Tobacco Documents Online

You're t6~;~ind. I 'just want to announce first of all, for those of yo6 whoha~ened to n6tice the marquee - billboard - just outside the theater, what you are about to see will not be the movie "Dr. Syn" - rated PG - thi~ is rather an "R" presentation - some people may ask what "R" means, ljust hope that after the speech is over, you don't "Boy that was 'R'idiculous~" But it is good to be walk out and say, , . here, back at Th~ Grcenbrier, and talk before the Tobacco Association of United States and Leaf Tobacco Exporters Association. I had the choice of staying in Washington and actively managing the U.S. Trade Representative's office Bill Brock, my boss, is in Europe - or to speak before 'this group. I volunteered for the t~ugh, front-line duty down here at The Greenbrier, rather than the plus, perquisite-laden center-of-.po~r iife tha~:~L~ig government executives enjoy in our Nation's Ca'pital~. '~ I'd liketo talk to you briefl~ about the new ad- ministration, just give you a feel for it, as I see it, then I though~t maybe I'd go on"very quickly into the economic plan of the administration which I understhnd that Senator East has discussed, but I think that sometimes things look a little different up on the Hill than they do down :around Pennsylvania Avenue. And then I thought I'd touch on some tobacdo i'ssues and some more general trade issues. When Presid6nt Reagan was elected, he announced that he was going ~to try a new style of government, a cabinet style of government, where- by the cabinei would again become an active managing source of decision- making anda lot of people chuckled and said, "Boy, that sure shows how innocent he is. People have said that for the last 20 years and never yet has it worked." Well, after he indeed was inaugurated, he formed a number of cabinet counsels. Each cabinet counsel specializes in a particular area - for example, there's a cabinet Counsel on economic affairs which is chaired by the Secretary of the Treasury and has those ddpartments in it that are interested in economic affairs. And there's a cabinet counsel on commerce and trade, and then there's the trade policy committee, which Bill Brock heads, and various other cabinet counsels, and I must say that these cabinet counsel meetings take place about every other day there's one going on and l've attended more than I probably should have in order to get my own work done - An address by Ambassador David blacDonald, Deputy U.S. Trade Representa- tive, Executive Office of the President, at the Annual Meeting of TAUS/LTEA, White Sulphur Springs, West Virginia, May 26, 1981. T105390035

but I have to tell you the government is operating, in my view - having served in two other administrations and watched still another administration quite closely - better than I've ever seen it run. When you see six or seven cabinet officers discussing substance oh, for example, whether the foreign corrupt practices act should be amended and they're sitting around there with their assistants behind them and - just as you might sit around your living room - talking freely, sometimes one particular cabinet officer will get cut off at the knees, figuratively speaking, it doesn't seem to bother them, there's a nqw collegiality in the whole process, and when you get through with a discussion like that and you've got six cabinet officers all agreeing on what to do, you don't really need any further approval, they stamp their decision on it, the government is off and running on that particular point. I frankly never saw anything like that in the prior administrations that I was a part of, and it almost - it reminds me of Civics i01 - the way government should work is actually the way in fact it is working, and the-tough problems that I'm sure you're all familiar with there, I won't say they will disappear, they'll never disappear as long as you've got headstrong individuals with their own ideas about what should happen, but they're really reduced to a minimum. The cabinet itself operates much more often than it has in the past. I happened to be lucky enough to bc present at the first cabinet meeting that the President attended after he was shot, and, just to give you a feel of the guy himself, he walked in -- everybody at the table stood up, there was long, sustained applause as you might well ~Inagiuc, finally, the applause stopped, everybody sat down, and the President looked around and sai~, "You know," he said, "actually should be applauding you guys for the job that you did when I was in the hospital." He said, "This old house hasn't seen a team like this for many a year." He said, "Of course, I was a little nervous," he said, "when I found out that the government was running so well without me." But he went along like that for about five minutes, and when he got all through, there wasn't a cabinet officer in ready to go out and win an.other one for the old "Gipper". It is truly inspirational| The economic program. The economic program of the President, which, as you know, is a sharp cut in the budgetary expenditures across the board, as well as a reduction in taxes both by accelerating depreciation and simplifying depreciation levels and reducing the level T105390036

