The economy that in 1976 was fast recovering in all OECD countries from 1977 was characterized by a divergent tendency in the industrialized countries as, while the United States continued to grow in the two following years approximately at the same rate as in 1976 (Table 1), the growth rate in the EC member states markedly slowed down, with the exception of Ireland and Luxembourg (Table 10). Also, Japan experienced a deceleration of its rate of growth.
When the new president, Jimmy Carter, took office in January 1977 the rate of unemployment was 7.4 per cent, a level of joblessness that the Democratic executive could not but consider unacceptable, being only one point below the 1975 peak. The Tax Reduction and Simplification Act passed in May 1977 increased the personal standard deduction and provided additional funds to states and localities. Later the administration increased spending on public works and on public service employment. The fiscal deficit of the two previous years was not curtailed (Table 9) but the economy kept growing and by 1978 the rate of unemployment was reduced to a still high but more acceptable 6.1 per cent. From 1977 onwards, the favourable picture was marred by the worsening of the balance of payments. The merchandise trade deficit soared by 228 per cent relative to the deficit of the previous year, which, in turn, was much higher than in 1972, that is, the year in which the effects of the dollar devaluation had not yet been felt, while the current account balance, positive for the last four years, turned into a deficit of $14.5 billion in 1977 and $15.4 billion the following year (Table 2). As shown by Table 3, only a part of the trade deficit can be attributed to constant US thirst for imported oil, although only between 1976–7 crude petroleum imports grew by one-quarter. The deficit for the whole of the industrial supplies and materials group doubled in the same period; the deficit for non-food consumer goods except automotives doubled between 1975 and 1977 and trebled a year later. The same trend characterized the automotive sector. The deficit with Germany, which had been cancelled in the previous year, reappeared in 1977 and further grew in 1978, but overall the negative balance with the Federal Republic remained a modest portion of the US trade deficit. The deficit with Japan more than doubled between 1976–8, accounting for over a third of the US merchandise trade deficit (Table 4). A cursory analysis of the causes of the deficit, that is, without considering its various components, does not point to the non-competitiveness of American products in terms of costs. On the contrary, it appears that the competitive edge provided by the 1971–3 devaluation of the greenback had not been eroded. For instance, the unit labour cost in manufacturing of the main US trading partners, estimated on a dollar basis, rose much more quickly than in the United States (Figure 3). It is, therefore, arguable that at least part of the deficit was the result of the discrepancy between the speed and extent of the recovery in the USA and in the other OECD countries. The path to a sustained, non-inflationary growth in all industrialized countries, also capable of avoiding dangerous gaps among their balance of payments, was seen in the coordination of their policies, in particular those of the United States, Japan and West Germany. The ‘Locomotive’ approach, which was the official Group of 7 (G7) philosophy, was that a satisfactory pace of global recovery could be achieved only if the major industrialized countries, that is, initially Germany, Japan and the United States adopted a stimulative stance in their domestic stabilization policy. In turn, such a policy would not only bring about export-led expansion in the weaker countries but would also loosen domestic policy constraints linked to balance of payments deterioration risks. The apparently rational picture was spoiled by the fact that the three engines forming the locomotive had different levels of inflation and above all of unemployment, which was higher in the United States than in the other two countries, and their priorities in fighting the two ills were different. Both Germany and Japan were wary of relying on domestic stimuli to the economic recovery, also because, as in the past, their recovery, modest though it was, was export-led. The German monetary authorities, in particular, were worried about measures that could rekindle Germany’s traditional bogyman: inflation. The May 1977 Downing Street Summit committed the G7 governments ‘to targets for growth and stabilization which vary from country to country but which, taken as a whole, should provide a basis for non-inflationary growth worldwide’. The Summit declaration also stated that the governments of countries pursuing stabilization policies, designed to provide growth without inflation, would continue to pursue those goals, whereas countries that had adopted reasonably expansionist growth targets would keep their policies under review and, if needed, adopt further measures to contribute to the adjustment of payments imbalances. It seems, therefore, that Japan’s and West Germany’s policies received full endorsement while the United States was required to implement adjustments in case of worsening of its balance of payments.
Attitudes substantially changed at the time of the Bonn Summit in August 1978 as the pace of recovery had not shown any significant improvement in most EC member countries where the unemployment rate was approaching that of the United States, which in turn was declining. The Bonn declaration pointed at unemployment as the main evil, to combat which the G7 governments would build on the progress already made in curbing inflation, pursuing, however, higher economic growth. In this context West Germany’s Chancellor, Helmut Schmidt announced that his government would propose to the German parliament additional fiscal measures of up to 1 per cent of Gross National Product. According to a political scientist, by so doing under the cloak of an international commitment Schmidt, backed by the Social Democratic Party, also in view of the approaching 1980 election, wanted to overcome the resistance of the junior partner in the government, the Free Democratic Party, represented by the Finance Minister, as well as of the business and banking communities.1 Actually, the German government’s fiscal stimulus had already secured the bolstering of a Community commitment as the EC Summit held in April at Copenhagen had called for a growth rate of 4.5 per cent throughout the EC by 1979, while the GDP growth of Germany, by definition the Western Europe Locomotive, in 1978 was not expected to exceed 3 per cent.2 The Japanese Prime Minister Takeo Fukuda stressed his governments’ efforts to increase by 1.5 percentage points the growth rate of the previous year, mainly through the expansion of domestic demand, and pledged to increase imports through the same channel. The US president announced that his government had already taken measures to prevent its fiscal stimulus from reigniting inflation by reducing expenditure projection for 1978 and 1979, while a very tight budget was prepared for 1980. Carter also committed the US executive to introduce measures directed to curb the US dependence on imported oil by the end of the year. Actually, the programme, whose cornerstone was the decontrol of oil prices, had been hailed at the Downing Street Summit, but was soon bogged down on account of opposition in Congress and in the administration as well, as some of Carter’s political and economic advisers deemed that such a measure could rekindle an inflation that had abated but did not give any sign of disappearing. In any case, price deregulation was bound to stir up resentment from the average American who had long taken cheap consumption of oil for granted. The renewed pledge in Bonn offered Carter the international backing that enabled him to push through the reform, also assisted by the announcement that the EC member states had agreed during the European Council held in Bremen the previous week to reduce the Community’s dependence on imported energy to 50 per cent by 1985. Although with a delay of five months from the deadline indicated at the G7 Summit, price decontrol in the US began on 1 June 1979, with all controls to end by October 1981. It must be noted that the administration was careful enough to schedule the final stage of the alignment to world prices well after the November 1980 presidential election.
The recovery, whose strength was different in the United States and in Western Europe, concealed areas of decline and expansion bound to have an impact on their economic policies and on the multilateral negotiations.
