The years 1974 and 1975 witnessed an unprecedented slump on both sides of the Atlantic which had its impact on trade relations between the United States and the EC member countries, as well as between the two areas and the Rest of the World. Contrary to previous slumps in the nineteenth and twentieth centuries, the reversal of the upwards phase that had marked most of the 1950s and 1960s was accompanied by an inflation upsurge that hit the EC member states and the US, although with different strength and duration. Indeed the years following 1973 are remembered as the years of stagflation. They are viewed as the outcome of changes in the economic trend that characterized the ‘golden age’ of the two previous decades in terms of productivity, trade expansion and management of fiscal and monetary policy. However, as already noted, this term can be apposite to the performance of the European economy, with the remarkable exception of Great Britain, but not to the performance of the US economy which, by the close of the 1960s, saw its predominance over the Japanese and Western European partners shrink, not only because Japan and Western Europe were fast closing the productivity gap, but also because overall productivity in US industry was decelerating. Secondly, in Western Europe too by the end of the 1960s, the golden age had lost much of its lustre. On both sides of the Atlantic the beginning of the 1970s saw a robust upsurge in the economic cycle, along with, it is true, a price hike which, however, was far below the inflation rate in the years following the start of the oil crisis (Tables 1, 10 and 22). It must also be noted that after the 1974–5 decline, the recovery that marked the following three years in the US was characterized, in contrast to most EC member states, by a growth rate comparable to the recovery of the early 1970s and to the years of highest growth in the previous decade.
As often in the declining phase of a cycle, the 1974–5 slump was triggered by an exogenous factor. The exogenous factor was the so-called oil crisis set off by events that took place in the last quarter of 1973. The oil crisis took partially different features in the US and the EC member states, although its impact on the economies of both sides of the Atlantic was broadly similar. Thus, it caused different responses in political and economic terms, as context and constraints were not the same in the United States and in the Western European countries.
The EC member states were traditionally heavily dependent on foreign oil supply. Only the UK, Germany and Belgium had a sufficient alternative source of energy in coal, whose exploitation, however, was becoming increasingly expensive relative to oil imports, while the Netherlands had good gas reserves. Although the United Kingdom had the medium-term prospect of becoming an important oil producer itself, at the time of the crisis it was no exception, its problems being exacerbated by a lengthy dispute between the Heath government and the National Union of Miners which had curtailed its supply of alternative energy source, coal. The United States, the main oil producer, but at the same time the dominant oil consumer, after 1970 had passed rapidly from a position of relative oil supply independence to a position of relative oil supply dependence. In spite of new discoveries on the North Slope of Alaska and on the Outer Continental Shelf, oil production slowed down in the 1960s and early 1970s, also hampered by a variety of environmental restrictions and governmental controls, while no significant progress took place in the development of alternative sources of supply. In contrast demand for fuel kept growing, stimulated by oil and gas prices which remained below the market clearing price.1 In April 1973, the system of import quotas adopted in 1959 to limit dependence upon foreign sources supply was definitively abandoned in favour of a flexible import fee. Imports of crude oil and refined products in the US rose from 22 per cent of domestic consumption in 1969 to 36 per cent in 1973.2
At the same time the oil producing countries had been constantly strengthening their sway over the market. The Organization of Petroleum Exporting Countries (OPEC) was established at the Baghdad Conference in September 1960 with the objective of resisting pressure by the oil companies, the so-called ‘Seven Sisters’ in particular, to reduce oil prices and payments to the exporting states. It had an original membership of seven countries, but by 1973 the organization had acquired a membership of 13 states. Most of these countries had been able to replace the royalty system with a majority share in the oil companies, which entailed a direct control on quantities produced, while Algeria, Libya and Iraq proceeded directly to nationalization of the more important companies operating on their soils. The foregoing, coupled with growing demand for oil, offered a good chance to impose higher prices. The Tehran and Tripoli agreements of January and February 1971, of the OPEC members to impose a substantial price increase, soon turned out to be exceedingly moderate. In fact the increase was more than offset by the depreciation of the dollar, the currency in which oil prices were fixed, and by growing inflationary pressures characterizing the world economy since 1972, which increased the price of imports for the oil producing countries including food and materials essential to their development programmes. The break-out of the Yom Kippur War in October 1973 allowed the OPEC members to raise the posted price of oil by 70 per cent to US$5.11 per barrel while implementing measures to increasingly cut supply.
The OPEC decision overlapped with the embargo imposed by the Organization of Arab Petroleum Exporting Countries (OAPEC) to put pressure on those Western countries that appeared to support Israel in the conflict. In the Kuwait meeting on 24 and 25 December, the OAPEC cut oil exports by a minimum of 5 per cent and subdivided the importing countries into four categories: a) countries that had severed diplomatic relations with Israel, including the United Kingdom, France and Spain, which were to be preferentially supplied according to their need even if that exceeded the 1973 level of oil exports; b) friendly countries, such as Japan, Belgium and West Germany, that had adjusted their policies so as to favour the Arab position to which supplies would be secured at the September 1973 level; c) unfriendly countries like the United States, the Netherlands, Portugal and South Africa, to be placed under total embargo; d) neutral remaining countries not belonging to the previous groups which were to receive a prorated share of the remaining Arabian oil supply and were subject to the general cutback.3 On 17 March, 1974 the OAPEC members, with the exception of Libya, lifted the embargo, but by then oil prices had quadrupled to nearly US$12 per barrel. Thus, as Venn points out, a clear distinction must be drawn between the 5 month embargo, which only affected a few countries, only one of which was a EEC member state, and the oil price crisis which was brought about by the policy that OPEC as a whole was able to establish also thanks to the embargo itself.4 That policy also presupposed agreed control of oil supply, but agreements of this kind were rarely implemented effectively.
The November 1973 call from Secretary of State Henry Kissinger for a united front of oil importing countries under the leadership of the United States met with a lukewarm response from the EC countries. The Community member countries, as well as Japan, which was even more dependent on supply from the Middle East, tried to establish bilateral agreements with the oil producing countries of North Africa and the Middle East to secure oil imports at good terms in exchange for high technology exports.5 France in particular, unwilling to sacrifice its long-lasting political and economic links with the Arab countries, tried to scupper the US project for a coalition of oil consumers under its leadership.6 The February 1974 Washington Energy Conference, summoned by the United States to establish consumer cooperation in place of bilateral deals, was attended by all main oil importing countries, including France, but failed to achieve a unified consuming nations policy towards OPEC and OAPEC. Yet, the participants agreed on a number of principles, such as the need for conservation, emergency sharing and development of new energy sources, and on the establishment of an Energy Coordination Group. These principles were rendered more operative when in November 1974 the OECD members, with the exclusion of France, agreed to implement a joint programme under the aegis of a newly established International Energy Agency (IEA), which provided for an emergency petroleum allocation scheme, including oil sharing, demand restraint obligations, an extensive information system on the oil market and long-term cooperation on energy research to develop hydrocarbon and alternative energy sources. However, the launch of the new programme, prevalently aimed at dealing with emergency situations and the IEA establishment, did not result in a qualitative leap in the coordination among consumers. Bilateral agreements with several oil producing countries remained the dominant approach of the EC member states, and the United States, having set aside the goal of a unified consumer coalition under its leadership, soon started to develop a network of bilateral relations with the so-called ‘moderate oil producers’ in the Middle East, at the centre of which was Saudi Arabia.
