The 1979–80 biennium ushered in a period of turmoil in the industrial economies characterized by rising inflation, worsening of trade and current account balances, although with the relevant exception of the United States, a generalized, but not uniform, slowdown and a renewed increase in unemployment. As had been the case five years earlier, the main culprit was seen to be the hike in the oil price. On 31 December 1978 the oil price was $12.70 per barrel. By 1 July 1980 it was around $30 and was approaching $35 at the close of the year. The volatility of the political situation in the Middle East led to widespread fears of an upcoming oil shortage for the Western world and this situation led to pressure on the market price for oil, which in turn allowed the OPEC countries to set higher prices. What was originally believed to be a looming supply crisis soon turned out to be a price crisis. No effective response to stop the rise came from the consuming countries. The IEA had been established in 1974 to deal with oil shortages but it was not equipped to coordinate the reaction to soaring prices.
As in the previous oil crisis, the new price rise had a double impact on the oil importing countries: direct and indirect inflationary consequences, and a curtailment of domestic demand as the so-called ‘OPEC tax’ reduced consumer spending power, which was not offset by a prompt increase in the oil exporting countries’ demand for imported products. The gap between the transfer of resources to the OPEC countries and their capacity to absorb imports, in turn, caused strains on the ability of the international monetary system to recycle an increasingly huge volume of funds. However, the cyclical swings during the second oil crisis were less severe than those accompanying the first one. Whereas in the years preceding the first shock there had been a synchronized boom in the major industrial countries, in the late 1970s the upswing was weaker and less heavily synchronized. Likewise, the impact of the oil shock was not uniform and, in spite of the widespread adoption of restrictive monetary policies, in most industrialized countries there were offsetting factors which helped delay, with different lags, the constraints imposed on domestic demand.
The economic policy of the major industrial countries reflected these new, or more exactly, renewed challenges. The Tokyo and Venice G7 Declarations, in June 1979 and June 1980 respectively, focused on two priorities: inflation, whose reduction was regarded as the immediate top priority, replaced unemployment as the main target for the United States and the major EC member states, along with Japan; the need to counter the threat of narrower room for manoeuvre in running the economy caused by rising oil prices, aggravated by the possibility of supply shortages.
The first goal was pursued through a prudent fiscal policy and above all through a restrictive stance in monetary policy in the main industrial countries which, following a method implemented by the Bundesbank in 1973, set targets for the growth of monetary aggregates. The downward trend of such growth targets during the biennium was accompanied by repeated increases in official discount rates and in several industrialized countries by direct control of certain monetary aggregates.
As regards the second priority, the industrial countries adopted two sets of measures, starting with the reduction of oil consumption. Already in June 1979, at the Tokyo Summit, the EC declared its commitment to restrict 1979 oil consumption to 500 million tons and to maintain oil imports between 1980–5 at an annual level not higher than in 1978. As a goal for 1985, the United States adopted import levels not exceeding either the level of 1977 or of the 1979 target of 8.5 million barrels per day. The achievement of this policy objective relied on two instruments. First, curbing energy consumption in the production process; secondly, the shift to alternative sources of energy like coal and nuclear power. In the second instance, the industrial countries looked at sources other than the OPEC producers for their oil import needs. The consumption of the OECD members, measured in millions of oil barrels per day, fell from 40.5 million in 1979 to 35.4 million (–12%) in 1981 and stabilized at around 34 million in the next four years. Net exports from OPEC countries declined from 28.2 million in 1979 to 20.9 million (–26%) in 1981 and 14.1 million (–50%) in 1985.1
In the United States the long-awaited recession did not occur in 1979 but, in the words of Campagna, ‘some of the old problems continued, and some new ones were added’.2 The oil drag was estimated to reduce consumer spending power by about 3 per cent of after-tax income in 1979, wearing away 2 per cent of GNP by the end of 1980. Relative to the size of the US economy, the new oil price increase was larger than the 1973–4 rise. During the first shock the world price of oil tripled from about $4 to about $12 per barrel, adding about $18 billion to the US bill for imported oil, roughly 1.4 per cent of the gross national product. In percentage terms the 1979–80 hike was definitely more modest (about 170 per cent), but in absolute terms it meant a rise of over $20 per barrel, adding about $50 billion to the oil cost. Its impact on GDP was, however, offset in the short-run by a drop in the personal saving rate which resulted in an increase in private spending. In 1979 unemployment remained below the average of the decade, even though it was above the average of the 1960s, but inflation accelerated (Tables 21–4). Consumer prices soared by 3.6 points above the already high 1978 rate and wholesale prices for manufactured goods rose by 5 points. As noted by the Economic Report of the President for 1980, the 1979–80 oil price shock worsened a ratchet-like inflationary process that had characterized the American economy since the mid-1960s, accelerating from the beginning of the following decade. In this process the inflation rate only partially decreased when the cause of the previous jump in price stabilized. In particular, after the hike of the first half of the 1970s, in spite of the subsequent recession, inflationary expectations remained high and were built into demand for higher wages by employees and price setting by firms. Monetary and fiscal restraint could, therefore, curb national income growth and with it employment, without significantly curtailing inflation.
To fight inflation the Carter administration adopted a more restrained fiscal policy, while the FED embraced a restrictive monetary policy directed at curbing the growth of the monetary aggregates. The Federal Reserve fixed low target ranges for M1 and M2 growth in 1979 allowing the federal funds rate to increase. However, the management of interest rate did not hit the target, and monetary aggregates exceeded their desired growth range. In October 1979 the FED, led by the new chairman Paul Volcker, announced a policy shift by direct control of bank reserves. Under the new approach, open market operations had to supply the volume of bank reserves consistently with the desired rate of monetary growth.3 As the growth of monetary aggregates went on surging despite the new policy announcement, in March 1980 the FED imposed comprehensive credit controls, but in June adopted a more relaxed policy. The uncertainty caused by the persistence of inflation and the expectation of a restrictive stance from the monetary authorities resulted in skyrocketing interest rates which became positive in real terms too.
It was predicted that such measures would cause a recession with real GNP falling by 1 per cent. Actually, for the whole year GNP declined by only 0.3 per cent (Table 1) but in a way that did not favour the incumbent president in the run-up to the November elections. After rising in the first quarter, real GNP plummeted by almost 10 per cent, the sharpest decline in the post war period, although it quickly recovered in the second half of the year. Unemployment jumped to 7.1 per cent (Table 21), while inflation, rather than declining, went on growing, as the CPI rose by 13.5 per cent and the WPI by 14 per cent (Tables 22–3). The decline in consumption, under the strain of rising inflation in the wake of increasingly high oil prices, was accompanied by a contraction in housing and business investments. Although the current account balance markedly improved, the merchandise trade deficit remained high (Table 2). The private business sector’s productivity growth rate, already negative in 1978, worsened in the two following years. In the presidential campaign Carter tried to keep his distance from the Federal Reserve’s stance, stressing its independence from the executive under American law. The president even declared that ‘the strictly monetary approach to the Fed’s decision on the discount rate and other banking policies is ill-advised’, adding that ‘the Federal Reserve Bank Board ought to look at other factors and balance them with the supply of money’.4 The voters did not pay much attention to his remarks.
The direct burden imposed on the Community’s trade balance by the oil rise in 1979–80 was almost $70 billion compared with some $31 billion in 1974. Expressed as a percentage of the import bill in the years preceding the oil shocks, if exchange rate changes are ignored, the costs to the trade balance were quite similar: 13.4 per cent and 13 per cent respectively.5 As a percentage of GDP they amounted to 3.4 per cent in the 1979–80 price rise and 2.9 per cent in the previous rise. However, during the second oil shock the dollar price rise was eased by the appreciation of the ECU, i.e. the basket of the EC member states’ currencies, whereas during the first oil crisis the dollar price rise was amplified by the 1974 depreciation of the ECU vis-à-vis the dollar after the hike of the previous year. As a percentage of GDP the oil-price rises in ECU were respectively 3 per cent for the second oil shock and 3.1 per cent for the first.6 Obviously, the exchange rate factor varied with reference to the various currencies included in the basket: for instance in 1979 and much of 1980 the Deutschmark went on appreciating vis-à-vis the dollar, while the Italian lira continued its downward trend (Figure 1).
