Special Report
THE TOKYO ROUND HOW THE U.S. CHEMICAL INDUSTRY FEELS ABOUT IT The current round of trade negotiations is the most ambitious yet, but in an era of economic uncertainty, the U.S. chemical industry wonders if this is the time to be negotiating at all
Earl V. Anderson C&EN, New York
The most ambitious and potentially significant trade negotiations that the nations of the world have ever attempted finally may be getting down to brass tacks. After more than two long years of tedious groundwork, the negotiations have reached what Ambassador Frederick B. Dent, U.S. special trade representative, has called "a critical juncture." Almost 100 industrialized and developing nations are trying to move the seventh round—called the Tokyo round even though the talks are taking place in Geneva, Switzerland—of multilateral trade negotiations (MTN) into high gear. What they hope to accomplish is nothing short of colossal. Whatever they eventually do accomplish certainly will have a big impact on the U.S. chemical industry and its foreign trade. Tariffs no longer are the impediments to trade that they once were. Yet, negotiators expect to slash most of the industrialized world's tariff rates even further, just as they have done in past trade talks held under the auspices of the General Agreement on Tariffs and Trade (GATT). But that is just for openers. An unbelievably complex assortment of nontariff barriers has replaced tariffs as the major impediment to international trade. Unlike in past GATT sessions, Tokyo round delegates hope to knock a few bricks out of the walls of nontariff barriers. Agricultural trade, traditionally the most difficult and politically sensitive of all trade issues, will be on the bargaining table. It will, that is, if negotiators can agree on a mutually satisfactory way to approach the subject. Roughly 80% of the countries participating in the Tokyo round are developing nations. They will be in Geneva to make sure that the industrialized nations keep their promise of special and more favorable treatment for the exports of what now has become known as "the third world." Third-world countries always have considered GATT to be a "rich-man's club." Previous GATT trade talks, they complain, benefited only the wealthy, industrialized countries. Virtually every conceivable aspect of international trade could surface during the Tokyo round: safeguards against excessive imports on the one hand; assured access to raw materials on the other. An international code of ethical conduct to prevent bribery, kickbacks, and other unsavory practices may become another goal of Tokyo round negotiators. They may even get around to restructuring parts of GATT itself. A quiet chemical industry
Heady stuff, all of this. Yet, according to one well-known chemical industry trade expert, "Nobody in the entire American chemical industry seems to give a damn." 22
C&EN Feb. 2, 1976
That is quite an indictment against an industry that is considered by itself and everyone else to be as internationally oriented as any industry in the country. It also may be something of an exaggeration. Exaggeration or not, there is no disputing the fact that the chemical industry's first-string trade spokesmen have been uncharacteristically quiet of late. The Tokyo round hasn't been elbowing other topics off of industry meeting programs. Nor is it the subject of a relentless flow of press releases, as the Kennedy round of trade negotiations was a decade ago. Then, top executives of chemical companies mounted speaking platforms en masse to voice their outrage at U.S. negotiating tactics in Geneva. They visited Washington, making personal pitches to Dent and, occasionally, to the President himself. Unlike the Kennedy round, the Tokyo round is blessed —or cursed—with none of this. Not yet, anyway. Why this lack of visible interest on the part of the industry's hierarchy? Perhaps the snail-like pace of the Tokyo round so far has something to do with it. Technicians within GATT actually began doing the spade work for these trade talks almost as soon as the Kennedy round ended in 1967. Officially, the Tokyo round was launched in September 1973, when delegates from more than 100 countries signed the Tokyo Declaration in the Japanese capital. Hence, the name of the negotiations. (There was a time when these trade talks were to have been known as the Nixon round.) What the diplomatic corps likes to call the "substantive phase" of the Tokyo round didn't really get started until last February. That's when the Trade Negotiations Committee, the parent body established by the Tokyo Declaration to supervise progress in the negotiations, met in Geneva and set up six committees. Each of these six committees (and their subcommittees) is responsible for one of the problem areas outlined in the Tokyo Declaration—tariffs, nontariff barriers, sector bargaining, safeguards, agriculture, and tropical products. The U.S. must shoulder much of the blame for the long delay, It wasn't until December 1974 that Congress was able to agree on a new trade bill. In January 1975, the President signed the Trade Reform Act of 1974, giving U.S. negotiators the authority they needed to participate in the Tokyo round. Amazingly, the U.S. had been without a trade bill since the Trade Expansion Act of 1962 expired in 1967. This uninspiring pace has done little to trigger the enthusiasm of top chemical management for the Tokyo round. In addition, domestic problems—energy policy, toxic subFeb. 2, 1976C&EN
23
After a long decline U.S. share of world exports is recovering
World chemical trade is up fivefold in a decade
Per cent
World chemical exports, $ billions
Chemicals
t
J
t
t
t
t
! AH manufacturing I
I i 1i
a First quarter only. Source: Department of Commerce
stances, pollution, capital shortages, and the late, unlamented recession—have pushed the trade talks a few rungs down their ladder of priorities. But make no mistake about it. The U.S. chemical industry does give a damn. It has been, and still is, vitally concerned about developments in the Tokyo round, just as it has been in all the earlier GATT sessions. Soaring world trade
And well it should be. Whether the negotiators accomplish a little or a lot in Geneva, the outcome is certain to have a tremendous impact on international trade. This trade, in turn, has become an important element in the overall world economy. World trade, measured as exports, has grown from $214 billion at the end of the Kennedy round to a staggering $880 billion last year. Today, about 16% of the world's production crosses national borders, twice the percentage of 25 years ago. If not this year, then certainly next year, world trade will become a trilliondollar economy in its own right. Chemicals have figured prominently in this expansion. World chemical exports have grown an average 19% per year since the Kennedy round ended. They hit $60.5 billion in 1974 before sliding back to $59.0 billion last year. U.S. chemical companies enjoy a good slice of this export business. They exported about $8.8 billion worth of chemicals in 1975, about 10% of total U.S. shipments of chemicals and allied products. This year, U.S. chemical exports could top the $10 billion milestone. In all the world, only West Germany exceeds the U.S. as a chemical exporter. On the other hand, the U.S. also is a large chemical importer. Imports last year were $3.75 billion. They probably will jump to $4.7 billion this year given any encouragement from an improved domestic economy. On balance, however, this country always has benefited from a healthy chemical trade surplus—a surplus that hit $5 billion last year. The U.S. chemical industry and the men who run it want to maintain, and even improve upon, that $5 billion surplus. They know that what comes out of the Tokyo round will help determine whether or not they are able to. And just because top chemical management hasn't been sounding off about the Tokyo round as much as some observers would like them to doesn't mean that the industry has forgotten where Geneva is and what's going on there. Instead, one has to drop a few floors below the executive 24
