The Reagan Administration and Multinationals

Unsafe at home, dumped abroad: Sanctioning hazardous exports

0n January 15, 1981, in one of his last acts before leaving office, President Jimmy Carter signed Executive Order 12264, "On Federal Policy Regarding the Export of Banned or Significantly Restricted Substances," aimed at curbing the export of hazardous substances produced in the U.S. Thirty-four days later, one of Ronald Reagan's first official acts was to rescind the order.

The Carter action had been a response to evidence that hazardous pesticides, food, consumer goods, and wastes-many banned for use or disposal in the U.S.-were being dumped overseas in developing countries which were unaware of the inflow or lacked the legal structures necessary to restrict it. Third World people were being injured and killed as a result of exposure to, or use of, these substances.

A 1979 report from the General Accounting Office, for instance, had found that 29 percent of the 522 million pounds of pesticides exported from the U.S. in 1976 were not registered for use in the U.S. About 20 percent of these unregistered pesticides had been cancelled or suspended by the U.S. Environmental Protection Agency because their use posed unreasonable risks to public health and the environment. Mean-while, Oxfam estimates that there are 10,000 pesticide poisoning deaths each year in the Third World.

In addition, U.S. companies have exported over two million sleepwear garments treated with the flame retardent TRIS, an agent that may cause cancer through absorption in the skin; several hundred thousand dangerous pacifiers which had caused choking deaths in infants in the U.S.: unsafe food, including fish contaminated with mercury or PCBs; and hazardous wastes. In 1979, a U.S. company offered the president of Sierra Leone $25 million to agree to disposal of hazardous mining wastes in his country.

The Carter executive order was intended to curb export of these hazardous products in several ways. It would have improved the export notice procedures already required by other laws, and called for the annual publication of a summary of U.S. government actions banning or severely restricting substances for domestic use. It also would have directed the State Department and other federal agencies to participate in developing international hazardous alert systems. Finally, it would have established procedures whereby formal export licensing controls would be placed on a very limited number of "extremely hazardous substances" that represented a serious threat to human health or the environment, and the export of which would threaten U.S. foreign policy interests.

To Ronald Reagan, these export controls amounted to a "cumbersome regulatory program, costly to both the public and private sectors." Cancelling the Carter order, Reagan asked the Secretaries of Commerce and State to review the field and make new proposals.

More than two years later, Commerce Secretary Malcolm Baldridge and Secretary of State Alexander Haig quietly issued a report to U.S. Trade Representative William Brock, copies of which were leaked to the public. The report proposed the elimination of existing requirements that the U.S. government alert foreign governments as to the shipments of toxic chemicals and pesticides that are banned or restricted in the U.S., and a repeal of the 44 year old prohibition on the export of drugs that the Food and Drug Administration has not approved for domestic sale.

S. Jacob Scherr, senior staff attorney with the Natural Resources Defense Council, charges in a recent policy analysis that the Haig-Baldridge report is "extremely short on facts and appears to have been written to please the preferences of the free market ideologues in the Administration." (Scherr's report, "Hazardous Exports: United States and International Policy Developments," details Reagan's policy's on hazardous exports.)

Although the Haig-Baldridge proposals have been blocked in Congress, U.S. multinationals still have Reagan to thank for freeing them of the minimal restraints that Carter's executive order would have guaranteed. Meanwhile, people in the Third World have Reagan to thank for dangerous products the U.S. considers unsafe for use at home..

Double Standard on Drugs: Pharmaceuticals Exports

In 1984 the Reagan Administration and Senator Orrin Hatch (R-Utah), Chairman of the Senate Labor and Human Resources Committee, launched a drive to support legislation permitting American drug companies to manufacture and export to consumers in other countries drugs which have not been found acceptable by the Food and Drug Administration for sale to American consumers. The double standard was justified by the drug companies as creating jobs and tax revenues in this country. They argue that the drugs are going to be produced and sold anyway, so the U.S. should reap the benefits.

The legislation would expand to all drugs the industry's right to export certain non-FDA approved pharmaceuticals. Presently, antibiotics are the only drugs that can be sold abroad by American factories if they are not approved for sale in the U.S. Under the proposed law, if at least one foreign regulatory authority approved by the FDA accepts a drug, then U.S. drug manufacturers can export it anywhere abroad where they find a market.

One party that didn't buy the jobs argument was the International Chemical Workers Union, which released a letter to Senator Hatch opposing the legislation. The union said that the number of projected new jobs was wildly exaggerated by the industry and that, in any event, "the jobs that would be created are outweighed by the tremendous ethical disadvantages of the bill. The idea of the bill is morally repugnant and can do nothing but harm the reputation of the United States in the world community."

Consumer groups argued that changing the law would also discourage the international trend toward the tightening of controls over exports of drugs and other hazardous products, especially those from developed to developing nations. As for the "adequate foreign drug approval authority" provision, it was pointed out in hearings that just last year even the United Kingdom took off the market six prescription drugs which had been approved in that country, due to the significant number of deaths caused by the drugs.

The legislation never reached the floor of the House or Senate, but is expected to be refiled in the next session of Congress..

"Global Paternalism": The UN and the World's Consumers

Multinational corporations had no trouble enlisting Reagan Administration opposition to voluntary consumer protection guidelines proposed by the United Nations Economic and Social Council. Already under Reagan, the U.S. had cast the only vote against a voluntary infant formula marketing code issued by the World Health Organization, and the only vote against a U.N. resolution regarding the export of hazardous products. The reasons given for these votes were free trade and an aversion to "patronizing" other countries with our standards. Not one single country-ally or adversary-agreed with the U.S. position.

