AGENDA AND PAPERS FOR THE SEPTEMBER 16 MEETING

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP89B00224R000602040008-7
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 33
• Document Creation Date: December 22, 2016
• Document Release Date: November 3, 2011
• Sequence Number: 8
• Publication Date: September 15, 1987
• Content Type: MEMO

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9 September 1987
MEMORANDUM FOR: Distribution
SUBJECT: Inter-Agency Meeting
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Economic Policy Cotmcil
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TYPE OF MEETING
DATE
TIME
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SUBJECT/AGENDA
Canada FIAA
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(:UNt'iMNT1AL ATTAC:MMr:NT
THE WHITE HOUSE
WASHINGTON
EN X% his
87-32658
CABINET AFFAIRS STAFFING MEMORANDUM
Date: 9/15/87 Number: 490, 692 Due By:
Subject: Economic Policy Council Meeting -- Wednesday, September 16, 1987 --
-- 11:00 a.m. -- Roosevelt Room
Action
ALL CABINET MEMBERS ^
Vice President
State
Treasury
Defense
Justice
Interior
Agriculture
Commerce
Labor
HHS
HUD
Transportation
Energy
Education
Chief of Staff
OMB
UN
USTR
EPA
GSA
NASA
OPM
SBA
VA
FYI
11
W ^
CEA
CEQ
OSTP
Carlucci
Cribb
Bauer
Dawson (For WH Staffing)
Executive Secretary for:
DPC
EPC
REMARKS: The Economic Policy Council will meet on Wednesday,
September 16, 1987 at 11:00 a.m. in the Roosevelt Room.
The agenda and background papers are attached for your
review.
RETURN TO:
Cabinet Secretary Office of Cabinet Affairs
456.2823 456-2800
(Ground Floor, West Wing) (Room 235, OEOB)
lllancyJ. Risque ^Associate Director
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September 15, 1987
MEMORANDUM FOR THE ECONOMIC POLICY COUNCIL
FROM: EUGENE J. McALLISTER c /
SUBJECT: Agenda and Papers for the September 16 Meeting
The agenda and papers for the September 16 meeting of the
Economic Policy Council are attached. The meeting is scheduled
for 11:00 a.m. in the Roosevelt Room.
The single agenda item will be a discussion of the negotiations
tor a free trade agreement with Canada. There are five papers
attached, with reports on the status of the negotiations and the
investment, energy, and automotive issues. The final paper is a
report from the working group examining the implications of the
Canada FTA for the FCN treaties we have with other nations.
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September 16, 1987
11:00 a.m.
Roosevelt Room
AGENDA
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UJt ILtN I IN
FTA NEGOTIATIONS: STATUS AND TRADE-OFFS
Issues
A US/Canada agreement still appears possible before the
early October deadline, but the two sides are far apart in many
areas. We have shown flexibility on the key Canadian demands
on subsidies and countervailing duties, but still need
concessions in areas important to us. Following is the
background for the negotiations, a summary of US and Canadian
objectives, an outline of the shape of a possible agreement and
the trade-offs involved. Attached are papers on auto trade,
investment, and energy; some of the areas where EPC decision is
required.
Background on Free Trade Area Negotiations
On March 17, 1985, President Reagan met Prime Minister
Mulroney in Quebec and issued a joint declaration of their
desire to negotiate the "broadest possible package of mutually
beneficial reductions in barriers to trade in goods and
services." The negotiators' goal is to eliminate tariffs and
substantially reduce regulatory barriers to the flow of goods,
services, and investment. These are the most comprehensive
trade negotiations we have ever undertaken.
The negotiations, which are taking place under special
"fast track" negotiating authority, have a target completion
date of early October 1987, when the Administration must notify
Congress of its intent to enter into an agreement.
The negotiations are complicated by several factors: the
need to break new ground on many issues (services, intellectual
property, subsidies, investment, dispute settlement); state
and/or provincial jurisdiction in many key areas; outstanding
bilateral trade and investment irritants; and the overall
Congressional debate on trade. (The close vote in the Senate
Finance Committee that allowed "fast track" negotiations, a
10-10 tie, reflected disagreement with overall Administration
trade policy and not the Canada initiative.)
Complete elimination of trade and investment barriers
would require controversial policy changes in both countries.
Canadians believe their exports are unfairly harassed under US
trade remedy laws, and seek to limit their application. At the
same time Congress seeks to tighten these provisions in
general. On the other hand, US interest in a free, open
investment regime raises Canadian fears of US domination of
business and industry.
. . C) -111W
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The US interest in an FTA is to promote efficiency on both
sides of the border, set an example for multilateral trade
talks, and to prevent Canada from backsliding to the
restrictive, inward-looking policies of the 60's and 70's. In
Canada, Prime Minister Mulroney has staked his leadership
credentials on his proposal for a comprehensive trade
agreement. He appears convinced that an agreement is in
Canada's fundamental interest, both to avoid the protectionist
push of Congress and to make Canadian industry more competitive.
US Objectives
0 Elimination of Tariffs: Canadian tariffs are about twice
as high as ours.
0 Reduction of Nontariff Barriers; including technical
agricultural and industrial standards; elimination of
discriminatory energy restrictions and pricing;
elimination of discriminatory distribution and pricing
practices affecting wine, spirits, and beer.
o Open and Secure Investment in Canada: Guarantees reducing
Canada's ability to screen and prevent US investment;
prohibition of performance requirements, uncompensated
expropriation, and restrictions on sales and acquisitions;
o Improved Protection for Intellectual Property: Improved
patent, trademark, and copyright protection, particularly
for pharmaceuticals and broadcasting.
o Rules for Services: National treatment for US services,
including the motion picture industry.
o Discipline over Canadian Subsidies
0 Energy: Long-term secure access to Canadian supplies on a
non-discriminatory basis.
o Auto Trade: Elimination of remaining tariffs and duty
remission programs.
o Resolution of Outstanding Bilateral Trade Irritants:
including proposed film distribution restriction,
discriminatory broadcast media policies, and restrictive
plywood standards.