C&ENFeb. 2, 1976
a C&EN estimate. Source: United Nations
suites to find where the real chemical industry concern about the Tokyo round lies. There, among shirt-sleeve middle management, as well as within the many industry trade associations, are the men whose job it is to follow international trade and economic developments almost on a dayto-day basis. These chemical industry trade experts have been on top of developments in the trade negotiations from the very start. Many of them have been at it since the Kennedy round days. Every time a trade bill hit the Congressional hopper, they either were there personally or prepared testimony for their bosses. Advice from the experts
Since the trade act was signed, these experts have been busy funneling data and policy recommendations into the extensive web of information-gathering channels set up to tap the public's views on Tokyo round issues. They have filled out endless questionnaires for the International Trade Commission (ITC). They have testified at a number of ITC hearings throughout the country. They have reinforced their positions at hearings of the Trade Policy Staff Committee (TPSC), a federal interagency group. Many of them serve on one of the four ISAC's (Industry Sector Advisory Committee) set up to provide detailed advice and information on trade barriers that affect individual chemical products. There are 26 ISAC's in all. These ISAC's have spawned Industry Sector Advisory Reports, which have added to the special trade representative's overflowing data bank. But many people in the chemical industry think the reports do not reflect accurately the way the industry—or at least their own companies—feels about some aspects of the Tokyo round. For this, they blame the ground rules under which the ISAC's had to operate. In this respect, it is the Kennedy round all over again. During the last round of GATT negotiations, one of the chemical industry's biggest complaints was that government officials made little effort to hear what industry representatives were saying. Or if they heard, they didn't heed. Some chemical industry trade experts sense that the same thing may be happening this time. So they are picking up their old hats as chairmen or members of several industry task forces that were set up under the Office of the Chemical Industry Trade Adviser (OCITA), which itself
was established by industry trade associations in 1973 to centralize and coordinate industry positions on pending trade legislation and the trade negotiations. The task forces are administered by various industry trade associations and are set up along product lines—for instance, pigments, elastomers, cyclic intermediates, and dyes—an even dozen in all. The network provided by the trade act to collect information and advice from the public sector had brought much of the task forces' work to a screeching halt. Supposedly, for example, the ISAC's would do the work that the task forces had been set up to do. However, as dissatisfaction with the ISAC reports grew, several task forces were reactivated. What these task forces will do with the information and positions they develop is difficult to say. Industry trade experts believe that the task-force approach gives them more flexibility than they have under, say, the ISAC setup. They could use task force data to reinforce the ISAC reports or route the data to the Trade Policy Staff Committee or directly to the special trade representative. Or they might put the data in the laps of an influential Congressional committee, such as the Senate Finance Committee or the House Ways & Means Committee, which will be keeping their own eyes focused on Tokyo round developments. To many industry experts, this seems like the most effective approach. "We will do what we have to do to get our positions heard," says the head of one trade association.
Dry Color Manufacturers Association
A policy of caution
Society of the Plastics Industry
Mostly, the work of the task forces will involve detail because the chemical industry's policy on the basic issues of the Tokyo round already has been well established. If that policy were to be summed up in one word, the word would be caution. Dow's Robert E. Naegele expressed it best at an ITC hearing last year while he was still president of the Synthetic Organic Chemical Manufacturers Association. "Go slow until the fog clears," he told ITC. Dr. David H. Dawson, a Du Pont director, head of OCITA and the chemical industry's senior trade adviser, elaborated on Naegele's statement. Economic disturbances and uncertainty about the future, said Dawson, "make highly questionable the wisdom of entering into extensive negotiations at this time." What Dawson had in mind was the then-current recession throughout the world and the inflation that accompanied it both in the U.S. and abroad. Uncertainties about future supplies and prices of hydrocarbon feedstocks and about energy in general make it hazardous if not impossible to forecast the future competitive position of the U.S. chemical industry vis-a-vis foreign competition. The devalued dollar, fluctuating exchange rates, and the unpredictable impact of the oil-rich Arab countries on petrochemical supplies only cloud the picture even more. With these factors in mind, Dawson outlined four basic tenets of the chemical industry's trade policy, all of which add up to a cautious, go-slow approach: • The Tokyo round should concentrate on the long and time-consuming negotiation of nontariff barriers. • Basic changes in the tariff structure should be delayed because of the uncertain future of world trade. • Whatever tariff changes are negotiated at Geneva should be phased in at the slowest possible rate. The U.S. Trade Reform Act says that this phase-in period cannot be more than 10 years. "We would urge that it not be sensibly less," says Dawson. • The maximum tariff reductions allowed by the trade act should not be considered as the negotiators' principal objective. Under the law, the President is authorized to eliminate all U.S. tariffs that now are 5% or less. Others can be cut up to 60% of their existing rate. Instead, the objective should be tariff changes, whether they are large or small, that yield an advantage for the U.S. There is no doubt that the uncertain economic climate played a big role in molding the chemical industry's trade
Trade associations organize to advise on chemical trade policy Under the Office of the Chemical Industry Trade Adviser, organized in 1073 by several trade associations, four of the associations are responsible for one or more tide forces established to advise the government regarding trade policy for a (token specific chemical product lines:
Pigments
!
