Senator ROTH. In other words, it has seemed to me important, if we are going to compete abroad, that we maintain the most modern technology and plant capacity possible. If you have any further suggestions in this area, I would be very happy to receive them.

Mr. ABEL. I would just make this further observation, not only from the need and the competitive standpoint, but I think too little attention is being given to the importance of the steel industry in the defense of this country, the security of this country. Certainly, we cannot wage another world war with an obsolete steel industry, especially when the potential enemies have modern facilities.

Senator ROTH. I agree very much with that observation. Let me ask one further area. That is the area of adjustment assistance. I think, generally speaking, it has been felt in the past that it has not been adequate. Some steps have been taken in the current legislation to strengthen that. I think maybe in recent years, a little better job has been done, but I still do not think it is still adequate. Do you have any suggestions in this area?

Mr. ABEL. Well, we think it is a very poor substitute for meeting the problem. Again, we have had some experience because of the displacements resulting from imports. But it is like pulling teeth, quite frankly, to prove your justification to assistance. Many industries, and workers in these industries, have failed to get any approval for assistance. We think a better approach is some type of quota arrangement or some type of arrangement to regulate the flow of imports related to the condition of our domestic markets.

Senator ROTH. Would you not agree that in some measure, if you are going to increase trade, there are going to be some losses in some industries?

Mr. ABEL. Oh, yes, sure; we recognize that.

Senator ROTI. I have wondered why the cost of that should not be a cost of doing international business. In other words, there might be some kind of special excise tax or something to finance these economic adjustments. Has your organization given any thought to this kind of approach?

Mr. ABEL. Well, I would have to say, Senator, we have considered every kind that you can think of.

Senator ROTH. Mr. Abel, I appreciate very much your appearing here, as does the chairman, who regrets that he cannot come back. I think that your testimony has been most helpful. As I said earlier, any suggestions you might have as to tax provisions that might make our industry more competitive, which means more jobs, I, speaking for myself, would be interested in having them.

Mr. ABEL. Fine. Thank you, Senator.

Mr. CLAYMAN. Senator Roth, if you will permit us to make some additions to the record-we are in the process of preparing some additional information, conceivably some that will answer more directly, more adequately and inclusively, the questions you have raised. We would be pleased if we could submit them to you for the record. Senator ROTH. I would appreciate that very much. That is very fine. Mr. ABEL. Thank you, sir.

[Appendixes to Mr. Abel's statement follow. Hearing continues on P. 1371.]

APPENDIX

THE CASE FOR A MODERNIZED FOREIGN TRADE POLICY

Objective-The objective of U.S. foreign trade policy is much the same as that which applies to the development of any economic policy; namely, the promotion and development of a strong, healthy, and vigorous economy.

This in turn implies increased opportunities for business and industry to market their products, increased productivity through the establishment and conservation of a sound and stable industrial base, and increased job opportunities consistent with labor force growth. Business must be able to sell its products. Workers must be able to find and keep decent jobs. And, there must be an industrial base which can support increased growth and an ever improving standard of living. Since foreign trade represents a significant part of the total economic fabric, and since by its very nature, it is subject to external as well as internal forces, particularly the actions of other governments, it is in a particularly vulnerable position. As a result, we need legislation both to help assure that our foreign trade can be conducted in a climate conducive to market, employment and productivity growth, and to give us the policy instruments necessary to forestall or compensate for the actions taken by other nations when such actions restrict U.S. opportunities.

TRADE PROBLEMS

There are at least six major trade problems for which legislation is required. These include the problem of non-tariff barriers maintained by other nations, the tremendaus growth of U.S. imports, the increase in U.S. private direct investment in foreign countries, the dramatic deterioration in both our balance of trade and in the overall balance of payments, (only temporarily alleviated this past year), the rise of the multinational corporations and the recently developing threat of economic warfare by the raw-materials producing nations of the world. Precise delineation of the issues is difficult at best, since many of the problems are related to each other, and indeed one problem usually growing out of another, and leading to a third, etc. All of these issues however, have one thing in common. If left unresolved the result will be a further erosion of the conditions necessary to maintain U.S. economic growth. Each of these problems is discussed briefly below.

