I come to the conclusion that at this turning point in our nation's international affairs, and as we stand at the threshold of opportunity for real progress between East and West and among the developed nations, but especially in many nations of the less developed world, that we should support and not condemn our multinational corporations. I would hope that our society will recognize that it is the American business establishment that is the principal means of providing for our country's domestic economic welfare, while extending our economic success to the areas of the world where it is still desperately neededand I hope that our Congress will rise above the parochial interests of those who would condemn America to international economic retreat, isolation and failure when the need to participate is so great!

WORLD TRADE, WOOLLY THINKING AND THE WORKINGMAN, BY ROBERT MCLELLAN Our nation-indeed, our world-has arrived at a point where the mechanisms for dealing with international monetary affairs and the rules governing trade among nations are clearly inadequate. We are faced with recurring crises in the international money markets; our nation's first trade deficits in this century are making headlines; U.S. labor unions charge that hundreds of thousands of American job opportunities have been lost to foreign competition; and, there are charges and counter-charges among nations of unfair trade practices. What has happened to create this state of affairs and what should be done?

This discussion will probably benefit from a brief historical review followed by examination of some of the discussions now taking place and some of the initiatives being advanced with regard to our nation's international economic policies. From this, we can make some assessment of how these initiatives relate to the real problems that we now face and whether they will serve us in the changing circumstances of the foreseeable future.

The liberal trade-protectionist struggle has been with the United States since the meeting of the First Congress in 1789. In the early days, protectionists successfully argued that high external tariffs would not only help put infant American industries on their feet but also could be an important source of revenne for the new young nation as well. Tariffs and quotas have continued to occupy Congressional time and attention every since.

In 1930. spurred by the beginnings of worldwide depression, Congress passed the Smoot-Hawley Bill, which set tariff rates at an all-time high. Because of foreign retaliation, U.S. exports collapsed-from $5.2 billion in 1929 to $1.6 billion in 1932, and imports fell from $4.4 billion to $1.3 billion.

Seeking a way to expand American exports, and to aid economic recovery at home and abroad, Congress passed the Trade Agreements Act of 1934. This law authorized the president to reduce U.S. tariffs in exchange for equivalent benefits from other countries. The liberal trade philosophy of the act governed U.S. trade policies for almost thirty years-and its tariff-reducing authority was extended eleven times between 1937 and 1958. Over the years, safeguards were added to protect American industries, but the basic intent of the act remained.

At the end of World War II. the trade situation, of course, had changed drasfically. Much of Western Europe, Eastern Europe. Japan and Southeast Asia stood in economic and physical shambles. Other parts of the world, largely classified as underdeveloped and possessed with a desire for political independence, were about to attempt self-management of their international economic affairs-in spite of their lack of experience in such matters, and frequently in spite of many missing ingredients necessary to the development of an internal economy.

At the other end of the spectrum, the United States was uniquely wealthy and in good operating order. We had reserves of some $27 billion representing twothirds of the world's reserve assets, a well-developed technological base, and a society that had been brought together by a common national purpose inspired by World War II.

Given these circumstances, it fell to the United States, both from a humanistic and a national security point of view, to take the leadership role in restructuring international affairs. This effort led to the creation of the United Nations, its related multilateral agencies, and especially the International Monetary Fund

and the International Bank for Reconstruction and Development-out of the Bretton Woods agreement-and the General Agreement of Tariff and Trade (GATT) in 1947.

At the end of World War II, we were however briefly-naive enough to think that the contest of military wills was over and that the entire world under our leadership would truly dedicate itself to economic achievement, political freedom and, hence, the creation of a peaceful world committed to individual happiness and liberty.

We were caught up short in this kind of thinking on several counts. Our poorest assessment was of the U.S.S.R. leadership at that time, and their desire for an international position to support the export of their Marxist-Lenin theology. Because the U.S.S.R. had very limited economic competence on which it could base its claim for international fame, they resorted to the alternative immediately available to them-a military competence. As a result of this, we soon determined that we could avoid large scale Communist takeovers only by sponsoring substantial programs of economic and military assistance.

This was the basis of the international policies that the U.S. followed during the 50's and the 60's. These policies encouraged the transfer abroad of our country's technology, management skills and capital that were primary factors in building the dynamic and highly competitive economies of Western Europe and Japan.