; I f
-
Manufacturing Chemists Association Elastomers Inorganic compounds Medicinal chemicals Pesticides Plasticizers Rubber processing chemicaJs
Plastics and resin materials Synthetic Organic Chemical Manufacturers Association Cyclic intermediates
Dyes
-mm
Miscellaneous organic chemicals Surface-active agents policy. There also is no doubt that much of it stems from a residual attitude left over from the Kennedy round. Many of the industry's trade experts still feel that they received the short end of the stick in the Kennedy round. And they doubt that the industry will fare any better from the Tokyo round. A widening chemical surplus
A glance at the industry's trade performance since the Kennedy round might make this attitude seem a little puzzling. Since 1967, growth of U.S. chemical exports has averaged 15.3% annually. The industry's trade surplus has increased from $1.84 billion to $5 billion. But the industry can muster some statistics of its own in defense of its position. Chemical imports have grown 18.5% annually since the Kennedy round ended. And the U.S. share of the world chemical export market, which stood at 24.6% before the Kennedy round, dropped to 18.5% by 1974. Industry spokesmen like to remind everyone how the U.S. cut its chemical tariffs 50% during the Kennedy round whereas the European Communities and the U.K. (which was not then a member of EC) cut their tariffs by only 20%. This time, the industry wants reciprocity in the tariff negotiations. It will settle for more, but certainly nothing less. Chemical industry policymakers also believe that international developments since the Kennedy round have hurt the industry's competitive position. For instance, they don't think that U.S. chemical companies obtained adequate compensation when the U.K., Ireland, and Denmark joined Feb. 2, 1976C&EN
25
U.S. enjoyed a record trade surplus last year • '•i'-''-'-iK!^\i:.'^--'-:'
I.S. chemical exports continue to top imports Dyaswiae margin
$ Billions
$ Millions
1965 1966 1967
loss
1969 1970 1971 1972 1973 1974 1975*
U.S. exports
U.S. Imports - Trade balance
$26.7 29.4,; . " ' sfiWw
-,
$21.41 [\ • 25*5 '. 'V;'#;$&$¥.
* .
1 ' M s r o;""f
u:t* ; *:i!?>yi*iak.2r\'> .
37.3 42.7 43.5 49.2 70.8 97.9 107.0
> > !f^^ : ':;m0, , .v$B-£ 55.6 69.5 . 100.3 »96.3r
~,
•
$5.3 3.9 4.1
1965 1966
0.9
1968 1969 1970 1971 1972 1973 1974 1975*
1.3. 2.7 -2.1 -6.4 1.3 -2.4 10.7
a C&EN estimates. Source: Bureau of the Census
the European Communities. Once these countries jumped behind EC's common tariff walls, the six original EC countries immediately reaped a trade advantage over U.S. companies. The preferential trade agreements that EC has negotiated with the European Free Trade Association countries that did not join EC also put the U.S. chemical industry at a competitive disadvantage. Duties on trade among these countries will be completely abolished by July 1977. U.S. exporters, meanwhile, will have to pay a duty to reach these 16 European countries. In addition, EC has signed or is negotiating trade agreements with several Mediterranean countries and also has preferential ties with 46 developing countries. Developments such as these, as much as uncertainty about the future, have helped to shape the chemical industry's cautious stance toward the Tokyo round. There are many other parts that make up the whole of the industry's trade policy, but perhaps the most important of them is its position on sector bargaining. A vote for sector bargaining
The industry favors sector bargaining; it wants U.S. negotiators to receive reciprocal chemical concessions for any chemical concessions they bargain away. In the U.S., the sector argument is primarily a fight between several manufacturing industries and agriculture. Agricultural negotiations are a priority item for U.S. trade officials. But U.S. farm interests, aware that they have little to place on the bargaining table, want our negotiators to offer industrial concessions in return for agricultural concessions. The chemical industry, as well as several other industries, wants no part of such a deal. It wants its own interests negotiated separately, as a sector. During Congressional hearings on the trade bill, Harold C. Whittemore, who was then president of the Synthetic Organic Chemical Manufacturers Association, told the Ways & Means Committee that reciprocity within sectors is essential "unless trade negotiations are to become a means of deciding which industry shall flourish and which languish or die." The final wording of the Trade Reform Act calls for sector bargaining as a "principal U.S. negotiating objective," but it does not make the sectoral approach mandatory. Obviously, the chemical industry's policymakers are less than enthusiastic about their prospects of coming out of the Tokyo round with an advantageous deal. In fact, several have said privately that they would be just as happy if the negotiators packed up their suitcases and left Geneva permanently. Failing that, they would prefer to see the negotiations drag on indefinitely without reaching any agreement. "That way, the diplomats would feel they are doing something constructive, but nobody would really get hurt," says one chemical industry trade expert. 26
