June 21, 1968
Page 18267
TRENDS IN INTERNATIONAL TRADE OF THE UNITED STATES
HON. EDMUND S. MUSKIE OF MAINE IN THE SENATE OF THE UNITED STATES Friday, June 21, 1968
Mr. MUSKIE. Mr. President, it has been recognized that the goals of our foreign policy should include plans for expanding our trade with the world. At this time of international economic crisis it is especially urgent that the United States reexamine its trade policy and study the steps the Congress must take to assure continued expansion of American trade.
Dr. Merrill A. Watson and Dr. Howard S. Piquet, economists, have given me a copy of their recent study entitled, "Trends in International Trade of the United States," which was prepared for the National Footwear Manufacturers Association, Inc. In this study the authors examine our Nation's position in world trade and analyze the capacity and composition of American trade.
The study also examines our trade with the European Economic Community, the impact of the Kennedy round tariff reductions as a stimulant to our imports, and the effect of foreign trade and investment abroad on our balance of payments.
I call this comprehensive study to the attention of Senators and ask unanimous consent that it be printed in the RECORD.
There being no objection, the study was ordered to be printed in the RECORD, as follows:
TRENDS IN INTERNATIONAL TRADE OF THE UNITED STATES
(By Dr. Howard S. Piquet and Dr. Merrill A. Watson)
PREFACE
There are few today who would disagree with the statement that the long-run aims of U.S. foreign policy should include, among other things, plans for encouraging and developing trade with the world. The position of the United States as a leader in the Western World, with an enormous stake in investment and production abroad, calls for such a posture. There are signs, however, that changes in our competitive position as compared with that of other principal trading countries may require more realism and tough-mindedness in the pursuit of this idea in the future.
Since 1934, when the Reciprocal Trade Act reversed a trade policy that had persisted almost from the beginning of the Republic, we have led the world in encouraging trade liberalization.
We have not worried too much about reciprocity in our trade negotiations but have attempted to influence others by example. In fact, our trade policy has been so interwoven with political goals that Senator Russell Long, chairman of the Senate Finance Committee, has said, "since World War II the commercial policy of the United States has been so merged with our foreign aid objectives that the two have become virtually indistinguishable." Most tariffs in the United States have been reduced to a point where in five years at the end of the Kennedy Round reductions they will be relatively unimportant. With declining tariffs, increasing competition from industries in lower wage countries abroad, and agricultural policies aimed at protecting home markets and achieving self-sufficiency almost everywhere, concern is arising about our ability to compete both here and abroad with the products of other countries. These developments, along with the current balance-of-payments problem, are causing some anxiety as to the direction of our future trade policy.
With the completion of the Kennedy Round negotiations, there would probably have been a review of trade policy in any event. Up until recently, at least, the current balance-of-payments "constraint" has not resulted from an imbalance in trade but primarily from military expenditures, foreign aid, and investment abroad. With the trade surplus shrinking, however, there has been growing uneasiness over our trade position. As a result of all these developments, there have been Congressional and Administration trade policy hearings, and a most important hearing on trade policy is promised for the near future.
This pamphlet does not attempt to answer basic questions concerning trade policy. It is primarily a series of statistical tables designed to reflect broad trends in merchandise trade, whether produced locally or from U.S. affiliates or subsidiaries abroad. Any worthwhile conclusions on the direction of future trade policy would require extensive investigation of many factors which affect the flow of international commerce. Among these would be the levels of economic development in the chief trading countries; the political, social and economic policies of their governments; detailed wage and price information including data on employee fringe benefits and productivity; trade barriers of all types; and finally, some consideration of the elasticity of demand for the major products entering into trade. The statistics do suggest that the time is fast approaching for such a thorough-going investigation to provide more information on whether or not we are losing our competitive "edge."
An estimate of the effect of the Kennedy Round reductions in tariffs, and a discussion of the methods of measuring our foreign trade, have been included because they are part of the current dialogue. For the same reason, a final section on the balance of payments has been included.
The statistics are from official sources, as indicated, and (with the exception of Tables 12, 21 and 22) have been supplied by Dr. Piquet, consulting economist, who also prepared the text on the Kennedy Round and the Balance of Payments. He is not responsible for the remainder of the text or for any other interpretations or conclusions, expressed or implied. The tables may be brought up to date by the user of this pamphlet as later data becomes available. It is hoped that this compilation will be useful in broadening the understanding of the position of the United States in world trade.
MERRILL A. WATSON.