of personal taxes across the board 10% a year £or three years. On the spending side, I would say the program looks pretty good. The vote on the floor of the house to set the budget at a level that the govern- mcnt suggested is an implicit indication that the [louse is prepared individually, when those various spending votes come down into the appropriations committees, that the House of Representatives, as is the Senate, is prepared to make the kind of reductions that this administration is asking for, and that I think most people think we need in order t~o stop inflation in its tracks. The tax side is not as strong - I hav~ to tell you frankly the biggest blow - you know, with all of the Democrats and opponents and some Republicans who are not enthusiastic about what was at one time known as "Roth-Kemp" - the biggest blow came not from those people but actually from the fact that the prime rate after dropping from a high of 21-1/2% down to about 17% in March, began to go up again. That fact - I'm not sure why it happened, I don't think most people, including Beryl Sprinkel, the Under Secretary for Monetary Affairs, knows why it happened, but that fact has created some hesitation about going ahead with a straight tax reduction program of the size and nature that the administration has been offering. Nevertheless, I think we will see substantial tax reductions, altlaough the exact form of that may remain to be seen. /bld I think that that tax reduction will be along the lines of Roth- Kemp, it may be somewhat slower, it may be extended over four years, there may be other options, other tax reforms added to the bill. But that will begin to play out now here very quickly as hearings start on tile tax bill in both the Senate Finance Committee and the [louse Ways and blcans Com~nittee. I myself have set a three-test criteria in order to determine whether tile first four years of this administration has really been successful. My three tests are, and we'll know whether this country is getting moving again if my three tests are met. Those three tests are, first, that there are less lawyers at the end of four years than there were at the beginning of the term of Ronald Rea~an~ and perhaps more engineers. Secondly, that stock prices of most publicly-held companies will rise above their book value, because, as you may know, when you can get the stock prices above the book value it is an inducement for a company to offer stock rather than bonds and not dilute its book value, and so you tend to see an expansionism, a healthy expansionism, and a broadening of the equity base of our major Ti05390037

4/ corporations. This is a situation that has not prevailed really in this country since about 1972-1975. As a ~eneral rule, .the stock prices of the publicly held corporations have been below their book value, and this is why equity offerings in this country have dropped sharply over the last seven or eight years. And finally, the third test would be that housing in the Washington area actually either stabilizes or drops off in price. That would indicate that the number of gove_rnment employees is dropping and the -- but anyway, I'm not sure whether we can meet all those tests, right now I think I'll settle for two out of the three. Proceeding on to trade, first, we ought to start with the "givens" The United States is the world's leading tobacco exporter, ranks No. i. It actually ranks No. 3 in tobacco imports. Exports of tobacco in 1980 were valued at a record $2.43 billion and this was contrasted with an import level of tobacco of about $487 million., so that the net positive balance of trade in the tobacco sector is about 2 billion dollars. But, when you compare that with the total positive trade in 1980 of all agricultural products is about, I think, 25, 24 billion dollars, you can see that tobacco makes Ul) about 8 or 9% of our total positive balance in agriculture, and whenever you have an industry that has that kind of positive balance, those of us in government have to take careful notice of the welfare and prosperity affecting that industry. Actually, I tell you this -- it's a funny thing about government officials giving speeches, I'm sure most of you know this far bet'ter than I do, but the unique thing about a government official giving a speech is that a lot of times he'll tell the audience something not so that the audience will know it, but so that the audience will know that he knows it. The implications of this, I'd like to discuss a little bit later. But let me go first of all to some specific trade problems that we've got in the tobacco field. Now, we at USTR - I don't know how many of you are really familiar with USTR the United States Trade Representative'5 0ff~c~, ~6d ~0 be the Special Trade Representative. The job was created in 1962 by Congress which was sick and tired of the State Department's handling of trade matters" because the Congress felt, rightly or wrongly, that the State Department tended to subordinate trade issues to other geo- political and national security issues, and, as a result, tended to sacrifice the interests of U.S. trading concerns and manufacturing T!05390038