Further, these policies involved the outpouring of approximately $140 billion in military and economic assistance-much of which, incidentally, had limited immediate economic benefit to many underdeveloped nations. These policies ultimately encouraged our involvement in Viet Nam with its terrible economic costs in terms of international payments and its crippling inflationary impact on our domestic economy from 1964 through 1971.

During the post World War II years, we have maintained a foreign policy based essentially on military and political considerations, and one that as sumed our economic strength was unlimited. We believed we could afford to take a paternalistic and economically benevolent attitude toward the rest of the world. Our diplomats often discouraged the aggressive pursuit of international business by American firms and tended to overlook the contribution that a strong international business position could make to an effective foreign policy.

These policies, while well intended in our search for national-and worldsecurity and economic well being, have nonetheless brought us to a condition of serious international weakness. We are now at a point where:

Our international reserves have diminished to approximately $13 billion, putting us in third position after Japan and Germany-causing the presi dent to close the gold window at the time of the Smithsonian Agreement in December of 1971.

There has been a build-up of about $80 billion in foreign claims against the dollar-now non-convertible to gold on an official basis and creating inflationary problems and speculative activities abroad.

We have experienced our first trade deficits in this century-deficits of $2 billion in 1971 and $6.4 billion in 1972.

Our government spending abroad continues to exceed receipts. In 1971. the net governmental deficit affect on our balance of payments was somewhat in excess of $6 billion and included $4.7 billion in gross military expenditure outflow

While we can take some consolation from the fact that we have in excess of $80 billion book value of industrial investment abroad, this does little good strictly in terms of our current monetary problems, beyond the important fact that it produces a favorable balance of payments return of about $5 billion per year.

If we had an inexhaustible supply of gold in reserve, we would not have this problem. Or, if there was not a foreign call on our current assets of about $80 billion, we would not have this problem. Or, if we had sufficient trade surplus to maintain a favorable balance of payments to offset other expenditures, we would not have this problem. Unfortunately, these are not the circumstances and our international economic activities are such that we do have a problem, and, therefore, some changes must be made.

Because this is a complex problem, there is a tendency to develop proposals from a parochial point of view; to deal in generalities; and to engage in considerable woolly thinking both as to the problem's cause as well as to its solution.

At the outset, I think we should recognize that our international payments deficits have not been, and are not now, a result of our international business activities. U.S. commercial involvement abroad has consistently created a positive balance of payments effect from international trade and international corporate investments through 1971. The cause of our international payments problem is simply a result of U.S. Government spending abroad in excess of our commercial surpluses. It seems logical, therefore, that the first step in the correction of our problem is to eliminate that which is causing it.

We are still encountering a serious negative balance of payments impact for the cost of military activities in Japan and in Western Europe. This is in spite of the fact that Germany and Japan both have reserve positions greater than ours-in spite of the fact that both of these nations are running substantial trade surpluses with the United States, and in spite of the fact that both of these nations engage in restrictive practices with respect to those products that we could export to them at a comparative advantage. One can argue the security merits of our military presence in Japan and Germany, but it seems to me that it should be abundantly clear we can no longer afford the cost-in balance of payments terms.

Apart from terminating excessive governmental expenditures abroad, it should be understood that government of itself cannot do much to correct the problem that it has caused. It can really only create the environment in which American business can correct the problem.

For example, we should recognize that devaluations of the dollar are the result of our international economic problem and are not really effective solutions of the problem. To be sure, the devaluations we have experienced in December, 1971 and February, 1973 will, in due course, have some beneficial effect in the relative pricing of our goods overseas as compared with the foreign produced goods coming to this country. But, by observation, it is equally clear that the devaluation of 1971 failed to accomplish the improvement in trade balance that was projected at the time of that devaluation.

Much more important than devaluation, however, is the pressing need for a more effective mechanism to absorb the surplus of dollars now outside this country. The extent to which this should be done by unilateral U.S. government action and the extent to which it should be done through building a more responsive cooperative international mechanism is subject to considerable discussion, but I think it is clear that it is the responsibility of the United States Government and the governments of the free world countries to move promptly toward a more effective international monetary mechanism.

