Now, I would say in both instances, Mr. Secretary, you have just agreed in your own language that this will be a price-control bill.

Mr. BALL. It is price control by the operation of the law of supply and demand which I had always assumed was the kind of price control that is the most desirable.

Mr. ALGER. Are we not talking about the law of lower tariff, not the law of supply and demand?

Mr. BALL. Lower tariffs result in an increased competitive situation. This results in the most classical kind of regulation of prices. This is the market regulator which, from Adam Smith on down, has been endorsed by all the classical economists.

Mr. ALGER. So I will quote President Kennedy once again:

Frequently imports may be only a relatively small percentage of our domestic market, 2 or 3 percent, but it breaks the price for the other 97 percent.

Unquote President Kennedy.

I happen to think this is accurate and I think the answer is price control. You do not, so I will leave it at that.

Now, on the matter of balance of trade that we have heard so much of, again I have been concerned that if we actually increased imports, Mr. Secretary, this bill, of course, is designed to increase exports, we know that, but if in the mutual lowering of tariffs it results in a greater inflow, we also know, therefore, that our balance-of-payment problems will be the wrong way, as we see it.

A gain I want to quote President Kennedy on something he had to say on balance of trade, October 4, 1960:

Actually as far as trade we have a favorable balance of trade. The unfavorable deficit is due to the fact that we are paying troops abroad to maintain bases and giving foreign aid. That is what is hurting. The balance of trade this year is all right.

What do you think about that statement?

Mr. BALL. That is entirely accurate. We have a highly favorable trade balance. It amounts to something like, in 1961, $5,600 million or, if you eliminate the factor of foreign assistance, something like $3,100 million-a very favorable trade balance.

Mr. ALGER. That is my point. We have been told that we need this bill because the balance of trade and payments is not good enough. Mr. BALL. It is not good enough to enable us to finance the burdens that we are carrying around the world for the defense of the free world. These are primarily burdens of defense: maintenance of very big armed forces.

Mr. ALGER. I would not dispute that at all.

Now, as to the political unity question I asked you earlier, but I have here a Common Market pamphlet. I recognize that they are trying to get their market closer over there. We have heard about a federation maybe, of a United States of Europe. It would be fine, of course, if we draw from our own experience, but that is the thing that has me concerned. I have asked a question earlier. I know your answer is that we are not interested in a political union with them, but carrying that thought further, if they are federating and if they can by their own language drive toward political unity, and I can quote you a few paragraphs in their language about how they are hopeful that there will be greater political unity; suppose they end up with a United States of Europe, is it not to be expected that they would have

lower tariffs within their countries even as we do? We do not have tariffs between our States, you see. Then why would they not have lower tariffs because we have been told in these hearings that the most harm that could happen to us is this outer wall built around the Common Market that we will not be able to penetrate so easily? If they federate more closely economically and politically, are they not going to continue to favor themselves; and this is a wall we cannot break down unless they want us to?

Mr. BALL. They will have complete free trade in the Common Market just as we have it in our Common Market. This is very clear, very definitely contemplated. The benefits of this not only to themselves but to the world are very great. They are in many areas, political areas, even in the economic area, because the creation of a great mass market of this kind has two consequences. It has a trade-creating as well as a trade-deflecting effect.

My own judgment is that the trade-creating effect of the Common Market, even at the presently contemplated levels of the Common Market external tariff, would mean increased flow of American trade. With the kind of arrangements which are possible, utilizing the powers that would be made available under the new act, we should share in a very considerable extent in the prosperity that is possible through the development of a great new mass market.

This is what we are interested in.

Mr. ALGER. I think that is fine. But again you would not expect them to lower their tariffs internally or lower their external tariffs? Mr. BALL. They would have no tariffs internally after the external tariffs are reached.

Mr. ALGER. You mean you think they will not?

Mr. BALL. I know they will not. The treaty is clear on that.
Mr. ALGER. They still have them?

Mr. BALL. They still have them. They are progressively eliminating them. By the end of the transition period, which should be not later than the next 8 years and perhaps even before, quite likely before, there will be no tariffs within the Common Market. It will be completely free internal trade just as there is internal free trade from Texas to New York within the United States.

