The overall conclusion of the Kennedy Round on 30 June 1967 meant significant progress in the reduction of trade barriers between the transatlantic partners. The average tariff reduction was 36–9 per cent and about two-thirds of tariff cuts were 50 per cent or more.1 Yet, in the first place, the tariff reductions were not homogeneous, nor were their benefits evenly distributed between the two partners. As expected, greater cuts were agreed in those sectors characterized by dynamic technology where the main trading partners’ industries were more eager to compete and less affected by import competition. Sectors like steel and particularly textiles did not see equivalent progress. In agriculture, where the formation of the CAP was to establish a strongly protected market for EC farmers, substantial reductions were made on a wide range of products, which, however, were far from accounting for the bulk of trade between the Community and the United States. Limited and unstable progress was achieved for the grain market, while no effective agreement could be reached for dairy and meat. The balance for tariff binding on industrial products was probably weighted in favour of the United States. According to the Economic and Social Committee of the EC both the arithmetic average and weighted average of the EC were lower than those of the US: respectively 6.9 per cent and 6.4 per cent versus 11.1 per cent and 7.3 per cent. Secondly, less than 7 per cent of EC customs tariffs exceeded the 12 per cent rate, whereas in the United States and in Japan almost one-third of them exceeded that threshold.2 In this context, the EC also argued that the linear cut system prevalently adopted in the Kennedy Round made the problem of tariff disparities worse since an equal reduction on either side would leave the protective effect of the high tariff substantially untouched while considerably reducing that of the lower tariff. For instance, a curtailment of a tariff rate from 80 to 40 had a much lower impact than a reduction from 30 to15.3
At the outset of the Kennedy Round the parties agreed that non-tariff barriers to trade should be included in the negotiations, but no real progress was made and quite soon the attempt was abandoned. Indeed, not only were non-tariff barriers difficult to assess but their international regulation was harder to achieve than tariff cuts. Unlike tariffs, approaches to the reduction of non-tariff barriers were difficult to embody in the delegation of negotiating authority, as in most cases they had their roots in domestic concerns only indirectly related to foreign trade and were subject to domestic laws. Only two agreements were signed: an antidumping code and an engagement to eliminate the American Selling Price (ASP) system in the US along with equally discriminatory measures in the EC. The ASP system was essentially a device by which the value of imports for tariff purposes was set by the price of like or similar American products instead of the actual price of the foreign product, which was the basis of tariff valuation for most other imports. The system applied, although not exclusively, to benzenoid chemical imports. The only equivalent non-tariff barriers that the US managed to find in the EC were discriminatory road taxes in West Germany, France and Italy which penalized high-powered, mostly American, cars. The agreement reached at the end of the round envisaged the elimination of the ASP regime in exchange for tariff concessions on chemicals by the EC. The US Congress did not ratify the agreement and refused to repeal the ASP legislation and the Community put on hold its tariff concessions.
Also the consistency of US law with the Kennedy Round ‘Agreement on the Implementation of Article VI’ was open to dispute. Although in signing the antidumping code the executive claimed that nothing in its provisions ran counter to existing US law, many in Congress and the US Tariff Commission argued that there were several inconsistencies between the two rules. In particular, while the code provided that an injury determination could be made only if the dumped imports were demonstrably the principal cause of material industry, the US administrative practice identified material injury with any injury that was more than ‘de minimis’. Also the parameters set by the Kennedy Round Agreement to determine regional industries affected by the influx of dumped products were viewed as much more restrictive than those applied by the US. Thus, Public Law 90–634 implementing the Kennedy Round antidumping code in the United States allowed its application but only to the extent that it did not conflict with existing US law and did not infringe on US practice based on such law.
Soon after the conclusion of the Kennedy Round, in November 1967 the GATT Contracting Parties agreed to draw up a list of non-tariff and para-tariff measures by April 1968, which was to be submitted to the newly established Committee on Industrial Products.4
In short, the future round of multilateral negotiations was expected to fulfil three tasks: to further cut tariff rates among GATT parties and above all to harmonize the level of tariff concessions; to work out appropriate procedures to cope with problems caused by a set of non-tariff barriers, which in a first stage were to be identified and subject to comparative scrutiny; to reform agricultural trade, achieving at the same time greater stability in the market. The viewpoints of the United States and of its transatlantic trading partners on how to achieve these goals were not necessarily close on all fronts.
Criticizing the proposals aimed at imposing selective tariff barriers on products entering the UK, Sir T. H. Farrer pointed out in 1885 that ‘the programme of the Fair Trade League is not definite in particulars, but its principal features are as follows: …. Import duties to be levied upon the manufactures of foreign countries which now impose prohibitory or protective duties on our manufacturers; such duties are to be removed in the case of any nation which will agree to take manufactures free’.5
Applied to the twentieth century experience, the foregoing suggests two observations. First, fair trade as an alternative to free trade was not an economic policy approach born in the US in post World War Two as a result of the declining competitiveness of the American industry. In other words, nothing new under the sun. Secondly, in the economy of the last century where the support available to foreign industries was not limited to protective tariffs, fair-trade measures could have wider reasons and take wider forms than in the nineteenth century. On the other hand, the absence of a precise gauge like tariffs allowed the complaining country much greater discretion in deciding where the unfairness lay.
The pursuit of fair trade became one of the main planks of the economic policy of the Kennedy administration when it became evident that trading partners and competitors were closing the gap with the United States. Fair trade was viewed from different angles. In the first place there were the hindrances raised by the prospective importing country either through tariff or non-tariff barriers. But there was also the threat to the domestic industry brought about by exports boosted by the exporting competitor through a set of measures directly or indirectly aimed at fostering the export sector. It was the import competing sector of the American industry that was most successful in capturing the ear of the executive and Congress. There is nothing surprising in this. Certainly, as Table 1 shows, imports were a small fraction of the domestic and national product but this does not imply that the weight in the national economy of the output of the import-competing industries was comparably small. Secondly, the contribution to employment of the import-competing industries could be somewhat greater than their contribution to GDP, as quite often these industries, just because they were traditional, absorbed a greater portion of the working population than those active in more advanced sectors. Besides, the import competing industries were often the hub of the economy of several regions and their difficulties had, therefore, a negative multiplier effect. Examples could be found in the textile industry and later in the steel and automotive sectors.
These multifaceted problems were not less pressing when in November 1969 the Nixon administration submitted its trade bill to the US Congress.6 The bill proposed a set of measures under the banner of free trade but not without giving due consideration to fair trade appeals and to the need to support those sectors of the US economy in difficulty because of trade competition, whether fair or unfair.
Nixon urged the renewal until June 1973 of the presidential authority of reducing US tariffs, an authority which had expired in 1967, just after the completion of the Tokyo Round. However, the president made it clear that the authority was not designed for major tariff negotiations – that is, in view of multilateral negotiations which were not foreseen in the short-run – but for minor adjustments, which, for instance, could be linked to the adoption of an escape clause or to changes in statutory classification. The president also called for a statement of congressional intent to assist the executive in future negotiations to obtain reciprocal lowering of non-tariff barriers, but Nixon was careful not to arouse lawmakers’ sensitivity, pointing out that he was not looking for a blank check, but pledging rather to maintain close consultation with Congress. As a first step Nixon suggested the elimination of the ASP, which at that time was the main irritant in the relations with trading partners and in particular with the EC.
To strengthen the defence of US exports against unfair foreign treatment Nixon urged the modification of section 252 of the 1962 Trade Expansion Act, which authorized the imposition of duties or other import restrictions on the products of every country placing unjustifiable restrictions on US agricultural products. The authority was to be expanded by covering unfair actions against all US products and by taking action against foreign subsidized competition affecting American exports in third markets.
