ECONOMIC POLICY COUNCIL MEETING -- OCTOBER 3, 1985 3:00 P.M. -- ROOSEVELT ROOM

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP87T00759R000200210027-4
• Release Decision: RIPPUB
• Original Classification: K
• Document Page Count: 26
• Document Creation Date: December 22, 2016
• Document Release Date: November 17, 2010
• Sequence Number: 27
• Publication Date: October 1, 1985
• Content Type: MEMO

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THE WHITE HOUSE
WASHINGTON
CABINET AFFAIRS STAFFING MEMORANDUM
Date: 10/1/85 Number: 317004CA Due By:
Subject: Economic Policy Council Meeting -- October 3, 1985
ALL CABINET MEMBERS
Vice President
State
Treasury
Defense
Justice
Interior
Agriculture
Commerce
Labor
HHS
HUD
Transportation
Energy
Chief of Staff
Education
CIA=
UN
USTR
GSA
EPA
NASA
OPM
VA
SBA
^
CEA
CEQ
^
1:1
^
^
^
Svahn
V
Chew (For WH Staffing)
lt~!'
Executive Secretary for:
EPC
REMARKS:
There will be an Economic Policy Council Meeting on
Thursday, October 3, at 3:00 P.M. in the Roosevelt
Room.
The agenda and background paper are attached.
RETURN TO:
Alfred H. Kingon
Cabinet Secretary
456-2823
(Ground Floor, West Wing)
^ Don Clarey
^ Rick Davis
^ Ed Stucky
11
11
^
11
^
^
^
Q
^
Associate Director
Office of Cabinet Affairs
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WASHINGTON
October 1, 1985
MEMORANDUM FOR THE ECONOMIC POLICY COUNCIL
FROM: EUGENE J. McALLISTER
SUBJECT: Agenda and Paper for the October 3 Meeting
The agenda and paper for the October
3 meeting
of
the
Economic Policy Council are attached. The
for 3:00 p.m. in the Roosevelt Room.
meeting
is
scheduled
The single agenda item is a review of potential section 301
cases to be initiated by the President. The trade policy review
group has developed seven cases for the Economic Policy Council's
consideration. A paper outlining the potential cases is
attached.
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October 3, 1985
3:00 p.m.
Roosevelt Room
1. Potential Section 301 Investigations
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THE UNITED STATES TRADE REPRESENTATIVE
WASHINGTON
20506
October 1, 1985
MEMORANDUM
To: Economic Policy Committee
From: Ambassador Clayton Yeutter C!,
Subject: Self-initiated Section ial--C
Enclosed are summaries of potential section 301 cases for EPC
review. These have all been developed by the TPRG, which has
recommended the first five for consideration. The TPRG has
no recommendation for the next two, but I believe we should
fully discuss the airbus situation in light of recent international
transactions in that industry.
A number of other cases were discussed too, and rejected for
a variety of reasons. A listing of those is attached for your
information.
As in our prior meetings, we will wish to evaluate such factors
as the flagrancy of the practice, the amount of trade and number
of jobs involved, the degree of support from U.S. industry,
the duration of the practice, the intensity and duration of
U.S. complaints, our international competitiveness, the likelihood
of negotiating the elimination or modification of the practice,
the impact on Congress of initiation and our political and econo-uc
relationships with the country involved.
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POTENTIAL SECTION 301 CASES
Tab A: Recommended to the EPC for action:
A.1: Taiwan -- Tobacco, wine and beer monopoly
Korea -- Ban on imports of computers
3? Korea -- Intellectual pr
Qnertv
STAT
A.4: Japan -- Aluminum cartel J1H1
EC -- Heavy electrical equipment STAT
Tab B: Referred to the EPC for consideration:
France, West Germany, and UK -- Airbus supports STAT
.2: EC -- Export subsidies for wheat a--a., r~?n, t1~J'~.,
~"
Ta Reviewed by the TPRG, but not referred to the EPC:
Brazil -- General aviation aircraft STAT
West Germany -- Transborder data flow
Canada -- Provincial liquor board practices
Japan -- Regulatory approval practices
Taiwan -- Trade related requirements*
*The TPRG agreed to consider pursuing this case under Section
307.
