CH^.A'F7^/i U.S. Foreign Trade A FIVE-YEAR OUTLOOK with Recommendations for Action U.S. DEPARTMENT OF COMMERCE BUREAU OF INTERNATIONAL COMMERCE U.S. Foreign Trade A FIVE-YEAR OUTLOOK with Recommendations for Action U.S. DEPARTMENT OF COMMERCE Maurice H. Stans, Secretary Kenneth N. Davis, Jr. Assistant Secretary for Domestic and International Business APRIL 1969 For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, D.C. Price $1.00 Digitized by the Internet Archive in 2012 with funding from LYRASIS Members and Sloan Foundation http://archive.org/details/usforeigntradefiOOunit This study appraises prospects for U. S. international trade through 1973 and recommends courses of action to improve export growth. Ini- tially issued in December 1968, as an internal government document, it is now made available to the public with revisions to incorporate final trade data for 1968. The recommendations in this report should not be considered recommendations of this Administration at this time. There is inevitably a wide margin of error in projecting anything so complex and variable as the foreign trade of the United States. One need look no further than to an unpredicted event of 1968 to be spared from overconfidence in conclusions concerning the trade outlook. In January of 1968 the United States Government set a goal of improving the year's trade balance by a half billion dollars. By year end the balance had worsened by an amount almost seven times as large as the goal for improvement. Nonetheless, despite the hazards of projecting a five-year trade outlook and the handicaps of deficient data and inadequate methods, the valid reason for undertaking the study prevailed: it is needed. So large is the role of trade in the balance of payments that a knowledge of what has been happening and an estimate of what may happen in the trade account are required for all who share responsibility for making economic policy. The Bureau of International Commerce (BIC) was responsible for the overall conduct of the study and for its conclusions and recommenda- tions. The study was planned and directed by Paul R. Porter, consul- tant on export strategy. The Business and Defense Services Administra- tion (BDSA) gave valuable advice, as did the Office of Foreign Direct Investments (OFDl), the Office of the Assistant Secretary for Economic Affairs, and the Deputy Assistant Secretary for Financial Policy. The Departments of Agriculture, Interior and Defense projected exports of agricultural commodities, coal and military sales. In addition, a survey conducted by Business International Corporation, under contract, provided data on the export expectations of 15>8 U.S. manufacturing corporations which accounted for a third of the 1967 exports of manu- factured goods and a quarter of all exports. L^-ocr^e^^^. ff^ I ( )0/ Lawrence A. Fox Director March 31, 1969 Bureau of International Commerce CONTENTS Page Foreword iii List of Tables v List of Charts vi Chapter 1 Findings, Conclusions and Summary of Recommendations 1 2 The Outlook for U.S. Foreign Trade, 1969-73.. 13 3 An Examination of 29 Major Country Markets... 31 h The Product Composition of Exports and Imports 1;1 5 How 158 Manufacturers View Their Export Prospects 63 6 Recommendations 73 List of Tables Table Page 1 Total Imports, Imports from the United States, and U.S. Share in 29 Major Country Markets, I960, 196? and Estimated 1973 32 2-9 5U-61 2 UoS. Exports, Imports, and Trade Balances by Commodity End- Use Categories, 1965-67 and Estimated 1973 3 UoS. Exports and Imports of 89 Selected Commodity Groups, 1965-67 and Projected 1968-73 k U.S. Exports and Imports of Selected Commodities Produced by 7 Major Industry Groups, 1967 and Pro- jected 1969-73 5 U.S. Trade of 89 Commodities Shown by 7 Major Industry Groups 6 U.S. Trade Shown by End-Use Categories of 89 Selected Groups of Manufactures, 1965-67 and Projected 1969 and 1973 7 U.S. Foreign Trade by Level of Technology, 1965-67 and Projected 1969-73 8 U.S. Trade of 89 Selected Commodity Groups by "Rela- tive Competitiveness" Categories, 1965-67 and Projected 1969-73 9 Projected Change in Total U.So Foreign Trade, 1965- 67 to 1973 10 U.S. Exports of U.S. Manufacturers Sampled, by SIC Group, 1967 and 1973 65 11 Major Forces Favoring and Hindering U„S. Exports, Based on Manufacturers Survey 69 12 Measures Which the U.S. Government Can Take to Increase U„S. Exports, Based on Manufacturers Survey 71 vi List of Charts Chart Page U.S. trade and balance of payments 2 Exports, imports and the trade surplus 3 GNP and imports £ Exports: U.S. and other countries, and market shares... 7 Exports and GNP: U.S. and other countries 11 U.S. trade by geographical area lU U.S. trade by main categories 15> U.S. trade projected for 1973 22 Imports, real GNP and prices 2k Export prices : U n S . and other countries 26 U.S. trade with four major trading partners 3o-39 U.S . trade in selected items hh-kl An assessment of U.S. export competitiveness „... £l Chapter 1 FINDINGS , CONCLUSIONS AND SUMMARY OF RECOMiytENDATIONS Findings and Conclusions Changes in the trade balance 1. Two comparisons provide a measure of the foreign exchange cost of the decline in the U.S. trade surplus from $U.l billion in 1967 to $0.8 billion in 1968. Last year all foreign expenditures of American tourists and all private direct investment abroad were each smaller than the drop in the trade surplus. 2. From 1950 through 1961; the average ratio of the trade surplus to exports was 28%. In 1965 it was 20$, in each of 1966 and 1967 it was 13% and in 1968 it was 2%. 3. About $2.U billion of export value in 1968 was financed by U.S. foreign assistance programs administered by the Agency for Inter- national Development and the Department of Agriculture. Apart from these specially financed exports, U.S. foreign trade was in deficit by about $1.7 billion. These Government-financed exports do earn foreign exchange in many instances , although the repayment period is longer than for purely commercial exports. Ij.. U.S. trade balances declined last year with almost all countries, but nearly three-fourths of the aggregate decline occurred in trade with the three principal suppliers to the United States: Canada, Japan and West Germany. In the several preceding years, trade balances also de- teriorated with these countries while rising with most others. Since 1962 the aggregate decline with Canada, Japan and Germany was $U.2 bil- lion. In the same period the aggregate balance with all other countries rose by a modest $0.3 billion. 5. The abrupt decline in the 1968 trade surplus occurred in the face of strong export growth - a gain of $3.1 billion at a 9. 9% growth rate. But imports grew at 23.6$ for a gain of $6.1; billion. Unless otherwise stated, the record of U.S. export and import performance reflected in this chapter covers the period from the end of 1962 through 1968 . Projectirns cover the 5-year period from the beginning of 1969 through 1973. U.S. trade figures used are those reported by the Bureau of the Census rather than those adjusted by the Office of Business Economics for balance-of- payments purposes. Military grant aid has been excluded from export figures. Some charts show 1968 estimates based on 9 months' data. The U.S. merchandise trade picture - 1962-1968: D. and PL. 480-ftnai Tne us - balance of payments picture - 19621968: 1962 '63 -3- The rate of U. S. import rise is outstripping the rise in exports J U L INDEX: 1960 = 100 y ... as both total and "commercial" trade surpluses drop. -TOTAL TRADE SURPLUS -h- Import growth 6. The U.S. domestic market — the largest, most prosperous , and most open market in the world — has drawn an increasing flow of foreign consumer goods, capital equipment and some industrial materials. The ratio of imports to GNP rose from a persistent level on the order of 3% from 1955-65 to 3.1$ in 1966-67 and to an indicated 3.8% in 1968. 7. Domestic price inflation was a major factor in the import surge, especially in 1968, but it was not the only cause. The U.S.- Canadian auto products trade agreement induced a rise in imports of automotive vehicles and parts from Canada (partially offset by a large gain in exports of autos and parts to Canada) . Additionally, the growing popularity of many foreign products, marketed with American merchandising skills, increased imports and seems likely to continue in a non- inflationary situation. Export performance and prospects 8. U.S. export growth, overall, has been strong and continues so. The average gain in value was over $2.2 billion a year since 1962. The average annual growth rate was 8.1;$, about one percentage point above that of GNP in the same period. 9. The relative export strength of the United States nonetheless diminished in recent years. Although the U.S. export growth rate was high in relation to earlier periods it was lower than that of any other Free World industrial nation except the United Kingdom. The U.S. share of all Free World markets declined by about one-half of a percentage point, to about 17$, since 1962. 10. Exports to the three largest markets of the United States - Canada, Japan and the United Kingdom - were very strong, with an average growth rate of about 12$. The three countries accounted for 39% of U.S. exports in 1968 and over half of the growth since 1962. There was only slight export growth, persistently throughout the period, to Germany, the fourth largest market, and to Italy, the seventh. 11. The strongest growth was in manufactured products based on advanced technology, including computers, jet aircraft, control instru- ments and some organic chemicals. Department of Commerce commodity specialists and manufacturers who provided separate estimates for this study expect the trend to continue through 1973 but at a slower rate. The largest expected increase is in capital goods, which is the export sector most dependent upon medium and long-term export financing. -s- nports. MPORTS ,, $ BILLIONS) , , .1 1962 1968 (est.) -6- 12. The competitiveness of most U.S. manufactured exports re- ceived a favorable rating from Department of Commerce commodity special- ists. In a large sample, 56$ of current exports of manufactures by- value were rated as likely to maintain or improve their position in for- eign markets, the position of about 3h% was considered to be slipping but retrievable, and that of 10$ likely to decline in any event. Con- tinued inflation would, of course, worsen this outlook. 13. U.S. export growth in four important product areas was not commensurate with comparative advantage derived from research, capital investment, high productivity, or natural resources. The four areas are: prestige products which have a high R and D component; military equipment; agricultural commodities; and coal. Foreign governments use a variety of means to offset the U.S. comparative advantage: in- ternational consortia as in the case of the "Concorde" aircraft; grow- ing insistence upon local sourcing (e.g. wing assembly in Canada as a condition for purchase of civilian aircraft, and a wide variety of European components for military equipment sold in Europe); non- tariff barriers and subsidies on domestic products applicable to agri- cultural products and coal. 111. The Department of Agriculture forecasts a static export level in the next five years for agricultural products other than feed grains and oilseeds, with a total gain of about $750 million. The Department of Interior expects only a small growth in coal exports above the current $500 million annual level. The Department of Defense projects a static level of military sales at about $1.5 billion annually. 15. The manufacturers who provided estimates of their own exports and commodity specialists and country analysts of the Department of Commerce each independently projected a decline in the rate of growth of world import demand. The country analysts, who projected U.S. ex- ports to 29 countries accounting for 86$ of total exports in 1967, ex- pect the import demand in these markets to decline from an aggregate growth rate of 8.U$ for I96O-67 to 7-1$ through 1973. They expect the U.S. share of these markets to decline from an aggregate 22. k% in i960 and 21.1$ in 1967 to 20.7$ in 1973. 16. Generally, an improved U.S. export growth rate is projected for the developing countries. India and some other Asian countries are an exception, resulting from an assumed reduction in U.S. economic aid. Latin America, which in 1967 received 1|2$ of its imports from the United States, is expected to be a better market for U.S. exports, in terms of growth rate, than it was in the 1960's, when, except for Mexico, the rate was low. Most of the manufacturers who were interviewed for for this study expected their strongest export improvements in the next five years to be in the developing countries. About 30$ of U.S. exports U. S. exports have risen at a good pace . . . U.S. EXPORTS ($ BILLIONS) 40 30 20 10 1 1 I 1 1 1962 '63 '64 '65 '66 '67 '68 (est.) ... so that while U. S. still holds large share of market . . . ... but not as rapidly as industrial countries . . . m . . . that share has shrunk in recent years. PERCENT CHANGE IN SHARE OF FREE WORLD EXPORT? 