However, the oil drag did not bring about a slowdown in the Community during 1979 and the first months of 1980. In partial contrast to the United States, the economic activity that had shown gradual improvements in 1978 strengthened in 1979 also benefiting from the stimulus package decided by the Bremen European Council in July 1978, which had assigned the ‘locomotive’ role to the Federal Republic. In 1979, GDP for the whole of the Community rose by 3.3 per cent and industrial production grew by 4.5 per cent (Tables 10 and 20). Consumer spending grew by the same rate as the GDP, while gross fixed capital formation increased by 3.8 per cent, the highest rate since the early 1970s. On the other hand, there was no reduction in the unemployment rate relative to 1978 and, as was to be expected, inflation remained high. The second quarter of 1980 marked the beginning of a severe slowdown. In the Community the GDP growth rate declined to 1.4 per cent reflecting the levelling off of domestic demand. Consumption slackened under the pressure of accelerating inflation triggered by the rising oil bill. Capital formation declined in the second half of the year in the face of high interest rates and the tightening of financial conditions. Real interest rates became positive in most EC member states and membership of the European Monetary System (EMS) prevented the countries participating in the new scheme from viewing depreciation of their currencies as an easy way to boost their exports.
The new EC currency system, which was established by the Brussels European Council on 5 December 1978, and entered into force on 13 March 1979, was mainly the result of a Franco–German initiative directed at tackling the drawbacks of the floating exchange for a highly integrated area like the EC. The new system, which replaced the unsuccessful Snake, was also based on a parity grid and compliance with bilateral margins of fluctuation (set at +2.25% and –2.25%, with the exception of the Italian lira which was allowed a wider 6% margin). However, the new regime provided for correctives aimed at guaranteeing greater flexibility, at more rapid forms of action when strains emerged and at avoiding that the burden of readjustment prevalently fell on the weaker currency, that is, on the currency at the bottom of the fluctuation range. The base of the EMS was the European Currency Unit (ECU), a basket of the currencies participating in the system, each of which was assigned a different weight. Each EC currency had an ECU related central rate – with the exception of the pound, excluded at the time from the exchange rate mechanism – which was used to establish the parity grill. When the margins of fluctuations were reached unlimited intervention on the exchanges became compulsory, usually in the currencies of the participating countries. However, the SME also adopted a preventive intervention mechanism, the ‘divergence indicator’, which established a requirement to take action by the authorities responsible for the currency whose rate exceeded certain limits fixed in terms of ECU, limits which, being narrower than those demarcating the bilateral margin, would be reached before it. These limits were particularly narrow for the Deutschmark while they were much larger for the weak currencies, the Italian lira in particular. The SME also provided for a substantial increase in the volume and the duration of credits to support the weakest currencies. These support mechanisms and the fact that greater responsibility for acting was cast on the authorities managing the stronger currencies could not free any SME member from bearing in mind that most of their partners wanted to keep a tight rein on the growth of monetary aggregates and were not willing to import inflation.
The trend was far from being uniform within the EC. Among the main member countries a distinction can be drawn between France and Germany, whose trend broadly coincided with the EC’s average, and peripheral countries like the UK and especially Italy whose performance diverged.
In 1979, West Germany’s GDP grew at a 4.3 per cent rate, the best result after the 1976 recovery, due mainly to a substantial increase in fixed investments and to the steady growth of export (Table 10). Imports, however, moved ahead more rapidly than exports and for the first time in the 1970s the current account balance was in the red. In 1980 the GDP growth rate fell to 2 per cent, the industrial production shrank and the value of imports almost caught up with that of exports. The current account deficit reached $17.5 billion. The 5.3 per cent consumer price growth rate was above the average of the years prior to the first oil shock, although it remained well below the average of the other EC members in 1980 (Table 22). In short, the continuous high value of the Deutschmark, in particular relative to the greenback, prevented the oil hike from stocking domestic inflation, but eroded the competitiveness of German industry.7 Nevertheless, at the close of the year, under the impact of the deterioration of the current account balance, the German currency started to decline vis-à-vis the dollar.
In spite of the oil drag the French gross domestic product went on growing in 1979, although at a moderate 3 per cent rate (Table 10). The expectation of an accelerating inflation engendered speculative demand both in stocks and investments, while private consumption did not contract significantly because French consumers reacted by curbing their saving rate.8 In 1980 the GDP growth rate fell to 1.3 per cent and industrial production declined. The inflation caused by the oil bill started to affect consumer spending power, while French firms’ profit margin underwent the impact of an acceleration of salary expenditures, higher prices of intermediary products, oil in particular, and this impact could not be fully transferred to final consumers because of price competition from foreign products.
The Italian economy presented some peculiar characteristics compared to most of the major members of the Community. The rate of unemployment was higher than the EC average, reaching 7.5 per cent and 8 per cent in 1979 and 1980 respectively as the labour force grew faster than employment due to demographic reasons and a higher female participation rate (Table 21). The fiscal deficit, which since the late 1960s had been constantly higher than the EC average, amounted to 9.4 per cent of GDP in 1979 and 8.4 per cent of GDP in 1980 (Table 19). The inflation rate was especially high (Tables 22 and 23). The CPI, after slightly subsiding from its 19.2 peak in 1974, started to accelerate again during the second oil crisis reaching 21.2 per cent in 1980. Likewise, the wholesale price growth rate for industrial goods soared from 8.1 per cent in 1978 to 15.5 per cent in 1979 and 20 per cent in 1980. Faced with the alternatives of fighting inflation and defending the currency value in the exchange market or preventing the deterioration of the economy, since 1975 the monetary authorities had been playing the card of successive heavy depreciations of the lira.9 Although entry into the EMS in 1979 forced Italy to adopt a rather less free management of the currency, the depreciation of the lira helped to preserve the competitiveness of Italian products in spite of high inflation and soaring unit labour costs on a national currency basis (Figure 3). The GDP growth rate from a 1.9 per cent low in 1977 jumped to 4.9 per cent in 1979 and 4 per cent in 1980, well above the EC average (Table 10). Also the rate of industrial production was much higher than the EC average in the period and the most dynamic factor was exports, which, in turn, helped bolster consumer spending and stimulate a recovery in investments. However, because of the deterioration of the terms of trade, imports grew faster than exports and increased the trade deficit in 1979 by over 1,100 per cent relative to the previous year (Tables 11 and 12) . The gap went on growing in 1980 as imports soared under the continuous pressure of the oil price rise while exports slackened because of the weaker competitiveness of Italian products caused by the inflation differential and the slowdown in foreign demand brought about by the worsening of the international economic environment. The trade deficit jumped to ECU 15.7 billion, with a 278 per cent increase over 1979.