Finally, the president called for the amendment of the Trade Expansion Act of 1962 to enhance governmental assistance to industries, firms and workers affected by a surge in imports. The amendments concerned both the escape clause to industries and the adjustment assistance to individual firms and groups of workers. The so-called ‘escape clause’ is the possibility of temporarily suspending tariff concessions on imports that, as a result of changed circumstances, are causing or threatening to cause serious injury to domestic producers. In the GATT the escape clause is regulated under Article XIX which allows the imposition of higher tariffs only when the injury is the result of the concession sought to be suspended, of unforeseen developments and of increased quantities of imports. Domestic laws providing for the escape clause had to be consistent with the GATT provisions. The trade bill submitted by the administration wanted to ‘liberalize’ the 1962 Trade Expansion Act’s provisions which were accused of being too stringent and technical, making it impossible for seven years to justify any recommendation for relief. Thus, according to Nixon’s recommendation, relief should be available whenever increased imports were the ‘primary cause’ rather than the ‘major cause’ of actual or potential serious injury and was no longer to be related to a prior tariff reduction. The first amendment meant that the impact of imports would no longer have to be larger than that of all other causes combined, but only the largest single cause. The second provision was probably inconsistent with the requirements of GATT Article XIX which referred to ‘obligations incurred by a contracting party under this Agreement, including tariff concessions’. Also the existing adjustment assistance provisions were ‘liberalized’ to allow individual firms and workers to receive loans, technical aid, tax relief, relocation and training when increased imports were found to be a ‘substantial’ rather than a ‘primary’ cause of actual or potential injury. This expanded the government’s room for manoeuvre to keep afloat domestic industries affected by fair import competition through tariff barriers and domestic subsidies, temporary though they may have been.
If the administration’s trade bill, in spite of its free-trade claims, contained some overtures to protectionist feelings, it risked becoming an example of a congressional-type sorcerer’s apprentice when it started its journey through Congress. The president was initially opposed to all kinds of import quotas, but later could not resist pressure from industrialists affected by foreign competition, particularly in the southern textile industry, and their supporters in Congress. When the administration’s bill went to the House of Representatives’ Ways and Means Committee, its Chairman, Wilbur D. Mills proposed establishing import quotas for textiles and footwear. The administration, which in 1969 had unsuccessfully tried to negotiate textile agreements with Japan and the EC, endorsed Mills’s provision with regard to the former item but opposed its extension to footwear. The Committee not only upheld the extension proposed by its Chairman, but introduced a provision requesting the president, unless he found it contrary to national interest to do so, to impose import quotas on other commodities when the US Tariff Commission found that domestic producers were seriously injured by imports according to specific standards, often based on arithmetical parameters. Analogous provisions were adopted by the Senate’s Finance Committee, which, however, suggested qualitative, more flexible standards. Both the Senate and the House of Representatives granted presidential authority to eliminate ASP treatment on chemicals, but not on rubber-soled footwear, the other major commodity affected.
The administration strongly opposed the changes made by House and Senate Committees to the bill it had forwarded. The president threatened to veto mandatory quota legislation on products other than textiles, arguing that the modified bill would set off a trade war and that if quotas could save some jobs ‘they cost more jobs in the export that would be denied us’.7 In a final attempt to save its modified version of the trade bill the Finance Committee attached it to a bill on social security examined by the Senate during the same legislation. However, at the end of December 1970 the Senate returned the bill to the Committee with instructions to delete all but the social security provisions. This meant the death of the bill in both its modified and original versions. Thus, the moderate and, on the whole, free-trade oriented government proposal was dragged down by the attempts made by several economic groups and their supporters in Congress to secure a more protected environment for American industries, which finally prevented its enactment. Organized labour was particularly active in promoting a protectionist approach to foreign trade. As Bergsten noted, by the end of the 1960s the US unions’ attitude reflected that of their members. Having achieved sufficient income levels, they had become more interested in avoiding shifts of geographic location and kind of work, a threat increasingly caused by the steady advance of foreign competition and by the factors of production mobility that was one of the main features of US multinational corporations. Besides, organized labour was at that time under-represented in the high technology industries which often had a great interest in liberalizing world trade, whereas it was over-represented in non-technology intensive industries which were increasingly threatened by foreign competitors and were therefore eager for governmental protection.8
Also, the circles that promoted greater participation of the United States in international trade, rather than a defensive attitude, argued that the international rules of the game should be changed and that the needed amendments implied the dismissal of protectionist or interventionist practices of the main US partners. In May 1970 the president appointed a Commission on International Trade and Investments under the chairmanship of Albert Williams, Chief Executive Officer (CEO) of International Business Machines (IBM). The Commission submitted its report in July 1971 recommending a programme of immediate and longer-term measures, domestic and foreign, to be undertaken concurrently in the areas of trade, monetary policy and investment.9 As regards international trade policies, the Williams Commission called for the prompt start of multilateral negotiations for the elimination of barriers to trade and capital movements within 25 years. The prospective multilateral negotiations had to pay particular attention to hindrances and distortions to trade in agriculture, implying in particular a thorough revision of the EC CAP, to preferential arrangements, to the progressive elimination of all tariffs and quantitative restrictions and to the reduction of non-tariff barriers, including a code on government procurement practices and the dismantlement of export subsidies.
On the other side of the Atlantic the perceived rise of protectionist attitudes in the United States was worrying the Community member states and Brussels. As far back as January 1971, the EC commissioner for External Relations and Trade, Ralf Dahrendorf, warned the European Parliament that the proposals discussed in the US Congress would automatically trigger quantitative restrictions that were bound to affect all Community exports. However, at that time the commissioner argued that a new worldwide round of multilateral negotiations ‘would not promise much’ and favoured instead bilateral talks between the concerned trading partners.10
Just a few years after it achieved full operation in 1958 the Bretton Woods system started to show strains. With the decline of sterling the system had become a gold dollar standard whereby the United States pegged the price of gold and the rest of the world pegged their currencies to the dollar, whose value in gold, fixed at $35 per ounce, had been kept unchanged since 1944. From the 1950s onwards the balance of payments of the United States was in the red. If the US balance of payments deficit was a means of providing liquidity to the international system, its persistence and expansion could engender fears in the convertibility of the US currency and, although no IMF article prevented the United States from devaluing the dollar, the US monetary authorities were loath to resort to devaluation for fear of undermining confidence in the system.11 To keep the balance of payments deficit under control would imply stricter fiscal and monetary policies that the US authorities were not willing to adopt as they might reverse the sustained growth achieved since the beginning of the 1960s. On the other hand, the overvaluation of the dollar had its advantages as it allowed US nationals to buy foreign goods and assets cheaply, as the MNC expansion bears out. In the absence of a corrective mechanism a series of international ad hoc arrangements soon became necessary.12 In 1961 the London Gold Pool was created to lessen the risk of a sharp drop in gold stocks. The following year a swap network between the Federal Reserve and the central banks of many industrialized countries was put in place. To this was added the issue of US Treasury special certificates and bonds, known as Roosa Bonds, denominated in the currencies of the European central banks and treasuries to provide the foreign countries concerned with an investment medium for past or present balance of payments surpluses. Finally, when in March 1968 a larger than expected balance of payments deficit prompted a rush to sell dollars, the Gold Pool was disbanded to be replaced by a two-tier arrangement whereby the central banks of the industrial countries agreed not to carry out market transactions in gold, using the metal only for official transactions among themselves. These measures, on the one hand, buoyed the dollar value up in spite of the growing US balance of payments deficit; on the other hand, they signified the unofficial inconvertibility of the American currency. The international arrangements were accompanied by domestic measures in the US aimed at preventing capital outflows.13 The Interest Equalization Tax, enacted in 1964, was imposed on purchases by Americans from foreigners of new or outstanding securities issued on behalf of a borrower resident in any industrial nation so as to increase the cost to foreigners of long-term financing in the US. Since 1965, the US monetary authorities had issued guidelines to the commercial banks to limit the increase of their foreign claims and guidelines envisaging a similar ceiling were issued for non-bank financial institutions. A set of voluntary controls on direct investments abroad was imposed in 1965 and was converted into mandatory restrictions in January 1968.