1962 TO 1967 ^g^*^*"^* FRANCE ~s. are to developing countries , which accounted for one-quarter of the growth, by value, since 1962 ; 80$ of the export growth was net of aid (AID and PL I4.8O) . The export projections may underestimate the payments problems of many of the developing countries, which will be aggravated if a slackening of growth in the industrial countries reduces demand for primary products. 17. A majority of the manufacturers who were interviewed for this study (most of whom have foreign manufacturing affiliates) believed that U.S. mandatory controls on foreign direct investment retard their export growth. On alternative assumptions that the mandatory controls would be continued indefinitely or eliminated at an early date, they projected exports as about 2% less in 1973 on the assumption of continued controls. Their estimates did not reflect capital goods exports which might be associated with their investments. 18. U.S. exports are impeded and imports are encouraged by a lack of parity between the United States and some of its principal competitors in the incidence of taxes on trade, arising from differ- ing tax systems. 19 o Export prospects are likely to be harmed unless the inter- national monetary system can provide adequate liquidity and facilitate a timely adjustment of imbalances which arise from dynamic but uneven growth in world trade and diverse national policies. The trade balance outlook 20. Relief of the domestic economy from inflationary pressures would greatly reduce the current excessive import demand and bring an improvement in the trade surplus. Nonetheless, other factors indicate a probable long term downward trend toward small surpluses or deficits. These factors include the probable persistence of forces conducive to strong import growth, existing independently of inflation; a moderate decline in overall export competitiveness ; and the prevalence of a variety of trade conditions which place the United states at a disadvantage. 21. Export projections derived from three separate sets of estimates ~ by manufacturers, commodity specialists and country analysts ~ range from $l;3 billion to $I;6 billion as the prospective merchandise export level in 1973. "High" and "low" import projections prepared for this study, when averaged, indicate a possible import level in 1973 of $14;. 8 billion. If the export projections and the averaged import projection should be approximately correct — they are, of course, subject to many variables, and are merely illustrative of anticipated trends — the indicated trade balance in 1973 would range from a $1.8 billion deficit to a $1.2 billion surplus. -9- 22. A diminishing trade surplus or a trade deficit, particu- larly in the context of an uncertain outlook for the balance of pay- ments , endangers the continuance of a liberal trade policy -which has contributed materially to the economic growth of the United States and its principal trade partners. Corrective measures 23. The prudent course with respect to the trade balance is for the United States Government to assume that some of the factors which have increased the ratio of imports to domestic production may persist after inflation has been moderated, that they may not be "" self -correcting, and consequently that positive measures should be taken to induce profit-motivated business decisions which will divert a larger share of the GNP to export. 2Uo An export goal of $50 billion in 1973 ($U billion above the most favorable export projection) is believed to be feasible if the Government commits itself to policies proposed in recommendations which follow and if growth in world import demand does not slacken significantly more than now anticipated. A goal of this magnitude will probably require a higher ratio of exports to GNP than the normal k%» A ratio of k.3% by 1973 has been established as an objec- tive of the Department of Commerce's Five-Year Export Expansion Frogram. While any estimate of GNP five years hence is highly speculative, a $50 billion export goal would represent a rough appro- ximation of a k»3% ratio, assuming strong growth in GNP.l/ 25. A significant, enduring shift in the proportion of domes- tic production devoted to export probably cannot be achieved without a purposeful change in the orientation of some institutions of the UoS. economy to make them more responsive to export interests. In particular, these are the tax system, the credit system and trans- portation facilities and rates „ Inevitably, they have been shaped to serve the domestic needs of a continental economy. Export is incidental. The nations most successful in exporting — notably Japan, Germany and Italy — have oriented tax, credit and transpor- tation policies to serve export goals as well as domestic ones. The United States will need to do the same to achieve comparable success. 1/ On Feb. 2U, 1969, the Cabinet Committee on Export Expansion endorsed a $5>0 billion export goal by 1973 as a tentative objective. -10- 26. Both general and pinpointed measures will be needed to increase the export proportion of domestic output. General measures which the Government might take to improve exports, as proposed by manufacturers who contributed estimates to this stude, correspond to recommendations of the National Export Expansion Council (NEEC). The highest priorities were given to tax incentives, better export financing, a curb to inflation, and a reduction in transport costs. Expanded export promotion facilities and similar Government assistance were recommended by U.S. industry, especially by smaller manufacturers. Pin- pointed measures include export targeting by selected industries, which was endorsed by the NEEC at its meeting in November 1968. Summary of Recommendations The first priority is for the United States to do those things that it can do alone. In this connection, the United States Government should: 1. Create certain tax incentives to make exporting more attractive and undertake a formal study of the merits of a value-added or other indirect tax for the United States; 2. Take specified steps to assure U.S. exporters adequate export financing on internationally competitive terms and condi- tions, particularly the establishment of an automatic rediscount facility for export paper, preferably by "the Federal Reserve System; 3. Enlarge and improve Government export expansion programs in cooperation with industry on a five-year basis; U. Initiate and support efforts to lower export distribution costs — particularly transportation and documentation costs; 5. Strengthen U.S. participation in international product and engineering standards -marking and intensify U.S„ efforts to simplify international patent and trademark-filing procedures; 6. Elevate export expansion to a higher priority in the foreign aid program, consistent with developmental and foreign policy objectives; and -11- '9HHV i ".;;>V- E <» .2 3 11 , - ; ^ "re o 0) (A -, - 5> 3 £ .2 3 1 - 60 "D 5 " p CO 3 ""3 iz ~ - = £ a 2 >- E o — - 1~ (A J= o + r^ ru m 3 JQ T3 1 1 L 0) 3: re 0) a> Si o 7 1 — ' u) .E || |"5 I y> CX> COCVJ LOCC COCV, 1 § £ °°d ot " "' oJ^ ^^ a- 1° S" « 1 5 3 si # * * * A * "3 22 O 3 ii 00 ° " ujo oo UJ s lower, possibly a deficit, is a question for which there is as yet no clear answer. A downward trend, as noted elsewhere, however, appears to be a strong possibility. The present trade problems confronting the United States are largely problems of adjustment in a period of dynamic growth in inter- national trade and investment. To understand their significance, a somewhat longer perspective, embracing the whole post-World War II period — from the 195>0 's on — is helpful. Since 1950 world production has approximately doubled and world trade has trebled. (For com- parison, between World War I and World War II world production grew only by hP% and international trade by half as much. ) Particularly in the years since i960 growth in both the United States and most other industrial nations, which are its principal markets, has been uncommonly strong. Aggregate figures tell only a small part of the story. Dramatic changes have occurred in the composition and flow of trade. Nations and whole industries have acquired a stake in maintaining and pro- moting new trade flows and others have encountered difficult adjust- ment problems. To take advantage of growing markets, many U.S. corporations have leaped over other nations' protective trade barriers to produce and sell within their markets and also to export to third countries. In doing so, they have generated new U.S. exports and may have displaced some others. New technology has a dual impact. Products which were unre- corded in trade statistics a dozen years ago are now large in U.S. exports and imports. Technology is also diffused internationally more rapidly than even before. The dynamic but uneven growth in trade and investment patterns has placed the international monetary system under heavy strains to provide sufficient liquidity, to accom- modate large and sometimes sudden capital movements since most major currencies were made convertible in 1958, and to facilitate — not always successfully — a timely adjustment of imbalances. The United States ranks first in world trade by a large margin. The prosperous U.S. market is eagerly sought — a circumstance which gives the United States a potentially strong position in pressing others to grant U.S. exports access to their markets as open as their access to the American market. The leading role of the United States in world trade may be con- veniently measured in export comparisons. In rough terms, U.S. exports are: about YJ% of exports of all other Free World countries nearly 35% of exports of Western Europe about 80$ of exports of all developing countries combined about hS% higher than Germany, the world's second largest exporter. Exports produce nearly two- thirds of the nation's earned for- eign exchange. They account for one twenty- fifth of the (MP — which perhaps helps to explain a less than adequate attention which they receive in the domestic economy. The export/GNP ratio of other industrialized countries ranges from 9% to y?%. Exports by U.S. manufacturing affiliates, alone, in Canada and the United Kingdom produce nearly 5$ of the Canadian GNP and about 2^6 of the British. Projections Three projections of U.S. exports in 1973 were made for this study. The first is a composite based on individual projections for 29 countries prepared by country analysts of the Bureau of Interna- tional Commerce. The 29 countries received Q6% of U.S. exports in 1968. The second projection is based on product composition. Commodity/industry specialists of the Business and Defense Services Administration prepared projections for 89 groups of manufactured products. The Department of Agriculture provided projections for agricultural commodities, the Department of the Interior for coal, and the Department of Defense for military sales. The combined sam- ple represents 1&% of U.S. exports. A third projection was derived from export estimates supplied by lh92/ U.S. manufacturers whose exports in 1967 accounted for about one-third of U.S. exports of manufactured goods and about one-fourth of total exports. The three export projections and the average annual growth rates from a 1968 base are as follows : T7 A total of 158 firms were interviewed but only IJ4.9 provided estimates of their future exports. 1973 value Annual (billions , growth rate Export projection based on t of dollars)— (1968-73 (1) Estimates of manufacturers U3-0 k*l% (2) Estimates by commodities U3.6 5.0% (3) Estimates by country markets I4.6.O 6.2% The growth of U.S. exports is not independent, but affected by such diverse influences as the over-all growth of world trade, the economic conditions in countries purchasing U.S. exports, the extent of U.S. investment abroad, the competitiveness of U.S. goods and U.S. business selling efforts. With such variables, the projections presented should be regarded as illustrative, and indicative only of an order of magnitude. Any projection of U.S. exports is contingent on certain assump- tions. The major assumptions used by the country analysts and the commodity specialists were: (l) that during the next five years the institutional arrangements for international trade and invest- ment would not undergo drastic modification; (2) that the United States and other industrial nations would continue to experience economic growth, although not necessarily at the same rates as since I960; (3) that no major international disruption would occur. Al- though no precise assumption was made concerning price rises, the use of current dollars and trade figures generally for I96O-67 or 1962-67 as a base built in an approximate 2% annual price rise in the 1973 estimates. The estimates obtained from the manufacturers reflect their individual appraisals of the trade outlook. Their assumptions are not known but probably, implicitly at least, were similar to the assumptions used in the other two projections. The three export projections were closer together than had been anticipated. It is possible that they reflected a bias toward caution on the part of the forecasters and they may also have under- estimated the export potential of new products. ~2j All projections are stated in current prices, i.e., those obtaining in 1973- See discussion below and footnote 3/ regard- ing price assumptions. For more detail on the methods of pro- jections, see Chapters 3> k and $. -19- The implicit growth rate of each of the three projections is well below the 8.1$ average annual growth rate that U.S. exports actually experienced in the 1962-68 period. The lower projections reflect a probable declining ratio of exports to GNP, although the GNP which may be achieved in the next five years is also highly speculative. A GNP projection was made in 1968 by a specialist of the Office of Business Economics and used in Congressional testimony. The projection for 1973 was $1,132 billion. 