STAT
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TAB A
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TAIWAN -- TOBACCO, WINE AND BEER MONOPOLY
TAIWAN'S TRADE PRACTICE
The Taiwan Tobacco and Wine Monopoly Bureau (TTWMB) controls the
importation and distribution of cigarettes, wine and beer. it
limits imports to those items not produced in Taiwan or those not
produced in adequate amounts to meet domestic demand. This
control is implemented through a system of import licenses.
Taiwan imposes tariffs of 35-75 percent on tobacco products and
applies a 185 percent mark-up to imported cigarettes. Taiwan
imposes a tariff of 65 percent on wine and beer, as well as
commodity taxes and a TTWMB pricing formula that raises the cost
an additional 230 percent (domestic beverages are subject to the
same commodity tax rates, but they are assessed on a lower
base). Foreign firms are not permitted to advertise cigarettes,
beer and wine in Taiwan, although the local products are advertised
freely on television and in the printed media.
U.S. cigarettes are currently restricted to less than one percent
of domestic consumption. In 1984, imports of U.S. cigarettes
were valued at $5.7 million; it is estimated that U.S. cigarettes
would capture 25 percent of the market ($210 million) in the
absence of TTWMB quotas, pricing practices and distribution
controls.
In 1984 Taiwan imported only 62 metric tons of grape wine and
vermouth products from the United States; total imports of such
products amounted to 404 metric tons (France and West Germany
were the top two suppliers, with the U.S. ranked third). We do
not have an estimate of what the U.S. could ship under a freer
import regime, but Taiwan has been designated by USTR, in consul-
tation with the industry, as a market with significant market
potential for and import barriers to wine; this was done pursuant
to the Wine Equity Act. We have scheduled consultations with
Taiwan on this issue, as well as the limitations on the sale of
cigarettes and beer, for the week of October 7th.
The TTWMB purchased 23.26 million liters of U.S. beer in 1979 and
an almost equal amount in 1980. Due to the resemblence of the
Rheingold label to a local agricultural chemical, however, sales
stagnated (the prohibition against advertising, of course,
prevented Rheingold from marketing its product effectively in t e
local market.) TTWMB cut back its imports by two-thirds in 131.
During the past three years there has been a ban on imports of
beer. As with wine, we do not have estimates of U.S. sales in
the absence of the TTWMB controls. Nevertheless, there appears
to be keen interest on the part of American brewers in penetrating
the market. The American Institute in Taiwan reports that
six-packs of American beer are the most valued gifts that one can
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give to a local citizen.
EVALUATION OF THE PRACTICE
The TTWMB's control of cigarettes, wine and beer imports is so
complete that it would meet anyone's standard of an unfair trade
practice. In addition, now that Taiwan has begun to export its
own beer (China beer) to the United States, the inequity of
Taiwan's practices is blatant.
This case would be the ideal one against Taiwan. It would
provide an opportunity to open the Monopoly Bureau which has
been one of our major market access objectives with Taiwan for at
least two years. There is interagency agreement (TPSC 85-80) to
seek significant liberalization of the Monopoly Bureau. Also, it
would send a message to the Koreans that they should open their
wine market soon or face a similar 301.
SECTION 301 CASE -- SUBSTANCE AND PROCESS
The United States has a meritorious claim that Taiwan maintains
unreasonable barriers, i.e., discriminatroy treatment of imports
and import restraints, against the importation of cigarettes,
wine and beer. Such practices are generally prohibited by GATT.
Since Taiwan is not a signatory to GATT, it has violated no
international rules; however, its behavior can be deemed unrea-
sonable under section 301.
If initiated, this investigation would be pursued bilaterally and
would be concluded within one year. At that time, if the problem
has not been resolved, USTR would recommend to the President what
action he should take. Our leverage to negotiate greater market
access with respect to these products rests on our willingness to
retaliate by restricting imports from Taiwan if Taiwan does not
open its market.
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KOREA--BAN ON IMPORTS OF COMPUTERS
KOREAN TRADE PRACTICE
Under its computer decree, Korea has established certain criteria
for the issuance of import licenses for computers and peripherals
(i.e., printers, terminals, and disk and tape devices) which
effectively ban imports of any computers and peripherals of a
type made locally.