The sectors experiencing grave difficulties were shipbuilding, in particular in the EC, textiles and steel, while agriculture and aircraft industry acquired growing importance in the expansion of US and EC trade. In line with the teaching of international political economy, the crisis that affected the first three sectors fostered protectionist tendencies on both sides of the Atlantic. Yet, the sheer fact that the success of the latter two sectors was inextricably linked to public support both in the US and in the EC, although with different levels and different kinds of intervention, hampered trade liberalizing agreements and only postponed the confrontation between the two areas, for agriculture until the early 1980s and for aircraft until the twenty-first century.
As noted by Lindert, the United States shipbuilding industry was never able to effectively compete with the United Kingdom shipbuilding industry and the chance to gain ground on the British was seized by other European nations and later by Japan. The United States, therefore, satisfied itself with isolating a non-competitive industry from foreign onslaughts.3 Thus, there was no question of any new difficulties for the American industry in the 1970s. A serious decline was, instead, experienced by the EC industry, unable to withstand competition, not only from Japan but also from some newly industrialized countries in a global environment dominated by overcapacity. Order books in the international market swelled unprecedentedly between 1970–73 as a result of optimistic forecasts of the world economy and of speculative demand. To meet orders received in 1972–3, annual world production in the period 1974–6 grew to approximately 20 million cgrt (compensated gross registered ton).4 Production in the EC countries had not kept pace with the buoyant world market, as its share had steadily declined from 70 per cent in 1955 to 23.3 per cent 20 years later, while that of Japan had jumped from 12 per cent to 50.6 per cent.5 The 1974–5 slump, although not the only cause of the decline, put an abrupt end to the rosy expectations. By 1977 new orders had fallen to 14 million cgrt and had started to cause overcapacity problems even to Japan. A year later they plummeted to just 10.8 million cgrt (–23 % relative to 1977 and –32% relative to 1976). Production fell from 22.1 million cgrt in 1976 to 16.5 million cgrt in 1978 (–25%).6 The recession was forecast to extend well into the following decade. The EC shipyards were hit more than their competitors as their share of world newbuilding completions declined to 21 per cent by 1978. Already in 1975 the decline was affecting 8.3 per cent of the workforce in the shipyards of the EC member countries. In 1978 employment in new shipbuilding fell to 155,840 units, with a 25 per cent decline relative to 1975 and a similar trend characterized all other sectors of shipyards.7 The member states at national levels reacted by supporting their shipyards, i.e. placing orders for naval vessels and, above all, through financial intervention aimed at overcoming the price advantage of Japan and of the Newly Industrialized Countries (NICs). These efforts, however, ended up by keeping afloat an industry affected by overcapacity but without effectively tackling this problem.
The EC intervened by issuing directives aimed at harmonizing state intervention in the sector and reducing the level of aids which were damaging intra-Community competition. The stated aim of the Community was to make the EC shipyards more competitive in the world market, thus providing a more significant proportion of the member countries’ fleets. Since demand for shipping was declining, because of the continuous impact of the oil crisis, the European Commission suggested that financial measures should be taken to stimulate demand and to orientate it towards local production. Nevertheless, restructuring and curtailment of production potential had to be accepted. The European Regional Development Fund provided financial support to the regions, prevalently located in France, Germany, Italy and the UK, where there was a high concentration of shipbuilding to create or preserve jobs and to assist the execution of industrial infrastructure projects. Obviously, the Community’s efforts to buoy up, restructure and render its shipbuilding industries more competitive was open to the accusation that reorganization of the shipyard industry would interfere with the market, distorting competition with other producers. Under the auspices of the OECD ‘general guidelines for government policies in the shipbuilding industry’ were agreed by the EC member states together with the other members of the Association of West European Shipbuilders (AWES) and by Japan with the stated aim of pursuing the reduction of production capacity so as to restore in the medium-term the balance between supply and demand, while maintaining fair competition. The OECD agreement was made more effective by pressure on Japan to bear a satisfactory share of the consequences of the crisis under threat of unilateral protective measures. Japan agreed to raise its export prices by 5 per cent and introduce a series of measures of voluntary restraint vis-à-vis some EC member states, which, however, was far from bringing balance back in the market.
Similar problems were experienced by the US and EC steel industries in the period ushered in by the oil crisis. The years 1973–4 witnessed a strong expansion in steel demand which entailed major expansion projects as producers were forecasting an upwards trend for the following decade. After a decline in 1975, world consumption slowly recovered in the second half of the 1970s until it exceeded its 1973 level by a meagre 3.7 per cent in 1980. However, the overall trend masked more ominous developments for the industrialized countries where consumption annually declined by 2.4 per cent.8 As a result the steel industry on both sides of the Atlantic experienced significant losses and overcapacity. The American and Western European problems were rendered more acute by the fierce competition of Japan and some NICs. The United States, which accounted for over 48 per cent of world production in 1950, accounted for 21.6 per cent 20 years later and for just 14.1 per cent in 1980.9 By 1960 the US had become a net importer and by 1980 its net imports amounted to 12.4 million tons of steel products. Japan, which accounted for only 2.6 per cent of world output in 1950, accounted for 16.1 per cent in 1970 and 15.5 per cent ten years later, and its net exports soared from 0.4 million tons in 1950 to 22.3 million tons in 1970 and almost 35 million in 1980. The EC remained a net exporter but its share of the world product, after climbing to over 29 per cent in 1960, declined to less than 18 per cent 20 years later.
The changing production pattern of steel trade flows is primarily explained by changes in relative costs in favour of Japan and the NICs vis-à-vis their competitors in the United States and Europe. US costs relative to Japan went from being slightly lower in the mid-1950s to over $100 per ton higher in the mid-1970s and by 1976 the Japanese industry was 13–7 per cent more productive than its American competitor in converting inputs into steel.10 In spite of the recovery of the economy, the steel industry experienced low capacity utilization, significant job losses and declining profits. The industry’s difficulties were exacerbated by imports which, during 1977, rose 35 per cent by volume and covered 17 per cent of domestic consumption. It was, therefore, natural to claim that in a sluggish world market, foreign competition was taking the form of major price reduction which was quite often bound to result in sales below production costs.11 In September 1977, an interagency task force, headed by Treasury undersecretary Anthony Solomon, was established to examine the steel industry’s problems. The task force recommended measures to encourage modernization of steel making facilities; assistance to firms and workers in adjusting to import competition; review of the environmental regulations applying to the steel industry; and above all the establishment of a trigger price mechanism for monitoring imports into the US and initiating expedited antidumping investigations. The trigger price mechanism (TPM) was approved by Carter at the end of 1977 and was formally initiated the following February in the investigations on the 32 categories of steel products marketed in the US. It was based on the full cost of production by the most efficient foreign steel producer, Japan, plus the cost of bringing the imported products into the United States. The TPM was not considered a minimum price system as the importers were free to sell steel in the United States below the trigger price as long as they were selling above ‘fair value’ as defined by the Antidumping Act. It indicated, however, when an imported product was likely to be sold at less than fair market value, thus automatically opening an investigation unless the exporter had received a pre-clearance. In other words, importers of foreign steel at better prices than increasingly costly US products were warned that they were embarking on a dicey adventure. It was, therefore, much more consistent with prudence to buy American products.