3/ It is not an official forecast but only a heavily qualified possi- bility. It represents an average annual growth rate of 6.2$ at current prices. The average GNP growth for the five years, 1963.-1967, was 7.1$.' In the 1960's exports in most years have been approximately k% of GNPo The highest of the three projections would have a k% ratio to an assumed GNP of $1,132 billion in 1973. Earlier this year, in instituting the Five Year Export Expansion Program, the Department of Commerce set as a goal an increase in the export/GNP ratio to k*3% in order to emphasize the need for policies designed to divert a larger proportion of domestic production to export. To achieve a k»3% goal in relation to the assumed GNP of $1,132 billion, exports in 1973 would need to reach a level of $lj.8.6 billion. As another yardstick, if exports were to grow at the 8.1$ rate achieved since 1962, they would amount to $50.8 billion in 1973. An export target of $£0 billion in 1973 is regarded as an approxi- mation of the h»3% ratio to GNP established in the Five Year Export Expansion Program. "What trade surplus might be achieved at a $£0 billion export level? Projections of imports are beset with even greater pitfalls than those of exports. Subject to highly uncertain variables, two import projections have been prepared which are believed to repre- sent plausible parameters of prospective imports in 1973. ~3] This GNP projection for 1976 has a built-in assumption of a 2% annual price rise. This price rise is not intended as a forecast of future price movement in the U.S. economy but is for the purpose of illustrating the export relationship dis- cussed in this section. The braod basic assumptions and the methods of projecting suggest implicit assumptions of price rises of a similar magnitude in the export projections. The first projection was made by BDSA as a composite of indi- vidual commodity import projections for a sample of manufactured goods plus extrapolations of non-manufactures at 1962-1967 growth rates. The coverage ratio of the sample was 90% or better for capi- tal goods and automobiles but only about k0% for industrial supplies and materials and consumer goods. At the time the commodity projec- tions were made adequate data reflecting the big import increases in 1968 were not available. The import volume projected by BDSA for 1973 is $1|1.2 billion. Several rough tests based on experience suggest that it is conservative. It is assumed that inflation will slacken in 1969 or 1970 and the current bulge in the import trend line will be followed by a moderate growth rate for several years thereafter^ even so, in the absence of a recession, the BDSA pro- jection appears to be a likely minimum in 1973. The second import projection, considered as a likely maximum for 1973* is a composite projection based on estimated growth rates of major end-use commodity categories related to an assumed annual GNP growth rate of 7% (approximately that of 1962-67). Import records show markedly different rates of import growth by such cate- gories in relation to growth in GNP. "Food, feeds and beverages", as a category, has been consistently below growth in GNP; "industrial supplies and materials" (despite the recent big increase in steel imports) has maintained a rate equivalent to the GNP growth rate; "non-food consumer goods", being highly volatile, has risen in much larger increments than gains in GNP growth rates; "capital goods" has risen rapidly in recent years but from a low base. On the basis of these observations, different import growth rate assump- tions were used for each of those end-use categories in relation to a 7% growth in GNP. The method of projection, though admittedly crude, is considered reasonable. The prospective range of imports, as indicated by the two pro- jections, is from $1|1.2 billion to $1;8.U billion. Inasmuch as any estimate must be arbitrary and has only an illustrative value, an average of the two — $1^.8 billion — is used to indicate potential trade balances. The following table shows illustrative trade balances for 1973 under the assumed import level (average of the two rough projec- tions) and exports as indicated by each of the three projections and by the proposed $50 billion export goal (in billions of dollars): Export projections based on: IT) 12} Estimates Estimates of manu- by com- facturers modi ties Exports as projected i;3.0 U3«6 Assumed imports UU.8 hk. 8 (average) Illustrative trade - 1.8 - 1.2 balances h/ Estimates by country markets U6.0 kk.Q + 1.2 Export goal 50.0 hh.B * + 5.2 For such significance as it may have, note may be taken of an econometric projection made recently by another Government agency which projected the U.S. trade balance in 1972 under two assump- tions. The balance ranged from a surplus of $1.6 billion under the more favorable assumption to a deficit of $2.U billion under the less favorable assumption. The economists who made the projection have major reservations concerning the adequacy of the model and the assumptions. An Appraisal of Major Factors Force and duration of the recent import surge There are multiple causes of the import surge which began in 1965, declined sharply in 1967, and rose even more sharply in 1968. The causes include domestic price inflation, the stimulus of the U.S. -Canadian Auto Products Trade Agreement to auto imports from Canada, and in 1968 random events such as a prolonged strike in the copper industry and the threat of a steel strike. "U7 By alternative calculations, a combination of the "high" import and the lowest export projections would indicate a possible trade deficit of $5«U billion, while a combination of the "low" import projection and the export goal would indicate a possible surplus of $8.8 billion. The U.S. Trade Picture, Projected for 1973, Based on: Estimates of U.S. Manufacturers Estimates of Commodity Specialists $ BILLIONS) 1973 TRADE BALANCE -1.8 i 1 PORTS ^^*^ ~ IMPORTS 1 S BILLIONS) - 1973 TRADE BALANCE -1.2 EXPORTS^ ^^*^^ "^^^ ^IMPORTS 1 1 Estimates of Country Analysts A $50 Billion Export Goal $ BILLIONS) 1973 TRADE BALANCE + 1.2 1 1 1 PORTS ^-<^ ^>-"" IMPORT 1 % BILLIONS) - 1973 TRADE BALANCE +5.2 E I r **» ' ^ yj/f ...** <^v — yv ,'X/ syZs /Sjr / *.+* ^^ &&*'^ i i i 1 1 y /\. / y s X -27- to produce for the U.S. market, as in the case of TV picture tubes and clothing. Precise data are not available to develop this observation fully. An appraisal of the outlook for the next five years should not dismiss the possibility that increased prosperity may be a factor in increasing the ratio of imports to domestic production. The accompanying chart "Imports, Real GNP, and Prices — a Comparison of Rates of Change" shows a correlation wherein gains in real GNP are accompanied by a still larger growth in imports, especially in non-food consumer goods. The analysis made for this study was too limited to warrant firm conclusions, but suggests that healthy growth in the domestic economy may be reflected in still stronger growth in imports, even if price increases are held to a low rate. If the ratio of imports to GNP is higher in the future than was customary when the United States had substantial trade surpluses, a large surplus can be achieved only by raising also the ratio of exports to GNP. Effect of inflation on export competitiveness An analysis of the effect of domestic price increases on exports to date yielded mixed results. Aggregate U.S. exports continue to maintain a strong growth rate — 9,9% in 1968. The growth is responsive to a current high import demand in most world markets, several of which experienced mild recessions in 1 67„ This high growth is being maintained, in part, by a very large increase in the exports of civilian aircraft and the continued large exports of auto parts to Canada. Increases which have occurred in U„S. export prices would probably have had a more serious effect on U S. exports except for the fact that in most industrial countries, other than Germany, Italy and Japan, export prices have risen comparably. The adverse changes in relation to export prices in Germany and Italy are doubtless a significant factor in the near static level of U.S. exports to those countries, although a German recession in 1967 and an earlier Italian recession are also important factors. Conversely, the steady level of export prices in those countries helps to explain their large increases in exports to the United States. Some analysts believe that relatively full employment in most countries of Western Europe, Japan and Canada will cause their export prices in the next few years to increase relative to U.S. export prices. Despite the mixed picture, it seems possible to conclude on balance that some U.S. exports have doubtless been injured by U.S. price rises, that in some other cases the domestic price rise may not yet have been reflected in export prices, and that in any event continued inflation would seriously erode the competitiveness of U.S. exports. Kennedy Round tariff cuts In due course, tariff reductions agreed to in the recent Kennedy Round may be expected to result in an increase in U.S. imports and improved opportunities for exports. However, since the reduction will not become fully effective until 1972 the effect of the Kennedy Round during the next five years probably will not be large. Of the 1^8 U.S. manufacturers interviewed for this study, less than one- third anticipated an increase in their exports in this time period specifically as a result of the Kennedy Round. Only 2% ranked the Kennedy Round as of first importance and 9% as of second or third importance in their export expectations. Most respondent manufac- turers ranked "foreign market growth" as of first importance, which is broad enough to have possibly included the effects of tariff cuts. Non-tariff barriers and similar restraints All nations, including the United States, maintain a variety of measures, other than tariff duties, which protect domestic produc- tion. Those of the United States are generally more widely publi- cized but smaller in their restraint on trade than those of most other nations. The largest impact of non- tariff barriers on U.S. exports is felt in the case of agricultural commodities. Other restraints on U.S. exports which are not usually described as non-tariff barriers include a growing practice of many industrial nations to insist that certain types of U.S. exports, such as civilian aircraft or military equipment, include locally made components as a condition of their purchase. While some progress in reducing non- tariff barriers and similar handicaps to U.S. exports may be made, the outlook does not appear to warrant optimism in the short-term future. The broader production options of multinational corporations Among the l£8 manufacturers interviewed for this study — of which more than 100 fit the description of "multinational" — many indicated that it is easier for them to forecast their total foreign sales than the specific part provided, by their exports from the United States. Export from this country is only one of the options open to them. The options for supplying foreign markets from Euro- pean, or even Japanese sources, have multiplied in recent years with the rapid growth of U.S. manufacturing affiliates abroad. In a competitive situation it is likely that if goods of the same quality can be delivered at lower cost from a foreign plant than from the United States, business will go to the foreign affiliate. In 1965 slightly over hk% of sales by all U.S. manufacturing _ affiliates abroad were made by affiliates located in Europe. More than three-fourths of the sales from these European plants were made locally and only slightly over 1% were export sales to the United States. Most of the other sales were probably to other European countries, especially in the case of plants within the European Common Market. (Exports by U.S. affiliates located within the Com- mon Market accounted for 6% of EEC total exports and U.S. affiliates in the United Kingdom accounted for 1J% of all British exports.) Among major commodity groups, those which appear to give the principal cause for future concern are chemicals, non- electrical machinery and electrical machinery, which collectively