The objective of the decree is to protect emerging local manufac-
turers and to attract off-shore computer technology by requiring
investment or licensing of local production as a condition for
importing. In practice, a foreign supplier must have an approved
computer import plan (i.e., approved by a Computer Screening
Committee chaired by the Electronic Industries Association of
Korea) in order to receive an import license. As a general rule,
the plan must include some licensing of Korean firms to produce
relevant products.
IBM has negotiated an arrangement with Korea that lessens the
effect of the decree on its operations. The impact of the
restriction is greatest on smaller suppliers and suppliers of
small computers, peripherals and parts because such firms do not
have the necessary capital or scale of production to license
Korean firms. In many cases, they do not manufacture the medium
size or large scale computers that Korea is more likely to
approve for importation. Even the importation of medium and
large scale systems, however, depends on the foreign producer's
willingness to transfer technology, produce computer parts
locally and provide the know-how for producing plug compatible
peripherals. In 1983 -- the year that the restrictions went
into effect -- the import market for computers and peripherals
was estimated to be $80 million annually.
The principal U.S. private sector interest in liberalizing the
Korean market for small computers is the Computer and Communica-
tions Industry Association (CCIA), which is comprised of young,
highly innovative firms (predominantly small and medium size fires)
that export approximately 40% of their U.S. manufactured products.
More than 90% of these firms manufacture all of their products in
the United States; as a group, they employ more than 200,000
American workers.
EVALUATION OF THE PRACTICE
Liberalization of the computer decree was a top priority of or
1983 effort to gain greater access to the Korean market. '-urea
did liberalize imports of mainframes and other large computers
effective July, 1984. They did nothing, however, on small ccnpu-
ters. There is no justification in economic terms for the strict
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licensing procedures used by the Koreans, particularly in light
of their willingness to treat some U.S. firms differently than
others.
SECTION 301 CASE -- SUBSTANCE AND PROCESS
The United States has a meritorious claim that Korea has violated
its GATT obligations by effectively banning the importation of
computers and peripherals which are made in Korea. Korea could
conceivably invoke the infant industry provisions of the GATT
applicable to LDC's; however, even if such provisions were
applicable, Korea would still be required to compensate the
United States.
If initiated, this investigation would involve dispute settlement
in the GATT which could take up to two years to complete.
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Korea's inadequate laws on patents, copyrights and trade secrets
effectively deny protection to American intellectual property.
The combination of inadequate laws and the manner of application
of the laws provide a significant impediment to U.S. companies
interested in doing business with Korea. According to industry
estimates, lost sales of these companies due to inadequate
copyright and patent protection could exceed $200 million annually.
Copyrights protection is available to foreigners only if the
work is either first published in Korea or ,if a treaty requires
the protection. Korea does not have such a bilateral treaty
with the United States, nor does it adhere to the major inter-
national copyright conventions. Even where there is explicit
protection, such as criminal penalties for unauthorized duplication
of movies and sound recordings, enforcement of the laws is weak
and the penalties too small to be effective deterrents. U.S.
books, sound recordings and motion pictures are the subject
of substantial unauthorized copying. Although the Koreans have
promised to amend the existing copyright law, they have been
unable to obtain legislative approval for the amendments. In
addition, the proposed amendments do not include protection for
software, an area of critical importance to the United States.
Korean patent laws also hurt American companies. Certain types
of products simply cannot be patented in Korea. These include
foods, beverages and medicines. In addition, protection for
chemicals and pharmaceuticals is limited to process patents,
which is a very weak form of protection. Finally, Korea offers
no protection at all for forefront activities such as biotech-
nology. Korea argues that its current level of patent protection
is appropriate for a country at its level of development and that,
patent protection will be upgraded as Korea becomes more devel-
oped. The U.S. view, however, is that Korea already has reached
the point at which its intellectual property laws should be
upgraded significantly. Several rounds of consultations with the
Government of Korea have yielded commitments to improve protection
for both copyrights and patents, but to date there -has been no
change in legislation.
TRADE EFFECTS
It's hard to quantify the actual effects of these policies and
practices. Perhaps their greatest impact is in foregone investment
by U.S. firms in Korea. Companies are reluctant to introduce
their technology rich products into markets where there are
no effective controls on misappropriation of the underlying
research and development. The Intellectual Property Alliance
has made a number of estimates of the economic effects of sales
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of unauthorized copies of books, recordings and motion pictures.