Ironically, the proposed U.N. consumer code currently under U.S. attack is drawn heavily from U.S. consumer laws. According to Esther Peterson, former consumer adviser to Lyndon Johnson and Jimmy Carter, the principles are simply meant to serve "as a guide for governments committed to protecting, or desiring to protect the health, safety and economic rights of their citizens as consumers. They recognize the right to he protected against the marketing of hazardous goods, the right to be protected from fraudulent, deceptive, or restrictive business practices, the right to information necessary - to make informed choices and the freedom to organize consumer groups and to have their views represented."

But corporate-oriented Reagan officials apparently reject the idea that people in the Third World-most of whom live under authoritarian regimes-should be provided with such an ethical framework. "Global paternalism," Jeane Kirkpatrick, Reagan's U.N. representative, called the guidelines. "The U.N. should not assume the role of global `nanny' and international consumer 'cop,' " said Murray Weidenbaum, former chief economic adviser to President Reagan. The guidelines constitute "overregulation," according to Virginia Knauer, Reagan's consumer adviser. (In fact, there is no regulation or governmental authority in the guidelines.)

Meanwhile, consumer groups have been shut out of consultations over the guidelines between industry and the State and Commerce Departments. To give greater publicity to the Reagan--U.N. consumer code tussle, this summer the House Foreign Affairs Subcommittee on Human Rights and International Organizations held hearings focusing on this propensity of the Reagan Administration to consult with corporate leaders while ignoring consumer groups.

Overcoming the U.S. pressure, however, the U.N. Economic and Social Council decided recently to pass on the consumer guidelines to the U.N. General Assembly for "consideration with a view toward adoption" sometime in late 1984.

BribesDismantling the Foreign Corrupt Practices Act

One year into office the Reagan Administration teamed up with Washington-based corporate lobbies to target the Foreign Corrupt Practices Act (FCPA) for legislative dismantling. Thanks to a counter coalition of public interest groups and isolated federal enforcement agents and members of Congress, the Reagan dismantling effort was stalled, but even in the last hours of the 98th Congress, the anti-FCPA forces were looking for a chance to push their program.

Ever since Congress passed and President Ford signed the law in 1977, U.S.based multinationals have been upset about what they see as a misguided effort to impose American ethical standards on foreign cultures. They shore up their criticism by claiming that the law's accounting and bribery standards are vague, and that it has impeded business practices, reduced foreign trade, and burdened companies with extra paperwork and accounting costs.

In fact, the law was a necessary response to embarrassing revelations of more than 450 American corporations engaging in improper payment practices abroad. It seeks to limit those practices by providing stiff penalties against individuals and foreign officials who make payments to foreign officials. A complementary provision requires public corporations to devise and maintain accurate accounting records and internal accounting controls.

Led by U.S. Trade Representative Bill Brock, and the Departments of Commerce, State, and Justice, the Reagan Administration actively supported and lobbied for an amendment to the law that would create broad exceptions to its prohibitions, and would have removed enforcement jurisdiction from the Securities and Exchange Commission (SEC) to the Justice Department. In a speech at the U.N. in August 1981, Attorney General William French Smith said that the Administration intended to "eliminate the more offensive provisions of our law," specifically advocating easing the law's ban on paying bribes overseas to reflect the "reality" of dealing in international markets. Trade Representative Brock denied that the Administration was for bribery. "I state unequivocally," he told a Senate committee, "that the Administration supports the principal that illicit payments, whether foreign or domestic, are unethical and undesirable."

Senator William Proxmire (D-Wisc.) wasn't convinced by Brock's assurance. Charging that the Reagan Administration was in fact out to gut the law, Proxmire painted the proposed amendment in medieval terms: "It beheads the Foreign Corrupt Practices Act and then puts (its) corpse to the torch and turns that corpse to a pile of ashes and scatters the ashes to the wind." It would have been more honest, Proxmire claimed, to repeal the act altogether.

But the U.S. corporate community was less interested in an honest argument, than in one that would go over well on Capitol Hill. Their position that FCPA had resulted in lost foreign trade, for instance, rested primarily on a 1981 General Accounting Office report that surveyed the business opinion as to what trade loss was due to the law. Thirty percent of the businessmen surveyed cited FCPA as costing foreign trade, but no substantiation of the claims was given. Other, more reliable studies have found that FCPA had no negative effect on the export performance of U.S. industry. Despite the strong dollar, American merchandise export trade was 77 percent greater in 1982 than in 1977, the year FCPA became law.

Since it wasn't making headway legislatively, the Reagan Administration sought to accomplish its ,goals, at least in part, at the enforcement level. In October 1981, Congressman Timothy Wirth (D-Colo.) reported that the Justice Department had brought prosecutions in only two FCPA cases, had closed 27 withoyt prosecution, and had 57 still open. In an internal memo to Wirth last February, members of the staff of the Subcommittee on Telecommunications, Consumer Protection and Finance of the House Energy and Commerce Committee reported that in September 1981 the Justice Department had dropped criminal charges in an overseas bribery case against four top McDonnell Douglas executives, in return for a guilty plea by the corporation and criminal and civil fines. Wirth's staff criticized the settlement, and Phillip Heyman, who as head of the Department's criminal division during the Carter Administration had approved the charges, said that he "would have been extremely reluctant to drop any charges brought after very careful consideration by a previous administration."

