Self-initation could allow the U.S. to influence the
outcome Of the LOT so that the Law would take greater
account of U.S. interests.
B. Disadvantages
1. Self-initiation could jeopardize passage of the LOT,
which brings Telefonica wider the control of the
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Ministry of Transport, Tourism and Communications. The
success of subsequent USG-GOS negotiations will depend
upon the Ministry's jurisdiction in this area.
2. Such action could be counterproductive to U.S. efforts
to influence the substance and implementation of the LOT.
3. The Spanish telecommunications market is small relative
to other markets being considered for "301"
self-initiation.
Prepared by: JMcCarthy/ITA/TD/SU/OT/x4466/8-31-87
HShaw/NTIA/OIA/x1803
File Name: "SPAIN"
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U9A-3tN I IRL
THE UNITED KINGDOM
I. Technical Criteria
The general telecommunications policy framework in the United Kingdom
was established by the Telecommunications Act of 1984. Under its
provisions, the Secretary of State for Trade and Industry was given the
authority to grant licenses to provide telecommunications services and the
Office of Telecommunications (OFTEL) was established to monitor compliance
of licensees with license obligations, and arrangements were made to
transfer British Telecom (BT) from public to private ownership. Therefore,
a longterm U.S. objective with regard to fair treatment of U.S.
telecommunications firms in foreign markets has been addressed in the U.K.
-- that is, there is a separation of regulatory and operational
responsibilities.
A. Significant Barriers to Trade and Investment
1. Terminal Equipment
Type approval procedures are now the responsibility of the British
Approvals Board for Telecommunications (BABT), although the BABT is
permitted to delegate its testing responsibilities to independent
laboratories. Indeed, as of June 1987, for certain categories of equipment
(telephones and modems), manufacturers have the option of choosing their own
testing laboratories. Moreover, although there is not yet a full list of
standards for terminal equipment, the British have essentially adopted a "no
harm to the network" standard with associated safety requirements.
While it is not -clear that there are any U.K. government policies
that could be characterized as "barriers" to trade or investment with regard
to the U.K. terminal equipment market, there are several very limited areas
of concern. First, the relevant U.K. authorities do not accept test data
from laboratories located in the United States. Second, the standard
setting process is not yet transparent. The British Standards Institute
(BSI) has the task of setting standards, and trade associations, unions, and
the British government are permitted to participate in the process. Foreign
manufacturers may participate in the BSI standard setting process, but only
if they belong to a British trade association. Moreover, BSI has such a
backlog- that BT and OFTEL are setting some standards in the interim, until
BSI catches up. BT's standards are proprietary, and outside -participation
is not permitted. OFTEL sets standards with help from selected
participants.
2. Network Equipment
? We have received no industry complaints of
this sector.
COI
-TINL
barriers in the U.K. for
ctass1flGdW.S. Bruce Wilson
Declasstfy on: OADR
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3. Services
Two public telecommunications entities have been licensed to provide
basic domestic and international teletommunications service -- BT and
Mercury -- with this duopoly policy scheduled for review in 1990. There
is, however, a specialized satellite services exception to the duopoly
policy that has not been addressed in a comprehensive fashion to date.
Simple resale (that is, resale of basic services without any "enhancement")
is prohibited before 1989; at that time the prohibition on simple resale
will be reviewed. A new licensing regime has also been established to
encourage the development of broadband cable systems. An operator wishing
to provide entertainment and telecommunications services over a cable system
requires two licenses, one from the newly established Cable Authority under
the Cable Broadcasting Act of 1984 and the other from the Secretary of State
for Trade and Industry under the Telecommunications Act of 1984. BT and
Mercury's duopoly does not extend to broadband cable systems, but any cable
operator wishing to provide voice telephone service must do so in
collaboration with BT or Mercury, and the latter retain the right to
interconnect systems and to provide data services in certain business
centres.
The 1984 Telecommunications Act also requires so-called "private
systems" to be licensed subject to certain, very limited exceptions. The
Secretary of State for Trade and Industry has the power, however, to issue
class licenses that cover private telecommunications systems. Earlier this
year, the U.K. issued a class license for the operation of
telecommunications systems providing value added and data services (VADS).
This license permits the resale of leased capacity for telecommunications
service except simple resale, basic voice or telex, land mobile radio, and
cable TV. Providers of the so-called VAD services are subject to a
registration requirement, a publication requirement, and certain other
so-called "fair trading" conditions.
B. Basis on Which We Consider Barriers Unreasonable
At this point, the U.S. government has a limited number of points on
which we would hope to make progress with the government of the U.K.. These
include, among other things, the acceptance of U.S. test data for terminal
equipment registered in the U.K., the extension of a more liberal regime for
so-called VAD services to the provision of VAD services between the U.S. and
the U.K., and the provision of separate satellite services between the U.S.
and the U.K. Each of these questions involve difficult policy questions
that require thorough and careful discussions. It would be difficult to
characterize continuing U.K. restrictions in these areas, however, as
"unreasonable" trade barriers.
None of the barriers listed above violate the GATT or the GATT Code.
The non-acceptance of U.S. generated test data might be considered
unnecessary if one decided that there was no technical reason to restrict
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sources of test data. Only the U.S., Canada, and Japan accept test data
from foreign sources. The non-acceptance of test data could be considered a
burden on U.S. commerce, in that terminal equipment manufacturers must re-
test in the U.K., with associated delays and costs. Since no other European
country accepts foreign test data, and because of the tenuousness of the
"unnecessary" categorization, it would be stretching a point to characterize
the non-acceptance of U.S. test data as unreasonable.