At least at first sight, during the second oil crisis the United Kingdom shared most of the Italian problems without enjoying the main advantage of the southern EC member, nominally its fast income growth. In the years following the first oil crisis, the GDP growth rate of the United Kingdom was only once, in 1978, not below the EC average (Table 10). However, unemployment and fiscal deficit remained high and the trade gap showed no sign of shrinking (Tables 11, 12 and 21). The year 1979 witnessed an acceleration of inflation, as the CPI jumped to 13.4 under the combined pressure of a wage explosion consequent on the refusal of the Trades Union Congress (TUC) to further endorse the social contract at the centre of the Labour Government income policy, the increase in Value Added Tax decided by the incoming Conservative government and the impact of the oil bill (Table 22). The latter, however, was not as strong as in most other EC members, as North Sea oil came on stream in 1976 and by 1980 the direct contribution of domestic oil and gas to GDP reached 4.4 per cent. The Thatcher Government, which came into office in May 1979, made fighting inflation its main priority, duly stressing its commitment to the issue, whereas the previous administration had shown a commitment to both tackling unemployment and price stability.10 And in the words of the Iron Lady, ‘inflation was a monetary phenomenon which it would require monetary discipline to curb’.11 In keeping with its declared monetarist approach, the new Conservative Government’s strategy was to reduce the growth of monetary supply. Already in 1979, the first moves were taken to curb the demand for bank credit by raising interest rates. To lend more credibility to its monetarist policy, in 1980 the Thatcher administration introduced a medium-term financial strategy, establishing targets for periods of up to four years for both monetary growth and Public Sector Borrowing Requirement, the latter no longer seen as an instrument of demand control but as a source of monetary base and hence as an inflationary factor. In the short-run the new policy was not very successful as inflation continued to rise, reaching 18 per cent in 1980. On the other hand, the squeeze resulted in a marked GDP slowdown in 1979 which turned into a slump the following year, pushing the unemployment rate up. In contrast to Italy, the deficit of Britain’s trade balance did not result in a steady depreciation of the pound. After the downfall of 1976, the UK currency went on rising from the following year, also in real terms.12 Various factors explain this trend. If the trade balance was constantly in deficit, the current account, including the invisible balance, turned positive in 1978, and after a negative figure in 1979 yielded a surplus a year later. The sharp rise of interest rates in the first years of the Thatcher government attracted capitals from abroad because of the rate differential and also because the rise indicated the willingness of the new administration to curb inflation and consequently to avoid the weakening of the currency in the exchange rate market. After the widening of the gap in 1979 the trade deficit shrank in 1980 as demand for imports was curtailed by the recession; and North Sea oil replaced imports from the OPEC and other developing countries. On the other hand, the strength of the pound made it difficult to cushion the rising unit labour cost of manufactured products. By 1980 the differential between the unit cost increase measured on a dollar basis and on the national currency basis, allowed by the slide of the pound in 1976, petered out (Figure 3).
The foregoing shows that the years 1979–80 saw a generalized slowdown in most of the OECD countries that turned into a slump in the United States and in the UK. Among the other EC member states only Denmark had a negative growth rate in 1980. The slackening of the economy was accompanied by a price hike. In other words, the term ‘stagflation’ fits this period even more than the previous triennium. And there is no doubt that this unstable economic environment could foster protectionist policies, even though, in a world keen to abide by economic precepts, fighting inflation, an unreservedly shared priority, might encourage governments not to hinder the entry of cheap foreign products. This, however, does not offer proof that protectionism made actual progress, nor does it shed any light on the factors, if any, that stimulated protectionist measures, or on the form they took and on the sectors of the economy which were affected by such measures. To address these issues a first task should be to identify the weak industries in the US and the EC domestic economies and the measures eventually taken to boost them. It should be remembered, on the other hand, that if one gives, as did the Americans in particular, a wider meaning to the term ‘protectionism’, those areas whose competitiveness is enhanced by subsidization or other forms of support from public authorities might be regarded as protected sectors. Secondly, since this research focuses special attention on the relationship between the great transatlantic partners, the inquiry should consider the weight of the principal products in the trade balance between the US and the EC and between these two areas and the rest of the world.
The surplus sectors in the US merchandise trade balance were agriculture, high technology manufacture and crude materials and fuels except crude oil. The deficit sectors, apart from oil, which was the main factor of deficit, were low-technology manufacture, consumer goods and automotive products. As regards the EC, apart from raw materials and fuels, the sectors undergoing the main difficulties were chemicals and textiles and above all iron and steel products and the shipbuilding industry.
The United States managed to reduce its merchandise trade deficit from a $34 billion peak in 1978 to a more modest $27.6 billion the following year (–19%) and to $25.5 billion in 1980 (–25%). The US current account was almost in balance in 1979 after two years of large deficits, above all as a result of the increase in investment income from abroad, and it turned into a small surplus in 1980. The reduction of the deficit (Table 2) reflected the slowdown in import growth due to the fall of the GDP growth rate and with it of the domestic demand of which imports represented a pArticle Obviously the value of imports would have reduced further in the absence of the oil bill and actually in 1980 imports slightly declined in real terms (Table 1). The acceleration of the export growth was largely the result of the depreciation of the dollar from 1977 (Figure 2). However, the trade balance and the performance of the US currency showed a different trend according to its trading partners across the Atlantic and the Pacific.
The total trade deficit of the nine EC member states towards the United States swelled in 1979 and 1980 (Tables 4, 13 and 14). EC exports grew much more slowly than imports. Even Germany’s positive gap shrank (or even turned into a deficit in 1980 according to the ECU data). The US surplus in agriculture grew from $1.4 billion in 1971 to $6.8 billion in 1980 (388%), but imports from the EC went on growing, increasing from a modest $423 million to $2 billion (391%); for manufactures the US deficit of $1.5 billion in 1971 turned into a surplus of $5.7 billion nine years later (485%).13 In 1980, the main US export products were office machinery and computers, electrical machinery apparatus and chemicals and soybeans, while imports from the EC were concentrated in passenger cars, special purpose machinery, iron, steel and other ferrous metals, chemicals and, quite surprisingly, crude petroleum.14 This trend reflects the depreciation of the dollar vis-à-vis the currency of its main EC partners except Italy, in particular after 1976 (Figure 1), and with it the increased competitiveness of the US. Indeed, as shown by Figure 3, under the pressure of inflation, incorporated in turn in the trade unions’ demand for higher wages, which were not offset by sufficient productivity increase, the unit labour cost, grew in most EC member states at a rate not lower than in the United States. However, the unit labour cost in the Community measured on a US dollar basis grew much faster than the equivalent cost in the United States, obviously with the exception of Italy and, to a lesser extent, the UK.
Both trade areas were suffering from the successful competition of Japan and a number of NICs. The US positive balance with the EC countries was dwarfed by the deficit with the OPEC and other oil exporting countries, which from $16.3 billion in 1978 soared to $31.9 billion two years later, and with Japan. The trade deficit with Japan, which in 1975 amounted to $1.9 billion, jumped to $11.6 billion three years later, averaging between $8.7 billion and $10 billion in the next two years (Table 4). The unit labour cost in yen grew at a higher rate than in the United States but starting from a much lower basis, while the yen appreciated vis-à-vis the greenback. Yet, the appreciation of the yen was definitely more limited than that of the Deutschmark in spite of the wider trade gap with the US. Besides, the upwards trend turned into a slight decline from 1979 under the strain of the second oil shock (Figures 1 and 3). Thus, the competitiveness of Japanese products in terms of costs was not reversed in the years under review.
In 1980, the principal US products out of a total $20.8 billion exports to Japan consisted of unmilled corn, logs and lumber, bituminous coal, soybeans, metal ores and metal scrap – worryingly reminiscent to those of a developing country rich in natural resources – while out of a $30.7 billion bill the main imports from Japan included passenger cars totalling $8.4 billion, telecommunications, sound recording and reproducing apparatus totalling $3.1 billion, iron and steel mill products totalling $2.8 billion and office machinery and automatic data processing machines totalling $1.2 billion.15 It must be noted that Japanese exports of passenger cars and iron and steel products to the United States exceeded by 102 per cent and 67 per cent respectively those originating in the Community. The EC deficit on bilateral trade with Japan rose from $1.3 billion in 1973 to $7.1 billion in 1979, reaching about $10 billion in 1980.16 Japan’s exports concentrated on products such as cars, television sets and electronic goods and machine tools, while the Community failed to secure offsetting outlets for its manufactures.