The balance of payments problem prevalently originated in the outflow of long-term capitals and in military expenses, which were partly offset by a positive current account balance. After being positive for a short spell at the end of the 1960s, in 1970 the balance of payments sharply worsened and a large outflow of short-term capitals was recorded, while at the same time the economy fell into its second recession since 1958 (Table 1). In the following year the economy recovered but the balance of payments deficit grew by over 200 per cent and for the first time the merchandise trade balance went into the red, along with the current account balance (Table 2). The room for manoeuvre left to the government was not large as severe monetary discipline to reverse the growing outflow of capital could jeopardize recovery in the months immediately preceding the presidential election year. The secretary of the Treasury, John Connally, made it clear that the United States was no longer prepared to bear disproportionate economic costs and that the other members of the Western block had to share the burden by more effectively opening their markets to US products.14
The benign neglect policy followed by the Nixon administration made the expectation of a future realignment of the dollar a self-fulfilling prophecy for both the monetary authorities of the main trading partners of the US, which ended the defence of the American currency, and the traders in the foreign exchange market, who had been launching attacks against the greenback since the beginning of 1971.15 The end of the Bretton Woods monetary system, established by international agreements in July 1944, was the result of a set of unilateral measures implemented by the US executive 17 years later. In his ‘Address to the Nation outlining a new economic policy’ on 15 August 1971, Nixon claimed that his success in creating what, in his opinion, was a more favourable environment for ending the hot war in Vietnam, offered the opportunity to give the American economy a new start, for which it was also necessary that the Western allies took their fair share of the burden in the management of international economy.16 The measures announced by the president can be divided into two groups. On the domestic side, Nixon announced a series of initiatives to stimulate the economy, keeping employment at a high level and fighting inflation. Among the fiscal measures were a tax credit on new equipment to increase productivity and generate new jobs, the repeal of excise tax on automobiles and the acceleration of income tax exemptions whose pressure on the budget were to be offset by a $4.7 billion cut in government spending through a postponement of pay rises and a 6 per cent cut in government personnel. To balance the budget, but not without effects on the economy of many developing countries, the president also ordered a 10 per cent cut in foreign economic aid. The only measure directed at contrasting the creeping inflation – the implicit price deflator grew by 6.1 per cent in 1969, 5.4 per cent in 1970 and 5 per cent in 1971 – was a freeze on all prices and wages for a period of 90 days accompanied by a call for a voluntary freeze on all dividends payable by US corporations.
Although it was not among the measures announced by the president, the government soon forwarded to Congress a fiscal stimulus bill destined to stir up a hornet’s nest in US relations with its trading partners. As noted in the preceding chapter, the weight of direct taxation in the US system was disadvantageous to US firms’ exports compared to those from countries relying on different forms of taxation. The solution worked out by the US Treasury was to carve out a special tax regime in favour of those companies engaged in export activities. The January 1972 DISC Law allowed exporters to create domestic paper shell affiliates, known as ‘Domestic International Sale Corporations’ (DISCs), to be used as a conduit for exporting goods actually sold by their parent companies. One half of the DISC’s profits were deemed distributed back to the parent exporter, while the remainder would not be taxed until distribution to the parent. As intended by the US executive, very soon tax experts and accountants understood that the deferral could be indefinitely extended, thus actually coinciding with an exemption as no interest accrued on the deferred tax. In practice, the scheme allowed a deferral/exemption on 25 per cent of the exporter’s total export profits, later reduced to 17–18 per cent.17
The second array of measures directly affected international trade and currency relations. Nixon announced a temporary suspension of convertibility of the dollar into gold and other assets in order to protect the reserves of the United States from further draining and to let all other countries take note of US desire to achieve significant improvements in its position and of the need for a reform of the international monetary system.18 The temporary suspension was presented as the result of speculative attacks on the dollar. Indeed, net short-term capital movements had jumped to over $10 billion in 1971 and were the main negative item in the balance of payments. However, the president did not mention any specific monetary measure to attract foreign capitals or to curb the drain from the US. On the other hand, as noted above, disguised de facto inconvertibility of the dollar had marked the monetary history of the previous decade. Suspension of convertibility, which was in force for a temporary but indefinite period, was aimed at forcing the US’s main partners in the international monetary system to give up the defence of their existing pegs, as the dollars they acquired were made inconvertible into gold and thus less desirable to hold. Concurrently, the US government imposed an additional tax of 10 per cent on goods imported into the United States to be in force, like the inconvertibility, for a temporary but indefinite period. The surtax covered about half of US imports, applying only to products on which duties had been reduced under reciprocal trade agreements with the exception of items subject to mandatory quota restrictions. The import surcharge was evidence of a link between monetary and trade problems as it was clearly directed at improving the trade balance by making foreign goods less competitive. In Nixon’s words, it was ‘an action to make certain that American products will not be at a disadvantage because of unfair exchange rates’. The president added that ‘when the unfair treatment is ended, the import tax will end as well’.19 The administration’s objective was to achieve a $13 billion improvement in the basic balance (comprising current transactions and long-term capital movements) substantially through a surplus in the trade balance that could more than offset the negative tendency in capital movements.
The measure by itself was neither extraordinary nor unprecedented. For instance, a temporary surcharge on imports was introduced by the British Labour government when the pound came under pressure in late 1964. What was different was the weight of the two countries in the post World War Two international economy and the way the measure was justified. The UK government claimed that the surcharge had a defensive goal, aimed at avoiding devaluation. The US made it clear that the repeal of the surcharge was conditional on a parity realignment whose burden had to be borne prevalently by its trading partners.
The United States hoped that the realignment could be achieved through a revaluation of the US trading partners’ currency. A devaluation of the US dollar could be carried out unilaterally but was difficult to justify politically. The West European countries indicated, however, that the United States should raise the price of gold as part of a prospective multilaterally agreed exchange rate adjustment and this approach was supported by the IMF.20 Although it had no operational significance, as the dollar was no longer officially convertible into gold, the gold price rise allowed the European central banks to maintain the local currency value of their reserve assets, avoiding the legal and political difficulties of making book losses on their reserve holdings.
The standoff between the United States and its West European partners was ended by a meeting between Nixon and his French counterpart, Georges Pompidou, in the Azores. Pompidou rejected the idea of a floating system, an alternative already keenly considered by the US, but declared he was prepared to help establish new parities provided they reflected relative economic strength.21 The French president also insisted that the new parities should be defended.22 The meeting was followed by negotiations within the Group of Ten that led to the Smithsonian Agreement of 18 December 1971. In return for the repeal of the 10 per cent surcharge, revaluation of currencies ranging from 7.5 per cent to 17 per cent was agreed.23 The US price of gold was raised from $35 to $38 per ounce, but the dollar remained inconvertible.
