rates. It is no use obtaining a reduction in customs duties or even the elimination of nontariff obstacles if the effect of those measures is then nullified by heavy fluctuations on the exchange market.

If it is therefore true that the success of trade negotiations in fact depends not only on a revival of economic activity but also on a reform of the international monetary system, it is essential that, until those two conditions are fulfilled, no protectionist measures should be taken. It is certain that the United States and the European Economic Community, through their weight in international trade, have a special responsibility in this field. Were protectionism to prevail on either side of the Atlantic, the consequences would be highly prejudicial for the whole of the Western World. The delegations should undertake to oppose any attempt to solve unemployment of balance-of-payments problems through the use of trade restrictions which would inevitably result in a harmful escalation of protectionist measures.

II. TRADE QUESTIONS

As regards the protectionist measures just referred to, the Trade Act signed by President Ford on January 3, 1975, has caused a certain anxiety in European circles. While the latter were pleased at the signature of this act, which permits the United States to negotiate within the framework of GATT, certain fears have nevertheless been expressed. These fears are of two kinds. First, the targets fixed for the negotiations seem, on certain points, to diverge from those the Community has set herself. Second, are the powers which the President of the United States reserves to himself compatible with the GATT rules, or should a modification of these rules be considered?

As regards objectives, the Trade Act provides for the possibility of reducing up to 60 percent duties in excess of 5 points, and wholly eliminating duties less than 5 points. However, the Community's approach to the negotiations is to aim for a better harmonization of tariffs between all the partners and to maintain a certain "tariff threshold." In order to achieve harmonization, it is necessary to trim the highest duties; this is directed mainly toward those countries which have very diverse customs tariffs. The maintenance of a tariff threshold has two purposes: It leaves open the possibility of future negotiations and it allows for the granting of preferences, notably within the framework of generalized preferences, in favor of the developing countries.

In the matter of nontariff barriers, the United States may negotiate very extensively but the negotiations must be ratified subsequently by Congress, which risks making all negotiations appear futile. It is hard to see the partner countries making concessions in a spirit of broad compromise when a single partner can afterward call the overall agreement into question.

More disturbing, perhaps, than the powers wielded by the President of the United States is the obligation imposed upon him by law to set up obstacles to trade in periods of balance-of-payment deficits, where this deficit calls for special measures in the field of imports. Admittedly, if the President feels that import restrictions would be contrary to the general interest, he is not obliged to set up obstacles, but in that case, he must consult Congress. For this reason, the dialog which European parliamentarians are conducting with their American colleagues is extremely important, and we should like to be given an assurance that the attitude of Congress will be a liberal one.

Another source of apprehension is the dilution of some of the criteria affected by the previous provisions of the “escape clause." The existence of a relationship of cause and effect between increases in imports and concessions resulting from trade agreements is no longer required. In addition, an increase in imports must constitute an "important factor" of the serious prejudice or the threat of prejudice and no longer the "major cause" as used to be the case, "important" is defined as "at least as important as any other factor."

If the rapporteur is correctly informed, the United States may annul or terminate any trade agreements concluded pursuant to the Trade Act. If this were really so, the negotiations would lose a great deal of their interest.

It appears to the rapporteur that the reduction of duties on products which engage national security or are subject to measures reducing imports is not a matter that can be negotiated under the terms of the act, any more than the lowering of barriers on the same products. The question is: What meaning is to be attached to the terms "products which engage national security ?"

In conclusion, the act would appear to indicate that GATT reform is necessary in order to promote the establishment of a liberal, equitable, and nondiscriminatory world system. It would be interesting to know the precise reforms envisaged.

III. AGRICULTURAL QUESTIONS

The rapporteur has already had occasion to present a number of reports on this subject in preparing meetings with American parliamentarians.3

The first of these reports, devoted to the social aspects of the Community's agricultural policy, needs to be brought up-to-date taking into account, on the one hand, the accession of new members to the European Economic Community and, on the other, more generally, the documents recently drawn up by the European Commission, notably the recently published stock taking of the Common Agricultural Policy (doc. COM. (75) 100). There has not been enough time for this but the rapporteur proposed to get these things done for a subsequent meeting.