The common pledge to curtail consumption and develop alternative sources of energy production did not result in a unified policy and each IEA member implemented its own measures and achieved different results. The outcome was markedly different on the two sides of the Atlantic.
In November 1973 Nixon declared that by the end of 1975 oil imports would be reduced by one million barrels per day through energy conservation and enhanced domestic energy supply. Things turned out differently. With the aim of preventing windfall gains for domestic oil producers and curbing the inflationary impact of the increased cost of energy, the oil policy measures that were actually adopted ended up by implicitly taxing domestic producers and subsidizing consumers and importers. The result was lower levels of production, more consumption and higher imports, thus increasing the bill paid to the OPEC countries.7 Before the occurrence of the oil crisis, the Cost of Living Council had established a distinction between ‘old oil’ and ‘new oil’, whereby a ceiling price was set for oil in stock, while new and imported oil was allowed to seek a market-clearing level. After the end of the oil embargo, the Entitlements Program, implemented in November 1974, provided that refiners who purchased price-controlled oil had to make an income transfer to refiners who purchased uncontrolled or imported oil. Finally, the Energy Policy and Conservation Act brought more domestic crude oil under control and fixed a $7.66/bbl price ceiling from February 1976 which could rise ten per cent a year. Domestic consumers paid a composite price based on a weighted average of low-priced domestic and high-priced imported oil. As a result, in spite of a slight decline in 1974 and 1975 on account of the oil embargo and what could be more properly called ‘slumpflation’, US oil consumption between 1973 and 1978 grew from 17,308 thousands of barrels per day to 18,847 thousands of barrels per day and total imports grew from 6,256 thousands of barrels per day to 8,363 thousands of barrels per day.8 Imports as percentage of demand grew from 36.1 per cent to 44.4 per cent, whereas in 1970 they had accounted for only 23.3 per cent.
The performance of the EC was more cautious. After the 1974 shock which witnessed a 146 per cent growth rate under the pressure of the quadrupling of the oil price, the fuel bill grew by only 18 per cent by 1978 (Table 18). In quantitative terms the contraction was remarkable, although it was helped by the slump and the slackening of the economy after the 1976 recovery. Petroleum consumption in West Germany, France and the UK declined respectively by 3.6 per cent, 6.4 per cent and 14.7 per cent, while imports fell by 6.5 per cent and 13.2 per cent in West Germany and France, plummeting by over 41 per cent in Britain.9 However, the success achieved by the EC member states was not the result of a unified policy entrusted to a supranational entity. Although the Commission reviewed the overall energy position in the Community, the individual members maintained full control of their domestic and foreign policy in pursuit of their national energy interests, nor was there any pooling of energy sources.10 In particular, the United Kingdom made it quite soon clear that it was not willing to surrender control over North Sea oil. France used state-owned or controlled companies to exploit foreign oil resources and developed a domestic nuclear energy programme. Italy did not depart from its policy of friendly relations with the oil producers maintained through the state-owned ENI, which in the two previous decades had often been at odds with the main oil companies.
The undeniable fact that the sudden hike in the oil price ushered in a prolonged slump along with an upsurge in inflation proves that the upheaval in the oil market had a role in the economic crisis characterizing 1974 and 1975. However, this does not shed much light on the importance of the oil factor in the recession plus inflation process as other elements of greater weight might have been at play.
A Marxist commentator claims that ‘the 1974–5 recession was a classical overproduction crisis and the outcome of a typical phase of decline of the rate of profit’, which pre-dated the leap in oil prices following the Kippur War.11 Certainly, the movements around the trend had become more pronounced and more frequent since the late 1960s and the overheating of the economy in 1972–3, following the decline of 1970, made it possible to foresee a marked slowdown in the following years. And there is no doubt that the 1974–5 recession ushered in a lowering of the general trend. With reference to inflationary pressures, Aldcroft argues that the leap in oil prices cannot be regarded as the initial cause of acceleration of inflation or as the main contributor to its perpetuation in the 1970s, and that instead ‘a secular upward trend in inflation from the mid–1960s had superimposed on it a cyclically or partly cyclically generated price boom in the early 1970s’.12 Yet, there is no denying that the oil crisis in its various aspects and stages deeply affected the main features of the stagflation and its severity. For instance, in the United States a soft landing of the economy could have occurred under different circumstances. In fact, the Economic Report of the President for the year 1973 relates that as early as the second and third quarters of the year there were signs of deceleration in the growth of output and demand.13
Rostow points out that overall the OECD countries suffered total output declines in 1974 and 1975 twice the level that could be directly attributed to the rise in the oil price, while the inflation rate after 1972 was greater than what could be directly attributed to the rise in food and energy prices. However, the scholar adds that the effect on GDP of the rise in the oil bill was compounded by policies of fiscal and monetary restraint, while the inflation leap caused by the hike in basic commodities was also the outcome of the attempt of the labour unions to protect the real wage of workers from the explosive increase in the price of basic commodities.14 All this suggests that if the oil price rise and the other threats of the oil crisis to the economies of the OECD countries are viewed as an independent variable affecting income and inflation along with several other independent variables – including fiscal and monetary policies as well as firms’ and trade unions’ decisions on investments and wage and price rises – in assessing the weight of the former in the causal process, one must also consider their influence on concurrent causes. Put more simply, it is arguable that the oil crisis had a direct impact on the industrialized countries’ economy, but above all contributed to the economic environment that, in turn, induced the monetary and fiscal authorities on both sides of the Atlantic to take the measures that triggered the slump or made it worse.
The quadrupling of oil price affected the OECD members’ economy in a plurality of ways, although their impact was not uniform. In the first place, the quadrupling of the oil price caused a diversion of expenditures in the oil-importing countries from domestically produced goods to imported petroleum products, whose immediate result, in the absence of an equivalent decline in the price of other consumer goods, was a reduction in the available income. A French economic historian put the transfer of wealth to the oil-exporting countries between 2 and 3 per cent of the Federal Republic of Germany’s GDP, that is, a burden of the same order as the Dawes Plan war reparations.15 The worsening of the terms of trade compelled oil consumers – manufacturing industries in particular – to pay higher prices for equal or even declining quantities, and in order to foot the bill the industrial countries had to withdraw resources from the domestic economy. This, combined with a lack of compensating increases in productivity and real wage resistance, resulted in lower profits and hence fewer investments, which, in turn, led to a fall in output and productivity growth.16 As the oil-exporting nations did not increase their imports correspondingly, aggregate demand was bound to decline in the oil-importing countries unless the reduction was offset by domestic policy action. But the room for manoeuvre left to their governments was quite limited as they operated in an already inflationary environment and any income support measure might have resulted in the acceleration of inflation.
