International Trade under President Reagan: US Trade Policy in the 1980s 9781350271418, 9781350333840, 9781350271425

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International Trade under President Reagan

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International Trade under President Reagan US Trade Policy in the 1980s Giuseppe La Barca

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BLOOMSBURY ACADEMIC Bloomsbury Publishing Plc 50 Bedford Square, London, WC1B 3DP, UK 1385 Broadway, New York, NY 10018, USA 29 Earlsfort Terrace, Dublin 2, Ireland BLOOMSBURY, BLOOMSBURY ACADEMIC and the Diana logo are trademarks of Bloomsbury Publishing Plc First published in Great Britain 2023 Copyright © Giuseppe La Barca, 2023 Giuseppe La Barca has asserted his right under the Copyright, Designs and Patents Act, 1988, to be identified as Author of this work. For legal purposes the Acknowledgments on p. viii constitute an extension of this copyright page. Cover image © President Ronald Reagan at Durenberger Republican convention Rally, 1982. Photo by Universal History Archive/Getty Images. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or any information storage or retrieval system, without prior permission in writing from the publishers. Bloomsbury Publishing Plc does not have any control over, or responsibility for, any third-party websites referred to or in this book. All internet addresses given in this book were correct at the time of going to press. The author and publisher regret any inconvenience caused if addresses have changed or sites have ceased to exist, but can accept no responsibility for any such changes. A catalogue record for this book is available from the British Library. A catalog record for this book is available from the Library of Congress. ISBN: HB: 978-1-3502-7141-8 ePDF: 978-1-3502-7142-5 eBook: 978-1-3502-7143-2 Typeset by RefineCatch Limited, Bungay, Suffolk To find out more about our authors and books visit www.bloomsbury.com and sign up for our newsletters.

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Contents List of Figures List of Tables Acknowledgments Introduction

vi vii viii 1

First Presidency of Ronald Reagan: January 20, 1981–January 20, 1985 1 2 3 4

Recession and Recovery: Facts and Contrasting Evaluations Policy Goals and Multilateral Initiatives Trade and Foreign Policy: Central America and the USSR Import Competition and Problems in Basic Industries and Agriculture

13 39 53 69

Second Presidency of Ronald Reagan: January 20, 1985–January 20, 1989 5 6 7 8 9

The Development of the Trade Deficit The Executive, Congress, and the New Course of Trade Policy Free-Trade Agreements Trading Partners Outside the Americas Economic Diplomacy and the Uruguay GATT Round

99 119 141 159 195

Conclusion

217

Bibliography Index

227 235

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Figures 2.1 Trade in commercial services by main exporters, 1980–88 5.1 Total outlays and national defense expenditures in real (FY 1987) billions of US dollars, 1977–88 5.2 Multilateral trade-weighted value of the US dollar, 1975–88 5.3 Currency units per US dollar, 1975–88 5.4 Percentage shares of main exporters in manufacture trade, 1980–88 8.1 US farm trade and income, 1968–88 10.1 Multilateral trade-weighted value of the US dollar and US fiscal trade and fiscal deficit over gross domestic product, 1977–88

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40 102 103 104 115 188 218

Tables 0.1 Relation between US gross domestic product (GDP) and US gross national product (GNP) 1.1 US federal and total government receipts and expenditures, 1965–88 1.2 US gross domestic product (GDP) with its components, 1965–88 1.3 Civilian unemployment and annual growth rate in consumer prices in major industrial countries, 1970–88 1.4 US trade balance, current account balance, and capital movements, 1965–88 1.5 Foreign direct investments (FDIs) in the United States by main areas and industries, 1965–88 1.6 US gross saving and investment, 1966–88 5.1 US exports and imports by broad end-use class, 1965–88 5.2 US exports and imports of merchandise by area of destination and origin, 1965–88 8.1 US direct investments in foreign countries by areas, 1965–88 8.2 Major exporters of farm products, 1969–88

8 15 16 17 19 25 30 105 106 160 189

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Acknowledgments I wish to thank Professor Maxine Lawson who expertly proofread several chapters of my manuscript and Mr. Romel Sallutal who skillfully incorporated my tables and figures into its text.

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Introduction

Issues to be dealt with in examining the trade sector’s difficulties during the Reagan administration and the scope and effectiveness of the moves made to cope with them A leading source of pride for Ronald Reagan’s eight-year long presidency was the executive’s success in managing the US economy, despite an unpromising beginning. However, critics of the executive’s performance, both in the administration itself and in the US Congress, as well as adverse analysis in the economics literature, highlighted two blind spots: a soaring trade deficit, together with a possibly related mounting fiscal deficit. The US executive, never backward in presenting data to support its claims, rejected these criticisms, pointing out that US trade performance and policy, despite certain hitches, were playing a significant role in buoying up the international economy, including the American one, and in promoting a freer and, above all, fairer management of world trade. Yet, notwithstanding its ostensible commitment to free trade, the United States somewhat stepped up the use of government measures inherited from the previous decade to protect any US industries threatened by foreign competition. The picture should be dissected into various interconnected parts. In the first place, the causes of the trade downturn should be examined along with its impact on the whole of the US economy. More precisely, what was the relationship between the fiscal and trade deficits? Was the trade deficit caused by other factors and, if so, what were their origins? Secondly, there is the question of the plight of certain industries having a heavy weight in the US economy. Here a caveat needs to be inserted relating to structural problems in a number of prominent, labor-intensive industries, such as steel, automobiles, textiles and footwear, which had been building up for more than a decade. Hence, in these cases, the factors that triggered the widespread deterioration in the trade balance were not the only, or even the main, cause of the troubles faced by such industries. They simply made matters worse. In other sectors of the US economy, as in the case of agriculture, the general factors bringing about the trade downturn had a direct, though not exclusive, impact. In both of these cases, the analysis should also focus on the reaction of the domestic authorities to the difficulties of the industries in question. Here, it should be noticed that the executive was not the only decision maker: 1

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International Trade under President Reagan

Congress too had, or at least tried to have, a say in the matter. Actually, Article 1, section 8 of the American Constitution confers upon Congress the power to regulate commerce, but since the 1930s there had been a trend towards the delegation of authority to the president. This trend had marked a period in which the current account balance was prevalently positive and US firms favored trade liberalization. It was therefore logical that Congress, in which Democratic party members overall held the majority during the eight Reagan years, should have wanted to take advantage of the United States’ trade troubles to assert a more active role in shaping trade policy. There was therefore the need for a dialogue between the administration and lawmakers. At the same time, the executive had to tackle the reactions of the countries whose industries were allegedly affecting competing US firms or were rightly or wrongly charged with imposing barriers to those US industries that still showed competitive potential on the world market. US interventions took different forms. Especially during the first Reagan presidency, US actions were directed towards a plurality of countries and their regional organizations in defense of some specific industry, as was the case for steel and textiles, and later for semiconductors. In other instances, especially during the second Reagan presidency, US initiatives focused on single foreign entities, but addressed a variety of issues, as was the case for Japan with the Market-oriented Sector Selective (MOSS) talks and for the European Community (EC) with regard to the 1992 Project and its impact on relations with third countries. In this context, two questions require answers. Was the administration unreservedly pursuing a market-oriented, free-trade policy, as it often claimed to do, and was it hampered by a Congress that supported the interests of particular industries? Was the final outcome of this interaction a limited series of trade-distorting measures, or was the United States broadly able to pursue an aggressive trade policy consistent with the general goal of promoting the nation’s economic interests, but tailored to technological variations across industries? The Reagan administration also had a powerful voice in international fora, including the Organisation for Economic Cooperation and Development, the United Nations Conference on Trade and Development, and in particular the General Agreement on Tariffs and Trade (GATT). The Republican executive argued that the Tokyo Round agreements, widely hailed as a success till its assumption of office, were both obsolete and limited in scope. It also openly broke from the consensus which had prevailed during the previous decade on the relations between developing and industrialized countries. It is therefore worth analyzing, from a historical perspective, how the new executive wanted to reshape the world trading system. Which were the sectors of the US economy that might benefit from trade reform? What was to be the place given to the developing nations in the new system? It is also necessary to examine whether, and to what extent, the initiatives at an international level were consistent with US domestic policies. Likewise, a historical perspective needs to take into account the stance taken by the other participants, be they industrialized or developing countries, in the multilateral negotiations. A note, however, is needed here: in the first quadrennium of the Reagan presidency, trade policies went beyond the protection and enhancement of

Introduction

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domestic economic interests and pursued goals belonging to other domains, such as national security, as exemplified by the Soviet pipeline case.

An overview of the legacy from the previous decade Whilst the foregoing questions concern issues that will be dealt with in detail in the following chapters, in order to understand economic development, goals, and policies during the Reagan years, a brief analysis is required of the inheritance from the preceding decade, including measures adopted by previous administrations. As claimed in his “farewell” Economic Report by Jimmy Carter and not contested by the annual reports of the following administration, the United States enjoyed non-negligeable growth, even in the turbulent 1970s: from 1970 to 1980 real disposable income per capita grew at an average compound rate of 2.2 percent, below the 3 percent rate of the 1960s, but well ahead of the 1.2 percent pace of the 1950s. Yet Carter admitted that the progress in the 1970s was tainted by rising inflation, a decline in productivity, and a growing fiscal deficit.1 However, as regards the latter, the outgoing president stressed that the leap in the federal deficit during his last year in office was affected by an unforeseen increase in military spending, by the hike in interest rates caused by recent restrictive monetary policies, and by the impact of the 1980 slump on both expenditures and receipts, which qualified it as a prevalently cyclical deficit. The Carter government did not radically change the approach followed by the previous administrations, whether Democratic or Republican, from the Second World War onwards. However, the stagflation that marked most of the 1970s in the aftermath of the two oil crises gave strength to economic theories that contested the principle underlying such policies. The monetarists denied that there was any link between the growth in money supply and domestic product and therefore contested the alleged inverse relation between inflation and unemployment. The link was simply between the excessive growth in money supply and inflation; hence, what was relevant was to secure monetary growth in line with stable product growth so as to allow the actors in the economy to make rational choices unhindered by erratic changes in the growth in money.2 One economist, Paul Volcker, avowedly intent on curbing inflation, was nominated chairman of the Federal Reserve in 1979. The Keynesian principle that still informed government policies in the 1970s was turned on its head by supporters of so-called supply-side economics. Demand level was not seen as the factor determining supply movements; rather, expansion of supply in the whole economy created its demand.3 Thus, sound policy had to aim at the removal of hindrances to growth in productivity and at their replacement with incentives to hard work and investment. The main targets were high tax rates, or more specifically marginal rates, but they also included a host of administrative measures that might discourage investment or reduce the effective supply of labor, such as unemployment insurance and the minimum wage. This new perspective started to gain ground at both state and federal levels: Proposition 13 for a substantial reduction in property tax rates was approved by the voters of California in 1978, and the Kemp-

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International Trade under President Reagan

Roth bill, submitted by two Republican congressmen in 1980, called for substantial cuts in marginal rates of direct taxation combined with a reduction in federal government spending as a percentage of gross national product.4 The bill, strongly supported by Ronald Reagan, the Republican candidate for the presidency, was an embarrassment to Carter, who was forced to increase fiscal pressure to prevent the budget from spiralling in a year in which depression was curbing receipts while expenditures were growing to buoy up the slack economy. In the 1970s, international trade started to weigh more heavily in the national economy, although its share remained far below that of the United States’ main trading partners. Between 1960 and 1970, US exports represented 4.4 percent of gross national product (GNP), but over the next decade exports’ share nearly doubled to 8.5 percent, with the value of agricultural exports more than doubling during the same decade; imports more than doubled from 4.1 percent to 9.5 percent of GNP.5 The manufacturing sector exported 19 percent of the goods it produced in 1980, while imports of manufactured goods represented 23 percent of manufacturing that year. Exports were a far more important business for certain industries, especially those producing hightech goods. Product groups categorized as research and development (R&D)-intensive, comprising chemicals, electrical and non-electrical machinery, aircraft and parts, as well as professional and scientific instruments, all ran trade surpluses for more than two decades, with their total surplus reaching $52.4 billion in 1980, whereas nonR&D-intensive manufactured goods recorded a $33.5 billion deficit.6 For the former group of products, there was a need to expand their markets and to defend the key to their success, i.e. scientific primacy, from foreign countries’ attempts to steal it by copying it; for the latter, the priority was more and more to bolster their presence in the domestic market and to defend their market share from the aggressive competition of foreign firms. The number of so-called basic industries facing this predicament was growing. Yet the changes in the significance of manufacturing industries in the national economy and in US trade were outshone by the growing speed of the service sector. In 1980, services accounted for $1,640 billion, or about 63 percent of gross domestic product (GDP), whilst goods, including farm products, accounted for $960 billion, 37 percent of GDP.7 In the same year, two-thirds of the civilian work force was employed in the service sector. Between 1970 and 1979, 18 million new jobs were created in service industries, whereas the production of goods was responsible for just 2.5 million new jobs.8 In the course of the 1970s, the value of service exports increased by 260 percent, reaching a recorded $36.2 billion in 1980. It was, however, estimated that the actual quantity amounted to $60 billion, the discrepancy likely being related to the tendency to register many services industries’ foreign earnings as investment income.9 The positive balance of service proceeds and investment income more than offset the merchandise trade deficit that had been recorded since 1976. On the other hand, in stark contrast with the trend in the domestic economy, service exports, whatever their true value, were still only a fraction of the value of exports of goods, a fact which fostered the opinion that the potential for the dominance of American services in world trade was being hampered by restrictive attitudes or even policies in foreign countries.

Introduction

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A further legacy from the previous decade, and even earlier, was the host of measures, codified by statutes or developed through administrative practice, which aimed to tackle foreign competition to American industries, or to break foreign barriers to their products. The United States was a prominent user of antidumping and countervailing duty proceedings. Such measures were costly for exporting firms and based on controvertible arguments of economic efficiency. As a matter of fact, dumping practices were often similar to practices that would escape the rigors of national competition laws, and subsidies helped the development of several industries in the exporting countries. Moreover, these practices sometimes turned out to be beneficial for firms in the importing country, reducing their production costs, obviously with the exception of the firms that were directly competing with the dumping or subsidized exporters. On the other hand, GATT explicitly allowed antidumping and countervailing duties under certain conditions, and other countries were also applying them, especially the antidumping duties, along with the United States. However, the Trade Act of 1974 introduced a host of amendments to the 1921 Antidumping Act, aimed at making the remedy more effective. For instance, the Act made it possible, in ascertaining “fair value” for exports to the United States, to disregard persistent sales of the merchandise under investigation in the home market at prices below the cost of production, which was not necessarily in line with the provisions of GATT. Besides, at that time, the American statute did not require an injury to domestic industry test. Tightening the net allowed US industries to petition with good prospects of success for an investigation against foreign companies whose main “fault” was managing to enter the US market.10 Trade court judgements and the Trade Agreements Act of 1979 extended the countervailing duty net to practices not explicitly covered by previous legislation. Secondly, section 301 of the Trade Act of 1974 gave the president authority to retaliate against unreasonable as well as unjustifiable restrictions imposed by foreign countries that burdened US commerce, whether through tariffs or non-tariff barriers. This allowed the executive to take unilateral action without waiting for a decision from an international court, and in the absence of reciprocal concessions. The section allowed the executive to suspend trade concessions, to impose new higher tariff rates on a selective basis, or to take other retaliatory measures, including exclusion orders barring the import of a product into the United States. Thirdly, as with most other industrialized countries, the United States negotiated Orderly Market Agreements (OMAs) with overly dynamic exporting countries, which gave it a way to dodge the ban on import quotas, imposed, with strictly limited exceptions, by GATT. Thus, in the wake of the Zenith Radio Corporation judicial controversy, the United States negotiated an OMA with Japan, limiting exports of color televisions.11 The agreement was followed by two analogous OMAs with Taiwan and South Korea.12 Two other OMAs were concluded with Taiwan and Korea following a finding of serious injury to the American nonrubber footwear industry.13 Export restraints on steel had already been agreed in the 1960s and, after all, the Multifiber Arrangement, of which the United States was part, was substantially an umbrella under the aegis of GATT for multiple export restraint agreements. It should be noted that the threat of the imposition of the punitive measures alluded to above was the main stimulus for the exporting countries to accept or even to suggest quantitative constraints on their exports. Nor was the United States

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International Trade under President Reagan

completely immune from the sins against which its unfair trade weaponry was directed. In his report, the first United States Trade Representative (USTR) of the Reagan administration proudly and candidly stated that large investments in military research and development had paid off in the emergence of a highly competitive civilian aircraft industry.14 Many US trading partners argued that this was a kind of subsidization covered by public orders. A reorganization of the international trade functions of the executive was made in the aftermath of the conclusion of the Tokyo Round, which was to influence the responsibilities and powers of the members of the subsequent administration. Executive order n. 12188 of January 2, 1980 replaced the Office of the Special Trade Representative with the Office of the United States Trade Representative, which had an expanded staff and task set. The USTR, whose mandate included responsibilities previously handled by the State Department, was charged with developing international trade policy and coordinating its implementation, thus dealing with the expansion of US exports, matters concerning GATT and other multilateral organizations, bilateral negotiations, and political oversight of trade remedies.15 The USTR Office had one peculiarity. Although it was an executive branch unit, the USTR was at the same time responsible both to Congress and the president for the administration of the trade agreements program. Hence, because of its dual responsibility, the USTR acted as a liaison between the administration and Congress on international trade matters.16 Concurrently, the 1980 reform transferred the enforcement of antidumping and countervailing duty laws and the regulation of exports from the Treasury Department, deemed to have been too lenient in their management, to the Department of Commerce (DOC), which already had responsibility for monitoring the implementation of trade agreements and for developing programs to expand American exports. There were, therefore, potential overlaps between the spheres of action of the DOC and the USTR. Members of the Republican administration repeatedly suggested reshaping the trade reform, which would have enhanced the role of the Trade secretary, whilst reducing or even abolishing that of the USTR, but this restructuring never took place.17 Thus, both the new USTR, William Brock, and the new secretary of commerce, Malcom Baldrige, were required to fulfill the tasks inherited from the 1980 reform and were able to enhance their position by asserting their respective authority. Brock can be credited with negotiating a free-trade agreement with Israel, with blunting the protectionist features of the 1984 Trade Act, and with paving the way for a new multilateral trade round, although its actual launch was left to the efforts of his successor, Clayton Yeutter. The secretary of commerce took full advantage of his apparently simply administrative responsibilities to exercise a powerful role in trade diplomacy. This was possible because the imposition of countervailing and antidumping duties could be suspended if the alleged offenders offered to eliminate or curb the effects of their practices subject to the DOC’s proceedings, and the secretary “never met an import restraint that he did not like”.18 The Treasury secretary, Donald Regan, inherited a department that had been stripped of its previous tasks on unfair trade practices, but maintained its competences on managing the external value of the greenback. The non-intervention policy prevalently followed by Regan during the

Introduction

7

upwards trend of the dollar helped to obviate the need to constrain the fiscal reform sponsored by the president and of which he was one of the most active supporters and the main executor.19 When the trade deficit started to become an excessive burden for the administration, his successor, James Baker, Reagan’s former chief of staff, adopted a much more active policy in the exchange market to pursue the depreciation of the dollar, without having to resort to the radical measure of putting the executive’s fiscal policy into reverse gear.

Brief notes on the structure of the book The book is broadly divided into two sections. The first four chapters focus on economic and trade policy developments during the first Reagan presidency, whilst the subsequent five chapters are concerned with developments during the second administration. This structure is justified by various factors. Firstly, the international economic environment and the management of the dollar’s movements changed significantly between the two quadrennia. The difficulties of some US industries and the measures adopted by the administration to cope with them were not identical during the first and the second presidencies. Achievements in international trade negotiations also differed between the two periods. Congress, which was dominated by the opposition Democratic party for most of the second presidency, became more assertive in its role of constitutional depositary of international trade policy and was, therefore, less subservient to the administration’s initiatives. This is not to deny that there were many elements of continuity and overlapping of issues. On both sides of the January 1985 divide, each chapter focuses on a specific subject or a group of similar topics. Periods can also obviously overlap in different chapters. Given that, especially with regard to economic development, the analysis carried out in this book is based on the reports of the main actors in US economic policy, a certain precision is required. Most of the reports concerning the Reagan era refer to US gross national product (GNP). GNP is defined as the market value of all goods and services produced during a particular time period by US residents, whether individuals, business, or government, and therefore include income earned by US-owned corporations overseas and US residents working abroad. From 1990 onwards, the United States has shifted to gross domestic product (GDP), which is the value of output produced by people, government, and firms in the United States, whether they be US or foreign citizens, or American or foreign-owned firms. Hence, profits earned by foreign-owned firms in the United States are included in GDP but not in GNP, while profits earned by US firms abroad are included in GNP but not in GDP (Table 0.1). The latter corresponds more closely to other indicators used to analyze movements in the US economy, such as employment and industrial production, and to the statistics already in use by most US trading partners. The shift from GNP to GDP also reflects the fact that by the end of the Reagan era, foreign direct investments in the United States almost matched American investments abroad. Some tables (chiefly Tables 1.1 and 1.2) deal with GDP, and any data not drawn from other quoted sources are based on these.

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International Trade under President Reagan

Table 0.1 Relation between US gross domestic product (GDP) and US gross national product (GNP) (billions of US dollars)

Year

Gross domestic product (GDP)

Plus: receipts of factor income from the rest of the world

Less: payments of factor income to the rest of the world

Gross national product (GNP)

1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988

702.7 769.8 814.3 889.3 959.5 1010.7 1097.2 1207.0 1349.6 1458.6 1585.9 1768.4 1974.1 2232.7 2488.6 2708.6 3030.6 3149.6 3405.0 3777.2 4038.7 4268.6 4539.9 4900.4

8.1 8.3 8.9 10.3 11.9 13.0 14.1 16.4 23.8 30.3 28.2 32.8 37.7 47.1 69.7 80.6 94.1 97.3 95.8 108.1 97.3 96.0 105.1 128.7

2.7 3.1 3.4 4.1 5.8 6.6 6.4 7.7 11.1 14.6 14.9 15.7 17.2 25.3 37.5 46.5 60.9 67.1 66.5 83.8 82.4 86.9 100.5 120.8

708.1 774.9 819.8 895.5 965.6 1017.1 1104.9 1215.7 1362.3 1474.3 1599.1 1785.5 1994.6 2254.5 2520.8 2742.1 3063.8 3179.8 3434.4 3801.5 4053.6 4277.7 4544.5 4908.2

Source: Economic Report of the President, transmitted to the Congress February 1992: Table B-20.

Notes 1

Economic Report of the President transmitted to the Congress (hereinafter ERP) January 1981, 7 et seq. 2 See Nicolas Spilber, Managing the American Economy. From Roosevelt to Reagan (Bloomington: Indiana University Press, 1989), 95. 3 Ibid., 97 et seq. Bruce R. Bartlett, Reaganomics. Supply-Side Economics in Action (New York: Quill, 1982), chapter 1. 4 Ibid., chapter 11. 5 Annual Report of the President of the United States on the Trade Agreements Program (hereinafter ARPTAP), 1983, Twenty-seventh issue, 14. 6 Ibid, 16. 7 Twenty-sixth ARPTAP, 1981–82, 16. 8 Ibid. 9 Twenty-fifth ARPTAP, 1980–81, 17. 10 See Giuseppe La Barca, International Trade in the 1970s. The US, the EC and the Growing Pressure of Protectionism (London: Bloomsbury, 2013), 76, 107 et seq.

Introduction 11 12 13 14 15 16

Twenty-second ARPTAP, 1977, 30. Twenty-fourth ARPTAP, 1979, 107. Ibid. Twenty-seventh ARPTAP, 1983, 16. Ibid., 31. Twenty-fifth ARPTAP, 1980–81, 28; I.M. Destler, American Trade Politics, Third Edition (Washington DC: Institute for International Economics with The Twentieth Century Fund, 1995), 117. 17 Ibid., 120. 18 William A. Niskanen, Reaganomics. An Insider Account of the Policies and the People (New York, Oxford: Oxford University Press, 1988), 298. 19 Ibid., 291.

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First Presidency of Ronald Reagan: January 20, 1981–January 20, 1985

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12

1

Recession and Recovery: Facts and Contrasting Evaluations

Prologue On February 18, 1981, a month after his inauguration, Reagan sent to Congress a bold and apparently well-balanced program of economic reform that, in his view, would revitalize the American economy after years of slack growth, rising inflation, and declining productivity.1 The package had four, or more precisely, five planks. Firstly, there was to be a substantial reduction in the tax burden on individuals and firms. The administration’s proposal provided for a 10 percent reduction in the federal personal income tax rate for three years in a row and faster tax write-offs for new factories and production equipment to stimulate greater investment and job creation. Secondly, a substantial reduction in, though not a curb on, the rapid growth in federal spending, whose rate was to be reduced from the 12 percent that had marked a considerable portion of the previous decade down to about 7 percent. The proposed decline in the growth rate would be the result of two components. On the one hand, there was to be a substantial increase in allocations to the Department of Defense and to safety net programs for really disadvantaged Americans, which would respectively account for 24 percent and 37 percent of the budget in 1981, up to 32 percent and 41 percent three years later. On the other side of the ledger, there was to be a curtailment of numerous poorly conceived or inessential programs, the axe falling in particular on middle-upper income benefits, public sector capital improvement programs, as well as other programs of national interest, economic subsidy programs and the overhead and personal costs of the federal government. Budget outlays were to respect the following targets: $654.7 billion in 1981, $695.5 billion in 1982, $733.1 billion in 1983, $771.6 billion in 1984, $844 billion in 1985, and $912.1 in 1986. Despite the forecast growth in outlays, the targets would secure increasingly conspicuous budgetary savings relative to the estimated trend in expenditures if the programs established under previous administrations were left in force: $4.4 billion in 1981, $41.4 billion in 1982, up to $104.4 billion in 1984, and $117.6 the following year. The budgetary savings were also to be joined by sizeable reductions in off-budget outlays. The third plank of the economic expansion program was a thorough reform of regulations in order to reduce government interference in the marketplace and prune several administrative regulations deemed to impose barriers to investments, production, 13

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International Trade under President Reagan

and employment. The fourth prong of the reform was a monetary policy aimed at a steady growth in the money supply at a more modest level than often experienced in past decades. The task of guaranteeing a financial environment consistent with a steady return to sustained growth and price stability was entrusted to the Federal Reserve (FED), with the full endorsement of the new administration. The government, however, was requested to secure a fiscal policy that should be complementary to the monetary one pursued by the FED. The key was a balanced federal budget. Fiscal deficit would entail either an increase in money supply, thus hindering the FED’s policy, or a growth in the public sector borrowing requirement, which would deprive the private sector of needed capital and force already high interest rates to rise further. The answer to these dangers was a steady reduction in the federal deficit, resulting in a balanced budget by 1984 and modest surpluses thereafter: −$54.5 billion, −$45.0 billion, −$22.9 billion, $0.5 billion, $6.1 billion, $29.9 billion, respectively in the six years from 1981.2 This raises a question: if expenditures were to go on growing, even though at a slower rate than in previous administrations, how would it be possible for receipts to catch up given that the executive had promised generous cuts in tax rates for both families and companies? The prodigy was to be the upshot of the unrestricted implementation of supply-side economics, in whose virtues the president was a staunch believer: as a 1980s Prometheusunbound, the American economy, free from tax burdens and from the shackles of cumbersome administrative interference, would secure strong stable growth in gross domestic product (GDP), giving rise to a growing tax base. The new administration was prudent, making it clear that the cure would be effective only if followed in full, and in the right doses. In reality, Reagan’s virtuous picture was somewhat spoiled by ugly facts. The deficit, rather than tailing off, rocketed, reaching its peak during Reagan’s second term in office; receipts grew, but at a much slower pace than forecast, while expenditures grew at a much faster rate, as shown by Table 1.1. Actually, government purchases vigorously contributed to buoying up American products as their growth rate between 1980 and 1987 exceeded that of personal consumption and private fixed investments, and this without considering their likely accelerator effect on private investments (Table 1.2). It is arguable that the executive would have been forced to take decisive and prompter action, under pressure from the stringencies of the economy or, even more likely, from Congress, including most Republican lawmakers who saw a balanced budget as the expected outcome of cuts in taxation and expenditure.3 The difficult and embarrassing choices the government would have to face were delayed and made less difficult by the inflow of foreign capital prompted by several contingent factors. But, as with most pieces of luck, there was a price to pay for this.

Years of stagnation and recession The 1981 recovery, which actually started in the second half of 1980, was timid: GDP grew by 1.8 percent on a yearly base and the 7.6 percent unemployment rate was higher than in the previous four years, as shown by Table 1.3.

Table 1.1 US federal and total government receipts and expenditures, 1965–88 (billions of US dollars)

Year

Federal receipts

Federal expenditures

1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988

125.8 143.5 152.6 176.8 199.6 195.2 202.6 232.0 263.7 294.0 294.8 339.9 384.0 441.2 504.7 553.0 639.0 635.4 660.0 725.8 788.6 827.2 913.8 972.3

124.6 144.9 165.2 181.5 191.0 208.5 224.3 249.3 270.3 305.6 364.2 392.7 426.4 469.3 520.3 613.1 697.8 770.9 840.0 892.7 969.9 1028.2 1065.6 1109.0

Federal surplus or deficit

Federal surplus or deficit as % of GDP

1.3 −1.4 −12.7 −4.7 8.5 −13.3 −21.7 −17.3 −6.6 −11.6 −69.4 −52.9 −42.4 −28.1 −15.7 −60.1 −58.8 −135.5 −180.1 −166.9 −181.4 −201.0 −151.8 −136.6

0.18 −0.18 −1.56 −0.53 0.89 −1.32 −1.98 −1.43 −0.49 −0.80 −4.37 −2.99 −2.15 −1.26 −0.63 −2.22 −1.94 −4.30 −5.29 −4.42 −4.49 −4.71 −3.34 −2.79

Total receipts

Total expenditures

Total surplus or deficit

Total surplus or deficit as % of GDP

187.0 210.7 226.4 260.9 294.0 299.8 318.9 364.2 408.5 450.7 465.8 532.6 598.4 673.2 754.7 825.7 941.9 960.5 1016.4 1123.6 1217.0 1290.8 1405.2 1492.4

185.8 211.6 240.2 265.5 284.0 311.2 338.1 368.1 401.6 455.2 530.6 570.9 615.2 670.3 745.3 861.0 972.3 1069.1 1156.2 1232.4 1342.2 1437.5 1516.9 1590.7

1.2 −1.0 −13.7 −4.6 10.0 −11.5 −19.2 −3.9 6.9 −4.5 −64.8 −38.3 −16.8 2.9 9.4 −35.3 −30.3 −108.6 −139.8 −108.8 −125.3 −146.8 −111.7 −98.3

0.17 −0.13 −1.68 −0.52 1.04 −1.14 −1.75 −0.32 0.51 −0.31 −4.9 −2.16 −0.85 0.13 0.38 −1.30 −1.0 −3.45 −3.70 −2.88 −2.94 −3.44 −2.28 −2.01

Source: Economic Report of the President, Transmitted to the Congress, February 1992: Table B-77; Table B-1: own calculations.

15

16

Table 1.2 US gross domestic product (GDP) with its components, 1965–88 (billions of 1987 US dollars) 1

2

Year

GDP

1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988

2473.5 2622.3 2690.3 2801.0 2877.1 2875.8 2965.1 3107.1 3268.6 3248.1 3221.7 3380.8 3533.2 3703.5 3796.8 3776.3 3843.1 3760.3 3906.6 4168.5 4279.8 4404.5 4540.0 4718.6

3

% year change 6.0 2.6 4.1 2.7 −0.1 3.1 4.8 5.2 −0.6 −0.8 4.9 4.5 4.8 2.5 −0.5 1.8 −2.2 3.9 6.2 3.2 2.9 3.1 3.9

4

5

Gross private Personal domestic consump. invest. 1497.0 1573.8 1622.4 1707.5 1771.2 1813.5 1873.7 1978.4 2066.7 2053.8 2097.5 2207.3 2296.6 2391.8 2448.4 2447.1 2476.9 2503.7 2619.4 2746.1 2865.8 2969.1 3052.2 3162.4

413.0 438.0 418.6 440.1 461.3 429.7 481.5 532.2 591.7 543.0 437.6 520.6 600.4 664.6 669.7 594.4 631.1 540.5 599.5 757.5 745.9 735.1 749.3 773.4

5a Fixed invests. total 387.9 401.3 391.0 416.5 436.5 423.8 460.7 509.6 554.0 512.0 451.5 495.1 566.2 627.4 656.1 602.7 606.5 558.0 595.1 689.6 723.8 726.5 723.0 753.4

5b

6

Fixed invests. nonGovern. residential purchases 259.6 276.7 270.8 280.1 296.4 292.0 292.6 311.6 357.4 356.5 316.8 328.7 364.3 412.9 448.8 437.8 455.0 433.9 420.8 490.2 521.8 500.3 497.8 530.8

569.9 628.5 673.0 691.0 686.1 667.8 655.8 653.0 644.2 655.4 663.5 659.2 664.1 677.0 689.3 704.2 713.2 723.6 743.8 766.9 813.4 855.4 881.5 886.8

7

7a

8

Index Number (I.N.) Exports 1965 = 100 Imports 118.1 125.7 130.0 140.2 147.8 161.3 161.9 173.7 210.3 234.4 232.9 243.4 246.9 270.2 293.5 320.5 326.1 296.7 285.9 305.7 309.2 329.6 364 421.6

Source: Economic Report of the President, Transmitted to the Congress February 1992: Table B-2; own calculations.

100 106.4 110.1 118.7 125.1 136.6 137.1 147.1 178.1 198.4 197.2 206.1 209.1 228.8 248.5 271.4 276.1 251.2 242.1 258.8 261.8 279.2 308.2 360.0

124.5 143.7 153.7 177.7 189.2 196.4 207.8 230.2 244.4 238.4 209.8 249.7 274.7 300.1 304.1 289.9 304.1 304.1 342.1 427.7 454.6 484.7 507.1 525.7

8a

9

10

I.N. 1965 = 100

7/2%

8/2%

100 115.4 123.5 142.7 152.0 157.8 166.9 184.9 196.3 191.5 168.5 200.6 220.6 241.0 244.3 232.9 244.3 244.3 274.8 343.5 365.1 389.3 407.3 422.2

4.8 4.8 4.9 6.0 5.1 5.6 5.5 5.6 6.8 7.2 7.3 6.9 6.9 9.1 9.7 9.9 8.5 7.9 7.3 6.5 7.2 7.5 8.0 8.9

6.0 5.5 5.7 6.3 6.6 6.8 7.0 7.4 7.5 7.3 6.5 7.4 7.8 8.1 8.0 7.7 7.9 8.1 8.8 10.9 10.6 11.0 11.2 11.1

Table 1.3 Civilian unemployment (C. U.) and annual growth rate in consumer prices (C. Pr.) in major industrial countries (1970−88) United States

Canada

Japan

France

West Germany

Italy

United Kingdom

Year

C. U.

C. Pr.

C. U.

C. Pr.

C. U.

C. Pr.

C. U.

C. Pr.

C. U.

C. Pr.

C. U.

C. Pr.

C. U.

C. Pr.

1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988

4.9 5.9 5.6 4.9 5.6 8.5 7.7 7.1 6.1 5.8 7.1 7.6 9.7 9.6 7.5 7.2 7.0 6.2 5.5

5.7 4.4 3.2 6.2 11.0 9.1 5.8 6.5 7.8 11.3 13.5 10.3 6.2 3.2 4.3 3.6 1.9 3.6 4.1

5.7 6.2 6.2 5.5 5.3 6.9 7.1 8.1 8.3 7.4 7.5 7.5 11 11.9 11.3 10.5 9.5 8.8 7.8

3.2 2.8 5.0 7.4 11.1 10.8 7.4 8.0 9.0 9.2 10.1 12.5 10.9 5.8 4.4 3.9 4.1 4.4 4.0

1.2 1.3 1.4 1.3 1.4 1.9 2 2 2.3 2.1 2 2.2 2.4 2.7 2.8 2.6 2.8 2.9 2.3

7.5 6.2 4.9 11.6 23.2 11.8 9.2 8.2 4.2 3.7 7.8 4.9 2.2 1.9 2.2 2.1 9.7 0.1 0.7

1.3 1.6 1.8 1.8 2.3 3.9 4.2 4.8 5.2 5.9 6.4 7.7 8.7 8.3 10 10.4 10.6 10.7 10.2

4.7 5.6 6.3 7.1 13.9 11.7 9.6 9.6 9.1 10.6 13.5 13.3 12.1 9.4 7.7 5.8 2.5 3.3 2.7

0.6 0.7 0.9 1.1 2.3 4.1 4 4 3.8 3.3 3.4 4.8 6.9 8.4 8.4 7.2 6.6 6.4 6.3

3.7 5.1 5.6 7.0 7.0 5.9 4.2 3.6 2.7 4.2 5.5 6.2 5.2 3.4 2.4 2.1 −0.2 0.2 1.3

4.4 5.1 5.2 4.9 4.9 5.3 5.6 5.4 6.1 6.7 7.2 8.1 9.7 10.9 11.9 6.0 7.5 7.9 7.9

1.2 4.8 6.2 10.2 19.4 17.1 16.7 19.3 12.5 15.5 21.3 19.3 16.3 14.9 10.6 8.6 6.1 4.6 5.0

2.5 2.9 3.2 2.2 2.2 3.6 4.9 5.3 5.1 4.7 6 9.1 10.6 11.6 11.8 11.2 11.2 10.3 8.6

6.9 9.2 7.1 9.4 15.8 24.5 16.4 15.8 8.3 13.5 17.9 12.0 8.5 4.6 5.0 6.0 3.4 4.2 4.9

Source: Economic Report of the President transmitted to the Congress, February 1992: Table B-106, Table B-105; own calculations.

17

18

International Trade under President Reagan

On the other hand, inflation showed signs of abating, declining to 10.3 percent from 13.5 percent in 1980—proof that the severe cure imposed by the governor of the FED, Paul Volcker, was having effect, which was gratefully and lastingly appreciated by the new president, despite the criticisms later expressed by the governor over relevant aspects of Reagan policy. The deficit on goods and services showed a contraction of $3,200 million relative to the previous year and of over $8,000 million relative to 1979. Encouraging results marked the current account, which recorded an improvement of about $5,000 million over the previous year, reaching $6,892 million, the best result in six years (Table 1.4). The federal and the total government deficits slightly reversed their course from the last year of the criticized Carter administration. The philosophy, defended by the new administration, of non-interference of public authorities on the free play of the market also applied to international trade as well as to the currency market. At the 1981 annual meeting of the World Bank and of the International Monetary Fund, Reagan stated that the best contribution that a country could give to world development was to pursue sound economic policy at home, adding that the US administration’s approach to international economic issues was based on the same principles that pervaded its domestic economic policy: a belief in the superiority of the market and trust in private economic initiative.4 Reagan’s statement implied that his administration’s policy was beneficial to the international economy since it was sound. Hence, if there were problems for the economy of other countries, they could not be imputed to the United States and could not be countered by governmental intervention that was not in line with the verdict of the market. The Economic Report of the President to Congress noted that in 1981 the dollar appreciated sharply both in nominal and real terms: the nominal appreciation of the greenback on a weight-traded basis relative to other major countries was 15.6 percent. This was partially explained by the current account surplus, but also by a shift towards dollar-denominated assets that “may have been a consequence of the President’s economic recovery program”.5 According to the Report, the effect of the growing preference of the market for dollar-denominated assets could not be countered by strong sales of dollars from foreign central banks or by an increase in interest rates relative to those prevailing in the United States. The assumptions of the US executive were subject to dispute. In the talks held in Brussels in May 1981 between Commission officials and representatives of the US administration, the Commission complained that high interest rates prevailing in the United States aggravated the problems in the European countries “since they were obliged to keep up this ‘escalation’ in rates in order to defend their currencies”.6 It might be argued that the complaint was made at the very beginning of the Reagan administration when the executive’s fiscal reform had not yet been launched, but the European countries repeated their worries on subsequent occasions.7 Statistical evidence shows that interest rate pressure added to the EC countries’ plight as real long-term interest rates were exceeding the net rate of return on fixed capital from 1981, thus further depressing investments.8 The problems caused to the European economies by their US trading partner did not escape members of the administration. During a meeting of the National Security Council dealing with the issue of East–West trade controls, the USTR William Brock remarked that the effect of high interest rates,

Table 1.4 US trade balance, current account balance, and capital movements, 1965–88 (millions of US dollars) Merchandise trade balance* Year

Exports

Imports

Net

1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988

26461 29310 30666 33626 36414 42469 43319 49381 71410 98306 107088 114745 120816 142054 184473 224269 237085 211198 201820 219900 215935 223367 250266 320337

−21510 −25483 −26866 −32991 −35807 −39866 −45579 −55797 −70499 −103811 −98185 −124228 −151907 −176001 −212009 −249750 −265063 −247642 −268900 −332422 −338083 −368425 −409766 −447323

4951 3827 3800 635 607 2603 −2260 −6416 911 −5505 9503 −9483 −31091 −33947 −27536 −25481 −27978 −36444 −67080 −112522 −122048 −145058 −159500 −126986

Balance on goods and services

Balance on current account

Balance on current account as % of GDP

4664 2940 2604 240 91 2253 −1303 −5443 1900 −4293 −12404 −6081 −8676 −10505 −24533 −19389 −16126 −24343 −57611 −109779 −123025 −140353 −153156 −116647

5431 3031 2583 611 399 2331 −1433 −5795 7140 1962 18116 4207 −14511 −15427 −991 1119 6892 −5868 −40143 −99006 −122332 −145393 −160201 −126236

0.8 0.4 3.2 0.1 0 0.2 −0.1 −0.5 0.5 0.1 0.1 0.2 −0.7 −0.7 0 0 0.2 −1.7 −1.2 −2.6 −2.6 −3.4 −3.5 −2.6

Note: *Excluding military

19

Source: Economic Report of the President, transmitted to the Congress February 1992: Table B-100; own calculations.

US assets abroad, net [increase/ capital outflow (−)] −5716 −7321 −9757 −10977 −11585 −9377 −12475 −14497 −22874 −34745 −39703 −51269 −34785 −61130 −64391 −86118 −110951 −124490 −56100 −31070 −27721 −92030 −62937 −86057

Foreign assets in the US, net [increase/ capital outflow (+)] 742 3661 7379 9928 12702 6359 22970 21461 18388 34241 15670 36518 51319 64036 38752 58112 83032 93746 84869 102621 130012 221529 229828 221534

20

International Trade under President Reagan

which had resulted in a revaluation of the dollar, had brought to Western Europe the equivalent of a third oil shock.9 As noted by the Economic Report of the President, while the value of US petroleum imports fell dramatically in the second half of 1981, with both volume and price declining, the appreciation of the dollar caused the oil price in European and Japanese currencies to rise.10 The question is, therefore, legitimate as to whether in the first year of the Reagan administration skyrocketing interest rates were an upshot of the “innovative” policy of the executive or were a legacy of strict monetary policy, dating back to the Carter years, that nipped in the bud the strong recovery which, in the hopes of many presidential advisers, was to be the key for a balanced budget. No conclusive evidence on either side can be given. Friedman, one of the fiercest critics of Reagan’s fiscal policy, noted that high real interest rates did not initially reflect large deficit, as “the deficit for fiscal year 1981 was still just $79 billion, barely 2 percent of income”, while interest rates were at a historical high.11 On the other hand, in May 1981, a subtle member of Congress, Henry Reuss, chairman of the Joint Economic Committee, questioned the undersecretary of the Treasury for Monetary Affairs, Beryl Sprinkel, on the measures the executive might take if a tight monetary policy and “your very huge deficit-prone budgetary policy” caused the dollar to become super-strong. To which Sprinkel optimistically replied that “it is also practically impossible that the assumption you have made would lead to higher interest rates”.12 It is, therefore, possible that also market operators, who are not usually less clever than attentive politicians, might have taken such a possibility into account, thus including prospective growing fiscal deficits in the price of debt. The International Trade Commission argued that the main factor hampering a robust recovery of the American economy in 1981 was interest rates, which, in spite of a drop in inflation were at historically high levels. Because of high inflation, real interest rates in 1979–80 were actually negative, whereas in 1981 real interest rates averaged 6 percent, as nominal rate remained high while inflation subsided. The Commission added that one of the factors contributing to the persistence of high interest rates was the concern about the likelihood of future record-high levels of fiscal deficits, which in a prospectively strong economic recovery were bound to compete with an increased demand for loanable funds by the private sector.13 The likelihood that the fiscal deficit was bound to skyrocket in the following years of the Reagan administration did not escape one of the minds behind the Reagan fiscal revolution, David Stockman, who on August 3 during a working luncheon made it clear to the other participants that in contrast with the rosy predictions of the Laffer curve, revenues could not offset expenditures and, therefore, severe cuts on the latter, including defense spending, were needed; the alternative being a curb on the prospective tax cuts. The reasons why Stockman, as director of the Office of Management and Budget (OMB), waited to blow the whistle until a celebratory working luncheon a month after the approval of the tax reform are open to dispute.14 Actually, according to Stockman’s account, he tried several times to alert his colleagues of the likely inconsistencies in the implementation of the reform of which he had been a theoretician. To balance the budget Stockman had suggested a $40 billion curtailment of expenditure, but Reagan did not agree on where the axe should fall. Not only was national defense spending off limits, but the so-called social safety net providing

Recession and Recovery

21

income transfers primarily for the lower class had to be spared. Also on previous occasions Stockman had argued that the monetary squeeze carried out by the FED would at least slacken the growth of the economy and thus offset the increase in fiscal revenues predicted by the Laffer curve, widening therefore the fiscal deficit rather than reducing it in following years. Stockman’s misgivings were compounded by the miscalculation he had incurred in February when he estimated the defense buildup requested by Reagan with the Defense secretary Caspar Weinberger, thus building into the budget a real growth rate for defense spending of 9.5 percent over the following five years. History does not say whether the “miscalculation” was an unpredicted outcome of the rush to submit to Congress the Reagan reform plans or, as the skeptic might think, was made under duress by Weinberger, who happily complied with the non-100 percent specific but clear instructions of the president. At any rate, Stockman’s remarks and advice to redress the course of fiscal policy met with hostile indifference. The president and the secretary of the Treasury, Donald Regan, made it clear that in no way could the tax reform be reshaped, and Reagan stressed that the increase in defense spending was a tenet of his policy. In his memoirs Reagan relates that he had already “given the final approval to blue prints to a multilateral billion dollar modernization of our strategic forces”.15 As regards the deficit issue, the president reports that he wanted a balanced budget but he also wanted peace through strength and that he was confident to reach a balanced budget by 1984 thanks to the tax reforms pushed through in 1981.16 At the end of his long mandate, his quest for peace through strength bore fruits beyond his expectations as the Soviet colossus had started to crumble. His rosy expectations on closing the budget gap did not share the same fortune. Initially, however, the American economy did not experience an acceleration which would bring about increasing credit demand for investments; it experienced a severe slump. The recession, which was the most severe since the 1930s, started in the second half of 1981 and lasted till the third quarter of 1982. In 1982, GDP contracted by 2.2 percent and unemployment rose to 9.7 percent on average, with a peak of 10.8 percent in December 1982. Various factors contributed to the recession, which was marked by a sharp contraction in business fixed investment and inventory investment. Contrary to what had characterized previous recessions, one of the main contributing factors in 1982 was foreign trade. While in earlier periods of recession US trade balance had improved, thus offsetting other areas of weakness, in 1982 the export sector deteriorated registering a drop of about 15 percent in volume from the fourth quarter of 1981 to the fourth quarter of 1982; as a result the decline in real US exports of goods and services contributed to over a third of the total decline in US gross national product (GNP).17 The value of merchandise exports fell by about $26 billion, of which $7 billion was due to agricultural exports and over $18 billion to the nonagricultural sector. Also, the value of imports fell by about $18 billion, but the decline was predominantly due to petroleum products, while non-petroleum imports remained almost unchanged. The current account balance turned from a surplus of $6.9 billion to a deficit of $5.9 billion. The deficit was partly attributed to the weakness of the US trading partners’ economies, although many of them were in less severe predicaments than that of the United States, and to the decline in the price competitiveness of US products caused by the apparently unstoppable rise of the greenback, whose price-

22

International Trade under President Reagan

adjusted value soared by roughly 40 percent from the beginning of the upsurge in autumn 1980 to November 1982. The growing strength of the dollar was explained by the progress against inflation as well as by the apparent stability and security of the United States and of its financial system relative to its trading partners in Latin America and to a certain extent in Europe, and by still exceptionally high interest rates in the US market. The impact of the high value of the dollar on net exports was, however viewed, prevalently as a legacy from a preceding period: according to FED econometric estimates, everything else being equal, each 1 percent appreciation of the dollar depressed the US merchandise trade balance by $2 billion after two years, most of the effect being felt in the second year.18 As regards interest rates, due to a less stringent monetary policy to stimulate the economy, nominal short-term interest rates, and to a lesser extent long-term interest rates, markedly declined in the second half of 1982, though the decrease was partially offset by the curb of inflation in the United States, and the differential with those prevailing in other main economies was strongly reduced. However, as emphasized by the FED, interest rates remained at high levels, both historically and taking into account the inflation rate, a major factor propping up long-term rates being the prospective size of fiscal deficit. The federal deficit grew by over 130 percent relative to the previous year. However, a substantial part of the deficit was cyclical, reflecting the impact of the recession. This occurred because the unemployment rate exceeded the inflation threshold; that is, the level of inflation that is not triggered by the minimum level of unemployment. As such, it might help buoy the economy up by supporting spendable income at a time when investment was weak and credit demand was slack. During the prospective recovery the cyclical deficit was bound to recede because spending for unemployment compensation and to stimulate the economy would decrease while receipts would improve. It was not, however, the cyclical portion of the deficit that worried many economists but its structural portion. In the absence of a turn in the legislation affecting the budget, the deficit was destined to harden for much of the decade due to spending programs other than cyclical ones and earlier tax changes. This would put pressure on monetary policy to monetize the deficit and the prospect of rekindled inflation by itself would call for an inflation premium on nominal interest rates. Hence, the higher cost of available credit would hinder interest-sensitive investments and with them a stable recovery.19

Years of recovery Prophets of gloom proved partially incorrect. The 1983 recovery was robust, though not as vigorous as those of the previous decade, taking moreover into account the severity of the slump in the preceding months. Major factors in the recovery were consumption spending and housing activity. Unemployment fell by 2½ percentage points over the year to 8.2 percent by the year’s end and significant progress was made in reducing inflation as the consumer index rose 3.75 percent, the lowest increase in more than a decade.20 There were, however, areas of concern, in particular the ballooning budget and international accounts deficits.

Recession and Recovery

23

The federal budget deficit reached $180 billion, over 6 percent of GNP, in spite of the contraction of the cyclical portion. As Volcker remarked, if the rising budget deficit provided a large stimulus to purchase power despite historically high interest rates, on the other hand it absorbed three quarters of US new net domestic savings, therefore squeezing the credit available for private investments on which a steady and lasting recovery usually rests.21 Particularly conspicuous was the worsening of the international balances. The deficit of the merchandise trade balance, the American Achilles’ heel since the 1970s, more than doubled relative to 1981, reaching $67 billion, an increase of over 80 percent relative to the previous year. The current account balance, positive in 1981 but already in the red a year later, worsened from a $5.9 billion deficit to a $40.1 billion deficit. The FED and the Council of Economic Advisers, whose most prominent member was Martin Feldstein, identified three main causes of the growing deficit. The first cause was seen in a cyclical factor. The United States, whose recession had been more severe than in the European countries and Japan, in 1983 was experiencing a stronger recovery than most of its trading partners and therefore was importing goods and services in higher proportion than was the case elsewhere.22 The US executive claimed that the US deficit was buoying the recovery in EC member states hampered by so-called Eurosclerosis. Yet, if exports to the United States helped the EC countries, they were only a limited part of their total exports, on average below 10 percent, and the European economies from 1981 to 1985 were affected by high interest rates, while the appreciation of the greenback made a significant share of their imports more expensive as the bulk of imported commodities was quoted in dollars. A further cause was a byproduct of the difficulty in meeting debt obligations that many highly indebted developing countries, mostly in Latin America, had been experiencing since 1982. Credit-restricted countries, in order to handle their debt crisis, were forced to reduce current consumption, restrict imports, and increase exports. By lowering domestic demand, they cut back their import levels. However, as the resulting import decline was insufficient in many debtor countries, policies to discourage or actually restrict imports had to be enacted. As limiting imports saved these countries’ foreign exchange, but did not actually earn them additional hard currencies, their retrenchment efforts also included a strong push to increase exports. The trade balance with Mexico alone, which in 1981 accounted for 7.6 percent of US exports, that same year changed from surplus to deficit and registered a decline of $12 billion between 1981 and 1983. The US loss in net exports to Latin America was about $21 billion.23 Yet, despite its suddenness and consistency, this deficit remained limited in geography and percentage. In 1983 US exports and imports to and from the Western hemisphere, with the exception of Canada, were respectively 13 percent and 16 percent of the total. The deficit towards Canada, Japan, and other Asian countries, with the exclusion of the Middle East, amounted to over $48 billion while those countries accounted for about 44 percent and 53 percent of the whole of American exports and imports. The most important source of the deficit was seen in the substantial appreciation of the US currency. By December 1983 the dollar had risen 52 percent against an average of ten trading partners’ currencies weighted by their shares in world trade, relative to the average in 1980. In real terms the dollar appreciated by about 45 percent, as little of

24

International Trade under President Reagan

the nominal appreciation of the greenback was offset by a more rapid increase in foreign price levels; it was roughly 25 percent higher than its average value for the entire floating rate period since 1973.24 Two factors were viewed as a main source of the rise of the dollar, which were boosting the capital account balance. Foreign funds were attracted by the prospect of a high ratio of revenue over capital invested, linked to the favorable tax treatment and the expectation of higher economic growth. The United States was also seen as a safe haven at a time when the economic and political situation in many countries, particularly in Latin America, was dicey. All this was making the United States an attractive place for stock market investment and direct business investments. Actually, in 1980, foreign direct investments in nominal terms were six times as high as in 1970; just three years later they were ten times as high; and in 1985 fourteen times as high (Table 1.5). The bulk came from Europe, in spite of the higher cost of investment in national currencies, and in particular from the United Kingdom, the Netherlands, West Germany, and Switzerland. Foreign direct investments (FDIs) from Japan, negligible till 1975, soared in the 1980s and by 1984 had overtaken Canadian investments. However, the main cause of the inflow of capitals was still considered to be the increase in the US real interest rates, i.e. nominal interest rates corrected for expected inflation, and more specifically the differential with those of the main trading partners.25 The FED and the Council of Economic Advisers pointed the finger at a shortage of savings, to which the fiscal deficit was particularly instrumental. Real interest rate balances the supply of saving, both public and private, with the demand for saving in the form of investment. In 1983, after the strong decline of the previous year, fixed investments recovered, therefore modestly contributing to GDP growth, even though they were still lower than in 1980, both in amount and as a percentage of GDP.26 However, the US government debt increased by over 21 percent, whereas it had risen less than 8.5 percent in the first year of the five previous recoveries; at the same time, private debt rose about 8 percent, close to the average in analogous periods. Thus, spurred by the rise in federal borrowing, total debt rose almost 11 percent, about 3 percentage points more than the average on earlier recoveries.27 The rationing device was interest rates held higher than would otherwise have been the case.28 On the other hand, the gap between demand and supply of savings was covered by the inflow of foreign savings, attracted by the differential in interest rates along with the other factors mentioned above. They helped to finance the US fiscal deficit and at the same time put a curb on the rise of interest rates, which would have been even higher. Besides, by lowering the price of imports the dollar rise contributed to keep inflation in check when the economy started to grow. The benefits, however, entailed a cost. The inflow of capitals caused the appreciation of the dollar and with it the growing loss of competitiveness of American goods and services both as exports and as importcompeting products. The recovery, therefore, was unbalanced, favoring those sectors that were sufficiently insulated from foreign competition, such as the building sector, but handicapping tradeable goods industries. The FED and the economic advisers discarded trade restrictive measures, noting moreover that even if such measures were to succeed in reducing the trade deficit, they would concurrently reduce capital inflow, thus only redistributing the strains in the economy given the difficulty of sufficiently financing

Table 1.5 Foreign direct investments (FDIs) in the United States by main areas and industries, 1965–88 (millions of US dollars) All areas Year

Total

1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988

8797 9054 9923 10815 11818 13270 13914 14868 20556 25144 27662 30770 34595 42471 54462 83046 108714 124677 137061 164583 184615 220414 271788 328850

Petroleum Manufact. 1710 1740 1885 2261 2493 2992 3139 3272 4792 5614 6213 5921 6573 7762 9906 12200 15246 17660 18209 25400 28270 29094 35598 34704

3478 3789 4181 4475 5344 6140 6722 7262 8231 10387 11386 12620 14030 17202 20876 33993 40533 44065 47665 51802 59584 71963 94745 121434

Canada Finance and insurance

Total

2169 2072 2193 2305 2189 2256 2553 2911 3415 3530 3828 4741 5398 6392 9395 12027 14748 17933 10934 24881 27429 34978 35675 39829

2388 2439 2575 2659 2834 3117 3335 3466 4203 5136 5352 5907 5650 6180 7154 12162 12116 11708 11434 15286 17131 20318 24013 27361

Petroleum Manufact. 208 98 99 100 132 190 207 243 426 547 596 676 710 734 943 1817 1801 1550 1391 1544 1589 1432 1426 1614

1219 1342 1397 1413 1644 1836 2013 2201 2319 2905 3061 3386 3077 3213 3615 5227 3376 3500 3313 4115 4607 6108 7636 9391

Europe Finance and insurance

Total

370 386 354 376 325 324 330 353 376 425 451 541 464 540 839 1612 1806 1801 1061 3245 4008 4283 5426 5051

6076 6273 7005 7750 8510 9554 10336 11087 13937 16756 18584 20162 23754 29180 37403 54688 72377 83193 92936 108211 121413 144181 186076 216418

Petroleum Manufact. 1481 1620 1772 2146 2322 2777 2893 3012 4079 4714 5478 4999 5523 6569 8010 10137 12854 15071 16326 23142 25636 26139 32957 31536

2156 2335 2669 2941 3530 4091 4455 4836 4790 6109 6673 7426 9267 11717 13952 21953 30897 33032 36866 39083 45841 56016 73981 91932

Japan Finance and insurance

Total

1724 1611 1758 1855 1766 1805 2048 2336 2174 1954 2218 2815 3273 3905 6080 8673 10084 12601 8450 15945 17022 21787 25835 27328

591 1178 1755 2749 3493 4723 7697 9677 11336 16044 19313 26824 35151 53354

25

Source: Historical Statistics of the United States Colonial Times to 1970—Part 2 Series U 47–74; Statistical Abstract of the United States: Foreign Direct Investments in the US—value by Area and Industry, various issues.

26

International Trade under President Reagan

domestic investments from domestic savings.29 As regards intervention in foreign exchange markets to bring about a depreciation of the dollar and subsequent improvement in the US trade balance, the Governor of the FED argued that such a measure had a subsidiary role as “intervention alone is a limited tool that cannot itself, greatly or for long, change the market results unless accompanied by changes in more basic policies”.30 He did, however, concede, with prophetic implication for future events, that “exchange market intervention can occasionally play a useful role in dealing with disturbed market conditions or even in signaling the desires or policy intent of the financial authorities in various countries, particularly when the approach is coordinated among them”.31 Volcker, along with the economic advisers of the president, also discarded as counterproductive a more accommodating monetary policy to bring about lower nominal interest rates and with them a depreciation of the dollar, as such policy might rekindle inflation without effect in the long-run when prices had time to adjust to the real exchange rate. The only effective tool was seen in forceful action to reduce the federal budget deficit, thus reducing pressure on the financial market by restoring a better balance between domestic sources and uses of credit.32 These remarks could not but provide ammunition to those in Congress who criticized the roots, in their view, of the growing fiscal deficit; that is, tax cuts and increased military expenditure. Reagan accepted the opinions of the FED, whose chairman was reappointed in June—probably for his achievements in curtailing inflation without hindering the recovery—and of his economic advisers, but as regards trade deficit his comments had a less critical undertone.33 The president stated that “the high interest rates in the United States and our low rate of inflation continue to make dollar securities an appealing investment for individuals and businesses around the world”. Though allowing that the consequent appreciation of the dollar had resulted in an unprecedented trade deficit, Reagan declared that he remained committed to the principle of free trade, working instead with the other nations to reduce export subsidies and import barriers. Given that a combination of exchange market intervention and expansionary monetary policy could reduce the dollar exchange value, but at the price of higher inflation, he stated that “the dollar must, therefore, be allowed to seek its natural value without exchange market intervention”.34 No express reference was made to the possibility of a link between fiscal deficit and high interest rates, though the president promised to cut substantially the government deficit, not failing to indict Congress for the negative results in curbing it. The reaction of the secretary of the Treasury was quite sanguine, as apparently Donald Regan even threatened that he would tell the president not to sign the Report of the Economic Advisers and told the Senators that, as far as he was concerned, they could throw the report into the waste basket.35 Indeed, the FED and the Economic Council were more or less openly critical of the trend in the two main sectors under the jurisdiction of the Treasury Department: the budget and international value of the greenback. Regan and the undersecretary for monetary affairs, Beryl Sprinkel, were committed to a policy of non-intervention in the exchange market, except in the case of disorderly markets, which did not apply to the United States. The EC member countries, though not always for the same reasons, voiced their concerns on the American policy and its effects on other countries’ economies. In the

Recession and Recovery

27

statement, given during the 1983 Annual meeting of the IMF and World Bank, on behalf of the member states of the European Communities, the Minister of the Greek National Economy, then president of the EC Council for financial matters, emphasized that “the difficult situation in both industrial and less developed countries, is further complicated by uncertainties over the future course of world interest rates, and by uncertainties linked to the volatility of the dollar, the recent rise of which has adversely affected the terms of trade of many countries”, adding that “these developments are heavily influenced by financial policies in the United States”.36 Yet, the choices of the US administration on fiscal and currency policy were not openly put in the dock by its allies, at least during the great gatherings of the leaders of the main industrial countries. In spite of sometimes heated arguments in the preliminary stages of the economic summits, the sherpas always managed to find words reconciling the contrasting views of the chiefs of state and governments and the words of the declarations were not in contrast with the US perspective. The declaration at the end of the Versailles Summit in June 1982 mentioned the need to intensify economic and monetary cooperation but such cooperation, rather than on negotiated adjustment of domestic macroeconomic policies, was to rely on the convergence of such policies focused on medium term structural reforms to bring down inflation and free up labor, capital, and product markets. The Summit’s Statement on International Monetary Undertakings declared that “we are ready, if necessary, to use intervention in exchange market”, but this was only to “counter disorderly conditions”, and the US government might easily claim that the upsurge of the dollar was only the result of the fundamental stability and attractiveness of the American economy. The Declaration of the May 1983 Williamsburg Summit partially reflected the viewpoint of the US administration. In the preparatory stage of the Summit the US delegation stressed the benefit for the international economy of convergence of policy criteria among the main players, that is, the G7 members, which was to be based on stable, moderate monetary growth, discipline over government expenditure, particularly transfer payment, openness and free trade to enhance competition and tax and regulatory reform to enhance the role of the market. Such convergence would minimize the need for exchange market intervention. The Exchange Market Intervention Study, issued in the run-up to the Summit, argued that exchange market intervention had often been effective in attaining short-term objectives in response to exchange market disorders and unsettled trade conditions, while for longer-term adjustments it had not proved effective, unless accompanied by changes in domestic policy, especially in the monetary field. In other words, exchange rate intervention by itself was not enough to influence the fundamentals of the economy, and the US executive was claiming that those of the United States were sound. The Annex to the Summit Declaration called for disciplined non-inflationary growth of monetary aggregates and appropriate interest rates and for “improved consultations, policy convergence and international cooperation to help stabilize exchange markets”, but “bearing in mind our conclusions on the Exchange Market Intervention Study”. On the other hand, the heads of state and government committed themselves to reduce structural budget deficits, among which that of the United States was soaring in

28

International Trade under President Reagan

contrast to its partners’. Although the Annex stated, in line with the perspective of the American executive, that the reduction was to be carried out, preferably through discipline over government expenditures, and therefore not through tax increases, it added that the consequences of fiscal policy for interest rates and growth had to be taken into account. In the United States, critics of the administration’s approach to the rise of the superdollar argued that the policy of benign neglect had a serious impact on export and import competing sectors in agriculture as well as in several manufacturing groups, from television sets to automobiles, favoring the consumption of foreign-made goods to the expense of domestic investments.37 The question, however, is whether such policy was so uncompromising or whether behind the statements the executive, while avoiding direct involvement in the exchange market, was trying to pass the buck to other countries. The obvious candidate was Japan, whose surplus in 1983 was already the highest among the US trading partners and which was already outperforming many other countries, nominally those in Western Europe. In the first half of the 1980s many in Congress were claiming that the rising sun’s currency did not reflect the role of the country in international trade and finance. Japan was accused of accumulating large trade surpluses and stockpiling foreign currency reserves, while maintaining considerably undervalued exchange rates. If the Treasury Department did not intervene effectively, many lawmakers believed that the Japanese growing surplus issue should be addressed by legislation. Over the course of 1983, the United States urged Japan to relax restrictions on foreign participants in its capital market and take steps that would allow the yen to become a more widely used currency, which it was hoped might take pressure off the dollar in the international financial system. Bilateral talks between Donald Regan and his Japanese counterpart prepared the ground and, during Reagan’s meeting in Tokyo with the Japanese prime minister, Yasuhiro Nakasone in November 1983, Japan promised to further open its financial system and a task force was created to work out ways to achieve this goal. After six meetings, the task force developed a series of recommendations published in a “Report on Yen/Dollar Exchange Rate Issues” and Japan agreed that it would pursue most of the necessary measures over an agreed time frame. The measures fell into four categories: liberalization of Japanese barriers against inflow and outflow of capitals; internationalization of the yen; equal treatment of foreign financial institutions under Japanese bank and financial regulation; and deregulation of the Japanese capital market.38 Frankel argues that as regards liberalization of the Japanese market and repeal of capital controls discouraging the flow of capital into Japan so as to depress the value of the yen, the agreement was actually pushing at an open door since such restrictions had been formally eliminated by the Foreign Exchange Law of December 1980 and the de facto liberalization dating from April 1979.39 Osugi retorts that, although financial deregulation in Japan had started before 1984, the agreement substantially accelerated the process as the Japanese authorities committed themselves for the first time to a specific time schedule and progress was monitored by a specific body, the Yen/Dollar Committee.40 It is arguable that the US executive, and in particular the Treasury, aimed at two goals. One was the liberalization of the Japanese capital market as part of the drive to

Recession and Recovery

29

open foreign service markets to American firms. However, as indicated by the title of the report published in May 1984, the main focus of the negotiations was on the exchange rate. In the short run the results were not up to the American hopes. The same year in which the report was published, the US International Trade Commission predicted that since total savings in Japan had by far exceeded total spending, it was likely that the measures agreed, in particular the liberalization of capital movements, would result in higher capital outflow, thus weakening the yen in exchange markets.41 Hence, with the endorsement of their financial authorities, the United States and Japan continued on what Grimes wittily describes as a pas de deux in which current account deficits in the United States were financed largely by current account surpluses in Japan.42 This allowed Japanese firms and financial institutions to obtain greater returns by investing their surplus funds outside the country, prevalently in the United States, while the latter was able to enjoy what, in the words of Grimes, was “the great Keynesian experiment called Reaganomics” without incurring the constraints otherwise imposed by its fiscal and current account deficits.43 1984 was the annus mirabilis of the performance of the economy in the Reagan years. Not only was it the second best year in a recovery in the last thirty years, confirming its strength and stability, but the GDP yearly growth rate (6.2 percent) was the best after the Korean War boom. Remarkable was the rise in domestic spending, which outstripped growth in domestic production. Contrary to the fears of those who foresaw that high real interest rates might put a brake on productive spending, as shown by Table 1.6, gross private domestic investment rose by 31 percent relative to the previous year and by 43 percent relative to the 1982 recession year. Business fixed investment grew by 17 percent compared with the previous biennium. The Economic Report of the President attributed the investment boom to several factors headed by the tax incentives of the 1981 Economic Recovery Trade Act (ERTA), thus vindicating the correctness of Reagan’s fiscal policy, and by the low level of inflation, which allowed the price of investment goods to be unusually well contained.44 Employment increased by 3.1 percent following an increase of 3.6 percent in the previous year, while unemployment, though still high, decreased by over 2 percentage points from the 1982 peak. The assessment of the FED was more cautious, noting that although the United States had made substantial progress towards the goal of sustained growth with price stability, important segments of the economy still experienced considerable difficulties, a symptom of continuing imbalances represented by interest rates which remained exceptionally high by historical standards. Although Federal government tax and spending policies had provided substantial stimulus to aggregate demands for goods and services, they had strongly added to the demand for funds and had been an important force in keeping interest rates high.45 In 1984, the Federal deficit slightly decreased from the 1983 peak, both in amount and as a share of GDP, but remained extremely high at 4.4 percent of GDP, and exceeded total domestic personal savings (Tables 1.1 and 1.6). The deficit reduction was the result of higher federal government receipts, raised by the expansion of the economy, while outlay growth was limited by further declines in recession-related expenditures and by a drop in agricultural support payments.46 Total government deficit declined to $105 billion and 2.9 percent of the GDP.

30

Table 1.6 US gross saving and investment, 1966–88 (billions of US dollars and Index Numbers (I.N.))

Year

Personal saving

Business saving

Total private gross saving

1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988

36.4 45.9 43.9 43.4 57.6 65.5 59.9 86.2 93.5 100.4 93.2 88.1 108.1 123.7 154.3 192.4 200.0 169.1 223.3 189.8 187.8 142.6 156.2

96.1 98.7 102.5 106.2 108.2 126.8 145.1 159.3 162.6 206.2 230.0 267.1 305.0 334.5 345.7 394.1 417.5 472.7 520.7 546.4 533.9 588.7 646.1

132.5 144.5 146.4 149.6 165.8 192.3 205.0 245.6 256.1 306.5 323.3 355.2 413.2 458.3 500.1 586.4 617.5 641.7 743.1 730.1 721.8 731.3 802.8

I.N.

Federal Govern. surplus or deficit

% of total private saving

State and local govern. surplus or deficit

% of total private saving

Total gross saving

100 109.1 110.5 112.9 125.2 145.1 154.7 185.4 193.3 231.3 244.0 268.1 311.8 345.9 377.4 442.6 455.0 484.3 560.8 555.5 544.7 551.9 605.9

−1.4 −12.7 −4.7 18.5 −13.3 −21.7 −17.3 −6.6 −11.6 −69.4 −52.9 −42.4 −28.1 −15.7 −60.1 −58.8 −135.5 −180.1 −166.9 −181.4 −201.0 −151.8 −136.6

−1.1 −8.8 −3.2 12.4 −8.0 −11.3 −8.4 −2.7 −4.5 −22.6 −16.4 −11.9 −6.8 −3.4 −12.0 −10.0 −21.9 −28.1 −22.5 −24.6 −27.8 −20.8 −17.0

0.5 −1.1 0.1 1.5 1.8 2.5 13.4 13.4 7.1 6.6 14.6 25.6 31.1 25.1 24.8 28.5 26.9 40.3 58.1 56.1 54.3 40.1 38.4

0.4 −0.8 0.1 1 1.1 1.3 6.5 5.5 2.8 2.2 4.5 7.2 7.5 5.5 5.0 4.9 4.4 6.3 7.8 7.6 7.5 5.5 4.8

131.6 130.8 141.8 159.6 155.3 173.8 201.8 252.4 249.6 241.6 285.0 338.4 416.1 468.8 465.9 567.2 508.5 501.9 634.3 610.9 575.0 619.6 704.5

Note: *Consist of net exports of goods and services plus net receipts of factor income from rest of the world less net transfers. Source: Economic Report of the President, Transmitted to the Congress February 1992: Table B-26; own calculations.

I.N.

Statistical discrep.

Gross private domestic invest.