However, in the course of the talks on currency realignment, the American representatives, probably aware that the prospective currency arrangement was not enough to secure the hoped-for reversal of the current account deficit, made it clear that the resolution of the international monetary crisis had to be complemented by trade negotiations. During the Rome G–10 meeting on 30 November 1971, Connally pointed out that the areas for discussion had to be and were three: currency realignment, burden sharing (of defence expense) and trade, the latter topic to be addressed by negotiations between the United States and Canada, Japan and the EC.24 The demands on the EC concerned in particular several aspects of the EC agricultural policy and the Community preferential arrangements with third countries. The Special Trade Representative, William Eberle, was sent to Brussels in December for preparatory talks. The Community accepted to start prompt negotiations on specific trade topics with its transatlantic partner, once the parity realignment had been put in place and the 10 per cent surcharge repealed and on the basis of reciprocity and mutual advantage, that is, concessions were not to be unilateral. On the other hand, the parties agreed that, in line with the issue of monetary realignment, where a multilateral approach had been preferred to bilateral deals, by 1973 a full-scale review of the entire trading system was to be set in motion.25
The Smithsonian Agreement not only established a new set of parities but also widened the trading bands surrounding the new central rates from 2.25 per cent to 4.5 per cent. This meant that a European country’s currency could fluctuate from ceiling to floor by 4.5 per cent against the dollar, but that the currencies of two European countries would fluctuate by 9 per cent against each other if one rose from floor to ceiling while the other fell from ceiling to floor. 26 This ran counter to the scheme of the Werner Report of October 1970 according to which the EC central banks had to restrict the margin of fluctuation between Community currencies and subsequently from 1974 would progressively exclude autonomous parity changes. In April 1972 the EC members inaugurated a regime, known as the ‘snake in the tunnel’, by which their currencies would jointly fluctuate against the dollar by 4.5 per cent (the tunnel) while the fluctuation between member countries’ currencies was to be kept within the narrower limit of 2.5 per cent (the snake). The three prospective members of the EC, Denmark, Ireland and the UK, joined the arrangement, along with Sweden and Norway, but the UK retired in June, followed by Ireland. Italy left the snake in February 1973.
In March 1972 the US Congress passed the law authorizing the Secretary of the Treasury to implement the dollar devaluation agreed at the Smithsonian meeting. However, soon after tensions on the greenback started again and on 29 July the Federal Reserve Bank of New York sold about $32 million in foreign currencies to support the Smithsonian rate and thus withstand a first assault on the dollar. As noted by Tew, the absence of a firm commitment to defend the Smithsonian Agreement and the knowledge that many in the US administration and banking were ready for a transition to floating, while others believed that larger currency changes were needed to restore equilibrium, led the market to expect another devaluation of the American currency.27 Indeed, in 1972 an improvement in the balance of payments was registered but it was not brought about by a return of the trade balance to the red. On the contrary, in January 1973 the Department of Commerce announced that in the previous year the merchandise trade deficit had soared to $6.4 billion from $2.3 billion in 1971, that is, an increase of more than 175 per cent. The European Community could now boast a surplus of ECU 996 million in its trade with the United States. The worsening of the US merchandise trade in spite of the devaluation could at least be partially explained by the J curve effect which determined a soaring import bill in US dollars. This was because the US demand for foreign products did not adjust speedily enough to their new price, while US exports failed to rapidly attract foreign demand in spite of their lower price in terms of other currencies. The consequent lack of confidence in the permanence of the Smithsonian central values triggered a run on the dollar. In the first ten days of February 1973 the West German Bundesbank bought $6.1 billion and the Japanese central bank $1.2 billion. On 10 February the Japanese authorities closed the exchange market and suspended their support for the dollar. After a series of secret rounds of consultations of the under-secretary for monetary affairs of the US Treasury, Paul Volcker, in Bonn, London and Tokyo, the representatives of France, Italy, the UK, the US and West Germany met in Paris on 12 February to revise the Smithsonian pegs. The revision was carried out by changing the US dollar’s par value from 38 dollars an ounce to 42.2 dollars an ounce, while leaving the gold value of other currencies unchanged. This meant a devaluation of ten per cent of the dollar relative to the currency of its main trading partners. Seven months later the US Congress ratified the rise of the official price of gold. Yet, in February and March 1973 a further run on the dollar occurred, which resulted in the abandonment, wrongly thought to be temporary, of pegging on the dollar. After two meetings in Paris, France, Germany, the Benelux countries and Denmark agreed to proceed with a joint float in which they were joined by their snake partners, Sweden and Norway, while the other EC members continued to float individually as did Canada, Japan and Switzerland. None of these currencies was pegged to the dollar.
The events from August 1971 to the middle of 1973 showed a clash of perspectives and approaches in which the US viewpoint prevailed de facto. For the United States the first cause of the US deficit lay in the desire for surpluses in the rest of the world rather than in the budget deficit and the relaxation of monetary policy in the early 1970s.28 The United States, therefore, did not believe that severe domestic fiscal and monetary measures were urgently necessary to restore competitiveness to the American economy so as to rebalance its trade and financial relations with its main trading partners. Instead, the burden of readjustment had to be born by the surplus countries. For instance, at the 1972 annual meeting of the IMF the Secretary of the Treasury, George Shultz, proposed a reserve indicator system under which countries would be obliged to adjust when their reserves passed certain specified points. The alternative approach, regarded with growing sympathy in Washington, was to accept floating rates through which the value of a currency was to be dictated, at least partially, by the market. Both approaches were looking for an automatic mechanism which could remove the currency undervaluation that allowed some countries to constantly achieve a trade surplus which, in turn, entailed hoarding of international reserves.
The European countries, whether in surplus or deficit, resented the monetary dependence implied by the dollar standard, while viewing the growing volatility of the international monetary market as a threat to their integration goals. The ‘snake in the tunnel’ was a tentative response to that perceived threat. However, their position was far from monolithic. The main concern for Germany was to prevent the inflationary bias inherent in the current system. Thus the Federal Republic’s main aim was to establish effective control over the volume of global liquidity, which, in turn, also meant the creation of a system of asset settlement that could neutralize the pressure generated by future US deficits. France was a strong advocate of fixed parity, which, however, did not necessarily coincide with a dollar-centric system. At the December 1971 Azores meeting Pompidou bargained the acceptance of new parities with the maintenance of a revised fixed parity system that had to reflect relative economic strengths and at the Paris meeting 14 months later Giscard d’Estaing defended the same pattern. It is likely that in France’s eyes adherence to fixed exchange rates would compel the United States to share the burden of economic adjustment. Besides, the volatility of the main reserve currency was bound to affect the stability of the European currencies. On the other hand, it cannot be said that the French were unsympathetic to the aim of ensuring that surplus countries played a proper part in the adjustment process, as shown by the disputes on the adjustment process with West Germany and by the fact that the French tabled a proposal for a reserve ceiling beyond which reserves would have to be deposited in a special account with negative interest rate in the IMF.29 Nor was French allegiance to the fixed exchange principle unconditional as borne out by the fact that the franc was allowed to float out of the snake when market pressure developed in January 1974. By June 1972 Britain was converted to the idea that floating was the best available option. Although the June 1972 float was described as temporary, the government showed no hurry to re-peg and declined to participate in the joint float against the dollar operated by other EC partners.30 Initially the pound was allowed to find its own level but in May 1973 the Bank of England started to intervene in the market, at first to moderate upward pressure on the British currency and later to support it. Analogous interventions were carried out by other central banks and by the end of the year a managed floating regime was the rule, one way or another, in the industrialized countries.
Despite the currency turmoil, both 1972 and 1973 were marked by a very strong GDP growth rate in the OECD countries and by a sustained increase in world trade, accompanied, however, by accelerating inflation. After the slump of 1970, the US economy started its recovery in the second half of 1971 and strengthened in the following two years, reaching its peak in the first half of 1973. While in France 1973 marked the fifth year of increase in general demand, in West Germany, Japan and the UK the acceleration in growth rate started only in the second half of 1972. In the United States and in France investments in plant and equipment represented the main driving force in the expansionary phase, while the growth of the West German economy was provided by the external component. The continuous increase in West German exports, despite the appreciation of the Deutschmark, could be explained by the fact that relative price rises in the period were far smaller than the cumulative revaluation of the DM and by the characteristics of German exports heavily weighted in favour of machinery often sold in fairly monopolistic markets.31 In the other OECD countries demand was mostly boosted by domestic consumption.
