import financing to (1) the United States, which is always eligible; and (2) to those Far Eastern countries which accept letters of credit tied to purchase of iron and steel machine tools, metal-working machines and a limited amount of steel scrap from the United States.

Under the new A.I.D. procedure, Korea could purchase its iron sheet for galvanizing from Japan, but every A.I.D. dollar earned on sales to Vietnam of galvanized products must be spent by Korea in the United States for iron and steel products, including tools with high iron and steel content or a small amount of iron and steel scrap.

In devising the new procedure, which was on a trial basis, A.I.D. had in mind five principal considerations: (1) the need for nearby sources of roofing and other products at delivered prices that would not feed inflation in Vietnam; (2) the desire to permit Korea, which is making a major contribution to our military effort in Vietnam, to at least have a chance to continue sales to that country; (3) protection of the U.S. balance of payments; (4) promotion of U.S. steel exports; and (5) competitive, fair prices.

We considered and rejected the alternative of insisting that Korean or other Far East suppliers use only U.S. blackplate in the galvanized products, because (a) this would substantially raise galvanized product prices they could quote probably above the high U.S. prices on galvanized products-and, consequently, (b) might cause the Vietnamese Government to finance these imports with its own foreign exchange, with all this business going to the lowest price source, Japan. In either event, this would effectively deny Korea continued sales to Vietnam at a time it was considering doubling its 20,000 man troop commitment to Vietnam.

As a result of intensive investigations made by A.I.D. in the Far East, we have concluded that prior actions taken by this Agency needed to be supplemented by even more restrictive measures. We have recently instituted the following measures to complement and supplement the procedure established in January, 1966: (1) galvanized iron and steel products now must meet U.S. commercial standards of 1.25 oz. of zinc coating per sq. foot: (2) the items must be inspected by an independent testing and inspection agency in the source country; (3) the bidding and award system is to be so arranged to preclude collusion between suppliers or suppliers and importers: (4) fifty percent value must be from the United States; (5) price must be reasonable and honestly competitive: (6) Far East suppliers must have an opportunity to make offers, but if successful will receive payment under A.I.D.'s restricted tide letter of credit procedure, with scrap, however, eliminated. A copy of our new procedure is enclosed.

We believe the revised procedure is the best means of serving several United States interests in this matter. It will take some time before the tied letters of credit are translated into orders for U.S. iron and steel products. When these orders do start flowing, they will inevitably increase our iron and steel and tool exports to countries which have been only minor customers of these U.S. industries. Since it is estimated that A.I.D.-financed commercial imports of galvanized sheet by Vietnam will total $25 million, in calendar 1966, a substantial boost will be given U.S. iron and steel and tool exports when the tied A.I.D. payments to Far Eastern suppliers are spent in the United States. The following are answers to your specific questions:

1. "Could galvanized sheets of satisfactory quality financed by the United States be obtained more cheaply from any other source or under any other arrangement?"

No, unless we are willing to finance procurement from Japan. With respect to the 50 percent of the business allocated to the United States alone under our revised rules, we could obtain sheet more cheaply from Far Eastern sources, if they were permitted to use Japanese blackplate.

2. "Is the galvanizing industry a more effective vehicle for stimulating the Korean economy in terms of creating employment or developing manufacturing facilities, or for political impact, than other industries or operations to which the United States might give preferred treatment?"

In connection with question 2, I invite your attention to the "Report of the Special Study Mission to the Far East, Southeast Asia, India, and Pakistan. November 7-December 12, 1965," under the Chairmanship of Congressman Clement J. Zablocki. This report to the House Foreign Affairs Committee recommends (at page 13):

"The United States should do everything possible to develop and exnand Korea's export market, including items produced in Korea which might be valuable to the U.S. military and economic effort in Vietnam."

After listing illustrative items which might be furnished by Korea, the Report concludes,

"Some [items] might successfully find commercial markets in Vietnam or be purchased through U.S. aid programs in Vietnam. Responsible U.S. officials should thoroughly explore these possibilities."

