THE IMPORTANCE OF THE ELECTRICAL MANUFACTURING INDUSTRY TO THE UNITED STATES ECONOMY

All production and distribution, all communications and transportation, as well as the living standards of the American people, are dependent upon the constant expansion of the electric-power industry and the electrical manufacturing industry which serves it.

In addition to its paramount importance as a direct producer of war materiel, the Nation's entire mobilization base is dependent not only upon power, but also the availability of its emergency and maintenance services.

Rapid growth has been accompanied by increasingly active competition within the industry for the domestic market.

The number of competing manufacturing establishments in the industry has risen from 1,979 in 1939 to 4,294 in 1951.

The combined share of the industry's annual sales volume, held by its 2 largest producing units, has declined from 37.6 percent of the total in 1936 to 27.6 percent in 1951.

Competitive position of the industry in foreign trade

During and since World War II annual exports of the industry's products have ranged between $400 million to $600 million to support the war activity and later to help rehabilitate competitive industries abroad, as well as supply neutral markets that for years had gone unserved. Imports during this period remained at low levels, rising from an average of $2 million in 1936-39 to $4 million in 1946-50. In the last 18 months the situation has undergone a rapid change.

In 1952 total sales of the United States industry were 9 times their prewar average and adjusted imports were 8 times their prewar average. In contrast, however, export sales were only 6 times their prewar level.

During the first half of 1953, competitive imports of electrical products exceeded those of the entire year 1952 by 20 percent, while exports of the industry during the first half of 1953 were 46 percent below total exports for the entire year 1952. Total (unadjusted) imports of electrical products have soared from their average level of only $4 million in 1946-50 to $14.6 million in 1951, $17.4 million in 1952 and $41.6 million in 1953 (based on the first half year.) In other words, total imports of electrical products in 1953 will be more than 10 times their 1946-50 average and more than 20 times their 1936-39 average. At the same time exports of electrical products in 1953 will be only 50 percent above their 1946-50 average and less than 7 times their 1953-39 average.

As foreign competitors reestablished and exceeded their prewar production levels, they first took over their own domestic markets, which the United States industry had largely served between 1945 and 1950.

In addition, with much more efficient facilities-largely as a consequence of United States economic aid-with substantially lower overall labor costs and lower tax costs than in United States and, finally, with various export subsidies from their governments, foreign competitors since 1950 have been rapidly regaining their prewar markets in countries which do not have electrical-manufacturing industries. These combined advantages are considerably higher today than they were in the prewar years.

This stronger competitive position of foreign producers will mean sharply reduced exports of electrical products from the United States to neutral markets that since 1939 have been served by the United States industry.

The United States electrical manufacturing industry is, therefore, facing not only a certain loss of a substantial part of its export markets, but also a serious threat of substantial losses in its domestic market (which has already been invaded) to foreign competitors.

Those very items upon which the United States economy and the entire industrial mobilization base of the Nation are most dependent, such as heavy power equipment, are those which have already been particularly subjected to sharp underselling of United States producers by foreign competitors.

The United States Government, despite the philosophy of the Buy American Act, has increased its purchases of this type of strategic equipment from foreign sources to an alarming degree

Data, compiled primarily from United States Government and other public sources, show that during 1950-53 (inclusive) foreign bidders have been awarded 50 percent of the dollar value of all awards to United States manufacturers of heavy power equipment, ordered by the agencies of the Federal Government and other public users of such equipment (including municipalities, public utility power

districts, Rural Electrification Administration power cooperatives, and a small number of private utilities and industrial users).

The dollar amounts of the contracts won by bidding foreign manufacturers rose from 11.3 percent of the dollar amounts of contracts won by United States manufacturers in 1950 to 62.5 percent for the first 10 months of 1953. As of October 31, 1953, with respect to the dollar value of pending bids, which had been opened, but not awarded, the combined low bids of foreign competitors were 83 percent of the combined low bids of United States manufacturers.

United States tariff rates, sharply reduced in the years between the two wars, and even the more recent Federal legislation, designed to protect industry's domestic market, are proving inadequate in view of the much stronger competitive position of foreign manufacturers since 1950.