THE UNITED STATES IN WORLD TRADE
There has been a great expansion in the trade of the free world in the last two decades. World trade, excluding the iron-curtain countries, was something over $106 billion in 1959 and, as Tables 1 and 2 show, was approximately $200 billion in 1967. Since World War II particularly, the United States has taken the leadership in encouraging a policy of trade liberalization and cooperation among western nations to solve international economic problems and raise standards of living. Marshall Plan aid, which made possible a rapid rebuilding of industry in western European countries and Japan, as well as the swift growth of U.S. investments abroad, were responsible to no small way for the growth of world trade. The role of the United States in the post-war development of world markets is reported to be well recognized abroad.
The United States is the world’s largest exporting and importing country. With only 6 per cent of the world's population and about 7 per cent of its land area, as Tables 1 and 2 indicate, it accounts for 16.6 per cent of the world's exports and 14.4 per cent of the world's imports.
The gain for world trade from 1960 to 1967 was considerably greater than the gain for the United States for the same period. The most significant gain in exports was shown by Japan, followed by Canada and industrial Europe. The Japanese percentage increase over the period was over twice that for the world as a whole and almost three times that of the United States.
The gain of 86.2 per cent for industrial Europe was substantially greater than that for the United States and twice that for the United Kingdom which was the smallest on record – even less, in fact, than for the less-developed countries. The increase for Canada for the period was slightly greater than that for industrial Europe. Exports from the less-developed countries increased only 45 per cent from 1960 to 1967, compared with an increase of approximately 75 per cent in the exports of the industrial countries. Another significant figure in Table 1 is the proportion of world exports accounted for by the United States. The U.S. share declined from 18.2 per cent in 1960 to 16.6 per cent in 1967, while industrial Europe's share rose from 33.2 per cent to 36.9 per cent during the same period. While the United Kingdom's share declined from 9.3 per cent in 1960 to 7.6 per cent in 1967, the Japanese share expanded from 3.6 per cent to 5.5 per cent for the same period. The share of world exports of the industrialized countries as a whole increased from 69.5 per cent in 1960 to 72.6 per cent in 1967, while the share accounted for by the less-developed countries declined from 23.7 per cent to 20.5 per cent.
Tables 1 and 2 indicate that the modern industrial complexes of Europe and Japan are finding it
possible to capture an increasing share of world trade.
FOREIGN TRADE AND THE GROSS NATIONAL PRODUCT
Discussion of the foreign trade of the United States often takes the form of rather broad generalization coupled with some hyperbole. Secretary of State Rusk has said: "For thirty-three years it has been the policy of the United States to lower, on the basis of reciprocity, barriers to international trade. This policy has served our nation well. It has contributed, I believe, especially since the Second World War, to the remarkable rise in our national prosperity and in the standard of living of our people."
Actually, the foreign trade of the United States is small, relative to our gross national product. The percentage of U.S. exports to total GNP has ranged from 3.2 per cent in 1934 to 3.9 per cent in 1967. During this period it reached a high of 6.8 per cent in 1947 as American industry aided in rebuilding the economies of war-torn countries. Since 1960, it has shown considerable stability, ranging between 3.7 per cent and 4.1 per cent.
Trade is much more important to some of our trading partners. Some approximate relationships of trade to GNP are as follows: United Kingdom, 14 per cent; West Germany, 16 per cent; Italy, 13 per cent; France, 11 per cent; and Japan, 10 per cent.
In the light of these data, it is not surprising that Oscar Gass, noted economist, has said: "Yet such is the ascendancy of British economics over the American mind, that much of what Americans write about international trade reads as if it were counsel addressed to a British Chancellor of the Exchequer."
Moreover, Table 3, which shows growth of GNP and trade from 1934 through 1967, indicates that while GNP increased from $65 billion to 1934 to $785 billion in 1967 (or an increase of $720 billion), gross exports grew by some $28 billion. In the last ten years exports have expanded on the average by $1.14 billion a year compared with an average expansion of $34.4 billion in GNP. While export growth may have been extremely significant to certain segments of industry and agriculture, it cannot be said to have had a marked effect on the standard of living in the United States.
There is a slight upward trend in the relationship of imports to GNP, particularly from 1961 through 1967. At 3.4 per cent of GNP, imports were the highest in 1967 of any of the years on record.
While exports provide the largest foreign exchange earnings, it is clear they do not occupy as important a place in the U.S. economy as they do, for example, in the United Kingdom. This would not be recognized from much of the current discussion on the subject. It has been estimated that an increase of 1 per cent in the annual growth rate of the United States would add possibly $50 billion to the gross national product. It would seem that some of the extensive discussion on exports, which have increased on the average by something over $1 billion a year, could well be devoted to the necessity for proper fiscal and monetary policy to encourage the growth of the domestic economy.