The standards-setting process constitutes a de facto rather than a de
jure barrier, and is by most accounts a temporary problem. In that some
standards are set by BSI, through a transparent process, it would be very
difficult to characterize this barrier as "unreasonable."
C. Effect of Barriers
The continuing restrictions discussed above may lessen competition in
the provision of telecommunications and VAD services as well as the sale of
telecommunications equipment in the U.K. It is not clear, however, to what
extent such restrictions have an actual effect on competition in the U.K.
or the U.S.
D. Status of Consultations
Several federal agencies, including the FCC, NTIA, and the Department
of State, have had informal discussions with officials from the U.K.
Department of Trade and Industry (DTI). Moreover, the FCC has established a
continuing relationship with its sister regulatory body, the Office of
Telecommunications. The FCC enjoys periodic visits from OFTEL on issues
ranging from the regulatory treatment of terminal equipment to the
application of international settlements policy. Moreover, FCC Chairman
Patrick and OFTEL Director General Carsberg have met twice over the past
several months to discuss issues of common interest and concern. Indeed,
Professor Carsberg told Chairman Patrick in July 1987 that he is willing to
consider the question of U.K. acceptance of test data from U.S.
laboratories should any firm raise this question to OFTEL's attention.
DTI has not replied, however, to an invitation by former FCC Chairman
Fowler to initiate formal bilateral discussions on terminal equipment,
enhanced services and other issues. Moreover, a senior DTI staff official
has informally expressed a reluctance to engage in any formal discussions,
particularly any that would include representatives of U.S. trade agencies.
This DTI official has suggested that he does not believe that there are any
"trade" issues outstanding between the U.S. and the U.K. and that the U.K.
is unwilling to permit the participation of officials of the EC in such
discussions (which he believes would be required should U.S. trade
officials be included on the U.S. side). Finally, this DTI official has
suggested that the U.K. does not have sufficient staff resources to engage
in formal bilateral discussions with the U.S. and would prefer to move
forward on an ad hoc basis.
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II. Advantages and Disadvantages of Self-Initiation
A. Advantages
1. Might lead to the acceptance by the U.K. of terminal
equipment test data generated by U.S. laboratories.
2. Might accelerate the elimination of the prohibition on
simple resale.
. Disadvantages
1. The U .K. has moved, further in the direction of
liberalization in its domestic telecommunications regime than any other
country in Western Europe. The British have given every indication that
they will continue to move in, the direction of liberalization, particularly
in light of the recent Tory victory.
2. The U.K. has an independent regulatory authority, OFTEL,
that provides a well-established legal forum for U.S. firms to address their
concerns with the fair development of competition in the U.K. The
initiation of a 301 action, absent full pursuit of U.S. complaints in that
forum, might lead to countercharges that the U.S. has not "exhausted"
existing U.K. domestic legal approaches -- that is, there would be a strong
implicit criticism of their regulatory structure.
3. A 301 action could cause a withdrawal of goodwill that would
jeopardize U.S.-U.K. relations in a variety of areas, particularly
telecommunications, as well as ongoing negotiations in other sectors.
drafted by: R.Millunan/FCC/632-4047 rev. 8/24/87; rev. 8/31/87
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.September 3, 1987
MEMORANDUM FOR THE ECONOMIC POLICY COUNCIL
FROM: THE TRADE POLICY REVIEW GROUP
SUBJECT: JAPAN KANSAI AIRPORT CONSTRUCTION PRACTICES
Issue
The Economic Policy Council is to decide whether the Trade
Representative will self-initiate a section 301 unfair trade
investigation of Japanese Government practices in connection with
the construction of the Kansai Airport.
Kansai? Airport
The Airport Project: The Kansai International Airport
Corporation (KIAC) is building an over $7 billion airport near
Osaka. KIAC is a "special" company established under the Kansai
International Airport Corporation Law and controlled by the
Ministry of Transportation. For example, the Ministry:
o holds two thirds of KIAC shares;
o authorizes any issuance of additional shares;
o approves KIAC's yearly business plan and any subsequent
changes to it, the appointment and dismissal of KIAC
directors and auditors, and any changes in its articles
of incorporation; and
in consultation with the Ministry of Finance, can veto
KIAC's access to Capital markets.
As a result, we consider KIAC an instrumentality of the Government
of Japan.
Airport construction is scheduled to proceed in four phases: (1)
building sea-walls, landfill and a bridge linking the airport
island to the mainland, which has begun; (2) constructing the
airport (runways and terminal building), expected to begin in
1990; (3) equipping the airport, scheduled to conclude by 1992;
and (4) expanding the airport to include two more runways.
While sizable by itself, the Kansai Airport project is the first
of several major such Japanese undertakings including the Trans-
Tokyo Highway Bay Bridge and Narita Airport expansion projects.
CII I1IAL
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2 -1113ENTIAL
U.S. Meat Export Federation, National Pork Producers Council,
American Farm Bureau Federation and National Cattlemen' s Association.
They charge that the directive denies national treatment (because
its standards are not enforced in trade between EC member states,
and do not apply within member states), and cannot be justified
on the basis of scientific evidence. Because these issues arise
under the GATT and Standards Code, we requested consultations
under Article 23:1, which are scheduled this month.