Secondly, increased oil prices had an impact on the general price level through various channels. There was a direct impact arising from the higher prices that consumers had to pay for petroleum products, such as gasoline and heating oil, and there was an indirect impact through the price increase for other goods of which oil was an input. Finally, the higher price for oil heightened the demand for substitute sources of energy driving up their prices. According to the 1974 Economic Report of the President, ‘the increase of the price of gasoline from October 1973 to August 1974 added between 1 and 2 percentage points to the rise of the consumer price index in Great Britain, Italy and the United States’.
Thirdly, the increase in the price of oil led to a deficit in the current account of the oil-importing countries and a matching surplus in the current account of the oil-exporting countries. The latter, however, in the short-run were precluded from significantly increasing their demand for imported products by the confinement of income gains to narrow segments of their population, or by the long lead time in developing major projects needing imports from industrialized countries. The OPEC countries’ trade balance surplus amounted to 102 billion dollars in 1974, compared with 22 billion the previous year, while the industrial countries’ deficit more than tripled.
The amount of the current account deficit and its impact on the economy was not the same among the OECD members. As noted by Thirlwall, if a country gets into balance of payments difficulties before reaching its short-term capacity growth, then demand must be curtailed, thus discouraging investment and slowing down technological progress.17 However, the constraint is not immediately felt, or is felt to a lesser degree, by those countries whose currencies are considered reserve currencies. Indeed, the United States benefited from short-term capital inflows as the oil-exporting countries invested part of their financial surpluses in its capital market. For most other countries the best way to ease the constraint imposed on the growth level by the balance of payments was to increase their exports, with the caveat, however, that the same rate of export growth in different countries could not necessarily permit the same rate of growth of output, because the import requirements associated with growth differed from country to country.18
There was, thus, the temptation for many countries affected by the oil crisis to resort to export incentives and import restrictions to prevent deterioration in their trade and current account balances. To prevent an escalation of trade-distorting actions the OECD members at their annual Ministerial Meeting in May 1974 agreed on a declaration setting forth their intention to avoid new import restrictions, artificial export stimulations and export restrictions for a period of one year. The declaration, known as the ‘trade pledge’ was renewed at the Ministerial Meeting of 1975 and at subsequent OECD meetings. However, there is no certainty as to whether the members of the Paris Organization stood by their commitment.
In the United States, the country in which stagflation was first experienced, the crisis was not brought about by current account constraints. After the recovery of 1973, the US merchandise trade balance went back into the red in 1974, but the losses caused by soaring oil import expenditures were partially offset by fast growing exports to Western Europe boosted by the dollar devaluation. In 1975, the current account balance reached a surplus unprecedented in monetary terms and the trade balance became positive again despite the impact of the oil bill thanks to sustained exports but above all to a contraction of imports brought about by the slump. The US slump was caused by its inability to fight inflation without compromising growth and employment. As noted by Alex McLeod, the simultaneous achievement of multiple policy goals by demand management requires as many effective and non-redundant policy instruments as policy objectives and the attainment of each objective must be influenced by at least one instrument. Besides, each instrument must also be capable of differentially affecting progress towards separate objectives.19 The problem with the use of fiscal and monetary policy to simultaneously curb inflation and increase national product and consequently employment is that, although the time and the impact of their effects may differ, they proceed in the same direction resulting either in an expansion or in a contraction of real as well as nominal income. As the United States had to rely on the usual instruments of ‘total’ demand management, while the causes of its troubles were several, it was not able to achieve a satisfactory balance between price stability and growth and unemployment reduction.
At the beginning of the recession inflation was perceived as the most acute problem. The US consumer price annual growth rate had already increased from 3.5 to 5.4 per cent between 1972 and 1973 but it ballooned to double figures the following year (Table 22). The wholesale price for manufactured goods hit 19 per cent (Table 23). In addition to disruption of economic activity, the energy crisis erased all hopes of controlling inflation through wage and price control programmes. In turn, inflation curtailed real purchasing power as real wages fell by 5 per cent during the year. Presenting his programme to check inflation and encourage growth, President Ford exhorted the nation to ‘whip inflation now (WIN)’ as a scourge threatening to destroy the American way of life20 . The overall contractionary fiscal policy was accompanied by a monetary policy that continued the move toward restraint begun in 1973. The rate of growth of money sharply declined in the second half of 1974 and the M1 growth rate became actually negative in the first quarter of 1975, just when the US economy was reaching the trough of the cycle. The slump first hit housing and then spread to other sectors, prominent among which were automobiles and clothing. In 1974 GNP declined by 0.6 per cent and GDP by 0.8 per cent (Table 1). Industrial production fell by over 12 per cent in the last quarter of the year and, even worse from a human and political perspective, unemployment rose to 7.2 per cent in December reaching 8.5 per cent by March 1975. In 1975 GDP and GNP declined respectively by 0.9 per cent and 1.2 per cent. During the months of the recession the capacity-utilization rate dropped to 68 per cent from 83 per cent at the beginning of the period. Nominal unit labour costs added to inflationary pressures as the growth of compensation per hour markedly exceeded the growth of output in the two recession years (Table 8).
In January 1975 President Ford called for tax reductions to fight the recession and Congress backed him. In December 1975 the tax cuts were renewed. As government expenditures also increased, the Federal budget deficit jumped from $11.5 billion to $69.3 billion, thus rising from a modest 0.8 per cent of the GDP to a non-negligible 4.5 per cent (Table 9). In 1976 a robust recovery (5.5%) seemed to be firmly established and consumer prices abated to 1973 levels under the effect of the recession, the monetary squeeze and the end of the oil hike. Yet, inflation was still high and the unemployment rate stood at a high 7.8 per cent, not far from the trough rate of the previous year. Meanwhile the merchandise trade balance had markedly returned to the red under the impact of growing imports, oil in particular, even though the current account balance was still positive (Table 2). The onset, duration and severity of the slump were not uniform among the EC member countries, which makes us think that the causes of the recession were not identical.
West Germany managed to escape the balance of payments constraint that affected most other EC member countries. Its trade balance remained healthy in spite of an export decline in 1975 (Tables 11 and 12). The slowdown in 1974 can be primarily attributed to the restrictive monetary policy adopted by the Bundesbank till the end of 1973 in the wake of the breakdown of the Bretton Woods system to combat inflation which in that year had already hit 6.9 per cent.21 The restrictive policy sustained the appreciation of the Deutschmark vis-à-vis the US dollar, thus curbing the oil bill and with it inflation. However, investment contracted by almost 10 per cent in 1974 ushering in a slowdown which turned into recession in 1975 when the spreading slump caused exports, the engine of German economic strength, to decline for the first time in over 20 years. Thus, it was not the constraint imposed by the surge of import value in the balance of payment but the decline of main components of demand, nominally investments and exports, that brought about the slump. In 1975 the German monetary authority adopted a cautiously expansionary stance, while the fiscal authority continued the countercyclical course already adopted in 1974 and the fiscal deficit reached an unprecedented high of 5.8 per cent of GDP (Table 19). In 1976 the economy fully recovered with a 5.1 growth rate not lower than the 1960 average (Table 10), fuelled by the resurgence of exports and the recovery of investments. However, the expansionary momentum slowed down quite soon.
