I propose secondly that this extension be granted in consideration of the appointment of a commission which shall examine in detail the questions I am raising in this memorandum and any other pertinent questions which may be developed, and that said Commission shall be required to report its findings to the Congress in January of 1960, well in advance of the time when the renewal of the reciprocal-trade treaties again comes before the Congress.

It scarcely needs to be said that the existing treaties will remain in effect unless abrogated, whether or not the reciprocal-trade legislation is extended. It is necessary to say this, however, because much popular support of the existing law is based on the assumption that otherwise we "will go back to the SmootHawley Tariff.” This is, of course, not true and the sentiment for reciprocal trade should not have to be supported by any such assumptions.

Meanwhile, it is to be hoped that the administration will concentrate its negotiations during the 2-year extension on those products and commodities now carrying a high rate of tariff, rather than making further reductions in the lowtariff products which meet severe foreign competition.

(The Secretary of Commerce subsequently forwarded to the committee for insertion in the record his reply to Senator Flanders' memorandum of May 12:)

Hon. RALPH E. FLANDERS,

United States Senate,

Washington, D. C.

DEAR SENATOR FLANDERS: I have given considerable thought to your May 12 memorandum on trade policy. Several of he questions you raise are quite complex, and I think it would be best for me to give you my reaction on a pointby-point basis in order of presentation in your memorandum.

1. The economic basis of the program is the sound concept of comparative advantage, which does not presuppose any particular mechanism of adjustments to international disequilibria, such as the gold standard, but merely presupposes the existence, in one or both areas involved in trade transactions, of differencesfor whatever reasons-in comparative costs of producing various goods and services. In essence, the program is simply an application to international transactions of the basic free-enterprise principles on which we rely so heavily for successful operation of the domestic economy.

Neither the nature of Professor Taussig's assumptions regarding the gold standard nor the fact that the gold standard has long since passed from the scene is germane to consideration of the trade-agreements program. After all, the first Trade Agreements Act was not passed until after all of the major trading nations, including the United States, had abandoned the old gold standard. The goldstandard mechanism of adjustments to international disequilibria played no part whatever in the rationale of the original trade-agreements legislation, nor in that of the successive extensions of the act during the past two decades.

2. The assumption that dollars paid for purchase of foreign goods have no ultimate value except as potential claims upon American goods or services is not invalidated by the increased importance of dollar balances as international reserves, nor by the tendency in recent years for foreign countries to enlarge their holdings of liquid dollar assets. On the contrary, the value of dollars as international reserves fundamentally rests precisely on their ultimate value for procurement of United States goods or services. The tendency of foreign countries to expand their dollar holdings has been in part merely a matter of restoring-with due allowance for expansion of trade levels-reserves depleted during the war and early postwar reconstruction periods. Apart from that, it is a natural consequence of the relatively new role of the United States as a major international banker-a reflection of the vast sums which United States private businesses and the United States Government have invested abroad. It is inevitable and normal for large liquid balances to be held in a major international creditor country by residents of other countries, and for these holdings-to a considerable extent in the nature of working balances to tend toward growth with the growth in levels of trade and of the creditor's foreign investments.

The existence of such a tendency does not imply that dollars paid out by the United States will not continue to be spent here. Given basic propensities for current spending and for additions to reserves by foreign countries, it remains as true as ever that marginal increments in douar payments by the United States result in roughly commensurate increments in foreign purchases of United States goods and services, and that inhibition of dollar payments results in corresponding limitation of foreign purchases here.

Convertibility and multilateral balancing of accounts is not a new factor in international trade. It has always been axiomatic that the amounts of goods and services which we can sell abroad are correlated with-and except over relatively short interludes, limited by-the amounts of goods and services which we buy from the rest of the world plus the amounts which we invest abroad or otherwise transfer to foreign countries, either privately or governmentally. This proposition, which lies at the heart of our trade-agreements policy, is sometimes obscure to those who limit themselves to fragmentary views or piecemeal observations regarding particular commodities, individual countries or areas, and/or brief periods of time; but the fact that a balance of receipts and expenditures does not necessarily hold in transactions with any one country at any time, or with the world as a whole (apart from changes in foreign holdings of dollar assets) over short intervals, does not make the global limitation of our foreign sales potential by our total foreign payments any less real.

