NAM urges the Congress to establish the negotiation of such a code as a priority of the highest importance, and believes that the President's Special Trade Representative should be directed to complete such a negotiation for the multilateral safeguard code without delay.

Two other areas for further negotiation are also important: improvement in the harmonization of the tax treatment of exports and imports, and a code dealing with trademark counterfeiting.

In selecting these subjects for comment, NAM is not unmindful of the importance of the agreements reached to expand American trade in farm products, nor are we suggesting that the tariff reductions across the board are of minor significance. It is simply our wish to focus attention on the codes of conduct which will play a major role in the coming years to establish a higher degree of openness in world markets in accordance with free market conditions, that is, market access for U.S. goods under rules known in advance and which are in accordance with an established rule of law.

The final benefits of these trade agreements to the U.S. economy will be realized, of course, only if we are able to fully and effectively implement in practice the items agreed to on paper. Successful implementation of the MTN package requires two types of actions. First, there must be prompt and cooperative action by Government and private industry to follow up on the new export opportunities opened up by the trade agreements-both through the reduction of foreign tariffs and the elimination of nontariff barriers in areas such as Government procurement.

Second, there must be effective enforcement of the internationally agreed trade standards outlined in the agreements. Too often in the past, the United States has been lax in opposing unfair foreign trade practices. We can be certain that other nations will not hesitate to bring complaints and press actions under the new procedures and this country can afford to do no less.

Both these aspects of implementation raise the question of U.S. Government reorganization of the international trade area. I do not believe there is any government in the world which has its trade functions and authority so scattered and poorly coordinated as the current U.S. structure.

And I speak from personal experience in trying to administer the trade laws.

Perhaps when this country ran a consistent trade surplus in an expanding world economy, we could afford the luxury of such disorganization. As we face the third consecutive year of a trade deficit running over $25 billion, the cost is no longer tolerable.

I would compliment you on the strong position you have taken on the need to receive the administration's recommendations for reorganization of the executive with regard to trade administration. I won't go into further details on the concept here because our International Committee Chairman will testify specifically on the subject next week before your Senate Governmental Affairs Committee.

I would hope, however, that this is a subject that will receive congressional action this year.

With that, Mr. Chairman, I will conclude my remarks.

Senator RIBICOFF. Thank you very much. Any questions? [The prepared statement of Mr. McLellan follows:]

PREPARED STATEMENTS OF THE NATIONAL ASSOCIATION OF MANUFACTURERS

Mr. Chairman and members of the Committee, I am Robert McLellan, Vice President of FMC Corporation. I am appearing today on behalf of the National Association of Manufacturers (NAM) as Chairman of the NAM International Trade Committee. As you know, NAM is a voluntary, non-profit association of over 12,000 business firms, large and small, located in every state of the nation. The Association's member companies account for about 75 percent of American industrial output and provide about the same percentage of the nation's industrial jobs. My own company is a diversified producer of machinery and chemicals with 1978 sales of over $2.9 billion, including exports of more than a half billion dollars. FMC's manufacturing operations employ 46,000 people in 33 U.S. states and 14 foreign countries.

The successful conclusion of the Multilateral Trade Negotiations in Geneva and the submission by the Administration of the Trade Agreements Act of 1979 (S. 1376) culminate many years of negotiation to improve and make more certain the conditions under which world trade takes place. The last previous worldwide trade negotions, the so-called Kennedy Round, was completed in une of 1967 and brought about a reduction of world tariffs, but very little improvement in the general framework of international law governing trade between countries. One of the major objectives of the Trade Act of 1974, from NAM's point of view the most important objective, has been the creation of a rule of law establishing appropriate conditions of competition in world markets based to the maximum extent on free market competition within agreed international rules. In common parlance, this subject generally has been referred to under the heading "non-tariff barriers" (NTBs).

From our standpoint, the heart of the NTB problem relates to the acceptance by governments of constraints on their actions which alter and distort trade by government fiat. The codes of conduct negotiated in the MTN are designed to address this problem, and in fact to constitute a major step forward in establishing a world trade system under the General Agreement on Tariffs and Trade (GATT), which recognizes the realities of the role of governments in today's world in connection with trade.