account for about one-half of U.S. exports of manufactured goods and a third of all U.S. exports. Aggregate exports of these products to third coun- tries by U.S. manufacturing affiliates in Europe were $1.9 billion in 1965 — a fifth of all U.S. exports by the same industries in that year — and were growing at twice the rate of U.S. exports by these industries. Another side of the picture — a very important one — is that U.S. manufacturing affiliates abroad generate a large market for U.S. exports which might be difficult to obtain in the same magnitude by other means. Exclud in g aircraft and automobile companies, the manu- facturers interviewed for this study projected approximately one-half of their exports to their own affiliates. The magnitude of exports to affiliates by companies in the same sample was about $3.5 billion in 1967 and is projected as about $lj..9 billion in 1973. On balance, it may be concluded that the important asset to U.S. export trade represented by U.S. investment overseas will be significantly diminished if a decline in U.S. competitiveness or continued relative disadvantage in export conditions causes U.S. multinational corporations to turn increasingly to non-U. S. sources of production to meet their foreign market opportunities. The diffusion of industrial technology The large technological lead which the United States holds in many industrial products and "which is a major export strength probably is diminishing. Technology is diffused more rapidly among industrial nations than in any past period of history. A principal agency of transfer is the U.S. -controlled multinational corporation which inevitably transfers at least some of the technology of the parent company to its foreign affiliates. A second major transfer agency is the net- work of licensing agreements which U.S. corporations have with for- eign manufacturers. While some firms also receive new technology through licenses, the net flow is outward. The technological picture is not all one-sided, however. The applied technological lead of Germany and Japan in some industries, which resulted from the almost complete rebuilding of plants in the post-World War II period, may not extend much longer into the future as U.S. firms continue to replace some obsolete plants. -31- Chapter 3 AN EXAMINATION OF 29 MAJOR COUNTRY MARKETS One of the several approaches selected to evaluate the outlook for U.S. exports in 1973 was to examine selected country markets for U.S. exports. Country analysts of the Bureau of International Commerce (BIC) prepared forecasts for the 29 major U.S. export markets, countries that in 1968 took Q%.6% of total U.S. exports to the world. The forecasts were prepared - on the basis of broad assumptions about world conditions in the next five years - by projecting quantifiable factors (e.g., economic growth) and then modify- ing such projections in accordance with the analysts' assessments of other factors which are expected to affect trade. The aggregate forecast and the individual country forecasts should be taken only as general indications rather than as accurate statements of events to come. U.S. Export Estimate, 1973 Relative to actual performance in 1962-68, the outlook for U.S. exports in 1969-73* as predicted by BIC country analysts, is less favorable. The predicted outlook is for an increasing level of exports, but at a slower rate of growth. Total U.S. exports to the entire world in 1973 are forecast at $1+6.0 billion 1/, growing 6.2$ per year from the 1968 figure of $3U.U billion. This expectation results from a predicted slowdown in the rate of growth of world trade and a predicted continu- ation of the deteriorating U.S. share in most of the 29 country markets. Of the two factors, the predicted slowdown in world trade has the greater impact on U.S. exports. Also, it may be the less influenceable, for even though the United States is the world's single most important trading nation, the level of world import growth is largely beyond its control. 1/ See footnote 5 in Table 1 regarding method of deriving overall forecast. CD -P XI to CO w Pi vO O CD CK T3 rH «H O cu o -P no CO cd On PI -P rH o CO C ■e-d ■a! I.s II : ll fA On On On 1A no On On cr\ CO -J" "LAOO NO XA CA1A H H "LA H O rH fA On fA CM 1A -H H O O -P •H H CO CD Sh CO -p cd S O -H 03 gp-s^ 2 ° ^ R cD •H CO %S."fcR ^S.'feS.^'teR.^^. 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Cd T3 +3 — P. -H 0O T3 - -iDti |3 43 Pi n m H S CO -H M CD 3) Industrial machinery (SIC 3h2, 3^2, 35U-356) Business machines (SIC 3S>7) Aircraft and parts (SIC 372) Scientific instruments (SIC 36U, 381 ) Photographic equipment and supplies (SIC 386) The selected commodities produced by these seven industry groups, which produced only 8 percent of the nation's GNP in 1967 in terms of value added, contributed $6.9 billion or 168$ towards achieving the total U.S. trade surplus of $lj..l billion in 1967 and compensated for the trade deficit of $2.8 billion in other commodities. The projected trade surplus from these seven industry groups may reach $9.2 billion by 1973 — far above the most optimistic projection for the total U.S. trade balance. A large part of this performance is due to the rapid growth in world demand for these products which is also reflected in the U.S. import statistics. Imports of products of the seven industry groups are expected to rise more rapidly than in other commodity groups. The import level, however, is much lower and even in 1973 imports for these industries will amount to only about one-third as much as exports . -Ii3- The contributions of these seven industry groups to total 1967 export trade, their projected 1969-73 import and export growth rates, and their estimated 1973 trade surpluses are shown in Table 5. If these projections are confirmed, the chemical industry will generate a trade surplus of more than $2.3 billion by 1973 — over half as large as the total U.S. trade surplus in 1967. Business machines, photographic products, and scientific instruments, which collectively produced only 5>.2 percent of total 1967 exports, are expected to contribute about the same proportion in 1973. End- Use Categories^ / A grouping of the 89 "commodities" surveyed by BDSA according to end-use categories provides additional insight into probable future U.S. foreign trade patterns (Table 6). Exports of capital goods, which have shown good performance in recent years, are expected to continue as the mainstay of the U.S. exports. Despite a more rapid increase in imports than exports, the present large trade balance for capital goods is projected as increasing and off- setting unfavorable developments in other commodity areas. For consumer goods (other than food and automobiles), rising imports are expected to outweigh the modest increase in exports; the trade deficit for this category may nearly double during the 1969- 73 period. The commodities included in the BDSA sample, however, comprised only 61j. percent of the total exports of consumer goods and U3 percent of imports in 196^-67. It was impractical to substan- tially increase this coverage since this would have required making a large number of projections of relatively small heterogeneous categories. Automotive products showed a trade deficit in 1968 but a turn- about is expected and a surplus is forecast for 1973. This forecast assumes that Detroit's small car program will be implemented rapidly and be fairly successful in the U.S. market,, 17 A number of charts showing U.S. trade for certain commodities are included in this chapter as indicating some recent trends. The commodity classifications used in the charts, covering the period 1962-67, do not conform to those of end-use categories which were used in BDSA's survey of 89 commodity groups; a "commodity" in the chart series, for example, may fall into two or more end-use categories. -hk- U.S. trade in capital equipment; selected items, 1962-1967 MILLIONS OF DOLLARS ELECTRIC POWER MACHINERY AND SWITCHGEAR : m \ MILLIONS OF DOLLARS ELECTRICAL MEASURING AND CONTROLLING INSTRUMENTS MILLIONS OF DOLLARS MILLIONS OF DOLLARS MILLIONS OF DOLLARS MILLIONS OF DOLLARS -1*5- U.S. trade in industrial materials; selected items, 19621967 MILLIONS OF DOLLARS MILLIONS OF DOLLARS IRON AND STEEL MILL PRODUCTS /* # / # + ~' PAPER AND MANUFACTURES 64 65 67 1962 64 65 66 67 MILLIONS OF DOLLARS MILLIONS OF DOLLARS bOO FABRICS, YARNS AND S** %, *+ MAN-MADE FIBERS* ^f ^ % M)l) + ,> 400 S 300 - 200 - inn 1 1 1 1 1 15 62 63 64 65 66 67 500 400 RUBBER MANUFACTURES 300 200 " 100 .~ — 19 1 1 62 63 64 1 65 1 66 1 6 "Includes some consume) goods -U6- U.S. trade in consumer goods; selected items, 1962-1967 MILLIONS OF DOLLARS 1962 63 64 65 66 67 jgg2 63 -U7- U.S. trade in automotive products; selected items, 1962-1967 MILLIONS OF DOLLARS i 1 1 PERCENT WITH CANADA 1 iUO _ - 1967 - 1 i i 69 i i t 48 i i 400 I i I i EXP. IMP. # i NEW AUTOMOBILE S £ 200 1 f B IMPORTS # \f OOfl f # t I I 1 / soo / / s / 1 / X Mil) - *■ + + / • • • • ^^ + 400 ^^ EXPORTS : — —^ 200 i i 1 1 MILLIONS OF DOLLARS -U8- The BDSA projections indicate that the U.S. trade deficit in the category "industrial supplies and materials" will remain rela- tively constant during 1969-73. Rising exports of chemical products are expected to be offset by increasing U.S. raw materials imports from abroad. The recent trade patterns for some items in this cate- gory are shown in the charts on page k9- The basic conclusion of a trade deficit for this group is based, however, on very limited coverage of this large end-use category. The commodities evaluated in this category by BDSA, plus those included in the projections by the Department of Agriculture and Interior, comprised only 6l per- cent of total U.S. exports and the commodities evaluated by BDSA amounted to only hi percent of total U.S. imports in this category. (Agriculture and Interior did not make import projections.) A major deficiency in the coverage was the lack of import projections for petroleum products and nonferrous ores which comprised about 23 percent of total imports of industrial supplies and materials in 1967. BDSA made projections for iron ore and concentrates and fer- rous and nonferrous scrap to improve the coverage of the metals areas . The Role of Technology in U.S. Exports A large part of the present U.S. commodity trade surplus is derived from technologically advanced products. If the nation's competitive advantage in these products should deteriorate sub- stantially, the United States would be in serious trouble in main- taining good export growth. To provide insight about future exports in relation to technology, the commodity groups covered by the BDSA projections were grouped according to level of technology into: (l) science industry products, (2) basic materials and supplies, and (3) other manufactured products. A "science industry" for this purpose was defined as one which supported research and development expenditures in 1966 in excess of h% of sales. An analysis from this standpoint suggests that the growth of U.S. exports and future trade surpluses will continue to be highly dependent upon aerospace, data processing, chemicals, instruments and other "science industry" products. Exports of this category are expected to increase by more than $2 billion between 1969 and 1973 and the trade balance in these products may exceed $6 billion by 1973 (Table 7). The projected rate of export increase for science industry products, however, is only 6 percent — about the same as for the larger "other manufactured products" category. This relatively -h9- low 1969-73 expansion rate is due to aerospace products which com- prise about a fourth of the exports in this category. Analysis of jet transport and other aircraft delivery schedules indicate that exports of aerospace products may reach a very high level in 1969* about double the 196^-67 average of $1.2£ billion, peak in 1971, and decline moderately thereafter. The stimulation from SST deliveries will not be felt until after 1973 when aerospace exports would be expected to resume their upward trend. The favorable trend in the trade balance for science industry products is due to increased exports and a low level of imports. The American market requires the most sophisticated products and U.S. firms serving this market are generally the international leaders in these products. But these science industry firms are also the leading U.S. international companies which increasingly are supplying overseas markets from their foreign subsidiaries or affiliates. This is another reason for the low projected increase in exports. Technology is rapidly diffused among advanced countries. European and Japanese manufacturers are penetrating the American market even in the most advanced product areas where we have been exporting technology. The more rapid rate of increase of imports than exports implies a larger problem in future years. Some of these imports will come from foreign subsidiaries or affiliates of U.S. firms. The U.S. trade deficit in "materials and supplies" which includes textile fabrics and yarns, petroleum, ores, and other basic materials, is expected to continue to grow. Due to the lack of some minerals and insufficient supplies of others, the United States must depend upon imports for many basic materials. Rising exports of machinery and other capital goods are expected to sustain a positive trade balance in the large "other manufactured products" category, but the level will gradually decline. Technology will continue to be a major factor favoring increased capital goods exports. Research and development expenditures as a percent of sales are as high in industrial machinery manufacturing as in the chemical industry group, but most of this effort is concentrated in development engineering in contrast to pure or applied research. -50- Relative Competitiveness The BDSA analysts were requested, in connection with making their trade projections, to classify each of the 89 commodity groups into one of three "relative competitiveness" categories: 1. Commodities whose competitive position seems likely to be maintained or improved. 