The Alliance estimates that as much as 60 percent of audio
recording sales in Korea were of unauthorized copies. --The losses
to the U.S. recording industry amount to about $40 million
annually. There are also $16 million worth of unauthorized sales
of motion pictures, and $20 million in sales of computer software.
Unauthorized sales of books, periodicals and journals for another
$80 million per year. Overall, American losses amount to over
$170 million per year because of the absence of inadequate
copyright protection alone. Losses from inadequate, or unavail-
able, patent protection could amount to again as much.
EVALUATION OF THE PRACTICE
The Korean government has failed to adopt policies or enact
laws that would provide reasonable protection. We have had
ongoing consultations at the technical and policy levels, but
the Koreans thus far have not responded as positively on these
issues as have Taiwan, Singapore and Hong Kong. A Section 301
may focus the Korean's attention in a way we have not yet been
able to do. In addition, a 301 would send a strong signal to
other countries in the region that the Administration was carrying
out the President's commitment to increase the effort to protect
American intellectual property.
One consideration in evaluating this case is that there already
are two Section 301 investigations against Korea - the Adminis-
tration's self-initiated case on insurance and the Motion Picture
Export Association's case on motion pictures.
SECTION 301 CASE -- SUBSTANCE AND PROCESS
Korea has not violated any international rule in limiting the
protection it affords to intellectual property rights. Neverthe-
less, the President is authorized under section 301 to act
against practices which he deems unreasonable. Inadequate
protection of intellectual property rights clearly can be encom-
passed by the term "unreasonable."
If initiated, this case would be pursued bilaterally and would
be concluded within one year. At that time, if the problem has
not been resolved, USTR would recommend to the _President what
action he should take. Our leverage to negotiate greater protec-
tion of intellectual property rights rests on our willingness to
retaliate by restricting imports from Korea if Korea does not
resolve this matter.
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JAPAN - ALUMINUM CARTEL
Pursuant to a special law for the structural improvement of
industries, Japan has designated the aluminum fabricating industry
as requiring structural adjustment. While the GOJ does not
concede that it has created a cartel, the industry is author-
ized, subject to specific MITI and Japan Fair Trade Commission
(JFTC) approval, to reduce capacity and control investment.
One purpose of the plan is to reduce substantially high-cost
domestic smelting capacity. This may have been effected through
subsidized loans. This capacity reduction has led to substantial
increases in Japanese imports of ingot. However, because Japan STAT
grants preferential tariff treatment to ingots imported by
Japanese smelters (many of whom' are related to the aluminum
fabricators), U.S. exporters have not shared in this growing
import market. In fact, U.S. ingot exports have decreased.
Under the plan for the aluminum industry (which has been approved
by MITI and JFTC and is in effect through 1988), the companies
agree with MITI on demand and supply forecasts, joint research is
permitted, mergers are officially encouraged, and joint buying
and selling may be permitted (it is not known whether this latter
activity is occurring now).
TRADE EFFECTS
U.S. exports of ingot have fallen despite increased Japanese
demand for imported ingot. U.S. exporters currently have less
than 1% share of Japan's fabricated product market. Japanese
aluminum exports to the U.S. have increased significantly during
the 1973-83 period.
EVALUATION OF THE PRACTICE
The United States has a meritorious claim that Japan's preferential
tariff treatment is inconsistent with GATT. The subsidies may
also be GATT inconsistent if they have seriously prejudiced
U.S. interests. Japan's cartel practices are not covered by the
GATT. However, if we can demonstrate that the- cartel allows
Japanese firms to engage in anticompetitive behavior which denies
access to U.S. exports, it can be deemed unreasonable under
Section 301. We need further information before we can defini-
tively evaluate the merits of this aspect of the case. This
could be developed during the investigation.
SECTION 301 CASE -- SUBSTANCE AND PROCESS
Because of the existence of GATT and non-GATT issues, the case
can only be handled comprehensively through a non-GATT bilateral
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approach. However, we have the option of invoking the GATT
dispute settlement mechanism for the GATT issues while pursuing
the other issues bilaterally if we choose. If the latter option
is selected, the investigation will take longer to complete
because of the time necessary to finish the.GATT process.