CONFIDENTIAL
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Canadian Objectives
o Assured access to the U.S. Market: "Predictable" trade
rules and a bilateral mechanism for the binding resolution
of trade disputes, including subsidy and countervail
disputes; substitution of antitrust law for antidumping
laws; exemption from US safeguard actions (section 201),
Section 232 (protection of the defense industrial base),
and Section 337 actions on intellectual property;
elimination of customs user fees; assurance that Canada
will not be hit by restrictive elements of the trade bill.
o Binding Bilateral Dispute Settlement: an institutional
mechanism to enforce the agreement and deal with any
individual disputes that may arise.
o Government Procurement: Waiver of Buy America provisions
at both the federal and state level.
o Border Crossing: Simplified procedures for business
travelers; additional access for some service sector
professions.
o Cultural Exclusion: Exemption from FTA disciplines for
cultural industries (broadcasting, films, publishing,
music) in order to maintain Canada's "cultural identity."
o Agriculture: Partial exemption from US restrictions on
sugar and sugar-containing products; prior consultation on
subsidized grain exports; shielding of marketing boards,
and horticultural industries.
o Energy: Guaranteed access to US market, for example,
removal of restrictions on exports of Alaskan North slope
crude; access to Bonneville power grid; exemption from
uranium enrichment restrictions.
o Services: Access to U.S. coastwise trade for Canadian
built vessels with Canadian crews; protection for all
current practices from 301 actions.
o Financial Services:Ten year moratorium on the application
of Glass-Steagall restrictions for Canadian financial
institutions;
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Status of the Negotiations
Going into the final three weeks of this negotiation, the
U.S. and Canada remain far apart on major issues. If it were
possible to conclude an agreement of the basis of the issues
which have been resolved to date, plus those which appear
resolvable, we might have an FTA that looks something like that
described in "Core Package" below. We do not know if Canada
would accept a core package.
To expand the core package, both countries must make some
painful political decisions which will give rise to domestic
opposition both in Congress and the private sector. The TPRG
and the EPC must consider how far we can go. .
CORE PACKAGE:
o Tariffs: eliminated, mostly over 5-10 years.
o Customs: tight rule of origin; elimination of duty
waivers/inward processing/duty drawback/duty
remission schemes; improved border cooperation,
facilitation and enforcement.
o Investment: review only of large take-overs; ending
of performance requirements and forced divestiture.
o Subsidies: improved discipline in exchange for a
role for dispute settlement and technical changes in
the application of US CVD laws.
o Dispute Settlement Mechanism (DSM): bilateral
version of the GATT, plus voluntary binding
arbitration.
o Dumping: commitment to consider replacing national
dumping laws with competition laws at the end of 10
years when tariffs are eliminated.
o Services: standstill on current practices; few or no
rollb ac s; possibility of sectoral agreements on
tourism and insurance.
o Border Crossing: facilitated procedures for business
travelers and services providers.
o Agriculture: Progress in reducing technical barriers;
exclusion from each others' meat import laws.
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o Financial Services: some liberalization possible,
including 10/25 limit on acquisitions; Glass-Steagall
still major impediment.
o Government Procurement: perhaps nothing; possibility
of small expansion of GATT Code coverage at federal
level, coupled with lower threshold (e.g., $25,000
vice 170,000 SDRs).
o Intellectual Property: possibly some improved patent
protection for pharmaceuticals, but not as much as we
want; compulsory licensing would remain; new
copyright protection for cable retransmission;
perhaps nothing unless we neutralize 337.
o QRs/Standards: some rollbacks and harmonization,
sharing of resources in short supply possible.
o Alcoholic Beverages: improved market access and
reduced discrimination on wine and distilled spirits;
little or nothing on beer.
o Auto: elimination of tariffs and duty remission
schemes, but major controversy regarding Auto Pact.
o National Security Exceptions:
o Safeguards: provision for 201-type actions during
the transition period, but Canada may insist on being
excluded from global restraints.
II. BROADER PACKAGE: The Canadians say they want a major
package and are prepared to pay for it. We must be prepared to
reciprocate if we expect to achieve our major goals. The
principal issues are these:
o
Subsidies: Canada says it will undertake meaningful
discipline in exchange for replacing U.S. CVD laws
with common rules and binding dispute sttlement.
Assessment:
If
Canada does accept some real
discipline,
we
can provide some limited dispute
settlement.
We
are currently testing the Canadians
flexibility
on
this issue.
o Dispute Settlement: Canada wants an independent,
binational tribunal to replace national trade remedy
laws with binding arbitration. The U.S. has offered
a binational version of the GATT, plus voluntary
binding arbitration. Recent public statements by
various GOC ministers suggest they have not backed
away from their demand, as we had thought. Mulroney
will try to press this view with the President at the
UNGA, as he did during their private meeting at the
Venice Summit. Assessment: This could be the deal
maker or breaker.
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o Investment: Canada has linked what we want on
investment to what they want on subsidies/DSM. We
have denied any such linkage but to no avail. We
have much to gain. This issue is our sine qua non.
Canada knows it. Assessment: Canada appears ready
to deal.
o Ener9Y : a major package including open market and
supply access appears possible. Canada wants to
limit our ability to impose import and export
restrictions for national security purposes. Any
deal on energy, however, is dependent on our ability
to provide limited access to Alaska North Slope oil
(50,000 to 200,00 barrels/day) and access to U.S.
uranium enrighment facilities. Assessment: do-able,
but at a domestic political cost. Chairman Dingle of
House Energy Committee is opposed, as are others.
o Services: There will not be major package no matter
what we do. However, we are trying to salvage what
we can. We want improved market access on trucking
and busing. Canada has said all transportation and
telecommunications must be included. There is fierce
Congressional opposition on maritime (Jones Act).
