Nearly all our economic legislation and certainly the oncoming military and defense operations came to rest on industry as higher unit production costs. Then came the post-war programs of foreign aid, followed by the recent steeply upward tilted governmental expenditures, Federal, State and local, aimed at social welfare, war on poverty, improved education and health, etc. A few statistics will tell the story. In 1960 the total outlay in this country for social welfare plus defense and veterans benefits was 51% of the gross product of industry. In 1972 this percentage had risen to 85.6%. Another measure of the greater industrial cost burdens is the comparative employment in government and industry.

In 1965 Federal, State and local governmental employment was 9.94 million. That of industry, agriculture and mining was 26.68 million. In 1972 the governmental workers had mushroomed to 13.29 million while its industrial counterpart actually declined slightly. Thus the goods turned out by industry, mine, and farm had to carry piggyback 3.3 million more governmental workers than in 1965 with a cost addition equal to their total pay.

The only offset would be found in rising industrial productivity, but this was only 13.5% (1965-71) while industrial wages rose 36%. Thus we had two sources of cost increases, namely, rapidly rising governmental outlays and wages outpacing productivity.

Other countries have also had rising costs but the rise in productivity in leading competing countries was more than twice as high as here-not surprising since they were playing catch-up technology. Moreover, in Japan and West Germany national defense costs were minimal. Here they were 32% of the gross industrial product in 1972.

Our voluminous machinery exports, spurred by our huge foreign investments, greatly enhanced foreign productivity while foreign wages lagged by our standards. The foreign competitive sharpened decisively.

Our woeful competitive slippage was, however, hidden by two factors. Our exports of machinery and transport equipment (1971) were more than double our total farm exports and also double our exports of all other manufactured goods. Ths surplus in this machinery category was so breathtaking that our serious and growing deficits in nearly all other manufactured goods was buried in the euphoria.

The second factor of concealment lay in our official trade statistics. They presented a false picture, and the news media were derelict in not exposing the fact. The public therefore was not aware of our deteriorating trade position. While we were experiencing trade dficits, the official statistics continued to parade handsome but deceptive trade surpluses before the public.

By 1971 even the official statistics showed a deficit of $1.6 billion and one of $6.4 billion in 1972. The latter should have been nearer $13 billion if the trade statistics had reflected reality.

The second deception arose from two sources. (1) Our shipments under Foreign Aid, Food for Peace, etc. were treated as true exports, which they are technically, but are no measure of our competitive standing. We exported these goods not because they were competitive but because we paid for them in whole or in substantial part. Treating them as evidence of our competitive prowess as President Kennedy did, was misleading. He denied that we were pricing ourselves out of foreign markets, for, behold, we were enjoying a handsome export surplus!

(2) The second form of deception continues to lie in your import statistics. They are undervalued by some 10% since they are based on foreign value, omitting ocean freight, insurance and other costs. On $65 billion of imports the undervaluation is therefore some $6.5 billion. Added to the statistical treatment of our exports our trade balance is thus badly distorted. We therefore went blindly and self-deceptively into the Kennedy Round which should have been shelved.

In a few years Japan and West Germany were foundering in dollars, thanks to their great trade surpluses. In 1971 the crisis culminated and we deserted convertibility of the dollar, put a 15% additional tariff on most imports and devalued. The effects were meager and we devalued again early in 1973. In effect the devaluation was raising the duty, but this fact could not be acknowledged. The Japanese yen was made about 35% dearer, the mark some 25-30%. The action represented a helated effort to stop the dollar hemorrhage; and our trade balance is now in a lesser hole.

Our agricultural exports have recently skyrocketed; but the surge is possibly transitory because of unusual weather conditions abroad. Meantime our growing dependence on oil imports may soon offset the boom in farm exports.

The proposed trade legislation can indeed be said to face a far different world today from the previous occasions. The last trade bill was passed in 1962. Quite clearly now is not the time to embark on a new tariff-cutting rampage that would quickly undo the beneficial effects of our devaluation and expose the dollar to further erosion.