The subcommittee staff also reported on a number of other cases that were closed out by the Reagan Justice Department, including one which was closed because, according to the memo, "prosecutors simply could not get a reporter to talk about the facts of the case reported in a newspaper article." The case involved an unidentified large U.S. multinational in an unidentified African country that had recently experienced a coup as a result of widespread corruption. "Other than question the reporter," the staff reported, "it is unclear whether the Department did any investigation at all."

In a case involving a multinational oil company, the staff studied SEC documents and found that the allegations of bribery had been "unenthusiastically pursued by the SEC for more than two years." The staff found in interviewing SEC attorneys that SEC's director of enforcement, John Fedders, had yelled at three attorneys on the case, saying, "Haven't I told you we're not doing foreign payments cases anymore?"

In addition to failing to prosecute legitimate FCPA cases, in early 1983 the Justice Department, according to the Wall Street Journal, eliminated its multinational fraud branch.

At the start of the 98th Congress in 1983, Reagan's forces were back on Capitol Hill with new amendments to change the liability provisions for bribes paid through third parties - amendments that would remove jurisdiction over bribery provisions from the SEC (which is still considered an "independent" agency compared to the Justice Department). So far these attempts to weaken the anti-bribery law have been unsuccessful.

Anti-Soviet Ideology and the Policing of Exports

Last November, customs officials in Hamburg, West Germany seized sophisticated American made computers en route to the Soviet Union. The Digital Equipment Corporation computers, capable of directing nuclear missiles, had been licensed by the Commerce Department for export to a South African firm. A South African company re-exported the computers to a firm in West Germany.

The Commerce Department later charged that Digital, through its German affiliate, had unlawfully sold the computers to Richard Mueller, a West German who had previously been denied U.S. export privileges for illegally reshipping U.S. goods to the Soviet Union. In settlement of the complaint, Digital agreed this September to pay $1.1 million, and in a conciliatory gesture the Commerce Department granted the Massachusetts-based computer firm a two year renewal of its general distribution export license.

The much publicized Digital case drew the attention of anti-Soviet hardliners within Reagan's Defense Department, who claimed that Commerce had been negligent in its policing of exports and that as a result U.S. technology was slipping into Soviet hands. They urged the White House to give the Defense and Customs Departments greater policing authority in the area.

In response to this pressure, last January the Commerce Department proposed new regulations tightening control over high--tech exports. The rules would require that companies in the NATO nations, Japan, Australia, and New Zealand would have to agree not to sell the U.S. products in another country without U.S. approval, and companies located in other countries would be required to supply lists of potential purchasers.

By May, Commerce was flooded with objections from more than 250 U.S.-based corporations, arguing that the proposals would cost them millions of dollars in lost business and thousands of U.S. jobs. IBM called the proposal "unjustified and misdirected." Xerox estimated that the proposal would cost the company 1,000 jobs and between $25 million and $35 million a year. And a spokesman for Dow International said that it didn't make sense to "add more paperwork to the export business and add to the growing trade deficit."

This September, Commerce scrapped the proposed rules, and replaced them with new proposed rules calling for U.S. exporters to police themselves.

It wasn't the first time that Reagan foreign policy ideologues had clashed with multinationals. Soon after martial law was imposed in Poland, for example, the Reagan Administration-which opposed construction of the Trans Siberian natural gas pipeline on the grounds that it would make Western Europe dependent on the Soviet Union for energy supplies--prohibited U.S. companies from supplying parts to the pipeline, and attempted to extend the ban to foreign based companies that were subsidiaries of U.S. firms or used U.S.-licensed technology.

U.S. Chamber of Commerce Chairman Donald Kendall (who is also chairman of Pepsico, which holds exclusive cola marketing rights in the Soviet Union) led the corporate attack on the President's pipeline ban. Chamber president Richard Lesher wrote Reagan in February 1982, stating that the Reagan pipeline policy could be likened to a "strategy of economic warfare."

With European companies refusing to comply with the ban, and with corporate pressure against it mounting at home, Reagan changed course in late 1982 and lifted the trading restrictions.

A similar pattern has emerged in the area of nuclear proliferation. In July 1981, Reagan issued a statement highlighting the need to prevent the further spread of nuclear explosives. Key State Department and arms control aides have also taken strong positions against nuclear fuel reprocessing. Richard Perle, an Assistant Secretary of Defense, has admitted that the initial effort to promote nuclear sales-Eisenhower's "Atoms for Peace" program-was "probably a bad idea," and that "there are certainly inherent risks in the diffusion of plutonium around the world." Meanwhile, however, the ailing nuclear power industry has sought to expand exports and has successfully pressured the Reagan Administration into reducing restrictions on reprocessing of spent nuclear fuel both here and abroad.

This year, in the final days before recessing, Congress failed after months of debate to pass export control legislation. The Republican-controlled Senate had passed a provision that would give the Defense Department the role it has wanted in licensing strategically critical export goods, while the Democratic-controlled House passed a provision banning new bank loans to the government of South Africa. (Members of the Congressional Black Caucus abstained from voting on this measure to protest the exclusion in the House bill of a stronger measure that would have banned all new investment in South Africa.) The export control bill then failed in House-Senate conference..

Protectionism, Free-Market Style

In 1980 the outlook was bleak for U.S. automobile manufacturers. They had had recent huge profit losses. Employment had fallen by 20 percent. The Chrysler Corporation had just narrowly escaped bankruptcy by a federal bailout. It was all bad news, but rather than look for causes within (such as quality control problems and lagging productivity), the industry blamed Japanese imports. It turned to the President it had supported in the 1980 election-who had run on a platform of free market and free trade-and demanded some type of restraint on imported autos.