100 99.4 107.7 121.3 118.0 132.1 153.3 191.8 189.7 183.6 216.6 257.1 316.2 356.2 354.0 431.0 386.4 381.4 482.0 464.2 436.9 470.8 535.9

2.8 0.8 −0.1 −2.6 0 3.1 1.1 −0.5 1.4 6.0 10.4 10.9 −7.6 13.8 13.0 10.9 −7.4 10.2 −9.0 −13.9 1.2 −24.8 −28.4

130.8 128.0 139.9 155.2 150.3 175.5 205.6 243.1 245.8 226.0 286.4 358.3 434.0 480.2 467.6 558.0 503.4 546.7 718.9 714.5 717.6 749.3 793.6

Net foreign I.N. invest.* 100 98.2 107.3 119.0 115.3 134.6 157.7 186.4 188.5 173.3 219.6 274.8 332.8 368.3 358.6 427.9 386.0 419.2 551.3 547.9 550.3 574.6 608.6

3.9 3.6 1.8 1.8 5.0 1.4 −2.8 8.9 5.3 21.6 9.0 −9.0 −10.3 2.4 11.9 10.1 −1.9 −34.6 −93.6 −117.6 −141.4 −154.5 −117.5

Recession and Recovery

31

If the budget deficit slightly slowed down in 1984, only to restart its run the following year, merchandise trade deficits soared to over $112 billion, with an increase of 68 percent from the previous year, while the current account deficit reached $107 billion, with an increase of 131 percent. The appreciation of the dollar largely contributed to the imbalance between exports and imports. On a trade-weighted basis the dollar climbed a further 12 percent, bringing the cumulative appreciation since the end of 1980 to about 65 percent. Despite the loss of competitiveness caused by the apparently unstoppable rise of the American currency, exports moved up in value and real terms, respectively by 10 percent and 6.8 percent. However, the export rise was dwarfed by that of imports, which grew by 24 percent in value and in real terms. With the exception of the European communist countries, the Middle East, Australia, and New Zealand, the merchandise trade balance plummeted into the red (see Table 5.2). The deficit with Canada grew by over 43 percent exceeding at almost $20 billion that of the whole of the other countries in the Western Hemisphere. The balance with the EC from a small surplus in 1983 became markedly negative, registering a $10.4 billion deficit. The deficit with Japan soared by over 70 percent to $33.6 billion. The deficit with the other Asian countries totaled $25 billion. With regard to the strong dollar, the Council acknowledged that it had affected the competitiveness of some industries, prevalently in the manufacture sector, though noticing that in many cases the loss of competitiveness was due to factors independent of the strength of the dollar, such as high labor and raw material costs. Likewise, the strong dollar had contributed to the decline of farm surplus, which had been a trump card of American export since 1973. The balance worsened in all the sectors of trade. As regards the strengthening of the dollar, both the FED and the Annual Report of the Economic Advisers for 1984 agreed that factors like the profitability of after-tax investments in the United States, also stimulated by the strength of the US recovery relative to most trading partners, particularly in Europe, and generally the more favorable long-run prospects for the American economy did prompt additional demand for the greenback. They also agreed on the role played by interest rate differentials in attracting foreign capitals. They disagreed, however, on the causes of persisting high interest rates in the United States and in particular on their link with the fiscal deficit. And, if they did not disagree on the roots of trade imbalances, they differed on their weight on the national economy and on the problems they might cause. It must be noted that one name was missing among the signatories of the Report for 1984: that of the deficit hawk Martin Feldstein. According to the Economic Advisers, if the growth in real interest rates was initially associated with the tightening in monetary policy since 1979, it later reflected the strength of the US recovery, as high interest rates were attributable to the after tax rate of return for new investment, largely facilitated by Reagan’s fiscal reform.47 The economic advisers dismissed the presence of a strong link with the expanding federal budget deficit, remarking that it might have helped to raise interest rates, “however the extent of upward pressure on real interest rates and on the dollar through this channel is uncertain and numerous studies have failed to uncover this effect”.48 On the other hand, the dollar rise had stimulated production and investment both in sectors less exposed to international competition and in sectors

32

International Trade under President Reagan

that had to defend themselves from it, and by lowering the price of imported inputs and close substitutes it had helped keep inflation under control. Besides, because of the shift towards dollar assets, interest rates had been lower and investments higher, thus strengthening US production capacity.49 In contrast, Volcker stressed the link between budget and external deficits—labelled by the FED chairman as twin deficits, and their dangers.50 Since domestic private savings were not sufficient to contemporarily finance rising investments needed to support growth and productivity and the government deficit, the US economy had become dependent on the inflow of foreign savings. This inflow, while containing pressures on interest rates, was having mounting adverse implications, because the mirror image of capital inflow was a trade and current account deficit with adverse impacts on industries looking to export markets or competing with imports, thus preventing a large sector of the economy from fully participating in the recovery. In Volcker’s opinion, the progressive deterioration of the current account balance and the fears of renewed inflationary pressures linked to the government deficit could undermine confidence in the stability of the American economy and discourage the capital inflow on which it was more and more dependent. Therefore, the key ingredient in the policy mix to stave off such a threat was simple: “Steps now toward decisive, credible reduction in our budget deficit—large enough to have an impact on expectations and confidence in market would provide the necessary sense of reassurance while working to alleviate the underlying imbalance between our capacity to save and the demand on those resources.” The available data prevalently support the thesis of the FED. Certainly, as summed up by some American scholars, the appreciation of the dollar, which “acted like a tax on U.S. production and a subsidy for foreign production”, might have been a main cause of the trade deficit, along with the strength of the US economy compared with that of Western Europe and the heavily indebted developing countries.51 However, the impact was skew: exports in 1984 were slightly lower than exports in 1981, a year in which exports and imports were almost in balance, while imports soared by 40 percent. This would suggest that imbalances in the US domestic economy might also be at play. The worries of the FED can be explained by the following open economy identity provided by the USTR: T + S = NFI = PS − GB − PI + SD (−106.3) + 12.8 = −93.4 = 674.8 − 122.9 − 637.8 (−7.4) Where T = balance of trade in goods; S = balance in services, interests, and transfers; NFI = net foreign investments; PS = gross private domestic savings, made up of corporate savings and household savings; GB = net government borrowing, consisting of the budget balance of the federal government and state and local governments; PI = gross private domestic investment; and SD = statistical discrepancies.52 The identity can also be written as NFI = PI − GS , where GS (gross domestic saving) is given by: Y (income) − C (home consumption) − GB (government deficit). Private saving as share of US national product usually fell below the average of the industrial nations, rarely exceeding 19 percent of GDP.53 However, as shown in Table 1.6, till the beginning

Recession and Recovery

33

of the 1980s domestic private saving overall exceeded and grew at a higher rate than private investment. Also, domestic saving as a whole seldom fell below private investment as government sectors’ dissaving did not significantly dent private saving. During the same span of years, capital outflows from the United States dominated the balance of payments picture, except for few years such as in the aftermath of the first oil crisis. Things markedly changed in 1983 and even more in 1984, when over 20 percent of private saving was eaten up by the federal deficit. As the current account plunged into deficit, the gap was filled by foreign investment. In 1984, the gap between gross private domestic investments and gross domestic savings soared by 17 percent relative to the previous year which, in turn, had grown by $32.5 billion from the modest $1 billion in the 1982 recession year. Two factors accounted for the change. Domestic investments were significantly higher than in previous recoveries; while total domestic savings were lower than the usual domestic savings in analogous periods. During the 1984 boom, domestic private investments ballooned by 32 percent. Also, private savings grew strongly, by 14 percent, but over a sixth of them were absorbed by the government deficit, as the federal deficit, though slightly declining from the previous year, remained extremely high, contrary to the usual pattern in preceding post-Second World War recoveries. The domestic savings shortfall was filled by a capital inflow, which, leaving aside statistical discrepancies, grew by almost $18 billion, while capital outflow decreased by about $25 billion. Yet, the process was not necessarily unidirectional; that is, foreign capital inflows not only filled the gap between domestic investments and savings, but also influenced width and duration of the gap. The dollar exchange rate was swept up as foreigners exchanged their national currencies for dollars to lend and invest in the United States for the various factors discussed above, while the dollar surge contributed to the trade deficit. Usually, under a flexible exchange system a current account deficit is followed by the depreciation of the currency, which in turn reduces import by encouraging export, thus gradually reconstructing the balance.54 According to Stephen Axilrod, to the extent that dollar exchange rate had remained high for exogenous reasons, “one might view the current account deficit as determined by capital account rather than vice versa”.55 At any rate, at the basis of the process there was the US failure to save enough to finance domestic investment needs—because of the concurrent need to meet government borrowing—thus increasing American reliance on foreign credit, till then willingly provided.56 From a strictly economic viewpoint the sensible thing to do to tackle the trade deficit, as advocated by Volcker, was first to curtail the government deficit rather than to address the currency value. It is, therefore, arguable that the benign neglect policy till then officially followed by the government was the correct answer. Yet, there were many points of dispute that had to be answered before any kind of intervention, whatever its target, might be worked out. As argued by the government, the outcome of the inflow of capital was at most of a mingled yarn. The evil was the impact on the price competitiveness of some key industries, such as steel, automotive, textile and clothing, shoes, and even some high-tech products. There was, however, the fact that exports, and above all imports, though representing a growing share of the American economy, as a GDP percentage were still much lower than in most of its trading partners.57 And

34

International Trade under President Reagan

this was borne out by the fact that their losses did not prevent the economy from growing at an unprecedented rate. Besides, many of their problems were independent of the impact of the high dollar and often even predated it. On the other hand, the foreign capital inflow might help these industries to get back on their feet and in any event prevented a crowding out of private investment by the public deficit, financing up to one half of the federal budget deficit. Not less important was the fact that adequately cutting the government deficit was politically impracticable because, if it was not the result of an agreement, nevertheless it was the outcome of a de facto compromise between the executive and Congress, the House of Representatives in particular, since it allowed them not to give ground on politically sensitive issues.58 The administration put the growth of social policy expenditure into reverse gear, but did not deliver an uncompromising attack on it. On the other hand, it was able to push through cuts on income and corporate taxes and to increase national defense expenditure. At any rate, Reagan, in line with his presidential campaign statements, in 1982 championed a constitutional amendment for a balanced budget, but as one witty commentator wrote, the proposal “was akin to the nation’s chief distiller coming out in favour of Prohibition”.59 The Tax Equity and Fiscal Responsibility Act (TEFRA) of 1982 aimed at reducing the deficit, especially in the first two years of its implementation, but did not introduce a severe correction to the tax cuts provided by the 1981 legislation. The Deficit Reduction Act (DEFRA) of 1984 provided for $50 billion in new revenues over three years through tax loophole closures and excise tax increases but did not envisage corresponding cuts in social security spending. Combined revenue enhancement from TEFRA and DEFRA equaled 31 percent of revenue loss from ERTA in fiscal years 1984–88.60 The odd balance that was underlying the success of Reagan’s partially accidental Keynesian experiment came under pressure in the last months of 1984. In August there were indications that the US economy was slowing down while economic activity abroad was picking up and interest rates decreased in nominal terms. Expectations developed that the dollar would weaken. But these expectations were soon dashed as the greenback was buoyed up by an easing of inflationary fears, which implied that US real interest rates were still attractive, while the US economy continued to be a haven of stable prices and steady growth. Capital, through the banking sector and subsequently as portfolio investments in dollar denominated securities, flew into the United States at a pace greater than needed to finance a large current account deficit: from August 1984 to mid January 1985 the dollar rose 8 percent against the continental European currencies, 15 percent against the pound and 3.5 percent against the yen.61 Concurrently the trade deficit went on deteriorating. Thus, the Reagan administration abandoned its benign neglect policy: after all, it could claim to respond to disorderly markets. Between September 1984 and the following January, the US authorities intervened in the exchange markets on several occasions: they bought $50 million equivalent of marks in early September, $229 million on four occasions between September 24 and October 17, and $94 million in January.62 However, at the same time, the executive adopted contrasting policies that increased the inflow of foreign capitals and helped the market to believe that the years of a high dollar were not over. A prominent factor of attraction of foreign capitals was the issue in September of government bonds targeted at foreign

Recession and Recovery

35

investors and aimed at financing the fiscal deficit in order to avoid pressure on interest rates. Thus, it can be argued that, faced with the alternative of allowing the saving shortfall to exercise further pressure on interest rates, thereby crowding out the interest-sensitive components of US demand, and keeping the dollar high and, therefore, crowding out the sectors more exposed to foreign competition, the executive de facto opted for the second alternative.63 Things changed when the new Reagan administration took office and Baker replaced Regan, introducing a dollar exchange policy clearly aimed at alleviating the sacrifices imposed on the exporting and import competing sides of the economy. Yet, to tackle the deep cause of the problems at the basis of the above-mentioned alternatives was another matter.

Notes 1

2 3

4

5 6 7 8 9

10 11 12

13

14 15 16 17

United States President, America’s New Beginning: A Program for Economic Recovery, February 18, 1981 (Washington DC: The White House, Office of the Press Secretary, 1981). Ibid., Table 4. On the attitude of the Republican administration in regard to the deficit issue see W. Elliot Brownlee, “Reaganomics: The Fiscal and Monetary Policy”, in Johns Andrew L. (ed.) A Companion to Ronald Reagan (Wiley Blackwell, 2015), 136 et seq. Public Papers of the Presidents of the United States (hereinafter PPPUS)—Ronald Reagan. Remarks at the Annual Meeting of the Boards of Governors of World Bank Group and International Monetary Fund, September 21, 1981. ERP February 1982, 172. Bulletin of the European Communities (hereinafter Bull.EC) 5-1981, point 2.2.42. For one of the first occasions, Bull. EC 2-1982, point 1.3.1. Derek H. Aldcroft, The European Economy 1914–2000, 4th edition (London and New York: Routledge, 2001), 218—Figure 8. National Security Council meeting (hereinafter NSC) July 9, 1981, East-West Trade Controls, in The Reagan Files (National Security Council and National Security Planning Group Meetings) ed. by Jason Saltoon- Ebin. www.thereaganfiles. com/19810709-nsc-17.pdf (accessed February 28, 2019). ERP February 1982, 176. Benjamin Friedman, Day of Reckoning. The Consequencies of American Economic Policy Under Reagan and After (New York: Random House, 1988), 173. The dialogue is reported in I.M. Destler et al., Dollar Politics. Exchange Rate Policymaking in the United States (Washinton DC: Institute for International Economics, 1989), 21. US International Trade Commission (USITC), Operation of the Trade Agreements Program (hereinafter OTAP) 33rd Report 1981, 5. usitc.gov/publications/332/ pub1308_old.pdf (accessed February 28, 2019). David A. Stockman, The Triumph of Politics: How the Reagan Revolution Failed (London: Hodder and Stoughton, 1986), 288 et seq. Ronald Reagan, An American Life (London: Hutchinson, 1990), 294. Ibid., 235. Statement by Paul A. Volcker to the Joint Economic Committee of the U.S. Congress, January 27, 1983, Federal Reserve Bullettin (hereinafter FRB ), February 1983, 78;

36

18 19 20 21 22

23 24

25 26 27 28 29 30 31 32 33

34 35

36 37 38 39 40 41 42

International Trade under President Reagan Statement by Paul A. Volcker to the Committee on Banking, Housing and Urban Affairs of the U.S. Senate, February 16, 1983, FRB , March 1983, 170; International Transactions in 1982, FRB , April 1983, 253. International Transactions in 1982, FRB , April 1983, 254. Statement by Paul A. Volcker before the Committee on the Budget, U.S. Senate, February 24, 1983, FRB March 1983, 185. Monetary Policy Report to the Congress, February 7, 1984, FRB , February 1984, 75 et seq. Statement by Paul A. Volcker before the Committee on Banking, Finance and Urban Affairs, U.S. House of Representatives, February 7, 1984, FRB , April 1984, 98. ERP, February 1984, 45; ibid., 45; Statement by Henry C. Wallich, Member, Board of Governors of the Federal Reserve System, before the Subcommittee on Commerce, Transport and Tourism of the Committee on Energy and Commerce, U.S. House of Representatives, March 6, 1984, ERP , March 1984, 216. Ibid., 47. Ibid., 45; Statement by Henry C. Wallich, Member, Board of Governors of the Federal Reserve System, before the Committee on Finance, U.S. Senate, March 23, 1984, FRB , April 1984, 295. ERP, February 1984, 53, Table 2-2. Ibid., 54, Table 2-3. Stephen H. Axilrod, “U.S. Monetary Policy in Recent Years: An Overview”, FRB , January 1985, 20. Statement by Paul A. Volcker before the the Committee on the Budget, U.S. Senate, February 29, 1984, FRB , March 1984, 209. Statement by Paul A. Volcker before the Subcommittee on Trade of the Committee on Ways and Means, U.S. House of Representatives, April 10, 1984, FRB , April 1984, 327. Ibid. Ibid. Ibid., 326; ERP, February 1984, 62. The Economic Report of the President actualy consists of two parts: the introduction, usually of no more than ten pages, in which the president sums up, with some comments, the report of his economic advisers, and the much more voluminous and detailed Annual Report of the Council of the Economic Advisers. ERP, February 1984, 5. Jeffrey A. Frankel, “The Making of Exchange Rate Policy in the 1980s”, in Martin Feldstein (ed.) American Economic Policy in the 1980s (Chicago: University of Chicago Press, 1994), 298. Bull.EC 9-1983, Annual Meeting f the IMF and the World Bank. Antony S. Campagna, The Economy in the Reagan Years: The Economic Consequencies of the Reagan Administration (London: Greenwood Press, 1994), 156. OTAP 36th Report 1984, 141. usitc.gov/publications/332/pub1725_0.pdf (accessed July 23, 2019). Jeffrey A. Frankel, “The Making of Exchange Rate Policy”, 299. K. Osugi, Japan’s Experience of Financial Deregulation since 1984 In An International Perspective, BIS Economic Papers n. 26, January 1990, 8. OTAP 36th Report 1984, 142. William W. Grimes, “Economic Performance”, in Steven K. Vogel (ed.) U.S.-Japan Relations in a Changing World (Washington DC: Brookings Institution Press, 2002), 37.

Recession and Recovery 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57

58 59 60 61 62 63

37

Ibid. ERP, February 1985, 31. Monetary Report to the Congress, February 20, 1985, FRB , April 1985, 191. Ibid. ERP, February 1985, 35, 105. Ibid. Ibid., 106; see also C. Fred Bergsten, “The Making of Exchange Rate Policy in the 1980s”, in Martin Feldstein (ed.), American Economic Policy, 341. Statement by Paul A. Volcker to the Committee on the Budget, U.S. Senate, February 8, 1985, FRB , April 1985, 209. Michael Aho et al., After Reagan. Confronting the Changed World Economy (New York: Council of Foreign Relations, 1988), 94. Twenty-eighth ARPTAP, 1984–85, 14—Box 1. Andrew Dean et al., Saving Trends and Behaviour in OECD Countries (OECD Economics Department Working Paper n. 67, 1989), Table 5. Twenty-eighth ARPTAP, 1984–85, 17; also Robert Solomon, The Transformation of the World Economy, 1980–93 (New York: St. Martin’s Press, 1994), 31. Stephen H. Axilrod, “U.S. Monetary Policy”, 22. Twenty-eighth ARPTAP, 1984–85, 17. According to the ARPTAP 1984–85, Twenty-eighth issue, 25—Table 11, in the 1980–84 years US imports and exports averaged respectively 9 percent and 7 percent of GNP, well below the average of the main trading partners. See Peter Baker et al., The Man Who Ran Washington: The Life and Times of James A. Baker III (New York: Doubleday, 2020), 235. Iwan W. Morgan, The Age of Deficits: Presidents and Unbalanced Budgets from Jimmy Carter to George W. Bush (Lawrence: The University Press of Kansas, 2009), 96. Ibid., 105. Treasury and Federal Reserve Foreign Exchange Operations, FRB , May 1985, 287–88. Ibid., 289. Jeffrey A. Frankel, “The Making of the Exchange Rate Policy”, 303.

38

2

Policy Goals and Multilateral Initiatives

Fundamental goals of US trade policy (in bilateral and multilateral relations) On July 8, 1981, six months after his appointment, the new USTR, William Brock, gave a statement on US trade policy on the occasion of the joint oversight hearing of the Senate Committee on Finance and of the Senate Committee on Banking, Housing and Urban Affairs.1 The administration’s program focused on the reduction on self-imposed export disincentives, such as export regulations and controls and the system of taxation of Americans employed abroad; effective enforcement of US trade laws and international agreements, obviously as they were implemented and interpreted in the United States; and the reduction of government barriers to the flow of trade and investments among nations, “with particular emphasis upon improvement and extension of international trade rules”. As regards this latter topic, the statement pointed out that, although the Tokyo Round had succeeded in substantially reducing tariffs and in dealing with a wide range of non-tariff barriers, there were a number of issues which had not been adequately resolved in the multilateral trade negotiations of the previous decade or which had not been addressed in those talks. It was, therefore, “U.S. policy to deal with individual problems through bilateral negotiating efforts in the short run and to seek to negotiate new multilateral disciplines over the longer term”. The issues that had not been covered by previous agreements, whether bilateral or multilateral, were services, effects on trade of investment restrictions, and trade in goods incorporating advanced technology. Services were viewed as of growing importance for the United States because they contributed substantially to its exports and were also essential to export of high technology and capital goods. Service industries such as telecommunications, data processing, engineering, and construction industries were among the most competitive US enterprises and represented a main source of earning. World trade in services had grown at an annual rate of 20 percent in the 1970s, almost keeping pace with the growth of trade in goods, but still accounted for only a little more than one-fifth of total world trade, the United States being the world leader in the sector, followed by France and the United Kingdom (Figure 2.1).2 The fact that the trade in services was still well behind trade in goods, notwithstanding that services outpaced manufacturing and agriculture in the industrial countries, was 39

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Figure 2.1 Trade in commercial services by main exporters, 1980–88 (millions of US dollars). Source: World Trade Organization: Documents Data and Resources—Statistics on Trade in Commercial Services, 1980–88.

seen as proof of the existence of barriers imposed by several nations to exports and investments from the leading service exporters. Brock argued that the most common barriers derived from the unfavorable treatment of imported services by public authorities, which included restrictive licensing requirements, or even outright prohibition, discriminatory taxes or fees, restrictions on marketing and selling of imported services, and discriminatory government procurement practices.3 The statement declared that the United States must address the range of investment issues that distort trade flows as seriously as do tariff and non-tariff barriers, through bilateral agreements and by trying to negotiate new multilateral disciplines. In spite of the growing importance of investments outside its borders, the United States had not previously negotiated treaties dealing exclusively with investment concerns. In the past, investment protection had been one of the subjects of the treaties of Friendship, Commerce and Navigation (FCNs); in fact it was the dominant one after the Second World War. The last FCN treaty was signed by the United States in 1966. West European countries and Japan signed numerous bilateral investment treaties (BITs) during the 1970s. The Reagan administration decided to change course but found that the BITs till then entered into by the industrial trading partners did not provide enough specific

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41

rights for foreign investors. The new executive believed that the bilateral treaties it wanted to negotiate should address many more issues of concern for American investors than the FCN treaties or other industrial countries’ BITs, aiming in particular at securing freer access to foreign investments while releasing them from performance obligations and other requirements.4 The US BITs provided protection for investments by US companies and companies based in the country of the treaty partner, as well as for investments of nationals of either party. The protection extended to investments of subsidiaries. In particular they stipulated that foreign investors should receive “national treatment”, that is, treatment no less favorable than that of domestic investors. The national treatment provision also implied that US investors were not to be compelled to accept minority shareholding or to surrender management control. Exceptions were permitted, but in such cases the most favored nation (MFN) principle, providing for non-discrimination between foreign investors, applied. The draft treaty, in line with US practice, also excluded an approval process for new foreign investments, which constituted one of the main irritants for American companies wishing to invest abroad. Innovating from both US FCNs and bilateral investment treaties made by other countries, the US prototype prohibited imposition of performance requirements such as minimum export and local content requirements. In this the draft treaty met the wishes of American companies investing abroad, although in its uncompromising rigor it might have exceeded their interests. Certainly, US investors were not willing to buy local products when they could import more functional and cheaper items from abroad, particularly from their parent companies or fellow affiliates. However, some firms might find it acceptable to submit to a minimum export requirement—especially when such an obligation was a condition for obtaining fiscal or other incentives from the host state— if this performance meant exporting cheap and therefore competitive products to their home country or abroad. Bilateral treaties were negotiated from a standard prototype, the existence of which was first announced in January 1982. It was later modified in the version released in January 1983 to take into account the experience of the negotiations conducted with Egypt and Panama. As regards prospective multilateral negotiations, there was a series of questions: which were the investment measures on whose trade-distorting effect a consensus might emerge, for instance only performance requirements or other kinds of restrictions, and were they to come under the scope of existing GATT (General Agreement on Tariffs and Trade) provisions or had new rules to be established? A third new goal mentioned by the statement was the defense of goods incorporating advanced US technology whose trade was deemed to be frequently distorted by various forms of government intervention, without having received sufficient coverage in the previous GATT round. No details, however, were given as to which way distorting foreign intervention occurred. As regards developing countries, the new administration declared that its aim was to integrate them more fully into the international trade system, also ensuring that the more advanced of them undertake trade obligations commensurate with their stage of development, while increasingly directing the benefits of differential trade treatment to the least developed countries. The trading dialogue was to be carried out “with the

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objectives of making genuine trade progress, to our mutual advantage”. Development, therefore, had to be achieved through and within the free flow of trade and presumably investment. No mention was made of unilateral forms of support. The foregoing concerned issues prevalently destined to be treated bilaterally or in the GATT. The statement, however, also mentioned an issue dealt with in the Organisation for Economic Cooperation and Development (OECD). The administration stated that it would prioritize the fight against subsidization of export credits by many trading partners and it would seek to renegotiate the existing rules on official export credits to substantially reduce, if not eliminate, the subsidy element and to conform credit rates to market rates.

Difficult beginning of negotiations in the GATT and the US stance The events that, inside and outside the General Agreement on Tariffs and Trade, led to the launching of the Uruguay Round in 1986 can be divided into two phases, broadly corresponding to the first and the second Reagan presidency. In both phases the United States acted as “demandeur”, with quite different levels of success. The high point of the first stage was the November 1982 ministerial meeting, which attracted the attention of the public and the criticisms of the media and of many political observers. Alan Oxley, a trade expert who became Australian ambassador to the GATT in 1985, argued that the failure of the 1982 ministerial meeting was the foreseeable upshot of the choice of a wrong date, falling in a moment of deep and widespread economic recession, and of an excessively ambitious and controversial set of proposals for which the United States was the main responsible party.5 Other observers pointed out that, in spite of the jerk of the 1982 ministerial, the United States, precisely during that GATT conference, managed to secure a consensus on cautious exploratory works that, together with a gradually more favorable diplomatic environment, provided the basis of the progress in the second phase and eventually of the successful launch of the Uruguay Round.6 It is arguable that the Republican executive deemed that it had little time to implement at multilateral level its ambitious project which had to satisfy the requests of several sectors of the US economy, from the major service companies to the great number of manufacturing industries that had moved part of their operations abroad to reduce costs and fight competition from foreign industries, and later to farm produce exporters that had growing difficulties in defending their presence in foreign markets. The Tokyo Round, launched under a Republican administration, lasted six years and became the achievement of a Democratic government. There was no reason to believe that a new round of multilateral negotiations tackling new and complex issues might take less time. There was no guarantee that Reagan’s mandate should be renewed, as during the unprecedented recession of 1982 the popularity of the government was far from its zenith. Yet, the prospects for a successful attempt were not completely bleak. The OECD ministerial meeting of June 1981 stressed the need “to improve and to liberalize conditions of international trade, including in those fields which had up to now a lesser

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part in the process of liberalization”. It also “welcomed the increased attention given within the Organisation to the service sector in view of the important role played by services in member countries’ national economies and in international trade”, and agreed to discuss a study on problems of agricultural trade in the next ministerial meeting.7 The United States found an ally in the GATT’s new director general, Arthur Dunkel, who wanted to give momentum to the trading system at a time during which, in his view, it seemed unable to cope with the pressures generated by rapid economic changes, financial disequilibrium, and the growing difficulties experienced by the developing countries. Dunkel claimed that, in spite of their differences, most GATT members were worried by the current drift in trade relations and that a number of governments had told him to encourage a political level meeting of GATT members to allow a frank assessment of the difficulties of the trading system and of the ways to cope with them.8 A further boost to the American ambitions was given by the Consultative Group of Eighteen. The Consultative Group, of which the United States and the EC were influential members, had been established in 1975, with the task in particular of following international developments with a view to the pursuit and maintenance of trade policies consistent with GATT’s objectives and principles, becoming a permanent body of the trade organization in 1979. In June 1981, the fifteenth meeting of the Consultative Group of Eighteen reached the conclusion that “it could be useful to consider at the political level the overall condition of the trading system” and that “to this end it would be appropriate for the GATT Contracting Parties to envisage convening a ministerial meeting during 1982”.9 The prospective ministerial meeting was the first in over nine years after the meeting that launched the Tokyo Round. According to the majority of the group, the declared objective was to give the GATT parties an opportunity to confirm their will to continue to support the multilateral trade system and to affirm their determination to maintain a forward-looking attitude in the face of current economic difficulties. The declared goal was rather open-ended and several members, though not all of them, stated that the meeting would not be called to launch a new round of negotiations. It was agreed that purposes and expected results of the prospective meeting should be clarified before it was called. A further meeting of the Consultative Group in October agreed that a GATT meeting at ministerial level should meet in November 1982 to review the implementation of the results of the Tokyo Round and “to review the current state of the multilateral trading system, and to consider how it might be improved and made more effective”.10 The date was endorsed by the general meeting of the contracting parties the following November, and in December a preparatory committee was set up with the task of making proposals on the agenda and providing documentation for the thirty-eighth session of the GATT parties to be held at ministerial level. The agenda gradually included a growing number of subjects. As regards the decisions to be taken by the trade ministers to improve the operation of the trading system in the near and medium term, the United States suggested that they should address the problems of trade in agriculture, the operation of the GATT dispute settlement, the reform of the safeguard discipline, and the trade problems of the developing countries.11 For agriculture, the United States sought a commitment in the ministerial meeting to address the implementation of a standstill on export

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subsidies and their phased elimination, as well as to tackle the other measures affecting international trade, including national support policies by the GATT members. For the longer term, the United States suggested that the trade ministers should agree on a new, more expansive work program, which should address: investment issues with particular focus on trade distorting practices such as performance requirements; the growing barriers to trade in services and the applicability of GATT articles and codes along with the need for new GATT rules; the review of practices affecting trade in high-technology goods. The attitude of the European Community towards the ministerial conference was rather cautious, even bordering on reluctance. Indeed, the EC member states, some of them in particular, were quite wary of reopening discussions on hard-won achievements in the Tokyo Round, while not seeing reasonable prospect of progress on issues of interests for which no deal had been struck just three years before. The Community also believed that the economic environment was far from favorable to a process of further liberalization as appeared to be the United States’ hope. The guidelines worked out by the Council of Ministers, on the basis of a negotiation scheme submitted by the Commission in July, argued that the task of the November meeting ought to be the reaffirmation of the willingness of the GATT contracting parties to oppose protectionist tendencies and to respect the spirit and the provisions of the General Agreement as well as the agreements reached during previous negotiations, and in particular in the Tokyo Round.12 Hence, there was no question of organizing new global negotiations on customs reduction or trade regulation, although there might be the possibility of limited accords covering particular sectors like public markets and civil aviation. As regards agriculture, new negotiations on the rules applying to the sector were excluded as the conclusions of the Tokyo Round held and had to be respected. France, the most critical of the EC member countries on the conference’s agenda, remarked that the economic crisis at the basis of trade difficulties had its roots in monetary disarray, and, therefore, the stabilization of exchange rates and a drop in interest rates should be among the objectives addressed in the November meeting. On the other hand, the Community showed interest in a long-period study program that might lead to a decision on the possibility of introducing international regulations in the service sector, and in drawing up a list of rules on investment measures capable of affecting international trade. The attitude of the developing countries on the new subject advocated by the United States was rather critical. As regards trade in services they had three main concerns: the perceived lack of a comparative advantage in traded services and, therefore, the fear that liberalization would lead to a surge in imports, hampering the development of indigenous service industries and exacerbating current account problems; the need to protect their infant service industries; and the fear that liberalization might affect national security and sovereignty.13 With regard to the issue of the effects on trade of performance requirements, many developing countries feared that the obligations and constraints they had not accepted in bilateral talks with industrial countries could get in through the back door of multilateral negotiations. The depth of the rift in perspectives and goals emerged during the drafting of the ministerial declaration, whose text remained heavily bracketed till the opening of the

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conference. In its final version the declaration, issued on November 29, consisted of a political statement and of a list of works to be undertaken after the closure of the meeting.14 In the political statement, the participants started by focusing on the difficulties encountered by the multilateral trading system because of the economic crisis to which the lack of convergence in national economic policies had contributed, and on the shortcomings in the functioning of the agreements reached in the Tokyo Round that such a situation underlined. The trade ministers, therefore, committed themselves to refrain from taking or maintaining any measure inconsistent with the GATT, to resist protectionist pressures in the implementation of national trade policy, to bring agriculture more fully into the multilateral trading system by improving the effectiveness of GATT rules, to improve the terms of access to markets, and to bring export competition under greater discipline. The second part of the declaration required the GATT to start work on a wide number of subjects, from reform of safeguards and review of the Tokyo Round codes to trade in tropical products, tariffs, rules on activities related to less developed countries, dispute settlement procedures, and rules on the textiles and clothing sectors. The results of these works, entrusted to several groups, had to be submitted to the GATT contracting parties mostly by their 1984 meeting and some by 1983. As noted by The Economist, studies and reports had provided the background for the launching of the Kennedy and Tokyo rounds.15 The group on agriculture was entrusted with a comprehensive examination of all matters affecting trade, market access, and competition and supply in farm produce, and in 1984 put forward recommendations on how the sector might be liberalized. The European Community, which made a number of qualifying statements on the ministerial declaration, underlined that its acceptance of the work program on agriculture was on the understanding that this was not a commitment to any new negotiation or obligation concerning agricultural products.16 On the other hand, two of the topics of particular interest for the United States, trade in high-technology goods and trade-related investment issues, were not included in the declaration. No mention was made of the possible extension of the purview of the GATT to the safeguard in international trade of intellectual property rights. The declaration only instructed the GATT Council to examine the appropriateness of joint action in the GATT framework on the trade aspects of commercial counterfeiting and the modalities of such action. As regards services, the declaration did not envisage an examination of the subject in the GATT, at least initially, but it only recommended that the parties to the General Agreement with an interest in services of different types should undertake examination of the topic and exchange information among themselves. The results of these individual examinations were to be reviewed at the 1984 GATT session also in order to consider whether multilateral action was appropriate. In the aftermath of the November GATT meeting, the United States renewed, with a certain degree of success, its diplomatic efforts. In December, the United States and the EC agreed to begin bilateral talks on farm issues. At the end of the Williamsburg summit in May 1983 the heads of state and government declared that “we will actively pursue the current work programs in the General Agreement on Tariffs and Trade (GATT) and the Organisation for Economic Cooperation and Development, including

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trade in services and in high technology products”, adding that “we have agreed to continue consultations on proposals for a new negotiating round in the GATT”. A year later, during the OECD meeting in May 1984, the participants agreed that a new round of multilateral trade negotiations would be “of the utmost importance to a strengthening of the liberal trade system and the growth of trade opportunities”. The ministerial communiqué also expressed concern for the disequilibria in a large number of farm products “due to a large extent to domestic support policies”. However, the participants of the meeting were careful to stress that thorough preparation for the prospective negotiations was necessary and extensive consultations with all GATT partners, implicitly including the developing countries, had to take place “so as to ensure a broad consensus on objectives, participation and timing”. The guidelines worked out in the OECD ministerial meeting were largely reproduced in the declaration of the G7 summit in London a month later.17 The United States’ efforts for securing a thorough reform of the current trading system, and, therefore, for a new round of multilateral negotiations, received adroit help from the GATT Secretariat through the appointment in November 1983 of a group of seven experts charged with identifying the fundamental causes of the problems afflicting the international trading system and the ways to overcome them during the 1980s.18 Dunkel, with the informal encouragement of several governments, nominated the group, chaired by Fritz Leutwiller, head of the Swiss central bank and president of the Bank for International Settlements and, to underline its independence while avoiding lengthy controversy over its membership, sought neither permission nor financing from the GATT member governments.19 The report of the group, issued in early 1985, was in agreement with most of the United States’ viewpoints, although it was far from endorsing all the American perspectives and trade practices.20 In particular, the report argued that subsidies had become the main source of unfair competition and that GATT was not, to the extent it should be, a forum where subsidy actions affecting trade could be discussed and differences over them resolved. Thus, clearer and more strictly defined rules were to be adopted for actions against subsidies and dumping, as they could be applied unfairly and result in harassment of importers. As regards agriculture, the report contended that the then ongoing GATT rules had failed to prevent major distortions in world markets and, therefore, in the long run export subsidization should be eliminated altogether. The report, however, stated that exceptions from the GATT provisions should be subject to strengthened rules. The exceptions to which the Leutwiller Report referred included restrictions maintained under past waivers, such as those granted to the United States. The experts also suggested that dispute settlements should be carried out in a more judicial way, which was in line with the American viewpoint. In agreement with the American perspective, the group contended that the prospective GATT negotiations should avoid a North– South debate approach. It argued that preferential tariff schemes in favor of developing countries were of little value, often distracting them from the fact that tariff escalation on semi-finished and finished products handicapped their exports, while tariff protection against imports from industrial countries could help their infant industries in the short term, but might turn counterproductive in the long run. What was needed was their integration into the trading system “with all the appropriate rights and

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responsibilities”. Discarding the developing countries’ fears, the report suggested that particular attention should be given to the integration of services into the GATT system, since, in the absence of a multilateral discipline, bilateral and regional rules would be developed segmenting the world market. On the other hand, the report was extremely critical of trade restrictions outside the GATT, such as VERs (voluntary export restraints) and OMAs (orderly marketing arrangements), the so-called “gray area”, and asked for prompt identification of such measures and their elimination over an agreed timescale. Likewise, trade in textiles and clothing had to be brought back within the normal GATT rules over a clearly defined time period. Finally, the report expressed strong support for the launching of a new round of multilateral negotiations as soon as possible, thus endorsing the American efforts.

Progress in the OECD The path for the United States towards the achievement of its objectives for the reform of the international trading system was much easier in the OECD. The Paris organization’s aim was to promote a consensus on the nature of the problems facing the member states and to coordinate strategy on policies to solve these problems. The members of the organization, with few exceptions, were industrial countries, which basically shared the same perspective on international trade issues. The EC was able to take part in some activities of the organization, coordinating its member countries, but chose not to replace them: each member had its voice. It was, therefore, much easier for the United States to find allies. Thus, the efforts of the United States to secure progress in other fora, nominally the GATT, were boosted by the consensus in the OECD. Yet, the OECD’s studies and policy recommendations were just such and did not have the binding force of a treaty. There was, however, a sector among the OECD competences in which binding agreements could be reached among the participating members: the extremely competitive area of officially supported export credits. The sector remained outside the scope of the GATT because the subject of the discussions was not subsidized products, but loans and guarantees that were used to support sales of goods and quite often to finance the carrying out of industrial projects in developed and developing countries. The Reagan administration achieved an initial partial success in the international trade sphere at the end of its first year in office by obtaining the agreement of the other members of the OECD group on Export Credits and Export Guarantees on an interim reform of the Arrangements on Guidelines for Officially supported Export Credits (currently known as the Arrangement) signed in April 1978.21 The temporary reform of the Arrangement cannot be simply ascribed to the new executive’s efforts to align officially supported credit to market conditions under the standard of liberalization. In fact, the efforts to bring a progressive approach to the market and the reasons behind them were a legacy of previous administrations, and it is also likely that these reasons were rather more practical than sheer liberalizing ideology. All OECD countries had public or semi-public banks borrowing from the Treasury or from the market and providing long-term credit for national exports. The American agency was the Export-Import Bank (Eximbank). In some cases, the export

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International Trade under President Reagan

credit agencies offered terms of repayment, nominally interest rates, more favorable than those available on the market. Till the beginning of the 1970s the United States, which traditionally had low domestic interest rates, opposed international limitation on facilitated loans, arguing that credit terms were an element of competition comparable to cheap labor and higher productivity. When, however, conditions changed with the oil crisis, which was ushering in current account problems for most developed and developing countries and, therefore, fiercer export competition, the United States pressed for regulation of officially subsidized export credits. The change in attitude of the United States was prevalently influenced by the particular institutional and market conditions in which the Eximbank, as a semi-private bank, had to operate, conditions that were less favorable than those of other export credit agencies in Japan and Europe, particularly France which was the main US opponent both in the international market and international institutions such as the OECD. While public agencies were required to provide financing at international competitive rates and received subsidies with which to do so, semi-private agencies like Eximbank had to provide competitive export finance, but also had to avoid losses. This was rendered more difficult by the gap between loan revenues and the cost of funds the agency needed to carry on its operations and by the uncertain availability of government financing. On the other hand, Eximbank was favored by the depth of the American market in providing long-term funds, which by far exceeded those of the countries on the other side of the Atlantic. This allowed the agency to offer loans with very long terms of repayment, which obviously made them attractive.22 The 1978 Arrangement set a floor on interest rates charged on official export credits: from 7.25 percent to 8 percent, according to the terms of the loan and the level of development of the borrowing country. The maximum period of repayment was fixed at ten years for less developed countries and eight years for other countries. The guidelines also provided for a down payment not lower than 15 percent of the value of the goods being financed. They were viewed as a compromise between France, which was competitive on interest rates, and the United States, whose strength was in the long period of repayment. The Arrangement was not concerned with export of aircraft, agricultural goods, and nuclear energy products. There were, however, several problems, at least from the US perspective. The guidelines were set before interest rates soared in 1979 and 1980 and there was no mechanism of adjustment to changes in market conditions. In addition, the minimum interest rates applied uniformly to lending in all currencies despite differing inflation and exchange rate prospects. The United States complained that the Arrangement as it was was unable to effectively cope with subsidization and made it difficult for Eximbank to match foreign competitors in a period in which financing was becoming a major factor in export sales. No substantial progress in the negotiations to reform the Arrangement was made in 1979 and 1980, and 1981 started inauspiciously as the Reagan administration at the beginning of the year declared a moratorium on Eximbank lending, which was only lifted in July. However, in October the participants to the Arrangement agreed to increase the interest rates of officially supported export credit and to slightly differentiate between currencies. In particular, interest rates were increased by 2.5 percent, except for credits to relatively poor countries repayable after five years, for which the increase was only

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2.25 percent.23 Japan, whose commercial interest rates were below the newly agreed minimum rates, was subject to a minimum rate of 9.25 percent. A second interim reform was agreed in July 1982 which modified the groups of receivers of officially supported export credits and transferred several countries to more restrictive categories. For instance, Brazil, Cuba, Mexico, Nigeria, and Taiwan, previously classified as poor countries, were graduated to intermediate, while the USSR, Bahrain, Czechoslovakia, the German Democratic Republic, Israel, Ireland, and Spain were included among the relatively rich countries. The temporary modification to the Arrangement increased the minimum rate and introduced, with effect from October, a non-derogation clause prohibiting variations in minimum rates and maximum durations. The clause was directed in particular to the Eximbank which, since the signing of the Arrangement in 1978, had derogated on thirty-four occasions by extending repayment terms to increase competitiveness. The interim 1982 agreement was substantially incorporated into the Agreement reached in October 1983.24 The new arrangement provided for three categories of countries: relatively rich countries, having per capita GNP over $4,000; intermediate countries with per capita GNP between $681 and $4,000; and relatively poor countries with per capita GNP below $681 or eligible for concessional lending by the International Development Association of the World Bank. The minimum rate of interest varied according to the country type and the repayment period, which could not exceed ten years. The arrangement established a mechanism of automatic adjustment of the minimum interest rates to occur every six months to reflect changes in the market rates of interest. The adjustment was triggered when a change of at least one-half of 1 percent occurred in an internationally weighted average interest rate. A process of upward adjustment beginning in July 1985 was also introduced in order to bring the minimum interest rates more in line with commercial market rates. The October 1983 Arrangement substantially met the US goal of achieving greater flexibility of minimum interest rates in officially supported export credits and their progressive alignment to the market. However, the agreement did not extend to many sectors, including nuclear power equipment, commercial aircraft, and farm products. In August 1984 an agreement on guidelines on credits for exports of nuclear power equipment was made, which was substantially modeled on the 1983 arrangement. A further sectoral agreement on the financing of civil aircraft sales entered into force two years later. The arrangement, however, laid down conditions different from those generally applied, notably as regards interest rates and repayment periods.

US stance on multilateral development diplomacy The perspective of the Reagan executive clashed, much more openly than the previous administration, with the view of the developing countries on the role of trade and investments in fostering development. Developing countries generally argued that unregulated free markets work to their disadvantage and, therefore, regulation is needed to achieve a more equitable international system. The United Nations Conference on Trade and Development (UNCTAD), in which the voice of the

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developing countries united in the Group of 77 was particularly influential, advocated stabilization of world prices at profitable levels for primary products exports; improved and preferential access to northern markets for manufactured goods from the South; a greater share for the South in the world’s industrial capacity and production; rules to govern foreign investments; and the operation of multinational firms as well the transfer of technology.25 Most, though not all, developed countries tended to invoke the tenets of neoclassical economic theory to oppose international regulation of market forces. The United States was at the forefront of the opposing industrial countries. The US perspective on trade and aid relations with the developing world and its distance from the demands of the non-industrialized countries were unequivocally expressed during the North–South Summit held in Cancun in October 1981. In his diaries Reagan wrote that the United States “can’t agree to the demand by the underdeveloped countries to enforce a share of the wealth policy on industrial nations”.26 Dashing the hopes of most developing nations, in Cancun the president made it clear that talks on developments should be based on “an agenda composed of trade liberalization, energy and food resources development, and improvement in the investment climate”.27 He agreed that the “talks should respect the competence, function and powers of the specialized international agencies”, adding, however, that “we should not seek to create new institutions”. Therefore, the program put forward by the United States was concentrated around the following principles: stimulating international trade by opening up markets; tailoring developing strategies to needs and potentials of individual countries and regions; developing self-sustaining productive activities, particularly in food and energy; and improving the climate for private capital flows, particularly private investments.28 The contraposition became more open during the sixth session of UNCTAD, held in Belgrade from June 6 to July 2, 1983.29 On the issue of the world economic situation, with particular emphasis on development, the United States dissociated itself from the statement approved by the conference, arguing, without diplomatic gloves, that it was “too negative, one sided and in places too ideological to be accepted”. The report adopted by the conference had stressed that the global recession had particularly affected the developing countries and that measures to foster the recovery in the developed marketeconomy states would not suffice “and it could be aborted unless these policy measures addressed both the revitalization of the world economy and the reactivation of the development process in the developing world”. Several industrial countries were critical of various points of the statement but did not dissociate themselves. The US delegation was the only one to vote against a draft resolution on compensatory financing of export earnings shortfall, contending that earning stabilization was an overall balance of payments issue and, therefore, should be addressed in the IMF and not in UNCTAD and that the resolution would represent “a serious attempt to exert pressure on deliberations in another international organization”. As to the subject of trade in goods and services, the United States voted against the part of the draft resolution concerning services because, in stark contrast to the position of the Group of 77 denying any role of the GATT, it believed that complementarity between GATT and UNCTAD in this area should be dealt with much more adequately. The US delegation, along with the other participants of the conference, approved the draft resolution on implementation

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of the Integrated Programme for Commodities (IPC) in the area of stabilization and strengthening of commodity markets. In 1976 the fourth session of UNCTAD had unanimously adopted resolution 93(4), which called for an integrated program to improve the terms of trade of developing countries and to eliminate the economic imbalance between them and the industrial nations. The centerpiece of the IPC, which covered several commodity agreements, was to be a common fund conceived as a device to support the financial operations of the various commodity organizations. The United States had duly signed the agreement establishing the fund in June 1980, but had not ratified it. In Belgrade, though approving the draft resolution, the US delegation stressed that it had joined in the consensus “as a symbol of its continuing willingness to abide by conference resolution 93 of May 1976 and to participate constructively in the Integrated Programme for Commodities”, but that this was “despite its well known reservations on the need for more price stabilization agreements and despite a number of difficulties with regard to the wording of the resolution”. The last clash with an organization representing the interest of developing countries occurred a few months before the end of Reagan’s first mandate. At the closure in Vienna of the fourth general conference of the United Nations Industrial Development Organization (UNIDO) in August 1984 the United States withheld its acceptance of the final text of the conference report. The report, among others, dealt with the relative responsibilities of different countries and groups of countries for recent problems in the world economy, the policy orientations required to accelerate development, and the serious nature of the debt problem and the question of high interest rates. The United States refused a compromise solution whereby it would make a statement dissociating itself from the text, while other countries might make interpretative comments, and called for a vote. The report was adopted by seventy-nine votes for, twelve abstentions, and one against.30

Notes 1 2 3 4 5 6 7 8 9

Twenty-fifth ARPTAP, 1980–1981, 5–9. Jeffrey J. Schott, “Protectionist Threat to Trade and Investment in Services”, The World Economy, Vol. 6 (1983) n. 2, 198. William E. Brock, “A Simple Plan for Negotiating on Trade in Services”, The World Economy, Vol. 5 (1982) n. 3, 234. See Kathleen Kunzer, “Developing a Model Bilateral Investment Treaty”, Law and Policy in International Business, 15 (1983), 279 et seq. Alan Oxley, The Challenge of Free Trade (New York and London: Harvest Wheatsheaf, 1990), 65. John Croome, Reshaping the World Trading System. A History of the Uruguay Round (Geneva: World Trade Organization, 1995), 12. The text of the ministerial meeting’s declaration is reported in the Twenty-fifth ARPTAP, 1980–1981, 46. John Croome, Reshaping the World Trading System, 11–12. General Agreement on Tariffs and Trade (Hereinafter GATT), Fifteenth Meeting of the Consultative Group of Eighteen. GATT/1291, June 26, 1981.

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10 GATT, Sixteenth Meeting of the Consultative Group of Eighteen. GATT/1297, October 16, 1981. 11 Twenty-sixth ARPTAP, 1981–82, 64. 12 Minutes of the 789th Council of Ministers, July 19–20, 1982; minutes of the 807th Council of Ministers, November 22–23, 1982. 13 Jeffrey J. Schott et al., “Trade in Services and Developing Countries”, Journal of World Trade Law, Vol. 20 (1986), n. 2, 259 et seq. 14 GATT, Ministerial Declaration. GATT/1328, November 29, 1982. 15 The Economist, December 4, 1984. 16 Bull.EC, 11-1982, point 1.1.1. 17 OECD Ministerial Communiqué (1984). Text reproduced in appendix G of ARPTAP 1984–85, Twenty-eighth issue. 18 GATT Focus, December 1983, 1. 19 John Croome, Reshaping the World Trading System, 20. 20 Trade Policies for a Better Future: Proposals for Action/Chairman Fritz Leutwiller (Geneva: GATT, 1985). 21 Janet West, “Export Credits in the OECD”, in OECD Smart Rules for Fair Trade: 60 Years of Export Credits, OECD Publishing, 2010. http://dxdoi. org/10.1787/9789264111745-4-en (accessed June 2, 2019). 22 See Andrew M. Moravcsik, “Disciplining Trade Finance: The OECD Export Credit Arrangement”, International Organization, Vol. 43 (1989), n. 1, 181; also Patrick A. Messerlin, “Export-Credit Merchantilism à la Française”, The World Economy, Vol. 9 (1986), n. 4, 388. 23 OTAP, 33rd Report, 1981, 78. http://www.usitc/publications/332/pub1308_old.pdf (accessed June 2, 2019). 24 OTAP, 35th Report, 1983, 119. http://www.usitc/publications/332/pub1535.pdf (accessed June 2, 2019). 25 Thomas G. Weiss, Multilateral Development Diplomacy in UNCTAD. The Lessons of Group Negotiations 1964-84 (New York: St. Martin’s Press, 1986), 36. 26 Ronald Reagan, The Reagan Diaries (London: HarperCollins, 2007), October 15, 1981. 27 PPPUS—Ronald Reagan 1981, Statement at the First Plenary Session of the International Meeting on Cooperation and Development in Cancun, Mexico, October 22, 1981. 28 Ibid. 29 Proceedings of the United Nations on Trade and Development. Sixth Session, Belgrade June 6–July 2, 1983. https://unctad.org/en/Docs/td326vol1_en.pdf. 30 Bull.EC 7-8-1984, points 2.2.31–2.2-34.

3

Trade and Foreign Policy: Central America and the USSR

The Caribbean Basin Initiative (CBI) and the Siberian Natural Gas Pipeline (SNGP) quarrel with the West European allies are to be set in a different class from those of the steel and car arrangements or the Multifiber Arrangement, which will be dealt with in the next chapter. The question is: what are the factors that set the CBI and the SNGP apart from those affecting particular US industries and can such factors be viewed, from a historical analysis, as embracing both of them? Actually there is no doubt, as we shall see below, that distinctions must be drawn between the Caribbean Basin Initiative and the SNGP quarrel. In the first case the US administration put forward a new vision, of aid to development, whose main target was an area not far from the US border, whereas in the second case the issue seemed to boil down to a clash with Western allies about economic relations with the Soviet Union and was centered on a project far away from the US border. Additionally, the CBI gave a pivotal role in the development of the Central American and Caribbean countries to investments by US firms rather than by public financing, and gained the support of a large sector of the industry. In contrast, the restrictions imposed on the SNGP excited the opposition of the American corporations that had an interest in the development of the Siberian gas project. On the other hand, they were both marked by the fact that, in contrast to automobiles, steel, and other cases, they were not the administration’s response to the plights and claims of industries with powerful lobbies in Congress, but the outcome of decisions autonomously taken by the executive, being among the very first policies to be worked out in the National Security Council. And in both cases trade, or more exactly its pattern and direction, was an instrument for wider goals: the Caribbean Basin Initiative aimed at strengthening US control over Central America and at withstanding infiltration from the Soviets and their allies. The opposition to the SNGP was directed at weakening the Soviet economy and preventing West European countries’ dependence on energy supply from the USSR, which could put a wedge on Western solidarity.

The Caribbean Basin Initiative (CBI) The Caribbean Basin Initiative (CBI) is the first approach to trade liberalization under Reagan’s ideological leadership. It illustrates the Reagan administration’s philosophy on 53

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development strategy, which gives priority to private enterprise over large-scale multilateral financial engagements. Above all, it is an example, perhaps the first, of the president’s tendency to utilize economic strategy for wider political objectives, in particular withstanding and rolling back alleged communist threats to American supremacy at global or, as in this case, regional level. It was also an occasion for the president to show his political eloquence at both international and domestic levels. Certainly, the results were far from matching Reagan’s ambitions and rhetorical ability, but it could be argued that they might have been more satisfactory if the executive’s economic strategy had not been curbed by Congress and various components of the American industry whose interests were not in line with the administration’s perspective. The situation in Central America, including the Caribbean Basin, was the subject of the first National Security (NSC) meeting of the Reagan presidency. Opening the discussion, the assistant to the president for national security affairs, Richard Allen, pointing out the threat put out by Cuba and the deterioration of the situation in the area, particularly in Nicaragua and El Salvador, stated that “if the President so directs, we could develop an overall policy for the Caribbean Basin within about four months . . . . Such a policy would, among other things, involve finding ways to cope with the Cuban problem, the situation in El Salvador, the question of foreign assistance and the transfer of technology to the area”.1 In May, the secretary of State, Alexander Haig, submitted to the NSC a State-drafted paper which focused on improving economic conditions in the region and on strengthening internal security by providing security assistance to friendly governments. Reagan asked for time to “read and digest the essence of the proposal”.2 In June, a Trade Policy Committee (TPC) was established to develop a specific policy proposal. The TPC, however, was headed by the USTR William Brock, while Haig was charged with organizing the CBI’s multilateral aspects. The United States quite soon started to solicit the participation of other major countries in the Western hemisphere to the political and economic reinforcement of the Central American governments. Reagan met the Canadian prime minister, Pierre Trudeau, in January and the Mexican president, José Lopez Portillo, in March. The US secretary of State and the USTR met the foreign ministers of Canada, Mexico, and Venezuela in Nassau to develop concerted efforts for the recovery of the area. However, the four countries did not share the same outlook on the problems of the Central America states and on how to support them. Canada emphasized the need to increase public development aid, while the United States was to give priority to the role of private investments. Mexico and Venezuela supported the Nicaraguan government, while looking with suspicion to Duarte’s government in El Salvador, and Mexico had good relations with Cuba and favored its inclusion in the recovery programs. Hence, there was no joint participation in a single project, but a plurality of programs carried out by the three states, although with a common final objective. Canada pledged to expand its foreign assistance to the region and announced financial aid and concessionary trade policies. Mexico and Venezuela established a joint oil facility, to provide low-interest loans to Caribbean Basin countries, which was to be financed through their sales of oil products. Later, Colombia too offered its support through a technical assistance program and announced plans for greater financial aids and more concessionary trade policies.3

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If the president and the main members of the executive were willing to have cosponsors of the development of the Central America countries so as to present the CBI as a multilateral initiative, they were utterly opposed to its internationalization under the supervision and therefore interference of new agencies created in the context of the North–South dialogue. Nor did they want the commitment of a large amount of American public funds as had been the case in the Alliance for Progress under Democratic administration, assigning instead a pivotal role to private initiative, in line with their wider economic philosophy. The development program established by the Republican administration for the region was based on the following principles: stimulating international trade by opening up markets; developing self-sustaining productive activities, particularly in food and energy; and improving the climate for private capital flows, particularly private investments, above all from the United States. And obviously the grant of American benefits had to be conditional on compliance with US goals and interests. The venue chosen to introduce, with political pomp, the CBI to the world was a meeting of the Permanent Council of the Organization of American States (OAS). Illustrating his plans for supporting the economy of the Caribbean Basin and Central American states, Reagan stressed that these countries were under economic siege, adding that “economic disaster has provided a fresh opening to the enemies of freedom, national independence and peaceful development”.4 According to Reagan, the recovery of these countries could not rest only on economic assistance but had, prevalently, to be based on “the strength of market-oriented policies and vigorous participation in the international economy”. The key was in unhindered access to potential importers, nominally the United States, which in turn would attract investments. The development program consisted, therefore, of three prongs, the centerpiece of which was free access to the US market for twelve years. It was true that most of Caribbean and Central American exports already entered the US market free of duty under the Generalized System of Preference, but these exports covered only the limited range of existing products, not the much wider range of potential products that investments attracted by this opportunity might develop. The only exception would be textile and apparel products, as they were already covered by other international agreements, i.e. the Multifiber Arrangement, though the US executive would provide more liberal quota arrangements to the countries in the Region. The second plank was the provision of tax incentives to encourage American investments in the region, along with the negotiation of bilateral investment treaties aimed at creating a safer environment for US firms that were considering establishing affiliates or branches in the area. The third primary element was a supplemental fiscal year 1982 aid appropriation of $350 million, mostly directed to the private sector to assist the countries in most serious economic distress. Actually, the amount to be committed was quite limited, almost inconspicuous if compared with the billions of dollar invested in the Alliance for Progress. There was also the promise of technical assistance and training. A month later, Reagan transmitted to the Congress a bill on the economic recovery of the Caribbean and Central America states.5 As regards accession to the American market, the proposed legislation made it clear that it was a one-way free trade offer; that is, no reciprocity was requested. To the exclusion of textiles and apparels it added

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the application of quotas on sugar, at least as long as a sugar price support program was in effect in the United States. A minimum amount of local content (25 percent) was also required for the products to enter duty free in the United States: the bill also envisaged an extension of the 10 percent tax credit applying to investments in the United States to those in the area. Actually, investments, nominally American investments, were the real centerpiece of the Caribbean Basin Initiative. The duty-free provision and the tax credit were both aimed at attracting American investors without whose capital no real development was foreseeable. Finally, the bill envisaged the above-mention $350 million for the 1982 fiscal year. The executive also informed Congress that further development assistance funds for the fiscal year 1983 and beyond would be increased to ensure adequate funding for private sector initiatives. Clear evidence that the Initiative, as admitted by the administration, had goals wider than simple economic development, the lion’s share (over 36 percent) of the $350 million was to be destined to one country, El Salvador, confronting a leftist guerrilla, irrespective of the fact that the country fronted the Pacific Ocean rather than the Caribbean Sea. Meanwhile Reagan, the shrewd politician, canvassed the business community to show to the American public its support to the initiative and to use its sway in lobbying congressmen.6 In July 1982 a CBI coalition was established, headed by banker David Rockefeller along with the CEOs of the Landmark Banshare Corp. and of the Internorth Inc. and Trustees of CCAA. Hundreds of business leaders attended the gala held by the OAS Pan American Union, during which Reagan, after an overview on how the administration intended the proposed initiative to help the countries in Central America, declared that he intended to personally lead “the effort to assure passage of this vitally needed legislation before the summer recess”.7 Actually, most members of the coalition had moved or were about to move to the region, the CBI being only the cherry on the cake. American firms, in particular electronics and pharmaceutical multinational corporations, were relocating their operations from East Asia which was increasingly becoming a preserve of Japanese corporations. Central America and the Caribbean islands offered a series of advantages, from the proximity to the big US market, thus lowering transport cost, to inexpensive and stable labor supply and the availability of export processing zones offering numerous tax incentives.8 However, if the Lobby in favor of the CBI was powerful and well organized, many aspects of the CBI proposal met the opposition of some business groups and labor unions. The opponents feared that goods from the CBI area might undersell US products and that many firms, in the absence of offsetting tariff and fiscal disadvantages, would shift production to the area. The unions were especially critical of the tax provision, arguing that it would run counter to the administration’s policies of encouraging business investment in the United States and that such tax breaks might be easily exploited, providing windfalls for business that established branches in Central America and the Caribbean islands.9 Farm groups were worried by the threat of competition from CBI growers of fruit and winter vegetable. Liquor producers in Puerto Rico and the Virgin Islands were concerned that increased rum imports from their Caribbean neighbors might force the closure of some of their distilleries. As regards the CBI section concerning aid, the critics pointed out that the funds the

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administration planned to commit would not offset the ongoing outflow of private capital from the region and were, in turn, offset by the curtailment of the US contribution to multilateral bank programs in Latin America which the executive intended to carry out. Secondly, they claimed that the funds earmarked in the administration’s proposal favored excessively some Latin American states, El Salvador in particular, and were mostly slated for short-term balance of payments support rather than for projects helpful to overcome the structural problems hampering development in the region. Consequently, the Way and Means and Foreign Affairs Committees in the House of Representatives and the Finance and Foreign Relations committees in the Senate rejected or reformed some key provision of the proposed legislation.10 In 1982 the US Congress approved only the requested $350 million for emergency economic aid to the region, but did not enact the two economic prongs of the CBI. The statute was submitted again, with amendments, the following year and on August 5, 1983 Congress enacted the legislation, under the title of Caribbean Basin Economic Recovery Act (CBERA), which granted the president authority to eliminate import duties on certain articles produced in the geographically enlarged Caribbean Basin, subject however to several conditions, and provided certain fiscal benefits to businesses in the region. The number of countries potentially eligible for the provisions of the CBERA was twentyseven, but the president could not designate as beneficiaries countries whose trade policy harmed US commerce, or who did not assist the US in controlling narcotics trade originating from or passing through their borders. The president was also prevented from designating countries that did nor recognize arbitral awards in favor of US citizens or had seized properties owned by US citizens or by any corporation more than 50 percent owned by US citizens, as well as countries that had broadcast US copyrighted material without the consent of the US owner. Finally, as expected, no communist country was eligible. However, some of these exclusions might be disregarded if the president determined that it was in the national or security interest to do so. Cuba was excluded from the outset from the list of potential beneficiaries, but Nicaragua was not cancelled from the list. To be eligible for duty-free, the articles had to be the growth, product, or manufacture of a beneficiary country and be imported directly into the customs union of the United States. Additionally, to prevent the possibility of pass-through operations, the articles had to show at least a 35 percent value-added in the area, 15 percent of which, however might consist of US components. Articles for which the processing operations were the result of mere combining or packaging were not eligible. Safeguard measures were included in the Act to protect, if necessary, American industries. However, unlike Generalized System of Preference exports, there was no so-called competitive need exclusion for products exported by the Central American countries. The competitive need exclusion, dating back to the Trade Act of 1974, provided that if a GSP beneficiary became a significant supplier of a particular product to the US market, it might lose its GSP status in respect of that product. The products excluded from duty-free treatment were petroleum and petroleum products, mostly from the Netherlands Antilles, which in 1983 totaled about $5 billion, that is, over 50 percent of US imports from the area, textiles subject to the Multifiber Arrangement, certain leather products, footwear, and

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canned tuna. As regards tax benefits, the CBERA allowed US citizens the same tax deduction for conventions held in eligible Caribbean countries as allowed for US conventions, provided the nations had entered into a tax treaty with the United States. There was, however, a fundamental question: was the regional scheme put forward by the Reagan administration, and adopted with amendments by Congress in the CBERA, consistent, or more exactly fully consistent, with the provisions of the General Agreement on Tariffs and Trade? According to the United States, the CBERA fully reflected the principle of more favorable treatment to less developed nations codified by GATT. Yet, as the Act was only aimed at countries of a specific region, it did not fall within the four cases envisaged by article 2 of the so-called Enabling Clause (Tokyo Round Agreement on “Differential and More Favourable Treatment, Reciprocity and Fuller Participation of Developing Countries” of November 28, 1979) to grant more favorable treatment only to developing countries in derogation of the MFN principle. In particular, it did not fit with the first section of the mentioned article according to which preferential tariff treatment may be given to products from developing countries in accordance with the Generalized System of Preference (i.e. it must be generalized, and non-discriminatory).11 The possibility of overcoming this legal obstacle was seen by the United States in footnote 2 of Article 2, according to which the principle of more favorable treatment of developing countries, in derogation of the most favored nation clause, might also apply to other cases considered by the members of the General Agreement on an ad hoc basis under the GATT provisions for joint action. On this basis, the United States requested a waiver for the CBERA under GATT Article 25, paragraph 5 providing that, in exceptional circumstances, the contracting parties may waive an obligation imposed upon one of them by the approval of a two-thirds majority of the votes cast if such majority comprised more than half of the contracting parties.12 The waiver was requested for eleven and three-quarter years; that is, the residual duration of the Act. On November 21, 1983, a working party with open membership was established to examine the waiver request. The United States argued that the exceptional circumstances justifying the waiver were economic and legal as the economic recovery of the fragile economies of the region required the prompt support of policies aimed at achieving sustained investment and growth rate. The United States also emphasized that the dutyfree provision of the Caribbean initiative would not create barriers to trade with other trading partners nor impede the growth of imports from developing countries outside the area. The reception of the US request was generally favorable. Notwithstanding, criticisms on certain aspects of the waiver demand were expressed by various GATT members. Some argued that the CBI constituted a move towards regionalism and a derogation of the principle of non-discrimination outside the exception of GATT Art. XXIV on free-trade areas and customs unions, thus entailing the possibility of significant negative effects for other GATT members. Others noted that the Act contained elements that permitted discrimination on the basis of non-economic criteria. Yet others stressed that the grant of the waiver did not imply that any GATT party might not seek redress if it deemed that its trade interests had been impaired, particularly if trade diversion affected tariff concessions. Many members of the working party, although not opposing the waiver, expressed the view that, in accordance with GATT Art. XXV, paragraph 5,

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terms and conditions should apply, among which regular reports on CBERA implementation so as to guarantee its transparency, analysis of the trade consequences of the Act, periodic reviews, and prompt consultations with interested GATT members. After three meetings of the working party, a draft decision of the proposed waiver was worked out. The report of the working party was then adopted by the GATT Council and the draft waiver was sent to the GATT members to be voted on during their fortieth session in November. The vote was, however, postponed and took place by postal ballot, resulting in the adoption of the waiver. Given the international importance that the administration conferred to the Central America initiative, and the debate that followed both within and outside the United States, the question from a historic viewpoint should concern the prospective impact on the economy of the region at the moment the executive proposal became law, although with the caveat that the president himself had been careful to point out that the CBI benefits would not develop immediately. In 1981, just before the launching of the CBI, the exports from the region to the United States totaled $9,889 million, of which $7,024 million were dutiable, while $2,875 million were duty-free, $550 million being GSP products.13 In 1983, exports to the United States amounted to $9,006 million, of which $6,237 were still dutiable, little less than $5,100 million being constituted by products excluded from duty-free treatment under the CBERA, while $2,769 million were duty-free, 21 percent of which were GSP items. Thus the value of new products that, prospectively, might enter dutyfree totaled about $1,100 million, i.e. about 12 percent of exports at the time. The industries most likely to benefit from the CBERA were those that manufactured products already imported in significant quantities by the United States, nominally certain electrical products, certain tobacco products, and rum.14 Estimates worked out by two American economists—which, however, gave beef exports a greater weight than rum exports—projected a meagre increase of about $109 million in imports from the area, of which $102 million would be due to trade creation and $7 million to trade diversion.15 A source of hope might derive from a strong increase in investments, but the fiscal boost provided by the original government proposal had been curtailed by Congress and the potential attraction of the area was strongly influenced by its political environment, which during the Reagan years was not to show significant improvements.

The US–West Europe quarrel on the Siberian Natural Gas Pipeline (SNGP) Unlike the grain embargo ordered by Carter after the Soviet invasion of Afghanistan, there was no direct cause–effect relation between the imposition of martial law by the Polish prime minister, general Vojciech Jaruzelski, and the imposition by the Reagan administration of an embargo of gas and oil equipment and technology produced in the United States to the Soviet Union, which turned into a clash between the United States and its Western European allies. Actually, the deterioration of the situation in Poland was the casus belli that allowed the United States to implement measures aimed at the Soviet Union, which the executive had been debating since Reagan was sworn in.

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The clearest testimony was given by the president himself, who, in a meeting of the National Security Council during the hottest phase of the wrangling with the European allies, stated: “Our pipeline position has to do with European exposure. Poland gave us a reason to act. There is more at stake here than Poland.”16 The Soviet Union in the last years of the Brezhnev era was characterized by growing stagnation of the economy. This was an opportunity that the incoming Republican administration did not want to lose. In the first place the increasingly apparent economic weakness of the USSR worsened its position in the renewed arms race with the United States, in spite of the fact that, according to the estimates of western experts, as much as 10–15 percent of GNP was devoted to the military industrial sector. It increased the technological gap with the West. It constrained the room for maneuver of the political elite in the international arena. Finally, the stagnation of the economy was a political embarrassment for the Soviet leadership, which might lead to an unspecified change in the regime. In short, the Soviet economy had to stew in its own juices and, if possible, be squeezed. Imports had been a traditional lifeline for the USSR economy, providing goods that the Soviet Union was not able to produce, or to produce with sufficiently sophisticated technology, such as chemical equipment, which in turn had allowed the doubling in production of ammonia, nitrogen fertilizer and plastics, plant for car production, computers, and pumps and pipeline equipment, which had made possible enhanced exports of oil and gas. As regards in particular military capability, imports had allowed the USSR to enhance production and technical sophistication of its weapons system, to expand industries of particular importance for military production, and, more generally, by easing economic problems, to allocate more resources to the arms race.17 Imports from the West were paid for with hard currency, the sources of which had changed in the course of the 1970s. In 1971, energy constituted only 25.9 percent of hard currency earning; in 1981, the share of energy increased to 68.5 percent.18 Besides, the composition of energy exports showed a growing shift from oil, dominant during the price hike of the 1970s, to gas. A second source of import financing was constituted by, often government-backed, credit. Quite soon, the Republican administration started to examine whether the existing measures implemented by the Coordinating Committee for Multilateral Export Controls (CoCom) and the US legislation and administrative practice on exports to the Soviet Unions were in line with the harder approach the new executive wanted to follow in its political and economic relations with the USSR. During the NSC meeting on July 6, 1981, three options on export of US products were discussed. Option I would maintain existing controls on equipment and technology; option II would add to the controlled items equipment and technology critical to military related industries; option III would control all military relevant technology.19 The participants expressed a general preference for option II, but this masked strong differences in attitude on the scope of such controls. On one side, the hardliners, headed by Defense secretary Caspar Weinberger, wanted to “strengthen implementation of option II by an ad hoc examination of things under option III”, irrespective of the sentiments of US allies.20 In contrast, the secretary of Commerce, Malcom Baldrige, pleaded for a more practical approach that should not handicap US exporters by which “we should go for option

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II—tighten controls at the top (the higher technology) loosening at the bottom on routine items”.21 Baldrige’s point of view was shared by the Treasury secretary and by the USTR. Lionel Holmer, undersecretary in the Department of Commerce, later argued that “controls on export of civilian products and technology were excessive, and the policy seemed driven by the Pentagon desire to impose economic hardship on the Soviet Union, the Eastern Bloc and the People’s Republic of China”.22 Within this frame, the exports of equipment and technology for exploration, extraction, and transport of gas and oil, and chiefly the gas pipeline, had their own particular features. Firstly, they, save for rather limited cases, offered no chance of direct exploitation for military purposes. Secondly, the supply of these kinds of equipment was prevalently a business for firms located in Western Europe, though American and Japanese companies were also interested in supplying the Soviet Union with equipment for gas and oil projects. As specifically regards the SNGP for both economic and political reasons, West European governments were involved in supporting the project, and backed its financing. For the Europeans, availability of Siberian gas meant reduced dependency on unreliable and more expensive oil supply from OPEC countries. The SNGP project involved the construction of the longest pipeline in the world, stretching from the Urengoi field in the Yamal peninsula in Western Siberia to West Germany, France, and Italy via Czechoslovakia. It also meant a boost for some of its key industries at a time when its GDP and industrial production growth rates were at their nadir while unemployment was rising. Several major West European companies had won contracts for the supply of the equipment. The list included the German Mannesmann, AEG-Kanis and Demag, the French Valourec and Alsthom-Atlantique, the German–French Mannesmann Creusot-Loire Consortium, the Italian Italsider and Nuovo Pignone, the British John Brown Engineering, and others. Also, Japanese companies, such as Sumitomo, Nippon Kokan, and Kawasaki took part in the project. By 1981, Western Europe along with Japan had extended approximately $13 billion credits for the gas export pipeline, excluding pipes, which covered about 85 percent of the equipment contracts. West Germany, Italy, and France had each extended almost two-thirds of the credits offered, which were all government guaranteed.23 Also, the UK provided facilitated loans for the project. Credits for pipe were to be negotiated annually at market rates of interest. In many West European countries, and in particular in the Federal Republic of Germany, the SNGP project was also seen as a way to contribute to the detente with the Soviet Bloc. The USSR, in turn, was expecting to enhance its strongly needed hard currency revenues from the mid-1980s. In the eyes of the Americans, however, the USSR–West Europe deal had severe drawbacks. It would increase the dependence of Western Europe on Soviet-supplied energy, while strengthening its economic links with the Soviets, which could be exploited by the latter as a way to economically blackmail its Western counterpart, and possibly weakening trans-Atlantic solidarity. A particular irritant for the United States was the use of publicly subsidized loans to support Western European firms engaged in the project. A political observer sympathizing with the Pentagon attitude, in a later stage of the events even argued that the use of such loans was lowering the cost of the SNGP for the Soviets while secretly raising it for the European states providing the funds, which was allegedly in violation of the

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basis on which the North Atlantic Treaty Organization functioned; that is, preventing the Soviet Union from exploiting the industrial potential of Western Europe.24 It can be doubted, however, that the US hatred for subsidized export credits to the USSR by West European countries was also motivated by the feeling that European firms might displace American companies having an interest in the gas project. With various levels of severity, the hardliners favored a general ban on items that might be utilized in the project, while the pragmatists, from the Department of State to the Department of Commerce (DOC) and the USTR, leaned towards a case-by-case examination of the items to be exported, or to a general prohibition of high-technology export. They also expressed the opinion that restrictions from the United States could not prevent, and could not legally forbid, the Western allies from selling to the Soviets items necessary for the completion of the SNGP. Some of them suggested instead that the United States should try to convince the allies to delay the completion of the project, while offering alternative sources of supply for the Europeans’ energy needs. At any rate, in a first stage the growing attitude of strictness in the administration towards the supply of items for the SNGP, given the role the Soviet Union was allegedly having in the Polish crisis, was borne by American firms, prominent among which was Caterpillar. The company, after having been hit hard by restrictions imposed by the Carter administration on export to the Soviets, had successfully concluded a $400 million contract for the delivery of pipe-layers for the SNGP project, but in July 1981 it was denied the required export license.25 Its management lobbied Congress and finally obtained a limited export license, but a few days later a general ban was imposed on all US companies’ exports linked to the SNGP. Caterpillar again pressured Congress and finally obtained exclusive permission for pipe-layer export to the Soviet Union, starting from 1983.26 Despite the hardening of the American attitude towards the supply of equipment for the SNGP, the executive did not apply general restraining controls on exports for the project because most of the items could not be proved to be relevant for national security and, therefore, none of the three hypotheses envisaged by the Export Administration Act, extended in 1979 (PL 96-72), could apply. The Act, the last in a series dating back to the 1940s, provided that exports could be controlled for three purposes: to protect national security; to achieve foreign policy goals; and to prevent the depletion of goods in short supply.27 This difficulty was overcome when, on December 12–13, 1981, general Jaruzelski, to prevent direct intervention by the Soviets, who, however, were far from eager to cross the Polish borders, introduced martial law and arrested 200,000 Solidarity supporters, ruling Poland through a military council for national reconciliation. The embargo on SNGP equipment could, therefore, be classed in the foreign policy goals category as a reaction against the Polish crackdown under Soviet prompting. There was, however, a second hurdle: the unwillingness of the West European allies to toe the American line on this matter. During a NSC meeting in December 1981 a worried president exclaimed: “those ‘chicken littles’ in Europe, will they still be ‘chicken littles’ if we take the lead and ask them to follow our lead?”28 It seems that Reagan, who was an eager viewer of not overly intellectual films, was referring to a 1943 Walt Disney film, in which a clutch of chicks, one of which is Chicken Little are fooled by clever Foxy Loxy and devoured by it (for the occasion of the Russian plantigrade being transformed into a cunning canid).