The document relating to international trade in agricultural products which gives a rough description of relations between the United States and the Community retains its value, though it must now be added that the enlarged Community is now even further out in front as the world's leading importer of foodstuffs. The value of total agricultural and food imports reached 19 million units of account in 1973 and it was the United States which most profited from the increase in Community imports. Forty percent of these come from the developing countries, 50 percent from industrialized countries and 10 percent from statetrading countries. The Community's dependence on other countries for supplies of oilcake, particularly soya, and fishmeal, has increased sharply. Altogether, the Community continues to depend on a single supplier for 62 percent of its supplies of oil seeds and oleaginous fruit, oilcake and starch residues. If security of supply is virtually guaranteed as regards vegetable products for human consumption, the enlarged Community depends on other countries for about 80 percent of its protein concentrates and 50 percent of its maize.

The third working document, relating to world arrangements and buffer stocks, drawn up in February 1974, had a number of things to say on this subject. It remains topical since practical discussions within GATT have just begun, though the first meeting took place at Tokyo in September 1973.

A. WORLD ARRANGEMENTS

Since the Kennedy round the EEC has been proposing the conclusion of worldwide agreements on a number of major agricultural products. This proposal has not obtained the support of the participants mainly, it would seem, because traders fear restrictions on their freedom. Perhaps, too, the relative stability of prices at that time obscured the need for markets to be organized on an international scale.

Variations in the prices of cereals, sugar, and soya since 1972 and the shortages that even some major developed countries have experienced have led all the authorities concerned to interest themselves in the conclusion of worldwide arrangements capable, if not of eliminating inevitable price variations on the agricultural markets, at least of minimizing their effects.

What will the Community be trying to achieve at the GATT negotiations? The rules worked out there will differ according to the products concerned. As regards dairy products, dried milk, butter and butterfat, the mechanisms will be limited to rules of sale or purchase according to price levels.

In regard to cereals, including rice and sugar, rules of purchase and sale will be supplemented by the obligation to establish national stocks managed on the basis of rules laid down in the agreement, the size of which will be fixed in the light of its objectives. In the view of the rapporteur, establishment of such stocks is fundamental. Indeed, experience has shown that agreements cannot withstand sharp price variations. The only means of limiting these is by using a "balance wheel." It will of course be necessary to determine who will bear the cost. In this connection, the objectives of the agreement will have to be clearly fixed in order to distinguish between the quantities needed to meet these objectives and any surplus quantities.

3 Working document on the social aspects of the agricultural policy of the Community (PE 32.746/rev.). Working document on international trade in agricultural products (PE 34.176+supplement). Working document on world arrangements and regulating stocks (PE 36.065).

Conclusion of these agreements and, in particular, their enforcement, will not be an easy matter. At the same time there is the more distressing problem of the world food shortage which the World Food Conference highlighted.

B. THE WORLD FOOD CONFERENCE

The World Food Conference noted that more than two thirds of the world's population produce about one third of the world's food resources and that a very serious food crisis affects the peoples of the developing countries, where most of those who suffer from hunger and malnutrition are to be found. If the Conference cited historical circumstances among the principal causes, it also brought to the fore more permanent factors, namely the poor development of agriculture and its excessively unilateral orientation, or more recent phenomenons such as population growth, the deterioration of the international monetary system, and the growing cost of certain production factors.

The overall objective is to abolish hunger in the next 10 years, so that no human being's potential will be impaired by malnutrition. The major objective is higher food production in the developing countries, but also in the developed countries. The former should give priority to food crops, taking account, of course, of the special conditions of each country. All ways and means were reviewed: improvement of production structures, the woman's role at work and at home, the conservation and improvement of land under cultivation, agricultural and food research.

In addition, food aid continues to be recommended during an interim period. An appeal has been made to donor countries to supply products and/or financial assistance insuring a volume of food aid of at least 10,000,000 tons of cereals as from 1975, as well as other food products.

Food Aid Convention

This request is therefore for an amount of aid above and beyond the commitments undertaken in Rome in 1967 within the framework of the Food Aid Convention, namely the annual supply of 3,000,000 tons of cereals to the developing countries. Meeting this request would mean establishing stocks during surplus years so as to fulfill this obligation and to avoid an increase in prices in deficit years an increase which, in turn, would compromise aid through the greater burdens it imposed on the donor countries.