Before analysing the crises that hit several sectors of the economy in the US and in the EC and the means adopted to cope with them, it is appropriate to examine the way in which both areas acceded to the codes signed at the end of the Tokyo Round and applied them to their domestic legislation.
The EC approved the codes in November 1979 and subsequently conformed the legislation of the Community and its member states to the international rules, in most cases reproducing their wording. Things were more complex in the case of the United States whose Congress was called by the 1974 Trade Act at the same time to approve, without passing any amendment, the multilateral NTB agreements signed in Geneva and to implement them by amending and, if necessary, establishing the relevant US statutes.
As noted in the previous chapter, before entering into the Geneva agreements, the US executive had to strike a deal with the powerful textiles and steel lobbies. In particular, the Carter administration gave assurances that the steel industry’s call for a minimal injury test and the tightening of trade laws would be fully taken into account. The main expert on the Tokyo Round negotiations, Gilbert Winham, argued that in passing the Trade Act of 1974 ‘Congress removed itself from a major role in writing legislation or representing constituencies in connection with the MTN’.17 This may be true as regards the course of the negotiation, but it does not imply that Congress was ready or willing to cut itself off from the dialogue between lobbies and administration in the final stages of the round. The dialogue was trilateral as Congress was empowered to approve or to reject the agreements worked out in Geneva and above all to preside over the consequent adaptation of domestic law. As in 1979, the traditional supporters of trade liberalization, such as electronics, had become increasingly concerned with foreign competition, their sway was not strong enough to offset the call from other sectors of the economy for rules against ‘unfair’ foreign competition that were more effective and less conditional on the executive’s willingness to apply them, and Congress was bound to acknowledge the growing demand for protection. Thus, if Congress was certainly not prepared to scupper the international deals in which it had had a role, it was far from willing to allow such agreements to entail the weakening of the domestic system of defence against foreign competition it had inherited or had itself built over the last few years. On the contrary, the Trade Agreements Act of 1979 turned out to be an opportunity to render the domestic rules stricter and exploitable for protectionist ends.18
Thus, the Act approved the Tokyo Round codes, stressing, however, that no provision of any trade agreement would take precedence over domestic law in the event of a conflict. The Act also provided that the NTB agreements would not come into force in the US until each major industrial country also completed its domestic implementation procedure. The president, however, could accept a particular agreement if only one industrial country had not accepted it and acceptance by that country was not considered essential. As stated in the Senate Report, the intent of the provision was ‘to assure that the United States would not commit itself to new international rules that could only be effective and beneficial to the United States if accepted by all major Western industrial countries’.19
As regards measures directed to counter so-called unfair trade practices, i.e. subsidies and dumping, the Act further shortened the investigation period and imposed more severe obligations on importers of subsidized or dumped products. In antidumping proceedings the 1979 Act allowed the Customs service six months to assess the duty and during the assessment period importers had to pay estimated antidumping duties. In countervailing procedures importers were forced to deposit bonds or cash in less than three months if a preliminary investigation should find that imports were subsidized.
As regards countervailing measures in particular, the Trade Agreements Act tightened the reins relative to the preceding statutes in two ways. First, by codifying a practice dating back to the Michelin case, the Act made it clear that countervailable subsidies included not only export subsidies, prohibited by the MTN code, but also a number of domestic subsidies, which, unsurprisingly, coincided with the list of domestic subsidies allegedly causing serious prejudice to other trading partners proposed by the American negotiators during the Tokyo Round but not accepted by the other parties. Secondly, it was a long established rule that US countervailing duties should be applied to so-called ‘net subsidies’ and a somewhat open-ended set of factors could be considered in arriving at their value. ‘Gross subsidy’ was the value of the subsidy provided, while ‘net subsidy’ was assessed by deducting from the gross subsidy one or more offsetting costs. The 1979 Act limited the allowed deductions to three: payments made to qualify for the subsidy; losses in the value of the subsidy resulting from its late receipt; and charges levied on the export of the merchandise specifically intended to offset the subsidy received. As the Senate Report on the Trade Agreements Act of 1979 pointed out, the reform wanted ‘to place clear limits on offsets from a gross subsidy’.20 Therefore, it was no longer recognized that subsidies are often granted to offset certain negative effects that government measures can have on an industry, such as interference in the location of new plants, closure of old installations in the context of industrial sector restructuring, or policies to buoy up employment and prevent lay-offs. All these policies were widely followed within the EC. The combination of the statutory extension of countervailing duties to domestic subsidies and the marked curtailment of allowed reductions in assessing net subsidies helps explain why the American steel firms, after prevalently relying on antidumping duties until the beginning of the 1980s, in 1982 shifted the emphasis of their attacks to the countervailing duty provisions of the Trade Agreements Act of 1979 so as to coerce their European counterparts into a comprehensive pact to regulate production and exports.21
The Trade Agreements Act, in keeping with the Tokyo Round codes, made the imposition of both antidumping and countervailing duties conditional on proof of material injury or threat of it to an industry in the US or material retardation to the establishment of such an industry. Before the Trade Agreements Act of 1979, the US law provided for an injury test in antidumping cases and the American authorities claimed that their assessment of injury, based on the occurrence of more than ‘de minimis’ injury, was consistent with GATT Article VI and with the Kennedy Round code on subsidy, both of which required the injury to be ‘material’. No injury test was provided for countervailing measures except in the case of duty-free imports. The new provision, however, was much less innovative than could appear at first sight. In the first place, the material injury requirement applied only to countries that had enacted the two Tokyo Round codes and to countries that had assumed substantially equivalent obligations. Even more important was the fact that both the statute and the executive’s Statement of Administrative Action defined ‘material injury’ as ‘injury which is not inconsequential, immaterial or unimportant’. The term ‘material’ is commonly considered equivalent to important, substantial and significant. Certainly, the definition of ‘material injury’ adopted by the US lawmakers might be in line with the ordinary meaning of the term, but it could also mean something less and it was for the US administrative authorities and subsequently for the US trade courts to decide where to draw the line.
Thus, on the one hand, the Trade Agreements Act of 1979 marked the approval by the US of a multilateral regime aimed at better preventing trade distortion and improving the environment for solving potential dispute. On the other hand, with regard to domestic rules directed at countering imports of allegedly dumped or subsidized products, the Act meant not only the confirmation of practices that could carry protectionist effects, like the imposition of antidumping duties even though the export price was not lower than the price of like products in the exporting countries, but made new legal instruments exploitable for protectionist ends available to import competing firms. Many importers expressed their misgivings on the stricter antidumping and counter-vailing regimes. The representative of the Automobile Importers of America, John Rehm, was quoted as saying that he deplored ‘the fact that as the product of an international effort to liberalize trade, we now see these two statutes turned into protectionist measure’.22 As the Act did not have to implement any Safeguard code, given the failure to reach an agreement on this subject at the close of the Uruguay Round, no amendment was made to the previous US law. It was, therefore, natural that American firms threatened by foreign competition, irrespective of whether it was fair or unfair, looked at antidumping and countervailing proceedings as the only effective method to keep imports at bay. Indeed, as noted by Finger, Halland and Nelson, though the ‘legal objective’ of antidumping and countervailing duties was distinct from that of safeguards, their ‘economic objective’, that is, protection from foreign competition through import restrictions, was the same.23
In other sectors too the Trade Agreements Act of 1979 did not involve the opening of the American market that the ratification of the Tokyo Round codes could have allowed. For instance, the implementation of the Customs Valuation code meant the repeal of the ASP system, but converted ASP rates of duty into tariffs estimated to afford the same level of protection provided under the abrogated valuation method. Contrary to the hopes of the EC, the implementation of the Government Procurement code was far from bringing about a significant curtailment of the preference given to American firms by existing federal and state laws. The president was given power to waive certain Buy American Act restrictions, but the Act was not repealed. According to the Senate Report, the procurements subject to presidential waiver accounted for about 15 per cent of federal government procurement. Apart from the $190,000 threshold agreed in the Uruguay Round, several US agencies, among which the Departments of Transportation and Energy, were excluded. So too were State and local government purchases, existing preferences for small and minority businesses, strategic goods, and purchases for farm support and foodstuffs for the indigent.
