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reached the point some time ago where the generation of capital and savings was sufficient to satisfy their domestic needs. The improved economic and financial position of the industrialized countries has enabled them to assume, for the most part, their responsibilities to end currency restrictions as provided under Article VIII of the International Monetary Fund Agreement. Since post-war economic reconstruction has long since been completed, the United States can no longer look aside when any of these industrialized countries takes action which prejudices our own trading and payments position. The United States can no longer be as tolerant, as it was in the early postWorld War II period, of harmful trade measures employed or continued too long by other countries. President Johnson took note of this point in his New Year's Day Message:

"We must now look beyond the great success of the Kennedy Round to the problems of nontariff barriers that pose a continued threat to the growth of world trade and to our competitive position. American commerce is at a disadvantage because of the tax systems of some of our trading partners...."

Steps Underway To Reduce Non-Tariff Barriers

Efforts to achieve and maintain a healthy United States trade surplus must be directed not only toward obtaining price stability at home but toward expanding liberal trading practices which provide equal access to the markets of the world. This past year has seen a pronounced increase in our efforts to make world markets more open and fair.

Most of these efforts have been pursued multilaterally, through the General Agreement on Tariffs and Trade, where international trading rules and practices have been codified and established. Basically, the rules limit the extent to which countries can raise new nontariff barriers and they provide a framework for the reduction of such barriers. Countries in balance of payments difficulties are permitted to maintain or establish quantitative import restrictions and are required to consult with other countries in the General Agreement on Tariffs and Trade under a waiver procedure. The United States has increased the emphasis it places upon the GATT by furthering multilateral discussions on compliance with its provisions. To this end, we have participated in complaints regarding specific practices of others. In addition, we have initiated new efforts to examine old or unclear rules of GATT, with the intention of relating them more closely to the experiences of recent years and the requirements of the future.

Compliance with the GATT

Review is presently underway in the GATT of several specific actions or failures to act by other countries. The United States is

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participating through this multilateral forum to make sure that rules and objectives of the GATT are followed by others as well. For example, several countries-Brazil, Chile, and Israel-have revised their tariff schedules and Austria and Spain have taken actions which adversely affect American trade. The United States is negotiating with these countries to obtain new concessions to offset the effect of their actions. Should redress not be achieved through the avenue of first recourse, the action may be advanced to a point where under GATT, if ultimately unsatisfied, other nations would be permitted to take specific and compensating trade measures to offset the losses suffered from these unfair practices.

Bilaterally, we have insisted on compensation for any new trade restrictive measures imposed on our exports even temporarily. For example, Canada gave tariff concessions in agricultural trade as compensation for the introduction of temporary special import charges on imports of potatoes and corn into Canada.

Through the Organization for Economic Cooperation and Development (OECD) in Paris in a matter closely related to the GATT, the United States has initiated consultations to examine the trade effect of forthcoming tax measures in the Netherlands and Belgium. In the course of harmonizing the indirect tax system of the member countries, within the Common Market, the Netherlands and Belgium will be changing their indirect taxation from existing cascade tax assessment to the turn-over, value-added system. In a similar move a year ago, the Federal Republic of Germany achieved a significant trade benefit. After World War II, in an effort to protect local industry and foreign exchange, many countries employed import quotas. As these industrial countries improved their economies and their international balance of payments positions, they were able to assume the responsibilities of nations with freely convertible currencies as described in Article VIII of the Agreement of the International Monetary Fund. A country may qualify as an "Article VIII country" without having fully achieved the removal of all its quota restrictions; however, it is the understanding of an Article VIII status that these restrictions will be progressively removed over not too long a period of time. For the most part, this has been done--but in nations such as France and Japan quota restrictions (among others) linger. We started using the GATT framework to achieve the removal of these restrictions well before 1968 with respect to France. With respect to Japan, we are presently negotiating bilaterally. In the summer of 1968, we successfully obtained a relaxation of the Japanese restrictive trade practices with respect to our automotive trade and investment in that country. Nevertheless, many other areas of our trade remain encumbered by restrictive Japanese practices. We are vigorously pressing ahead to make this important market open and fair.

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A Fresh Look at Provisions of the GATT

At the GATT Minsterial Meeting in November 1967, it was agreed that new Committees in industry and agriculture would be established to examine nontariff barriers (NTB's) and other trade restrictions. The rules, laws, administrative practices, commercial practices, and preferences employed around the trading world are numerous, insidious and always difficult to identify. Therefore, the first task was to establish a useful if incomplete catalog of these nontariff barriers. This has been accomplished. The GATT Committees are now turning to the more difficult task of preparing for the negotiation of the reduction and removal of these nontariff barriers.

The normal objective in negotiating bilateral or multilateral trade provisions is to achieve a neutral trade effect. This means that one nation will agree to make an adjustment involving a certain amount of trade, on the condition that another country makes a compensating gesture involving an opposite and equal amount of trade. In negotiating the removal of illegal nontariff barriers, this principle of balance must be set aside. It is clearly unfair to have a country impose a nontariff barrier and then, as a condition for its removal, demand a compensating trade benefit.