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On December 30, 1981, the US administration embargoed exports of all gas and oil equipment and technology produced in the United States to the USSR. Things, however, turned out to be not so clear cut as the executive had hoped. Many Western European firms had already entered legally binding contracts for the West Siberian gas pipeline, which included components made in the United States or the use of technology licenses by American companies. There was, therefore, the question as to whether the ban applied only to new contracts or to all of them. Also, quite a few of companies incorporated in Europe and engaged in the projects were affiliates of US corporations. The following February, during a NSC meeting secretary Haig, referring to the measures taken in December, argued that their consequences had not been sufficiently analyzed, as the sanctions on the transfer of technology and their implication for the connected contracts were creating a situation “where U.S. Corporations stand to lose $265 million, but the loss to Europe would be $873 million”.29 The British prime minister alerted Reagan of the likelihood of the dire consequences of the embargo for firms based in Europe. In a moment of candor Reagan stated, “I must take the blame for having been careless. At the time I announced the sanctions, I believed that the United States was the dominant factor in what went into the production of the pipelines. Now Maggie Thatcher has made me realize that I have been wrong.”30 On the other hand, the repeal or the limitation of the export embargo could have severe implications for the effectiveness and credibility of the foreign policy of the Republican administration, whose real objective was not just the repression in Poland. During the meeting a plan was worked out, envisaging stricter monitoring by CoCom of technology transfer with potential implications for security, the acceptance by the West European countries of a specific list of technology and equipment prohibited for export to the Soviet Union, and a moratorium on credit and credit guarantee until the mechanism of control was established.31 Undersecretary of State James Buckley was sent to negotiate the plan in the European capitals. The mission, however, turned out to be a partial success as the moratorium on credit and credit guarantee was rejected by the European allies.32 Thus, the debate between moderates and hardliners in the administration went on. The DOC and the Office of the USTR argued that the United States’ first objective should be to convince the Europeans to get alternative sources of energy, which could not be achieved by technology restrictions. On the other side of the board the CIA director, William Casey, rather gloomily predicted that “if Soviet energy supplies are fully developed, then whoever sits where you are sitting now, Mr. President, ten years from now will confront a situation where Europe will obtain 50 percent of its gas supplies from the Soviet Union”, adding that by then the Soviets would earn 80 percent of their hard currency from gas export.33 More convincingly, perhaps, Jeane Kirkpatrick, the first woman to serve as US ambassador to the United Nations, leaving aside technical considerations and focusing on the political and personal effects of the decisions to be taken, aptly argued that “to lift sanctions would be political dynamite”, because “on four specific occasions, Mr. President, you have publicly committed yourself to take stronger measures if there is no easing of the situation in Poland”.34 A final decision on the extent of the measures taken in December was postponed, waiting for the outcome of the meetings that the president planned to have at the economic Summit at Versailles and at the NATO Summit in Bonn. At Versailles,

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Reagan pressed in particular France and West Germany to increase interest rates on loans offered to the USSR, with the understanding that, in exchange, the United States would refrain from extending the embargo on oil and gas equipment. The answer, however, was only partially favorable, as the European allies only agreed to limit their government credits with no engagement on prospective contracts.35 At the NSC meeting in mid-June, three options were presented to the participants in a more formal way than in the previous meeting: a) to lift the sanctions announced on December 30 on oil and gas equipment exports to the USSR governed by existing contracts; b) maintain the December sanctions as they stood; and c) extend the sanctions to include subsidiaries and licensees of US companies abroad.36 On June 22 the sanctions were extended, and the government also announced that it would not consider any applications for validated licenses to export to the Soviet Union. The embargo operated extraterritorially in three ways: it applied to all foreign firms controlled by US companies; it applied to any foreign firm using US technology under a license agreement; and it applied to all foreign firms’ parts and equipment of US origin. It also operated retroactively, as its enforcement did not depend on the time the relevant equipment or technology was exported from the United States.37 Extraterritoriality was enforced by the issue of temporary denial orders against US firms not complying with US controls, also barring any firm, including foreign companies, from trading in oil and gas commodities and technology with the offending firm.38 The reaction of the EC member countries was unanimous outrage. The European Community sent to the Department of States on July 14 an aide-memoire in which it contested the extraterritorial and retroactive nature of the US measures and called for the lifting of the embargo.39 On August 12 the EC renewed its call for the withdrawal of the embargo, arguing that the new limitations and their retroactive effects on existing contracts put in jeopardy the basic principle of the world trading system and might have long-lasting negative effects on business relations between European and American firms, thus worsening the strains of the economic decline on both sides of the Atlantic.40 Particularly harsh were the measures taken at member country level. Even the staunchest ally of the Reagan administration and supporter of its free-market philosophy, Margaret Thatcher, stated in her memoirs that she was appalled on learning the Washington decision, adding that “the reaction of the Europeans was even more hostile”.41 Thus, the United Kingdom, enacting the Protection of the Trade Interest Act of 1980, aimed at protecting residents in the UK from foreign government demands contrary to UK trade interests, ordered John Brown Engineering to fulfill its contract with the Soviet Union, and the French government served Dresser France with a requisition order to compel the company to honor its contract with the USSR. In turn, the US parent companies found themselves blacklisted. An American legal expert reports that when the Nuovo Pignone was hit by a temporary denial order, the Italian prime minister, Giovanni Spadolini, during a visit to the United States, threatened to put on hold the prospective purchase of thirty McDonnel Douglas DCC-9 jets by Italy’s national airline, Alitalia, until the US sanctions over the pipeline sales were ended.42 In August, however, the president of the European Commission signaled the willingness of the European side to take the heat out of the transatlantic conflict and to improve consultations between the two sides of the Atlantic, pointing out that “we in Brussels are

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ready to arrive at practical decisions before the end of the year”.43 Reagan authorized discussions with the Europeans to sound their willingness on having a meeting to set out a compromise solution. In September the new secretary of State, Shultz, reported that the British, the Germans, and the Italians were willing to have a joint meeting, though the French believed that if they were to wait the Americans would fold.44 The goals that the United States wanted to pursue in the prospective discussions with the allies included: strengthening of the CoCom controls; credit restraints towards the Soviet Union; an agreement on not selling key oil and gas technology and equipment to the Soviets; and, finally, preventing the USSR from further expanding its share of the market in the energy sector.45 On the other hand, the executive had to take into account the growing resistance of US companies hit by the measures of December 1981 and June 1982, which formed a coalition lobbying through the US Chamber of Commerce, the National Association of Manufacturers and through a unit of Congress, the Office of Technology Assessment.46 The complaints of the business coalition were concentrated on the fact that the embargo and its extension were rendering US industry an unreliable trading partner. It was, therefore, necessary to repeal the embargo, maintaining at the same time pressure on the allies not to clash with the American policy on security controls towards the USSR, while avoiding putting US firms at a disadvantage relative to their transatlantic competitors in supplying allowed equipment and technology to the Soviets.47 During the meetings held in Washington between the United States, France, West Germany, Italy, and Japan, which was also interested in Soviet projects in developing the Union’s energy potential, agreement was reached on the need to conduct their relations with the Soviet Union and Eastern Europe on the basis of a comprehensive policy designed to serve their common security interests and to adapt their economic initiatives to that need. The participants, or, perhaps more exactly, the US allies, agreed not to undertake trade arrangements or steps contributing to the military advantage and capability of the Soviet Union and not to subsidize the Soviet economy.48 Even more important, the participants agreed to examine in the appropriate bodies the ways to apply the mentioned criteria with a view to establishing a common line. The areas to be covered included strategic goods and technology of military significance, which were to be dealt with in the CoCom, other high technology items, credit policy, agriculture, and energy, giving particular attention through studies to be carried out in the OECD, to the energy needs of Western European countries and the ways to satisfy them.49 The agreements were incorporated in the National Security Decision Directive (NSDD) n. 66, which did not fail to stress that the allies had committed themselves to immediate action on the key elements of East–West trade, including the “agreement not to sign or approve any new contracts for the purchase of Soviet gas during the urgent study of Western energy alternatives”.50 As regards the measures related to the Polish crisis, in the NSDD 66 the president approved the repeal of sanctions imposed on December 30, 1981 and their extension on June 22, 1982. Reagan also approved the resumption of case-by-case licensing for commodities under national security control. The president emphasized that the repeal was due to his conviction that the framework agreement reached in Washington represented “stronger and more effective measures to advance reconciliation in Poland and address our strategic and security objectives toward the USSR”.51 On the other hand, the decision did not concern the sanctions

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imposed by the previous administration, following the invasion of Afghanistan, on US export of oil and gas technology for manufacturing equipment used for exploration and production. The dispute between hardliners, who wanted to strengthen and expand controls on exports, and pragmatists, who wanted to reduce and render more flexible such controls, went on in Congress, where the industries that exported products actually or potentially subject to controls had a strong lobby. The occasion was the renewal of the Export Administration Act of 1979, which was due to expire on September 30, 1983. The House of Representatives was controlled by the Democrats, but the Republicans had gained majority in the Senate in 1981, for the first time since the Second World War. The division, however, was not clear cut according to the party majority in the two houses of Congress. Rather, points of difference and agreement were to be found in the two main hypotheses of export restriction provided by the 1979 Act: control of exports for foreign policy reasons and national security controls. In the first case the president’s authority to control exports for foreign policy purposes was greatly restricted by bills approved by the Senate Banking Committee and by the House Foreign Affairs Committee. However, the bill endorsed by the Senate Banking Committee contained a “contract sanctity” provision, which prohibited export controls that would force US companies to violate existing contracts. The House bill instead allowed the administration to break contracts if it were necessary to combat terrorism, human rights violation, nuclear weapons testing, and imminent acts of aggression, thus offering considerable leeway to the executive. The Senate bill was actually a compromise by the head of the Banking Committee, hawk Jake Garn (Republican from Utah), who wanted to keep some room for maneuver in drawing up the security provisions of the bill, and the head of the Banking Subcommittee on International Finance and Monetary Policy, John Heinz (Republican from Pennsylvania), who sympathized with exporters’ complaints against controls. The House of Representatives prohibited the application of foreign policy controls to companies outside the United States, including subsidiaries of US firms, and required the president to lift these kinds of controls after six months if the products were available from other nations and attempts to eliminate foreign availability proved unsuccessful. Strong differences characterized instead the national security area. The Senate measure retained tight controls, in particular giving authority to the Defense Department to review exports to US allies in addition to its existing authority on exports to Soviet Bloc countries. The House of Representative bill eliminated licensing requirements for exports to CoCom countries, except in cases of exports to specific endusers suspected of diverting goods or technology to controlled countries, and required the executive to drop national security controls on a product readily available from other countries, if it had failed to change their course in eighteen months. As it became clear that the House of Representatives and the Senate would not be able to reauthorize the Export Administration Act before its expiry, Congress authorized a temporary extension of the president’s authority to control exports till October 14. After that date Reagan briefly invoked emergency powers to prevent controls from lapsing, and on November 18 Congress extended again the president’s control authority until the end of February 1984, but even at this later date was not able to produce a new statute.

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Notes 1 2 3 4 5 6

7 8 9 10

11 12

13 14 15 16 17

18 19 20 21 22 23

NSC 1, February 6, 1981. Caribbean Basin—Poland. www.thereaganfiles. com/1981026-nsc-1.pdf (accessed November 11, 2019). NSC 9, May 22, 1981, www.thereaganfiles.com/19810522-nsc-9.pdf (accessed November 11, 2019). OTAP, 35th Report, 1983, 28. http://www.usitc/publications/332/pub1535.pdf (accessed September 15, 2019). PPPUS—Ronald Reagan. Remarks on the Caribbean Basin Initiative to the Permanent Council of the Organization of American States, February 24, 1982. PPPUS—Ronald Reagan. Message to the Congress Transmitting Proposed Caribbean Basin Initiative Legislation, March 17, 1982. PPPUS—Ronald Reagan. Remarks on the Caribbean Basin Initiative at a White House Briefing for Chief Executive Officers of United States Corporations, April 28, 1982. PPPUS—Ronald Reagan. Remarks at a Celebration Sponsored by the Caribbean Basin Initiative Coalition, July 21, 1982. Ronald W. Cox et al., US Politics and the Global Economy: Corporate Power, Conservative Shift (Boulder and London: Lynne Rienner Publishers, 1999), 189. Congressional Quarterly Almanac 1982, 183. Jonathan Sanford, Caribbean Basin. Issue Brief number IB82074. The Library of Congress Congressional Research Service, 1983. https://www.everycrsreport.com/ files/19830919_IB82074_73dafecbbce25fd94d21597dd47743733ca5d856.pdf (accessed May 11, 2019). Wolfgang Benedek, “The Caribbean Basin Economic Recovery Act: A New Type of Preference in GATT?”, Journal of World Trade Law, Vol. 20 (1986) n. 1, 33. GATT, Basic Instruments and Selected Documents (hereinafter BISD), Thirty-first Suppl, United States—Caribbean Basin Economic Recovery Act Report of the Working Party Adopted on 6–8 and 20 November 1984 (L/5708). Data in this paragraph and in the following one are taken from OTAP, 35th Report, 1983, 26–35, Table 4 and Table 6. Ibid., 36. Charles Sawyer et al., “Caribbean Basin Economic Recovery Act. Export Expansion Effects”, Journal of World Trade Law, Vol. 18 (1984), 435. NSC 61, September 22, 1982, Pipeline Sanctions. www.thereaganfiles.com/19820922nsc-61.pdf (accessed May 21, 2019). CIA, The Soviet Gas-Pipeline in Perspective. Special National Intelligence Estimate, February 3–11, 1982. www.cia.gov/library/readingroom/docs/19820921.pdf (accessed May 22, 2019). Ibid., Fig. 2. NSC 16, July 6, 1981, East–West Trade Controls. www.thereaganfiles.com/19810706nsc-16.pdf (accessed May 22, 2019). Ibid. Ibid. Lionel H. Olmer, “Trade Policy”, in Martin Feldstein (ed.), American Economic Policy in the 1980s, 662. Office of Soviet Analysis Central Intelligence Agency, Overview of the Siberia-to Europe Natural Gas Pipeline, February 9, 1982. www.cia.gov/library/readingroom/ doc/DOCS_0000637831.pdf (accessed May 23, 2019).

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24 Gordon Crowitz, “The Soviet Pipeline: A Bad Idea Made Worse”, The World Economy, Vol. 5 (1982), n. 4, 408. 25 Ksenia Demidova, “The Deal of the Century: The Reagan Administration and the Soviet Pipeline”, in Kiran Klaus Patel and Kenneth Weisbrode (eds.), European Integration and the Atlantic Community in the 1980s (Cambridge University Press, 2013), 68. 26 Ibid., 68. 27 Congressional Quarterly Almanac 1983, 153. 28 NSC 34, December 22, 1981, Poland. www.thereaganfiles.com/19811222-nsc-34.pdf (accessed May 22, 2019). 29 NSC 43, February 23, 1982, Terms of Reference for Mission to Europe on Soviet Sanctions. www.thereaganfiles.com/19820226-nsc-43.pdf (accessed May 22, 2019). 30 Ibid. 31 Ibid. 32 NSC 44, March 25, 1982, Debrief of Under Secretary Buckley’s trip to Europe. www.thereaganfiles.com/19820325-nsc-44.pdf (accessed May 22, 2019). 33 NSC 50, May 24, 1982, Review of the December 30, 1981 sanctions. www.thereaganfiles.com/19820524-nsc-50.pdf (accessed May 25, 2019). 34 Ibid. 35 Ksenia Demidova, “The Deal of the Century”, 76. 36 NSC 51, June 18, 1982, East–West Sanctions. www.thereaganfiles.com/19820618nsc-51.pdf. 37 James Atwood, “The Export Administration Act and the Dresser Industries Case”, Law & Policy in International Business, Vol. 15, 1983, 1157. 38 Jerome J. Zaucha, “The Soviet Pipeline Sanctions: The Extraterritoriality Application of U.S. Exports Control”, Law & Policy in International Business, V. 15, 1983, 1170. 39 Bull.EC, 7-8-1982, point. 1.1.4. 40 Ibid. 41 Margaret Thatcher, The Downing Street Years 1979–1990 (New York: HarperPerennial, 1995), 256. 42 Jerome J. Zaucha, “The Soviet Pipeline Sanctions”, 1176. 43 Bull.EC, 7-8-1982, point 1.1.4. 44 NSC 61, September 22, 1982, Pipeline Sanctions. www.thereaganfiles.com/19820922nsc-61.pdf (accessed May 22, 2019). 45 Ibid. 46 Ksenia Demidova, “The Deal of the Century”, 69. 47 NSC 65, November 9, 1982, Meeting regarding the Allied Agreement on East–West Trade and Poland-Related Sanctions. www.thereaganfiles.com/19821109-nsc-65.pdf (accessed May 22, 2019). 48 Washington meeting—Summary of Conclusions. fas.org./irp/offdocs/nsdd/23-1936t. gif (accessed June 15, 2019). 49 Ibid. 50 Ibid. 51 Ibid.

4

Import Competition and Problems in Basic Industries and Agriculture

The measures described in the previous chapter were dictated by the executive, and the star of these initiatives was a former Hollywood actor. Both the CBI and opposition to the SNGP reflected the views and political objectives of the president. Congress and the American industries directly involved supported and opposed them by turn, but were never the initiator. Things went quite differently when the Reagan administration was faced with the call for help from a growing number of basic industries whose problems preceded the Reagan era, but were worsened by the recession in the early 1980s. The new president had made vague promises during the electoral campaign, which obviously did not mention direct financial aid. Apart from the relaxation of environmental requirements imposed by previous executives, the most obvious way to protect struggling industries seemed to be by curbing competing imports. The lawmakers, both Democrats and Republicans, called for the adoption of import quotas, which by definition had to be imposed by statutes. However, the administration was aware that such measures ran afoul of GATT rules, and, what is more, limited its room for maneuver in negotiations with foreign countries and in pressing for the launch of a new negotiating round in GATT, with the United States acting as demandeur. On the other hand, the administration had to avoid being accused of failing to deliver. The game was to satisfy most of the demands for protection by the industries in question and by Congress, while preventing measures from being openly protectionist. As regards agriculture, the reforms suggested by the administration were watered down by the lawmakers and, quite soon, the impact of the rising dollar and the contraction of world demand begot strains that rendered interventionist measures necessary and accelerated the confrontation with foreign producers, EC farmers in particular.

Basic industries Iron and steel In 1980, the long-term decline of the US steel industry showed a marked acceleration brought about by the downturn of the domestic automotive manufacture along with the impact of high interest rates on machinery and construction markets. Domestic 69

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shipments plunged by 18 percent relative to 1979 and hit the lowest level since 1975. Imports declined too, but since they fell less sharply than domestic shipments, import penetration grew, magnifying the effect of an already depressed market.1 In March, a volley of antidumping petitions were fired against EC steel exports, covering five categories of steel products. Soon after, the United States suspended the Trigger Price Mechanism (TPM), arguing that it had to devote its limited resources to the investigations provoked by the petitions. The TPM was instituted in January 1978 by the Carter administration to monitor imports on thirty-two categories of steel products. It was based on the full cost of production by the most efficient foreign steel producer, Japan, plus the cost of bringing the imported products into the United States.2 It was not a minimum price system as the importers were still free to sell steel in the United States below the trigger price as long as they were selling at “fair value” as defined by the Antidumping Act. It indicated, however, when an imported product was likely to be sold at less than fair market value, thus automatically opening an investigation, unless exporters had received pre-clearance. In other words, importers of foreign steel at better prices than increasingly costly US products were warned that they were embarking on a dicey adventure.3 On the other hand, till 1980 the TPM still had appeal for both American and European producers. US producers wanted to retain the TPM because it provided some protection from low-priced imports, while EC producers, though often complaining that trigger price levels were set unfairly high, putting Community steel at a disadvantage in the American market, wanted to retain it because it maintained some order in the American steel market and limited the number of antidumping actions. Apparently, the Carter administration had tried to dissuade the US steel industry from filing the antidumping complaints, fearing that it would make relations with the European Communities more difficult, but antidumping investigations were based on quasi-judicial proceedings with little room for direct interference from the executive. In September, the petitioners withdrew the complaint and the TPM was reinstated, but with a series of amendments which portended new troubles for the EC. The most significant amendments were the monitoring of surges of unfairly priced imports and the extension of TPM to subsidization. Under the modified mechanism, whenever imports captured more than 15.2 percent of the US domestic market and when the US steel industry was operating at less than 87 percent of its productive capacity, the Department of Commerce (DOC) was to initiate a 90day review to determine whether the surge in imports appeared to be the result of dumping or subsidization practices. In the affirmative case the DOC could either initiate an autonomous investigation or provide non-confidential material to interested parties in the US which might file complaints on their own behalf.4 After a brief rally, the steel market rapidly deteriorated in the course of 1981.5 The steel industry operating rates plunged from 84.5 percent in the first six months of 1981 to 53.7 percent at the end of the year, and fell below 50 percent in the first ten months of 1982. By late October 1982, more than 165,000 steel workers had been laid off or worked short working weeks. Apparent consumption (i.e. US producers’ shipments plus imports less exports) of steel products fell by 28 percent from 105 million short tons in 1981 to 76.4 million short tons a year later. At the same time, import penetration climbed from 13.9 percent in the first quarter of 1981 to 23.7 percent in the last quarter

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of the year. Imports from the EC fell from 6.5 million short tons to 5.6 million short tons but their percentage of US apparent consumption rose from 6.1 percent to 7.3 percent. In autumn 1981, the US Steel Corporation threatened to file antidumping and antisubsidy suits against EC exporters and other foreign producers. In November, the DOC undertook six self-initiated antidumping and countervailing duty investigations on steel products from Belgium, France, and non-EC suppliers, warning that if analogous complaints were lodged by the American steel industry, the TPM would be suspended. In December, Reagan asked the chairman of the US Steel Corporation to delay filing the petitions and met with EC representatives trying to secure strict compliance by EC firms to the TPM. The talks did not achieve results as the TPM trigger level was set in US dollars, which had steadily appreciated, while at the same time the downfall in demand for steel products was depressing the price of shipments by US companies. It might seem, therefore, that during 1981, the Reagan administration tried to preserve the Trigger Price Mechanism despite pressure caused by the increased willingness of the US industry to resort to antidumping and countervailing remedies and by the alleged unwillingness of the EC to comply with the changed rules of the monitoring device. Yet, a main factor leading to the demise of the TPM was the negative attitude of the new executive, and in particular of the Department of Commerce, which was the agency charged with the implementation of antidumping and countervailing duty law since 1979. The new undersecretary of Commerce for international trade, Lionel Olmer, unambiguously states that he became persuaded that the TPM, which “was the Carter administration’s way of dealing with the US Steel industry’s complaints of foreign dumping and government subsidization . . . was simply not working”, and “was being circumvented easily by several foreign companies . . . as it was a perfect example of the government attempting what it was not well equipped to do”. According to Olmer, what the DOC was instead promising the steel industry was strict enforcement of US trade law.6 The Tokyo Round Subsidies and Countervailing Measures Code had certainly strengthened the discipline on subsidization, but, because it was the product of a compromise between often divergent US and EC viewpoints, it had left many gray areas to be clarified in its implementation in the GATT. On the other hand, the Trade Agreements Act by which the United States approved and incorporated the Tokyo Round codes in its statutes gave the United States the opportunity to render countervailing measures more severe and more effective.7 And there was no doubt that in many cases the EC steel industry was heavily subsidized. In January 1982, seven US steelmakers filed 132 petitions against forty-one suppliers in eleven countries, seven of which were EC members. The DOC decided to initiate 109 investigations based on the private petitions. The TPM was once again suspended. In the following months other petitions were filed on steel products, and by late September the DOC was investigating fifty-six countervailing duties and twenty-six antidumping cases. The European Commission reacted vigorously to the news of the filing of the complaints, contesting the claim that the Community exports were causing injury to the American industry, and stated its intention to use all the procedural means at its

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disposal. In an informal meeting in Brussels on January 13, 1982, the EC Industry ministers backed the Commission and claimed that the difficulties of the American steel industry were not due to EC exports but were attributable to the deterioration in the economic situation in the United States, “which has resulted in a dramatic slump in the demand for steel in the American market”. 8 Likewise, on February 3, the Consultative Council of the European Coal and Steel Community (ECSC) urged the Commission to use every means available to thwart the threat caused by the US proceeding, which could impair the restructuring of the steel industry in the Community, and constituted a violation both of GATT rules and of the “consensus adopted in November 1977 by all the member countries of the OECD”.9 At the meeting of the OECD Ad Hoc Group on Steel the participants had agreed, among other things, on the need for profound restructuring of the sector and on the principle that necessary sacrifices had to be shared equitably without threatening traditional trade flows. However, there was a snag hindering the reference to OECD consensus. Unfortunately for the Community, when the Ad Hoc Group on Steel was replaced by a standing Steel Committee in 1978, the US authorities secured a modification of the reference to traditional trade flows as the participants, when taking action under domestic law to deal with the difficulties of their steel industry, had to take account of traditional trade flows established under normal conditions of competition.10 The United States could, therefore, rejoin that the EC trade flow of subsidized steel was traditional, perhaps, but was not consistent with normal conditions of competition. It should also be noted that both the Industry ministers and the ECSC Consultative Council argued, in contrast to the data provided by the American authorities, that imports from the Community in 1981 had decreased more markedly than the apparent consumption of steel in the United States. Discussions between the EC Commission and the DOC started in the first months of 1982. Things came to a head on June 11 when the DOC published the preliminary results of its investigation. Subsidy margins were put at 40 percent for British steel, 30 percent and 20 percent for France, 18.3 percent for Italy, 2 percent to 21 percent for Belgium, 0.2 percent to 0.6 percent for Germany, 1.8 percent for Luxembourg, and 0.8 percent for the Netherlands.11 During the meeting of June 21 and 22, the EC ministers of foreign affairs claimed that actual impositions of steel duties not only were bound to have grave consequences for international trade, but “clearly represent an attempt to overturn in the interest of one contracting party the general balance of advantage reached in the Tokyo Round in the rules dealing with subsidies and countervailing measures”.12 The ministers also stated their intention to challenge in the forthcoming meeting of the OECD Steel Committee the compatibility of the US action with the aims and commitments of the OECD consensus on steel. These declarations were repeated in the European Council of June 28. Yet, in spite of the wording, the mandate given to the Commission was more than clear: to reach an agreement with the United States that might somehow avoid the imposition of crippling countervailing measures. The route to the agreement turned out to be difficult and rugged. The US executive agreed to offer the EC a way out. The reasons appear to be substantially political, going beyond the steel crisis issue. The steel investigation came at a moment in which the United States and the EC were at odds over agricultural subsidies and the Soviet gas

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pipeline. The United States needed the Community’s cooperation to pursue a tougher policy towards the Soviet Union and it did not want to deprive a new round in the GATT, whose launching already appeared to be very dicey, of a starting chance, and steel seemed the area where compromise was most likely.13 In July, the European Community presented an offer that would cut by 10 percent its 1981 share of the US market for seven ECSC products in the context of an arrangement between the United States and the Community and four of its member states (Belgium, France, Italy, and the United Kingdom) but the offer was rejected.14 On August 6, vice presidents Haferkamp and Davignon for the Commission, and Baldrige for the DOC, worked out an arrangement by which the EC would restrict its exports to the United States in ten steel products for the period October 1, 1982 to December 31, 1985, conditional on the withdrawal of the petitions filed by the US industry. The agreement was hailed as a serious step towards resolving steel disputes, and apparently Reagan himself welcomed the success of the negotiations. But it was too early. The US producers refused to withdraw their petition without better terms, particularly with regard to shipments of steel pipes and tubes.15 However, the final countervailing measures determination on August 24 did not meet the expectations of the US steel industry as the duties were substantially reduced, ranging from 0.5 to 21.4 percent.16 For example, the duties imposed on the British Steel Corporation were cut from 40 percent to 20 percent and the subsidy margin for the whole of the Dutch companies and for most German and Luxembourg firms was found to be de minimis (less than 1 percent) and, therefore, non-countervailable. Thus the US steel industry could no longer put all its hopes of staving off foreign competition only on antidumping (AD) and countervailing duty (CVD) proceedings. The EC Commission proposed certain changes to the initial arrangement resulting in a 4.2 percent increase in the volume and products covered, but the US industry continued to hold out for some action on pipes and tubes.17 In the EC, things were made more complex by the fact that the subsidy margin, and thus the amount of countervailing duty, was high for exporters from Belgium, France, Italy, and the United Kingdom, while it was much lower for other European producers. Germany in particular objected to paying twice for the proliferation of steel subsidies in other member countries which had already created an artificial supply on the German market and cut off German export in the Community. In the end, however, the Federal Republic grudgingly accepted the principle of Community solidarity invoked by those countries most hard hit by the imposition of countervailing duties and the Netherlands and Luxembourg followed suit. Subsequently the EC agreed to develop a procedure concerning export of pipes and tubes while the US producers agreed to withdraw their CVD petitions.18 On October 26, the United States and the EC reached an agreement, through an exchange of letters, on two arrangements. Under the first arrangement, which covered about 64 percent of steel products from the EC, the Community adopted voluntary export restraints (VERs) on ten major categories of carbon and alloy steel products during the period November 1, 1982 to December 31, 1985.19 The arrangement did not provide for fixed tonnage quotas, but established specific percentages of the projected US apparent consumption, thus giving a greater margin of flexibility, and was to be

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enforced through the establishment by the EC of a system of mandatory export licenses. The overall share available to EC exports covered by the arrangement was about 5.9 percent of the US market. The entry into effect was conditional on the withdrawal of the various antidumping and countervailing duties and other petitions filed in respect of imports of the products covered by the agreement. The EC also reserved the right to terminate the arrangement if new antidumping or countervailing duties investigations or section 201 (escape clause) and section 301 (relief for unfair trade practices) of the Trade Act of 1974 investigations were initiated against the products in question. For products other than the ten items to which the license system applied, consultation would be held between the transatlantic trading partners if imports in the United States showed a significant increase indicating the possibility of trade diversion. The stated objective of the arrangement was to give time to permit restructuring of the steel industry and to create a period of trade stability. The second arrangement only provided for consultations if imports of EC pipes and tubes exceeded the 1979–81 average share of US apparent consumption, estimated at 5.9 percent. If no solution were to be found within sixty days, the parties could take the measures they deemed necessary, having recourse to their respective legislative and regulatory frameworks.20 Under the unfavorable circumstances the EC welcomed the arrangements, stressing that they meant peace in the steel sector until the end of 1985. This optimism turned out to be premature, as the flexible quota system and the guarantees it offered to the Community concerned only a large but limited share of EC steel exports, leaving aside other products and in particular higher value and more technology intensive products. On July 5, 1983, Reagan announced the application of an escape clause increasing tariffs and imposing quantitative restrictions on imports of specialty steel products from a number of countries including EC member states. The escape clause aimed at providing import relief for a limited period to facilitate orderly adjustment to import competition, according to the provision of GATT Art. XIX. The US International Trade Commission (ITC) was the agency charged with carrying out investigations to determine whether an article was being imported into the United States in such increased quantities as to be a substantial cause of serious injury or a threat thereof. Since it was not a measure imposed against unfair trade, compensation was due to the exporting countries and the president had to decide if its adoption was in line with national economic interest. The escape clause adopted by Reagan provided import relief on specialty steel for a four-year period through the temporary imposition of increased tariffs for stainless steel sheet, strip and plate, and quotas based on the minimum tonnages recommended by the Commission for stainless steel bar, rod, and alloy tool steel.21 By October 1983, the US government had concluded orderly marketing agreements (OMAs) covering 61 percent of all quota-bound specialty steel imports with Japan, Canada, Poland, Argentina, Spain, Austria, and Sweden, later followed by Brazil and Korea. There was, however, a remarkable exception. The EC Council of Ministers claimed that the US measures were not reconcilable with the commitments of the OECD Ministerial Council and the Williamsburg Summit regarding the halting of protectionism. The European Commission contended in the OECD Steel Committee

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that exports from the EC were not the cause of the US steel industry problems and that the measures adopted by the United States would squeeze out Community exports of products subject to an additional duty and substantially reduce its exports of products subject to quantitative restrictions.22 Concurrently the Commission started negotiations in the GATT challenging the conformity of the measures with Art. XIX of the General Agreement and submitting claims for compensation under the aforesaid article.23 The negotiations in Geneva stumbled on the issue of compensation because the EC rejected the US offer, arguing that the US method of assessment covered only those products affected by tariff increases and did not take into account the impact of quota restrictions.24 When the negotiations in the GATT broke down in February 1984, the Community retaliated against chemicals, plastic, and other products by increasing EC duties by about $160 million a year.25 The retaliatory measures were renewed the following February, but with adjustment in the level of retaliation to take account of the degressive nature of the import restrictions adopted by the transatlantic partner. The escape clause investigation on specialty steel and its outcomes were prodromic to the wider section 201 investigation conducted by the United States International Trade Commission (USITC) a year later. The 1983 events also influenced the response that the president gave to the Commission’s recommendations. Despite feeble signs of improvement in 1983, the biennium 1982–83 represented the worst years for the American steel industry since the Second World War. The 1982 arrangement with the EC was not able to secure a recovery and things were made prospectively worse by the fact that the Community announced import cuts to offset the curb on exports to the United States imposed on its producers, which in turn meant that exports from third countries should be diverted elsewhere; that is, to the American market.26 The American steel industry relied on three weapons: a petition for escape clause; filing of dozens of unfair trade suits; and lobbying in Congress. The goal was a comprehensive quota limiting imports to 15 percent of the domestic market. On January 26, 1984, Bethlehem Steel Corporation and the United Steelworkers of America jointly filed a petition under section 201 of the Trade Act of 1974 asking for temporary relief from foreign competition for a wide range of carbon and alloy steel products, plus some semi-finished products. Certainly, the move was apparently risky since there was the double barrier of the decision of the ITC, based on technical considerations, and the president’s decision that the measures suggested by the Commission were in the national interest. But the petition was filed at the beginning of the presidential election year, which meant that the incumbent president had to think twice before forfeiting the favor of an important part of the voters; and if the ITC’s decision was negative there would always be the path of appealing directly to the president and to Congress.27 In July, the Commission made affirmative determinations covering approximately 76 percent of the steel products under investigation. According to the Commission, increased imports of carbon and alloy steel were a substantial cause of serious injury to the domestic industry, and increased imports of semi-finished steel products were both a substantial cause of serious injury and threat of serious injury.28 The USITC ascertained that, although in 1983 domestic shipments had shown a modest recovery from the nadir of the previous year, they were 39 percent below the 1973 peak level of 111 million tons and capacity utilization had plunged from 87.8 percent in 1979 to 56.2

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percent, while the average number of workers in the sector had declined from 169,000 in 1979 to 98,400 in 1983. Meanwhile, although the volume of imports of all steel mill products had dropped from their 1981 level, the ratio of imports to domestic producers’ shipments had reached 26 percent in 1983 and had climbed to 34 percent in the first quarter of 1984.29 The Commission recommended three kinds of measures: tariff increase on imports of wire products; quotas on imports of plate, sheet and strip, structural and wire; and tariff-rate quotas (i.e. imposition of tariffs or higher tariffs on imports exceeding a given threshold) on semi-finished products.30 The relief had to be granted for five years, with possible reductions in the last two years, so as to allow the industry to modernize and withstand foreign competition. The president did not accept the recommendations, and on September 18 he outlined an alternative program to cope with the steel industry’s difficulties.31 Reagan argued that the relief proposed by the USITC was not in the national interest since it would raise steel prices, undermining the domestic and international competitiveness of the steel industry, and cost jobs not only in the steel industry, but also—more importantly perhaps—in steel-consuming industries. Instead, he claimed that what was needed was a policy that would respond to the legitimate concern of the domestic industry, while providing certainty of access to the US trading partners, on condition, however, that their exports were fair. The key was the agreement by the major steel exporting countries—which implicitly were viewed as culprits—on the adoption of VERs. Unfair trade included dumping, subsidization, and diversion from other importing countries that had restricted access to their market. According to the president, the net result of the program would be to reduce imports to about 18.5 percent of the US market, not including semi-finished steel imports which would be restricted to about 1.7 million tons annually. On the domestic side, the steel industry had to carry out monitored efforts to adjust and modernize, and assistance should be provided to adversely affected workers and communities. Congress endorsed the program. Sections 805 and 806 of the Trade and Tariff Act of 1984, signed into law in October, gave the president authority to enforce the steel trade arrangements for five years. This was subject to the submission of an annual report on the substantial reinvestment by major steel companies in the United States of their net cash flow from steel operations into modernization and enhancement of competitiveness, and on their commitment of at least 1 percent of the mentioned cash flow to workers retraining. Section 803 of the Act stated that “it is the sense of the Congress” that the policy the president was granted authority to implement would “result in a foreign share of the domestic market to 17.0 to 20.2 percent”, under conditions of fair, unsubsidized competition. In December 1984, agreements were signed with seven countries, followed by further agreements in 1985 and 1986. These agreements had a similar structure which in turn substantially reproduced the one worked out two years earlier with the EC. They were retroactive to October 1, 1984 and would remain in effect for a five-year period through September 30, 1989; they also assigned, except for semi-finished products, the exporting country a percentage share of the US market which allowed greater flexibility than quotas as the level of exports was a function of the prospective demand in the United States. There was, however, a remarkable difference with the

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1982 arrangement. The issue of licenses was no longer a responsibility for the exporting countries, but had to be administered by the importing one, the United States. Concurrently the United States called for negotiations with the EC for the pipes and tube sector as imports had exceeded the 5.9 percent ceiling stipulated by the 1982 agreement. On January 10, 1985, a pipes and tubes arrangement was concluded through an exchange of letters which restrained EC exports to a level of 7.6 percent of US apparent consumption from January 1985 to December 1986. Within this general limit a 10 percent market share was established for oil country tubular goods.32 What is the morale of the steel saga? Did the measures adopted by Reagan turn out to be more protectionist than the ordinary imposition of countervailing measures and antidumping duties or of safety clause measures which were subject to investigations regulated by the frequently amended Tariff Act of 1930 and Trade Act of 1974? Stern, at that time chairwoman of the USITC, contrasts the rule-oriented system with the politics-as-usual system. The former, administered by the Department of Commerce and by the International Trade Commission, “is designed to produce a particularly foreordained outcome” and its rules are sanctioned by multilateral covenants under the GATT, while in the latter “decision makers are elected officials who have to achieve policies that are politically palatable”.33 In the case of steel, Reagan opted for the second option, taking “full advantage of the flexibility inherent in the political system to promote a free trade public image while simultaneously protecting many powerful industries claiming to suffer from international competition”.34 Yet, in the first place, the membership of bodies dealing with antidumping, countervailing duties, and safeguards was relevant not only in interpreting the rules but also in evaluating the facts to which the rules had to apply. In particular, if the ITC was substantially independent of administrative interference, the agency charged with investigating antidumping and CVD cases was the DOC, which was part of the executive and whose head, Malcolm Baldrige, is remembered as never being coy on starting an investigation. Secondly, especially under the Trade Act of 1974 and the Trade Agreements Act of 1979, rules on countervailing measures and antidumping were made stricter and thus exploitable for catching in the net exporting companies that would not have been caught previously or in different legislations, including perhaps the 1947 GATT and the Tokyo Round codes. As regards in particular the 1982 steel agreement with the EC, the arrangement did not seem to run counter to US and multilateral provisions on countervailing measures and antidumping. The American statute and the Tokyo Round Code on Subsidies and Countervailing Duties (art. 4) provide that “proceeding may be suspended or terminated without the imposition of provisional measures or countervailing duties, if undertakings are accepted under which: the government of the exporting country agrees to eliminate or limit the subsidy or take other measures concerning its effect”. Analogous provisions applied to antidumping investigations. The European Community, under the threat of crippling duties, though claiming that the prospective measures were illegal under the GATT and the OECD consensus on steel, hurried to reach an agreement that if it did not eliminate or curtail the subsidy level, would limit its effects, and the obvious solution was to curb steel exports. The only puzzling thing was the variation in the countervailing duties to be imposed. These were threateningly

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high when it was necessary to keep the EC under pressure, but were substantially reduced when a final agreement was about to be reached and the US industry’s resistance was on the wane. The rejection of the USITC recommendations and their replacement with a comprehensive steel program in 1984 was not the first time a US president did not accept the measures supported by the International Trade Commission. For instance, in 1977 Carter, though accepting the affirmative result of the investigation on color televisions from Japan, did not deem that safeguard was the appropriate remedy, directing instead the Special Trade Representative to negotiate an orderly marketing agreement which was duly signed by Japan.35 The conclusions of the safety clause investigation on steel in 1984 were far from unquestionable. There was no unanimous determination since only three out of five members of the Commission found that imports were causing or threatening to cause severe injury to American firms. The chairwoman, Paula Stern, and the vice-chairman, did not think that this was the case. In fact, until 1984 imports were also declining, and the contraction of US shipments might have been caused by a host of endogenous factors. Besides, the weakness of the American industry relative to its foreign competitors, in particular from Japan and the NICs, had long preceded the period under investigation. This was attributed to the loss of the previously enjoyed advantage in proximity of iron ore, declining technical superiority, and, above all, uncompetitive labor costs, which in 1982 were almost three times as high as in Japan and Brazil and over six times as high as in South Korea.36 On the other hand, the solution chosen by the executive was far from being faultless from a multilateral law perspective. According to Reagan’s statements, the goal was to curb unfair exports to the United States, but the main objective remained the curtailment of foreign steel products to the American market, which was bedeviled by self-caused difficulties. Even if it is possible that the relative generosity of the VERs would depend on the expected size of countervailing and antidumping duties, their amount was unilaterally assessed. Besides, under the 1984 steel plan, unfair trade practices might be tolerated as long as the exporters honored their fixed market share.37 In any case, as noted perhaps with a certain satisfaction by the USITC, the arrangements meant a surge in the number of measures falling into the so-called gray area, which was not at loggerheads with the letter of GATT rules, but was likely to infringe their spirit.38

Motor vehicles Troubles in the US car industry preceded the advent of the Republican administration. Chrysler, the smallest of the “Big Three” US automakers after Ford and General Motors, closed 1978 with a net loss of $204.6 million and was saved by a complex $3.5 billion aid package, the cornerstone of which was a government $1.5 billion loan guarantee, which probably might be labeled as a subsidy. The Chrysler bailout heralded a crisis for the whole sector in 1980 when a steadily rising oil price accelerated consumer demand for a switch to smaller cars for which the industry was unprepared. Production plummeted to a nineteen-year low, while unemployment in the car industry and in its suppliers surged to 40 percent of a work force of 2.5 million persons.39 The domestic production downturn was mirrored by a surge in imports. Passenger car imports,

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excluding Canada, rose from 2.2 million units in 1978 to 2.5 million in 1980 (+15 percent), 79 percent of which came from Japan, while exports fell from 164,000 units to 105,000 units.40 A petition for import relief was filed by the United Automobile Workers (UAW) in June 1980 and by the Ford Motor Company in July, but in November the International Trade Commission determined that car imports had not increased in the medium term to such an extent as to constitute a cause of serious injury to domestic industry in the United States. The Carter administration opted to rely on special assistance programs to stimulate the auto industry recovery, including a special $50 million Community Assistance program, a special Small Business Administration for auto dealers, and measures to reduce the economic impact of safety, fuel economy, and emission standards on the industry.41 It also successfully pressured the Japanese government to eliminate duties, ranging from 4 to 10 percent, on most automobile parts. On the other side of the Pacific, the Ministry of International Trade and Industry (MITI) tried to convince the main Japanese car manufacturers that it was high time to start to curb exports to the United States and to increase investments across the ocean, but the answer was generally negative, except for the announcement by Honda that it would construct an auto assembly plant in the United States by 1982.42 The attitude of the Japanese firms, however, started to soften when in early 1981 John Danforth (Republican from Missouri), chairman of the Trade Subcommittee in the Republican-controlled Senate, introduced a bill to limit imports from Japan to 1.6 million automobiles per year. Hearings were scheduled for spring and a vote on the bill was expected for the summer. The bill was cosponsored by a Democratic senator from Texas, Lloyd Bentsen, which shows that the wish to curb Japanese imports was bipartisan.43 Reagan could not disown his electoral pledge to help the American car industry recover, but his administration was unwilling to appear to be wavering in its stated policy of opposing protectionism, nor did it want to make conspicuous exceptions to its stance against the subsidization of industries in distress and interference with the market. Actually, in March, an administration panel testified against quota legislation.44 The way to cut the Gordian knot of how to stop the growing flood of Japanese cars and buoy up American producers without appearing protectionist was found by the vice-president: in George Bush’s view, shared by the president, the imposition of quotas by the United States was bound to be judged protectionist, but it could not be so labeled if the Japanese kindly announced their readiness to voluntarily reduce their export of autos to the United States, without any request from the American side.45 In fact, the request was less than veiled. In a meeting with the Japanese foreign minister, Masayoshi Ito, Reagan told him that, although the Republican administration was firmly opposed to import quotas, “strong sentiment was building in Congress among Democrats to impose them”. The threat, however, might be foiled if the Japanese played the game.46 In April, a delegation headed by the USTR met with Japanese officials in Tokyo and on May 1, 1981, the Japanese government announced a voluntary restraint of automobile exports to the United States. Soon after, Danforth withdrew the bill, even though the restrictions offered by the Japanese were lower than 1.6 million units and did not provide for any further reduction in the event that the overall US market should shrink further as, indeed, happened in 1982.47 In short,

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diplomacy and the helping hand of Congress, not only from the Republican side, enabled Reagan not to contradict his electoral promises without being accused of protectionism and interference in the market. The VER restrained the exports of passenger cars for a two-year period, with a commitment of monitoring shipments for a third year.48 The MITI announced that Japan’s car exports to the United States would be reduced by 7.7 percent for the Japanese fiscal year from April 1, 1981 to March 31, 1982; that is, from 1.82 million units to 1.68 million units. Also, exports of sport utility vehicles (SUVs) were to be limited to 82,000 and exports to Puerto Rico to 70,000 cars, which brought the total of Japanese exports to 1,832,500 units. In the Japanese fiscal year (FY) 1982, vehicle exports would be kept at the same level plus an adjustment factor of 16.5 percent of the projected change in sales in the US auto market. Actually, at the beginning of 1982, Japan announced that it would limit shipments in the second year of the program to the previous year level and it made the same commitment for 1983. The VER was further extended to FY 1984, but with a 10 percent increase of the export ceiling. The stated goal of the gracious gesture of Japan was to give the US auto industry time to make necessary adjustments and become more competitive with imports. The plight of American automakers, however, went on worsening in 1981 and 1982 under the impact of high interest rates and the slowdown and then the slump of the economy. US consumption of automobiles declined from 10.5 million units in 1975 to a low of 7.6 million units in 1982. Domestic production dropped from 8.4 million units in 1979 to 5.1 million units in 1982, while employment reached a low of 623,000 employees. Although shipments from Japan fell to 1.68 million units in calendar year 1982, their share of the US market increased to 25 percent. Consequently, measures with strong protectionist features continued to be debated in Congress. In 1982, with full support of the UAW, Richard Ottinger, Democratic representative of New York, introduced a bill providing a “domestic content” requirement for vehicles destined to the US market. The domestic content requirement would increase according to the number of cars sold. Thus the bill allowed importation into the United States of up to 100,000 vehicles without regard to domestic content, whereas for manufacturers producing or importing over 900,000 vehicles, there was a requirement of a 90 percent domestic content ratio. This resulted in a strict import quota on autos and auto parts produced abroad. It also meant that foreign manufacturers needed to consider relocating a significant proportion of their production to the United States, thus creating jobs in the United States.49 The House of Representatives passed the bill on November 3, 1983. A similar bill was introduced in the Senate but failed to get beyond the stage of discussions in the committees. The executive strongly opposed the bills, arguing that they would: entail high consumer costs; deter the US industry from trying to become more competitive, also imposing new regulatory burdens on it; violate GATT obligations; and possibly end up causing loss of jobs in other sectors of the economy because of probable retaliation by foreign countries against US exports.50 The administration implemented instead an “auto program” to prop up the industry which, in line with the philosophy of the Republican executive, was prevalently based on fiscal benefits and on the revision and elimination of auto-related safety and environmental regulations.

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Things started to change in 1983 resulting in what, at least in the short-term, appeared to be a win–win deal. The share of Japanese vehicles as a percentage of the US market decreased, but not dramatically: from 22.4 percent in 1980 to 18.4 percent in 1984. The same thing did not happen for the value of Japanese car exports which increased from $9.5 million in 1981 to $10.8 in 1983 and 12.3 in 1984.51 The Japanese exporters were able to exploit the return of the American consumers’ preference for larger, more luxurious models because of the decline in oil prices. The ceiling on their exports also induced them to improve the quality and refinement of the small cars they used to ship, also raising their price. The deceleration in Japanese exports was partially exploited by Western Europe competitors. American producers were able to regain lost ground. Total production increased to 7.4 million units in 1984 and net losses of $4,667 million in 1980 suffered by producers operating in the United States (including subsidiaries of foreign companies) turned into profits of $5,330 million in 1983 and estimated profits of over 10,000 million the following year.52 The turnaround was explained by several factors, prominent among which was the increase in production which allowed US firms to rapidly absorb fixed costs. In turn, the increase in production was facilitated by the brakes being put on imports from Japan.53 A further factor was the reduction in fixed and variable costs that American firms were able to implement during the grace period granted by their Asian competitors. In January 1985 the MITI hinted that Japan’s voluntary ceiling on automobile exports would not be renewed, given the improving earnings of the US automakers and the decline of unemployment in the sector. In March, Reagan decided not to ask Japan to continue its voluntary restraint. Soon, however, a number of resolutions were introduced. These called for continued import limits, if necessary through the imposition of quotas, and the Japanese authorities deemed it prudent to announce that from 1985 to early 1992 exports would be limited to 2.3 million passenger cars to the United States plus 206,000 SUVs and vehicles shipped to Puerto Rico.54 The prospect of trade barriers also meant a partial reorientation in the Japanese selling strategy, which till 1981 had been based on the shipment of vehicles produced entirely in Japan. Until the beginning of the 1980s, Japanese foreign direct investments in the United States, though growing vigorously, had remained a distant third relative to investments from Europe and Canada, and they were prevalently constituted by firms engaged in distribution. By 1984, Japanese foreign direct investment (FDIs) overtook Canadian investments, and the share of manufacturing, among which automotive vehicles in particular, grew steadily. Nissan established a light truck plant in Smyrna, Tennessee, and Honda operated an assembly plant in Marysville, Ohio. In 1984, the US Federal Trade Commission gave its approval to a cooperative joint venture between the American company General Motors and Toyota to produce approximately 250,000 small cars in Freemont, California. Moreover, the move of the big Japanese vehicle producers compelled several Japanese parts suppliers to set up American production facilities. Notwithstanding this, the level of local content in their production of assembled vehicles remained somewhat below that of American firms.55 Therefore, the issue of local content remained liable to be dragged up in the US Congress.

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However, it was not only the threat of looming trade barriers that induced Japanese car manufacturers to cross the Pacific. There was also the inducement of incentives, lavishly provided by several US states, including those located in the so-called “rust belt” to attract investments to reverse economic decline or to boost economic development. These incentive packages went from generous grants to develop the sites to reduction in local taxes and even free English tutoring at nearby universities for Japanese expatriates and their children.56 Certainly, those incentives were not linked to trade performance requirements. They were subsidies all the same and this was likely to create difficulties for the US Federal government, which in domestic legislation and practice and in international fora was a stark critic of subsidization and its effects on trade.

Textiles and clothing The Reagan administration inherited rapidly worsening conditions in the textile and clothing sectors. Between 1973, the year that preceded the coming into effect of the Multifiber Arrangement (MFA) and 1982, the first year of its second renewal, the decline in US textile production did not differ from the average in developed countries (1.5 percent), and in clothing was slightly less severe (1 percent vs. 1.5 percent). A similar trend characterized employment which for textiles contracted by 3 percent in the United States and 4.5 percent in the whole of the developed countries and by 2.5 percent and 3 percent for clothing.57 The problem is that the comprehensive data mask a marked shift in the United States between the years through 1979 and the following years. In 1980 production and employment in textiles both fell by 4.5 percent relative to the previous year and in clothing they fell respectively by 5 percent and 3.5 percent. The reduction in production and employment in 1981 was 2 percent in textiles and 5 percent and 2 percent in clothing. A year later the contraction was 8.5 percent and 9 percent in textiles and 9.5 percent and 6 percent in clothing. Unemployment within the textile industry reached a postwar peak of 14.2 percent in June 1982 and within the apparel industry it reached 18.1 percent in April 1982, the highest rate since March 1975.58 In the period from 1974 to 1981 the overall US imports of cotton and wool and manmade fiber textiles increased by 34 percent from 4.4 billion to 5.8 billion equivalent square yards (SYE).59 The textile and apparel industries started lobbying in Congress to secure more severe restraints in imports from developing countries. The executive, however, did not have to seek a compromise with protectionist groups of lawmakers or to find subtle ways to circumvent American statutes. The legal background was already in place, being provided by the MFA, and what was needed was to render it more flexible and more suited to the needs of importing countries. The MFA was an “umbrella” agreement under which importing countries might restrain imports of textiles and apparel through the negotiation of bilateral agreements with exporting countries. Although developed countries were still the larger exporters in the two sectors, the bilateral agreements were negotiated with less developed countries, whose share of exports was increasingly growing, threatening the production and employment achievements of their counterparts that had reached maturity. The

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goal of the Arrangement, stated in Art. 1, was to ensure the expansion of trade in textile products, particularly for developing countries, and to achieve the reduction of trade barriers, while, at the same time, avoiding disruptive effects on individual markets and on individual lines of production. Thus, it allowed the establishment of quotas, based on previous import levels, providing, however, for their growth at a minimum of 6 percent a year, although safeguard measures might be imposed in case of market disruption. When the MFA was renewed in 1977, largely to satisfy the concerns of the EC whose textile and clothing producers were already in a severe predicament, an amendment was introduced allowing a departure from the 6 percent growth and from flexibility provisions in the agreements. This resulted in zero or negative growth in products considered sensitive for the importing country.60 Prior to the expiry date of the extension, the developing textile exporting countries complained that the MFA was discriminatory as it controlled exports from developing countries but not from developed producers, and that the promises of importing countries to liberalize trade in textiles and apparel remained unfulfilled. Thus, they called for a gradual return to free trade in conformity with normal GATT rules. The perspective of the developed countries, and not only the United States, was quite different as they stressed the need to relate import growth to growth in domestic consumption and to restrict import growth from developing countries that were major suppliers. The United States, along with the EC, to put pressure on the developing textile exporters, even threatened to enact the so-called “snapback” provisions according to which the maintenance of tariff reductions negotiated in the Tokyo Round should be linked to the continuance in force of the MFA or of suitable substitute arrangements for controlling imports of textile products. The negotiations that started in November 1980 were finally concluded on December 31, 1981. The negotiators agreed on a protocol that extended the MFA for four years and seven months through July 31, 1986.61 On the other hand, an annex to the protocol, which specified in greater details than in 1976 the hypotheses in which the parties might derogate from the provisions of the MFA, took into account the worries of the manufacturers in the developed countries. In particular, it was provided that bilateral arrangements might limit the aggregate growth rate of textile imports to the growth rate of the domestic market in the importing country, defined as the growth in the per capita consumption of textile and apparel. Likewise, a sudden surge in imports, caused by previously underused quotas, which provoked or threatened serious damage to domestic industry in the importing country might be curbed through emergency restrictions. The main textile exporting countries, like North Korea and Hong Kong, along with Taiwan (which, however, was not a party to the MFA) were to accept a negotiated reduction of their export growth. The reduction would offset the greater share to be allocated to new entrants and small suppliers which were allowed growth rates exceeding 6 percent. Finally, it was agreed that the MFA parties would cooperate in dealing with problems related to the circumvention of the agreement and that, where evidence was available regarding the country of true origin, there should be an adjustment of charges to existing quotas. Despite the import restricting leeway that MFA III allowed the industrialized importers, the trend in the United States continued to worsen and the foreign share of

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the American textile market went on growing. Thus by 1985 there were strong pressures in Congress to introduce a strict quota system independent of the Multifiber Arrangement.

Agriculture The year 1982, or more specifically the marketing year 1981/82, saw the start of a U-turn in the US agricultural trade, which reached its trough in 1986, when the United States was briefly overtaken by the European Community as the largest agricultural exporter.62 In the years that followed the outset of the 1980s, world trade in agriculture slackened and American farm exports, in particular for cereals and oil seeds, declined. These events raise several questions: which factors brought about the downturn? Which domestic measures were adopted in the United States that might have accelerated or contained the decline? What steps were taken to compete or to put pressure on the trading partners? This chapter, however, only deals with bilateral relations, leaving multilateral negotiations to separate chapters. The 1970s witnessed a hike in farm trade and in the share of American agriculture in it (Table 8.2). A series of factors contributed to the expansion. Import demand for agricultural products soared, especially in the developing countries whose share rose from about one-third to nearly a half over the decade.63 The main beneficiaries were the industrial countries, in particular the United States and the EC member states. Backstage there was a slight gap, but with cumulative effect, between production and consumption going back to the 1950s, but in the early 1970s contingent factors were also at play. From 1973 poor world harvests and very heavy Soviet purchases, coupled with a weak dollar, spurred on US sales, bringing stocks down and forcing up prices. The process was particularly remarkable in cereal and coarse grain sectors. As noted by one scholar, trade in grains, where the United States was the dominant exporter, doubled for wheat and grew more than three times for coarse grains between 1960 and 1980, though the main leap took place in the 1970s.64 The US farm trade balance, which showed a modest $2.1 billion surplus in 1965 and a lower $1.5 billion in 1970, boasted a $12.6 billion surplus in 1975, reaching $23.8 billion in 1980, a year in which the overall merchandise trade balance was deep in the red (Figure 8.1). The US share in the value of total world exports jumped from 13 percent in 1970 to about 19 percent ten years later. Things radically changed in the following decade. As a matter of fact, the observers, even though not explicitly, agreed that the decline of the US farm trade was due to a plurality of factors. However, they differed on the main factors that caused it. Some commentators pointed the finger to the rise of the dollar vis-à-vis the currencies of the main trading partners, which raised the price of American agricultural exports, not only in the countries directly concerned, but also in those states that belonged to the same currency areas.65 Within this framework, different groups of importers and exporters were identified according to the relation of their currencies with the greenback. Those countries whose currencies moved with the US dollar were to experience the same trend of contracting exports, while countries like the EC member states whose currencies were depreciating against the dollar were heading for an

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improvement in their export competitiveness. For those importers whose currencies were pegged to the US dollar, the exchange rate impact was neutralized vis-à-vis US exports, but imports from countries with depreciating currencies would become cheaper relative to US exports. US farm produce would become more expensive for importing countries whose currencies were depreciating and for inconvertible currency countries which relied on primary product exports and gold sales to finance food imports.66 Other economists argued that the appreciation of the dollar—which had to be measured in real terms—was only a concurrent factor, since it was overcome as a major culprit by the impact of the decline in the income of the main importers during the first years of the 1980s.67 In the industrial countries the slump was more prolonged than in the United States and since 1981 growth had effectively come to a halt in some of the more heavily indebted developing countries, especially in Latin America, a traditional export market for the United States.68 The data provided by another observer also indicate that by the early 1980s the production–consumption cycle in wheat and coarse grains had shifted, entailing an increase of stocks.69 The main factor was the worldwide improvement in technology causing a jump in average yields; policy reform, principally in the form of price guarantee for producers and an improved domestic marketing environment, was a further causal factor.70 Annual growth rate in trade volume declined in the first half of the 1980s, while grain prices, in particular in constant terms, after a peak in 1975 and a first trough in the second half of the 1970s, followed by a brief recovery, started to plunge from 1982.71 Thus, the difficulties of American trade might be seen as deriving from two concurrent factors: the world trade slowdown and the rise of the dollar. Yet some scholars as well as the administration argued that a third factor played a more decisive role: the impact of the federal farm policy.72 There were two fundamental mechanisms to support farmers’ proceeds and their income. They did not exclude each other. The first, which was very similar to the one adopted by most West European states and later by the EC, was introduced during the New Deal and was managed by a governmental agency, the Commodity Credit Corporation (CCC). Created in 1933, the CCC was a credit agency also charged with supporting farmers’ sale prices. It provided non-recourse loans to farmers at a loan rate that was annually fixed by Congress. The loan rate, which was not synonymous with interest rate, was the amount of credit provided by the Corporation for bushels of farm produce covered by government programs. The farmers were required to pledge their commodities as collateral for the loan. As the loan was non-recourse, farmers had the option of either paying it back at concessional interest rates or defaulting and forfeiting the produce to the Corporation. The choice was not random: if the market price was higher than the principal loan to be repaid, farmers would reimburse the loan, keeping the product and selling it on the market. If the market price was lower, farmers would default, surrendering the collateral to the CCC. The mechanism acted therefore as a floor for return expected by producers. The system, however, could work only if accompanied by constraints of production; otherwise, it would result in a growing gap between market and support prices, forcing the CCC to acquire a glut of products at a loss. Thus, only farmers who signed contracts to reduce the amount of produce used as

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collateral could take out loans. The price support system was bolstered by a waiver to GATT Article XI obtained by the United States in 1955. The mentioned article allowed quotas on farm products only to restrict production and remove temporary surplus. The waiver permitted the US authority to impose quotas to prevent foreign imports from undermining the support offered to American producers. The waiver was exceptionally broad, having no time limit and requiring only an annual report. The second main farmer support program was established by the Agriculture and Consumer Production Act of 1973, at a time when market prices were quite high and well above loan rates. The mechanism for direct income support envisaged by the 1973 Act was based on target prices and deficiency payments. The former was the legislative set level at which farmers’ income was to be guaranteed and whose amount was related to production costs adjusted to yields. Deficiency payments would be paid if the average market price for each product covered by the scheme during the first five months of the marketing year, or the loan rate if more remunerative, were below the target price. Also, deficiency payments were conditional on the reduction of acreage planted by the farmer. Yet, since 1977, with few exceptions, target prices were set above average farm prices and, as deficiency payments were proportional to production rather than tied to allotments fixed on a historical base, they were likely to increase supply on a greater scale than set-asides and acreage diversions designed to reduce production. The increased supply might be destined to the domestic market as well as to the foreign market. Hence this kind of income support program left the United States open to the charge of dumping its farm produce on the world market. Additionally, as it was a subsidy, it increased the pressure on the budget when the prevailing policy called for curtailment of fiscal deficit. As pointed out by the secretary of Agriculture, John Block, more than half of US commodities did not receive direct support. Wheat, feed grains, rice, cotton, dairy, peanuts, and tobacco were supported, but meats and all the special crops were unsupported, although meat was indirectly supported because the animals were fed by grain.73 On the other hand, the bulk of American farm exports were products receiving public support. The proposal made by the new secretary of Agriculture in 1981, in line with the Reagan administration’s general approach, revolved around three objectives: to reduce the role of government in the marketplace and in the regulatory process; to maintain the growth of productivity in the agricultural sector and in the level of farm exports; and to curb the pressure of the sector on the federal budget. The main target of the Block proposal was the dairy sector, not a main item in farm export, which appeared to be ballooning, thus creating serious problems of storage and budgetary containment for the CCC. For wheat, feed grains, cotton, and rice, the secretary rather baldly proposed to terminate target prices and deficiency payments; to terminate authority for set- aside; and to grant the Department of Agriculture authority to set commodity loan rates at its discretion, though at a level high enough to provide an effective safety net for the farmer.74 The proposal was only partially successful, as it was made at a moment in which there were fears of a looming inability of supply to meet demand for farm produce, and the main concern for lawmakers was farmers’ declining real income under the growing

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pressure of costs, financial in particular. Thus, target prices and deficiency payments were not eliminated, but increases in price support levels were moderate. The loan rates for grains other than rice were frozen at the 1982 level, while loan rates for rice and cotton were allowed to increase less than expected inflation.75 In short, the Agriculture and Food Act of 1981 continued the declining trend in real support price, without altering its mechanism. There was, however, a snag. The prospective declining role of price support depended on stable market prices, which was not the case. Domestic demand was affected by recession; and by 1982, farm exports, grains in particular, fell, causing carry-over stocks to increase. When in 1982 farm prices started to fall, loan rates acted as a safety net for both wheat and feed grains, a role that they had had for a large part of the 1950s and 1960s, but was no longer operational since the early 1970s thanks to the booming phase of American agriculture. Price decline induced farmers to forfeit part of their produce to the CCC, increasing its stock. The loan rates constrained the downward adjustment of US farm prices by setting price floors, and since the United States was the price leader in the world markets, they also acted as floor prices in foreign markets.76 In the absence of government intervention, declining prices would have forced farmers to reduce supply, but their final proceeds were guaranteed by the target price-deficiency payment mechanism, which was linked to the amount of produce. Thus, in spite of the limitations imposed on arable land, no supply reduction took place in the market year 1982/83, and the stocks went on increasing. In fact, the United States curbed supply of its produce in the world market by increasing its level of stockholding in an attempt to keep the world price from falling as low as it might otherwise have done. Some observers argued that the United States behaved as a rational exporter with market power.77 For others, the US approach was self-defeating as it buoyed up the price for overseas competitors who chose not to exercise comparable restraints.78 The fact that US loan rates were acting as floor prices in international markets did not necessarily imply that they were the bottom line. Indeed, the appreciation of the dollar by about 40 percent relative to the currencies of most of its competitors in the farm market meant that several exporting countries were able to offer their produce at lower prices expressed in US dollars.79 This, in turn, gave competitors such as the EC greater flexibility in terms of price movement and return to producers, and was an incentive to continue expanding production. The United States argued that the EC was able to match world market prices only because it subsidized exporters through socalled export refunds, which offset the high supported price in the Community’s market. It might have been so in the first years of the US export slump, but it was no longer the case when the greenback reached its peak. The Common Agricultural Policy (CAP) intervention price for wheat (translated in US dollars) in 1984/85 stood at about $132 per metric ton (i.e. tonne), whereas the US target price was $163.51 per metric ton.80 Obviously, there were other competing countries, like Argentina and Australia, which could not be accused of heavy subsidization, and which took effortless advantage of the soaring American currency. In short, the fall of US farm exports was due to the convergence of several factors: the contraction of world demand due to economic difficulties of various kinds and the growing ability of many traditional importers to reach self-sufficiency, which in turn meant that countries like the EC

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member states managed to become net-exporters in sectors in which the United States was the dominant supplier; the growing strength of the dollar that made US produce less attractive in the world market; and, although in different circumstances American farmers might accept to offer lower prices to offset the rise of the dollar, they were discouraged from doing so by the safety net provided by loan rates. The difficulties caused by the timid and untimely reform of 1981 soon became evident as stocks soared while farm exports declined (Table 8.2). In January 1983, the US Department of Agriculture (USDA) announced an unprecedented acreagecontrolled program directed at curbing production and reducing stocks. The program, the participation in which was voluntary, did not need Congressional approval as it was based on existing statutory authority. It covered wheat, corn, sorghum, rice, and cotton, and was supposed to last two years, although in 1984 it concerned only wheat, and gave producers the option to add a further 10 to 30 percent to acreage diverted under other provisions. Farmers who participated in the program were paid a percentage of crops they would otherwise have grown. Alternatively, farmers could offer to lease the whole farm to the government at a payment rate of their choice, but the USDA local branches selected the lowest bids which, in any case, could not exceed the rate paid under the ordinary choice. The program, however, had a particular feature. Farmers were not paid in cash, but in crops; hence the name payment in kind (PIK). There were three reasons for the USDA’s choice: it made it possible to utilize the large accumulation of government and producer-owned commodity inventories; it minimized the budget outlays; and it avoided the $50,000 limitation applying to cash payments.81 To make the program more attractive, on request of the executive, Congress added some fiscal bonuses, allowing deferral of tax payment until the farm sold the commodity. In 1983, 77.9 million acres of land were withheld from production, and the average farm price rose from $2.68 to $3.265 per bushel.82 Coupled with a severe drought that affected the corn belt, the PIK allowed a 50 percent reduction in grain stocks.83 However, the administration warned that the PIK had drawbacks in the international market, as production cuts at home were likely to stimulate extra production by competing countries. At any rate, when the drought was over stocks started to grow again at great speed. The plight of the US agriculture was not relieved by the prompt regaining of some main outlets of the previous decade. Securing the USSR market in 1972 had implied a long-term agreement with credit facilities.84 The Reagan administration, also to keep an electoral promise, on April 24, 1981, lifted the grain embargo on the Soviet Union imposed on January 4, 1980 by Carter as a reaction to the invasion of Afghanistan. Once again, however, general foreign policy concerns stood in the way of a farm deal. To react against the declaration of martial law in Poland, the US government refused to start negotiations for a new long-term grain agreement, preferring to extend the expiring agreement on a year-to-year basis. It also refused official credit for Russian purchases, although it did not try to prevent private banks from offering loans at market rate.85 Finally, in July 1983 the Agriculture secretary announced a new five-year grain agreement with the USSR, which was formally signed on August 25. The longterm agreement provided for minimum Soviet purchases of nine million tons of grain, of which at least eight million tons had to be wheat or corn, although up to one million

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tons of this minimum could be replaced by the purchase of half a million tons of soybeans or soybean meal.86 The success, however, was only partial as in the meantime other countries like Australia, Canada, and Argentina had established a foothold in the Soviet market, offering the expectation of a supply less dependent on political factors and, therefore, less volatile, and often on better credit terms than the United States. Also, France was able to secure a share of the Soviet farm market. The complaints of the United States against other countries were not new, but they were exacerbated by the deterioration of its farm exports and by the less conciliatory attitude of the executive. The main targets were the EC and Japan. The main culprit was the European Community, accused of being guilty on two counts. Not only were subsidies granted to farmers abnormally high, but, in contrast to the United States, they were not accompanied by effective production controls, which had resulted in excessive agricultural expansion. The growing production had firstly displaced imports, and later overflowed the EC borders, being increasingly disposed of through subsidized prices on the international market.87 Thus, the EC’s share of world wheat (including wheat flour) exports had risen from 4.7 percent in 1967–68 to 15.5 percent in 1980–81; its share of beef and veal from 2 percent to 19 percent; and its share of dairy products from 14 percent to 22 percent.88 The accusations against Japan were partially similar. Japan, for economic and political reasons, pursued two goals: self-sufficiency in some produce to pursue food security; and keeping farm income at levels comparable to that of non-farmers. To reach these goals, though taking into account the changing pattern of taste in the Japanese population as its income increased, the government would resort to high tariffs and quotas. Import quotas were applied to twenty-two agricultural items, the most important being beef, while agricultural raw materials, such as feed grains and soybeans, could be imported freely.89 The only item in which Japan was fully selfsufficient was rice, but an agreement limiting Japanese exports had been reached with the United States in 1980.90 Thus Japan was not a competitor in the world market, but it maintained barriers to imports of American high-value products which were looking for foreign markets, and even self-sufficiency for rice was secured by keeping at bay foreign substitutes. The dissatisfaction of the US executive with the Common Agricultural Policy (CAP) can be detected even before the 1982 farm export slump. In a meeting between trade members of the new administration and the Commission, the secretary for Agriculture, John Block, expressed concern with the amount of support given by the Community to the export of production surpluses.91 Seven months later, according to the Commission, the bilateral talks could not iron out the differences between the two parties on agriculture, but “at least served to clarify the points of view”, which reflected two different perspectives.92 For the Americans, the opportunity to expand their exports was blocked by the Community’s export policy which, therefore, had to be reformed. The Community rejoined that the CAP was a fundamental political and social factor, and its export refunds were perfectly in line with the obligations negotiated in the Tokyo Round. At the outset of 1982, the Commission claimed to be most concerned by the systematic nature of the attacks carried out by the United States against the EC’s export policy both through antidumping and countervailing duty

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procedures at home and by actions taken in the GATT under the Tokyo Round code on subsidies.93 Between 1981 and 1982, the United States lodged four complaints to the GATT concerning EC subsidizing practices that affected trade in wheat flour, pasta, poultry, and sugar. The disputes over poultry and sugar were promptly settled by agreement. The United States prevailed over the European Community in the pasta case, as pasta was not considered a primary product and therefore fell within the scope of paragraph 4 of GATT Article XVI, which laid down stricter rules for industrial products. Thus, the US victory was a blow for EC exporters of processed agricultural produce but did not legally endanger the Community’s farm export subsidy mechanism. The wheat flour complaint, on the other hand, was directed at the heart of the Common Agricultural Policy because wheat flour was classified as agricultural produce and the claim concerned the export refund. The Millers’ National Federation, which in 1975 had already unsuccessfully filed a section 301 petition, filed a second petition in 1981, two years after the Tokyo Round agreement on subsidies, which had made some clarifications on displacement caused by subsidizing measures. The United States complained to the GATT, which in December 1981 set up a panel to adjudicate. As already noted, agriculture was not left outside the GATT scope. The problem was that the provisions concerning this sector were less wide and more vague than those concerning non-primary products.94 In particular, Article XVI of the GATT on subsidies stated that GATT parties should just “seek to avoid the use of subsidies” on primary products. If notwithstanding they granted subsidies increasing the export of the mentioned products from their territory, such subsidies should not be applied in a manner resulting in their having more than an equitable share of world export trade, account being taken of all the GATT parties’ shares in a previous representative period. No definition of what constitutes an “equitable share” and of what is a “previous representative period” was given. The Tokyo Round code on subsidies and countervailing duties did not result in great progress on the matter. No specific definition of what constitutes agricultural export subsidies was given and no obligation to reduce their use was provided. On the other hand, Art. 10 of the code on subsidies and countervailing measures made, at least in certain cases, the acquisition of a nonequitable share more ascertainable by requiring that export subsidies should not displace another country’s export to a particular market by offering supplies at prices materially below those of other suppliers. It also stated that a previous representative period should normally be the three most recent calendar years in which normal market conditions existed. The United States maintained that as regards wheat flour the subsidies received by EC producers had resulted in displacement under the mentioned Article 10. It argued, however, that reference should not be made to the three most recent calendar year; that is, 1977–80, because heavy use of export subsidies by the EC had distorted trade patterns, suggesting instead to refer to 1959–61, the three-year period preceding the advent of the CAP.95 It is likely that the United States hoped that, by upholding its claim, the panel would strengthen its legal position either in future negotiations or controversies. Yet, the panel report recognized that EC exports had strongly increased in the period with the help of the export refund mechanism, but it held that the information provided by the United States was not enough to prove

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market displacement caused by EC practices and, therefore, the acquisition of a “nonequitable share” of the market. It appears that, given the uncertain results of the legal confrontation with the Community, the United States became convinced that reliance on the Tokyo Round rules was not enough and that to gain the upper hand in the dialogue with its European counterpart, whether bilaterally or multilaterally, economic rather than legal pressure was required. During the run up to the GATT ministerial meeting of November 1982, the US and EC delegations were not able to paper over their disagreements. Following the clash in the ministerial meeting on December 10, 1982, in a meeting in Brussels, the two parties agreed to begin bilateral agricultural talks, the first of which was held in Washington the following January. Despite this sign of goodwill, tensions across the Atlantic on farm issues soon grew. On January 11, 1983, speaking at an annual meeting of the conservative, and powerful, American Farm Bureau Federation, but probably also addressing the Europeans, Reagan stated: “we will not give in to protectionist measures, but at the same time we aren’t going to let ourselves be plowed under”.96 The countermeasures listed by the president, however, were not new weapons, but relied on the enhancement and more aggressive use of the current US credit subsidy arsenal. In particular, the CCC was entitled to extend direct credit loans (GSM-5) for up to three years to foreign entities at rates slightly above the cost of government borrowing, and to provide export credit guarantees (GSM-102) to bank loans of up to three years against all repayment risks. In addition, under a title of the 1954 Agricultural Trade Development and Assistance Act (PL-480), agricultural commodities could be offered on concessional terms, the credit being repayable in US dollars over a period of twenty to forty years and a grace period on principal repayment of up to ten years. Also, potentially available to foreign purchasers were blended credits, which were an admixture of government direct credits and guaranteed commercial loans. In February 1983, the secretary for Agriculture announced that over 700,000 tonnes of wheat were released from the Commodity Credit Corporation’s stocks to provide over 1 million tonnes of wheat flour to Egypt, for long a secure French market, at a price around $15/t. below the world price and the EC offered price.97 The president of the European Commission, Gaston Thorn, expressed “the considerable surprise of the Commission on the US action to take over for 12 to 14 months the total Egyptian flour market at subsidized price well below the world market”, adding that “this action seems hardly compatible with the spirit in which official talks on agriculture were launched in December”.98 The Commission also took the matter to the GATT, and during the bilateral talks on agriculture warned the United States that “any new deal like the United States/Egypt one would lead the Community to take defensive countermeasures in order to protect its markets”.99 The same month, however, the United States negotiated a trade agreement with Iraq for the sale of wheat, barley, rice, and other commodities. In August, the United States carried out a second attack on the Egyptian market, this time for the provision of dairy products. The contract provided for the sale of 18,000 tonnes of butter and 10,000 tonnes of cheese, on special terms, including a three-year interest-free loan and repayment in Egyptian pounds.100 The Community complained to the International Dairy Product Council, arguing that the price offered to Egypt was below both the world price and the minimum price set by the Council. The United

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States, however, vetoed the resolution moved by the EC, which called on the United States not to repeat such action.101 The Community counterattacked. In October 1983, the Commission introduced a special export refund, seven ECUs over the general one, for up to 400,000 tonnes of wheat flour shipped to Egypt to recover a share of the Egyptian market.102 In particular, France, the main EC competitor, was able to renew its farm credit agreements with Egypt and concluded agreements with Morocco and Tunisia, while strengthening its presence in the Soviet and Chinese markets. The US attacks on the Community’s traditional markets were not repeated in 1984. Farm trade with Japan was less confrontational. US exports to the Asian country totaled $6.75 billion in 1984, but the United States believed that they might be much higher if Japan dropped, or at least reduced, its barriers to imports, in particular its quantitative restrictions affecting eighteen categories of agricultural products. The main source of tension concerned beef and citrus. The two countries had reached an agreement in 1979 that raised Japanese quotas on beef, citrus, and citrus juice for four years. At the expiry of the agreement in 1984, Japan proposed a simple renewal of the treaty, but the United States successfully pressed for an approximate doubling of the quotas for the next four years and for discussions on further liberalization of Japanese restrictions in 1987.103 The United States initiated, in 1982, a dispute settlement in the GATT concerning Japan’s quotas on thirteen categories of agricultural products. However, in June 1984 it dropped its GATT cases for two years, in exchange for some liberalizing measures by its Japanese counterpart, including elimination of quotas on five categories of products, expansion of quotas on four other products, and lowering of tariffs on thirty-two others.104 The United States, on the other hand, was also an importer of farm produce. Apart from products like livestock, dairy, and sugar, largely destined for the domestic market, which were protected by quotas thanks to the 1955 agricultural waiver granted by the GATT parties, the main defense from foreign competitors was antidumping and countervailing proceedings. US farmers often lodged successful complaints against allegedly dumped or subsidized imports, and indeed most antidumping and countervailing cases concerned agricultural products. In this, agricultural producers were helped by the US statutes, which stretched to the extreme limits the provisions of GATT and of the Tokyo Round codes, and by the interpretation of the statutes by the DOC, the USITC, and the trade courts. Their consistency with multilateral rules was open to dispute.105 A glaring example of a helping hand offered by Congress to the farm industry can be found in the Trade and Tariff Act of 1984.