However, we have no realistic hope of achieving an outcome under
GATT dispute settlement procedures by January 1, when the temporary
approvals of 59 U.S. plants expire. Unless they are certified,
the result will be either a reduction in U.S. meat exports to the
EC, or the incurrence of unnecessary expenditures by U.S. plants
to conform to EC requirements.
EC Hormones. In January 1987, the U.S. asked for consultations
under the Standards Code to complain of the EC's Animal Hormone
Directive. This directive precludes the importation into the EC
after January 1, 1988, of any meat produced from animals treated
with hormones (which is widespread in the U.S.). We believe that
hormones can be used safely under prescribed conditions, and that
the EC should accept our residue testing program as a sufficient
guarantee of the safety of meat from animals treated with hormones.
After the Standards Code Committee was unable to achieve a
mutually satisfactory solution, in July 1987 the U.S. asked for
the establishment of a technical experts group. The EC has
blocked its establishment, interrupting the dispute settlement
process. Unless the EC agrees soon to proceed, we may wish to
consider self-initiating an investigation or acting under section
301. Even if the EC permits dispute settlement to proceed,
however, it could not be completed prior to the implementation
January 1 of the EC directive.
As a result of the Third Country Meat and Animal Hormone Directives,
as of January 1, 1988, we expect U.S. exports of meat products to
the EC to cease abruptly. The issue for the EPC will_ be whether
and how to act unilaterally absent a satisfactory resolution in
the interim. This issue must be addressed no later than early
November, if public comment on proposed retaliatory measures were
to be obtained and retaliation implemented by January 1.
Argentina Soybeans
The Government of Argentina has maintained higher export taxes on
soybeans than on processed soybean products. This differential
discourages the exportation of beans, puts downward pressure on
the price of soybeans in Argentina, and thus provides a competitive
advantage to the Argentine crushers of soybeans into soybean meal
and oil.
In response to a petition filed by the National Soybean Processors
Association in 1986, we initiated a section 301 investigation.
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Last May, the President suspended this investigation based upon
the Argentine Government's commitment to eliminate or substantially
reduce all export taxes by October 15.
On July 20 Argentina eliminated or significantly reduced the
export taxes on all products except soybeans and sunflower seeds.
It reduced the differential in taxes on soybeans and processed
soybean products from 12 to 11 percent, which we do not consider
a substantial reduction.
We are pressing the Argentine Government to fulfill its pledge by
October 15. Argentina's Finance Minister will meet with Ambassador
Yeutter at the end of September to discuss the problem. However,
for Argentine domestic political and revenue reasons, we are
skeptical how far the Government will move.
Agencies agree that this export tax differential distorts trade;
despite repeated deliberations within the Section 301 Committee,
they still disagree whether it is unjustifiable, unreasonable or
discriminatory and a burden or restriction on U.S. commerce (the
criteria of section 301). However, breach of Argentina's commitment
to eliminate or substantially reduce all export taxes by October
15 would be independently actionable under section 301 as unjusti-
fiable, if it also burdened or restricted U.S. commerce.
Absent a satisfactory settlement by October 15, the issue for the
EPC will be whether and how to respond to Argentina's breach of
its commitment and maintenance of an export tax differential that
distorts trade. This issue would arise as of October 15, but
there would be no need to act immediately to preserve the status
auo (as in the EC meat matters).
Argentina Air Couriers
In 1984 the Air Courier Conference of America complained of the
Argentine Government's restrictions on the delivery of time-
sensitive commercial documents, which essentially prohibited U.S.
couriers from the international carriage of such items. In
November 1984 the? President determined this practice to be
unreasonable and a restriction on U.S. commerce. He directed the
Trade Representative to consult further with Argentina, but to
submit proposals for action under section 301 within 30 days if
the issue were not resolved through consultations.
With the help of this leverage, we persuaded Argentina to eliminate
its restrictions. However, it replaced the restrictions with a
discriminatory tax on international courier operations, which our
industry maintains bore no reasonable relationship to the cost of
any services provided. Recently the Argentine Government allegedly
has harassed the local franchise of one U.S. company, DHL, on the
basis of purported ties to British interests. In addition, the
Government is replacing the clearly discriminatory tax system
with a nondiscriminatory tax system that may operate nonetheless
to the disadvantage of international couriers and to the advantage
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of the Argentine monopoly postal authority, ENCOTEL.
The Section 301 Committee will review the new draft regulations
as soon as they are available and meet with U.S. industry repre-
sentatives and GOA officials. If the Committee concludes that
the Argentine Government simply would be replacing one unfair and
burdensome practice with another, it will recommend any appropriate
action to the Trade Policy Review Group.
Brazil Informatics
President Reagan suspended the procedural and market reserve
portions of this case in December 1986, and the intellectual
property portion on July 1. The latter suspension was based on
passage by Brazil's Chamber of Deputies of legislation that would
provide adequate copyright protection to computer software.
However, Brazil's Senate does not consider this legislation
urgent and may delay its consideration until it completes drafting
the Constitution. More ominously, the Brazilian private sector
opposes the bill's market reserve provisions for software, which
prohibit software imports if a Brazilian company produces a
"functional equivalent." Brazilian software user and producer
associations have asked the Senate leadership to replace this
provision with a tax on imported programs. If the Senate amends
the bill, it will be sent back to the Chamber of Deputies, where
nationalistic deputies are likely to try to derail the entire
bill if they believe that the market reserve policy is threatened._
To further complicate matters, Brazil's Secretariat for Informatics
may shortly approve a pending license application for a Brazilian
clone of the Apple MacIntosh 512 personal computer. Depending
upon these developments, the EPC may have to consider whether to
reopen the intellectual property portion of this case. (The
investment portion remains active.)
