less substantial long-run improvement in productivity, attributable to innovation, on the other. The level of employment could be maintained in the face of these trends only by raising the price of steel products high enough to cover the inefficiencies of use of marginal, antiquated plants, and inefficient labor, and by excluding the use of imports and substitutes. This would obviously entail a gigantic misallocation of labor and capital.

6. In general, it should be noted that the industry's dire predictions about idle machines and unemployed workers have been vastly exaggerated. These Malthusian predictions came into vogue during the 1960's to buttress the industry's demands for governmental protection from import competition. Thus, in October 1967, Mr. John P. Roche, president of the American Iron and Steel Institute, told the Senate Finance Committee that quotas were necessary because of the chronic excess capacity in the world steel industry: "It has been estimated that steelmaking capacity abroad now exceeds demand by more than 55 million tons. Countries which formerly relied on imports for their steel requirements have tended more and more to develop their own steel industries and to protect them against imported steel. Home markets of some long-established steel producers have grown less rapidly than expected. These producers have, therefore, taken increasingly to invading the markets of other producers-especially that of the United States." " Joseph P. Molony of the United Steel Workers presented parallel testimony to the Finance Committee.

12

Contrast that position with the industry's current rationale for protectionism, By 1980, says Father William Hogan, a sympathetic observer of the industry and a consistent advocate of import quotas, the annual steel demand will require a world-wide capacity of 1.1 billion raw tons as compared to today's capacity of only 780 million tons. "Blazes, that's a short fall, with new and replacement needs, of 600 million tons,' he says.' "13 Thus, what was considered only a few short years ago a chronic world steel surplus has suddenly become an endemic world steel shortage-and the way to cure it, so runs the argument, is by higher prices and higher profits which would make additional investment in steel capacity attractive. This, in turn, would require-almost as a sine qua nona "normalization" of world trade in steel, meaning strict regulation of steel imports and the sterilization of their impact on domestic steel prices.

In short, the steel industry has shown a fascinating talent for using contradictory arguments in support of its inflexible position: in boom and bust alike, it persists in its demands for governmental protection from import competition. 7. If we can conclude that, given the current predictions about a shortfall in steel capacity, the domestic industry simply could not replace imported steel except at prohibitive cost, we should recognize that the persons employed in those industries further fabricating this imported steel, and turning it into final product, owe their employment to the imports. They would have to turn to other jobs, or be unemployed for an indeterminate period if the steel were not available. Although we do not insist that imported steel makes a permanent, net contribution to employment-any more than we would conclude that any change in demand or output in one industry would have a permanent effect on employment-it is useful to recognize that, by our estimates, something like 1.000.000 persons are associated directly or indirectly with the production of goods for final demand, which are dependent on the input of imported steel. "

8. Imports of steel have affected the price of steel in the United States, and have therefore tended to check inflation, and to apply competitive pressures to the members of the steel oligopoly. While influences on prices are so diverse that it is difficult to determine the precise amount by which steel prices have been prevented from rising by imports-particularly during a period when both price controls and quotas have been in operation-the fact that imported steel has been available at between 10 to 20 per cent below the ruling domestic price for many finished and semi-finished shapes that has helped to prevent steel prices from escalating even further. That this has been a consequence of imports needs no demonstration. Even though, as a consequence of devaluation and the world wide steel shortage, imported steel often sells at a premium, this supply helps to prevent ever greater price rises, and serious production bottlenecks.

Senate Finance Committee, Hearings, Import Quotas Legislation (1967), pp. 828-829. 12 Thid., p. 889.

13 Forbes, April 15, 1973. In September 1973, after taking into account Russian, Japanese, English, French, Italian, Brazilian and Spanish expansion plans for the foreseeable future, a critical shortage on a world wide basis was seen as probable for 1977. Address by Rev. William T. Hogan, September 19, 1973, p. 4.

14 Unpublished study (1973) by J. F. Abgrall, translating input-output data into labor requirements per $1 billion of final demand.

The fact that the United Steel Workers and the domestic steel industry have finally united to support quotas shows the deflationary power of imports. With a price structure under pressure from imports, the union and the steel companies could not combine to exploit oligopolistic power. That is why both of them support quotas: even though higher wages mean higher costs, when demand is inelastic, as it is for steel, a higher price may not lead to a substantial decrease in the quantity sold if all domestic firms raise their prices by the same amount, and foreign steel is not available. In the long run, of course, there may be substitution, as there has been, of plastics, aluminum, and cement for steel; but this consequence seems to have been overlooked by the industry. Indeed, the industry and the union seem blithely unaware of the danger that constant escalation of wages and prices under the umbrella of a protective and permissive government are likely to have the same unfortunate results in steel as they had in our hapless railroad industry.