Notes 1 2 3 4 5

Twenty-fifth ARPTAP, 1980–81, 68. Twenty-third ARPTAP, 1978, 101. Giuseppe La Barca, International Trade in the 1970s. The US, the EC and the Growing Pressure, 93. Twenty-fifth ARPTAP, 1980–81, 68. Twenty-sixth ARPTAP, 1981–82, 114. Bull.EC 10-1983, point 2.2.19.

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37 38 39 40 41

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Lionel H. Olmer, “Trade Policy”, in Martin Feldstein (ed.), American Economic Policy in the 1980s, 660. See Giuseppe La Barca, The US, the EC and World Trade, 103. Bull.EC 1-1982, point 2.2.24. Bull.EC 2-1982, point 2.4.34. Mickael K. Sevine, Inside International Trade Policy Formulation. A History of the 1982 US –EC Steel Arrangement (New York: Praeger, 1985), 31. Bull.EC 6-1982, point 2.2.42. Ibid. Mickael K. Sevine, Inside International Trade, 37. Bull.EC 7/8-1982, point 1.1.2. OTAP, 34th Report, 1982, 125. https://www.usitc.gov/publications/332/pub1414_old. pdf (accessed August 6, 2019). Twenty-sixth ARPTAP, 1981-2, 114. Also Hans Mueller et al., “Perils in the Brussels– Washington Steel Pact of 1982”, The World Economy, Vol. 5 (1982), n. 3, 260. Bull.EC 10-1982, point 1.3.1; OTAP, 34th Report, 1982, 125. OTAP, 34th Report, 126. Ibid. Ibid., 127. OTAP, 35th Report, 1983, 342. www.usitc.gov/publications/332/pub1535.pdf (accessed February 18, 2019). Bull.EC 7-8-1983, point 2.238 et seq. Ibid.; also OTAP, 35th Report, 1983, 217. Bull.EC 10-1983, point 2.2.19. EC, OJL 40, 11.2.1984. Kent Jones, “Trade in Steel: Another Turn in the Protectionist Spiral”, The World Economy, Vol. 8 (1985) n. 4, 396. Ibid., 398. OTAP, 36th Report, 1984, 19. www.usitc.gov/publications/332/pub1725_0.pdf (accessed February 18, 2019). Ibid., 20. Ibid., 21. Ibid., 22; Twenty-eighth ARPTAP, 1984–85, 70. Ibid., 70; Bull.EC 1-1985, point 2.2.13. Paula Stern, “Trade Policy”, in Martin Feldstein (ed.), American Economic Policy, 668 et seq. Ibid. Giuseppe La Barca, International Trade in the 1970s . . ., 111. Peter H. Lindert, “U.S. Foreign Trade and Trade Policy in the Twentieth Century” in Stanley L. Engerman et al. (eds), The Cambridge Economic History of the United States, Vol. III, The Twentieth Century (Cambridge: Cambridge University Press, 2000), 426; Richard Pomeret, “World Steel Trade at a Crossroads”, Journal of World Trade, Vol. 22 (1988) n. 3, 83, figure 1. Kent Jones, “Trade in Steel”, 401. OTAP, 35th Report, 1984. Twenty-fifth ARPTAP, 35th Report, 1980–81, 49. Ibid., Table 4.1. Ibid., 50.

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42 Dennis J. Encarnation, Rivals Beyond Trade. America versus Japan in Global Competition (Ithaca and London: Cornwell University Press, 1992), 130. 43 Ibid., 131. 44 Twenty-fifth ARPTAP, 1980–81, 51. 45 Ronald Reagan, An American Life, 254. 46 Ibid., 255. 47 I.M. Destler, “U.S. Trade Policy Making in the Eighties” in Alberto Alesina et al. (eds), Polities and Economics in the Eighties (Chicago and London: University of Chicago Press, 1994), 259. 48 Twenty-fifth ARPTAP, 1980–81, 52; also USITC, A Report of Recent Developments in the U.S. Automobile Industry Including an Assessment of the Japanese Voluntary Restraint Agreement, USITC Publication 1648, 1985. https://www.usitc.gov/ publications/332/pub1648.pdf (accessed August 15, 2019). 49 OTAP 35th Report, 1983, 281; Paul Dymock et al., “Protectionist Pressure in the U.S. Congress?” Journal of World Trade Law, Vol. 17 (1983), n. 6, 506. 50 Twenty-sixth ARPTAP, 1981–82, 118. 51 OTAP, 36th Report, 1984, 150, Table 16. 52 A Report of Recent Developments in the U.S. Automobile, 3, 13. 53 Ibid. 54 OTAP, 37th Report, 1985, 164. www.usitc.gov/publications/332/pub1871_0.pdf (accessed February 18, 2019). 55 Dennis J. Encarnation, Rivals beyond Trade, 135. 56 Ibid., 133. 57 Twenty-eighth ARPTAP, 1984–85, 41, Table 23. 58 Twenty-sixth ARPTAP, 1981–82, 120. 59 OTAP 33rd Report, 1981, 23. www.usitc.gov/publications/332/pub1308.pdf (accessed February 18, 2019). 60 See Joseph Pelzman, “The Multifiber Arrangement and Its Effect on the Profit Performance of the U.S. Textile Industry”, in Robert Baldwin et al. (eds), The Structure and Evolution of Recent U.S. Trade Policy (Chicago, London: University of Chicago Pres, 1984). 61 GATT, Protocol Extending the Arrangement Regarding International Trade in Textiles, L/5276, December 23, 1981. 62 Mark Newman et al., A Comparison of Agriculture in the United States and the European Community (New York: United States Department of Agriculture, Economic Research Service, 1987), Table 7. 63 George W. Reeves, “World Agricultural Trade and the New GATT Round”, Journal of Agricultural Economics, Vol. 38 (1987), 395. 64 Dale E. Hathaway, “Agricultural Trade Policy for the 1980s”, in William R. Cline (ed.), Trade Policy in the 1980s (Washington: Institute for International Economics, 1983), 439. 65 G. Edward Schuh, “International Agriculture and Trade Policies: Implications for the United States”, in Bruce L. Gardner (ed.), US Agricultural Policy: The 1985 Farm Legislation (Washington DC: American Enterprise Institute for Public Policy Research, 1985), 60. 66 Alex F. McCalla, “Impact of Macroeconomic Policies upon Agricultural Trade and International Agricultural Development”, American Journal of Agricultural Economics, Vol. 64 (1982), n. 5, 866. 67 Dallas S. Batten et al., “The Recent Decline in Agricultural Exports: Is the Exchange Rate the Culprit?”, Federal Reserve Bank of Saint Louis Review, Vol. 66 (1984), 13.

Problems in Basic Industries and Agriculture

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68 Robert Paarlberg, Fixing Farm Trade. Policy Options for the United States (Cambridge Mas: Ballinger Publishing Company, 1988), 16. 69 Barbara Insel, “A World Awash in Grain”, Foreign Affairs, Vol. 63 (1984–85), 894, Table 1. 70 Ibid., 893 et seq. 71 Dale E. Hathaway, Agriculture in the GATT: Rewriting the Rules (Washington DC: Institute for International Economics, 1987), Table 2.1, Figure 3.1, and Figure 3.2. 72 See in particular, Bruce L. Gardner, “International Competition in Agriculture and U.S. Farm Policy, Introduction”, in Martin Feldstein (ed.), The United States in the World Economy (Chicago: The University of Chicago Press, 1988), 443; David Freshwater, “American Agriculture in the Debt Crisis”, in Stephan P. Riley (ed.), The Politics of Global Debt (New York: St. Martin Press, 1993), 142. 73 John R. Block, “International Competition in Agriculture and U.S. Farm Policy, Food Policy in an Evolving World Marketplace”, in Martin Feldstein (ed.), The United States, 469. 74 U.S. Code Congressional and Administrative News, 97th Congress First Session 1981, Legislative History, Agriculture and Food Act of 1981, 1989 et seq.; Robert Paarlberg et al., “Agricultural Policy in the Twentieth Century”, Agricultural History, V. 74 (2000), 147. 75 Fred H. Sanderson, “US Farm Policy in Perspective”, Food Policy, Vol. 8, n. 1, 6. 76 U.S. Code Congressional and Administrative News, 99th Congress First Session 1985, Legislative History, Food Security Act of 1985, 1744. 77 Murray Fulton et al., “A New World Agricultural Order?” in Hans Michelmann et al. (eds), The Political Economy of Agricultural Trade and Policy (Boulden: Westview Press, 1990), 73. 78 Robert Paarlberg, “The Political Economy of American Agricultural Policy: Three Approaches”, American Journal of Agricultural Economics, Vol. 71 (1989). 79 Food Security Act of 1985, 748. 80 Stephan Tangermann, “The Repercussion of U.S. Agricultural Policies for the European Community”, in Bruce L. Gardner (ed.), US Agricultural Policy, 332. 81 U.S. General Accounting Office, The Department of Agriculture’s 1983 Payment-in-Kind Program—A Review of Its Costs, Benefits and Key Program Provisions, 1. 82 Dal E. Hathaway, Agriculture in the GATT , 83; Bruce L. Gardner, “Farm Policy and the Farm Problem”, in Phillip Cagan (ed.), Essays in Contemporary Economic Problems. The Impact of the Reagan Program, 1986 (Washington DC: American Enterprise Institute, 1986), 234. 83 Congressional Quarterly Almanac, 1983, 184. 84 Seventeenth ARPTAP, 1972, 34. 85 The Economist, 8 May 1982, 97. 86 Twenty-seventh ARPTAP, 1983, 81. 87 Twenty-sixth ARPTAP, 1981–82, 36. 88 Ibid. 89 Dale E. Hathaway, Agriculture in the GATT , 79. 90 Twenty-fifth ARPTAP, 1980–81, 93. 91 Bull.EC 5-1981, point 2.2.47. 92 Bull.EC 12-1981, point 2.2.41. 93 Bull.EC 1-1982, point. 2.2.25; Bull.EC 2-1982, points 1.3.1-1.3.2. 94 See in particular, Timothy E. Josling et al., Agriculture in the GATT (London: St. Martin’s Press, 1996), 94.

96

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95 William H. Boyer III, “The United States–European Community Export Subsidy Dispute”, Law and Policy in International Business, Vol. 16 (1984), 199 et seq. 96 PPPUS—Ronald Reagan, Remarks at the Annual Meeting of the American Farm Bureau Federation in Dallas, January 11, 1983. 97 Agra Europe, February 21, 1983, n. 1014, E/3. 98 Bull.EC 2-1983, point 2.2.22. 99 Bull.EC 2-1983, point 2.2.23. 100 Bull.EC 7/8-1983, point 2.2.47 et seq. 101 Bull.EC 10-1983, point 2.2.19. 102 Bull.EC 10-1983, point 2.2.21; Agra Europe, October 28, n. 1054,P/4. 103 OTAP 36th Report, 1984, 144. 104 Ibid. 105 It is not the task of this historical research to deal with the numerous legal cases; see the critical analysis carried out by N. David Palmeter, “Agriculture and Trade Regulation. Selected Issues in the Application of U.S. Antidumping and Countervailing Duty Laws”, Journal of World Trade, Vol. 23 (1989), n. 1.

Second Presidency of Ronald Reagan: January 20, 1985–January 20, 1989

97

98

5

The Development of the Trade Deficit

At the outset of the second Reagan presidency the White House chief of staff, James Baker, and the secretary of the Treasury, Donald Regan, swapped their mandates, with the apparently indifferent countenance of the president. The change ushered in a significant turn in the management of the US currency, which as a result had an impact on the trade and current account balance of the country. The price-adjusted weighted average exchange value of the dollar had risen nearly 80 percent against major foreign currencies from the beginning of 1980 through February 1985. Between February and the end of the year, the nominal and the price-adjusted values of the dollar both fell nearly 20 percent. The descent did not stop but continued for the whole of the second Reagan presidency. There are three sets of questions: was the impact of the depreciation significant, was it prompt or delayed, and what factors, if any, limited its effectiveness?

1985–86 worsening of the trade balance Feldstein, in an article written in 1987, argued that the fall of the dollar, prevalently, was not the result of coordinated measures by the monetary authorities of the main world economies, but was due to the reaction of the market to the perceived over-appreciation of the greenback and to its belief that the decline of the American currency at some point in the future had become inevitable.1 For instance, according to the scholar, in early 1985 there was a differential of about 4 percentage points between the yield of US bonds and German bonds, but the differential was not enough to compensate holders of dollar bonds if, as was likely, a marked decline of the dollar were to occur. Only if the decline did not exceed 4 percent, would the equilibrium be maintained, but so slow a decline was bound to cause a further rise in the US trade deficit that sooner or later had to be corrected. It is arguable, however, that the monetary authorities of the United States and its trading partners had a primary role in foreseeing, or, more exactly, encouraging the reaction of the operators in the currency exchange market. At the G-5 meeting of January 17, 1985, in which both Regan and Baker took part along with Volcker, the financial authorities of the United States, France, Japan, West Germany, and the UK expressed their commitment to work towards greater exchange market stability and to pursue monetary and fiscal policies that would promote a convergence of economic performance among their countries.2 Following the G-5 meeting, most European 99

100

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central banks participated in a coordinated intervention, selling dollars, “at times in sizable amounts”, while Japan followed suit but with less conspicuous results.3 Between January and the outset of March, the US authorities sold $659 million.4 In March and April, the dollar declined, and after a short stabilization resumed its decline in July. On September 22, 1985, the ministers of finance and the central bank governors of the five abovementioned countries met in the Plaza Hotel of New York. To the satisfaction of the American executive, the participants declared that “recent shifts in fundamental economic conditions among their countries, together with policy commitments for the future, have not been reflected fully in exchange markets”.5 The discrepancy might, therefore, impair the success achieved by their states in securing high non-inflationary growth for the world economy. According to the Plaza statement, the exchange rate misalignment had “contributed to potentially destabilizing external imbalances among major industrial countries”, whose main outcome was the United States’ large and growing current account deficit and Japan’s and, to a lesser extent, Germany’s large and growing current account surplus. The ministers and governors, therefore, announced that “exchange rates should play a role in adjusting external imbalances”, better reflecting fundamental economic conditions. The announcement did not make any explicit reference to intervention in the market by financial authorities, but the word appeared in a separate non-paper that was not made public.6 Nor did the declaration mention a depreciation of the dollar, assuming instead that “in view of the present and prospective changes in fundamentals, some further orderly appreciation of the main non-dollar currencies against the dollar is desirable”. Certainly it can be argued that, in contrast to a fixed exchange rate system where there are clear, though adjustable landmarks, in the floating exchange rate regime, as in interstellar space, it is impossible to establish which currency goes up and which goes down. Yet, there is more than a whiff of diplomatic bending of sheer occurrences in the fact that the nation that had summoned the monetary authorities of its main trading partners to solve a problem that was likely to be caused by its domestic policy confided to them the arduous task of coping with international currency adjustment. At any rate, the message was clear: the burden of adjustment was not to be carried only by the United States with the gracious assistance of other nations, but had to be shared by all the countries represented in the meeting, and in particular by those enjoying a positive current account. Each participant made a statement of “policy intention”, the implementation of which would help achieve a better currency equilibrium, although no formal engagement for closer cooperation on macroeconomic policy was agreed on, and most present were careful to stress that their country was already pursuing policies conducive to this goal, which, therefore, only needed to be carried on. In particular, the Japan representatives pointed out that as “the Japanese economy is in an autonomous expansion phase mainly supported by domestic demand increase” its government would “continue to institute policies intended to ensure sustainable, non- inflationary growth”, while the German delegates noted that the “German economy is already embarked on a course of steady economic recovery based increasingly on international generated growth”. The United States committed to pursue steady, non-inflationary growth and to “maximize the role of markets and private sector participation in the

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economy”. To achieve this objective the US executive would “continue efforts to reduce government expenditures as a share of GNP in order to reduce the fiscal deficit and to free up resources to the private sector”. Thus, according to the policy statement, the only acceptable way to reduce the deficit was to cut expenditure. The question was which expenditures and in which way. Reassuringly, the statement of policy announced that the United States would “implement fully the deficit reduction package for fiscal year 1986”, which “will not only reduce by 1 percent of GNP the budget deficit for fiscal 1986 but lay the basis for further significant reductions in the deficit in subsequent years”. In 1985 Congress passed a law aimed at curbing the federal budget deficit, which at the time was the largest in history in dollar terms. The Balanced Budget and Emergency Deficit Control Act of 1985—better known as Gramm-Rudman-Hollings, by the name of its promoters, two Republicans and a conservative Democrat—mandated deficit reduction of $11.7 billion in fiscal year (FY) 1986 and then annual installments of $36 billion to achieve a balanced budget in FY 1991. If the deficit was $10 billion over the target, sequestration, that is automatic cancellation of budgetary resources, had to be applied on outlays for discretionary programs, including the ever-growing military expenditures.7 Reagan, in signing the bill, made it clear that the curtailment of the deficit was supposed to be achieved only through an across-the-board reduction in a wide range of programs, rather than through taxes or borrowing, as they imposed a heavy burden on the private economy. The president also expressed doubts on the adherence to the constitution of some provisions of the Act, among which, in particular, that allowing the Comptroller General to have a say on the implementation of national defense programs.8 Apart from the constitutional questions that soon emerged, both administration and Congress found it impracticable to respect the constraints imposed by the Gramm-Rudman-Hollings.9 The Act was amended in 1987, raising the target above which sequestration was automatic and postponing the deadline for a balanced budget to 1993. The expected decline of the federal deficit in FY 1986 turned into an increase, though at a lower rate than in the previous year, and after a three-year abatement it soared in 1991–92 under the impact of stagnation and a short war. Total outlays for mandatory and discretionary programs did not decline either in current or constant dollars. Outlays for discretionary programs, about 60 percent of which were allocated to national defense, slightly contracted only in FY 1987, but defense expenditures never declined during Reagan’s second term (Figure 5.1). In contrast to the difficulties encountered in cutting the fiscal deficit, the United States was successful in bringing down the value of its currency with the help of its trading partners. After the conference, “despite strong resistance from the traders, the dollar dropped against other currencies quickly and substantially”, and it continued its downwards trend during 1986 and even a large part of 1987.10 Volcker and Baker agreed on the general outline of the strategy pursued at the Plaza meeting, but they differed on the extent and speed of the depreciation of the greenback as well as on the importance of keeping the US house in order by curtailing the fiscal deficit. In his memoirs, Baker states that “item one on our agenda was the dollar” and as regards the action on the federal deficit he notes: “Critics say that the United States later reneged on its deficit reduction pledge. All I can say is that we made our promise in

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Figure 5.1 Total outlays and national defense expenditures in real (FY 1987) billions of US dollars, 1977–88. Source: Historical Tables: Budget of the United States Government.

good faith and our best to implement it.”11 The statement might seem rather vague, being made by a former secretary of the Treasury. Destler and Randall argued that the Treasury secretary, in contrast to his counterparts in Europe and Japan, did not have direct powers on budgetary policy, which remained under the control of the president in his game of chess with Congress and it was, therefore, natural for him to focus his efforts on something that Treasury could dominate as exchange rate policy exercise, involving the finance ministers of the other main industrial countries.12 In his efforts, Baker could exploit their fear of protectionist initiatives in the US Congress and their desire to lower interest rates in the United States and worldwide. Besides, the prospect of depreciation of the dollar was of no particular concern at a time in which recovery had matured without inflationary pressures. More recently, other authors have maintained that Baker also had an active role in negotiating the 1986 tax reform with Congress.13 The fact remains that currency management was a preserve of the Treasury, in partnership with the Fed, and there is no record that Reagan had the wish to venture into the unfamiliar field of international finance. Two months before the Plaza meeting, Volcker in his report to Congress pointed out that the output of goods and services had not kept pace with final sales to consumers, businesses, and government, which was evidence that the nation was borrowing far more than it was willing to save internally, was buying abroad much more than it was able to sell, and was only able to close these gaps by piling up debts abroad in amounts unparalleled in its history. Such imbalances could “neither be sustained indefinitely, nor dealt with successfully by monetary policy alone, however conducted”.14 The FED chairman conceded that it was necessary that other nations do more to open their economies and to encourage growth, but added that there was “no doubt that it all will come easier as the United States does its part” and this implied not only monetary policy interventions, but especially “coming to grips with budget deficit”.15 In turn, the vice chairman of the board of governors of the FED pointed out

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the risk that factors inducing investors to bid up the price of dollar assets could reverse abruptly, since if that happened at a time when credit demands in the United States were still strong, especially those from the federal government, the resulting pressure on the financial market could have seriously harmful consequences driving up interest rates and curtailing private investment. Hence, prompt action to reduce the federal budget deficit was an essential aspect in reducing the impact of the high dollar on the ever-growing current account deficit.16 The conditions of the economy and of the trade balance in the first two years of Reagan’s second term as president showed similarities as well as marked differences. As noted above, after the peak in the first quarter of 1985 the dollar started its decline. Yet, for the whole year, the multilateral trade-weighted value of the dollar—i.e. the tradeweighted index of the bilateral exchange rates between the US currency and the currencies of the trading partners—both nominal and real, that is adjusted for corresponding differences in inflation rates, were still slightly higher than in the previous year: respectively, 3.4 percent and 2.8 percent (Figure 5.2). The real exchange value of the dollar in the third quarter of 1985 was higher than in the second quarter of the previous year, and even in the fourth quarter of 1985 the real exchange rate was higher than the 1983 average.17 Likewise, as shown by Figure 5.3, the value of the dollar vis-à-vis the currencies of Japan and of the main European trading partners was slightly higher than in the preceding years. Thus the deficit reflected the continuing effect of the high dollar on the price competitiveness of the US industry in international markets. At the same time, the fiscal deficit went on growing: the federal deficit grew by 8.7 percent relative to 1984 and the total government deficit jumped by 15.2 percent. On the other hand, the gap between the US GNP and GDP growth rates and those of the big trading partners like Germany and Japan shrank, particularly because the US economic hike slackened. Likewise, the real interest rate differentials in the industrial

Figure 5.2 Multilateral trade-weighted value of the US dollar, 1975–88 (index numbers: 1980=100). Source: Economic Report of the President, transmitted to Congress February 1992: Table B-107; own calculations.

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International Trade under President Reagan

Figure 5.3 Currency units per US dollar, 1975–88 (index numbers: 1980=100).

countries narrowed. The outcome was a decline of the growth rate of the deficit in real terms, which, however, grew substantially as the 1984 base was quite high: for GDP the trade deficit reached $145.4 billion (See Table 1.2) and the same went for GNP, though the amount was less severe, slightly exceeding $100 billion. The volume of GDP exports grew by barely more than 1 percent, while imports grew by over 6 percent and from a much higher base. The deficit of the merchandise trade balance in current dollars rose by 8.6 percent to $122,148 million and the deficit of the current account balance soared by 23.5 percent to $122,332 million. Merchandise exports in current dollars slightly declined to $215,935 million, while imports grew by 1.7 percent to $338,083 million (See Table 1.4). The value of agricultural exports dropped by 23 percent due to the contraction of both price and volume. The export value of non-agricultural consumer goods and industrial supplies also declined, while the value of capital goods and automotive vehicles increased; the value of oil imports decreased, but the decline was partially offset by the growth of non-oil imports (Table 5.1). The worsening of the merchandise deficit was particularly severe with regard to both the EC and Japan (Table 5.2). As regards the EC, the deficit almost doubled relative to the previous year, reaching $18,826 million, whereas two years earlier the United States had a slight surplus. That with Japan grew by over 35 percent to $46,152 million, although the growth rate started to decelerate. The current account deficit was offset by capital inflows. According to official estimates the United States became a net debtor for the first time since the First World War, the deterioration of the overall net investment position being concentrated in portfolio investments; although, as pointed out by the FED, the data might be disputable due to the possibility of several statistical discrepancies.18 Foreign direct investments more than doubled between 1980 and 1985. The main share was owned by

Table 5.1 US exports and imports by broad end-use class, 1965–88 (millions of US dollars)

Year 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988

Foods, Feeds, and Beverages

Industrial Supplies and Materials

Capital Goods except Automotives

Automotive Vehicles, Parts and Engines

Consumer Goods (nonfood) except Automotives

Exports Imports Balance

Exports Imports Balance

Exports Imports Balance

Exports Imports Balance

Exports Imports Balance

4928 5489 4998 4813 4687 5874 6110 7504 15199 18638 19234 19800 19724 25155 30171 36417 38845 32228 32116 32197 24512 23790 25252 33734

3946 4499 4586 5271 5239 6147 6364 7258 9119 10568 9642 11500 13981 15397 18001 18548 18531 17462 18871 21873 21873 24346 24809 24929

982 990 412 −458 −552 −273 −254 246 6080 8070 9592 8300 5743 9758 12170 17869 20314 14766 13245 10324 2639 −556 443 8805

8917 9613 9971 11006 11758 13795 12703 13966 19862 30129 29945 32000 34312 39044 57812 72297 70428 64269 59146 64148 61140 64923 69976 89990

11024 12162 11856 14159 14163 15343 17444 20958 28049 54428 51030 63700 79933 83613 108464 132256 134944 110922 109193 124026 113678 104263 113746 122683

−2107 −2549 −1885 −3153 −2405 −1548 −4741 −6992 −8187 −24299 −21085 −31700 −45621 −44569 −50652 −59959 −64516 −46653 −50047 −59978 −52538 −39340 −43770 −33693

8039 8892 9913 11072 12322 14659 15372 16914 21999 30878 36639 39100 39766 46471 59183 76259 83915 76026 71308 77041 79618 82906 92352 119005

1458 2136 2382 2825 3331 3978 4334 5919 8263 9819 10166 12300 13985 19705 24460 31420 36912 38407 43193 60460 61434 72139 85129 102203

6581 6756 7531 8247 8991 10681 11038 10995 13736 21059 26473 26800 25781 26766 34723 44839 47003 37619 28115 16581 18184 10767 7223 16802

1929 2354 2784 3453 3888 3870 4698 5484 6878 8678 8625 12200 13536 15742 18065 17350 19657 17422 18620 22581 25144 25331 28131 33869

939 1910 2634 4295 5346 5515 7358 8685 10257 12028 11693 16800 19359 24993 26454 28058 30885 34040 43218 56561 65077 78110 85174 87948

990 444 150 −842 −1458 −1645 −2660 −3201 −3379 −3350 −3068 −4600 −5823 −9251 −8389 −10708 −11228 −16618 −24598 −33980 −39933 −52779 −57043 −54079

1799 2035 2111 2334 2596 2798 2913 3583 4800 6399 6560 8000 8931 10466 12899 17698 17778 16162 15040 14982 14381 18275 20275 26869

3305 3912 4213 5330 6503 7403 8388 11104 12892 14380 13211 17200 21796 28943 31207 34222 38302 39661 47200 61155 66345 79179 88824 96424

−1506 −1877 −2102 −2996 −3907 −4605 −5475 −7521 −8092 −7981 −6651 −9200 −12865 −18477 −18308 −16524 −20524 −23499 −32160 −46173 −51964 −60904 −68549 −69555

105

Source: Historical Statistics of the United States Colonial Times to 1970—Part 2: Series U 249-263; Statistical Abstract of the United States: Exports and Imports—Value by Broad End Use Class, various issues; own calculations.

106

Table 5.2 US exports and imports of merchandise by areas of destination and origin, 1965–88: Balance (millions of US dollar); percentage share of exports (%E); percentage share of imports (%I) AMERICA

Year 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988

Other Western hemisphere countries

Canada Balance 811 536 58 −867 −1247 −2013 −2426 −2492 −2611 −2350 −497 −2131 −3811 −5151 −4950 −6064 −6850 −12757 −13886 −19954 −21755 −22920 −11271 −11688

%E 21 22 23 23 24 21 23 25 21 20 20 21 21 20 18 16 17 16 19 21 22 23 24 22

EUROPE

%I 23 24 27 27 28 28 28 27 25 22 23 22 20 19 18 17 18 19 20 20 20 18 17 18

Balance −97 748 84 210 413 697 454 271 322 −2615 1041 2579 −3135 −928 −2004 1491 3081 −4398 −15747 −18210 −15440 −10870 −11888 −7351

%E 16 14 15 15 15 15 15 15 14 16 16 17 15 15 16 18 18 16 13 14 15 14 14 14

%I 21 19 17 15 14 15 13 13 14 18 17 14 14 13 15 15 15 16 16 15 14 11 12 12

Other Western Europe countries, Communist including EFTA Areas in Europe

EC Balance 1930 1379 1190 190 1207 1814 865 −123 1140 2863 6472 8010 5248 3574 9926 18217 10739 5423 410 −10384 −18985 −22581 −20613 −9065

%E 19 18 18 18 18 19 19 18 23 22 22 23 23 23 24 25 22 23 22 22 21 23 24 24

ASIA

%I 16 16 17 18 16 17 16 16 22 19 17 15 15 17 16 15 16 17 17 18 19 21 20 19

Balance 1139 748 862 612 1047 1480 702 61 934 2040 2581 1597 1843 −128 2735 2693 2783 2285 1677 −2759 −4008 −5601 −5165 −3454

%E 14 14 14 14 14 14 13 13 6 7 6 5 6 6 6 6 6 6 6 5 5 4 4 4

% I Balance % E 13 3 1 14 11 1 13 18 1 13 19 1 12 54 1 10 125 1 11 161 1 12 498 2 5 1275 3 4 542 1 4 2056 3 4 2773 3 4 1412 2 4 2177 3 4 3818 3 4 2423 2 4 2784 2 4 2543 2 4 1532 1 4 2034 2 4 1279 1 4 −12 1 3 277 1 3 492 1

%I 1 1 1 1 1 1 0 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1

Middle East Countries

Japan Balance −334 −599 −304 −1107 −1398 −1223 −3206 −4101 −1363 −1777 −1862 −5359 −8021 −11573 −8667 −9924 −15789 −12757 −19289 −35560 −46152 −55029 −56326 −52070

%E 8 8 9 9 9 11 9 10 12 11 9 9 9 9 10 9 9 8 11 11 11 12 11 12

AUSTRALIA and OCEANIA

%I 11 12 11 12 14 15 16 16 14 12 12 13 13 14 13 13 14 15 16 18 20 22 20 20

Balance 455 537 601 691 931 998 1173 1142 1444 431 2962 223 −2811 999 −3959 −6772 −3579 4138 6661 3071 3442 525 −1309 −654

%E 3 3 3 3 3 3 4 4 4 5 8 8 8 9 6 5 6 8 7 5 5 4 4 3

AFRICA

Other Asian Countries including NICS

% I Balance % E 2 1363 11 1519 11 1 1501 11 1 1083 10 1 453 9 1 631 9 1 100 9 1 −861 9 2 181 10 5 −391 10 6 −24 10 7 −4502 9 9 −7044 9 7 −7660 10 7 −5342 11 8 −3434 12 7 −8816 12 5 −7648 13 3 −15023 14 2 −25110 14 2 −28428 13 2 −34833 13 4 −43550 14 3 −38302 16

% I Balance % E 8 506 3 8 212 3 8 436 3 8 332 3 8 170 3 9 318 3 9 274 3 10 −111 2 10 182 3 10 1192 3 10 660 2 12 1019 2 12 1149 2 13 1114 2 12 1247 2 13 1484 2 14 3083 3 15 2569 3 17 1783 2 17 2187 3 16 2580 3 17 2942 3 19 2389 3 20 3418 3

Source: Statistical Abstract of the United States: Exports, Imports and Merchandise Trade Balance, By Continent, Area and Country, various issues; own calculations.

%I 2 2 2 2 2 2 2 2 2 1 2 1 1 1 1 1 1 1 1 1 1 1 1 1

Balance 351 370 376 148 346 467 457 −18 −277 −2962 −3350 −7438 −11575 −11011 −18083 −25350 −15974 −7499 −5657 −5528 −4576 −4370 −5656 −3432

%E 4 5 4 4 4 4 4 3 3 4 5 4 5 4 3 4 5 5 4 4 3 3 2 2

%I 4 4 4 3 3 3 3 3 4 7 9 10 12 10 12 14 10 7 6 4 3 3 3 2

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European capital, although the rate of Japanese FDIs was the fastest growing (see Table 1.5). This meant that a growing share of US GDP was engendered by the inflow of foreign capital. In 1986 the dollar fell by over 21 percent on a year base, both in nominal and real terms, relative to the basket of its main trading partners’ currencies. The posture of monetary policy remained broadly accommodating. The discount rate was reduced in four steps, facilitating the decline in short-term interest rates, and long-term interest rates also moved lower, extending the drop of the previous year. Baker managed to maintain political pressure on the Western allies despite the resistance of some of them, the Germans in particular. The participants in the Tokyo Economic Summit in May 1986 remarked that “there has been a significant shift in the pattern of exchange rates which better reflects fundamental economic conditions”. However, the heads of state and government requested their finance ministers to improve economic coordination, with particular focus on promoting non-inflationary economic growth and strengthening market-oriented incentives for employment and productive investment. This was a call for greater domestic rather than export-led growth, particularly addressed to Germany and Japan.19 It is thus arguable that dollar depreciation might still have a role in a wider strategy in which the US trading partners were supposed to buy more American products to meet growing domestic demand, while exporting less to the United States and avoiding hitches to its continuous economic expansion, helped by lower interest rates. Observers also noted that the secretary of the Treasury was willing and apt in talking down the dollar as some of his remarks gave a helping hand in inducing market operators to sell dollars for other currencies.20 Yet, the current dollar deficit of the merchandise and current account balances went on growing, reaching a peak respectively of $145,058 million and $145,393 million. An explanation might be found in the classical Marshall-Lerner Condition and in its proviso for the short-term, the J-curve effect. According to the Marshall-Lerner Condition, the devaluation (or depreciation in the case of flexible exchange rates) of a currency can result in an improvement of the trade balance if the increase in import expenditures and the decrease in export revenues caused by the depreciation are more than offset by the decline in the demand for imports, and by the increase in the demand for exports. In short, the outcome of a currency depreciation depends on whether or not the quantity effect outweighs the decline in the value of the currency. Hence, according to the Condition, for a currency depreciation to have a positive impact on the trade balance the sum of the price elasticities of exports and imports must be greater than 1: ƞxe +| ƞxm| > 1, where ƞxe and ƞxm are notation for the elasticity of exports and imports with respect to the exchange rate. According to the J-curve theory, initially after the depreciation of the currency there will be no change in the quantity of imports and exports, which, therefore, will become respectively more expensive and cheaper, thus worsening the trade balance. Subsequently, the volume of the nation’s exports begins to rise, while consumers at home begin to buy more locally produced goods, and over time the trade balance between that nation and its partners bounces back and even exceeds pre-depreciation times. There was, however, a problem in the explanations provided by the two theories. Both models are based on the implicit assumption that there must be a positive

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response to the currency depreciation in volume and constant value of the exported and imported goods and services, a response that might be sufficient to offset the depreciation, or insufficient and even null. In 1986 the US real trade balance worsened, and the deficit grew to $155.1 billion for the GDP and $146 billion for the GNP. Both exports and imports increased by a modest 6.6 percent, but the base of the latter was much higher, resulting in a widening of the gap between the two components (see Table 1.2).21 As noted by the GATT, the response to the change in real exchange rates was asymmetric between the countries that experienced a real appreciation of their exchange rate, such as Japan, Switzerland, Germany, and the Netherlands and the ones that experienced a real depreciation, such as the United Kingdom, Taiwan, Korea, and the United States.22 In the first group, with few exceptions, there was a marked decline in the growth of total export volume, or even a change from growth to decline, while the growth of import volume accelerated. In the second group real depreciation did not improve export performance, while imports went on growing and in some nations even showed an acceleration. The modest increase in the volume of US exports was the result of a significant decline in farm exports and an expansion of industrial supplies excluding fuels, but it was only in the last quarter of the year that exports of manufactured goods showed a remarkable rebound.23 The executive explained the slow recovery in export volume with the persistent difficulties encountered by the developing countries and by the still sluggish pace of demand for imports in the industrial nations, also attributed to the persistence of structural rigidities.24 Since the outset of the 1980s the developing countries, mostly in Latin America, had been hard hit by a combination of factors, including the fall in the price of oil and other raw materials, the higher price of imports quoted in US dollars, and the soaring interest rates they had to pay on debts incurred in the previous decade. Difficulties in servicing their debts had forced credit-restricted nations to reduce current consumption and imports and to try to increase exports.25 US exports to Latin American and other Western hemisphere countries, excluding Canada, declined, in nominal terms, by over 22 percent between 1980 and 1985. The predicament of the Latin American oilexporting countries, including Mexico, Venezuela, and Ecuador, worsened when in 1986 there was a sharp decline in oil prices, which had repercussions on their capacity to import foreign products, most of which were from the United States, and in servicing their debts, most of which were held by American banks. To stave off an irreversible collapse of the economies of the debt-burdened developing countries, and in particular of those with stronger links to the United States, such as Mexico, in October 1985 Baker put forward a plan involving an additional $29 billion in credit to those countries over the period 1986–88, $20 billion being provided by commercial banks and the balance by multilateral development financial institutions (MDFIs), headed by the World Bank, which were assigned a coordinating role.26 Under the plan the MDFIs were charged with increasing their lending, with providing analytical expertise, and with verifying the debtor countries’ compliance with market-oriented reforms. The structural, that is market-oriented, reforms that the developing countries were requested to undertake proved a hard medicine to swallow, but the flow of private and multilateral credits kept them afloat. It was not, however, able to solve their difficulties

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in servicing their debt and in achieving a stable recovery. In March 1989 the Baker Plan was replaced by the Brady Plan, with better results.27 The economies of most EC member countries consolidated their recovery, helped by lower petroleum prices and by the decline in interest rates. On the other hand, their growth rate was overall still below that of the United States while the unemployment rate was higher. This did not favor the increase of imports from the United States, which already were not particularly conspicuous and whose share of total imports did not improve.28 Growth rate in Japan slowed to under 3 percent because of the decline in exports, the main engine of the Japanese economy. The contraction of exports was only partially offset by the growth of internal demand due to structural rigidities that allegedly held domestic demand below its full potential, thus hampering a significant expansion of imports. The other side of the coin was the steady rise of real imports despite the fall of the greenback. Time lag in the effect of the depreciation might have played a role, but certainly it was not the main factor, and actually it can better explain the absence of a decline in imports rather than their persistent growth. The dominant factor was instead the excess of national investment over national saving, or to put it another way, the excess of domestic demand growth over income growth.29 The cause of the discrepancy cannot be put on investment as in 1986 gross private domestic investment was lower than in 1984 (See Table 1.2). What was rising at a steady pace was the total government deficit, and in particular the federal government deficit which grew by $20 billion relative to the previous year and was three times as high as in 1980, thus absorbing a sizeable share of a never particularly high domestic private saving (see Table 1.6). Volcker remarked that the depreciation of the dollar was contributing to reduce the US external deficit and to reduce the surplus of its main trading partners, but was not necessarily sufficient to secure a steady international equilibrium. What was needed was better coordination of international economic policy, expanding domestic demand in most EC countries and in Japan and reducing it in the United States. In particular, Volcker feared that the United States was still not prepared for a really large improvement in the trade balance as “our financial market remains dependent on the large capital inflows from abroad that are a necessary counterpart of our trade and current account deficits”.30 Moreover, in his view, a cascading depreciation of the dollar posed a risk of renewed inflation and inhibited inflow of capital from abroad at reasonable interest rates. To overcome these dangers, he suggested that the United States should shift more of its resources into exports and into recovering domestic markets affected by high import penetration, which implied “relatively more growth in manufacturing; relatively less growth in services, in government spending, or in other sectors; and more savings and less borrowing”.31 Hence, the chairman noted that “only as our huge federal deficit is cut can we comfortably contemplate less borrowing abroad and provide assurance against renewed inflation”.32 There was, however, a further causal factor that affected both imports and exports: the dollar had not depreciated substantially or even had not depreciated at all against the currencies of important trading partners, including Canada, South Korea, Taiwan, and Hong Kong, which concurrently amounted to about 25 percent of American trade.33 In short, for a group of countries having a sizeable weight in US trade there had been no significant alteration in the currency relation relative to previous years.

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1987–88 recovery in the trade sector, but with limits and snags Trade data for 1987 and 1988 present similarities, differences, and peculiarities. In both years there was a decline of the trade deficit in real terms, moderate in 1987 and sizeable the following year (see Table 1.2). On the other hand, the merchandise trade deficit in current dollars went on growing in 1987, but showed a non-negligible reduction the following year; the same went for the current account deficit (See Table 1.4). The US currency depreciated in both years, although at different speed (Figures 5.2 and 5.3). In 1987 the US dollar depreciated by 14 percent relative to a trade-weighted average of the other G-10 countries, i.e. the main industrial nations.34 Yet, at least officially, there was a consensus in the major industrialized countries on preventing the dollar from going down too far. For the United States there was the risk of reigniting inflation and of generating a negative image of its economic and political performance that might curtail foreign investments with a domino effect, while for Western Europe there was the threat of overvalued currencies, as in the later part of the 1970s, that could hinder their efforts to overcome structural problems.35 For most of 1986 the US current account deficit had been plentifully financed by private capital as foreign investors believed that, given the strong bull market on Wall Street, exchange rate losses would be offset by capital gains on stocks and bonds. However, in the last part of the year and since the outset of 1987, a growing share of foreign private investments was replaced by foreign exchange reserves held by central banks outside the United States.36 Following the October 1986 bilateral meeting between James Baker and his counterpart Kiichi Miyazawa, the dollar steadied. In their communiqué, the Japanese Finance minister announced a package of fiscal and monetary measures to stimulate the economy, while the secretary of the Treasury reaffirmed his administration’s commitment to curtail the fiscal deficit consistently with the Gramm-Rudman-Hollings Act. The two ministers expressed a willingness to cooperate on exchange market issues, pointing out that, given their commitments on fiscal and monetary policy, the dollar–yen realignment achieved since the Plaza accord was broadly consistent with the economic fundamentals of their countries. In January 1987, after a new joint statement by Baker and Miyazawa reaffirming their willingness to cooperate on foreign exchange issues, a coordinated US–Japanese intervention on the exchange market encouraged expectations that multilateral efforts might be forthcoming to prevent the dollar from declining further. On February 22, the ministers of finance and the central bank governors of the G-7 countries, except Italy, meeting at the Louvre in Paris, stated that, given the economic policy commitments they were making, their currencies were “within ranges broadly consistent with underlying economic fundamentals”. In particular, the authorities of Germany and Japan stated that they would provide greater stimulus to their economies, while those of the United States gave assurances that they would resist protectionism and substantially reduce the budget deficit. The participants also noted that “further substantial exchange rate shifts among their currencies could damage growth and adjustment prospects in their countries” and announced that they had agreed “in current circumstances to cooperate closely to foster stability of exchange rates around current levels”.37

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The Louvre meeting encouraged the operators in the currency market to believe that the main industrial countries were committed to stabilizing the level of the US dollar, thus strengthening its value. But already in April, following a meeting of the G7 finance ministers and central bankers in Washington in which no new measures were announced, and given disappointing news on the US current account, the American currency was again subject to intense selling pressure. After a recovery that began in late spring and lasted till early August, the dollar came repeatedly under heavy downward pressure from late August. News that the trade deficit for June had been larger than in any previous month prompted heavy sales, which in turn forced the US Treasury and the FED to intervene in the market. Matters came to a head in October, making it also clear that the worries and goals of the Treasury and the FED did not fully coincide. In his memoirs, Alan Greenspan, the new chairman of the Federal Reserve, writes that when he started his mandate he was particularly worried by: the swelling of the national debt from the beginning of the Reagan presidency; the fall of the dollar, which made people worry that America was losing its competitive edge; and the increase in inflation rate in 1987—all factors suggesting the need for a less accommodating monetary policy.38 In September, the Board of Governors increased the discount rate from 5.5 percent to 6 percent. In October, James Baker, more concerned with securing cooperative fiscal and monetary policies from the main trading partners, was reported to comment that surplus countries (that is, Japan and in particular Germany) should not raise interest rates in the expectation that US interest rates would surely follow, and that the Louvre framework could accommodate further currency adjustments.39 These comments, which might have been misinterpreted, caused a further decline of the US currency. On October 16, the Dow Jones average dropped by 108 points in the worst stock market crisis in the decades after October 1929. Slowing growth and further weakening of the dollar were among the factors that contributed to the reaction of the stock exchange operators.40 The FED reacted vigorously, serving as a source of liquidity to support the economic and financial system, and the danger of a prolonged downfall was overcome the same month. On the other hand, the injection of liquidity did not help the strengthening of the greenback. After a very short period of apparent calm, the downward pressure on the dollar restarted, as press commentary, whose truth was strongly denied by Baker, repeatedly suggested that the US authorities were prepared to allow the dollar to decline further. In addition, interest rates in the United States fell sharply after the stock market decline. Interest rate differentials, previously favoring the dollar, contracted sharply, as interest rates abroad decreased less than in the United States, and pessimism about efforts to reduce the fiscal deficit weighed on the dollar.41 At the end of the month the monetary authorities had to intervene in the market, in cooperation with the central banks of other industrial countries, including the Bank of Japan and the German Bundesbank, to stop the downfall. The data for 1987 show a set of peculiarities calling for explanations. In the first place, the merchandise trade and the current account deficits in current dollars went on growing, as had happened in 1986, reaching respectively $159,500 million and $160,201 million; and this, in spite of the prolonged slide of the dollar since the first quarter of 1985. The merchandise trade deficit in current dollars with Japan and

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especially with the East Asian countries worsened, but contracted with the EC as a whole and with Canada (see Table 5.2). From the fourth quarter of 1986 to the fourth quarter of the following year, the value of exports increased 20 percent while that of imports climbed 14 percent, with the caveat that at the end of 1986 the value of imports was 68 percent higher than that of exports.42 The trade balance in real terms showed signs of improvement, but remained deeply in the red and the deficit was much higher than in 1984 and almost twenty times as high as in 1982 (see Table 1.2); besides, real imports continued to grow. Finally, but this feature will become more evident in 1988, despite the persistence of a sizeable real term deficit, foreign trade started to contribute vigorously to the extension of the positive trend of the US economy. In particular, the volume of merchandise exports increased strongly as US exporters took full advantage of the depreciation; indeed, the dollar price of US exports was only marginally larger than the increase in the price of similar domestic goods.43 The expansion concerned both industrial supplies and materials, such as lumber, paper products and semifinished iron and steel, and consumer durables, from sporting goods to household electrical appliances and recreational equipment. Also, farm exports recovered after two years of decline. On the other side of the ledger, merchandise imports went on growing. On previous occasions imports, due to price adjustment, had responded with a lag of up to two years to changes in exchange rates. This did not happen in 1987. In 1987 and in the previous year there was only an attenuated J-curve effect, which can be explained by the fact that exporters preferred to narrow profit margins so as to maintain market shares as the dollar depreciated. Rises in import prices were smaller than was to be expected and consequently the J-curve effects, through which depreciation temporarily inflate trade deficit, were muted and delayed.44 According to the OECD, only about one half of the dollar’s decline resulted in higher prices of exports to the United States, excluding fuels.45 It is likely that foreign manufacturers had built up their profit margins on their exports during the phase of overvaluation of the dollar and, therefore, were able and willing to curtail them during its decline. It has also been suggested that the decision taken by foreign exporters not to pass through a share of the dollar depreciation into the price of their manufactured goods was influenced by the slow growth of labor costs and the decline in the price of oil and other commodities, which gave them room for maneuver.46 If the depreciation and the pass-through in dollar prices did not have a decisive role in causing the worsening of the trade balance, other factors must have been at play in bringing about the growth of imports during the year. In contrast to most previous years in the decade, the US economy’s growth rate was actually slightly below the average of that of the OECD countries, that is the main trading partners, exceeding in particular the growth in the EC member states, but falling behind that of Canada and Japan. Outside the industrial countries, real economic growth went on expanding at a rapid rate in the newly industrialized countries of Asia, but declined in several Latin American countries. The persistence of the external deficit was mainly due to the excess of growth in real demand over growth in national income.47 This can also be described as excess of gross private domestic investment over gross domestic saving, i.e. the sum of private saving (household and business) plus public saving or dissaving (surplus or deficit of federal, state, and local governments).

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The OECD cast doubts on the exclusive role of the US fiscal deficit in causing the country’s trade and current account deficits.48 The Paris organization pointed out, in the first place, that in 1987 the fiscal deficit declined but the external balance went on deteriorating. Secondly, it remarked that, although the central government deficit was somewhat higher than the OECD average, the states and local governments were in surplus, and consequently the general government deficit as a share of GNP was below the average of the major seven OECD states. Therefore, the organization argued that other factors, such as the deterioration of private saving might have been at play. The Paris organization’s assessment is partially confirmed by the data concerning the relation between US investment and saving (see Table 1.6). Gross private saving fell by about 2 percent of GDP in less than ten years. Yet there is no denying that the total government deficit was certainly still a main factor in taking away saving from the financing of domestic investment, as the permanent surplus for state and local governments was less than a third of the almost constant federal government deficit.49 Till 1981, gross saving in the United States quite often exceeded gross private domestic investment, but things radically started to change in 1982 and the main culprit was the federal government deficit. Certainly, the federal deficit started to grow during the first oil crisis; however, in 1985 it was exactly three times as high as in 1980 and almost forty times as high as in 1968. In 1987, public debt was more than twice as high as six years earlier. The gap was closed by the surge of net foreign investment, which reached its maximum level in 1987. On the other hand, the year witnessed a fall of about a third in the federal deficit. The contraction was due to a number of favorable one-time factors like revenues boosted by the effect of previous tax reforms, while changes in the timing of certain payments delayed outlays.50 Actually federal revenues were the dominant factor in the reduction, while expenditures went on rising in nominal and real terms, although at a low rate. The administration and Congress also reached an agreement on further deficit reductions in the following two fiscal years. However, the reduction of the federal deficit was partially offset by the decline in the surplus of state and local governments under the pressure of reduced federal grants and local tax limitation movements. After a peak in 1984, personal saving decreased by over a third three years later and its decline was barely offset by an increase in business saving. The reduction was mirrored by a growth in private debt, fostered by aggressive lending by financial institutions and by techniques of non-financial corporations aimed at stimulating purchases, such as interest-rate bargains and buy-downs offered by auto companies and home builders.51 The following year seemed to be destined to confuse the doubtful. In his final Economic Report, the president felt confident enough to write, though with regard to his whole mandate: “When I took office 8 years ago there was widespread doubt concerning the ability and resolve of the United States to maintain its economic and political leadership of the free world. . . . Today, it is as if the world were born anew. Those who doubted the resolve, and resilience, of the American people and economy doubt no more.”52 The data for 1988 seem to vindicate his enthusiastic statement. The year was the sixth in one of the longest economic recoveries since the Second World War, but, while the growth rate in the previous triennium was not remarkably high, especially if compared with the brief upturn of the second half of the 1970s, it could

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boast a growth rate that compared favorably with the average of the two preceding decades (see Table 1.2). The administration could also claim remarkable success in curtailing the federal deficit, which was reduced by almost a third from its peak in just two years. Even more conspicuous was the decline of the federal deficit as a share of domestic product as it went down from 5.29 percent in 1983 to 2.79 percent in 1988. Good progress was made too in cutting the external deficit, which fell by 21 percent from the peak of 1987, its ratio decreasing to a more modest 2.58 percent of GDP (Table 1.4). Hence, the US deficit was smaller than that of the United Kingdom as a percentage of GDP, although it remained above the average of its major trading partners, some of which, Japan and Germany in particular, had a surplus.53 The trade deficit in real terms declined to $104 billion. This was the result of a jump of exports that boasted a 16.7 percent growth rate, while imports grew by only 3.7 percent (Table 1.2). Merchandise trade was particularly dynamic as exports volume soared by 22 percent, over three times as high as imports.54 The administration explained the improvement by the delayed positive effect of the depreciation of the dollar and by the growth of productivity, which was more rapid than in most US trading partners and had not been offset by a significant rise in the cost of labor.55 It is, however, arguable that the improvement was made possible by the temporary contraction of the gap between available private saving and domestic investment. In current dollars the merchandise trade deficit with the EC declined by 56 percent; that with Japan by a more modest 7.6 percent, though in constant dollars the decrease was more significant. A 12 percent decrease was also recorded with the Asian countries, excluding the Middle East (Table 5.2). Till 1986 growing real net exports had been a negative factor in the formation of domestic and national product. The trend changed in 1987, although the first signs of a shift appeared in the last quarter of 1986, and accelerated in 1988. This was due to the weight of exports and imports in the US economy and to the different speed of their growth rate. According to the USTR 1988 report, from late 1986 through mid-1988, GNP growth would have averaged a full percentage point less if no real trade correction had occurred.56 The surge of merchandise exports entailed a shift from services to goods (manufacturing, materials, and agriculture) in contributing to economic growth: in the mentioned period, good production grew at an annual rate of 5.9 percent, while services output rose at a rate of 3.3 percent.57 Thanks to export growth, manufacturing production jumped on average by 6.3 percent, with peaks in iron and steel, nonelectrical machinery, chemicals, and rubber and plastics; soaring exports along with strengthened domestic demand pushed several manufacturing industries to near capacity.58 Manufacturing exports surged in particular in automotive vehicles, spacecrafts and parts, iron and steel, synthetic resins and plastics, and a wide variety of machinery (Table 5.1). Yet, the Reagan administration could not claim to have reversed the downwards trend that had marked the US manufacturing in the international trade before the 1980s (Figure 5.4). Also, agricultural exports went on recovering from the trough of 1986. Major increases in manufacturing imports were registered in electrical machinery, chemicals, office machines and iron and steel products. Growth in world merchandise trade scored an 8.5 rate, the highest after 1984. According to GATT statistics, in 1988 US

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Figure 5.4 Percentage shares of main exporters in manufacture trade, 1980–88. Source: World Trade Organization: Documents Data and Resources—Statistics on Merchandise Trade—Manufactures, 1980–88; own calculations.

exports were exceeded by a hair’s breadth by those of Germany and accounted for 11.1 percent of world merchandise exports, well above those of Japan, France, and the UK; when its imports, amounting to over 15 percent of the total, were included, the United States was still the world largest trader by a wide margin.59 As regards the persistent trade deficit, the US executive pointed out that very likely it was a blessing needing no particular disguise as it necessarily implied a corresponding inflow of capital, whose beneficial or negative effects much depended on how such resources were used.60 The current account deficit was balanced by a capital account surplus; total assets held by foreigners included official assets such as international reserves, direct investments, and other private assets such as bonds, Treasury bills, bank deposits, and stock. The latter two provided resources that could not only increase investment, raising productivity and future output, but also finance social services for US citizens, and perhaps boost muscular spending in defense of the free world, which some foreign allies were lukewarm to share. By 1988 the stock of foreign direct investments attracted by the favorable prospects of return in the United States was almost equal to US FDIs abroad, whereas at the end of the 1970s it was only a third.61 It might be argued, however, that in contrast to the optimistic reports of the executive, the trade gap was symptomatic of a declining trend in American competitiveness. The critics of the experiment, or rather the experiments, of the Reagan administration point out in the first place that total annual borrowing, private plus public, in the 1980s rose to an unprecedented peacetime level of 22.1 percent of GDP compared with 17.4 percent for the years 1973–80 and 11.8 percent for the years 1960– 73.62 Secondly, despite the prolonged recovery from the 1982 slump, notwithstanding the curb imposed on the cost of labor, the rate of profit for the private business economy

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in the 1980s failed to reach the previous post-oil crisis level attained during the second half of the 1970s.63 The decline was probably caused, at least partially, by the fact that several sectors of the American industry had been losing ground to foreign competition. Thirdly, despite the relaxation of monetary policy after the downturn of the early 1980s, during the whole decade both short-term and long-term interest rates on business borrowing were much higher than in the previous decades.64 The combination of low rate of profit and high interest rates stemmed private investment: in the 1980s net business investment accounted for about 2.7 percent of national income, whereas on average from the 1950s to the 1970s the ratio was 4.1 percent.65 This, in turn, was destined to hamper productivity growth relative to main trading competitors, such as Germany and Japan, not to mention the Asian NICs. The chairman of the FED was not willing to give unconditional support to the optimistic view of the administration. The discount rate was raised to prevent the overheating of the economy just before the Republican convention, thus disappointing those, the vice president in particular, who wanted to reap the benefits of the Reagan economic policy, as they had contributed to its success. Moreover, quite soon Greenspan made it clear both to the new executive and to Congress that “the deficit was no longer a mañana problem” because to balance its books the government had to borrow by selling treasury securities, siphoning away capital that would otherwise be invested in the private economy.66

Notes 1

Martin Feldstein, “Correcting the Trade Deficit”, Foreign Affairs, Vol. 65 (1986–87), n. 4, 798. 2 The text of the announcement of G-5 Ministers and Governors of January 17, 1985 is reproduced in Yoichi Funabashi, Managing the Dollar: From the Plaza to the Louvre (Institute for International Economics, 2nd edn., 1989). 3 Treasury and Federal Reserve Foreign Exchange Operation, FRB , November 1985, 855, 858. 4 Ibid., 851. 5 The Announcement of the Finance Ministers and Central Bank Governors of France, Germany, Japan, the United Kingdom and the United States is reproduced in ARPTAP 1984–85, Twenty-eighth issue, Annex C. 6 James A. Baker, Work Hard, Study and Keep Out of Politics: Adventures and Lessons from an Unexpected Public Life (New York: G.P. Putnam’s Sons, 2006), 430. Also Jeffrey Frankel, The Plaza Accord, 30 Years Later (Cambridge, MA, 2015), 7. 7 ERP, February 1986, 64; Joseph Hogan, “Federal Budget in the Reagan Era”, in Joseph Hogan (ed.), The Reagan Years: The Record in Presidential Leadership (Manchester and New York: Manchester University Press, 1990), 227. 8 PPPUS—Ronald Reagan, Statement on Signing the Bill Increasing the Public Debt Limit and Enacting the Balance Budget and Emergency Deficit Control Act of 1985, December 12, 1985. 9 See in particular Iwan W. Morgan, The Age of Deficits, 111 et seq. 10 James A. Baker, Work Hard, Study and Keep Out of Politics, 431. 11 Ibid., 428, 431.

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12 I.M. Destler et al., Dollar Politics, 43. 13 Peter Baker et al., The Man Who Ran Washington, 261 et seq. 14 Statement by Paul A. Volcker before the Subcommittee on Banking, Finance and Urban Affairs of the Committee on Banking Finance and Urban Affairs, U.S. House of Representatives, July 17, 1985, FRB , September 1985, 692, 696. 15 Ibid., 697. 16 Statement by Preston Martin, Vice Chairman, Board of Governors of the Federal Reserve System before the Subcommittee on Banking, Finance and Urban Affairs, U.S. House of Representatives, July 17 1985, FRB , September 1985, 699. 17 U.S. International Transactions in 1985, FRB , May 1986, 291, Table 2. 18 Ibid., 294. 19 Henry R. Nau, The Myth of America’s Decline: Leading the World Economy into the 1990s (Oxford and New York; Oxford University Press, 1992), 273. 20 Yoichi Funabashi, Managing the Dollar, 235. 21 See also Paul Krugman et al., “The Persistence of the U.S. Trade Deficit”, Brooking Papers on Economic Activity, 1987 n. 1, 5 et seq. 22 GATT International Trade 86–87 (Geneva: General Agreement on Tariffs and Trade, 1987), 12 and Box 1.1. 23 U.S. International Transactions in 1986, FRB , May 1987, 324, Table 2. 24 ERP, January 1987, 103 et seq. 25 Robert Solomon, The Transformation of the World Economy (London: Macmillan, 2nd edn., 1999), 167. 26 See in particular, Patrick Conway, “Baker Plan and International Indebtedness”, The World Economy, Vol. 10 (1987), n. 2, 193 et seq. 27 See Catherine R. Schenk, International Economic Relations since 1945 (London, New York, Routledge, 2011), 72 et seq. 28 See Giuseppe La Barca, The US, the EC and World Trade, Tables 12 and 14. 29 U.S. International Transactions in 1987, FRB , May 1988, 281; GATT, International Trade 86–87, 89. 30 Statement by Paul A. Volcker before the Committee on Banking, Finance and Urban Affairs, U.S. Senate, July 13, 1986, FRB , September 1986, 637. 31 Ibid. 32 Ibid., 638. 33 ERP, January 1987, 116; GATT International Trade 86–87, Box 1.1. 34 Monetary Policy Report to Congress, FRB , March 1988, 155. 35 Stephen Marris, Deficits and the Dollar: The World Economy at Risk (Washington DC: Institute for International Economics, 1987), 253. 36 Ibid., XXVIII. 37 The Louvre G-6 Communiqué is reproduced in Yoichi Funabashi, Managing the Dollar, 277–80; also Treasury and Federal Reserve Foreign Exchange Operations, FRB , July 1987, 553. 38 Alan Greenspan, The Age of Turbulence: Adventures in a New World (London, New York: Penguin Books, 2007), 102. 39 Federal Reserve Foreign Exchange Operations, FRB , January 1988, 16. 40 Alan Greenspan, The Age of Turbulence, 104. 41 Ibid.; also Stephen Grubaugh et al., “Monetary Policy and US Trade Deficit” in Joseph Hogan (ed.), The Reagan Years. The Record in Presidential Leadership (Manchester: Manchester University Press, 1990), 246. 42 U.S. International Transactions in 1987, FRB , May 1988, 281.

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43 Monetary Policy Report to Congress, FRB , March 1988, 156. 44 OECD Economic Surveys: United States 1987.88 (Paris: Organisation for Economic Cooperation and Development, 1988), 33. 45 Ibid. 46 U.S. International Transactions in 1987, FRB , May 1988, 283. 47 Statement by Paul A. Volcker before the Subcommittee on International Finance and Monetary Policy, Committee on Banking, Housing and Urban Affairs, U.S. Senate, April 7, 1987, FRB , June 1987, 426. 48 OECD Economic Surveys: United States 1988–89 (Paris: Organisation for Economic Cooperation and Development, 1989), 58. 49 See for further detail Benjamin Friedman, Day of Reckoning, 169. 50 Monetary Policy Report to Congress, FRB , March 1988, 157. Ibid., 174. 51 Leonard Silk, “The United States and the World Economy”, Foreign Affairs, Vol. 65 (1986–87), n. 1, 460. 52 ERP, January 1989, 2. 53 GATT International Trade 88–89 (Geneva: General Agreement on Tariffs and Trade, 1989), 18. 54 Ibid., 17, Table 14. 55 ERP, January 1988, 120. 56 Twenty-ninth ARPTAP, 1988, 15, Graph 7. 57 Ibid., 15. 58 Ibid. 59 GATT International Trade 88–89, 15, Table 11. 60 ERP, January 1989, 128 et seq. 61 The reduction of the gap between US FDIs in foreign countries and foreign FDIs in the United States might be, as noted by the Economic Report of the President, less pronounced, as direct investment was valued at historical cost and, therefore, the increased market value of older assets was not taken into account. 62 Robert Brenner, The Economics of Global Turbulence: The Advanced Capitalist Economies from Long Boom to Long Downturn (London: Verso, 2006), 197. 63 Ibid., 195. 64 Benjamin Friedman, Day of Reckoning, 173. 65 Ibid., 174. 66 Alan Greenspan, The Age of Turbulence, 113.

6

The Executive, Congress, and the New Course of Trade Policy

If in the first Reagan presidency foreign trade was the preserve of the executive, which cunningly exploited the threat of severe application of the remedies envisaged by the laws, while Congress had only a supportive role, in the 99th and 100th legislatures the lawmakers claimed a much more active role in shaping trade rules. This does not mean that there was a uniform pattern in the attitudes of the legislators nor that there was an absolute divide between the two parties, although the omnibus trade statute, finally cleared in 1988, was mainly the offspring of Democratic initiatives. Likewise, interests and attitudes of the industries involved in international trade were far from uniform. Certainly, most of the industries whose fortunes in the domestic market were affected by foreign competition were likely to call for stricter protection, but their claims were offset by those of the industries that wanted to conquer or defend foreign markets, or that benefited from imports. For instance, if traditional industries such as textiles, apparel, and shoes claimed for import barriers, the big chains of retail shops had the opposite interest. Agriculture and high-tech industries were affected by foreign competition, but they were largely interested in securing foreign markets. Other industries feared competition from abroad, but, given their trade structure, were opposed to tariff increases.

