Mr. BROTZMAN. It is a national policy however and I think probably a wise one that we want to try to encourage and help developing nations build up. Is that our present posture?

Secretary ROGERS. Yes.

Secretary SHULTZ. That is the reason for the previous arrangements. Mr. BROTZMAN. I thank you very much.

The CHAIRMAN. Mr. Corman will inquire.

Mr. CORMAN. Thank you, Mr. Chairman.

Mr. Shultz, on page 14, discussing the tax on runaway plants, at the conclusion of that paragraph you indicate that exceptions will be permitted for particular situations if the President determines it is in the public interest to do so. I wonder if you can give us an example of what that will be.

This is a situation where the plant goes abroad, there is an income tax advantage to them and they are reimporting at least 25 percent of their production into the United States.

Secretary SHULTZ. Well, I suppose that if we determined that there was no real possibility of production in the United States.

Mr. CORMAN. Well, they took their plant abroad. There was production in the United States before they took their plant abroad, I take it. Secretary SHULTZ. Suppose that there was no possibility of effective U.S. competition.

Mr. CORMAN. Well, but a runaway plant implies to me at least that there was U.S. production which went abroad and I assume what we are addressing here is that it went abroad because of the income tax advantage.

Now, is it that if the whole industry goes abroad that then the President can waive the tax.

Secretary SHULTZ. What it applies to is a situation where a plant abroad ships over 25 percent of its product back to the United States. Now, whether it was once located in the United States is not the question. I think people worry about that pattern, that flow.

Mr. CORMAN. In other words, they are going to be exporting something into this country that this country didn't have before, is that it? Secretary SHULTZ. Or doesn't now produce or perhaps is not interested in producing.

Mr. CORMAN. It is hard to visualize a hypothetical case. I assume that we say runaway plant and we mean there is a plant in this country that is producing for domestic production and because of the tax incentive that plant is moved abroad, produces and reimports in the United States at least 25 percent of the products.

Secretary SHULTZ. When it happens with exactly that pattern then the proposed law would apply. You asked about this provision that would allow an exception occasionally when that seemed to be in the public interest, what could one visualize as a possible situation for an exception.

My reply was, and I don't hold this up as a typical case at all, but as something that might merit an exception; a situation where you found an American-owned plant that was shipping a large proportion of its product to the United States and it happened to be in an industry or working with a product that for some reason we didn't produce here or didn't seem to want to produce here.

Mr. CORMAN. This provision would not be applicable unless we had produced it here originally and the plant left this country; is that

correct?

Secretary SULTZ. No, I don't think so. It applies to any Americanowned plants and the flow of their product. The question is where does that product go?

That is, it is not just a question of trying to trace movements of plants from the United States.

Mr. CORMAN. I am not familiar with many instances in which the President has discretion as to whether or not a tax is to be due. We have a number of points here where the President is asking for discretion he didn't have before. I couldn't think of an analogy where the President has the discretion to say whether an entity had to pay a tax. That is what struck my interest.

Secretary Rogers, would there be different considerations in granting most-favored-nation treatment to Russia and to China meaning particularly, do you anticipate diplomatic recognition of a country before granting most-favored-nation treatment or might that come first?

Secretary ROGERS. Well of course, I am not sure what the President would do, assuming this trade reform act is passed. But I don't think that one depends on the other. I think we could grant most-favorednation treatment to a country without having formal diplomatic relations.

As you know, Mr. Corman, we now have communications channels established in our liaison office in Peking and the Chinese are setting up here.

Mr. CORMA.N How about Mongolia, would that he a similar situation? I realize that is a relatively small country.

Secretary ROGERS. Yes; as a theoretical matter, it would be the same. situation.

Mr. CORMAN. They might get most-favored-nation treatment before they got recognition.

Secretary ROGERS. Yes.

Mr. CORMAN. Mr. Secretary, this is a very troublesome problem of Jewish immigration. Is it your feeling that that is really an internal matter of the Russian Government that we should not concern ourselves with or is it a matter that we should concern ourselves with or you just feel the executive branch is just better able to do it than the legislative branch?