CONCLUSIONS AND PROPOSALS FOR EFFECTIVE PROTECTION OF THE UNITED STATES ELECTRICAL MANUFACTURING INDUSTRY

The United States electrical manufacturing industry is an industry that is vital to national security-a key industry, basic to the whole United States economy. The industry provides equipment upon which the transportation, communications, power-generating and utility systems of the country, as well as all other industry, depend.

It maintains, not only the plants, labor, and skills to produce this equipment, but extensive and expensive facilities to service it by repair and maintenance.

Maintaining the industry and its productive and maintenance facilities in a strong position is vital to the economic health, to the general welfare, and to the safety, as well as to the security of the Nation.

The industry, therefore, must be protected at all costs from any force-external or internal-which might joepardize its stability or its capacity to produce, and provide services to maintain, the equipment for generating, distributing, and utilizing electric power, as well as its position on the front line of technological research and development.

The industry-and the key items which it produces-cannot be allowed to become the subject of trading off for uncertain reciprocal advantages between nations.

The very items upon which our entire economy and our industrial mobilization base are most dependent, such as heavy power equipment, are those which have already been subjected to sharp underselling of American producers by foreign competitors.

It is obvious from the facts presented in the report of the National Industrial Conference Board (supplemented by the report of the Stone & Webster Engineering Corp. and the legal analysis of Donovan, Leisure, Newton & Irvine as well as this economic analysis) that United States markets for products of the industry are already in serious jeopardy-more so by far than following World War I or in the earlier years after World War II.

It is equally obvious from these reports and this analysis that foreign competition is almost certain to become progressively more intensified and bitter in future years with respect to both United States exports and United States imports of electrical products.

While imports of electrical products into the United States have been only a small percentage of total sales of the industry, they have expanded since World War II at rates sharply higher than exports. The rate of increase-compared with that for exports-has sharply accelerated in the last 2 years, as foreign nations have completed rehabilitation of their productive facilities and begun to seek larger markets abroad. In fact, current imports of electrical products are increasing more rapidly than the total demand for such products on the domestic markets of the United States. Therefore, these imports constitute a serious and growing threat to the Industry.

The argument might be made that the small volume of imports of such products should be no cause for great concern to the industry. These imports, however, can undermine the price levels (resulting from a highly competitive industry with common cost factors) on which depends its ability to support the research, development, and productive strength of its entire organization.

Consequently, the elimination now of all imports of those electrical products that are essential to the national security and the industrial mobilization base of the Nation-before they become substantial in volume-will avoid the grave dangers inherent in making the entire United States economy dependent on foreign sources.

Action now will prevent greater injury abroad later, when the impact of such action on foreign nations would have much more serious consequences to them. Action now is further justified because (as the report of the conference board and the conclusions of this analysis clearly show), the United States electrical manufacturing industry is almost certain in the future to suffer extensive losses in its exports to foreign markets.

SPECIFIC PROPOSALS FOR THE ELECTRICAL MANUFACTURING INDUSTRY

The only constructive-the only safe-policy for the United States with respect to the electrical manufacturing industry is the elimination of the importation into the United States of all those custom-built items, having high labor content, such as heavy electrical machinery and equipment which are vital to the United States economy and national security.

This objective can be effected in various ways-such as quotas or tariffs. The philosophy of the Buy-American Act should be broadened and its administration strengthened to prohibit all Federal imports of the items to which these restrictions are applicable.

The pressing need for outright elimination in the case of this type of equipment is illustrated by recent developments. The Federal Government has been making in recent months substantial purchases of heavy machinery and other electrical equipment from foreign sources. This practice has increased to an alarming degree. The foreign equipment, in many instances, has already been ordered for our power systems, atomic-energy installations, and other governmental projects vital to national defense and security. The United States cannot afford to have these vital systems and essential projects depend upon foreign sources for emergency service and maintenance. It cannot, from a security standpoint, have foreign nationals familiar with vital installations.

This policy of purchasing from abroad impairs both the continued availability of power in emergency periods and the capacity of the electric power equipment industry to provide the necessary planning facilities and skills to assure such availability.