The legacy of the Trade and Tariff Act of 1984 Three months before the start of the second presidency, the Republican executive had succeeded, though not easily, in gaining the endorsement of Congress to its plans on foreign trade relations. In dealing with the growing trade deficit and its impact on US industry and employment, the lawmakers had favored the establishment of cogent rules to defend American interests in the trade arena. Yet, they did not easily agree on the direction that such rules should take. Two sometimes intersecting strands prevailed in Congress: a more protectionist one calling for higher duties or quotas, either limited to particular products or to the whole of imports, and for stricter proceedings against unfair trade; and a second one calling for reciprocity in the face of allegedly restrictive trading partners’ practices hindering American exports and investments. In the first group the most prominent bill was the one on “domestic content” for motor vehicles. Other bills called for special 119

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protection for sectors such as shoes, aluminum, and copper, or for expanding the net of antidumping and countervailing duty proceedings to the so-called downstream dumping (i.e. the unfairly low priced sale of an input to a producer in a foreign country of a product incorporating that input) and the so-called natural resource subsidy by which low prices for natural resources in the domestic market were considered subsidies if they were less than the export sale price. The president and the USTR opposed the protectionist proposals. They would have contradicted and even made a mockery of the free market/free trade administration’s badge, attracting criticisms and probable retaliation by the US trading partners. Above all, they would have impinged on the room for maneuver in negotiations that the executive was eager to preserve. Certainly, the administration now and then used the specter of compulsory measures worked out by Congress to put pressure on the US trading partners, but the threat was effective as long as the specter did not become a cumbersome reality. The administration favored the bills aimed at securing reciprocity from the US trading partners. These bills could not be labeled as protectionist, at least prima facie. On the contrary, they appeared to call for open trade and made it clear that it was not the US market that was not open; this was an obligation to be imposed on other nations that were not giving US firms the same opportunities they were able to enjoy in the United States. They also allowed the executive to give legislative strength to some of its trade policy priorities, such as enhancement and protection of American investments abroad, boosting trade opportunities for sectors like commercial services and high-technology. Opposing protectionist proposals and favoring the quest for reciprocity also gave the administration the opportunity to push through initiatives that some sectors of Congress did not favor: the Generalized System of Preferences (GSP) renewal in the United States and the signing of bilateral free-trade agreements at a time during which there was no significant multilateral progress on trade matters. After a long process, in which the USTR William Broke played an active role, in October 1984 the president signed the Trade and Tariff Act of 1984. This was an amalgam of more than 100 measures, some of which would help import-competing producers, but it was deprived of a strong protectionist content. Reagan remarked that, although the Act’s precedents were “strongly protectionist and would have sharply limited our trade with other nations”, in its final draft it was “a crucial piece of legislation and a triumph not just for freer and fairer trade, but for the legislative process itself ”.1 However, many provisions of the statute attracted strong criticism from both American trade law experts and foreign trading partners. The provisions concerning “barriers to market access” (that is, reciprocity) extended the scope of sections 301–4 of the Trade Act of 1974 and increased the power of the USTR in dealing with such issues. The reciprocity provisions authorized negotiations, as well as the imposition of retaliatory measures, to remove or reduce barriers and trade distorting measures not only with regard to trade of products, as was implicit in the Trade Act of 1974, but also with regard to investments abroad, high-technology trade, property rights, and services. The Trade and Tariff Act also provided a definition of the terms “unjustifiable”, “unreasonable”, and “discriminatory”, which had been previously explained only by reference to legislative history. The term “unjustifiable” referred to any act, policy, or practice which was in violation of or inconsistent with the

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international legal rights of US nationals. The term “unreasonable” meant any act, policy, or practice, which, while not necessarily in violation or inconsistent with the international legal rights of the United States, was otherwise deemed to be unfair and inequitable, thereby including denial of market opportunities, opportunities for the establishment of an enterprise, and adequate protection of intellectual property right. The term “discriminatory” meant acts and policies denying national or most favored nation treatment to US goods, services, and investments. The amended sections authorized the US Trade Representative to initiate investigations without waiting for a private petition or an order from the president. Previously the president had authority, under section 301, to take action without receiving a petition, but had not used it. The USTR was also requested to prepare, in consultation with the House Ways and Means and the Senate Finance committees, an annual national trade estimate (NTE) on significant barriers to the exportation of US goods and services and restriction on foreign investments and on the actions taken to remove these barriers. The amendments to the relevant sections of the Trade Act of 1974 were viewed as a further step of the United States’ drift towards unilateralism. Unilateralism must be conceptually distinguished from protectionism, although the two can interact. The interaction is given by the fact that reprisal against countries unwilling to open their markets to American merchandise or services or adopting trade-distorting policies could take the form of restrictions of foreign products threatening import-competing industries. The critics pointed out that the amended version of section 301 and the following sections allowed the United States to unilaterally determine which foreign measures were unfair or nullified and impaired US trade benefits under the GATT and, under threat of retaliation, demand the elimination of such measures to the exclusive advantage of American industry.2 As a consequence, dispute settlement would revert from the existing multilateral approach through the GATT to a bilateral settlement, or otherwise would result in the imposition of unilateral restrictive measures. Obviously to this criticism both the executive and Congress could rejoin that the amendment of the Trade Act was the outcome of the ineffectiveness of the GATT system in imposing binding decisions on disputes among its parties. At any rate, any bilateral settlement achieved under the reformed section 301 would result in a violation of the GATT MFN principle, according to which concessions on trade must be equally extended to all GATT parties.3 Moreover, the amended section 301 interfered with the balance between industries interested in gaining or expanding access to foreign markets and import-competing industries. If the former wanted to expand their presence, any international settlement had to accept unhindered or less hindered access to the US market. Instead, the reformed section offered an autonomous remedy to industries affected by alleged foreign restrictions, while industries threatened by foreign competition could resort to the several remedies offered by the US statutes. The impact of unilateralism was particularly evident in the case of alleged unfair trade policies or practices where there might be no reference whatsoever to internationally acknowledged rights and obligations and where the only parameter was conformity to the objectives pursued by the United States in the interest of its corporations.4 The Trade and Tariff Act extended the grant of the Generalized System of Preferences to developing countries, but for a shorter period (eight-and-a-half years) than the one

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suggested by the administration. The GSP had little support among US firms and was opposed by the organized labor, although exports from less developed countries under the scheme accounted for about 4 percent of US imports. The executive, however, considered the GSP renewal a priority, for both political and economic reasons. According to the administration’s philosophy, development of trade was preferable to aid, and to develop their economies developing countries needed temporary preferential treatment to compete with industrialized nations. Besides this, the developing world was the fastest growing market for American exports, and especially in Latin America many of its members urgently needed to earn foreign currencies to service their debt.5 There were, however, some snags. Under the previous GSP rules a limit was imposed on duty-free imports based on the competitiveness of the product. The “competitive need clause (CNC)” excluded the product of a country from duty-free benefit if its shipments in the previous calendar year exceeded 50 percent of the value of total US imports of the product, or exceeded a certain dollar value ($63.8 in 1984). The Trade and Tariff Act of 1984 requested the president to complete by 1987 a review of which product from which country was sufficiently competitive. In the case of affirmative determination, the CNC threshold was reduced from 50 percent to 25 percent, or to $25 million. The Act, however, introduced an element of flexibility into the determination as the president might waive the application of the new limit if the country under review provided reasonable access to its market, refrained from unreasonable export practices, offered adequate protection of US intellectual property rights, and reduced trade-distorting investment practices and barriers to trade in services.6 As noted by a Latin American observer, this created a new element of “negotiable eligibility” since only those countries willing to accept the reciprocity criteria were eligible. This was not denied by Reagan who, in his remarks on the GSP renewal, noted in passing that “in turn, it will help American industry by ensuring that less developed countries accept increased responsibility in areas like the protection of patents and trademarks in the international trading system”.7 The Trade and Tariff Act also marked a moderate increase in the exploitability of the US unfair practices law for protectionist ends. Under pressure from the administration, the downstream dumping and natural resources proposals were defeated. On the other hand, the Act extended the purview of countervailing law to the so-called upstream subsidies, also catching in the net imported products that were not directly subsidized but were made of subsidized inputs whenever these inputs bestowed a competitive benefit. The extension simply codified a Department of Commerce practice, as the concept of upstream subsidy was not dealt with in GATT Article XVI, or in the Tokyo Round Subsidies Code. The Act requested that the administration remove or reduce trade barriers to the US wine trade. At the prompting of Californian grape growers, a provision of the Act allowed grape growers to join wine makers in filing unfair trade complaints. This meant that petitions against allegedly trade-distorting practices (nominally subsidized exports of wine) could also be filed by an industry other than that directly injured by the practices in question. Obviously, the extension, which seemed to go beyond the purview of GATT rules, did not fail to attract an irritated response from the European

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Community. The right for grape growers to lodge complaints along with wine makers was, however, limited to two years. As noted in Chapter 4, the Act also gave the president authority to enforce for five years, by such actions that might be necessary or appropriate, the quantitative limitations contained in the bilateral arrangements that were to be negotiated with steel-exporting nations. Finally, the Trade and Tariff Act gave the president authority to conclude the welladvanced negotiations with Israel for the establishment of a free-trade area. The concessions on tariff and non-tariff barriers had to be submitted to Congress for approval under the fast-track unamendable procedure. For other states that should seek to enter into a free-trade area with the United States the statute granted a general negotiating authority contingent, however, upon a sixty-day disapproval period by the Finance and Ways and Means committees before beginning negotiations. No specific authority was granted with regard to Canada for the simple fact that the question of whether there should be an agreement with the northern neighbor and whether it should be a sectoral or comprehensive agreement was still unanswered.

The 99th Congress Preceded by first-time self-initiation of four investigations under section 301—against Korea for restrictions on insurance services and over protection of intellectual property rights; against Japan for restrictive practices on tobacco products; and against Brazil for informatics policy—to show that it meant business and did not hesitate to use the powers conferred by Congress, the administration issued a statement on international trade policy on September 23, 1985.8 The same day, the detailed statement was rendered more synthetic and pugnacious by an address given by the Great Communicator to a receptive audience, that of business and trade leaders.9 The executive reaffirmed its commitment to “pursue more open access to foreign markets for U.S. exports and fairer conditions of trade while opposing policies at home and abroad that are protectionist”. Reagan pointed out that “free trade is, by definition, fair trade”. Hence, “when domestic markets are closed to the exports of others, it is no longer free trade” and “when governments assist their exporters in ways that violate international laws, then the playing field is no longer level, and there is no longer free trade”. The EC Commission scathingly observed that “it was tempting to think that it was always the ‘other side’ that was guilty of unfair practices”.10 The statement of September 1985 basically, as declared by the executive itself, took up the subjects of the July 1981 statement as developed the following year, but it went on to illustrate the measures that the US administration was ready to adopt if the reforms of the trade system according to the American perspective did not promptly take place through either multilateral negotiations or arrangements with a limited number of parties. Thus, the administration declared that it would continue vigorous enforcement of US antidumping and countervailing duty laws as well as initiate section 301 unfair trade investigations. However, when export subsidy rules were absent, or inadequate, or even unsatisfactory in their implementation, it was ready to take steps to vigorously defend the interests of American exporters against subsidy practices of

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other nations, including, for instance, an aggressive mixed credit lending program targeted at foreign markets. Likewise, according to the statement, the administration would take tactical measures aimed at eliminating unfair foreign trade practices and opening foreign markets. If efforts to resolve such issues through consultations failed, denial or limitation of access to the US market might be the next step. On the other hand, the executive would support market opening objectives discussed in Congress, but would oppose legislation requiring the president to close US markets “on the basis of sectoral reciprocity”, the proper approach being “to grant the administration authority to negotiate foreign barrier reductions”. The message, therefore, had two goals and two addressees: to pressure foreign countries to negotiate or to align their trade policies to the American desiderata; to urge Congress not to constrain the room for maneuver of the executive in trade negotiations and to avoid pushing through protectionist or unilateralist measures that might cause the hardening of the trading partners’ posture, thus hampering the administration’s efforts that at the time, September 1985, seemed to have prospects of success in obtaining international cooperation in depreciating the dollar and in laboriously fostering a consensus to a new round of multilateral talks. In December 1985, Congress approved a bill that gathered the support of both Democrats and Republicans.11 The bill cut by about 30 percent below the current level clothing imports from those countries that each accounted for over 10 percent of exports to the United States, i.e. the so-called Big Three: Hong Kong, Taiwan, and South Korea. Individual categories of textile products from a second group of countries, including China, Japan, India, and the Philippines, which each provided between 1.5 percent and 10 percent of total US textile and apparel imports in 1984 would be held in 1985 to their previous year level. After 1985, imports from the two groups would be allowed to grow by 1 percent a year. The remaining exporters were to be allowed in general to grow their shipments to the United States by 6 percent a year. The bill also limited imports of non-rubber footwear to no more than 60 percent of the domestic shoe market for an eight-year period and required the president to undertake negotiations with copper-producing nations to establish a voluntary five-year agreement limiting copper production. Reagan vetoed the bill, stating his “firm conviction that the economic and human costs of such a bill run far too high—costs in foreign retaliation against U.S. exports, loss of American jobs, losses to American businesses and damage to the world trading system upon which our prosperity depends”.12 The president, however, was careful to claim to be deeply sympathetic about job lay-offs and plant closures and to direct the Treasury secretary to determine within sixty days whether import levels set by previous negotiations had been exceeded. He also promised not to weaken existing import restraints under the Multifiber Arrangement (MFA), and gave assurances that the next MFA would be no less restrictive than the ongoing one. Eight months later, an attempt to override the veto failed to gather the required two-thirds majority in the House of Representatives thanks to the administration’s intensive lobbying campaign towards wavering Republicans. The campaign, however, was made more convincing by the signing of pacts with South Korea, Hong Kong, and Taiwan, the three primary targets of the textile bill.13 At the same time, various bills were presented which called for the start of

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negotiations with foreign countries, notably Japan, to remove barriers from their telecommunication imports. One bill, sponsored by a Republican senator, John C. Danforth, provided for an eighteen-month negotiating period at the end of which the president would be required to impose sanctions which could include increased import tariffs and a ban from government procurement of imported telecommunication products. Bills of similar content were introduced in the House of Representatives, mainly sponsored by Democrats, but also by a Republican. Along with the numerous bills directed at providing protection for specific sectors of the economy, a different approach was followed by the Democratic majority in the House of Representatives aimed at a comprehensive approach to the various problems characterizing the plight of American trade. The bill, originally sponsored in July 1985 by Dan Rostenkowski from Illinois, chairman of the House Ways and Means Committee, and Richard Gephardt from Missouri, chairman of the House Democratic Caucus, and subsequently modified in the course of the debate, aimed at a more effective reaction to trade-distorting practices of trading partners, in particular those with a conspicuous surplus, at reducing the trade deficit, and at limiting the executive’s discretion in trade matters, while strengthening the power of control of Congress.14 The measures discussed in the House, under the cloak of a fight against foreign trade restrictions and unfair practices, had several protectionist features that the administration vehemently attacked. In particular, the measure introduced by Gephardt required the president to impose a 25 percent duty on the value of imports from countries that had an excessive surplus in trade with the United States and were engaging in unjustifiable or discriminatory trade practices that had an adverse effect on US trade. Excessive trade surplus was deemed to occur if the value of the country’s non-petroleum exports to the United States exceeded its non-petroleum imports by more than 65 percent and if the country’s merchandise trade with the United States were valued at more than $7 billion in 1984. The administration was requested to start negotiations with the country concerned, which had to result in an engagement to eliminate restrictive barriers to imports or, at any rate, in the reduction of the excessive surplus by 10 percent a year. The punitive duty was not to be applied if the total US trade deficit did not exceed 1.5 percent of the GNP, which certainly was not the case when the bill was introduced. Countries that had an excessive trade surplus would include Brazil, Italy, West Germany, Hong Kong, Japan, South Korea, and Taiwan, but only the last four were likely to be found guilty of consistently trade distorting practices. The final version of the Gephardt amendment was more flexible.15 The 25 percent duty and the 10 percent annual reduction were no longer present. Instead the USTR was required to establish surplus reduction goals for countries having an excessive and unwarranted trade surplus and to negotiate a surplus reduction agreement. If such reduction goals were not achieved, the president was requested to suspend or withdraw previous trade concessions, to impose duties or other import restrictions, and to implement other actions that could restore or improve the competitive position of US industries with the countries concerned. If such actions did not achieve the surplus reduction objectives, the president had to impose import quotas. Such obligations of the executive might be waived if the measures might harm the US economic interest.

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The Democratic proposals also expanded the definition of unfair foreign trading practices that might trigger retaliation, including, among others, export targeting. Targeting comprised any governmental or officially sanctioned policy that sought to enhance or foreseeably would enhance the competitiveness of a particular industry in the domestic and export market, including, among other things, measures directed to subsidize research and development (R&D), reduce domestic competition, increase available capital, and increase the market size. The executive’s approach towards such practices was more cautious and sophisticated. In a report submitted to Congress in July 1985 the administration noted that, in several industries, targeting involved subsidization and could, therefore, be countervailed. In other cases, however, targeting was carried out through measures, such as high tariffs, that did not contravene GATT rules. In other areas, as was the case for R&D, the United States had often offered a helping hand to its own industries. Consequently, in quite a few cases, if the United States wanted to stop targeting practices on the part of its trading partners, it had to seek a negotiating solution and offer some concessions. Other provisions strengthened legal protection for intellectual property against foreign appropriation, expanded the factors the US International Trade Commission should take into account in determining material injury, made the import of items utilizing natural resources at subsidized rates subject to countervailing duties, and required the Treasury secretary to negotiate with the major industrialized countries to coordinate international economic policy. The Democratic proposals renewed the presidential authority to embark in a new round of multilateral trade negotiations, but at the same time shifted authority from the president to the USTR in several matters, such as deciding unfair trade cases and authorizing import relief to trade-affected industries and workers. Particularly unwelcome for the free-market presidency was a provision establishing an Industrial Competitiveness Council to develop strategies to boost productivity and performance of US businesses, which was seen as an attempt to develop an industrial policy. Bills of similar content, but envisaging less contentious measures, were introduced in the Senate by both Democrats and Republicans. Despite the repeated veto threats by Reagan, the House of Representatives approved its heavy-handed trade bill on May 22, 1986 by a swinging majority of 295–115.16 The bill also garnered the vote of nearly onethird of Republican members of the House, who, in particular those from states with industries threatened by foreign competition, did not consider it prudent to obstruct it. Thus, a conflict with the presidency seemed to be in the offing. But no clash occurred. In the Senate, where the GOP held the majority, the committees concerned did not show any hurry in producing a definitive bill. For instance, the Finance Committee gave more attention to the further tax reform the administration wanted to push through. Therefore, no bill reached the Senate floor before the end of the legislature and the confrontation was postponed. If the first attempt to push through a comprehensive trade bill did not meet with success, in the 99th legislature, progress was made in the area of export control. In March 1984, the Export Administration Act lapsed, and the president had to administer export controls under the International Emergency Economic Powers Act of 1977. During this period Reagan authorized a Pentagon review of the licensing of high-

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technology products by the Department of Commerce (DOC) to fifteen nonCommunist countries. In the Senate a proposal by the Republican Jack Garn supported the strengthening of the Department of Defense role in reviewing export license applications to Western nations that might be a source of diversion of technology to the Soviet Union. The same proposal, however, contained a clause on contract sanctity according to which the president would be prevented from voiding ongoing contracts for foreign policy reasons.17 The majority in the House of Representatives, with the favor of the DOC, argued that an active control of the Pentagon would hamper American exporters. On the other hand, the House bill put forward a much weaker sanctity provision which contained several exceptions. The House bill also envisaged a series of restrictions on trade and investment with South Africa in protest against the apartheid policy of that government, while the Senate opposed such measures. A compromise between the two Houses was reached in June 1985 and the new Act was signed into law on July 12, 1985. The Export Administration Amendments Act of 1985 was a step towards the relaxation of the constraints imposed on the export of products that might have an impact on national security. In particular, the Act authorized the DOC to establish a new special licensing procedure allowing multiple exports under a single authorization from US companies to their foreign subsidiaries, joint venturers, and long-term licensees. Licenses were no longer required for exports of low-technology commodities to CoCom countries, and for other exports to CoCom members the processing time of license applications was significantly shortened. The imposition of national security or foreign policy controls on goods or technology was also revoked if they were available in sufficient quality and quantity from sources outside the United States which could render such controls ineffective. On the other hand, the Act pointed out that the executive should conduct bilateral or multilateral negotiations to limit the availability by foreign countries of this kind of products and technologies. As regards foreign policy controls, the president was still authorized to impose, expand, and extend them, but only after consultations with the appropriate congressional committees, and he had to submit a report to the Congress before applying them. The president was also prevented from extending foreign policy controls to contracts that were in effect on the date he informed Congress of his intention to impose such controls, except if he could certify that there was a direct threat to the strategic interests of the United States.

The 100th Congress In November 1986 the Democrats captured the Senate while maintaining their grip on the House. Their success made it quite likely that trade would be a high priority in the 100th Congress. In any event, the election results also made it far less likely that trade legislation would fade away as it had done in the previous Congress. At that time the chairman of the Finance Committee in the Senate, the Republican Bob Packwood, showed little interest in producing a trade bill, which the administration was not keen to have, preferring instead to discuss a further tax reform, which was a priority for the executive. This time the Democratic majority had the opportunity to push through a

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statute that reflected its priorities, while indicting the Reagan administration for not being able to tackle the growing trade deficit. In the House, the Democrat representative Dan Rostenkowski kept his place as chairman of the Ways and Means committee, while in the Senate Packwood was replaced by Lloyd Bentsen, Democrat of Texas. In retaking the Senate, the Democrats increased their ability to pass a trade bill, but a 55–45 majority was far short of the two-thirds needed to override a presidential veto. The bills introduced in both Houses proposed a comprehensive, i.e. an omnibus, law, that should regulate, under the conceptual umbrella of trade, a variety of topics, strengthening the control of Congress on them, given the alleged inactivity of the executive. Thus, the prospective omnibus law would deal with disparate subjects from trade negotiations, reaction to unfair trade practices and import relief to export promotion and control, patent and trademark protection, international finance, and even education and training and foreign corrupt practices, to name just a few. The executive certainly was not happy with having to cope with bills that were likely to reflect the ideas and goals of a Democratic majority. Its members, however, were not necessarily of one mind in dealing with Congress. The USTR and the secretary of Commerce were receptive to working with the lawmakers for a compromise legislation. Others, including the secretary of the Treasury and the secretary of State, were considered to hold more hardline views, fearing that a comprehensive bill might limit the administration’s room for maneuver in negotiating with trading partners. On the other hand, the administration was aware that it had to accept the idea of a trade bill from Congress because it needed the extension of the fast track negotiating authority, due to expire in January 1988, for the Uruguay Round.18 The bills discussed in the two houses in the first place, though with occasional differences, rendered the measures against so-called foreign unfair trade practices more severe and widened the remedies provided to industries and employees affected by fair competition.19 As regards antidumping, the House bill envisaged duties against imports of products using inputs priced below the standard for their market value or which had been subject to dumping investigations in the previous six years. Both bills required the International Trade Commission to monitor imports of products containing dumped inputs and extended the power of the Department of Commerce to prevent the circumvention of antidumping orders, for instance through import of partially assembled goods for completion in the United States. As regards countervailing measures, both bills expanded the Commerce Department’s interpretation of what constitutes a foreign government subsidy which would allow the imposition of countervailing duties. The bills expanded the list of actionable practices under section 301 of the Trade Act of 1974, including in particular a lack of market reciprocity, export targeting, toleration of anti-competitive practices, such as cartels, restrictions on technology transfer, violation of workers’ rights, and denial of protection of intellectual property rights to foreigners. Deadlines from six to nineteen months were imposed for the determination of unfairness and the action to be taken. As regards the safety clause, although the bills did not modify the provision requiring that imports should be a substantial cause of injury for domestic industries, they expanded the list of factors to be taken into account as injury indicators including, in particular, the diversion of

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exports to the United States caused by trade policies in other countries, foreign export targeting, and findings of dumping and subsidization on imports competing with products of US industries. As noted by one observer, such cases implied the intrusion of considerations concerning unfair trade into the ascertainment of the condition for the escape clause which is intended to provide relief from fairly traded imports.20 In addition, the bills increased the available remedies to protect domestic industries from import flows, adding to tariff increase and quotas the negotiation with foreign countries to limit exports of products involved. This would imply statutory countenance to the practice, quite doubtful under GATT law, of negotiating OMAs and VERs with foreign countries. On the other hand, significant differences divided the House and Senate over key sections of the Omnibus Trade bill and several sections of the prospective statute were attracting strong criticism with threats of veto by the executive. The House and Senate differed on presidential negotiating authority, mandatory sanctions against unfair trade practices abroad, and mandatory relief for industries and workers harmed by rising imports. Both the House and Senate bills would grant authority for the president to negotiate multilateral reductions in tariff and non-tariff barriers to trade. But only the House would continue the traditional practice of allowing the president to put tariff reductions into effect without specific congressional approval. Both bills would require retaliation for perceived unfair practices helping to feed the large trade surpluses that several countries had with the United States. The House approach was still embodied in the so-called Gephardt Amendment, which would specifically target those surpluses. The Ways and Means committee had reported a draft that did not include the Gephardt provision, and its chairman denounced it as too draconian to be effective, but the Missouri representative managed to win inclusion of his amendment by a floor vote of 218–214. Instead, the Senate bill was specifically aimed at unfair practices. The final version of the bill passed by the Senate in July included an amendment, destined to become the famous Super 301, which required the USTR to identify countries that maintained a consistent pattern of import barriers and market-distorting practices and to self-initiate investigation with respect to those major barriers, the elimination of which would have significant potential to increase US exports, either directly or indirectly. No specific reference was, however, made to the occurrence of a deficit.21 After several amendments and counter amendments, the bill that was debated and passed by the House of Representatives in April 1987 transferred authority for action in all section 301 cases to the USTR without distinction between cases in which retaliation would be required or it would be discretionary. In contrast, the bill passed by the Senate transferred authority to determine whether foreign government practices were unfair to the USTR, but not authority to take action in response. The Senate’s bill doubled to ten years, the period during which relief from foreign competition would be allowed, though providing, as under existing law, that the relief had to begin to be phased out after three years. It also required a petitioning industry to include a statement of proposed adjustments to be undertaken during the relief period so as to render its concession unavailable to industries that had no hope of

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competing with foreign producers. Finally, organized labor reaped the benefit of Democratic control of the Senate when its members approved a labor-backed provision which required that companies with over one hundred employees should give at least sixty days’ notice before plant closing. No similar provisions were present in the House’s bill. Strong disagreement between Senate and House emerged on the issue of retaliation against the Toshiba Corporation of Japan and Kongsberg Vaapenfabrikk of Norway for illegal sales of sensitive technology by their subsidiaries to the Soviet Union, apparently in violation of CoCom rules. It followed the disclosure of advanced Japanese milling machinery and Norwegian computer controls by subsidiaries of the above-mentioned companies to the Soviet Union, which might have used them to produce extra-quiet submarine propellers.22 The Senate voted 92–5 a trade bill amendment sponsored by Jake Garn, a hardline Republican from Utah, to close the US market to Toshiba and Kongsberg products for two to five years and establish mandatory retaliation for similar future violations, except when such measures proved counter-productive for American military interests. House representatives led by Don Banker, Democrat from Washington State, argued that unilateral, mandatory retaliation would undermine efforts to strengthen the international system of technology transfer control under CoCom and would ultimately result in hampering American sales of high-technology products, which the law of 1985 reauthorizing the Export Administration Act appeared to facilitate. The White House fiercely opposed several provisions of the bills and repeatedly threatened a veto. Lunches and informal meetings with Republican senators and representatives to solicit their active support in opposing such and such articles of legislation were also extremely frequent. As was to be expected, also because the proponent was a prospective Democratic candidate for the presidency, the main target was the Gephardt Amendment. The executive maintained that the Gephardt proposal was ineffective because it aimed at cutting the trade deficit, focusing on policies that were only a minor factor of its cause; it also argued that the amendment was counterproductive as regards opening markets to US products and investments, since the foreign government concerned was more likely to reduce exports to the United States than to eliminate restrictive trade practices.23 A major concern for the administration was that the mandatory retaliation provisions of both bills to contrast unfair foreign and restrictive practices might weaken its flexibility in trade matters and invite retaliation at a time during which the United States was dependent on foreign investments to finance the budget deficit and strengthen its productive capacity. The proposals to transfer retaliatory power from the president to the USTR were not welcomed by the executive, including the trade representative himself. Yeutter remarked that no member of government in his right mind would take decisions contradicting the president’s. The administration opposed the proposal to extend the scope of section 301 to cover denial of workers’ rights, stressing that it had no basis in internationally agreed rules. Likewise, it opposed the inclusion in section 301 of retaliation against anticompetitive practices, fearing that it would increase pressure to use the section authority in response to principally private behavior, which was a fundamental departure from the traditional focus of the section

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on government policies or practices. It did not fail to notice that such a statutory inclusion was unnecessary since the mentioned section could already be used if there was a sufficient link between private and governmental activities.24 As regards export targeting, the administration contended that an amendment of section 301 was unnecessary since some targeting practices were already actionable under this trade remedy, as borne out by the actions taken by the executive in cases such as Japanese semiconductors and Brazilian informatics, and could provoke retaliations harmful to US exports by countries claiming that the United States was also engaging in targeting practices.25 Sharing the concern of a coalition of businesses led by the National Association of Manufacturers, the president opposed the sixty days’ mandatory notice before plant closure approved by the Senate, claiming that it was a business straightjacket which would have an anticompetitive effect and would discourage the creation of new companies.26 The executive also objected to a provision narrowly adopted in the House and rejected by the Senate imposing new financial disclosure requirements on foreign investors in US business. In August 1987 a conference, involving the staff of the twenty-one House and Senate committees that had contributed to the respective bills, was convened to work out the details and iron out differences. However, a bill that could receive the consensus of the whole Congress would emerge only in spring 1988. The chairmen of the main committees charged with trade issues in the House of Representatives and in the Senate, Rostenkowski and Bentsen, declared that they wanted a bill that might be signed into law by the president. This meant that the most contentious provisions had to be dropped so as to avoid a presidential veto, or at least so as to secure sufficient bipartisan support to withstand it. The most contentious proposal, the Gephardt Amendment, did not survive the conference. The amendment followed the fortunes of the representative from Missouri as prospective presidential candidate. It was not jettisoned in the conference when in February 1988 Gephardt gained good electoral success in the primaries in Iowa and South Dakota, but when he lost badly in the March Super Tuesday, the amendment was doomed. The provision on financial disclosure of foreign investments was also dropped. But the final bill still included several provisions that had attracted criticism from the administration. Yet, the president seemed willing to compromise on most of the contentious issues, remaining, nevertheless, unyieldingly opposed to the provision on mandatory notice in case of plant closures and heavy lay-offs. Reagan was also worried by the impact that the ban on Toshiba exports might have on relations with Japan. On May 14 Reagan announced in a radio address to the nation that he would veto the bill as it was, that is with the mandatory notice provision, adding, however, that he “did not want to leave the impression that the bill is completely bad”.27 On May 24 the president vetoed the Omnibus Trade bill.28 In his message, returning the statute unapproved, Reagan started with an impassioned defense of the economic policy of his administration, based on non-interference with the market and low taxation, and of its achievements, in particular a high growth rate for the longest period after the Second World War, and above all an impressive creation of new jobs, which overshadowed that of US trading partners. On this premise he indicted the mentioned provision, arguing

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that “there are many circumstances under which such mandatory notification would actually force a faltering business to close—by driving away creditors, suppliers and customers, and—in the process destroying jobs”. In other words, the veto was principally motivated by Reagan’s attitude over an issue of domestic policy that was only indirectly linked to trade. The president also criticized other provisions of the Trade Act: new restrictions on Alaskan oil exports which would hinder US efforts to reduce dependency on foreign production and were unconstitutional, discriminating against a single state; the establishment of a new council on competitiveness, which would reintroduce oldfashioned dirigiste schemes; a requirement for negotiation to establish a multinational financial authority to deal with developing countries’ debt; a provision allowing expanded ethanol import, thus harming domestic grain producers; and an amendment to the Trading with the Enemy Act that would prevent a president from halting imports of blatant enemy propaganda even during wartime. The president, however, concluded the message, stressing that he wanted to sign a trade bill in 1988 and urging “prompt action on a second bill immediately after Congress sustain my veto”. On the other side of the Atlantic the European Commission, though looking favorably at the veto, did not fail to point out that the reasons given by the US president to justify his decision did not address the Community’s concern for the threat of strengthened protectionist and unilateralist tendencies in the prospective statute.29 Just after the message, a defiant House of Representatives voted 308–113 to override the veto, but the Senate was not expected to follow suit and preferred to postpone the vote. The same week the presidential spokesman, Martin Fitzwater, all but committed the president to supporting the measure if the section on plant closure were removed along with disputed new restraints on the export of Alaskan oil. In June the trade bill was reintroduced without the plant closure section or the restraints on Alaskan oil exports and on August 23 Reagan signed it into law.30 The Omnibus Trade and Competitiveness Act of 1988 (PL 100-418) firstly met the wishes of the administration renewing the president’s authority to negotiate trade treaties. As regard tariffs, the president was granted authority till June 1, 1993 to conclude multilateral agreements and to implement them by proclaiming changes in tariff. However, he had to obtain congressional approval, under fast-track procedure, if the tariff reduction exceeded 50 percent, unless the original rates were 5 percent ad valorem or less. For non-tariff barrier agreements and for bilateral agreements, presidential authority was extended until May 31, 1993, but required congressional approval through implementing legislation. Agreements entered into before June 1991 would be implemented by Congress with fast-track procedure. The Act significantly expanded the authority of the United States Trade Representative and transferred functions previously held by the president to him. It specified that the USTR had primary responsibility for developing and implementing international trade policy, international trade negotiations, and trade policy guidance. On the other hand, the USTR was required to consult with Congress, and in particular with its concerned committees, on trade policy as well as on international negotiations and on specific actions under trade law. In short, the USTR was a victim of his own success. No matter if he went on repeating that he was just a member of the executive and that the final decision on any trade matter was for the president; the fact remained

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that, in the eyes of Congress, the USTR, or more exactly Dr. Yeutter, was the knowledgeable interlocutor of the lawmakers. He was the one who, after over four years, had been able to secure the launching of a new multilateral trade round. He was the experienced diplomat, not distracted by other topics, who had successfully negotiated with recalcitrant trading partners like Japan and the EC. Thus, it was natural and logical that Congress was willing to grant the USTR a large authority, in the exercise of which he was expected to take account of the advice of the lawmakers and to report to them. Substantial changes were made in the rules concerning unfair foreign trade practices (section 301 and subsequent sections of the Trade Act of 1974, as amended by the Trade and Tariff Act of 1984). The 1988 Act transferred from the president to the USTR the authority to decide whether a foreign practice hindering US trade was unfair and should be investigated. And it transferred the authority to decide what actions to take and to implement them. The Act required the USTR to take retaliatory actions against violations of trade agreements or other unjustifiable practices, while for unreasonable or discriminatory practices the reaction continued to be discretionary. Despite the objections of the executive, the category of unreasonable practices was expanded to include export targeting, a persistent pattern of denial of certain workers’ rights and toleration by foreign governments of anti-competitive activities by private firms hindering access of US goods. Of particular relevance was an amendment of section 301 which required the USTR to identify so-called “priority” trade practices, the elimination of which would increase the potential to expand US exports, and to identify “priority” countries that repeatedly adopted such practices. The Act required the USTR to initiate an investigation of each priority practice of each priority country and to send a list of such practices and countries to Congress. The provision in question was called “super 301”. A similar provision applied to the identification of countries with trading practices that infringed on US intellectual property rights. Super 301 was useful in signaling to other countries US intolerance of certain practices deemed to affect American interests, and to warn them of its readiness to react.31 Secondly, it was meant to help the US negotiating position, showing that not only was the country not talking softly, but it was also carrying a big stick and was ready to use it if negotiations failed. Besides, the simple fact of openly brandishing the sword was destined to affect the capacity of the allegedly offending country to export to the United States. Within the same strategic framework, the Act also prevented the Federal agencies from contracting with countries whose goods and services were acquired in significant amounts by the US government and which discriminated against US products and services in government purchases. Before imposing the ban, the executive was to negotiate the elimination of the discrimination. It is arguable that this provision was prevalently directed at Japan. At any rate, sections 1306 and 1307 were more explicit, although not binding. Section 1306, taking note of the trade disequilibrium between the two countries, included a “sense of the Congress” that a special summit should be held between the leaders of the United States and Japan to address trade and economic issues and to establish an agreement “that provides objectives for improvement in trade and economic relations, and targets for achieving these objectives”. Section 1307, stressing the difficulties encountered by the American supercomputer industry in

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penetrating the Japanese market and in selling supercomputers to Japanese government agencies and universities, despite the agreement signed by the governments of the two countries in August 1987, expressed a further “sense of the Congress” that the USTR and other appropriate officials (probably the secretary of Commerce) should give the highest priority to concluding and enforcing agreements to “achieve improved market access for United States manufacturers of supercomputers and end any predatory pricing activities of Japanese companies in the United States, Japan, and other countries”. The Omnibus Trade and Competitiveness Act increased, though with no qualitative leap, the rigor of the antidumping and countervailing laws. To prevent circumvention, the Act allowed the Department of Commerce to include, within the scope of outstanding countervailing or antidumping orders, parts used to create a finished product subject to an order, merchandise assembled in a third country, and merchandise altered in minor respects. The Act required the International Trade Commission to consider, in addition to the factors listed in previous laws, the actual and potential negative effect on the existing development and production efforts of the domestic industry. Cumulation, that is being able to take into account the cumulative impact on the domestic industry of a dumped or subsidized product from more than one country, previously allowed for actual material injury, was extended to the threat of material injury. As regards agricultural trade, the statute reauthorized the Export Enhancement Program, a form of export subsidization that will be examined in Chapter 8, increasing to $2.5 billion the value of surplus commodities to be used. It also increased to $215 million an export subsidy program of a lower amount that assisted US organizations of producers and processors in developing foreign markets. On the domestic side, the Act required the president to implement a new federal price support program for wheat, feed grains, and soybeans in 1990 if he could not certify that GATT negotiations had produced significant results in eliminating or reducing world farm subsidization, except, however, if the chief of the executive deemed that the program would hamper such negotiations; in this case the available funds would be diverted to expand existing export subsidy programs. The new farm program envisaged so-called marketing loans which allowed farmers to repay the loans received by the government at the market price of the crop serving as collateral rather than at the official loan rate if the latter were higher. The final version of the sections dealing with import relief (sec. 201) reflected the concern of Congress that industries seeking and obtaining relief would demonstrate a willingness and ability to compete with imports at the end of the relief program, and that some kind of positive action be obtained by those industries seriously injured by imports, thus limiting presidential discretion in granting or denying relief.32 Hence, the submission of a statement of proposed adjustment measures by the petitioner was not required. However, the International Trade Commission, in deciding whether there were the conditions to suggest relief, was allowed to take into account the ability of the industry concerned to face foreign competition after the relief period, which was extended to eight years. The 1988 Act expanded the types of actions the Commission could recommend to the president and those the president was authorized to take. In addition to the traditional forms of import relief, tariffs, and quotas, international

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negotiations might be started to address the underlying causes of the increase in imports of the article along with any other action authorized by law that was likely to facilitate adjustment to import competition. And since the International Trade Commission was also required when making its injury determination to look at factors other than imports, which might be a cause or threat of serious injury, the president was correspondingly authorized to take domestic policy measures, such as steps to reduce government regulations hindering the performance of the concerned industries which was a kind of policy that the free-market Republican administration was not loathe to take. On the other hand, for each industry to which relief had been granted, the International Trade Commission was requested to make biennial reports to Congress and the president on its monitoring of industry development and to provide an evaluation of the effectiveness of each concluded action or set of actions. It is possible that the members of the Treasury Department and of the FED read with a sneer and, perhaps, with a sigh the sections of the Omnibus Act dealing with international finance. The Act required the president to negotiate with other countries on macro-economic policies and exchange rates that might secure more appropriate and sustainable levels of trade and current account balances. The Treasury secretary was required to check whether foreign countries manipulated their exchange rates to the disadvantage of the United States, to negotiate with the guilty states and to report twice annually to Congress on currency policy and the status of negotiations. Actually, the main cause of the current account deficit remained the budget deficit, and the government had been actively pursuing in the last four years the policies that the lawmakers wanted to make compulsory and to oversee. In spite of Reagan’s scathing remarks, the statute provided that the secretary of the Treasury should study and report to Congress on the feasibility of creating an international institution that would buy problem loans of developing countries at a discount and renegotiate them on terms more favorable to the borrowing countries. Following the trend started three years earlier by the Export Administration Amendments Act of 1985, the Omnibus Trade and Competitiveness Act reduced the scope of export controls. In particular, the Act rescinded all export licensing requirements for shipments to CoCom countries, or equivalent countries that maintained effective systems of export control. With certain exemptions, the Act eliminated license requirements for re-export to the CoCom countries and expanded the exemptions from licenses for re-exports to other countries. It also eliminated licenses for exports to non-Soviet-bloc countries of low-technology goods that could be exported to the Soviet bloc without multilateral approval. On the other hand, the Act did not fail to establish severe punishments for perpetrators, in the past as well as in the future. Imports of products of the Toshiba Machine Company Ltd (TMC) and Kongsberg Trading were prohibited for three years, starting December 1988 and the US government was barred from procuring products or services of the two companies for the same period. The Act also precluded the US government from purchasing any products or services from the parent companies Toshiba and Kongsberg for three years. The ban was not extended to other subsidiaries and affiliates. The Act, however, provided for some exemptions for certain essential defense procurement, or for spare parts or goods of other companies

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containing Toshiba or Kongsberg components. In addition, the Act envisaged the application of sanctions to foreign persons who would violate any regulation issued by a country to control exports for national security purposes pursuant to the CoCom agreement, if such violation should result in substantial enhancement of the Soviet and East Bloc military capability, with serious adverse impact on the balance of forces. The sanctions, which consisted of the prohibition of importation into the United States and a ban from contracting with any US department and agency, were to be applied for not less than two years and not more than five years, and were to be imposed, with few specific exceptions, not only to the foreign person committing the violation, but also to its parent company, affiliates, subsidiaries, and successors. It would be improper as well as useless to try to give a single label to a statute that consisted of 467 pages and addressed so many disparate issues. The Act gave a boost to the multinational trade negotiations under way by granting wide negotiating authority to the president. It strengthened the power of control of Congress over trade issues, but did not substantially limit the power of the executive to establish foreign trade policies and to negotiate them, no matter if the leading role were given to the president or to the USTR. In sectors like antidumping and countervailing measures, safeguards, and above all reaction to unfair and restrictive trade practices of foreign countries, the Act might be and was accused of protectionism and unilateralism. But, contrary to initial expectations, these tendencies were only incremental; that is, there was no qualitative leap, as the trade law of 1988 just strengthened what was already present in previous statutes. Part 2 of Subtitle C (Response to Unfair International Trade Practices) dealing with imports of allegedly unfairly traded products had the reassuring title of “improvement in the enforcing of antidumping and countervailing duty laws”. As regards the safety clause, the president was also authorized to start negotiations with countries from which the main flow of exports originated, thus increasing the likelihood of gray-area settlements, like VERs, but this was already a staple of American and EC trade policy. The Omnibus Trade and Competitiveness Act only expanded the list of foreign actions that might be deemed unjustifiable. However, it strengthened the arsenal to counter allegedly trade-distorting practices and made some measures compulsory. Above all it subjected those unfortunate countries that had not been prompt to yield to American requests to a kind of public trial. As was to be expected, the attitude of the European Community towards the Omnibus Trade and Competitiveness Act was overall rather critical, observing that many of its sections had a protectionist bias, motivated by the persisting difficulties of the US trade balance, while others expanded the framework for unilateral interpretation of trade rules giving the US government the authority to decide what constitutes unfair trade practices and adequate foreign market opportunities. Willy De Clercq, commissioner for External Relations and Trade, remarked that the 1988 Act appeared to contravene the engagement of the participants in the Toronto Summit to continue to resist protectionism and the temptation to adopt unilateral measures outside the framework of the GATT.33 In September, the European Council expressed concern at the protectionist potential of the statute and its provisions that could lead to greater recourse to unilateral measures and declared that “the Community will monitor the implementation of the Trade Act very closely, and will take prompt action to defend its rights”.34

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The president praised the Act, which after all was the outcome of a protracted negotiation between Congress and the administration, but remarked that it included some provisions, probably those that, in his opinion, infringed on the autonomy of the executive, that might be illegal according to international law, inconsistent with “our goal of moving toward free world trade” and even unconstitutional. As regards the provisions that assigned “specific authority to executive officials such as the United States Trade Representative”, Reagan deemed it necessary to state that “it must be understood that all officials of the executive branch of the government are subject to the direction and control of the president”. Reagan concluded his presidency by withstanding a new attempt by the lawmakers to pass a bill aimed at buoying up import-competing industries that were not in good shape, nominally textiles, apparel, and non-rubber shoes. The bill, sponsored by a Democrat senator from South Carolina, Ernest F. Hollings, would have set permanent global quotas that, from a 1987 base, would have grown by 1 percent each year. The comprehensive quotas would have replaced the over forty bilateral agreements negotiated by the United States under the umbrella of the MFA and those negotiated with the shoe exporters. The president vetoed the bill arguing that the tough negotiations undertaken by the administration during the MFA renewal in 1986 had already borne fruit, significantly curbing the increase in imports, and that the best way to protect jobs was “to retrain and move dislocated workers into industries of the future, not to maintain them in non-competitive and inefficient facilities at all costs”. He added that in August he had signed the Omnibus Trade and Competitiveness Act of 1988 into law, “which provides additional tools for prying open closed foreign markets”.35 Congress did not override the veto.36 The statement was a last indication of the trade strategy preferences of the administration. The executive opposed laws that openly adopted import restrictions. This did not mean that provisions increasing protectionist biases already present in previous antidumping and countervailing laws were not allowed, nor did it mean that the administration itself, as shown by trade history especially in the first Reagan presidency, was loath to adopt measures with a protectionist content. However, especially when the economy and later the exports started to accelerate, the executive preferred to appear to take the banner of a free-trade crusade to open unreasonably averse foreign markets to better American products and to the flow of sound American investments, no matter if the competing foreign products happened to be better, if the policies pursued by the foreign countries did not run afoul of extant international rules and if the US policy in its implementation partook sometimes of dirigisme.

Notes 1 2 3

PPPUS—Ronald Reagan, Remarks on Signing the Trade and Tariff Act of 1984, October 30, 1984. Thomas O. Bayard et al., Reciprocity and Retaliation in U.S. Trade Policy (Washington DC: Institute for International Economics, 1994), 19. Keith A.J. Hay et al., “U.S. Trade Policy and Reciprocity”, Journal of World Trade Law, Vol. 16 (1982), n. 6, 475.

138 4 5 6 7 8 9 10 11

12 13 14 15 16 17

18

19 20 21

22 23 24 25 26 27 28 29 30

International Trade under President Reagan Miguel Rodríguez Mendoza, “Latin America and the U.S. Trade and Tariff Act”, Journal of World Trade Law, Vol. 20 (1986), n. 1, 49. Elisa Patterson, “Features of the Omnibus Trade Act in the United States”, The World Economy, Vol. 7 (1985), n. 4, 414. Twenty-eighth ARPTAP, 1984–85, 156. PPPUS—Ronald Reagan, Remarks on Signing the Trade and Tariff Act. Twenty-eighth ARPTAP, 1984–85—Appendix B. PPPUS—Ronald Reagan, Remarks at a White House Meeting with Business and Trade Leaders, September 23, 1985. Bull.EC 9-1985, point 2.3.7. Congressional Quarterly Weekly Report, 7, 9, 1985, 1755 and 7, 12, 1985, 2556; Congress Gov., Summary H.R. 1562, 99th Congress (1985–86), www.congress.gov/bill/99thcongress/house-bill/1562. PPPUS—Ronald Reagan, Message to the House of Representatives Returning Without Approval the Textile and Apparel Industries Bill, December 17, 1985. Congressional Quarterly Almanac, 1986, 347. Congressional Quarterly Weekly Report, 20, 7, 1985, 1436. Congress Gov, HR 4800—Trade and International Policy Reform Act of 1986. https:// www.congress.gov.bill/99th-congress/house-bill/4800. Congressional Quarterly Weekly Report, 24, 5, 1986, 1154 et seq.; Congress Gov, HR 4800—Trade and International Policy Reform Act of 1986. See Dean L. Overman, “Reauthorization of the Export Administration Act: Balancing Trade Policy with National Security”, Law and Policy in International Business, Vol. 17 (1985), 328; Congress Gov, S.883-Export Administration Amendments Act of 1985. https://www.congress.gov/bill/99thcongress/senate-bill/883. See I.M. Destler, “U.S. Trade Policy-making in the Eighties” in Alberto Alesina et al. (eds), Politics and Economics in the Eighties (Chicago and London: University of Chicago Press, 1991), 271. See Provision of House, Senate Trade Bill Compared, Congressional Quarterly Weekly Report, 8, 8, 1987, 1822 et seq. Keith E. Maskus, “The View of Trade Problems from Washington’s Capitol Hill”, The Word Economy, Vol. 10 (1987), n. 4, 411. See in particular, Judith Hippler Bello et al., “The Heart of the 1988 Trade Act: A Legislative History of the Amendments of Section 301”, in Hugh T. Patrick et al. (eds), Aggressive Unilateralism: America’s 301 Trade Policy and the World Trading System (London: Harvester Wheatsheaf, 1991), 80. On this infringement of CoCom rules see in particular George R. Packard, “The Coming U.S–Japan Crisis”. Foreign Affairs, Vol. 68 (1987–88), n. 3, 348. Judith Hippler Bello et al., “The Heart”, 77. Ibid., 73. Ibid., 69. See Congressional Quarterly Weekly Report, 15, 7, 1987, 1512. PPPUS—Ronald Reagan. Radio Address to the Nation on Free and Fair Trade, May 14, 1988. PPPUS—Ronald Reagan. Message to the House of Representatives Returning without Approval the Omnibus Trade and Competitiveness Act of 1988, May 24, 1988. Bull.EC 5-1988, point 2.2.15. The following outline of the Act of 1988 is based in particular on U.S. Code Congressional and Administrative News, 100th Congress Second Session 1988,

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Legislative History, Omnibus Trade and Competitiveness Act of 1988; OTAP 40th Report, 1988, 1–10; Congressional Quarterly Almanac 1988, 209 et seq. Helen Milner, “The Political Economy of U.S. Trade Policy: A Study of the Super 301 Provision”, in Hugh T. Patrick et al. (eds), Aggressive Unilateralism, 175. Paul G. Rosenthal et al., “The 1988 Amendments to Section 201: It Isn’t Just for Import Relief Anymore”, Law and Policy in International Business, Vol. 20 (1988–89), 423. Bull.EC 7-8-1988, point 2.2.20. Bull.EC 9-1988, point 2.2.13. PPPUS—Ronald Reagan. Message to the House of Representatives Returning without Approval the Textile Apparel and Footwear Trade Act of 1988, September 28, 1988. It is arguable that the executive’s opposition to the bill was strengthened by the international reaction. In particular, fearing that the countries directly affected by the prospective measure might divert their products to the European market, the EC Commission warned the US authorities that “if the Bill were adopted . . . the Community would be obliged to adapt its textile trade policy to prevent deflection of trade and to retaliate against US products”. Bull.EC 3-1987, point. 2.2.9.

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Free-Trade Agreements

Since the first years of the Reagan administration the trade program of the United States envisaged, along with a new round of negotiations on trade liberalization under the aegis of GATT, bilateral negotiations, or negotiations with a group of countries. As illustrated in previous chapters, such talks addressed specific issues. This, however, did not exclude the possibility that the discussions might be directed at wider arrangements for the elimination of trade barriers with like-minded countries: in other words, the establishment of a free-trade area. A precondition was that the prospective members should be like-minded states; that is, countries that shared the US political views and had a management of the economy which did not clash with its objectives. The executive and Congress did not consider forms of stricter economic integration as a customs union, and they were aware that the establishment of the area would not secure, at least in the middle-term, free-trade, but would result in freer trade, as not all trade barriers were to be included in the elimination list and some might be only partially included.1 On the other hand, unlike most previous free-trade agreements, the treaties to be negotiated did not focus only on tariffs but contemplated a much wider range of trade barriers.

The first free-trade agreement The second Reagan presidency saw the signing of two important free-trade agreements, with Israel and Canada, and the start of a process that would lead to the creation of a North American free-trade area, although the agreement with Israel was negotiated during Reagan’s first term. The Israeli government proposed the idea of a free-trade agreement with the United States in 1981, but no negotiations were undertaken. It was only two years later, during a state visit in November 1983, that the then Israeli prime minister, Yitzah Shamir, and the US president agreed to start talks on the establishment of a free-trade area. The negotiations were formally opened the following January. Three questions about the goals of the United States may be asked: why a bilateral free-trade agreement? Why the choice of a state whose imports from the United States accounted for less than 1 percent of total US exports? And why was the decision taken in 1983? According to the report given to the Finance Committee of the Senate by the assistant USTR, Doral Cooper, in 1982 the United States exported goods to the value 141

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of almost $1.5 billion to Israel, excluding military trade, and imported $1.2 billion.2 The bulk of Israeli products entered duty-free into the United States both as most-favorednation (MFN) zero duty items and, for about 35 percent, under the Generalized System of Preference. Thus, in the mentioned year only $118 million were dutiable. About 40 to 45 percent of American exports to Israel were subject to duties. The amount of Israeli imports from the United States was definitely lower than that of imports from the EC, which in 1975 had signed a free-trade agreement with the Middle Eastern country.3 The agreement, however, concerned only industrial products. The negotiations coincided with an extremely difficult time for the Israeli economy, which was besieged by rampant inflation, fueled by a large build-up of military hardware and large non- defense expenditure, combined with subsidies and indexation of wages, while the GDP growth rate had slowed to less than 2 percent.4 The Israeli economy strongly depended on imports which, except for aid, had to be repaid by exports. The exports to the region were constrained by the boycott of the Arab countries and the main outlets were the EC and the United States. But, despite the 1975 treaty, the prospective accession of Spain and Portugal loomed on Israeli exports. In the United States, the Generalized System of Preferences (GSP) was approaching its date of expiry and uncertain renewal, and, apart from this, the preferences granted to less developed countries’ exports were, by law, systematically reduced as their industries became more competitive. This was the case for Israel,5 whose primary goal was, therefore, to achieve secure and stable free access to the US market. Rosen remarks that the goals of the United States in signing a free-trade agreement were substantially political. Yet, the term encompasses several objectives. One of them was to help buoy up the economy of a state that was a close ally, a traditional client, and probably on occasion a zealous executor of covert operations. The main goal of the United States reflected the political economy objectives of the Republican administration. Israel was seen as a very suitable candidate for experimentation, without much ado either in Congress or abroad, in new forms of multi-sectorial liberalization, suiting American interests, outside the traditional network of GATT rounds. Indeed, the US attempt to launch a new multilateral round with new topics of discussion had met with the opposition of most developing and developed countries at the Ministerial meeting of November 1982, and in the following two years no significant progress was made by the United States in breaking the impasse. The Annual Report of the President on the Trade Agreements Program unequivocally stated that “following the 1982 GATT Ministerial, the United States began to consider new trade liberalization approaches and reconsider the Israeli proposal”.6 Thirdly, it is arguable that the United States deemed it unseemly, for economic but above all for political reasons, to be only second best to the EC in the trading relations with its ally. The treaty promised to invert the position since it was more comprehensive than the EC agreement in terms of both products as it included agriculture and covered trade barriers. Certainly, the agreement did not fail to raise concerns in some US industries, such as agricultural products, textiles and apparel, leather products, and bromine products, but Congress endorsed the negotiations, granting fast-track procedure for its approval and the pact was signed on April 22, 1985; the implementing legislation was signed into law by Reagan the following June 11. As regards potential

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foreign complaints, the agreement could easily withstand the test of GATT Art. XXIV on the establishment of customs union and free-trade areas because it covered substantially all trade between the two countries, did not raise barriers to trade and was to be implemented within a reasonable length of time.7 Under the agreement, duties were to be eliminated in four different stages upon enforcement of the treaty.8 To assuage Israeli fears of non-extension by Congress of the GSP scheme, which was to expire in 1984, the Americans agreed to include also a large share of items that were still imported tariff-free under the mentioned system in the basis subject to duty abrogation. Thus, 80.4 percent of the products concerned (estimated at about $415 million) would enter duty-free into the United States and 52.5 percent of dutiable American products would be imported duty-free by Israel; a further 5.4 percent and 31.5 percent of respectively American and Israeli exports would be imported duty-free by 1989. These two categories consisted of products that were not deemed import-sensitive. By 1995, duties on a share of respectively 0.9 percent and 3 percent of items considered as import-sensitive by the United States and Israel were to be eliminated. This category included textiles and apparel, some horticultural products, and certain bromine compounds. The duties on products considered as most sensitive by both countries were to remain unchanged until January 1, 1990 and were to be eliminated by 1995, according to a formula devised following receipt of advice from the relevant industries and government agencies. The products identified as most sensitive by the United States included cut roses, certain categories of olives, citrus fruit juices, some other bromine products, and certain gold jewelry. The agreement allowed Israel to impose customs duties to protect infant industries until 1991, but they could not exceed 20 percent and were to be phased out by January 1, 1995. On the other hand, as a token of cultural respect, in article 8 the United States agreed that Israel had the right to impose import restrictions for the purpose of its kosher laws. As regards non-tariff barriers, in the first place the Israeli government had to agree to eliminate export subsidies on industrial products, including processed agricultural goods. Secondly, Israel agreed to license virtually all non-agricultural products automatically, unless an express reason was provided for non-automatic licensing. Both countries, that is, actually only Israel, were allowed to take temporary measures when threatened by a serious balance of payment deterioration, but had to consult with the other party and put strict limits on the use of quantitative restrictions and measures such as import deposits and surcharges. Most aspects of interest for Israel and, in particular, for the United States with regard to investment were already covered by the United States–Israel Treaty of Friendship, Commerce and Navigation, which envisaged equal treatment with domestic investments and expropriation only for public purposes and with compensation. The free-trade agreement, however, specifically stipulated that requirements to export a share of production or to use domestic goods and services would not be a condition for investment or for receiving investment incentives. The two countries agreed to expand access to their public procurement market by lowering the threshold established by the Tokyo Round government procurement code. The agreement also had a provision on rules of origin, similar to that of the Caribbean Basin Initiative, for exports to qualify for duty-free treatment, according to which the product had to be exported directly from the

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exporting country and contain at least 35 percent local added value, though up to 15 percent of it could originate in the importing countries. A novelty of the treaty was a provision dedicated to services. Here, however, the parties limited themselves to recognizing the importance of trade in services and the need to maintain an open system of services exports. On the other hand, they agreed to continue talks to strengthen their commitment to open their respective markets to service industries. Finally, the agreement established a joint committee, chaired by the USTR and the Israeli minister of Industry and Trade, to oversee the implementation of the treaty, to hold consultations, and to provide a mechanism for dispute settlement. In the years immediately following the implementation of the treaty, Israeli exports to the United States went on growing, though at a lower rate than in the years preceding the agreement, probably because of the depreciation of the dollar. Israeli imports from the United States grew only by 9 percent, compared with a 33 percent growth in imports from all sources.9 This, however, did not seem to constitute a particular concern on the American side since the agreement, also given the little weight of trade with Israel, was only a trial balloon that had to set the pattern for future treaties.

The Canada–United States Free Trade Agreement (CUSFTA) The background for the establishment of a free-trade area between the United States and Canada was quite different. As noted by the US International Trade Commission, the world’s largest international trade flows took place between Canada and the United States.10 In 1985, almost 22 percent of overall US exports were directed to the Canadian market and 20 percent of US imports came from Canada. On average, the United States accounted for over three-fourths of all Canadian exports.11 The interest of the US Congress for a trade agreement with its main trading partner was already borne out by the Trade Act of 1974, whose section 612 states that “it is a sense of the Congress that the United States should enter into a trade agreement with Canada, which will guarantee continued stability of the economies of the United States and Canada”, adding that to this end “the President may initiate negotiations for a trade agreement with Canada to establish a free trade area”. The lawmakers, however, prudently pointed out that “nothing in this section shall be construed as prior approval of any legislation which may be necessary to implement such a trade agreement”. In section 1104 of the Trade Agreements Act of 1979, Congress requested that the president should study the desirability of entering into trade agreements with countries in the northern parts of the Western hemisphere. No actual steps, however, were taken to start negotiations between the United States and its neighbors. In August 1983, the Canadian government, under Prime Minister Pierre Trudeau, released an official discussion paper entitled “Canadian Trade Policy for the 1980s”, which supported Canadian participation in multilateral negotiations, but also endorsed bilateral discussions with the United States to enhance economic relations with the Southern neighbor. The paper reflected both the idea that Canada needed to strengthen its links with the booming US economy in order to boost its domestic recovery and the fear that protectionist tendencies south of the border might hinder this process.

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The paper did not propose the establishment of a free-trade area, but suggested the negotiation of a sectorial free-trade agreement which would identify certain areas of interest for the United States and Canada that could benefit from the elimination of barriers in the flow of goods and services between the two countries. The model was, therefore, to be the 1965 Automotive Products Agreement (APTA), which covered the main sector of interchange between the two countries. The United States reacted positively to the proposal and the two sides agreed to examine a number of sectors in which the potential for free trade was greater. Nevertheless, the USTR William Brock declared that he preferred to see specific proposals before starting negotiations on any type of sectorial free trade. US industries that were confident of having a comparative advantage, and thus a good growth potential in a free-trade agreement, included telecommunication equipment, informatics, furniture, woodworking, agricultural machinery, general industrial machinery, professional and scientific instruments, and medical equipment, while the Canadians saw opportunity for trade growth in urban mass transit, textiles, certain petrochemical products, and specialty steel.12 Working groups were established that made some progress in sectors like agricultural equipment and inputs, and informatics. Other sectors such as petrochemicals, beef, cosmetics, forest products, and alcoholic beverages were identified for discussions, but no breakthrough was made. If the Canadians were interested in a sectorial agreement, on the American side other options started to be explored, apparently without great vigor: a functional arrangement designed to eliminate non-tariff barriers on a reciprocal basis, and a comprehensive free-trade agreement which would gradually phase out all bilateral trade barriers.13 By the end of 1984, many obstacles remained in the face of any sectorial free-trade agreement. In particular, no GATT articles allowed for free trade agreements on a sectorial basis and the degree of government involvement in the Canadian and US economies differed. At the same time, Canada entered a transitional period with the electoral campaign and the election of a new government in late 1984. Apart from this there was an absence of convergence in the economic philosophy of the two administrations. The US executive was openly endorsing the expansion of American investments and services beyond national borders. The Canadian government was still unwilling to abandon the traditional policy of defending the economic and cultural identity of Canada from colonization by its southern neighbor. The obstacles to foreign investments imposed by the Canadian legislation were still a particular irritant for the United States. The Foreign Investment Review Agency (FIRA) was created in 1973 by the Canadian parliament dominated by the Liberal Party with the task of ensuring that foreign acquisitions and the establishment of new businesses were beneficial to the country. When Pierre Trudeau’s Liberal party returned to government after a brief absence in March 1980, the FIRA seemed oriented to adopt a stricter policy, and the rate of authorizations in the fiscal years from 1981 to 1983 sharply decreased relative to the average of the previous years for both acquisitions and new business investments, although the rate subsequently recovered, possibly in a gesture of goodwill to the southern trading partner, from which the bulk of these investments came.14 Moreover, the authorizations granted by the FIRA were often conditional on the acceptance of

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obligations on the purchase of a certain amount of domestic inputs or the selling abroad of a minimum share of the output. The United States would consider this as trade-distorting practice. A complaint was lodged by the United States to the GATT, whose panel partially agreed with the American point of view. In the same year, Canada moved towards the implementation of a nationalist National Energy Program (NEP) which aimed to reduce foreign ownership of the petroleum sector from 75 percent to 50 percent by 1990. The advent of a new government of a different political color might have further delayed progress in the discussions for removing trade barriers, if only for the administrative jams accompanying most transition processes. But it was not so. The nomination of Brian Mulroney, who was québécois and Catholic, but of Irish descent and above all a Progressive Conservative, marked the dawn of a new era in the relations with the US administration and a new course in the discussions for the removal of trade barriers between the two countries. In his diary, Reagan wrote that when he met Pierre Trudeau, he liked him.15 Expounding the statement of the American president, it appears that his liking for the Canadian prime minister was personal, but was set against a backdrop of difference in attitude and suspicion of his political choices. Indeed, Trudeau was a defender of the cultural and economic independence of Canada and a liberal, in the transatlantic meaning of the term, and therefore his perspective and attitude in the domestic and international fields did not fit well with those of Reagan and the other members of the US executive. A few weeks after the nomination of Mulroney, Reagan wrote, “he has just won a tremendous victory. He’s a super fellow. We got along fine & will continue to do so”.16 On the day on which the Shamrock Summit was held, the president enthusiastically wrote, “I have to believe US–Canadian relations have never been better & certainly not at the leader level”.17 He would not be disappointed. For instance, in June 1985 the FIRA was more attractively renamed Investment Canada and its mandate was drastically reduced. As regards trade negotiations, the changed perspective of the Canadian government can be detected in the report “How to Secure and Enhance Canadian Access to Export Markets”, published by the minister for International Trade, James Kelleher, which showed interest in negotiating a comprehensive, but not all-inclusive, free-trade agreement between the two countries. The comprehensive approach differed from the sectorial approach in that it would begin with a draft for a free-trade agreement from which special exemptions would be agreed through negotiation. The joint declaration issued at the end of the March 17–18, 1985 Shamrock Summit emphasized the willingness of the two leaders to strengthen political cooperation in North America, which included the establishment of a stable and predictable trade environment between the two countries.18 Reagan and Mulroney committed themselves to give high priority to finding mutually acceptable means to reduce and eliminate existing barriers in order to secure trade and investment flows. The USTR and the Canadian International Trade minister were charged by the two leaders with immediately establishing a mechanism to chart all possible ways of reducing trade barriers; they were to report within six months. From the Canadian side, in early September 1985 the MacDonald Commission, publishing the result of a three-year study, recommended the pursuit of a multilateral

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trade agreement within the GATT, but, at the same time, recognizing that the process would be long, the Commission also suggested that priority should be given to a bilateral free-trade agreement with the United States that should conform to the definition of a free-trade area as set forth in the GATT. It pointed out that a free trade agreement would help Canada, which sent about 75 percent of its total exports to the United States, to avoid bearing the brunt of the growing protectionist mood in the US Congress which was bound to result in trade-restrictive measures. Besides, although the establishment of a free-trade area would, in the short term, force some sectors of the Canadian economy to undergo a process of adjustment to withstand American competition, in the long run, the adjustment would enhance their competitiveness and, by becoming more competitive with American firms, Canada would increase its ability to survive in an increasingly competitive global trade environment. The view of the Commission was shared by many Canadian economists who emphasized the threats and actual costs caused by US exploitation of unfair trade measures for protectionist ends. Rugman reported that, between 1980 and 1983, forty-three investigations were conducted against specific Canadian product lines to which were to be added general investigations under the US escape clause.19 The economist also pointed out that Canada was extremely vulnerable to US countervailing measures because its exports were concentrated in relatively few resource-based sectors, and a series of trade actions focused upon those sectors could restrict many Canadian exports to the United States with consequent major disruption in Canadian employment and in certain exportdependent areas.20 Other economists later estimated that between 1980 and 1987 the value of Canadian exports hit by US measures was approximately fifteen times as high as the value of US exports subjected to Canadian impediments.21 At the same time, Canada was not in a condition to retaliate, as an escalation would hit Canada much harder than the United States given the disproportion between the weight of Canadian exports to the United States over total exports and the share of American exports directed to Canada. Two weeks after the MacDonald Commission released its report, the Canadian International Trade minister, Kelleher, presented the findings of his March assignment research, which concluded that the time had come to explore the scope and prospects for a new trade agreement more directly with the US administration. On September 26, Mulroney officially announced to the Canadian House of Commons that he had invited the United States to begin negotiations “for the broader possible package of mutually beneficial reductions in tariff and non-tariff barriers”. The same day, the USTR also presented his findings to the US president. The report concluded that, of the several ways in which barriers to bilateral trade in goods and services with Canada might be reduced or eliminated, the most promising would be the exploration of a comprehensive bilateral trade negotiation. On December 10, Reagan notified Congress of his intent to enter into bilateral negotiations leading to a free-trade agreement. Despite official support for the negotiations, some sectors of the US economy were opposed to an agreement, believing that a free-trade area would allow unfairly subsidized Canadian products to enter the US market tariff free and thereby undercut US producers. Opposition was expressed by representatives of the following industries:

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carbon steel, lead and zinc, television and television picture tubes, certain chemicals, non-rubber footwear, forest products, malt beverages, fiber optic cables, and wire products. It can be argued that the free-trade proposal originated substantially in Canada and it is reported that, in the words of the Canadian ambassador, the US Congress greeted the initiative with a yawn.22 Nevertheless, the lawmakers’ acceptance of the start of the discussions was not peaceful. Under section 401 of the Trade Act of 1974, as amended by the Trade and Tariff Act of 1984, the negotiation of a free-trade area agreement could not proceed if disapproved within 60 session days from the president’s notification. The deadline was April 23, 1986, and on that date a motion to disapprove the negotiation was presented in the Senate, but it failed by ten-to-ten: a close shave.23 The Senate Finance Committee explained the occurrence as due to their concern that the executive was not adequately consulting with Congress in the course of the negotiation. The talks officially started in May. The US delegation was headed by Peter Murphy, a deputy United States Trade Representative. At the start, the size and level of the Canadian team, headed by Simon Reisman, a veteran and experienced trade negotiator, was definitely superior to its counterpart, which bears out that the establishment of a free-trade area was a priority for the Canadian executive, whereas it only met some of the United States’ goals. As noted by a Canadian diplomat, Murphy was not well known in Washington and was not connected to the president or other senior White House members.24 Attentive to the several topics on the table, he was not able to give momentum to the talks, which dragged on for sixteen months. The absence of progress was partially the result of unwillingness on both sides to engage from the start in the topics of main interest to each of them: trade remedies and dispute settlement for Canada and subsidies and investment restrictions for the United States.25 In the United States, the attention of Congress was concentrated on a prospective wide-ranging trade law and the attention of the administration on the opening of a new GATT round. The establishment of a free-trade area with the United States, given its weight on the economy, was a main topic of debate in Canada, where fears of loss of jobs and industrial decline caused by American competition was growing, especially in some regions like Ontario, which was the industrial hearth of the Dominion. During months of lack of progress in the negotiations, Mulroney’s popularity was plummeting due to several factors, among which relations with the United States were relevant, although the main bone of contention was the acid rain issue. The Liberals and the National Democratic Party were opposed to a free-trade area and they seemed to be well placed to dislodge the Progressive Conservatives from government. The prospect of losing a staunch ally and ideological companion deeply worried the US president. During a National Security Council in March 1987, while many participants, including the USTR, were enumerating the issues in which progress was made with the northern neighbor, although a final solution was still to be reached, Reagan simply said that he wanted “to reiterate once again how difficult Brian Mulroney’s political situation is. The Prime Minister is in trouble and it behooves us to do what we could to help him. God help us if the opposition parties were to take over. That would have serious consequences for our defense and trade relationships”.26 To break the impasse in the negotiations with Canada on a free-trade area, James Baker, secretary of the

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Treasury and former chief of staff of the president, was chosen to hold talks with the Canadians, having in his own words a simple mandate: if a deal is at all possible, get it.27 The urgency was particularly strong as the deadline for a “fast track” vote by Congress was nearing. To fulfill his task Baker had to deal with the political realities on the two sides of the border which included the need to make concessions to Canada’s inflexible attitude in protecting the country’s culture from Americanization, and, as the Treasury secretary wittily noted, “it seemed whatever they wanted to protect, they called culture”.28 On October 3, 1987, the president notified Congress that, contingent upon successful completion of the negotiations, he wanted to enter into a free trade agreement with Canada the following January 2, the date on which the agreement was actually signed. The notification gave Congress ninety session days to examine the measure and to reject or approve it; no amendments were allowed. However, a hitch soon developed in the ratification process. Congress complained that during the period between October 3, 1987 and the signing of the trade agreement, disregarding the provisions of the 1974 Trade Law, the administration had failed to consult with the committees in the House and in the Senate which had jurisdiction over the subjects that were affected by the treaty. The reason for the non-fulfillment of the procedure was that on October 3 the executive could produce only a general outline of the agreement with many of the important details missing. It might be argued, therefore, that the administration was in a hurry to take advantage of the fast track procedure while avoiding observations and requests by the US lawmakers which might derail the still uncertain negotiations with the Canadian counterpart that had its own troubles with the Dominion’s parliament. A settlement was reached between Congress and the executive to ensure that the objectives of the fast track process were achieved without much ado.29 A special procedure for consultations on the implementing bill was created by an exchange of letters, dated February 18, 1988, between Congressional leaders and Cabinet officers on behalf of the executive, under which the president would not forward legislation to implement the free-trade agreement to Congress prior to June 1. In return, both Houses pledged to vote on the legislation before the end of the session. Also, provisions were included in the Omnibus Trade and Competitiveness Act of 1988 to ensure that the executive would consult in a timely manner in future trade negotiations. When the hearings began in 1988 there was a tide of complaints from specific industries and regional groups. Agricultural groups were angered by the transportation subsidies for Canadian wheat; a bipartisan coalition of Western state senators warned that the pact endangered US petroleum, mineral, and wheat interests; the uranium industry argued that it could not survive competition from tariff-free, high-grade Canadian uranium; textile producers complained against the refund of duties paid by Canadian apparel makers still allowed by the Canadian government; automakers were impatient with the slow phase-out of Canadian duty remission designed to promote the use of Canadian auto parts by foreign-owned manufacturers in Canada; and the plywood industry claimed that recent decisions by the Canadian authorities were denying access to the Canadian market. On the other hand, important business groups, including the National Association of Manufacturers and the American Business Conference, supported the agreement. The nation’s governors

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voted overwhelmingly in favor of the agreement. It is arguable that tactical reasons also convinced US lawmakers not to oppose an initiative favored by the administration at a time in which a major new trade statute was about to be completed and the threat of a presidential veto was still impending. The implementing bill passed the House and Senate on September 9, 1988, and was signed into law by Reagan the following September 28. The process assumed more dramatic tones in Canada where the implementing legislation was delayed in the Senate, which had a Liberal majority. Mulroney had to call an election and, as he won a governing majority in November, the agreement was passed into law. The agreement took effect on January 1, 1989, following an exchange of diplomatic notes. The Canada–United States Free Trade Agreement (CUSFTA) stated that, consistently with GATT Article XXIV, its objectives were to eliminate barriers in goods and services between the territories of the countries; to facilitate conditions of fair competition within the area; to significantly liberalize conditions for investments; to establish effective procedures for the joint administration of the agreement and the solution of disputes; and to lay the foundations for further bilateral and multilateral cooperation to expand and enhance its benefits. All tariffs between the two countries were to be eliminated by 1998. About 10 percent of the tariffs were to end immediately, in January 1989, including in particular those on data processing and related equipment, certain telecommunications equipment, some processed fish, rawhides, leather, and fur. About 25–40 percent of the tariffs affecting paper, furniture, chemicals, and certain automotive parts were to be phased out over five years, by 20 percent yearly reductions. The remaining tariffs were to be phased out over ten years by a 10 percent reduction each year. However, contrary to what was argued by the Senate report on the implementing bill, the complete elimination of tariffs in ten years could not claim a predominant role in the agreement. With the completion in 1987 of the tariff reductions agreed in the Tokyo Round, the rate of price protection of US and Canadian tariffs averaged 2.8 percent and 4.5 percent respectively. About 70 percent of trade between the two countries was already free from tariff restrictions.30 Quantitative restrictions, which already did not exceed 2 percent of all goods on both sides of the border, were to be phased out. What was important, at least from the US perspective, were the articles (in chapter 4 of the agreement) on rules of origin, which established that items qualified for tariff-free status only if they were wholly produced in either nation or, if imported materials were used, the imports were altered significantly during the manufacturing process, resulting, in general, in a change in the tariff classification of the item. The remission of duties paid by Canadian exporters was no longer allowed. Each party might adopt emergency measures during the transitional period to 1998 by suspending the reduction of duties provided by the agreement or by imposing current MFN rates. The safeguard action could be imposed only once for a given product and could not exceed three years. After the transitional period, no emergency action might be imposed, except by mutual consent. Particular rules applied to some industries. As regards agriculture, the agreement eliminated tariffs within ten years, but either country could impose a temporary duty on fresh fruits and vegetables for twenty years to protect producers harmed by import

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surges. Meat import quotas between the two countries were eliminated and Canadianbased levels for imports of poultry and eggs were increased. Canadian import licenses for US wheat, barley, oats, and their by-products were to be eliminated as long as US government price support was the same or less than Canada’s. Finally, the agreement ended tariffs on whiskey and rum immediately and phased out tariffs on other distilled spirits and wine, but beer was effectively excluded from the CUSFTA to protect the inefficient Canadian breweries from the devastating competition of their large-scale US counterparts. As regards energy, the two parties committed themselves not to apply, in line with the GATT provisions, prohibitions or restrictions on bilateral trade of energy products and not to impose minimum export price requirements and, except in case of countervailing and antidumping orders, minimum import price requirements. In particular, the agreement exempted Canada from any future US restriction on uranium imports that might be imposed under a statutory requirement and ended Canadian rules permitting Canadian uranium to leave the country only with a high level of Canadian processing. It also allowed Canada to import up to 50,000 barrels per day of Alaskan oil, the export of which had been previously prohibited for national security and protection of consumer prices. The CUSFTA maintained the 1965 Auto Pact, but introduced several important modifications. The Agreement Concerning Automotive Products between the Government of Canada and the Government of the United States (called synthetically Auto Pact) provided for the abolition of tariffs between the countries for cars, trucks, buses, and original automotive parts as long as they had a 50 percent Canadian or US content. Used cars and aftermarket auto parts were excluded. Two annexes, requested by Canada, provided important specifications aimed at safeguarding the growth of the fledgling Canadian industry. In the first place, only assemblers already producing in Canada in the period from August 1963 to July 1964 were allowed to benefit from the pact. The US producers established in Canada included General Motors, Ford, and Chrysler. Secondly, for every vehicle sold in Canada, one vehicle was to be produced there. The Pact entitled vehicles manufactured in Canada to remission of duties when exported. Later, Canada extended its duty remission scheme to producers of nonNorth American countries, nominally Japanese ones, on their exports from Canada, mostly to the United States. Both the duty remission and the performance requirement on car sales and production remained the subject of complaints from the US side. The CUSFTA eliminated, over ten years, tariffs on original equipment, whether or not covered by the Auto Pact, and over five years on replacement parts. The Canadian embargo over used car imports was replaced by free entry. The Canadian export-based duty remission program for export to the United States was eliminated on January 1, 1989, while for exports to other countries the remission scheme was to end on January 1, 1998. Local production-based duty remission programs were to be repealed by 1996. The rule of origin for automotive products was tightened by maintaining the 50 percent content requirement provided by the Auto Pact, but applying it to a different basis. On government procurement, the parties referred to the rights and obligations established by the Tokyo Round code, but made further steps to enhance the access of their industries to the calls for biddings in each of the two nations. In particular, the contract price threshold was reduced from approximately US$156,000 to US$25,000

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and its Canadian equivalent, which brought a large number of small contracts within the scope of non-discriminatory competitive bidding. Secondly, the parties committed themselves to developing improved bid challenging procedures and to creating an impartial review authority. On the other hand, the CUSFTA did not enlarge the list of entities whose procurements were subject to non-discriminatory competitive biddings under the Tokyo Round code, which meant that a large amount of procurement at subfederal level remained untouched. Apart from duty drawbacks, which the United States viewed as subsidies, and a few other hypotheses, the free-trade agreement did not deal with subsidies. The silence of the treaty favored Canada whose industries overall enjoyed greater government support than did their US counterparts. On the other hand, the agreement did not bring changes in the law and practice of either country for countervailing and antidumping duties, which in the United States were more severe, and arguably more protectionist, than in Canada, and, what is worse, seemed destined to become even stricter in the near future, thus frustrating one of Canada’s main goals in calling for the creation of a free-trade area. However, the CUSFTA allowed for the replacement of a national court review of countervailing and antidumping determinations by a binational panel which, nevertheless, had to apply national laws in rendering its decisions. Up to this point the scope of the agreement substantially coincided, though with some free-trade enhancing modifications, with that of GATT 1947 and the Tokyo Round codes. In line with US wishes, part four of the agreement extended the principle of National Treatment, i.e. non- discrimination, provided with regard to goods by GATT Article III, to both services and investments across the border. With specific regard to investments, the treaty provided that neither party could impose on investors of the other party that a minimum level of equities be held by its nationals, or that they dispose of any investment or any part thereof. It also prevented each party from requiring any investor from the other country to substitute local goods for imports or take other trade-distorting action. Neither party could stop an investor from transferring earnings. The agreement did not abolish the Canada Investment agency, but raised the threshold for government review of direct acquisition by US investors to Canadian $150 million and ended the review of indirect acquisitions. Services covered by the CUSFTA included construction, tourism, insurance, telecommunications, computer and some professional services, wholesale and retail trade, and management and other business services. As regards financial services, the treaty committed the parties to preserve existing aspects of bilateral liberalization and to promote national treatment in future changes of their legislations. It exempted US bank subsidiaries from Canada’s 16 percent ceiling on assets held by foreign institutions and ended Canada’s foreign ownership restrictions on US purchases of shares in federally regulated insurance and trust companies. Canadian banks operating in the United States were allowed to underwrite and deal in Canadian government debt and were allowed to maintain multistate branches, in contrast to their US competitors. An important exception to the liberalization of services between the two countries concerned the so-called cultural industries, a rather vague concept, but one that substantially reflected Canadian fear (which it must remembered was a bilingual country) of having industries considered important in preserving national or provincial

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identity crippled by the inroads of competitors with greater capacity of self-financing and greater economies of scale. The United States accepted the Canadian request to keep the publication and distribution of books, magazines and newspapers, film and video recordings, audio or music recordings, and radio, television, and cable broadcasting out of the scope of the agreement. However, it complained that the exception allowed the beneficiary industries to continue being subsidized and perpetuated inequities in investment opportunities between the two economies. Both the report on the implementing law in the United States and the USTR report did not fail to stress that the acceptance of the cultural exception did not mean a surrender of the US right to adopt unfair trade remedies, from section 301 to countervailing measures, whenever it resulted in trade-distorting practices damaging American industries. Finally, the CUSFTA established a Canada–US Trade Commission whose task was to resolve disputes arising in the implementation of the agreement (except for antidumping and countervailing duties, safeguards, and financial services) through consultations and negotiations. If that proved unsuccessful, a dispute settlement panel would be appointed to consider the dispute and issue promptly a ruling. Whenever the Commission was unable to agree on the settlement of the dispute after the panel’s ruling, the aggrieved party was authorized to suspend concessions made under the treaty. It is, therefore, arguable that if the initiative for the agreement came from the Canadian side in order to secure access to the big US market, the CUSFTA allowed the United States to achieve a number of specific objectives: in particular, the elimination of tariffs, overall higher for Canadian imports; a reduction in Canadian non-tariff barriers on merchandise trade; a reduction in Canadian investment restrictions; the establishment of rules in services; and improved discipline on subsidies, according to the US model. Yet, contrary to the expectations of both countries, at least in the short run, the rise in trade and investments that the agreement was supposed to boost did not materialize. In real terms Canadian exports to the United States increased only slightly in 1989 and 1990, and their post-agreement growth rate was below that of the years preceding the CUSFTA.31 US investments in Canada in 1990 grew in real terms relative to the previous year, but remained below the level reached in 1987 and quite below the average of the years before the treaty.32 Direct investments in Canada from third countries went on growing at a strong rate.33 In the same years, American investments in its southern neighbor and the trade flow across the border were growing at an accelerated speed.

