THE FOREIGN POLICY ASPECTS OF THE KENNEDY ROUND TUESDAY, AUGUST 9, 1966 HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON FOREIGN ECONOMIC POLICY, Washington, D.C. The subcommittee met at 10:30 a.m., in room 2172, Rayburn House Office Building, Hon. Leonard Farbstein (chairman of the subcommittee) presiding. Mr. FARBSTEIN. The subcommittee will come to order. As chairman of the Subcommittee on Foreign Economic Policy, I have called these hearings to review the consequences on our foreign policy as they relate to the Trade Expansion Act of 1962. President Kennedy, in calling upon Congress to pass this item of legislation and in designating it No. 1 on his priority list, promised a great deal from it. Our objective is not to study what President Kennedy foresaw as the domestic consequences of this act. It is rather to see whether the act has succeeded or failed in its foreign policy objectives and to examine the state of the foreign policy problems which provoked consideration of this measure 4 years ago. I quote from President Kennedy's 1962 message on trade to illustrate the areas which we propose to explore: The success of our foreign policy The President said depends in large measure upon the degree of Western economic unity. In the next few years the nations of Western Europe will be fixing basic economic and trading patterns vitally affecting the future of our economy and the hopes of our less developed friends. Basic political and military decisions of vital interest to our security will be made. Unless we have this authority to negotiate and have it this year if we are separated from the Common Market by high tariff barriers on either side of the Atlantic-then we cannot hope to play an effective part in those basic questions. I might say that on the face of it, in view of the apparent setbacks to our political and military policies in Europe in recent years, we seem to have misgaged the impact that this legislation would have. I would like to explore the status of these policies and the reason why our trading positions have had so little apparent impact on them. I am concerned at the growing investment of American industry in Europe, to the detriment of the sale of American products to Europe. Many Europeans, as I understand this, resent this penetration. Our balance-of-payments problems remain severe. Yet we do not seem to be able to reach agreement with our European friends at the conference table in Geneva. I wonder if there is not a close relationship between the political differences and the economic differences we are currently having with Europe. I am anxious for some enlightenment on these matters. We are privileged to have as our first witness the distinguished Under Secretary of State, Mr. George Ball, and also the Honorable Anthony M. Solomon, Assistant Secretary for Economic Affairs. Mr. Ball was one of the leading figures in the enactment of this bill 4 years ago. No one is more qualified than he to comment on the foreign policy implications of this act. Mr. Ball personally sparked debate on this bill in a speech delivered in 1961 in which he said: We are coming to the close of a familiar era in our world trading relations and entering another that is not familiar at all. Some see this new phase as filled with opportunity and challenge. Some, on the other hand, are apprehensive. But few question the proposition that pervasive change will be the dominant characteristic of the years that lie ahead. Four and a half of those years have now passed. I am pleased to have the Under Secretary tell us what has transpired and why and what is likely to follow. Thank you. You may proceed. STATEMENT OF HON. GEORGE BALL, UNDER SECRETARY OF STATE Mr. BALL. Thank you very much, Mr. Chairman. I would like, if I might, to make some background comments, picking up the reference to the pervasiveness of change, in a speech that I made myself which you have just quoted. I think what we are confronted with in the world trading environment is a whole new structure of trading relationships and in fact a whole new character of world trade. This is a function of the new interdependence which has been a very conspicuous feature of the postwar period-economic interdependence, particularly among the great industrial nations of the world, most of whom, so far as the free world is concerned, lie on the littoral of the North Atlantic. In this complex of nations, the Western European nations and North America, there is perhaps as much as 80 to 85 percent of the industrial capacity of the free world. So that the problems of trade necessarily must focus in the first instance on the trading relations among these nations. Now, when I say there has been a qualitative change in trade among nations, I think we have to understand the degree to which international trade has bolted upwards even faster than the productive capacities of the nations themselves. As I recall the figures within the past 12 years, free world trade has increased something like 2% times, while the growth in gross national products of the nations concerned had been nothing like this. If the level of prosperity which we have managed to achieve through this industrialized sector of the world in the past few years is to be sustained, trade has to become progressively more free so that the nations can take the fullest advantage of the great economic benefits that derive from the most effective use of resources. When I say "most effective use of resources," I mean the use of resources which is dictated by the operation of a relatively free world marketplace. This is why, in 1961, when we had a very long and searching look at the position of the United States in world trade, we came to the conclusion that a major new step toward trade liberaliza tion was necessary; we also then came to the conclusion that the United States was "the" Nation which would have to take the lead in bringing about this liberalization if it were to be achieved, just as we had taken the lead ever since 1934 in almost every major initiative toward a liberalization of trade. Now, the major element, which was quite new, and which we faced in 1961, was the fact that six of the nations of Western Europe had felt the need to combine their economies in such a manner