In conjunction with the elimination of excessive military expenditures abroad and the creation of an effective international monetary exchange mechanism, American business will be able to do its job in correcting our problem if American government will do its part in creating-with the other world governments-a set of trading rules that is fair to all. Further, these rules should provide the means to deal quickly with those countries that do not open their markets to the other countries of the world, while piling up payments surpluses to the detriment of the world's economic stability.

Fundamental to the solution of our problem, however, is the creation of a domestic policy environment that will permit, and indeed encourage. American companies to expand their international sales by becoming more competitive in international markets and, thereby, change the direction in the flow of dollarsby bringing them back to the United States. The primary characteristic of the proper domestic environment must be an effort to maintain wages and prices at constant levels so that we can re-establish our competitiveness on the international trade scene. This means that wage increases must be geared to productivity gains and that American industry must be accorded a tax policy that will encourage R&D investment in the most modern plant and in equipment to make these productivity gains possible.

It seems terribly unfortunate that at a time when American business needs the support of our entire nation to overcome our international economic problems, we are challenged by the AFL-CIO Industrial Union Department which characterizes multinational corporations as "a modern-day dinosaur which eats up the jobs of American workers."

In a brochure now being distributed, the AFL-CIO solicits support of the Burke-Hartke proposals which, among other things:

would establish quotas on thousands of categories of imports based upon the 1965-1967 level:

would impose further restrictions on the outflow of capital for U.S. direct investment abroad;

would establish restrictions on the outflow of American technology; and, would establish new policy with regard to taxation of foreign earnings by American companies and their foreign subsidiaries.

To clear up the misconceptions on which the AFL-CIO and the Burke-Hartke proposals have been based, a number of studies have been undertaken to develop the facts surrounding the so-called multinational corporations. These studies have been conducted by the United States Department of Commerce, the United States Tariff Commission, the Emergency Committee for American Trade, and by Business Inernational. Although these studies were conducted independently, they come to the same general conclusion: That the international business activities of American firms are vital to our domestic economic welfare.

The survey by Business International covered the activities of 125 U.S. manufacturing companies which, as a group, accounted for over 16% of 1970 U.S. factory shipments, over 26% of U.S. non-agricultural exports, and over 40% of U.S. foreign manufacturing investment. This study precipitated these facts: Foreign investment creates jobs at home. The companies studied increased their net U.S. payrolls by more than 26% between 1960 and 1970. In the same period. U.S. manufacturers as a whole increased their payrolls by less than 11%.

The larger the foreign investment, the faster the rate of employment growth in the U.S. In the ten-year period ending 1970, the sample companies with the most intensive foreign investment increased their payrolls three times as fast as firms with the least intensive foreign investment.

Foreign investment promotes overall sales. During the 1960-70 period. the analyzed companies increased sales to U.S. customers by 104%. Sales to foreign customers rose by more than 300%.

Foreign investment produces chiefly for local overseas markets. More than half the companies replying to the question, "Where do you sell goods produced in your overseas plants?" answered that between 90% and 100% of sales were to the foreign market in which the plants were located.

Foreign investment increases U.S. exports. The participating companies had exports totaling $9.3 billion in 1970. Their exports rose almost twice as fast as those of all U.S. manufacturers between 1960 and 1970. Exports to their foreign affiliates rose almost three times as fast as the exports of all U.S. manufacturers.

The larger the foreign investment, the faster the export growth. As with job growth in the 1960-70 period, companies with the highest rate of foreign investment increased their exports at a faster rate-more than 110%-than companies analyzed with the lowest foreign investment growth.

Imports from affiliates as a percent of U.S. sales (excluding the auto industry) were 0.6% in 1960, 0.7% in 1966, and 0.8% in 1970.

Foreign investment strengthens the U.S. balance of trade. The surplus of exports over imports of the companies studied rose from less than $2 billion in 1962 to $5 billion in 1970. During the same period, the U.S. trade surplus declined from $5.4 billion to $2.6 billion.