In response, Reagan announced in 1981 that the U.S. had reached an agreement with Japan on a voluntary export restraint limiting Japanese automobile exports to the U.S. to 1.68 million cars a year.

The result has been a bonanza of auto profits and auto executive bonuses. Creating an artificial scarcity of Japanese autos has caused prices of both Japanese imports and U.S. manufactured autos to jump. A 1983 Wharton Econometrics study estimated that in 1981 and 1982, the prices of Japanese imports increased an average of $920 to $960 per car. And since 1981, the average price of a U.S. manufactured car has increased by over 40 percent-twice the rate of increase in the Consumer Price Index during the same period.

Profits in the U.S. auto industry soared from a loss of $3.8 billion in 1980 to a gain of $7.7 billion in 1983. Brookings Institute economist Robert Crandall estimates that "a substantial share of the explanation must be the price effects of import restraints." And auto industry executives have cashed in, too: Roger B. Smith, General Motors chairman, granted himself $1.5 million in cash and stock bonuses in 1983; Ford's chairman Phillip Caldwell took home $1.4 million.

Even the Japanese have been heard expressing support for the quotas. "If the restraints raise the price of Japanese cars in the United States by $1,000 per vehicle or more," observes Crandall, "the Japanese should be pleased indeed-unless, of course, a slightly tighter or looser restraint would increase their profits even more."

The U.S. auto industry was only one of a number of U.S. industries (including steel, textiles, specialty steel, meat, sugar, and motor cycles, among others) to benefit from a Reagan protectionist policy that runs against a Reagan free market-open trade political rhetoric. His rejection of copper quotas stands as one of the few exceptions to this protectionist rule.

This September, for instance, Reagan rejected the International Trade Commission's recommendations for formal tariffs and quotas on imported steel. Instead he decided to negotiate steel quotas on a "voluntary" basis, with the aim of reducing foreign imports from the current 25 percent to 18.5 percent. With headlines reading "Reagan rejects steel quotas," the political impact was as Reagan intended-the continued perception of the President as a free trader. But the real world effect was an unadorned protectionism.

Similarly, also in September, the Reagan Commerce Department promulgated regulations intended to protect American textile manufacturers from foreign imports by closing a loophole in the existing import controls. With major textile corporations based in southern states-states key to the President's reelection effort-it was difficult to miss the political thrust of the regulations. (Ironically, the regulations may boomerang to hurt the U.S. textile corporations they were intended to benefit; industry observers note that in closing one loophole, the regulations may have opened a bigger one that will allow more foreign imports to enter the U.S.)

In addition to increasing protectionism, the Reagan Administration has pulled the trend away from tariffs and toward quotas as the import barrier of choice. Quotas are more anti-competitive than tariffs: A quota limit on imports is an absolute ban to entry of the product, while a tariff can be overcome with added price and/or product competition.

Among the losers of an overall protectionist policy here are consumers-who have to pay the artificially high inflated prices-and Reagan's free market rhetoric, which is especially strong in a campaign season, but buckles under the slightest pressure from corporate constituencies..

The IMF and the Big Bank Bailout

In 1983, as many debtor nations in the Third World became less able to pay the interest on their debts, the major U.S. banks (including Citibank, the Bank of America, Chase Manhattan, Morgan Guaranty, and Manufacturers Hanover) urged the Reagan Administration to ask Congress for a sizable increase of U.S. support for the International Monetary Fund (IMF). Last fall after sharp controversy in the House, Congress passed the International Recovery and Financial Stability Act, adding another $8.37 billion authorization for the IMF as part of a larger package of support from its member nations.

The principal argument by proponents of the bill was that additional IMF lending will help debtor nations resolve their debt crisis. Critics maintained that unless the legislation is accompanied by specific measures restructuring the private bank loans to those nations by lowering interest rates and providing longer loan maturities, the IMF bill will function primarily as a bailout for large multinational banks. IMF loans to debt-troubled nations, they claimed, will merely be used to make interest payments to private banks, rather than stimulate economic growth in those countries.

The Senate first passed the authorization bill quickly and overwhelmingly. But public scrutiny increased when the House took up the legislation, due to an unlikely coalition of liberal and conservative groups that included the Environmental Policy Center, the United Methodist Church, Congress Watch, the National Taxpayers Union, and Free the Eagle. Their near success against the combined support for the IMF bill by Ronald Reagan, House Speaker Tip O'Neill, and the powerful banking lobby, promises difficult times for any near-term -additional IMF expansion from Congress.

Although the groups' opposition was for widely differing reasons, they agreed that the net result of the IMF authorization bill would be a bad deal. Multinational banks, they agreed, will continue to earn excess profits on country loans that should be restructured through negotiations between creditors and debtors. In addition, the debt burden of debtor nations will continue to increase, and finally, a growing share of credit risk will be shifted from the private banks to the IMF and ultimately to U.S. taxpayers.

Some opponents were particularly concerned about the impact on the poor and workers of the austerity measures the IMF imposes on debtor countries in return for credit. These measures usually include reducing social services and consumer subsidies for food and other necessities; reducing indexing for worker wages; and sharply depressing imports to build up foreign exchange. Shifting land from staples to cash crops for exports and hard foreign currency is also encouraged.

University of Southern California professor W. David Slawson, author of "The New Inflation: The Collapse of Free Markets," has called these IMF conditions "morally repugnant and politically dangerous. The suffering is an evil in its own right; it also risks triggering antidemocratic political revolutions in countries that are democracies and further repression in countries that are not."