Other Current Section 301 Cases
The following are major developments and deadlines in other _
active Section 301 cases:
o Canada Fish (concerning Canadian prohibitions on the
export from Canada of unprocessed salmon and herring): We
expect the GATT panel report in October. The deadline for
the Trade Representative's recommendations to the President
is 30 days following the conclusion of dispute settlement.
o India Almonds (concerning Indian licensing requirements
and steep tariffs on imports of almonds): At the Indian
Government's request, a second round of GATT consultations
is scheduled for the week of September 28; and we have asked
for the establishment of a panel in the Licensing Code
Committee. The deadline for the Trade Representative's
recommendations to the President is 30 days following the
conclusion of dispute settlement.
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o Brazil Pharmaceuticals (concerning Brazil's lack of
product or process patent protection for pharmaceutical
products): After three rounds of consultations, the Brazilian
Government indicated it would not grant either product or
process patent protection for pharmaceuticals. Public
hearings are scheduled for September 14. The deadline for
the Trade Representative's recommendations to the President
is July 23. 1988.
Possible Section 301 Industry Petitions in the Wings
In addition to pending cases, we are aware of the following petitions
that could be filed by U.S. industry:
o Canada wine (concerning provincial barriers to the sale of
U.S. wine in Canada): The Wine Institute submitted a draft
petition this summer, and is likely to file if FTA negotiations
do not resolve this trade barrier.
o Canada printing (concerning various Canadian barriers to the
importation of certain U.S. printed publications): Printing
Industries of America, Inc. submitted a draft petition late
last spring, apparently intended to serve as leverage in the
FTA negotiations.
o UK/FRG/France/Spain Airbus (concerning subsidies and
inducements to the purchase of Airbus aircraft): Boeing and
McDonnell Douglas continue to consider the possibility of
petitions under section 301 and/or the antidumping and
countervailing duty laws.
o EC Soybeans (concerning the EC's domestic subsidies for
soybeans): The American Soybean Association has submitted a
second draft petition which the Section 301 Committee is
reviewing. ASA says it plans to file September 16, and is
determined to proceed regardless of agency comments. This
would be a blockbuster case. In 1986 U.S. oilseed and
oilseed product exports to the EC totaled $2.3 billion,
compared to $4.2 billion five years ago. If filed and
initiated, it presumably would be handled as a GATT case;
therefore, the deadline for the Trade Representative's
recommendations to the President would be 30 days following
the conclusion of dispute settlement.
o Argentina/Chile Pharmaceuticals (concerning those countries'
lack of product patent protection for pharmaceuticals): The
Pharmaceutical Manufacturers Association (petitioner in the
Brazil case) advises us that they plan to file petitions on
Argentina and Chile as well in November.
Another Possible Self-Initiation Candidate
Finally, at some point agencies may be called upon to review
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again Japanese soda ash practices. Several times we have considered
whether to self-initiate an investigation based upon possible
cartel activities among Japanese firms tolerated by the Government,
and U.S. soda ash producers' failure to sell as much soda ash in
Japan as their comparative advantage would warrant. Senators
Wallop and Symms have urged us repeatedly to consider action
under section 301.
To date, however, the Justice Department and some other agencies
have opposed this step based upon insufficient evidence of the
continuation or resumption of an earlier cartel. The Section 301
Committee is monitoring this situation, and will recommend action
to the Trade Policy Review Group if evidence of unfair and
burdensome practices by the Japanese Government develops.
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DEPUTY UNITED STATES TRADE REPRESENTATIVE
EXECUTIVE OFFICE OF THE PRESIDENT
WASHINGTON. D.C. 20506
202-395-51,14
September 10, 1987
MEMORANDUM FOR THE ECONOMIC POLICY COUNCIL
FROM:
SUBJECT:
ISSUE
THE TRADE POLICY REVIEW GROUP
SECTION 301 ACTION AGAINST KOREAN INSURANCE PRACTICES
Should the President determine under section 301 that Korean
practices involving access to its life insurance market are
unfair and direct the development of appropriate and feasible
counteraction.
RECOMMENDATION
There is consensus in the TPRG that the attached section 301
unfairness determination should be forwarded to the President for
his signature. USTR will continue to seek a satisfactory solution
through negotiations simultaneously with the implementation of
the unfairness determination.
THE 1986 SECTION 301 AGREEMENT
o Last year we concluded a self-initiated section 301 action
against Korean insurance practices intended to provide full
market access to that market for U.S. companies. The 1986
agreement (attached) specified that qualified U.S. insurance
firms,would be promptly licensed. No reference was made. to the
form.. of .establishment -- branch office, subsidiary or joint
venture -- under which U.S. insurance firms would be required to
operate in either the life or non-life insurance' markets.
o The United States government consistently maintained its
position that restrictions on the form of establishment for entry'
into the Korean insurance market were unacceptable. During April
trade .consultations and the. July Economic Consultations, the
Koreans vere.put on notice that failure to allow joint ventures
and subsidiaries in the life market would be viewed by the United
States as a derogation of the agreement.
