as everybody has said, of our attempts to combat inflation. It was the first victim, and it has difficulty in recovering, and it has a long way to go. I would just like to ask about one other point. On page 17 the staff study indicates that bank credit control could be slowed so that in 1969 instead of two-fifths, only one-fifth to one-third of the total funds raised would be by the banking system. Is this a goal or a policy that you expect to achieve, or is this something that you think is going to result without the conscious effort to achieve this? Mr. BRILL. I think this would be the result of the policy, not specified as a goal, the result of a policy which would change incentives to the private economy as to how they want to hold their assets. In that process the changing relationship between market interest rates and the rates available at financial institutions would result in a larger supply of funds being channeled from savers through financial markets to borrowers, rather going through institutions such as the banking system. Senator PROXMIRE. Did you work up this graph considering what has happened to the stock market in the last couple of weeks? I would think if I were a corporate treasurer I would be very reluctant about going into a market which is deteriorating as badly as the stock market is. It is almost down to 900 on the Dow-Jones. Mr. BRILL. Of course, corporate treasurers have not been going to the stock market, they have been going to the bond market. be. Senator PROXMIRE. But for long-term money it seems to me it would But all this is good, because it restrains business economic activity, and right now we would like to see restraint. Thank you very much, Governor Martin, you have done a marvelous job. You have been extremely responsive and helpful. The committee will stand in recess until 10 a.m. in room 1114, the same room, to hear the Secretary of Commerce. (Whereupon, at 1 p.m. the committee was recessed, to reconvene at 10 a.m., Thursday, February 27, 1969.) THE 1969 ECONOMIC REPORT OF THE PRESIDENT THURSDAY, FEBRUARY 27, 1969 CONGRESS OF THE UNITED STATES, The Joint Economic Committee met, pursuant to recess, at 10 a.m., in room 1114, New Senate Office Building, Hon. Henry S. Reuss (member of the Joint Committee) presiding. Present: Representative Reuss; Senators Percy and Javits. Also present: John R. Stark, executive director; James W. Knowles, director of research, and John R. Karlik, economist, and Douglas C. Frechtling, minority economist. Representative REUSS (presiding). Good morning. The Joint Economic Committee will be in order for today's discussion of international economic issues. We have with us this morning Mr. William M. Roth, until recently the Special Representative for Trade Negotiations. Last January 14 he submitted a report to President Johnson outlining his recommendations for a future U.S. foreign trade policy. We are delighted to have Mr. Roth with us today and hope that he will summarize the recommendations made in his report. Later on this morning, we expect Secretary of Commerce Stans and Under Secretary of the Treasury Volcker to outline the new administration's position toward balance-of-payments matters, foreign investment controls, and possible reforms in the international monetary system. They will arrive in half an hour or so. Therefore, I would like to proceed with Mr. Roth. Mr. Roth, you are very welcome. Your statement has been received into the record. Would you proceed now in your own way to read or summarize your statement. STATEMENT OF HON. WILLIAM M. ROTH, FORMER SPECIAL REPRESENTATIVE FOR TRADE NEGOTIATIONS Mr. ROTH. Mr. Chairman, thank you. I would like to read my statement. I wonder, too, if I could have our report of January 14 as part of the record? 1 Representative REUSS. Without objection, the report 1 is made a part of the record in these proceedings. (See appendix, this day's proceedings.) 1 "Future U.S. Foreign Trade Policy," report to the President submitted by the Special Representative for Trade Negotiations, Jan. 14, 1969. Available from Superintendent of Documents, U.S. Government Printing Office, Washington, D.C. 24-833-69-pt. 3- -12 Mr. ROTH. Mr. Chairman, I deeply appreciate the opportunity to appear before you today. My report on future U.S. trade policy, which was submitted to President Johnson in January, sets out the various aspects of that policy that I believe to be of particular importance. This report attempts to take note of the sweeping changes that have taken place in world commerce over the last decade and to suggest modifications in our own policy-in techniques if not in objectives-to meet the challenge of those changes. I feel most strongly that U.S. trade policy, and therefore the trading structure of the entire world, is at a crossroads. The problems that the new administration and the Congress are facing now, today, entail choices that are not-as they have been in the past-choices of degree but rather choices of alternate routes that are fundamentally divergent. Our choice lies between a world trading system of shared markets restricted by import and export quotas and a system of competition based upon a further liberalization of impediments to trade. These are the alternatives that I want to emphasize this morning. Let me be specific. President Nixon, at his second press conference made a fine and forthright statement on the necessity for the continuation of a policy of liberal trade. He said he did not believe in quotas, but rather in the expansion of world trade. He added, however, that textiles were a special problem and that exploratory discussions will be taking place with the major countries involved to see if we can handle this on a volunteer basis rather than through legislated quotas. Former Vice President Humphrey during the electoral campaign made a similar pledge to the textile industry. This is not, therefore, a partisan issue. Rather, it relates to an industry-with plants in many States employing a large number of workers-that has the political power to make itself heard. But does it also have a sound economic case in asking for what amounts to a substantial subsidy from the American people? To my knowledge the U.S. textile industry has not made an economic case for overall protection. In fact, investment analyses over the past few years by respected Wall Street firms suggest that this industry is properous and growing. True, there are parts of the industry where heavy import penetration has raised the possibility of economic hardship-knitted woolen outerwear is an example. But the important point to emphasize and one repeatedly made by former Representative Tom Curtis, who was a member of this committee is that protection should not be afforded to an entire industry, involving billions of dollars, to take care of the problems of individual segments. And yet this is exactly what the textile industry, as a totality, is asking from the American people today. In terms of other U.S. foreign trade goals, additional quota protection for the textile industry would be very costly. The foreign cost to the United States of the international arrangement in