At the same time the Carter administration carried out a reorganization of the trade programmes. The trade reorganization plan enhanced the role of the trade negotiator creating a permanent Office of the US Trade Representative (USTR). The assessment of both the existence and amount of dumping and subsidization was withdrawn from the Department of Treasury, considered not responsive enough to the interests of domestic industries, and transferred to he Department of Commerce.
The difficulties experienced by the US automobile industry in the period under review were certainly aggravated by the second oil shock which highlighted the industry’s failure to adapt production to growing demand for fuel-efficient cars, but were also the result of other long-standing factors. The first trade deficit dated back to 1968, becoming, however, 13 times as high ten years later and over 14 times in 1980 (Table 3). The (higher) price assurances given by foreign manufacturers from Europe, Canada and Japan, to obtain the discontinuance of a mega antidumping investigation opened in 1976, only entailed a weak and short respite.
The first firm to run into trouble was Chrysler, the smallest of the ‘Big Three’ US automakers, after Ford and General Motors. The company closed 1978 with a net loss of $204.6 million and its deficit grew by $53.8 million in just the first quarter of 1979, which made the corporation’s bankruptcy and massive redundancies for its 130,000 workers in the US alone a likelihood, if not a certainty. Realizing that the company would go out of business if it did not receive a significant amount of money to continue and enhance its activities, Chrysler’s president and CEO, Lee Iacocca, called for public aid. Iacocca received support from the powerful automobile workers union, UAW, which lobbied for the approval of a financial package in Congress and convinced the company’s employees to accept financial sacrifices in order to save their jobs.24 After a difficult process, Congress, with the backing of the executive, gave its approval to a $3.5 billion aid package. Public aid did not come directly as a loan but as a $1.5 billion loan guarantee, conditional on the company’s coming up with a matching $2 billion in help from creditors, dealers and workers. The latter had to give up over $580 million in pay rises over the next three years. Obviously the loan guarantee, authorized by a law signed by Carter the following January, was the key for the company to obtain the credits necessary for its survival. In his memoirs Lee Iacocca expressed the unreserved view that Chrysler was lucky to have ‘appealed to a Democratic administration that put people ahead of ideology’ and that it was quite likely that a Republican administration would not have endorsed the rescue package for ideological reasons.25 Indeed, the way Reagan coped with the widespread crisis in the US automotive industry partially differed from his predecessor’s. Yet, the rescue of one of the ‘Big Three’ deserves some critical remarks in light of the issue of the strengthening of protectionist tendencies in both the US and the EC. Apparently the rescue package was just a domestic measure without impact on international trade and there were no government outlays. However, according to the proposal tabled by the US negotiators during the Tokyo Round, the provision of loan guarantees on terms inconsistent with commercial considerations would be an index of serious prejudice to the interests of other trading partners caused by domestic subsidization, and there is no doubt that very few, if any, American or foreign financial institutions would have been willing to provide credit to the ailing company without the security of governmental money in case of default. And it is easy to guess that the fact that one of the ‘Big Three’ went on producing meant that fewer Japanese or European cars could enter into the US market while Chrysler could go on competing in the world market. It is then arguable that, under the circumstances, it was a piece of luck for the US itself that its call for more stringent rules on domestic subsidies was not reproduced in the final text of the Tokyo Round code on subsidies and countervailing duties. Besides, as noted above, according to the US statute loan guarantees inconsistent with commercial considerations were sanctioned with countervailing measures. This could give support to the accusation of a double standard: practices subject to penalties by the US administrative authority, if adopted by foreign states, were no longer condemnable but became instead a sensible intervention to redress the economy if the decision was taken by US lawmakers and implemented by the US government.
However, the Chrysler bail-out did not put an end to the sector crisis, rather it was its herald. Things started to get worse for the whole industry in 1980 when a steadily rising oil price accelerated consumer demand for a switch to smaller cars. Production plummeted to a 19-year low while unemployment in the car industry and in its suppliers surged to 40 per cent of a work force of 2.5 million persons. The domestic production downturn was mirrored by a surge in imports, the Japanese share of which went on growing.26 Passenger car imports, excluding Canada, rose from 2,192 thousands of units in 1978 to 2,522 in 1980 (+15%) and Japanese cars, which in 1973 accounted for 40 per cent of total imports, amounted to 71 per cent of imports five years later, reaching 79 per cent in 1980. Exports declined from 164 thousands of units in 1978 to 105 thousand in 1980.
The plight of the US industry and the rise in imports resulted in the introduction of several bills in Congress to raise trade barriers on automobiles. However, the response of the administration was cautious and could not be classified as protectionist. In March 1980 an administration panel, composed of the USTR, the Council of Economic Advisers and the Departments of Commerce, Transportation and Energy, testified against new import barriers, arguing that the crisis was due to a cyclical depression in the market exacerbated by the slow response of the US industry to the change of demand to smaller and more fuel-efficient cars which was met by foreign, prevalently Japanese, models. However, the panel pointed out that the decline in overall demand far exceeded the number of purchases of imported cars. The administration also stressed that if the industry believed that imports were the cause of its worsening economic conditions, it should pursue the remedies provided by section 201 of the Trade Act of 1974, i.e. adoption of safeguard measures. However, when a petition for import relief was filed by the United Automobile Workers in June 1980 and by the Ford Motor Company in July, the US International Trade Commission determined that car imports had not increased in the medium-term to such an extent as to constitute a cause of serious injury to the domestic industry in the United States. The executive, therefore, preferred to rely on special assistance programmes for the domestic auto industry and advances to the Japanese government to achieve further liberalization of the trade in automotive parts. In July 1980, Carter announced a set of support initiatives including a special $50 million Community Assistance programme, a special Small Business Administration loan programme for auto dealers and measures to reduce the economic impact of safety, fuel economy and emission standards to the automobile industry.27 In May 1980, in response to the US requests, the Japanese government announced the elimination of duties on most automobile parts to facilitate American manufacturers’ access to the Japanese replacement market.28 In short, Carter, rather than adopting tariff and quota restrictions to solve the problems of the ailing motorcar industry, opted for domestic aid, quite akin to subsidization, and efforts to reduce the obstacles to American exports. Reagan did not overturn his predecessor’s approach but somewhat changed its emphasis, modifying adjustment assistance procedures and lifting some antitrust provisions to allow for consolidation of American firms. Also the Republican administration opposed proposals in Congress to introduce quotas on car imports. In April 1981, however, a US delegation, headed by the new United States Trade Representative (USTR), William Brock, flew to Tokyo for talks with Japanese officials. A month later the Japanese government announced a voluntary restraint of automobile exports to the United States. The good news was soon followed by an upsurge of over 130 per cent in Japanese direct investments in the United States during the following two years, in large part directed to the automobile sector.
Import penetration of Japanese automobiles, i.e. the share of domestic consumption covered by import products from Japan, also grew rapidly in many EC member states during the 1970s.29 By 1977 Japanese exports accounted for about ten per cent of the British and German markets. However, the import penetration of Japanese cars in the French market remained constantly below the 5 per cent threshold and the Italian market remained almost impermeable. Only the Dutch and Belgian markets experienced level of imports penetration higher than the US market, even exceeding the 20 per cent threshold at the end of the decade.
The contraction in US motor vehicle production and the resulting fall in the demand for car input was one of the causes of the downturn that hit the steel industry on both sides of the Atlantic.
