PRESIDENT'S ACTION ON ESCAPE-CLAUSE REPORTS SENT TO THE PRESIDENT BY THE TARIFF COMMISSION 1. In 25 cases, the Tariff Commission has decided in favor of escape-clause action. These cases and the President's disposition of each are shown below: 2. In five cases, the Tariff Commission divided evenly on the question whether serious injury was caused or threatened. These reports were sent to the President, who broke the tie in each case by voting with the group which found no ground for action. These cases are: Handmade blown glassware Spring clothespins (third investigation) Wood screws (third investigation) 3. President's action on peril-point findings: Peril-point investigations have been made and transmitted to the President on all articles considered for possible tariff concession in negotiations carried out at times when this procedure was in effect for trade-agreement operations. No agreement concluded while perilpoint legislation was in effect has contained any concession making effective a rate below a peril point found by the Tariff Commission. The In the supplemental negotiations with Venezuela in 1952, when the President did not have authority to break ties by his vote, a concession was granted on petroleum in a case in which the Commission divided evenly in its finding. details of this action were reported to the Congress at that time. In addition it may be noted that in the 1956 tariff negotiations, the Tariff Commission found that existing duties on three items were inadequate to avoid serious injury, and the President was successful in negotiating only one of the three proposed increases. A report was also transmitted to the Congress concerning the other two, namely certain tungsten alloys and violins and violas. Secretary DULLES. Yes, sir. The CHAIRMAN. Have it show what the President has done and so forth? Secretary DULLES. Yes. The CHAIRMAN. And other information we would like to have is copies of the agreements that have been made with these forty-odd nations, showing expiration dates and so forth. Secretary DULLES. Yes. (The material referred to has been supplied to the committee and is retained in the committee files.) The CHAIRMAN. Senator Flanders? Senator FLANDERS. Mr. Secretary, your statement was a very adequate statement it seems to me of the importance of reciprocaltrade treaties from the international standpoint, and its importance is one which I think I have recognized over the years. I do a this moment find particular interest in the paragraph at the foot of page 6 from your statement. I will read it; Why then should we insist upon the reargumentation of its merits every 3 years or oftener and lead our friends abroad to fear we may suddenly reverse our trade policy? The Trade Agreements Act has become a symbol around which other free world countries develop their trade policies and make their plans. Greater stability in our program would certainly mean greater stability in their programs. Can there be any doubt that such stability would benefit us all. Now that last question is one which raises some questions in my mind. You would want to be sure, would you not, that reciprocal-trade policies which have been followed and which this extension of the law will permit us to follow are helpful to the internal prosperity of the United States. That is in your mind? Secretary DULLES. Yes, sir. Senator FLANDERS. As well as the support of our foreign relations. Secretary DULLES. I think that one has to take into account obviously both the impact of this upon our foreign relations and also upon our domestic economy. Senator FLANDERS. May I say that I have become disturbed in the last year or so with what seemed to me to be increasing problems toward which our reciprocal-trade policies are leading us. I expressed this in a memorandum of May 12 to Secretary Weeks; a memorandum giving a series of questions. I am going to talk with him in detail about that, but there are one or two points in it to which I would like to refer at the present time, and for that purpose I am passing a copy over to you. Our clerk here has other copies to pass to others as well. (The document referred to follows:) MEMORANDUM To: Hon. Sinclair Weeks, Secretary of Commerce. MAY 12, 1958. The administration has not made its case for a 5-year extension of the reciprocal-trade treaties on the basis of its present practices in negotiation. The theory of the advantages of reciprocal trade is based on free trade theory which was perhaps most authoritatively developed by Professor Tausig of Harvard in the 1920's. His classical development of that theory was logical for the conditions then existing. Those conditions no longer exist and a new examination of trade policy is required. Among others the following changes have taken place: 1. Professor Tausig assumed that the gold standard was in active effect with tendency automatically to keep the price levels of the commercial nations within bounds. The gold standard has gone out of existence and there is no automatic price stabilizer. 2. The assumption was made that when the United States makes purchases abroad, the dollars paid for the purchase have no ultimate value except as they return here to purchase American goods or services. This is no longer strictly true since dollar balances rather than gold balances are now the accepted reserves for giving financial stability to other nations. There is therefore a tendency to retain dollars instead of sending them back to the United States for purchases. 3. There was assumed an elasticity in prices which would take place in such a way as to bring price levels into balance. That elasticity no longer exists. The wage-price inflationary spiral is inflexibly without downward movement, and seems to be uncontrollable in the upward movement. Our economy is thus getting progressively out of balance with the price level of the rest of the world. American products are being priced out of the international market, and the range of goods in which we can effectively compete is narrowing year by year. 4. Another new factor is the increasing exportability of American know-how, equipment, and capital. To the extent that this was done under the Marshall plan, it had the highly successful effect of restoring the economies of the Western European nations. It had a side effect of increasing the effectiveness of European competition. Its present effect is to expand our investment abroad so that we ean compete in world markets by manufacturing at lower wage rates abroad and thus regain lost markets from which we have been priced out by our wage-price spiral. 