Things went comparatively worse for the EC member states as the downturn did not mean the worsening of a long downwards trend but the inversion of a phase of expansion culminated in 1974. In 1977 the Community’s production of crude steel amounted to just over 126 million tons, compared with 134 million in 1976 (–6%) and 155.6 million in 1974 (–19%). The rate of utilization of production capacity was approximately 60 per cent and the rate was even lower in Germany, Belgium, Denmark, Luxembourg and Ireland. Steel imports increased by 67 per cent compared with 1974 and the proportion of consumption covered by imports jumped from 5.8 per cent to 10.4 per cent.12
The EC steel industry had set up a cartel, which fixed minimum prices and quotas of production and exports within the Community. Derogating the General EC rules on competition, the steel cartel was allowed under the 1951 ECSC Treaty. The effectiveness of a cartel depends on two factors: its comprehensiveness and unity; its ability to prevent the entry of foreign competitors into its market. Within the EC the effectiveness of the cartel was put into question by competition from the so-called Bresciani firms (from the name of a town from the industrial North of Italy). These small and efficient firms were able to produce at much lower costs than big German and particularly French steelmakers and, therefore, were threatening their markets. The growing inflow of steel products from a wide range of countries was even more dangerous.
As was predictable, since the crisis was more unexpected and was deeply felt in all the Community member countries, the measures adopted were even less consistent with the principles of free trade and free market which, after all, was the philosophy to which both sides of the Atlantic claimed to adhere. As the system by which steel producers could voluntarily undertake to limit supplies of certain products did not prevent the deterioration of the market, in May 1977 the Commission, endorsed by the European Council, adopted a package of measures which were further expanded in December, to reorient and reshape the steel industry and to protect it from foreign competition. These measures, known as the ‘Davignon Plan’, after the commissioner for Industrial Affairs, provided for mandatory minimum prices for products under stiff competition like concrete reinforcing bars and hot-rolled wide strips and called for guidance price for other products, combined with voluntary production quotas. Concurrently an import control programme was initiated. Like the TPM in the United States, the programme employed a system of basic prices reflecting the lowest production costs in the exporting country in which normal conditions of competition prevailed, but went further than the American regime, as it provided for the levy of provisional duties on imports below basic price without need for prior enquiry.13 Steel exporting countries were, however, exempt from the basic import price system if they negotiated voluntary export restraint agreements. Fifteen countries providing about 75 per cent of EC imports, including EFTA members and Japan, agreed to a VER as of 1 January 1978.
On the other hand, one of the declared objectives of the plan put forward by the Commission – whose policy, unlike the United States’, along with protectionism, was also characterized by a high degree of dirigisme – was to bolster the profitability of the EC steel industry by a severe curtailment of its capacity in order to achieve balance between offer and prospective demand.14 According to the Commission’s estimates, the latter could regain its 1974 level, that is the highest level ever met by member states’ supply, only in 1989. Thus the 1979 capacity was forecast to exceed foreseen production needs for 1983 by 13 per cent for crude steel and 15 per cent for laminated products, which, taking into account the cuts already carried out by the firms concerned, made a further reduction of about 20 million tonnes necessary. The foregoing would have required a restructuring policy involving the reconversion of industrial plants and workers to other sectors to be financed by the Community budget and stricter rules on subsidies provided by member states as they would distort competition and hinder the capacity cut process.
If the measures adopted by the Community were definitely inconsistent with the GATT provisions, they did fit with the understanding worked out in the OECD where, at the initiative of the United States, an Ad Hoc Group on Steel was formed to identify structural problems of the sector on a worldwide basis and to provide a forum for discussion. The Group, which in late 1978 was replaced by a standing Steel Committee, focused on three main areas: steel trade, steel prices and longer-term structural changes in the industry. At a meeting in November 1977 the Group agreed on a number of principles to guide governments in dealing with the steel sector’s problems: worldwide rationalization of the sector was needed and the burden of adjustment was not to be shifted from one producing nation to another either in the short or the long-term; immediate measures to keep domestic firms afloat had to be consistent with the longer-term need to rationalize the industry while maintaining free and fair flow of trade and, therefore, ‘unilateral’ quantitative restrictions were to be avoided; in spite of slack demand, the parties to the understanding were to refrain from cut price competition that could affect the industry of the other parties, which was a warning not to exploit cost advantages under threat of countervailing measures.15 To render the commitment more effective and to prevent freelancing, a monitoring mechanism was established which aimed at identifying incipient problems and facilitating ‘rational investment decisions through increased transparency’.
The dealings in the OECD were obviously influenced by trilateral talks held by the US with its EC and Japanese counterparts. This may explain why the United States, while pressing foreign exporters with quasi-judicial antidumping proceedings, refrained from large-scale actions involving presidential decisions. For instance, President Carter decided in January 1978 to discontinue review of a complaint filed by the American Iron and Steel Institute under section 301 of the 1974 Trade Act alleging substantial diversion of Japanese steel to the US market as a result of a voluntary restriction agreed with the EC. The president noted that there was no sufficient evidence of significant diversion of Japanese steel towards the US and that, at any rate, adequate relief could be obtained through the antidumping complaints filed by the steel industry.16 However, there is no evidence that the activities in the OECD and the tripartite talks resulted in or aimed at the establishment of an international steel cartel. The Americans, for instance, were not prepared to impose a curtailment of capacity on their industry. No deal on market shares is traceable. The EC steel producers looked favourably to the re-birth of the voluntary restraint arrangement expired in 1974, which would have provided a limited but not threatened share of the US market, but this policy was not followed by the Commission. On the other hand, the absence of a stable outlet in foreign markets, and the United States was a main importer of EC steel products, meant that the forecast of excess capacity made by the Commission could prove optimistic and that, therefore, more severe rationalization measures were needed.