What has been keeping the debt crisis in uneasy equilibrium is that neither lenders nor borrowers can afford a default. While the banks are making enormous profits on their Third World loans (the return on their assets in Latin America in 1982 was more than twice their rate of return on domestic U.S. assets), they are in so deep that they cannot risk default. According to the American Banker, the largest U.S. banks had the following ratio of their bank investments in just Mexico and Brazil to their bank capital at year end 1982: Citicorp--158 percent; Bank of America-105 percent; Chase Manhattan-147 percent; Manufacturers Hanover- 135 percent; Morgan Guaranty-102 percent; and Chemical Bank-144 percent. In short, if those two countries had declared a sudden defiant default on their loans, without a bail out by Uncle Sam of the big banks, these over-extended financial goliaths would have collapsed. But those developing countries would be well on the way to collapsing their own overly foreign-dependent economies as well.

The Reagan Administration rejected attempts in the House to require the U.S. representative to the IMF to vote against IMF credit assistance to a debt-troubled nation unless there is a debt restructuring agreement on the part of the private banks.

The White House and the House of Representatives also rejected proposals under which loan loss reserves requirements would be used as a means to encourage larger banks to restructure their loans to debtor nations.

Since the passage of the bill, major Latin American countries, most recently Argentina, have been engaged in intensive negotiations with the IMF, the banks, and U.S. government representatives regarding restructuring and austerity measures..

Eximbank - The Multinationals' Lending Agency

When Ronald Reagan entered office in 1981, his budget director David Stockman targeted the Export-Import Bank-a U.S. agency that offers loan, guarantee, and insurance programs to U.S. exporting corporations-for large budget cuts. Stockman charged that the bank served a small group of corporations and that its existence had "not been justified" in terms of attracting foreign buyers. It was an attempt to show that the Reagan Administration would be evenhanded in its budget cutting --cutting wasteful subsidy programs for rich multinationals as well as poor individuals.

But the Administrations' bite didn't match Stockman's bark. When the proposed budget cuts went to Congress for consideration, the Reagan Administration stood aside and let Eximbank beneficiary corporations, including General Electric and Boeing, work their will unopposed. After limiting legislative efforts to cut the Eximbank budget in 1981 and again in 1983, the nuclear and aircraft industries created and underwrote a group they called the Coalition for Employment through Exports to lobby Congress for increased funding to the bank.

Under the Reagan Administration, Eximbank continues to be a private lending agency for a handful of large U.S.-based multinationals. During the early part of the Administration, the aircraft and nuclear industries enjoyed close to half of the bank's total lending. While in the front of its 1983 annual report, the bank's chairman William Draper III writes glowingly about "a special team ... to conduct seminars around the nation aimed specifically at acquainting the local small business communities with the export financing programs available from Eximbank," the back of the report lists multinationals, including Bechtel, McDonnell Douglas, General Electric, and Boeing, as recipients of the bank's largesse.

In 1980 John Moore, then president of the bank, told the Atomic Industrial Forum that "historically, the Export-Import Bank has probably been the nuclear power industry's best friend in the U.S. Government." But subsidies to the troubled nuclear industry have put the bank itself on shaky footing.

In June 1982, the Comptroller General warned that the risk of losses to the bank had increased. "Although the reserve increased in fiscal year 1981," the comptroller reported, "the risk of incurring possible future losses increased to a larger extent. This increased risk is due primarily to loan purchases, outstanding purchase agreements, and principal and interest delinquencies."

A more recent report from the General Accounting Office indicates that under Reagan, Eximbank may be trying to hide something. This April, the GAO reported that the bank's financial statements "do not include an allowance for estimated losses that are likely to be sustained due to the uncollectibility of a portion of the loans it has made. " In a letter to the bank's board of directors, the Comptroller General challenges the bank's accounting methods in strong terms: "In our opinion," the letter reads, "(Eximbank's) financial statements do not present fairly the financial position of Eximbank as of September 30, 1983, or the results of its operations and changes in its financial position for the year then ended in conformity with generally accepted accounting principles."

Anti-Anti-Trust - FTC Approval of the GM-Toyota Venture

The Federal Trade Commission's approval early this year of the General Motors-Toyota joint venture to assemble, with many Japanese-built parts, 250,000 small cars a year in Fremont, California, brought Chrysler's chairman Lee lacocca to a congressional hearing to deliver searing testimony against the deal.

Iacocca charged that the GM-Toyota venture would lead to a rise in everybody's car prices, reduce product choice, and promote collusion between the two largest domestic and foreign car manufacturers. He warned that Chrysler would have to have a Japanese partner if the courts do not overturn the Reaganite FTC's decision.

"GM is the domestic price leader and Toyota is the import price leader," lacocca reminded Congress. "Ford and Chrysler target their domestic prices on GM. It's been the head-to-head competition between Toy ota and GM that sets the pricing pattern for the entire industry. Do you think that pattern is going to stay the same when GM and Toyota sit down together and set price,, as they already have?

"What really is the issue here?" he went on. "Size. And power. GM's sales are bigger than the GNP of all but 25 countries in the world; add Toyota, and their combined sales are bigger than the GNP of all but 20 countries. In the U.S. market, which is the one at stake, they are bigger than all the other automotive companies in the world . . . put together."

Iacocca ridiculed the FTC (which approved the venture by a three to two vote of commissioners) for believing that GM needs Toyota's help if it is to compete effectively in the U.S. market. The two dissenting commissioners were unequivocal in their condemnation as well. Commissioner Michael Pertschuk wrote, "This joint venture is a plain and unambiguous violation of the antitrust laws. It's bad news for the consumer." Commissioner Patricia Bailey said the joint production venture "assures an ascending spiral of lockstep pricing. If this venture between the world's first and third largest automobile companies does not violate the antitrust laws, what does the Commission think will?"