This is not a merely theoretical proposition. It is thoroughly confirmed by empirical experience, as is evident to anyone who studies the long-term history of the United States international balance of payments. In the nearly four decades from 1919 through 1957, the United States made payments to foreign countries and international institutions totaling, according to the official estimates, $445 billion. This figure includes, of course, our net private investment abroad, private remittances, and Government grants and loans, as well as all our purchases of foreign goods and services. During the same 39 years, cumulative United States receipts from sales of goods and services to foreign countries, together with statistical errors and omissions aggregating $6 billion, were $443 billion, or 99.4 percent of all the dollars paid out. The resultant net increase over these decades in foreign holdings of gold and dollar assets (including long-term investments by foreigners here, as well as liquid dollar balances) was just about $21⁄2 billion, or less than 0.6 percent of the total.

In the face of these figures, it would be difficult to suggest that the dollars we spent abroad have no potent tendency to rebound to the benefit of our exporting industries. The contrary is perfectly clear in the record. Over nearly four full decades, they have returned virtually dollar for dollar to the benefit of United States export industries and no valid reasons have been advanced for doubt that the same strong tendency will prevail in the future.

However, the impression should not be left that it is only in the very long run that our export sales are closely correlated with our payments to foreign countries. While the trends can, of course, diverge temporarily because of the possibilities of liquidation, replenishment, or expansion of foreign dollar holdings, United States exports of goods and services are nevertheless highly responsive to changes in the level of our payments to the rest of the world, even over periods of a very few years. This is brought out in the attached chart, depicting total international payments and receipts of the United States (except changes in foreign gold and dollar asset holdings) annually since 1919.

The chart speaks for itself. It is difficult to imagine two more closely correlated series of economic statistics. With but 3 or 4 exceptions, of which the year 1950 is the only notable case, even year-to-year changes in United States receipts have consistently followed the direction of changes in total United States payments to foreign countries.

3. It may be true that an inexorable long-term upward trend in price levels now prevails (though this is certainly not beyond the control of monetary and fiscal policy, if sufficient priority and public support is given to that objective). However, such a tendency certainly is not peculiar to the United States alone. Hence, it does not follow that "our economy is thus getting progressively out of balance with the price level of the rest of the world."

On the contrary, price increases have been greater in most other countries than in the United States during most of the period since World War II. This is illustrated, for the years 1950 through 1957, by the attached tabulation of both wholesale and consumer price indexes for the United States and nine other leading industrial countries.

These figures, taken primarily from statistical publications of the United Nations, show that wholesale prices have risen considerably more since 1950 in France, Sweden, the United Kingdom, and Japan, and somewhat more in Germany and the Netherlands, than in the United States. The average change in wholesale prices since 1950 in Belgium, Italy, and Switzerland has been about the same as that in the United States.

Over the same period, the cost-of-living indexes for France, Italy, Sweden, the United Kingdom, and Japan have all risen considerably more sharply than has

the consumer price index for the United States, and that for the Netherlands has risen somewhat more sharply. The indexes for Belgium and Germany have shown changes roughly parallel to our own while that for Switzerland has risen slightly less than ours.

Generally speaking, then, the evidence shows that if the United States price level is "getting progressively out of line," it is lagging below the "line" rather than climbing above it. As a matter of fact, reputable foreign theoreticians have so interpreted the situation, and have been very seriously worried about the possible long-run inability of their economies to meet United States competition. The assertion that "the range of goods in which we can effectively compete is narrowing year by year" does not seem to be supported by any evidence. There is, of course, a constant shifting of competitive conditions in international markets; but the volume of goods supplied to them by the United States in the past two years has been the largest in history, and this record volume-far from comprising a narrower range of products-appears to have been more highly diversified than ever before.

4. The suggestion that growth of United States investment abroad has stemmed importantly from an effort to "regain lost markets from which we have been priced out by our wage-price spiral" is fallacious. As noted under item 3, above, the wage-price spiral in the United States has actually been less steeply upward than in most of the countries which constitute our principal competitors in world markets for manufactured goods. The reasons for expansion of various types of United States foreign investments are numerous and complex, but they obviously do not include the one alleged here.

