vested abroad. Those concerns are set forth in greater detail in my prepared statement.

Having set out, sir, the administration's position on this bill, I would like to offer on behalf of the administration to work closely with the subcommittee on the broader issue which underlies this bill. As I have said earlier, we share your concern about the potentially disruptive consequences of imports benefiting from dual pricing. We want to explore potential solutions that are hopefully consistent with the GATT and with the long-term U.S. economic interests. But the problem is that right now under existing international conventions, conventions, as I say, which are shared by the United States legally, these countries are in many ways doing exactly what the international convention says they should do, selling abroad for a higher price than they sell at home. They surely are not dumping nor are they subsidizing under any interpretation of existing law, be it our law, their law, or the GATT's law.

We at the USTR, Mr. Chairman, have worked very hard and with a great deal of pleasure with your Subcommittee in the past to formulate common approaches to trade problems. We want to take advantage of that past relationship and we welcome the opportunity to work with you and the members of your staff to see how, if at all possible, the problem which underlies this bill can or should be addressed.

I would add just a footnote, sir. We raised this issue as a matter of general trade policy concern 2 years ago in Ottawa with our Canadian, European Community and Japanese colleagues. At that time, all of us agreed that we had potentially a major trade problem or dilemma. In dealing with natural resources products, the rules of the past 35 years, or be they the rules of the past 200 years, may have to be reexamined, particularly as they impact on industrialized societies or societies with a large industrial base. Maybe the law of comparative advantage should be turned upside down as this bill, in my view, does turn the law of comparative advantage upside down. But we should not do that alone or without knowing the cost to us, or without an international consensus. Otherwise, we fear that this would be to invite the law of the jungle in international trade, an outcome that I respectfully submit, sir, nobody wants to see.

I will be pleased to answer any questions that you have or if you would like to ask Mr. Holmer for his comments.

Thank you.

[The prepared statement follows:]

STATEMENT OF MICHAEL B. SMITH, DEPUTY U.S. TRADE REPRESENTATIVE

Mr. Chairman, Members of the Subcommittee, I am grateful for the opportunity to appear before you today to testify on H.R. 2451, a bill to amend the countervailing duty law to apply countervailing duties to resource input subsidies.

I want to begin by emphasizing that this Administration is deeply committed to the vigorous enforcement of the antidumping and countervailing duty laws. During the past four years, we have conducted more countervailing duty investigations and issued more countervailing duty orders than at any point in the history of the United States. We have not hesitated to enforce our CVD law to the fullest extent of the international rules. Since the negotiation of the International Subsidies Code in 1979, we have pushed aggressively into the area of domestic subsidies and have rethought and reexamined our methodology in order to more accurately reflect the

economic benefits of foreign government subsidies. Today, the United States has by far the toughest and most rigorous countervailing duty program in the world.

The program is in many ways a tribute to our long and productive relationship with the House Ways and Means Trade Subcommittee. Over the years, we have worked closely with this Subcommittee to improve the remedies to American firms and workers under our trade laws. Last year, Congress enacted and the President signed into law the first major revision of the trade laws since the Trade Agreements Act of 1979. The Trade and Tariff Act of 1984 was a major achievement, one which renewed the GSP program for 81⁄2 years, laid the groundwork for a Free Trade Area with Israel, provided authority for the President's Steel Import Stabilization Program, and enacted important procedural reforms of the unfair trade laws. In the antidumping and countervailing duty area, the 1984 Act codified our ability to attack upstream subsidies, strengthened the threat of material injury standard, and established a Trade Remedies Assistance Office in the ITC to help small businesses gain access to import relief. These achievements would not have been possible without the work of this Subcommittee and leadership of Chairman Gibbons. We may have disagreed on certain points, but I think we shared broader concerns for the fairness and integrity of the unfair trade laws, the adherence of our law to the international rules of the GATT and the Subsidies Code, and the vital role of the U.S. in the international trading system.

I would like to turn now to H.R. 2451. We understand and share the Subcommittee's concern over the possibility of long-term trade problems in the area of lumber, gasoline, petrochemicals, ammonia, cement, carbon black, and other resource-intensive products. Immediately after the enactment of the Trade and Tariff Act of 1984, Ambassador Brock directed that an inter-agency group of experts be formed to conduct an intensive study of potential problems in the natural resources area. That work began last January and is being pushed ahead as quickly as possible. We want to work with the Subcommittee to examine the potential for serious trade disruption in this area and to meet any problems uncovered by the study.

