APPENDIX VIII

ANSWER TO ARGUMENT THAT U.S. CONSUMERS WILL BE HURT IF IMPORTS AND EXPORTS ARE REGULATED

World trade has been expanding more rapidly than output for many years. In 1971 world exports rose 18% and in 1971 world exports rose 12%. As world trade has expanded and become much freer, world inflation has continued to rise as country after country faced new and serious problems.

Few American consumers can put much faith in international trade as the solution to their price problems in 1974. They know that U.S. trade has expanded rapidly-both exports and imports-and that prices have gone through the roof. U.S. consumer prices have risen more rapidly in the past year than at any time since World War II. U.S. trade flows were the highest in its history. "In December 1973, the Consumer Price Index was 8.8% higher than a year earlier," according to the Bureau of Labor Statistics. And food prices rose 20.1% in that period. Every analysis shows that both the price of imports and the price of exports rose rapidly. International trade in 1973 and 1974 creates higher prices for Americans.

Quotas, which are usually blamed for rising prices, seemed to have less impact than the lack of quotas. The world sugar prices were higher than U.S. prices. World oil prices were higher than U.S. prices. As food prices shot upward, most analysts talked about the rise of foreign demand. That means more exports added to pressures on prices upward. As the price of lumber, steel scrap and other products needed to produce in this country were affected by zooming exports, prices went up. The consumer is affected by exports as well as imports. While the U.S. was regulating prices at home to some extent, the old theories of free trade were used to explain policies that allowed exports to be without price controls and imports to have few effective control mechanisms to reduce prices.

The Wall Street Journal on March 13, 1974 (attached) showed that the U.S. increase in prices has been "by far the sharpest" of 18 countries. The U.S. has freer trade policies and freer internal non-tariff barrier policies than almost any other country in the world.

But despite this new ball game, one of the most persistent of arguments voiced by proponents of "free trade" is that imports are good for the consumer and any move to regulate them is bad.

To bolster this argument, experts trot out the textbook theory, no matter how old it may be, that imports automatically mean a greater choice of products for the consumer, more competition and hence lower prices. Regulation of imports the theory goes, reduces the selectivity of the consumer, lessens competition among U.S. businessmen, and permits American manufacturers to charge higher prices.

In the vastly changed world of the Seventies, this theory is no longer valid. The U.S. has been providing a wide-open door to imports. The result has been rapidly rising prices, lessening competition, and a narrowing of selectivity for the consumer. Few of the opponents of quotas seem to realize even in 1974 that almost every price is now higher. Both imports and exports have raised prices. For example, the market in home electronics has been all but taken over by imports, or by "American" products which have been produced and assembled abroad-and prices have often headed upward. The consumer has the "choice" of buying a television set which may be made-even though it bears a U.S. label-in Taiwan, Hong Kong, Japan, Mexico or some other low-wage country. And the consumer pays the American price for the product, not the foreign price. Competition? Try to find a truly American-made set. Selectivity? Only among foreign-made sets.

Imported shoes, the bulk of them once from Italy then from Spain and increasingly from Brazil and elsewhere in Latin America, have taken over half the U.S. shoe market. What has happened? Shoe prices in the decade from 1961 to 1971 rose a whopping 41 per cent-and were increasing at an annual rate of

5.5 per cent at the end of that decade. Despite U.S. price controls, prices have continued to go up.

The fact is that the American consumer, as a result of America's deteriorating trade position and the outmoded and unrealistic government trade, is paying through the nose.

The costs to the consumer run far beyond the price paid for a product at the store counter. Go into a community where a plant has closed because it has been suffocated by imports. The jobs are gone. The payroll is gone. The tax base of the community is eroded. The taxpayers who still have jobs must pay more to support the services still needed by the community, or see those services diminished. They must pay more to support the welfare costs of those thrown out of work.

The loss of local purchasing power and the loss of taxes has a "ripple out" effect on the local service economy, further decreasing the jobs which depend on the industrial base. So there is a substantial hidden cost to the nation's present policy on foreign imports.