C&EN Feb. 2, 1976
U.S. chemical exports
.S. chemical 'fropdrts^ *
nemicai trade balance :
, ' -~ $2402:; -,"".**$ 778 L /:"2676V;.; $&
1Qfi7
98h2t
,,
l(k^
-- 3289'v^" ; ; H'^^& •* 33^3 , '' ::Wi£&t ' * : 3826 . $m 3837 161:2' 4134 2015 5748 2437 8819 4018 8750. 3750
$1624 1734 1POQ
2167' 2151 2376 2225 2119 3311 4801 5000
a C&EN estimates. Source: Bureau of the Census
But these industry "pros" will have to face the fact that the negotiators aren't going to leave Geneva, although there was a time when it seemed that some of them might. Nor will the trade talks drag on indefinitely. It only seems that way. Dent wasn't making idle diplomatic chatter when he said at the most recent Trade Negotiations Committee meeting last December that the negotiations had reached a critical juncture. Certainly, whatever naive hopes that once existed for a speedy conclusion to the Tokyo round long since have gone by the boards. And, if the trade talks are to succeed at all, this is the year in which the delegates will have to get moving. They will have to set aside their information gathering and their analytical studies and tackle the real issues. Pressures for more protection
Until last month, protectionist pressures created by the worldwide recession and unemployment threatened any further progress in the Tokyo round. In the U.S., threats of antidumping action and countervailing duties against some imports angered many European countries. The U.S. indicated that it might retaliate against the import controls that Britain imposed to help its faltering industries. Actually, the British controls are modest and don't seem to have ruffled too many feathers. For the most part, the world's trading nations tend to be sticking to their pledge, made through the Organization for Economic Cooperation & Development (OECD), that they would not adopt beggar-thy-neighbor policies to deal with import problems. In a recent speech before the National Foreign Trade Council in New York City, EC commissioner Finn Olav Gundelach noted an important distinction between protectionist pressures and protectionist measures. Given the present economic conditions, protectionist pressures are inevitable, he says. But so far, responsible officials on both sides of the ocean have been able to avoid adopting protectionist measures. Not only was latent protectionism a threat to the Tokyo round, the snail-like pace of the negotiations themselves threatened to disrupt the talks. Several countries threatened to pull out of the negotiations, complaining about the cost of maintaining a delegation in Geneva for such a long time. Other countries who were on the verge of quitting simply regarded the Tokyo round as a futile exercise. Setting a target
But last month's meeting of the Trade Negotiations Committee endorsed a new work schedule and also nine specific work projects suggested by U.S. Ambassador Dent. "New life has been breathed into M T N , " said EC's Gundelach. The committee confirmed 1977 as the target date for
reaching the final phase of the negotiations. This is the target called for by six industrialized nations at an economic summit meeting in Rambouillet, France, last fall. As it is, that target date is two years later than the 1975 date originally set by the Tokyo Declaration for completing the negotiations. Two years is not a lot of time to complete everything that has to be done in Geneva. Presumably, the negotiators will set aside all of 1977 for hard-nosed bargaining, though, if their past record is any indicator, they will end up scrambling for an 11th hour agreement. Even so, they will have to complete a massive amount of work this year, just to get ready for next year's bargaining. Deputy special trade representative William N. Walker, who heads the U.S. trade delegation in Geneva, will find it especially tough to sell some of his counterparts on U.S. proposals. Last year, the U.S. chalked up a record trade surplus, estimated to be $10.5 billion to $11 billion. Coming on the heels of a $2.4 billion trade deficit the year before, the 1975 surplus stands out conspicuously. Although U.S. officials may applaud the surplus on this side of the ocean, in Geneva Bill Walker may find it an embarrassment. It might sound ironic for him to plead for trade concessions when last year's trade balance was so lopsided in favor of the U.S. The fact that almost everyone expects this year's balance to shrink considerably makes Walker's task only a little less awkward. Walker and his Geneva deputy William Culbert head an on-the-scene staff of about 40 full-time negotiators. They are set up in six project teams, corresponding to the six working groups established by the Trade Negotiations Committee. A seventh U.S. project team is concerned with the structure of the trading system.