NON-TARIFF BARRIERS

One of the most difficult issues that must be resolved concerns the establishment of barriers to foreign trade, particularly the proliferation of non-tariff barriers. These barriers, originally condoned by the United States as being necessary to help the recovery of war ravaged countries, take many forms, ranging from special taxes to the formation of preferential training blocs. The Common Market itself, for example, presents a barrier to the U.S. in that it discriminates in favor of intra-mural trade and against trade from outside the market. Third country preferential agreements make matters worse. Other barriers, such as the variable levy, special administrative practices, licensing requirements value added taxes, restrictions on extra-national ownership, and even export subsidies, have not only remained unaffected by the GATT rules and procedures (which was supposed to promote "free" trade) but in recent years they are used increasingly by more and more countries as they prove to be effective instruments for the promotion of national policy goals and objectives. The recent bi-lateral trading agreements between France and the oil producing nations are a case in point. The end result of this kind of activity, of course, is to close access to world markets for the U.S. In fact, we seem to be the only country which is still promoting the concept of most favored nation treatment. The shutting off of access to world markets has a predictable result.

Insofar as foreign trade is concerned, there are three ways in which U.S. companies can expand markets. They can increase exports, or they can license foreign companies to produce the same products, either charging a fee or accepting royalties, or they can establish a foreign affiliate, and produce and market the product overseas. When barriers are imposed, making it difficult or impossible to market U.S. made products, the company will make use of alternative methods to increase markets and profits. The increase in licensing by U.S. companies and in investment in plant and equipment abroad is direct evidence of the impact of non-tariff barriers on the activities of U.S. companies. As U.S. companies increase exports of technology through licensing and other agreements

and increase export of capital through direct investment in plant and equipment in foreign countries, the result is a further loss of U.S. employment opportunities, contributing further to U.S. economic and social stagnation. Here is what has happened since the early 1960's.

The book value of U.S. foreign direct investment has tripled since 1960, from $32 billion to more than $94 billion in 1972. It must be assumed that the 1973 figure is over $100 billion. Moreover, it should be noted that the real market value is considerably higher, probably more than $150 billion.

In 1972, more than forty percent of this investment growth was in manufacturing industries, accounting for nearly half of the total growth in investment that year-up from the previous average when manufacturing accounted for only 43 percent of the growth.

Despite two devaluations of the dollar and other international economic developments which might conceivably have made foreign investment less attractive, the increase in direct foreign investment by American companies is continuing. In the first three quarters of 1973, the amount of new funds exported for direct investment abroad was almost as high as for all of 1972, $3.2 billion compared to $3.4 billion. Projecting at the same rate for the rest of the year, it can be estimated that the investment flow could reach $4.3 billion when the final torals for the year are in.

Not only is the export of capital continuing, but so is the export of technology. Since 1960, the fees and royalties paid on direct investment overseas has increased more than sixfold from $.4 billion to an estimated $2.6 billion in 1973. This covers only fees from U.S. affiliates and does not include fees and royalties paid by unaffiliated foreigners-that is to foreign companies which have no direct connection to U.S. companies. The total paid to unaffiliated foreigners amounted to another three quarters of a billion dollars in 1973 or a total technology export of approximately $3.4 billion for the year.

INCREASED IMPORTS

In the decade since 1963, imports have increased from $17.2 billion to $69.1 billion or an average annual growth rate of 30.2 percent.

Not only are imports increasing but the rate of increase is accelerating. In 1971 imports rose by 14 percent; by 22 percent in 1972 and by 24 percent last year, 1973. Exports, on the other hand, have increased from $22.5 billion to $70.8 billion or an average annual growth rate of only 21.5 percent. As a result, we moved from a comfortable trade surplus to a trade deficit in 1971 and 1972, only temporarily relieved this past year, primarily because of the Russian grain deal. In manufactured goods, the area where the United States complacently believed it would always have a technological advantage, the U.S. moved to a deficit position in 1971-a deficit which still remains. In 1963, the U.S. showed a trade surplus in manufactured goods of $6.2 billion. This slipped to a zero balance in 1971, and then to a deficit of $4.1 billion in 1972. Despite the tremendous increase in manufacturing exports during the past year—(due primarily to the temporary palliative of devaluation) manufactured goods still showed a slight deficit of $.1 billion in 1973.

Source: Economic Report of the President, 1971, 1972, 1973.

Totals include reexports as well as shipments under AID and food for peace programs, and military grant-aid shipments.

The accelerating rate of increase in imports of manufactured goods is especially worrisome. Since 1963, while exports of manufactured goods have increased at an average annual rate of approximately 21 percent, imports of manufactured goods have increased at an average annual rate of 45 percent, or more than twice the rate of increase in exports.

In addition, any elation we might have felt at the turn in the 1973 total trade balance, was mitigated by the knowledge that imports of 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.

The table below indicates the increasing importance of manufactured goods in the total import picture.