Approval of the GM-Toyota venture, without public hearings and with a good measure of FTC-imposed secrecy on the two companies' documents, is another green light by the Reagan Administration to major corporations to merge and acquire one another here and across national boundaries without worrying about antitrust laws. 'Fen years ago a GM-Toyota type joint venture would have been inconceivable; one former Justice Department lawyer has remarked that the proposal would not have been submitted to the government, so low were the odds of its being accepted..

The SEC Under Reagan - Restricting Activist Shareholders

During the first weeks of the Reagan Administraton, White House and Office of Management and Budget officials solicited "wish lists" from companies and trade associations about health, safety, and economic deregulation. One wish list item of larger corporations was to get pesky shareholders off their backs as far as the shareholder resolution process was concerned. Executives didn't like what they saw as "political" and "extraneous" resolutions being discussed and voted on-including resolutions regarding trade and loans to South Africa, military weapons production, pollution, equal employment, agribusiness, neighborhood redlining, and other nettlesome issues.

In August 1983, the Securities and Exchange Commission gave companies some relief-and activist shareholders some more obstacles in their efforts at broadening sensitivities to social consequences of corporate actions.

The SEC move was in the form of amendments to Rule 14a-8, which controls shareholder resolution procedures. Only one of the four commissioners, Bevis Longstreth, dissented, saying that "these amendments, in the aggregate, tilt significantly and unnecessarily against shareholders seeking access to the proxy machinery. The tilt, in my opinion, goes well beyond that which is necessary to deal with recognized abuses."

The major new requirements, which went into effect last January, are:

• to be eligible to submit a resolution, a shareholder must own at least one percent, or $1,000 in market value, of stock for one year or more before the proposal is submitted;
• the shareholder or a designated representative presenting the resolution as a proxy must be at the meeting, or the SEC can apply a penalty for no-shows without a good excuse for being absent;
• the deadlines for submitting proposals to be included in proxy statements is 120 days (extended from 90);
• a sponsor can offer only one proposal per company (reduced from two);
• a company can exclude a proposal if it is "designed to result in a benefit to the proponent or to further a personal interest, which benefit or interest is not shared with the other security holders at large" (This clause can permit companies broad interpretation affecting, for instance, authors writing books, editors of newsletters, or worker-shareholders submitting proposals to correct workplace hazards);
• a company can exclude a resolution from the proxy statement "if the proposal relates to operations which account for less than 5 percent of the issuer's total assets at the end of its most recent fiscal year, and for less than 5 percent of its net earnings and gross sales for its most recent fiscal year and is not otherwise significantly related to the issuer's business" (This provision obviously favors large corporations and conglomerates); and
• the SEC staff can decide whether a proposal asking the company to report on an aspect of its business, or to form a special committee to study some aspect of its business, falls under an "ordinary business" rule and is thereby excluded (Before, such resolutions were not excludable under this rule).

For seasoned investors like churches, colleges, and other institutional shareholders, the new rules are chiefly nuissances requiring new strategies. But the new rules come down particularly hard on small, unaffiliated shareholders.

The legitimacy of the publicly held corporation depends on management's accountability to shareholders-all of whom have the same rights of access to the proxy machinery. The SEC under Reagan, however, has decided that procedurally, some shareholders are more equal than others-thus setting a precedent for stratifying access rights based on the dollar amounts of shares and how long they are held.

(For the complete "Amendments to Rule 14a-8 under the Securities Exchange Act of 1934 Relating to Proposals by Security Holders," release no. 34-20091, write the SEC, 450 Fifth St., N.W., Washington D.C. 20549.)e

Reaganite "Deregulation" and the strengthening of the Maritime Cartel

0ffshore and out of sight, the maritime industry has been especially invulnerable to movements for intra-industry competition. Its operations and regulations by the Federal Maritime Commission have been arcane, and insulated against outside probing and public discussion. A strong industry union bond was long ago extended to Congress, in the form of campaign contributions to members of committees with jurisdiction over the maritime industry. And the industry has an additional factor in its favor: unlike with the airline or trucking industries, ordinary consumers are not directly involved, and cannot be directly appealed to by industry critics.

Given this background, it's hardly surprising that legislation described as deregulatory, passed by Congress and signed into law by Reagan this March, will actually strengthen the cartel-like structure of the maritime industry. The law, applauded by the industry, broadens exemptions from antitrust prosecution for price-setting and other agreements reached by international shipping cartels known as conferences. The law covers ships transporting packaged goods on a regular schedule between U.S. and foreign ports; it does not affect carriers of bulk cargo like petroleum and grain.

The new law switches away from the companies the burden of justifying their agreements with one another through shipping conferences on rates and other matters. These agreements are now deemed acceptable unless the Federal Maritime Commission can demonstrate to the contrary. Under the old law, the FMC had to specifically approve the conference agreements, which allowed for the possibility of challenges to the cartels by other parties. -Now the Commission can intervene only when it affirmatively determines that a shipping conference's agreement would result in an "unreasonable" increase in cost or reduction in service. Prohibitions are continued against predatory pricing and boycotts. The Commission is also given more authority to retaliate against discrimination by foreign countries against U.S. flag vessel operators' access to foreign-to-foreign trade.