Assessment: small agreement possible.
o Telecom: we are unlikely to get non-discriminatory
procurement from Bell Canada unless we commit our
regional Bell companies to provide similar
treatment. Assessment: we may get nothing
regardless of what we do.
o Auto Pact: politically explosive in Canada. GOC
wants to retain the Auto Pact and its local content
and other performance requirements imposed on local
investors (GM, Ford, Chrysler, Others). The Big-3
also want to keep the Pact which now gives them an
advantage in Canada over Japanese-oned US plants.
The auto parts manufacturers, the UAW, and at least
seven state governors and their Congressional
delegations are opposed to this arrangement because
it is skewed in Canada's favor. Assessment: a very
contentious issue. Some way has to be found to
strike a compromise between the interests of the
Big-3 and the auto parts people.
CONFIDENTIAL
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o Agriculture: The Canadians have raised the prospect
of dropping agriculture (including alcoholic
beverages) from the agreement unless US import
restrictions on sugar and sugar-containing products
are limited. The EPC is scheduled to review the
sugar program on September 24. A larger package on
agriculture involving removal of Canadian grain
import licenses, termination of freight rate
subsidies in grain exports to the US, and removal of
Canadian restrictions on consignment sales and bulk
shipments to processors, has been linked to US
concessions involving prior consultations with Canada
on EEP sales and exemption of Canadian imports from
state marketing orders. Assessment: uncertain,
depends on ability of US to make painful concessions.
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U.S.-CANADA FTA: INVESTMENT
Can the EPC accept in principle some Canadian screening of foreign
takeovers, narrowly circumscribed, in return for all the other
undertakings from Canada to improve the foreign investment
climate?
BACKGROUND
The investment negotiations were at a procedural impasse until
last Friday, when Canada gave us a draft investment chapter at the
same time the U.S. gave them a revised subsidies/ countervail
proposal. Canada has explicitly linked formal progress on the
Investment Chapter to progress satisfactory to Canada on the
Subsidies/Countervail/Dispute Settlement issues.
Prior to Friday's procedural breakthrough, a Canadian draft text
was shown to and discussed with our group negotiator. These
discussions advanced the substantive negotiations considerably.
Both negotiators believe an agreed text can be developed rapidly,
now that Simon Reisman has given his authority to move to closure.
A. STRUCTURE OF THE AGREEMENT
The emerging agreement will accomplish the three main U.S. goals:
(1) It substantially narrows Investment Canada's screening au-
thority. Most U.S. investments in the future will not be screened
and will receive national treatment. The small group of direct
acquisitions remaining, a narrowly defined class of politically
sensitive (i.e. large) acquisitions, will still be screened but
only above a significantly higher threshold (asset value of ac-
quired firm) than at present. Canada also will retain screening
for new establishments and direct acquisitions in "cultural in-
dustries", because the cultural sectors are generally carved out
of the whole FTA. (The Canadians have agreed, however, to end
practices in "cultural sectors" that have been particular irri-
tants, such as forced divestiture and discriminatory taxation
--see (2) below.)
(2) Certain problematic Canadian practices will be banned. These
include:
-- Forced divestiture, including in book publishing and energy.
-- Minimum Canadian equity requirements.
-- Expropriation without due process and prompt, adequate and
effective compensation.
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-- Most performance requirements.
-- Discriminatory postal rates for foreign-controlled publica-
tions and discriminatory tax practices for advertisements and
small businesses.
(3) It prohibits Canada from backsliding on the substantial
liberalization already achieved by the Mulroney Government.
B. KEY UNRESOLVED ISSUES
Four main issues remain for final negotiation:
(1) Level of the screening threshold for direct acquisitions--
i.e. size of acquired firm below w is n sscreening wi
occur. The U.S. side has laid down a non-negotiable require-
ment that the threshold go to three digits--i.e. above C$100
million, in constant C$. The Canadian side has spoken of a
"significant multiple" of the present C$5 million threshold.
In our view, all that is negotiable is where the threshold
settles above C$100 million.
(2) U.S. demand that "indirect" acquisitions not be screened when
Canadian subsidiaries change hands as a result of changes in
ownership of U.S. parent corporations. The Canadians instead
want a minimum threshold (i.e. size of Canadian subsidiary)
above which screening would occur. We believe that ultimate-
ly the Canadians will agree to our demand.
(3) What performance requirements (PR's) are banned. Canada has
agreed to end trade-related requirements (e.g. local content,
export, and import-substitution requirements). Still under
discussion are product-mandate, R&D, and technology transfer
requirements, which the U.S. insists be banned. Also unre-
solved is the issue of banning PR's on third-country invest-
ors that could indirectly affect U.S. trade. The U.S. wants
these banned, while the Canadians do not.
(4) U.S. demand that Canadians cease screening all sales of
Canadian firms already owned-by U.S. investors. The U.S.
wants this right to sell freely so that U.S. investors may
receive full value for their assets. The Canadians counter
that U.S. sellers should receive national treatment--i.e.
like Canadian investors, U.S. investors selling to foreigners
should be subject to screening.
ACTION NEEDED: an EPC decision to accept a narrowly circumscribed
amount of Canadian screening in return for all the other
undertakings Canada would make to liberalize and stabilize the
investment climate.
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U.S./CANADA FTA NEGOTIATIONS:
ENERGY
ss : Elimination of barriers to trade in energy is agreed by
all agencies and by both the United States and Canada to be in
the long-term interest of both countries. However, achieving
this objective will require taking certain politically sensitive
actions on both sides. Canada has now indicated a willingness to
make commitments on their side and is looking to our side for
comparable commitments.