Trends in dutiable versus nondutiable imports
An examination of Table 5 will show that the percentage of total imports entering free of duty has fallen from 61 per cent in 1934 to 38 per cent in 1967. The dollar volume of duty-free imports increased about ten times.
The percentage of dutiable imports has increased from 39 per cent in 1934 to 62 per cent in 1967. The dollar volume of dutiable imports during this period increased approximately twenty-five times.
In dollar volume, dutiable imports exceeded duty-free imports for the first time in 1956 and have increased over two and a half times since that year.
In 1934 our duty-free imports were about one and a half times our dutiable imports. Over the years the situation has been reversed, and in 1967 dutiable imports were about one and a half times our duty-free imports.
Duties as a percentage of total imports have declined from 18.4 per cent in 1934 to 7.5 per cent in 1967. When the percentage of duties is applied to dutiable imports alone, the decline has been from 46.7 per cent in 1934 to 12.2 per cent in 1967.
So many variables are involved – the growing industrial maturity of countries, changing demand, elasticity of demand for products, fiscal policies and price levels, as well as complicated causal relationships – that it is impossible to reach meaningful conclusions as to the influence of duty cuts on imports of dutiable products over this extended periods
MEASUREMENT OF FOREIGN TRADE
With growing interest in the U.S. trade position as a result of the balance-of-payments problem and an increasing number of appeals from industry and agriculture for relief from foreign competition, more attention has been given the measurement and reporting of trade figures. The discussion has revolved around the measurement of imports on an f.o.b. vs. c.i.f. basis and the publication of data on gross exports without supplementary figures on the part that is government financed.
First, considering the f.o.b. (free on board) vs. c.i.f. (cost, insurance and freight) argument, if all trading nations followed the same practice in measuring imports, as they do essentially in measuring exports, there would be no debate. Practically all countries in the world value exports f.o.b. or its approximation. In most cases, this is f.o.b. point of exportation. In the United States it is f.a.s. (free alongside ship); in Canada, the point where exports were consigned for shipment or some interior point where they were consigned for shipment.
The argument over whether imports should be measured on an f.o.b. or c.i.f. arises because practice in trading countries is not uniform. With the exception of the United States, Canada, the Union of South Africa, and a few small countries – all of which use f.o.b. – imports are measured on a c.i.f. basis. In developing statistics on world trade the International Monetary Fund converts the import data of f.o.b. countries to a c.i.f. basis.
One of the reasons – but not the only one – why nations do this is that when duties are added to import values on a c.i.f. basis and when certain levies or border taxes are added to that it produces more revenue.
Economists generally agree that for logic and consistency both imports and exports of a country should be valued either f.o.b. or c.i.f. J. R. Meade, British economist, points out: "But if it is decided to maintain an international consistency between all the constituent elements in all countries, balances of payments (in the sense that the total of all importing countries' visible imports should equal the total of all exporting countries' visible exports and the total of world invisible imports should equal the total of world invisible exports). Either all imports and all exports should be valued c.i.f. or all imports and all exports should be valued f.o.b." He concludes, however: "Since in practice exports are recorded f.o.b. by all countries and imports are also recorded f.o.b. by a large number of countries, it will accord more closely with reality if, in order to achieve international consistency in the argument, we treat all visible exports and imports as f.o.b."
In these comments Meade does not seem to be aware of the fact that, as J. P. Young in "The International Economy" indicates, most countries consider c.i.f. to be the proper basis for valuing imports. Young in this text does not comment on the propriety of either method. Ely and Petruzelli point out that it depends on how the statistics are to be used. If the purpose is to compare the statistics of trading countries, then it would be better to use f.o.b. for both exports and imports. This would permit the cost, insurance and freight to be taken care of separately in the balance-of-payments account.
On the other hand, they indicate that a c.i.f. valuation would be more useful in comparing imports with domestic trade and that it might be useful to have the data available on both bases.
Those who agree with the economists and with our current policy of recording imports f.o.b. argue that to treat imports on a c.i.f. basis and exports f.o.b. (f.a.s.) is to mix trade and services. The value of imports themselves at port of entry is one thing. The costs of transportation, insurance and labor to get them to the port is another and quite different thing. To add goods and services together is like adding together apples and oranges.
However, those who take issue with the official U.S. policy of measuring imports and argue for c.i.f. imports have the support of the great majority of trading countries. This group, more interested in trade measurement than in international finance, believes that for trade purposes these countries measure the value of imports accurately by computing the costs of making the goods available in the importing country and providing more accurate comparisons with domestic merchandise.
