drafted technically would permit the President to limit beneficiary developing countries to countries of this hemisphere otherwise qualifying, or of any other region. This is not, however, the intent of the Administration proposal. The purpose of the legislation is to permit United States participation in a generalized preference scheme which includes most developing countries. This coverage of countries would be narrowed, however, under section 604(b) (2) and 605 (b) (2) of the bill which prevent the bestowal of beneficiary status on any country not eliminating before January 1, 1976, preferential treatment that it accords to the products of a developed country other than the United States.

The paper also proposes that the President be given authority beyond that reqeusted in the bill to establish intermediate rates of duty between zero and the most-favored-nation rate for the preferences. It proposes no standards to guide the President in determining the appropriate preferential rate; nor does it consider what consequential revisions would have to be made in the provisions dealing with import relief if this approach were adopted. This would be administratively burdensome and unnecessarily complicate the United States generalized preference scheme.

Finally, it proposes that the President be required to establish quotas on imports from developed countries of articles with respect to which preferences are to be granted-conceivably the vast majority of the manufactured and semimanufactured articles in the Tariff Schedules. Such legislation would be directly contrary to the international obligations of the United States, as contained in Article XI of the General Agreement on Tariffs and Trade, and could not be justified under the terms of the GATT waiver for a generalized system of preferences. It would also be contrary to the economic interests of the United States.

TITLE VII-GENERAL PROVISIONS

The Stewart paper suggests that section 706 (d) be amended so as not to repeal either section 252 or 255 of the Trade Expansion Act of 1962. However, neither of these authorities contained in the Trade Expansion Act of 1962 need be continued in view of section 301 and section 408 of the proposed Trade Reform Act of 1973. These latter sections contain completely without any omission all of the authority contained in sections 252 and 255 of the 1962 Act. The earlier sections are therefore made entirely unnecessary.

ADMINISTRATION COMMENTS ON MR. EUGENE STEWART'S TESTIMONY

Much of Mr. Stewart's testimony and recommendations can be summed up as follows: (1) The U.S. negotiators in the Kennedy Round did not achieve equivalent concessions from our trading partners.

(2) Those concessions that the United States did obtain in the Kennedy Round were negated by the increased use of nontariff barriers and unfair practices by our trading partners and the unwillingness of U.S. officials to use available means of redress in the GATT or under U.S. law, including the statutes providing for antidumping and countervailing duties.

(3) Consequently, the Kennedy Round tariff reductions resulted in the deterioration in the U.S. trade balance and the balance of payments. (4) The declining trade balance, in turn, was a major cause of increased unemployment during the period 1967-1971.

(5) Trade policy should be more restrictive in the interests of U.S. economic welfare.

The Administration's comments on these matters are contained in the attachments hereto.

(1) The United States did not receive reciprocity in the Kennedy Round.-— Many of Mr. Stewart's conclusions concerning the effects of increased trade and his recommendations for changes in the Administration's Trade Bill derive from his assumption that:

"The United States expended enormous bargaining power in the form of tariff concessions on industrial products without securing the required access for our exports of agricultural products through appropriate concessions by the EC and other developed nations; the deep reductions in import duties on industrial products made by the United States were not reciprocated by concessions of equivalent value applicable to U.S. exports of industrial products." (page 5) The principle of reciprocity has been the cornerstone of multilateral negotiations under the GATT in which all major trading nations make comparable

reductions in trade barriers, yielding a multilateral balancing of concessions. In other words, the sum total of trade concessions each nation received would equal the total of concessions it gave. However, there are no rules or principles for judging whether reciprocity has been obtained in a negotiation. Such a judgment is reached by each participant on the basis of what it gave to and received from all other participants. Obtaining agreement on this key point is the reason trade negotiations are long and difficult to conclude.

Trade concessions given and received are evaluated by a number of factors, such as depth of tariff cut, the trade volume affected, the trade potential of the item and many other considerations relating to the U.S. economy and to the economies of countries granting concessions.

In the Kennedy Round, the participants used primarily the linear technique for reducing tariffs, i.e. reducing each rate line by a common percentage. However, they also employed virtually all other negotiating techniques such as itemby-item negotiation, harmonization and sector negotiation. The vast complexity of the results of the Kennedy Round cannot be measured in total except by two methods, volume of trade on which concessions were granted and received and depth of tariff cut.

The table below summarizes the nonagricultural trade concessions which the United States received from and gave to major participants in the Kennedy Round. In terms of trade covered, the United States granted concessions on $4.9 billion of imports from the main participants; in return, the United States received concessions on $5.4 billion of its exports.