Now, the effect of this is to create a great mass market. The effect of this is to develop purchasing power by developing all of the efficiencies and economies of scale which, again, in classical economics, are the things that result from the application of mass techniques to serve a market of this kind.

This will result in greatly increased standard of living, purchasing power, demand for goods, our goods as well as the goods of the rest of the world.

Our problem is to bring about, by arrangements with this Common Market, a mutual reduction of the duties which will enable our goods not to have to face the obstacle of a high common external tariff, but to move in and enjoy the benefits that the mass market is creating by the purchasing power it is generating.

Mr. ALGER. As we have said several times-you have repeated it today on the balance of trade and other witnesses have, too-we are doing pretty well on trade; are we not?

Mr. BALL. As far as trade is concerned, we are doing very well. I am confident we can do better.

Mr. ALGER. We always want to do better. But the fact is we are doing well. We cannot then say we are doing so poorly that we must do better because we are doing well.

Before this committee alternately we have had people who are over enthusiastic with our trade balance; others say we are doing terrible, we have to increase. I am glad you admitted that we are doing fairly well.

Mr. BALL. We are doing well with our trade balance. We are not doing nearly so well with our overall balance of accounts.

Mr. ALGER. According to your judgment?

Mr. BALL. As far as the overall balance of accounts is concerned, this is simply statistical. We are running a deficit.

Mr. ALGER. This gets into foreign gifts of $2.8 billion and many other things, does it not?

Mr. BALL. The biggest element is the defense expenditures.
Mr. ALGER. And the foreign aid which is not defense.

Mr. BALL. Well, the foreign aid is a very much smaller area.

Mr. ALGER. Public Law 480 and the other gifts. We have lots of other things; we are shoveling it out.

Mr. BALL. I do want to make the record clear on this one thing, Mr. Alger, that the extent of the burden imposed by the whole foreignaid program is far smaller than the burden imposed by the maintenance of defense expenditures around the world because about 80 percent of the foreign-aid program is tied to American goods and therefore has no effect on the balance of payments. That means that what we are talking about is not more than say, a billion dollars a year, as the burden of the foreign-aid program.

The big burden is the burden of the maintenance of defenses around the world which runs about $3 billion a year.

Mr. ALGER. Of course, you want to overcome that with increased shipping. I guess we would all like to see that.

Mr. BALL. That is right.

Mr. ALGER. Again, you have said, and I think it is important for people to realize, that we are doing quite well even with all the handicaps we have had.

Now, to move to something else, you mentioned earlier today thirdcountry benefits with regard to tariffs. It was a rather neat way of putting it.

Now, I would like to get into this matter of transshipping and thirdcountry benefits. It is true that this bill will repeal section 11 of the 1951 act which relates to trade with Soviet and Communist countries. I believe that is correct?

Mr. BALL. Is that section 111?

Mr. ALGER. No, section 11 of the 1951 act, which is that section, if I am not mistaken, which has to do with Communist-dominated trading.

Mr. BALL. That, I believe, is section 5, the substance of which is retained, Mr. Alger.

Mr. ALGER. We have some testimony, Mr. Secretary-I do not think we fully developed it here today-we have had testimony earlier that

81843-62-pt. 6-26

you recognized in your Bonn speech that the typewriters are on the free list.

The witness before our committee told us that a Czechoslovak company was exporting typewriters to the United States through Canada.

Would you be in favor of continuing to permit this duty-free importation of typewriters which were manufactured in whole or in part in Communist-controlled countries?

Mr. BALL. There is a certain amount of trade with Czechoslovakia. I think the figures are very small indeed.

Mr. ALGER. I understand that these typewriters are being sold at Macy's right now; and the parts are assembled in various places. I have a detailed description of what is being done.