The aftermath of the first oil crisis also witnessed a surge in import restricting policies within the textile and clothing industries. The new trend was the outcome of the worsening condition in Western European countries, although the US was not coy to exploit the advantages offered by the EC call for greater control over developing country exports. While the United States had actively pursued bilateral agreements during the first period of the Multifibre Arrangement, the EC had not implemented a consistent textile trade policy and was paying the price.17 In 1977, the United States had agreements with 18 countries, covering approximately 77 per cent of its imports of cotton, wool and man-made fibre textiles and apparel and was actively negotiating new bilateral agreements. The EC had been slow in exploiting the room for manoeuvre offered by the MFA, as most of the voluntary restraint agreements signed with developing countries did not come into force until 1976, that is, two years after the MFA took effect. Moreover, the quantities stipulated in many bilateral agreements were relatively large and numerous concessions had to be given to those countries with which the EC had signed preferential agreements. The EC trade surplus for manufactured textiles and clothing of over $900 million in 1971 turned into an $846 million deficit in 1975, and in terms of tonnage this deficit rose from 163,000 tons in 1974 to 383,000 tons in 1975 and 600,000 tons in 1976.18 Between 1971 and 1977 530,000 workers left the textile and clothing industries, while over 700,000 workers were either unemployed or working short-time. 19
The negotiations for the extension of the MFA offered the industrial countries an opportunity to curb textile and apparel inflows. The 1973 MFAs, though imposing import limits on all kinds of textile products, provided for a 6 per cent annual rate of growth for individual countries that was in line with the normal increase of their exports. When the Arrangement was renewed in 1977 with reference to the 1978–82 period, although it still envisaged the abovementioned growth rate, it did allow the importing countries to set lower limits through bilateral negotiations. The EC, at the behest of France and the United Kingdom in particular, required that the exporters of the largest developing countries reduce their 1978 exports of textiles and clothing to the Common Market below the 1976 level. Likewise, the United States reached agreements with Hong Kong, Korea and Taiwan to freeze their 1978 exports of textiles and clothing at the 1977 level and then to increase the exports of a number of sensitive items at a rate substantially less than 6 per cent.
The difficulties of the textile industry contributed to worsen the prospect in the EC member states of the synthetic fibres industry which was affected by the economic decline triggered by the first oil crisis and by the consequent explosion of overcapacity, estimated at around 30 per cent in 1977. The EC Commission urged the member countries not to provide aid which would create new production capacity. In turn, the main producers in the Community resorted to the establishment of a semi-official cartel similar to the regime in place in the steel industry. This informal understanding, which was based on a concerted reduction of production capacity and production quota allocations, was tolerated by the Commission in spite of its dubious conformity with EC rules on competition.
The US predominance in the civil aircraft market continued throughout the 1970s, but the EC industry gradually increased its presence in the market. The orders and deliveries of American jet aircrafts up to December 1974 outshone their European competitors by a ratio of 5.3 to 1.20 However, between 1970 and 1975 the American market shrank from 64 per cent of the world market to about 46 per cent, while the EC market rose from 14.7 per cent to 17.6 per cent and that of the other Western European countries from 6.3 per cent to 8 per cent. On the other hand, the share of European products on the various markets fell substantially: from 33 per cent in 1970 to 22 per cent five years later and from 2 per cent to just 0.3 per cent of the US market.21
Nonetheless, prospects for the EC industry started to become brighter in the second half of the decade without direct involvement of the EC, but thanks to cooperation among the industries and governments of some member states. The first main example was Concorde, which entered service in 1976. This new aircraft was the product of an Anglo–French government treaty, combining the manufacturing efforts of Aérospatiale and the British Aircraft Corporation. The main enterprise was, however, the Airbus. Airbus Industrie was formally established as a Groupement d’Interêt Économique (Economic Interest Group) in December 1970 as a result of government initiative between France, Germany and the UK that dated back to 1967. The members of the Group were Aérospatiale, Deutsche Airbus, Hawker Siddeley and Fokker-VFW, and they were joined in October 1971 by the Spanish company CASA. In January 1979 British Aerospace, which had absorbed Hawker Siddeley, acquired a 20 per cent share of Airbus Industrie. The first production model, the A300B2 entered service in 1974. Initially the success of the consortium was poor, but orders for the aircraft picked up as Airbus succeeded in targeting airlines in America and Asia. By 1979 the consortium had 256 orders for A300, while a more advanced aircraft, the A310, had been launched the previous year. By the early 1980s the European Industry led by Airbus had become a main competitor of the American giants, Boeing, McDonnell Douglas and Lockheed.
Both the United States and the European states involved in the Concorde and Airbus projects were lavish in providing financial aid, but the means of support were different. In the United States the federal government intervened primarily by means of military purchases and military research and development contracts which provided a basis for many large-scale civil engineering projects. In the Community, government support was given through purchases and Research & Development (R&D) contracts, later followed by reimbursable launch investments. In case of a legal conflict involving governments on both sides of the Atlantic, it would have been easier for the US to deny that it was financially supporting its civil aeronautical industry as the aid it received was just a by-product of military contracts. The European member states could reply that their support was only the result of ordinary purchases and that, at any rate, subsidies bestowed on their national industries were domestic subsidies that were not aimed at distorting competition in world trade.
The aftermath of the 1974–5 depression saw the continuation of the farm products export boom in the US, although at a growth rate lower than in the years between 1971 and 1974 (Figure 4). The growth was due to an increase in export volume rather than to an increase in prices. which were often marked by a declining trend. Exports, which as expected, showed a very strong correlation (0.99) with gross farm income, in 1978 accounted for over one-fourth of a fast growing gross income while, on average, they had made up just one-eighth of it in the 1960–70 years. The scenario was less bright for the net farm income in constant dollars. Indeed, after reaching a $25.9 billion peak in 1973, with an over 100 per cent increase relative to 1971, the net income of the whole sector constantly fell and in 1977 was much lower than in 1965, totalling less than $11 billion, though recovering the following year. The decline was the upshot of the faster growth of the non-farm components of the gross product such as wages paid to farm workers, rent on land owned by non-farm operators and inputs provided by other sectors. On the other hand, the net farm operator income per farm significantly improved compared with the previous decade, due to the continuing decline in the number of farms, from almost 4 million in 1960 to about 2.7 million in 1977.22 However, in 1977 also the net farm income per farm was somewhat lower than four years earlier as the 1973 bonanza slowed down the exodus from agriculture and the prices paid to non-farm sectors were biting. In other words, the export boom was not enough to prevent the malaise of farm operators, or at least a number of them, as borne out by the numerous demonstrations of protest, which manifested striking similarities with those organized on the other side of the Atlantic.
It is in this context, less positive than the one in which the 1973 farm law was drafted but much more favourable than the one which characterized the US farm industry during the Reagan years, that the Food and Agriculture Act of 1977 was approved. The 1977 Act envisaged six main policy instruments for the crops that constituted the bulk of American exports, wheat, feed grains and cotton: loan rates; target prices and deficiency payments; land set-aside and diversions; crop acreage reductions; land diversion payments; and an extended farmer-held grain reserve programme. In particular, as for the 1973 statute, the loan rates, that is, the support prices provided by the Commodity Credit Corporation, were kept below market prices and, therefore, were not destined to impinge on the export propensity of US farmers. Judgment is much less clear-cut with regard to target prices. The latter, introduced in the 1973 legislation, were used to determine deficiency payments per unit of eligible production which were the new main instrument of income support for American farmers. The deficiency payment was the difference between the target price and the market price or the loan rate, whichever the higher. The target prices fixed by the 1977 Food and Agricultural Act, as amended by the Emergency Agricultural Act of 1978, were higher than market prices and loan rates, in particular for wheat, thus entitling farmers to an integration of their income. As the Food and Agricultural Act stipulated that deficiency payments be proportional to production rather than tied to allotments fixed on an historical base, they were likely to increase supply on a greater scale than set-asides and acreage diversions designed to reduce production. Therefore, the income support programme left the United States open to the charge of dumping, thus weakening its call for reform of the EC’s CAP that it was accusing of trade distortion through subsidization. Besides, as it was a form of direct income support, it increased the pressure on the budget when the prevailing policy called for the curtailment of fiscal deficit.