cotton textiles was minimal because-let us be honest-it primarily affected less developed countries with relatively little ability for effective retaliation. An extension of this arrangement to include man-made and woolen textiles would affect important trade of developed countries and would invite overt retaliation in the form of restrictions against U.S. exports and/or lack of cooperation in achieving major U.S. trade objectives. These trade objectives of vital importance to our agricultural and industrial exports require cooperative international effort. For example, a major U.S. goal is the reduction of the adverse effects on U.S. exports of the common agricultural policy of the European Economic Community. Soybeans is a case in point. Because of the huge surplus of dairy products that the common agricultural policy has artificially stimulated, the EEC is now considering levying a very high tax on soybeans and other vegetable oil products. This tax would affect close to $500 million of U.S. exports. We have urged the Community not to levy it. We are also urging restraint in the common agricultural policy for tobacco, which has yet to be decided and which could be very restrictive. The subsidization by European countries of exports of poultry and other products has already injured our exports to third markets and is another issue that must be settled. We are also engaged in international discussions on border taxes and are trying to eliminate the trade distortions arising from the tax systems of several European countries. But Europe is not the only area where important U.S. trade objectives could be frustrated. We have a number of outstanding problems with Japan, for example, which are of both a trade and investment nature. All these efforts would be endangered if the United States demanded an expanded textile arrangement. During the last session of the Congress, the House-Senate conferees considered the Hollings textile quota amendment to the surtax bill. Congressman Byrnes and other Members consistently made the point that if there was to be protection for the textile industry it should also be extended to other industries equally pressed by import competition. Why, they asked, should one segment of American business and not others have this kind of Government assistance? Chairman Mills also pointed out that a similar discussion must have been held many years before during consideration of the Smoot-Hawley tariff bill when individual Congressmen traded high protection in one industry for protection in another. In other words, it was clear to the conferees, and I believe it must be clear to you that once we go down the road of market sharing, there will be no place to stop. Last month, Japanese and European steel producers announced their intention to voluntarily limit their exports to the United States during the last 3 years. When in Government, I did not oppose this arrangement because of problems peculiar to the domestic steel industry. However, I have become increasingly concerned about the precedent established by this and other voluntary agreements that restrain trade. Not only do such voluntary agreements have the same economic objections as mandatory quotas, but they are concluded without a demonstration of serious injury in accordance with the rules of the GATT. Furthermore, they circumvent legislative and administrative procedures and preclude both public and congressional consideration. We must be terribly careful lest this precedent become a prelude to a general market-sharing or quota approach to U.S. trade policy. The cost of such a general approach-whether achieved through voluntary agreements or by mandatory legislation-would be enormous. Domestically, the cost would be higher prices and less variety for the consumer, higher raw material and intermediate costs for producers, and inflation for the economy as a whole. Furthermore, the nature of the U.S. economic system would be changed. Governmentnot the marketplace-would decide the level of imports and to whom they were allocated. Indeed, in order to look after the interests of consumers and of unprotected producers, I believe it would become necessary for a Government agency to review price and investment decisions. But U.S. adoption of the quota approach would have worldwide effects. It would undermine the General Agreement on Tariffs and Trade (GATT), which prohibits the use of quotas for protective purposes. The postwar multilateral trading system that has been so painstakingly constructed would be seriously weakened. The alternative to market sharing and quotas is the continued expansion of world trade. In my judgment, the goal of U.S. foreign trade policy should be to make America more-not less-competitive and to strengthen-not weaken-the multilateral institutions concerned with international trade and monetary affairs. As my report points out, however, this will require that we deal effectively with new and changing conditions in world trade-including the inflationary pressures in this country, the growing competitiveness of European and Japanese industry, the increasing importance of nontariff barriers to trade, and the effects of an inadequately flexible international monetary system. I firmly believe that a nation that uses its managerial, educational, and research abilities to maximum advantage need not fear that it will become noncompetitive in world markets. Indeed, one of the most important competitive advantages this country has is a demanding and increasingly sophisticated consumer market-a market that generously awards innovation and technical advance. With innovation and technical advance, our position in international trade will grow. In making America more competitive in world markets, the U.S. Government must play a significant role. On the broadest front. the rate of inflation must be slowed down. Domestic policies providing for growth with price stability are now a prerequisite to our ability to compete at home and abroad and to improve our trade balance. More specifically, the Government should go considerably further in assisting our exporters, through stepped-up export promotion and more extensive and readily available export financing. At the same time, changes and growth in trade can cause hardship, and particularly to individual firms or groups of workers. This I believe is a legitimate concern of government and society. There must be adequate adjustment assistance to firms and workers adversely affected by increased imports. Moreover, temporary import protectionor escape-clause relief-should be available more broadly to industries that can show serious injury from imports. My report makes recommendations for liberalizing the present rigid statutory criteria for adjustment assistance and escape-clause relief. In both cases, it is proposed to drop tariff concessions as the first cause of injury and deal solely with the relationship between increased imports and injury. In addition, the President should be empowered to reduce U.S. duties so that compensation can be given to foreign countries that may be affected by escape-clause actions that impair previously granted |