5. We will have to make a new examination of our policy of meeting destructive competition from abroad by raising tariffs and not by establishing quotas. There are commodities in which oriental competition is so severe that raising tariffs to protect our own industries shuts out the competition of European countries which we are, or should be, willing to meet. We have gone halfway toward employing quotas for protection by negotiating them as voluntary restraints on the part of oriental competitors. We may find it necessary to impose where we cannot negotiate. The above list of changes in the conditions on which classical free-trade theory was based make it evident that we cannot continue without a reexamination of the bases of our policy. Among the lines of study which I would suggest are the following: (a) Some calculation as to the number of labor hours lost by importing goods instead of manufacturing them, to set against the only figure now offered, which is the labor hours presently employed on exported goods. This latter figure is meaningless without its offset. (b) Examination of the desirability of basing our trade policy on desired imports, with export business sufficient to pay for them and for exported capital and equipment for our investments abroad. (e) An examination of the wisdom of our supporting economic areas consisting of nations with resources and industries which on the whole tend to complement each other. An example is the contemplated common-market area in Western Europe. Another example (which I believe to be economically sound) is the "greater eastern Asian coprosperity sphere" which the Janapanese sought most unfortunately to put into effect by force of arms. Our own economic area might well include Canada and a large part of South America. In all these groups and others which might be considered, there is a common interest which leads to mutual profits rather than to economic disruption. (d) There should also be an examination of the effect of tariff reductions under the reciprocal-trade treaties on small and local industries. We have to ask ourselves the question whether if that effect is severe we are prepared to discriminate against them and in favor of large corporations with varied products which can more easily adapt themselves to handicaps in the marketing of particular products, which consitute but a small percentage of their business. (e) We should consider whether continued adherence to the classical theories world while our own economic strength goes down. Can we so manage our policy involves, or can be detached from, the necessity for building up the rest of the administration has a very serious responsibility in deciding which of our industries shall continue and which shall be marked for more severe and perhaps fatal competition. This is the more serious as it becomes evident that few of our industries will be safe if the wage-price spiral continues. I therefore propose first that the reciprocal-trade treaties be continued for 3 years only, not 5. I propose secondly that this extension be granted in consideration of the appointment of a commission which shall examine in detail the questions I am raising in this memorandum and any other pertinent questions which may be developed, and that said Commission shall be required to report its findings to the Congress in January of 1960, well in advance of the time when the renewal of the reciprocal-trade treaties again comes before the Congress. It scarcely needs to be said that the existing treaties will remain in effect unless abrogated, whether or not the reciprocal-trade legislation is extended. It is necessary to say this, however, because much popular support of the existing law is based on the assumption that otherwise we "will go back to the SmootHawley Tariff." This is, of course, not true and the sentiment for reciprocal trade should not have to be supported by any such assumptions. Meanwhile, it is to be hoped that the administration will concentrate its negotiations during the 2-year extension on those products and commodities now carrying a high rate of tariff, rather than making further reductions in the lowtariff products which meet severe foreign competition. (The Secretary of Commerce subsequently forwarded to the committee for insertion in the record his reply to Senator Flanders' memorandum of May 12:) Hon. RALPH E. FLANDERS, United States Senate, Washington, D. C. DEAR SENATOR FLANDERS: I have given considerable thought to your May 12 memorandum on trade policy. Several of he questions you raise are quite complex, and I think it would be best for me to give you my reaction on a pointby-point basis in order of presentation in your memorandum. 1. The economic basis of the program is the sound concept of comparative advantage, which does not presuppose any particular mechanism of adjustments to international disequilibria, such as the gold standard, but merely presupposes the existence, in one or both areas involved in trade transactions, of differencesfor whatever reasons-in comparative costs of producing various goods and services. In essence, the program is simply an application to international transactions of the basic free-enterprise principles on which we rely so heavily for successful operation of the domestic economy. Neither the nature of Professor Taussig's assumptions regarding the gold standard nor the fact that the gold standard has long since passed from the scene is germane to consideration of the trade-agreements program. After all, the first Trade Agreements Act was not passed until after all of the major trading nations, including the United States, had abandoned the old gold standard. The goldstandard mechanism of adjustments to international disequilibria played no part whatever in the rationale of the original trade-agreements legislation, nor in that of the successive extensions of the act during the past two decades. 