Yet, there is no denying that the CAP was bound to raise the worries of the United States as, assisted by scientific progress enhancing productivity, the Community was fast reaching self-sufficiency in main farm products sectors and by 1979 sugar and butter exceeded self-sufficiency by 20 per cent (Figure 5). Surpluses entailed the need for storage and disposal in markets outside the EC. The CAP mechanism started, therefore, to cause costs that were no longer exclusively borne by consumers but by the tax payers, straining the limited budgetary resources bestowed on the EC by its member states. But progress towards self-sufficiency was not uniform in all member states, some of which reached and exceeded self-sufficiency in most products covered by the CAP long before others which remained net importers. France, in particular, by far exceeded self-sufficiency in all kinds of grains, especially wheat, along with sugar, cheese and butter by the early 1970s. The aim of achieving balance in farm trade, underlying the ‘Loi d’Orientation Agricole’ (Law of Agricultural Orientation) of 1960, by the mid–1970s was replaced by the goal of becoming a net exporter.23 This objective was made possible by membership of the EC within which France had a positive farm trade balance while it was still a net importer vis-à-vis the countries outside the Community which, however, also provided many products that France was unable to grow. Therefore, for France it was not just a question of successfully competing in the world market but of safeguarding the non-tariff barriers that prevented third country competitors from displacing it in its preserve, the European Common Market. France was not the only great farm product exporter in the Community. In 1972 the Netherlands exceeded self-sufficiency in butter by over 200 per cent, in cheese by over 100 per cent and in veal by a modest 1,700 per cent. Germany in 1978 exceeded self-sufficiency only in rye (6%), sugar (29%) and butter (35%). As West Germany was the main exporter of industrial products in the EC it would have been foreseeable that the Federal Republic might be inclined to sacrifice the preservation of the CAP to favourable deals in other areas of the multilateral negotiations that could enhance its predominance in manufacturing exports. Yet, the German farmers had a staunch ally in the Minister for Agriculture, the liberal democrat Josef Ertl and were among the main beneficiaries of the European Agricultural Guidance and Guarantee Fund (EAGGF). Besides, if it is true that manufactured exports dwarfed the agricultural exports of the Federal Republic, to deduce that the latter were irrelevant would be misleading. If intra-EC exports are included, West Germany numbered among the main farm product exporters of the 1970s and by 1977 it had outstripped traditionally big exporters like Australia and Canada.
As was to be expected, the United States attacked various EC programmes adopted under the Common Agricultural Policy. The principal examples of this policy can be found in the NFDM and MIP disputes. In 1976 the National Soybean Processors Association filed a section 301 petition against an EC scheme requiring the mixing of non-fat dry milk (NFDM), a product increasingly in surplus in the Community, into livestock feed, allegedly displacing a substantial amount of vegetable proteins mainly imported from the US. The United States requested the submission of the issue to a GATT panel which in 1978 declared the EC measure inconsistent with its obligations under the General Agreement. The opinion of the panel was solicited by the United States, albeit the NFDM compulsory requirement had already been repealed after the European Court of Justice found it illegal under the Treaty of Rome. On the other hand, since not all of the surplus non-fat dry milk had been disposed of, the Community replaced it with a domestic subsidy system. Following another 301 petition, the US lodged a complaint in the GATT against an EC programme which had established minimum import prices (MIP) for tomato concentrates and imposed a system of licencing and surety deposits on some processed fruits and vegetables of interest for American exporters. However, the opinion of the panel was only partially favourable to the United States as it found that the MIP was inconsistent with the Community’s obligation but that the import licencing surety bond system was not.
The measures described above were confined to single industries. However, from the middle of the decade the problem started to be perceived no longer as concerning one or more domestic industries, but the entire economy and the cause was no longer attributed to a plurality of separate foreign industries but to a single economic entity: Japan. The total US merchandise trade deficit with its Asian partner soared from a manageable $1.4 billion in 1973 to $8 billion four years later and $11.6 billion in 1978 (respectively 26 per cent and 34 per cent of the total US deficit).
Actually, it was difficult to point the finger at particular failings in Japanese trade policy as a whole, that is, its lack of consistency with fair play rules in international trade. During the 1950s Japan adopted a strategy of export promotion and import control, but this policy was gradually abandoned in the 1960s when a growing number of non-traditional sectors of the economy achieved competitive advantage in the absence of governmental assistance, and the demand for import restrictions in the United States and Europe became stronger and stronger. In 1968 the Japanese government announced a programme of liberalization on 60 items and partial liberalization on 12 by the end of 1971. At the end of 1972, when pressure on the yen mounted despite realignment, the government cut tariffs by 20 per cent and even adopted measures to control the rise in the export of certain products to particular countries.24 By the mid–1970s tariff rates in Japan, averaged over dutiable imports and over all imports, were lower than in the US.25 Thus it was reasonably arguable that the loss of share by the United States in nearly all categories of trade in modern manufacturing was due to the lack of competitiveness of US companies relative to the Japanese industrial juggernaut rather than to deliberate policies of the Japanese government.26 The same could be said of the growing trade gap between the EC and its Far East trading partner.
This is not to say that all barriers to imports from the United States and elsewhere had fallen. The Japanese approval procedures for product marketing hindered imports more than the explicit and independent procedures across the Pacific and public policy companies, including the Telephone and Telegraph Public Corporation or the National Railways, went on using product specification that hampered bids from outsiders, thus favouring Japanese firms and in turn making them more competitive in the international market.27 It is arguable that the removal or the ease of these restrictions should have formed the subject of concessions in the ongoing multilateral negotiations. A possible compensation might have been the repeal of the Buy American Laws. On the other hand, the gaping deficit was perceived in Washington as a bilateral and urgent issue and the outcome of the Tokyo Round negotiations was still an uncertain prospect.