REMAINING MARKET ACCESS BARRIERS
o Implementation of the agreement to date has produced mixed
results. U.S. firms have been admitted to the compulsory fire
URENITAL
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JA-m-rfULN 11AL
pool, two limited life licenses have been approved and numerous
procedural/regulatory issues have been resolved. However, we
have not achieved the objective of full market access to the life
insurance market as a result of Korean limitations on participation
in that segment of the market to branch offices.
LEGAL BASIS FOR ACTION
o Ambiguity in the language of the 1986 agreement makes it difficult
to assert unequivocally that Korea has violated the agreement.
Nonetheless, Korea's pattern of interpreting and implementing the
agreement in an unduly narrow manner has prevented U.S. firms
from gaining full entry to the life market.
o The August 18, 1987 Korean decision to reject a bona fide
joint venture application, as well as its stated intent to reject
future joint venture applications and applications of U.S.
subsidiaries, clearly signal the Korean policy of continued
protection of its life insurance market. Other practices -- such
a delays in the issuance of licenses, limitations on the number
of products that U.S. insurance firms may market and requirements
concerning renewal of licenses every two years-- also underscore
the Korean intention to attempt to implement the 1986 agreement
in a minimalist fashion.
o It is the consensus of the TPSC Korea Subcommittee responsible
for monitoring implementation-of the -1986 section 301 agreement
that further technical level consultations under the consultative
mechanism of the agreement will not accomplish the goal of
increased access for U.S. firms. Elimination of restrictions on
form of establishment would require a ministerial level decision
in Seoul. ,Such a decision is unlikely in the absence of an
unfairness determination and a direction to recommend counter-
measures.
o Because these practices deny national treatment and fair and
equitable market opportunities, they may be considered unreasonable
under section qn. Because they also burden and restrict -U.S.
commerce (by limiting the sale of insurance by U.S. firms in
Korea), they are actionable under section 301.
o In addition, we believe these restrictions violate Article VII
of the 1956 U.S.-Korea Treaty of Friendship, Commerce and Navigation.
Article VII aCcords national treatment "with respect to engaging
in all types of commercial,...financial and other activities for
.gain (business activities)..., whether directly or by agent or
through the medium of any form of lawful individual entity." In.
our opinion, the broad scope of this provision covers insurance
services. Consequently, Korean government acts, policies and
practices are also unjustifiable under section 301.
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PRIVATE SECTOR VIEWS
o The Korean insurance market is'the 10th largest in the world with
1986 total life premiums of $6.3 billion. The life market grew
at an average annual rate of 30 percent between 1982-1986.
Industry analysis predicts average annual growth of 20 percent in
the Korean life market over the next five years. Again according
to industry analysis, roughly five years of operation by new
entrants to the market are required before profits are earned.
The International Insurance Council estimated in 1986 that U.S.
firms would be able to capture immediately a 5 percent market
share if allowed to operate without restriction on form of
establishment. We believe this is a conservative estimate given
the industry's interest in pursuing entry into the Korean market
following the 301 agreement, i.e., letters of intent or applications
from six U.S. firms.
o U.S. insurance firms have actively supported our efforts to
aggressively enforce the 1986 section 301 agreement. Preliminary
soundings of the industry indicate that it will support retaliation.
POSSIBLE RETALIATION
o Based on industry analysis, we estimate that the 1986-90
Korean life market will approximate $55 billion in total premiums.
Using an average annual premium level of $11.3 billion, we
estimate that U.S. firms are losing in the range of $550 million
to $1.1 billion in life premiums annually.
o Preliminary interagency discussions have focused on developing
a retaliation package based on imposing prohibitive tariffs on
Korean exports in the $0.5 to $1.0 billion range (1986 Korean
exports to the U.S. were valued at $13.4 billion).
o It is generally agreed that textiles covered by the bilateral
agreement and steel items under restraint should be excluded from
any retaliation package. Products appropriate for consideration
would include, inter alia , automobiles, various consumer electronics,
computers, certain footwear, automobile tires, and processed
agricultural products.
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MEMORANDUM FOR THE UNITED STATES TRADE REPRESENTATIVE
SUBJECT: Determination Under Section 301 of the Trade Act of 1974
Last year the Governments of the United States and the Republic
of Korea (Korea) concluded an agreement intended to provide fair
and equitable access for U.S. insurance companies to the Korean
life and non-life insurance markets. However, the operation of
this agreement to date has failed to achieve its objective,
because Korea has engaged in unjustifiable, unreasonable or
discriminatory acts that burden or restrict United States commerce.
Therefore, I direct the United States Trade Representative (Trade
Representative) to recommend appropriate and feasible countermeasures
for my consideration unless he is able to resolve this dispute
through bilateral agreement.
Reasons for Determination
On September 16, 1985, at my direction, the Trade Representative
initiated an investigation under section 302(c) of the Trade Act
of 1974, as amended (the Act), of the Korean Government's policy
of prohibiting or restricting the activities in Korea of foreign
insurance firms.
On August 14, 1986, I determined that certain acts, policies or
practices of Korea regarding access to its insurance markets were
unjustifiable, unreasonable or discriminatory and a burden or
restriction on United States commerce. Specifically, .I addressed
the Korean Government's policy of prohibiting or restricting U.S.
firms from participating fully in Korea's compulsory fire insurance,
life insurance and reinsurance markets.