I wondered if you knew about it and what you think about it? Mr. BALL. The bill would not encourage it. I would like to call your attention to section 231 which says that:

The President shall refrain from applying any reduction or elimination of any duty or other import restriction proclaimed in carrying out any trade agree ment under this title or any predecessor Act to products of any country or area dominated or controlled by international communism, whether imported directly or indirectly-

which would cover the Canadian situation. This simply says that far from encouraging imports of that kind that this bill would not extend any reductions made under this trade agreement, made under its authority, to the bloc countries.

Mr. ALGER. How would you even know they were being assembled elsewhere and shipped into Canada and Canada shipping to us? Mr. BALL. We have this problem which is dealt with every day, I mean the question of following shipments to make sure that they are not brought in indirectly. This is very standard procedure.

Mr. ALGER. I have some figures here just given me of the imports into the United States from Communist nations, January-February 1962, 17,404 portable typewriters; from East Germany, 12,216; Czechoslovakia, 5,000. Maybe these are small numbers; I really do not know, but I do know it is significant.

I do know that we can be hoodwinked-I am not questioning your intent--when they come down here from Canada. But here are some facts. Is not this bill going to encourage or at least permit this sort of transshipping?

Mr. BALL. No, it does not encourage it at all. The provisions I have read mean that none of the benefits of this bill will apply to trade with the Communist bloc countries. The question of how you police imports to prevent evasion is a matter which the Treasury Department deals with all the time. They have a lot of people working on this problem, and this is one we have faced for many years.

Mr. ALGER. You see, I was relating this to Canada, not to Czechoslovakia per se, but coming from Canada.

Mr. BALL. This bill relates to imports imported directly or indirectly which addresses itself specifically to the problem of bringing them in from Canada.

There is a problem of identification. At the same time, there is a great deal of checking going on constantly to see that there is not that kind of evasion.

Mr. ALGER. Let us relate it to something else since the answers I got from Secretary Hodges were anything but accurate or the least complete. It is my understanding-and I have reason to believe you understand all about this, I may be wrong, but a subcommittee of Congress has studied this, I have some of their material with me now-Italy has made a deal with Russia for Russian oil, and Italy will provide pipe and possibly pumps and such other equipment like valves to the Russians. Italy, in the meantime, is one of the nations of EEC that will be doing business with us and is getting dollars from us by selling such things to this country-typewriters, office equipment, and so forth, for dollars and they are going further and getting equipment from us of various types like, possibly, pumps and valves and then using them as prototypes and making them or shipping them on into Russia.

It is this type of thing that I am asking you to direct your attention to, to tell us what you think can be done to prevent it when these member nations will continue to do this. Human beings are going to make a fast buck wherever they can. Look at our own people that transship from this country through Mexico into Cuba. We here are charged with writing a law to protect people from their own weaknesses.

What are we going to do about a deal like this, the Comincom or the Cocom pipeline deal; what is the story on that, and how is this bill going to prevent that sort of thing?

Mr. BALL. This bill is not designed to deal with this problem. That is the problem of East-West trade, which is not covered specifically by this bill. This bill would not encourage it. In fact, in the provisions of the bill I read, none of the benefits would apply to trade of this kind.

On the question of how one deals with East-West trade, this is a problem of a different kind. As you know, there is a fair amount of trade that flows back and forth in Europe. This is a matter of the governmental policies of the countries concerned that historically have had a very large amount of East-West trade.

In Germany, for example, prior to the end of the war, trade with East Germany was internal trade and obviously a considerable amount has continued, in part out of what one might call almost economic necessity and in part out of old trading relations and trading habits and the policies of the governments. We cannot dictate the policies of the European governments with respect to this. We have, however, worked out arrangements through NATO for the establishment of a so-called Cocom embargo which is a coordinating committee which is set up under the NATO and which has developed lists of products which are not to be shipped to the bloc countries. These lists of products are policed by each one of the countries.

The situation which you referred to a moment ago was the import of oil by Italy and shipment of large diameter pipe. Large diameter pipe is a matter which is not on the Cocom list, because in and of itself it is not regarded as a strategic item.

So far as shipment of oil, we have been making strong representations to the Italian Government and discussing it within NATO to see if these shipments could be curtailed.