Nevertheless, given the extensive debates over the natural resource subsidy provision of H.R. 4784 last year, I doubt if it will come as any surprise that the Administration must oppose H.R. 2451 in its present form. The bill represents a fundamental departure from the policy developed jointly by Congress and the Executive Branch. This policy, which is clearly and specifically embodied in our law, is designed to separate out selective trade-distortive governmental actions from general government measures. This policy represents the only rational countervailing duty procedure that can be administered by the U.S. and our trading partners. To depart from this policy brings the risk of dismantling the international consensus on countervailing duties which has been of such benefit to our domestic industries, both in protecting them from unfairly traded imports and in shielding our exports from harassment abroad.

In its present form the bill violates the GATT. There is a broad international consensus that the proper test of the countervailability of a domestic subsidy is whether a government is providing benefits to a specific industry or specific group of industries, so that the subsidy is not "generally available" within the country. This is the standard that was enacted by Congress in section 771(5) of the Trade Agreements Act of 1979. It is the standard recognized in Article 11:3 of the Subsidies Code, which states that domestic subsidies are those "granted with the aim of providing an advantage to certain enterprises” and are "normally granted either regionally or by sector." This standard has universal international acceptance. We should not enact legislation which violates the GATT and would compel us to countervail practices falling outside the internationally accepted definition of a subsidy. Violations of the GATT can have a high price. If we violate the GATT, other countries have a legal right to retaliate against our exports. The ITC's recent section 332 study shows that H.R. 2451 would affect some of our major trading partners, including Canada, Mexico, Saudi Arabia, and the Peoples Republic of China. Our training partners currently recognize our right to apply antidumping and countervailing duties under Article VI of the GATT. If, however, we start to apply countervailing duties to practices which do not fall within the internationally accepted definition of a subsidy, our trading partners would regard our action as a thinly disguised excuse for a tariff increase, rather than a legitimate exercise of our Article VI rights. They may well demand compensation in the form of reductions in U.S. tariffs that limit their exports to our market. If we failed to offer satisfactory compensation, they would retaliate by raising their tariffs to shut out American exports. Thus, GATT-illegal legislation is likely to get us into the situation of trading off one industry for another, "saving" American jobs in one industry at the cost of jobs in another. If we unilaterally protect resource-dependent industries in violation

of the international rules, other industries will suffer. We should not make our export industries pay this price.

All governments engage in interventions in the marketplace that directly or indirectly affect the competitiveness of certain industries. Every government sets broad macroeconomic policies that are designed to lay a solid foundation for economic growth. Every government supplies certain basic services to its citizens, such as roads, schools. police, and fire protection. Every government, including the United States, provides subsidies. We build irrigation projects to help our farmers and hydroelectrical projects to supply electricity. The U.S. Tax Code offers a wide variety of subsidies to our businessmen, such as investment tax credits, accelerated depreciation allowances, and interest deductions. The money that we spend on defense and space research helps our aerospace and high tech industries.

Accordingly, within the universe of interventions in the marketplace, it is absolutely essential to distinguish those subsidies which are properly the subject of countervailing duties, or in other words to distinguish those types of government actions which are permissible from those which are not. The international consensus, as reflected in the GATT and the Subsidies Code, is that the generally available test marks the dividing line between permissible and impermissible government subsidies. This test serves U.S. interests well, since unlike some other governments, we rarely channel benefits to specific industries, but instead engage in broader policies designed to foster economic growth.

The generally available test therefore provides a safe harbor for many of our programs from foreign governments who might otherwise be looking to impose countervailing duties on American exports. Our programs are not targeted at specific industries, even though government funding of schools and universities may provide disproportionate benefits to high-tech firms which need a highly educated work force, and accelerated depreciation allowances may provide disproportionate tax benefits to our industrial sector which spends heavily on machinery and equipment.

If we follow the course of H.R. 2451 and break the generally available standard, we will open a Pandora's box. Other countries could and would use mirror legislation to attack some of our strongest export industries. I know that the drafters of the bill have attempted to craft a definition of a “resource subsidy" that would provide a safe harbor for the natural resource practices of the United States government. But, since we would be violating the international rules, other countries would not be bound by our definitions, which they would regard as self-serving. They are perfectly capable of drafting their own definitions in order to go after American industries with a competitive advantage in their markets, such as hightech and agriculture. Like ever other government in the world, the United States has many generally available subsidies. We provide tax breaks; we have a system of price supports designed to help our farmers; we have a highly developed educational system; through our defense, scientific research, and space programs, we spend large sums of money on our high tech industries. If we depart from the specificity principle and go after generally available benefits, we risk an open season on any sort of government intervention, including our own. Violating the generally available standard is an all or nothing proposition; we cannot violate the international rules for one sector and expect the damage to be limited to this sector. In an open season, all American businesses could be the losers.