Chemical tariffs of the major industrialized nations are, roughly, at the same average levels. The same holds true for the average tariff rates of other manufactured products. In the U.S., the average arithmetic (unweighted) tariff for all chemicals (including duty-free imports) is 9.0%. In EC, it is 10.6%; in Japan 9.6%; in Canada 7.7%. What these average rates do not show, however, is that some countries have particularly high peaks and low valleys in their tariff structures. This is especially true of the U.S. In U.S. tariff schedules, for instance, almost half of all chemical tariffs are below the 5% duty level. By the same token, a high proportion (about 11%) of chemical tariff rates are above 20%. By comparison, the bulk of EC's chemical tariff rates are bunched between 5% and 20%. Only 8% of its rates fall below this range and a paltry 0.3% of them fall above it. A formula for smoothing tariffs
The peaks and valleys in the U.S. tariff structure lead EC negotiators to favor the harmonization formula. This way, the higher tariff rates would be cut by a larger percentage to bring about a more uniform, or "harmonized," tariff structure throughout the industrialized world. Linear reductions, says EC, would reduce already-low tariffs to such a low level that they would afford no protection whatsoever. Meanwhile, high tariffs still would remain high enough to give import protection to those countries fortunate enough to have them. Meanwhile, EC would be left with little leverage with which to obtain subsequent reductions in those high tariffs that its exports must face. Trade experts in the chemical industry naturally favor linear—and reciprocal—tariff cuts, if there have to be any cuts at all. "What [does EC] expect us to do," one chemical Cutting tariff rates pro asks facetiously, "raise our low tariffs in order to get harmonization?" The U.S. delegates and their counterparts on the MTN Chances are good that the U.S. and EC negotiators will Tariffs Group have their work cut out for them. So far, be able to reach a compromise on a tariff-cutting formula progress on tariff-cutting procedures has been disappointingly slow in the Tokyo round. Despite this, the chances of reaching an agreement on tariff reductions are as good as any. One big reason is that the negotiators have had more experience dealing with tariffs than with any other subject Ilolon-atoc t n t h o T * L - > ^ rWnnH >.f +>~>H« t^]L,KsK>«,»iSiB» of the Tokyo round. Such a prospect doesn't make the U.S. aMed'.tp shoot 1 f ; p i t e « « M ^ B chemical industry particularly happy. It would just as soon see tariff cuts delayed as long as possible. rare?.. One of the first problems facing the MTN Tariffs Group is agreeing upon a tariff-cutting formula. It may take a giant '•3fa?&m»^ iftioffeu step toward doing this when it meets again in March. By then, the U.S. may be ready to indicate its preference for a s&r r Jvoran or a ^Qse^eawQ^ vynmrntjatRmfinffii tariff-cutting formula, says Allen Garland, assistant special tiaras. representative and Dent's tariffs specialist. But indicating a U.S. preference and obtaining internafe-t * A procedure! for; Umrmz^g ^mif^^m^m tional agreement are not the same. And as in most other v9 : p a c t i o n s o n imports, ~'~:\~. >" iW^X^M areas of the Tokyo round, reaching agreement implies a meeting of the minds between the U.S. and the European IfV-^ Selection qf products-Jor>WHip^S#p|#^ Communities. ;%)ientary sector bargaining is feasil?!&: ! ) l $ i ^ ^ ^ | So far, at least nine different tariff-cutting proposals have ^ ' f Special treatment for deveIp|3)ngj^fM^|^ffl been brought before the MTN Tariffs Group. The U.S. has offered three formulas "for study purposes only." EC has #$rade negotiations. ' " AA/^t%m§i^m proposed a couple without indicating exactly which it pre:,;; ; ,• ^\J''^WMmMm fers. '"', • ' Agreements on tropical produMs^^M?iJiP>l^M Basically, the various proposals call for either linear tariff !,,' -•- A framework^ for d e a l i n g v ^ ^ ' ^ j | p 9 | w w cuts or reductions designed to harmonize tariff rates. Some countervailing duties. \/ ' '>. ' * -* :V A ^^iMmmS proposals are a combination of the two. Under the linear scheme, tariffs are reduced by a fixed percentage across the - • Agreement on basic d d n c £ $ | s ^ board on all industrial products. This was the general rule ;^ul^dn^afeguar4s against ^x6is!si^e:;f^|Jpv^^2 in the Kennedy round, when negotiators achieved an aver:;.,: ? A look- at issues which haye,.;^et!tp;^fl^S age 35% reduction in the tariff rates of industrial products. Although the U.S. isn't locked into a position, it tends to V;quat0^attentjon;dijiring the: TokyO'^rduhcJjiis^^^M favor linear cuts. export restraints, government procuredertilMli|S EC, on the other hand, favors the harmonization techprocedures for'settling disputes, ^ ^ ; p r | f e # | i ^ f S nique, by which high tariffs are cut by a bigger percentage Meeting world trade, and/^,;cpde|';p|;/ n cof||^^|o^ than are low tariff rates. A look at comparable tariff rates ; ^Urriirtate unethical p r a c ( t f c ^ ' J & ^ ^ ^ ' ^ | ^ | ^ ^ ^ around the world shows why the U.S. and EC lean the way they do.
p%, goals m\m0
Feb. 2, 1976C&EN 27
Six GATT trade negotiations completed since 1947 have spurred world exports
Average tariffs are fairly uniform among industrialized countries...
World exports, $ billions
Average chemical tariff rate U.S.
All chemicals Dutiable chemicals
9.0% 9.7
Tokyo round 197!
European Canada Communities Japan
777% 13.5
10.6% 10.9
9.6% 10.4
. . . but the U.S. rate structure for chemicals is less uniform than others Duty level Free 0.1-5.0% 5.1-10.0 10.1-15.0 15.1-20.0 20.1-25.0 25.1-30.0 More than 30
7.6% 39.5 25.3 7.4 9.2 6.7 3.5 1.0
42.6% 2.6 13.6 31.7 8.3 0.9 0.1 0.2
2.5% 5.3 33.0 48.7 10.1 0.3
—
7.1% 13.1 53.9 18.8 5.2 1.1 0.3 0.3
Source: International Trade Commission
W^m^mm^^^tl^
a C&EN estimate.