Secretary ROGERS. It is a combination. First, we think it is a matter of importance and a serious matter because we believe in the United Nations Charter, in the declarations of the United Nations dealing with immigration. We believe that immigration should be freely permitted. The Soviet Union takes a very strong position that this is an internal matter, and they are going to deal with it internally.

We have had discussions with them about it. As I say, I think the discussions we have had with the Soviet Union in the last 2 or 3 years have been very useful and have contributed to the improvement of the situation as far as the Soviet Jews are concerned.

So we feel that any public confrontation on this issue certainly any legislative restrictions which attempt to say we wouldn't do this unless you do that, in terms of trade, will be counterproductive. We think

our record is good enough in this field so we can demonstrate that what we have been doing has contributed very much to an improved

situation.

The Jewish community in this Nation recognizes this. So what we would like to do is continue to seek progress in that way. We think that is the way to do it. We are very much concerned about the problem. We have been very active in our discussions with Soviet officials on the subject. And considerable progress has been made; not as much as we would like, and not as much as we hope we can accomplish in the days ahead. But I am quite convinced, and I say this without any reservation at all, I am convinced that enacting into law a provision which in effect provides for a confrontation with the Soviet Union on this issue would be very counterproductive.

Mr. CORMAN. Secretary Rogers, in the use of nontariff barriers in negotiations such as import quotas and that sort it is really kind of a joint venture between the executive branch and the Congress in that you set up some provisions in which either House of the Congress can stop or void the action. Do you think we would be well disposed to have similar legislation in the conduct of the war? To make it easier, conduct of the war in a substantial and prolonged way, avoiding the incident of immediate reaction to an immediate military threat?

Secretary ROGERS. Well, Mr. Corman, of course this is a very complicated constitutional issue. I am sure we can't cover it within the 5minute rule.

Mr. CORMAN. This is not a constitutional issue. It is a matter of policy. I am just trying to find out whether conducting war is as important as nontariff trade barriers.

Secretary ROGERS. I think it is more important.

Mr. CORMAN. Perhaps the Congress should look to some way to join in the decisions as to whether or not we can make war.

Secretary ROGERS. Well, as I say, this is a pretty big subject. I would be glad to come up and discuss it with the committee. I talked with the Foreign Relations Committee in the Senate and the Foreign Affairs Committee in the House. I would be glad to come back and discuss it with you.

Mr. CORMAN. My 5 minutes are up. I will talk with you again shortly.

Mr. ULLMAN [presiding]. Mr. Conable will inquire.

Mr. CONABLE. Mr. Secretary, the power to move against countries that are in chronic surplus has at least some implication of bilateral relationship with respect to balance of payments. We have a very substantial interest I think it encouraging the development of the market for Japanese products in Western Europe. Do you feel that this is a subject that can appropriately be discussed with Western European nations in the course of the negotiations that are contemplated by this legislation, and do you have any comments about this problem generally? There is strong feeling in this Congress here that the United States carries a very substantial part of the burden of a free trade and that we should be interested in reflecting the fact that trade is multilateral and not bilateral, more than is implicit at least in the sections of the legislation I have referred to.

Secretary ROGERS. The answer to your question is yes, it is a subject that we can discuss with the European community and we do

discuss with the community. I think they should open up their markets to Japanese goods to a greater degree than they have in

the past.

To some extent, that would, I think, create a more balanced trading environment than now exists. We will continue to have discussions along those lines. Certainly that would be an appropriate subject for discussion in the negotiations.

Mr. CONABLE. Do you feel that it is a problem?
Secretary ROGERS. Oh, yes; sure it is.

Mr. CONABLE. Is there progress being made at this point, irrespective of the position of this country? My impression is that there are many quantitative restrictions, comparatively easily triggered, that tend to be quite exclusionary as far as Japanese goods are concerned in the European market.

Secretary ROGERS. I will defer to Secretary Shultz.