The House-Senate conferees' report on the bill declared that market shares of carriers w-ere to he considered as just one factor in judging agreements, because possible reductions in competition "will be at least partially offset by a member carrier's right of independent action and ability to enter and leave the conference freely." Critics say, however, that unspoken sanctions and few incentives await any carrier contemplating such an exit.

Senator Howard Metzenbaum (D-Ohio) voted against the legislation, after having led a Senate filibuster against it in 1983. The industry has pushed the bill for seven years, and some members of the House appeared to tire in their opposition after some language was modestly revised. Metzenbaum says that the bill still "goes further than it should" in continuing antitrust exemptions for certain activities among ocean common carriers, and that the law doesn't provide consumers with adequate protections. In fact, few consumers were even aware of the bill.

What the bill does accomplish is clear: In the name of Reaganite deregulation, it transfers government regulatory authority to industry cartel power.

John Connally thinks "Congress was wrong" this summer to forgive the taxes due from "Domestic International Sales Corporations (DISCs). As Nixon's Treasury Secretary in 1971 when the DISC bill passed, Connally recalls that forgiving taxes wasn't Congress's original intention in creating DISCs; deferral of taxes was. Senator Howard Metzenbaum calls Congress's recent move "an outrageous giveaway." During the Senate debate this summer he said, "You may have been for or against the DISC program. But the whole concept of the DISC program is that the taxes would eventually be paid and they were being deferred. But under this bill we are canceling, terminating, abrogating, forgiving $13.6 billion from corporations that owe that money to the U.S. Treasury."

For corporate lawyer John Connally and Howard Metzenbaum to agree on a corporate tax matter means something unusual is going on. The subject of their current agreement was a measure pushed by Senator Robert Dole (R-Kansas) to benefit, to the tune of billions of dollars, multinationals like Boeing, TRW, Dow Chemical, Exxon, DuPont, General Electric, United Technologies, Allied Chemical, and McDonnell Douglas.

Originally, the DISC program was justified as a tax incentive to encourage U.S. exports. Under the legislation, corporations could create paper subsidiaries to receive export income, half of which was tax-free as long as the earnings were held in the DISC and reinvested in export-related projects. The taxes were "deferred" in order not to violate the General Agreement on Trade and Tariffs (GATT), a treaty to which the U.S. is a signatory. Other signatory countries have always believed that DISC was a not-so-hidden subsidy to U.S. exports which would be a violation of GATT; now, with Reagan and Congress forgiving the DISC taxes, those countries' claims have been substantiated.

The National Association of Manufacturers and other Washington lobbying offices for corporations were surprised that they won the whole game. Some lobbyists told Congressman Pete Stark (D-Calif.) that they would have settled for around $4 billion. Instead, they got $10 to $12 billion when expected opposition to the bill from House Ways and Means Committee chairman Daniel Rostenkowski (D-Illinois) evaporated and Rostenkowski accepted Senator Dole's amendment. The news media was caught napping, a fact lamented by a business writer for the Washington Post in a column some days later.

The DISC giveaway was put into memorable context by Stark, who noted that the money lost by cancelling DISC deferrals was recouped by cutting federal support to medicare and medicaid. "'There are a lot of American people, the elderly and middle--class people." Stark said, "who are going to pay $7 billion more one way or another in medicare and medicaid. It is interesting that with one sweep of the pen early Saturday morning, we gave $12 billion to the major corporations in this country tax free, as a gift_"

(For more on UISCs, and their reincarnation in the tax world, FSCs, see the article in the News Monitor section of this issue.).

Reigning In States' Rights: Campaign Against the Unitary Tax

In 1967 w hen he was governor of California. Ronald Reagan said that "federal intervention in state tax matters is objectionable in principle." And throughout his Presidency . Reagan has espoused the cause of states' rights to determine their own destinies without interference from the federal government.

But the Reagan Administration has recently found it difficult not to interfere in the issue of how individual states tax income of multinational corporations.

The compelling reason: Twelve states have adopted the "unitary" method for taxing these corporations-a method that in most cases increases the multinationals' state tax bills. In response, the companies have engaged in an all-out campaign to repeal the unitary tax and to stop it from spreading to other states, to the federal level, and to other countries.

Under the unitary method, multinationals are taxed on a formula-determined portion of their income earned not just in the state, but worldwide. The companies prefer instead the "arms length" accounting method used by most of the states and the federal government, under which multinationals are taxed based on the profits they say they earned in the state. Unitary proponents say that this method allows multinationals to avoid hundreds of millions of dollars in state and federal taxes through such accounting shell games as shifting profits to states that don't have corporate income taxes and to overseas tax havens.

Multinationals have been seeking federal legislation in the U.S. that would effectively prohibit states from using the unitary method. This federal move would cost the 12 states which currently use the unitary method-and save the multinationals--more than $625 million a year.

The multinationals' lobbying has been intense at both the federal and state levels. A group of Japanese corporate executives, led by Sony chairman Akio Morita, arrived in the U.S. earlier this year to push for repeal of the unitary tax in the 12 states. In Washington, Morita made an appointment with Reagan, and when he arrived in the Oval Office, he was greeted by Reagan, Vice-President George Bush, Secretary of State Schultz, and White House Counsellor Edwin Meese. He later was granted private meetings with Schultz and Treasury Secretary Donald Regan.

At the state level, Morita and the Japanese executives met with governors and high legislative officials-with impressive results. Morita told state officials in Oregon, Indiana, California and elsewhere that unitary tax states would be "labelled" and that "we would advise our member companies that if they go into those states they would not get the benefits" of their investments. Only after the governor of Indiana gave Morita a written commitment to repeal the unitary tax there did Sony agree to build a planned $25 million plant in the state.