Further, the nation's import and export policy in important cases has helped contribute directly and substantially to the present inflation. Recently, this has affected almost every type of product. But again, the shoe industry is a clear example.

When the shoe industry saw that imports were going to be allowed to flood the nation without any move by the government to provide safeguard for domestic producers, many of them relocated abroad, leaving behind empty factories, unemployed workers, decimated communities, depleted tax rolls. Now these formerly American producers are using foreign nations as a base from which to send shoes made by low-cost foreign labor back to the U.S., competing with domestic producers. In addition, the overseas producers are bidding up the price of hides, thereby influencing the flow and supply of U.S. hides to go into export markets. This makes the domestic price of hides for domestic shoe and leather goods manufacturers, higher, and these increased prices are passed along to the American consumer.

The inundation of the American market from imports has been a large factor in the huge U.S. balance of international payments deficits over recent years which were at the heart of two devaluations of the dollar within a 14-month period. These devaluations, according to Federal Reserve Board estimates, cost the American consumer some $3 billion.

One purpose of a currency devaluation is to "cheapen" a currency against other currencies. The U.S. devaluations made the dollar worth less in international trade; that is, Americans had to pay more dollars for the same amount of imports as a result of devaluation. The theory of a devaluation is that it tends to curb imports because they will be higher in price. Americans, the theory goes, would then turn to U.S. products, where the devaluation would not affect the price of goods.

However, the pace of import purchases by Americans seems so far to have had little affect by devaluation, The President's International Economic Report explains that the trends in imports from developing countries did not change much because except for minor adjustments, these countries' currencies continued to follow the dollar." (p. 37) In many cases, consumers have little or no choice but to go on buying the imported products, paying higher prices. This is because, certainly in the field of home electronics, imports have so taken over the market that there is little or no choice; the consumer can't "Buy American" because the American products are not there. Imports dominate the market not only in home electronics but in typewriters, 35 mm cameras, radios, phonographs, shoes, just to name a few. And foreign prices of many of these and other items are heading still higher.

To put restrictions on these imports, according to the textbook theory, would send prices even higher because American producers would face less competition and thus would be able to charge what they wanted. However, facts don't always follow the theory. For example, a study of automobile prices by Stanley H. Ruttenberg & Associates, a Washington economic consulting firm, shows that between 1958 and 1963, when the number of foreign auto sales in the U.S. stayed fairly level-and declined as a portion of the total sales market-auto prices in the U.S. went down by as much as 5 percent. Between 1966 and 1971 the share of foreign cars in the U.S. more than doubled, from 10 percent to 24 percent. Rather than falling, as theory says they should, price movements of autos was just about identical with that of all other industrial commodities.

The economists' studies of the impact on consumers are usually based not only on theory but also on certain assumptions which are no longer valid. Thus, a free import policy is no guarantee of lower prices for consumers. And the im

position of quotas to curb imports does not automatically lead to lighter prices. The following table shows a lesser price increase on items for which there were quotas than on those for which there were no quotas:

American consumers are aware of the damage that the flood of foreign imports is causing to the U.S. economy. In a 1973 poll, the Louis Harris organization found a distinct sense among the American people to rally in support of their economy. The survey, taken among a national cross-section of 1,472 households, found that the proposition "if our people don't 'Buy American' more in the products we purchase, the U.S. economy will be in real trouble here at home" met with 65-17 percent agreement.

One of the dangers in the administration's proposed Trade Reform Act of 1973 is that it would deny consumers the chance to know whether the product they were buying was American. This is because the administration measure could remove the "marking of origin" requirement. Present trade law says that every product coming into the U.S. must be clearly marked as to its origin; if it is made in Hong Kong, or Japan, or Taiwan, it must say so.