There was greater volatility in the course of events in Italy, the UK and France which, in turn, showed many similarities. In particular, the Italian economy, in spite of the oil crisis, went on growing in 1974, although at a rate lower than the previous year: 4.1 per cent and 7 per cent respectively (Table 10). Industrial production also continued to grow (Table 20). Inflation, however, jumped to over 19 per cent and the trade gap widened at an unprecedented rate (Tables 11, 12 and 22). Thus, in line with the model developed by Thirlwall, the gaping current account deficit, which in 1974 exceeded US$8 billion, forced the Italian central bank to tighten credit conditions to reduce private demand.22 The credit squeeze helped reduce the trade deficit and abate inflation, though not significantly nor durably (Tables 22 and 23). At the same time the Italian GDP plunged by a stunning minus 3.6 per cent (Table 10) while the fiscal deficit soared to over 13 per cent of GDP under the combined pressure of lower revenues and higher expenditure to subsidize declining industries and contain unemployment (Table 19). To redress the current account balance without penalizing growth, the Italian authorities tried to boost exports by resorting to devaluation. At the beginning of 1976, after a 40 day suspension of the foreign exchange market, the lira depreciated by about 30 per cent on average. The manoeuvre raised the competitiveness of the Italian products despite the continued rise of the cost of labour (Figure 3) and in the short-run the Italian GDP recovered by a robust 5.9 per cent, while the import bill and inflation remained high.
The recession started earlier in the UK than in Italy but was less severe, while the 1976 recovery was less pronounced (Table 10). Inflation, whose average was 5.1 per cent in the 1961–73 years, ballooned to 16 per cent in 1974 and hit 24 per cent in 1975 and did not fall below 16 per cent the following year, thus remaining well above the EC average along with Italy (Table 22). The initial impact of the oil crisis on the trade balance was even more severe than in Italy, but in 1975 the import bill went down, partly because of the prolonged slump and because North Sea oil began to flow (Table 12).
The first impact of the oil shock on France was to accelerate the overheating of the economy, stimulating in the first semester of 1974 both the demand for consumer goods and investments; but the monetary and fiscal squeeze carried out in June 1974 drastically altered the economic environment hitting both above-mentioned components.23 On a yearly basis, GDP grew by 3.2 per cent, while inflation jumped to 13.7 per cent (Tables 10 and 22). Exports grew by a robust 33 per cent but imports soared by 47 per cent (Tables 11 and 12). In 1975 the GDP growth rate was almost nil and import value slightly declined but inflation remained above 10 per cent. In September 1975 a plan was adopted to boost the demand by public investments, by the reduction of fiscal pressure and interest rates to stimulate private investments and by social aids. The outcome was not convincing as there was a strong recovery, but at the price of a rate of inflation higher than the EC average, and the worsening of the trade balance, which forced the French government to abandon once again the European Snake.24 In September 1976 the new French government introduced a plan, known as Barre Plan, primarily directed at stabilizing the economy and curbing inflation. The set of measures helped to improve the trade and current account balances but the GDP growth slackened, the rate of investment decreased and unemployment remained high relative to the years prior to the oil crisis, while inflation did not significantly abate.
Considering all the EC member states, the oil crisis swelled their trade deficit: the gap between imports and exports grew by over 280 per cent between 1973 and 1974 and quadrupled two years later (Tables 11 and 12). The main cause was obviously the impact of the energy bill, as the share of fuel products rose from 11.7 per cent of the whole of commodity imports in 1973 to 20.5 per cent in 1974, declining only slightly in the following two years (Table 18). Obviously the picture was not uniform. The Federal Republic of Germany, although its exports contracted in 1975, was always able to keep a positive trade balance and the Netherlands improved it thanks to its energy exports, while the other EC countries saw their trade gap worsen in spite of the growth of their exports. Countries with sources of oil and gas like the UK and the Netherlands suffered much less than the other Community members from the burden of the energy bill or even benefited from its rise.
After the 1973 peak the following three years witnessed a decline in intra-EC trade (Table 16). This can be explained by the ballooning of the oil imports from the OPEC countries, to which corresponded the need to reorient EC exports of equipment and consumer products toward those countries. The Community trade gap with the United States almost quintupled between 1973 and 1976 (Tables 13 and 14). The share of exports from the EC member countries to the United States over their total exports declined from 7.5 per cent in 1973 to 5.5 per cent in 1976 while the share of imports remained constant at just over 8 per cent. Conversely, the share of US imports from the EC declined from 23.3 per cent in 1973 to 14.7 per cent three years later, and the share of exports to the Community decreased from 24 per cent to 21 per cent.25
The change in the economic environment was to have a delaying impact on trade negotiations as the negotiators were faced with economic decline, rising unemployment and, for the first time in 1975, with a 5 per cent contraction in world trade volume, which had almost tripled in the preceding 14 years, all but quadrupling in manufacture exports. While in 1973 the predominant economic problem for the OECD countries was inflation and, therefore, cutting trade barriers was seen as an opportunity to counter it, in the following years the industrial countries plunged into the worst recession after World War Two and ‘the old pressure to limit imports and thus export unemployment returned’26. Other factors, which were linked to domestic developments in the US, hindered progress. In the first place, the US executive received trade authority more than a year after the official opening of the negotiations. Secondly, the attention to the GATT negotiations of the new president, whose accession to the presidency was due to his predecessor’s misfortunes, was distracted by the forthcoming 1976 elections which was also a factor that made too clear a stance on several issues in the multilateral trade talks a dangerous course.
As noted above, the multilateral talks launched by the September 1973 Ministerial Conference in Tokyo were kept in a preparatory stage awaiting Congress’s grant of negotiating authority to the US executive. The negotiating mandate was expected to provide a clear signal of the American stance in the negotiations as well as of the room for manoeuvre allowed to the executive. Congress cleared the bill on 19 December 1974, just before the end of the second session of the 93rd Congress and the bill was signed into law by Gerald Ford on 3 January 1975. The delay was formally caused by a peripheral controversy over restriction on Jewish emigration by the Soviet Union to which the administration wanted to grant MFN status, but actually it was the result of the declining authority of a presidency crippled by impeachment. It also concealed substantive issues of trade authority allocation on which the Senate’s attitude was less compromising than the House’s. The Jewish emigration obstacle was overcome by a compromise authorizing the president to waive the bill’s ban on trade concessions to Communist countries that restricted emigration if he received assurances that practices were implemented to allow freedom to expatriate.