Once more the public has been shortchanged. The dollar devaluation was not explained as the fruit of our intemperate tariff reductions during a period when our competitive position in the world was deteriorating ominously. The whole course adopted added up to what we came to face in crisis proportions in 1971. The present writer on May 5, 1960, i.e., well over ten years ago, stated in a speech:

"It took 25 years of doing, including much domestic economic legislation, a world war, a local war (Korea) and the cold war to stack up the international competitive situation as we see it today: ***

"We are on the eve of an earthquake that will shiver us to our economic foundations if we do not soon take thought and reverse some of our romantic policies." As a reward he was dubbed a prophet of gloom and doom.

The developments since the foregoing paper was written have borne out most of what was outlined in it.

The article made reference to the deceptive statistical practices of the Department of Commerce that resulted in the concealment of our weak competitive position in world trade. This concealment, consisting of reporting our imports on their f.o.b. value rather than c.i.f. and treating subsidized exports as true exports, provided justification for further tariff reductions under the Kennedy Round when it was no longer good economics.

This statistical practice has now been remedied in major part by showing c.i.f. imports, beginning January 1, 1974, but is not yet made to reflect our true competitive position in the world since it continues to treat shipments of products under Foreign Aid, Food for peace, etc. as if they were true exports, reflective of our competitive standing, which they are not.

However, the error from that source is no longer as serious as it was because Foreign Aid shipments no longer represent a high share of our agricultural exports, which, as the foregoing paper notes, have risen to unprecedental levels: $17.6 billion in 1973, representing an increase of $8 billion over 1972.

Imports of petroleum products, however, are destined, from present appearances, to work havoc with our improving trade balance. This improvement will likely be nullified as the year progresses. Moreover, agricultural exports can hardly be expected to continue the sharply upward movement of 1973, since there were special factors contributing to that rapid growth. These record exports, indeed, were quite costly because of the higher food prices generated by them.

The conclusion can hardly be avoided that the present is not a good season for trade legislation. Several very important elements in the trade trend are very unstable, and until these become stabilized or more predictable than at present, any legislation now passed would soon require review and readjustment.

This observation relates particularly to the agricultural exports, the petroleum import situation and to the world currency instability.

The conditions laid down for Most-Favored-Nation treatment of the U.S.S.R. are out of place in trade legislation and should be treated separately on their own merits.

COMPETITIVE PLATEAU OF U.S. TRADE

(By O. R. Strackbein, Chairman, the Nationwide Committee on Import-Export Policy, Nov. 20, 1968)

The weak competitive position of American Industry in world trade is beyond dispute.

It may be useful to inquire into the degree of this weakness and to determine in what class of products it is most pronounced. It may also be useful to determine whether we enjoy competitive strength in some products even if the total competitive position is weak.

It may be helpful, further, to inquire into the causes of the competitive weakness from which our trade suffers and to determine what steps, if any, might be taken to overcome the weakness or to adjust to it.

WEAKNESS REVEALED BY TRADE TRENDS

The competitive weakness of this country in world trade has become increasingly visible in recent years. It is especially pronounced in some classes of goods and in our trade with several leading trading nations. It is also visible in the declining share of total world exports enjoyed by the United States.

WEAKNESS BY CLASS OF PRODUCTS

The principal competitive weakness has appeared in the trade in manufactured goods. Because of the most intensive application of labor in producing finished goods, compared with the lesser application of labor in the production of raw materials and agricultural products, the implications of the import trend for employment in this country are serious and will become acute if we return to a peace-time economy.

As recently as 1951 manufactured goods represented only 27.0% of our total imports. In 1967 this share had more than doubled, reaching 58.3%.

By contrast the share of our total imports represented by raw materials, which in 1951 stood at 50.3%, had declined to 21.3% in 1967.

The meaning of this trend for employment will be better appreciated if we compare employment within this country in the raw-material producing operations, namely, agriculture, mining, lumbering and fisheries, with employment in the manufacturing industries. The raw materials industries, with minor exceptions, supply the materials used in all manufacturing in this country. Exceptions are imported raw materials which represent less than 2% of all materials used by our industries. Raw-material production employed 4,656,000 workers in 1957 compared with 19,339,000 in the manufacturing establishments that processed the materials into finished goods. The ratio of manufacturing employment to employment in raw-material production was therefore over 4 to 1.