Without this marking, the consumer who wanted to "Buy American" would have no way of knowing whether the product he was purchasing was American made. Indeed, because there would no longer be any requirement for such identification, it is likely that more U.S. manufacturers would switch to foreign production for profit purposes, and consumers would have a choice of even fewer American-made goods.

Consumer protection laws are non-tariff barriers. So are product standards. These could be removed any time after date of the enactment of the Trade Reform Act by international agreement. Congress would have 90 days to veto the agreement or it would have the force of U.S. law.

[From the Wall Street Journal]

AMERICA FIRST-U.S. INFLATION RATE NOW EXCEEDS INCREASE IN MANY OTHER LANDS

(By Alfred L. Malabre Jr.)

Prices have recently begun to rise faster in the U.S. than in many other countries.

The development marks a major turnabout in world price trends. Until recently, Americans concerned over steep U.S. inflation rates could at least derive a bit of comfort from the fact that prices were going up even more sharply almost everywhere else. Indeed, as recently as a year ago there wasn't a major country where inflation rates didn't exceed the U.S. pace.

Today, in bleak contrast, there are seven countries in Western Europe aloneplus another 11 in other parts of the globe-where prices are rising at a more moderate rate than in America.

Analysts at the International Monetary Fund in Washington, as well as other private economists, hesitate to predict whether inflation will continue to be more feverish in the U.S. than in many other lands. Oil is among the imponderables. The latest price statistics generally available don't reflect the full inflationary impact of the Arab oil squeeze, which has tended to be harsher in Western Europe and Japan than in the relatively self-sufficient U.S.

LOSING THE EDGE

In any event, the consensus view is that the U.S. in recent months has clearly lost its enviable edge in inflation-fighting. Moreover, it's widely felt that a continued sagging in the U.S. position could ultimately lead to renewed economic troubles quite apart from the price arena.

An economist at the International Monetary Fund warns, for instance, that "unless the U.S. can set a firm example in keeping inflation in check, it will be difficult for the U.S. to take the lead in working out arrangements for a lasting reform of the international monetary system." Without U.S. leadership, he adds, the likelihood of reforming the system seems "dim."

Another analyst, at Chase Manhattan Bank in New York, worries that, unless the U.S. can maintain a relatively effective rein on prices, "It's entirely possible that U.S. goods could encounter fresh difficulties in world markets, where only recently they have started to compete effectively again." He notes that in January, the latest month for which figures are available, the U.S. exports topped imports by nearly $644 million, a dramatic improvement from January 1973, when U.S. trade was in deficit to the tune of about $290 million.

The table below shows how good, in relative terms, America's inflation record seemed as recently as last March and how the U.S. position has deteriorated since then. The first column lists the average increase in consumer prices in various West European countries and in the U.S. during the most recent 12-month period available, generally through January or December. The second column shows the consumer price rise in the same lands for the 12 months ended last March.

In every case, the rate of inflation has accelerated. But the U.S. speedup, as the table indicates, has been by far the sharpest. Indeed, International Monetary Fund statistics show that only Britain, Italy and Switzerland within industrial Western Europe have steeper inflation rates now than America. The only other major industrial country whose price spiral remains more severe than that in the U.S., in fact, is Japan, where inflation was a fat 20.4% in the past year. Other places where inflation a year ago exceeded the U.S. pace but now is more moderate include such disparate lands as Iraq, Malta and Tunisia.

Many analysts cite the expansionary direction of U.S. economic policies in recent months as a fundamental cause of the country's deteriorating price performance, compared with the record elsewhere.

International Monetary Fund statistics show, for instance, that the U.S. money supply-defined as private checking accounts and currency in circulationhas grown more swiftly over the past year, while monetary expansion in most key countries has tended to slow. Economists generally hold that accelerating monetary expansion tends to bring a speedup in inflation and slowing monetary growth tends to foster more moderate price increases.

COMPARING MONETARY GROWTH

In the 12 months ended last March, U.S. monetary growth came to only 3%, IMF figures show. This was far more moderate than monetary expansion in any other major nation. Increases during the same span amounted to 11% in France, 14% in West Germany, 15% in Belgium, 16% in the Netherlands, 13% in Canada and a frenetic 27% in Japan.