concerns to other concerns which the State Department felt were more important, so USTR was created right in the White House at - sub- sequently at Cabinet level rank in order to arbitrate between the various agencies when disputes arose, and also to be the lead negotiator on trade negotiations. But when it comes to agriculturRl products, we're very fortunate in that we have a department - the Department of Agriculture with its Foreign Agricultural Service - which is really outstanding. The Department of Agriculture is really in doubt ~s to where its interests lie in the interests of its con- stituents, and we find that to be very refreshing, and so our relation- ship to the Department of Agriculture, which I look at as very good. I knew Seeley Lodwick, who is the Under Secretary of Agriculture for International Affairs - I knew him back in my old days at Treasury, and he used to come around as a member of the American Farm Bureau, and we've got a very close relationship, as have our deputies and people, and I think if I had to describe a relationship I would say we're almost like a, well, I don't want to say lawyer, but we're sort of a representative of the Department of Agriculture when it comes to agricultural products. So we handle these kinds of problems. Last year, the U.S. producers petitioned the Customs Service to reclassify cigarette leaf scrgp in order that a higher import duty would be levied than the 16.1¢ a pound duty that was then in effect. After considering this matter for several months, the Customs Service did reclassify machine threshed tobacco into another category, but the duty was only raised to about 17.5 cents per pound under that other category, which I think was tobacco not otherwise classified. The pl'oducers were petitioning for a tobacco classification of stemmed cigarette leaf, which would have meant a duty of 41¢ a pound. Now, to a great degree, this may be a tempest in a teapot, because the U.S. exports so much more tobacco than it imports that there is in effect what is known as a substitution drawback system, whereby a tobacco processor can obtain 99% of the duty that he pays on importing tobacco if l~e exports the same class of tobacco later, even ~£ it's not the same identical tobacco. So, whether the duty is 16, 17 or 4]¢, when you can get 99% of it back upon re-exportation, as you can well see, it really doesn't ]]ave the economic effect that you might at first blush think i.t would have. So, after this happened, after this classification - just to show you how these matters work the U.S. ]]as semi-annual consultations with the ~uropean Community. The £uropean T|05390039

61 . ~Ir Community, in September 1980, during these consultations, contended that this ruling, this Customs ruling, had reduced the scope of granted concessions, that is, concessions that they had bargained for in the recent Tokyo Round of negotiations, and that it resulted in the application of a higher duty, and they asked us to, what is known as rectify that duty, that is to say, make concessions elsewhere, or otherwise improve their position to bring them back up to Where they were before the reclassification, or otherwise they can reserve to take unilateral action to raise their duties on some product that we might want to export, possibly even tobacco. And, we denied that there had been any impairment of concessions, or of GATT obligations, our obligations under the General Agreement on Tariffs and Trade, which is the overall umbrella framework under which most countries negotiate their tariff agreements. And, to date, this problem is still at an impasse, it just has not been solved. One of the reasons that it may not have been solved and that the EC may not have taken any action is because of this drawback, sucking the vitality out of the decision in the first instance. ., : Another thing that you should probably be awa~.e of is that the United States International Trade Commission will begin public hearings on June 24 on the question of whether certain tobaccos are imported under such conditions that render ineffective or materially interfere with the USDA tobacco program. This is known as a Section 22 action, as I'm sure many of you are aware, and can result in a recommendation by the ITC to the President, that import quotas or other restraints be placed on imported tobacco in order to protect a government support program. This recommendation then is forwarded to the President, and USTR gets in its recommendation as to what to do about the ITC commendation. Well, just to give you a little feel of how these things work, because we have such a positive balance of trade in tobacco, we have been informally advised, I don't think it's any secret, by the EC, that if action is taken under Section 22 to restrict EC tobacco, they will indeed retaliate. They think that it's somethin~ less than ludicrous to have us, a major tobacco exporter to the EC, actually restricting what little imports we do import from the EC. This is a problem that is going to have to be studied very carefully -- now we don't fall over when the EC tells us that -- but, on the other hand, we do have a positive trade balance with the European Community, overall somewhere between 17 and 20 billion dollars, that is to say, we export that much more to them than we :report from Them. And this does tend Ti05390040