The legislation, entitled the ‘Trade Act of 1974’, has been labelled as ‘essentially liberal’.27 This judgement can be accepted only with some caveats. The Act is divided into six Titles of which only the first, dealing with negotiating authority, can be labelled as ‘essentially liberal’, although its provisions were far from being unconditionally free-trade oriented and many of the administration’s preferences to secure room for manoeuvre in the multilateral negotiations did not meet with unconditional Congressional acceptance. Many other Titles contained provisions aiming at unilaterally opposing alleged unfair trade practices by foreign competitors or directed to providing more protection to those sectors of the economy allegedly hit by foreign competition or to make quasi-judicial remedies already in force, like antidumping and countervailing measures, stricter, more effective and more easily accessible.28 Indeed, although openly protectionist proposals, such as the Hartke and Burke bill, were rejected, the legislation was adopted in a moment in which the economy was hit by the second recession in just four years and unemployment was increasing. The Senate Report pointed out that during the 1960s and early 1970s US pre-eminence in the world economy had declined as compared with Western Europe and Japan. It was then arguable that much of world economic history in the years following the Trade Expansion Act of 1962, considered the climax of the US drive to secure a freer and fairer world trade, ‘has been unfavourable to this country, largely because of the antiquated rules of the international trade and monetary systems and the related lack of genuine cooperation and reciprocity in international economic relations’.29
Negotiating authority to the president was granted for tariff cuts, following the long-established rule of allowing the executive to negotiate cuts and implement them by self-executing presidential order. The Trade Act authorized the president to eliminate tariffs on goods carrying duties of 5 per cent or less and to reduce higher tariffs by as much as 60 per cent, subject to commensurate actions by other countries. The provision widened the administration’s room for manoeuvre at the multilateral talks by negotiating tariff cuts modulated according to their level at the opening of the negotiations. Indeed, while the United States and the EC had comparable average duties of 6 per cent to 7 per cent, 12 per cent of US tariffs had a rate not lower than 20 per cent. On the other hand, the Act authorized the president to increase tariffs by 20 per cent of the 1973 rates or 150 per cent of the 1934 rates, whichever was the higher.
Things were much less simple with regard to non-tariff barriers (NTBs), as in this area future international deals would overlap with often quite complex domestic rules, which, in most cases, till that moment had not been affected by international commitments, whereas domestic interest groups had swayed their draft.
The administration had proposed an arrangement, accepted by the House of Representatives, under which the president would give notice in advance to Congress of his intention to negotiate an agreement so as to allow lawmakers to express their views. After the negotiation the agreement would be submitted to Congress along with the implementing legislation, entering into effect if not rejected by a majority vote within 90 days. In short, Congress would have been given an advisory function plus a power of veto to be exercised in a short span, but no positive approval of the agreements was envisaged. This approach would have satisfied the other parties to the negotiations, afraid that the NTB agreements could be blocked or deprived of content by the US Congress in the ratification stage. The lot of the limited number of non-tariff issues dealt with in the Kennedy Round, the American Sale Price system in particular, did not bode well. Formally Congress maintained veto power, but this would have cast on it full and, even worse, open responsibility for scuttling a deal laboriously worked out by the United States and its trading partners.
The Senate was not satisfied with the arrangement as the quasi-automatic implementations of multilateral trade agreements would impinge on its power to regulate, and to regulate in detail, matters that had often quite a weight on the domestic economy. The implementation of a tariff barrier agreement would simply require the lowering of a duty. The implementation of an NTB agreement would often entail a complex grafting on the legislation already in place. On the other hand, it was clear that Congress could not have an autonomous role in negotiating with foreign countries. The compromise worked out envisaged a greater voice for Congress in shaping an international agreement that could satisfactorily be implemented in the domestic legislation, but no power of amendment or deferral. The Trade Act of 1974 thus required the president to notify Congress at least 90 days in advance before entering into an NTB agreement and, following such an agreement, to transmit a copy of it along with the draft of the implementing bill and a statement of the reasons as to how the agreement served the interests of the United States. Congress had 90 days (60 for non-revenue bills) to decide on the legislation, but could not introduce amendments. This in practice meant that the Special Trade Representative had to work closely with the House Ways and Means Committee and the Senate Finance Committee during the transmittal phase. To this end delegates of both the House and Senate were accredited to the US delegation to the trade negotiations and the chairmen of the Ways and Means and Finance Committees were authorized to designate members to be official advisers of the delegation in Geneva.
The Trade Act also gave a direct role to interest groups in the NTB negotiations by creating a system of private sector committees to supply advice and information for US negotiators. The Act provided for the creation of an Advisory Committee for Trade Negotiations (ACTN) composed of 45 members appointed by the president, representing labour, industry, agriculture, small business, consumer interests and the general public. The ACTN, presided over by the US Special Trade Representative, would convene in Washington and in Geneva as well. At a level below the ACTN the legislation called for the creation of general policy advisory committees for industry, labour and agriculture and for a series of advisory committees to be established at a sectoral level. Thus, the reform relieved Congress of the pressure of interest groups and arguably diminished the lawmakers’ power as mediators of such interests in drawing up statutes. Conversely, the interest groups were now able to make their voice heard directly, becoming a major interlocutor of the executive, and of the Special Trade Representative in particular, in the course of the multilateral negotiations.
The stated overall objective of the trade negotiations was to obtain more open and equitable market access and the harmonization, reduction, or elimination of devices that distort trade in every area. The Senate Report stressed that, as far as was feasibly possible, the process of harmonization, reduction or elimination of agricultural trade barriers should be undertaken in conjunction with industrial trade liberalization.30 This meant that, in contrast with the EC perspective, although certain particular features of the farm sector could be recognized, this should not entail separate negotiations for agricultural trade. On the other hand, for some industrial sectors, such as steel, aluminium, electronics, chemicals and electrical machinery, sectoral negotiations could be carried out which should result in equivalent competitive opportunities for the developed countries within each sector. The Senate also made it clear that benefits and obligations of non-tariff barrier agreements should be limited to the parties of such agreements in order to encourage all trading nations to commit themselves and to avoid free-lancing in the hope of obtaining benefits without reciprocal engagements.31 Finally, the Trade Act directed the president to seek reform of the GATT to promote the development of an open, non-discriminatory and fair world economic system. Among these principles particular attention was given to the revision of the decision-making procedures of the GATT, the establishment of international procedures for consultation among countries on trade issues and for the resolution of commercial disputes, the reform of GATT Article XIX on safeguard measures with the view to making it more flexible. In response to the particular difficulties of the economic situation in 1974, Congress also called for strengthening of the rules directed to assure access to supplies including procedures governing imposition of export controls and sanctions on those countries that denied fair and equitable access to supply sources. However, the Trade Act of 1974 and the reports of the Ways and Means Committee and of the Finance Committee were silent on issues such as customs valuation, public procurement, import restrictions and technical barriers to trade, which would figure prominently in the negotiations in Geneva.
Along with the draft of the US goals and strategies in the multilateral negotiations, the Trade Act set a series of domestic measures nominally directed at strengthening the protection of the US economy and of its industries against the pressure exerted by the international economic environment, whether its causes were labelled as unfair or otherwise.