or a combination of formulas. In some cases, even an itemby-item tariff-cutting approach could be used. Even after the MTN Tariffs Group agrees on a basic tariff-cutting formula, it will be confronted with other problems. EC favors setting a threshold or floor below which no cuts would be made. It has adopted this stand for two reasons. First, a floor guarantees that some small measure of tariff protection remains intact. Secondly, it means that developing countries that benefit from preferential tariff rates offered by industrialized countries will continue to enjoy a tariff advantage. Developing countries, needless to say, also favor a floor because they don't want to see their preferential tariff margins eroded away. The U.S. trade act permits U.S. negotiators to completely abolish tariffs that now are 5% or less. This doesn't mean, however, that they intend to do so. And the chemical industry certainly hopes that they don't. Canada is against a tariff "floor." Searching for a base
Then there are the technical details involved in any tariff-cutting exercise. One is the question of base dates and base rates—that is, the dates and rates on which negotiated tariff cuts are to be based. The base date is simple enough. Negotiators merely establish a particular date. The tariffs in force at that time are the ones to which concessions will be applied. The base rate question is more complicated. Negotiators must decide which rates of duty in a country's tariff schedule will be the bases for concessions. These could be statutory most-favored-nation rates. They could be rates bound or fixed under GATT, if these differ from statutory rates. Or they could be higher or lower rates that might be temporarily in effect on the base date. These higher or lower rates could have been imposed because of a temporary duty increase under an escape clause action or a temporary duty reduction or suspension. Another task facing the MTN Tariffs Group is selecting the year—or years—upon which trade statistics used in the negotiations will be based. There was no formal base year used in the Kennedy round, but this issue now has taken on greater economic and political significance. The reason: Many countries taking part in the Tokyo round have or have had large bilateral trade imbalances. What may be a good base year for one country may not necessarily be a good base year for another. For instance, a 28
C&EN Feb. 2, 1976
Source: United Nations
T^^cftl»w*
country's bargaining position is better if its import figures are larger and those of its negotiating counterpart are smaller during the base year. Tentatively, the Tariffs Group has chosen 1970-72 as the statistical reference years. They may, however, add or switch to more recent years if the data become available. Obviously, with last year's huge trade surplus, 1975 would not be a good base year for the U.S. Canadians favor the sector approach to tariff negotiations, at least as a complementary technique. This should endear them to the U.S. chemical industry. But the industry needs more support than the Canadians can muster before it can feel confident that sector bargaining will be used in the Tokyo round. Many developing countries also have expressed interest in the sector approach, primarily because their exports tend to be concentrated in a relatively few product areas. The U.S. Trade Reform Act says that sector bargaining should be a "principal U.S. negotiating objective," but doesn't require it. The U.S. attitude toward sector bargaining so far can best be described as cautious. U.S. representatives on the MTN Sectors Group, which is handling this issue, proposed that three product areas be studied for possible sector treatment. These three, in addition to the ones already under study, are chemicals, heavy electrical equipment, and electronics. When this U.S. proposal was first presented, opposition was strong and widespread. EC spokesmen, for instance, have emphasized repeatedly that the sector approach is essentially a "complementary technique" that cannot be considered as a substitute for other negotiating methods. EC has some support for its position in the Tokyo Declaration itself. The declaration provides only for "an examination of the possibilities for the coordinated reduction or elimination of all barriers to trade in selected sectors as a complementary technique." It doesn't specify whether or in what product areas the sector approach might be applied. At best, EC says that the use of sector bargaining can be decided only after general tariff and nontariff-barrier negotiations are well advanced. Theodorus Hijzen, who heads the EC negotiating team as he did in the Kennedy round, believes that it will be too difficult to achieve true reciprocity using the sector approach. EC still is unconvinced that the sector approach is in the interests of all Tokyo round participants and not just some of them, says Hijzen. The MTN Sectors Group is moving ahead on its studies
of ores and metals as sector-bargaining candidates. It also is studying sectors proposed by developing countries, particularly wood and wood products. Only after a compromise agreement did the group agree to add the U.S.'s three candidates to its study list. It deferred until March a Canadian proposal to consider copper specifically for sector bargaining. This Canadian proposal was opposed not only by EC but by Japan, Switzerland, and the Nordic countries as well. The U.S. chemical industry, it seems, will have a long wait for sector bargaining to become a reality in Geneva. Indeed, the sectors group may never go beyond studying the problem.
Nontariff barriers Among more than 850 nontariff world trade, major types include Specific limits on trade
barriers to
Quotas. Import licensing practices. Restrictions on the proportion of foreign-todomestic goods used.
The vexing problem of nontariff barriers
Minimum import price limits.
Meanwhile, another working group has the unenviable task of coping with one of the most complex and difficult phases of the Tokyo round. That group is the Nontariff Barriers (NTB) Group. The Tokyo round often is described as an ambitious undertaking. It has earned that tag primarily because it is attempting to negotiate nontariff barriers, something that no previous round of trade talks has done. Since the Kennedy round ended, tariffs have become less of an impediment to world trade. Nontariff barriers have taken over as the tools most widely used to either restrict imports or artificially stimulate exports. In a report on nontariff barriers, the National Association of Manufacturers cites ways in which these barriers impede the flow of trade. First, their very existence creates an element of uncertainty for exporters seeking to penetrate a foreign market. Secondly, these barriers restrict the free flow of goods and services. Finally, they discriminate against foreign supply sources. A related factor, says the association, is the difficulty exporters have of clearly identifying some nontariff barriers and measuring their economic effects. These same difficulties face the NTB Group in Geneva. Only its task is multiplied many-fold. At last count, GATT had identified more than 850 existing nontariff barriers. Certainly no one in his right mind expects the Tokyo round to resolve all of these barrier issues. But even after picking out the ones that are really important or potentially negotiable, the negotiators may have more on their hands than they can handle in one