The recovery coincided with and contributed to an upsurge in international trade that grew approximately by 17 per cent in 1972 and 36 per cent in the following year, compared with a 9.3 per cent average in the 1960s. This growth can be attributed to a large increase both of trade volume and of international prices, estimated at around 14 per cent and 20 per cent respectively in 1973. Various factors contributed to this expansion: the high rate of economic growth, coupled with the coincidence of the boom phase of the cycle in most industrial countries, at least since the second half of 1972; the distribution of income in favour of a number of developing countries; and greater participation of socialist countries in world trade. The price rise was preceded and accompanied by monetary expansion, as the combined growth of the nominal money supply (M1) in eleven major industrial countries almost doubled between 1970 and 1972. On the other hand, the acceleration of inflation increased the demand for international liquidity, while the US decision to sever the link between gold and the dollar eliminated the principle factor limiting the supply of liquidity.
The parity changes that had taken place since December 1971 fully manifested their influence on the pattern of world trade in 1973. The growth rate of United States exports was roughly three times as large as in 1972, while the volume of imports rose at half the rate of the previous year. With the exception of Germany, the trade balance with the EC member states and the whole of Europe, which was negative in 1972, showed a substantial credit for the US. A particularly dynamic sector was agriculture.
The early 1970s also witnessed a shift in the terms of trade between the industrialized countries and developing countries that exported raw materials. The international prices of raw materials started to rise in 1968 but they gathered considerable speed in the second half of 1972. The hike was due not only to the faster growth of economic activity in the main industrialized countries, but also to structural factors such as the increasingly oligopolistic nature of the primary products market occasioned both by the growing number of multinational corporations and by agreements among producer countries. However, the attempt of the countries exporting raw materials was also a defensive move, as is borne out by the price acceleration in 1972. Primary products, including oil, were generally priced in US dollars, a currency whose value was falling. The developing countries’ reserves were in US dollars or British pounds. Their imports were affected by an accelerating inflationary process and were quite often from countries whose currencies were appreciating against the greenback. The hike in one essential import, food, was particularly strong as the United States had difficulties in coping with soaring demands for its farm products.
The year 1973 was the annus mirabilis of American agriculture, ushering in nine years of farm products export boom. In 1972 exports had already grown by over 20 per cent rising to $9.4 billion and the Secretary of Agriculture, Earl L. Butz, confidently predicted that they would reach $11 billion by 1973.32 His forecast was dwarfed by the accounts: in 1973 exports grew by 88 per cent, reaching $17.7 billion (Figure 4). About 60 per cent of the increase was caused by increased volume, the remainder coming from higher prices. The $9.26 billion positive farm trade balance showed an improvement of over 215 per cent. In the following years it remained the strong point of the US trade balance, while the fortunes of manufactured goods declined. Net farm income, already on the rise in 1972, jumped by 78 per cent in current dollars and by 68 per cent in real terms to $33.3 billion and $25.1 billion respectively (Figure 4). However, this success was short-lived as growing production expenses started to erode the earnings from the following year onwards.
With the exception of World War Two, US agriculture had been marked by excess capacity even before the slump of the 1930s, to deal with which government restrictions on farm outputs were adopted. By 1973, however, the higher level of exports had eliminated almost all excess capacity and the government accelerated the implementation of policies encouraging all-out production. The reasons for this change were several. Backstage there was a slight gap, which had however a cumulative effect, between production and consumption that was traced back to the 1950s. World food production outside the US grew by 2.95 per cent per annum between 1950 and 1972, whereas in the same period consumption grew by 3 per cent per annum.33 The gap was particularly wide in certain key food products like wheat and coarse grains where the US was the dominant producer. According to the International Wheat Council, in the market year 1972–3 wheat production fell to 337 million tons, contracting by over 7 million tons relative to the previous year. 34
In the early 1970s demand for food produce in the international market also increased in response to contingent factors like shortages in the Central Plan economies, in particular the Union of Soviet Socialist Republics (USSR) and China which were affected by bad weather. In the summer of 1972, following a poor harvest, the Soviet Union entered the American market and purchased some $750 million worth of wheat and feed grains over a three-year period. The July 1972 deal bolstered the policy of détente which the two blocks were pursuing at that time. In the years preceding the Afghan crisis, exports to Eastern Europe and the USSR increased by 41.9 per cent annually.35 The new trade bonds with the USSR and its satellite countries did not bring about a significant improvement in the US balance of payments. The Soviet Union sold some gold, exerting modest downward pressure on world gold prices and thereby supporting the dollar-gold parity, but its interest as a major gold producing nation was not to stem the rise in world gold prices. It preferred to borrow Eurodollars in the West European market and in February 1973 it was able to obtain substantial loans at a modest 6 per cent interest rate.36
Also contributing to the pressure on the market was the growing need for food products in some fast growing economies in East and South-East Asia and the hike in world population which grew by 75 million in 1972 alone. The depreciation of the dollar, whose multilateral trade-weighted value fell by 21 per cent between 1970 and March 1973, also contributed to encourage demand for American produce, first preceding and then partially offsetting the price hike.