NAM recommends that the Congress act favorable on the trade package now before it. With certain reservations which we will refer to later, we believe that the codes of conduct negotiated with respect to the major non-tariff barriers which confront American trade are sound and represent major improvements in the GATT system. The most important codes concern government procurement, subsidies and countervailing duties, technical standards, customs valuation and trade in civil aircraft. The most important area in which agreement has not as yet been achieved relates to a multilateral import safeguard system under the GATT. Two other areas are also important: improvement in the harmonization of the tax treatment of exports and imports, and a code dealing with trademark counterfeiting.

In selecting these subjects for comment, NAM is not unmindful of the importance of the agreements reached to expand American trade in farm products, nor are we suggesting that the tariff reductions across the board are of minor significance. It is simply our wish to concentrate this brief testimony on the codes of conduct which will play a major role in coming years to establish a higher degree of openness in world markets in accordance with free market conditions, i.e. market access for U.S. goods under rules known in advance and which are in accordance with an established rule of law. We will state how we think greater certainty and fairness in the conditions of world trade can be achieved through these agreements and how we believe the U.S. Government, working with American industry, can organize efforts to achieve the implementation of the goals of these agreements.

Our comments, of course, will be focused on manufactured goods, which last year totalled about $95 billion and constituted two-thirds of our exports-and which for the indefinite future will remain the key to successful performance in the U.S. trade account. If we are to pay for the huge oil import bill, which is now running over $50 billion a year, obviously manufactured goods exports must be the principal additional source of new foreign exchange earnings.

I would like to emphasize the changed trading conditions which now prevail throughout the world from those which existed at the time of the establishment of the GATT in the late 1940s. Most importantly, the GATT concept, which is a concept based on open competition in relatively free markets in which tariffs and import quotas were the principle obstacles to trade, has been replaced in major part

by a world in which governments are frequently the main actors in determining what is bought and sold in the international marketplace. Governments act to enhance the foreign exchange position of their countries, often to earn the necessary foreign currency to pay for the increased costs of oil and other energy sources, but increasingly with emphasis on broader economic objectives. We are now in an age of slower economic growth throughout the industrialized world, where the Keynesian vision of the ever-growing economic pie has been replaced by a more stark reality of slow growth, higher unemployment, unacceptable levels of inflation, and the social problems associated with these conditions. Under such circumstances, most countries have come to view exports as a means of dealing with domestic economic problems, especially to achieve higher rates of employment and growth, and are in fact intervening in the economies of their countries very actively to achieve these ends. Consequently, trade which has played such an important role in increasing the standard of living throughout the world in the post-war period, is increasingly the target of governmental policy, often described as "industrial policy" or policies of "positive adjustment." The GATT system prior to the MTN simply had not been brought up to date to take into account this increased interventionist role of governments. The MTN codes of conduct tackle this problem in a comprehensive way and introduce a number of important legally binding commitments on governments regarding the techniques and limits of economic intervention insofar as the trade interests of other countries are concerned. The major MTN codes of conduct covering government intervention affecting trade, which are contained in the trade bill before this Committee, are described below. The U.S. national interest in these codes is also defined.

THE ROLE OF GOVERNMENTS IN TRADE

Governments now are major purchasers of manufactured goods and services. The growth of public sector enterprises, and the public sector more generally throughout the world, has meant that increasingly governments are making decisions as to what type of goods are bought and sold—notably, advanced technological communications systems, civil aircraft and other transportation equipment, energy production and distribution systems, data processing and electronic means for storing and utilizing facts and figures.

