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completely logical self-interest have been encouraged to export technology and capital instead of products.

The tax incentives to overseas investment are still in force. Accordingly, it is still more profitable for U.S. based multinational companies to increase investment overseas than it is to increase investment in the United States. That these companies take advantage of these incentives should certainly not come as a surprise to anyone.

We still cling to the myth that the free market principle of comparative advantage will work. The fact is that the development of managed economies and of monopolistic industries, such as the oil industry, have long since relegated such theories to the scrap heap.

As a result of this sort of head-in-the-sand attitude and our lack of attention to the basic causes of our international trade problems, we have a situation which is unchanged from that of 3 years ago.

The CHAIRMAN [presiding]. Mr. Abel, if I might interrupt you, you could not be more right. I agree that the principle of comparative advantage must be carefully reexamined in this time of managed economies and export controls. With regard to the oil industry-and I say this coming from a State which produces more oil for its size than any State in the entire Nation-we were led to believe that we could get all that foreign oil much cheaper than we can nowadays. Those who fought to let that foreign oil in are today complaining about the price of it. Foreign oil now costs twice as much as what we have in this country. Just because they can produce it at 15 cents a barrel does not mean that they will sell it to you at that price. The OPEC nations are organized, and are selling it for $10 or $15 a barrel, when it costs 15 cents to produce it. So it turns out that the cheap oil is the expensive oil to produce, the oil here.

Senator RIBICOFF. Mr. Chairman.

The CHAIRMAN. Senator Ribicoff.

Senator RIBICOFF. How do you do, Mr. Abel? As long as the chairman has gotten philosophical, may I interrupt?

The CHAIRMAN. Yes.

Senator RIBICOFF. One of the great myths we still have is the phrase, "comparative advantage." As a practical matter there is no such thing any more, just as you can't really talk about free trade or protectionism. The theory of comparative advantage certainly goes out of window, not only from the chairman's comment, but when you consider how capital, technology, management, can be shifted at will from nation to nation. Workers without skills can be trained. When you combine them with the latest machines, and computerized programs you can produce goods with very little manpower. You do have completely different economic trade problems in the world today. If a nation does not have a comparative advantage they substitute a quota system or other methods to make sure that whatever disadvantage they have is offset with the protection that they need. What we are going to have to make sure is that it is not a one-way street, with jobs and technology going out of the United States and little coming in in return.

Mr. ABEL. Right.

Mr. RIBICOFF. I am glad you brought that up, because this is a very important factor as we delve into this entire problem.

Mr. ABEL. Well, Mr. Chairman, continuing, U.S. imports of manufactured goods are still rising.

U.S. tax incentives still encourage overseas private investment. U.S. export of capital and technology is still increasing.

The U.S. industrial base is still subject to erosion, and

U.S. jobs are increasingly vulnerable to the hard-nosed decisions of evermore powerful, and less controllable, multinational corporations.

If we are ever to achieve a balanced trade policy, we must begin to correct some of the conditions which led to this imbalance. The trade policies proposed by the administration and encompassed in the trade reform legislation you have under consideration will not accomplish this purpose.

U.S. IMPORTS OF MANUFACTURED GOODS STILL RISING

The improved performance in the 1973 U.S. trade balance, although a welcome development, does not by any means signal the end of the problem, nor the end of the IUD concern. The significance of the 1973 trade surplus is tempered by the fact that although exports rose, so did imports. Not only was there an import increase, but it occurred at an accelerated rate. Last year imports rose by more than 24 percent compared to a 22-percent increase the previous year and a 14-percent increase the year before that. In addition, manufactured goods are taking up an ever-increasing share of total imports, approximately 66 percent of the total last year compared to only 52 percent in 1965. In other words, the time has long gone when we could lull ourselves into complacency with the thought that the United States is primarily an importer of raw materials and an exporter of manufactured products. It just isn't so today. Agricultural products have become our fastest growing export, and, except for oil, manufactured goods have become our fastest growing import.