In this favourable context the administration pursued a policy aimed at making US agriculture more respondent to market signals.37 The Agriculture and Consumer Protection Act of 1973 allowed farmers to plant any crop they chose on the acres outside the portion of the base acreage they had to keep fallow if they agreed to participate in farm support programmes. Loan rates for non-recourse loans administered by the Commodity Credit Corporation (CCC) were fixed well below the foreseeable market price, having, therefore, only a safety net function. This made 1974 the first year in which a farmer was not assured of direct payment regardless of the market price level. On the other hand, the 1973 Act added an income support regime to the price support mechanism for crops and cotton, based on target prices related to changes in production costs adjusted for yields. According to the new regime, a deficiency payment would be made if the average market price during the first five months of the marketing year were below the target price. The new regime was not as market-neutral and budget cost-effective as one might have expected. Indeed, it was bound to increase budget costs, at least in times of low average market prices, since, in contrast to a pure loan rate regime, the burden on the taxpayer was not shared by domestic consumers forced to buy agricultural produce at higher prices. Besides, it did not reduce incentive to overproduce, as target prices could result in total returns for farmers above those provided by the equilibrium market price and, because of the expansion of local production, would interfere with international trade.38 As noted by the Deputy Director of the Cost Stabilization Program, deficiency payments applied to portions of the crop required for domestic and export use would result in a more direct subsidy to exports. It was, therefore, to be expected that: ‘Such a program would invite criticism from those countries whose producers would be affected by this competition. This could seriously impair our posture in upcoming GATT negotiations’.39
On the other hand, the export expansion and the consequent disappearance of excess capacity in agriculture brought about strains for the domestic food market. In 1973 the food component of the consumer price index rose by over 19 per cent accordingly reducing the purchasing power of American consumers. The large exports of feed grains and oilseeds raised the cost of livestock production. Beef producers, whose profits were squeezed first by the ceiling price on red meat and then by the general freeze on food prices, were no longer able to pay world prices for the available supplies of soybean products and started to slaughter breeding animals.40 On 27 June the government imposed export embargos on soybeans, cottonseed and their derivatives. A month later the embargos were replaced by export licences, which, however, were also applied to other farm commodities, livestock feed, edible oils, peanuts and animal fats. By October the restrictions were lifted but the incident provided ammunition to the advocates of a special treatment for agricultural trade, particularly numerous in the EC and Japan. Indeed, the embargos were evidence of the danger of unconditionally relying on free imports from countries allegedly endowed with a comparative advantage and of the wisdom of actively pursuing a policy of self-sufficiency.41
After the shock announcement of a new policy for the United States and, therefore, for all the industrialized nations in August 1971, faced with the prospect of a 10 per cent surtax on about 87 per cent of EC exports to its main trading partner, the European Commission argued that the measure would threaten a stable upwards trend in trade between the two areas, whose balance had increasingly been in favour of the United States. It also contended that the surcharge, which threatened to wipe out most of the concessions negotiated in the Dillon and Kennedy Rounds, was not in conformity with GATT rules and that it was inappropriate, given the nature of the United States’ balance of payments problems and the undue burden of adjustment placed on the import account with serious effect on the trade of other GATT parties.42 A GATT working party was set up, of which both the United States and the EC member states were parties along with other countries. The working party, obviously with the contrary view of the United States, urged the US to repeal the 10 per cent surcharge as soon as possible. However, the IMF representative testified that, although a corrective adjustment in the pattern of exchange rates would be preferable, given the low level of US international assets and the high level of its reserve liabilities, in the absence of other appropriate actions the import surcharge could be regarded as being within the bounds of what was necessary to prevent a serious deterioration in the United States balance of payments position. Moreover, the US did not fail to point out that, given the findings of the IMF, it was ‘entitled under GATT Article XII to apply quantitative restrictions to safeguard its external financial position but had chosen instead to apply import surcharges, which were less damaging to world trade.’ 43
The 10 per cent surcharge was repealed on 20 December soon after the Smithsonian Agreement and at the same time the European Commission and the United States started bilateral commercial negotiations. The talks ended on 11 February 1972 with limited concessions by the EC, mostly addressing American grievances on transatlantic farm trade.44 No engagement was made with regard to the thorny reciprocity issue in the preferential agreements with the Mediterranean and ex-colonial countries. They marked, however, the assent of the EC to the US executive’s opinion, in line with the recommendations of the Williams Commission, that a multilateral revision of the international trade regime was needed. The really noteworthy result of the talks was a joint declaration by which the United States and the Community recognized the need for a comprehensive review of international economic relations with a view to negotiating improvements in the light of the structural changes which had recently occurred. These covered ‘inter alia’ all elements of trade, including measures which impeded or distorted agricultural, raw material and industrial trade.45 The multilateral negotiations which, within the GATT framework, were to begin in 1973 – subject to the required internal authorizations – had to aim at the expansion and ever greater liberalization of world trade and improvement in the standard of living of the people of the world, paying special attention to the needs of the developing countries, goals that could ‘be achieved “inter alia” through the progressive dismantling of obstacles to trade and improvement to the international framework for the conduct of world trade’.46
Thus the transatlantic trading partners acknowledged that their conflicts could be properly and lastingly solved only within the context of multilateral negotiations aimed at curbing obstacles to trade and improving the rules of the world trade game. It seems, however, that the parties to the declaration, and in particular the EC, saw these two objectives as part of a greater puzzle in which variables other than trade liberalization were to be taken into account. This wider context – with reference to which the term ‘inter alia’ could be explained – was also likely to include the reshaping of the world monetary system on more stable bases.
The ‘declaration’ along with a Japan – US statement 47 having a similar content was hailed by the GATT Council at its 7 March meeting.48 However, the EC–US Joint Declaration had a jarring note. On agriculture the Community stated that ‘in appropriate cases’ the conclusion of international commodity agreements was also one of the means to achieve expansion of world trade and improvement in standards of living. The United States dryly answered that ‘such agreements do not offer a useful approach to the achievement of these aims’. In other words, the viewpoints of the United States and the Community on how to achieve a better environment for farm trade seemed to be irreconcilable and, therefore, on one key point of the talks the two parties had to agree to disagree.
The US protectionist lobbies did not give up. In 1971, Senator Hartke’s and Representative Burke’s Fair Trade and Investment bill called for quotas on all imports based on the 1965–9 average and for a set of measures, including the withdrawal of tax benefits to discourage American investments abroad, especially by MNCs. The stated rationale for the bill was the constant gap between US imports and exports. Even though the bill failed to make significant progress and was fiercely opposed by the administration, its rationale was shared by many in Congress and to a certain extent by the executive. Although they were more and more focused on Japan, US grievances were also directed to the EC. In the first place, the US assumed that the disappearance of its trade surplus was the upshot of currency undervaluation and unfair practices from both Japan and the EC. Secondly, the Common Agricultural Policy was accused of fostering expensive overproduction in the Community, while preventing American farm products from acquiring a share of the EC market commensurate to the US comparative advantage. Thirdly, alleged EC restrictions diverted Japanese exports towards the US market. Finally, the network of agreements signed by the Community, in particular with the Mediterranean countries and the former colonies, which provided for reciprocal preference, allowed tariff-free entry of EC industrial products in the markets of these countries, displacing, in the US view, competing American products. This would be inconsistent with GATT Article I on MFN (Most Favoured Nation) treatment despite the inexistence of a customs union or a free-trade area given the non-fulfilment of the requirements of Article XXIV of the General Agreement for their actual establishment. This was because the developing countries which were parties to the agreements would never be able to dismantle all their restrictions on EC goods.
His standing and room for manoeuvre boosted by a sweeping endorsement by the electorate in the 1972 presidential election, on 10 April 1973, Nixon proposed a Trade Reform Act to Congress and asked for wide negotiating authority in view of the approaching GATT round.49 The details of the government bill will be analyzed in great detail in the following chapter, as it was only in December 1974, four months after Nixon’s resignation, that at the end of a long and uneven journey the US Congress approved the bill, though without substantial amendments to the original proposal. The bill, which partly resubmitted the proposals put forward four years earlier, had the following goals: negotiating for a more open and equitable world trading system; strengthening the US ability to deal with unfair competitive practices and rapid increases in imports which threatened the disruption of the US market; managing more efficiently the US trade policy and using it effectively to fight inflation and improve the balance of payments; and enhancing the contribution of trade to the development of poorer countries.
With particular regard to the issue of negotiating authority, in contrast with the previous requests, the bill did not set a limit in the percentage change of the tariffs subject to negotiation, thus maintaining full freedom to raise a duty to any level the president wished or eliminate it altogether. As regards non-tariff barriers, Nixon found it impossible to come up with a common standard that would lend itself to a new delegation of authority. The main problem lay in the fact that the elimination of such barriers quite often required changes in domestic laws, whose uncertain implementation would make foreign governments reluctant to accept concessions subject to congressional delay and opposition. The administration suggested a new optional arrangement under which the president would give advance notice to the Congress of his intention to negotiate an agreement so as to allow the lawmakers to make their views known. After the negotiation the agreement would be submitted to Congress along with the implementing legislation. If not rejected by a majority vote, it would then enter into effect within 90 days. Advance authority was asked only to deal with some specific customs matters primarily involving customs valuation and the marking of goods by country of origin. The authority would be granted for five years on both tariff and non-tariff barriers. On agriculture, Nixon stressed that the executive expected the round to achieve the expansion of agricultural trade, arguing that the concerns of all nations for farmers and consumers could be best met by greater reliance on free market forces. He also made it clear that he did not believe that agriculture should have a separate place in the negotiations as barriers to agricultural trade were either tariff or non-tariff in nature and could therefore be dealt with under a general framework which would encompass other primary products as well as manufactured goods. Finally, Nixon called for presidential authority to extend Most-Favoured Nation (MFN) treatment to any country when he deemed it in the national interest. MFN status was a condition for the implementation of the US–Soviet trade agreement of October 1972. The agreement was the cornerstone of the détente policy with the Soviet Union which was not a party to the GATT. Moreover, if the agreement did not enter into force the USSR would not have to repay its World War Two lend and lease debt of $722 billion.