From a theoretical standpoint, if ships were to meet in the middle of the ocean and exchange goods, assuming equal shipping costs, then accurate trade comparisons with various countries would be possible. Each trade figure would contain an equal c.i.f. addition. In practice, when County "A" exports f.o.b. and the United States imports f.o.b., there is no problem of comparison. The value of goods leaving their shores should approximate the value of goods reaching the United States. When the United States exports f.o.b. and Country "A" imports c.i.f., there is a problem of comparability. For example, in 1964 the United States reported exports, f.o.b., of $1.9 billion to Japan; Japan recorded as U.S. imports, c.i.f., of $2.3 billion. For the same year the United States reported exports, f.o.b., $1.4 billion to Britain; Britain recorded these as U.S. imports, c.i.f. of $1.7 billion. These calculations assume that errors from the shipment at sea are washed out for each country.
Because most countries use c.i.f. for imports, the International Monetary Fund adjusts import data for the United States, Canada, and a few others to this basis. It is hardly likely that in spite of the economists' views these countries will change their basis of tabulating imports. They will continue to compare exports f.o.b. with imports on a c.i.f. basis. Perhaps they are not particularly concerned with consistency here and believe the gains from added duties are more important. At the same time, it is not likely the United States will go to a c.i.f. basis in measuring imports.
It was pointed out earlier in this section that the c.i.f. measurement of imports would be useful in comparing imports with domestic trade. Table 6 also calculates the amount of duties collected on the official f.o.b. basis and adds these to hypothetical imports on a c.i.f. basis. On this basis, which is similar to that used by most countries, total imports in 1967 would have been valued at $31 billion as compared with the official $26.8 billion. Actually, for a proper comparison with wholesale value of domestic output, brokerage and miscellaneous charges should be included which could mean an additional $1 billion to $2 billion; over the $31 billion total. In other words, the value of imports for comparison with wholesale domestic production should include not only cost, freight and insurance but duties, brokerage and miscellaneous charges, as well as all costs to land imports ready for domestic sale.
The comparison of U.S. imports on a c.i.f. basis with f.o.b. exports to show a smaller trade surplus than officially reported has been made, in practically all cases, by those who believe trade liberalization policies have gone too far. It is worth noting that the Committee for a National Trade Policy, a liberal trade group, has expressed no objection to calculation of imports on a c.i.f. basis if it does not impose a burden on those engaged in international trade. Presumably they would object if it were used to calculate the official trade surplus.
However, as a result of interest in this subject, on February 9, 1966, Senator Russell Long, chairman of the Senate Finance Committee, requested the chairman of the United States Tariff Commission to carry out a Senate resolution calling for an investigation of the methods of valuing imports used by the United States and by the principal trading partners of the United States. The Bureau of the Census, in cooperation with the United States Tariff Commission and the Bureau of Customs, examined a representative sample of U.S. import shipments and found that the value of U.S. general imports on a c.i.f. basis was about 8.3 per cent higher than the f.o.b. value reported in the U.S. import statistics.
If we were to follow the practice of the nations recording imports on a c.i.f. basis, Table 6 will illustrate the extent to which the official import figures increase by the use of this adjustment factor. It will be noted that on a c.i.f. basis the value of imports is increased by $2.226 billion in 1967.
As interest in our foreign trade has grown, the question of proper measurement of exports has arisen along with the discussion of import valuation. In his memorandum calling for a review of trade policy, Senator Everett Dirksen also pointed out the effects of including government- financed merchandise in the official trade figures on exports. The exports on government account take the form primarily of U.S. merchandise under A.I.D. loans and grants and agricultural exports under Public Law 480. Senator Russell Long has also commented on this point. Recently a bulletin of the Bankers Trust Company called attention to the difference between the official trade surplus, which includes government-financed exports, and the trade surplus on purely commercial transactions.
Table 7 shows the excess of commercial exports over imports, on the official f.o.b. basis, from 1960 to 1967. It will be noted that while the excess of total exports over total imports declined from $7.0 billion in 1964 to $4.1 billion in 1967, the commercial "surplus" declined from $4.2 billion in 1964 to $893 million in 1967. It also reveals that in 1967 for the first time exports of nonagricultural products on government account were substantially larger than government financed agricultural exports.
The export-import figures used in Table 7 are balance-of-payments figures and the trade balance compares with that in Table 30 on balance of payments. In some cases the trade balance is calculated from the merchandise adjusted data as shown in the June 1968 Survey of Current Business, and government-financed shipments are deducted. The "commercial" surplus would be slightly different and as follows: 1960 – 2.9 billion; 1961– 3.2 billion; 1962 – 2.1 billion; 1963 – 2.4 billion; 1964 – 3.9 billion; 1965 – 2.0 billion; 1966 – 7 billion; 1967 – 255 million.