5. In contemplating the use of quotas as an expedient to protect certain industries against abrupt or severe dislocations which might result from increased imports, we must always remember that they have many disadvantages.

When quotas are applied on some products it is difficult to reject their use on others. Furthermore, once a quota has been adopted it is usually necessary to allocate shares among different supplying countries and among different importers. It is also necessary to keep these quota operations under constant surveillance and to police them to prevent transshipment and other evasions. Thus Government intervention, once initiated, tends to feed on itself, constantly spreading through day-to-day business operations, further curtailing the automatic market adjustments of competition.

Quantitative import restrictions are especially hard on small businesses which have difficulty financing large inventories from quota period to quota period.

Any general resort to quotas on the part of the United States would weaken our current efforts to reduce_foreign_quantitative restrictions against our own exports. Actually the United States has been the greatest victim of quotas and stands to gain the most from progress in their abolition. As a large exporter and an efficient producer of products wanted by other countries, we have more to gain by avoiding quotas and more to lose by any action on our part which encourages their greater use throughout the world.

(a) The attached extract from a Labor Department study gives an estimate (in the nature of an outside order-of-magnitude limit) of the number of United States jobs "lost" in 1956 by importing dutiable goods instead of producing themthe number "lost" or "displaced" being computed as the number of fulltime workers who would have been required to produce the equivalent of dutiable imports, on the assumption that all of them could have been made by American workers. The Labor Department study goes on to explain some of the reasons why the rough estimate given "approximately 1 million"-is "obviously much too high." In addition, it may be noted that a similar estimate covering only dutiable manufactured goods would be considerably lower, while one covering duty-free goods as well as dutiable merchandise might be much higher, even without going to such ridiculous extremes as computing, for example, the numbers of workers required to produce our supply of coffee by hothouse methods.

The notion that the available estimate of man-years utilized in producing exported goods and related services is "meaningless without its offset" is not well founded. In the case of export employment, the estimators-despite difficult statistical problems can deal with a clear and straightforward concept of employment actually utilized in producing certain values which were definitely created by the United States economy. Any attempt to compute man-years "lost" through imports, on the other hand, not only encounters equal or greater difficulties of a statistical nature, but must be predicated upon purely hypothetical concepts regarding situations which might prevail in an entirely different economic world. So many speculative judgments must be pyramided in this process that

the meaningfulness of any general estimate of this kind is open to the gravest doubts.

(b) If our trade policy were to be based upon "desired imports," who would decide what were the "desired imports"? In a free enterprise economy, such decisions are normally made by the market place. Deciding by Government fiat what imports might be "desirable" would run counter to the principles under which our dynamic economy has prospered in the past.

(c) In the references to support for "economic areas consisting of nations with resources and industries which on the whole tend to complement each other," it is not at all clear what concept of an economic area is envisioned, nor what is meant by "our supporting" any such area. With regard to complementarity of the component nations' economies, the situation of the six common-market countries is certainly radically different from that of the Far Eastern area mentioned, or of the Western Hemisphere group.

Indeed, the necessity for elaborate arrangements to bring the common market into existence is a reflection of the fact that what is involved is the integration of broadly similar economies, rather than mere formalization of closely complementary economic relationships which would prevail, generally speaking, in any event. Contrastingly, relationships among the Western Hemisphere and Far Eastern countries, respectively, tend to be essentially of the latter type. In each of these areas, the grounds for trade between a predominant industrial nation, on the one hand, and a group of countries exporting chiefly primary products, on the other, are so overwhelming that no special economic integration measures are required to promote the trade in question. The degree to which such trade is likely to be inhibited by narrowly nationalistic economic policies is minimal as compared with the degree of limitation inherent in corresponding policies in Western Europe. Under these circumstances, arrangements along the lines of the common market would not offer anything like the same prospect that they do in Western Europe of bringing about fundamental changes in the character of the trade and the economic productivity of the areas involved.