However, the request for negotiating authority was made at a moment in which Nixon’s personal authority was shaken as his administration was embittered over the so-called Watergate scandal. On 11 December the House passed the government bill with amendments.50 It rejected the president’s request for unlimited authority to raise or lower tariffs, setting limits to his power according to the tariff rate to be reduced. It adopted the procedure for prompt consideration of non-tariff barrier agreements briefly outlined above, but rejected Nixon’s request for advance authority on matters concerning customs valuation practices and rules of origin. However, a main reservation, the so-called Vanik Amendment, was made with regard to the authority to give MFN trade status to the Soviet Union. Although the president was given authority to grant MFN status to countries that were not GATT parties, particularly Communist countries, for the Soviet Union the status was made conditional on the relaxation of its policies discouraging Soviet Jews from emigrating to Israel, actually preventing the coming into force of the US–Soviet trade agreement. In turn, the Senate postponed any decision on the governmental bill until 1974. Thus, because of an issue unrelated to the GATT negotiations, the American executive could not enter the round it had helped to launch with the full authority it had requested and with definite terms of reference.
In October 1972 the European Summit requested the Commission to work out an overall approach of the Community to the coming trade round in the GATT, establishing 1 July 1973 as the deadline for its submission to the European Council.
A first Memorandum was sent by the Commission on 4 April .51 In keeping with a Council Resolution of 13 December 1971 and with the Summit communiqué, the Commission expressed the view that the imminent negotiating round had to have two general goals. The first was the pursuit of trade liberalization on the basis of reciprocity and mutual advantage for all parties. The second was greater participation of the developing countries in international trade and the achievement of better economic equilibrium with the industrialized world. The Commission, however, was careful to stress that the participation of the Community to the negotiations would not jeopardize the advantages already enjoyed by those countries with which the EC had special relations. In other terms, their margin of advantage in trading with EC member states relative to the generality of developing countries was to be preserved.
As regards the main aspects of the negotiation, the Commission did not consider the complete elimination of all customs duties as a realistic approach. There were two main obstacles: the role of customs duties in protecting sectors that in quite a few countries were experiencing difficulties in withstanding foreign competition; and the lack of harmonization of national policies concerning taxation, social security and measures to stimulate economic development. On the other hand, every tariff reduction method had to take into account the considerable differences between average customs duty levels in the developed countries as well as their different structure, since some countries applied tariffs of a roughly homogeneous level to all products while others applied very high tariffs to some products and much lower ones to others. What was to be worked out, therefore, was a mechanism that could at the same time reduce the overall level and level off the differences. However, the general scheme should not prevent the parties from seeking, on a reciprocal basis, greater concessions on individual items, which could even imply the abolition of customs duties.
The Commission’s approach to non-tariff barrier negotiations was less specific, since negotiators would be confronted by a set of problems wider than those concerning tariff barriers. First, the existence of a great variety of different kinds of barriers, classified by a GATT committee under nearly 30 chapter headings, rendered a solution for all the listed measures problematic and made it preferable to select a restricted number of non-tariff barriers on which the negotiations should be focused. Secondly, reciprocity was harder to assess and this made it necessary to come up with a wide range of solutions to make up a well balanced package of concessions, while there was the possibility that not all the negotiating parties would be willing or could take part in the agreement. In this context, before entering negotiations the Community and its member states had to fulfil two tasks. The first was to select those non-tariff barriers whose suppression or regulation was in the Community’s best interest. On the other hand, as such measures were in most cases imposed and administered by the member states rather than by the Community itself, it was necessary that the former agreed as soon as possible on a sufficient number of negotiable measures so as to offer adequate reciprocity in return for concessions by the trading partners. Finally, in order to secure the greatest possible participation of the GATT parties to such agreements and to prevent the worsening of the existing imbalance it was to be made clear that the advantages derived from solutions comprising obligations going beyond the existing GATT rules would be reserved to those countries which in practice abided by those solutions. In short, the Commission was suggesting, as was the case for the US Congress, the conditional application of the MFN clause.
On agriculture the Memorandum reiterated the Community’s stance that, although the objectives of the negotiations were to be in keeping with the general approach of the round, that is, trade expansion and barrier reduction, they also had to take into account the sector’s specific characteristics: the universal existence of support policies and the instability of world markets. In the Commission’s view, the condition for expanding trade was stability of world markets and the best way to achieve this objective was a code of good conduct on export practices, aimed at introducing market discipline. Within the domestic sphere governments should intensify structural reforms so that marketing policies and price policies were based to a greater extent on economic considerations. On the other hand, for products such as cereals, dairy products and sugar the Commission suggested the negotiation of international arrangements, which should provide a price mechanism and adjustment of supply including measures of storage. The Community was to pledge to apply the instruments of its CAP in a way consistent with its multilateral commitments. However, taking into account the criticism of the Economic and Social Committee and some member states, the Commission amended its draft, stressing that ‘the principles of the CAP should not be called into question’. Thus, on agriculture the memorandum seemed to meet French farm market philosophy and policies. France, which in the 1960s had carried out structural reforms aimed at transforming peasant farming into modern agriculture, in the 1970s was eager to secure its present and prospective share in the world market, while guaranteeing its role as main supplier in the EC market. These objectives made it favour forms of multinational cooperation and orderly trade conduct rather than the elimination of trade barriers and the retreat of government from the domestic market.
Like the United States, the Community was concerned with the upsurge of imports that could cause market injury to the domestic industries of its member states. The Commission suggested that the provisions of GATT Article XIX should be kept in force, but, given the difficulty of their effective implementation, that they be accompanied by a complementary mechanism, which should especially allow selective application of safeguard measures and suspension of the affected trading partners’ compensatory rights.
Specific advantages had to be provided to the developing countries through improvements to the Generalized System of Preference, with the inclusion of a greater number of processed agricultural products and the widening of duty-free quotas, and through a more flexible application of the rules to be established on non-tariff barriers.
The Commission was careful to stress that its memorandum was based on the assumption that parallel machinery would be developed in the monetary sector to guarantee its long-term balance and stability, the absence of which would jeopardize the effectiveness of any wide-ranging agreement in the field of trade.
What were the similarities and differences between the preparatory stages to the new GATT round in the United States and in the EC, and why was the US executive able to take part in the opening phase of the negotiations without receiving negotiating authority from Congress? As regards similarities, the answer is simple and to a certain extent tautological. The stated aim of both parties was a more open and equitable world trading environment resulting in the general improvement of the world economy and in which the needs and expectations of the developing countries should be particularly taken into account. That was, after all, the core of the 11 February 1972 EC–US Declaration that paved the way to the launching of the round. The basic difference between the Commission’s Memorandum and the US president’s request for trade negotiating authority in the Trade Reform Act lay in their function and in their context. The negotiating authority requested by Nixon was directed at providing the executive with room for manoeuvre with regard to two sets of subjects on which authority was conferred on Congress by the US Constitution or by statutes. In the case of tariffs, Article 1, section 8, clause 3 of the Constitution empowered Congress to regulate commerce. However, since the Reciprocal Tariff Act of 1934, the US Congress had granted the executive the power to reduce customs duties up to a certain rate. It was, therefore, an a priori authorization. Once the authorization was granted the executive was free to choose the terms in which the prospective reductions could be applied: it could be an item by item reduction, an across the board cut, and so on. In the case of non-tariff barriers, since these obstacles resulted from the existing provisions of law, as every international agreement to be implemented implied the modification of a statute, the negotiating authority was directed to find a system by which the implementing legislation could be passed without bringing up for further discussion what had already been agreed by the executive in the negotiations. Otherwise, the other parties could never be sure whether the concessions they had made were grounded on reciprocal advantages. In this case, however, there was to be an agreement between the executive and Congress on the topics to which the new simplified legislation could apply. Thus, in both cases the US negotiators were able to play a primary role in the opening phase of the Tokyo Round not only because they were one of the main trading partners and the new round originated from a US proposal, but also because the initial stage only set the framework of the negotiations. Indeed, the actual start of the talks was postponed for over one year awaiting negotiating authority to be granted by US Congress and it was only when the House and the Senate conferred the authority that the attitude of the lawmakers and also of the executive towards the various items already debated in Geneva took complete, though not definite, shape.