However, the Governments of the United States and Korea concluded
an agreement that appeared to resolve the lack of access by U.S.
firms to the Korean insurance markets. Also on August 14, 1986,
I determined to accept that agreement and terminate the investi-
gation. I also directed the Trade Representative to take any
actions necessary to implement and monitor the agreement. I
stated my expectation that this agreement would accomplish our
goal of obtaining increased access for U.S. firms to Korea's
insurance markets.
Unfortunately, we have not achieved this goal. The Government of
Korea ,has interpreted the agreement unduly narrowly. For example,
it has refused to permit joint ventures of American and Korean
companies to .offer insurance services, and has failed to act
promptly on applications by .U.S. insurance firms for licenses.
Moreover, it has repeatedly refused to modify its restrictive
policies and practices in this regard despite U.S. resort to the
consultative mechanism established in the agreement.
Therefore, I have .determined that further acts, policies and
practices of the Government of Korea regarding access to its
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insurance markets are unjustifiable, unreasonable or discriminatory
and a burden or restriction on United States commerce. I am
directing the Trade Representative to initiate a new proceeding
under section 302(c). If he-is unable to achieve fair and
equitable access to Korea's insurance markets through a mutually
satisfactory bilateral resolution of this matter, I direct him to
recommend appropriate and feasible countermeasures.
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THE UNITED STATES TRADE REPRESENTATIVE
WASHINGTON
205.06
August 28, 1986
The Honorable Kyung-Won Kim
Embassy of the Republic of Korea
2370 Massachusetts Avenue, N.W.
Washington, D.C. 20008
Dear Ambassador Kim:
I have the honor to acknowledge receipt of your letter of today's
date which reads as follows:
"Dear Ambassador Yeutter:
This letter sets forth measures that the Government of the Republic
of Korea (ROKG) will undertake in connection with insurance
practices.
A. NON-LIFE INSURANCE
1. The ROKG will license two U.S. firms to underwrite compulsory
fire insurance and will assist the two U.S. firms to become
admitted to the fire pool in all geographic areas by July 31,
1986.
2. The allocation of premia and risks within the fire pool
is not subject to government regulation or control, but is a
matter of private agreement. Accordingly, the method of allocating
premia and risks within the fire pool will be negotiated and
decided upon by the participating firms, including participating
U.S. firms. The ROKG will provide support for a fair and reason-
able system of allocation of premia within the fire pool. In
this regard, it is understood that U.S. firms will participate
in the fire pool on the basis of the same allocation formula
that applies to Korean _firms participating in the pool. This
principle would permit the U.S. firms, under the current allocation
formula, to share equally in premia distribution within the
pool. Subsequent to the date of this letter, the U.S. firms
referred to in the above paragraph will participate fully in
any reformulation of the distribution of premia. It is understood
that any change in the current formula would be through agreement
among all the insurance firms participating in the pool including
the two U.S. firms referred to in the above paragraph. It is
understood that the U.S. firms operating in the pool will not
share risks and participate in the allocation of premia for
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1lMik
the buildings owned by the government or defense contractors.
It is further understood that the proportional share of underwri-
ting activity in the fire pool represented by the buildings owned
by the government or defense contractors will not change signif-
icantly. Should either government so request, the two governments
shall consult in the consultative mechanism concerning this
issue.
B. LIFE INSURANCE
The ROKG will license at least one branch of a U.S. insurance
firm to underwrite life insurance by the end of 1986.
C. ADDITIONAL LICENSES
The ROKG will license qualified U.S. insurance firms to underwrite
life and non-life insurance in Korea. Korean insurance authorities
will be prepared to receive license applications as soon as
the section 301 case is terminated, and will provide all necessary
information as to the technical requirements for submitting
applications. All applications will be reviewed in a timely
fashion and decisions rendered on the qualifications of U.S. firms
will be provided in writing.
D. CONSULTATIVE MECHANISM
The ROKG and the United States government agree to consult through
the Korea-U.S. Economic Consultation Trade Subgroup regarding
(1) any matters relating to the implementation of the understanding
reached with respect to the 301 case on insurance (e.g., complaints
about specific practices, the operation of the fire pool, technical
and administrative matters and new entrants to the market) and
(2) other issues on insurance of interest to either party.
Consultations in the Trade Subgroup concerning regulatory and
capitalization requirements, reinsurance and retention levels
will begin in August 1986 and proceed according to a schedule
to be developed by the two governments with a view to reaching
specific understandings during 1986.
It is our understanding that, in recognition of these measures,
the United States Government has terminated the investigation
into insurance practice in Korea initiated under section 301 of
the Trade Act of 1974, as amended.
Sincerely,
Kyung-Won Kim
Ambassador"
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Based on the commitments contained in your letter, and in
anticipation that implementation of these commitments will
proceed as scheduled, the United States Government has terminated
the investigation into insurance practices in Korea initiated
under section 302(c) of the Trade Act of 1974, as amended.
Sincerely,
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September 3, 1987
MEMORANDUM FOR THE ECONOMIC POLICY COUNCIL
FROM: THE TRADE POLICY REVIEW GROUP
SUBJECT: SECTION 301 DEVELOPMENTS
Summary
This memorandum outlines likely section 301 developments between
now and year's end. The Economic Policy Council may wish to take
them into account in deciding whether to initiate investigations
or recommend action under section 301 to the President regarding
telecommunications, Korean insurance, and Japan Kansai practices.