Even if for some reason foreign governments were to follow the general approach of the bill and limit themselves to natural resource inputs, they could attack a number of U.S._government programs, including oil depletion allowances, special tax breaks for the timber industry, price controls on natural gas, Tennessee Valley electricity, Western dams and irrigation projects, and government coal and oil leases. We should not enact a set of rules for imports unless we are prepared to live by the same rules in our own trade.

The definition of a removal right subsidy provides an excellent example of the dangers of having the same rules apply to U.S. products. The bill essentially defines a removal right subsidy as the difference between the price of U.S. timber rights and Canadian timber rights. This is essentially a rule that no foreign country can sell a natural resource right for less than what the same right would cost in the United States. Surely, we would not accept the same rule for our own industries, since it would prevent American industries from exploiting our own comparative abundance of natural resources. We should not adopt definitions that are designed to serve the narrow interests of a few industries, rather than the broader interests of all American industries.

Similarly, the bill's definition of a resource subsidy strikes at the heart of comparative advantage, which is the basic principle underlying international trade. Lower domestic prices of oil and natural gas in many oil-producing counties reflect the

comparative abundance of hydrocarbon reserves in those countries and the lower costs of exploiting the reserves. The proposal makes no allowance for the fact that a part, or all, of the price difference may be due to comparative advantage rather than foreign government intervention.

In addition, the bill sets out unworkable concepts that would be impossible to administer, such as the "fair market value" for a resource input or the "market clearing price." Given the complexity of resource markets and the variables involved in international trade, we would find it impossible to apply these standards with any accuracy or predictability.

In short, for the reasons I've set out, the Administration strongly opposes H.R. 2451 in its present form.

However, while we oppose the bill, we are not insensitive to the Subcommittee's concern over the broader issue of trade in natural resource-intensive products. We share the Subcommittee's concern over the potential for long-term trade problems in ara of lumber, hydrocarbons, gasoline, ammonia, and petrochemicals. As I stated earlier, an inter-agency group of exports is currently conducting an intensive study of the energy resources issue. The problem is one of extraordinary complexity.

As you know, the core of the energy problem is the concentration of hydrocarbon reserves in a few states. While other countries also have oil reserves, this oil tends to be less accessible and more expensive to drill. This relative concentration of oil reserves in a few oil-producing states has given rise to the OPEC cartel, oil shortages, oil embargos, and monopoly prices. Because of the artificially high price of oil, certain oil producers are able to sell oil and energy stocks at prices far exceeding their cost of production. This has led to fears that oil-producing states will attempt to exploit this advantage by shifting into the production and sale of refined products, such as gasoline and petrochemicals. These concerns hae focused on the practice of dual pricing, where the lower domestic price reflects the producing countries' lower costs for extracting oil, and on restrictions on the ability of American companies to purchase and export the energy resource at the lower domestic price.

From this point, the energy problem acquires a myriad of complexities. As the ITC Report demonstrates, the energy resources issue involves the written and unwritten practices of over a dozen countries, including Mexico, Canada, the Soviet Union, the Peoples Republic of China, Saudi Arabia, and the various members of the OPEC cartel. The potential for serious trade problems is also tied up with the prospects for the construction of new refineries, petrochemical plants, and other facilities in these countries and the transportation costs of various countries, which make it more or less economical to export natural resources or refined products.

While the possibility of long-term trade problems is a matter of serious concern, we should not rush_precipitously into the wrong solution. We have a number of vital interests at stake. In the first place, many of our companies have invested heavily in joint ventures abroad, including joint ventures in OPEC nations. We should not put these investments at risk. In addition, we should be careful about taking actions that might jeopardize our long-term economic relations with friendly oil-producing nations on whom the Western world depends for its supplies of oil. While the bill seeks to use our countervailing duty law as a club to dictate the natural resource pricing policies of foreign governments, this approach carries some obvious risks and could backfire, given our probable long-term dependence on foreign oil. Finally, we should consider the interests of our consumers, since one consequence of the bill would be to bolster OPEC's pricing discipline. The reported sale of refined products by oil-producing countries for less than their crude oil equivalent, less costs for refining and transportation, reflects the weakening of OPEC's pricing regime. As oilproducing countries have experienced difficulties in selling crude at OPEC prices, they have turned to downstream products not subject to OPEC's pricing discipline. This lowers the energy costs of oil-importing nations, helps weaken crude oil prices, and lowers gasoline prices for the American consumer. We should not make our consumers pay higher prices. Indeed, if U.S. consumers must pay higher prices for energy, they will be less competitive in international markets. We also have the problem of imports of Canadian lumber, which is analytically distinct from the energy problem, and raises concerns of its own.