Objectives/Benefits for U.S.: As a significant net importer of
energy, the U.S. seeks to assure long-term secure access to
Canadian energy supplies on a nondiscriminatory basis. This is
consistent with the March 1987 DOE report to the President on
energy security and will provide an important counter to future
increased dependence on OPEC oil. By establishing free and fair
trade in energy between the two countries, we will encourage the
investment necessary to allow the most economic development of
North American resources and thus lower energy costs for industry
and other consumers of both countries. This will improve the
international competitiveness of energy-intensive industries such
as petrochemicals and basic metals, as well as improving our
overall energy security. Failure to achieve such nondiscriminatory
access to Canadian oil and gas will, on the other hand, cause the
U.S. chemical industry and other energy-consuming industries to
oppose approval of the FTA by the Congress.
Concessions Necessary to Achieve Objectives: Access to Canadian
resources is a very sensitive political issue in Canada. To
allow U.S. purchasers access to these resources on terms comparable
to Canadians, Canada is asking for balancing concessions which
would assure Canadian energy suppliers nondiscriminatory access
to the U.S. market and reduction of U.S. barriers to bilateral
energy trade. The Canadians have requested (1) limiting the
national secury exception on import restrictions to situations
which relate directly to national defense (as opposed to broad
interpretation to cover the entire industrial base); (2) avoiding
energy regulatory actions which discriminate against Canada; and
(3) reducing restrictions on energy exports to Canada (ANS oil).
This last item would generate opposition from U.S. maritime
interests.
Current Status of Negotiations: Both countries have agreed to
have no barriers to imports or exports except under very narrow
conditions (conservation of finite resources, short supply,
requirements for military installations) and, in the event of
supply restrictions based on conservation or short supply, to
share energy supplies proportionately and without price discrimi-
nation (attached language still being reviewed by legal drafting
group). The attached language on energy regulation has also been
agreed to. Negotiators have agreed to eliminate/phase-out
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existing restrictions on uranium trade in a manner to be agreed
to. Negotiators have also agreed that energy trade restrictions
on national security grounds should be limited (language still
being reviewed).
Canada has requested elimination or modification of ANS oil
export restrictions and the U.S. has noted the sensitivity of
this issue, stating that at present we are not in a position to
offer concessions in this area. However, Canada has made clear
that concessions on access to Canadian energy supplies must be
balanced by similar actions on the U.S. side (even though the
volumes of oil from Canada to the U.S. are much larger) to
achieve the necessary reciprocal balance of openness on both
sides. Thus, the broader U.S. objective of assuring long-term
future access to Canadian energy supplies is clearly dependent on
some concession on the ANS oil export restriction. A paper
discussing possible options with respect to this issue is attached.
Background: Canada is by far the largest supplier of energy
imports to the U.S. (1986 imports: oil, $4.5 bil.; natural gas,
$1.9 bil.; electricity, $760 mil.; uranium, $200-250 mil.).
Canada is also our largest export market for coal and coke ($890
mil.). In the past this trade relationship has been characterized
by government intervention and trade restrictions on both sides.
We now have a unique opportunity to put our bilateral energy
trade on a more secure, long-term basis, to the mutual benefit of
both countries. The President and the Prime Minister recognized
this objective and in the March 1985 Quebec Summit Declaration on
Trade committed to "strengthening our market approach to Canada-
United States energy trade by reducing restrictions, particularly
those on petroleum imports and exports, and by maintaining and
extending open access to each other's energy markets, including
oil, natural gas, electricity and coal."
Attachments
COMFBET%L
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9/3/87
ENERGY REGULATORY REQUIREMENTS
[The Parties seek to broaden and secure the free trade in
energy commodities between them and to avoid energy regulatory
actions inconsistent with this objective. To this end, if either
Party believes energy regulatory actions by the other Party would
as a direct effect discriminate against its energy commodities,
nationals, or companies in a manner inconsistent with this
Agreement, that Party may initiate direct consultation with the
other Party. The consultation shall be between, for Canada, the
Ministry of Energy, Mines, and Resources and, for the United
States, the Department of Energy. For purposes of this
provision, "energy regulatory actions" means any action taken for
Canada by the National Energy Board and for the United States by
either the Federal Energy Regulatory Commission or the Economic
Regulatory Administration.)
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ANS OIL EXPORTS
ss : Canada has requested elimination or modification of the
current ban on exports of Alaskan oil as part of the FTA. This
would be opposed by U.S. maritime interests, which some believe
could jeopardize the entire Agreement. However, failure to make
concessions on Alaskan oil will mean Canada cannot make commitments
on access to Canada's oil and gas in Alberta on the same terms as
Canadians have access to these supplies, with the result that the
U.S. chemical industry will oppose the Agreement, as they have
stated in writing.
Background:
Approximately 1,600 to 1,700 thousand barrels per day
of crude oil is produced at Prudhoe Bay on Alaska s(Nortth
Slope (ANS); this oil is transported across Alaska through
the Trans Alaska Pipeline System (TAPS) to Valdez, where
most of it is put on tankers for consumption outside Alaska.
Section 7 of the Export Administration Act effectively bans
exports of ANS crude oil by establishing criteria for its
export that are virtually impossible to meet; since demand
in Alaska is relatively small, this means most of the oil
must be used in the Lower 48.
Because of the Jones Act, ANS oil must be carried to the
Lower 48 on U.S. bottoms; this trade accounts for about 60%
of total U.S. flag tanker tonnage.
Any concession at all on ANS oil is opposed by maritime
interests, which have attempted in H.R. 3 to extend existing
restrictions to oil not now covered; there is also some
concern regarding impacts on development of oil and gas in
the Alaska Natural Wildlife Reserve (ANWR).
Canada has expressed interest in bringing some ANS crude
into British Columbia because their alternate sources are
either Alberta crude transported over the Rockies or imports
from Asian sources.
Canada's particular concern regarding possible retention of
the ban by the U.S. if Canada were to relax its oil export
restrictions in the FTA is that this lack of reciprocal
treatment would be very difficult to sell politically in
Canada.
