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GROWING GOVERNMENT INVOLVEMENT IN TRADE 81 One area of action that should be explored in response to flagrant distortion of trade agreements by foreign governments is the possible utility of retaliatory measures that are clearly temporary. Temporary measures that permit immediate unilateral action could expire in six months or less, barring certification of continued subsidization of sales or other forms of predatory action by foreign governments. Examples of such temporary policies include the denial of investment tax credit on the foreign-produced (non-U.S. labor) content of imported aircraft, or the prohibition of loans under the FAA loan guarantee program for purchases of foreign aircraft with a U.S. content below some threshold (e.g., 35 percent). Such retaliatory measures are not without danger, because they in turn invite retaliation, not necessarily in the field in question, but rather where the foreign government feels it has the greatest leverage. Their existence on a standby basis, however, would be a clear signal of the importance attached to the problem and would add another dimension to the options available to our trade negotiators. Foreign trade negotiations are like a high-stakes poker game, and it is important for our negotiators to have as potent a list of bargaining ploys as do their counterparts. Temporary measures could, in principle, be invoked on short notice and could thus help alleviate the problems of slowness of response. As noted earlier, the pace of commercial negotiations and the ebb and flow of competitive success in the marketplace are frequently faster than the ability to mobilize the machinery of government and to generate a response. Improvement requires action by both industry and government. In the past, there have been painful occasions when by the time some members of the industry recognized the need to invoke government participation, learned to deal with the bureaucracy, and built a case that would initiate government action, and appropriate government agencies had coordinated their positions, the transaction had already been completed. The recent changes in the U.S. Department of Commerce provide the basis for more timely government action. Recognition of these changes is not yet widespread in industry. Both trade associations and government must be active in fostering improvement. Government can be most useful when it is involved early and can initiate discussions with other governments before bargaining ploys have surfaced and positions have become more intractable. FINANCING A particularly troubling aspect of government involvement concerns financing of purchases. Due to the large sums of money
GROWING GOVERNMENT INVOLVEMENT IN TRADE 82 and the long time interval associated with payback, financing terms have significant leverage on the eventual cost to the customer. The discussion that follows will examine the general situation and then look specifically at the circumstances for large aircraft and smaller aircraft. Export credit and export subsidies are a common feature of foreign trade and a topic on which Organization for Economic Cooperation and Development (OECD) negotiations were conducted in 1975. The agreement was intended to cover all capital goods, but Great Britain, France, West Germany, and the United States were unable to reach agreement on civil aircraftâan indication of the resolve of others to alter the competitive picture in aircraft. Consequently, a so-called "standstill" was adopted under which the OECD nations agreed not to offer in the future terms more favorable than then being offered. The 1975 "standstill" set a maximum of 10 years on the repayment period for loans to purchase large transport aircraft, but 12 years for leases. However, it set no minimum for interest rates. The limitation on the term of the repayment period does not coincide with the useful life of aircraft (20 to 25 years); furthermore, it abrogates a powerful U.S. competitive weapon, the strong long- term (20 to 30 years) capital market, a feature lacking in Europe. This short period in itself constitutes a barrier to sales because it mandates a rapid repayment schedule that necessitates large early payments. As market interest rates began to escalate, the United States found itself in an increasingly disadvantageous position. The absence of a minimum for interest rates offered opportunities for increasing levels of subsidy through lower-than- market interest ratesâa condition the agreement was intended to bring under control. Airbus made aggressive use of such interest subsidies in its marketing. As interest rates escalated further, the United States undertook to negotiate a "commonline" with the Airbus-financing governments. We succeeded in establishing a minimum interest (eventually 12 percent on U.S. dollar loans) that was still below market rates, with the repayment period remaining at 10 years. Agreements in export finance are no stronger than the political will of their signatory governments. However, these agreements clarify and ratify the basis for retaliatory actions, and they provide a forum for continuing multilateral and bilateral negotiations over trade policy. The panel endorses and recommends continued vigorous efforts to eliminate all forms of trade-distorting mechanisms7 so that normal market forces can operate effectively.
