In view of the stubbornly high U.S. unemployment rate-signifying an apparently chronic inability of the economy to generate sufficient employment to keep up with labor force growth, such a job loss cannot be countenanced.

The erosion of the U.S. industrial base is equally disturbing. In 1948, of all U.S. workers employed in the non-agricultural sector of the economy, 39 percent were employed in the production of goods and 61 percent were employed in the provision of services. By 1969, the proportion employed in the goods producing industries had dropped to 33 percent. The trend is still continuing and in 1972 the percentage dropped another percentage point. According to Department of Labor projections, we can expect this trend will continue over the next decade. This shift, which might itself appear to be unworthy of comment, is particularly disturbing to the labor movement for two reasons; first because continued improvements in the U.S. standard of living are dependent on improvements in productivity, for which the goods producing sector has the greatest potential; and second because of the inherent danger in dependence on other nations for our basic industries. The first point is proved by the historically consistently greater productivity growth in manufacturing over other segments. For example, between the fourth quarter of 1971 and 1972, productivity increased in the manufacturing sector by 7.4 percent compared to a 4.2 percent increase in all sectors. Between the fourth quarters of 1972 and 1973, comparable figures were 2.3 percent growth in manufacturing compared to only .9 percent in the total private sector.

To drive home he second point, we need only remind ourselves of the oil embargo of 1973–74, and its impact on our economy. It would be dangerous in the extreme to allow ourselves to get into the kind of situation where our basic industries on which the economy depends could be subject to that kind of international political and economic gamemanship.

INCREASED DIRECT FOREIGN INVESTMENT

As we have seen, foreign direct investment, the flow of U.S. capital into foreign business enterprise in which U.S. residents have a significant control, is one of the major new developments on the international economic scene over the past decade. The flow of investment increased from $1.6 billion in 1960 to $4.4 billion in 1970 and $4.8 billion in 1971. This was primarily a one-way street with the flow of foreign capital into the U.S. for direct investment remaining miniscule in comparison. As a result of the investment flow, the book value U.S. direct foreign investment had reached almost $95 billion by the end of 1972, representing true market value considerably higher, probably more than $150 billion. This increase in foreign investment was the result of several factors, including the development of non-tariff barriers which discriminate against U.S. made products, the ability and apparent eagerness of U.S. companies to take advantage of the lower wage scales that exist in other parts of the world, and finally the incentives provided under our own tax laws.

TAX INCENTIVES

The U.S. tax laws not only provide an incentive for the export of capital and technology, but also actively discourage investment in the United States, especially investment in energy resource development. Incentives take two major forms: (1) the foreign tax credit; and (2) the tax deferral on non-repatriated income.

The principles that lie behind these special provisions of the U.S. tax code are designed to promote international equity. They include the prevention of double taxation of U.S. companies and U.S. residents, the neutralization insofar as taxes are concerned, of the decision whether or not to invest in a foreign country. and taxation of income only when it is received. Although the elimination of unfair competition may have been the goal, as it has developed, the end result is to load the dice in favor of investment overseas and against investment in the U.S.

Under the foreign tax credit 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 deduction. The result of the foreign tax credit is that if a company located overseas pays a foreign income tax lower than the U.S. tax of 48 percent (the 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 United States government. So 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 possiblefor 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. These are the provisions which (1) allow 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, and (2) the timing provisions which allow a company to apply its excess credits on a two year carry-back and a five year carry-forward option. All of the provisions taken together give a big company-specifically multinational companies with diversified operations in many foreign countries(the oil industry comes most readily to mind)-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 optimum advantage of the options open to him, or her (and they didn't go to the Harvard Business school for nothing). Particularly for the oil companieswhich are specially favored because of the high per barrel foreign royalty payment which is counted as an income tax-but also for all diversified multinationals, the system is such that 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 a clear disincentive to increase investment in the U.S. No wonder that refineries have not been built, that research, development and exploration in the U.S. has not kept pace with the burgeoning requirements, that-indeed we 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.

The second tax incentive which tends to encourage overseas investment is the provision that 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 mix of new direct investment between 1971 and 1972 is indicative of this effect. In 1971, reinvested earnings accounted for $3.2 billion or about 39 percent of new foreign direct investment, but in 1972, reinvested earnings increased to $4.5 billion and accounted for 59 percent of the total.

It has been estimated that together these tax incentives represent a loss in tax revenues of more than $3 billion.

RESULTS OF INCREASED FOREIGN INVESTMENT

The increase in foreign investment results in a loss of jobs and job opportunities, further erosion of the U.S. industrial base, the continued deterioration of the balance of payments, and the elimination of any technological advantage which the U.S. might have had. The impact is particularly severe on jobs.