The US executive effectively exploited the bugbear of protectionist feelings in Congress which were bolstered by the remedies introduced by the Trade Act of 1974 which required the president to adopt temporary corrective actions, including import surcharges and quotas, in case of large balance of payments deficit and, under section 301, gave him authority to retaliate against ‘unjustifiable or unreasonable’ restrictions by foreign countries that hampered US trade. The United States started to complain that economic relations with Japan were threatened by the stress placed on the world monetary system by Japan’s persistent and large current account surplus and by the widespread feeling that it was not giving US exporters equitable access. To make amends for its alleged trade sins, in a meeting on 13 January 1978 between the new US Special Trade Representative, Robert Strauss, and the Japanese minister for External Economic Affairs, Nobuhiko Ushiba, Japan pledged to adopt measures for the stimulation of the economy, aiming at a target of 7 per cent growth rate in the fiscal year 1978 so as to increase imports and to implement specific measures to improve market access.28 The measures adopted by Japan to increase imports ranged from tariff reduction on $2 billion of imports to the removal of quotas on 12 products and to quota increases for a series of products of particular interest to American farm exporters. As was to be expected, a joint Trade Facilitation Committee was set up with the task of solving problems of market access on a case by case basis and of sponsoring a variety of trade development activities. Government and industry buying missions to promote exports to Japan were organized. But the Japanese authorities went further. Realizing, perhaps with the help of hints from their American counterparts, that the root of US malaise was not so much lack of equitable access to the Japanese market but the swell of Japanese exports to the American one, at the Bonn Summit Japanese prime minister, Takeo Fukuda stated that, to cope with the unusual trade surplus with the United States, his government was taking ‘the temporary and extraordinary step’ of calling for moderation in exports so as to keep their total volume in the 1978 fiscal year at or below the 1977 level. The outcome of the foregoing was modest. Despite the directives given to the Japanese industrial establishment and the measures envisaged in the joint declaration, the trade gap continued to grow in 1978 (+45%) and, although it declined the following year, it was still greater than in 1977.
Also, the EC tried to reach an agreement with Japan to reduce the rocketing deficit with its Asian trading partner. Indeed, the EC member states’ negative balance increased seventeen-fold overall between 1970 and 1977, while that of the United States increased less than six-fold. Yet, the quantitative difference, which made the blow suffered by the EC heavier than the one borne by its transatlantic partner, was more than offset by a qualitative difference in favour of the United States. The EC lacked, among other things, the economic policy weaponry that had made the US request for a Japanese effort to close the trade gap credible and compelling. There was no section 301 and since balance of payments deficit was a matter for each member state, there was no provision authorizing the Community executive to impose surcharges and quantitative restrictions on Japanese exports. Thus, when in March the two parties met in Tokyo, the vice-president of the Commission, Wilhelm Haferkamp, could not draw any substantial commitment out of Nobuhiko Ushiba. The joint statement provided only vague generalities on the improvement of the international trade context and the assurance that the EC would doubtless benefit from the implementations of the pledges made by Japan on previous occasions and from the measures it was autonomously undertaking.29
The foregoing sectorial analyses lead to the conclusion that the so-called stagflation years witnessed a rise in protectionist tendencies in the industrialized world, notably for the two transatlantic partners. Yet, this statement, which to a certain extent is borne out by the facts, could be misleading; it could hinder a clear understanding of the stance of the two parties in the concurrent multilateral negotiations in the GATT. Hegel, criticizing the ‘absolute’ theory in Frederic Schelling’s objective idealism, said that it was like the night in which all cows are black. The same could be said of the above statement. Moreover, it could be suggested that it would lead to mixing allegedly inoffensive sheep with aggressive bulls. On the other hand, the sheep, inoffensive though they seem, could cause negative environmental effects and the apparently aggressive bulls could claim they were only reacting to a threat to their herd. In other words, was the weaponry used by the main trade competitors directed at favouring domestic producers over their foreign competitors or was it aimed at offsetting distortions often caused by trade disruptive practices adopted by the competitors themselves? In the first case, was there a substantial increase in such practices during the years following the oil crisis?
What has been said in the previous sections and chapters shows that the measures in question could be divided into two strands: those aimed at hindering the inflow of foreign products and those aimed at boosting domestic production, which in so doing could prevent imports of foreign like products or could outcompete them in foreign markets, including the market of importing countries. The first class, in turn, could be divided into tariff barriers which had been on the decline due to the various rounds of GATT negotiations, and non-tariff barriers.
The years under review witnessed a further decline in the implementation of safeguard measures in the US. Both GATT Article XIX and US legislation gave relevance to safeguard measures (also known as escape clause). This form of temporary protection was originally designed only to protect against import surges causing economic dislocation in excess of what had been anticipated by trade negotiators in offering concessions. Subsequently, however, these measures were increasingly used to protect domestic industries against increased import competition regardless of previous tariff concessions.30 In particular, in US legislation, the link with serious injury or threat of serious injury had become increasingly weak: the 1951 trade law provided that imports had to cause or threaten serious injury; the 1962 Trade Expansion Act provided that imports had to be the major factor in causing or threatening to cause serious injury; the Trade Act of 1974 only required that the increased import be a substantial cause of serious injury. Yet, no relevant increase in the use of such measures can be detected in the years following 1974. Not only had serious injury to be proved but the remedy had to be applied in line with the MFN principle, i.e. it had to be applied to all exporting countries rather than the main exporter, and in the absence of compensation, retaliatory measures would be applied. Above all, the final decision on adopting the remedy was for the president who had to balance the interest of the industries affected by foreign competition with those of other industries interested in expanding their trade or acquiring cheaper inputs and with the need not to cause undue strains in relations with US trading partners. At the close of 1977 the US had in effect escape clause relief on just five products and three other safeguard measures were authorized the following year.31 The trend was different in the EC where the number of safeguard actions soared from 2 in 1974 to 36 three years later, declining to 23 and 19 in the following years.32
Conversely, quota restrictions were rapidly increasing following the oil crisis. As is well-known, quotas, which were the trademark of Orderly Market Agreements (OMAs) and VERs, were prohibited by GATT Article XI, with the exception of clearly circumscribed cases in agriculture, and were only allowed by GATT Article XII to safeguard the balance of payments, a provision that was never invoked by the United States nor, after the 1950s, by the EC member states. Yet, quota restrictions became current currency in the 1970s under the cloak of a deal between importer and exporter, thus falling, with the exception of the textile arrangements, into a grey area outside the GATT purview. As related in Chapter I, import quotas were doubtless already applied in the 1960s, but after a pause in the first half of the 1970s they soared in number and value during the stagflation years. The rise does not seem to be directly linked to the general state of the economy, but to the declining health of some particular sectors, encompassing not only textiles and clothing or iron and steel products, but also chemicals, machinery and transport equipment as well as footwear and domestic appliances like TV receivers.
At EC level so-called bilateral trade agreements jumped from 3 in 1973 to 14 in 1975, 11 in 1976, 19 in 1977, 11 in 1978 and 15 in 1979.33 However, in measuring the impact of such measures it should also be remembered that analogous restrictive measures could be taken by each member state. Italy, for instance, introduced 14 autonomous import quotas in 1977. Also, there was a surge in the imposition of quotas on the other side of the Atlantic. Apart from the quotas established within the framework of the MFA, an orderly marketing agreement was negotiated with Japan on specialty steel in 1976. Orderly marketing agreements were signed in 1977 with Japan on colour TV receivers, a sector in which the US had been the world leader until recently, and with South Korea and Taiwan on footwear. In the first instance, imports were limited to 60 per cent of the 1976 level until 1980. Regarding South Korea and Taiwan, quotas would apply until 1981, curtailing imports to a level below the 1976 value despite annual increases. In 1978, when imports of colour TV receivers from Japan were replaced by an inflow from Taiwan and Korea, voluntary restraint agreements were promptly negotiated with both countries.