Free-trade with Mexico? In the years in which Mexico implemented its import liberalization program, officially launched in June 1985, but unofficially started at the outset of the decade, the flow of products southwards and northwards across the US border soared. Between 1985 and 1988 the value of US exports rocketed by 52 percent and that of its imports grew by 19 percent.34 What is relevant was the radical change in the composition of the

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Mexican exports, which showed a decline of 59 percent in the sale of mineral fuel and oil products and a 72 percent rise in that of manufactured goods. In 1985, Mexico’s manufacturing exports already exceeded oil exports, whereas they had been dwarfed by them four years earlier. Between 1985 and 1988, US exports and imports of transportation equipment grew respectively by 52 and 65 percent. During the 1980s, Mexico remained a leading trading partner, ranking third as a single country market for US exports and either fourth or fifth as a single national source for US imports. For Mexico, the United States remained both its principal foreign supplier and its principal foreign market. The oil price fall also coincided with a strong increase in the US share of Mexican exports and imports: in 1981 the US share was respectively 55.3 and 63.8 percent; in 1987 it was 69.6 and 73.5 percent.35 Mexico had long followed an import substitution model, which, however, had not prevented that, with the exception of the oil industry, the key sectors of economic development, nominally in manufactured goods, were controlled by American companies, whether directly or through Mexican affiliates. On average, about twothirds of foreign direct investments in the Latin American country came from north of the border. Mexico still prohibited majority foreign ownership, although the rule was implemented with a certain elasticity. Besides, prospective foreign investors had quite often to accept government interference in the management of their initiatives through local content and export performance requirements. On the other hand, they also received financial incentives; that is, subsidies. Both practices were censured by the US administration, though American MNCs seemed to be more forbearing. In short, there was already a strong link between the two economies, but there was a gap in their level of development and, because of its economic strategy, Mexico was not to be considered as a like-minded country. The fall of the price of oil in 1981, and its acceleration in 1986, induced the Mexican government to reconsider its traditional policy, as the main source of revenue that had helped to carry on with its development model, was dwindling. The import liberalization scheme adopted by the administration of Miguel de la Madrid resulted in the curtailment of import licenses and average tariff rates. The coverage of import permits on imported products plunged from 92.3 percent in June 1985 to 25.4 percent in December 1987, and in the same period the average tariff fell from 23.5 percent to 11.8 percent.36 On the other hand, import permits remained particularly frequent in sectors such as electronic equipment, motor vehicles, and pharmaceuticals, which were a privileged goal of American investment. The cut of tariffs and other import restrictions aimed at reducing production costs for the firms operating in the country. Local content and export performance requirements were not abolished since they were believed to help the development of the Mexican economy. For the new model to work it was necessary to secure open access to foreign markets, nominally the American one, which accounted for three-quarters of Mexican exports.37 The main concern for Mexico was no longer the level of US tariff barriers which, having been cut in the course of several GATT rounds, had been reduced also for the southern neighbor, which had been granted MFN treatment though not a party of the General Agreement. Instead, as was for Canada, the concern derived from the set of statutory provisions as well as their protectionist biased implementation, which

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included countervailing measures against Mexican exports and prospective retaliatory restrictions under section 301 of the Trade Act of 1974, as modified by the 1984 Trade and Tariff Act, since Mexico was accused of imposing excessive constraints even for a developing country on foreign investment.38 Mexico was particularly exposed to countervailing duty proceedings since, not being a signatory to the Tokyo Round code on subsidies and countervailing measures or an equivalent bilateral accord until 1985, it was not entitled to an injury test on the effect of its subsidized exports on American industries. During the period 1980–85 there were twenty-seven countervailing duty cases concerning Mexican products such as steel, cement, ceramic tiles, textiles, fresh flowers, bricks, and even toy balloons.39 In April 1985, Mexico signed a three-year agreement with the United States which substantially incorporated the provisions of the Tokyo Round code in their bilateral relations. In particular, Mexico undertook to do away with practices resulting in export subsidies, while the United States committed itself not to apply countervailing duties before a finding of injury to its industries by the US International Trade Commission. The agreement was renewed in 1988. A further step towards liberalization took place in August 1986 with the accession of Mexico to the GATT. In the same months during a meeting of the presidents of the two countries, Reagan and de la Madrid agreed to complete bilateral negotiations for a broad agreement on trade and investments within a year. The agreement, signed on November 6, 1987 by USTR Clayton Yeutter and by the Mexican secretary of Commerce and Industrial Development, Hector Hernandez Cervantes, sanctioned the promotion of Mexico to like-minded country. It provided a framework of principles and procedures for consultations regarding trade and investments between the two countries.40 In the statement of principles, the two states recognized the need to eliminate non-tariff barriers and the role that the GATT played in their trade relations. More specifically, it acknowledged the increased significance of services in the US and Mexican economies and in their bilateral relations, and the importance of adequate protection of intellectual property rights as well as the importance of export earnings in allowing Mexico to meet its foreign debt obligations. The accord established a bilateral consultative mechanism obliging the two countries to begin formal negotiations within thirty days after either government requested to consult on any bilateral trade and investment matter. It also committed both nations to start substantive negotiations on seven contentious subjects: textiles, steel, agricultural products, investment matters involving technology transfer, intellectual property protection, electronic products, and service industries. In December 1987, a steel agreement was signed to amend the 1985 understanding on certain steel products, which increased the quota of Mexican exports for 1988, added a new category of steel, and changed the basis for calculating adjustments in export ceilings. The Mexican government agreed to eliminate or significantly reduce the import barriers previously imposed on beer, wine, distilled spirits, and certain other beverages. In February 1988 the United States agreed to increase the quota that it had assigned to Mexican textile and apparel products in the MFA framework. The international Trade Commission stated that the 1987 agreement was “a landmark in improving economic relations between the two countries”, noting, however, that it was “much less ambitious than the U.S. pact with Canada signed a

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month earlier”.41 Actually the November 1987 agreement did not give any definitive indication as to what the end of the process might be. An observer remarked that despite the large volume of US–Mexican bilateral trade, any step towards a free-trade area in line with GATT Article XXIV was likely to be hampered by the gap in level of development and the concerns of many sectors in agriculture and manufacture on both sides of the border.42 On the other hand, under the GATT to which both states were then parties, sectorial concessions, at least those on trade in goods, had to be extended to the other members according to the MFN principle, or had to obtain a GATT Article XXV waiver. Reagan, in the State of the Union delivered to Congress in January 1988, stated, though in passing, his determination to extend the principles informing the agreement with Canada south of the border, announcing that he would visit Mexico “where trade matters will be of foremost concern”.43 Congress in section 2101 of the Omnibus Trade and Competitiveness Act of 1988 praised the 1987 agreement as “a useful vehicle for the management of bilateral trade and investment relations, based on shared principles and objectives”. The second part of the section stated that “within the context of the bilateral framework Agreement on Trade and Investments the president is urged to continue to pursue consultations with representatives of the government of Mexico for the purposes of implementing the Agreement and achieving an expansion of mutually beneficial trade and investment”. The section contained nothing on the extent of the requested expansion of trade and investments, and the format in which it was to be achieved.

Notes 1

Gary Clyde Hufbauer et al., North American Free Trade. Issues and Recommendations (Washington DC: Institute for International Economics, 1992), 9. 2 Proposed United States—Israel Free Trade Agreement. Hearing of the Committee on Finance United States Senate, March 20, 1985. https://www.finance.senate.gov/imo/ media/doc/HRG99-76.pdf (November 1, 2018). 3 Howard F. Rosen, “The US–Israel Free Trade Area: How Well Is It Working and What Have We Learned?” in Jeffrey J. Schott (ed.), Free Trade Areas and U.S. Trade Policy (Washington DC: Institute for International Economics, 1989), 103, Figures 3.1 and 3.2. 4 See W. Charles Sawyer, et al. “U.S.–Israel Free Trade Area. Trade Expansion Effects of the Agreement”, Journal of World Trade Law Vol. 20 (1986) N. 5, 527. 5 Ibid., 528. 6 Twenty-eighth ARPTAP, 1984–85, 97. 7 See Francine McKenzie. GATT and the Global Order in the Postwar Era (Cambridge: Cambridge University Press, 2020), 161. 8 On the provisions of the Free-Trade Agreement see in particular OTAP 36th Report, 1984, 30 et seq. https://www.usitc.gov/publications/332/pub1725-0.pdf (accessed November 2, 2019); Twenty-eighth ARPTAP, 1984–85, 97. 9 Howard F. Rosen, “The US–Israel Free Trade Area”, 102. 10 OTAP 37th Report 1985, 129 https://www.usitcgov/publications/332/pub1871-0.pdf (accessed October 3, 2019).

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11 Ibid. 12 OTAP, 36th Report, 1984, 125. https://www.usitcgov/publications/332/pub1725-0.pdf (October 3, 2019). 13 Twenty-eighth ARPTAP, 1984–85, 98. 14 Alan Rugman, “Canada: FIRA Updated”, Journal of World Trade Law, Vol. 17 (1983), 352; OTAP, 37th Report, 1984, 121. 15 Ronald Reagan, The Reagan Diaries, Tuesday, March 10, 1981. 16 Ibid., Tuesday, September 25, 1984. 17 Ibid., Monday, March 18, 1985. 18 The meeting was held in Quebec City (la ville de Quebec, ancient capital of francophone Canada) but was dubbed The Shamrock Summit to stress the close relationship of the two leaders, duly borne out by their common roots: Mulroney and in part Reagan were of Irish descent. 19 Alan Rugman, “U.S. Protectionism and Canadian Trade Policy”, Journal of World Trade Law, Vol. 20 (1986) N. 4, 369. 20 Ibid., 374. 21 D.L. McLachlan et al., “The Canada–U.S. Free Trade Agreement: A Canadian Perspective”, Journal of World Trade Law, Vol. 22 (1988) N. 4, 14, Table 1. 22 See OTAP 37th Report, 1985, 40. 23 U.S.–Canada Free-Trade Agreement, Senate Report n. 100-509. 24 Derek Burney, Getting It Done: A Memoir (Montreal: McGill-Queen’s University Press, 2005), 109. 25 Ibid., 111. 26 NSC, March 3, 1987. Canada–U.S. Relations. www.thereaganfiles.com/870303.pdf (accessed September 29, 2019). 27 James A. Baker, Work Hard, Study, 435. 28 Ibid. 29 U.S. Code Congressional and Administrative News 100th Congress- Second Session, 1988, Legislative History U.S.–Canada Free-Trade Agreement, Senate Report n. 100–509. 30 D.L. MacLachlan et al., “The Canada–U.S. Free Trade Agreement”, 11. 31 See John Whalley, “Regional Trade Arrangements in North America: CUSTA and NAFTA”, in Jaime De Melo et al. (eds), New Dimensions in Regional Integration (Cambridge: Cambridge University Press, 1993), 362, 363, Table 11.2. 32 Ibid. 33 Ibid., 365, Table 11.3. 34 OTAP 37th Report, 1985, 178, Table 15 and OTAP 40th Report, 1988, 116, Table 13. www.usitc.gov/publications/332/pub2208_0.pdf (accessed September 20, 2019). 35 Ignacio Trigueros, “A Free Trade Agreement Between Mexico and the United States?” in Jeffrey J. Schott (ed.), Free Trade Areas, 263, Table 10.2. 36 Ibid., 259, Table 10.1. 37 Gary Clyde Hufbauer et al., North American Free Trade Issues, 12. 38 See Sidney Weintraub, A Marriage of Convenience. Relations Between Mexico and the United States (New York, Oxford: Oxford University Press, 1990), 81. 39 OTAP 37th Report, 1985, 184. 40 Twenty-ninth ARPTAP, 1988, 57; Guy C. Smith, “The United States–Mexico Framework Agreement: Implications for Bilateral Trade”, Law & Policy in International Business, Vol. 20 (1988–89) 836 et seq.

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41 OTAP 39th Report, 1987, 4–36. www.usitc.gov/publications/332/pub2095_0.pdf (accessed September 20, 2019). 42 Guy C. Smith “The United States–Mexico Framework Agreement”, 854. 43 Ronald Reagan, January 25, 1988: State of the Union Address, millercenter-org/ the-presidency/presidential-speeches/january-25-1988-state-union-address (accessed April 15, 2020).

8

Trading Partners Outside the Americas

A cursory look at the statistical evidence on the US merchandise trade with its transpacific and transatlantic main partners in the first half of the 1980s helps explain the major policy developments affecting trade during the second Reagan presidency. The European Community (EC) remained a net importer of food and live animals. Yet, it increasingly became a competitor of the United States in the world farm market and also managed to record conspicuous exports across the Atlantic if beverages and pasta are included in the picture. Likewise, the export and import ratio in manufactured products was much more balanced than for Japan. As regards the latter country, the small Japanese farm exports were dwarfed by imports from the United States. In contrast, with the exception of chemicals, including pharmaceutical products, and aircraft, US exports of manufactured goods were surpassed by imports from Japan. US car exports were crushed by the Japanese juggernauts, but the success story was repeated in several other sectors and Japan was increasingly making inroads in the high-technology area which had long been an American preserve. Western Europe was a magnet for American foreign direct investment (FDI), which by 1960 surpassed investments in Canada, thus securing a foothold in the growing European market. Things went differently across the Pacific where, as shown in Table 8.1, in 1985 FDIs in South and East Asia, including Japan, accounted for 11 percent of the US stock, while in the European Community they exceeded 35 percent.

Japan The cause of the imbalance with Japan, excepting farm produce, was seen by the United States as twofold, showing in both cases a lack of equity. On the one hand, there was the import penetration of Japanese-manufactured goods into the US market. It could be easily pointed out that the assumption of unfairness was mixing the effect up with the cause, leaving aside the fact that even the United States acknowledged that the main factor was the unprecedented appreciation of the greenback. Notwithstanding, the United States was arguing that Japanese exports were boosted by unwarranted government practices, many of which were not in line with GATT provisions, including tax reductions, subsidies, and several forms of protection for industries showing strong export potential. On the other hand, exports by US firms were allegedly meeting undue 159

160

Table 8.1 US direct investments in foreign countries by area 1965–88 (millions of US dollars and percentage of total investments)

Year

All areas

1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988

49328 54777 59486 64983 71016 75480 82760 89878 101313 110172 124050 136809 145990 162727 186760 215375 238348 207752 207203 211480 230250 259800 314307 333501

Canada 15223 17017 18097 19535 21127 21015 21818 22985 25541 28404 31038 33838 35052 36396 40243 45119 47073 43511 44339 46730 46909 50629 57783 62619

30.9 31.1 30.4 30.1 29.7 27.8 26.4 25.6 25.2 25.8 25 24.7 24.0 22.4 21.5 20.9 20.6 20.9 21.4 22.1 20.4 19.5 18.4 18.8

Latin America and Caribbean 10836 11498 12044 13101 13841 12962 14013 14896 16484 19492 22167 23934 27515 31771 35056 38761 38838 26314 24133 24626 28261 36851 47551 51941

22 21 20.2 20.2 19.4 17.2 16.9 16.6 16.3 17.7 17.9 17.5 18.8 19.5 19.8 18 17 12.7 11.5 11.6 12.3 14.2 15.1 15.6

Europe 13985 16212 17926 19407 21650 25255 28654 31696 38255 44782 49305 55139 62552 70647 82622 96287 101601 92449 92176 91589 105171 120724 150439 156932

Australia, New Other African Zealand, & S. countries & Africa Middle East

EC 28.3 29.6 30.2 29.9 30.5 33.5 34.6 35.3 37.8 40.6 39.7 40.3 42.8 43.4 44.2 44.7 44.5 44.5 44.5 43.3 45.7 46.5 47.9 47.1

6304 7587 8444 9012 10255 11516 13070 15339 30919 35453 38773 43215 49150 55991 65681 77152 80743 71712 70210 69501 81378 101625 123999 131116

12.8 13.9 14.2 13.9 14.4 15.3 15.8 17.1 30.5 32.2 31.3 31.6 33.7 34.4 35.2 35.8 35.4 34.5 33.9 32.9 35.3 39.1 39.4 39.3

2342 2666 3186 3508 3865 4067 4457 5056 5746 6520 7013 7830 7923 8781 9595 10583 12003 12014 11558 10868 10743 11455 13603 15288

Source: Statistical Abstract of the United States: US Investment Position Abroad by Country, various issues; own calculations.

4.7 4.9 5.4 5.4 5.4 5.4 5.4 5.6 5.7 5.9 5.7 5.5 5.4 5.4 5.1 4.9 5.3 5.8 5.6 5.1 4.7 4.4 4.3 4.6

2925 3141 3356 3783 4032 3948 4288 4161 2602 −4139 −1626 −526 −1216 −400 2029 5941 2205 7755 8574 9481 9103 8890 8456 8005

5.9 5.7 5.6 5.8 5.7 5.2 5.2 4.6 2.6 ° ° ° ° ° 1.1 2.8 1 3.7 4.1 4.5 4 3.4 2.7 2.4

Other Asian countries incl. NICS

Japan 675 731 870 1050 1244 1482 1902 2323 2671 3319 3339 3797 4593 5406 6180 6225 6762 6930 7661 7936 9235 11472 15684 17927

1.4 1.3 1.5 1.6 1.7 2.0 2.3 2.6 2.6 3.0 2.7 2.8 2.8 3.1 3.3 2.9 2.8 3.3 3.7 3.7 4.0 4.4 5.0 5.4

1366 1308 1685 1869 2172 2250 2718 3216 3818 4519 5747 5904 6217 6757 7440 8505 11018 12142 13039 15045 15400 15332 17010 18515

2.8 2.4 2.8 2.9 3.1 3.0 3.3 3.6 3.8 4.1 4.6 4.3 4.3 4.2 4.0 3.9 4.6 5.8 6.3 7.1 6.7 5.9 5.4 5.5

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difficulties in entering the Japanese markets, especially for products in which they were most competitive. The accusation was difficult to prove as the Japanese tariff rates were among the lowest in the world and certainly were not higher than in the United States.1 An analogous trend had marked the dismantling of quotas, with the exception of those imposed on agricultural imports. According to the United States, however, Japan was using more subtle barriers than tariffs and quotas to protect its firms. Thus standards— establishing quality, performance safety, and other characteristics of products—gave no recognition to those with which exporting firms had to comply in their own countries. Likewise, certification systems, that is, procedures for testing products to see if they meet standards, favored Japanese companies, which were allowed to type approval based on factory inspection, whereas foreign products were subject to time-consuming lot inspections, or other cumbersome procedures. Furthermore, participation in public procurement was actually limited to Japanese firms, or Japanese practices put foreign firms at a severe disadvantage. There was a further snag to the inflow of American exports into the Japanese markets: in Japan, local producers tightly controlled their distribution channels and were consequently able to severely constrain market access for foreigners. However, there was no global antitrust law based on the American pattern. The United States was complaining that, as regards capital goods, its share in the world market had dropped to 19.4 percent in 1981, that is before the full impact of the dollar appreciation, reflecting a 50 percent decline in thirteen years, while imports had increased from $90 million in 1971 to $1.5 billion ten years later, over 43 percent of which were supplied by Japan.2 Also, the US leadership in key high-tech sectors seemed to be threatened. Certainly the balance, both at world and regional level, was in favor of the United States in aircraft, spacecraft, engines, computers, and drugs and plastics, but as regards Japan it was no longer so in electronic components and professional and scientific instruments.3 The overall decline of the United States in favor of its trading partner across the Pacific increased over the course of the 1980s. The share of the United States in the world high-technology exports declined from 29.5 percent in the 1970–73 years to 25.2 percent in the 1982–83 period and to only 23 percent in the following three years. Even more marked was the decline of the European Community. In contrast, Japan more than doubled its share in the same period, which grew from 7 percent in 1970–73 to 12.9 percent in 1982–85 and 15 percent in 1985–87.4 The trend was confirmed by the changes in the position of the two countries in the revealed comparative advantage, i.e. the ratio between the share of global exports of a particular product from a single country (or group of countries) and its share of global exports of all manufactured products. The US comparative advantage for all high-tech products fell from 219 in the 1970–73 period to 192 in the 1986–89 period, while the comparative advantage of Japan grew from 80 to 133 in the same years.5 The EC advantage contracted from 99 to 91. In the high-tech area, the United States preferred to establish, though not without difficulties, a cooperative dialogue, an attitude that characterized key developments in the second half of the decade. In March 1982, a High Technology Work Group was established, which initially focused on transfer of high technology, market access, joint research and development, and trade distortions.6 In September 1981, the two countries

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negotiated a bilateral reduction on semiconductor tariffs down to 4.2 percent, and two years later agreed to eliminate them.7 Access to the Japanese market was not confined to trade. Direct investments by American firms might help fill the gap in several ways. In the previous three decades, FDIs had been a launching pad for US multinationals in Europe. The establishment of majority-owned subsidiaries not only had stimulated imports through intracompany trade, but had resulted in sales of goods directly produced by the affiliates, which quite often were a multiple of the trade across the Atlantic. For a long time, this had not been possible in Japan because of capital restrictions imposed by the Japanese authorities and in large measure tolerated by their US counterparts for political reasons. In 1980, US FDIs in Japan amounted to $6.3 billion, less than 5 percent of total US foreign direct investments.8 At the same time, in contrast to FDIs in Europe, where there was a predominance of majority subsidiaries, securing control of the management to American multinationals, in Japan minority-owned affiliates prevailed on account of the restrictions imposed by the Japanese authorities. As a result, minority affiliates in Japan often helped funnel Japanese products to the United States.9 When in March 1980 the legal barriers to foreign investments were declared completely removed, after a lengthy and uneven process that had lasted for over twenty years, new barriers to the establishment of American multinationals were created by local powerful keiretsu (see below). Yet, between 1980 and 1984 the stock of US direct investments in Japan grew by 27 percent, a rate much higher than that in Canada and in Europe, although from a much lower base (Table 8.1). Between 1984 and 1988, US FDIs skyrocketed by 112 percent, reaching $17.9 billion, an amount exceeded only by investments in the UK, a traditional magnet for American multinational corporations, West Germany, and Switzerland. On the other hand, US multinationals preferred to invest in subsidiaries engaged in distribution, which in 1988 sold one-tenth of all US exports to Japan, twice the contribution of those subsidiaries manufacturing in the country.10 It is not the task of this work to ascertain whether all the complaints of the United States with regard to the impermeability of the Japanese market were well grounded. Japanese firms, as well as many politicians, would argue that the failure of American corporations to make significant inroads in the Nippon market, in areas in which they claimed to have a competitive advantage, was simply due to the fact that they had no competitive advantage. And many of the United States’ complaints were unlikely to be covered by GATT rules or by the purview of other international laws. On the other hand, the United States could reply, although its claim was not watertight, that its market had been traditionally open to foreign products and investments. For instance, the abolition of the telecommunication monopoly had offered great opportunities to new entrants, both Americans and foreigners. Why, therefore, were similar opportunities not offered to American companies by the US trading partners, among which was Japan? The relevant point, however, was that the conventional wisdom shared by firms, Congress, and government in the United States was that the reason for the enormous surpluses of Japan was its decision to pursue belt-tightening policies favoring exportled growth. The best cure was, therefore, to induce Japan to reorient its economic policy by giving priority to domestic development; and this view seemed to be shared by many influential Japanese policy makers.11 Hence from the late 1970s, the United

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States’ requests for Japanese concessions increasingly addressed issues that might affect trade topics but prevalently concerned measures considered as belonging to the domain of internal affairs of sovereign states, thus encroaching on Japan’s internal affairs.12 The tactic adopted by the United States was to exert diplomatic pressure and waive the threat of import restrictions, leaving, however, autonomy on the selection of needed policy changes to Japan. Yet, as the trade gap increased, the United States constantly criticized the extent of the Japanese reform programs and the speed of their implementation. In 1981, at the request of the prime minister, Zenko Suzuki, the Japanese national diet, dominated by the Liberal Democratic Party, established a Committee on International Economic Measures, which in January 1982 announced the launch of forty-seven non-tariff liberalization actions. Unfortunately, the announced actions were found out to be a compilation of measures that were already in the pipeline of various Japanese agencies.13 Further reform programs would follow. Four years later, the USTR, rather scathingly, remarked that “rather than enact new trade restrictions, Japan has been glacially slow in lifting nontariff barriers”, pointing out that despite the submission of three additional packages of liberalizing measures since the start of 1984, American firms still encountered a variety of obstacles in the Japanese market.14 A more direct and specific approach was therefore needed.

MOSS talks In their meeting on January 2, 1985, Reagan and the Japanese prime minister, Yasuhiro Nakasone, agreed to start an ambitious negotiating program intended to uncover and resolve barriers to exports to Japan in four sectors in which the US industry deemed that its export potential could not be fully exploited in the Japanese market. The US decision to focus on selected sectors was taken in December 1984 during the preparation of the Reagan–Nakasone meeting.15 It reflected a shift in the American approach to tackling the soaring trade deficit, in particular with Japan, from controlling foreign exports to the United States to securing overseas markets for American products. More specifically, the MOSS (Market-Oriented Sector Selective) talks can be viewed as an expression of the executive’s philosophy that had been endorsed by Congress in modifying section 301 within the Trade and Tariff Act of October 1984. While the bills periodically introduced by lawmakers during the first Reagan presidency focused simply on the deficit that was to be curtailed by imposing tariffs and quotas on the export of countries found guilty of unjustified trade surplus, the executive stressed the need to encourage exports, which after the contraction in the previous two years had started to show signs of unstable recovery in 1984. The strategy of dialogue with the Japanese authorities was chosen in preference to other actions, such as restrictions of imports, as envisaged by section 301. The possibility of retaliatory measures was, however, present and the Japanese government was well aware of them. Indeed, Nakasone in July and October 1985, while the MOSS were in progress, produced two action programs to enhance market access into Japan, which, however, were received rather coldly by the Americans. On the other hand, Nakasone viewed the United States not only as Japan’s main trading partner, but also as a strategic ally whose requests had to be supported.

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The MOSS talks aimed at reforming and opening the Japanese market, which in turn was supposed to foster American exports to the country of the Rising Sun. The reform, which was to be carried out from the interior, aimed at tackling a series of barriers affecting US export in the four sectors concerned. The first category consisted of governmental restrictions, both as tariff and non-tariff barriers. These barriers were considered responsive to foreign political pressures and could be eliminated through legislation or administrative action. The second category, structural barriers, encompassed various interrelations between companies, distribution systems, and government entities, which were extremely hard to break by the action of government officials, whether domestic or foreign. The Japanese market was often structured around families of firms with strong business linkages, known as “keiretsu”. Keiretsu might be organized horizontally around a bank that served as a source of capital for the member companies or vertically with a major firm linked directly with a supplier or with a distribution network. Such a structure would probably fall under the rigor of US antitrust law, but Japan had no similar laws and the keiretsus were a powerful interlocutor of Japanese bureaucracy. The first MOSS talks concerning telecommunications, electronics, pharmaceuticals, medical equipment, and forestry products, which were held from January 1985 to the early months of 1986, addressed the first kind of obstacles, i.e. tariff and non-tariff barriers originating from legislation or administrative practice. A fifth MOSS talk on transportation machinery (auto-parts), launched in May 1986 and lasting till August 1987, focused instead on the second kind of barriers originating16 from restrictive business practices in the Japanese private sector. The sectors were selected on the basis of the following criteria: the products under discussion constituted a sector; the sector industries had repeatedly complained against formal or informal trade barriers; the US industries were internationally competitive but their market share in Japan was small and there was potential for its increase; the concerned industries were interested in the talks and willing to provide backup information; there was the prospect of near-term observable results. The talks did not concern specific problems on a case-by-case basis, but aimed at removing trade barriers within selected sectors.17 Contrary to what their name suggested, the talks did not imply bilateral bargaining with each side making concessions, as they simply concerned unilateral changes in Japan’s trading practices. On the other hand, if the result of the negotiations was destined to be unidirectional, consisting of reforms in some key sectors of the Japanese economy, the features and intensity of such reforms were not just a function of the amount of pressure applied by the United States, but reflected a multiplicity of factors. These included the availability of effective policy instruments to the Japanese ministries requested to pursue market liberalization in the areas of competence, their relation with the private sectors as well as the attitude of such sectors towards liberalizing reforms, and the stage of implementation of the reforms at the time the American requests were made.18 A further important factor was the effectiveness of the agenda-setting by the demandeur United States; that is, the submission of a concrete list of requests at the initial stage of the negotiations, which was the case in the pharmaceutical talks, but was lacking in the electronics talks.19

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Till the end of the 1970s the Japanese counterpart in negotiations with the United States had been the Ministry of International Trade and Industry (MITI) as the industries under its jurisdiction, such as textiles, steel, and automobiles had successfully expanded their exports thus causing frictions with other countries. Instead, the MOSS talks concerned rather heterogeneous sectors of the Japanese domestic bureaucracy, and therefore a plurality of Ministries were present at the negotiating table: the Ministry of Post and Telecommunications and the MITI in the telecommunication negotiation; the Ministry of Health and Welfare, with the non-official intervention of the Ministry of Finance, in the pharmaceutical and medical equipment negotiations; The MITI in the talks on electronics; the Ministry of Agriculture, Forestry and Fishery and the MITI in the discussions on forestry products; the MITI and the Ministry of Transportation in the transportation machinery sector. On the American side, the Department of Commerce was responsible for telecommunications and transportation machinery, the Department of the Treasury for medical equipment and pharmaceuticals, the Office of the United States Trade Representative (USTR) for electronics, and the Departments of Agriculture and Commerce for forestry products, while the State Department was charged with the oversight of the negotiating process. Factors favoring the success of the talks were present during the first stage of the negotiations on telecommunications, which were conducted in two phases. The first phase focused on telephone communications, or wired equipment and services, including basic telephone and enhanced services; the second phase concerned wireless, or radio services and equipment, involving radio frequency allocation, pagers, and cellular phones. In 1983, Japan had started to make plans for the privatization of the Nippon Telegraph and Telephone Corporation (NTT) as of April 1985, stripping it of its monopoly in some telecommunications service markets. The United States, however, was worried that the law for privatizing NTT was biased in favor of Japanese subscribers and continued to limit foreign access. Thus, from the start of the MOSS talks, the US negotiators focused their attention on the ordinances implementing the privatization of NTT, which were due to become operative by April 1, 1985, in order to prevent them from disadvantaging US suppliers of equipment and services. In particular, they wanted to ensure that US firms did not face hindering technical standards and discriminatory certification procedures, while enjoying greater freedom to participate in deregulated service sectors. The US delegates were favored by the fact that pressure to liberalize the Japanese market also came from domestic sources that wanted to gain access to foreign technology and from the Post and Telecommunication Ministry, which believed that the advancement of telecommunications would play an important role in modernizing the Japanese economy. The US delegation succeeded in setting April 1 as a deadline for the completion of the first round of talks. In March, the Japanese authorities agreed to accept foreign-generated tests in certifying interconnected equipment, such as facsimile machines, switchboards, modems, and answering machines. They also agreed that only one independent agency would be charged with certifying the conformity of telecommunications equipment to Japanese standards and allowed greater foreign inputs in drafting the standards.20 A month after the deadline, Japan also announced that it accepted the US request to impose, as in the

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United States, only those standards needed to prevent equipment attached to the phone network from impairing its operations. No deadline was established for the conclusion of the second stage, nor was there any impending legislation, but this time the task to put pressure on the Japanese authorities was taken up by Congress, alarmed by the data on the growing deficit with Japan that in 1984 had neared $34 billion. By October, the US lawmakers had begun to discuss retaliatory legislation to limit Japanese exports of telecommunications equipment to the United States. The previous March, the Electronic Industry Association had requested the application of section 301 to telecommunications exports from Japan and other developed countries. The United States hoped to close, at least partially, the gap with the Far Eastern country by conquering 20 percent of its market for radio communications equipment, which totaled about $500 million in 1984, but could reach $20 billion within a few years. The pressure on the Japanese counterpart bore fruit: Japan expressed its willingness to update standards in mobile telephones and paging devices and to consider the use of US standards on cellular telephones in lieu of NTT standards. In December 1985, the two sides reached agreement on the issue of manufacturer-generated conformity data and on frequency allocation. An independent Radio Inspection Approval Institute was established. Use and purchase of US satellites by private companies was allowed, though government procurement was still prohibited. In the pharmaceuticals talks, the United States was advantaged by the fact that American pharmaceutical firms already had a foothold in the Japanese market and their exports far exceeded imports from Japan: in 1983, American exports amounted to $526 million while Japanese exports totaled $103 million; in 1984, US exports reached $534 million, whereas imports from Japan slightly decreased to $92 million. As regards medical equipment, Japanese exports exceeded imports from the United States, but the Japanese medical equipment market was only a modest percentage (about 14 percent) of the pharmaceuticals market. Thus, the United States did not feel the need to put particular pressure on its counterpart as is borne out by the fact that the negotiations started only in March 1985. The US industry was interested in the MOSS talks firstly to strengthen its presence in the Japanese market, where per capita consumption of drugs was the highest in the world and comprehensive health care programs covered nearly 100 percent of the population; secondly, for fear of catch up by Japan followed sooner or later by overtaking as had happened in other key industries.21 Japan agreed to adopt a number of market-opening measures, including improvements to granting product approvals and manufacturing licenses and for setting reimbursement prices under its health insurance scheme. In particular, standard processing time procedures comparable to those used by the US Food and Drug Administration were introduced Of the four MOSS talks, progress on the forest sector was the most difficult to achieve as the Japanese side was unable to promptly acquiesce to US demands because of the needs and structure of its industry. Japan was the second largest market for forest products after the United States and it imported over 60 percent of its wood, of which about 35 percent came from the United States. It was also an exporter, although it faced growing competition from South East Asia, especially in the plywood industry. Japan

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was the world’s second largest producer and consumer of paper and paperboard. The Japanese government had helped the curtailment of excess capacity of the paper industry encouraging “depression and disposal” cartels. Although this was not a formal subject of the talks, the United States also argued that a negative feature of the Japanese market was its keiretsu network in which the supplier had part ownership of business that they supplied, creating a structural barrier to outside competitors. Only at the very end of the negotiations did the United States partially achieve its goals, since, although no formal agreement was signed, the two parties reached consensus on several trade issues, as publicized in their January 1986 joint report. At the beginning of the talks in January 1985, the Japanese foreign minister, Shintaro Abe, flatly rejected the US requests for tariff reduction and, in meeting with American representatives, including Vice-President George Bush, high-ranking members of the Japanese Liberal Democratic Party emphasized that maintenance of the forestry industry was important for anti-flood and anti-erosion purposes and there was strong opposition in Japan to tariff reductions as the issue was highly politicized.22 However, at the end of the discussions, Japan agreed to reduce tariffs on several forest products by 20 percent as from January 1986 and from April 1987 by 20 to 67 percent on several lumber, plywood, and veneer products, followed by further reductions on plywood in 1988. Although rejecting US requests to eliminate tariffs on all paper products, Japan agreed to cut them by 20 percent and to introduce reductions on a series of craft paper products between April 1986 and April 1988.23 It even agreed to examine business and financial practices affecting trade. The MOSS talks on electronics involved the highest representatives of American and Japanese trade diplomacy: the Office of the USTR and the MITI. Yet, they lacked a general focus due to the failure of the United States to present a clear negotiating agenda. This, in turn, stemmed from the absence of a clear definition of the term “electronics” and from the consequent US inability to clarify its requests for a long period after the start of the MOSS talks. Besides, when these requests were presented some of them turned out to refer to items already implemented. The main cause of the initial absence of a concrete list of requests was the fact that the real concern of the United States was the semiconductor trade along with trade in supercomputers. However, the MOSS talks dealt with sector problems and did not allow the United States to pick up single items for discussions. Hence, when semiconductors and supercomputers were negotiated separately, the electronics discussions were no longer the focus of interest and the talks ended without any formal conclusion. Nevertheless, the United States achieved some of its goals in removing Japanese trade barriers and in securing better access to the East Asian country’s market. In particular, Japan agreed to provide, as in the United States, fifty-year copyright protection on computer software and ten-year protection on original chip designs. In August 1985, Japan eliminated the 3.7 percent tariff on computer parts—a decision that in reality had been taken earlier—and reduced tariffs by 20 percent on electronics products. At the same time, Japan gave assurances that US firms might be allowed to participate in Japanese government-sponsored projects and to have access to computerrelated patents held by the government. However, Japan gave no concession on the issue of government procurement of non-communication satellites.

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The talks on the Transportation Machinery Sector (informally called Auto Parts MOSS), rather than dealing with trade barriers originating from legislation and administrative measures as was appropriate for government-to-government discussions, focused on allegedly restrictive practices in the Japanese private sectors. Initially, many American trade negotiators, including DOC officials, were doubtful of the suitability of this topic to MOSS negotiations, but they then deemed that there was no reason not to take advantage of the opportunity, taking into account the large sector deficit with Japan and the, grudging, willingness of the Japanese authorities to open discussions on the issue. In 1980, during the Carter administration, the Japanese government had agreed to eliminate certain tariffs on auto parts and to send purchasing missions to the United States. With the adoption of the voluntary export restraint (VER) on automobiles in 1981, the Japanese dropped their pledge to support purchases of US auto parts. Thus, the primary negotiating objective of the United States in the meetings held from August 1986 to August 1987 was to gain full access for their auto parts firms to the original equipment and replacement markets for Japanese vehicles and to establish long-term purchasing relations with Japanese car companies, breaking or at least weakening the Keiretsu bonds. The US negotiators were not only concerned with cars produced in Japan, but also with cars produced in the United States by the growing number of US-based Japanese car factories, as many American companies complained that cars made by Japanese transplants had less US domestic content than those produced by US firms because of the needs and structure of its industry. To this, the Japanese countered that the quality and price of US-made parts made their full acceptance difficult. The outcome of the three plenary sessions and seven working meetings that lasted one year was simply the establishment of a monitoring system. On August 18, 1987, the United States and Japan agreed that the Japan Manufacturing Association would provide data collected on a voluntary basis from Japanese automakers on the value of purchases of US-manufactured auto parts, on the number of purchasing relationships between US suppliers and Japanese automakers and on the number of prototype samples ordered by Japanese vehicle makers from American suppliers. The two parts agreed that high-level meetings would be held to assess the progress of US auto parts manufacturers in the Japanese market and that a technical expert group established during the talks would continue to meet on an ad hoc basis.24 The year of negotiations coincided with a 16 percent jump in US exports to Japan, from $225 million in 1986 to $262 million in 1987.25 Obviously, the export increase had little to do with the MOSS talks and was rather due to the weakening dollar, which made US products more competitive, and to improvements in their quality and service. Good progress in gaining access into the Japanese market was, overall, registered in the four sectors in which the discussions aimed at governmental barriers, although it is quite difficult to assess if and to what extent factors other than the MOSS talks came into play. In the telecommunications sector, exports to Japan increased by 93.4 percent from 1984 to 1987, stepping up from $185.9 million to $358.3 million; in the pharmaceutical and medical equipment sector, exports increased by 38.6 percent,

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from $832.4 million in 1984 to $1,153.9 million in 1987; in the forest products sector there was a 62.2 percent increase from $640.7 million to $1,039.2 million; and in the electronics sector, exports stepped up by 47.4 percent from $1,419.7 million to $2,092.6 million.26

Public procurements Disputes with Japan also concerned public procurements whereby the United States deemed that the Far Eastern country did not respect its engagement under the Tokyo Round code or at least did not open its market correspondingly to current practices in the United States. Japan planned to carry out over $60 billion in public work projects, including airports and urban renewal projects, in the ten years following 1985. The first of them was the Kansai International Airport project, which involved four stages and whose completion was scheduled for the mid-1990s at a total cost of $8 billion. In 1984, the Kansai International Airport Corp (KIAC), which was responsible to the Ministry of Transportation, was set up to manage the project. The Japanese argued that the KIAC was a private endeavor exempt from GATT coverage, while the United States contended that it was a public work project which came under the purview of the Government Procurement code and was, therefore, subject to open bidding procedures. A consortium of Japanese firms was invited to participate in the initial planning stages, which gave them an opportunity to become familiar with the unique environmental and engineering aspects of the project: the airport was to be built on an artificial island. Following US pressure, the KIAC allowed foreign firms to register as prospective bidders for all the stages of the Kansai airport project, but the first phase, involving construction of the offshore island, seawalls and a connecting bridge, was exclusively contracted to Nippon firms. In early 1987, three American companies were awarded contracts to supply services in the project, but the combined value of the contracts represented less than 1 percent of the cost of the project. A main irritant for the Americans was the designated bidding system adopted by the KIAC, which gave only selected suppliers access to design specifications, offering them a better starting point for bids than that enjoyed by competitors who were not privy to the technical details of the project. Despite some apparent concessions in the course of bilateral discussions, US officials remained concerned about the excessive discretion exercised by the Japanese authorities, which favored Japanese firms. In the same year, Congress came on stage to give muscular support to the unsuccessful diplomatic pressure. The House of Representatives approved an amendment to the Omnibus Appropriation bill banning Japanese firms from providing goods and services for federally funded construction projects during fiscal year 1988. Senator Frank Murkowski (Republican from Alaska) submitted an amendment prohibiting foreign firms from participating in federally funded public works projects if their governments did not grant reciprocal access. The ban was later limited to projects over $500,000 during FY 1988. The discussion of retaliatory measures in Congress bore fruit, at least on paper. On May 25, 1988, an agreement was reached between the two countries. The agreement, which covered an estimated $16.9 billion in construction work on fourteen projects, including the Kansai

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International Airport, for the following ten to fifteen years, set forth open, non-discriminatory provisions, which, among other things, allowed US firms to obtain construction licenses and make tenders without having to demonstrate previous activity in Japan, a requirement which, till then, had prevented American firms from being selected as bidders in spite of having worldwide experience. Similar problems were encountered by American supercomputer firms in penetrating Japan’s public sector market, which was deemed to be the largest in the world. Although US producers accounted for over 85 percent of the world market, they had succeeded in selling only six machines in Japan, whose public sector continued to be dominated by Japanese companies such as Fujitsu and Hitachi. The lackluster performance of the US producers was ascribed to a non-transparent procurement process, which included an informally sanctioned “buy Japan” preference for domestic firms, and in December 1986 the Office of the USTR initiated a section 301 investigation on Japan’s trade practices with regard to supercomputers.27 The following August an agreement was reached by an exchange of letters establishing new procedures for supercomputer procurement by Japanese government entities, including national universities and laboratories. The agreement entitled US suppliers to be involved in the early stages of procurement planning and to take part in the discussion phase that gave all potential bidders an opportunity to demonstrate their products’ merits.28 The agreement, however, did not tackle the discounted price practices of Japanese suppliers, which due to their financially integrated structure were able to offer their supercomputers at 70 to 80 percent below list price, allegedly to retain a market that was characterized by very low Japanese government budgets for public sector purchases in this sector. In the first year of implementation of the agreement, US firms were able to supply only 6 percent of the Nippon public sector market for supercomputers. But this was the result of two purchases by Japanese government entities, which were made under a special, one-time only, budgetary item for import promotion purposes whose allocation, moreover, preceded the agreement.29

Semiconductors The context of the United States–Japan semiconductor dispute was quite different. As regards supercomputers the United States was the uncontested dominant producer and trader. The unwillingness of Japan to open its market hindered further progress of the US sway, which caused irritation but was not seen as a threat. The United States was no longer the leader in semiconductor trade and semiconductors were not a product at the end of the production chain but had a pivotal role for other sectors of the national economy. In both the United States and Japan, progress in the semiconductor industry was bound to have spillover effects, upwards in the highly sophisticated semiconductor material and equipment (SM&E) industry and downwards in the computer industry.30 In Japan, but also in the United States, government could not exempt itself from supporting this sector. Japan was repeatedly accused of subsidizing semiconductor companies, to grant them tax advantages and to restrict the domestic market in their favor, to which the Far Eastern country rejoined that the US Department of Defense used to support infant industry with robust

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research expenditure and that tax exemptions for American firms were much higher than across the Pacific.31 On the other hand, the frequency of cooperative ventures across the border and the speed marking the dissemination of technological advances made it difficult for competing countries to keep within national borders the externalities provided by the semiconductor industry.32 Factors other than state intervention might have also contributed to the success and failure of the competing industries, and Japan was helped by the more integrated structure of its industry, which secured an outlet for semiconductors, by greater availability of financing and by cooperative arrangements, encouraged by the MITI, which helped bigger firms with better export potential. The United States was the largest producer and exporter in the 1970s, but Japan became increasingly important both as producer and as exporter, and in 1981 its exports exceeded those of the United States.33 The rise of Japan’s semiconductor exports soon made itself felt in the US market, as the Japanese share of total US semiconductor consumption rose from 7.5 percent in 1982 to 12.4 percent two years later.34 The crisis that affected the US semiconductor market in 1985 triggered a forceful response against Japan by both firms and government. After increasing by a factor of five between 1981 and 1984, domestic shipments plunged by 8 percent in 1985.35 In June 1985, the United States Semiconductor Industry Association filed a petition under section 301 of the Trade Act of 1974, complaining that Japan was restricting access to US producers. The same month, an antidumping petition was filed by Micro Technology Inc. concerning 64K dynamic random access memories (DRAMs) from Japan. In September, a petition for dumping of erasable programmable read-only memories (EPROMs) was filed by Intel Corporation, Advance Micro-Devices Inc., and the National Semi-conductor Corporation. In December, the Department of Commerce initiated an antidumping investigation (one of the first unfair trade investigations autonomously started by the DOC) on imports of Dram with 256K capacity and above.36 As regards antidumping procedures, the Department of Commerce ascertained, though preliminarily, the existence of dumping and appeared willing and ready to slap substantial duties on Japanese semiconductors, while the US International Trade Commission found that overall imports from abroad, prevalently from Japan, were a cause of material injury to US firms. As regards the section 301 complaint, there was no denying that purchases of US semiconductors in the Japanese markets were, at least in American eyes, unjustifiably low. On the other hand, the assumption that Japanese imports were a main cause of the troubles of the American semiconductor industry is doubtful. Indeed, the decline in US production in 1985 was part of a significant drop in world production, entailed by slack demand, that was also affecting Japan. Between 1984 and 1985, world production declined by 13.2 percent while US production declined by 19.4 percent. Therefore, even if every producer’s share had remained constant, US production would have dropped by 13.2 percent, roughly two thirds of its actual decline.37 Thus, Japan was faced with the unpleasant choice of making amends for two groups of illegal practices, whose proof, however, was somewhat circumstantial, or to have one of its most promising industries crippled by duties and other items of American weaponry. After lengthy negotiations, an agreement was reached on September 2, 1986,

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which was subsequently notified to the GATT in November. The arrangement, which had a duration of five years, had two sets of provisions. In the first, the government of Japan pledged to foster a steady increase in the market of the islands to foreign producers. Specifically, it would give support for expanded sales of foreign semiconductors through the establishment of an organization providing sales assistance, quality assessment and research fellowship, and through promotion of a long-term relationship between Japanese buyers and foreign producers, including joint product development programs.38 However, the accord was bolstered by a confidential side letter—whose existence was widely known—by which the Japanese authorities would make efforts to assist foreign companies in reaching their goal of a 20 percent market share within five years.39 It must be noted that the 20 percent share was set in terms of the nationality of suppliers rather than their location and that some subsidiaries of American multinationals were already present in Japan. In the second set of provisions, Japan agreed to monitor costs and export prices of Japanese semiconductor firms in order to prevent pricing at less than fair value, determined, on a company-specific basis, adding an 8 percent profit margin to production costs. Sales below fair value were presumed to constitute dumping. Also, the agreement took into account the global nature of the semiconductor market. If the arrangement concerned only exports to the United States, Japanese producers might be tempted to offer more attractive prices in third-country markets where US and other consumers might switch their purchases. Hence, price control had also to cover these markets.40 It was, in particular, this provision that called for the reaction of the EC and several other consumers. In exchange, the United States agreed to suspend its proceedings on dumping, along with that under section 301. At first Japan appeared lukewarm in fulfilling its obligations under the agreement. It feared the reaction of semiconductor consumers other than the United States and had some difficulties in implementing the monitoring of price sales abroad. The United States was also complaining that its share in the Japanese market had only marginally improved. In March 1987, Reagan announced the imposition of duties up to 100 percent ad valorem on a list of 300 million dollars’ worth of Japanese exports of certain electronic products containing Japanese semiconductors. Of this figure, $135 million was attributed to semiconductor dumping since the accord and $165 million to lost sales for lack of market access in Japan. Tariffs were not raised directly on semiconductors to minimize adverse effects on American consumers.41 Japan threatened to take the issue to the GATT but hurried to comply, perhaps somewhat over zealously. According to some scholars, the 1986 semiconductor trade agreement was the first one motivated by fear of loss of high-technology competitiveness rather than protection of declining basic industries, and it was the first dedicated to improving market access abroad rather than restricting it at home, though its goals were far from free-trade enhancing.42 As the United States and Japan controlled the bulk of the world market in semiconductors, the monitoring system that Japan adopted willy-nilly resulted in extraterritorial price fixing. This damaged countries that were heavy users of chips but were not producers, while the share insurance in the Japanese market seemed to be a preemptive market, splitting against European and other producers.43

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In the complaint lodged with the GATT, the EC contended that the benefits accruing to it from the General Agreement were nullified or impaired by certain provisions of the agreement between the United States and Japan, which constituted interference in trade and production of GATT members not party to the arrangement. In particular, the Community argued that the monitoring measures applied by the Japanese government vis-à-vis third-country markets contravened the provisions of Article VI (on dumping) and Article XI (on elimination of quantitative restrictions) of the GATT, and that the provisions of the agreement on access to the Japanese market included discriminatory conditions that contravened Article I (on most-favored nation treatment) of the General Agreement.44 Similar arguments were developed in the complaints lodged by Australia, Canada, and Hong Kong. In its March 1988 report the GATT panel charged with adjudicating upon the issue found that the monitoring of export prices by the Japanese authorities, resulting in a de facto floor price by means of administrative guidance and in export restrictions to third countries was in violation of GATT Article XI.45 The issue of export control of Japanese semiconductors shows some paradoxical features. In an extreme example of victim becoming accomplice, it was Japan that stood in the dock, not its pitiless instigator, the United States, and the existence of administrative guidance by the Nippon executive, which otherwise risked being deemed as just an urban legend for the use of US politicians and political scientists with the MITI playing the role of bogyman, was certified by the GATT. The contention that the provisions on market access violated Article I of the GATT was instead rejected since there was no proof that there was a secret understanding favoring American companies, as was borne out by better progress made by firms of other countries in expanding their presence in the Japanese market.46 The GATT Council suggested that Japan should bring its measures relating to exports to GATT members other than the United States into conformity with the provisions of the General Agreement, but did not specify in which way. Japan tried to reach a compromise between the EC and other semiconductor importers and the United States. The EC argued that the GATT ruling required Japan to repeal the thirdcountry dumping portion of the arrangement and to dismantle the monitoring of third-country sales. The United States on its part made it clear that it did not wish to relieve Japan from its obligations in the third-country dumping portions of the 1986 agreement, which only addressed desired results, and that how to comply with GATT rules was simply a concern of Japan.47 Yet, in June and November 1987, despite opposition from some lawmakers, the president had already lifted the duties on 45 percent of the affected exports. The US administration refused to repeal the $165 million punitive duties for failure to open the Japanese market, as sales from American firms had only slightly increased by 1988, well below the 12 to 13 percent average rate which was needed to meet the objective of a 20 percent US market share by 1991. The agreement resulted, at least in the short run, in a price recovery for several semiconductors, EPROMs in particular. This helped the major producers, mostly Japanese, to strengthen their self-financing capacity.48 The composition of the market did not change abruptly after the 1986 agreement, but the United States achieved some of its objectives, while Japan enhanced its position.49 In 1984, US firms had an 11 percent share of the Japanese market. Their share decreased to 9 percent in 1986,

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while the other countries gained a 0.2 percent share. In 1988, the US firms’ share was 10 percent of the market, while that of the other countries was 0.3 percent. In 1990, the US share rose to 12 percent, while the other countries gained a 1 percent share. The share of Japan in the US market rose from 14 percent in 1984 and 1986 to a peak of 24 percent in 1988, but declined to 21 percent in 1990, while the other countries gradually carved a share of 7 percent. As regards the world market, the US share was 53 percent in 1984, 42 percent in 1986, 37 percent in 1988, and 40 percent in 1990. The share of Japan was 37 percent in 1984, 45 percent in 1986, 52 percent in 1988, and 47 percent two years later. In the same years, the other countries’ share grew from 10 percent to 13 percent.

Asian NICs In the second half of the 1980s, both South Korea and Taiwan showed an impressive growth often at a double digit rate. As this growth was export driven, it went together with soaring trade surplus. In 1987, Taiwan boasted the second largest bilateral trade surplus with the United States after Japan.50 Both nations, however, despite their forceful growth, continued to view themselves as evolving economies still in need of protection, while the United States was increasingly inclined to consider them as prosperous and stable economies that had to be ready to assume the full obligation of the international trading system; that is, to open their markets, to US export in particular. The United States, therefore, pressed these countries to adopt the necessary reforms, often starting proceedings under section 301 of the 1974 Trade Act, as amended, or simply raising their specter in bilateral discussions. In 1985, the USTR self-initiated a section 301 investigation on restrictions in the Korean insurance market and on the lack of effective protection of US intellectual property rights.51 Negotiations soon followed. In July 1986, Korea agreed to improve protection of copyright, patent, and trademark rights.52 Under an agreement reached the following August, Korea allowed US firms to underwrite both life and non-life insurance and subsequently agreed to permit joint ventures and subsidiary operations in the insurance sector.53 The United States was successful, though partially, in addressing one of the main barriers to the Korean market: tariff barriers on a wide range of products. By early 1988, Korea had announced tariff reductions on more than 500 products, from cosmetics and photographic films to automobiles, construction equipment, computers, some food products, and cigarettes. Also, substantial duty cuts were introduced on over 800 items covered by the tariff quota plan, i.e. tariffs at a reduced level until specified quota ceilings are reached.54 In August 1986, the US president determined in a section 301 proceeding that Taiwan had breached a 1979 bilateral commitment to conform substantially to the provisions of the Tokyo Round Customs Valuation code. The island had instead adopted a duty-paying list system, under which the value of imported items was determined administratively. This system was accused of lacking transparency, to the disadvantage of foreign producers. That same August, Taiwan enacted new regulations under which, in line with the mentioned code, tariffs were based on the goods’

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transaction value.55 The threat of retaliation under section 301 prompted a virtuous cycle. In 1987, Taiwan started to cut its duties in earnest. By February 1988, tariffs rates were cut an average of 50 percent on 3,377 items and eliminated for 142 products. As a result, Taiwan’s nominal average tariff rate fell from 20 percent at the beginning of 1987 to about 12 percent the following year.56 A similar liberalization trend also characterized the service sector, as Taiwan, although with limitations, allowed American firms to expand their investments and range of operations in the banking, insurance, and securities markets.57 Progress was slower in both countries as regards imports of farm products. However, things went differently for wine, beer, and tobacco. Following a section 301 investigation by the American authorities, in December 1986 Taiwan lifted its ban on beer imports, no longer required that retail price of US wine and tobacco be taxed at higher rates than domestic products, and allowed full access for these US products to the retail outlets in the country.58 Korea followed suit. Under repeated pressure from the United States in 1988, the Asian republic agreed to fully open its market to American wines, although in subsequent stages. After the USTR started an investigation under a section 301 petition filed by the US Cigarette Association, the country agreed to liberalize its market for imported cigarettes, paving the way for significant increases in US export sales.59 Also, Japan had agreed to take steps to open its market. Between 1986 and 1988, US exports of beverages and tobacco to Taiwan jumped almost four times to $179.7 million and exports of the same products to South Korea soared almost six times to $67.4 million.60 Neither the United States, nor the reluctant importers paid attention to an anti-smoking commercial recorded in 1985 by a famous Russian-born American actor. In the advertisement Yul Brynner, playing the role of himself, indicted cigarette smoking for his premature death. The position of the two Far East countries as beneficiaries of the Generalized System of Preference (GSP) became increasingly precarious. Certainly until 1988 Taiwan was the primary beneficiary country of the US GSP program, and South Korea was the second one. In spite of their development, the two countries did not graduate to the category of no longer developing countries: their per capita income was still below the threshold for graduation and they were deemed to respect the requirement for GSP beneficiary status. There was, however, a snag: an increasing number of their export items were graduating, as section 504 (c) of the Trade Act of 1974, and subsequent amendments, provided for the exclusion of particular products deemed to be sufficiently competitive in the US market, or viewed as affecting US overall economic interests, including the import sensitivity of American producers and workers. Thus, in 1986 duty-free imports from Taiwan and Korea in the United States accounted respectively for 34.7 percent and 47.4 percent of GSP-eligible imports and for 19 percent and 17.5 percent of total imports from each country. In 1988, the percentage had fallen to 23.5 and 17.5 relative to GSP-eligible imports and 13.8 relative to total imports.61 On January 2, 1989, Taiwan and Korea were graduated, along with Hong Kong and Singapore, from the US GSP scheme in light of their advances in economic development and trade competitiveness.62

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The European Community (EC) The second Reagan presidency coincided not only with economic recovery in most EC members states, but also with the enlargement of the Community and the launching of a new phase in its internal market aimed at eliminating physical, fiscal, and capital barriers among the member countries, and thus enhancing their economic development. Some aspects of the enlargement and the further integration of the Community caused concerns in the United States and even legal challenges, though the United States claimed to be hostile to neither of them as such. The US authorities also challenged several measures adopted by the Community in the context of its Common Agricultural Policy.

The 1992 project The project of reform of the internal market submitted by the Commission in June 1985 was soon endorsed by the Milan European Council, which also summoned an intergovernmental conference for the reform of the European Communities treaties. In February 1986, the Single European Act (SEA) was signed by the representatives of the great majority of the member states, incorporating in a wider context the objective of the establishment of a true single market. The White Paper “Completing the Internal Market”, produced by Lord Cockfield for the Commission, identified 279 measures deemed necessary to remove hindrances and distortions affecting state procurements, technical standards, taxation, capital movements, and the provision of services in the EC area. The deadline for the completion of the reform was 1992. With regard to public procurements, the Commission proposed improvements to increase transparency and the extension of the legislation coverage to include new sectors, such as energy, transport, and telecommunications. As regards services, the White Paper suggested a new approach, while not completely discarding the old one based on harmonization among member states, which had proved cumbersome and had slowed down the integration process. Thus, it proposed a mutual recognition strategy placing regulation into the hands of national bodies in the member countries, though listing several directives for minimal rules and standards across the EC market.63 The fact that the new approach focused on the enhancement of the EC internal market with only limited attention on the relations with third nations raised, mostly theoretical, concerns, playing into US hands, on the emergence of a Fortress Europe by 1992. Actually, if there was any threat of a Fortress Europe, there were already plenty of US Trojan horses. Indeed, every large American corporation selling to the European market relied on production from its subsidiaries in Europe rather than on direct exports. In 1987, sales of US manufacturing subsidiaries in the EC amounted to $249,113 billion, while US-manufactured exports amounted to $44 billion.64 Since the beginning of the 1970s, US direct investments in the EC had exceeded 30 percent, outshining those in Canada and in Central and South America. The policy of the 1992 project was that the prospective full integration of the market had to benefit all companies already established in the Community, no matter the source of their capital, and the US

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affiliates, thanks to their presence in several member states, might even be in a better position than those companies that had previously limited their activity to a single country.65 There was, however, a question: under which conditions and to what extent were new foreign entrants to benefit from the prospective opening of the EC domestic market? A test for these questions turned up in the last year of the Reagan administration. In February 1988, the Commission submitted to the EC Council of Ministers a proposal for a new directive on regulation of banking activities within the Community that should replace the 1977 First Banking Directive, adopting the mutual recognition approach at the basis of the White Paper. According to the draft directive, any credit institution authorized in a member state (the home member state) should be free to establish branches in other member countries and offer its services throughout the Community under the supervision of the home member state’s banking authorities.66 The draft directive concerned credit institutions, i.e. undertakings whose business was to receive deposits or other repayable funds and to grant credit. However, the activities in the EC of the credit institutions were no longer limited to such traditional functions but could include several services, which were listed in the directive and were authorized, for the whole series or for only part of it, by the home member state’s authorities. These activities obviously included deposit taking, lending, and money transmission services, but also extended to trading in money market instruments and securities, participation in securities issues and provision of services related to such issues, portfolio management and advice, and so on.67 The authorized activities might be fewer than those listed in the directive, but could not exceed them. The second banking directive might have been a windfall for foreign new entrants wishing to establish a subsidiary or to acquire a holding in a member state particularly generous in setting the activities that a credit institution could carry on. Yet, there was a snag: the draft directive provided that foreign firms wishing to enter into the liberalized EC market be given only the same advantages granted by their governments to the Community’s credit institutions. The American regime, enshrined in the International Banking Act of 1978, was more liberal, adopting unconditional national treatment for foreign firms. This meant that, regardless of the treatment provided to US companies, foreign firms were to be treated at least as well as domestic firms, in law or in fact; that is, any possible discriminatory rules should not impede their ability to compete on essentially equal terms with US firms.68 However, there were attempts in Congress, in particular the Schumer amendment to the Omnibus Trade and Competitiveness Act of 1988, to replace the unconditional national treatment with reciprocal national treatment, although these attempts mainly targeted Japan.69 On the other hand, in the case of the prospective EC directive, the defense of the unconditional national treatment by the US credit authorities did not fail to bring significant comparative advantages to American firms. Indeed, in the United States domestic and foreign credit institutions met two kinds of operational limits imposed by the Glass–Steagall Act and by the McFadden Act and its subsequent amendments. The Glass–Steagall Act of 1933, which aimed at separating commercial from investment banking, prevented banks from underwriting or dealing in corporate debt or equity and from being affiliated with companies engaged in such activities. The McFadden

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Act of 1927 prohibited the formation of interstate banks, although the ban was gradually limited, first by the Douglas amendment of 1957, which allowed US states to legislate whether out-of-state bank holding companies might be permitted to establish, operate, and own banks within their borders, and in the 1980s when this authority was extended to regional banks and to credit institutions from other states. In other words, the operational freedom allowed to domestic and foreign banks in the United States might be compared to that allowed by the First Banking Directive in the EC and was certainly far below the standards underlying the second directive. In the European Community, Germany and particularly the UK argued that the reciprocity principle might arouse recriminations undermining the soundness of domestic and global financial markets and objected to the Commission’s usurpation of their regulatory powers. It seemed that by the end of 1988, the EC was inclined to shift from the reciprocity requirement to the unconditional national treatment principle. Actually, things did not go exactly that way. The final version of the directive allowed the reciprocity and the conditional national principles to be followed according to the degree of the obstacles encountered by EC banks.70 Article 9 of the Second Banking Directive adopted by the EC on December 15, 1989, contemplated two hypotheses. If the Commission found that third countries did not offer effective market access to Community credit institutions comparable to those granted by the Community to credit institutions from those countries, it had to submit a proposal to the Council of Ministers for the appropriate mandate to negotiate with a view to obtaining comparable opportunities, and it was up to the Council to decide, by qualified majority, whether to endorse the proposal. On the other hand, whenever it appeared to the Commission that Community credit institutions did not receive the same treatment offered by foreign nations to domestic credit institutions, or effective market access was denied, it might initiate negotiations to remedy the situation, without previous endorsement by the Council. These rules left open the possibility of negotiations and clashes with Japan as well as with the United States. As regards public purchasing, the 1992 program meant the prospective elimination of the barriers to competition among firms of the member states. These barriers were non-statutory in nature, as Article 30 of the Treaty of Rome prohibited quantitative restrictions on trade and equivalent measures within the EC. Instead, the barriers to be removed derived from the unwritten common practice of giving absolute preference to domestic firms when placing public contracts, and of encouraging the formation and growth of national champions. The latter, however, in the mid-1980s tended to be replaced by major Europe-wide suppliers, some of which had entered into cooperative agreements with Japanese and American firms.71 The rules for the opening of the public purchasing market to all member countries’ firms, only some of which reached an advanced stage during the Reagan years, implied extending the coverage of the directives of the 1970s to include not only all forms of local governments, but also utilities whether publicly or privately owned, and services. Secondly, suppliers allegedly affected by unfair barriers were provided with more effective remedies than those envisaged by the directives of the preceding decade. Unlike the EC, the United States retained a significant number of statutory barriers, many of which were based on national security. Further statutory barriers were provided by the Buy America Act of

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1933 and its amendments and equivalent local laws, which added a percentage amount to the quoted price of non-US suppliers before comparison of the bids. The Tokyo Round Government Procurement (GPR) code had secured some progress in the liberalization of the sector, but this was far from entailing an effective internationalization for most of the 1980s. The code required governments to provide national treatment and to establish common and more transparent procedures on opening and awarding bids and settling disputes, However, the code had strong limits: it was only concerned with public procurements by central government entities, leaving aside state and local governments; it applied only to contracts worth more than 150,000 Special Drawing Rights (SDRs), a threshold considered too high by the United States and too low by the Community; it did not address, being a GATT code, the provision of services; and, given the opposition of the EC, it did not cover utilities.72 Article 9:6 of the code provided for the undertaking of subsequent negotiations to broaden and improve the agreement, but it was only in February 1988 that the protocol amending the agreement entered into force. The amendments included, in particular, the lowering of the threshold level from SDRs 150,000 to SDRs 130,000; the inclusion of leasing contracts under the scope of the code; the increase of the minimum period for submitting bids; and the easing of the qualification of foreign firms to take part in the tender. Thus, progress in the liberalization of public purchasing was prevalently confided to domestic reforms and bilateral discussions. The attention of the United States concentrated on a specific utility: telecommunications. This was the upshot of the liberalization that had taken place in the United States and which offered opportunities not only to domestic firms but also to foreign ones. Telecommunications services had long been provided by a single carrier, American Telegraph and Telephone (AT&T). Although AT&T was a private company, rather than a government administration, it enjoyed a monopolistic position while performing critical public functions, providing universal service irrespective of cost and conducting research of benefit to the whole economy. Yet, in the 1970s it became the subject of repeated antitrust investigations and in 1982 the company reached an agreement with the Department of Justice whereby it would divest its Bell affiliates operating in the telephone sector, but would be allowed to enter new lines of business including data communications.73 In most EC member countries, government monopolies controlled the provision of telecommunications services along with postal services and followed a strict “buy national” policy. On the other hand, in the context of the 1992 project, the European Commission was trying to establish an open and competitive EC-wide market.74 The Commission’s proposal, although conceding that a strictly limited number of certain basic services should be carried out exclusively by national authorities, called for the substantial liberalization of the supply of all other services and of all technical equipment. It also called for the separation of the regulatory and operational functions by postal, telephone, and telegraph (PTT) providers; for the establishment of common norms and standards across the Community through the creation of a European Standard Institute; for the access to the PTT networks on fair terms to competitors who offered rival services; and for the establishment of a common position to be defended at international level. Concurrently a debate was going on at member states level on the reform of the PTT service.