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EC--HEAVY ELECTRICAL EQUIPMENT
Purchases of heavy electrical equipment in Europe are dominated
by government owned or state controlled utilities which follow
restrictive buy national procurement policies that effectively
curtail U.S. export potential. These government entities are
not covered by the Government Procurement Code.
EUROPEAN TRADE PRACTICES
The heavy electrical equipment industry is highly concentrated and
oligopolistic in structure. The capital intensity, long term
horizons, high risks associated with developing new technical
systems, and the cyclical nature of the industry have led to a
limited number of suppliers in this industry. Purchases of
heavy electrical equipment in most major developed countries are
dominated by government owned or controlled utilities. These
utilities, for the most part, follow buy'national procurement
policies. In those countries where the market is divided among
state and, privately owned utilities, the private firms generally
procure domestically. U.S. industry representatives argue that
in these cases opening the state controlled market would lead to
increased sales to the privately owned firms as well.
The major European manufacturers have restrictive licensing
arrangements among each other. Some evidence suggests that the
concentration of the heavy electrical equipment industries in
Western Europe is not the result of normal market forces but
instead the result of a conscious policy by the respective
governments to consolidate the industry. The award of contracts,
encouragement of mergers, provision of low interest financing,
subsidization of export sales and two-tier pricing systems have
all operated to exclude U.S. firms from the European market.
While discriminatory procurement practices are widespread in
Europe, key target countries should include the U.K. and France.
TRADE EFFECTS
Significant sales to third country markets of heavy electrical
equipment support the industry's contention that U.S. firms would
capture a share of the European market in the absence of buy'
national practices. Given the size of this market, even a
modest share would be important in value terms. For example,
even a 15 percent market share for one product area--large
power transformers--would have resulted in an additional $50
million of U.S. exports to Europe annually for the period 1980-85.
In the case of turbine and turbine generators, the industry
estimates that a 15 percent share would yield an additional $60
million annually in exports to Europe for the period 1987-91.
While it is difficult to estimate potential market share when
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those markets are virtually closed at present, a market share of
15 percent is considered to be a reasonable estimate and would
be attainable within current production capacity of U.S. industry.
EVALUATION OF THE PRACTICE
Although the Administration is continuing to press for coverage
og these government owned or state controlled utilities under the
GATT Government Procurement Code, the prospects are not hopeful.
In the absence of unilateral opening of the European market,
U.S. firms will continue to suffer from the lack of equivalent
competitive access to world markets and foreign suppliers will
enjoy higher prices in their home markets than those realized on
competitive export markets.
SECTION 301 CASE -- SUBSTANCE AND PROCESS
Although the U.S. has clearly suffered economically from the EC
procurement practices, our case against the EC is legally weak.
Not only have the EC countries not violated any international
rules in procuring their heavy electrical equipment domestically,
they have acted consistently with an explicit GATT provision
which permits such practices. Our aim in pursuing this issue
would be to bring government owned or controlled utilities under
the disciplines of the Government Procurement Code. However, if
we are unsuccessful, we would need to consider whether to retaliate
against the EC.
If initiated, this investigation would be pursued bilaterally and
would be concluded within one year.
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TAB B
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AIRBUS GOVERNMENT SUPPORTS
AIRBUS GOVERNMENTS' PRACTICES
The Airbus Member Governments (France, West Germany, and the
United Kingdom) are subsidizing the development and'production of
Airbus aircraft. These government support practices enable
Airbus to not only slash prices in sales campaigns but allows
Airbus to embark upon new program development without first
recouping the costs of previous programs. U.S. aircraft manufac-
turers are finding it increasingly difficult to compete against a
government-supported foreign aircraft industry.
Airbus has captured 19 percent of the total market for large jet
transports between 1980 and 1984 (or sales of $8.5 billion) and
10 percent of the market during the first six months of 1985.
These latter figures do not take into account recent major
procurements of Airbus aircraft by Lufthansa. and Indian Airlines.
Foreign government support of the development, production and
marketing of commercial transports challenges the market share
and production activity of private U.S. firms and alters the
perceptions of these firms concerning future aircraft marketing.
Airbus' greatest market advantages, resulting from the extensive
subsidization, are in the areas of pricing and launching of new
programs without consideration of recoupment of costs.