to make those of us engaged in the trade field walk on eggs a little hit when it comes to dealing with the EC they are in the throes of a recession worse than anything we've seen in this country in the last few years, and the protectionist sentiment in the EC is running fairly, fairly heavy, and I've got to hand it to them for having resisted this sentiment quite - with some exceptions - quite well thus far. [ncidentally, when we get that recommendation from the ITC, the International Trade Commission, we will undoubtedly convene our ATAC for Tobacco. Our ATACs and our APACs, excuse this governmentese, the way we operate at USTR is. we have a series of private industry and labor advisory committees. In the industrial sector, they're known as ISACs, Industrial Sector Advisory Committee, and then we have LPAC, Labor Policy Advisory Committee, which has Washington Reps o£ labor unions, then over in the agriculture side we have APAC and ATACs, which are Agricultural Policy Advisory Committees, and Agricultural Trade Advisory Committees, also divided into segments of tile agricultural industry, and we call these advisory committees together with, in the case of agriculture, the Department of Agriculture, in tile case of tile industrial side, we call them together with the Commerce Department. I have little doubt that we will call the ATAC for tobacco in order to advise us on the ITC decision when that de- cision is made. There is one other point that does not directly - it only indirectly affects this group if you can bear with me, I'd like to just give you a little flavor of what our trading relationships are like. This has to do with the 301 action which is an unfair trade action which has been brought against Japan on tobacco products, that is to say, cigarettes. There was a complaint filed against Japan for.restricting the export of cigarettes to Japan and ultimately a setzlement was reached. The very terms of this settlement, with all due regard to my friends from the Japan Tobacco and Salt Public Corporation, the very terms of the settlement give you an idea of what k~nd o£ distr~Sution system the Japanese tend to have. 'Fhe U.S, I think exports 1% - has a 1% share of the market for cigarettes in Japan. Independent experts have guessed that if the market were totally free as it is in this country, that that share would rise perhaps to 10%, but the 1% share is h'or~h about $40 million. The settlement reached wit], the Japanese is that, beginning in Japan fiscal year 1981, first, the government intends to reduce its tariff on cigarettes from 90 to 35%, reduce its T105390041

cigar tariff from 60 to 35%, and reduce from II0 to 60% its tariff on pipe tobacco, all of this subject to Japanese Diet approval. Secondly, retailers' profit margins on the sales of imported tobacco products, you've got to understand how close the control is over this distribution system, the retailers' profit margins have been negotiated up on U.S. cigarettes from 7 to 8.5%. This brings them into line with the same profit margins for domestic Japanese cigarettes in order that the retailer will have the same motivation for selling our cigarettes as he does for selling Japanese cigarettes. Third, the government of Japan will endeavor to insure that the price differential between imported filter kings and major domestic cigarettes will not exceed I00 yen for Japanese fis, cal year 1981, in other words, it's kind of a price control system. Fourth, distribution will be improved by in- creasing the number of retailers which handle U.S. cigarettes from 14 thousand to 20 thousand during 1981. Fifth, the test marketing will be improved by increasing the number of test market outlets from 40 to 60, and finally, sixth, the U.S. companies will be permitted to advertise in the Japanese language for the first time. Now, I realize that some of this group may have some ambivalent feelings regarding that since we're dealing here with a leaf industry sector, but it does - I give it to you just to give you a feel for what it's like when you negotiate with the Japanese. We're going to watch this agreement very carefully. We at USTR incidentally, we look at ourselves as trying to free up markets wherever we can, whether it's processed cigarettes, whether it's leaf tobacco, or any other product. Ne would just rathe.r have the trade flow the way the market demands it to flow on the theory that in that way you remove the hidden taxation of consumers by removing these impediments and obstructions and costs that occur somewhere between the producer who gets paid for producing and the consumer who pays for the ultimate product. Well, that kind of leads me to a more generalized statement involving trade. As the world's leading tobacco trader~ the United States really has the most to gain from an open trading system and free trade, and more to lose from protectionism, than any other country. Essentially, if we were to adopt a protectionist stance with regard to the imports, let's say, of tobacco, we would be trying to cut off a half a billion dollars worth of tobacco imports in exchange for the possible loss of exports that are worth 2.4 billion dollars. So, any action tha~ ~-:~, take in that regard under inter- Ti05390042