A close look at the 1973 surplus makes this clear. This surplus in effect represents an $8 million shift, from a deficit of $6.4 billion in 1972 to a surplus of $1.7 billion in 1973. The biggest contributors to this shift are food products, including grains, which account for approximately $5 billion of the shift, and other raw materials (excluding fuels) which make up another $2 billion. On the other hand, there was virtually no change in the trade balance in manufactured goods classified by materials such as steel products, and a worsening deficit in the balance of miscellaneous manufactured goods which includes such items as scientific goods, sound and photographic equipment as well as footwear, apparel, and sporting goods. Although the trade balance for machinery and equipment improved by $2.7 billion, half of this improvement was accounted for by the aircraft industrywhich, of course, is in a special situation. The hard fact is that if it had not been for the Russian grain deal, and the crop shortages throughout the world which led to the tremendous increase in U.S. agricultural exports, our trade balance would have remained in the red. With the rising cost of oil imports, we can expect that last year's gains will be quickly wiped out.

This rise in imports of manufactured goods is a serious concern to the Steelworkers and to the IUD for three reasons:

First there is a direct loss of jobs by American workers. When plants are closed down and the domestic market supplied with prod

ucts manufactured overseas, the direct impact on U.S. employment is all too painfully clear. As you all know, this has already happened in many industries, most notably but not exclusively in the electronics industry, the textile and garment industries, my own steel industry, the glass and pottery industries, footwear, office machines and many, many others.

Second, we are concerned because the increase in imports represents a loss of job opportunities. Imported manufactured goods replace products that might have been manufactured in the United States if U.S. companies had made a management decision to supply the domestic market from domestic sources. Increased imports, therefore, provide a crude measurement of lost job opportunities. With our fast growing labor force, and the chronic difficulty our economy has in creating jobs fast enough to keep up with labor force growth, a loss of job opportunities is a serious matter.

Third, the increase in imports of manufactured goods is of concern to us because it provides the clearest evidence of the shift that is taking place in the U.S. economy from the production of goods to the production of services.

Conceivably, in a considerably more perfect and more friendly word than presently exists, an entirely service-oriented economy would pose no threat to U.S. workers and to the U.S. standard of living. But the recent oil embargo should serve to remind us that the world we live in is far from perfect, and that the U.S. economy is dangerously vulnerable to international economic and political gamesmanship. It is neither safe nor sensible for the United States to let our economy continue to drift-as it has over the past two decadesinto complete dependence on the service segment and continual downgrading of the production segment. If we are to maintain our high standard of living, we must maintain our industrial base.

A FLEXIBLE SYSTEM OF IMPORT RESTRAINTS

One way to assure that the industrial base and the potential for productive employment are maintained in the United States is to establish a flexible system of measured restraints on imports of manufactured goods; particularly on those products which can be produced as easily in the United States as in other countries.

A flexible system could be based on some sort of triggering arrangement which, on the one hand, clearly recognized the need for continued imports, and on the other, prevented severe disruptions of important U.S. industries. It should be selective, easy to administer, and economically justifiable; applied only when the relationship between imports and exports is so far out of line that special measures are clearly dictated. The triggering factors that come most readily to mind are those that relate to penetration by imports of the U.S. market, industry employment trends, and the relationship between industry import trends and domestic production trends.

A flexible system would not only permit the retention of a manufacturing capacity in competitive industries, and help to prevent the loss of jobs and job opportunities, but also it would serve as a useful counterbalance to the existing incentives to overseas investment. These incentives are basically of two kinds; the positive incentives-pri

marily the result of U.S. tax laws which provide favorable conditions for increased foreign investment; and the negative incentives-primarily the laws and practices of other nations which force U.S. managers to establish foreign plants because if they didn't, they would lose the foreign market.

MORE AND BETTER INFORMATION NEEDED

The development of an effective foreign trade policy is not a simple matter under the best of circumstances. The issues are difficult, the relationships between economic, social, and international policies are intricate and complex. The subject is made more difficult, however, by an astonishing lack of hard data on which policy decisions can be based. The dependence of the Government on the oil industry for information on supply, demand, price, and profit is a case in point. Another example concerns the relationship between U.S. imports and exports and domestic employment. Not since 1969 has the U.S. Bureau of Labor Statistics undertaken a study to determine export and import related employment-a study which used to be performed with some regularity. So no one knows with certainty the real impact of our shifting trade balance. We do not have adequate statistics on investment abroad, licensing of production or technology flows. Without full information, our policy decisions at best are gambles, at worst reckless. We suggest however, that such information will not be forthcoming unless Congress requires it.