As requested by the executive, the legislation relaxed the criteria for industries to be allowed relief from import competition, providing for an affirmative determination wherein the International Trade Commission (ITC) found that increased imports were a substantial cause of injury rather than a major cause as in previous laws.32 At the same time the administration’s room for manoeuvre was curtailed as the president could waive such relief if he found that it was not in the national interest but, if he did so or provided ways of relief other than those recommended by the Commission, he had to report his reasons to Congress which could override his decision by a concurrent resolution. Also the criteria for adjustment assistance to industries, firms and workers affected by foreign competition were made more elastic by the requirement that imports ‘contribute importantly’ to their difficulties. The Act, under Section 122, also required the president in case of large balance of payments deficit to proclaim for up to 150 days corrective action, including import surcharges of up to 15 per cent and temporary quotas, unless he determined that such measures were contrary to the national interest.
Under Section 301 of the Act the president was given authority to retaliate against ‘unjustifiable or unreasonable’ restrictions imposed by foreign countries that burden or restrict US commerce, both in goods and services, or access to supplies, whether through high tariffs or non-tariff barriers, including subsidies and import and export quotas. The term ‘unjustifiable’ referred to restrictions which were illegal under international law or inconsistent with international obligations. The term ‘unreasonable’, however, referred to restrictions which were not necessarily illegal but which nullified or impaired benefits accruing to the United States under trade agreements or which otherwise discriminated or burdened US commerce, opening the door for affirmative findings even if no treaty or international law provisions were violated. The section allowed the president to suspend trade concessions, impose new higher tariff rates on a selective basis, or take other retaliatory actions, including the imposition of antidumping duties or countervailing measures or even exclusion orders which barred a product from being imported into the United States. Although any decision on unjustifiable or unreasonable restrictions was the executive’s responsibility, the procedure of ascertainment could be initiated by the petition of individual parties seeking recourse against foreign actions adversely affecting their interests.
The Trade Act introduced a host of amendments to the 1921 Antidumping Act directed to make the remedy more effective.33 A deadline of six months, or nine months in most complicated cases, was applied to antidumping investigation and the right to judicial review of negative findings on dumping was given to United States industries petitioning against allegedly unfair imports, whereas previously the right to appeal positive decisions was only conceded to importers and foreign producers. Secondly, the Act tightened the net to catch allegedly unfair foreign competitors. Under GATT Article VI and subsection 205 of the 1921 Act, dumping was defined as selling goods in foreign markets at prices below those charged at home, and only in the absence of such domestic prices could the comparison refer to ‘the cost of production of the product in the country of origin plus a reasonable addition for selling cost and profit’. The new statute, however, went a step further, providing that the Treasury Department conducting a dumping investigation should disregard home market sales at below the full cost of producing the article, relying instead on the constructed value (i.e. the estimated cost of production and marketing, plus a profit margin) whenever such home sales were made in substantial quantities over an extended period of time and did not allow recovery of all costs in a reasonable time. This new procedure allowed proof of dumping even though home market prices in the country of origin were not above export prices. If the non-defined ‘reasonable time’ was interpreted as also including cost recovery in the short-term, the new regime could result in an unbearable burden on foreign exporters during a period of widespread and prolonged recession, since in a recession average costs rise because fixed costs must be distributed over a smaller volume of sales. In order to pass the test foreign producers unable to recover costs at home had to sell at rather higher prices in foreign markets, which in practice meant that their products were destined to be outcompeted by US goods.34
Time limits were also established for countervailing duty proceedings, thus preventing the Treasury Department, considered by the lawmakers as too soft in opposing foreign subsidization, from stretching out or shelving countervailing duty investigations.35 On the other hand, the Trade Act of 1974 introduced a temporary provision that allowed the Treasury Department to waive counter-vailing duties during the trade negotiations. However, the House bill was amended by the Senate making the Secretary of the Treasury’s discretionary authority conditional on three requirements aimed at acting as stick and carrot for other participants to the multilateral negotiations on subsidies: the foreign government had taken steps to reduce substantially or eliminate the adverse effect of the bounty or grant; there was a reasonable prospect that an NTB agreement would be negotiated; and the imposition of duties would be likely to jeopardize the satisfactory completion of the negotiations.
The Trade Act was also an occasion to tighten the rein in applying the Generalised System of Preferences in favour of developing countries. In 1971 GATT members, agreeing on a request from United Nations Conference on Trade and Development (UNCTAD), enacted a waiver to the MFN which permitted tariff preferences to be granted for ten years to developing country exports, without reciprocity and without extending the concession to other developed countries. The new statute contained several exclusions some of which were opposed by the administration. The exclusion from receiving generalized preferences concerned Communist countries as well as any country which entered into a cartel to withhold supplies of vital materials or to charge monopolistic prices, including first and foremost the OPEC members. The exclusion also applied to those countries that expropriated the property of US nationals and to those that applied reverse preferences to imports from other developed countries, that is the developing countries that had entered into a preferential agreement with the EC.
The directives issued by the EC Council for the GATT multilateral negotiations in April 1975 were much less far-reaching as they merely elaborated, with no relevant amendments, the main points of the ‘Overall Approach’ already approved by the Council two years earlier.36 Besides, as admitted in the document introduction, although the directives were viewed as sufficiently specific to allow the Community to embark on the negotiations with a clear idea of its objectives, they did not aim at predefining a line of action on the detailed aspects of the negotiations, as such a move would have been inadvisable at a stage in which the general context of the multilateral talks was not yet clear. However, the directives stressed the Community’s stance on a series of negotiating issues. In particular, for industrial customs tariffs the Council’s objective was a significant lowering of duties which, however, was to lead to their harmonization, that is, resulting in the levelling of the differences between the maximum and the minimum rates in the various tariffs. As regards non-tariff barriers the directives stressed the need for a case-by-case approach concentrating on the measures likely to create the greatest obstacles to international trade. The directives also made clear that, at least in some cases, the MFN principle should be made conditional on the participation to the agreements.
With specific reference to countervailing measures, the EC Council stressed that such measures should be applied by all GATT parties, including the United States, only when they were fully justified in terms of already existent GATT rules and consistent with the injury criterion established by GATT Article VI. In exchange of a satisfactory agreement on countervailing duties the Community was willing to negotiate rules on direct export subsidies for industrial products other than basic materials. Reading between the lines it meant that the Community was not disposed to a deal on agricultural subsidies or on domestic subsidies even if applied to manufactured products. On agriculture the directives emphasized that the tensions of the previous two years had turned a period of surplus characterized by increasing competition among exporters into a period of scarcity marked by concern over security of supply, which showed the need for an expansion of trade based on stable world markets. This goal was to be achieved through a set of multilateral agreements covering the main commodities, i.e. wheat, maize, sorghum, barley, rice, sugar and dairy products, and involving the major producing and consuming countries. For dairy products the agreements had to be based on the establishment of minimum and maximum safeguard prices and on preferential purchase and sale obligations, while for the other products, price arrangements were to be accompanied by coordinated national stockpiling policies. For products other than those subject to international agreements, the expansion of trade had to result from coordinated actions from importers and exporters directed at securing the orderly functioning of the market.