There is nothing startling about the figure of 10,000,000 tons when one is aware that the FAO estimated, as at the end of December 1974, the immediate needs of the most seriously affected countries up to June 30, 1975, at 6.2 million tons of cereals, needs which are not covered by commercial purchases. Bangladesh alone has to import 200,000 tons of foodstuffs per month to meet the basic needs of the population up to the June harvest. The Community, for its part, has received appeals from 37 countries for 2,370,000 tons of cereals, an increase of 25 percent over previous requests, the total import requirements of these 37 countries totaling some 25,000,000 tons.

Need Outreaching Aid

What observations are to be made from these facts? The first is that the developed countries seem to be reducing their aid just when the real needs of the developing countries are growing at the same rate as their populations. Even the food aid programs of the United States, which are worth somewhat more than $1 billion, and the emergency programs to help the countries most seriously affected by the crisis, which are quite considerable in themselves, are of minimal value compared with actual requirements. The most seriously affected countries. which number altogether 9,000,000 inhabitants, received in 1972-73 $1,800,000 in public development aid from the CAD countries, 44 percent of which came from the Community countries and 33 percent from the United States, or $2 per inhabitant per year.

The second remark that can be made is that alongside the efforts that will be made by the developing countries to increase their agricultural production, there is certainly room for increased production in the developed countries provided that financial means are found of sending foodstuffs to those countries which cannot meet their own demand. However, the general economic situations is in no way calculated to encourage such transfers, unless these countries which are enjoying increased revenues pass on some of the benefits to the poorest countries. According to a recent OECD report, the OPEC countries have undertaken to supply $2.7 million in bilateral aid.

The Commission, for its part, has made proposals to improve aid to the developing countries but, although these proposals have been supported by the European Parliament, they have not always been approved in the Council. On the other hand, the signature of the Lomé Convention between the EEC and 45 developing countries may be considered an important element in development aid.

C. BILATERAL U.S.A./EEC RELATIONS

These relations, which were affected during 1973 by the problem of the supply of soya oil-cake to the EEC, are now affected by the conditions of entry into the United States of cheese produced in the community.

Dairy producers have apparently taken proceedings against the Federal administration for failure to apply an act of 1897 relating to countervailing duties. It would also appear that Congress intends to take similar action. Under this act the United States may tax imports with a countervailing duty if such imports are subsidized, whether or not national production has suffered any prejudice. This act diverges from the GATT rules laid down in articles VI and XVI relating to countervailing duties and subsidies respectively. Under GATT, a countervailing duty may be applied if dumping causes or threatens to cause serious prejudice to the established production of a contracting party.

Article XVI provides that if a contracting party grants or maintains a subsidy, it shall communicate its size and nature in writing to the contracting parties. Wherever it is established that such a subsidy causes or threatens to cause serious prejudice, the contracting party granting it shall consider, when so invited *** the possibility of limiting the subsidy.

What place does EEC cheese occupy on the U.S. market? At 52,000 tons, imports from the EEC represent a maximum of 5 percent of the American market. Some of these are soft cheeses in respect of which the Community does not grant refunds; the rest are cooked cheeses for which refunds are granted. It should also be pointed out that U.S. imports are governed either by simple quotas or by quotas plus a minimum price clause, Furthermore, the Community, at the request of the United States, has reduced refunds and even suspended them for a period of 6 months. As a result, the price of imported cheese has been 20 percent-30 percent higher than the domestic level. This is also the case even when the Community grants refunds. Indeed, their amount, which varies from 12 to 50 units of account per 100 kgs according to the type of cheese, is not such that the price level of EEC cheese can be lower than domestic prices. The proceedings against the administration are probably a reaction to a deterioration in the U.S. dairy market dating back to July 1974 when, only shortly before, the United States had opened supplementary quotas to meet the existing shortage. This affair has caused some concern in the Community, partly because of the situation itself but mainly in connection with the application of GATT rules where the latter differ from those established by previous national legislation. If priority were to be given to the latter, the general significance of international agreements would be greatly reduced. Combined with present monetary uncertainties, this might well cast doubt on the value of the current negotiations.