It is the domestic steel industry's unwillingness to have its pricing discretion threatened by imports that has generated the most powerful opposition to imports. The employment argument, as we have seen, is specious, and has been used when unemployment in the steel industry and the economy generally was less than five per cent. But to an industry long accustomed to making its pricing decisions through a kind of mutual tacit understanding about costs and margins, alternative sources of supply introduced a competitive variable which called for greater efforts and efficiency to maintain profit levels, and hence necessitated maintaining a technological parity with foreign mills. These conditions had never prevailed prior to the import surge of the 1960's, and the industry did not relish the competitive adjustments they necessitated.

9. Imports, therefore, through their effect of prices, generate pressures to innovate. Although the process of invention may be mysterious, and indeed not subject to economic law in any easily or directly ascertainable way, the improvement and adoption of invention are governed by profit and loss. Industries not characterized by competition may postpone the adoption or introduction of improvements. Whether the competition is actual or potential does not seem to be important. Driven by the necessity for operating at maximum efficiency from exclusively imported raw materials, that had to be turned into product marketed thousands of miles away, the Japanese have led the world in blast furnace size and efficiency. In the 1950's the steel industry in the United States was not aware of a competitive threat, and assumed that, when a revolutionary invention like the oxygen converter made its appearance in Austria, there was no point in replacing the anachronistic open hearths with the improved equipment until the former were fully depreciated. To await the scheduled retirement of obsolete equipment is a luxury that only an oligopoly or monopoly can afford.

15

Imports, by undermining oligopoly power in the steel industry, have made the steel giants more receptive to new methods. U.S. Steel-the industry leader which not only did not pioneer the oxygen converter, but did not even introduce it until many years after smaller firms had found it successful-is now, at last, under competitive pressures, beginning to use its vast resources for pioneering. With the Q-BOP process, a German invention that blows pure oxygen into the bottom of a converter, U.S. Steel seems to have hit upon a genuinely important innovation. We think we can say, without exaggeration, that the industry has resolved not to repeat the oxygen converter mistake. But had it not been for import pressures, the awareness of the potentialities of the Q-BOP process would probably not have been created.16

17

10. Finally, in assessing the overall effects of steel imports on the domestic industry we should take account of, even if we cannot measure, the factor that Professor Leibenstein has called "X-efficiency." " (We do not pretend-nor did Leienstein--that he was doing anything more than giving a fetching name to a phenomenon that has been recognized since the publication of Adam Smith's The Wealth of Nations.) Managements of monopolies, or closely knit oligoplies, do not search for ways of reducing costs with continuing, dedicated, un- See W. Adams and J. B. Dirlam, "Oxygen Steelmaking-The Phantasmagoria of Innorate Giantism." Iron and Steel Engineer, July, 1968.

U.S. Steel is planning to install two 200-ton Q-BOP furnaces at Fairfield, Alabama, which will be the first to be constructed in the Western Hemisphere. At present, there are ane such furnaces in Europe and one in South Africa. See U.S. Steel Annual Report. 1972, and I.S. Steel press release, December 15, 1972. See also "Oxygen Bottom Blowing by the LWS Process," by P. Leroy. Assistant Manager of Creusot-Loire, in Iron and Steel EngiBeer, October 1972, pp. 51-55.

Lelbenstein, "Allocative Efficiency vs. 'X-Efficiency'." American Economic Review, Vol. LVI, No. 3, 1966.

wavering intensity. One of the advantages of being a monopolist, to a monopolist, is that he can lead a more agreeable life, in which tensions can be relaxed, bureaucracies become entrenched, and promotions are given as the reward for long service. The big steel companies would be the first to insist that at an accelerated pace during the past 15 years, they have overhauled their organization, eliminated some fat, and prepared to compete on a more equal basis with their foreign rivals. While this does not deter them, of course, from efforts in the political sphere to erect barriers to competition through quotas, the companies today feel the competitive compulsion to strive for constant cost reduc tion-thanks largely to import competition.

11. For all the above reasons, we do not support legislation which would make it more difficult for steel imports to enter this country. Indeed, we believe that such legislation would run counter to the best long-run interests of the steel industry, its workers, and the national economy.

THE CASE OF PETROLEUM

12. At this juncture it should need no underscoring on our part to demonstrate the economic fatuity of restrictions on imports of petroleum. Our quota program has been a disaster. Not only did it raise prices of petroleum products for U.S. consumers, including the petrochemical industry, but it prevented the construc tion of desperately needed refineries, especially on the East Coast. The quota system now stands revealed for just what it was a vital underpinning for a domestic and international cartel. Instead of preserving our self-sufficiency, the quota system with its artificially high prices, promoted the use of domestic reserves at an accelerated rate, leaving us less self-sufficient in 1974 than we were when the restraints were first proposed. Major U.S. chemical companies-duPont, Dow, and others-who had to compete in the world market, suffered serious handicaps because they paid 60% more for feedstocks than the world price." Professor Wayne Leeman has well summarized this aspect of the problem: "So the oil we keep out of the United States benefits our most important competitors. Manufacturers in Japan and Western Europe but energy, industrial heat, and petrochemical feedstocks at prices which give them a competitive advantage over U.S. producers. And they have this competitive advantage partly because import quotas give U.S. firms only limited access to cheap foreign oil and partly because oil shut out of the United States depresses the prices they pay."