Additionally, governments act to strengthen private sector enterprises in their competitive position, often utilizing various forms of domestic subsidies to provide capital, support for research and development, and additions to infrastructure to enhance the competitiveness of such private sector enterprise. Often, technical standards are used in defining the nature of the equipment to be used in such enterprises, and the technical specifications and standards setting procedures are designed to favor home producers over the producers of competing goods in foreign countries. In some instances, the private sector companies are assured markets for their products which have been developed entirely with government support, i.e., the private sector companies know in advance that the national airline of the country concerned will buy its airplane, or the national telephone and telegraph system will buy the communications equipment produced, etc. Often the government support of a new industry or the expansion of an existing industry contemplates the establishment of a manufacturing capacity well in excess of local needs. The result, of course, under these circumstances, may be the substitution of domestic products for imports, the meeting of domestic market demands entirely from domestic production and the creation of domestic capacity which can be utilized only through exports. Under these conditions, exports are often subsidized in various ways by governments, either directly or indirectly. Government-to-government agreements often create the framework for these exports, especially to the developing countries, including the oil-producing countries.

In this light, the three most important codes of conduct which have been negotiated in the MTN are interrelated and deal with government procurement, subsidies and technical standards. The MTN package of agreements provides a meaningful first step in dealing with each of these categories of govern nent intervention in determining the direction and flow of trade.

GOVERNMENT PROCUREMENT

At the present time, there is no effective rule in the GATT or elsewhere with respect to government procurement practices. The MTN agreement on government procurement establishes a system hereby the signatory countries to this agreement undertake commitments to have designated public sector enterprises make their purchases above the minimum threshhold level of about $175,000 available to international bidding as well as domestic bids. Reciprocally, of course, the U.S. Govern

ment at the Federal level is required to undertake a corresponding commitment. Small business and minority business set-asides in the U.S. are not affected, i.e., such procurement can be given a preference by American government agencies to American small and minority business heretofor.

The introduction of a systematic opening of government purchasing to international bids and scrutiny is an extremely important step from the standpoint of opening up world markets to U.S. goods. As governments have taken up a bigger role in the economy of their respective countries, obviously their purchases have become a more important part of total purchase goods and services. Since governments frequently buy advanced types of equipment, the opening up of such markets to U.S. goods is extremely important. Thus, the government procurement code replaces in the signatory countries a system mainly of administrative discretion in purchasing with a system of open bids.

The government procurement code will not be self-enforcing, of course, and it will be necessary for American industry to take advantage of the new market opportunities and to bring complaints to the U.S. Government for submission to the GATT in the event that violations of the code appear to take place. Also, a number of important public sector enterprises are exempted by one country or another, and in the future the U.S. Government should press for the inclusion of additional public sector activities of other countries in the product areas covered by the code. Other countries will press the U.S. for similar treatment, of course. An incentive is supplied to countries to sign the agreement if they wish to have access to government purchases in the U.S., since reciprocity will be required from industrialized countries generally and in time from the advanced developing countries also. Annual reports on the implementation of the code should be undertaken through the GATT Secretariat to make certain that the purpose of the government procurement code is in fact being carried out.

SUBSIDIES

In the past the GATT has had a rule against subsidies in the case of manufactured goods, but in general this rule has been of limited applicability and related only to export subsidies. The new code with respect to subsidies and countervailing duties not only includes export subsidies and defines and illustrates such export subsidies more fully, it also includes so-called domestic subsidies to industry when such subsidies can be determined by having a significant effect on the trade of other countries.

The inclusion of domestic industrial subsidies is an extremely important step forward from the standpoint of U.S. export interests. As I have previously indicated, industrial policy as it is now carried out in most industrialized countries and in virtually all of the developing countries utilizes to a greater or lesser extent domestic subsidies to industry. Under the new code of conduct, such subsidies where they can be demonstrated to have a significant trade distorting effect will come under the jurisdiction of the GATT and can be the subject of appropriate counter action by governments, primarily through the use of countervailing duties.

In order to achieve this advance in dealing with both internal subsidies and export subsidies more fully, the agreement calls upon the U.S. to adopt a so-called injury test as a condition of the application of countervailing duties in the U.S. It seems to us that this is an appropriate price for the U.S. to pay for the establishment of an adequate system of control over the use of subsidies in world trade. The implementation of U.S. countervailing duty law in many respects will be speeded up and made more certain and thus should provide more prompt and adequate relief to domestic American industries adversely affected by imports entering the American market under conditions of foreign subsidization.

As in the case of government procurement, the subsidy-countervailing duty code requires careful implementation and calls for improved government-industry cooperation to make certain that foreign subsidies adversely affecting our trade are identified and carefully documented and presented to the GATT for adjudication.