Canada has been the largest supplier of oil to the U.S. in
recent years, with current exports totalling nearly 800
MB/D; it is anticipated that Canada will remain an important
source of oil and other energy imports into the next century.
CONFIDENTIAL
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Total refining capacity in British Columbia is about 165
MB/D, which defines the theoretical effective upper limit on
ANS exports that could result; however, because of existing
contractual relationships, refinery processing limitations
and other economic and technical constraints, it is believed
the actual amount of ANS oil that might go to British
Columbia is between 35 and 50 MB/D.
Depending on how the oil is transported, the maximum maritime
effects for 50 MB/D are estimated to be three tankers (about
327,000 dwt) and about 190 jobs. (The Canadians have
indicated that they may be willing to agree to conditioning
of the export on transportation on U.S. tankers to Cherry
Point, Washington, and subsequent lightering to British
Columbia, thus reducing the potential maritime impact.)
Options:
While total elimination of the ban on all ANS oil exports is
clearly most consistent with our overall trade and energy policy
objectives and would respond not only to the Canadian request but
also to longstanding requests from Japan and Korea, it is not a
viable option in light of the strong opposition of maritime
interests and the negative effects on maritime employment and USG
loan guarantees on tankers. If it is decided to make some
concession to Canada on ANS oil, the following appear to be the
most feasible options:
1. Exempt Canada from ANS oil ban if certain conditions are met
which result in overall increased U.S. energy security
(e.g., commitments on nondiscriminatory access to supply on
oil, gas, electricity and uranium).
Simplest approach to responding to Canadian request.
Would not open up ANS oil for significant exports to
Pacific Rim countries.
Would meet Canadian concerns, but only to the degree
our own concerns on longer-term energy supply security
are also met under the terms of the Agreement.
Would satisfy Canadian need for reciprocal concessions
on energy exports on both sides.
Would not involve the administrative problems of
volumetric limits or requirements such as those listed
in option 2.
CONFIDENTIAL
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CUNF1BET1L
Would still generate significant maritime opposition,
although not as much as total elimination of the ban.
Could be read to open up to large exports beyond the
requirements of British Columbia, although this possibility
is viewed as unlikely, and we would require a ban on
reexports.
3. Allow exports to Canada subject to certain specific restric-
tions, e.g., up to a certain volumetric limit, possibly
tying the exports to a requirement that equal volumes of
crude oil be exported from Canada to the U.S. in a barrel-
for-barrel exchange, and/or requiring U.S. flag tanker
transportation.
Would probably encounter less maritime opposition than
Option 1 (though some opposition could be expected in
any case).
Would likely be viewed as inadequate by the Canadians
when considered in comparison to the concessions we are
asking on access to Canadian energy supplies, resulting
in failure to achieve balance of commitments needed to
win U.S. chemical industry support or at least neutrality.
Would be administratively complex compared to other
options.
Discussion:
There is a clear trade-off of political risks here. On the one
hand, trying to accommodate Canadian desires and concerns regarding
exports of ANS oil could result in a major effort by the maritime
lobby to defeat the entire Agreement. On the other hand, if we
do not provide some concessions on our side that are perceived to
be comparable to those we are requesting from Canada, we will not
get the commitments necessary to assure- equal access to oil and
gas supplies at comparable prices on both sides of the border.
Since this is a basic condition without which there cannot be
free and fair trade in energy, petrochemicals and other energy-
intensive products between the two countries, we will lose the
support of significant U.S. industries unless we get Canadian
commitments on supply access and pricing. These industries are
being asked to give up some fairly substantial tariffs as part of
the Agreement. They have made it clear that these U.S. concessions
must be contingent on certain Canadian concessions, specifically
including discipline on energy supply and price as a "must have."
IT I A,, I
,nNFinF I
ru LILN 1! L
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U.S.-Canada Free Trade Negotiations
Automotive Issues
ISSUE:
The EPC needs to decide two issues related to the automotive
sector: (1) whether to seek the elimination of Auto Pact safe-
guards/performance requirements; and (2) an appropriate standard
of preference for duty free treatment of automotive products
under the FTA.
BACKGROUND:
Assembled automobiles and automotive parts for use as original
equipment currently enter the U.S. and Canada duty-free under the
terms of the 1965 Auto Pact. Imports from Canada qualify for
duty-free entry into the U.S. if they meet a 50 percent North
American value added test. Imports into Canada qualify for duty-
free treatment only if the importing company meets two safe-
guard/performance requirements.
Briefly, companies must (1) maintain a production-to-sales ratio
of 1:1 (for every car sold in Canada, one must be produced in
Canada); and (2) a Canadian value added/sales ratio of 60 percent
(for every dollar of sales in Canada, the company must generate
60 cents of Canadian value added in Canada). As long as the two
performance requirements are met, qualified companies can import
assembled autos and automotive parts for use as original equipment
from any source, not just from the U. S. Hence the Big-3 save
tens of millions of dollars in duties annually on imports from
non-U.S. sources. Since elimination of safeguards would likely
lead to the elimination of this duty-free multilateral sourcing,
the Big-3 strongly oppose it.
A level of 35 percent direct cost of processing (factory floor
cost, harder to meet than value added test) has been proposed to
cover all assembly industries across the board under the FTA. In
order to encourage increased North American content in automotive
products, U.S. interests have urged a higher threshold for the
automotive sector. The Motor Vehicle Manufacturers Association
supports 50 percent, requests from parts manufacturers range from
35-70 percent, and the UAW urges 75 percent. A 50 percent cost
of processing test equals about a 65 percent value added test.
The higher the North American content, the more protected from
import competition will be U.S. suppliers to the auto assemblers.
The Big-3 also favor a high standard, even though it limits their
ability to source offshore, because many Japanese-owned producers
would not qualify.