The bestowal of negotiating authority on the US president signalled the effective start of the discussions but was far from entailing a breakthrough. On the other hand, as noted by Winham, despite the lack of overall progress, the early period of the Tokyo Round opened up a large range of areas for formal negotiations, as some of these areas had already been the subject of talks in the GATT even before the launch of the Tokyo Round.37
In February 1975 the Trade Negotiation Committee (TNC) created six specialized subcommittees which conformed to the negotiating areas outlined in the Tokyo Declaration:
group on tariff negotiations
group on reduction or elimination of non-tariff measures and their trade-distorting effects
group for the examination of the sector approach as a complementary negotiation technique
group for the examination of the multilateral safeguard system
group on agriculture negotiations
group on tropical products negotiations.
Later in the year the non-tariff measures group was subcategorized into five subgroups: quantitative restrictions; technical barriers to trade; customs matters; subsidies and countervailing duties; government procurement. The agriculture group was subdivided into three subgroups: grains; meat; and dairy products.
No progress was made on tariffs as the members of the group, rather than engaging in negotiations of substance, remained stalled in theoretical discussions about the approach to tariff cuts, with the EC and other Western European countries arguing that duty reductions should go hand-in-hand with tariff harmonization, whereas the United States seemed to favour linear reductions. On non-tariff barriers the interest groups, both in the EC and in the United States, started lobbying the EC and US executives even before the outset of the negotiations. Many EC industries complained that a host of non-tariff measures on government procurements, quantitative restrictions, antidumping and countervailing proceedings as well as on product standards and customs assessment, had been lowering their foreign market share. The main target was the United States whose domestic legislation was accused of imposing undue burdens on foreign exporters.
On subsidies the European Commission suggested that a list of always prohibited export support measures should be drawn up, while a second, non-exhaustive, list should enumerate subsidies prohibited only if they resulted in export prices lower than domestic market prices. Export credit and export insurance should not be prohibited but could be subject to a good conduct agreement. Domestic subsidies should under no circumstances be prohibited, being only subject to an improved notification and consultation procedure to deal with cases that could affect trading partners’ interests. The EC complained that the US countervailing measures did not conform yet to GATT Article VI because of the Grand Father clause as they were applied irrespective of proof of damage to domestic industry.38 The EC also argued that the implementation of the Kennedy Round Antidumping code by the United States was not fully consistent with the provisions of the code and with GATT Article VI because the US authorities applied too wide criteria in ascertaining when dumping occurred and when the domestic industry was hit. The United States rejoined that the real problem was dumping and subsidization and that, therefore, alleged inconsistencies of its regime with GATT rules would become irrelevant once a satisfactory solution to the mentioned trade-distorting practices had been found. In contrast to the EC, the US negotiators called for stricter regulation not only of export subsidies but also of domestic support measures, even prohibiting those able to significantly distort trade.
As regards quantitative import restrictions, while the United States favoured their gradual phasing-out, the attitude of the EC Commission was more prudent. In the first place, the regulation of these restrictions remained mostly under the jurisdiction of each member state until a uniform regime was adopted across the Community, although the Commission was confident that this regime could soon be implemented. On the other hand, the EC executive argued that concessions on quantitative restrictions had to be contingent on the adoption of more elastic criteria on the application of the Safeguard Clause under Article XIX of the GATT and on the satisfactory result of its bilateral negotiations with Japan and with the East European countries.
The subgroup on customs matters dealt prevalently with the methods to be used for determining the value of imported goods for the purpose of imposing duties. GATT ArticleVII required customs valuation to be based on the ‘actual value of imported goods’, i.e. the actual price at which the product is offered for sale in the ordinary course of trade under fully competitive conditions, but it did not shed light on the methodology to be followed for the assessment. The EC member states followed the Brussels Convention on valuation of goods and, along with most participants in the Tokyo Round, assessed imports according to the Brussels Definition of Value (BVD). Under this method, the value for customs purposes should be the normal market price, defined as the price that goods would fetch on sale in the open market between a buyer and a seller independent of each other. Other countries, among which the United States, followed different systems. The United States accused the BVD of being based on a notional approach, focusing on what the value would or should be rather than on what it was.39 However, the US regime was not an example of administrative simplicity as it allowed for a multitude of assessment criteria according to needs and products, which could be basically grouped in five methods of valuation: export value (actual export price of freely offered goods); foreign value (price in the exporting country’s market); United States value (price of comparable imported products in the US); cost of production (estimated cost of production plus profit); and American sale price (price of comparable goods produced in the United States). It was the latter method that, although applied to a limited set of imported products, was seen as the main irritant by the EC exporters as the ASP did not reflect prices charged by them but by the US industry, quite often resulting in an unfair evaluation of the imported goods. As previously noted, the US executive had on many occasions called for the repeal of such a method, but Congress had denied its assent. However, by 1975 the main beneficiary of the method, the chemical industry, had signaled its willingness to accept the repeal of the ASP in exchange for higher duties and the US customs authority was arguing that life would be easier if a simplification of the existing methods were carried out. Also the EC Commission had started to view a multilaterally agreed customs valuation reform as an opportunity for strengthening its grip on the functioning of the customs administration in the Community. Indeed, although a common tariff regime had been introduced in 1968, its administration continued to be carried out by the customs services of the member states and the Brussels Definition of Value appeared to give them discretion in following their traditional paths on evaluation.
Both the United States and the EC, as major exporters of finished and semi-finished products, had an interest in an agreement that could secure outlets in a new main section of the developed countries’ economies: public procurement. Negotiations on public procurements were already carried on in the OECD and many member states believed that they could be continued in the OECD in parallel with the GATT talks. The prospective agreement would then be included in the Tokyo Round final package and would be opened for accession by the GATT parties that were not members of the Paris Organization. The major aim of the EC in the negotiations had been, long before the start of the Tokyo Round, the abolition of the 1933 Buy American Act which provided that goods purchased with federal funds for government use or for construction of public works must be of domestic origin as long as the American firms’ bid did not exceed their competitors’ offered prices by a given percentage (originally 25 per cent and later 6 per cent, except for Department of Defense procurements). The European Commission and the EC member states also feared that the United States would try to limit its commitments appealing to national security reasons, or arguing that many groups of potential buyers were not under Federal jurisdiction or belonged to the private sector even though they exercised public functions, while many American firms could bid for public procurements within the EC through their subsidiaries in the EC member states. On the other hand, the Community was handicapped in its negotiating position by the lack of a general discipline on public procurement bids among its member states. It was only in December 1976 that a draft Directive submitted by the Commission was finally approved by the EC Council, with an effective date in 1978.
Greater progress was made on so-called technical barriers to trade, that is, on product standards inhibiting the free flow of goods, whether intentionally or unintentionally, where negotiators took advantage of the existence of a draft code prepared before the start of the Tokyo Round, which was used as a starting point for discussions. Negotiations covered such topics as testing and certification by governmental bodies and included the areas of packaging, labeling and marking of origin.