As imports shift from raw materials to manufactured goods, as they have in the past fifteen years, it becomes obvious that employment must suffer. The impact has become sharper, moreover, in recent years than in the past because of the heavy movement of workers in this country out of the raw-material-producing field into manufacturing and the service occupations. The shift has been the result of the still-rising productivity in agriculture and mining. In 1960, or less than eight years ago. the ratio of manufacturing employment to employment in agriculture, mining, lumbering and fisheries (the raw material industries) was only in the ratio of 21⁄2 to 1, compared to more than 4 to 1 in 1967, as shown above. (Statistical Abstract of the United States, 1968. Tables 317, 318, 320 and 993.) In other words, our imports have been shifting from goods requiring the least amount of labor to goods requiring the greatest amount. Should, for example, 10% of our raw materials be imported the average straight-line labor displacement in 1967 would have been 465,600 workers, while if 10% of our manufactured goods had been imported the displacement would have been 1,933,900 workers. (The 10% share is for illustration purposes only.)

While it is true that finished manufactures represent about two-thirds of our exports, the share of total exports has remained about the same in recent years. In '58 and '59 the share was 67.8% and 66.5% respectively, compared with 66.2% in 1967. This lack of a trend shows that our manufactured goods as a whole are not gaining ground in foreign markets in contrast to the sharp gains foreign manufactures have made in this country.

COMPETITIVE STRENGTH IN MACHINERY AND CHEMICALS

Nevertheless in some lines we have enjoyed a substantial growth of exports. This is especially true of machinery, including sophisticated products such as computers; and chemicals. Since the share of manufactured goods in total exports has not grown, the gain in exports of machinery and chemicals was necessarily offset by declines in the export of other products.

HELPED BY FOREIGN INVESTMENTS

Two observations are in order. Our increasing exports of machinery and chemical products has been a parallel of our increasing investment abroad in plants and installations. Our industries have installed a vast amount of American machinery overseas (over $50 billion since 1960); and our chemical plants

overseas have consumed great quantities of raw and semi-manufactured chemical products as feeders to their overseas plants.

SURPLUS OF MACHINERY EXPORTS NARROWING

The other observation applies particularly to machinery. Our imports of machinery have grown much more rapidly in recent years than our exports, and the export surplus, while still wide, is narrowing rapidly. From 1960 through 1967 our machinery exports increased 84.9%. During the same period imports of machinery increased 328% or about 3 times as rapidly as our exports. (Statistical Abstract of the United States, 1968, Tables 1218 and 1219.)

The foreign competitive advantage over us that resulted in the loss of export markets in steel, textiles, sewing machines, typewriters and a number of other products is obviously asserting itself in machinery. The relatively sharp increase in machinery imports is but a forwarning of what may be expected in the future. Thus may be expected the crumbling of our principal remaining export advantage. It will fall for the same reason that caused formerly strong export industries to fall back.

HANDWRITING ON THE WALL

The handwriting on the wall was never clearer. When will those who shape our foreign trade policy recognize the overwhelming evidence? Year after year since 1958 they have said that the trend against this country's export position was only temporary and that the trend would soon right itself. Ten years is a long time to wait for a turn of the tide.

One excuse after another has been worn out during this period. In the most recent years when the tide should already have turned had the previous reassurances had any substance, the explanation advanced was that the prosperous conditions in this country attracted imports while our exporters were not greatly interested in export markets. This style of explanation would, of course, dispose of any and all trends in foreign trade.

CAUSES OF OUR COMPETITIVE DISADVANTAGES

The refusal to face monumental facts is becoming very expensive to a number of industries and poses a serious problem for labor. If and when our economy moves toward a peace basis the harsh facts that have so long been ignored can no longer be brushed aside. It is already very late.

Let us look at the facts and what they mean:

1. Production costs in this country are higher in many lines of products than those of their foreign competitors.

2. Among the high cost elements are the high wages upon which our domestic market depends in the form of consumer purchasing power. Employee compensation represents by far the principal source of effective demand-by far, which is to say, in the magnitude of about 4 to 1 compared with all other sources combined.

3. The wage-gap separating this country from other countries (Canada excepted) is not by way of closing or coming within shouting distance of such an event. The outlook is that it is here to stay for many years.

4. Those who suggest that wages should stand still in this country to permit foreign wages to catch up in point of unit costs, are either deceived, or incapable of recognizing realities or, worse, refuse to see what so clearly and unmistakably stares them in the face.

