Senator HATHAWAY. If we wanted to offset that, we would have an 0.85 percent tariff?

Mr. MUNDHEIM. That is right.

Now, the third broad category are certain Federal Department of Regional Economic Assistance grants to fishing communities, in Newfoundland for water supply and wharf facilities, and various loan programs by several of the Maritime Provinces for vessel construction which, together, result in approximately 0.4 of a percent ad valorem. Now, as Senator Kennedy and Congressman Studds have indicated, those last two categories of subsidy which are capital intensive, infrastructure, have a greater impact than the amount of the ad valorem duties that we calculated, and their point, and I think we would accept this, the advantage created by working with more up-to-date boat and wharf facilities. And they contrast that kind of help to the Canadian industry with the U.S. industry's difficulty in raising capital.

Nevertheless, the countervailing duty law limits the Secretary to assessing an additional duty equal to the net amount of the bounties, or grant paid.

One other point I ought to make about the subsidy, and that is that none of these programs are specifically limited to export activity, but because a preponderance of the Canadian fish production is exporting, we do conclude that the effect of the subsidies is to bestow a bounty under the countervailing duties law.

So the first part is that there clearly are subsidies. We have found those to exist, and I think I now have to explain to you why we have decided to waive what are clearly subsidies.

Senator HATHAWAY. What did you determine to be the total amount of the subsidy?

Mr. MUNDHEIM. We would say that they amount to roughly 17 percent ad valorem.

Now, there are, as this committee well knows, three conditions that must be satisfied under the statute to waive.

First, adequate steps have got to be taken to eliminate or reduce the subsidy paid. That condition, I believe, has been met, and I want to explain precisely how the Canadian Government has dismantled its subsidy program.

First, there are the outstanding claims of processors of fish. Those have not been honored, as I understand it, since April 1977. The authorization for paying those claims was formerly terminated as of April 1, 1978.

Thus, the effective bounty paid to processors has been reduced by 46 percent since April 1977.

Second, the outstanding claims of fishermen with large vessels, so-called offshore, have been disallowed as of April 1, 1978. That disallowance with the disallowance for the processors means that the total subsidy has been reduced by 71 percent as of April 1, 1978.

The claims of the fishermen with smaller vessels, onshore fishermen, will be disallowed as of October 1, 1978. That disallowance reduces the subsidy by 94 percent.

Now, I should emphasize that the dismantling of the GTAP program covers categories of fish beyond those mentioned in the petition. Thus, the dismantling also applies to fish categories included in the National Federation of Fishermen and the Point Judith Fisherman's

Cooperative. Those are gone, or are committed to be gone, insofar as the onshore fishermen are concerned, as of October 1.

They are also gone, I might say, with respect to fish that are not exported. But I think that aspect of the congressionally mandated criteria has been met, and very substantially met.

The second criteria requires a reasonable prospect that a successful trade agreement will be negotiated with foreign countries providing for the reduction or elimination of barriers to or other distortions to, international trade.

I have already alluded to the ongoing negotiations in Geneva, and we believe that the second criteria is also met.

Now, the third criteria requires a determination that countervailing would seriously jeopardize the satisfactory completion of negotiations.

Canada plays a very active role in the trade negotiations and we concluded that the Canadian reaction to a countervail would be very adverse particularly after they had agreed to eliminate 94 percent of the subsidy by October 1. As you know, waivers have, in the past, been granted where the subsidies found have been reduced to a lesser degree, or over a longer period of time.

We have consulted, at some length, with Ambassador Strauss and his staff and they indicated their serious concern to us that a failure to waive, under the circumstances of this case, would affect, detrimentally, the progress they felt was being achieved in arriving at a subsidy program.

Of course, before we made the determination to waive, we did consult with Members of Congress, their staffs, representatives of U.S. industries, the Department of State, the Department of Commerce and, as I have indicated, the special trade representative.

There is always the contention that a waiver such as this one gives more weight to the interests of foreign policy than to the needs of the domestic industry. I think that this a case where that argument is wide of the mark.

The Canadian actions to dismantle GTAP directly and substantially eliminate an important element of unfair competition to our fishing industry. We insisted to the Canadians that unless all payments under GTAP cease by October 1, we would countervail and we were prepared to do so.

However, with the almost complete elimination of the subsidy-94 percent by October 1-it seemed appropriate to use the waiver authority as a lever for moving forward the effort to resolve the problems of subsidies on a broader, international basis.

