tions abroad by officers of their respective embassies. The contrast in approach was also made clear during the Kennedy Round tariff negotiations when it became necessary for the U.S. to abandon its long standing opposition to the appointment of industry advisors to the government negotiators so as to approach the effectiveness of other countries' bargaining teams. One ingredient of an effective export expansion program is full cooperation and mutual support between government and business. This means that the U.S. Government-particularly the State Department-must give up its inhibitions about frankly and openly supporting U.S. private commercial interests abroad. Moreover, the government must be so structured and organized as to be able to back up the drive of the private sector for foreign markets.

9. Antitrust Policy.-One area where the U.S. Government has actively intervened in matters pertaining to foreign commercial policy has been that relating to antitrust. Here, we have witnessed the oddity of the Antitrust Division pursuing U.S. companies abroad and prosecuting them for actions taken in other countries, despite the fact they were adhering to the laws and mores of the host country. In these instances the Antitrust Division has asserted the principle that U.S. law is ap plicable to U.S. business everywhere in the world regardless of local law and custom. On the other hand, the Antitrust Division has sat by in circumstances where foreign companies have entered the U.S. market and have achieved monopoly positions through agreements in their own countries which are clearly prohibited by U.S. law, and which would be denied to any U.S. company which became party to such an arrangement. The Antitrust Division takes the position that they should not seek to interfere with such foreign intervention in U.S. markets unless the State Department requests that they do so. What is needed is a policy which permits U.S. companies to conform to the laws of the countries in which they operate and which applies U.S. law with equal force to domestic and foreign companies operating within U.S. markets.

10. Government Organization.-The U.S. is unique among the developed countries of the world in that it is the only one that does not have a Department or Ministry of International Trade and Investment, or its equivalent. Within the Executive Branch, the functions pertaining to foreign economic and commercial policy are scattered through a variety of departments and agencies. Prior to the creation by the President a few days ago of the Council on International Economic Policy, there was no place in the Executive Branch where the issues were brought to a focus. There was no place where the entire range of U.S. foreign economic and commercial interests could be looked at and reconciled with other U.S. interests.

Note that U.S. political interests are centered in the State Department which serves as an effective claimant for its point of view within the councils of government. Similarly, U.S. defense and national security interests are centered in the Defense Department, which is also an

effective claimant for its point of view. But who represents the foreign economic and commercial interests of the U.S. in these councils?

It was the absence of such representation that made it possible for the Federal Reserve Board to impose export credit ceilings in the Balance-of-Payments Program of February 1965, and to persuade a reluctant Commerce Department to administer restraints on foreign direct investments. These measures have had a devastating adverse effect on U.S. trade. The absence of a rational governmental structure has also permitted our aid programs to evolve in such a way as to inhibit U.S. trade with the developing countries, notwithstanding the contention of its administrators that aid develops trade.

While the creation of the new Council on International Economic Policy by the President may serve to coordinate and reconcile foreign economic and commercial policy issues, I believe that eventually the need for a new Cabinet Department of International Trade and Investment will be recognized and that one will be created.

11. Measures to Encourage Exports by Small and Medium-Size Businesses. Most people think of an export expansion program as the various measures the U.S. Government takes to encourage and facilitate exporting by small and medium-size businesses. There is no question that there are a large number of small and medium-size businesses in the U.S. which might, in the proper circumstances, expand into overseas markets. Since 1961 the Commerce Department has been developing and improving programs for trade missions, trade centers and commercial trade fairs. Most of these programs are particularly designed to assist small and medium-size businesses-rather than large companies who depend on their own commercial intelligence and market strategies. While such programs can be important to individual businessmen, they are not of paramount importance as potential solutions to the problem of a deteriorating U.S. trade balance. When even the largest U.S. companies are frustrated in their efforts to expand their overseas markets by the failure of government to provide the proper support programs, we can hardly expect smaller companies to be successful in undertaking to break into new markets abroad. I am not suggesting that there be any diminution in the efforts to help small and medium-sized businesses to export, but I suggest we should not expect too much in the way of results until such time as the basic problems I have outlined have been resolved.

III. THE U.S. CAN COMPETE

If the U.S. were to adopt export expansion measures comparable to those of other developed countries, the U.S. should have no difficulty in expanding its trade surplus substantially, thereby reducing if not eliminating its chronic balance-of-payments deficits. The U.S. has the advantages of economies of scale, of advanced technology, of superior management, of a highly skilled work force—all of which can be put to good service in competing for international markets. An effort was made

in the period 1961 through 1964 to work on all the elements of an effective export program. The then Secretary of Commerce virtually converted the Department into a Department of International Commerce. He made the achievement of expanded international trade his primary objective. He found, however, that the Commerce Department as presently constituted was an inadequate instrument for this effort. Consequently other institutional arrangements were tried, including the establishment of a President's National Export Expansion Coordinator and a Cabinet Committee on Export Expansion chaired by the Secretary of Commerce.