EC Meat Issues
Third Country Meat Directive. On May 1, 1987, the EC began
implementing its Third Country Meat Directive, which precludes
the importation of meat products from any plant outside the EC
that does not pass EC inspection. The directive establishes
detailed requirements, such as:
o the maintenance of separate rooms for various meat
slaughter and processing operations, and
o a prohibition on the use of wooden pallets, knife handles,
structural beams or fencing.
Of the more than 400 U.S. plants inspected by the EC since 1984,
only 7 slaughter and 3 cutting plants have been certified.
Another 59 slaughter plants are approved only until December 31,
1987, and must be reinspected by EC officials.
In 1986, U.S. meat exports (beef, veal, pork, horse and variety
meats) to the EC exceeded $165 million in value, or about 15
percent of total U.S. meat exports that year. USDA currently
accepts meat imports from over 250 European plants.
Last year we undertook a fact-finding investigation under section
305 of the Trade Act of 1974 on our own motion. The EC offered
to cooperate but never responded to the questions we posed.
On July 22, Ambassador Yeutter initiated a section 301 investigation
in response to a petition filed by the American Meat Institute,
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2 1tJENJfL
U.S. Meat Export Federation, National Pork Producers Council,
American Farm Bureau Federation and National Cattlemen' s Association.
They charge that the directive denies national treatment (because
its standards are not enforced in trade between EC member states,
and do not apply within member states), and cannot be justified
on the basis of scientific evidence. Because these issues arise
under the GATT and Standards Code, we requested consultations
under Article 23:1, which are scheduled this month.
However, we have no realistic hope of achieving an outcome under
GATT dispute settlement procedures by January 1, when the temporary
approvals of 59 U.S. plants expire. Unless they are certified,
the result will be either a reduction in U.S. meat exports to the
EC, or the incurrence of unnecessary expenditures by U.S. plants
to conform to EC requirements.
EC Hormones. In January 1987, the U.S. asked for consultations
under the Standards Code to complain of the EC's Animal Hormone
Directive. This directive precludes the importation into the EC
after January 1, 1988, of any meat produced from animals treated
with hormones (which is widespread in the U.S.). We believe that
hormones can be used safely under prescribed conditions, and that
the EC should accept our residue testing program as a sufficient
guarantee of the safety of meat from animals treated with hormones.
After the Standards Code Committee was unable to achieve a
mutually satisfactory solution, in July 1987 the U.S. asked for
the establishment of a technical experts group. The EC has
blocked its establishment, interrupting the dispute settlement
process. Unless the EC agrees soon to proceed, we may wish to
consider self-initiating an investigation or acting under section
301. Even if the EC permits dispute settlement to proceed,
however, it could not be completed prior to the implementation
January 1 of the EC directive.
As a result of the Third Country Meat and Animal Hormone Directives,
as of January 1, 1988, we expect U.S. exports of meat products to
the EC to cease abruptly. The issue for the EPC will be whether
and how to act unilaterally absent a satisfactory resolution in
the interim. This issue must be addressed no later than early
November, if public comment on proposed retaliatory measures were
to be obtained and retaliation implemented by January 1.
Argentina Soybeans
The Government of Argentina has maintained higher export taxes on
soybeans than on processed soybean products. This differential
discourages the exportation of beans, puts downward pressure on
the price of soybeans in Argentina, and thus provides a competitive
advantage to the Argentine crushers of soybeans into soybean meal
and oil.
In response to a petition filed by the National Soybean Processors
Association in 1986, we initiated a section 301 investigation.
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Last May, the President suspended this investigation based upon
the Argentine Government's commitment to eliminate or substantially
reduce all export taxes by October 15.
On July 20 Argentina eliminated or significantly reduced the
export taxes on all products except soybeans and sunflower seeds.
It reduced the differential in taxes on soybeans and processed
soybean products from 12 to 11 percent, which we do not consider
a substantial reduction.
We are pressing the Argentine Government to fulfill its pledge by
October 15. Argentina's Finance Minister will meet with Ambassador
Yeutter at the end of September to discuss the problem. However,
for Argentine domestic political and revenue reasons, we are
skeptical how far the Government will move.
Agencies agree that this export tax differential distorts trade;
despite repeated deliberations within the Section 301 Committee,
they still disagree whether it is unjustifiable, unreasonable or
discriminatory and a burden or restriction on U.S. commerce (the
criteria of section 301) . However, breach of Argentina's commitment
to eliminate or substantially reduce all export taxes by October
15 would be independently actionable under section 301 as unjusti-
fiable, if it also burdened or restricted U.S. commerce.
Absent a satisfactory settlement by October 15, the issue for the
EPC will be whether and how to respond to Argentina's breach of
its commitment and maintenance of an export tax differential that
distorts trade. This issue would arise as of October 15, but
there would be no need to act immediately to preserve the status
quo (as in the EC meat matters).
Argentina Air Couriers
In 1984 the Air Courier Conference of America complained of the
Argentine Government's restrictions on the delivery of time-
sensitive commercial documents, which essentially prohibited U.S.
couriers from the international carriage of such items. In
November 1984 the President determined this practice to be
unreasonable and a restriction on U.S. commerce. He directed the
Trade Representative to consult further with Argentina, but to
submit proposals for action under section 301 within 30 days if
the issue were not resolved through consultations.