Nonagricultural Trade on Which the United States Granted and Received Tariff Reductions and Bindings in the Kennedy Round-Major Participants Only

These concessions resulted in the following percentage reductions (excluding the reductions in the ASP agreement) :

Taken together, these tables indicate that overall the United States received tariff concessions on nonagricultural trade from its main trading partners which were approximately comparable to those that it gave.

The extent of trade concessions negotiated on agricultural products in the Kennedy Round was limited. Nonetheless, the following table shows that the United States received comparable concessions in agriculture to those that it gave. On temperate products the United States received total concessions on exports of $866 million vs. imports of $604 million on which it granted concessions. The concessions we gave on tropical products, $256 million, were of importance primarily to developing nations.

These broad measures of reciprocity, admittedly not perfect, indicate fairly clearly that insofar as the depth of tariff reductions made and the volume of trade affected are concerned, the United States came out fairly well in the Kennedy Round.

(2) Tariff concessions granted to the United States have been negated by nontariff barriers.-Mr. Stewart refers to the "host of nontariff barriers and other discriminatory arrangements which inhibit equitable access for U.S. exports to the markets of other countries." His testimony infers that these burdens on U.S. trade are greater than U.S. nontariff barriers are on the trade of other countries and that these nontariff barriers against U.S. trade have increased in recent years.

It is certainly true that preferential trade arrangements, particularly by the European Community with other countries, have proliferated in recent years. These arrangements are prejudicial to U.S. exports because they can result in a diversion of sales from United States to preferential suppliers. One of the reasons for the request of tariff authority in the Trade Reform Act of 1973 is to deal with this problem. The adverse trade effects of these arrangements would be reduced or eliminated with the reduction or elimination of foreign tariffs. It is also true that nontariff restrictions by foreign countries on agricultural products have increased. The Common Agricultural Policy of the European Economic Community is a prime example of such increased foreign protection. It is difficult, however, to make the same case for foreign restrictions on industrial products. With the reduction of tariffs, nontariff barriers have become relatively more important restrictions on trade. However, it does not appear that foreign nontariff barriers have increased absolutely. On the contrary, quantitative restrictions on industrial products of export interest to the United States have virtually disappeared in Europe and there has been a large rollback of such restrictions imposed by Japan. On the other hand, foreign countries have accused the United States of increasing its quota restrictions in recent years and, in particular, have cited export restraints on such products as steel to illustrate their case.

In a general series of comments before he turned to a Title-by-Title analysis of the Trade Reform Act, Mr. Stewart criticized the administration of the Antidumping Act and countervailing duty law by the Treasury Department charging "that the vigor with which the Antidumping Act was briefly enforced by Secretary Connally and Assistant Secretary Rossides has been substantially diminished under the policies of the current officials responsible for the enforcement of the Act."

In support of this contention, Mr. Stewart referred, among other items, to proposals for changes in the Antidumping Regulations which, in his opinion, were substantially weakened when finally promulgated by the Department on December 4, 1972. Mr. Stewart failed to note that the regulations as promulgated were approved by Assistant Secretary Rossides.

Referring to this same subject, Mr. Stewart charged that the amendment to the Antidumping Regulations initially proposed by the Treasury Department in April 1972 had, "as its most important provision a requirement that differences in circumstances of sale which would be recognized as a basis for making an adjustment in the home market price would be limited to those 'directly related' to the sales of merchandising under consideration." "Regrettably," Mr. Stewart

stated, "the Treasury Department 'backed away' from the 'direct relationship' requirement, and the principal provision which would have validated the Department's assertion that the purpose of the amendments was to defend United States industry effectively against unfair international trade practices in the dumping area disappeared."

Mr. Stewart failed to note that the amendments of the Antidumping Regulations issued by the Treasury Department do, in fact, require that circumstances of sales be directly related to the sales of the merchandise under consideration. Mr. Stewart's objection to the reregulations as finally issued is presumably related to one minor issue concerning allowances for expenses for general advertising of a particular product under investigation. The Treasury Department decided that adjustments for certain types of advertising expenses should be allowed if properly verified, in contrast to the initial proposal which would have disallowed any adjustments for advertising expenses. Treasury's decision was based on the fact that general advertising of a particular product, while possibly not directly related to specific sales in the home market, has a significant impact on subsequent sales. Under the regulations, as finally issued, expenses for general advertising for a company or brand name which does not feature the particular product under investigation and expenses based upon bad debts now are disallowed for the first time. In short, the amendment of the section of the Antidumping regulations to which Mr. Stewart objected, 19 C.F.R. 153.8) reflects a significant tightening of the Treasury's earlier practices with respect to adjustments for circumstances of sales.

Mr. Stewart also criticized a recent decision by the Treasury Department concerning the treatment to be given sales made in foreign home markets or to third countries at prices less than the cost of produtcion of the merchandise involved.