Thus, I think the use of the waiver in this case illustrates precisely how Congress intended the authority to be used. It allowed, on the one hand, for preservation of the cooperative spirit during the most critical phase of the trade negotiations and, at the same time, it brought about the substantial termination of one of the largest subsidy programs that Treasury has dealt with.

Senator HATHAWAY. Well, thank you, Mr. Mundheim. I think there may be some dispute as to the way you compute the actual subsidy, and that will be brought out in testimony later on. But assuming that you are right and it is only 17 percent ad valorem and that you are going to wipe out 94 percent by October 1, that means there is only going to be a 1 percent-6 percent of 17 percent would be about 1.02.

Mr. MUNDHEIM. That is correct.

Senator HATHAWAY. Well, why do you not go all the way? It seems that your argument cuts both ways. If it is that negligible, it is that negligible either way.

Certainly, you cannot say that a 1-percent tariff is going to jeopardize our relationship with Canada as far as the trade negotiations are concerned. And even though you can make the argument that that is a substantial reduction-if you are right, if you cut it off to a 94 percent it seems to me that it is ridiculous not to go all the way.

Mr. MUNDHEIM. The problem is that the Canadian Governmentsome of these are not at the federal level, but at the provincial levelalso has its problems in completely phasing out a program. I think the important point here is that they went as far as they did, and therefore. what we have is a 94-percent elimination.

Senator HATHAWAY. Well, they do not have to phase it out. We will just propose a 1-percent tariff. They are not going to complain about a 1 percent tariff, are they?

Mr. MUNDHEIM. I appreciate that point, but I think part of our mandate under the countervailing duty law is to try to get the Government to reduce, or to eliminate, the subsidies by their own action. It was considered by Congress that that was important. That was one of the things that we were told to do during the period of our countervailing duty negotiations.

I think we have done that in this case, and I think we have come out pretty well.

Senator HATHAWAY. Well, the problem is-I do not know if you are really answering my question. What harm is there going to be having 1 percent on it?

Bearing in mind that what you say may be correct, that the paramount concern, under the countervailing duty provisions, is to get the other countries to do it voluntarily, still, with only a 1-percent tariff to be added on to make it come out to zero, eliminate it altogether, it seems to me that the other country is not going to complain all that much.

Mr. MUNDHEIM. It is our feeling that they would complain and that that would substantially diminish the favorable atmosphere in Geneva for arriving at a subsidy code, and if we get a subsidy code, we are going to have a much broader and better basis for dealing with what is a real problem. I could not agree with you more, Mr. Chairman, but we would be able to deal with it on an international basis and across industry.

We think that is just very good for U.S. industry.

Senator HATHAWAY. Why could we not just propose it until we get that code, which may not come about in the next 10 years? They have been working on that for quite a while, have they not, to determine just what is a subsidy and what is not a subsidy, and coming to some common agreement.

I know we have a lot of problems with respect to our own tax code that they contest, and say, look, a 10 percent investment credit is a subsidy and it is a subsidy, I suppose-and if we wait until they get all of the loopholes or subsidies in our tax code before coming to some agreement, that will take quite a while.

Mr. MUNDHEIM. Well, you will remember, sir, that the waiver is only good until January 4. If we have not arrived at an international agreed on code and present it to this Congress and accept it, by January 4, our waiver is already stopped. On January 4, we will countervail against these grants. It is obligated. We will do it.

So we are not talking about a waiver forever. We are talking about a temporary waiver.

Senator HATHAWAY. From now until January 4.

Mr. MUNDHEIM. From now until January 4. And it was with a small amount of the duty and it was to preserve the kind of atmosphere that we hope would be

Senator HATHAWAY. It seems to me it is psychological and real. I mean, it is only a 6-month period, and the 1 percent, if you are going to come down on either side, you ought to come down in favor of the American fisherman, because the American fisherman is actually being pressed, as you know.

The Department of Commerce is telling them, look, you cannot fish for groundfish for a certain length of time; you have overfished them, and there is a big debate on that.

They are trying to try to get into a lobster quota, and that is going to be a real problem. As you know, they have had a real tough time.

And I would think that if it is only for a 6-month period that you could say, well, look, there is not that much sense in hurting the American fisherman just for the 6-month period and I don't think there is that much benefit to be gained from it.

But there is without really getting into the merits of whether or not your decision is correct with respect to the first of that three-part statutory condition on the waiver section 303 (d) (2) (A) of the Trade Act.