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The United States tried to exploit the prospective liberalization of the EC market for telecommunications equipment and services on two different levels. The first approach was the opening of discussions with the European Commission whose Green Paper, in particular, had attracted US attention.75 The United States, however, was concerned that the liberalization process encouraged by the Commission might take effect only within the EC borders with limited benefits for third countries’ companies. In particular, it argued that liberalization of network equipment sales should require member countries to open 40 percent of their procurements to foreign firms, rather than the 10 percent suggested by the EC executive, and that the standard-setting process should be open to all interested parties rather than limited to Europeans.76 The second US approach was based on informal discussions, known as market access fact-finding (MAFF) talks, held with some EC member states, among which France, Germany, Italy, the Netherlands, and Spain, which were not intended to be actual negotiations but to serve as preparation for them. The opening of the German market was of particular interest for the United States, as it was the largest in Europe, but was seen as one of the most closed. However, in September 1987, the Witte Commission report made extensive recommendations on liberalizing the West Germany telecommunications market and quite soon proposals for its reform were submitted to the parliament. The MAFF talks with Germany had a favorable conclusion in March 1988.77 Yet there was a snag. The reform of the telecommunications service in the Federal Republic did not concern just the adoption of new rules for private companies, but had to address the reshaping or even the dismantling of a governmental agency, which had deep political implications. The same went for France and other EC countries. Thus, substantial reforms were adopted only long after the end of the Reagan presidency.

Steel During the second Reagan presidency, the United States managed to increase the number of EC steel products subjected to import limits and to extend their imposition to the end of the decade. However, it was not a smooth path. On August 6, 1985, an exchange of letters modified the 1982 arrangement by subjecting to specific restraints sixteen products that were previously included in the consultation product category, limiting their exports to 197,917 short tons from August 1 to December 31, 1985. On November 5, 1985 the EC Commission agreed to limit steel shipments to 5.5 percent of the US market from January 1, 1986 to September 30, 1989. The United States had already reached analogous agreements with fourteen other exporting countries so as to curb the total share of steel imports in the US market to 18.5 percent. However, the EC Council of Ministers was unable to approve the deal, due to the opposition of the United Kingdom, a prominent exporter of semi-finished steel, which argued that the share of 400,000 tons assigned to the Community under prospective restrictions was too low and had to be reviewed. After a stalemate, during which the United States imposed a limited embargo on EC steel, the UK lifted its veto and the EC Council of Ministers formally approved the agreement on December 10, 1985.78 Although the UK’s reluctance to endorse the agreement was due to the fear of prospective restrictions on exports of semi-finished steel, this product was still included

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in the consultation products category under the 1982 arrangement. However, on December 30, 1985, the United States unilaterally limited imports of EC semi-finished steel from January 1986 to September 1989, complaining of a protracted surge of such imports in the US market, to which no remedy had been found through negotiations. The Community reacted the following February by imposing retaliatory measures against imports of US fertilizers, coated paper, and animal fats. In June 1986, the United States and the EC came to an agreement by which the Community would rescind the retaliatory measures and accept the imposition of quota restrictions on its exports of semi-finished steel. The agreement was implemented only in September because of a dispute among the EC countries on the allocation of the quotas, while the United States, at first, tried to defer its acceptance until the concurrent dispute on citrus was resolved.79

Enlargement If the 1992 project during the Reagan years only started preliminary discussions on new trade relations across the Atlantic, intensive negotiations and open clashes marked the issues of EC enlargement and agriculture measures. After eight years of negotiations, the treaties of accession of Spain and Portugal to the EC were signed in June 1985 and went into effect on January 1, 1986. Internal industrial tariffs had to be phased out over seven years, while the external tariffs of the two countries were to be progressively lowered to meet the EC Common External Tariff (CET). The Iberian nations’ tariffs to third states would, therefore, be reduced from an average of about 15 to 17 percent to an average of 5 to 7 percent, which would be a boost for foreign exporters, prominent among which was the United States. On the other hand, the trade-enhancing effect might be offset by the trade-diverting effect of the elimination of duties with the old EC members.80 The farm market support and trading system was to be adapted to the Common Agricultural Policy (CAP) over a maximum period of ten years. The US objections to the terms of accession concentrated on agriculture. The United States complained that the clauses of the accession treaties imposed quotas on Portugal’s imports of oilseeds and oilseed products and required Portugal to purchase at least 15.5 percent of its grains from the EC, thus impairing American exports. It also contended that the extension of the CAP regime to Spain would replace the country’s 20 percent duty on imports of corn and sorghum with variable levies, which was deemed to be equivalent to a tariff of over 100 percent.81 The Americans were also concerned that the inclusion of the Iberian countries in the Community would result in a boost to the competitive potential of EC farm produce in the world market. The potential losses for US farm exports were estimated at $1 billion.82 The EC declared that it was willing to undertake a general review of the consequences of the enlargement of its customs union and start bilateral negotiations with each of the countries affected, including the United States, under Article XXIV:6 of the GATT, which provides for compensation to other trading partners if the balance of previously bound concessions is changed, adding, however, that “due account shall be taken of the compensation already afforded by the reduction brought about in the corresponding

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duty of the other constituents of the union”. The Community argued that lower industrial tariffs in the two Iberian countries should be balanced on their higher agricultural tariffs. The United States contended instead that lower industrial tariffs should not be used to offset any compensation owed on higher agricultural tariffs on items bound by GATT concessions. After a few months the negotiations reached a stalemate and in March 1986 Reagan stated that he was ready to take retaliatory action against imports from the EC if compensation was not received for the restrictions introduced on American farm exports. The EC Council of Ministers reaffirmed the Community’s willingness to take part in Article XXIV:6 negotiations under GATT supervision, but made it clear that it was ready to take equivalent actions against threatened US unilateral proceedings that would be economically unjustifiable and contrary to GATT principles.83 In May, in retaliation against the measures concerning Portugal, the US executive imposed quotas on several EC exports including white wine, chocolate, candy, apples, pear juice, and beer, and in response to the increase of Spanish tariffs on corn and sorghum, published a list of EC products, including wine, brandies, cheeses, and sausages, that were to be affected by restrictions.84 However, the quotas were large enough not to hit immediately EC exports and the restrictions list was to be implemented in July if compensation were not obtained by the EC. In June the Community published its list of counter-retaliatory measures affecting American wheat, rice, and corn gluten feed, though reaffirming its readiness to carry out negotiations under GATT Article XXIV:6.85 An interim solution was negotiated ad referendum in July to stave off a crisis in the run-up to the new GATT round. The solution, which was to apply from July 1 to December 31, 1986, provided for the monitoring of US exports of maize, sorghum, corn gluten feed, brewer grains, and citrus pellets to the Community and for the adoption of measures to maintain the balance should American exports of said products fall below 234,000 tonnes per month.86 As the talks held in the following months broke down, in December Reagan announced that by the end of the following January he would impose duties of 200 percent on a range of Community exports worth 400 million ECU, including cognac, gin, and certain white wines.87 The EC declared that it was ready to retaliate. At the eleventh hour, the two parties, though recognizing that their different interpretations of GATT Article XXIV:6 could not be reconciled, worked out an agreement which envisaged in particular tariff concessions by the Community on a number of American agricultural and industrial products for a four-year period and a commitment to ensure a minimum annual level of imports of 2 million tonnes of corn and 300,000 tonnes of sorghum into Spain from non EC sources. The Community also agreed to extend to Portugal and Spain its zero tariff rate on imports of soybean products and corn gluten feed.88 It could be argued that, overall, the United States carried the day, imposing its approach on the negotiations over that of the EC, and was able to show to its farm lobbies that their interests were actively taken into account. The USTR Clayton Yeutter stated with satisfaction that “the United States and the European Community (EC) avoided a trade war by keeping Spanish and Portugese markets open to imported corn, sorghum and oilseeds”.89 The EC parliament deplored the threatening attitude adopted

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by the United States during the negotiations and also called on the Council and the Commission to adopt a firmer line in future talks with the United States.90

Citrus–pasta dispute A good opportunity to settle old scores with the EC was provided by the citrus and pasta dispute. A central provision of the trade agreements stipulated with countries of the Mediterranean Basin provided concessions on agricultural products, to the advantage in particular of their citrus producers. As the benefits were only directed to Mediterranean countries, they did not comply with the MFN principle in the absence of a justifying factor. In response to a section 301 petition, in 1982 the United States sought a GATT ruling on the effect of EC tariff preferences for imports of citrus products from Mediterranean countries on American citrus exports to Europe. The GATT panel, rejecting the legal arguments of the EC, found that the United States had been adversely affected by the preference scheme and should be compensated. However, the Community blocked the adoption of the panel report, arguing that the preference scheme was necessary to promote political stability in the area. In retaliation, in June 1985 the US president announced his intention to raise duties on pasta imports. In so doing, he was killing two birds with one stone, as US pasta producers had brought an action under section 301 complaining that EC export subsidies on pasta were negatively impacting their industry, and in 1983 a GATT panel had ruled them inconsistent with Article 9 of the Tokyo Round subsidies code. The EC, however, had blocked the panel report. Thus the United States was overcoming the inaction of the GATT on the pasta dispute while putting pressure on the EC to the advantage of its citrus producers on the issue of the Mediterranean agreements accused of being trade diverting. The EC announced that it was ready for retaliation, targeting lemons and walnuts. In July, to avert an open confrontation, the two sides agreed on a cooling-off period until October 31, but the talks did not achieve results, and on November 1 the US duties were increased from about 0.25 percent to 25 percent on pasta containing eggs and from about 0.5 percent to 40 percent on pasta without egg. The EC immediately retaliated by raising the duties on US lemons from 8 percent to 20 percent and on walnuts from 8 percent to 30 percent.91 As in early 1986, the EC, after the accession of Spain and Portugal, started to renegotiate its preferences on Mediterranean citrus, the United States reacted to the possible granting of further preferences by imposing a July 31 deadline to reach a settlement. The new talks led to an ad referendum agreement between the USTR Clayton Yeutter and Willy De Clercq, member of the Commission with responsibility for external relations and trade policy, which was approved the following October. The settlement provided for recognition by the United States of the Community’s current and renewed agreements with the Mediterranean countries, the abolition of the duties applied by the two parties on pasta, citrus products, and walnuts, and reciprocal concessions on imports of several farm products of interest for each of the contendents.92 The two parties also agreed to continue discussions on the issue of pasta refunds. It was only in early August 1987, after marathon negotiations, that an agreement was reached providing a severe curtailment of export refunds by the EC while the United States agreed not to reopen the pasta dispute at GATT level.93

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The accession of Portugal and Spain and the citrus and pasta dispute were not the only clashes arising from EC measures on agricultural products. The list of confrontations also included the fats and oils tax, soybeans, and the EC ban on the sale of meat from animals treated with growth hormones. The latter measure actually was motivated by health concerns and was primarily directed to EC meat producers and wholesalers, but the United States argued that growth hormones did not pose a health hazard, and therefore the ban unreasonably affected its exports. The foregoing were thrusts to various aspects of the EC policy on agriculture. In the next section the analysis is concerned with the US farm policy itself and its impact on international trade.

US agricultural policy and its impact on international farm trade At the outset of Reagan’s second term the administration reasserted its commitment to full liberalization of agriculture and dismantlement of what it saw as counterproductive fetters. The executive gave its bill the provocative heading of Agricultural Adjustment Act, the same as that adopted in 1933 by the Roosevelt administration to buoy up American farmers during the Great Depression. The secretary of Agriculture, John Block, in his statement before the House of Representatives’ Committee on Agriculture, pointed out that the 1933 Act, which laid the groundwork of the ongoing farm programs “was the government’s response to an unprecedented crisis . . . but it is apparent that the New Deal programs are not working for today’s agriculture”.94 According to Block, agriculture should not be a sector severed from the rest of the economy by market-distorting protection but must recognize its full integration and contribution to the general economic environment, as factors other than price and income support had greater impact on farmers’ welfare. In other words, Block was suggesting that by causing pressure on the budget the ongoing farm programs contributed to the ills affecting farmers’ costs and prevented them from competing in the world market according to their full potential. The remedy was to repeal, though not abruptly, “the 40 to 50 permanent programs that were authorized as part of the 1930’s legislation”.95 As regards in particular wheat, feed grains, cotton, and rice, the bulk of American commodity exports, the administration proposed to cut the loan rates to 75 percent of national average prices received by producers in the preceding three years, with no minimum, assigning to them only the function of safety net for farmers in major difficulties, and to base target prices in 1986 on 100 percent of the national prices in the previous three years, gradually bringing them down to 75 percent by 1991. Acreage reductions had to be phased out by the 1989 crop year. As regards export expansion, Block promised to negotiate reductions in restrictive trade practices with key trading partners and to continue the GSM–102 export credit guarantee program. The government proposal for a radical reform of the farm regime, which was also probably motivated by budgetary concerns, had a fundamental flaw: it was put forward at a time of deep crisis for American agriculture. Average farm income in real terms for the 1980–84 period was 35 percent less than for the period 1975–79 and over 50 percent below the 1970–74 period.96 And it was not only a question of real income:

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high real interest rates and concurrent decline in farmers’ real assets took their toll. Farmers who had invested in land and agricultural equipment during the years of bonanza and high inflation started to have difficulties in repaying their debts when inflation abated and their receipts fell. At the same time, several factors such as high real interest rates, low expected farm rents and the declining appeal of real estate as a refuge against financial asset devaluation caused a plunge in land value, which in turn meant a depreciation of the guarantees provided by farmers for their loans.97 The financial difficulties of the farmers soon affected the banks lending to the farm sector. Block’s proposal sounded, therefore, too much as “survival of the fittest” to be accepted by the lawmakers. They could accept measures to liberalize the market, but they were wary of dismantling income support for an influential portion of their electorate. What was needed instead, according to Congress, was more robust support for farm exports, which accounted for one-third of harvested crop consumption and between one-fifth and one-fourth of farm receipts, but had declined dramatically in the last four years, also because of unfair trade practices pursued by competing exporting nations.98 The bill that was signed into law by Reagan in December 1985, with the less ambitious title of Food Security Act of 1985 (PL99-198), was a compromise. The statute reauthorized the basic set of farm programs, which, however, were significantly reoriented towards market forces. Loan rates were set at 75 percent of a moving average of market prices, excluding the higher and lower years, which meant that they would move up and down according to market trends. For the 1986 market year, loan rates were permitted to fall by 25 percent. Payment in kind was authorized for a number of farm programs, including deficiency payments, land diversion, and export subsidies. Target prices were frozen for one or two years, according to the commodity, and later allowed to decline. In the short run this latter provision did not help reduce budget deficit. Indeed, as loan rates fell below market prices, the gap with the target price and, therefore, the amount of deficiency payments, rose. Among the programs based on payment in kind, the Export Enhancement Program—EEP, also known as BICEP for “Bonus Export Incentive Commodity Export Program”, was the most prominent. The administration, initially reluctant to launch a new subsidized export program, agreed to implement it in May 1985 in exchange for the support of several farm belt congressmen to the deficit reduction package for the fiscal year 1986 backed by the president. Seven months later, the EEP was codified by the Food Security Act. The Act requested the secretary of agriculture to provide at least $2 billion of Commodity Credit Corporation (CCC) commodities to US exporters, users, and processors, and to foreign purchasers, during the fiscal years from 1986 through 1988. This funding level was amended by the Food Security Improvement Act of 1986 requiring that not less than $1 billion and not more than $1.5 billion in CCCowned commodities be used as EEP bonuses in the mentioned period. Wheat was the chief commodity sold under the EEP, which, however, also applied to several other products, including barley, wheat flour, semolina, sorghum, rice, poultry feed, frozen poultry, vegetable oil, dairy cows, and table eggs. Corn sales did not benefit from the program. The 1985 Act also authorized the use of cross subsidization; that is, the use of one commodity to boost the export of another. For instance, wheat stocks could be used to subsidize egg or vegetable oil exports. US Department of Agriculture (USDA)

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support was based on four criteria: sales had to increase exports above the foreseeable amount in the absence of the program; they had to be targeted at specific market opportunities aiming in particular at challenging competitors that subsidized their products; they were to result in a net plus for the US economy; and they should not increase budget outlays beyond what would have occurred in the absence of the program.99 The first stage of BICEP implementation was uncertain as regards results and actual goals. During a speech at the Midwest Conference on business planning, Block declared that retaliation was needed to encourage future trade talks. An American scholar, also relying on statements of top USDA officials in congressional hearings, argued that the real aim of the executive was not the quick recovery of world market shares, but the EC budget since the program forced the European Community to provide higher export refunds for its exporters to outbid American offers, thus raising the cost of a fundamental component of its agricultural policy beyond bearable limits.100 Certainly the possibility of a correlation between the Export Enhancement Program and the export refund expenditure hike in the Community is borne out by the analysis conducted by the Organisation for Economic Cooperation and Development, which showed that after 1985 export restitutions for major commodities and some processed products increased both at individual and aggregate level.101 However, the available data do not allow an answer to the question of the BICEP impact on the EC budget relative to concurrent factors, notably the dollar fall in the two years that followed the first half of 1985. This happened just when EC farm exporters, especially the French ones, were hoping that the upward trend of the greenback would make export refunds unnecessary, freeing them from the accusation of violating the “equitable share” limit provided by the GATT rules on primary export subsidies. Shipments of US wheat and wheat products to North Africa and the Middle East went up sharply, but ignored for the first two years the Soviet Union and China, where French exporters were making inroads. Moreover, the EC did not fail to retaliate to defend its traditional outlets. For instance, in September 1986, the EC increased its export refunds on grain and flour sales to Algeria Morocco, Egypt, and Syria, allowing France to sell about 200,000 tonnes to Algeria; while in June, it raised restitution payments for barley sales to Saudi Arabia, Algeria, Israel, and Jordan, which secured new purchases for about 200,000 tonnes by these countries despite the fact that they were targeted for EEP barley sales. The fact that the EEP initially did not include the Soviet Union among the covered countries gave the Soviets an excuse to back out from their long-term commitment under the 1983 agreement, claiming that they had no obligation to import at higher prices than other US customers, and, although later the US executive, under pressure from producers and exporters, extended the program to sales to the USSR, in the first instance the Soviet Union found more heavily subsidized French sales more attractive.102 It was only in 1987, when the USSR changed its attitude, that the EEP started to prove its effectiveness. Until 1986, EEP wheat sales amounted to little over 7.2 million metric tons mostly concentrated in North Africa and the Middle East, for a bonus value of about $220 million. When Russia and to a lesser extent China started to

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purchase EEP wheat, sales totaled over 44 million metric tons in 1987–88 and the bonus value exceeded $1,380 million.103 In keeping with the conditions BICEP had to comply with, at the end of the day the program was budget neutral. Indeed, the export bonus stimulated importers’ demand, as the unitary price declined. This allowed American exporters to increase their offered price, obviously quoted in depreciating dollars, which in turn entailed a reduction in deficiency payments. Thus, the USDA could claim that the cost of EEP subsidies was offset, or even exceeded, by the reduction in deficiency payments.104 The pressure exerted on Japan for a radical review of the restrictions on imports of US products bore fruit in the last year of the Reagan presidency. When the 1984 agreement on beef and citrus was about to expire, the United States refused to renew it, calling instead for an immediate elimination of quotas on this produce, and stepped up pressure by requesting the formation of a GATT dispute settlement panel. After intensive negotiations, in July 1988 the United States accepted the Japanese proposal for the phasing out of beef and fresh oranges quotas over a period of three years and of orange juice quotas over a four-year period, in exchange for substantial amplification of allowed quotas and tariff reductions in the interim period.105 The following August, in a settlement that substantially implemented a GATT panel decision favorable to the United States, Japan agreed to eliminate import quotas on seven categories of agricultural products, and to lift quotas and provide substantial liberalization for four other product categories.106 However, the United States could not achieve any breakthrough in the primary Japanese staple, rice, despite the pressure put on the executive by the Rice Millers Association, which twice filed a section 301 petition. Farm trade followed the trend of agriculture in general, of which on the other hand, it was a primary component. Were the American farmers heavily subsidized relative to other producers in the main OECD countries during the second Reagan administration? Was the increase in support particularly marked relative to the happy years of expansion in production and trade? Elements for a multinational comparative analysis based on a common parameter are provided by the OECD reports. The parameter adopted by the Paris organization was the so-called “producer subsidy equivalent (PSE)”, which measured the loss of farm income that would result from the removal of a given set of policies: PSE = Q (Pd − Pw) + D − L + B, where Q is the level of production, Pd is the domestic price, Pw is the world price, D is direct payments, L is levies collected from producers, and D summarizes all other forms of support. Since the total amount of support varies according to the level of production, the relative level of support PSE/Q is more useful for a comparison.107 The 1984–86 period saw a remarkable increase in the PSE rate, which almost doubled relative to the more prosperous 1979–81 period. The cost for the taxpayer was three times as high as during the 1979–81 period. The main hike, however, occurred in 1986 and can be explained by the jump in direct payments, prevalently deficiency payments, concentrated in the crops sector.108 Yet, from 1987 the PSE started to decline, both in absolute and percentage terms, permitting the United States to claim to be a moderate subsidizer, at least if compared with Japan, the EC, and even Canada.109 The cost to taxpayers remained high, also because, despite the abatement in deficiency

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Figure 8.1 US farm trade and income, 1968–88 (billions of dollars). Source: Economic Report of the President, transmitted to the Congress February 1992: Table B-93 and Table B-97.

payments, direct payments remained high, due to several factors among which the need to offset the impact of the 1988 drought was prominent. Exports and trade balance recovered from the trough of 1986, though remained far below the level of the 1970s and early 1980s (Figure 8.1). As shown by Table 8.2, the US share of world produce exports showed a slight increase relative to the 1986 crisis, but it was just 1 point higher than the 1969 share and well below the average of the period going till 1983. It was, therefore, to be expected that agriculture was bound to be a bone of contention and a big stumbling block in the multilateral negotiations.

Table 8.2 Main exporters of farm products 1969–88 (billions of US dollars; percentage of world exports) Country

US$ bill. % W, EX, US$ bill. % W, EX, US$ bill. % W, EX, US$ bill. % W, EX, US$ bill. % W, EX, US$ bill. % W, EX, US$ bill. % W, EX, 1969

World Argentina Australia Belg. - Lux. Brazil Canada France Germany F.R. Netherlands UK US

1975

1978

1981

1983

1986

1988

47.6 1.4 2.1 1 1.8 1.4 2.9 1

100 2.9 4.4 2.1 3.8 2.9 6.1 2.1

121.9 2.2 5.3 3.1 4.9 4.2. 8.5 4.8

100 1.8 4.3 2.6 4 3.4 7 3.9

170.8 4.5 5.8 4.6 6.7 4.6 12.4 7.2

100 2.6 3.4 2.7 3.9 2.7 7.3 4.2

232.6 6.5 9.5 6.3 9.8 7.8 17.9 10.5

100 2.8 4.1 2.7 4.2 3.4 7.7 4.5

208.0 5.9 7 5.6 9 8.2 16 9.6

100 2.8 3.4 2.7 4.3 3.9 7.7 4.6

228.7 4.5 8.1 7.5 7.7 6.5 19.9 13.1

100 2 3.5 3.3 3.4 2.8 8.7 5.7

287.1 5.5 10.4 11.4 9.5 8.9 21.2 16.9

100 1.9 3.6 4 3.3 3.1 7.4 5.9

2.6 1.1 6.2

5 2.3 13

8.5 3.5 22.5

7 2.9 18.5

12.3 6 30.6

7.2 3.5 17.9

15.9 7.9 45.1

6.8 3.4 19.4

14.7 6.8 37.6

7 3.3 18

19.2 8.6 28

8.4 3.8 12.2

25 10.3 40.3

8.7 3.6 14

Source: FAO Trade Yearbook, various issues; own calculations.

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Notes 1 2 3 4 5 6 7 8 9 10 11 12

13 14 15 16 17

18 19 20 21 22 23 24 25 26 27 28 29

See David Flath, The Japanese Economy (Oxford: Oxford University Press, 2000), 173, Figure 8.5 (a) and Figure 8.5 (b). Twenty-sixth ARPTAP, 1981–82, 71. Twenty-fifth ARPTAP, 1980–81, Table 10.n; see also The Economist, August 23, 1986, Survey High Technology, 6. See Laura D’Andrea Tyson, Who’s Bashing Whom? Trade Conflicts in High Technology Industries (Washington DC: Institute for International Economics, 1992), Table 2.3. Ibid., Table 2.4. Twenty-sixth ARPTAP, 1981–82, 71. Ibid.; OTAP 35th Report, 1983, 268. www.usitc.gov/publications/332/pub1535.pdf (accessed April 25, 2019). Twenty-sixth ARPTAP, 1981–82, 71; also Dennis J. Encarnation, Rivals Beyond Trade: America versus Japan in Global Competition, 38, Figure 2-1. Ibid. Ibid., 24. Endymion Wilkinson, Japan versus the West. Image and Reality (London: Penguin Books, 1990), 197. Ryutaro Komiya et al., “Japan’s International Trade and Trade Policy, 1955–1984”, in Takashi Inoguchi et al. (eds), The Political Economy of Japan. Vol. 2. The Changing International Contest (Stanford: Stanford University Press, 1988), 216. Twenty-sixth ARPTAP, 1981–82, 69. Twenty-eighth ARPTAP, 1984–85, 71. OTAP, 37th Report, 1985, 158. www.usitc.gov/publications/332/pub1871_0.pdf (accessed April 18, 2019). Anne O. Krueger, American Trade Policy: A Tragedy in the Making (Washington DC: The AEI Press, 1995), 74. United States General Accounting Office, U.S.-Japan Trade. Evaluation of the MarketOriented Sector-Selective Talks (July 1988), 10. https://www.gao/assets/150/146777.pdf (accessed April 18, 2019). In particular, Yumiko Mikanagi, Japan’s Trade Policy. Action or Reaction (London and New York: Routledge, 1986), chapter 2. Ibid., 40. Ibid., 46. Ibid., 51. Ibid., 49. United States General accounting Office, U.S.-Japan Trade, Evaluation of the MarketOriented, 38. Ibid., 53. OTAP, 39th Report, 1987, 4–30. www.usitc.gov/publications/332/pub2095_0.pdf (accessed April 19, 2019). United States General Accounting Office, U.S.-Japan Trade, Evaluation of the MarketOriented, 60, Table 1.1. OTAP, 38th Report, 1986, 4–28. www.usitc.gov/publications/332/pub1995_0.pdf (accessed September 15, 2019). Twenty-ninth ARPTAP, 1988, 49. OTAP, 40th Report, 1988, 109. www.usitc.gov/publications/332/pub2208_0.pdf (accessed September 15, 2019).

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30 See Marc L. Bush, Trade Warriors. States: Firms, and Strategic-Trade Policy in HighTechnology Competition (Cambridge, Cambridge University Press, 1999), 67 et seq. 31 Dorinda G. Dallmeyer, “The United States–Japan Semiconductor Accord of 1986: The Shortcomings of High-Tech Protectionism”, Maryland Journal of International Law, Vol. 13 (1989), issue 2, 185; also, for the whole electronics industry, Michel M. Kostecki, “Electronics Trade Policies in the 1980s”, Journal of World Trade, Vol. 23 (1989), n. 1, Table 2. 32 Marc L. Bush, Trade Warriors, 74 et seq.; Congressional Budget Office—September 1987, The Benefits and Risks of Federal Funding for Sematech, 47. cbo.gov/sites/default/ files/100th-congress-1987-1988/reports/doc14b-entire.pdf (accessed September 15, 2019). 33 BISD Thirty-fifth Supplement, 1987–88, Japan—Trade in Semiconductor. Report of the Panel Adopted on 4 May 1988 (L/6309), para. 10; According to Laura D’Andrea Tyson, Who’s Bashing Whom?, 105–106, Figures 4.1 and 4.2, the Japanese overtaking occurred in 1981 only in the DRAM sector, while the overtaking for the whole of the semiconductor industry took place in 1985. 34 Douglas A. Irwin, “The U.S.–Japan Semiconductor Trade Conflict”, in Anne O. Krueger (ed.), The Political Economy of Trade Protection (Chicago: University of Chicago Press, 1994), 7. 35 Ibid., 8. 36 BISD Thirty-first Supplement (L/6309), para. 11. 37 Congressional Budget Office, The Benefits and Risks, 16. 38 BISD Thirty-first Supplement (L/6309), para. 13. 39 OTAP, 38th Report, 1986, 4–8; Laura D’Andrea Tyson, Who’s Bashing Whom?, 109. 40 Ibid., 110. 41 OTAP, 39th Report, 1987, 4–25. 42 Laura D’Andrea Tyson, Who’s Bashing Whom?, 109. 43 J. David Richardson, “Trade Policy”, in Martin Feldstein (ed.), American Economic Policy in the 1980s, 645; Michel M. Kostecki, “Electronics Trade Policies”, 29; OTAP, 38th Report, 1986, 4. Ibid. 44 BISD Thirty-first Supplement (L/6309), paras 33–59 and 60–63. 45 Ibid., paras 104–23. 46 Ibid., paras 124–27. 47 OTAP, 40th Report, 1988, 109. www.usitc.gov/publications/332/pub2208_0.pdf (accessed September 20, 2019). 48 Laura D’Andrea Tyson, Who’s Bashing Whom?, 114. 49 The following data are taken from Marc L. Bush, Trade Warriors, Figures 4.4–4.6. The source of the data in the figures is Semiconductor Industry Association. 50 Twenty-ninth ARPTAP, 1988, 47. 51 OTAP, 37th Report, 1985, 205. 52 OTAP, 38th Report, 1986, 4–45. 53 Twenty-ninth ARPTAP, 1988, 42. 54 Ibid., 51. 55 OTAP, 38th Report, 1986, 4–38; Twenty-ninth ARPTAP, 1988, 45. 56 Ibid., 53. 57 Ibid., 54. 58 OTAP, 38th Report, 1986, 4–40. 59 OTAP, 40th Report, 1988, 129.

192 60 61 62 63

64

65 66

67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94

International Trade under President Reagan Ibid., Table 15 and Table 16. OTAP, 38th Report, B-29; OTAP, 40th Report, 153. Ibid., 154. See Giuseppe La Barca, The US, the EC and World Trade, 140; also, N. Piers Ludlow, “From Deadlock to Dynamism. The European Communities in the 1980s”, in Desmond Dinan (ed.), Origins and Evolution of the European Union, 2nd edn. (Oxford: Oxford University Press, 2014), 222 et seq. Elliot Zupnick, “American Responses to 1992”, in George N. Yannopoulos (ed.), Europe and America, 1992. US–EC Economic Relations and the Single European Market (Manchester: Manchester University Press, 1991), 44 note 6. Ibid., 32. See Mark Dassesse et al., EC Banking Law, 2nd edn. (London, New York: Lloyd’s of London Press, 1994), chapter 4; also, Michel Gruson et al., “The Second Banking Directive of the European Economic Community and Its Importance for Non-EEC Banks”, Fordham International Law Journal, Vol. 12 (1988), issue 2, 211 et seq. Ibid., 215. Thomas O. Bayard et al., Reciprocity and Retaliation in U.S. Trade Policy, 269. Ibid., 274 et seq. See Anthony Thompson, The Second Banking Directive (London: Butterworts, 1991), 52. Stephen Woolcock, Market Access Issues in EC–US Relations: Trading Partners or Trading Blows (London: Pinter Publishers, 1991), 75. Giuseppe La Barca, International Trade in the 1970s, 135, 157. Steven K. Vogel, Freer Markets, More Rules: Regulatory Reform in Advanced Industrial Countries (Ithaca and London: Cornell University Press, 1996), 220 et seq. Green Paper on the Development of the Common Market for Telecommunications Services and Equipment Com(87) 290 final, 30 June 1987. Twenty-ninth ARPTAP, 1988, 59. OTAP, 39th Report, 1987, 4–13. Twenty-ninth ARPTAP, 1988, 59 OTAP, 37th Report, 1985, 154. OTAP, 38th Report, 1986, 4–9. OTAP, 37th Report, 1985, 23. Ibid. Ibid., 24. Bull.EC 4-1986, point 2.2.9. OTAP, 38th Report, 1986, 4–8. Bull. EC 6-1986, point 2.2.12. Bull.EC 7/8-1986, point 2.2.8; OTAP, 38th Report, 1986, 4–8. Ibid.; Bull.EC 12-1986, point 2.2.10. OTAP, 39th Report, 1987, 4–8; Bull.EC 1-1987, point 1.2.2. Twenty-ninth ARPTAP, 1988, 3. Bull. EC 2-1987, point 2.2.10. OTAP, 38th Report, 1986, 4-7; Bull.EC 10-1986, point 2.3.11. Ibid. OTAP, 39th Report, 1987, 4–11. U.S. Code Congressional and Administrative News, 99th Congress, First Session, 1985, Legislative History, Food Security Act of 1985—Statement by John R. Block Secretary of Agriculture Before the Committee on Agriculture U.S. House of Representatives, 1565 et seq.

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98 99

100 101 102 103 104

105 106 107

108 109

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Ibid. Barry J. Barnett, “The U.S. Farm Financial Crisis of the 1980s”, Agricultural History, Vol. 74 (2000), 375. See in particular, Frederick H. Buttel, “The US Farm Crisis and the Restructuring of American Agriculture: Domestic and International Dimension”, in D. Goodman et al. (eds), The International Farm Crisis (London: Macmillan, 1993), 53 et seq. U.S. Code Congressional and Administrative News, 99th Congress, First Session, 1985, Legislative History, Food Security Act of 1985, 1172. Ann Hillberg Seitzinger et al., “The Export Enhancement Program. How Has It Affected Wheat Exports?”, USDA Economic Research Service, Agriculture Information Bulletin, n. 575, December 1989, 1. https://naldc.nal.usda.gov/CAT90930894/PDF (accessed March 25, 2019). Ronald T. Libby, Protecting Markets: U.S. Policy and the World Grain Trade (Ithaca: Cornell University Press, 1992), 81. Organisation for Economic Cooperation and Development, Agricultural Policies, Markets and Trade: Monitoring and Outlook 1988 (Paris: OECD, 1988), 88. Robert Paarlberg, Fixing Farm Trade, 95. Ann Hillberg Seitzinger et al., The Export Enhancement Program, 5—Table 3. Bruce L. Gardner, “The Political Economy of the Export Enhancement Program for Wheat”, in Anne O. Krueger (ed.), The Political Economy of Trade Production (Chicago: University of Chicago Press, 1996), 65. OTAP 40th Report, 1988, 106. Ibid., 107. Carnell Cahil et al., “Estimation of Agricultural Assistance Using Producer and Consumer Subsidy Equivalent. Theory and Practice”, OECD Economic Studies, 13 (1989), 15. Organisation for Economic Cooperation and Development, Agricultural Policies, Markets and Trade. Monitoring and Outlook 1988 (Paris: OECD, 1988), 48. Organisation for Economic Cooperation and Development, Agricultural Policies, Markets and Trade. Monitoring and Outlook 1990 (Paris: OECD, 1990), Table III.1.

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The launch of a new round of negotiations in the GATT Nau, criticizing the lack of perspective in economic diplomacy of the second-term Reagan administration, lamented the transfer of William Brock to the head of the Labor Department and the delay in his replacement as USTR.1 Oxley renamed the Uruguay Round the Yeutter Round, stressing the new USTR’s role in launching a new multilateral negotiating round, while keeping at bay protectionist pressures from Congress.2 Actually, if Brock can be credited with the idea and the first steps of a new GATT round and with subsequent progress in preparing the ground for its launch, it was actually Yeutter who achieved this goal, after a year as chief US negotiator, and in setting the agenda of the negotiations in line with most US objectives. Nor was Yeutter an outsider, having a strong background of experience in previous Republican administrations. In particular, in 1974 he was appointed assistant secretary of Agriculture for International Affairs and in 1975 as deputy special trade representative. Also, as CEO of the Chicago Mercantile Exchange, Yeutter was frequently in touch with lawmakers, which proved helpful when he had to work with Congress for a new trade statute that was influenced by the growing protectionist mood in the two houses, but did not clash with the executive’s goals. The United States achieved a partial success in pressing for a new GATT round in the months preceding Yeutter’s appointment. The communiqué of the OECD meeting at ministerial level in April 1985 stated that a new round of trade negotiations in the GATT would significantly contribute to strengthening the multilateral trading system by securing further liberalization, and that “there was therefore agreement that such a round of negotiations should begin as soon as possible (some felt this should be in early 1986)”. It added that “ministers agreed to propose to the Contracting Parties that a preparatory meeting of senior officials should take place in GATT before the end of the summer to reach a broad consensus on subject matter and modalities for such negotiations”.3 In fact, the well-written communiqué masked some disagreement between the United States and several of its transatlantic trading partners, as well as various differences in attitude among the EC member states. The preceding March, the EC trade ministers had met to discuss the Community’s position on the prospective new round of GATT negotiations on the basis of a 195

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communication from the Commission, which was conditionally favorable to the participation of the Community. The majority of the member states, notably the UK and Germany, supported the prompt launching of new multilateral talks with the objective of further expansion of trade and the strengthening of GATT structures and disciplines. The countries of the southern area headed by France argued that the launching of the round should be conditional on previous international consensus on objectives, participation, and schedule. This implied a delay to the start of the multilateral negotiations, as, if the developing countries are taken into account, the GATT members in 1985 were not near to an agreement as to the subjects to be dealt with in the talks. It also offered the Community, and some of its members in particular, greater leeway in the establishment of a negotiating agenda that did not simply meet the goals of the United States. In their final declaration, the ministers ironed out their differences, expressing a willingness to participate in the prospective GATT round, but with a series of caveats that greatly conceded to the worries of France and its Mediterranean allies.4 The EC ministers in the first instance pointed out that the new round, important as it might be in strengthening the multilateral trading system, was not of itself sufficient. Thus, concerted actions had to be taken to improve the functioning of the international monetary system and the flow of financial resources to overcome imbalances, the solutions to which could not be found in the trade talks. The Council also requested a standstill, that is the halting of protectionist measures, and their rollback, that is their gradual dismantling. As regards the general frame of the prospective GATT negotiations, the ministers affirmed the need for reciprocity and a better balance of rights and obligations and for the avoidance of too selective an approach to specific negotiating points. On agriculture they declared that the Community was ready to work towards improvement of the GATT discipline on all aspects of trade in agricultural products, but within the existing framework of rules and taking full account of the specific characteristics and problems of the sector. At the same time, the fundamental characteristics of the Common Agricultural Policy (CAP), both internal and external, were not to be placed in question. Trade in services and problems of counterfeit goods were deemed suitable for inclusion in the GATT talks. As regards the start of the new round, the Council stressed that it should be subject to the establishment of a prior international consensus on objectives, participation, and timing, and, therefore, a precise date for the formal launching of the negotiations could not be fixed in advance. The clash between the French and American perspectives came to the fore during the Bonn Summit in early May. In his diaries Reagan wrote that Mitterrand “pressed for a formal monetary conference to deal with exchange rate etc”. The US president proposed to wait for the report of the finance ministers, which was due in June, and then decide what further was needed, but the French president was “not satisfied with that & wants to tie a monetary meeting with any trade talks”.5 The day after Mitterrand expressed his opposition to protectionism, but “refused to agree to an ’86 meeting or re-opening of trade talks to further reduce or eliminate protectionist measures that presently exist”. Rather wittily, Reagan added: “We’re all guilty of some. His big hang up is the fact that France subsidizes its agr. so that they can compete in export trade at lower than world market prices. Couple that with his upcoming election in ’86 & we

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have the story”.6 Reagan also reported that the debate grew heated. Yet, a compromise formula was found to gloss over the clash. The Summit Declaration stated: “We strongly endorse the agreement reached by the OECD Ministerial Council that a new GATT round should begin as soon as possible. Most of us think that this should be in 1986”. At the meeting in Stockholm by ministers of twenty-four states, developed and developing countries seemed close to agreement on two separate but parallel sets of negotiations on trade in goods, within the framework of GATT, and on services, but no substantial progress was made. The lack of consensus was confirmed in the June meeting of the GATT Council during which a large group of developing countries led by India insisted that new negotiations could not start in the absence of prior confidence-building measures, including a commitment not to introduce new restrictive trade measures that were GATT inconsistent and to rollback the existing ones, as well as the recognition of the unsuitability of the Multifiber Arrangement (MFA) to regulate trade in textiles and clothing.7 The task of explaining the French attitude towards the new GATT talks in a more Cartesian way than during the summit in Germany was entrusted to the trade minister. In an article published in a political economy magazine, Édith Cresson argued that before accepting an invitation to discuss anything, whatever it may be, it was necessary to know what was to be discussed and who was going to take part in the discussion, and, as was borne out by recent events in the talks about a prospective GATT round, both these elements were lacking.8 Secondly, contrary to the American reasoning, fixing a date for the start of multilateral negotiations was not to be of great help in stemming the specter of protectionist feelings in the US Congress, as these feelings were aroused by the longstanding difficulties of several sectors of the United States as well as the European economy. Thus, the process to establish a preparatory committee responsible for setting up a timetable was “inevitably to be a long road”, as “you can’t have a child in a month even with nine wives”. This was not the opinion of the Americans, under the leadership of the new USTR, especially if the wives were more than nine and each of them, even for separate reasons, had an interest in putting one or more topics on the negotiating table. Certainly, consensus was at the basis of any decision in the GATT, but this was the usual procedure not the rule. The lack of consensus on the subjects of the negotiations would have put the start of a new round off for a long time, but, confident of gathering a more than sufficient number of supporters, on July 24, 1985 the American delegation formally called for a special session of the GATT Contracting Parties in September.9 As explained by the organization’s secretariat, the GATT members could by simple majority decide to conduct, sponsor, or support multilateral negotiations, although they could not oblige individual members to accept substantive obligations resulting from such negotiations.10 There was no need for a vote, as the countries unhappy with a new round of talks, or with some items of it, preferred not to be defeated. The participants in the special session agreed that “a preparatory process on the proposed multilateral round of trade negotiations has now been initiated” and that a group of senior officials was established with the task of examining the subject matter and modalities of the proposed negotiations, reporting to the Contracting Parties in November.11 In the November GATT session, a Preparatory Committee was established to determine objectives,

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subject matter, and modalities for, and participation in, the new multilateral trade negotiations.12 The favorable moment for the US ambitions was confirmed in the Tokyo Summit of May 1986 whose final declaration stated that the new round should strengthen the functioning of the GATT and its adaptation to the international economic environment, thus addressing, inter alia, trade in services, trade-related aspects of intellectual property rights and of foreign direct investments, as “further liberalization of trade is, we believe, of no less importance for the developing countries than for ourselves”. The heads of state and government also noted with concern the situation of global structural surplus in some farm produce arising from several factors, among which were “longstanding policies of domestic subsidy and protection of agriculture in all our countries”. Two occurrences favorable for the United States took place just before the launch of a new round. On July 31 the Multifiber Arrangement was renewed for the fourth time for a further five years to 1991. Even before the official start of negotiations for a further extension of the MFA, in July 1985 several developing countries had called for a rapid dismantlement of the Arrangement and for the return of the textiles and apparel sector to ordinary GATT discipline. The EC, while requesting a further extension of the MFA, favored greater flexibility in its application. This was not the attitude of the United States, whose textiles and clothing industries had been hard hit by the appreciation of the dollar, and the deficit in the two sectors had all but tripled as imports almost doubled while exports remained stagnant. The US administration, while vetoing a bill that would set strict import limits on exporting countries and individual categories of textile products, gave assurances that the prospective Multifiber Arrangement would be no less restrictive than the ongoing one. The MFA IV favored the expectations of the importing countries.13 The coverage of the MFA was extended to vegetable fibers and vegetable fiber blends; circumvention provisions were reinforced; an anti-surge provision was introduced; the possibility of adopting a lower rate of import growth on a particular product from a particular source was recognized in case of recurrence or exacerbation of market disruption; problems of infringement of property rights regarding trademarks and designs received explicit acknowledgment. A boost to the hopes of the United States for a thorough reform of the world agricultural system came from the establishment in August 1986 of a group of countries that pledged to seek to liberalize global trade in agricultural products, in particular by the abolition of export subsidies and trade-distorting domestic subsidies.14 The creation of the group took place during a meeting in Cairns, a resort town in Northern Australia, of fourteen farm produce-exporting countries, whose share of agriculture in exports was substantially higher than the world average and who deemed that their export potential was hindered by the protectionist policies of other trading partners, in particular, though not exclusively, the EC. The group, which has since become known as Cairns Group, was rather heterogeneous, comprising a majority of developing countries and three industrial countries, members of the OECD. Also, a Communist country, Hungary, was one of the founders. Thus, support for a free-trade reform of the agricultural sector was coming not from single states that might have opposing interests in other sectors of the economy, but from a well-united group that had a clearly set policy.15

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In the run-up to the ministerial conference, three draft declarations were presented. The first, sponsored by a group of ten hardline developing countries led by Brazil and India, made no concession to the inclusion of the new subjects of services, intellectual property and trade and investments. A second draft text, drawn up by the Colombian ambassador, Felipe Jaramillo, and by the Swiss ambassador, Pierre-Louis Girard, the so-called “café-au-lait” proposal, was the product of the cooperation between a group of industrialized countries, joined in the last stages by the EC, the United States, and Japan, and some developing countries that opposed the stance of the hardliners headed by Brazil and India. A third text, submitted by Argentina, was a modification of the Colombian–Swiss proposal. The Jaramillo–Girard draft became the basis for negotiations at the opening of the ministerial conference that started at Punta del Este, Uruguay, on September 14, 1986, although some amendments had to be made to accommodate divergences in sectors such as agriculture and services. The Ministerial Declaration that launched the new round was divided into two parts, the first of which concerned trade in goods, while the second one referred to trade in services.16 The first part consisted of a preamble, which stated the basic decision to negotiate and reverse protectionism, and seven sessions. In particular, the second section adopted the idea, upheld by the EC, that the negotiations had to be treated from start to finish as parts of a single undertaking, although agreements reached at an earlier stage might be implemented on a provisional or a definitive basis prior to the formal conclusion of the negotiations. The same section laid out the principle of differential and more favorable treatment for developing countries, which, however, was to be applied in inverse relation to their economic development. The third section set out the “standstill” and “rollback” commitments. The first commitment required that no trade restrictions inconsistent with the GATT be introduced and that even GATT-consistent measures should not go beyond what was strictly necessary to remedy specific situations, as provided for in the General Agreement. This could be read as a clear reminder to some developed countries, notably the United States, not to overexploit GATT remedies for protectionist ends. The rollback commitment called for the progressive phasing out of restrictive or distortive measures inconsistent with the General Agreement. The following section listed the areas of negotiations on goods and set out the basic aims to be pursued in each negotiation. Thirteen subjects for negotiations were given: tariffs, non-tariff measures, GATT articles, safeguards, tropical products, natural resource-based products, textiles and clothing, agriculture, the Multilateral Trade Negotiations (MTN) agreements (i.e. the codes negotiated in the Tokyo Round), subsidies and countervailing measures, dispute settlement, traderelated intellectual property rights, including, among others, trade in counterfeit goods, and trade-related investment measures. As was to be expected, the goals set for each negotiating item frequently had to satisfy the contrasting perspectives of GATT members and, therefore, showed a certain amount of ambiguity. Thus, for agriculture the negotiations had to improve the competitive environment by increasing discipline on the use of all direct and indirect subsidies and other measures affecting directly or indirectly agricultural trade, including the phased reduction of their negative effects and to deal with their causes. But the text of the

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section did not prescribe their phasing out. On the other hand, the talks had to bring more discipline and predictability to agricultural trade, so as to reduce instability and imbalances in the world agricultural market, and this could imply a concerted action among the main exporters. As regards safeguards, the declaration did not take sides on the various stances, only stating that the negotiations should clarify and reinforce the discipline of the General Agreement, should apply to all parties, and should contain, inter alia, elements like transparency, objective criteria, degressivity, and compensation. No mention was made of the “selectivity” option sponsored by the EC, or of the Brazilian proposal that safeguard actions be based on the most-favored nation (MFN) principle. As regards textiles and clothing, the negotiations had to aim to formulate modalities that would permit the eventual integration of the sector into GATT on the basis of strengthened GATT rules. Actually, the stated aim was not the direct reintroduction of the sector into the scope of the General Agreement, but only the setting of modalities conducive to this end. At any rate, the industrial countries had already secured a renewal of the MFA for a further five years. To encourage the participation of a large number of developing countries in the discussions, it was provided that the negotiations should aim at the fullest liberalization of trade in tropical products, including in their processed and semi-processed forms. The Punta del Este Declaration rather succinctly called for the improvement, clarification, and expansion, as appropriate, of the codes on non-tariff barriers negotiated in the Tokyo Round. A group on Multilateral Trade Negotiations (MTN) was later established to deal with five of them (technical barriers to trade, government procurement, customs valuation, import licensing, and antidumping). The subsidy and countervailing duty code had separate mention in the Declaration and was entrusted to a different negotiating group. This resulted from the pressure of the United States. In the Preparatory Committee, the United States repeatedly stressed that “it was not possible to talk about strengthening and improving the system without dealing with subsidies”, as “this was one of the fundamental weaknesses of the existing system which had to be dealt with on as wide a front as possible”.17 The US opinion was shared by other OECD countries, the most assertive of which was Australia, which contended that a radical reform of the subsidy discipline that specifically addressed the issue of primary products’ subsidization was needed. The EC, in contrast, stated that it was not convinced of the utility of treating subsidies as a separate item and argued that a wrong approach to them seemed to prevail as they were accused of exhausting budgetary resources by unduly expanding the role of the state in the economy, neglecting the fact that governments had to have recourse to subsidies to protect national interests in times of economic difficulties.18 The Declaration provided that the negotiations should aim to clarify GATT provisions and elaborate as appropriate new rules and principles to promote effective protection of intellectual property rights and to ensure that measures and procedures to enforce such rights did not themselves become barriers to legitimate trade. In the preparatory Committee the United States had forcefully argued that GATT was the appropriate forum to seek enforcement of international protection of intellectual property rights and that its mandate should not be limited to the protection of trademarked goods, as requested in the 1982 ministerial conference, but should also

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include other property rights like trademarks, copyright, and trade secrets.19 Numerous developing countries led by Brazil retorted that not only were counterfeited trademarked goods beyond the GATT authority, but GATT could not address issues like copyrights and patents as they covered intangible goods.20 Notwithstanding, the new topic, also thanks to the support offered by several industrial countries, found a place in the Punta del Este Declaration and, therefore, became a subject of negotiation, though the developing countries were expected to make fearful resistance to a final agreement. Ambiguity also marked the paragraph dedicated to trade-related investment measures. The trade-related investment issue was not mentioned in the 1982 Ministerial Declaration, but the United States managed to reintroduce the subject at a later stage, arguing that encouragement of unhampered foreign investment would add significantly to GATT contribution to promoting structural adjustment and more efficient economic development, which was a main goal underpinning the prospective negotiations. The emphasis of the provision in the 1986 Declaration was not on the measures themselves but on their “trade restrictive and distorting effects”. In such a case it is presumable that damaging effects could simply be dealt with by existing GATT articles. Yet, the paragraph also provided that negotiations should address negative effects not already covered by the GATT, which was concerned with cross-border trade. In such a case the actual outcome of the negotiations might turn out to be the prohibition of the behavior at the root of the allegedly trade-distorting effects rather than the latter.21 On dispute settlement, the Declaration was a step towards acceptance of the requests of the United States as it envisaged that the negotiations should aim at strengthening the rules and procedures of the dispute settlement process and should include adequate arrangements for overseeing compliance with adopted recommendations by dispute settlement bodies. The last two sections concerned participation in the negotiations and their organization. A Group of Negotiations on Goods (GNG) was established to which negotiating groups on the various topics of discussion had to report. In turn, the GNG together with the Group on Negotiations on Services (GNS) had to report to the Trade Negotiations Committee. The second part of the Declaration envisaged the establishment of a multilateral framework of principles and rules for trade in services and the possible elaboration of principles for individual sectors. It was provided that GATT procedures and practices should apply, with the proviso, however, that the multilateral framework on services should respect the policy objectives of national laws and take into account the work of relevant international organizations: both the OECD and the UNCTAD had debated and produced declarations on the sector.

The US stance in the first two years of the Uruguay Round and the Montreal Ministerial meeting At its very beginning the Punta del Este Declaration optimistically stated that “the Multilateral Trade Negotiations will be concluded within four years”. As expected, in

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the first two years the United States was particularly active in five sectors: subsidies and countervailing duties; agriculture; trade-related investments; trade-related intellectual property rights; and services. The progress was not smooth. US attention was also directed to dispute settlement and trade in tropical products. From the outset of 1987 the United States also pressed for a high-level meeting, a “mid-term review”, to be held before the end of the Reagan presidency to confirm the consensus emerging in various subjects of negotiations, to accelerate the slow progress towards an agreement in other subjects, and to break the impasse in other topics.22

Subsidies and countervailing duties From the beginning of the negotiations the United States argued that stronger discipline on subsidies was needed and that similar forms of governmental support to industries with a potential for exports might lie within the purview of strengthened GATT articles. In its communication of March 1987, the United States put forward that “the current rules with respect to some of the most sensitive and contentious subsidy practices are so vague as to invite differences of interpretation”, while “in other areas, the GATT and the Code rules are so weak as to provide few constraints over subsidy practices that clearly result in harm to the interests of other nations”.23 In particular, the US criticisms focused on the provisions of GATT Article XVI:3 and Article 10 of the Tokyo Round subsidies code on agricultural subsidies and on the provisions of GATT Article XVI:1 and Article 8 of the Tokyo Round code on trade-distorting domestic subsidies. The United States was also critical of the lower level of obligation imposed by GATT Article XIV to developing countries with respect to export subsidies. On targeting, that is a scheme of coordinated measures to assist specific export-oriented industries, the United States argued that some of such measures were undeniably subsidies, but that others resulting in the channeling of resources to a specific industry or sector should be the subject of discussions as they might have trade-distorting effects. The US proposal was attacked by both developed countries, including the EC, Japan, and Canada, and many developing countries, which deemed the proposal too ambitious and would prefer that the negotiations should focus on countervailing duty issues in order to dilute US law by exempting certain kind of subsidies and by making countervailing requirements more rigorous.24 The proposal put forward by the Swiss delegation distinguished among three categories of subsidies: prohibited subsidies; actionable subsidies; and non-actionable subsidies.25 Further discussions had to identify the measures falling within each category. The United States, in a later submission, was critical of the Swiss proposal, pointing out that an approach based on category of subsidies would permit governments to simply relabel measures shifting them from a prohibited category to an allowed one, and secondly, since money is essentially fungible, the ostensible aim of the measure might be actually used for financing initiatives having trade-distorting effects.26 The United States proposed, instead, to adopt objective and verifiable criteria, to be established through further negotiations, in determining whether domestic subsidies were prohibited; to eliminate the distinction between primary and

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non-primary products; to prohibit agricultural subsidies affecting trade; and to assess the amount of a subsidy according to the benefit to the recipient. As regards, in particular, industrial targeting, the United States, though recognizing that “most targeting practices fall outside even the most expansive international definition of a subsidy and, therefore, are not covered by GATT Article VI and XVI”, contended that the negotiations should determine if their effects were analogous to subsidies resulting in economic harm. It is, therefore, arguable that the US executive, while opposing the attempt of Congress to include such practices under the scope of an extended section 301 of the 1974 Act, was endeavoring to have them censored in a multilateral forum. However, when the mid-term review was held in Montreal in December 1988, the framework for future negotiations was based on the so-called “traffic light” approach (red, yellow, and green), which was drawn from the Swiss proposal distinguishing between prohibited, actionable, and non-actionable subsidies.27

Trade-related investment measures As expected, the United States was particularly active in calling for specific discipline on trade-related investments measures (TRIMs). In the months preceding the midterm review, out of thirteen communications received by the negotiating group on TRIMs six were submitted by the United States. And though stating that it was concerned only with the trade-distorting effects of many TRIMs, the United States actually contended that these effects were necessarily linked to such measures and that their number was extremely high, coinciding in practice with the measures forbidden by the “investment treaty” standard prototype drawn up four years earlier. In one of its first submissions the United States conceptually grouped the effects of the TRIMs under categories which: prevent, reduce, or divert imports by limiting sale purchase and use of imported products; restrict the ability to export by home and third country producers; artificially inflate exports from a host country, thereby distorting trade flows in the world market. Seventeen measures were included in the three categories, including not only local content and export requirements, but also several others, from technology transfer and local equity requirements to remittance restrictions and trade balance requirements, and so on.28 In a subsequent communication, the United States argued that the trade-distorting and restrictive effects of TRIMs were dealt with by several GATT articles, but they were also under the purview of two basic GATT principles: non-discrimination, as either MFN or national treatment; and prohibition, a concept implicit in many GATT rules. However, there were cases in which the measures might escape the mentioned general principles, while their effects were still affecting international trade: in such a case new rules had to be established.29 The EC contended instead that only a few investment policies “limit the investor’s capacity either to import or export goods or to sell them on the domestic market” and therefore are trade restrictive since they affect the investor’s ability to import and export according to free economic calculations.30 Many developing countries accused the United States of going well beyond the mandate of the Uruguay Round Declaration and of trying to establish within GATT a new

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system to regulate investment measures that might have an effect on trade, thus infringing the sovereign right of government to regulate foreign direct investments and to lay down conditions of establishments.31 Malaysia in particular argued that the industrial countries’ submissions did not take into due account the GATT provisions (Art. XVIII and Part IV) on trade and development, which allowed developing countries to take protective measures to implement programs and policies of economic development.32 The perspectives of the participants in the group were quite distant. Yet four elements as a basis for future negotiations and possible endorsement in a ministerial conference could be found: identification of harmful effects of TRIMs that were covered by the GATT; identification of similar effects not covered by GATT provisions; development considerations; and means to overcome the trade-distorting effects of such measures.

Trade-related intellectual property rights The industrial countries since the 1970s had been arguing that the Paris Convention for the protection of industrial property and the Berne Convention for the protection of literary and artistic works were lacking detailed rules on enforcement of rights before national authorities and on binding and effective mechanisms for settlements between states; they were also accused of not being abreast of the progress brought about by technological progress.33 In October 1987, the United States, which spearheaded the developed countries, remarked that ineffective protection of intellectual property rights resulted in trade distortions and nullification of concessions and that the Berne and Paris contentions were never intended to be used as enforcement mechanisms for the aforementioned rights.34 What was needed was a GATT-based intellectual property agreement that should address trade distortions resulting from the absence of agreed procedures for dealing with import of products infringing such rights and multilateral dispute settlements, as well as from the absence of internationally agreed standards for protection and of domestic mechanisms for their enforcement. The United States, therefore, floated the idea that new substantial rules on the various forms of intellectual property should be created by a treaty under the aegis of the GATT; in short, a code with a limited number of members, like those signed in the Tokyo Round, which, however, “would provide signatories with a strong basis for coordinating their efforts to encourage non-signatories to adopt intellectual property regimes in accord with standards embodied in the agreement”. Similar positions were adopted by the industrial countries, although their proposals were less ambitious than those of the United States. The developing countries, with the exception of Korea and the ASEAN members, objected that the GATT was not the forum to negotiate norms of intellectual property protection, except on the question of trade in counterfeit goods. They also complained that strict rules in the GATT would result in unfair deterrents in the transfer of technology at their disadvantage.35 The stance of the developed and developing countries remained separate until the mid-term review, and it was impossible to reach agreement even on a compromise text to submit for consideration to the trade ministers in Montreal.

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Services The members of the group on service negotiations at the beginning of 1987 agreed to deal in the first phase of the discussions with a series of topics, some of which were politically relevant: basic concepts on which principles and rules for trade in services, including possible disciplines for individual sectors, might be based; coverage of the multilateral framework for trade in services; formulation of a list of measures that might be viewed as limiting the expansion of trade in services.36 The developing countries, which previously had opposed the inclusion of services in the Uruguay Round, tried to set strict boundaries on the scope and direction of the negotiations. Especially India and Brazil contended in the first instance that, although included in the same round, the negotiations on trade in services were clearly separate from the negotiations on trade in goods, and therefore there might be no cross-linkage between concessions in the area of goods and concessions in the area of services.37 Secondly, concepts deemed basic with regard to trade in goods were not necessarily applicable to the negotiations on trade in services. In particular, liberalization per se was not viewed as a goal of the talks, as the real aim of the exercise of negotiations was simply to promote economic growth for all parties and especially development of developing nations through expansion of trade in services under conditions of transparency and progressive liberalization. This implied that the need of developing countries to carry out their development policies and to protect their industries from the long-consolidated strength of the multinational corporations, particularly active in this sector, had to be taken into account. Thirdly, since the Uruguay Round Declaration referred to trade in services, the subject of the negotiations had to be international, i.e. cross-border, trade and the talks should not deal with production of services within the national borders, which strictly remained under the purview of national laws. The developed countries assigned to the discussions a much wider scope, both with regard to the ways in which services were provided and to the extent of liberalization. The most ambitious and well-constructed suggestion came from the United States.38 According to the United States, future negotiations should focus on the progressive and time-phased liberalization of world services markets, which would “be of benefit of every country, regardless of its stage of economic development”, “without compromising any individual country’s development objectives”. Quite reassuringly, the proposal made it clear that the negotiations should recognize the sovereign right of every country to regulate its services industries, but with the caveat that the talks would be only concerned with those measures whose purpose or, which is more important, whose effect “is to restrict the access and operations of foreign service providers”.39 This would have expanded the scope of discussions and, at a later stage, of disputes among the parties. The negotiations should apply to the cross-border movement of services, but also to the establishment of foreign branches and subsidiaries to produce and provide services within the host country. The general rules should extend their coverage to a wide range of services and on their bases individual sector agreements could be negotiated. Principles from the GATT were to be transplanted into the framework for services negotiations: in particular, transparency of measures concerning services; MFN and national treatment, i.e. treatment identical to that provided to domestic

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service providers. Obviously in some cases identical treatment might not be allowed, but the treatment reserved for foreign providers had to be equivalent in effect. National treatment was to apply, though not exclusively, to access to local distribution networks, access to customers, access to licenses, and right to use brand names. The United States was rather flexible on the participation in a prospective agreement. Although the framework agreement was open to all GATT parties, it was accepted that some GATT members might elect not to become signatories and that the signatories might be allowed to take limited exceptions to the coverage of the agreement. The differences of opinion among the members of the group did not disappear in the months preceding the ministerial conference, but there was no reason for an open clash as the discussions had only to work out the general framework for subsequent negotiations. Thus, it was possible for the group to put forward a draft decision for ministers on the continuation of the talks, which included a good share of the US ideas.

Agriculture In the first two years of the talks, the differences in attitude in most of the subjects of negotiations occurred between industrial countries, in particular the United States, and developing countries. This was not the case for agriculture where the main opponents were the two major transatlantic trading partners, and their divergences were a prominent factor in causing the turmoil that marked the ministerial meeting in Montreal at the very end of the Reagan presidency. In July 1987, the United States tabled a proposal for a radical reshaping of the agriculture trade environment, calling for a total phase-out of trade-distorting subsidies and border restrictions over ten years starting from the conclusion of the round expected by the end of 1990.40 The proposal covered “market support”,“income support”, and “other support”, including concessional farm credit, fuel and fertilizer subsidies, and marketing programs. It envisaged the elimination of all subsidies that directly or indirectly affected trade as well as of all import barriers, and the harmonization of sanitary and phyto-sanitary regulations based on internationally agreed standards and mutual recognition of processing and production regulations offering equivalent guarantees. A two-tier process was envisaged for the implementation of these goals: GATT members had to agree on an “aggregate measure” that quantified the amount of support given to farmers through government intervention in order to equate the various policies used by the trading partners. One choice was the producer subsidy equivalent (PSE) used by the OECD, although other methods might be available to the negotiators. In the second tier each country, or group of countries, was required to submit a ten-year plan indicating how to implement its commitment during each year of the transition period. The proposal became known as “zero option”, but it was not so radical as its name suggested as the dismantlement of subsidizing measures did not concern those policies which did not distort production, consumption, or trade: income payments unrelated to production or marketing were placed in the exempted category along with aid programs.41 Some scholars have argued that the “zero option” put forward by the United States was a tactic directed at starting a dialogue that might result in a move towards greater liberalization in farm trade.42 Yet, the suggestion that the zero 2000 proposal was a

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mere ideological trial balloon launched to encourage a more trade-oriented dialogue in the GATT is not supported by available evidence. The proposal, which, anyway, had the partial support of the Cairns Group, remained at the heart of the American position until the mid-term review in Montreal (i.e. until the end of the Reagan administration) and was viewed favorably by the president. Preeg wittily remarks that Reagan “especially liked the target date, which was analogous to the US proposal to the Soviet Union for elimination of medium-range nuclear warheads”.43 Moreover, the “zero option” had strong similarities with the radical reform of the domestic farm policy that the Republican executive had tried to launch, with no success, two years earlier. It also coincided with the advice of influential American trade experts for phasing out public support of farm output and for the alignment, over time, of domestic farmers’ revenues to prices prevailing in the world market, in the absence of distorting subsidies.44 It must also be noted that the ambition for a sweeping reform of farm trade also influenced the US stance in the tropical products negotiations. Indeed, the United States stressed that there was a linkage between the two sectors since most tropical products were agricultural and, therefore, all participants in the talks, not just developed countries, had to accept their share of responsibilities in achieving liberalized trade, which was not confined to industrial products. As acknowledged by the USTR, the United States continued to meet resistance to its attempt to link the two sectors.45 The Cairns Group’s perspective overall was in line with the US proposal. The group supported the complete removal of distorting policies, although on the one hand it was disposed to consider a longer phasing out period, while on the other it sought early relief through a freeze of market access restrictions.46 The US proposal, however, encountered the skepticism of many delegations, including those from Japan and from the EC, which stressed that the negotiations had also to keep non-economic factors and values at the forefront, along with the recognition of specific characteristics and national differences in the agricultural sector.47 The Community waited over three months before replying to the American ideological challenge and its answer reflected quite a different outlook on issues and solutions, arguing that a concerted, progressive, and balanced reduction of the level of public support was just the main tool to address the root problem afflicting trade in farm products: the imbalance between supply and demand.48 The position paper submitted by the EC in the negotiating group on agriculture envisaged two stages. In the first, the major farm producers would take emergency measures to relieve the worst affected commodity markets (particularly grains, sugar, and dairy) and concurrently would reduce in the short-term government support in sectors with structural surpluses. In a second stage, GATT members would carry out a significant, concerted curtailment of support, coupled with a readjustment of external protection in order to achieve a significant reduction of the distortions contributing to market disequilibria. In a later stage, the Community called for a progressive reduction of domestic agricultural support over five years from a 1984 baseline, thus taking into account support curtailment already carried out in the CAP.49 For monitoring progress in the reduction of domestic support, the Community suggested the adoption of a “support measurement unit (SMU)”, which, however, was much less encompassing than the PSE worked out by the OECD. In short, the proposal was a far cry from the complete liberalization by the year 2000 put forward by the

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United States. A few weeks later, the United States, in view of the mid-term conference, reaffirmed its goal of full dismantlement of trade barriers and distortions, which was to be based on the tariffication of all non-tariff barriers to agricultural trade and on the establishment of a schedule for the phased reduction and elimination of the estimated tariffs.50 In other words, the perspectives of the two transatlantic partners were very different. The US hopes of achieving a breakthrough in its favor at the Montreal meeting were unrealistic. On November 14, 1988, in preparation for the Montreal midterm review, the Council of Ministers made it clear that the EC negotiators, though with some room for maneuver, had to distinguish between short-term and long-term commitments. The short term should involve a freeze on support measured in accord with previous Community proposals and a reduction to be defined, which “would enable the adjustments to the CAP in recent years to be capitalized”, while the long term “should encompass a reduction of support significantly affecting international trade in agricultural products, together with the adjustment of protection”.51 In short, the two delegations were only refining their original proposals with no meeting of minds.

The mid-term review In February 1988, the Trade Negotiations Committee decided to meet at ministerial level in Montreal the following December. At the Toronto Economic Summit in May, the heads of state and government declared: As the Uruguay Round enters a most difficult phase, it is vital to ensure the momentum of these ambitious negotiations. The Mid-Term Review will provide a unique opportunity to send a credible political signal to the trading world. . . . For our part, we are committed to ensure that the Mid-Term Review establishes a solid base for the full and complete success of the negotiations, in accordance with the Punta del Este Declaration.

A quadrilateral meeting of the trade ministers of the United States, Canada, Japan, and the EC was held in Brainerd, Minnesota, and was followed by a wider meeting in Islamabad in early October to prepare for the conference of the trade ministers of the GATT members in Montreal.52 The ministerial meeting was only a partial success and was marked by a dramatic turn of events that almost led to the failure of the GATT talks. At the opening of the meeting on December 5 there were still nine contentious issues over the fifteen areas of the negotiations. Of the nine contentious issues, which were before the trade ministers, five were resolved.53 Agreement was reached on tropical products, although the package as a whole was put on hold, given the US insistence on linking progress in this area with an agreement on agriculture. Agreement was reached on guidelines for tariff negotiations and a negotiating framework for services was worked out. Also, the impasse on dispute settlement and the future functioning of the GATT was broken. The text on safeguards, consisting of a work plan and a timetable for future negotiations,

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was not approved. The disagreement, at the basis of which were the issues of selectivity and “gray area” elimination, involved in particular the EC and some developing countries led by India. No agreement could be reached on trade-related intellectual property rights and on textiles and clothing, given the irreconcilable views of developed and developing countries. The clash that triggered the turmoil concerned agriculture. The talks between the United States and the EC, as was logical, came to nothing, except bickering between the heads of the two delegations. The failure of the attempt to work out even a tentative agreement prompted several Latin American countries, some of which belonged to the Cairn Group, to refuse to go forward and approve texts on which they had made compromises in view of concessions to their advantage in the agricultural sector, which they deemed essential to their economies.54 The risk of a prolonged stalemate was avoided by the decision of the ministers that the Trade Negotiations Committee should meet again in April 1989 at the level of senior officials and that the results achieved in Montreal should be put on hold until then. In April the mid-term review was completed thanks to an agreement between the United States and the EC to continue their talks abandoning their opposing proposals on agriculture. Also, the impasse on textiles, trade-related property rights, and safeguards was broken as texts that could be found acceptable by the parties concerned were drawn up. During the Bush presidency, Carla Hills became the new USTR, but Yeutter was nominated secretary of Agriculture, a mandate that secured him a key role in the GATT negotiations on farm trade and on the prospective reform of agriculture at home.