It is interesting to speculate on what figures the U.S. negotiators in the Kennedy Round used in meeting with their European counterparts. Was the U.S. trade balance on an f.o.b. import-export basis compared with a French balance derived from comparing exports f.o.b. and imports c.i.f.? Were U.S. imports f.o.b. compared with French imports c.i.f.? Were the border taxes added to these c.i.f. figures? The regular publication of the gross trade balance or "surplus" in the U.S. could lead to important misconceptions both here and abroad as to our actual competitive position in trade. This in turn could influence our bargaining posture with trading countries. It is to be assumed these factors were taken into consideration by the negotiators. It has also been pointed out that there are other factors to consider than government-financed exports. There are some commercial agricultural exports that are produced only because they are subsidized by the government and, under these terms, are sold at lower prices in international trade .
Now that Commerce is making available the c.i.f. adjustment factor so that those interested may calculate imports on this basis, it would seem desirable to include with the reported trade figures supplementary data on government-financed exports as frequently as these could be made available.
U.S. EXPORTS, IMPORTS, AND THE COMPOSITION OF TRADE
U.S. exports have exceeded U.S. imports consistently since 1894. Table 8 will show the gross value of exports, imports, and the merchandise balance since 1950 as officially reported. It reveals that both imports and exports of domestic merchandise, unadjusted for price changes, have trebled over the last eighteen years. While it shows the extent to which military grant-aid has entered into exports, it does not reflect the fact that since 1950, if sales are included with aid, over 6 per cent of all U.S. exports have consisted of military material.
From 1950 to 1964 there was an irregular upward trend in the gross merchandise trade balance. The excess of merchandise exports over merchandise imports increased from $1.1 billion in 1950 to $7 billion in 1964 but receded to $4.1 billion in 1967.
During the first four months of 1968, with exports amounting to $10.9 billion and imports $10.5 billion, the trade-balance surplus on a seasonally-adjusted basis fell to $431 million. During the same period of 1967, the excess of exports over imports on a seasonally-adjusted basis amounted to $1.5 billion.
The sharp decline in the favorable balance of commercial trade suggests that basic changes are underway in the foreign trade of the United States which may have important implications for future trade policy.
Table 9 reveals the change in composition of U.S. exports since World War II. All categories except manufactured foodstuffs have shown substantial growth. The maximum gain was in exports of semi-manufactures, followed by finished manufactures.
The percentage distribution of these broad categories of exports reveals only modest changes since the 1946-1950 period and even since 1960. Since 1960 the export share of crude materials and manufactured foodstuffs has declined slightly. Combining semi-manufactures and finished manufactures show a modest increase for the 1960-1967 period.
More significant changes are revealed in Table 10 on broad categories of imports. Gains in imports of crude materials and foodstuffs in 1967 over the 1946-1950 period were small compared with the increase in imports of manufactured items. The percentage increase in imports of finished manufactures stands out sharply in comparison to semi-manufactures.
Some significant trends are shown in the percentage distribution of the various categories of imports. The share of imports of crude materials and foodstuffs declined from 49.1 per cent of the total imports in the postwar period to 21.1 per cent in 1967. From 1960 this share declined from 31.6 per cent to 21.1 per cent in 1967. Imports of semi-manufactures and finished manufactures together, which totaled 40.2 per cent of imports in the 1946-1950 period, rose to 69.5 per cent in 1967. Imports of finished manufactures alone rose from 17.9 per cent of total for the 1946-1950 period to 48.8 per cent for 1967.
If it is assumed that the "other" on Table 7 is, for the most part, manufactured goods, it is possible to arrive at an approximation of the total commercial sales of manufactured goods. This is shown in Table 11 which points up that our commercial exports of finished manufacturers and semi-manufactures have increased 50.3 per cent since 1960, while our imports in the same category have increased 113.8 per cent. It is also apparent that our export surplus of commercial manufactures and semi-manufactures, which gained slightly in 1967 over 1966, has been declining since 1960. If the trend of increasing imports recorded for the first quarter of 1968 continues, the trade surplus for the year 1968 may show a sharp drop from 1967 and possibly vanish.
These trends in trade and manufactured goods are not surprising. Spurred by American aid, the rapid industrial recovery in Japan and Western Europe after World War II has encouraged an intensive drive for foreign markets in most of these countries. With new facilities, access to American technological improvements, and lower labor costs, there is little reason to expect a change in the current export programs of these countries.
Trade in agricultural products in practically every major trading nation is subjected to the political, social, and economic objectives of the country in question. This includes the United States. To one degree or another, governments, through price supports, crop controls, import restrictions, and export subsidies frame farm policies directed at self-sufficiency goals and an improvement in farm income which usually lags income in the industrial sector. Practically all major commodities in Europe are covered by one or another of these types of controls .