The contrast in results between that period, and the period beginning in 1965 when the new Balance-of-Payments Program in effect dismantled the export expansion effort, is very dramatic. A careful review of this experience suggests strongly that the problems of the U.S. are not those of inherent incapability or any basic inability of the business community to compete for world markets. Rather they reflect the need for establishing defined goals supported by rational governmental policies and programs. In brief, U.S. private business could do the job if the government would take its foot off the brake, and instead would step on the gas.

EXPORT TAX INCENTIVES

By John S. Nolan

The dramatic failure of our exports to keep pace with the increasing level of our imports, and the consequent adverse impact on our balance of payments, have fairly demanded a critical re-examination of government policy affecting international trade-including our tax policy. During 1969 Secretary Kennedy directed that we evaluate the impact of the existing tax system on exports with a view to a healthier tax climate to be achieved on a basis consistent with our tax structure generally and without unreasonable revenue loss. We found on examination that our present federal income tax system not only fails to provide any encouragement to exports but actually prejudices exports in favor of overseas manufacturing by United States companies. Our study work culminated in our recommendations to Congress for a special income tax regime for Domestic International Sales Corporations, popularly referred to as DISC's. It may be useful to the Commission to understand the conclusions we reached and the reasons why we are convinced that the DISC proposal will have a substantial, favorable impact on our trade balance by increasing exports as a result of structural improvements in our income tax system.

There are two tax factors which have served to dampen the growth of U.S. exports: first, the income tax structure of the United States, which grants tax deferral treatment to income from direct U.S. investment in manufacturing facilities abroad, but not to U.S. export production; and second, tax advantages offered by foreign countries for export production which take three forms-inherent structural advantages, provisions specifically designed to promote exports, and the manner in which the intercompany pricing and similar rules are enforced.

The United States taxes its citizens, including domestic corporations, on their worldwide income. Where they have income from foreign sources and the foreign government imposes a tax on that income, we allow a credit against the U.S. tax for the foreign taxes paid to avoid double taxation of the same income. In the case of foreign subsidiaries of U.S. corporations, the timing of the U.S. tax on the foreign source

John S. Nolan is the Deputy Assistant Secretary for Tax Policy, Department of the Treasury.

income is of crucial importance. As a general rule, the U.S. tax on the earnings of a foreign corporation owned by U.S. shareholders is postponed until those earnings are distributed as dividends. Thus, the U.S. tax may be deferred by use of foreign subsidiaries of U.S. corporations in certain circumstances. If the foreign effective tax is lower than the U.S. tax, whether by reason of a lower rate, a tax holiday, or an investment incentive in the foreign tax law, the foreign subsidiary of the U.S. company enjoys the full benefit of this lower rate so long as the earnings are retained abroad in that subsidiary.

In contrast, U.S. companies are generally taxed currently at the full U.S. tax rate on their export earnings, even though this is also foreign source income, and even though in making export sales they are performing essentially the same function as a foreign subsidiary of a U.S. company selling goods manufactured abroad. United States exporters under certain circumstances may obtain the advantages of deferral if instead of exporting directly to a foreign country they set up a foreign sales subsidiary in a low tax country through which the exports are routed. The Revenue Act of 1962 was designed to eliminate such taxhaven practices, but there are exceptions (particularly the minimum distributions rule) which permit large U.S. corporations with foreign manufacturing subsidiaries to avoid the impact of this 1962 legislation. However, by reason of the strict enforcement by the U.S. Internal Revenue Service of the arm's-length standard for intercompany pricing, the benefits to U.S. exporters using foreign sales intermediaries have been much less than benefits to exporters from other countries.

Thus, there is a clear-cut bias in our existing tax structure favoring the manufacture of goods abroad through foreign subsidiaries, as compared to exporting, in order to benefit from deferral of the U.S. tax. Further, our existing system is so complex in its tax treatment of foreign source income that only our very largest companies have been able to cope adequately with the complications. These largest companies are also favored because, as indicated, it is sometimes possible for them to achieve tax deferral treatment for their export income because of their widespread foreign manufacturing activities. Thus, the foreign taxes on such manufacturing operations may sometimes be used to shield the export income from U.S. tax. As a result of the complexity and these differences in tax treatment, our smaller companies too often have abandoned the full potential of foreign markets to their foreign competitors and the very largest of the U.S. companies.

While the United States imposes its income tax on a worldwide basis, the income taxes of many other industrialized countries are imposed only on income from sources within those countries. Under this socalled territoriality principle of taxation, income derived from sources outside those countries is wholly or partially tax exempt. Thus, income from exports from such countries through foreign branches or agents, as well as income from direct investments abroad, is not taxed by the home country, and export sales may be routed through foreign sales