Main achievements in the OECD Of the various forums in which the United States had to defend and push through its trade policy, the OECD was the one in which it received most support. For instance, the communiqué issued at the end of the May 1987 ministerial meeting hailed the launch of a new round in the GATT. It also urged the member countries to develop a more rational approach in their domestic agricultural policy and committed them to progressive and concerted reduction of agricultural support, replacing price guarantees and other production support measures with direct farm income support not linked to production. The following year, the OECD ministerial declaration urged the greatest possible advance in the GATT negotiations in the months to come and promised to develop a “framework approach” on all negotiating topics by the December mid-term review to allow successful completion of the Uruguay Round by 1990. Regarding agriculture, the OECD ministers expressed their concern on the limited progress on agricultural policy reform in the member states. Certainly the ministerial declarations, well sounding as they were, were not binding the individual members of the Paris organization. On the other hand, the Arrangement on Guidelines for Officially Supported Export Credits was binding for the signatories and here in 1987 the United States scored some success. The United States had been particularly concerned with tied aid and with mixed credits in particular. The bulk of the aids given by industrial countries to developing ones, either as pure grants or concessional loans, were tied to procurement in the donor country or in the donor

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country and a limited number of developing countries. The combination of a tied aid with a commercial or officially supported loan was called mixed credit. The 1978 Arrangement requested that tied aid credits had a grant element of at least 15 percent. Loans with a grant element lower than 15 percent were not prohibited but were submitted to prior notification. When the no-derogation engagement was adopted in 1982, tied aid credits, whether single source or mixed, were not allowed to have a grant element of less than 20 percent, except for matching non-conforming credits offered by other countries.55 The grant element is a measure of the concessionality of a loan, which is calculated as the difference between the face value of the loan and the discounted present value of the service payments the borrower will make over the lifetime of the credit, expressed as a percentage of the face value.56 Below the grant element issue there were two different perspectives on tied aid. The United States had traditionally focused most of its foreign assistance on helping developing nations meet basic human needs, leaving the financing of more important projects to commercial credits, and therefore to competition among credit institutions.57 Some other industrial countries, among which in particular France and Italy, believed instead that tied aid might go beyond meeting basic needs and help developing countries to carry out projects that could secure a qualitative leap in their level of development, at the same time not failing to provide some benefits to the generous industrial country: a win-win for both developing country and developed country offering credit at better conditions than the usual financing at market terms, which could not be easily repaid by the receiver. For instance, a grant with a 100 percent grant element could finance a modest $100,000 aid project, burdening the donor’s budget for an equivalent amount. A tied aid credit or a mixed credit of $1,000,000 with the same burden for the budget, but with a lower grant element ratio, could finance a much more ambitious project: actually, a great number of industrial development initiatives that still haunt countries across the Atlantic (Chinese steel plants are a good example) were financed through these kinds of credits. There was, however, a negative fallout: they displaced ordinary commercial credits offered by competing nations’ banks. The trend in the first half of the 1980s could not help limit the attraction of tied aid credits. Between 1982 and 1983 OECD countries’ exports of capital goods fell by 6 percent to $327 billion, and capital goods exports to developing countries shrank by 22 percent.58 It was, therefore, difficult for both developed and developing nations to resist the siren song of tied aid credits. The United States claimed that tied aid practices were severely handicapping its exporters in the competition for capital goods transactions. The United States started new negotiations in the OECD to significantly increase the concessionality; that is, the cost of tied aid credits so as to discourage their offer. When the negotiations stalled in 1985, the executive proposed a “war chest” legislation to bolster US negotiating leverage, and in October 1986, Congress announced a two-year $300 million war chest program as part of the reauthorizing legislation of the Eximbank.59 The following November, the Eximbank offered two highly concessionary $100 million lines of credit to Indonesia and Thailand, countries where US high technology export sales had been lost allegedly because of concessional financing provided by foreign governments.60 The move, apparently, bore fruit. After protracted negotiations, in March 1987 the OECD major industrialized nation agreed to increase the grant element of tied aid credits.61 The

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grant element was increased to 30 percent as from July 1, 1987 and to 35 percent as from July 1, 1988; it was increased to 50 percent for loans to the least developed countries. Also, the way to calculate the grant element was changed: since 1969 a 10 percent interest rate had been used to assess the discounted present value of service payments, which ignored the different cost of borrowing in different currencies and favored low interest rate currencies. It was replaced, in two stages, by a differentiated discount rate based on the commercial interest reference rate (CIRR) of each currency utilized in the financing. The US success, however, did not curb the use of tied aid and the battle dragged on for six years till the so-called Helsinki Package of 1992.62 As regards export credits not involving tied aid, the small interest rate subsidies allowed under the Arrangement on export credits were further reduced, and from July 1988 loans to industrialized countries could only be provided on commercial terms.63

UNCTAD VII The seventh quadrennial UNCTAD conference, held in Geneva from July 7 to August 3, 1987, marked a significant victory for the United States. In the words of the USTR, the United Nations Conference on Trade and Development, previously “characterized by politically slanted rhetoric and analysis based on an erroneous ‘North/South’ world view”, was finally able to achieve major progress “by infusing its discussions with a greater sense of pragmatism”, leading to recommendations that would form the basis for its future work.64 The Final Act of the conference, in which the US position had the support of the EC, recognized the importance of the Uruguay Round in bringing about growth of trade, assigning to the United Nations Conference a supporting role, actually limited to the production of data on the developing countries’ economies.65 Though recognizing the role of the industrialized countries in improving the world economic environment, the conference did not fail to underline the essential role of the developing countries in ensuring their own development through their domestic policies, which had to remove extant restrictions and rely on market forces. As regards commodities, the Final Act recognized the growing difficulties faced by many commodity-exporting developing countries, but, in line with the American perspective, stressed the crucial role of market forces in overcoming such difficulties. The developing countries’ proposals for an international conference aimed at reforming the international monetary system and for an enhanced role of the International Monetary Fund (IMF) in surveying capital flows and exchange rates did not find a place in the Final Act. The Act, however, recognized the need to pursue an approach to the debt problem of the developing world which should involve a balance between domestic adjustment and external financing. The decisions in the UNCTAD must, therefore, be seen in connection with the developments in the new negotiating round in the GATT. In the past, developing countries had played a minor role in previous GATT rounds and their stronghold had been the UN Conference on Trade and Development where they had, vociferously, though hardly ever with great success, appealed for support and concessions from the industrial world. Now, instead, they had to accept willy-nilly, for greater integration

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into the GATT system, whose agenda in the new round was, however, mostly dictated by the developed countries. A growing rift in treatment and attitudes was also likely to emerge between newly industrialized developing countries and so-called least developed countries.66 Although the Punta del Este Declaration stated, in line with long-established GATT rules, that reciprocity was not required for developing countries, the successful resolution of many subjects of negotiation called for concessions by developing countries and not only by the newly industrialized ones. For instance, even countries which did not belong to the newly industrialized group had to make concessions, or at least show goodwill, in areas such as trade and investment, intellectual property rights or agriculture, if they hoped for more favorable treatment for trade in tropical and natural resources, textiles and clothing, and export restrictions imposed by their industrialized counterparts. The newly industrialized countries in particular were expected to accept a role in international trade analogous to that of their industrial predecessors. On the one hand, this would imply the dismantling of barriers to foreign goods and services and, on the other, the end of their participation in the Generalized System of Preferences (GSP) granted to the bulk of developing countries. The only questions were the speed and extent of the process. Were they to immediately abide by GATT rules or should they be granted a transitional phase-in period? As regards the GSP, their position as beneficiaries of the system was to come increasingly under threat either because they graduated to the status of no longer developing countries or because a growing number of their shipments were exceeding the threshold above which exports were deemed as potentially competitive with industries of industrial importing countries.

Notes 1 2 3 4 5 6 7 8 9 10 11 12 13 14

Henry R. Nau, The Myth of America’s Decline: Leading the World Economy, 255. Alan Oxley, The Challenge of Free Trade, 61 et seq. OECD Meeting of the Council at Ministerial Level in April 1985. Communiqué. www. g7.utoronto.ca/oecd/oecd85.htm (accessed June 15, 2016). Bull.EC, 3-1985, point 2.2.12; Europe Agence Internationale d’Information pour la Presse, n. 4052, n. 4053. Ronald Reagan, The Reagan Diaries, May 2, 1985. Ibid., May 3, 1985. John Croome, Reshaping the World Trading System, 24. Edith Cresson, “French Attitude to a New GATT Round”, The World Economy, Vol. 8 (1985), n. 3, 317 et seq. GATT, Special Session of the Contracting Parties GATT/AIR/2180, July 26, 1985. John Croome, Reshaping the World Trading System, 26. GATT, Decision of 2 October 1985. Decision of the Contracting Parties L/5876, October 3, 1985. GATT, Contracting Parties Forty-First Session 1985. Decision by the Contracting Parties. L/5925, October 28, 1985. GATT, Extension of Multifibre Arrangement Agreed, GATT/1390, August 5, 1986. On the origins of the Cairns Group see in particular Alan Oxley, The Challenge, chapter 8.

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15 See Tissa Rajapak et al., “The Evolving Role of Trade Diplomacy in Multilateral Trade Negotiations: Experience of Agricultural Trade Liberalisation”, Journal of International and Area Studies, Vol. 9 (2002), n. 2, 55 et seq. 16 GATT, Ministerial Declaration on the Uruguay Round. MIN.DEC, September 20, 1986. 17 GATT, Preparatory Committee Record of Discussions—Discussion of 4–5 February. PREP.COM (86) SR/2, March 18, 1986. 18 GATT, Preparatory Committee Record of Discussions—Discussion of 5–7 May, PREP. COM (86) SR/6, July 16, 1986. 19 GATT, Preparatory Committee Record of Discussions—Discussions of 17–20 March. PREP.COM (86) SR/4, May 23, 1986. 20 GATT, Preparatory Committee Record of Discussions—Discussions of 8–31 July. PREP. COM (86) SR/9, August 26, 1986. 21 See David Greenaway, “Trade Related Investment Measures: Political Economy Aspects and Issues for GATT”, The World Economy, Vol. 13 (1990), n. 3, 367 et seq. 22 See Alan Oxley, The Challenge, 157. 23 Multilateral Trade Negotiations The Uruguay Round (hereinafter U.R.), Negotiating Group on Subsidies and Countervailing Measures, Communication from the United States. MTN.GNG/NG10/W/1, 15 March 1987. 24 Twenty-ninth ARPTAP, 1988, 27; also Patrick J. McDonough, “Subsidies and Countervailing Measures”, in Terence P. Stuart (ed.), The GATT Uruguay Round: A Negotiating History (1986–1992) (Deventer and Boston: Kluwer Law and Taxation, 1993), 847–49. 25 U.R., Negotiating Group on Subsidies and Countervailing Measures, Communication from Switzerland. MTN.GNG/NG10/W/17, February 1, 1987. 26 U.R., Negotiating Group on Subsidies and Countervailing Measures, Communication from the United States. MTN.GNG/NG10/W/20, June 15, 1988. 27 Patrick J. McDonough, “Subsidies and Countervailing Measures”, in Terence P. Stuart (ed.), The GATT Uruguay Round, 855. 28 U.R., Negotiating Group on Trade-Related Investment Measures, Submission by the United States. MTN.GNG/NG12/W/4, 11 June 1987; also Keith E. Maskus et al., “Developing New Rules and Disciplines on Trade-Related Investment Measures”, The World Economy, Vol. 13 (1990), n. 3, 526 et seq. 29 U.R., Negotiating Group on Trade-Related Investment Measures, Submission by the United States. MTN.GNG/NG12/W/11, May 31, 1988. 30 U.R., Negotiating Group on Trade-Related Investment Measures, Submission by the European Communities. MTN.GNG/NG12/W/10, May 14, 1988. 31 See William A. Fennel et al., “Trade-Related Investment Measures”, in Terence P. Stuart (ed.), The GATT Uruguay Round, 2081. 32 U.R., Negotiating Group on Trade-Related Investment Measures, Statement by Malaysia, MTN.GNG/NG12/W/13,16 June 1988. 33 Daniel Gervais, The TRIPS Agreement. Drafting History and Analysis (London: Sweet and Maxwell, 1998), 9; also Gary Clyde Hufbauer et al., Trading for Growth: The Next Round of Trade Negotiations (Washington DC: Institute for International Economics, 1985), 73 et seq. 34 U.R., Negotiating Group on Trade-Related Aspects of Intellectual Property Rights, Including Trade in Counterfeit Goods, Suggestion by the United States for Achieving the Negotiating Objective. MTN.GNG.NG11/W/14, 20 October 1920. 35 Congress of The United States—Congressional Budget Office, The GATT Negotiations and U.S. Trade Policy, 42. cbo.gov/publication/16361 (accessed April 15, 2020).

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36 U.R., Group of Negotiations on Services, Program for the Initial Phase of Negotiations. MTN.GNS/5, February 2, 1987. 37 U.R., Group of Negotiations on Services, Communication from India. MTN.GNS/W/4, March 11, 1987; Group of Negotiations on Services, Communication from Brazil. MTN.GNS/W/3, March 11, 1987. 38 U.R., Group of Negotiations on Service, Communication from the United States. Concepts for a Framework Agreement in Services. MTN.GNS/W/24, October 27, 1987. 39 See Jimmie N. Reyna, “Services”, in Terence P. Stuart (ed.), The GATT Uruguay Round, 2368. 40 U.R., Negotiating Group on Agriculture, United States Proposal for Negotiations on Agriculture. MTN:GNG/NG5/W/14, July 7, 1987: also Clayton Yeutter, “US Negotiating Proposal on Agriculture in the Uruguay Round”, in Ernest Ulrich Petersmann et al. (eds), The New GATT Round of Multilateral Trade Negotiations. Legal and Economic Problems (Deventer: Kluwer Law and Taxation Publishers, 1989), 263. 41 Jimmye S. Hillman, “The US Perspective” in K.A. Ingersent et al. (eds), Agriculture in the Uruguay Round (Houndmills: Macmillan, 1994), 37. 42 Ibid., 33. 43 Ernest H. Preeg, Traders in a Brave New World. The Uruguay Round and the Future of the International Trade System (Chicago: University of Chicago Press, 1995), 97. 44 Gary Clyde Hufbauer et al., Trading for Growth, 52. 45 Twenty-ninth ARPTAP, 1988, 26. 46 Rod Tyers, “The Cairns Group Perspective”, in K.A. Ingersent et al. (eds), Agriculture in the Uruguay Round, 88–109. London: Palgrave Macmillan. 47 U.R., Negotiating Group on Agriculture, Summary of Main Points Raised at the Third Meeting of the Negotiating Group on Agriculture, 6–7 July 1987, Note by the Secretariat. MTN.GNG/NG5/W/18, October 8, 1987. 48 Communication from the Commission to the Council, The Negotiation on Agriculture within the Uruguay Round. SEC (87) 1520 def—8 October 1987; U.R., Negotiating Group on Agriculture, European Communities Proposal for Multilateral Trade Negotiations on Agriculture. MTN.GNG/NG5/W/20, July 26, 1987; also K.A. Ingersent et al., “The EC Perspective”, in K.A. Ingersent et al. (eds), Agriculture in the Uruguay Round, 61 et seq. 49 GATT, Negotiating Group on Agriculture, An Approach for a Concerted Reduction in the Long Term, Submitted by the European Community. MTN.GNG/NG5/W/82, October 21, 1988. 50 U.R., Negotiating Group on Agriculture, A Framework for Agricultural Reform Submitted by the United States. MTN.GNG/NG5/W783, November 9, 1988. 51 Bull.EC, 11-1988, point 2.2.2. 52 Twenty-ninth ARPTAP, 1988, 25. 53 U.R., Trade Negotiations Committee Meeting at Ministerial Level Montreal December 1988. MTN.TNC/7(MIN), December 9, 1988. 54 A detailed and colorful description of the events in Montreal is provided by Alan Oxley, The Challenge, 166 et seq. 55 See John E. Ray, “The OECD Consensus on Export Credits”, The World Economy, Vol. 9 (1986), n. 3, 308. 56 OECD, Glossary of Statistical Terms. 57 See Catherine P. Rosefsky, “Tied Aid Credits and the New OECD Agreement”, University of Pennsylvania Journal of International Business Law, Vol. 14 (1993) n. 3, 438 et seq.

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John E. Ray, “The OECD Consensus”, 308. Twenty-ninth ARPTAP, 1988, 37. Ibid. Ibid.; David J. Blair, Trade Negotiations in the OECD. Structures, Institutions and States (London and New York: Routledge, 2010), 65. Catherine P. Rosefsky, “Tied Aid Credits”, 450. OTAP 40th Report, 1988, 51. https://www.usitc.gov/publications/332/pub2208_0.pdf (accessed August 3, 2019). Twenty-ninth ARPTAP, 1988, 35. Bull.EC 7/8 1987, point. 2.2.38; OTAP 39th Report, 1987, 3–5. https://www.usitc.gov/ publications/332/pub2095_0.pdf (accessed August 3, 2019). Congress of The United States—Congressional Budget Office, The GATT Negotiations, 43 et seq.

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Conclusion What answers to the questions set out in the Introduction can be drawn from the facts reviewed in the preceding chapters? A remark is called for here: the facts do not provide a single, unilateral answer to each of the questions. Certainly, the facts support a prevailing conclusion, but this conclusion has its caveat, and it is often contradicted by other facts under scrutiny. A good example is provided by the issue of the causes of the United States’ growing trade deficit and of its impact on the domestic and international economy. In proportion to the size of the US economy, the deficit was not uncommonly large but, given the weight of the American economy in world output, its impact was conspicuous, acting as a transmitter of US growth to the rest of the world and as the mechanism through which the savings of the rest of the world were sucked into the United States, hampering, in various ways, the development of a number of trading partners.1 It should be noted that in real terms the trade balance had been negative since the end of the 1960s; the current account balance went definitively into the red in 1976 (Tables 1.2 and 1.4). During the Reagan years, from 1983 onwards, there was a remarkable surge in the deterioration of the two balances. There were two conflicting lines of thought on the causes of the trade deficit. The first, espoused prevalently though not exclusively by the FED, argued that there was a link between fiscal and trade deficits and that together they directly, or at least potentially, affected the domestic economy. The large federal budget deficit aggravated the constant savings shortfall, as the US savings rate was among the lowest in the industrial world. Even though the gap between investments and available savings was temporarily filled by foreign savings, as foreign investors were attracted to the expanding US economy and strong financial markets, the flow of foreign investments was always likely to be on the ebb in the medium term. While business investment had performed relatively well, it had not been fully financed by domestic savings, which as a share of disposable income had fallen below 5 percent in 1983, which was low even by US standards. Hence, in the longer term, inadequate savings would constrain the nation’s ability to invest in new plants, equipment, and jobs. Fiscal deficits were normal and even desirable in recessions, because they sustained sagging demand and assisted recovery, but the US fiscal deficit was expected to continue at high levels for several years, in spite of a consolidated recovery, causing the Treasury to compete directly with the private sector for the small national savings, thereby preventing companies from borrowing enough to modernize facilities, pursue new opportunities, and create jobs. The alternative line of thought, mainly adopted by the government, saw the current account deficit as the outcome and the counterpart of the confidence of foreign investors in the American economy, under the leadership of the Reagan administration. It was an economy that offered high returns for the capital invested, undented by greedy taxation. And the flow of capital was bound to help business modernization and 217

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stronger growth, thus prolonging the virtuous cycle. There was no evidence of a direct link between fiscal and trade deficits; rather, the flow of foreign capitals helped to moderate the competition between the public and private sectors, preventing interest rates from rising, to the benefit of the domestic economy. Till 1984, no specific intervention was deemed necessary. From the start of the second Reagan presidency, the view prevailed that the difficulties of specific sectors of the economy, including those competing with foreign imports and those struggling to secure an outlet in foreign markets, should be tackled first by depreciating the US dollar, with the active intervention of the main trading partner, and by curbing the fiscal deficit, but only through the curtailment of expenditure. Statistical evidence shows that net foreign investment had been marked in the previous decades by a constant outflow of American capital, save for sporadic and modest exceptions. From 1983 onwards, this net outflow was replaced by net inflow at an accelerating rate (see Table 1.6). The table also shows that the main cause of the gap between gross private domestic investment and available gross savings was the federal deficit, which was soaring from 1982 onwards, though starting to decline in 1987, in part due to the implementation of the Gramm–Rudman–Hollings Act. It also confirms a marked correlation between the trends of the federal and trade deficits during the Reagan years, which, in contrast, had not been noticeable in the previous period during which the fiscal deficit declined without any significant impact on trade (Figure 10.1). It appears too that the upward and downward movements of the American currency also affected the trade balance, taking into account its delayed effects, whatever their causes. Yet the picture is nuanced. Certainly, the federal deficit as a percentage of GDP reached its peak in 1983, a year of both recovery and a deterioration of the trade balance, accompanied by a flow of foreign capitals (Tables 1.1 and 1.6). The rate

Figure 10.1 Multilateral trade-weighted value of the US dollar (index numbers) and US trade and fiscal deficit over gross domestic product, 1977–88. Source: Economic Report of the President, transmitted to the Congress February 1992: Table B-107; Table B 98; Table B-68; own calculations.

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remained quite high over the following three years, but declined sharply in 1987. It was slightly higher in 1988 than in 1980, but lower than in 1975 and 1976, although it should be noted that the deficit was cyclical in 1975–76, whereas in the second half of the 1980s the real problem was the curtailment of a structural deficit. Secondly, despite the decline in the rate of fiscal deficit relative to GDP, the flow of foreign capitals towards the United States went on growing, only contracting in 1988, though quite sharply. Account should also be taken of the fact that the gap between US gross savings and gross investment did not result, in particular during the first half of the decade, in the accumulation of dollars in foreign reserves, but was balanced by the inflow of foreign capital. For instance, the stock of foreign direct investments more than doubled between 1980 and 1985, reaching $184,615. Between 1970 and 1980, it grew from $13,270 to $83,046 (Table 1.5). Hence, factors other than the federal deficit might have been at play here and could explain the trend in net foreign investment during the two Reagan presidencies, some joining and others offsetting the effect of variations in the US fiscal deficit. Prominent among these factors was the attractiveness of the US economy, not limited to the differential in interest rates, but including the whole gamut of favorable prospects of return on invested funds. Be that as it may, the management of the economy was a trump card for the administration, which used it skillfully. In particular, in 1984, the year of the re-election, GDP reached its highest growth rate since the 1950s; in the final year of the Reagan presidency the economy was especially buoyant. Both years were marked by a jump in gross private domestic investment, mirrored by the rise in gross private savings, due to the increase in business savings, which were stimulated by the administration’s fiscal policy. It is arguable that neither of them would have taken place in the absence of the foreign capital inflows that offset the curb in self-financing imposed by the federal deficit (see Table 1.6). Yet, the fact remains that from the outset of the Reagan administration, the United States was able to consume more than it produced, and this remained substantially the same in the following decades. Was the vaunted success of the Reagan administration’s management of the economy the fruit of supply-side economics or was it a confirmation of the validity of post-Keynesian policies? It is submitted here that the Reagan experiment in its implementation was a cross between the two and that, all in all, the greater share should be attributed to the latter component.2 The fiscal deficit, though finally declining in 1988, soared for most of the presidency; government purchases grew at a higher rate than private fixed investments; public expenditure as a whole went on growing as defense spending reached its peak only in 1988, although its growth rate had started to decline two years earlier, and the ax on most discretionary programs was not as severe as it was supposed to be, which means that the income available to consumers was not affected. The same went for private investments, the demand for which benefited from tax cuts. Likewise, it is extremely difficult to give an answer to the question of the extent and causes of the increase in protectionist and unilateral tendencies during the Reagan presidencies. The easy answer is that the executive talked “free trade” for the general public, whilst acting “protectionist” for the benefit of specific industries. At the same time, Congress predominantly embraced protectionist and interventionist causes, and even had to be kept in check by the executive. This answer may well be right but it

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needs refinement. Certainly, protectionist policies had been adopted in the previous decade, but their number and scope grew in the Reagan years, at least till Malcom Baldrige took the helm at the Commerce Department. In particular, unfair trade proceedings, nominally ADs and CVDs, were often used for protectionist ends in the 1970s and the statutes of the decade, which went well beyond the letter of GATT, made them the instrument preferred by US import-competing firms aiming to curb foreign imports. Actually, the amendments adopted during the 1980s were not conspicuous. Yet the number of these proceedings swelled during the decade and, which is worth noting, the specter of their enforcement prompted many foreign countries to accept measures that were far from being in conformity with the provisions of the General Agreement. In the 1970s, the United States had been one of the few GATT members to initiate countervailing proceedings and to apply countervailing duties. However, their number soared from seven in the year ending in June 1981 to seventy-five over the following twelve months, whilst the number of provisional measures jumped from five to forty-six. Nevertheless, in most cases the proceedings did not result in the imposition of duties, soon being replaced by an arrangement with the European Community which was forced to accept a curtailment of the bulk of its steel exports to the United States. After a brief respite during which the number of proceedings fell back to a 1970s level, in the months from July 1984 to June 1985, the initiation of proceedings jumped back up to sixty cases and provisional measures rose to thirty-nine, coinciding with the negotiation of wider import restrictions on steel from several countries. Likewise, though the United States was traditionally a heavy user of antidumping proceedings, along with Australia, Canada, and the EC, the number of such proceedings in the United States became particularly conspicuous in the twenty-four months from July 1985 to June 1987, when the US administration managed to convince Japan to participate in a worldwide price cartel in which it had to impose and monitor high prices for its semiconductors. The threat of the imposition of quotas by Congress was skillfully exploited by the executive to induce Japan to generously offer a temporary but renewable curb on its motor vehicle exports to the United States, so as to allow American firms to get back on their feet. The Department of Commerce responded to the plea of US textiles and clothing producers for more restrictive import limits within the MFA framework. According to data provided by the United States, imports of steel, machine tools, automobiles, textiles, and meat, which were subject to some form of voluntary restraint arrangements, accounted for nearly 10 percent of total merchandise imports in 1988.3 Certainly a non-negligeable rate, but not such a conspicuous one either. Most scholars and commentators on economic developments did not fail to note that, admittedly only in the short-term, the foregoing benefitted the rescued industries rather than consumers, and had unintended but foreseeable effects, such as higher profits and a strengthening of the market-conquering ability of foreign competitors. What is, however, controvertible is the argument that the Reagan administration was motivated in these cases by political preference for certain industries, or by the need to satisfy Congress. On the one hand, the protection afforded to steel and automobiles had its bipartisan motivation in the weight of these basic industries in the national economy, and the scheme to improve the position of the semiconductor industry in its

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race with Japanese firms had its roots in the pivotal role that semiconductors had for a wide range of high-tech industries. On the other hand, the executive opposed the statutory imposition of quotas for industries that had strong bipartisan clout in Congress, such as non-rubber shoes, textiles, and apparel. There were several reasons for the administration’s opposition: apart from the fact that imports of textiles and clothing were already limited within the MFA framework, the probability of withstanding foreign competition was extremely low, and, since the exporting countries were far from willing to adopt VERs, any imposition of quotas by the United States would have clashed with the executive’s stated policy that for the betterment of the world economy it was necessary to open domestic markets to foreign products. Moreover, the idea of a protectionist Congress, trying to interfere or even supplant the executive in the management of trade policy could not be accepted, at least if one looks at the final stages. In their dialogue with Congress, the two USTRs managed to convince the lawmakers to only marginally enhance the protectionist contents of previous legislation, such as that on countervailing measures. Neither the Trade and Tariff Act of 1984 nor the Omnibus Trade and Competitiveness Act of 1988 imposed statutory protectionism, nominally through the imposition of quotas, nor did they impose direct congressional control over trade. The lawmakers chose instead to widen the legislative branch’s power to monitor the engagement of the executive in pursuing unfair practices and enhancing market access abroad, and in retaliating, if necessary, to prompt reluctant foreign states to accede to US requests.4 The two statutes also granted fast track authority for bilateral and Uruguay Round negotiations. Both Congress and the executive supported a stark reaction to obstacles allegedly established by foreign countries to the entry of American products and investments. Therefore, on the whole, the two branches preferred the expansion of American industry and of its products abroad to protectionist measures at home. However, more than a few analysts pointed out that the commitment to breaking into foreign markets, those of Japan and the NICs in particular, might well boil down to managed trade or, in any case, to the imposition of US political and economic strength, even when it clashed with international trade rules and did not always reflect the actual competitiveness of American firms. Just three months after the conclusion of the Reagan presidencies, forty economists headed by Jagdish Bhagwati noted that the power provided by section 301 and its strengthened variants under the Act of 1988 allowed the United States to unilaterally establish whether the policies of foreign states were in breach of legal obligations or otherwise unreasonable and discriminatory against US companies, and thus to demand concessions without offering any of its own. The implementation of these unilateral powers might be met with acquiescence from weak trading partners, but could also attract reaction from strong ones, and in some cases could result in the infringement of GATT rules, as members of the organization were not free to raise bound tariffs on manufactured goods at will.5 The attitudes of the executive and of Congress are reflected in the international negotiations carried out at bilateral and multilateral levels. The administration made it clear that the progress achieved in the previous decade had only been partial and sometimes flawed. Bilateral negotiations had both a minimal and a wider goal. The former was simply aimed at securing unrestricted access to American investments and

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freedom to repatriate their proceeds and the capital invested; the latter aimed to set a wider agenda which coincided with what the United States hoped to negotiate at the multilateral level, in particular in a new GATT round. In the prospective talks, the United States wanted to address the following new issues: services, which were not regulated by the General Agreement, but accounted for the major share of US GDP; requirements imposed on foreign investors having a distorting effect on trade; and the defense of goods incorporating advanced technology whose trade was deemed to be frequently distorted by various forms of government intervention, or by the ability of foreign firms to counterfeit them with impunity. A fourth goal, full integration of agriculture in a liberalized trade regime, was soon added to the others, under pressure from this sector in the American economy which was undergoing a steep decline. The USTR, William Brock, successfully pressed for a GATT meeting at ministerial level in late 1982, in which the concerns mentioned above were to be discussed along with antidumping and countervailing measures, the reform of the safeguarding regulations and of the dispute settlement regime, and improved integration of the developing countries in the international trade system. On previous occasions, the successful outcome of a ministerial meeting had signaled the launch of a new trade round. However, the meeting was far from fulfilling the hopes of the United States: the developing countries showed no interest in addressing subjects like services and the protection of intellectual property rights, and as regards their further integration into a free trade system, did not fail to note that the system was far from free, as borne out by the long-standing Multifiber Arrangement and by the OMAs and VERs imposed by the industrialized countries. The EC was unwilling to reopen discussions on farm trade, which would have endangered an agreement reached just three years earlier and which did not pose any substantial threat to its Common Agricultural Policy. The stalemate reached in the meeting did not nip the process in the bud: studies and reports on the subject submitted during the conference paved the way to the eventual launch of a new multilateral trade round. But it was a long time coming, so the ultimate success could not be claimed by Brock but was left to the statecraft of his successor, Clayton Yeutter. Yeutter’s efforts were facilitated by the skill of the new Treasury Secretary, James Baker. The EC, and in particular France among its member states, objected to starting a new trade round because they thought its usefulness was bound to be limited unless it was accompanied by an agreement on a currency policy aimed at curbing the impact of the soaring dollar and the upward pressure of US interest rates. This objection was neutralized by the fact that, by the end of 1985, Baker had managed to convince the main industrialized countries that concerted efforts on a multilateral scale were needed to bring the value of the American currency down, even though, in reality, the root cause of the rise in the dollar lay in the US administration’s economic policy choices. Despite the initial reluctance shown by many GATT members to discussing certain items in a prospective new round, the United States managed to identify and exploit subjects of common interest not only with other industrialized countries, but also with many developing ones. The opponents were cut down to a minority and preferred to agree to launching the eighth round of multilateral trade negotiations. The Punta del Este Declaration of September 1986 included all the subjects that the United States deemed essential. Progress was made in the following years, although there were still

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various contentious issues, including trade-related intellectual property rights, selectivity, the integration of the regime for textiles and clothing into GATT and, above all, agriculture. A ministerial meeting was convened for late 1988 to conduct a MidTerm review aimed at establishing a solid base for the full and complete success of the negotiations and, in the US hopes, increasing the likelihood of the American position on controversial issues being accepted. The long standstill in GATT initiated by the 1982 ministerial meeting induced the United States to explore alternative ways of bringing to fruition, though on a limited scale, its perspective on the reform of the international trade regime. The solution was to take the form of the establishment of a new kind of free trade area with selected partners, as the agreements did not only address tariffs on imported products but also non-tariff barriers and services. The two free trade agreements signed with Israel and later with Canada were motivated by several factors which went well beyond sheer economic interest. The agreement with Israel was meant to create a modest showroom of the advantages of implementing US trade goals with a small developing country that was not constrained, in the US view, by ideological guidelines. It also aimed to buoy up an important political client at a time of economic distress. Canada and the United States were each other’s most important trading partners, with the exception, perhaps, of the European Community taken as a whole. The same could be said of investments into the two countries. The attitude of Canadian firms and politicians towards a free trade agreement with the United States was characterized by two contrasting fears: on the one hand, concern about the multitude of obstacles imposed and the severity of US measures designed to hinder the flow of imports, all causing a threat to its domestic industries; on the other, fear that the Canadian economy might be phagocytized by the powerful industries south of the border. The new Canadian prime minister, the progressive conservative Brian Mulroney, opted for further integration with their southern neighbor. He came under attack for this and for certain other choices he made from many sections of the political spectrum, which put his survival in government in serious danger. In the United States, the prospect of a free trade area met with a mixed reception: some sectors of the US economy saw an opportunity to enhance their presence in the Canadian market; others were opposed to an agreement, believing that a free trade area would allow unfairly subsidized Canadian products to enter the US market tariff free, thereby undercutting US producers. Congress did not show particular interest in the agreement. It was the White House that favored the negotiations, as Reagan saw in Mulroney a like-minded companion and a strategic partner in North America, whose importance went well beyond economic affairs. Yet, in the short run, the CUSFTA did not alter the normal course of economic relations between the two countries and its role was quite soon subsumed under a wider and more controversial economic framework in which the attention of the United States was mainly turned towards Mexico. As regards bilateral relations with the main trading partners, the United States aimed to expand unhindered access for its exports and investments. During the second Reagan presidency in particular, the efforts of the administration were directed to ensuring that liberal reforms, whether already introduced or prospective, should also apply to and therefore benefit US nationals.

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The foregoing shows that several players contributed to the multifaceted pattern of the US trade economy in the Reagan years. On the one hand, there were the lawmakers who did not form a single block but wore the badges of the Republican and Democratic parties, the two dominant parties in the US Congress, although there were also many bills which had bipartisan support. On the other hand, there was the executive, within which the dominant trade policy shapers were Malcolm Baldrige, secretary of Commerce, William Brock, and Clayton Yeutter, the USTRs, Donald Regan, former secretary of the Treasury, and his successor James Baker. Was the president himself a prominent figure in shaping this complex US trade policy? There’s no denying that Ronald Reagan was the best spokesman his administration could have had. His grasp of the nuts and bolts of such a complex policy is far more doubtful. In the economic area, Reagan’s interest and statecraft were concentrated on fiscal reform, which was deemed by the president to play a pivotal role in relaunching the American economy. Yeutter relates that during his tenure as USTR he never had a “substantive one-on-one trade policy discussion with Ronald Reagan”.6 Yet, as pointed out by Machiavelli in The Prince, a good prince is not only the statesman who masters all the aspects of his rule, but also the one who is able to choose skillful and reliable advisers. Yeutter adds that he knew trade policy well and the president had confidence in his ability, and, therefore, there was no need for presidential involvement except when it was necessary to interagency discussion at the highest level. Indeed, Reagan was able and willing to exercise his leadership when trade was just a cog in a wider political scheme to which the president gave priority. In the Caribbean Basin Initiative case, Reagan, in keeping after all with traditional American policy, aimed at withstanding international interference and costly government involvement in a region which lay within an area that was the preserve of American private companies. In the Siberian Natural Gas Pipeline case, Reagan wanted to exploit to the full the decline which had characterized the Soviet economy since the second half of the 1970s, fearing that the project might provide the USSR with a lifeline. He also wanted the Western European states to remain unwavering allies of the United States and refrain from doing business on cozy terms with what he had dubbed the Evil Empire. In this, he met the opposition not only of the European countries but also of many American firms who hoped to take part in the project. The facts proved him right: just ten months after Reagan’s departure, the Soviet empire started to crumble for various reasons, with the weight of economic stresses and strains being prominent among them.

Notes 1 2 3 4

Jeffrey R. Shafer, What the U.S. Current Account Deficit of the 1980s Has Meant for Other OECD Countries (OECD Economics Studies, n. 10, 1988), 150. See David Harvey, A Brief History of Neoliberalism (Oxford: Oxford University Press, 2005), 5 et seq. Trade Policy Review. United States of America, 1989 (Geneva: General Agreement on Tariffs and Trade, 1990), 175. J. David Richardson, “U.S. Trade Policy in the 1980s”, 646.

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“Statement by Forty Economists on American Trade Policy”, The World Economy, V. 12 (1989), n. 2, 265. Clayton Yeutter, “Reagan, Bush and the Future of International Trade”, in Kenneth W. Thompson (ed.), The Reagan Presidency. Ten Intimate Perspectives of Ronald Reagan (Lanham, London: University Press of America, 1997), 136.

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234

Index The letter f following an entry indicates a page with a figure. The letter t following an entry indicates a page with a table. Abe, Shintaro 167 Advance Micro-Devices Inc., 171 Agreement Concerning Automotive Products between the Government of Canada and the Government of the United States (APTA) 145, 151 Agricultural Adjustment Act (1933) 184 Agricultural Trade Development and Assistance Act 91 Agriculture and Commerce Department 165 Agriculture and Consumer Production Act (1973) 86 Agriculture and Food Act (1981) 87 agriculture industry 1, 43–4, 184–9t, 222 Agriculture and Consumer Production Act (1973) 86 Agriculture and Food Act (1981) 87 Australia 198 Cairns Group 198, 207 Canada free trade negotiations 149 CAP 87, 89, 90, 196 CBI 56 CCC 85–6, 87, 91 citrus-pasta dispute 183–4 CUSFTA 150 dairy products 91 decline 84, 87, 184–5 developing countries 85 dollar appreciation/exchange rate 84–5, 87, 88 EC 45, 84, 87, 89–92, 181–4, 186, 196, 207–8, 209, 222 Egypt 91–2 expansion 84 export competition and problems 69, 84–92 export decline 87–8, 104

Export Enhancement Program 134 federal farm policy 85–8 Food Security Act (1985) 185 Food Security Improvement Act (1986) 185 GATT 45–6 GATT Uruguay Round 199–200, 206–8, 209 Japan 89, 92 loans 85–6, 87, 91, 134 meat 184 OECD 187, 209 Omnibus Trade and Competitiveness Act 134 PIK 88 production cuts 88 PSE 187 Soviet Union 88–9 subsidies 86, 87, 90, 206–8 tropical products 207, 208 USDA 88 wheat flour 90, 91 zero option proposal 206–7 aid 55, 56–7, 108, 209–11 alcohol industry 56, 122–3, 151, 155, 175 Algeria 186 Allen, Richard 54 American Business Conference 149 American Farm Bureau Federation 91 American Telegraph and Telephone (AT&T) 179 Annual Report of the Economic Advisors (1984) 31 antidumping 123, 128, 220 agriculture industry 92 CUSFTA 152 duties 5, 6

235

236 Omnibus Trade and Competitiveness Act 134, 136 semiconductor industry 171 steel industry 70, 71, 73, 74, 77 APTA (Automotive Products Agreement) 145, 151 Argentina 87, 89, 199 arms race 60 Arrangements on Guidelines for Officially supported Export Credits 47, 48–9, 209–10, 211 Asian NICs 174–5 AT&T (American Telegraph and Telephone) 179 Australia 87, 89, 198, 200 Auto Pact 145, 151 Auto Parts Moss 168 Automotive Products Agreement (APTA) 145, 151 Axilrod, Stephen 33 Baker, James aid 108 Canada free trade negotiations 148–9 as Treasury Secretary 7, 99, 101–2, 107, 110, 111, 222, 224 Balanced Budget and Emergency Deficit Control Act (1985) 101, 110 Baldrige, Malcolm 6, 60–1, 73, 77, 220, 224 Banker, Don 130 banking industry 177–8 benign neglect policy 28, 33, 34 Bentsen, Lloyd 79, 128, 131 Berne Convention 204 Bethlehem Steel Corporation 75 BICEP (Bonus Export Incentive Commodity Export Program) 185–7 see also EEP bilateral investment treaties (BITs) 40–1 bilateral negotiations 221–2 BITs (bilateral investment treaties) 40–1 Block, John 86, 89, 184–5, 186 Bonn Summit 196–7 Bonus Export Incentive Commodity Export Program (BICEP) 185–6 see also EEP borrowing 115 Brazil 123, 125, 199, 201, 204 Brock, William 6, 195, 224

Index as USTR 6, 39–42, 54, 120, 145, 222, 224 Canada 145 GATT 222 interest rates 18–20 service industry 40 TPC 54 trade policy goals 39–42 Brynner, Yul 175 Buckley, James 63 budget 13 balanced 14 deficits 32 Bush, George 79, 167 Cairns Group 198, 207 Canada 31, 54, 89, 109, 123 foreign investment 145–6 free-trade agreements 144–53, 223 Canada-United States Free Trade Agreement (CUSFTA) 144–53, 223 Canada-US Trade Commission 153 “Canadian Trade Policy for the 1980s” (discussion paper) 144 CAP (Common Agricultural Policy) 87, 89, 90, 181, 196 capital good market 161 capital movements 19t, 33 Caribbean Basin Economic Recovery Act (CBERA) 57–9 Caribbean Basin Initiative (CBI). See CBI Carter, Jimmy 3 color television imports 78 Carter administration 3–4, 70, 78–9 Japan auto parts 168 Soviet Union grain embargo 88 Casey, William 63 Caterpillar 62 CBERA (Caribbean Basin Economic Recovery Act) 57–9 CBI (Caribbean Basin Initiative) 53–9, 224 criticism 56–7 CCC (Commodity Credit Corporation) 85–6, 87, 91 commodities 185 Central America 53–9 Chicken Little (Disney, Walt) 62 China 124, 186

Index Chrysler 78 clothing and textile industries 220, 221 Canada free trade negotiations 149 CBI 55–6 decline 82 GATT Uruguay Round 200 import competition and problems 82–4 import cuts 124 import quotas 137 Mexico 155 MFA 82–4, 124, 137, 197, 198, 220, 221 CNC (competitive need clause) 122 CoCom (Coordinating Committee for Multilateral Export Controls) 60 Colombia 54, 199 Commerce Department. See DOC Commodity Credit Corporation (CCC) 85–6, 87, 91. See CCC Common Agricultural Policy (CAP) 87, 89, 90, 181, 196 comparative advantage 161 competition 128 see also foreign competition barriers 178–9 competitive need clause (CNC) 122 “Completing the Internal Market” (EC) 174 Congress 2, 7, 119–23 Canada free trade negotiations 149 CBI 57 99th 123–7 100th 127–37 Consultative Group of Eighteen 43 contract price thresholds 151 Cooper, Doral 141 Coordinating Committee for Multilateral Export Controls (CoCom) 60 Council of Economic Advisors 23 countervailing 5, 6, 123, 128, 220 agriculture industry 92 CUSFTA 152 GATT Uruguay Round 202–3 Mexico 154–5 Omnibus Trade and Competitiveness Act 134, 136 steel industry 73, 74, 77–8, 220 credit agencies 85–6 Cresson, Édith 197

237

Cuba 54, 57 cultural industries 152–3 cumulation 134 currency depreciation 107–8 currency exchange. See exchange market current account balance 18, 19t, 21 current account deficit 23, 31, 104, 107, 110, 111, 217 Axilrod, Stephen 33 Volcker, Paul 32 CUSFTA (Canada-United States Free Trade Agreement) 144–53, 223 dairy products 91 Danforth, John 79, 125 Davignon, Étienne 73 De Clercq, Willie 136, 183 de la Madrid, Miguel 155 debt 24, 113 defense Soviet Union 60 spending 20–1, 101, 102f Deficit Reduction Act (DEFRA) 34 DEFRA (Deficit Reduction Act) 34 Department of Commerce (DOC). See DOC developing countries 41–2, 49–51, 108 see also GSP agriculture industry 85 aid 55, 56–7, 108, 209–11 CBERA 57–9 CBI 53–9 debt obligations 23, 108 GATT 46–7, 58–9, 199, 201, 211–12 growth 85 imports 108 intellectual property rights 201, 204 MDFIs 108 MFA 82–3, 198 reciprocity 212 service industry 43, 204 tariff schemes 46, 58 UNCTAD 211 discriminatory 121 Disney, Walt Chicken Little 62 dispute settlement 121, 153, 201 DOC (Department of Commerce) 6, 128, 134

238

Index

licensing of technology commodities 127 MOSS talks 165 semiconductor industry 171 steel industry 71, 72, 73, 77 dollar agriculture industry 84–5, 87, 88, 186 appreciation 18, 20, 21–7, 31–2, 34, 84–5, 87, 88, 222 depreciation 99, 101–2, 103, 107, 109, 110–12 exchange rate 33, 84–5, 99, 103, 104f multilateral trade-weighted value 103f dollar-dominated assets 18 domestic saving/investment 29, 30t domestic spending 29 downstream dumping 120, 122 DRAMs (dynamic random access memories) 171 Dresser France 64 dumping 5, 86, 128, 171, 172, 173 downstream 120, 122 Dunkel, Arthur 43, 46 dynamic random access memories (DRAMs) 171 EC (European Community) 2, 31, 159, 176 agriculture industry 45, 84, 87, 89–92, 181–4, 186, 196, 207–8, 209, 222 banking industry 177–8 CAP 87, 89, 90, 181, 196 CET 181 citrus-pasta dispute 183–4 competition barriers 178–9 “Completing the Internal Market” 174 economy 109 enlargement 181–3 GATT 44, 45, 173, 181–2 GATT Uruguay Round 195–6, 207–8, 209 growth 109 interest rates 18 Israel free-trade agreement 142 Japan 173 merchandise deficit 104, 106t merchandise trade deficit 114 MFA 83, 198 1992 project 176–80 OECD 47

Omnibus Trade and Competitiveness Act (1988) 136 PTT providers 179 public procurement 176, 178–9 recovery 23, 109 semiconductor industry 173 steel industry 70, 71–5, 76, 77, 180, 220 subsidies 71, 72, 73, 77–8, 200 technology industry 161 telecommunication industry 179–80 textile and clothing industry 83, 139 n. 36 TPM 70, 71 TRIMs 203 US manufacturing in 176–7 US policies 26–7 US SNGP export embargo 64–5 Economic Recovery Trade Act (ERTA) 29 Economic Report of the President to Congress (1982) 18, 20 ECSC (European Coal and Steel Community) 72 Ecuador 108 EEP (Export Enhancement Program) 134, 185–7 Egypt 91–2, 186 El Salvador 54, 56, 57 electronic industry 167, 169 employment 29 mandatory notice provision 130, 131–2 energy industry 60–6, 151 see also oil industry EPROMs (erasable programmable read-only memories) 171, 173 erasable programmable read-only memories (EPROMs) 171, 173 ERTA (Economic Recovery Trade Act) 29 European Coal and Steel Community (ECSC) 72 European Commission 18 agriculture industry 89, 91–2 free trade 123 1992 project 179 Omnibus Trade bill 132 steel industry 71–4 telecommunication industry 179–80 European Community (EC). See EC excessive trade surplus 125

Index exchange market 99–103, 107, 108, 109, 110–11 intervention 26–9, 34 multilateral trade-weighted value of the dollar 103f Omnibus Trade and Competitiveness Act (1988) 135 Exchange Market Intervention Study 27 executive, the 1, 2, 6, 119–23 99th Congress 123–7 100th Congress 127–37 Eximbank (Export-Import Bank) 47–8, 49, 210 expenditure cuts 20–1, 101 Export Administration Act 62, 66, 126 Export Administration Amendments Act (1985) 127, 130 Export Enhancement Program (EEP) 134, 185–7 Export-Import Bank (Eximbank) 47–8, 49, 210 export targeting 126, 131 exports 4–5, 6, 31, 104, 105t 108 agriculture industry 84–92, 104, 181, 182, 185–9t barriers 164 Canada 144–53 CBI 55 citrus-pasta dispute 183–4 comparative advantage 161 control 126–7, 135 credit subsidies 42 developing countries 23 EC 23, 182 export credits 47–9, 62 growth 112, 114–15f Israel 141–4 Japan 159, 161, 163–4, 166, 168–9, 172, 173 manufacturing 114–15f merchandise trade balance 23 Mexico 153–6 national security 127 Omnibus Trade and Competitiveness Act (1988) 135 recession 21 service industry 39–40 South Korea 174

239

Soviet Union 60–6 subsidies 90, 123–4, 134 telecommunication industry 179 tied aid 210, 211 external deficits 32 FCNs (Friendship, Commerce and Navigation treaties) 40 FDIs (foreign direct investments) 24, 25t, 104–7, 115, 160t, 219 Japan 81–2, 107, 159, 160t, 162 South and East Asia 159, 160t Western Europe 159, 160t, 162 FED (Federal Reserve) 14, 29, 111 dollar appreciation 31, 32 fiscal deficit 23, 26, 102–3 federal farm policy 85–6 Federal Republic of Germany. See West Germany Federal Reserve (FED). See FED federal spending 13 Feldstein, Martin 23, 31, 99 finance industry 152 FIRA (Foreign Investment Review Agency) 145, 146 fiscal deficit 1, 14, 15t, 18, 29–31, 103–4, 109 Balanced Budget and Emergency Deficit Control Act (1985) 101, 110 Carter, Jimmy 3 cyclical 21, 23 DEFRA 34 developing countries debt obligations 23 dollar appreciation 23–4 expenditure cuts 101 FED 23, 26, 102–3 Friedman, Benjamin 20 GDP, relative to 218–19 growth 113, 219 International Trade Commission 20 OECD 113 Reagan, Ronald 21, 26 recession 21 reduction 113, 114 Reuss, Henry 20 Sprinkel, Beryl 20 Stockman, David 20–1 TEFRA 34 trade deceit, link with 217–18f

240

Index

Volcker, Paul 23, 26, 32, 33, 102 Williamsburg Summit (1983) 27–8 Fitzwater, Martin 132 Food Security Act (1985) 185 Food Security Improvement Act (1986) 185 foreign and trade policy Central America 53–9 controls 127 USSR 53, 59–66 foreign assets 115 foreign capital 33, 34–5 foreign competition 1, 2, 5 agriculture industry 87–92 barriers 178–9 CNC 122 iron and steel industries 69–78 motor vehicle industry 78–82 relief from 129–30 textile and clothing industries 82–4 foreign direct investments (FDIs). See FDIs foreign exchange markets 26 foreign investment 33, 34–5, 110, 113, 217–19, 222 see also FDIs Canada 145–6, 152 CUSFTA 152 GDP 107 Mexico 154 Foreign Investment Review Agency (FIRA) 145, 146 foreign savings 24 foreign trade 21 restrictions 125 forestry industry 166–7, 169 Fortress Europe 176 France 44, 196–7, 222 agriculture industry 89, 92, 186 exchange market 99–100 export credits 48 exports 115f GATT 196–7 SNGP 61, 64, 65 telecommunication industry 180 tied aid 210 free-trade agreements Canada 144–53, 223 Israel 141–4, 223 Mexico 153–6 free trade area 141, 144, 146–8, 155–6, 223

free trade policy 1, 2, 18, 26, 120, 123 Canada 123 Israel 123 Friedman, Benjamin 20 Friendship, Commerce and Navigation treaties (FCNs) 40 G-5 meeting (1985) 99–100 G-7 27 meeting, Louvre (1987) 110–11 Garn, Jake 66, 127, 130 GATT (General Agreement on Tariffs and Trade) 2, 42–7, 121, 220, 222–3 see also Tokyo Round agriculture industry 86, 90, 92 antidumping and countervailing duties 5 CBERA 58–9 CBI 58 citrus-pasta dispute 183–4 CUSFTA 152 EC 44, 45, 173, 181–2, 195–6 Enabling Clause 58 Japan 173 Mexico 155–6 Punta del Este Declaration 199–201, 212, 222 semiconductor industry complaints 173 steel industry 75 subsidies 90 UNCTAD 50 Uruguay Round 42, 195–209 GDP (gross domestic product) 7–8t, 16t, 24, 29, 103–4, 219 fiscal deficit, relationship with 218–19 General Agreement on Tariffs and Trade (GATT). See GATT General Motors 81 Generalized System of Preferences (GSP). See GSP Gephardt, Richard 125, 131 Gephardt Amendment 129, 130, 131 Germany. See West Germany Girard, Pierre-Louis 199 Glass-Steagall Act (1933) 177 GNG (Group of Negotiations on Goods) 201 GNP (gross national product) 7–8t, 103–4

Index GNS (Group of Negotiations on Services) 201 government debt 24 government expenditure 14, 15t government procurement 151–2, 179–9 EC 176, 178–9 Japan 161, 169–70 government receipts 15t Gramm-Rudman-Hollings Balanced Budget Act (1985) 101, 110, 218 Greenspan, Alan 111, 116 gross domestic product (GDP) 7–8t, 16t, 24, 29, 103–4 gross national product (GNP) 7–8t, 103–4 Group of Negotiations on Goods (GNG) 201 Group of Negotiations on Services (GNS) 201 growth 3, 112, 113–14 developing countries 85 EC 109 federal spending 13 Japan 109 GSP (Generalized System of Preferences) 57, 59, 120, 121–2, 142, 212 competitive need clause (CNC) 122 South Korea 175 Taiwan 175 Haferkamp, Wilhelm 73 Haig, Alexander 54, 63 Heinz, John 66 Hernandez Cervantes, Hector 155 Hills, Carla 209 Hollings, Ernest F, 137 Holmer, Lionel 61 Honda 79, 81 Hong Kong 83, 109, 124, 125 House Foreign Affairs Committee 66 “How to Secure and Enhance Canadian Access to Export Markets” (Kelleher, James) 146 Hungary 198 imports 4–5, 31, 104, 105t agriculture 69, 92, 182 Canada 144–53 CBI 57, 59 citrus-pasta dispute 183–4

241

CNC 122 color television imports 5, 78 cuts 124–5 developing countries 23 duties 125, 128, 143 EC 23, 180–2 escape clauses 74, 75 growth 109, 112, 114 GSP 57 iron and steel industries 69–78 Israel 142, 143–4 Japan 159, 166 merchandise trade balance 23 Mexico 153–6 motor vehicle industry 78–82 100th Congress 128–9 quotas 69, 137, 182 recession 21 relief 134 South Korea 175 Soviet Union 60 steel 180–1 subsidies 120, 122 Taiwan 175 telecommunication industry 125 textile and clothing industries 82–4, 124 TPM 70 TRIMs 201, 203–4 India 124, 197, 199, 204 Indonesia 210 Industrial Competitiveness Council 126 industry 1, 4, 119 agriculture. See agriculture industry alcohol 56, 122–3, 151, 155, 175 banking 177–8 competitiveness 33–4 cultural 152–3 electronic 167, 169 energy 60–6, 151 finance 152 foreign competition 1, 2 forestry 166–7, 169 insurance 174 iron and steel. See iron and steel industry military 5–6, 60 motor vehicle 78–82, 149, 151, 168, 220 oil 20, 57, 104, 132 paper 167

242 pharmaceutical 166, 168–9 political preference 220–1 profit 115–16 R&D 4 semiconductor industry 170–4, 220–1 service. See service industry shoe 124, 137 sugar 56 supercomputer 133–4, 170 technology 41, 126–7, 130, 161–2, 222 telecommunication 125, 165–6, 168, 179–80 textile and clothing. See textile and clothing industry tobacco 175 transportation 168 uranium 149, 151 wine 122–3 inflation 3, 18, 20, 21 insurance industry 174 Integrated Programme for Commodities (IPC) 51 Intel Corporation 171 intellectual property rights 45, 133, 167, 174, 200–1, 222 GATT Uruguay Round 204 interest rates 18, 20, 21, 29, 34–5, 111 Annual Report of the Economic Advisors (1984) 31 foreign savings 24 high 116 real interest rates 24 International Emergency Economic Powers Act (1977) 126 international finance 135 International Trade Commission (ITC)/ United States International Trade Commission (USITC). See ITC investment 24, 29, 30t, 33–4, 217, 219 see also foreign investment CBI 55, 56 CUSFTA 152 private domestic 33, 109, 112, 113, 116, 219 treaties 40–1 TRIMs 201, 203–4 Investment Canada 146 IPC (Integrated Programme for Commodities) 51

Index Iraq 91 iron and steel industries countervailing 73, 74, 77–8, 220 decline 69–71, 75–6 EC 180–1 EC competition 70, 71–5, 76, 77 import competition and problems 69–78 Mexico 155 TPM 70, 71 Israel 123, 141–4, 186, 223 Italy 61, 64, 65, 125, 210 ITC (International Trade Commission)/ United States International Trade Commission (USITC) 20, 128 import relief 134–5 motor vehicle industry 79 Omnibus Trade and Competitiveness Act 134 steel industry 74, 75–6, 77, 78 Ito, Masayoshi 79 J-curve theory 107–8, 112 Japan 2, 5, 28–9, 31, 110, 123, 159–74 agriculture industry 89, 92, 187, 207 clothing imports 124 color television exports 5, 78 Committee on International Economic Measures 163 electronic industry 167, 169 exchange market 99–100, 108, 110 exports 115f, 130, 131, 159, 166 FDIs 81–2 forestry industry 166–7, 169 GATT Uruguay Round 207 growth 109 imports 159, 166, 187 Kansai International Airport project 169–70 keiretsu 162, 164, 167, 168 merchandise trade deficit 104, 106t, 114 MOSS talks 163–9 motor vehicle industry 79–80, 81, 168, 220 NTT 165–6 Omnibus Trade and Competitiveness Act (1988) 133–4 paper industry 167

Index pharmaceutical industry 166, 168–9 public procurement 161, 169–70 public sector market 170 reform 163 semiconductor dispute 170–4, 220–1 SNGP 61, 65 Soviet Union 130 supercomputer industry 133–4, 170 surplus 114 technology industry 130, 161–2 telecommunication industry 125, 165–6, 168 Toshiba 130, 131, 135–6 trade surplus 125 transportation industry 168 Japan Manufacturing Association 168 Jaramillo, Felipe 199 Jaruzelski, Vojciech 59, 62 John Brown Engineering 64 Jordan 186 Kansai International Airport Corp (KIAC) 169 Kansai International Airport project 169–70 keiretsu 162, 164, 167, 168 Kelleher, James 147 “How to Secure and Enhance Canadian Access to Export Markets” 146 Kemp-Roth bill 3–4 Keynesian economics 3 KIAC (Kansai International Airport Corp) 169 Kirkpatrick, Jeane 63 Kongsberg Vaapenfabrikk 130, 135–6 Korea 108, 123 Leutwiller, Fritz 46 liberalization 44, 204 loans 85–6, 87, 91, 134, 184, 185 grant element 210–11 Louvre meeting (1987) 110–11 MacDonald Commission 146–7 McFadden Act (1927) 177–8 Machiavelli, Niccolò Prince, The 224 MAFF (market access fact-finding) talks 180

243

Malaysia 204 mandatory notice provision 130, 131–2 manufacturing 114–15f in EC 176–7 market access fact-finding (MAFF) talks 180 market-oriented Sector Selective (MOSS) talks 2, 163–9 marketing loads 134 Marshall-Lerner Condition 107–8 MDFIs (multilateral development financial institutions) 108 merchandise trade balance 23, 104, 106t, 107 merchandise trade deficit 4, 31, 110, 111–12, 114 Mexico 23, 54, 108 free-trade agreements 153–6 MFA (Multifiber Arrangement) 82–4, 124, 137, 197, 198, 220, 221 Micro Technology Inc., 171 military industry 5–6, 60 Millers’ National Federation 90 Mitterrand, François 196–7 mixed credits 209–10 Miyazawa, Kiichi 110 monetarism 3 monetary policy 14, 100–1, 116 Montreal Ministerial meeting 208–9 Morocco 186 MOSS (Market-Oriented Sector Selective) talks 2, 163–9 motor vehicle industry assistance programs 79, 80, 82 Canada free trade negotiations 149, 151 decline 78–9, 80 import competition and problems 78–82 Japan 220 MOSS talks 168 MTN (Multilateral Trade Negotiations) 200 Mulroney, Brian 146, 147, 148, 150, 223 Multifiber Arrangement (MFA) 82–4, 124, 137, 197, 198, 220, 221 multilateral development diplomacy 49–51 multilateral development financial institutions (MDFIs) 108 multilateral investment treaties 41

244

Index

Multilateral Trade Negotiations (MTN) 200 multilateral trade-weighted value of the dollar 103f Murkowski, Frank 169 Murphy, Peter 148 Nakasone, Yasuhiro 28, 163 National Association of Manufacturers 65, 131, 149 national security 127, 136 National Security Council (NSC) 53, 54. See NSC National Security Decision Directive (NSDD) 65 National Semi-conductor Corporation 171 national trade estimate (NTE) 121 natural resource subsidy 120, 122 negotiable eligibility 122 Netherlands 108 Netherlands Antilles 57 newly industrialized countries 212 Nicaragua 54, 57 1992 Project 2, 176–80 99th Congress 123–7 Nippon Telegraph and Telephone Corporation (NTT) 165–6 Nissan 81 non-tariff barriers 143 North Korea 83 North-South Summit 50 Norway 130, 135–6 NSC (National Security Council) 53, 54 Soviet Union 60–1 NSDD (National Security Decision Directive) 65 NTE (national trade estimate) 121 NTT (Nippon Telegraph and Telephone Corporation) 165–6 Nuovo Pignone 64 OAS (Organization of American States) 55 OECD (Organisation for Economic Cooperation and Development) 2, 42–3, 45–6, 47–9, 209–11 agriculture industry 187, 209 Steel Committee 72 US fiscal deficit 113

OECD Ad Hoc Group on Steel 72 Office of Technology Assessment 65 Office of the United States Trade Representative (USTR). See USTR oil industry 20, 57, 104, 132 see also energy industry Olmer, Lionel 71 OMAs (Orderly Market Agreements) 5, 47, 74, 78 omnibus law 128–9 Omnibus Trade and Competitiveness Act (1988) 132–7, 149, 156, 221 Schumer amendment 177 super 301 129, 133, 221 Omnibus Trade bill 129–32 100th Congress 127–37 open economy identity 32 Orderly Market Agreements (OMAs) 5, 47, 74, 78 Organisation for Economic Cooperation and Development (OECD). See OECD Organization of American States (OAS) 55 Ottinger, Richard 80 Oxley, Alan 42 Packwood, Bob 127, 128 paper industry 167 Paris Convention 204 payment in kind (PIK) 88 pharmaceutical industry 166, 168–9 Philippines 124 PIK (payment in kind) 88 Poland 59–60, 62, 63, 65, 88 political objectives 54 Portillo, José Lopez 54 Portugal 181–2 post-Keynesian policies 219 postal, telephone, and telegraph (PTT) providers 179 Prince, The (Machiavelli, Niccolò) 224 priority trade practices 133 producer subsidy equivalent (PSE) 187, 206 productivity 114, 116 profit 115–16 Protection of the Trade Interest Act 64

Index protectionism 69, 74, 79–80, 121, 122, 137, 219–21 Congress 119–20 France 1967 GATT Uruguay Round 199 Gephardt, Richard 125 Omnibus Trade and Competitiveness Act (1988) 136 PSE (producer subsidy equivalent) 187, 206 PTT (postal, telephone, and telegraph) providers 179 public procurement 151–2, 179 EC 176, 178–9 Japan 161, 169–70 Puerto Rico 56 Punta del Este Declaration 199–201, 212, 222 R&D (research and development) industry 4 Reagan, Ronald 13, 26, 224 agriculture industry 92, 207 CBI 55, 56 Chicken Little 62 de la Madrid, Miguel 155 defense spending 21 developing countries 50 EC 182 economic policy 18, 29 economic recovery 113 fiscal deficit 21, 26, 101 GSP 122 import cuts 124 Japan 28, 131, 163 mandatory notice provision 131–2 Mexico 156 Mitterrand, François 196–7 MOSS talks 163 Mulroney, Brian 146, 148, 223 Nakasone, Yasuhiro 163 Omnibus Trade and Competitiveness Act (1988) 137 Omnibus Trade bill veto 131–2 political rhetoric 54, 62 Reaganomics 29 SNGP 60, 62, 63–4 Trade and Tariff Act (1984) 120 Trudeau, Pierre 146 zero option proposal 207

245

Reagan first presidency (1981–1985) 13–14, 219 agriculture 69, 84–92 Central America 53–9 GATT 42–7 GDP 219 iron and steel industries 69–78 motor vehicle industry 78–82 multilateral development diplomacy 49–51 OECD 47–9 recovery 22–35 Soviet Union 53, 59–66 stagnation and recession 14–22 textile and clothing industries 82–4 trade policy goals 39–42 Reagan second presidency (1985–1989) 99, 219, 223 agricultural policy 184–9t Asian NICs 174–5 citrus-pasta dispute 183–4 criticism 115–16 EC 159, 176–84 EC enlargement 181–3 free-trade agreements 141–56 Japan 159–74 Japan, public procurement 169–70 Japan, semiconductor dispute 170–4 Montreal Ministerial meeting MOSS talks 163–9 1992 project 176–80 99th Congress 123–7 100th Congress 127–37 steel industry 180–1 Trade and Tariff Act (1984), legacy of 119–34 trade balance, recovery 110–16 trade balance, worsening 99–109 Uruguay GATT Round 195–209 Reaganomics 29 real interest rates 24 recession 21–2 reciprocity 119, 120, 122, 124, 178, 212 recovery 22–35, 113–14 Regan, Donald 6–7, 99, 224 Japan 28 taxation 21 regulation 13–14 Reisman, Simon 148

246

Index

“Report on Yen/Dollar Exchange Rate Issues” 28 research and development (R&D) industry 4 Reuss, Henry 20 Rockefeller, David 56 Rostenkowski, Dan 125, 128, 131 Rugman, Alan 147 safety clauses 77, 78, 128–9, 136 Saudi Arabia 186 savings 24, 217, 219 domestic 29, 30t, 112 domestic private 32–3, 112–13, 219 foreign 24, 32 SEA (Single European Act) 176 section 301 129, 130–1, 171, 174–5, 221 semiconductor industry 170–4, 220–1 Senate Banking Committee 66 sensitive products 130, 143 service industry 4, 39–40t, 143–4, 222 CUSFTA 152 developing countries 44 GATT 45 GATT Uruguay Round 201, 205–6 Shamir, Yitzah 141 Shamrock Summit 146 shoe industry 124, 137 Shultz, George 65 Siberian Natural Gas Pipeline (SNGP) 53, 59–66, 224 Single European Act (SEA) 176 SNGP (Siberian Natural Gas Pipeline) 53, 59–66, 224 South Africa 127 South Korea 5, 109, 124, 125, 174 alcohol industry 175 tobacco industry 175 Soviet Union 53, 59–66, 127, 130, 135, 136, 224 agriculture industry 88–9, 186 SNGP 53, 59–66, 224 Spadolini, Giovanni 64 Spain 181–2 Sprinkel, Beryl 20, 26 stagflation 3 stagnation 14–22 State Department 165 steel and iron industries

countervailing 73, 74, 77–8, 220 decline 69–71, 75–6 EC 180–1 EC competition 70, 71–5, 76, 77 import competition and problems 69–78 Mexico 155 TPM 70, 71 Stern, Paula 77, 78 stock market crisis 111 Stockman, David 20–1 subsidies 46 agriculture industry 86, 87, 90, 206–8 export 90, 123–4, 134 GATT Uruguay Round 200, 202–3, 206–8 motor vehicle industry 82 natural resource 120, 122 steel industry, 71, 72, 73, 77 upstream 122 sugar industry 56 super 301 129, 133, 221 supercomputer industry 133–4, 170 supply-side economics 3–4, 14, 219 surpluses 114, 125, 129 Suzuki, Zenko 163 Switzerland 108, 199, 202, 203 Syria 186 Taiwan 5, 83, 108, 109, 124, 174 alcohol industry 175 tariffs 174–5 tobacco industry 175 trade surplus 125 targeting 126 tariffs 46, 76, 129, 132 see also GATT and Trade and Tariff Act (1984) agriculture 208 Canada 147, 150–1, 153, 223 developing countries 46, 58 EC 181–2, 183 Israel 143 Japan 89, 161, 162, 163, 164, 167, 168, 172 Mexico 154 Portugal 181 South Korea 174 Spain 181, 182

Index steel 74, 76 Taiwan 174–5 Tax Equity and Fiscal Responsibility Act (TEFRA) 34 taxation 13 CBERA 58 CBI 56 Stockman, David 20 technology industry 41, 126–7, 130, 161–2, 222 TEFRA (Tax Equity and Fiscal Responsibility Act) 34 telecommunication industry 125, 165–6, 168, 179–80 textile and clothing industries 220, 221 Canada free trade negotiations 149 CBI 55–6 decline 82 GATT Uruguay Round 200 import competition and problems 82–4 import cuts 124 import quotas 137 Mexico 155 MFA 82–4, 124, 137, 197, 198, 220, 221 Thailand 210 Thatcher, Margaret 63, 64 Thorn, Gaston 91 tied aid credits 210–11 tobacco industry 175 Tokyo Round 2, 6, 39, 42, 43 Code on Subsidies and Countervailing Duties 77 Enabling Clause 58 Government Procurement (GPR) code 179 Subsidies and Countervailing Measures Code 71 textile and clothing industries 83 Toshiba 130, 131, 135–6 Toyota 81 TPC (Trade Policy Committee) 54 TPM (Trigger Price Mechanism) 70, 71 Trade Act (1974) 5, 77, 120, 121, 128–9 Canada 144, 149 free-trade area agreements 148, 149 section 301 129, 130–1, 171, 174–5, 221 Trade Agreements Act (1979) 71, 77, 144 trade and foreign policy

247

Central America 53–9 US trade policy goals 39–42 USSR 53, 59–66 Trade and Tariff Act (1984) 76, 133, 163, 221 free-trade area agreements 148 legacy of 119–34 trade balance 19t recovery 110–16 worsening 99–109 trade barriers 141 GATT Uruguay Round 200 Japan 164 trade deficit 1, 26, 31, 114, 115, 217 Baker, James 7 causes 217–18 Volcker, Paul 32, 33 Trade Policy Committee (TPC) 54 trade policy goals 39–42 trade-related investment measures (TRIMs) 201, 203–4 trade restrictions 24, 26, 47, 120 trade sanctions 129, 130, 135–6 trade surplus 125 Trading with the Enemy Act 132 transportation industry 168 see also motor vehicle industry Treasury Department 6–7, 102, 165 Trigger Price Mechanism (TPM) 70, 71 TRIMs (trade-related investment measures) 201, 203–4 tropical products 207, 208 Trudeau, Pierre 54, 146 twin deficits 32 UK (United Kingdom) 61, 63, 64, 65 banking industry 178 deficit 114 exchange market 99–100, 108 exports 115f steel industry 180–1 UNCTAD (United Nations Conference on Trade and Development) 2, 49–51, 211–12 unemployment 17t, 21, 29, 78, 82 unfair trade practices 123–4, 125–6, 128–31, 133, 136 UNIDO (United Nations Industrial Development Organization) 51

248

Index

unilateralism 121 United Kingdom (UK). See UK United Nations Conference on Trade and Development (UNCTAD) 2, 49–51, 211–12 United Nations Industrial Development Organization (UNIDO) 51 United States International Trade Commission (USITC)/ International Trade Commission (ITC). See USITC United States-Israel Treaty of Friendship, Commerce and Navigation 143 United States Semi-conductor Industry Association 171 United States Trade Representative (USTR). See USTR United Steelworkers of America 75 unjustifiable 120–1 unreasonable 120 upstream subsidies 122 uranium industry 149, 151 Uruguay Round 42, 195–209 agriculture 206–8 GNG 201 GNS 201 Montreal Ministerial meeting 208–9 OECD 209 Punta del Este Declaration 199–201, 222 services 205–6 subsidies and countervailing duties 202–3 trade-related intellectual property rights 204 trade-related investment 203–4 UNCTAD VII 211–12 US Congress. See Congress US Department of Agriculture (USDA) 88 US Steel Corporation 70, 71 USITC (United States International Trade Commission)/International Trade Commission (ITC) 20, 128 import relief 134–5 motor vehicle industry 79 Omnibus Trade and Competitiveness Act 134 steel industry 74, 75–6, 77, 78

USSR. See Soviet Union USTR (United States Trade Representative) 6, 120, 121, 125 authority 132–3, 134, 136 MOSS talks 163–9 section 301 cases 129, 130, 133 Venezuela 54, 108 VERs (voluntary export restrains) 46 motor vehicle industry 80 steel industry 73, 76, 78 Versailles Summit 27, 63–4 Virgin Islands 56 Volcker, Paul 18, 109 dollar depreciation 109 exchange market 99, 101 fiscal deficit 23, 26, 32, 33, 102 trade deficit 32, 33 twin deficits 32 voluntary export restrains (VERs). See VERs Weinberger, Caspar 21, 60 West Germany 61, 64, 65 banking industry 178 exchange market 99–100, 108, 110 exports 115f steel industry 73 surplus 114 telecommunication industry 180 trade surplus 125 Western Europe see also EC allies 61, 62, 63–6, 107, 224 FDIs 159 wheat flour 90, 91 Williamsburg Summit (1983) 27–8 wine industry 122–3 world economy 26–7 Yeutter, Clayton 133, 195 as Agriculture Secretary 209 citrus-pasta dispute 183–4 Uruguay Round 195 as USTR 6, 130, 133, 155, 182, 195, 222, 224 zero option proposal 206–7