In the United States the decline in steel demand during 1980 was the outcome of the downturn in domestic automotive manufacture along with the impact of high interest rates on inventories and machinery and construction markets. Domestic shipments plunged to 83.9 million tons, which represented a 16.4 per cent decline from 1979 and the lowest level since 1975. From June to August more than 40 per cent of the domestic industry’s production capability was rendered idle and by August the industry employed only 264,000 workers, the lowest number since 1933. As 1980 was a recession year, steel imports declined too (–11.5%), but since they fell less sharply than domestic shipments, import penetration grew magnifying the effects of an already depressed market.30
In March 1980, a volley of antidumping petitions was fired against EC steel exports. The US Steel Corporation filed 28 petitions covering five categories of steel products for a trade value totalling $147 million from seven EC member states. Soon after the United States suspended its TPM applied on steel imports, arguing that it had to devote its limited resources to the investigations provoked by the petition. As noted in Chapter 4, the TPM was a somewhat biased means of ascertaining likelihood of dumping based on the presupposition, subject to contrary proof, that sales in the US at prices below the steelmaking cost of the most efficient producer, Japan, were evidence of dumping.31 However, European products usually stood up to this test. Apparently the Carter administration had tried to dissuade US Steel from filing the antidumping complaints, fearing that it would make cooperation with the Community more difficult, but antidumping investigations were based on quasi-judicial proceedings with no room for interference from the executive. The EC complained that the threat posed by the antidumping investigations was not consistent with the 1977 OECD consensus on steel, obstructing EC exports when domestic and world demand was plummeting. Only in September did the petitioner withdraw its complaint, but the Department of Commerce, reinstating the Trigger Price Mechanism, had to introduce a series of amendments which portended new troubles for the EC steel industry in the near future. The most significant amendments were the monitoring of surges of unfairly priced imports and the extension of the TPM to subsidization. Under the modified mechanism, whenever imports captured more than 15.2 per cent of the US domestic market and when the US steel industry was operating at less than 87 per cent of its productive capacity, the Department of Commerce was to initiate a 90 day review to determine whether the surge in imports appeared to be the result of dumping or subsidization practices. In the affirmative case the Department could either initiate an autonomous investigation or provide non-confidential material to interested parties in the US who might file complaints on their own behalf. Unfortunately for the EC steel industry, there was no denying that it benefited from a host of domestic subsidies.
In the EC the steel industry was affected from the early summer of 1980 by a sharp decline of demand from the internal and world markets, leading to an overall drop in production, in turn resulting in an unprecedented fall in the rate of capacity utilization which by the autumn fell to around 50 per cent. The fall in demand entailed a lowering of prices which by early autumn declined by 13 per cent compared to the beginning of the year. Input prices, in particular ores, fuel, coke, electricity, labour and overheads, went up on average by about 5 per cent. Consequently, most firms were no longer able to cover depreciation costs as well as a part of variable costs. The decline in profitability led most EC steel firms, struggling for their survival, to dodge the straightjacket of the voluntary discipline agreed in 1977 to stabilize the market. The so-called ‘Bresciani firms’, which had tried to exceed the market share assigned by the 1977 agreement because they were able to increase production efficiently, that is to say securing a good profit margin, were followed by a growing number of firms that, in order to avoid going out of business, were willing to sell at prices that did not cover their total production costs. In this difficult context the Commission submitted a request to the Council for the compulsory establishment of a system of production quotas on the basis of Article 58 of the ECSC Treaty.32 The quotas were to be imposed for a maximum period until June 1981 on all undertakings with a steel production of over 1,000 tonnes per month, with the exception of companies producing only liquid steel for casting. The Commission’s request was opposed by West Germany which had a particularly high number of efficient producers and, therefore, felt it had little to gain from a compulsory curtailment of production. It was only at the end of October 1980, after the exception was extended to certain special steels, which the whole EC Council of Ministers, including the Federal Republic, gave its assent to the measures proposed by the Community’s executive. The measures, the first of this kind to be applied since the coming into force of the ECSC Treaty, concerned crude steel and four groups of rolled products. Thus from October 1980 steel production in the EC member countries was officially regulated from the top. The measures were meant to be repealed in the short-term but were subsequently extended several times as the EC steel industry found it difficult to recover from its plight. Obviously the new system was not supposed to be disrupted by inflows of cheaper foreign products. No import quotas could be applied as GATT Article XI prevented their imposition, but new base prices for iron and steel imports from non-Community countries were soon adopted in antidumping proceedings and the monitoring regime based on import licences was made stricter. New Orderly Marketing Agreements were negotiated for 1981 allowing lower import volumes.
The 1979–80 biennium did not turn the tide for the EC member states’ ailing textile industry. The EC had traditionally posted a substantial surplus in textile and apparel trade with the US, but from 1977 the United States started to close the gap as its exports to the EC more than doubled while its imports started to level off. In 1979 the EC industry showed a deficit that widened to almost $1.4 billion the following year. The British industry was particularly affected by foreign competition and in February 1980 the EC instituted a safeguard action under GATT Article XIX on imports of certain synthetic yarns into the UK for the whole of 1980. The United States contested the selective nature of the safeguard action as the bulk of imports came from the US and threatened the retaliatory withdrawal of tariff concessions on imports of certain wool apparel items, mostly supplied by the UK. Finally, at the end of the year, the EC lifted the quotas on synthetic yarns while the US accepted as compensation the Community’s offer of accelerated implementation of Tokyo Round tariff concessions on certain chemical products. As is usual in such cases, the Community also resorted to the antidumping lever imposing duties on imports of acrylic and polyester fibres from the United States.
In the petrochemical sector, where the US had a trade surplus with the EC, the latter had been complaining in the GATT since 1979 that growing US synthetic fibre exports to the Community were the result of indirect subsidization allowed by price control regulation on oil and natural gas combined with export controls on petroleum and naphtha, which gave American exporters a cost advantage over European producers. The United States rejoined that the rise in synthetic fibre exports was instead brought about by US competitive advantage combined with current EC structural problems in the sector and the depreciation of the dollar relative to EC currencies. In 1980 the two parties agreed to establish a bilateral government-industry group to explore on the one hand the impact of US energy controls on petrochemicals and on the other the general causes of the chemical industry difficulties in the EC. Did the controversy evidence a further covert form of domestic subsidization, to which the US claimed to be the enemy, or did it demonstrate an attempt by the EC to protect with legal sophistry a vulnerable sector battered by foreign competition? There is no documentary evidence in either direction since the dispute did not result in a GATT complaint or the adoption of countervailing measures. The conflict on petrochemicals subsided in 1982 when the recession dampened EC demand for these products and the appreciation of the dollar curbed the US cost advantage.
The year 1980 was one of turmoil in world agriculture as it witnessed the strengthening of a long-standing interventionist trend and foreboded the looming problems that afflicted agriculture throughout the decade.
To protest against the December 1979 Soviet invasion of Afghanistan, on 4 January 1980 Jimmy Carter announced a grain embargo on exports to the Soviet Union, suspending delivery of all US grain sales in excess of the eight million tons guaranteed by a 1975 bilateral agreement. The USSR had made plans to import a record 35 million tons, mostly from the United States, as its grain harvest had fallen short of production targets by over 20 per cent. Whatever the political and economic effectiveness of the embargo, it was bound to cause serious problems to US exporting companies and farmers. The Commodity Credit Corporation (CCC), the financial branch of the Department of Agriculture, covered the contractual obligations of the exporters for undelivered embargo grains, at a cost to the government of two billion dollars, and subsequently managed to gradually retender the bulk of the grains it had acquired. To relieve farmers from the potential price depression caused by the recycling of grains, the loan rate – that is, the amount of credit for bushels of produce covered by government programmes – was increased with further costs to the taxpayer.33 As for the Chrysler bail out, here too it is quite likely that the lavish amount of financial support provided to ease the pain of the 1980 grain embargo could have fallen under a subsidization ban had a code on agriculture been signed in the Tokyo Round. But this was not the case.