(d) Since there is no compilation of United States foreign trade statistics aceording to size of the trading firms or of the domestic firms affected by competitive imports, it is impossible to make any factually based analysis of the effects of past tariff reductions on enterprises of any given size. It is worth noting, however, that size has not been a criterion for determination of peril point or escape clause findings in the past, nor is it a criterion in the administration's pending bill. Since that bill contains fully adequate safeguards for domestic industries, regardless of size, the question of possible discrimination against small or local industries in favor of large corporations simply does not arise.

(e) In all probability, the economic strength of the United States and that of the rest of the free world will rise or fall together. United States commercial policies tending to weaken our friends economically will tend to weaken us, too, and policies which truly strengthen our own economy as a whole will fortunately contribute also to the strength of our friends abroad.

Under the pending Trade Agreements bill, there is no possibility of "deciding which of our industries *** shall be marked for * * * perhaps fatal competition. To be sure, the bill does envision the encouragement of expansion in our more productive industries, but it does not contemplate the sacrifice of existing industries to accomplish this common-sense objective. On the contrary, it includes all existing and some newly added safeguards against injury to domestic industries through increased imports which might result from tariff reductions.

"POLICY PROPOSALS"

Adoption of the proposal that the Trade Agreements Act be extended for only 2 years, instead of 5, is not responsive to United States policy needs. It would place the United States in a weak and uncertain negotiating position during the crucial formative period of detailed and specific determination by the common market countries what will be their ultimately uniform external duties on imported merchandise, including that from the United States. In view of the potentially profound effects of the common market upon our trade with Europe in decades ahead, it is vital that we retain the strongest and most flexible possible bargaining position in order to minimize the danger of common market decisions prejudicial to our national commercial interests. A detailed analysis of the need for tariff negotiations with the common market and the prospective timetable showing the need for 5-year renewal is attached. Even in the absence of the common market development, a 2-year extension would provide so little assurance

to other countries of stability in our tariff policy that we would have great difficulty in negotiating worthwhile concessions for our exports. Moreover, the processes of preparing for tariff negotiations and conducting them are so cumbersome and time consuming that an extension as short as 2 years would in any event curb the scope of the necessary staff work and thus limit the possibility of fruitful results.

The proposal for appointment of another Commission to examine questions relating to United States foreign commercial policies appears to overlook the intensive investigations in this field carried out so competently only a few years ago by the distinguished members of the President's Commission on Foreign Economic Policy (Randall Commission). The fact that no revolutionary changes have since occurred in basic conditions under which world trade is conducted makes it unlikely that a new Commission would arrive at fundamentally different conclusions. The guidelines laid down by the Randall Commission are still eminently appropriate, and a project to have them largely reconfirmed by another Commission would appear both unnecessary and unduly costly.

The 5-year authority would be used primarily in connection with those rates which are now unnecessarily burdensome, and concessions would not be made in cases where injurious increases in imports would be threatened. The probable effects of duty reductions are not necessarily correlated with the height of the existing duties. Some high duties could be reduced only at considerable risk of injury to domestic producers, while some relatively low duties could well be further reduced without such risks. The appropriate test lies in the probable result of a change in a tariff rate, rather than in the absolute level of a prevailing rate. Sincerely yours,

SINCLAIR WEEKS, Secretary of Commerce.

Index numbers of wholesale prices and cost of living in selected industrial countries, 1950 and 1953-57

1 Producers' prices of industrial products.

2 Manufactured products, except food, tobacco, and fuel.

Sources: United Nations-Statistical Yearbook and monthly bulletin of statistics, International Monetary Fund-International Financial Statistics OEEC-Statistical Bulletin. Prepared by: International Economic Analysis Division, Bureau of Foreign Commerce, U. S. Department of Commerce, June 1958.

Senator FLANDERS. There are 2 or 3 points with regard to these questions that I would like to take up with you; particularly in view of the fact that unless new light shines on me from some high source, it is my intention to support a 3-year extension of the act and to call for a new examination of its basis-a thorough professional economic examination and a report of a Commission brought to the Congress at the beginning of the new session of the Congress in 1960.

You might well ask why we should have a new report.