TABLE 2.-IMPORTS OF MANUFACTURED GOODS AS A SHARE OF TOTAL IMPORTS

In contrast to this trend, manufactured goods as a proportion of total exports have actually declined in the past three years. In 1971, approximately 71 percent of total export trade was in manufactured goods. But by the end of 1973, the proportion of manufactured goods in export trade slipped to 64 percent. Exports of machinery and transportation equipment (all high technology goods slipped from 44 percent of the total in the first 11 months of '72 to only 39 percent in the comparable period in 1973.) The significance of this steady upward creep of manufactured goods as a proportion of total imports and the downward trend of manufactured goods as a percentage of exports is directly related to the American workers jobs. It is also clear evidence that the time has long gone when we could full 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.

A close look at the 1973 surplus makes this clear. This surplus in effect represents an $8 billion 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 industry-which, of course, is in a special situation. The hard fact is that if it had not been for the Russian grain deal, and the top 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.

CAUSES OF INCREASED IMPORTS

There are many causes which have contributed to the tremendous increase in U.S. imports. Certainly one of the most important underlying factors is the dynamism of the U.S. high consumption market. However, the penetration by foreign countries of the U.S. market as evidenced by the huge increase in imports is not solely a phenomena of free market economics. Far from it. The fact is that

whatever strictly market incentives exist have been bolstered by a number of other developments, most of which act to contravene the hallowed free market principles. Among these developments are:

1. The artificial inducements to U.S. companies to locate plant and equipment abroad and to export technology rather than products. These include the positive inducement such as tax incentives, and the negative inducements such as nontariff barriers.

2. The increasing ability of companies to operate on an international scale, and the consequent ability to take advantage of low-wage economies, particularly in the less developed countries of the world. The shift of production facilities by U.S. companies in the electronics industry and in the office equipment industry are prime examples of this situation. The primary reason why most of our TVs, radios, typewriters, tape recorders, and other similar products are imported is because U.S. companies have shifted production to foreign shores in order to take advantage of low wage situations.

3. Items 806.30 and 807 of the Tariff Code further encourage U.S. firms to locate abroad sending the products fabricated abroad back for sale in the U.S. market. These code items apply to partially fabricated articles which are exported to another country for further processing or finishing and then reimported into the United States for sale in the domestic market. Under these provisions a duty is assessed only against the value of the processing in the foreign country. U.S. firms are therefore encouraged to ship parts either to affiliates or contracted processors overseas. As a result, instead of simply permitting export for supplementary processing, what has happened is that the whole product is frequently manufactured abroad with only a few supplementary parts being supplied from the U.S.

4. The development of managed economies throughout the world has reduced the so-called free market system to a fiction in most instances and has resulted in government supported assaults on the U.S. market by foreign suppliers. Although dumping is prohibited in theory, it is not prevented in practice. Export subsidies can be and are hidden under a variety of disguises-resulting in increased imports to the U.S.

5. In addition to the tax incentives which encourage overseas production, the extension of integrated multinational corporations in certain industries has also contributed to the increase in imports. When a few companies control all facets of industrial production and marketing, they gain a flexibility that permits management decisions to be made without regard to national, social or economic objectives. Certainly, a share of responsibility for increasing U.S. dependence on oil imports can be attributed to the integrated nature of the oil industry. which permitted management to make the decision not to expand producion and refinery capacity within the U.S., but instead to expand these activities outside the U.S. where the potential for higher profits was greater.

RESULTS OF INCREASED IMPORTS

The increase in imports has had a direct impact on U.S. economy, resulting in a loss of jobs and job opportunities, in a erosion of the industrial base and in a deterioration in both the balance of trade and the balance of payments, which in turn affects the U.S. position as a leader for world peace and stability.

Jobs are lost directly when plants close down and either are shifted to other countries, or are replaced by imports made by non-U.S. companies. The IUD's continuing study of plant shutdowns resulting directly from imports indicated a direct loss of more than 95,000 jobs in two years. As of December 1973, the IUD data center had reports showing that 169 plants had shut down and another 51 had permanently curtailed employment as a result of imports.

In addition to this direct los of jobs, there is the further and more serious loss of job opportunities to imports. This indirect loss is the number of job opportunities that might have been available to U.S. workers if competitive imports (imports which could have been produced in the U.S.) had remained at a constant level, as compared to exports. Estimates of import-related employment used to be made on a regular basis by the U.S. Bureau of Labor Statistics. Export employment was also estimated on a regular basis. However, no new estimates have been made since 1969-perhaps because the estimates would undercut the administration position. Lacking such statistics but using the BLS 1966 and 1969 estimates as a basis, we have projected that the increase in competitive imports since 1966 has resulted in a loss of approximately one million job opportunities.