In California, Morita promised that as many as 99 Japanese companies would invest a total of at least $1.4 billion in California and create 11,000 permanent jobs if the unitary tax were abolished there. And in Oregon, after four meetings with Morita, the governor agreed to seek repeal.

American multinationals like IBM, Sun Oil, and Coca Cola have used tactics similar to Sony's. Earlier this year, during the heat of a political debate in Florida over whether or not to shift to a unitary tax system, IBM announced that it was not proceeding with a $50 million consolidation project in the Boca Raton area. Florida decided to adopt the unitary method despite the pressure.

Caught between his "states' rights" rhetoric and the building corporate pressure, last November Reagan appointed a Presidential commission of state, corporate and U.S. Treasury officials to resolve the controversy. This October, Donald Regan issued the commission's report to the President, stating that the corporations and states had agreed to limit state taxing authority to the "water's edge"-that is, that the states wouldn't tax corporate income overseas. But state officials who served on the panel objected vigorously to Regan's report, saying that it didn't accurately represent the states' views. The states then issued their own report to the President. In response, Regan threatened to re-issue federal legislation that would abolish the unitary tax if the states didn't take voluntary action by the end of July.

It's rare that the Reagan Administration publicly applies federal muscle in an attempt to bring independent state action into line. On issues of judicial power, welfare rights, and civil liberties, Reagan allows the states full reign. But the multinationals have whipped up the unitary tax issue to such a degree that Reagan is being forced to choose between the states and the multinationals. Recent events suggest that he has chosen Sony and IBM over Indiana and Florida .

Tax Havens - The Battle of Antilles

The process of writing a tax bill is an enormously complex affair, especially, it seems, in the topsy turvy tax world of Ronald Reagan. In 1981, the Administration sponsored and pushed through Congress the largest tax cut in American history-a bill whose special-interest giveaways were so extensive that the explanation of the law published by the Joint Committee on Taxation ran longer than 400 pages. One year later, the Administration signed into law the largest tax increase ever -a bill which passed over the bitter objections of the corporations and lobbyists who had worked alongside the Administration in 1981.

Again in 1984, the bizarre politics of tax policy under Ronald Reagan came to the fore. Nowhere was this more striking than in the maneuvering over repeal of an obscure provision which, in dollar terms, represents a trivial portion of a bill designed to raise billions of dollars in new revenues over the next three >ear,.

The provision in question was the longstanding 30 percent withholding tax on interest earned h% foreign citizens and companies that invest in U.S. securities. The rationale for the withholding tax was simple enough: since it is difficult for the I.R.S. to pursue tax evaders once their U.S. income has left the country, automatic withholding improves compliance. In practice, however, the tax was of little consequence. again for a simple reason. Since 1955. the Netherlands Antilles, a chain of six islands (population: 253,000), has enjoyed a tax treaty with the U.S. that exempts its citizens and corporations from the withholding law. As a result of this treaty, the Antilles has developed the dubious status as the world's most prolific tax haven.

While the islands have been used by individuals looking to avoid taxes on their U.S. investments, the Caribbean tax connection has been of paramount interest to one group in particular: major U.S. multinational corporations, anxious to float bonds in the trillion-dollar Eurocurrency market and take advantage of interest rates that are often lower than the cost of money at home. The problem? Euromarket participants, many of them from the Middle East, are reluctant to invest their funds in offerings that require them to make tax payments or, of equal significance, to identify themselves to government regulators, since their Euromarket investments are often Used to evade taxes in their home country. So over the years, major corporations have flocked to set up storefront offices in the Antilles. Of the 30,000 corporations registered with the Curacao Chamber of Commerce, for example, 25,000 are owned by foreigners.

This is the backdrop to what might be dubbed the "Battle of the Antilles." For years, Wall Street and corporate America made use of' the islands while worrying about the obvious gimmickry involved. They have for that reason come to Congress again and again with a solution --simply repeal the withholding tax. Officials of the Treasury Department, whose opinions on these matters carry great weight with Congressional tax writers, have long had mixed emotions about repeal. They recognized the need to reduce obstacles to corporate borrowing abroad, but had misgivings about allowing foreigners to avoid taxes on earnings for which U.S. citizens are taxed. Needless to say, the Antilles looked upon the continuation of the tax as central to its economic survival-and signed a contract worth $100,000 with Charls Walker Associates, a lobbying firm whose name partner is considered in some quarters to be the most powerful tax lobbyist in Washington, to defend its interests.

These contending forces all came to a head this May, at a hearing before the House Ways and Means Committee. Representatives from Wall Street, the U.S. Chamber of Commerce and the National Association of Manufacturers all testified in dire terms about the urgency of repeal. Antilles Prime Minister Dominico Martina warned of economic collapse and social unrest if his nation is deprived of the financial drug to which it has become addicted. The Reagan Treasury Department testified in favor of full repeal; not, it said, in defense of corporate interests, but as a way to ease the pressures of massive budget deficits. By repealing the tax, government officials reason, European and Middle Eastern investors will now be willing to purchase government securities, thus reducing interest rates the federal government must pay. With the strong support of Treasury, the repeal won the day.

The final outcome in a nutshell: U.S. multinationals will no longer have to float Eurobonds through the Netherlands Antilles, thus closing one avenue of tax evasion. European and Middle Eastern tax evaders will begin to purchase U.S. government bonds, thus, in the eyes of some tax reformers, turning this country into the world's largest tax haven.