Trends and features are even more clearly detectable in the upsurge of antidumping and countervailing measures. Antidumping measures are duties imposed on products exported at less than their normal value in the exporting countries. There was and still is controversy among economists on whether this practice should be condemned. After all, price discrimination, i.e. the ability to identify separate markets for a product and to charge a higher price in the market attaching greater utility to the product, is usually tolerated by competition law when the markets in question are located within national borders. Dumped products sold in a foreign market can benefit domestic consumers except in limited cases, such as predatory dumping, e.g. when differential prices are charged with the aim of driving domestic producers out of the market in order to ultimately raise them to monopolistic levels. On the other hand, dumping damages domestic producers of like products and it was the interest of the latter that was upheld by Article VI of GATT in 1947. The article provided that products are exported at less than their normal value if their export price is less than the comparable price in the ordinary course of trade (a concept that the article failed to define) when destined for consumption in the exporting country or, in the absence of such domestic price, is less than the cost of production plus a reasonable addition for selling costs and profit.
The US antidumping statute provided that antidumping duties could be applied if imports occurred at less than fair value. The concept of fair value substantially coincided with the concept of normal value as outlined in the GATT. Although the US statute only provided for injury caused by dumping, whereas GATT Article VI required material injury, affirmative decision in antidumping cases could not be taken for granted and resort to antidumping procedures was limited to individual cases of allegedly unfair competition from foreign firms. In other terms, it was not the main defence to protect declining domestic industries against foreign competition. Things, however, started to change in December 1974 when, in the middle of an unprecedented recession, the president was granted trade authority no longer limited to tariffs but incorporating the unexplored areas of non-tariff barriers. As noted in the previous chapter, a trade-off was expected between the granting of authority and the strengthening of the defence for domestic industries that had to compete with inflows of foreign products or could not find outlets abroad. One trade-off was the introduction of antidumping rules which were stricter and more favourable to domestic firms, including a shorter deadline for determinations in antidumping proceedings, the right of judicial review of negative findings and, in ascertaining ‘fair value’, the possibility to disregard persistent sales of the investigated merchandise in the home market at prices below cost of production.34 Tightening the net allowed the US to accuse of unfair trade those foreign industries whose main fault was that they were able to successfully compete with US firms and to impose extra duties onto their exports. Thus, although the legal objective of antidumping and countervailing measures differed from that of safeguards, the former being directed against unfair trade, their economic objective tended to coincide, boiling down to protection from foreign competition through import restriction. However, antidumping did not have the limits of an escape clause: safeguards could only be implemented for limited periods, whereas antidumping had indefinite length once there was a positive finding. And whereas safeguards were subject to the executive’s discretion, the quasi-judicial character of antidumping proceedings – in which the petitioner was a domestic entity and the defendants were foreign firms – ensured a binding result in case of positive findings.35
Apart from more favourable rules, a factor that increased the use of antidumping petitions was the depreciation of the dollar vis-à-vis other currencies and in particular the yen, which accelerated between 1976–8 (Figure 1). In spite of the yen appreciation, which entailed a rise of the Japanese unit labour cost on a dollar basis (Figure 3), the merchandise trade gap with Japan soared between 1975–8 (Table 4). Ito provides a convincing explanation pointing out that the yen appreciation was partially offset by the lower cost of imported components and, in particular, of raw materials most of which were priced in dollars, as well as by the adoption of partial pass-through practice in determining the price charged on export products. In order to keep the retail price constant in foreign markets so as not to lose market share, many Japanese firms lowered their profit margin for exports while maintaining or even increasing their profit margin on domestic sales.36 The pricing to market system, which resulted in different prices in the domestic market and in the export market, unfortunately fell under the purview of the antidumping law whenever it injured domestic industries, which was not difficult to claim in a moment in which Japanese competition was becoming particularly effective not only in steel and motor vehicles but also in industrial plants and electronics. Thus, the rise in antidumping proceedings in the US was at the same time a byproduct of the dollar devaluation and its complement, which made life harder to those foreign exporters who were disposed to pricing to market whenever their products effectively competed with domestic industries.
In 1976 nine antidumping investigations were initiated on automobile imports from Canada, France, West Germany, Italy, the UK, Belgium, Sweden and Japan, involving over $7 billion of imports. However, the investigations were discontinued after receipt of satisfactory price assurances from foreign manufacturers. Twenty-nine investigations were in progress at the end of 1977 involving trade for over $1,960 million. Almost two-thirds of them, involving $1.7 billion, concerned steel products, 70 per cent of which were from Japan.
In the EC antidumping rules were first introduced by Council Regulation n. 458/68 of 5 April 1968, amended in 1973 and 1977. Some 60 antidumping proceedings were initiated under the mentioned Regulation, of which only five resulted in the imposition of antidumping duties as in most cases exporters subject to investigation signed price revision undertakings, that is, increased their export prices. In 1977 the Commission adopted antidumping rules specifically directed to products covered by the Treaty establishing the ECSC by introducing its Recommendation 77/320/ECSC, later modified in December to allow the imposition of provisional duties on steel imports not falling within a basic price system. Recommendation 77/320 and its amendment brought about a spate of self-limitation agreements with iron and steel producing countries. The foregoing seems, therefore, to indicate that also in the EC antidumping measures were nothing but a disguised tariff or a threat of one successfully transforming protection from unfair competition into a protectionist instrument.37
The idea, floated by the French government, of a multinational management of international trade, at least with regard to those industrial sectors most threatened by recession, did not receive any effective following. Yet, both the United States and the EC showed great sympathy for a managed trade with Japan directed at better balancing imports and exports, although the attempt was made under the cloak of presumed protectionist attitudes of the Japanese government and the insulation of the Japanese market from foreign imports.
Up to this point the United States and the EC seemed to be treading similar paths with regard both to the kinds of measures adopted and the objectives pursued. They parted company, however, as regards countervailing measures and subsidies. Along with antidumping investigations, the number of counter-vailing duty proceedings in the US increased in the stagflation years during which on the other side of the Atlantic the number and value of subsidization measures stepped up. In 1974, in the US, four countervailing duty orders and a negative determination were issued. Five countervailing investigations were launched. In 1977 12 petitions were filed and 14 final determinations were made, eight affirmative and six negative,while 11 other investigations were in progress covering trade for $57.2 million. In 1978 18 final determinations were issued, 11 positive and seven negative, while 20 investigations were pending. However, a relevant percentage of countervailing duties was temporarily waived in the course of multilateral trade negotiations until January 1979 under section 331 (a) of the Trade Act of 1974.