sitting, even a sitting that is lasting as long as the Tokyo round. GATT has classified its 850 nontariff barriers into five distinct categories. The NTB Group has set up subgroups under it to handle four of these. • Quantitative restrictions, including import licensing. • Technical barriers to trade, such as technical regulations, standards, packaging, and labeling. • Customs matters, which include customs valuation, nomenclature, documentation, and other import formalities. • Subsidies and countervailing duties. The untouched category is government procurement practices. Negotiators are considering the possibility of bringing this category into the trade talks. In fact, the U.S. considers government procurement, along with product standards and subsidies, to be one of the top-priority nontariff barriers that it wants negotiated during the Tokyo round. The topic has been discussed in OECD for the past six years, but agreement on drafting an international code is still a long way off. The technical barriers subgroup is concentrating its efforts on a product standards code. It has accepted a U.S. proposal that a draft code which a GATT committee prepared in 1973 serve as the basis for negotiating a contractual agreement. The U.S. negotiators jumped on the standards code early in the Tokyo round for two reasons. First, they consider standards a priority item. Secondly, they believed that early agreement could be reached on a code. The trade
Embargoes. Customs and administrative entry procedures Valuation systems for Imported products. Antidumping practices. Tariff misclassifications. Documentation red tape. Import fees. Standards that impede trade Frequent changes in regulations on product standards. Refusal of one country to recognize product standards of others. Unreasonable application of standards or packaging, labeling, and marking requirements. Government participation in trade Government procurement policies. Export subsidies. Countervailing duties. Domestic assistance and investment programs. Import charges other than regular tariffs Import deposits required prior to shipment. Administrative and statistical fees. Special supplementary duties on imports. Discriminatory credit restrictions for importers. Adjustable or variable import levies. Border tax and other fiscal adjustments to compensate for taxes applied within domestic economies. Rules of origin Discriminate against imports entering freetrade area or other regional trade bloc from nonmember countries. Domestic content requirements Private business practices, such as cartels
Feb. 2, 1976C&EN
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act says that agreements negotiated at Geneva must get prior Congressional approval. U.S. negotiators hoped to show their trading partners that this approval system will work. But Dent didn't get an "early harvest" out of the Tokyo round, as he called it. Some countries believe that an accelerated pace would yield a less-than-satisfactory code. Others believe that a standards code, by itself, can't lead to a balanced, reciprocal deal. They want the code to be considered as part of an overall MTN package agreement. Equally important, the European Communities, though accepting a standards code in principle, complained that, in practice, it would create too many problems within EC. The fact that the U.S. thinks the code should cover agricultural products as well as industrial products doesn't rest well with EC negotiators either.
U.S. imports of benzenoid chemicals continue to rise sharply
A debate over subsidies
Export subsidies and countervailing duties also are highpriority items on the MTN agenda as far as the U.S. is concerned. The two are inseparable. On the one hand, the U.S. argues that present GATT rules governing export subsidies are so vague and unenforceable that they are worthless. It considers subsidies to be the basic problem facing the committee. On the other hand, many U.S. trading partners think that countervailing duties, particularly U.S. countervailing duties, are the primary issue. These countries, led by EC, Canada, and Japan, proposed that a countervailing duties code be developed before work begins on export subsidies. Countervailing duties are duties imposed on imports and designed to counterbalance the preferential effects of bounties or grants (subsidies) that an exporter may receive from his home government. Many countries are critical of U.S. rules on such duties because they don't conform to GATT provisions. GATT says that subsidized exports must cause injury in the importing country before countervailing duties can be imposed. U.S. law provides for no such test of injury. Despite this, the U.S. claims that its laws don't violate GATT rules because U.S. laws on these duties were written long before the U.S. acceded to GATT and the GATT "grandfather clause" permits countries to maintain restrictions that predate GATT. The U.S., then, wants GATT rules revised to spell out clearly what does and does not constitute an illegal export subsidy. U.S. negotiators have suggested three categories of export subsidy practices: • Acceptable, because they are insignificant (such as trade fairs) or do not differentiate between products for export and products earmarked for domestic consumption. • Unacceptable, because they favor exports over domestic consumption. • Either, depending upon the way they are intended or used. That's what the U.S. wants. Just about everybody else in the world wants the U.S. to bring its 80-year-old countervailing duties law into conformity with GATT regulations by adding an injury test. Says Dent, "We think the two aims are not incompatible." Now, the subcommittee plans to look at subsidies and countervailing duties together in the form of still another code. The list of nontariff barriers problems facing the NTB subgroups is seemingly endless, with each one just as complicated as the other. Now, the NTB Group is thinking about setting up additional subgroups to handle still more nontariff barrier issues. In the reams of testimony that U.S. chemical industry trade experts have submitted to various government agencies, they probably have complained about most, if not all, of the 850 nontariff barriers that GATT has classified so far. That is, unless the barriers are ones that protect U.S. borders. However, two particular nontariff barriers are getting as much attention from the chemical industry as they did during the Kennedy round a decade ago. One, American Sell30
C&ENFeb. 2, 1976
Source: Department of Commerce