A cessation of A.I.D.-financed purchases would deprive Korea of all exports of galvanized products. The Korean industry has no export possibilities except A.I.D.-financed purchases because the highly efficient Japanese industry can undersell any competitor in the Far East. The point which distinguishes the galvanizing trade from others in Korea is that it has had the Vietnam business; Korea would be deprived of a chance to continue to bid for its continuance in the absence of the new A.I.D. procedure.

3. "Is the United States steel industry getting a significant volume of business from Korea as a result of the restricted letters of credit now being issued?” The U.S. steel industry will get the benefit of whatever galvanized products sales are made to Vietnam by Far East countries. All dollars these countries earn will return to the U.S. to buy U.S. iron and steel, machine tools and tools with a high steel component. No effect can be yet demonstrated because no transactions have been executed under this system.

4. "What would be the impact of the United States steel industry in terms of production and of jobs if means could be found to arrange for procurement in the United States of the galvanized sheets required for Vietnam or of the steel for galvanizing in Korea or elsewhere in the Far East?"

If all the procurement of either black sheet or the finished galvanized sheet for Vietnam were directed to the United States it would certainly require some additional man-hours of U.S. labor but we cannot quantify the number of additional jobs. U.S. sheet production (and galvanizing) is highly automated. It is our belief, however, that the manufactured iron and steel products and tools which must be purchased in the United States, with the dollar earnings of Far East suppliers of galvanized products to Vietnam, will involve considerably more labor and have greater impact in terms of production.

5. "Under the regulation now in effect, is competition with Korea for the Vietnamese market for galvanized sheets developing? Is it likely that such competition may have an adverse economic or political effect on Korea? If Korea loses its present 'monopoly,' will it be necessary for the United States to work out some other special arrangement to attain our political or economic objectives for Korea?"

Korea had competition on tenders received in Saigon on March 31 and April 4, from Taiwan, Thailand, Singapore, and the United States. (No business has been awarded under these tenders, which will have to be rebid under the new procedure.)

Although Korea will lose its recent Far East monopoly advantage, we doubt seriously that it will lose a sufficient amount of the market to require the United States to work out a compensating special arrangement to attain our political or economic objectives in Korea. We have responded to Korea's requests to be an eligible source of supply, and have permitted it to bid for sales under its existing pattern of trade, rather than to requests for an exclusive position in the market. In fact, the new system is designed to provide Far Eastern competition for Korean galvanized products, in order to assure reasonable prices. Provision for Korean opportunities to bid under the circumstances described, even with U.S. and Far Eastern competition, will be a sufficient response to reasonable Korean export promotion ambitions as far as galvanized product sales to Vietnam are concerned.

If you desire further information or clarification, please let me know.
Sincerely yours,

GALVANIZED SHEET PROCEDURE

DAVID E. BELL.

The following procedure has been devised to meet the criteria for supply of galvanized iron and steel sheet:

1. Quality must be acceptable to U.S. standards.

2. Price must be reasonable and honestly competitive.

3. Fifty percent of the dollar value must be from U.S. sources.

4. Far East suppliers must have an opportunity to make offers but if successful will receive payment in letters of credit requiring all dollar earnings be spent in the U.S. for iron and steel products and machine tools.

It is proposed that:

1. All Vietnam commercial import requirements of galvanized iron and steel sheet shall comply to ASTM Specification A-525-64T under coating class designated as 1.25 oz. commercial, subject to inspection at source by an independent inspection company.

2. No sheet thinner than gauge 31 shall be eligible for A.I.D. financing.

3. Procurement of galvanized iron and steel sheet shall be under formal bidding, the sealed bids to be opened in the presence of an A.I.D. observer, but otherwise privately.