.t 9/ national law could require compensation - that compensation be given to our trading partners in return for cutting off their exports to us. That compensation could be anywhere across the board including our tobacco exports. It might not be in our tobacco exports - it could be over in soybeans or something like that. So, it really doesn't behoove us generally to seek protectionism, and it certainly doesn't behoove this industry to look to prot. ectionism as any kind of solution to its .problems. It just is u~realistic for the United States to consider unilaterally taking steps to limit or cut off its import trade on tobacco, and also aggressively, as we are, also aggressively trying to seek to open new markets for our tobacco ex- ports. I guess that's a self-evident thought, but it does not hurt occasionally to reiterate it. For example, we had a, I've forgotten just what bill it was that went down to the floor of the Senate that somebody had attached on a casein amendment that would have put a quota on imports of casein - a milk biproduct, and we fought that - we went up and started lining up Senators to get rid of that import. Totally, there's no justification for it, we would have had to pay for that also for the exporters of casein would have demanded recompense or they would have retaliated against us. And there was an editor, I shortly thereafter gave a speech to a group of farm periodical editors, and one of them asked me, he was from Wisconsin, and he said, "Why did you ever do something like that, you would have saved the United States $230 million, something like that, in support costs because you would then have been able to market casein out of our own stocks rather than having to import it," and I had to point out to him that the problem doesn't end in casein when you do something like that you're asking for retaliation and compensation in other areas, and, frankly, the one thing that beat the casein amendment was the realization by Senators in other agricultural states who began to realize that the other end of that tunnel, the other end of that casein tunnel might well be the corn, the wheat, or the tobacco, or the soyboans, and whon they began to realize that, that's when the casein amendment was defeated in a re-vote on the floor of the Senate. So, in conclusion, I'd just like to say that ever since the Kennedy Round which is the round before the last round of negotiations, the last round was the Tokyo Round, the round before that was the Kennedy Round, there has been an increasing distinction drawn, a dichotomy, between so-called developed countries and so-called less T105390043

lO/ developed countries or developing countries. One of the themes that we're trying to broadcast to our trading partners is that we consider the United States to be a developing country, despite how we may be classified under the Generalized System of Preferences or anything like~that. We consider the pie to be - in the United States to be something that we would like to make larger rather than worrying about its redistribution. We figur% that by making that pie larger, we're going to make it larger not only for ourselves, but also for those who seek out our markets, so that we will be benefitting not only ourselves but our trading partners, whose who export to us. We're going to try to dismantle theobstacles to our exports, particularly our agricultural exports, whi6h suffer from a disproportionately large number of obstacles, and we wohld expect that this industry, the tobacco industry, would participate in this entire process, by criticizing us when we're wrong, by suggesting improvements to our conduct, and by supporting us when it believes that we are right, and I'm sure we will not be disappointed in any oneof the three. Thank you very much. T105390044