Participating Airbus Governments (France, West Germany, and the
United Kingdom) have provided Airbus Industrie with funds estimated
at $4.6 billion for the design and development of the A-300, A-310
programs, and approximately $1.6 billion to fund the A-300, A-310
plant and equipment costs. In 1982, the FRG suspended indefinitely
the recoupment of nearly $1 billion in previous development fund
guarantees to Deutsche Airbus. The A-320 was launched in 1984
with approximately $1 billion in support.
EVALUATION OF THE PRACTICE
The GATT Agreement on Trade in Civil Aircraft, which delineates
the rules governing commercial aircraft activities including
government supports, cross references the disciplines of the
Subsidies Code. While domestic subsidies are not prohibited,
parties have agreed to use such subsidies only in a manner that
will not adversely affect the trade interests of another signa-
tory.
The GATT Aircraft Agreement also requires that signatories price
aircraft based on a reasonable expectation of recoupment of all
costs, including non-recurring program costs, identifiable and
pro-rated costs of military research and development on aircraft,
components, and systems that are subsequently applied to the
production of such civil aircraft, average production costs, and
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financial costs. With the substantial price slashing that is
occuring with Airbus aircraft sales, it is difficult to believe
that prices are being based upon these criteria.
SECTION 301 CASE -- SUBSTANCE AND PROCESS
Under GATT rules, the EC is permitted to subsidize the production
of goods provided that the subsidies do not cause serious prejudice
to the interests of other GATT signatories. "Serious prejudice"
is a vague concept. It is not at all clear that we could obtain
such a finding if we took this case to the GATT.
We can pursue this issue in the Subsidies Code; indeed, the EC
may argue that our international obligations require us to do so
before we can take action against the EC; however, there is little
likelihood of a conclusive result in GATT on this matter.
Alternatively, the investigation could be handled bilaterally with
the Airbus Member Governments in which case it would be concluded
within one year. Our leverage to negotiate a solution rests on
our willingness to retaliate unilaterally if the EC does not
adjust its policies.
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EC -- EXPORT SUBSIDY ON WHEAT AND B
EC TRADE PRACTICE
1LL r,
By the use of direct export subsidies, the European Community
has dumped surplus grain onto the world market. These subsidies
are increased whenever necessary and are larger for more distant
destinations, such as China. Incomes and price levels for grain
producers within the Community are protected at levels well
above the market. In contrast to the United States, qualification
for such supports has required no cutback of acreage in the
EC. Thus, the surplus has grown and grain from the United States
and other exporting countries has been displaced at will by
the export subsidy mechanism. The EC wheat and barley export
subsidy not only allows EC grain to displace U.S. grain on world
markets, but it also tends to lower the level of world price.
TRADE EFFECTS
Globally, the EC share of world wheat and barley trade has expanded
steadily, as shown by the attached data. Currently, one example
of competition for U.S. grain from subsidized EC wheat and barley
is the USSR market, where EC shipments have risen sharply in
recent years to a 1984/85 level of about 9 MMT. The trade impact
of this practice involves both a quantitative loss of U.S. exports
and additional losses resulting from lower world price. Whereas
the quantitative impact accrues entirely to the United States
as a residual supplier, the price impact is shared by other
exporting countries; also the price impact applies to domestic
as well as export marketing.
Without export subsidies, total EC grain exports to all third
countries would probably be 10 million tons less. If those
subsidies were discontinued now, in the midst of global oversupply
situation for grains, EC exports--which now account for over
20 MMT per year--might even stop entirely.
Assuming 10 MMT less grain exports from the EC, current world
grain prices would be an estimated $10 higher per metric ton.
The current total trade impact on the United States is therefore
estimated at $2 billion per year; half of this is the quantitative
impact (10 MMT x $100 per metric ton), and the-other half is
price ($10 per metric ton x total U.S. grain exports of 100
MMT). The trade impact on other exporting countries represents
another $1 billion (100 MMTx $10 per metric ton). The domestic
impact aspects are even broader. A price difference of $10
on total U.S. grain production of 300 MMT represents $3 billion
annually that is being made up by deficiency payments, storage
costs, loans, etc.
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? !
EVALUATION OF THE PRACTICE
The EC argues that they have not taken an unfair portion of
world trade, but the percentage has increased steadily over
the past 20 years. The aggravation from the EC subsidies
presently is even greater because of their. major increases in
shipments to the USSR and Easter Europe. A program.to meet this
unfair practice would cause the EC's cost of managing their grain
surplus to rise sharply. Offsetting increases in sales to other
markets would not be practicable because the subsidy costs would
tend to "snowball". Storage, the other main alternative, would
also be costly.