13. The ostensible justification for the quota system on petroleum was to enhance national security in time of emergency. Only by restricting the flow of foreign crude, it was argued, could we assure uninterrupted access to petroleum and petroleum products. But the experience since the embargo should have demonstrated the intellectual bankruptcy of this support for protectionism. The oil we produced domestically since 1955 which could have been replaced by cheaper imports is no longer available to us in time of emergency. The crisis, far from being resolved by turning to domestic supplies, required government intervention to control allocation of supplies and prices, and skyrocketing prices in the international markets as independents bid for incremental supplies. If prices stabilize, they will do so at a level far above the direct costs of oil production.

Our conclusion from the facts, reached before the embargo, seems even more apposite today than in 1973. The only safe and low-cost storage for oil is underground. If we are to conserve domestic reserves for an emergency, they should be kept intact rather than depleted by artificial stimulation of domestic production. Secondly, to the extent that domestic reserves are in scarce supply, we should resist the temptation to deplete them in peacetime and maximize our reliance on foreign sources-especially those which might be beyond our reach in the event of a military conflict. And rather than subsidize domestic drilling by creating an artificially high price through restraints on imports, the government should support R & D for substitute energy sources.

In short, as a general guideline we should import low-cost foreign oil at a time when we have free access to it, and conserve our own reserves for such times as foreign oil may be no longer available to us. In this, as in other cases, the imperatives of national security and the dictates of rational economic policy would seem to coincide. We could not prevent the oil embargo by our quota

18 See testimony of Walter Adams, U.S. Senate Subcommittee on Antitrust and Monopoly Hearings on Government Intervention in the Price Mechanism, Part I (1969), pp. 306–307. 19 Ibid., p. 274.

system; but we would have suffered less from it had we produced at a lower, competitively determined rate during the years 1955–1973.

14. If we face, in fact not, merely a temporary though upsetting inconveniece of an embargo, but a permanent energy crisis will the shortage be relieved by returning to a restriction on imports? Without a quota, domestic supplies will be stimulated to the extent that market prices reflect the monopolistic practices of the producing countries or higher energy costs. At the same time it would be folly to intensify shortages by further reductions designed to intensify the escalation of domestic prices.

15. In retrospect, the major benefits of the import restriction scheme in the petroleum industry accrued not to the consumer, or to the economy generally, but to those companies that held import quota rights for crude oil (quota tickets) which, incidentally, were negotiable, and to domestic landowners who could collect higher royalties because of artifically high oil prices. This experience should alert us to the danger of government intervention to exclude imports in order to protect an industry because of its supposed importance to the national security. In such cases, as like as not, special interests that ultimately benefit from the restrictionist policy can most easily disguise their true motives in seeking governmental protection from import competition.

COMMENTS ON SPECIFIC PROVISIONS OF H.R. 10710

Although some provisions of this bill might be questioned because of the amount of discretion and power they convey to the President to raise and lower tariffs and change the quantity of imports (for instance in Section 122), it is the novel procedures introduced for excluding imports that are sold in the United States under conditions of fair competition that are particularly disturbing.

16. In general, and with the exception of Title II, the bill appears to be constructive in purpose and in the procedures for which it provides. It is desirable that the President, as in Section 122 (c) (1) be charged with promoting a reduction in quantitative restrictions. If there is to be effective bargaining to reduce duties, the President, or some executive body, must be empowered to make agreements. And in making specific mention of such other hindrances to the free flow of international trade such as non-tariff barriers and unfair and discrim1natory practices the bill's provisions should hasten the disappearance of these practices both here and abroad. By providing for advisory committees, whose views will be sought during negotiations, the bill may improve the results of bargaining, particularly if consuming groups are included in the advisory committees.

17. In Title II, however, machinery is established, hitherto unavailable in this country, for hampering or preventing imports that compete fairly and efficiently with domestic production. The armory of weapons that can be employed to check the flow of imports and hobble foreign competition, we should note, is in addition to whatever tariff and other barriers already prevent the flow of trade. And these barriers may be set up whenever imports enjoy marketing success, with the danger of disruption of sales of certain categories of imports those which other countries produce more cheaply than we do, and which, following principles of international trade, we should import in larger quantities. By impeding imports the actions contemplated by the bill would preserve high cost production in this country, and reduce our exports. On the other hand, those provisions of Title II that provide for adjustment assistance to workers and firms are deserving of support. But we want to emphasize that the principles underlying such assistance are wholly contrary to the protectionist spirit that underlies Chapter 1 of Title II whose sole purpose seems to be to protect inefficiency.