CURRENT MONETARY AND FISCAL PROBLEMS

Paper by Robert G. Stephens, Jr.

Industrialized nations are now facing the most serious economic slump since the end of the Second World War. The simultaneous worldwide slowdown in economic activity currently in process emphasizes clearly one fact: we live in a world in which national economies have become increasingly interrelated. Whatever happens in the economy of the United States directly affects others and, conversely, we are directly affected by the state of the economies abroad. With this in mind I would like to discuss the current economic situation in the United States and then turn to the problems facing policymakers.

In the United States, our economy is in the midst of a very serious recession. Since last fall business activity has deteriorated rapidly. The declines in production and employment have been steeper than at any other time in the postwar period. Since last summer our industrial production index has fallen 12 per

cent and total employment has dropped 2.4 million-both postwar records. Our gross national product has also been falling rapidly over the past half year. Consumer demand for new homes, autos, and other durables-items which can easily be postponed—fell considerably last fall and weakness has even extended to demands for clothing and other nondurable purchases. Although production has been sharply curtailed, inventories have continued to pile up causing further reductions in output. Cutbacks have been especially severe in the auto industry, but they have also been substantial in the production of other consumer goods, business equipment, construction products and industrial materials.

HIGH UNEMPLOYMENT RATE

The rapid slowdown in economic activity resulted in heavy layoffs of workers beginning last fall. Employment dropped sharply and unemployment in February climbed to a postwar high of 8.2 percent of the labor force. This means that 71⁄2 million workers are without jobs and seeking work. Unemployment in some economic sectors has been considerably higher than the national average. This is especially true in housing. In this area the rate has gone as high as 13 percent and in the related field of mobile homes, production has virtually halted. The workweek has been reduced and an increasing number of workers have been able to find only part-time jobs. The resultant decline in wages and salaries has dampened consumer demands. and according to recent surveys, consumer confidence has been very low. Spending plans of households probably will remain cautious and conservative for the near future.

Businessmen also have become more pessimistic, as evidenced in the erosion of capital spending plans and in the large drop in new orders for capital equipment and in contracts for commercial and industrial construction. Business spending will probably decline markedly this year in real terms.

However, there are a few signs-although rather tentative-that the decline in business activity may be in the process of moderating. For one, consumer purchases in the past few months seem to be firming somewhat. In the housing sector, mortgage credit markets are improving, and we may reasonably expect some recovery in housing in the months ahead.

Congress is considering legislation of an emergency nature to give temporary assistance to low-income persons in building a home. This would be in the form of an interest subsidy device. If enacted, housing starts will be further stimulated. Dr. Arthur Burns, Federal Reserve Board Chairman, in recent testimony before Congress said:

A solid recovery, however, will require a turnaround in housing and in spending for new plant and equipment by our Nation's business firms. New mortgage loan commitments of thrift institutions have risen appreciably in recent months, the inflow of funds to these institutions is continuing at a rapid rate, and new housing starts also increased somewhat in January.

However, recovery of momentum in housing will not come close to the national goal established in the 1960's of 2.6 million new unit starts a year.

HALTING INFLATION

The worst of the cutbacks in business investment plans also seem to be behind us. Some businesses are still postponing or canceling plans for constructing new facilities or for installing new machinery and equipment. This is markedly so in the realm of electrical utilities. Moreover, a major liquidation of inventory stocks is underway, and although this is bound to have a depressing effect on the economy in the near future, the success of businesses in reducing excessive stocks enhances the likelihood of a recovery later this year.

Halting and reversing the sharp decline in activity depends on prompt and effective application of both fiscal and monetary policy, and our Government. like many others, faces some very difficult choices. There is an immediate need to take measures to alleviate the recession. But, in doing so, we must take care that our actions do not have adverse implications for the rate of inflation.

Inflation has been a persistent problem throughout the span of time since World War II. The rate of price rise became dangerously rapid in 1973 and 1974. Beginning in the late summer of 1973 prices accelerated to double digit rates.