Meeting this unfair EC practice might tend to lower world prices
for grain in general. This would benefit many LDC countries
who are grain importers.
It might also have adverse effect on non-subsidizing exporter
countries, but this will happen to them anyway if U.S. loan
rates are modified beginning with 1986.
SECTION 301 CASE - SUBSTANCE AND PROCESS
Under GATT rules, the EC is permitted to subsidize the export
of primary agricultural products such as wheat and barley provided
that the EC does not take more than an equitable share of the
world market for these products as a result of the subsidies.
These rules are extremely vague and virtually inoperable. There
is no reason to believe that we could win this case if we took
it to the GATT. However, we remain convinced that but for its
subsidies EC exports of grain products to the world market would
be substantially less. Pursuing this case is consistent with
our goal of obtaining more discipline on the use of subsidies
in the agricultural sector; however, any action we take which
challenges the CAP will have strong immediate repercussions in
the EC. The repercussions will be all the greater because we are
considering unilateral retaliation in this case.
If initiated, this case would be handled bilaterally and would
be concluded within one year. If we have not resolved the issue
by that time, USTR would recommend to the President what action
he should take.
USDA Submission
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EC Exports of Wheat and Barley
Compared to Total Wold Trade
World Total
Volume
(MMT)
Share of
World Total
(%)
(MMT)
1970/71-72/73 Ave
7.0
10.2
68.7
1983/84
19.2
16.2
118.3
1984/85
24.5
19.4
126.3
1985/86 (forecast)
23.0
20.7
111.3
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This graph highlights the EC's increasing challenge to traditional grain
exporting countries. Over the past 10 years EC grain production has -increased
dramatically at the same time as utilization has stagnated. Viewed in terms
of a trend line, with yearly fluctuations removed, the indicated EC total
grain exportable surplus rises from a present level of 19.6 MM to 37.7 MNT by
1989/90. This represents a growth rate of about 4 MXI' annually, which is
double the average growth rate of total world grain trade between 1960 and
The growing exportable surplus has serious ramifications for the EC and
traditional exporting countries. If such surplus is exported, especially into
a highly competitive market, the costs for the EC export subsidy program could
soon approach $2 or $3 billion yearly. The economic impact on traditional and
non-subsidizing export countries, which already represents billions of
dollars, would be even larger. On the other hand, if the surplus is not
exported, costs of storage and/or production limitations will also become very
heavy for the EC.
EXPANDING EC WHEAT AND COARSE GRAIN SURPLUS
150
MMT
160
140
t
130 r
r
120
110
n
a,
PRODUCTION i'
i
?~? ?w ago
a c,
YEARS
1/ The difference between extrapolations of
trend lines Calculated for the 1974/75-1985/86 base period.
EXPORTABLE > 37.3
SURPLUS 1/
19.6
LO Go M=
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TAB C
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Cases Rejected by the TPRG
FRG - Transborder Data Flow
Initiation of an investigation is inappropriate at this
time because the U. S. and FRG will consult on this issue
shortly. Moreover, much of the data involved in this case
relates to banking services. Initiation of an investigation
would complicate the handling of international banking
issues.
Brazil - General Aviation Aircraft
Initiation of an investigation could jeopardize sales of
U.S. helicopters and large aircraft to Brazil. The U.S. has
several other unfair trade practice complaints against
Brazil pending now: 301 on informatics, antidumping and
countervailing duty cases.
Canada - Provincial Liquor Boa rd Practices
U.S. industry is split on support for this case. Prospects
for resolution appear slim unless the issue is folded into
free-trade agreement discussions. Canadian restrictions
are provincial, not federal; the case, therefore, raises
states' rights questions.
Japan --Regulatory Approval Procedures
Since this issue is under discussion in the MOSS talks,
it would be inappropriate to initiate a 301 investigation.
Taiwan - Trade Performance Requirements
Initiation of an investigation is premature; we should
look for better cases on trade related performance require-
ments. Sec. 307 of the Trade and Tariff Act of 1984 provides
another mechanism for dealing with export performance require-
ments.
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