5. The full impact of foreign competition has not yet been felt; nor the full effect of our foreign investments as a shrinker of export markets for finished manufactures in relation to the gross national product.

6. As a consequence our manufacturers have only one hope to regain a competitive position in the domestic market: namely, if the technology is at hand, to reduce man-power requirements sufficiently to shrink costs materially. Contrary to what mystics and romanticists might think, there is no other way to reduce cost of production significantly.

Also, no one should deceive himself that significant cost-reduction is a mild operation. In terms of employment it is harsh and drastic. We have a classic example in coal mining. In the mid-'fifties this industry was moribund because of encroaching competition from diesel oil, natural gas and imported residual fuel

oil. The only hope of survival lay in cost reduction. The objective was indeed accomplished by the introduction of machinery that supplanted men in a gargantuan ratio. The coal industry saved itself but the cost in coal miners' jobs was two out of every three. Employment dropped at a dizzying rate, falling from 480,000 to 140,000 or less in fifteen years. The problem known as Appalachia was a direct result. The cost of relief and inhuman misery was "unthinkable" and had it been appreciated ahead of time, would no doubt have been avoided as intolerable. The coal example was not as extreme as might be imagined.

Other industries branched out overseas to aovid similar debacles. Today the steel industry faces a challenge, which, if less drastic in its exactions, is nonetheless perilous. The shoe industry faces annihilation in a matter of a few years, The textile industry, which, though partially protected against the same disaster, still faces great difficulties. Other industries are not out of the range of the import onslaught. The fisheries on the east coast, the vegetable producers of Florida, and others are in the same corner.

Our merchant marine is totally dependent on subsidization for survival; and has been allowed to fall to the lowest level in our history from lack of adequate support. American flag ships now carry only about 1/16 of our total imports and exports. The facts are muted and smothered lest they awaken the dreamers and mystics who see nothing ominous in the competitive facts in our foreign trade. 7. Cost-reduction is not a monopoly of American industries, though its imperative presses insistently on them. While we continue as the most productive country in the world in terms of man-hour output, other countries, now equipped with our technology, are also capable of reducing their costs. Our own factories overseas, where our direct investments are now in the magnitude of some $60 billion, have introduced American methods of mass production, and other countries have not been backward in adopting the American system. If we automate in this country, so may and do our foreign competitors.

8. The cost-gap, although not uniform, will not go away, notwithstanding the theories of academic economists who apparently do their thinking in a vacuum wherein the realities of both national and international politics are absent. Competitive inequalities among the nations do persist, the economists notwithstanding, simply because free competition is now a museum piece thoroughly bolted down-largely, indeed, as a result of the very policies of those who invoke the free market to justify free trade but who buried free market forces under the weight of governmental controls, restrictions, heavy tax burdens, social welfare loads and other cost-inflaters.

The differential in shipbuilding and ship operation here and abroad is measured periodically by official wage surveys conducted by the Federal government. This differential is slightly over 100% and reflects the higher employee compensation in this country. That such differentials persist, as they may and do persist, despite economic theory that leaves the facts of life out of account, is shown by the fact that the maritime cost differential just mentioned has widened by 10% in the past ten or twelve years.

9. The competitive weakness of this country makes our economy stand like an island plateau against the pounding waves and tidal flows that beset it from all sides. The natural sequence will be a leveling process that will continue, unless it is halted, until we are level with the sea.

FALSE ASSESSMENT OF OUR COMPETITIVE HANDICAP

The competitive situation is serious indeed but is insulated against a remedy by the policy-makers who stubbornly refuse to accept irrefutable facts or insist on evasive interpretations. They will not believe or purport not to perceive that payment of an average industrial wage of $3 per hour in this country demands that our factories be several times as productive as their foreign rivals if they are to compete with them. With the exception of Canada, the highest foreign industrial wages will do well to equal 40% of our $3 level, while in many instances the gap is much wider. The difference in cost, now that our average duty on dutiable items is about 10% on foreign value, and destined to drop to about 7%, must be bridged by a productivity lead of sufficient magnitude to offset the foreign advantage. (For the industrial wage rate of the United States see Current Survey of Business, United States Department of Commerce, September 1968, p. S-15).

It is a favorite but false indictment of American industries that cannot compete with imports to say that they are inefficient. This indictment comes quickly