I rise these question not because I have all the answers, but to illustrate the conflicting policy considerations at work. While the potential for long-term trade problems is a matter of serious concern, we should not rush into the wrong solution before we have all the facts. Clearly, a number of industries have suffered problems as a result of oil decontrol, fluctuations in energy prices, declining demand for certain products, and inefficient plants. But the link to imports has not been demonstrated and indeed must be regarded with some skepticism. Imports of oil products are averaging about 1.8 million barrels per day in 1985, compared to 2.0 million in

1984 and the 1973 peak of 3 million. While imports of gasoline and blending components have increased in recent years, these imports still represented only 5.5 percent of total U.S. gasoline consumption in 1984. Net stock adjusted imports of Mexican ammonia have declined over the past 5 years and at their maximum accounted for only a small percentage of U.S. consumption. With respect to carbon black, overall imports have risen, but still account for an exceedingly small percentage of U.S. consumption, 1.04% in 1980 and 5.42% in 1984. Similarly, cement imports accounted for 6.5% of U.S. consumption in 1980 and 9.6% in 1984. These figures indicated that closer scrutiny of the problem is warranted.

Nor, in its efforts to obtain special legislation, has the ad hoc coalition explained why the normal import relief remedies are inadequate. The United States has a right under Article XIX of the GATT to impose quotas or a tariff increase if imports are the substantial cause of serious injury or the threat of serious injury to a U.S. industry. We have used temporary import relief measures to allow our industries time to adjust to international competition. We believe that escape clause of section 201 is one available procedure for conducting a precise, reasoned analysis of the impact of imports on U.S. industries. In the past, section 201, has functioned as a fair and impartial mechanism for allocating claims to import relief. We should not create a new remedy unless we have clearcut proof that our existing remedies cannot address the present situation.

Mr. Chairman, I have tried to lay our some of the Administration's concerns over this bill. We have disagreed in the past over pieces of legislation and undoubtedly we will disagree in the future. But our differences have always been those between honest men and women who share a common concern for the welfare of our firms and workers and for the health of the international trading system. As specialists in trade, we at USTR and the Members of this Subcommittee have long shared a common recognition that our national welfare is irrevocably bound up with the welfare of the international trading system. The Executive Branch and this Subcommittee have worked effectively together to develop solutions that meet the interests of American industries and workers and the international trading system as a whole. We understand and share your concern about the impact of imported lumber, gasoline, ammonia, and petrochemicals on our firms and workers. For our part, we are looking closely at the natural resources situation and the potential for serious, longterm trade problems in the energy and lumber sector. We want to work with you to address your concerns and to explore common solutions that are consistent with the GATT and long-term U.S. interests.

Thank you for the opportunity to present USTR's view on H.R. 2451. I'd be happy to answer any questions that you might have.

Chairman GIBBONS. Mr. Holmer, would you like to comment? STATEMENT OF ALAN F. HOLMER, DEPUTY ASSISTANT SECRETARY FOR IMPORT ADMINISTRATION, DEPARTMENT OF COMMERCE, ACCOMPANIED BY C. CHRISTOPHER PARLIN, DEPUTY FOR POLICY TO THE DEPUTY ASSISTANT SECRETARY FOR IMPORT ADMINISTRATION

Mr. HOLMER. Only very briefly, Mr. Chairman. Ambassador Smith has laid out the administration's position on the legislation. I would be happy to respond to questions you might have regarding our countervailing duty decision on Canadian softwood or Mexican ammonia or carbon black or cement.

I would like to address one issue, which seemed to underlie some of the discussion this morning, which was a question in some members' minds about the effectiveness of the administration of our antidumping and countervailing duty laws. I was troubled, frankly, Mr. Chairman, by your comment, I think if I have it right, that you did not get the kind of results that you intended when the program was picked up from Treasury and moved over to Commerce. Chairman GIBBONS. I said it had improved.

Mr. HOLMER. Well, my position is, and I think it is borne out, I would hope, by the record, that it has improved a lot. I agree with the testimony presented by Bob Peabody, the president of the