Trade war across Atlantic feared

Press, 28 February 1980, Page 18

Trade war across Atlantic feared

By Giles Merritt in Brussels and lan Hargreaves and David Buchan in New York, for the “Financial Times”

Trade wars, like shooting wars, can start as much from misunderstanding as from conflict of interest. And like real wars, too commercial hostilities can stem from a police action that could not be contained.

That, at any rate, is the assessment of European Commission officials in Brussels who are responsible for coping with the present surge of E.E.C.-U.'S. trade disputes. Taken separately each could be negotiated. The risk is that the issues will not be kept separate and will instead come together into an explosive mixture that could be the basis of a tit-for-tat trans Atlantic trade war on a scale not seen since the 19305. President Jimmy Carter and Mr Roy Jenkins, the ■ E.E.C. Commission President last month warned against the unravelling of the recently concluded Tokyo Round package of multilateral trade liberalisation deals in the unravelling of the recently concluded Tokyo Round package of multilateral trade liberalisation deals in the General Agreement on Tariffs and Trade (GATT). And the single strand that has come loose so far is synthetic fibres. Britain’s decision to impose quotas on three U.S. products — polyester filament yarn, nylon and tufted nylon carpets —could signal the start of retaliatory protectionism in the U.S.

The Brussels Commission is to try and persuade the U.K. to place curbs on just polyester filament yarn, arguing that that is the sector in which U.S. producers . have made the most serious inroads by pushing their market share from less than 4 per cent in 1977 to almost 30 per cent today. But the Commission will need to tread carefully, for the rest of the European textiles industry is deeply perturbed by the price advantage that their American competitors derive from the hidden subsidy of

cheaper petrochemical feedstock caused by oil and gas price controls. Even the free trade champions in the West German synthetic fibres industry last week put their names to an E.E.C. industry .demand for Community measures against the U.S. comparable to those being taken by the U.K. Restraining the European textile industry will be difficult enough. Not only are they scared that the British measures will mean that France and West Germany are the next U.S. targets, there is also concern that Italy should have been granted similar protection to reinforce the anti-dumping measures now giving some relief against U.S. acrylics that have been flooding in. In the U.K. the British Texile Confederation is still resentful that the new curbs do not extend to all fabrics with polyester content or to acetates.

Significantly, the European textile industry’s moves have been monitored nowhere so carefully as inside the European steel industry. The E.E.C steel-makers fear that although there is no logical link between the two industries, the U.S. riposte to textiles protectionism would be a spate of anti-dumping actions that could cut E.E.C. steel experts to half the hoped-for 1980 level of about 5M tonnes.

Many European steel companies are technically vulnerable to such actions, even if some U.S. producers can sell at up to 10 per cent below imported steel prices. Even.if the International Trade Commission were subsequently, to find in favour of European companies, import deposits and temporary duties could almost overnight erode importers’ confidence and thus lop around $1 billion from the Community’s trade with the U.S.

That, European industrialists are beginning to point out, would substantially

widen the E.E.C. ’s serious trade gap with the United States. All these trade problems must be set against the background of the E.E.C.’s growing deficit on manufactured goods with American industries that export on the back of the declining dollar. According to European Commission figures shortly to be made public, 1979 saw the gap reach Sl2 billion, of which only $4 billion, was accounted for by the traditional deficit on agricultural items. Only two years previously, industrial trade with the United States was roughly in balance. Last year it appears that the E.E.C.’s long-standing trade surplus with the United States in man-made textiles and clothing was wiped out. The United States industry estimates it will have a $l5O million surplus in 1979 compared with the $3OO million deficit in 1978. In American eyes, though, it is the Europeans who are the aggressors. Last year the Italian footwear industry walked all over the United States industry when it shipped an amazing 10 million pairs of cheap, $4-5-a-pair, women’s sandals known as “Candies” into the American market. And by dint of having increasingly elbowed the Spanish industry aside, Italy is this year being accused of United States market disruption in its concentration on the medium-to-top quality shoes sector. Poultry is another subject about which the Americans are angry. Export restitutions, or subsidies, to European poultry producers are alleged to threaten the United States industry’s $165 million a year international trade. It is small business when compared to other industries — such as United States nitrogenous liquid fertilisers produced from • the cheaper feedstock that Europeans claim are wrecking their third markets — but it has an emotional importance. It calls to mind the. “Chicken War” that rumbled on in the 1960 s and early 1970 s over a similar problem and which drew United States retaliation in the form of special duties on such goods as brandy.