This decision is explained in depth in another paper in response to Mr. Stewart's more detailed criticisms of this decision in the course of his specific discussion of the proposed amendments to the Antidumping Act. It is sufficient to say, at this point, that the decision of the Treasury was dictated by the language of the statute itself and considerations of sound administrative practice under the statute, not by any desire to "accommodate foreign manufacturers in their strategy of explaining away margins of dumping . . as Mr. Stewart alleges.

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(3) The Kennedy Round tariff reductions were a major cause of the trade defiet. Mr. Stewart notes that the Kennedy Round reductions began in 1968 and that the chart on page 11 of his testimony "shows quite dramatically how during this period U.S. imports were stimulated to a rate of increase which substantially exceeded the rate of growth of U.S. exports. The consequence, as shown by the chart, is the plunging trade balance. ." His analysis implies that the Kennedy Round concessions are the main, if not the only, cause for the deterioration in the U.S. balance of trade. What he fails to point out is that the trade balance had been declining since 1964 as the following table indicates. Moreover, it had recovered substantially in 1970 before the crises of 1971. Furthermore the Kennedy Round reductions did not begin to go into effect until 1968, and were staged over a period of five years.

The Kennedy Round reductions can neither explain the deterioration in the trade balance between 1964 and 1968 nor the recovery in 1970. The principal causes of the deterioration in our balance of trade (and payments) are generally held to be U.S. inflation, excess U.S. demand, changes in relative prices between the United States and our major trading partners, changes in relative productivity, and the overvaluation of the dollar.

Although economists have examined a number of factors that influence the level of trade, most agree that the major influences are the growth of income here and abroad and, secondly, the relative level of prices of U.S. and foreign goods.

Other important factors may be changes in tastes, degree of capacity utilization, technological factors and so forth. Studies by the staff of the Federal Reserve Board using static statistical methods for determining the relative importance of various trade factors have shown that "the entire deterioration of the trade balance from 1964 to 1969 can be explained by the excess demand and price inflation that prevailed in the United States during that period. The trade deterioration caused by inflation has been on the import side." That the growth in U.S. income is the major determinant for the level of U.S. imports can be shown by nothing the relationship between changes in current dollar GNP and changes in imports.

In the period 1957-1969, the percentage growth in imports exceeded the percentage growth in nominal GNP when the GNP growth exceeded 7 percent. In the period 1964-1969 GNP grew by more than 7 percent in every year except 1967, and in that period imports grew more rapidly tha GNP in every year except 1967. Imports grew particularly rapidly in 1966 and 1968. In 1966, GNP grew by 9.5 percent and imports by 19.5 percent. In 1968, GNP grew by 8.5 percent and imports by 22.4 percent.

The impression given by these figures correlates well with additional simulations conducted by the FRB staff which show "if the United States had followed a noninflationary growth path from 1965 onward . . . the U.S. trade balance in the first half of 1969 would have been almost $3 billion larger than it was in fact." Furthermore, if noninflationary growth was assumed for both the United States and Canada, but full employment growth for other countries, the U.S. trade balance would have been $5 bililon higher than in the first half of 1969.* In other words, the trade balance would have been maintained at near its 1964 peak.

Similarly, the 1970 recovery in the balance of trade is best explained by divergent trends in GNP and prices in the United States and abroad and not by the continuing reductions in the U.S. tariff rates. 1970 was a year of exceptionally low U.S. demand (real growth was a negative 0.6 percent, nominal growth 4.8 percent); foreign demand was strong and prices abroad were rising at a more rapid rate than the average during the past decade; and there was substantial idle capacity in the U.S. economy.

An examination of the correlation between our trade balance and export price and productivity indexes is revealing. Mr. Stewart, in using the 1967-1971 period for analysis of the deterioration in the trade balance, has adopted too re stricted a timeframe for analytical purposes. A valid economic analysis would examine both the period when the U.S. trade surplus was large and growing (i.e. 1960-1964) and the period of declining surplus (1965-1969). From such an analysis a clearer understanding of the deterioration in our trade balance emerges. Contrary to Mr. Stewart's contention that "the decline in the fortunes of the United States in foreign trade cannot be attributed to any failure on the part of the United States industry effectively to control its unit labor costs," the U.S. industry did, in fact, exhibit a poorer price and productivity performance relative to our major trading partners.

TABLE 2.-AVERAGE ANNUAL PERCENTAGE CHANGES IN UNIT LABOR COSTS IN MANUFACTURING INDUSTRIES

*F. Gerald Adams and Helen B. Junz, "The Effect of the Business Cycle on Trade Flows of Industrial Countries." Annual meeting American Finance Association, 1970.