as to enable them to utilize their resources most effectively and to gain the advantages of scale, which the United States great mass market had already proved were so effective. The European Common Market was a new fact with which we had to deal and alongside the European Common Market was the development of the EFTA countries, the European Free Trade Association of seven countries, which, again, were moving toward free trade among themselves. It was very important from the point of view of the United States that the common external tariff of the European Common Market not be fixed at such a level as would seriously disadvantage American trade in enjoying a part of this great new mass market which was being created. It was important also that we make it possible for American firms to export to this mass market and not find themselves under the compulsion of establishing productive facilities within the market in order to enjoy a share of it. This was to a considerable extent the commercial, the economic, motive behind the initiative for the Trade Expansion Act and the inauguration of the Kennedy Round of trade negotiations. Alongside this economic motive there was also a very profound consideration of foreign policy: The recognition on our part which I think was shared by the other major trading nations of the world, that the erection of barriers between the great trading nations would tend to result in political fragmentation; that, if we were to have a common understanding between us, it was important that we have the easiest kind of trade relations and that we not try to penalize one another for the benefit of our own rather short-range local interests. We regarded the Trade Expansion Act and the Kennedy Round not only as major commercial policy initiatives, but also as initiatives looking toward the creation of a more cohesive Western World. And it was with this in mind that we undertook this great new step toward liberalization. This has turned out to be very difficult. We recognized at the time that it was not going to be at all easy. I think to some extent we underestimated some of the problems which have arisen. We foresaw possibilities which have not come to pass as, for example, the accession of the United Kingdom to the Rome treaty, to the Common Market, which seemed at that time very imminent. The principal obstacle to a more rapid achievement of the trading goals that we had in mind has been the problems which the European nations, the six in the community, have encountered in trying to achieve a common agricultural policy. I think those of us who have had any experience at all with agricultural policy over the years are quite aware of the difficulty of an effective farm policy, even on a domestic basis. In the case of Europe there were at least five agricultural systems within the six countries which had developed over the years, each proceeding on a different set of conditions, with considerable disparities in the level of efficiency and productivity, each based on a somewhat different theory as to the best way to insure that the farmer secured a proper share of the benefits of productivity in a particular country. So, to merge these turned out to be a very difficult task because there has to be agreement on a common approach, a common philosophy; there had to be concessions and accommodations made to special groups in each of the six countries. But finally, after a great deal of anguish and agony, the six have achieved a common agricultural policy. Until they achieved that policy they were not in position to engage in any bargaining with regard to the levels of protection that might be accorded agriculture in their countries. We wanted a liberalization across the board which would be applicable not merely to industry, but to agriculture as well because American agricultural exports are of major importance to American foreign trade. They are of major importance to the health of our international balance of accounts. So we have been quite insistent from the beginning, not only that we try to move toward industrial liberalization, but that we move toward agricultural liberalization as well. In 1964 we were able to reach a point where industrial tariff offers could be tabled by the major trading nations. In September of last year agreement was reached for the tabling of agricultural offers by the United States and by other countries of a kind that were not of major benefit to the European Common Market. The European Common Market wasn't ready to table its agricultural offers at the time and the other countries, including the United States, were not willing to table offers of particular benefit to the European Common Market until the Common Market countries could table offers of their own. Since then, the EEC has attained agreement on a common agricultural policy-almost all of the details of it-and tabled its agricultural offers. Last week offers were therefore tabled by the other major trading nations on agricultural items where the trade was of particular interest to the European Common Market. We have now tabled offers for all of the items in which we are prepared to make offers, and the other major trading nations have done the same thing. We are moving into a new phase, which is the phase of actual bargaining. In the course of that bargaining, unless nations are prepared to improve their offers to a level where we are getting a full quid pro quo, we will have to lower some of ours or in some cases, in order to meet the offers of other nations which are better than ours, we may have to improve some of our own. This is the process which is now beginning. We are very anxious to see a substantial conclusion of this process between now and the end of the year because we are faced with the fact that the Trade Expansion Act expires on the 30th of June, 1967. We want to see a substantial completion of the bargaining process by the end of the year so that all the technical problems can be met in time to conclude the definitive agreements before the expiration of the authority which the President was given under the Trade Expansion Act. This is an experience which is going to be a difficult one for us. Obviously we are not going to achieve the degree of trade liberaliza |