4. The Director of Commercial Aid will aggregate requests for quotations received from Vietnamese importers and divide them into two gauge groups as nearly as possible equal in dollar value. He will then issue two invitations for bid:

(a) U.S. only for the thicker (lower numbered) gauges, and

(b) U.S. and eligible Far East sources for the thinner group. All Far East suppliers would be paid on basis of Small Business Memo 64-4A-26, March 29, 1966, including the restricted tied letter of credit except that scrap would be eliminated as eligible commodity under the tied letter of credit and from the blacksheet requirement.

5. Invitations for bids will require that each bidder forward:

(a) One set of sealed bids to DCA.

(b) One duplicate set of bids to A.I.D., Washington, D.C.

6. The DCA will receive offers, open bids in private, but with USAID/Vietnam present, tabulate and evaluate prices and quantities.

7. When the bids are received A.I.D. will furnish to DCA a confidential ceiling price established for each gauge on the date bids are due or thereafter. Any Far East bidder's price quotation in excess of this pre-established ceiling will be automatically rejected.

8. The DCA will quote prices by gauge and secure confirmation and earnest money from each Vietnamese importer of the total tonnage of each gauge he will accept. The DCA will not then disclose suppliers or source countries.

9. On basis of these confirmed tonnages, the Director of Commercial Aid will: (a) Determine lowest cost offers.

(b) Allocate not less than fifty percent of the dollar value of the total business to low bidder among the U.S. bidders.

(c) Allocate balance to low bidders among the Far East suppliers. In the event that there are insufficient U.S. bids to total half the business, the DCA shall award to Far East bidders an amount not exceeding the amount awarded to the U.S. A second bid invitation, again split 50-50, maybe required. In order to balance U.S. and Far East awards, the DCA may split a gauge between sources. If so, he will average or blend the prices and split the sheet supplied each importer.

(d) Õpen letters of credit in favor of successful bidders, including among provisions of the letters of credit:

(1) Instructions to suppliers to consign shipments to DCA.

(2) Requirement for an inspection certificate from an independent inspection company if merchandise originates in a non-U.S. source country.

10. After contractual arrangements have been completed, including issuance of letters of credit to successful bidders, all participating bidders will be sent copies of notices of awards. Such notices will be publicly displayed by the DCA and will be furnished to USAID/Vietnam in sufficient copies for transmittal of one set to A.I.D., Washington, D.C.

11. When shipments have been made by the supplier, DCA will notify participating importers in a timely manner of the anticipated arrival of the merchandise, will arrange for deposit of balance of counterpart to the extent this deposit has not already been covered by payment of earnest money, and license assignment of the merchandise to the importers following clearance through customs. 12. USAID/Vietnam would advise GVN and importers that if irregularities are found in this procedure, we reserve the right to insist on U.S. procurement authorities handling entire import of galvanized sheet.

Chairman MORGAN. I know you and I are interested in getting business for U.S. companies. Is it correct that under the procedure proposed by the administration the U.S. steel producers would get 50 percent of the business?

Senator BAYH. That is the implication of the letter; yes, sir.

Chairman MORGAN. Also, isn't it correct that they would get an equal amount under a tied letter of credit requiring Korea to spend the other 50 percent of these dollars for U.S. finished steel products?

Senator BAYH. They could compete for the other 50 percent.

Chairman MORGAN. I don't think we are too far apart here in arriving at some satisfactory solution, Senator. I think this testimony today has been very valuable. It has been particularly valuable to me because when I went to conference to consider your amendment I did a certain amount of soul-searching before we removed it from the authorization. I am for selling as much American steel around the world as we can sell.

I wondered if you and your staff would give the procedures AID proposes some serious thought before we start marking up this bill which will be in another week or 10 days and see if we cannot come up with some compromise arrangement that both AID and the steel companies could live with? Do you think that is possible?

Senator BAYH. I will be very glad to study the letter. As I say, I received it last evening. It has obviously received a lot of thought and attention. Again the issue that concerns me is whether we might still have a bad program. Remedying one half of the program, does not make that other remaining half any better. Despite the rather detailed proposals that are made in the letter, each one will require more policing, not less. Right now AID has its hands full getting programs under control in Saigon without establishing an intricate procedure that is going to require additional policing.