CONFIDENTIAL
r'1l
Classified by: 01Y 01
Decks* on: o Al
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2
OPTIONS: Safeguards/Performance Requirements
1. Seek Total Canadian Elimination of Safeguards
PROS
o Consistent with U.S. policy seeking elimination of performance
requirements bilaterally in the FTA and multilaterally in
the Uruguay Round;
Would eliminate investment distortions, possibly prompting
more future investment in the United States;
o May increase parts sourcing from North American manufacturers;
o U.S. firms in Canada that have not always met the safeguards
on the margin would no longer need to be concerned about them;
o Would totally free-up North American automotive trade;
o Would satisfy some U.S. part manufacturers, labor interests,
and a number of Midwestern Congressmen and Governors.
o Would strengthen our arguments against the UAW effort for
legislation to impose performance requirements on auto
assembly operations in the U.S.
CONS
o U.S. subs in Canada are likely to lose duty-free multilateral
sourcing, estimated to be worth C$100 million by 1990 (about
10 percent of annual net income);
o U.S. subs in Canada will probably continue sourcing multi-
laterally; their competitiveness would be diminished by the
Canadian tariff they pay;
o U.S. parent firms would strenuously object, perhaps to the
point of lobbying the Hill against the FTA;
o Would totally eliminate Auto Pact, creating political
firestorm in Canada (unless a "better deal" were to replace
the Pact);
o U.S. auto assemblers have already made the large investments
required to meet the safeguards, and they want to preserve
their advantages over foreign equity firms which have not
made-similar investments.
CONFIDENTIAL
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3
2. Allow Canada to Retain Safeguards
PROS
o U. S. assemblers in Canada would continue to benefit from
multilateral sourcing (they report a 27-33% price advantage
by sourcing overseas), enhancing their competitiveness;
o Allows Canada to retain the Auto Pact -- a big political
plus in Canada;
o Position is endorsed by major U.S. assemblers and their
Canadian subs, which would support the overall FTA;
o Eliminating bilateral tariffs in the FTA will reduce the
penalty for not meeting the safeguards and enable us to
argue that we allowed Canada to keep the safeguards but we
reduced their effectiveness;
o Bilateral trade would no longer be contingent upon meeting
any safeguards/performance requirements.
CONS
o Inconsistent with U.S. efforts to eliminate performance
requirements worldwide;
o May increase investment in Canada (vice U.S.);
o Would be opposed by aftermarket parts manufacturers, State
of Michigan, and the UAW;
o May strengthen UAW effort for legislation imposing performance
requirements on auto assembly operations in the U.S.;
o One U.S. manufacturer (Navistar), and possibly others, have
difficulty meeting the performance requirements, which force
them to source in Canada, when they may prefer sourcing
elsewhere;
o Might limit the opportunities for U.S. parts manufacturers
to supply more of the North American market for parts (since
multilateral sourcing would likely continue).
3. Seek Total Canadian Elimination of Safeguards Over a Phase-
Out Period
PROS
o A compromise which permits the U.S. Government to have a
consistent policy on performance requirement but reduced
financial impact on U.S. auto companies.
rnNFInPNT1A1
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cm
o Would not satisfy Canada and maybe not U.S. firms unless
coordinate with MTN tariff reductions.
OPTIONS: Standard of Preference
1. A Standard of Preference of 35 Percent Direct Cost of
Processing (about the same standard as under the current
Auto Pact) Would:
PROS
o Allow the USG to have one standard of preference for all
assembly industries under the FTA;
o Be sufficient to prevent transshipment;
o Provide maximum foreign sourcing flexibility to North
American automotive producers;
o Allow most motor vehicle assemblers and parts producers to
participate in duty-free trade;
o Allow customs to continue clearing entries on a product-by-
product basis.
CONS
o Be easy to meet with very little local manufacturing;
o Allow significant volumes of products from third countries
to be incorporated into U.S. and/or Canadian products and
then benefit from bilateral duty-free treatment;
o Be opposed by the majority of the U.S. and Canadian automotive
industry which favors a higher number as an inducement to
further U.S./Canadian sourcing.
2. A Standard of preference of 50 Percent Direct Cost of Processing
Would:
PROS
o Be closer to what the majority of U.S. motor vehicle and
parts producers want under an FTA;
o Allows considerable foreign component sourcing by U.S.
automotive producers;
0 Encourage an increase in domestic component sourcing;
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CONS
0
CONFIDENTIAL
5
Be more likely to be accepted in Canada.
Probably temporarily exclude the U.S./Canadian operations of
foreign producers from duty free trade under an FTA;-
o requiring more North American content in the Auto Pact,
while the Big-3 are increasing their use of imported components
because of market factors, could in the long run increase
their costs and decrease their competitiveness;
0 Be inconsistent with the Canadian-proposed rule of origin
for all other products;
o Probably exclude a significant number of products manufactured
by traditional U.S. automotive producers unless applied by
broad product classes -- e.g. passenger cars, commercial
vehicles, etc.;
0 Probably result in other industries more easily making the
case for a special rule of preference.
CON Ft OEN
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The Compatibility of a U.S./Canadian Free Trade Area
with other International Agreements
Issue:
o What is our potential liability to countries with which we
have bilateral most-favored-nation (MPN) obligations as a
result of special treatment for Canada in a free trade area
(PTA) and how can this liability be minimized?
Summar :
o The working group concludes that the potential liabilities
do not of themselves warrant changes in current U.S.
negotiating proposals. However, the working group
identified areas of potential agreement between the U.S.
and Canada which would create liabilities if they are
included in the FTA. These areas are only important if in
the future the U.S. imposes restrictive trade measures
affecting other countries but not Canada because of the FTA.