2. Those whose competitive position has been deteriorating but can probably be improved through corrective measures. 3. Those whose competitive position seems likely to .continue to deteriorate irrespective of corrective measures within the range of practicality. The summary results of this evaluation are shown in Table 8. Since the evaluations were subjective, considerable variance occurred, especially in applying ratings to borderline cases. Only 20 commodity groups, comprising about 10$ of the 1967 value of exports of all commodities evaluated, were rated in the third category. On the other hand, the 44 "successful commodities" of the first category contributed about %% of the total value of 1967 exports included in the BDSA sample. Each of the three competitiveness groups shows a fairly wide variation in the types of commodities included. Commodities from every end-use category or level of technology are represented in each group. As might be expected, the 44 "successful commodities" are predominantly capital goods but some consumer products (for example, medicinals and pharmaceuticals and photographic supplies) and some basic materials (for example, condensation plastics and certain kinds of paper) are also included. The second group also includes capital goods, although basic commodities and consumer goods comprise 11 of the 25 commodity groups so classified. Rising imports appear to be the major problem in the rapidly deteriorating trade balance for the third group as a whole. The pro- jected 13$ average annual increase in imports for this group, which is more than double the projected rate for the other two, -51- -52- indicates that foreign competitors are expected to continue to gain an increasing share of world markets, including the large U.S. market, unless corrective measures are taken soon to improve the competitiveness of these products. The average annual import growth rate for this group as a whole - which includes such commodities as organic chemicals, construction and mining equip- ment and textile machinery - was k&% in 1965-67, as shown in Table 9. Statistics on most of the commodity groups in the third category indicate a continuing deterioration in their present U.S. trade deficit. The projected rate of increase of both imports and exports for this group is far below historical averages which implies that our trade deficit in these products may grow more slowly in future years. Comparisons between 1969-73 and historical growth rates demonstrate the volatility of foreign commodity trade. The many and sharp changes in growth rates and rankings indicate that there is plenty of "room at the top" and that success during a past period does not insure continuing performance. All 89 commodity groups surveyed by BDSA were ranked in order of their projected 1969-73 annual rate of increase in exports and imports. Basis for Projections of Total U.S. Commodity Trade in 1973 The BDSA projections for 89 commodity groups can only be eval- uated when related to total U.S. commodity trade during the next 5 years. A relatively crude technique was used to derive overall estimates of total trade, as expected in 1973- (See Table 9 which is included to show how the estimates were derived.) Data were also inadequate. The commodity projections, including those provided by the Departments of Agriculture, Interior and Defense, were aggregated by broad end-use categories, and theses figures were then adjusted in accordance with the 1965-67 coverages ratios to provide total end-use category estimates. Since individual estimates were not made for imports included in the categories "food, feed, and beverages" or "other", the 1973 levels were stipulated for these based on a continuation of 1965-67 rates of growth. -53- Chapter k - Tables ^ o~. XI o^ 3 o u VD CD \ LO VO On 3 c c oo O OHina con P O TJ UIHCNNH 0\0 in (^ o <*i co n O o co h in h in a\ s c H M^ tN CN f^ 00 in cn cn co r-~ -d - ^> c}- m co m in o cd +J i-H CO IT! CN rH |cO H JPICN^ vD CN CO 3 T3 ii iii i cfl O ■faO^ W- -to- o I CO Ci" J" CO r in m in J- oo > > in o m o o i n o ^ in ^o i n co d- co co Cu CO 6 O TD O O 0) rH Q 0) O J -u ;_> O ■u -> t-i i_> uj m u O TJ CX P C x: H O C cd 3 o -P fe HU :>- i/) (1) o M CH u (1) rl •H !h i > PM H UJ d -d en p ■a o ,o x m< In O O 0) ft, O P"h Eh Eh ?■ •H (1) P o (1) d (1) Ih S X3 P cl ?H h 1 C) p g major country markets. The average of these forecasts totaled $171 billion — almost identical to the $173 billion prognostication made by BIC country analysts for the same countries in the recent projections carried out as part of this study -67- Among the four major country markets commented on separately, Canada stands out as the country to -which the largest number of manufacturers believe their exports will increase. It should be noted that in addition, one-fourth of the companies treat Canada as part of the domestic U.S. market and were therefore unable to pro- vide any data regarding Canada,, Following Canada, in order of expected prospects, are: Japan, Germany, and the United Kingdom. Less than half of the firms indicated that they expected increases in their exports to the United Kingdom in the next five years. A great many firms said that their total sales to a particular country market (i.e., the production of local affiliates, produc- tion of affiliates in third countries, and exports from the United * States) are expected to rise more rapidly than their exports from the United States. The largest differences in terms of numbers of firms predicting higher overall sales growth relative to the growth of their exports from the United States occurred in the case of the United Kingdom, Germany, and Canada (in that order). These are, of course, key markets but ones in which alternatives exist to exporting from the United States. Exports and Overseas Investment Many of the manufacturers surveyed believe that the techno- logical advantage enjoyed by U.S. producers relative to competitors in third-country markets is diminishing, while at the same time the labor cost differential is being maintained,, This is leading to a diminishing competitive advantage on the part of many companies and is causing some U.S. products to be dropped out of export trade. The companies surveyed are generally meeting increasing foreign competition in two ways: (1) by expanding their export product lines and applying more technology and product sophistica- tion; and (2) by establishing manufacturing facilities overseas to take advantage of reduced labor costs and other advantages. In many cases, these companies are now manufacturing their simpler, more standard product lines in their foreign manufacturing affili- ates and shipping their more sophisticated, technical product lines from plants in the United States . With the exception of the automobile and aircraft industries, the manufacturers surveyed ship a little less than half of their total exports to overseas affiliates. Exports to affiliates are expected to increase at a fractionally more rapid pace than to non- affiliates in the coming five years. Exports to overseas affiliates are expected to account for an increasing proportion of U.S. exports for those firms in the chemical and non-electrical machinery cate- gories, but a decreasing proportion in the case of the firms manu- facturing electrical machinery. Most of the companies surveyed indicated that the continued expansion of their overseas affiliates is necessary in order to increase their export volume. In this vein, slightly over half of the companies stated that the continuation of the present foreign direct investment restrictions, administered by Commerce's Office of Foreign Direct Investments, act as a restraint on their exports. They predicted, however, that should the foreign direct investment regulations be removed, their 1973 exports would be only $23U million higher than forecast; this seems surprisingly small in view of the importance given to the removal of these restrictions in the ques- tionnaire responses. The Determining Factors In addition to quantitative forecasts, the survey sought the companies' views as to the major factors both aiding and hindering export growth. The survey questionnaire included a list of factors generally considered important, which the companies were asked to rank. A number of additional factors were added by the respondents. The major results of this part of the survey are summarized in Table 11. The manufacturers included in the survey consider the expecta- tion of continued growth in markets abroad as the most important factor underlying potential U.S. export increases in the next five years. The introduction of new, technologically-advanced products in export lines was ranked second in importance and new planned investments abroad third. More vigorous company export promotion and tariff reductions stemming from the Kennedy Round were also seen as important positive factors to export growth in the years ahead. The smaller companies viewed the positive factors in essen- tially the same light as the larger firms, but the smaller companies rated Kennedy Round tariff reductions and company export promotion efforts of greater significance to their exports than did the large companies — possibly due to the fact that the smaller companies sell less to overseas affiliates and proportionally more to non- affiliated customers. -69- Table 11 - Major Forces Favoring and Hindering Based on Manufacturers Survey Percent of l£8 Firms Mentioning Factor^/ o Factors favoring exports 1. Foreign market growth 81.0 2« Introduction of new products 76.6 3. Planned new direct in- vestments abroad . . . <> . 57.0 h» More vigorous export promotion by firm ...... 50.6 5. Kennedy Round tariff CUtS ...0.0 31o6 . Factors hindering export s— ' 1. Increased third-country competition <■ . 62.0 2. Limitations imposed by the foreign direct investment program!/ o «... 56.3 3. Economic nationalism abroad 53.2 U. Nontariff barriers 52.5 5. Increasing U.S. costs . . . «, „ 5l°3 6. Increased local compe- tition o . U9oi| 7o Tariff barriers 1+8.7 80 Planned new direct in- vestment abroad . „ 25.3 9o Attractiveness of U.S. market o e ........ l5°2 10. Market stagnation or political unrest . „ . . c . ll|.6 U.S. Exports, Percent Ranking Factor 1st 2nd 3rd 1+th 30.1+ 25.3 16.5 6.3 29d 17.1 13.9 8 2 ll.lt 18.1+ 12 o 5.1 13.9 12.7 10.8 6.3 1.9 3.2 5o7 IO08 8.9 17 ol 12.0 8.2 15.2 8.2 8.2 12.0 9.5 19.0 12.7 13.3 7.0 8.9 7.0 12.0 5.7 7.6 2.5 7.6 7.6 12.0 7.0 8.2 10.8 k.h 10.1 3.8 3.2 3.8 3,8 0.6 1.3 1.3 1.3 1.3 1.3 2.5 1.3 1/ The four columns showing the ranking do not add up to first column figures because firms that ranked lower than fourth or did not rank an item are not includedo 2/ Other factors not included in this table but mentioned by a rela- tively small proportion of the firms were: U.S. tax policy, inade- quate U.So Government financing, U.S. export controls, reduction in AID spending, and U.S. protectionism. None of these items had been listed in the questionnaire form. 3/ Although the questionnaire form did not list this as an item, the respondents — most of whom have overseas affiliates — gave it a high ranko -70- Of the factors seen as impeding growth for U.S. exports, the manufacturers consider third-country competition (especially from Western European and Japanese firms) as the most important. In effect, the companies thus foresee continuing pressure on the U.S share of foreign markets Increased competition from domestic competitors within individual markets is listed as being of lesser importance . In considering third-country competition, emphasis was placed on the support that European exporters receive from their Governments — especially export subsidies, better credit terms, and tax incentives <, These factors — in the eyes of the respon- dents — will make competition for U.S. exporters especially severe in the 1969-73 period. More than half of the companies surveyed mentioned that present U.S. Government regulations limiting investment outflows inhibit exports and indicated that their exports would increase in the absence of such restraints. One-quarter of the companies, however, stated that their planned investments overseas would reduce their exports from the United States. Economic nationalism abroad, non-tariff trade barriers, and tariff barriers were all listed as important negative factors, with non-tariff trade barriers considered particularly important in ex- porting to Japan and to Latin American countries. The increasing level of U.S. costs was also listed as an important negative factor, but it was mentioned less frequently than the above factors. Government Action to Increase Exports The survey requested the views of the companies regarding measures the U.S. Government should take to increase exports over the coming five years. The companies' views are presented in Table 12. Tax incentives stand out as the most frequent suggestion for government action Q To be effective, the companies stipulated, tax incentives should: (1) be simple, (2) have an immediate effect, and (3) lead to significant increases in after-tax profits. Next to tax incentives, the respondent firms indicated that the most helpful action the Government could take would be to improve export financing. The most frequent proposal mentioned in the inter- views was the need to improve the workings of the present system — for example, to reduce "the red tape", the delays, and uncertainties of coverage in their dealings with the Export-Import Bank and the Foreign Credit Insurance Association (FCIA). The manufacturers see \OOOMD"Lf\COONVOOI^CM • • ncNw^ownisvo ravo oo i CMvO nj-OHCOIAOOvOCO CD ^H CD •fij G o CO CO fl5 3 t3 P> -p -P ^ ^ !h CO tj H Xi •h ° a -P -H P H w o TO P 15 g Ph O CO H Is] 8 •H -H CH t3 p> •H -P 5 a) •H1A fe» co p -p xi a) 'B8 • a t - -P o I O CH MP Sh CD «H «H CTJ t> n3 O p> •H CD •+- fl O ^ CD r^ S-P SS^ I 0) CD CD . -P p> !