Chairman MORGAN. I am very much impressed with your statement that we should have additional end-use supervisors to ride herd on the imports that are going in there

Senator BAYH. Primarily South Vietnam.

If

Chairman MORGAN. Yes, South Vietnam. We have a very friendly relationship with South Korea. As you pointed out we have spent two and a half billion dollars to help South Korea and our relationships are good. As I said before, the South Korean economy apparently is on the way back and we want it to continue to improve. we get American black plate and send it to our friendly neighbors in South Korea, even if it cost us a few dollars more and if we can get a good quality product for use in South Vietnam, I think maybe it could be worked out. I see no reason why we should deny the economic benefit to South Korea which they get from galvanizing the steel, and as I read your remarks in the record at the time you offered your amendment in the Senate I think that was your line of thinking.

Senator BAYH. I have said that from the beginning. I have offered such a proposal in each conversation with AID officials. With all due respect, I think that would be a solution that we could all accept.

Chairman MORGAN. I note that you stated, "I would not want my amendment to be interpreted in any way as interfering with our friendly relations with South Korea." I want to make clear that I, as one Member of the Congress, greatly appreciate the help that South Korea is giving us in South Vietnam.

If it can be worked out so that black plate can be bought in this country and sold to South Korea and they can galvanize it and if the inspector says it is up to standard it can be shipped to South Vietnam, I am all for that.

Senator BAYH. I see the way you do on that particular subject.
Chairman MORGAN. Mr. Adair.

Mr. ADAIR. I am not clear upon one point. Is it your understanding, and the gentleman from AID can enlighten us on this later, that AID has or has not now established quality standards for this product in Vietnam?

Senator BAYH. They have proposed these standards.

Mr. ADAIR. What does that mean?

Senator BAYH. This means they are going to do a better job of checking, taking samples, analyzing the products. I think that with additional effort they can police the galvanizing process.

Mr. ADAIR. Have these standards been circulated to your knowledge so that concerned people know about them?

Senator BAYH. In my estimation they probably have not been circulated to the industry. I learned of them last evening. We will check this out. Congressman Adair, we would not require such a thick base plate as is required in this country for normal use.

Mr. ADAIR. Of the galvanizing material?

Senator BAYH. Yes, sir. It is important for us to understand that conditions in the field in South Vietnam are considerably more difficult as far as the corrosive effect on galvanized plate is concerned than they would be on the north 40 here in the United States.

Mr. ADAIR. To come back to this matter of specifications again, if I understand you correctly it is your present feeling that these are now more in the nature of guidelines than in the nature of absolute requirements in Vietnam?

Senator BAYH. That is my understanding, although the gentleman from AID can speak more directly to that.

Mr. ADAIR. We will no doubt make inquiry on that.
Chairman MORGAN. Any further questions?

Mr. MCDOWELL. Mr. Chairman, for the record, my State doesn't produce any steel, but the Du Pont Co. produces some pretty good paint. Regardless of how we are successful in increasing the quality of this galvanized metal that is going to be used over there in Vietnam, I think we might introduce them to the use of a little paint on it in time. Senator BAYH. May I say, Mr. McDowell, it might be in the best interest of Du Pont and others in the paint industry to vote against my amendment. Perhaps paint could be used to prevent rusting of the steel.

Mr. MCDOWELL. Do you--I am sure you know, Senator, from your experience as you have stated you don't put the paint on until it begins to rust anyway.

Chairman MORGAN. Any further questions?

Thank you, Senator Bayh, for your appearance today.

Senator BAYH. Mr. Chairman, you have been more than kind, as busy as you are.

Chairman MORGAN. We had Mr. Gaud and Mr. Poats scheduled for this morning, but we don't have time and we are going to reschedule them for Tuesday morning so that we can hear the executive side of this question.

The committee stands adjourned until 10:30 Tuesday morning. (Whereupon, at 12:30 p.m., the committee adjourned, to reconvene at 10:30 a.m., Tuesday, May 17, 1966.)