THE TAX INCENTIVES

The trade legislation before you fails to deal with the problem of foreign investment tax incentives. This is a most flagrant manifestation of the administration's apparent unwillingness to face up to the most crucial trade issues-the export of capital and technology and the uncontrolled rise of the multinationals. There is a definite link between the present U.S. tax laws, the accelerating export of capital and technology and the resultant loss of jobs and job opportunities. This has already been established. It cannot and must not be overlooked, or avoided. Not only is there a direct relationship between the present tax incentives and loss of job opportunities, but the U.S. foreign tax credit is also a major cause of our present energy shortage. The hard fact is that the U.S. tax code encourages foreign investment and actually discourages investment in the United States, especially investment in energy resource development.

Let me explain how this occurs: The principles that lie behind the U.S. tax code are to prevent double taxation of U.S. companies. These principles are observed by application of the foreign tax credit, under which a U.S. company with income earned outside of the United States is allowed to subtract all of the income taxes it has paid to the foreign government from the taxes it would owe to the U.S. Government. This is different from the way a domestically based company is required to treat its State and local taxes, where such taxes are considered a cost of doing business and therefore, can be deducted from gross income, but not credited dollar for dollar against Federal taxes. The credit of course, gives the company a better break than a deduc

tion. The result of foreign tax credit is that if a company located overseas pays a foreign income tax lower than the U.S. tax of 48 percentthe U.S. corporate tax rate-only the difference between the foreign tax and the U.S. tax is due and must be paid as U.S. taxes.

If the rate is equal to or higher than 48 percent, the U.S. company need pay no taxes on its earnings to the U.S. Government. So we see that in theory, at least, a company would never pay less than 48 percent. That should be incentive enough for many companies to locate facilities abroad, but there is more to it than that. Two provisions of the tax code make it possible for U.S. companies abroad to pay less than 48 percent and to turn the foreign tax credit into a system which can be used as a gigantic tax dodge. One of these provisions allows a company to use its excess tax credits (the amount it pays to a foreign government in excess of the 48 percent U.S. rate) to shelter income earned in enterprises located in other foreign countries-with a lower tax rate-from U.S. taxation. The other provisions allows a company to apply its excess credits on a 2-year carryback and a 5-year carryforward option. Taken together, these provisions give a big company-specifically multinationals with diversified operations in many foreign countries, such as the oil industry-tremendous flexibility, and tremendous potential for avoiding U.S. taxes.

The big challenge for an able multinational corporation manager is to devise ways to take full advantage of the options open to him, or her. The oil companies are especially favored under this arrangement because of the high per barrel foreign royalty payment which is counted as an income tax. But all diversified multinationals benefit under this system because large amounts of excess tax credits are constantly generated. These credits are like money in the bank, but only if the companies can find ways to use them.

Obviously, the only answer is to find an appropriate overseas investment with earnings on which the credit can be applied. Since the credits cannot be applied to U.S. earnings, there is no incentive to increase investment in the United States. This may explain why refineries have not been built, why research, development, and exploration in the United States has not kept pace with our growing requirements, and why we, indeed, now find ourselves with an energy shortage. Unless and until these tax inequities are corrected, we can expect further increases in overseas investments, and further deterioration of the U.S. manufacturing capability.

There is another tax incentive which tends to encourage overseas investment. This is the provision that says earnings of American companies overseas are not taxable until they are repatriated. The effect of this provision is to encourage companies to retain earnings overseas for reinvestment purposes. The change in the overseas direct investment position between 1971 and 1972 is indicative of this effect. In 1971, reinvested earnings accounted for $3.2 billion or about 39 percent of total direct foreign investment. But in 1972, reinvested earnings increased to $4.5 billion and accounted for 59 percent of the total.

A NEW LOOK IS REQUIRED

U.S. trade problems are not caused by a lack of authority and flexibility in the executive branch to deal with economic disruptions, as is implied by the administration's approach to trade reform.

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