Foreign investment stimulates investment at home. While all U.S. manufacturers increased their spending in domestic plant equipment in 1970 by 121% over 1960, participating companies increased theirs by 178%. These facts deny the wholesale condemnation of multinational corporations and particularly when the condemning is in the form of generalized, inflammatory invective without the foundation of any systematic study, so far as I know. It seems to me that the originators and the co-sponsors of the Burke-Hartke proposals are engaged in the worst kind of wooly thinking. Recognize with me-in four areas the contradiction between their proposed solutions and the real facts of the problems to which they contend they are addressing themselves.

First: On the matter of quotas, they want to apply general constraints, both with respect to country of source, as well as to product category.

But how can we expect to maintain an expansion of our exports to nationsthat are the source of troublesome shipments to the United States-when such nations are already in deficit in their trade account with respect to the United States?

This shows up in labor intensive, low technology industries—such as our shoe industry. In this case, a large part of the domestic unemployment has resulted

from imports of leather shoes produced in Italy and Spain. While I am concerned about the specific unemployment that these imports create, I am, at the same time, aware that we enjoy a substantial overall trade surplus with both of these countries. You can appreciate that the government of Spain, for example, is reluctant to be forced into a position of reducing its shipments of shoes to the United States when they are running a substantial trade deficit with our country. The same situation generally prevails with most regions of the world-with the primary, and glaring, exception of Japan.

This is our major problem area, so far as imports are concerned, and to undertake a program of general import quotas covering thousands of categories of products coming from nations where we have commercial payments surpluses, if not trade surpluses, is not to deal with the real cause of the problem, which is Japan. And the real solution lies in specific restraints with regard to Japanese imports, pending the development of fair international trade rules for all.

I shall return to the Japanese import problem in a few minutes, but I want to emphasize here that our government should not put the burden of correcting this problem on the back of Japanese political leaders. It is our problem and we should take the necessary action to moderate selected and unreasonable Japanese imports until the chronic and excessive imbalance is adjusted.

Continuing with the Burke-Hartke proposal to impose general quantitative quotas, we should recognize that this kind of a system would involve high bureaucratic expenses to administer which, at best, could never be fair in allocating import licenses to the importers, and certainly not be fair for the American consumer who, after all, is the American worker.

Second: The Burke-Hartke proposals suggest further restrictions on the outflow of American industrial investment on the basis that such foreign investment permits American companies to produce abroad for shipment back to the domestic market. To examine this, we should first recognize that American direct investment abroad is placed approximately 3 in Canada, % in Europe, and in the rest of the world.

Further, we need to understand that more than a third of our foreign investment has to do with American companies going abroad to obtain fuel and raw materials that are critical to our well being here at home. We can, therefore, eliminate any question of restricting capital outflow for those companies.

When we examine the manufacturing companies, and recognize that their investments are essentially in Canada and Europe, we must also recognize that these are both regions of the world with which we have maintained-if not always a surplus of trade-then generally a surplus on our total commercial activity, including return on our business investments, royalties and related fees.

Further, these are not the areas from which we have had chronic trade deficits caused by imports. To the contrary, our chronic trade deficits are from Japan, where the United States in 1970 had only 2%- -or $1.5 billion-of its foreign investment-practically no investment at all! By analysis, I hope it is absolutely clear that American foreign investment has not caused our nation's trade deficits, and therefore any restriction on the outflow of capital would be counterproductive.

Third: The Burke-Hartke proposals to restrict the outflow of technology disclose a naivete that is frightening, when one considers the attention being given to these proposals throughout the land and in the Congress. Technology cannot be restricted from flowing overseas, except by closing our communications and contact with the outside world. As new ideas develop and are applied here. they will be observed and eventually copied and modified by scientists, engineers, and managers in other countries. Admittedly, under the BurkeHartke Bill, the transfer process may take a little more time, but transfer it will-and at no monetary benefit for the R&D investment made within the United States. It is important to note from the Tariff Commission Report on multinational firms released last month that in 1970 the inbound royalties and fees to U.S. firms were equivalent to 11% of the $17.9 billion spent on R&D by all I.S. industry and nearly one fourth of total R&D spending financed by companyin contrast to federal-funds.

To impose restrictions on the transfer of technology and, accordingly, on the opportunity to earn royalties from doing so would have a negative impact on U.S. R&D employment and would have a serious negative effect on U.S. balance of payments. Additionally, it would retard the growth of the less developed nations. and, in my opinion, would contribute to a downward spiral in domestic