As was to be expected, most of the skirmishes concerned agriculture. Here, the EC contended that agriculture had a unique position in the world market and that multilateral negotiations should focus on the stabilization of the market for the main farm products. Conversely, the United States, though recognizing that the sector had its peculiarities and trade stabilization was important, argued that in the long-run market equilibrium would be brought about by liberalization of world trade and, therefore, by the elimination of protective barriers and distorting subsidies.40 The creation in February 1975 of an ‘agriculture’ group within the TNC was a favourable starting point for the Community. There was, however, the problem of the relationship of this group with the other groups in the TNC and in particular with the group on non-tariff measures, whose jurisdiction would also cover import restrictions and subsidies. Before the formal establishment of the ‘agriculture’ group, France, the main producer and exporter in the Community, had requested that the EC negotiators should make a declaration on the role of the prospective group, stating that it should have ‘responsabilité globale et exclusive’ (global and exclusive responsibility) on farm issues. However, a softer statement proposed by the Commission, to be circulated by ‘note verbale’, was finally agreed by the EC member states which assigned to the group ‘responsabilité globale et principale’ (global and main responsibility).41 The position of the United States was that negotiations on agriculture should take place primarily in the groups on tariff and non-tariff measures and other functional groups, on the assumption that the objective of the negotiations in agriculture and industry alike was liberalization of trade restraints and that this task could best be accomplished through an across-the-board approach to these issues. In May 1976 a compromise seemed to have been reached according to which the agriculture group would treat tariff and non-tariff measures relating to agriculture in conjunction with the work in the groups on tariff and non-tariff measures.42 The United States interpreted the compromise as allowing any participant to the round to raise a matter relating to agriculture in other groups, thus ruling out exclusive jurisdiction for the ‘agriculture’ group. As expected, the EC rejected such an interpretation. A new compromise proposal put forward by the United States in September 1976 was also rejected by the EC. This proposal suggested that consultations on agricultural restrictions could be held under the auspices of the ‘agriculture’ group so long as the results of the consultations were reported simultaneously to the subgroup on quantitative restrictions and any other relevant group or subgroup.
The same kind of problem about objectives and relations with other negotiating instances emerged in each of the three subgroups on grains, meat and dairy products. The disagreement was particularly manifest in the grains subgroup where the Community proposed the negotiation of a comprehensive international grains agreement that would stabilize prices within a wide band by means of stocks operated by the participating countries, whereas the US along with the other main producers saw trade expansion and liberalization as the major goal.
Efforts to avoid confrontation and postpone the unsettled differences without papering them over marked the negotiations on compensatory tariff reductions required of the EC under GATT Article XXIV: 6 as a result of its enlargement to nine members which were conducted in the GATT framework but were substantially bilateral. The mentioned article required customs unions, such as the EEC, to negotiate tariff compensation when the expansion of a common external tariff resulted in the increase in national rates of duties previously applied by the acceding countries. As noted in Chapter I, the accession of the United Kingdom, Denmark and Ireland, generally entailed lower tariffs in manufacture imports and higher barriers on farm imports.43
In the negotiations, which formally opened in January 1973, the EC initially argued that the tariff reductions implemented by the three acceding countries outweighed the tariff increases and, therefore, little or no compensation was due. The United States, along with other exporters, maintained that since it had bargained and paid for the lower tariff rates previously applied by Denmark, Ireland and the UK, it was entitled to receive compensation through EC tariff reductions on items of interest to its exporters.
In December 1973 the Community made a global offer of tariff reductions on items of interest to many countries, which, however, was found to be insufficient. The April 1974 decision of the EC Council of Ministers to be open to further settlement efforts resulted in an intensification of the dialogue between the Community and the United States which led the following May to a bilateral settlement. The US obtained concessions not only on some industrial products, but also on a number of agricultural products like tobacco, oranges and grapefruits. No concessions, however, were obtained on the item of main interest for US farmers, cereals, and the two parties agreed to continue discussions with a view to seeking agreed solutions to the problems of international trade in grains through international negotiations. Other countries like Canada, prevalently farm exporters, were not able to reach an agreed settlement on their demand for compensatory tariff adjustment and finally lodged a complaint in the GATT for violation of Article XXIV.
On the other hand, the launch of a new multilateral round in the GATT, the bite of the recession and the call for more decisive and prompter response to allegedly unfair practices by foreign competitors in the Trade Act of 1974 meant that the GATT increasingly became the arena for legal confrontation between the United States and the EC and, to a lesser extent, Japan. Until 1972 the legal disputes between the transatlantic partners did not result in a demand for formal legal rulings with the establishment of a panel or the complaint was dropped before the panel gave its rulings. However, in 1973 the EC lodged a formal complaint in the GATT against the Domestic International Sales Corporations (DISC) legislation, which, as noted in the previous chapter, provided fiscal incentives to US exporting companies.44 The EC argued that the DISC provisions violated Article XVI: 4 of the General Agreement as the regime conferred an export subsidy on US producers by allowing a continuous deferral of their foreign sale income tax liability or, in any case, by the exemption of the compound interest rate on the deferred tax.45 The United States countered that the territoriality principle, adopted by certain EC member states, led to equivalent economic distortions as it allowed European producers to reduce their overall tax liability by organizing foreign branches or subsidiaries in low-tax countries and using transfer price.46 The US accepted the creation of the panel, but on condition that a single panel should entertain the European complaints together with the American ones. It was a clever tactic which worked in the short-run. Three years later, in a highly politicized report, the panel, in a Salomonian way, held that neither the DISC regime nor the territoriality principle was fully consistent with GATT Article XVI. This gave the US substantial diplomatic leeway, as the repeal of the recently adopted DISC provisions was conditional on the surrender of the long-standing territoriality approach by its EC counterparts. However, the US legal position was strongly criticized by the majority of the other GATT members as the DISC regime was a blatant subsidy, whereas the territorial system of income taxation had been an integral part of many developed countries’ fiscal regime long before the existence of the GATT.47 This simple truth was finally recognized by the Parties to the General Agreement. After a five year stalemate, in December 1981 the Council adopted the four reports but with the understanding that ‘with respect to these cases, and in general, economic processes (including transactions involving export goods) located outside the territorial limits of the exporting country need not be subject to taxation by the exporting country and should not be regarded as export activities in terms of Article XVI: 4 of the General Agreement’. This implicitly acquitted the European countries’ regime based on the territoriality principle.48
In the United States the new section 301 of the Trade Act allowed several industries to put pressure on the executive to defend their rights against ‘unjustifiable or unreasonable restrictions imposed by foreign countries’ and in 1976 the Ford administration filed two complaints in the GATT against the EC involving short-term trade measures in the agricultural sector to alleviate surplus situations in sectors benefiting from CAP support.
Thus, the dispute settling apparatus of the GATT became the arena in which the United States turned the spotlight on the inconsistency of the CAP with already established GATT rules, while the EC and its member states tried to show that the United States, though a self-proclaimed opponent of government intrusion in the economy, in particular through subsidizing measures, was itself a subsidizer, being only able to conceal its policies in a more sophisticated way than its trading partners.