Table 12 reveals a little more clearly than Tables 9 and 10 trends in agricultural trade. Exports of agricultural products in relation to total exports have declined from a peak of 26 per cent in the 1961-1963 average to 20.8 percent for 1967. Imports of agricultural products have fallen from a total of 24 per cent for the I961-1963 average to 16.6 per cent for 1967.
To obtain an approximation of commercial sales, adjustments are made for the total shipments under P.L. 480 and A.I.D.
No adjustment has been attempted for that part of commercial agricultural exports which were produced as a result of government subsidy. One source has estimated this for fiscal 1965-1966 at $1.2 billion. If these sales averaged $1 billion in 1967 and were to be eliminated, commercial sales of agricultural products in 1967 would have been under $4 billion. With sales of agricultural products subsidized in practically every trading country, this hypothetical calculation may have little value.
The percentage of agricultural exports under governmental aid programs has been falling consistently over the past years but seems to have stabilized somewhere between 20 per cent and 25 per cent.
While no definite conclusion can be drawn from these data on agricultural exports, they suggest that statements that our exports of agricultural products may reach $8 billion by 1970 and perhaps $10 billion by 1980 may be over-optimistic.
Many factors have influenced and will continue to influence the growth and development of trade between the dynamic mixed economics of the United States and its trading partners. These data suggest, however, that important changes are taking place in the competitive relationship of the United States and that these should be given intensive study.
U.S. EXPORTS BY CATEGORIES AND GNP, 1960-67
Almost 75 per cent of the total increase in U.S. exports between 1960 and 1967 was accounted for by machinery, transportation equipment, miscellaneous manufactures, and chemicals.
Almost 66 per cent of all U.S. exports in 1967 consisted of products, the exports of which increased more rapidly than did the country's gross national product (82 per cent compared with 56 per cent). In addition to the product groups just named, the exports that increased most in terms of dollar volume were: grains and grain preparations, oilseeds and oil nuts, animal feeds, miscellaneous metals, wood, tobacco, and coal.
Among the $10 billion of exports in 1967 that increase less rapidly than the country's gross national product over the same period were: grains, miscellaneous manufactures of metal, tobacco, coal, wood pulp, textiles and clothing, fruits and nuts, petroleum products, animal and vegetable oils, and meat. Among the exports that actually declined over the same period were: raw cotton, iron and steel mill products, synthetic rubber, dairy products, and textile fibers.
U.S. IMPORTS BY CATEGORIES AND GNP, 1960-1967
Of the increase in U.S. imports of some $11.8 billion between 1960 and 1967, approximately 73 per cent was accounted for by machinery, transportation equipment, miscellaneous manufactures, metals and metal manufactures, iron and steel mill products, and textiles.
Table 15 shows that import of these products, together with imports of meat, beverages, fish, fruits and nuts, natural gas, footwear, vegetables, feed grains, and cheese increased more rapidly than did the country's gross national product and accounted for 91 per cent of the increased imports over the seven-year period. The increase in imports of these products was 138 per cent, compared with an increase in the gross national product of 55.8 per cent.
Among the imports that increased less than the GNP were petroleum and petroleum products, inedible crude materials other than fuels, chemicals, sugar, unmanufactured tobacco, animal and vegetable oils and fats, cocoa beans, and tea. The value of coffee imports decreased over the seven-year period (see Table 16).
U.S. EXPORTS BY GEOGRAPHICAL REGION
In 1950 Western Europe, the Latin American Republics, and Canada were the principal markets for U.S. exports. The most important single market country was Canada. Between 1950 and 1960 the largest increases in U.S. exports were to the six countries that now comprise the European Economic Community (EEC), or Common Market (West Germany, France, Belgium, Luxembourg, the Netherlands, and Italy), followed by Canada and the European Free Trade Association (EFTA) countries (United Kingdom, Norway, Sweden, Denmark, Switzerland, Austria, and Portugal). The largest percentage increases were to Oceania, Japan, and the Middle East. Over the decade U.S. increased approximately 10 per cent a year.
Between 1960 and 1967 U.S. exports increased 7.6 per cent a year, with the largest increases (in terms of dollar value) going to Canada, the EEC countries, and Asia. The largest percentage increases were in exports to Oceania, Canada, Japan, and Africa. In the 1960-1967 period, however, there were significant changes in the average annual gains for Western Europe, where the increases were substantially less than half that of the 1950-1960 period, and for Japan, where they were approximately half. Important declines were also shown for Asia. the Middle East, and Oceania. Canada and the Latin American Republics showed percentage increases in the 1960-1967 period compared with 1950-1960.