Despite the executive’s financial efforts, farmers were highly critical of Carter’s policy and the Republican platform for the November 1980 elections vowed to end the embargo immediately. Actually, the embargo did not entail any slowdown in farm exports as the fall in exports to the Soviet Union was offset by an upsurge in demand from other countries, prominent among which was China (Figure 4). Likewise, farmers’ gross income rose significantly thanks to governmental price support, growing demand from countries other than the USSR, along with the effect on prices of a severe drought (Figure 4). What fell was net income as farmers were hit by soaring input costs and rocketing interest rates. In defence of the Carter administration, it must be said that things certainly went no better for farmers in the Reagan years when export declined because of the appreciation of the greenback (Figure 2), the downturn in world demand and increasingly aggressive competition from the EC member states, while interest rates went on rising in the US.34 On the other hand, the embargo led to a rapid backlash for American producers as other main grain exporting countries like Argentina, Australia, Canada and France were ready to fill the gap in the Soviet market, not because they had the short-run capacity to expand production but simply by drawing down their surplus stock.35
France, the main grain producer in the EC, was able to tap into its stock because it had long since achieved self-sufficiency. By the end of the 1970s the Community had reached self-sufficiency in grains and exceeded it in wheat, and the surplus was even higher in sectors like sugar and butter (Figure 5). For these products, as pointed out by the European Commission, the most urgent problem for the EC was how to balance demand with supply rather than security of supply.36 Indeed, the management of surpluses was becoming increasingly burdensome for the EC budget since it prevented funds from being destined to other programmes, interest in which was growing as the slump approached. The Commission proposed two sets of measures to cope with the problem. First, to curb supply the Commission deemed it necessary to replace guaranteed prices or aid levels for unlimited quantities with producer co-responsibility, thus obliging farmers to bear the whole or part of the expense to absorb supply beyond a certain ceiling.37 Secondly, the Commission proposed to take actions on agricultural trade with regard to both import and export. In particular, the Commission called for more vigilance over the import of certain feeding stuff, most of which was provided by the US, and for the implementation of instruments similar to those already adopted by other major exporters like the US, Australia and Canada, chiefly the ability to conclude long-term agreements with foreign importers.38 However, a series of factors, whose analysis is beyond the scope of this research, prevented a significant reorientation of the Common Agricultural Policy to coherently address the supply-demand disequilibrium problem and it was only in 1992 that a substantial reform of the CAP was implemented.
At the onset of the new decade the United States share of world exports, which had amounted to over 14.5 per cent 16 years earlier, was slightly below 11 per cent (Figure 7). The US share of world exports in manufactures that was above 15 per cent in 1965 slightly declined to 14 per cent in 1980 and was exceeded by the share of West Germany which had become the main exporter of manufactured goods by the early 1970s, though its quota began to decline a little from the beginning of the first oil crisis (Figure 8). Japan was the third exporting country, having outpaced the United Kingdom. Yet, the loss of a few percentage points in the 1970s was far less conspicuous than the decline that characterized the period from the end of the Korean War to the mid-1960s when the US share of exports in manufactures had fallen from over 29 per cent to just over 15 per cent. However, the above sketched decline was not an unpredictable event but was the natural outcome of the rapid end of the exceptional circumstances that had put the United States on top of the world trade map in the aftermath of World War Two. The European countries, both in Western and Eastern Europe, as well as Japan, not only were able to rapidly reconstruct their production capacity affected, with different degrees of severity, by the wartime events, but soon began to catch-up with the American giant, demonstrating in the process that they were endowed with higher productivity.
The share of world exports of the whole EC reached its highest level in 1970, declining slightly over the next decade (Figure 7). The EC share of manufacturing exports reached its peak in 1974 and remained almost unchanged in the following six years (Figure 8). Nonetheless, by the early 1970s the dynamic of the EC countries in outpacing their transatlantic partner in world trade showed signs of slowing down (Table 25). In the period going from 1955 to the mid-1960s, the rate of export growth of the EC member states outshone that of the United States in most manufactured products ranked approximately in order of their knowledge content, but especially in those falling in group 1 and group 2. Group 1 consisted of high research-intensive products; group 2 of medium research-intensive products; group 3 of low research-intensive products. It must be observed that Table 25 has its drawbacks, which stem from the fact that it lacks sophistication, i.e. it provides the export value in current US dollars without the corrections necessary to take into account that from the beginning of the 1970s trade estimates were subject to a wide margin of error caused by inflation and by the fluctuation of exchange rates. Notwithstanding this, it appears that the United States was able to recover and to close the gap with the EC member states in both group 1 and group 2 exports from 1970 onwards.
The troubles that increasingly plagued the two transatlantic partners in the years following the start of the first oil crisis did not concern the whole economy or the whole trade balance. They predominantly affected particular sectors of the manufacturing industry on both sides of the Atlantic, including textiles, apparel, steel, motor vehicles and shipbuilding. All these sectors were characterized by shrinking demand from both the international and the domestic market and consequent falling production, worryingly accompanied by a steep contraction in employment. In short, these were the sectors that hindered full recovery and ushered in decline in the stagflation years. These sectors, which, non-technically, could be labelled as basic industries, weighed heavily in terms of production and employment on the American and European economies. The decline in output and employment was aggravated by the steady increase of the share of the domestic market captured by competing imports. As reported by American scholars, the import penetration ratios rose sharply in the second half of the 1970s in the US automobile, steel and textile industries and went on expanding, except for motor vehicles, in the first half of the 1980s.39 Analogous trends marked the EC basic industries. The impact of import penetration was repeatedly cushioned, although without lasting effect, by measures directed at hampering imports, often culminating in the acceptance of VERs by the exporting countries40.
Other sectors of the economy continued to grow in terms of domestic production and exports on both sides of the Atlantic. In the United States service exports grew in the decade under review by 260 per cent, reaching a recorded $36 billion, although estimates put them at around $60 billion.41 Despite this, the United States complained that its service industry was experiencing a multifaceted variety of trade barriers. This kind of problem was not yet addressed in the GATT, which only dealt with trade in goods, though the Trade Act of 1974 gave the US executive a mandate for the negotiation of international agreements limiting non-tariff barriers to trade in services and section 301 of the Act authorized the president to retaliate against unfair foreign practices affecting both trade in goods and in services.
US exports of capital goods quintupled between 1970 and 1980, while the positive trade balance quadrupled (Table 3). Particularly dynamic was the high-technology sector where the US had a steadily growing positive balance with Western Europe, with the not particularly relevant exception of West Germany, and especially with the developing countries. From 1974 the US had, however, a trade deficit with Japan which concerned primarily consumer electronics. In 1982 the Republican administration complained that many countries had adopted a broad range of interventionist policy instruments to protect and foster technology-intensive industries which were steadily becoming the focus of national industrial policies. State intervention in support of such industries was particularly active in Japan and in France but it was not absent in countries like West Germany that were less inclined to have a strong role in the choices of the industrial sector. Yet, the picture was not completely different for the United States where the electronic revolution, especially in integrated circuits and software, benefited from the high level of federal government involvement both through massive procurement, although the administration was primarily motivated by defence objectives rather than by the goal of boosting the US industry, and as a funder of R&D.