Any attempt to compromise the present danger by continued reliance on "peril point" or "equalization of production costs" or higher tariffs would require constant upward revisions of the rates for the key products of the industry, if the threat from abroad is to be eliminated. The legal analysis prepared by Donovan, Leisure, Newton & Irvine-referred to earlier in this analysis-documents the inadequacies of these provisions.

The acceptance of this policy with respect to heavy machinery and equipment will not foreclose the Government from making selective upward or downward adjustments in tariff rates after adequate analysis and study on other, less strategic products of the industry, should such a selective policy be applied generally to other industries.

It should be recognized that the most essential single element in the well-being of the free world and the promotion of its trade is a strong and productive United States of America which has the capability of sustaining and maintaining a large and expanding volume of trade, both domestic and foreign. In the light of the important place held by the electrical industry in the United States, from the standpoint of the investment in its facilities and the number of people depending upon it for a livelihood, any broad tariff policy, applied product by product, should contemplate the establishment of tariff rates at levels which will protect United States manufacturers from lower labor costs and the many discriminatory advantages of foreign manufacturers. This would force United States manufacturers to maintain a competitive position with respect to foreign producers, comparable with that which now prevails on United States markets among efficient and progressive domestic competitors.

Consequently, the most feasible alternative to the United States in its enlightened self-interest and the least damaging to foreign countries would be the elimination of imports of all strategic products of the industry, with selective adjustments upward or downward for other products of the industry.

ANALYSIS OF LEGISLATION, TREATIES, AND REGULATIONS AFFECTING THE ABILITY OF AMERICAN MANUFACTURERS TO COMPETE WITH FOREIGN-PRODUCED GOODS

Prepared for National Electrical Manufacturers' Association by Donovan, Leisure, Newton & Irvine

PART I

INTRODUCTION

THE PROBLEM

The problem is to determine the extent to which American industry today operates under statutes, regulations, and economic conditions which affect its ability to compete successfully with foreign industry for the American market. This study deals with the acts of Congress and the rules and regulations of various governmental departments and agencies which bear on the problem directly or indirectly.

The relevant statutes and regulations fall into two categories. In the first category are those enactments designed to protect American industry from ruinous foreign competition. Among these we will be concerned with the Buy American Act, tariff legislation, and the various reciprocal trade agreements made under the Reciprocal Trade Agreements Acts, particularly the postwar General Agreement on Tariff and Trade negotiated originally at Geneva and expanded at Annecy and Torquay. These agreements express an increasingly liberal policy by the United States Government to encourage imports by tariff reductions and concessions.

The second category consists of legislation which imposes on American suppliers who wish to deal with the Government standards relating to wages, hours, and working conditions which may be more stringent than those applicable to foreign manufacturers. Typical of this type of legislation are the Walsh-Healey Public Contracts Act and the Fair Labor Standards Act.

This study is divided into two parts. The first consists of a discussion and analysis of the problem as stated. The second part consists of a series of appendixes containing more detailed summaries and excerpts of the statutes, rules, and regulations involved.

At the outset it can be said, by way of brief summary, that the costwise disadvantages which our standerd of living imposes on domestic producers are increased by such laws as the Walsh-Healey Act. The traditional protection afforded by our tariffs has been substantially decreased. At the same time, while the "Buy American Act" still stands on the books, current administrative interpretation and application of its provisions have considerably weakened its force as a protection to domestic industry and the American standard of living.

I. STATUTES AND REGULATIONS DESIGNED TO PROTECT AMERICAN INDUSTRY FROM RUINOUS FOREIGN COMPETITION

The Buy American Act of 1933 applies to all Government purchases of articles, materials, or supplies for public use within the United States, its Territories and possessions. It provides that governmental agencies procuring such products for use within the United States must purchase domestic products only unless (a) such products are not available in sufficient commercial quantities of satisfactory quality, (b) the agency head determines that the purchase of the domestic product would not be in the public interest, or (c) the agency head determines that the cost of the domestic product is unreasonable.