Since then, however, U.S. monetary growth has sharply accelerated, while monetary expansion in almost every other key country has moderated, in some cases dramatically. In a recent 12-month period, according to the IMF, the U.S.

money supply rose about 6%, twice the March 1973 rise. In the same period, monetary growth in West Germany and the Netherlands amounted to about 1%. Other countries where monetary expansion has slowed markedly since a year ago include France, Canada, Japan and Belgium. The only major nations, besides the U.S., where monetary expansion has accelerated are Britain and Italy. In each, it's noteworthy, inflation has begun to soar at double-figure rates.

A relatively rapid buildup of inflationary pressures in the U.S. also can be seen in statistics that compare factory operating rates in various countries. Inflation is more likely at a time when factories are operating at or close to capacity than when a substantial portion of facilities stands idle.

As recently as the start of 1972, according to a Commerce Department analysis, U.S. factories, using 88% of their capacity on the average, operated at clearly lower rates than factories in the European Common Market, where plant operations averaged 91% of capacity. Recently, however, the analysis shows that U.S. operating rates, averaging a hectic 95% of capacity, actually exceed the Common Market average of 92%.

Hefty gains in labor productivity, of course, tend to ease inflationary pressure that might overwise build up from pay increases. Unhappily, a soon-to-be-released Labor Department study shows that productivity gains in the U.S. have recently been shrinking while increases elsewhere have been expanding.

PRODUCTIVITY IN PERSPECTIVE

Between 1972 and 1973, the study shows, productivity gains in the U.S. slipped from 5.2% to 4.7%. In the same two years, in contrast, productivity gains increased in Canada from 4.4% to 5.1%, in Japan from 10.1% to 18.9%, in France from 7.2% to 8% and in West Germany from 7% to 7.3%.

The lackluster U.S. productivity record, some analysts note, has come at a time when U.S. labor unions appear increasingly vocal about the need for big pay boosts to help workers regain purchasing power eroded in recent months by accelerating inflation.

U.S. workers generally remain by far the best paid in the world, even after repeated devaluations of the U.S. dollar and vastly larger annual pay boosts in such lands as Japan, where hourly pay went up an average of 21% last year, nearly triple the average U.S. gain. An unpublished Labor Department analysis places average hourly compensation for U.S. production workers last year at $5.25. This compares with $4.79 in Canada, $2.12 in Japan, $2.77 in France, $4.32 in West Germany, $2.72 in Italy and $1.99 in Britain. The analysis uses currency exchange rates prevailing in the middle of last month to arrive at the foreign pay rates.

OTHER IMPONDERABLES

The cost and availability of oil isn't the only imponderable that analysts cite when attempting to assess whether U.S. price increases will continue to be relatively steep. Another uncertainty involves the question of U.S. economic policies in the months ahead. Will U.S. planners adopt a more conservative stance for example, on the monetary front? And will the recent monetary stringency so evident in West Germany and elsewhere remain in effect?

There are still other uncertainties. How much does the progressive removal of controls in the U.S. alter America's relative prices? To what extent will wageprice restraints persist abroad? How may the current "floating" of currency exchange rates affect price patterns in the U.S. and elsewhere?

With regard to the last question, some economists contend that the advent of floating exchange rates has begun to make it harder for the U.S. to "export" inflation elsewhere. Under the old fixed-rate system, which fell apart in 1971, foreign governments were obliged to issue local currency for inflowing dollars at fixed rates of exchange. Foreign officials often complained that this arrangement forced them to issue more marks or whatever than was healthy for their particular economies.

Such transmission of U.S. inflation is far less probable with exchange rates that move around in response to supply and demand forces, it's claimed. The upshot, some analysts contend, is that the U.S. economy today is less likely than several years ago to escape the full inflationary impact of, say, a highly expansionary monetary policy.