ing Price (ASP), they defend, although not with their old Kennedy-round vigor. The other, border taxes, they attack. "The bombshell of the Kennedy round—ASP—is not defused," says OCITA head Dawson. But neither is it the emotion-laden issue that it was. The U.S. chemical industry isn't fighting to retain it as if its life depended upon it. Foreign chemical companies aren't screaming for its removal as they did 10 years ago. ASP, of course, is nothing more than a customs valuation method, under which the duty assessed on an imported product is based on the wholesale price in the U.S. of a comparable domestic product. Since the price of a domestic product—the American Selling Price—is usually much higher than the foreign invoice price that otherwise would be used in assessing the duty, the level of protection that ASP gives a domestic industry is much higher. ASP applies, among other things, to benzenoid chemicals. Yet despite the protection of ASP, benzenoid imports have increased from $132 million in 1967 to $634 million in 1974. During the Kennedy round, the benzenoid segment of the chemical industry fought tooth and nail to preserve it. This time, the trade experts of the chemical industry fully expect ASP to be bargained away. Their only hope now is that it will bring a good price. They also insist that whatever reciprocal benefits our negotiators receive for trading away ASP should come to the chemical industry, not to any other industry and not to agriculture. For openers, they suggest that the U.S. should get the 30% reduction on chemical tariffs that EC withheld from the basic Kennedy round agreement. During the Kennedy round, the U.S. cut its chemical tariffs roughly 50%, while EC cut its chemical tariffs only 20%. The additional 30% cut was to come if Congress approved the "separate package" that would have eliminated ASP. Congress didn't approve the package. EC didn't make the additional cuts. If ASP is negotiated at Geneva, the present ASP-based duty rates will have to be converted to rates based on conventional valuation methods. This time, say the benzenoid experts, U.S. negotiators had better make sure that the converted rates give benzenoid producers about the same amount of protection that they now enjoy under ASP. They think that one of the big mistakes that U.S. negotiators made during the Kennedy round was to negotiate with a faulty schedule of converted rates. They point out that the U.S. Tariff Commission (now the International Trade Com-
by the producer. This theory, it adds, has very few supporters today. What should be done about the border tax problem? The chemical industry has several suggestions. The simplest, however, would be for GATT to stay neutral on indirect taxes, as it now j s on direct taxes. That way, neither direct nor indirect taxes would be assessed on imports at the border or rebated on exports. Border taxes, ASP, and other nontariff barriers aren't the only problems that will test the skills of negotiators in Geneva. The developing countries soon may become impatient with the pace of the Tokyo round and press for action on their demands. Safeguards are another important issue. At a time when countries are trying to keep a lid on protectionist pressures and, at the same time, increase their exports, safeguards become especially significant. A look at safeguards
mission) admitted that instructions received from the special trade representative prevented it from coming up with converted rates that afforded equivalent protection. Focusing on border taxes
The chemical industry also believes that if ASP goes the U.S. should negotiate an end to the border tax-export rebate mechanism as practiced by EC. This is an old and favorite target of the chemical industry. The whole border tax issue stems from the accepted interpretation of GATT rules covering tax treatment at national borders. The rules distinguish between a direct tax, such as the income tax prevalent in the U.S., and an indirect tax, such as the value-added tax used by EC. Under GATT rules, an indirect tax is considered a tax on the product. It may be assessed on imports crossing the border and rebated to exports leaving the country which uses indirect taxes. Direct taxes, on the other hand, can neither be assessed on imports nor rebated on exports. The chemical industry thinks that this distinction is unfair and puts U.S. companies at a disadvantage. In testimony submitted to the Trade Policy Staff Committee, the Synthetic Organic Chemical Manufacturers Association and the Dry Color Manufacturers Association presented what they called an oversimplified example of how border taxes affect trade. Assume that a product is sold in the U.S. for $1000 and the same product is sold in Europe with all taxes paid for the same $1000. When a UQ.S. exporter ships to Europe, his product bears the full U.S. tax load. Then it is assessed an additional tax (assumed to be 15%) at the border in Europe. If the U.S. manufacturer wants to compete with the $1000 price charged by European companies, he will have to absorb this $150 border tax. The disadvantage is just as obvious, say the trade associations, if the trade flow is reversed. When a European company ships to the U.S., it receives a tax rebate of $150, which more than offsets the average U.S. duty on chemicals. Its product is free of a major European tax burden and bears none of the direct U.S. tax burden. The chemical industry claims that the GATT rules are based on an outmoded theory that all indirect taxes are passed on to the customer and all direct taxes are absorbed
Safeguards are the legal methods countries use to restrict imports whenever their balance of payments is in danger or their industries are threatened by import competition. GATT article XIX provides the basic safeguards rules for GATT members. But the GATT "safeguard" or "escape" clause leaves a lot to be desired. It hasn't been doing the job it was intended to do. Many countries, the U.S. included, have invoked safeguard measures that aren't permitted under the GATT rule. Tariff rates already are low and presumably will drop lower. Many countries will become more vulnerable to import injury and will turn increasingly to safeguards. The Safeguards Group hopes to revise the rules governing use of safeguards. But it won't be easy. Many countries represented at the Tokyo round have different ideas on how the rules should be changed. Some think they shouldn't be changed at all. But if there is one issue that could make or break the entire Tokyo round, it is agriculture. As usual, the problem stems from a U.S.-EC confrontation. The U.S. has insisted all along that tariff and nontariff concessions on farm products be linked with those on industrialized products. EC, sensing a threat to its cherished Common Agricultural Policy (CAP), has been just as insistent that agricultural and industrial negotiations be conducted separately. CAP, say EC officials, represents a special condition of agriculture within the community. "Its principles and mechanisms should not be called into question and therefore do not constitute a matter for negotiation." The U.S.-EC impasse surfaced over how the Agriculture Group was to structure its work. EC thinks the group should have sole responsibility for all issues affecting agricultural trade. Agreements reached in other multilateral trade negotiations groups should not be applied to agricultural products, says EC. The U.S., however, wants industrial and agricultural negotiations to advance hand in hand. It thinks that joint meetings should be held between the Agriculture Group and other negotiating groups. That way, it would be easier to reach agreements that could apply to both industrial and agricultural trade. Previous attempts to compromise on the issue have been blocked by the French. However, at last month's meeting of the Trade Negotiations Committee, each side was able to give a little. This compromise avoided a major procedural deadlock. In the final analysis, success or failure of the Tokyo round will depend upon whether or not the U.S. and the European Communities can continue to avoid deadlocks. Success also will depend upon whether or not all of the countries participating in the Tokyo round have the political will to solve international economic problems that now have grown large enough to be considered political problems. E Feb. 2, 1976C&EN
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