Table 18 will show the percentage distribution of U.S. exports by geographical region. Here the most significant changes are the decline in exports to Latin American Republics from 25.6 per cent in 1950 to 13.1 per cent in 1967 and the increase in exports to Japan from 4.1 per cent in 1950 to 8.5 per cent in 1967. The share of exports going to Western Europe increased until 1960, and since that time has fallen. Both EEC countries and EFTA countries showed declines since 1960.
As Table 19 shows, significant changes have taken place in the average annual percentage changes between the 1950-1960 period and the 1960-1967 period. In Canada, for example, the average annual rate of increase almost trebled between the two periods. Significant, too, was the decline in the annual increase in imports from the EEC in the 1960-1967 period, which were less than half the rate of the previous ten-year period. The average annual rate of increase in imports from the EFTA group fell considerably in 1960-1967 from that of the earlier period. The rate of average annual increase in imports from Japan was also less than half that of the previous period. The Middle East fell below the average annual increase during the 1950-1960 period.
Table 20 reveals significant changes in the distribution of imports by geographical region. Probably the two most striking trends are the decline in imports from the Latin American Republics where the percentage in 1967 was less than half that of 1950 and the gain from Western Europe where the share increase in imports in 1967 was double that of 1950. The rate of change here has slowed down since 1960.
The gain in the EEC share from 6.4 per cent in 1950 to 16.6 per cent in 1967 was even greater than that for Western Europe. From 1960 to 1967, however, the EEC gain in imports was relatively small. At the same time, the EEC increase was considerably greater than from the EFTA countries.
Percentage-wise, Japan showed the largest increase in imports, rising from 2.1 per cent in 1950 to 11.2 per cent in 1967. This has apparently been a more or less steady increase throughout the period.
TRADE WITH THE EUROPEAN ECONOMIC COMMUNITY
The European Economic Community with its plan for internal free trade and a common external tariff has been a matter of some concern to American industry and agriculture, although U.S. policy has supported the idea. Something over 22 per cent of our agricultural products and around 18 per cent of our manufactured goods are sold to the EEC. Next to Canada these countries are our largest customers.
As Witt and Sorenson have pointed out: "EEC agricultural policy is based on objectives and attitudes long embedded in national agricultural policies. Changes are aimed largely at arriving at a common market organization but not at reducing, or for that matter greatly increasing, the amount of protection to agriculture. To this point, the EEC has not developed a broadly oriented agricultural policy. The principal focus has been on domestic price supports, protection against competitive imports and, where necessary, export subsidies. These policies have recently taken on concrete form and will apply to 85 per cent or more of EEC production ... Price guarantees will apply to 85 per cent or more of EEC agricultural output.
In order to maintain domestic prices for most agricultural products high enough to provide protection and freeze out competition, the EEC uses a variable levy system. On grains this is reported to be about 100 per cent ad-valorem. Imports are permitted only when domestic production cannot supply the market at a predetermined price. This differs from the British program where supply and demand set market prices but government subsidies, to reach predetermined levels, make up the difference to the producer. Both programs, however, look toward self-sufficiency in agriculture and stifle outside competition.
Butter offers an example of how the levy system works. With high dairy support prices and variable levy protection, surplus EEC butter costing 60 to 65 cents a pound, which couldn't be sold to the United Kingdom, New Zealand, Denmark, Japan, Canada, and other countries because of tight quotas, was sold in the United States at around 22 cents a pound. This finally brought about quotas on butter and dairy products in the United States.
Tables 17 and 19 have shown that the growth rate of U.S. exports to the EEC of 15.1 per cent for the 1950-1960 period fell to 6.0 per cent for the 1960-1967 period, while U.S. imports from the EEC fell from 29.8 per cent in the 1950-1960 period to 13.8 per cent in the 1960-1967 period.
Tables 18 and 20 revealed that the share of U.S. exports going to the EEC fell from 19.3 per cent in 1960 to 17.9 per cent in 1967, while the U.S. share of imports from that area rose from 15.1 per cent to 16.6 per cent during the same period.
However, if the total of exports and reexports shown on Table 21 is compared with total exports from Table 8, it is apparent that there was no change in the share of U.S. exports going to the EEC from the United States in the last five years. It was 17.9 per cent in 1963 and the same percentage in 1967. During these recent years the United States has maintained its share of the EEC market. In dollars, however, exports to the EEC from 1963 to 1967 increased 34.8 per cent while imports as shown on Table 22 from the EEC grew 76.8 per cent for the same period.