On the eve of the 1982 GATT Ministerial Meeting, the United States suggested that the parties should assess possible trade distortions caused by the various forms of high-technology industry support and ascertain whether or not they could be addressed by existing trade agreements and, in the negative case, which further steps were needed to deal with the trade problems of the advanced technology sector.42 On the other hand, the United States maintained that specific problems with individual nations should be dealt with by bilateral negotiations.43 Prominent among the countries with which negotiations were needed was Japan, but no mention was made of the EC and its member states. In other words, the United States was not convinced that the instruments provided by the Tokyo Round, signed just three years earlier, were suitable for the more complex environment of high-tech industry. Indeed, as illustrated by this study, the Tokyo Round, although making progress in creating a better environment for international trade, codified or at least did not upset the law and the administrative practice that had been building up on both sides of the Atlantic. Two strands of interests, sometimes interwoven, are present in trade relations. On the one hand, there is the interest of those industries with a comparative or competitive advantage that aim at removing access barriers to foreign markets. On the other, there is the voice of the import competing industries. Even though during the run-up to the launching of the Tokyo Round negotiations there was a chance for the first strand to have a particularly visible role, the worsening conditions of a growing number of so-called basic industries in the United States and in the EC member states meant that particular attention was given to their claims. Conversely, no effective agreement was made on regulating, if not curtailing, the various forms of government support provided to national industries, either to buoy up declining industries or, as was the case of aircraft and high-tech industries, to protect them during their initial stage and later to foster their operations in the international trade arena.
Outward and inward foreign investments soared on both sides of the Atlantic in the 1970s. Despite the efforts of the government to promote exports directly from the United States, American FDIs grew almost seven times between 1951 and 1970. In nominal terms, that is, without taking into account the acceleration in the inflation rate, they were almost three times as high in 1980 but starting from a much higher basis and in a far shorter period (Table 5). The share of investments directed to Europe grew from 33.5 per cent in 1970 to almost 45 per cent ten years later. In manufacturing the European share of American FDIs grew five times (Table 6). Foreign investments in the United States grew by 3.6 times between 1951 and 1970, but became five times as great in the next ten years, two-thirds of them originating from Europe which were also stimulated by the depreciation of the dollar vis-à-vis many European currencies and in particular the Deutschmark. The growing presence of MNCs in the world economy meant that a growing share of trade flow was becoming intra-firm flow and this meant potentially growing support for the dismantlement of tariff and non-tariff barriers. In particular, the US multinational corporations turned out to be more successful in exporting than the American industries as a whole. The world market shares of the United States and its multinationals were about equal in 1966, but the share of the United States declined in the following 16 years while that of the multinational corporations remained almost unchanged.44 This implies that increasingly larger portions of the world market outside the US were supplied by production outside the country. The comparative advantage of US multinationals was in the same industries as the United States as a country but to a larger degree. In particular, MNCs were stronger than other US firms in chemicals, electrical and non-electrical machineries and especially in transport equipments.
It must be stressed, however, that taking for granted that the 1970s western economy could be divided between export and foreign investment oriented industries, on the one hand, and import competing industries whose activity was mostly focused on the domestic market on the other, would be misleading. Likewise, to assume that, at least in the 1970s and in the following decade, the first group of industries favoured free trade while the second group was protectionist and dependent on governmental support is a farfetched generalization. Proof can be found in the policy of the automobile and electronics industries. 45
Between 1973 and 1980 the ratio of cars produced in Latin America to those produced in the United States grew from 3.5 per cent to 7 per cent in the case of the General Motors, from 8 per cent to 22 per cent for Ford and from 7 per cent to 16 per cent for Chrysler.46 By 1980, 37.2 per cent of total motor vehicle production was located abroad.47 In 1967 Ford reorganized its European operations, previously separately managed in the UK, Germany and Belgium, into a transnationally integrated operation. Thus the production of the Ford Escort involved 16 countries of which 13 were European. GM’s European operations were based on two separate subsidiaries which were controlled by the American giant long before the 1970s and whose production responsibilities were redrawn in 1979. Therefore, the US motor vehicle industry had a double, apparently conflicting, feature. On the one hand, it developed highly integrated regional and international strategies. On the other hand, within the US it was an industry which was outcompeted by foreign car manufacturers, especially Japanese, and successfully called first for government financial help and later in the early 1980s for the imposition of import quotas. This, in turn, prompted the biggest Japanese firms to change their strategy of exporting from their national market or from East Asia and to invest heavily in the countries where they wanted to strengthen their trade hold.
Unlike the US giants, the operations of EC motor vehicle companies remained mostly concentrated within the Community boundaries and quite often, as was the case of the Italian FIAT within national boundaries.
US electronics industries started to move some of their activities abroad in the early 1960s. For semiconductors the push factor towards offshore assembly was growing competition within the United States itself and the acceleration of domestic production costs. For consumer electronics, television manufacture in particular, the push factor towards offshore assembly came from intensifying competition from low cost overseas producers, nominally the Japanese. The dominant motivation for investing in the European market was market access, though American MNCs were also heedful to select the lowest cost production sites, including those where government incentives operated. Although the main EC producers of electronics were slower in establishing offshore facilities across the Atlantic and were not able to establish affiliates or branches in Japan, firms such as Philips, Siemens and Thomson, created a production network in East and South East Asia as well as in many Mediterranean countries. Thomson, the French national champion, was not the only one to benefit from various kinds of governmental support.
As a matter of fact the major objectives of the companies engaged in foreign direct investments not always coincided with trade as was understood by the drafters of the General Agreement on Tariffs and Trade and consequently in the multilateral negotiating rounds, including the Tokyo Round, that is, trade among nations. FDIs were motivated by the desire to overcome tariff and non-tariff barriers by getting into a foreign customs area, or to avoid the burdens imposed by the national economy by moving production facilities to countries offering lower costs. Firms making FDIs certainly were not hostile to public support. Many multinational corporations, the Europeans in particular, were ‘national champions’ and received various kinds of governmental support. Most MNCs establishing branches or subsidiaries overseas benefited from a gamut of incentives directed at attracting foreign investments which were provided by national governments or, especially in the case of developed countries, by local authorities. They were opposed, however, to the imposition of export or local content requirements on their affiliates by some governments, especially in the developing countries, as the price for the continued operation in the host country, since such requirements were viewed as undue interference in the management of their global operations. On the other hand, as borne out by the quotas imposed by the US on colour TV receivers from Japan, Korea and Taiwan in the late 1970s, even high-tech industries would call for import restrictions whenever they felt threatened by foreign competition.48
In parallel, in the 1970s the attitude of many countries, including certain OECD members, towards foreign investments was ambivalent. On the one hand, they believed that foreign control could hamper the development of important sectors of the national economy. Therefore, developed and developing countries banned or limited foreign investments in a number of industries, or limited foreign participation in domestic firms. On the other hand, they started to claim that obstacles to foreign investments imposed by potentially recipient countries were preventing their companies from getting a foothold in those markets. Some countries, especially the developing ones, tried to attract foreign investments but made access and prospective benefits conditional on requirements impinging on trade choices. A further concern, in particular for both the United States and the EC, was to prevent foreign production facilities from being just assembly plants and quite often the two transatlantic trading partners made free circulation within their markets of the products of foreign corporations’ affiliates conditional on a high content of domestic added value.
In spite of the initial efforts of the EC and of its member states, France in particular, the Tokyo Round shed no light on the relationship between trade and exchange rate fluctuations. It appears that, from the beginning of the 1970s, the United States exploited the depreciation of its currency to contain the damages caused to its trade balance by other factors like the discrepancy between the US demand and that of its trading partners or the non-competitive costs of some of its industries (Figures 1 and 2). The main targets were Japan and in particular West Germany. The Carter administration was often accused of exploiting the downwards trend of the dollar to improve the US trade and current account balances.
The foregoing issues, which did not attract overt attention in the 1970s and were not tackled by the Tokyo Round, from the beginning of the following decade became pressing and along with the more traditional bones of contention, including agriculture, were the subject of heated negotiations and disputes when important changes took place in the economic and political environment in which the main trading partners were acting.