2. The assumption that dollars paid for purchase of foreign goods have no ultimate value except as potential claims upon American goods or services is not invalidated by the increased importance of dollar balances as international reserves, nor by the tendency in recent years for foreign countries to enlarge their holdings of liquid dollar assets. On the contrary, the value of dollars as international reserves fundamentally rests precisely on their ultimate value for procurement of United States goods or services. The tendency of foreign countries to expand their dollar holdings has been in part merely a matter of restoring-with due allowance for expansion of trade levels-reserves depleted during the war and early postwar reconstruction periods. Apart from that, it is a natural consequence of the relatively new role of the United States as a major international banker-a reflection of the vast sums which United States private businesses and the United States Government have invested abroad. It is inevitable and normal for large liquid balances to be held in a major international creditor country by residents of other countries, and for these holdings-to a considerable extent in the nature of working balances-to tend toward growth with the growth in levels of trade and of the creditor's foreign investments. The existence of such a tendency does not imply that dollars paid out by the United States will not continue to be spent here. Given basic propensities for current spending and for additions to reserves by foreign countries, it remains as true as ever that marginal increments in douar payments by the United States result in roughly commensurate increments in foreign purchases of United States goods and services, and that inhibition of dollar payments results in corresponding limitation of foreign purchases here. Convertibility and multilateral balancing of accounts is not a new factor in international trade. It has always been axiomatic that the amounts of goods and services which we can sell abroad are correlated with-and except over relatively short interludes, limited by-the amounts of goods and services which we buy from the rest of the world plus the amounts which we invest abroad or otherwise transfer to foreign countries, either privately or governmentally. This proposition, which lies at the heart of our trade-agreements policy, is sometimes obscure to those who limit themselves to fragmentary views or piecemeal observations regarding particular commodities, individual countries or areas, and/or brief periods of time; but the fact that a balance of receipts and expenditures does not necessarily hold in transactions with any one country at any time, or with the world as a whole (apart from changes in foreign holdings of dollar assets) over short intervals, does not make the global limitation of our foreign sales potential by our total foreign payments any less real. This is not a merely theoretical proposition. It is thoroughly confirmed by empirical experience, as is evident to anyone who studies the long-term history of the United States international balance of payments. In the nearly four decades from 1919 through 1957, the United States made payments to foreign countries and international institutions totaling, according to the official estimates, $445 billion. This figure includes, of course, our net private investment abroad, private remittances, and Government grants and loans, as well as all our purchases of foreign goods and services. During the same 39 years, cumulative United States receipts from sales of goods and services to foreign countries, together with statistical errors and omissions aggregating $6 billion, were $443 billion, or 99.4 percent of all the dollars paid out. The resultant net increase over these decades in foreign holdings of gold and dollar assets (including long-term investments by foreigners here, as well as liquid dollar balances) was just about $21⁄2 billion, or less than 0.6 percent of the total. In the face of these figures, it would be difficult to suggest that the dollars we spent abroad have no potent tendency to rebound to the benefit of our exporting industries. The contrary is perfectly clear in the record. Over nearly four full decades, they have returned virtually dollar for dollar to the benefit of United States export industries and no valid reasons have been advanced for doubt that the same strong tendency will prevail in the future. However, the impression should not be left that it is only in the very long run that our export sales are closely correlated with our payments to foreign countries. While the trends can, of course, diverge temporarily because of the possibilities of liquidation, replenishment, or expansion of foreign dollar holdings, United States exports of goods and services are nevertheless highly responsive to changes in the level of our payments to the rest of the world, even over periods of a very few years. This is brought out in the attached chart, depicting total international payments and receipts of the United States (except changes in foreign gold and dollar asset holdings) annually since 1919. The chart speaks for itself. It is difficult to imagine two more closely correlated series of economic statistics. With but 3 or 4 exceptions, of which the year 1950 is the only notable case, even year-to-year changes in United States receipts have consistently followed the direction of changes in total United States payments to foreign countries. 3. It may be true that an inexorable long-term upward trend in price levels now prevails (though this is certainly not beyond the control of monetary and fiscal policy, if sufficient priority and public support is given to that objective). However, such a tendency certainly is not peculiar to the United States alone. Hence, it does not follow that "our economy is thus getting progressively out of balance with the price level of the rest of the world." On the contrary, price increases have been greater in most other countries than in the United States during most of the period since World War II. This is illustrated, for the years 1950 through 1957, by the attached tabulation of both wholesale and consumer price indexes for the United States and nine other leading industrial countries. These figures, taken primarily from statistical publications of the United Nations, show that wholesale prices have risen considerably more since 1950 in France, Sweden, the United Kingdom, and Japan, and somewhat more in Germany and the Netherlands, than in the United States. The average change in wholesale prices since 1950 in Belgium, Italy, and Switzerland has been about the same as that in the United States. United Kingdom, and Japan have all risen considerably more sharply than has Over the same period, the cost-of-living indexes for France, Italy, Sweden, the |