The context in which the Memorandum from the Commission was worked out and approved was different. Article 113 of the Rome Treaty entrusted the Commission with the task of conducting negotiations on trade matters. However, the power of the EC executive was not open-ended. Article 113 of the Treaty of Rome provided that when agreements with third countries were to be negotiated in order to implement the Community Common Commercial Policy, the Commission should make recommendations to the Council, which should authorize it to open the necessary negotiations. The article also stated that the Commission should conduct the negotiations in consultation with a special committee appointed by the Council to assist it in the negotiating task within the framework of directives issued by the Council, the so-called Article 113 Committee, which was composed of senior civil servants (or their assistants) from the interested ministries of the member states. Thus, although formally an advisory body, the Article 113 Committee, whose members were national representatives, acted as a link between the Commission and the Council and, as its recommendations were often regarded as a preview of Council position, the Commission complied with them.
When in October 1972 the Paris European Summit entrusted the Commission with the task of defining a global approach to the GATT negotiations, it also stated that the strategy worked out by the Commission had to be submitted to the Council for approval by July 1973. Actually, as noted above, the Commission modified its Memorandum before submitting it to the Council for its final approval, which is indicative of a complex process of redaction that had to balance the not always reconcilable directives of the member states. Therefore, the Memorandum outlined the negotiating objectives of the Community, without, however, entering into the details. By approving the document the Council simply countenanced the line of action submitted by the Commission. On the other hand, as noted by the Commission itself, the ‘overall approach to trade’ was not a mandate to negotiate, nor did it provide specific negotiating directives on the various items of the forthcoming talks.52 Besides, while the ‘overall approach’ was quite specific on items such as tariff reduction and harmonization, the safeguard clause and, in particular, agriculture, it postponed the outline of the EC negotiating stance on non-tariff barriers to a subsequent stage.
In the absence of negotiating authority to the president which would have helped define the United States’ scope and approach to the GATT talks on tariff and non-tariff barriers and in the absence of any directive to the Commission on what the non-tariff barriers negotiations should be concerned with, in the run-up to the opening of the Tokyo Round there were only two areas of open disagreement between the US and the EC: trade in agriculture and the link between the prospective multilateral talks and the ongoing upheavals and negotiations in the monetary sector. A third potential area of disagreement concerned the manner and extent of tariff cuts, but it was to be expected that differences on this topic would be left to a later stage of the negotiations.
During the July meeting of the Preparatory Committee, the EC delegation circulated a ‘Statement by the European Economic Community on the General approach adopted by the Council of Ministers on the forthcoming multilateral trade negotiations’, which addressed, among other things, the question of the relation between trade negotiations and developments within the monetary system.53 The text of the Statement on this point had previously been debated in the European Council where the Commission had suggested a reference to the need for parallel efforts to set up a monetary system shielding the world economy from the shocks and imbalances which had recently occurred and to the necessity that progress in the monetary field should be borne in mind by the Parties to the General Agreement, both at the beginning and during the course of the negotiations. France proposed a harder and more pressing statement which labelled the actual start of trade negotiations as unrealistic until the necessary steps had been taken to allow the exchange market to reflect the parity grid agreed in Paris in March 1973. A compromise was finally reached adding a paragraph stating that there were prospects for the establishment of a fair and durable monetary system based on fixed but adjustable parities, the general convertibility of currencies, effective international regulation of the world supply of liquidities and a reduction in the role of national currencies as reserve instruments.54 The United States replied that an efficient monetary system was conditional on the adoption of trade measures which would facilitate the adjustment process as well as upon concurrent efforts to provide for trade liberalization and an improved framework for trade relations.55
In spite of the various differences in attitude there was no clash between the transatlantic parties. On the contrary, one senior member of the Commission delegation in Geneva related that in the last phase of the preparatory talks to the September ministerial meeting in Tokyo, the American delegation showed a strong desire to smooth over the points of dispute with the Community, avoiding any criticism of EC trade policy, and the CAP in particular, as it had done in the previous stages.56 Thus, with regard to the agricultural trade and monetary system issues the Declaration approved by the Ministers at Tokyo on 14 September 1973 was a compromise in which the Community did not have to make any significant concessions.57 Regarding agriculture, the Declaration called for an approach to negotiations which ‘while in line with the general objectives of the negotiations, should take account of the special characteristics and problems in this sector’. As regards the link with international monetary arrangements, the Ministers recognized that the policy of liberalizing world trade could not be carried out successfully without parallel efforts to set up a monetary system shielding the world economy from the shocks and imbalances which had previously occurred, but also acknowledged that the new phase in the liberalization of trade, which it was their intention to undertake, would facilitate the orderly functioning of the monetary system. No reference was made to any agreed parity grid.
The Tokyo Declaration did not make any reference to the elimination of tariff barriers suggested by Japan and the Scandinavian countries, but in line with the Community’s perspective simply referred to negotiations on tariffs based on appropriate formulae of as wide application as possible. On non-tariff barriers the Declaration pledged to reduce or eliminate non-tariff measures or, when this was not possible, their trade-distorting effects. However, the measures in question were not listed. The Ministers also agreed that the negotiations could concern the coordinated reduction or elimination of all barriers to trade in selected sectors. As requested by the EC, the adequacy of the multilateral safeguard system under GATT Article XIX was to be examined.
A Trade Negotiations Committee (TNC) was established with the task of elaborating detailed plans for the negotiations, working out appropriate procedures and supervising the progress of the negotiations. The Committee whose membership was open to all governments taking part in the talks and to the EC had to begin work by 1 November 1973. The deadline for the negotiations was set in 1975, a date that turned out to be overly optimistic, also because negotiating authority was still to be granted to the US executive. To avoid delays the parties agreed to concentrate their work in this first phase on the analytical and statistical aspects of the negotiations. The Commission decided not to table for the moment any substantive proposal not to allow the American negotiators to change their position on the pretext of new conditions attached to their mandate by the US Congress. On the other hand, the Commission suggested that the EC negotiators should be given specific directives which had to take into account the discussions on the trade bill in the US Congress, nevertheless avoiding the risk that they be left behind by the Americans in establishing their negotiating stance.58
Thus the spirit of the Tokyo Conference reflected the favourable but increasingly overheated climate of the world economy in which income and trade were strongly growing and there was a close correlation between the two. This meant that the voices of those calling for fewer barriers to trade were not drowned out by the complaints of import competing industries. Moreover, import liberalization began to be seen as an antidote against inflation by increasing the availability of goods at better prices and by generating major pressure for production efficiency. The performance of American farm trade made the United States consider the idea that the dismantling of CAP was still a priority but a less immediate one. On the other hand, the hostility of many European countries against the floating rate regime was waning as the West European countries, including the hardliners in the EC were, willingly or unwillingly, accepting a floating system as the normal course of currency management. The attitude changed when only a month later the so-called oil crisis ushered in a period in which inflation was no longer the unwelcome companion to growth but went hand in hand with recession.