At the November 1967 GATT Ministerial Meeting it was also agreed to establish a Working Party on countervailing duties, export subsidies and other export incentives. During the Kennedy Round negotiations, many countries complained about the countervailing duty law of the United States and its exemption from the provisions of the GATT. This legislation, passed in 1896, requires the United States to impose an equal and compensating import levy (countervailing duty) for an export subsidy (bounty or grant) used by a foreign nation to aid its exporters. This requirement to countervail is unrelated to the degree of trade injury to the United States resulting from the foreign subsidy. The GATT recognizes countervailing duty practices and the laws that many countries have in this field. However, the GATT authorizes a nation to countervail only to the extent that it is injured, and then only after efforts to achieve removal of the export subsidy through normal GATT procedures have failed.

In view of the 1947 GATT Agreement and our prior legislation, the United States is not covered by the GATT provisions. The absence of an injury requirement in our legislation is heavily criticized by foreign countries-some call it a major United States nontariff barrier. During the course of the Kennedy Round we agreed to discuss this subject with other countries. This was in keeping with the tradition that trading partners, when they have differences, should be willing to discuss them freely. We have refused, however, to have our countervailing duty law subjected to multilateral review, without simultaneous detailed examination of export subsidies of other countries, which are

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the target of this statute. Unfortunately, more than a year of negotiation has failed to reach agreement on the terms of reference of this Working Party. The European Community has not found it possible to agree to a basic examination of all export subsidies.

Progress in the review of border taxes received a boost from President Johnson's New Year's Day Message in which he called for both short-term and long-term trade measures to improve our trading position:

"American commerce is at a disadvantage because of the tax systems of some of our trading partners. Some nations give across-the-board tax rebates on exports which leave their ports and impose special border tax charges on our goods entering their country.

"International rules govern these special taxes under the General Agreement on Tariffs and Trade. These rules must be adjusted to expand international trade further."

Border Tax Adjustments

In 1968 a new Working Party was established on the question of border taxes.

The rules of the GATT permit goods sold for export to be relieved of the indirect taxes the products would have borne if sold in domestic markets. There is no such privilege pertaining to direct taxes. Imported products are burdened with the domestic indirect tax. These rules were established over twenty years ago, when indirect taxes were low. In the late 1940's they were employed by relatively few countries, and covered only a small portion of the volume of goods traded internationally. With the rapid growth of world trade and the increased revenue needs of the industrial nations, the use of indirect taxes broadened and their levels rose to rates undreamed of in 1946. With regard to the experiences of recent years and the requirements of the future, it is necessary to renegotiate the GATT rules on border tax adjustments in order that they are more neutral or equitable with respect to trade.

The United States undertook this effort when it requested GATT in March 1968 to convene the Working Party agreed to in November, 1967. At the first meeting of the Working Party, last April 30, and in four subsequent meetings, the United States has explored, with its trading partners, the history, the provisions, and the implications of the existing GATT rules on border taxes. We have pointed out that countries which employ primarily a system of direct taxation are disadvantaged by the GATT trading rules, vis-a-vis countries that employ indirect taxes significantly. We have argued that there is absolutely no limitation under the existing rules of GATT on the degree of border tax adjustments permitted for indirect taxes. We

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have also demonstrated a proliferation of these adjustments over the past few years. Finally we have pointed to the changes that the future will see in the adoption of indirect taxes by additional countries with the explicit objective of obtaining the trading advantages offered by the GATT rules on border taxes.

The United States delegation at the GATT has demonstrated that changes in the form of indirect taxes can also have an effect upon the patterns of trade. It is now clear that the provisions of the GATT lack precision and, therefore, encourage interpretations which frequently have the effect of improving a nation's trading position.

The time has now come to transcribe our understanding and new experience into constructive language in the GATT.

Temporary Border Adjustment for Balance of Payments Purposes

The President's New Year's Day Message stated:

"In keeping with the principles of cooperation and consultation on common problems, I have initiated discussions at a high level with our friends abroad on these critical matters-particularly those nations with balance of payments surpluses.

"These discussions will examine proposals for prompt cooperative action among all parties to minimize the disadvantages to our trade which arise from differences among national tax systems.

"We are also preparing legislative measures in this area whose scope and nature will depend upon the outcome of these consultations." In the days following President Johnson's message, Under Secretary of State Katzenbach, Under Secretary of the Treasury for Monetary Affairs Deming, Ambassador Roth, the President's Special Trade Representative, and Ambassador to the Organization for Economic Cooperation and Development Trezise visited with officials of our major trading partners in Europe to discuss the United States balance of payments program. Under Secretary of State for Political Affairs Rostow made a similar trip to Asia.

These emissaries in addition to describing the elements of our new balance of payments program, emphasized the necessity of restoring confidence in the exchange markets and the need for cooperative action to support the international monetary system. They distinguished between the long-term effects to be achieved through negotiations in the GATT on rules governing border tax adjustments and consultations with our trading partners to consider the best temporary actions to improve the United States' trade account. In these extensive consultations, we explored whether a temporary United States export rebate and import surcharge would necessitate or provoke similar measures by others which would have the effect of neutralizing the benefits the United States was seeking.