The intended purposes of this act were twofold: First, to serve as a means of sustaining the employment of American labor during the time of depression, and second, to retaliate against similar "Buy British" policies in effect at that time. The immediate occasion for the introduction of this legislation was the fear that

1 See appendix 1. Several other statutes either expressly require compliance with the Buy American Act or certain domestic preference requirements of their own in varying degrees. See appendixes 2 through 6. This act was introduced by Senator Hiram Johnson of California on February 2, 1933, as a ficor & mendment to the Treasury and Post Office Department Appropriation Act of 1934. It became law when the Appropriation Act was signed by President Hoover on March 3, 1933.

contracts for heavy electrical equipment for use at Boulder Dam might be awarded to German and other foreign producers of such equipment.3

Limitations on the application of the Buy American Act

As previously stated, the act applies only to purchases for public use within the United States, its territories and possessions. It does not, therefore, apply to purchases made by governmental agencies at the instance of the Foreign Operations Administration and financed by FOA.*

Contracts, therefore, entered into by the Department of Defense for products purchased at the request of FOA and financed by FOA contain no reference to the Buy American Act. Actually most functions exercised under the various foreign assistance acts have been exempted from the requirements of the Buy American Act by Executive order."

Orders, directives, and regulations promulgated under the Buy American Act

The Buy American Act does not establish standards as to what would be "inconsistent with the public interest" or what would constitute "unreasonable cost."

For the purposes of this study it may be said that the major Government purchasing agencies are the Department of Defense, the General Services Administration, the Department of the Interior, and the Atomic Energy Commission. Each of these departments has issued written policies on the application of the Buy American Act and has issued orders, directives, and regulations conforming to such policies. The written policies of each agency are in accord in two basic respects-first, all establish the same percentage differential for use in applying the "unreasonable cost" criterion provided for in the act, and second, none, with the possible exception of the Department of Defense, establishes any standard to be applied in determining whether an award to a domestic bidder would be "inconsistent with the public interest."

So far as the "unreasonable cost" criterion is concerned, the policy of each department provides that the cost of the domestic product is to be deemed unreasonable when it exceeds that of the foreign product by 25 percent or more, or 100 percent or more if the cost of the foreign product is less than $100. Under the various regulations, directives, and orders, contracting officers charged with the duty of making awards have little, if any, discretion but to make their awards to the foreign bidder where the prescribed differential is exceeded.

6

The figure of 25 percent is not new. It first appeared in a written policy statement issued on March 31, 1934, by the Branch of Supply of the Procurement Division of the Treasury Department as a test of the reasonableness of domestic cost with respect to purchases exceeding $5,000. Thus, it is apparent that the figure of 25 percent, even if realistic in 1934, must be in and of itself unrealistic when applied under today's inflationary conditions.

While all departments apply the differential of 25 percent, their method of application differs. Thus, the Armed Forces except the Coast Guard, and the Atomic Energy Commission, apply the 25-percent differential to a figure which includes the foreign cost, plus duty. The General Services Administration and the Department of the Interior, on the other hand, apply the 25 percent to the cost of the foreign product, less duty. The resulting figure and the duty are then added to the cost of such product for purposes of comparison with the domestic bid. What is inconsistent with the public interest?

Present-day policies of trade without aid and the like have rendered the 25percent price differential of little actual effect. The question of "public interest" is now the overriding consideration and all the policies which must be followed by agency heads give such heads the right to determine whether the award to a domestic producer would be in the public interest even in cases where the 25percent differential is not exceeded.

3 For excerpts from the Congressional Record, see appendix 7.

FOA was created by Reorganization Plan No. 7 of 1953, the functions of MSA were transferred to it and MSA was abolished, all effective August 1, 1953 (Aug. 4, 1953, 18 F. R. 4541). By Executive Order No. 10476 (Aug. 4, 1953, 18 F. R. 4537) the President, who had previously delegated his own fur eticns under the var ious foreign assistance acts to MSA, redelegated them to FOA. FOA makes no direct purchases of its own in connection with the foreign-aid programs. Purchases in general are made either directly by the foreign country or importers located therein on "procurement authorizations" issued by FOA or by other Government arents on requisition by FOA. (See MSA regulations, 22 C. F. R. 201.2-201.20.) The General Services Administration, for example, handles a large volume of FOA-financed purchases destined for southeast Asia.

See appendix 8.

Circular Letter No. 6.

* See appendix 9.