Legal Considerations:
o We have MFN obligations under agreements with a number of
countries which entitle them under international law to
certain benefits that might be accorded to Canada in an FTA
without having to offer equivalent concessions. The
statutory authority under which we are negotiating,
however, prohibits extending MFN treatment to any third
party and would prevail in domestic law.
o Violations of our international obligations arising out of
this conflict between international and domestic law could
lead to demands for compensation and/or compulsory
ajudication by the International Court of Justice,
including damages. Furthermore, such violations could
reduce the credibility of our FCN treaties and other
agreements and of the U.S.
o However, under current U.S. negotiating proposals, we would
not appear to have significant problems immediately upon
entry into force of an FTA agreement.
Potential Violations:
o 4 Eight developing countries would have an MFN claim with
respect to trade in goods, but the only significant product
for there countries is petroleum with a potential liability
of $25 million in tariffs. However, none of these
countries have objected to similar U.S. discrimination in
the past (e.g., in connection with the Caribbean Basin
Initiative, the Generalized System of Preferences or the
Israeli FTA). We do not expect them to object in this case.
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o Proposals in the services and investment chapters of the
agreement to exempt Canada from future restrictive measures
pose the main risk, because they would create liabilities
to several major trading partners should the U.S. impose
further restrictions in certain sectors, e.g.,
transportation, banking, telecommunications and the
exploitation of natural resources. Quantification of the
liability would depend upon the nature of future
restrictions. In the maritime sector, the Department of
Transportation estimated an exemption for Canada could lead
to claims as high as $1.6 billion, but acknowledged this
was highly speculative.
o We anticipate objections from certain countries if we
accord preferential treatment for Canada under our
intellectual property laws after agreeing that our domestic
legal regimes had been sufficiently harmonized. These
objections would be made for political reasons and we
believe there is not a legal basis to justify them.
Recommendations:
o To limit potential liabilities and minimize requests for
compensation, the U.S. should:
weigh carefully the implications for our MFN
obligations of any further proposals in the FTA
negotiations as well as any future proposed legislation or
administrative actions;
begin marshaling our defenses now, before claims are
brought by our treaty partners, e.g., by:
gathering evidence of failures to extend MFN treaty
benefits to the U.S. by our treaty partners in order
to establish counter-arguments;
considering, particularly in the field of services
and investment, whether and when to consult with
major treaty partners;
studying how our positions on services and investment
in the Uruguay Round can be used to ward off claims.
Background:
o The interagency working group reviewed the practical
implications of not honoring international legal
obligations which could result from commitments to Canada
in the following areas:
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--trade in goods, including eliminating tariffs, applying U.S.
trade remedy laws more favorably for Canada and exempting
Canada from export controls on Alaska North Slope oil;
--trade in services, including offering a standstill on future
derogations from national treatment for Canada in the
transportation, telecommunications and financial services
sectors;
--investment, including national treatment in some areas, a
prohibition on preference requirements and granting Canadians
in-state treatment;
--protection of intellectual property rights (IPR), including
the possibility of excluding Canada from enforcement of Section
337 of the Trade Act of 1930 once national regimes for
protecting IPR have been harmonized;
--cross-border movement of business Personnel, including
special treatment for Cana a n the administration of the H
(professionals, other occupations) visa category;
--government procurement, including expanded coverage for
Canada.
Summaries of the group's analysis and conclusions in each-
area are attached.
b00 6T0'ON 93 31d1S/03S 90:Lt L8%tTi6O
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Summary of Working Group Analysis
Trade in Goods:
We need not extend preferential treatment granted to Canada on
goods to most of our trading partners because of exceptions for PTAs
in our FCN treaties and in the GATT. However, we have non-standard
FCN's with Saudi Arabia, Yemen, Liberia, Iraq, El Salvador, and
Honduras, which contain MFN provisions but do not contain exceptions
for FTAs. In addition, we have FCN's with Costa Rica and Bolivia
which contain conditional MFN obligations without an FTA exception.
Therefore, any special preferences we give Canada on trade in goods
creates an international legal obligation to accord the first six
countries similar treatment unconditionally and the last two if they
offer equivalent concessions.
This same conclusion was reached during the negotiations for the
U.S./Israel FTA. Nonetheless, a decision was taken at that time not
to extend benefits granted to Israel to these countries. Only Saudi
Arabia was consulted, primarily for political reasons, and
apparently was satisfied since it has not protested. We also
received no protests when we did not extend to some of the above
countries benefits under the Caribbean Basin Initiative or the
Generalized System of Preferences.
Since U.S. trade with Canada is much more extensive than with
Israel, the working group felt we should assume that these countries
might take a more serious look at the economic implications of any
deal with Canada. To judge the potential compensation should these
countries demand their MFN rights and not get them, the working
group reviewed the recent history of our bilateral trade with these
countries and compared the overlap between their exports and those
goods that would receive duty-free treatment under an PTA with
Canada.
Major exports from these countries are either not produced by
Canada or already enter the U.S. duty-free under the Caribbean Basin
Initiative or the Generalized System of Preferences. The only
notable exception is petroleum, which the U.S. imports from Iraq and
Saudi Arabia, and eventually perhaps from Yemen. We estimated that
U.S. tariffs on imports of crude oil (at 10.5 cents/bbl) from Iraq
and Saudi Arabia combined in 1987 will be about $25 million/year,
primarily for imports from Saudi Arabia, but felt it unlikely that
Saudi Arabia would press a claim for this.
The working group further noted that several of these countries
are members of preferential arrangements, including CARICOM, the
Andean Pact and the Gulf Cooperation Council. Thus they may well be
in breach of their MFN obligations to us, a point we should explore
more carefully in anticipation of any complaints by these countries.