The increase in the number of investigations and affirmative decisions does not necessarily mean that countervailing measures had turned into a protectionist tool. It could be argued, as the Americans did, that countervailing measures were a necessary means to prevent unfair pressure on US industries as a result of more and more frequent trade-distorting practices adopted by other countries. On the other hand, American industries confronted by foreign competition, with the aid of the US trade courts, were able to expose to the countervailing authorities certain practices not condemned at the time by GATT rules. This was in particular the case of domestic subsidies. The first general US countervailing duty statute, the Tariff Act of 1897, only provided for the imposition of countervailing duties whenever a foreign government bestowed, directly or indirectly, any bounty or grant upon the exportation of any article or merchandise. The Tariff Act of 1922, however, widened the scope for countervailing measures covering any bounty or grant ‘on manufacture or production as well as on exportation’. From 1922, therefore, subsidies that had no export-related performance requirements could also be considered counter-vailable. Until the 1960s the US administering authority had refrained from imposing duties to offset public support not related to exports. Things changed radically a few years later. In 1974 countervailing measures were imposed on rubber tires produced by a French company, Michelin S.A., in a factory located in Nova Scotia so as to benefit from a series of incentives offered by that Canadian provincial government. In this case, although most of the products would ultimately compete in the US market, the Canadian statutory provisions that allowed the countervailed subsidies in question provided no requirement of export capability for programme eligibility. Thus, the rationale for this kind of countervailing measure was that what is relevant is not the destination of the subsidy but the impact of subsidized export on the US market. And this test was made more severe for foreign exporters by the absence of a material injury requirement in the US statute.
Some import competing American industries tried to extend the boundaries of the US countervailing legislation without, however, receiving governmental endorsement. This was the case with consumer electronics, in particular colour television receivers, a sector targeted for export growth by the Japanese government in the 1960s, which made heavy inroads in the US market in the following decade. American firms petitioned for countervailing duty proceedings arguing that rebates of commodity tax on exports allowed by the Japanese authorities constituted subsidies. An analogous petition was made against EC rebates of the value added tax (VAT) for steel exports. The Treasury Department issued a negative determination in line with a long established practice in the US and in the GATT. However, US legislation was ambiguous on this issue and a leading American firm, the Zenith Radio Corporation, successfully appealed the negative determination in the Customs Court in 1976. In a rare instance, Japan and the EC joined forces claiming that classifying indirect tax rebates on exports as subsidies ran counter to GATT Article VI. The message did not go unheeded and in 1977 the Court of Customs and Patent Appeals reversed the Customs Court decision. That same year the Committee to Preserve the American Television Industry filed an Escape Clause petition arguing that Japanese exports caused injury to the American domestic industry. The president agreed with the claim of injury with regard to colour televisions but did not deem that ‘safeguard’ was the appropriate remedy, directing instead the Special Trade Representative to negotiate an orderly marketing agreement with Japan, which, as noted above, was duly signed.38
The EC had a system under Articles 92 and 93 of the Treaty of Rome to monitor and eventually prohibit subsidies bestowed by its member states, which at that time was applied quite leniently, but had no regime to countervail subsidized imports from third countries comparable to that in force on the other side of the Atlantic.
The United States, in its heavy use of countervailing proceedings, could claim, in contrast to most of its trading partners, that it was not a subsidizer. Subsidies amounted to only 0.5 per cent of US GDP in 1970 and declined to 0.3 per cent in 1975 and 0.4 per cent five years later, although it is extremely likely that the United States did not include its public support to industries like civil transport aircraft and did not take into account the numerous measures offered by state and local authorities to attract investments. 39 Conversely, the EC member states not only started from a much higher basis but showed a marked upwards trend in their degree of subsidization: the EC average, which was 2 per cent of GDP in 1970, jumped to 2.9 per cent in 1975 and 3.2 per cent in 1980; in France and Italy the rate grew respectively from 2 per cent and 1.5 per cent in 1970 to 2.5 per cent and 3 per cent in 1980; in the UK the rate soared from 1.7 per cent in 1970 to 3.5 per cent five years later, declining to 2.3 per cent in 1980.40 The Federal Republic was on the lower echelon with a rate of 1.7 per cent of GDP in 1970 and 2 per cent in 1980. German scholars, however, contend that after the first oil crisis public subsidization took on a new qualitative dimension amounting to 4–5 per cent of German GNP.41 Subsidization, which before had concentrated on sectors of the economy traditionally considered as needing assistance, like mining and agriculture, now extended to many other sectors including shipbuilding and to a lesser degree, steel. The same scenario characterized the other main Western European economies. In the UK the declining nationalized steel industry and the motor vehicle industry, where British Leyland was effectively state-owned though technically not nationalized, were heavily subsidized. In Italy, where the capital of most import competing industries such as those in the steel, chemical and shipbuilding sectors was directly or indirectly controlled by the state, government-controlled firms would receive financial support from the owner. It must also be noted that investments of Italian industries benefited from long-term subsidized credit supplied by special credit institutions. In France, automobile, data-processing, pulp and paper, steel and watch industries received various forms of government aid.
The amount of domestic subsidization was in inverse relation with the competitiveness of the firms receiving subsidies, with their numbers and with the level of EC tariff protection.42 This does not imply that government support policies necessarily reduced non-tariff protection. On the contrary, most of the cases described above indicate that financial support to industries hit by foreign competition was part of a scheme in which import restraints played a large role, whether through quotas, antidumping proceedings or licences. In some cases the granting of subsidies was not linked to the displacement caused by competing foreign products, as the subsidies were granted to encourage investments in underdeveloped areas by offsetting the greater cost of the investment, or were granted to compensate for extra costs brought about by stricter requirements imposed on some industries. Likewise subsidies were bestowed to prevent firms from having to resort to laying-off their employees. All these kinds of measures could always be accused of artificially expanding production and by so doing impinging on the normal play of the market. The accusation, therefore, could be easily made that whatever their avowed purpose, most public aid ‘would shore up, and hence protect, weak industries or weak firms that found it difficult to face foreign competition’.43 The fact remains that, whatever their political persuasion, West European governments of the second half of the 1970s found it impractical to stop financial support to manufacturing industries and agriculture at a moment in which recovery could not steadily take off and unemployment was still high. When a few years later governments like those of Margaret Thatcher and Helmut Kohl came to power, though officially committed to freeing the economy from state interference or to balancing the budget, they found it difficult to reverse policy.
In short, though it may be precipitate to state that the increase in antidumping and countervailing proceedings on one side of the spectrum and in subsidies on the other was by itself clear evidence of rising protectionism, the foregoing demonstrates that there was an upwards trend in their use. The number of antidumping and countervailing proceedings increased and there’s no denying that in many cases such proceedings were adopted to constrain imports regardless of their fair or unfair nature, stretching the boundaries established by GATT Article VI. In Western Europe, though it is doubtful that the trend was limited to the eastern side of the Atlantic, public authorities intervened more frequently and more generously to buoy up industries that in the aftermath of the oil crisis were experiencing financial strains and were losing ground to foreign competitors.