While domestic employment of the U.S. multinational firms increased by 11 percent between 1966 and 1970, employment in the foreign affiliates of thèse multinational companies increased by 23 percent. In the area of manufacturing, the contrast is even sharper. Domestic employment of the MNC's increased by 7.6 percent, but employment by their foreign affiliates increased in the same period by 26.5 percent. Even in absolute terms, the increase in overseas employment for manufacturing companies was greater in the foreign affiliates than it was for the domestic plants, 452,000 new jobs overseas compared to 450,000 jobs at home.

APPENDIX

TIME IS RUNNING OUT

WE CAN'T DELAY ACTION ON TRADE

(By I. W. Abel, President, Industrial Union Department, AFL-CIO)

It is now three years since the Industrial Union Department publicly warned in this publication that outmoded and ill-conceived foreign trade policies were leading our nation toward a permanent world trade deficit.

Since then, our foreign trade surplus became a deficit, then returned to surplus again. But those who claim our foreign trade posture once more is strong are deluding themselves and their listeners. Our imports of foreign goods-including the high technology manufactures in which we once were the world's undisputed leader-grow by leaps and bounds. More and more U.S. technology and capital are exported, taking along more and more American jobs. A new complication, the "energy crisis", has arisen to point up in the starkest terms the role of multinational corporations in draining American strength from the world economy. Partly as the result of manipulations of the tax, foreign trade and other laws of the U.S. and other nations by these world-girdling and often irresponsible oil industry giants, we now suffer dizzying price increases, disruptive shortages, and an alarming lack of control over the availability of our major source of energy.

Yet nothing constructive has been done to modernize or reform our foreign trade law.

The export of technology and capital is as much in need of regulation as it was three years ago. Foreign nations still are encouraged to discriminate against U.S. products; there has been no real progress toward the dismantling of trade barriers abroad.

Worse, the worldwide energy crisis promises to disrupt the recent progress of workers abroad toward the type of living standards the U.S. has enjoyed. In view of our failure to reform our own foreign trade laws, this discouraging new factor could erase the only cause we had for hope of slowing the move of U.S. manufacturing operations to other countries.

In short, the United States needs foreign trade reform more than ever.

There has been much public discussion in recent weeks of the so-called "turnaround" in our foreign trade accounts. In the following pages, the IUD's economic consultant, Stanley H. Ruttenberg, and his associates, subject current foreign trade activity, and the decisions and events that shape activity, to thoughtful, rigorous analysis. The conclusions of that analysis are inescapable:

We must act to revitalize and modernize our foreign trade policy.

We must curb irresponsible exports of the technology and capital upon which our economic life and stanadrd of living depend.

• We must regain control over the economic decisions that determine our national well-being, so that these decisions are made in the public interest rather than for the private gain of a few multinational corporations.

Time has run out. We must act now.

LOTS OF TALK, NO ACTION

THE FOREIGN TRADE PROBLEM IS STILL WITH US

Like a broken record, U.S. foreign trade policy continues year after year in the same rut, going round and round with little or no progress. Propaganda prophecies to the contrary, the trade problem is still very much with us, and particularly with the American worker.

A year ago when the U.S. international trade balance skidded deep into the red, with U.S. imports exceeding exports by more than $6 billion, even the most ardent supporters of the current U.S. foreign trade policy lost some of their cool and began to admit there was a problem. Today, however-two devaluations later the trade balance bas shifted again and this year will be back into the black. There are some who are now looking at the current small surplus-estimated to be $1.7 billion for the past year-and claiming that the trade problem has been resolved. But they are wrong. The bitter truth is that the conditions that created our problems in the first place have not been changed.

The economic and social dislocations that are the result of our out-dated international trade policy have not changed either. If any relief is provided by the shift from a trade deficit to a trade surplus it is only temporary, illusory, and more shadow than substance. Not that it's not pleasant to have a surplus, but this one is only a sugar coating, covering a host of unsolved problems. Look beneath the surface and you will see that the improved U.S. trade position has not resulted in an improvement in the position of U.S. workers. Unfortunately, unless corrective action is taken soon, it will get worse before it gets better.

U.S. products are still being discriminated against abroad;

U.S. imports of manufactured goods are still rising;

U.S. export of technology is still increasing; and

US. jobs are still vulnerable both to imports and to the hard-nosed market place decisions of increasingly powerful multinational corporations.