Secretary SHULTZ. I think that the European response to Japanese products is one problem. Secretary Rogers has responded on that point. I think when you look at the problem of the surplus in trade or the balance of payments of Japan and if you assume that its flows in and out are going to be the same, then the problem of the surplus as such is not effected by where those flows are to and from. It is the problem of the surplus, persistent and large and growing; just as the reverse side of the coin, the problem of the deficit, the large persistent deficit that we have is a part of the problem. So, I think the answer to that has to be not to restrict the flow of Japanese goods to others, but to open up the Japanese market to our goods and to the goods of others.

In our proposal for international monetary reform, and I am referring back now to a question that was raised by the relationship between these, our proposal on the one hand talks about objective indicators that suggest and presume that some adjustment should be made, but then leaves open for a wide array of possible adjustments the possibility of an import surcharge is one answer, I think we would describe it as a kind of last resort measure but I think we ought to have a clear ability to be able to do that.

Mr. CONABLE. Secretary Shultz, I have one other question for you relating to Japan. It was alleged that after the Smithsonian agreement, a good deal of the competitive advantage that that agreement achieved for us in relation to Japan was vitiated by price-cutting on the part of the Japanese. I am wondering if there was any evidence of that in an upswing in dumping cases at that time.

If that did happen, is it going on now following the second devaluation and are we able to accomplish anything through existing dumping procedures irrespective of what you suggest in the new bill?

Secretary SHULTZ. I don't think that there is any particular connection between those two events, that is the exchange rate change and the dumping investigations.

Mr. CONABLE. If they were cutting prices to offset their competitive loss as a result of their revaluation it could easily bring about a dumping situation.

Secretary SHULTZ. I understand the reasoning, but I just say I don't know that we have any explicit evidence of that link.

Mr. CONABLE. That is the question I am asking.

Secretary SHULTZ. At the same time I think it is widely observed when exchange rate changes are made that there is a kind of absorptive process that goes on such that the impact of the exchange rate change is not necessarily fully reflected in the relative prices of goods.

That is a phenomena that you see when you study exchange rate changes in varying countries. So there is always this curbing process that goes on as individual manufacturers have to examine their market strategy and what prices and so forth, they are going to charge at home as well as abroad in the light of the changed opportunities they have.

But I think by now, with the very substantial exchange rate changes we have had with the Japanese, that we have seen a shift in the competitiveness of our goods with respect to theirs.

Mr. FLANIGAN. I think it is fair to say if I may that we have watched individual goods and the response in prices to the February realinement of currencies was much more prompt than it was to the Smithsonian realinement.

Mr. CONABLE. One last question, Secretary Shultz. You don't need to answer if if you don't want to. I am not sure whether it is sensitive

or not.

Secretary SHULTZ. It sounds like I don't want to answer it already and I have not even heard it.

Mr. CONABLE. I know the administration has done a great deal of base touching in the course of preparing this legislation. Has there been any change in the attitude of organized labor with respect to this legislation? Has there been any detectable shift that had to do with the timing of the legislation? We all noted that when Mr. Meany came up here and appeared before the committee with respect to tax reform that he was asked about his attitude toward the administration's trade proposal and he said, well, he kind of liked it.

He thought it was a possibility. Are you aware from your vantage point of any change in the political picture, the context in which this bill is going to be considered, with Burke-Hartke the anvil on which we are going to have to hammer out the compromise; generally speaking are you aware of anything that can give us encouragement here? The CHAIRMAN. You better plead the fifth amendment because if there is any change you may be implicated in it.

Secretary SHULTZ. Thank you, Mr. Chairman. That is what I was going to do. But I was not going to use that phrase. I was going to say I have an old policy of letting other people speak for themselves rather than speak for them myself.

Mr. CONABLE. Do you kind of like Mr. Meany's attitude?

Secretary SHULTZ. I am sure he will have an opportunity to appear before this committee. He has never been a reluctant person about stating his views so we will all hear what he officially has to say on the subject.

Mr. CONABLE. Thank you.

The CHAIRMAN. Mr. Waggonner will inquire.

Mr. WAGGONNER. Secretary Shultz, on page 12 of your statement you make the statement that in the vast majority of cases it is business factors and not income tax factors that lead to foreign investment. You further add, "Income taxes are not the cause of our trade problem." What is the cause of our trade problem?