18. Specifically, Title II introduces a number of dangerous possibilities of undermining trade at each stage of enforcement of the provisions against imports that compete fairly with domestic products. First, Section 201(b) (3) in defining the industry which might protest against competition, the bill uses extremely narrow tests. In effect, an industry is equivalent to the production of any article subject to import competition, so that any U.S. firm, even though it make a variety of products, and be capable of shifting from one to the other, and even though it may, on an over-all basis, using the normal industry definition, be realizing substantial profits, may be protected by Presidential action. In effect, the bill adopts the industry definition employed by the Tariff Commission in anti-dumping cases, which is at variance with the concept employed in economic

and business analysis. Moreover, this definition used in Section 201 (b) (3) is so narrow that it does not correspond with published financial and economic data. In reviewing the data presented to the Tariff Commission, consumers would be unable to check assertions of injury by the firms complaining, since the only relevant material-as in Tariff Commission anti-dumping cases-would be confidential.

After defining the industry, the Tariff Commission is directed by Section 201 (b) (2) to determine whether imports are a substantial cause-not a primary cause as in previous legislation-either of a serious injury or a threat of a serious injury. Injury is to be measured by such indexes as use of production facilities, profit rates, and unemployment and a threat of injury by a decline in sales, or rise in inventories. But as we pointed out earlier, the narrow definition of industry makes it extremely difficult for those most likely to be injured by exclusion of imports--the consumers-to present independent studies of the merits of the allegations of the domestic producers. How one could rebut a charge that a serious injury might result at some future date is not easy to imagine. It is akin to proof that one has stopped beating his wife.

19. If Chapter I of Title II is to be retained-and we fervently hope that Congress will not adopt legislation that reverses the presumptions of a free enterprise system-then at the very least the Tariff Commission, in examining claims of injury should be directed to look specifically at the efficiency, innovativeness, progressiveness, and anti-trust history of the firms in question. Those firms that would ask for government aid in order to avoid fair competition should be required to put their houses in order. True, the Tariff Commission is directed to report on efforts made to compete more efficiently. But the basic fallacy in the provisions of Section 201 is the implicit assumption that interests of producers of an article should take precedence over the interest of consumers. Nowhere in the initial definition of "injury" or threat of "injury" nor in the tests in Section 201 (b) (2), is injury to consumers mentioned.

20. The provisions of Section 201 (c) (4) direct the President in reviewing the recommendation of the Tariff Commission to take into account a broader spectrum of consequences of import competition so that he can, if he so desires, place greater weight on the possible injury to consumers, industries or localities that might follow from excluding exports. Thus the bill, by adding another stratum to the process of inquiry, attempts to offset, to a degree, the distorted focus of Section 201 (b) (2). We can not assume, however, that the President will have the time or inclination to second-guess the Tariff Commission, nor will he have the experts on his staff to carry out the kind of inquiry needed to redress the balance toward the public interest. Hence this provision is far from constituting a necessary and adequate safeguard.

21. Although the obstacles to trade that may be employed by the President are four in number, ranging from an increase in duties to suspension of imports. only the setting up of an "orderly marketing agreement" is subject to review by Congress. In view of the importance of the actions that can be taken by the President, which may be a matter of life or death for those firms dependent on imports for profitable operations, the same review procedure should prevail whenever the President takes the step of choking down imports.

Certainly, the requirement that the President justify in writing, his selection of a particular type of restriction will help to prevent excessively arbitary action. Nevertheless, a sharp increase in tariff rates may be just as damaging to consumers as a quota set up under a so-called orderly marketing agreement. Moreover, in view of the peculiar disabilities of quotas, which provide no revenue to the government, and which can not be avoided by the foreign competitors no matter how much they may improve ther production and marketing efficiency. or the quality of their product, and which, in effect, require foreign producers to collude if they are to make the quotas workable, they should be adapted only after a full public hearing, at which the impact on supplying countries should also be taken into consideration. The bill now as drafted permits the President to select a quota without any public hearing. Only in the case of the orderly marketing agreements is there provision for Congressional disapproval. Ent approval does not require action by Congress.

22. Further, the definition of "directly competitive with" (Section 601(5)) seems so broad as to cause concern about harmful application. This definition of "directly competitive with" is strategic because in Section 201(b) (2) the Tariff Commission can find injury or threat of injury to an industry if an imported article is a substantial cause. Under the definition, the imported article is "directly competitive" with a domestic article, even if the economic effect