With the help of this leverage, we persuaded Argentina to eliminate
its restrictions. However, it replaced the restrictions with a
discriminatory tax on international courier operations, which our
industry maintains bore no reasonable relationship to the cost of
any services provided. Recently the Argentine Government allegedly
has harassed the local franchise of one U.S. company, DHL, on the
basis of purported ties to British interests. In addition, the
Government is replacing the clearly discriminatory tax system
with a nondiscriminatory tax system that may operate nonetheless
to the disadvantage of international couriers and to the advantage
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4 , Pt1
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of the Argentine monopo postal authority, ENCOTEL.
The Section 301 Committee will review the new draft regulations
as soon as they are available and meet with U.S. industry repre-
sentatives and GOA officials. If the Committee concludes that
the Argentine Government simply would be replacing one unfair and
burdensome practice with another, it will recommend any appropriate
action to the Trade Policy Review Group.
Brazil Informatics
President Reagan suspended the procedural and market reserve
portions of this case in December 1986, and the intellectual
property portion on July 1. The latter suspension was based on
passage by Brazil's Chamber of Deputies of legislation that would
provide adequate copyright protection to computer software.
However, Brazil's Senate does not consider this legislation
urgent and may delay its consideration until it completes drafting
the Constitution. More ominously, the Brazilian private sector
opposes the bill's market reserve provisions for software, which
prohibit software imports if a Brazilian company produces a
"functional equivalent." Brazilian software user and producer
associations have asked the Senate leadership to replace this
provision with a tax on imported programs. If the Senate amends
the bill, it will be sent back to the Chamber of Deputies, where
nationalistic deputies are likely to try to derail the entire
bill if they believe that the market reserve policy is threatened.
To further complicate matters, Brazil's Secretariat for Informatics
may shortly approve a pending license application for a Brazilian
clone of the Apple MacIntosh 512 personal computer. Depending
upon these developments, the EPC may have to consider whether to
reopen the intellectual property portion of this case. (The
investment portion remains active.)
Other Current Section 301 Cases
The following are major developments and deadlines in other
active Section 301 cases:
o Canada Fish (concerning Canadian prohibitions on the
export from Canada of unprocessed salmon and herring): We
expect the GATT panel report in October. The deadline for
the Trade Representative's recommendations to the President
is 30 days following the conclusion of dispute settlement.
o India Almonds (concerning Indian licensing requirements
and steep tariffs on imports of almonds): At the Indian
Government's request, a second round of GATT consultations
is scheduled for the week of September 28; and we have asked
for the establishment of a panel in the Licensing Code
Committee. The deadline for the Trade Representative's
recommendations to the President is 30 days following the
conclusion of dispute settlement.
_JNEBENTi.
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o Brazil Pharmaceuticals (concerning Brazil's lack of
product or process patent protection for pharmaceutical
products): After three rounds of consultations, the Brazilian
Government indicated it would not grant either product or
process patent protection for pharmaceuticals. Public
hearings are scheduled for September 14. The deadline for
the Trade Representative's recommendations to the President
is July 23, 1988.
Possible Section 301 Industry Petitions in the Wings
In addition to pending cases, we are aware of the following petitions
that could be filed by U.S. industry:
o Canada wine (concerning provincial barriers to the sale of
U.S. wine in Canada): The Wine Institute submitted a draft
petition this summer, and is likely to file if FTA negotiations
do not resolve this trade barrier.
o Canada printing (concerning various Canadian barriers to the
importation of certain U.S. printed publications): Printing
Industries of America, Inc. submitted a draft petition late
last spring, apparently intended to serve as leverage in the
FTA negotiations.
o UK/FRG/France/Spain Airbus (concerning subsidies and
inducements to the purchase of Airbus aircraft): Boeing and
McDonnell Douglas continue to consider the possibility of
petitions under section 301 and/or the antidumping and
countervailing duty laws.
o EC Soybeans (concerning the EC's domestic subsidies for
soybeans): The American Soybean Association has submitted a
second draft petition which the Section 301 Committee is
reviewing. ASA says it plans to file September 16, and is
determined to proceed regardless of agency comments. This
would be a blockbuster case. In 1986 U.S. oilseed and
oilseed product exports to the EC totaled $2.3 billion,
compared to $4.2 billion five years ago. If filed and
initiated, it presumably would be handled as a GATT case;
therefore, the deadline for the Trade Representative's
recommendations to the President would be 30 days following
the conclusion of dispute settlement.
o Argentina/Chile Pharmaceuticals (concerning those countries'
lack of product patent protection for pharmaceuticals): The
Pharmaceutical Manufacturers Association (petitioner in the
Brazil case) advises us that they plan to file petitions on
Argentina and Chile as well in November.
Another Possible Self-Initiation Candidate
Finally, at some point agencies may be called upon to review
CONEITICVAI
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again Japanese soda ash practices. Several times we halfretroiasidered
whether to? self-initiate an investigation based upon possible
cartel activities among Japanese firms tolerated by the Government,
and U.S. soda ash producers' failure to sell as much soda ash in
Japan as their comparative advantage would warrant. Senators
Wallop and Symms have urged us repeatedly to consider action
under section 301.
To date, however, the Justice Department and some other agencies
have opposed this step based upon insufficient evidence of the
continuation or resumption of an earlier cartel. The Section 301
Committee is monitoring this situation, and will recommend action
to the Trade Policy Review Group if evidence of unfair and
burdensome practices by the Japanese Government develops.
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