=> CD 03 cti ft tuo tuOT* H •H O CD SB 1 d co • H CD CD P W) O -72- the administration of* the present programs as seriously affecting their exports and maintain that Western European countries and Japan have better programs than the United States o Third in importance, the companies stated,, would be an acceler- ated Government program to reduce or eliminate non -tariff trade barriers overseas. This is considered especially important by manufacturers of electrical equipment but was common to all industry categories. The TVA (tax on value added) system of the EEC countries (sometimes classi- fied as a non-tariff trade barrier) is considered particularly onerous. Import quotas and licensing systems — especially in the developing countries — also rank high as a trade deterrent. After action to reduce non-tariff trade barriers, the most frequent action suggested was the mounting of a further effort to re- duce tariffs. This action was seen in a more important light by the smaller companies. Steps to reduce U.S. inflationary pressures and to reduce shipping costs were rated next in importance, followed by elimination of the present regulations limiting foreign direct investment. Improvement of U.S„ Government promotion programs, including the provision of better foreign information, increased trade promotion activities, improved assistance from U.S. embassies, and improvements in distributor-finding programs, were cited as steps the Government should take to increase exports. Smaller manufacturers in particular found the need for increased export promotion facilities. -73- Chapter 6 RECOMMENDATIONS As indicated in the findings, the prudent course for improving the U.S. trade balance is for the United States to assume that some of the more important factors limiting exports and encouraging im- ports may not be self -correcting within any reasonably short time span Positive measures are needed to induce business through the profit motive to divert a larger share of domestic production to export. Restoration of a strong U.S. trade surplus will require a wide range of actions „ Some important areas, however, were considered beyond the scope of this study and therefore specific recommenda- tions concerning them were not included. Moderating U.S. inflation- ary pressures, for example, is a basic prerequisite for improving the trade balance, but particular measures of restraint must be formulated with due regard for overriding domestic objectives. Achievement of a better relationship among the currencies of major trading nations would obviously also be helpful, but this requires actions by both the United States and foreign governments involving important non- trade considerations. Recommendations to influence the level of U.S. imports other than by measures aimed at increasing competitiveness are not sug- gested at this time. Two distinct problems are posed regarding im- port policy — the general problem of inflation and its impact on imports and the special problems related to particular industries, e c g., textiles and steel. Import policy must take into account both conditions. Regarding particular industry situations, there is no substitute for detailed economic study of the causes of fail- ing competitiveness and possible remedies, taking into account ex- isting law (the "escape clause", trade adjustment assistance, the national security provision, laws dealing with dumping, subsidized exports to this market and other forms of unfair competition) and possible modifications of existing law The measures recommended in this study focus on improving UoS. export performance o They involve both actions that the United States Government can take unilaterally and those that require cooperation by other countries. Greatest reliance is placed on those measures that the United States can pursue at home and there- fore they are assigned highest priority,, Inasmuch as actions that -7U- the United States can take unilaterally are likely to be insufficient, the proposed international actions should also be pursued — with vigor, patience and persistence. Measures to strengthen the nego- tiating ability of the United States to achieve its international trade objectives are included among the proposals „ Among the measures the United States can implement alone, those relating to creation of export tax incentives and improvements in UoS. export financing are expected to have the greatest positive impact on UoS. export growth. They, therefore, deserve the most immediate attention. This assessment also reflects the weight given them by businessmen, e.g., the National Export Expansion Council and the manufacturers who provided estimates for one of the projections used in this study. Several assumptions were made in formulating the recommenda- tions. If these assumptions should prove wide of the mark, the adequacy of what is proposed would be diminished. The assumptions were that: lo The current rate of domestic price inflation will be moderated and that this will check the excessive rate of import growth and will safeguard the general price competitiveness of UoS. products in world markets -, 2. The declining trend of U.S productivity will be reversed; 3o The international monetary system will provide sufficient liquidity and stability for major growth in international trade and investment and will become a more effective instrument for accom- plishing balance of payments adjustments when conditions of dis- equilibrium develop; and k* There will be no major interruption in the growth of prin- cipal U.S. markets abroad or significant interference with access of U.So goods in these markets. Actions the United States Should Take Unilaterally lo PROVIDE U.S. PRODUCERS ECONOMIC INCENTIVES TO EXPORT 1.1 Tax incentives, consistent with GATT rules and as beneficial as provided to U.S. competitors, should be enacted as early as possible — to jjnprove the profitability of exporting „ -75- Some major countries tax export income more favorably than in- come from other sources; the United States does not. These tax advantages take the forms of lower effective tax rates on export earnings and of export tax rebates that may overcompensate for the indirect tax burden borne by domestic producers. U.S. businessmen have urged the Government to treat U.S. ex- porters no less favorably than other countries treat their exporters. Many of the l£8 U.S. firms that participated in the export survey conducted by Business International strongly favored the creation of export tax incentives to spur U.S. exports. The National Export Expansion Council (NEEC) has offered a number of proposals for such - incentives; the two described below should be given immediate atten- tion. The first is a proposal to liberalize provisions of the Internal Revenue Code (sections 970-72) dealing with the deferment of U.S. tax on income earned by Export Trade Corporations. The change would increase the base on which deferment could be claimed. The other proposal would give taxpayers an extra deduction — in addition to the full deduction now allowed — for increases in certain export promotion expenses in excess of the average of these expenses dur- ing the prior two-year period. This device is designed to stimu- late entry into foreign markets particularly by smaller firms „ Legislative proposals on these two measures have already been formu- lated by Commerce for Executive Branch consideration for 1969 legis- lative action. lo2 A formal study should be made of the merits of a value-added or other broad base indirect tax for the United States . There are many arguments for and against U.S. adoption of a tax on value added (TVA) or some other form of border adjustable indirect tax, but the facts and analyses are not available on which to deter- mine the desirability of such a system for this country. The Treasury Department should be requested to study the various possible alterna- tive indirect tax schemes, with particular attention to those that would have a significantly favorable effect on the trade account. These studies should include substitution of the TVA for a portion of the corporate income tax, institution of an optional form of tax payment by business based in part on the TVA or equivalent and in part on income tax, and substitution of a manufacturer's excise tax for some part of corporate income tax -76- 1.3 An increase in the U.S. investment tax credit to stimulate industrial modernization and greater U.S. competitiveness should be considered . Increasing the investment tax credit from 7 to perhaps II4. percent either for trade- sensitive industries or for all industries would pro- vide a powerful added incentive to modernize manufacturing plants and could significantly increase U.S. competitiveness in international trade both on the import and export sides. Such a step., however, would have to be carefully weighed against the loss of U.S. tax revenue and other economic considerations, and might be put forward when tax reduction becomes possible. If, however, the U.S. trade balance continues to worsen, the proposal should be given urgent con- sideration. 2. ASSURE U.S. EXPORTERS AN ADEQUATE SUPPLY OF EXPORT CREDIT TO FINANCE A GROWING VOLUME OF TRADE 2.1 An automatic rediscount facility for export paper should be pro- vided and potential budgetary constraints on export credits should be eliminated in order to expand the volume of private financing available for export Masiness . United States exporters' requirements for export financing are expected to grow faster than the availability of loanable funds from both private and official sources. In addition, the Export-Import Bank (Eximbank) may be increasingly hampered by restrictions on export credits due to budgetary considerations. Also, limitations on commercial export financing arising from the Federal Reserve Board's Voluntary Credit Restraint Program may intensify as U.S. export markets grow. To provide an adequate flow of credit to finance our expanding exports, these restraints should be modified or eliminated as soon as possible. In addition, the U.S. Government should establish an auto- matic rediscount facility for export credits, preferably within the Federal Reserve System. This major change would not only assist in increasing the available funds for exporting but would also encourage greater reliance on private financial sources. 2.2 Adequate financing should be assured for U.S. exports of jet aircraft and other costly items of capital equipment . One of the major problems the U.S. export financing system increasingly faces is adapting to the growing need for financing so- called "big-ticket" transactions. A new organization may be re- quired to deal with this problem one that could mobilize long- term private funds and remove large export transactions from present -77- U.S. budgetary constraints. It might take the form of an Eximbank affiliate or a -wholly private institution. In addition, the Exim- bank should provide export credit guarantees -with longer maturities when necessary to meet foreign competition. 