TECHNICAL STANDARDS

The drawing up of specifications for machinery, testing equipment, and other complex pieces of equipment used in modern industrial societies is an important aspect of the development of an integrated world economy. It is important that the development of such standards and specifications employ objective procedures and not serve as an instrument of disguised preference to domestic manufacturers. Under the technical standards code, the drawing up of specifications will take place around the world on a more open and systematic basis. U.S. industry for example, will be able to participate more actively in the setting of new standards which are

currently being drawn up in the European Community, as well as elsewhere. Certain procedural changes will be needed in the U.S., but these changes should not be disturbing to U.S. industry since the U.S. system already generally permits foreign producers or governments to present their views in the official standards setting procedures used in this country. Appropriate exceptions are made with respect to military specifications.

In addition to the setting of standards, the subject of testing to determine whether standards have been met is also important. A more adequate system has been developed whereby standards can be determined to have been met within the country of production rather than as is frequently the case now, being required to be determined in the national laboratories of the improting country. This more objective approach to testing for standards compliance should be helpful in facilitating the export of American machinery and equipment.

OTHER CODES OF CONDUCT

Important codes of conduct affecting our trade have also been negotiated in the fields of customs valuation, import licensing procedures and the purchase of civil aircraft. In addition, procedures for the handling of international trade disputes have been greatly improved and other steps to help ensure a fair and open international trading system have been agreed upon.

Unfortunately, however, it was not possible to agree on a code of conduct with respect to import controls-the so-called multilateral safeguard system. NAM urges the Congress to establish the negotiation of such a code as a priority of the highest importance, and believes that the President's Special Trade Representative should be directed to complete such a negotiation for the multilateral safeguard code without delay. We understand progress has been made toward agreement but major issues remain to be settled.

At the present time, great deficiencies exist in the GATT with respect to the imposition of import controls and a more effective GATT mechanism is required to defend American trade interests against increasingly commonly used trade restrictions. Under Article 19 of the GATT, only government-imposed restrictions on imports are required to be reported to the GATT. Thus, industry-to-industry_agreements need not be reported and in fact have not been reported to the GATT. An example of this major deficiency in the GATT is the arrangement reached between the Japanese steel industry and the steel industry of the Common Market with respect to exports of carbon steel from Japan to Europe. The consequence of this agreement, of course, was to divert steel to the U.S. market which might otherwise have gone elsewhere. Under U.S. antitrust laws, American industry is not permitted to participate in such arrangements nor are we recommending that the antitrust laws be amended in this respect. We are recommending, however, that the GATT rule with respect to import controls be broadened to cover all types of such controls, including orderly marketing agreements, so-called voluntary export controls and other forms of export or import restraint which nominally take place without the active participation or authority of governments. In fact, of course, governments are aware of the actions of their industries in this regard, prefering to cast a blind eye and thus avoid reporting such agreements to the GATT. NAM urges that the multilateral safeguard system be the subject of a new code, that existing export or import restraints of whatever nature be notified to the GATT, and that all future agreements whether governmental or private in character also be notified to the GATT. In this way, the trade interests of the U.S. as well as other countries not participating in such trade restraining agreements can be defended in the GATT in accordance with the provisions of the new code.

Trademark code. It is also regrettable that it was not possible to complete the negotiation of a code protecting trademarked goods, as for example "Levis" jeans. Increasingly the pirating of trademarked goods has become a problem in world trade and this matter should also be addressed by further negotiations as promptly as possible.

Harmonization of taxes affecting trade.-Trade performance can be enhanced greatly through various forms of taxation. Some forms of taxation create little or no problems in international trade, whereas others may distort trade and advantage one country over another. The treatment of taxes in relation to goods crossing the border, investment incentives designed to affect production and trade, and other aspects of taxation in relation to trade constitute an inportant area where international practice is no longer adequately dealt with under the rules of the GATT. The basic GATT rule with respect to taxation which permits the remission of indirect taxes on exports while forbidding the remission of direct taxes on exports does not in our opinion reflect the realities of the business world. It is not appropriate at this