No list of American complaints ■ on trade *would be complete without the canned hams and Danish butter cookies that have in recent years produced periodic fits of United States irritation. But the withdrawal of the waivers that admit these into the United States is not the sort of administration or congressional action that Europe most fears. The Brussels Commission is worried that the Carter Administration could stop acting as a brake on the United States steel industry’s moves toward launching anti-dumping suits; that in response to that E.E.C. governments would be hard put to resist calls for community-wide protection on synthetic textiles; and that having retaliated on some of the other outstanding trade issues the Americans might be tempted to tinker with their existing trade legislation. United States diplomats in Brussels share this concern, even if in Washington the mood is to dismiss the various factors as rumours of trade war rather than the beginnings of one. For the Carter Administration’s preoccupation is real war in the shape of the Afghanistan crisis and the presidential election in which trade protection is not yet an issue. On steel, the Carter administration has conducted a long and detailed dialogue with the industry, both before and since the emergence of the so-called Solomon plan in 1977 which set up the trigger price system on minimum prices for imported steel. The argument of the steelmakers, articulated with a new comprehensiveness and detail in the recently published strategy document of the American Iron and Steel Institute, “Steel at the Crossroads,” is that the Solomon plan an-’ the trigger price have not worked. According to Mr David Roderick, chairman of United States Steel .and the most outspoken of the Government’s critics, at least 8M tonnes of steel was dumped in the United States last

year, much of it by European producers. That allows for the possibility that the remaining 8M tonnes of imports was fairly priced. Mr Roderick says’ the trigger price system needs revising to set a second series of minimum prices for European producers based upon European rather than 1 Japanese costs: the latter are used exclusively in determining existing trigger price levels. It also wants similar protection for special steelmakers, whose anti-import quota system expires this month. The steelmakers made similar demands in 1977 and got the trigger price. But since then the scope of their other demands has widened and hardened. They want significant and what would be controversial relief from anti-pollution laws and they want a whole package of fiscal changes which would help their companies generate capital for reinvestment. They reckon to need $7 billion a year in the decade to put the industry back into shape — more than twice the existing level of spending. In pressing their demands the steelmen have two weapons. They could launch a wave of anti-dumping suits, which the administration maintains would overload the bureaucracy and thereby kill the trigger price system, and they could attempt to wield their political influence against the President in and outside Congress. The scope of that electoral influence is already significant in areas where thousands of men have lost their jobs. The President knows that there are dozens more closures in the pipeline — it is estimated that 25 per cent of the industry's capacity is uneconomic — and that these closures could be timed to cause some embarrassment to his campaign. That said, the Administration’s inclination seems to be to tread softly and offer Big Steel progress in small doses. It can help a little here and there with environmental costs. It may be able to offer a touch of fiscal relief and if European steelmakers are

prepared to offer some form of voluntary self-restraint, there is the making of a package, which may not satisfy Mr Roderick, but would buy time. Just as the administration is not over-enthusiastic about accepting blame for its steelmakers’ woes, it is not convinced that it carries any responsibility at all for the success of its man-made fibre producers in increasing their exports to Europe. • Officials back the U.S. industry view that Federal control of oil and gas prices is of little relevance to the industry's cost advantage which led to a 43 per cent increase in the export of U.S. man-made fibres last year, with the most significant penetration into Britain’s nylon, polyester filament and tufted carpet markets.

It is difficult to get to the bottom of this argument; for while it is true that U.S. manufacturers are far less dependent than Europeans on crude oil-derived feedstocks (about half U.S. feedstocks are oil-derived, half gas), until oil prices are fully decontrolled within the next two years and gas prices in the next five years, some advantage must exist. The U.S. industry says that only 2 or 3 per cent of U.S. fibres can be traced back to raw materials on which there are price controls. The real differentials, they say, are the 15 per cent devaluation of the dollar against the pound last year and the productivity advantages of U.S. companies. The average U.S. polyester plant, it says, has a capacity of 112 million lbs a year compard with 52 million in the EEC, Man-made fibre output per employee at 39,100 tonnes is very nearly twice that of Europe. Administration officials accept that Europe can use the same arguments about U.S. steel, which has not built a major new plant for almost two decades, and conclude that the subject is chiefly one of industrial competitiveness and investment rather than one of trade policy or dumping.