THE SHIFTING BALANCES OF TRADE

Up until the second half of the Sixties the United States had enjoyed a healthy trade surplus, exporting more goods than it imported and thereby earning the dollars needed to meet its international security commitments around the world. In the mid-Sixties however, as the industrialized countries of Europe and Japan reached a stage of full recovery from the devastating effects of World War II-a recovery that was immeasurably helped by U.S. aid as well as by U.S. concurrence with unilateral protectionist measures designed to help their rebuilt industries get a start in world trade-the full impact of U.S. foreign trade policy began to be felt here at home. Imports began to increase faster each year than exports.

By the end of 1972 more than one million job opportunities had been lost to imports over a six-year period. Moreover the trade balance continued to decrease each year until in 1971 the United States showed the first trade deficit since 1893-approximately $2 billion. In 1972, the deficit plunged to $6.4 billion. Even though exports increased by more than 12 percent, and imports rose at a rate of 22 percent, 1972 marked the biggest deficit in history. The past year, 1973, both exports and imports have continued to rise, with imports again increasing at an accelerating rate. By the end of 1973, imports grew by almost 25 percent over the 1972 level. Exports, helped by the devaluation of the dollar which made them relatively cheaper, increased during that year by 44 percent. Even with this tremendous increase in exports, however, the average annual rate of increase for the past three years for imports was higher than the average annnal rate of increase for exports. It's true that the U.S. exported more than ever before last year, but we also imported more than ever. Moreover, it is not just raw materials and fuel imports that have increased. Every year, the U.S. has brought in more and more manufactured goods; goods which are in competition with products manufactured here.

In the first 11 months of 1973, the U.S. imported $13 billion worth of manufactured goods, (including products made of iron and steel, non-ferrous metals, textiles, and newsprint), and another $21 billion of machinery and transportation equipment. These two categories together made up more than 70 percent of our total imports for that period. In contrast, imports of mineral fuels, (i.e., oil) lubricants, and related materials accounted for only 11.6 percent of our total imports. (Note this was even before the full impact of the oil embargo took effect. Crude materials except fuels, such as metal ores, rubber, textile fibers and paper hase stocks accounted for only 7.2 percent of our imports while chemicals accounted for 3.5 percent of the total.

THE TRUTH ABOUT IMPORTS

In view of these figures, it is hard to understand how the widely held myth can continue that U.S. trade consists of imports of raw materials and exports of manufactured goods. The facts show otherwise. The corollary of this myth is that the U.S. need not worry about rising imports because it has the ability to redress any adverse balance through the export of high technology goods in which it is supposed to have a perennial comparative advantage over other nations. Aside from the questionable nature of the assumption about the U.S. technological lead (diminished by the increasing export of U.S. technology abroad) the hard fact is that manufactured goods, including goods which incorporate a large

degree of sophisticated technology, make up a major proportion of total U.S. imports.

The U.S. Commerce Department uses many different systems for reporting U.S. trade. In one set of reports all imports are divided into three classifications; the first being food, beverages and tobacco; the second crude materials and fuels: and the third lumps together all manufactured goods. The last category includes manufactured goods and machinery and transportation equipment, chemicals and miscellaneous manufactured articles. It is interesting to note that this general category of manufactured goods has made up an ever-increasing proportion of our total imports since 1965 and the trend is still continuing.

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

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.

Note: The trend continued upward for the 1st 11 months of 1973, but was disrupted by skyrocketing fuel oil import prices in December.

The U.S. standard of living, which is the envy of the rest of the world, is based on a high wage-high consumption economy. This in turn, is based on the goods producing industries, where steady increases in productivity and a strong trade union movement assure that American workers can look forward to an oppor tunity to enjoy the benefits of productivity increases, and to improve their standard of living. The fact that we import more and more manufactured goods from abroad, and export less, only serves to underscore the basic shift in the U.S. economy from the production of goods to the production of services. Although there are many good jobs in the service sector, and it is unlikely that everyone will end up taking in his neighbor's washing, the productivity increases on which real economic improvement depends are not as great in the service industries as in the production of goods. That basic fact has not been changed by the current trade surplus.

DEVALUATION HAS NOT HELPED

In 1971, the worsening U.S. trade balance, plus a chronic deficit in the U.S. balance of payments, resulted in serious undermining of international confidence in the stability of the U.S. dollar. Devaluation became the fashionable panacea for our trade problems. After several panicky runs on the dollar in the European currency markets, the United States along with the other major industrial countries took the unprecedented step of a general revaluation of currencies. The socalled Smithsonian Agreement resulted in an upward revaluation for the nations of Europe and Japan and a devaluation of approximately 8 percent for the