AGENDA AND PAPERS FOR THE SEPTEMBER 10 MEETING

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP89B00224R000602040010-4
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 40
• Document Creation Date: December 22, 2016
• Document Release Date: November 3, 2011
• Sequence Number: 10
• Publication Date: September 8, 1987
• Content Type: MEMO

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8 September 1987
SUBJECT: Inter-Agency Meeting
TYPE OF MEETING
DATE
Economic Policy Council
Thursday, 10 September 1987
TIME 1100
PLACE Roosevelt Room
CHAIRED BY Baker
ATTENDEE(S) (probable) NIO/Econ
SUBJECT /AGENDA Various - See agenda
Agenda & Attached paper received today
Per Cabinet Affairs
DCI
DDCI
ExDir
DDO
DDI
Ch/NIC
\'/Exec Staff
ES
SDO/CPAS
ER
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EXECUTIVE SECRETARIAT
ROUTING SLIP
ACTION
INFO
DATE
INITIAL
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EXDIR
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STAT
Exec ive Secretary
9 Sept '87
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CONFIDENTIAL ATT-ACH S
THE WHITE HOUSE
WASHINGTON I Execll6re Re i
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
ALL CABINET MEMBERS
Vice President
State
Treasury
Defense
Justice
Interior
Agriculture
Commerce
Labor
HHS
HUD
Transportation
Energy
Education
Chief of Staff
OMB
UN
USTR
FYI
^
' IA
EPA
GSA
NASA
OPM
SBA
VA
0
0
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CEA
CEQ
OSTP
Carlucci
Cribb
Bauer
Dawson (For WH Staffing)
Executive Secretary for:
DPC 0
EPC 5311, 0
^ ^
^ ^
^ ^
^ ^
^ ^-
REMARKS: 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.
RETURN TO:
Nancy J. Risque ^ Associate Director
Cabinet Secretary Office of Cabinet Affairs
456-2823 456-2800
(Ground Floor, West Wing) (Room 235, OEOB)
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September 8, 1987
MEMORANDUM FOR THE ECONOMIC POLICY COUNCIL
FROM: EUGENE J. McALLISTERZ~l
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.
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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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COMFIBETIL
UNITED STATES-CANADA FREE TRADE AGREEMENT NEGOTIATIONS:
SUBSIDIES AND THE U.S. COUNTERVAILING DUTY LAW
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 mast 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.
Classified by: Ann Hughes
Declassify on: OADR
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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 much 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.
o 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.
JJ1
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U` ` I U . I I;~L
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.
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ij
UH r.JLNTll
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.
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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 indin dispute settlement at the end of
the ten-year transition period it (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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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
Live Swine
Raspberries
Groandfish
OCTG
Cut Flowers
Year
1985
1985
1986
1986
1987
Margin
C$0.0439/lb
0.99%
5.82%
0.72%
1.47%
1986 Import Value*
56,743,000 (1985)
15,588,752
44,835,092
63,227,854
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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CONEtOENTIft
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
review at the staff level leading up to the TPRG
CONFIDENTIAL
in the technical
discussion:
CjaS~ffied b
truce Wilson
Deciassfir on:
0 ADR
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-- 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).
C o IFIfL,TT'll"L
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CONFIDENTIAL
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.
CON FID ENT1At
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CONFIDENTIAL
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).
Consultations only began within
fairly well. Other priority
plate."
past year; going
issues "on our
Less Restrictive
Austria Non-EC European country (therefore no "competence"
problem). But, have held no consultations.
France Has made some moves toward liberalization.
Italy Not as large as other EC markets and not as
influential in policy-setting. Actual practices
more liberal than regulations.
Spain 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.
Col }.fin-!
,r0
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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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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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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 Rrinting (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
202-395-5114
CONFIDENTIAL
September 10, 1987
t1E-1ORANDUt4 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 out 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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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 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
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.
T IA L Ciassitied
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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 =inance, 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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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.
0 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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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:
o May 1986: Ambassador Yeutter writes the Minister of
Transportation to indicate concern about Japan's
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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.
o 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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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.
0 Establishes a time limit on negotiations, since the
Trade Representative would be required to recommend
action to the President within one year of initiation.
0 Responds to a particularly egregious unfair trade
practice, for which there is no other logical next step
except further negotiations.
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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).
COMFIBENT1L
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APPENDIX
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.
6/5/86 Baldrige letter to Nakasone requests open bidding procedures and
cites projects Japanese firms have undertaken here.
6/19/86 Senate Republican Conference Task Force on International Trade
Policy (chaired by Murkowski) requests USTR section 305 inquiry.
7/15/86 Nakasone becomes involved: instructs his cabinet that Kansai
project should not become a source of embarrassment.
7/23/86 Matsunaga letter to Yeutter argues Japan not shirking its inter-
national responsibilities, there is no discrimination against
foreign companies -- Procurement Code not applicable, KIAC is
private, foreign participation in Phase I impossible; describes
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.
Baldrige does not concede U.S. access to sales of equipment for
Phase I, or on an of Phases II and III (when actual airport and
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
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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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to comply with procurement requirements was provided to the USG
at the KIAC seminar; directs additional requests for information
on specific MOT projects to the policy division of the Bureau of
International Transport and Tourism. MOT agrees to provide
information about specific projects named by USG, on a case-by-case
basis. MOT 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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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).
12/7/86- Murkowski tours airport site, meets with Takeuchi; no
12/8/86 positive response.
12/23/86 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.
1/9/86 International Engineering and Construction Industries Council
(IECIC) approves position paper favoring consideration of self-
initiated 301 case.
1/20- Smith and Smart visit Tokyo for talks on subjects including Kansai.
24/87
3/11/87 Sen. Murkowski testifies at House Energy and Commerce Committee
hearing on Kansai.
3/16/87 Associated General Contractors adopt position paper endorsing
self-initiation of a section-301 case.
3/18/87 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.
3/19/87 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.
4/24/87 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 a o (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
6/17/87
Takeuchi writes back to Smart rejecting essentially all of USG
requests.
Kakizawa letter to Smith endorses Takeuchi letter.
Smart writes to Takeuchi stating that Takeuchi's letter is
unacceptable.
Senate approves Murkowski floor amendment to Senate trade bill by
voice vote (actively supported by NCA).
Takeuchi letter to Smart regrets lack of agreement, looks forward
to seeing Smart in August.
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7/15/87
Smart writes to Kakizawa of MOT, 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,
Smart,
MOC and MOFA. KIAC and GOJ make "final offer" to Undersec.
including:
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 MOT
and KIAC.
Sept. 1, 1987
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