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The working group also considered the possibility of complaints
should the U.S. agree to provide special treatment for Canada in the
application of U.S. trade remedy laws (countervailing duties,
anti-dumping, escape clause,.301 etc.), grant access to Alaska North
Slope oil or reach special understandings on standards, quantitative
restrictions and so on. In all these cases, it was generally felt
that the FCN and GATT exceptions for FTAS provide sufficient grounds
for more favorable treatment of Canada. This would not necessarily
be the case with respect to the same eight countries discussed
above. Nonetheless, it was felt that these countries would be
unlikely to complain against more favorable treatment for Canada in
this area.
In sum, the working group saw no need to alter our PTA stance on
goods to reduce obligations to third countries on trade in goods
created by the PTA.
Trade in Services;
Even though the PTA services chapter's approach is fundamentally
the same as that in the FCN's and BIT's with other countries, the
working group felt there were two potentially significant problem
areas:
(1) There is a difference between the FTAs current formulation
of the national treatment principle and that in the FCN's and the
BIT':. The FTAs formulation of the principle would require a U.S.
state to treat a Canadian like it treats one of its own residents,
whereas the FCN': and BIT's allow states to treat foreigners like
residents from the most-favored other U.S. states.
In most cases, we believe that any difference in such treatment
is unlikely to give rise to complaints. It would be theoretically
possible to avoid complaints completely by changing the national
treatment definition in the FTA services chapter to conform with the
FCN': and BIT':. However, this would be a substantive loss for us.
Canada's federal system is considerably weaker than ours, and its
provinces discriminate against each other in a number of areas.
(2) Some of the chapter's obligations may be extended to
services sectors, i.e., maritime, aviation, communications, banking
and exploitation of natural resources, typically excluded from the
national treatment obligations of other treaties but not from their
MFN obligations.
Given that the U.S. maintains important restrictions on
foreigners' activities in some of these sectors, preferential
treatment for'Canada could create significant obligations and major
claims for compensation. For this and other policy reasons,
although the Canadians have proposed more sweeping changes the only
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option under serious consideration in the FTA talks would be to
exempt Canada from future U.S. discriminatory actions in-the
maritime, aviation and telecommunications sectors. Such a freeze on
discrimination against Canada, arguably creates an immediate MFN
obligation, but estimates of its value would be highly speculative
until we actually took a discriminatory action against a treaty
partner without taking one against Canada. Therefore, it is
doubtful that there would be claims for compensation immediately
upon entry into force of the agreement, and if there were, we might
have case specific defenses in addition to arguing that the claim
was premature. A "contingent liability" would have been created,
however.
In the maritime sector, where future discrimination is a real
possibility, DOT's representative estimated the potential future
liability to third countries at $1.6 billion, but acknowledged this
figure is highly speculative. Moreover, a portion of this liability
may already exist since the standard FCN already prohibits
additional restrictions on companies already engaged in the service
sectors excepted from national treatment.
Investment:
We are not proposing any general liberalization of U.S.
investment law vis-a-vis Canada, but are trying to bring Canada
toward more liberal U.S. practices. However, we expect to pledge a
freeze on future discrimination against Canada, seek a prohibition
on performance requirements and grant Canada in-state treatment. A
freeze could create unknown contingent liabilities analagous to
those discussed in the services sector above.
Protection of Intellectual Property Rights:
In addition to other relatively non-controversial proposals, the
U.S. has proposed we and Canada harmonize our IP protection and
enforcement provisions. Further, after we agreed sufficient
harmonization had occurred, the U.S. would (1) amend Sections 337
and 526 of the Trade Act of 1930 to provide exceptions for Canada,
(2) amend sections 102 (g) and 104 of the Patent Act to recognize
inventive activity in Canada, and (3) exempt Canada from section 42
of the Trademark Act and customs regulations relating to copyright
and trademark infringement. If intellectual property protection and
enforcement provisions are successfully harmonized and the
exemptions are granted to Canada we do not see any MFN problems with
section 337. With regard to the other provisions, we could deny any
MFN claims on the basis of the same arguments we have already
advanced internationally to deny claims for national treatment. For
political reasons, however, we may expect strenuous objections from
the EC, Japan and others to these prospective amendments on behalf
of Canada alone.
Lee 6TO'ON 971 ?1H1S/1qq ROI:J.T JP/TT/rn
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The Canadians are proposing that the U.S. grant additional`aind
immediate preferential treatment, including access to licenses
resulting from federally supported R&D. The*U.S. is not
contemplating such actions for a variety of reasons.
Cross-border Movement of Business P rsonnel:
To facilitate trade in services, the PTA will include provisions
to improve access for Canadian business personnel. Most of the U.S.
proposals do not go beyond treatment which has been or is in the
process of being accorded to other countries. Thus it does not
appear that the PTA will create MFN obligations. One possible
exception is a proposal currently under consideration to provide
more favorable procedures for the administration of the H visa
category with respect to Canadians. However, Canadians already
benefit from more liberal procedures in the administration of other
U.S. visa categories, and this has never been challenged by our FCN
partners. Moreover, visa practices of most other countries are
based on reciprocity not MFN treatment and it is questionable
whether the PCN MPN obligations on customs treatment for business
travelers extend to visas. Thus the working group did not feel it
necessary to reconsider the H visa option.
Government Procurlment:
There is only a requirement for fair and equitable treatment on
government procurement in our FCN treaties, but there is an MFN
obligation to parties to the GATT procurement code. The current
draft FTA chapter on government procurement is designed to apply
only to areas which are outside of the coverage of the GATT code.
Thus the PTAs treatment of government procurement does not appear to
create any MFN obligations at all.
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&wl& %,W.r? -w/vi,f &F%.& 6&w wagon
9/11/87 X71162
Cleared: EB/OT:DMcConville
DOC/OGC:TSmith-Labat
EPC:CBuro-Bradie
USTR:DMarshall
USTR:CRoh
L/EBC:GRosen
DOT/MARAD:ALevine
Treasury/GC:JMurphy
Declassified in Part - Sanitized Copy Approved for Release 2012/02/28 CIA-RDP89B00224R000602040008-7