2.3 Procedures and criteria for granting export credit guarantees and insurance should be strengthened and simplified, and new coverage should be added . The Eximbank and the affiliated Foreign Credit Insurance Asso- ciation operate complementary and somewhat overlapping facilities for insuring medium- term export transactions. The two organizations should be encouraged to coordinate their services more effectively To this end, consideration should be given to a merger of the two. In addition, the opening of well-staffed field offices in major commercial cities would allow the new combined and strengthened organization to operate more effectively than at pre sent „ New types of coverage in the export credit guarantee and insurance pro- grams, such as some coverage for local cost financing, should be added in response to the needs of the business community. 3o ENLARGE AND IMPROVE THE EFFECTIVENESS OF GOVERNMENT EXPORT EXPANSION PROGRAMS, IN COOPERATION WITH INDUSTRY AND ON A FIVE-YEAR BASIS 3.1 The new 5-year, systematic Government export promotion program should be further developed and pressed forward vigorously . President Johnson in his January 1, 1968, Balance of Payments Message stated that a substantially larger export expansion program was needed and asked Congress "to support an intensified five-year, $200 million Commerce Department program to promote the sale of American goods overseas "„ Full implementation of such an expanded program will bring the U.S. Government's export expansion efforts more in line with those of governments of competing nations, will provide the additional resources needed to exploit the increased opportunities generated by the lowering of tariffs in the Kennedy Round negotiations, and will serve to facilitate long-range govern- ment and industry export planning. The enlarged export effort provides for both the strengthening of the Commerce Department's basic promotional programs — such as overseas trade fairs and trade centers, trade missions, America Weeks, -78- sample displays, and overseas market research and other commercial information services and the introduction of new programs. The significant characteristic of the new programs is that they constitute a planned system of long-range export promotion. This involves setting overall U.S. export targets in relation to the potential size of the world market and the probable strength of the competition. Enlisting the cooperation of private enterprise and other government agencies, the Department of Commerce will: (a) identify and analyze the factors likely to affect U.S. international trade for the next five years; (b) develop export goals or targets for certain industries or categories of goods; (c) develop measures that the U.S. Government can take to make exporting more attractive; (d) monitor U.S. export performance to help assure that the export potentials are realized with the assistance of appropriate govern- ment policies and incentives; and (e) conduct a continuing dialogue with business, at both the national and local levels, to assure mutual understanding and resource allocations by business and Govern- ment to sustain the long-range export effort necessary to increase the export/GNP ratio from an average I4..O to h»3%* An "export market identification" program that spots specific markets for specific U.S. products overseas is in the initial stage of development. This program will use automatic data processing tech- niques in collecting and analyzing foreign market data and in finding U.S. firms capable of taking advantage of the opportunities so identi- fied. The U.S. business community is being encouraged to become an active partner in this project. The new Joint Export Association program announced January 1, 1968, provides for joint Government/industry projects in which the Depart- ment of Commerce contracts with business for the planned new develop- ment of specific export markets over a sustained period. Commerce financial assistance consists prijnarily of cost-sharing of the market development work. The ability of the Government to honor its commitment to industry to initiate and sustain a systematic long-range export effort will depend on continued budget support by the Executive Branch and the Congress adequate to meet the task. This should include resources for expanded support by the Commerce Field Offices and the Regional Export Expansion Councils. Strengthening of the Department's field organizations, where a large number of the day-to-day contacts with business inevitably occur, is essential for a program that is truly national in scope. -79- 3.2 The availability and adequacy of trade figures and related statistical information should be improved . An essential tool in appraising overseas sales prospects for U.S. goods is detailed, up-to-date statistical data on the size and character of overseas markets, on the extent and origin of competi- tion abroad, and on U.S. trade, production, and prices. Several serious problems affect the availability and adequacy of statistical data. In some cases, statistics have been collected but funds are insufficient for regular assembly, analysis, and issuance. In other cases, data are not published on a timely basis. And in still others, the data are simply not available. More data are needed to measure U.S. price competitiveness, the value of purely "commercial" exports in the U.S. trade balance, the true value of our imports on a cost-insurance-freight basis, and the value of U.S. trade moving between U.S. firms and their subsidiaries abroad. The last-mentioned is particularly important for analyzing the impact of the Canada-U.S. Automotive Agreement on the U.S. trade balance. Funds are urgently needed to exploit available resources more effectively, improve current statistics, and develop new data. 3.3 U.S. Foreign Service support of Government export expansion activities abroad should be strengthened . While the number of positions authorized in Commerce appropria- tions for International Activities has more than doubled since fiscal year 1961, the number of Foreign Service Officers and related staff assigned to economic and commercial work the basic support for U.S. trade activities abroad has actually declined during the same period. Commerce appropriations have had to include funds for more than £0 overseas positions, mainly to staff expanding overseas exhibitions not provided for in the State Department budget. Unless ways are found for overseas support to keep pace with expanded business and Government -sponsored export activities, it will be increasingly difficult to meet the country's export expansion objectives. U. ENCOURAGE LOWER EXPORT DISTRIBUTION COSTS — PARTICULARLY TRANSFORATION AND DOCUMENTATION COSTS Efforts to lower the costs of export distribution are needed in a variety of fields. Three fields, deserving immediate attention, are: Containerization, export documentation, and freight rates. U.l Legislation should, be sought promptly to permit changes that would encourage increased use of containers in intermodal shipments . Existing laws, rules and practices are inhibiting the use of containers. The "Trade Simplification Act of 1968", which was intro- duced in the 90th Congress but not enacted, would have promoted their use. It would have: (a) facilitated the quotation of a single through rate to an exporter planning to use more than one mode of transportation, (b) provided for the use of a single through bill of lading from origin to destination, and (c) encouraged one of the carriers in a through movement to assume full responsibility for loss or damage of the merchandise along the entire route. This legisla- tion is needed to foster lower operating costs for exporters and lower prices for U.S. export goods. The Executive Branch should support reintroduction and enactment of similar legislation in the 91st Congress. U.2 A thorough study should be made of the economics of current international dimensional standards for containers . The dimensional standards for containers set by the International Organization for Standardization (ISO) have not been universally adopted. There is growing belief that they were accepted prematurely and do not provide for the best dimensions from the standpoint of container economics. A study, to be undertaken by the Department of Commerce, should be focused on determining if and how the ISO standards should be revised, so as to encourage efficient utilization of containers in domestic and international trade. I4..3 The U.S. Government should continue to support the development of a comprehensive, international container convention that would establish an acceptable system of regulating container movements . The U.S. Government should play an active role in the develop- ment of an international convention that would encourage adoption of uniform and liberal rules governing the movement of containers domestically and in international trade. Such a convention would remove existing international impediments to container traffic. k.h Export documentation requirements should be further simplified . The high cost of export documentation adversely affects the competitiveness of U.S. products and their fast delivery abroad. Enactment by Congress of legislation explicitly authorizing through bills of lading would be a major step forward in the simplification of documentation. Other steps should include investigation by -81- Commerce as to the ways of easing the impact of the requirement for Shippers Export Declarations. Additionally, AID should undertake further efforts to simplify its procedures regarding the shipment of goods under the foreign economic aid program. k.5 The rate-setting systems for all modes of shipment should be formally re-examined to assure that they adequately reflect the needs of U.S. exporters . Continued progress in facilitating intermodal shipments and in eliminating freight rates disparities, both domestic and international, that discriminate against U.S. exports require a thorough re-examina- tion of the effects of the steamship conference system as well as * the effects of rail and road rate-making on U.S. export trade. In addition, the possibilities of rationalizing freight rates on ship- ments on the basis of costs should be examined. The processes of freight rate -making are so complex and far-reaching, that a suit- able study would require careful planning, execution, and evalua- tion. A study of this kind should be started in the Executive Branch at an early date. 5. U.S. PARTICIPATION IN INTERNATIONAL STANDARDS-MAKING SHOULD BE BROADENED AND STRENGTHENED TO COVER ADEQUATELY ALL PRODUCT GROUPS IN WHICH THE UNITED STATES HAS AN EXPORT INTEREST: EFFORTS TO IMPROVE INTERNATIONAL PATENT AND TRADEMARK PROTEC- TION SHOULD BE INTENSIFIED £.1 The U.S. Government should develop proposals on the specific steps U.S. industry and Government should take to effect greater participation in the work of international standards organizations; such steps should include efforts to obtain Congressional support for an expanded program in this field . International adoption of product or engineering standards in- compatible with those followed in the United States can adversely affect U.S. export ability by impeding entry of U.S. products in foreign markets. Incompatibility between an international standard and a domestic standard is unlikely to develop, if the United States actively participates in the international standards -setting process. The United States has failed so far to commit sufficient finan- cial and technical resources to assure adequate representation of U.S. export interests in this process. The United States is not represented on many of the technical committees of the International Organization for Standardization and holds only a handful of the secretariats that importantly influence standards decisions. -82- Standardization work is moving forward rapidly internationally, and unless the United States broadens and strengthens its partici- pation, U.S. export interests are potentially endangered. To help meet this problem, the Department of Commerce has urged enactment of legislation that, among other things, would authorize funds for support of the activities of private standard- ization groups through grants and contracts. Such legislation was introduced in the 90th Congress but not enacted. The Department of Commerce should renew its efforts to get Congressional support for expanded U.S. participation in international standards activities and prepare appropriate proposals for Executive Branch consideration for inclusion in the 1969 legislative program. 5.2 The U.S. Government should intensify its support for simplified international patent and trademark filing procedures . U.S. producers have long complained about burdensome administra- tive requirements and costs in seeking foreign patent and trademark protection. A proposed, new international "Patent Cooperation Treaty," if adopted, would ease these burdens by permitting exporters to file a single international patent application for adhering countries in which they wish to sell their goods, instead of separate applications for each country as is now required. Present plans call for a diplomatic conference of members of the Paris Union Patent and Trade- mark Convention in 1969 to consider and adopt the draft treaty. The U.S. Government should actively support adoption of an acceptable treaty and adhere to it at the earliest practical date. In addition, the U.S. Government, in cooperation with business and legal groups, should continue to seek a sound basis for U.S. membership in an international trademark filing arrangement, the so- called "Madrid Arrangement," that would be compatible with the U.S. system. U.S. adherence to this arrangement would help U.S. exporters by facilitating and reducing their costs of filing trademarks inter- nationally. 