Mr. MUNDHEIM. My response to you, sir, is that these 6 months are critical. These are the 6 months in which we hope to arrive at a code, if we are going to do it. And we relied very heavily on the advice given to us by the administration's representative responsible for negotiating that code, who said, if you countervail in the face of what you have gotten the Canadians to agree to do in terms of voluntary elimination, you will poison the atmosphere. Do not do it.

Senator HATHAWAY. Who is telling you that?

Mr. MUNDHEIM. Our Ambassador, Mr. Strauss, told us.

That is the kind of consultation and advice that we are supposed to get, and weigh, and, as I said, it is a difficult decision.

Senator HATHAWAY. Well, perhaps we should have further hearings and call Ambassador Strauss in, as well as the Canadian Ambassador who has sent me a memo on this.

[The memo referred to follows:]

Hon. WILLIAM D. HATHAWAY,

U.S. Senate,

CANADIAN EMBASSY, Washington, D.C., June 21, 1978.

Russell Senate Office Building, Washington, D.C.

DEAR BILL: I am writing with reference to our conversation on the decision by the Secretary of the Treasury to waive the imposition of countervailing duties on Canadian groundfish imports, and Senate Resolution 483 which would override this decision.

As you are probably aware, the Canadian fishing industry has, over the past four years, gone through its worst crisis during the course of which unusually

high costs (stemming in part from the energy crisis of 1973), scarce fish and poor markets produced heavy losses and forced producers towards bankruptcy.

Faced with this social and economic crisis, the Canadian Government deemed it necessary to authorize emergency aid to the groundfish and other sectors of the fishing industry so as to prevent the collapse of communities and widespread dislocation in a primary industry of an already disadvantaged region of the country, where unemployment rates currently exceed eleven per cent.

The main financial mechanisms used by the Government to address this crisis was the Groundfish Temporary Assistance Program (GTAP) under which payments were made to fishermen and fish processors based on the amount of fish caught or processed. As the name of this program suggests, it was the intention of the Government from its initiation that this form of financial support be only a temporary measure sufficient to allow communities and the fishing industry to deal with a particular crisis situation.

As you noted in remarks made when you introduced the Resolution, the Canadian Government has stated its intention to phase out payments to processors and fishermen under the GTAP. Payments under this program have already been eliminated entirely for processors and substantially for fishermen. Remaining payments to fishermen will be terminated on October 1 of this year.

In your remarks, you also noted the existence of "indirect Canadian subsidies". I would point out that, to the extent you refer to financial assistance provided to communities in Newfoundland by the Federal Department of Regional Economic Expansion (DREE), the facilities in question, which involved the construction of wharves, marine centres and fresh water distribution systems, were essentially in the nature of infrastructure. In most instances, these facilities are available on a user-pay basis to all members of the communities in which they are located and their use is consequently not limited to the fishing industry. As you will appreciate, assistance of this type is normally provided by most governments (including the U.S. through the Economic Development Administration) for the development of community infrastructure, particularly in more disadvantaged regions of the country.

The substantial modifications made by Canada to its fisheries programs and our active participation in the Multilateral Trade Negotiations in Geneva would appear to meet the criteria set out under the Trade Act of 1974 providing the Secretary of the Treasury with authority to exercise a waiver of countervailing duties. In light of the importance of the fishing industry to the Canadian economy in general and more specifically its role as a leading employer in one of the more disadvantaged regions of our country, the Canadian Government welcomed the decision by the Secretary of the Treasury to exercise this authority. We would, of course, regret a Congressional decision to override his action.

Yours sincerely,

PETER M. Towe, Ambassador.

Senator HATHAWAY. How do you reconcile the requirements of (A) of these three conditions that you are supposed to have to meet in order to grant the waiver? It says, "Adequate steps have been taken to reduce, or substantially eliminated during such period, the adverse effect of a bounty or grant."

Now, that, necessarily, takes into consideration the plight of the fishermen, right? And so even though you might be right with respect to your figures, 1 percent could have a substantial effect, and I think from all of the testimony that you have heard Senator Kennedy did and Congressman Studds, without my reviewing it all, that you would recognize that American fishermen, and particularly New England fishermen with which I am more familiar, are having a tough time making a go of it. And even though it's only a 1-percent subsidy, it still hurts. Would you not agree with that?

Mr. MUNDHEIM. We certainly can understand that argument, and we weighed that argument. But still the statute says substantially eliminated, and 94 percent, it seems to me to be a substantial elimination.