6. ELEVATE EXPORT EXPANSION TO A HIGHER PRIORITY IN THE FOREIGN AID PROGRAM, CONSISTENT WITH DEVELOPMENTAL AND FOREIGN POLICY OBJECTIVES The following recommendations concerning the foreign economic aid program would, if implemented, contribute to expanding United States -83- exports. Because of the reduced scope of the AID program, however, they are not expected to yield large increases in exports. 6.1 Increased emphasis, when feasible, should be placed on: (a) aid-financed items that are in addition to normal commercial sales; (b) aid activities that provide follow-on business "and the promise of future sales; (c) reduced financing of commod- ities in which the United States is unlikely to be competitive In the long run; and (d) project loans to assure the U.S. more project-type business . Although considerable attention has been given to maximizing the export-creating aspects of the foreign aid program, especially in the past year, these efforts need to be maintained and, in the case of the programs for some countries, further intensified. Of particular importance are the development and application of tech- niques to avoid aid-financing of goods that would otherwise be pur- chased in the United States with free foreign exchange. Greater attention should be given to the commodity composition of aid- financed goods to emphasize, to the extent possible, products the United States is likely to be able to continue to supply competitively in the longer run and products with high follow-on content. Greater use of project loans relative to program loans (e.g., budget support loans for commodity imports) would also help increase U.S. exports. The use of project loans makes it easier to ensure that goods are truly additional and would not have been purchased by the aid-recipient from its own resources. Projects can be selected, at least in some instances, for their high follow-on generating characteristics. Projects may also be chosen so as to introduce U.S. equipment to the recipient's market. 6.2 U.S. aid to individual countries should be reduced to the extent feasible when our share of the country's total aid from all donors is very high relative to the share of U.S. exports in the aid recipient's commercial market . A very large U.S. aid program in a country that normally buys relatively small amounts from the United States has tended to cause significant substitution of U.S. sourcing of commercial sales by -82;- those countries enjoying a larger share of the recipient's market. Reallocation of U.S. aid relative to our normal market share vis-a- vis other industrial nations may limit the amount of substitution that can occur and may provide an incentive to the other industrial nations to increase their aid contributions. 6.3 Greater efforts should be made to obtain more U.S. export business from projects and programs financed by interna tional agencies . In the 1960's, U.S. sourcing for projects financed by inter- national agencies (The International Bank for Reconstruction and Development, the International Development Association, the Inter- American Development Bank, etc.) has been greatly reduced relative to that of other nations and U.S. procurement is below U.S. partici- pation in the capitalization of these organizations. To obtain a larger U.S. share of this business, consideration should be given to more directly relating U.S. contributions to the level of pro- curement from the United States. The principle of international competitive bidding need not be violated since the award of contracts might be limited to the volume of financing of the IBRD (or its affiliates) activities provided by that country. The United States might provide more active official support to the efforts of U.S. engineering and consulting firms in seeking engineering design and project preparation contracts. Experience has shown that export business tends to follow such contracts. 7. BRING TOGETHER THE PRESENTLY FRAGMENTED GOVERNMENT EXPORT EFFORTS BT DEVELOPING A COMMON GOVERNMENT POLICY AND COORDI- NATING THE RESOURCES NEEDED TO CARRY IT OUT IN A NEW INTERAGENCY EXPORT STRATEGY COMMITTEE. While a considerable part of the export promotion function is in the Department of Commerce, a broad measure of the responsibility for export support is diffused throughout the Executive Branch with no central focus except for the Budget Bureau and a Special Assis- tant to the President for whom export expansion is a collateral duty. In addition to the Department of Commerce, more than a dozen U.S. Government agencies directly affect export expansion, including Agriculture, Interior, Defense, State, Treasury, Transportation, Labor, the Export- Import Bank, AID, the President's Special Trade Representative, the Federal Reserve Board, the Small Business Administration, and the Federal Trade Commission. The large number of agencies with activities that bear on export expansion suggests the need for some means of common planning, -85- monitoring developments affecting U.S. trade, and coordinating re- sources to carry out complementary programs more efficiently. A central focus is also needed to mobilize quickly various Government activities in support of specific U.S. overseas business efforts requiring interagency assistance. For these reasons, the Government should establish an Export Strategy Committee, at the earliest practical date, under the chairmanship of the Secretary of Commerce. Its purpose would be to: (a) plan, on a continuing basis, the long-range, compre- hensive export strategy of the U.S. Government; (b) formulate major programs of export promotion and measures of support; (c) coordinate the relevant policies and programs of the various agencies concerned with export expansion; and (d) serve as a focal point for marshalling and concerting interagency supporting actions for specific export business projects. The Committee should include representation from the Departments of Agriculture, Interior, Defense, State, Transportation, and Treasury, the Export-Import Bank, and the Office of the President's Special Trade Representative. As the responsibilities of other agencies, such as AID and the Federal Reserve Board, will be in- volved in some aspects of export strategy, these agencies should be invited to participate as appropriate. As its first task, the Committee should consider and act upon the recommendations contained in this report as well as those in other reports, particularly those of the National Export Expansion Council, relating to improving the U.S. trade balance. Actions the United States Should Take Requiring Cooperation of Other Countries 8. PRESS VIGOROUSLY FOR REMOVAL OF FOREIGN NON-TARIFF BARRIERS THAT IMPEDE U.S. ACCESS TO FOREIGN MARKETS AND PREPARE FOR POSSIBLE FUTURE TARIFF NEGOTIATIONS 8.1 The U.S. Government program for removal of foreign non- tariff barriers should be intensified with emphasis on: (a) barriers in violation of GATT obligations, and (b) barriers sanctioned under GATT but significantly impeding U.S. exports and sus- ceptible to negotiation. The Executive Branch should intensify its program for the remov- al of those non-tariff barriers (NTB's) that have the largest negative impact on U.S. export sales and are susceptible to negotiation. Efforts to obtain the removal of NTB's that are maintained in viola- tion of international obligations should be strengthened. The pro- gram should include agricultural products, which are greatly impeded by foreign non-tariff barriers, as well as some important industrial products. When reciprocal negotiations would be advantageous to the United States, new legislation should be sought granting such auth- ority to the President. 8.2 Appropriate techniques should be developed for possible future tariff negotiations in the light of emerging U.S. trade interests. To prepare for the longer run, the Government should initiate studies to determine the most advantageous techniques for future major negotiations, including: (a) movements toward international tariff rate harmonization by product groups, such as was used in the steel negotiations of the Kennedy Round; (b) the matching of rates on specific products where meaningful in trade terms; and (c) the possible freeing of trade between two or more countries on a limited range of products. In addition, contingency plans should be undertaken to prepare for the possibility of impairment of U.S. access to European markets through a trade accommodation or merger of the European Economic Community and the European Free Trade Area. 9. CONTINUE TO WORK FOR REVISED GATT RULES ON THE TAXATION OF EXPORTS AND IMPORTS THAT WILL NOT DISADVANTAGE U.S. TRADE The United States Government maintains that countries relying heavily on indirect taxation principally the European countries have an advantage in international trade over countries relying more heavily on direct taxation, as does the United States. This advan- tage stems from the over-compensation to exporters through export rebates for the actual tax burden borne by domestic producers and through the imposistion of border taxes in excess of the actual internal effect of taxes paid on domestic sales. Since January 1968, the Executive Branch has made strenous efforts to persuade these countries to modify their border taxes to provide for more equitable treatment of U S. exports. These efforts have included bilateral diplomatic representations and several meetings of a special GATT working party. -87- It is recommended that the U.S. Government continue to insist, both bilaterally and in the GATT, on an accommodation on border tax adjustments. This accommodation might take the form of new GATT rules or agreements that insure that border tax practices will not disadvantage imports and confer competitive benefits on exports. In the meantime, the United States should pursue contingency plans of its own that do not depend on foreign government approval, e.g., consideration of a value-added tax in the United States. (See recommendation 1.2) 10. SEEK THE REMOVAL OF "HIDDEN" FOREIGN SUBSIDIES THAT HURT U.S. EXPORTS TO THIRD COUNTRIES AND HARM U.S. PRODUCERS AT HOME Many countries provide subsidies for exports through the opera- tion of state-owned industries and state-run transportation facilities. Internal rail rates, for example, frequently favor exporters over other users. The United States should identify these "hidden" sub- sidies and vigorously seek their removal or, alternatively, apply countervailing duties or other remedies as appropriate. The United States should also encourage the GATT to develop better guidelines for identifying and outlawing such subsidies. Actions Needed to Enhance the U.S. Ability to Achieve its Negotiating Objectives 11. RAISE THE MORE IMPORTANT U.S. TRADE OBJECTIVES TO A HIGHER PRIORITY IN U.S. RELATIONS WITH ITS PRINCIPAL TRADING PARTNERS United States trade interests have not always been given as much weight as they warranted in diplomatic dealings. This has resulted in part from the strong trade surplus that the United States has enjoyed until recently and in part from the greater weight given other policy considerations. In view of the need to restore a strong U.S. trade surplus, trade objectives should be given higher priority in U.S. dealings with major trading partners. 12. STRENGTHEN U.S. DEFENSES AGAINST FOREIGN PRACTICES THAT UNJUSTIFIABLY RESTRICT U.S. EXPORTS BY BROADENING THE PRESIDENT'S AUTHORITY TO RESTRICT IMPORTS FROM OFFENDING COUNTRIES AND BY TIGHTENING U.S. USE OF EXISTING AUTHORITY The President's authority to retaliate with import quotas against unjustified foreign trade practices presently is limited to foreign import restrictions against U.S. agricultural products. In the case of manufactured products, the President may retaliate with tariff action, such as the suspension, withdrawal or prevention of the application of the benefits of trade agreement concessions to the products of the offending country. The imposition of import quotas has proven to be a stronger sanction than an increase in duties. The present authority, provided by section 2^2 of the Trade Expan- sion Act of 1962, should be changed to permit the President to impose import quotas and other import restrictions on manufactured products as well as on agricultural products. Not only should the application of section 2f>2 be broadened, but it should be used more vigorously as well, so as to secure reductions of unjustified foreign restrictions of particular interest to U.S. exporters. (Section 2^2 has been invoked only once since its enactment increased duties were applied on selected items in 1963 in retaliation against the EEC system of variable levies that severely curtailed U.S. poultry exports.) 1969—341-025/156 J