If figures for exports and live animals, beverages and tobacco, and animal and vegetable oils and fats are combined, total U.S. sales of this group to EEC dropped from 21.3 per cent of total in 1963 to 19 per cent in 1967. Exports of machinery and transport equipment and other manufactured goods rose from 42 per cent in 1963 to 47.1 per cent in 1967.
U.S. imports from EEC of the products of the three combined groups shown above, which were 8.2 per cent in 1963, fell to 6.8 per cent in 1967. Imports of machinery and transport equipment and other manufactured goods from the EEC were 76.5 per cent of total in 1963 and 79.2 per cent in 1967.
It has been pointed out that from 1958 to 1966 world exports by value about doubled. U.S. exports increased about 70 per cent, while trade within the EEC countries more than trebled. This increase in trade among member countries, while exercising some restraint on imports from outsiders, is in conformity with at least one of the objectives of the formation of the Common Market.
The future development of trade with the EEC will be worth watching. The recent Kennedy Round discussions were marked by a relatively adamant attitude on the part of the Common Market toward giving concessions and opening agricultural markets to U.S. producers of these products. They wanted to preserve opportunities for market growth for their own producers. However, no action was taken to decrease exports. As a result, the United States did not improve its trading position in agriculture with the EEC. One participant in the Kennedy Round discussions has said: "The Kennedy Round has shown beyond doubt that we cannot buy – with reductions in duties – removal of the major barriers standing in the way of a substantial and orderly trade in farm products."
It is possible that action to increase domestic prices of feed grains, which will increase the levy in 1968, and consideration of similar action on other products may curtail U.S. export opportunities this year and beyond.
While the EEC did negotiate for duty cuts in many industrial areas, they were unwilling to make substantial cuts in "areas of advancing technology such as business machines. In steel, aluminum, and textiles none of the countries made very substantial cuts. But in most other areas of industry, I think we have the opportunity for substantial increases in exports."
There is apparently some doubt in other quarters on this point. The changing trends of U.S. imports, the steady progress of Western Europe in industrial technology in spite of the "technological gap," together with lower costs may well provide increasing competition for American industry and curtail export opportunities.
KENNEDY ROUND TARIFF REDUCTIONS AS A STIMULANT TO IMPORTS
Estimates have been made of the degree to which imports into the United States would increase if there were to be gradual removal of tariffs and import quotas. Although they were made about a decade ago, there is no reason to believe that the international economic situation has changed sufficiently to nullify the findings with respect to the magnitudes involved. One of the studies, based on estimates by technical and economic experts of the U.S. Tariff Commission, concludes that imports would increase by between 10 per cent and 25 per cent and the other, that the number of jobs that would be immediately affected adversely by increased imports would be at the rate of 83,000 per billion dollars of new imports. Applying this percentage factor to the estimates of increased imports made in the earlier study indicates that approximately 172,000 to 430,000 jobs might be adversely affected in the short run.
On the other hand, it is argued that in the longer run, after economic adjustments to the new imports have been made, there would be more, rather than fewer, jobs in consequence of the removal of all trade barriers and over-all per capita consumption in the country would be increased.
The Kennedy Round Trade Agreement (concluded in 1967) consists of schedules of tariff concessions together with separate agreements regarding certain trading sectors (such as grains, chemicals and steel) and a proposed anti-dumping code. With respect to cereals there was agreement regarding prices as well as food aid to needy countries. Several bilateral agreements were concluded regarding meat, while practically nothing was accomplished with respect to dairy products. American negotiators were unable to obtain concessions for agricultural exports comparable with those obtained for manufactured products, largely because the EEC was still developing its own common agricultural policy affecting approximately $200 million of U.S. exports. A few significant agricultural concessions were made by Japan, Canada, the United Kingdom, the Scandinavian countries, and Switzerland.
The thirty-nine countries participating fully in the negotiations, whose trade accounts for approximately three quarters of total world trade (excluding the communist countries), granted concessions affecting a little over $40 billion of trade, or approximately one fifth of all noncommunist international trade.
Approximately $26 billion of trade among the participating countries will be subject to tariff reductions, of which tariffs applicable to $17 billion will be reduced 50 per cent or more.
The United States obtained concessions from other participating countries on approximately $8.1 billion of its exports, of which $6.8 billion are tariff reductions. The United States granted concessions on approximately $8.5 billion of its imports from all countries. On $7.9 billion it reduced tariffs, on $150 million it bound existing rates against increase, and on $400 million it bound existing duty-free treatment.
Because most official analyses of the Kennedy Round Agreement refer to tariff concessions in terms of percentage reductions, it is tempting to infer that the cuts are more significant than they really are. A given percentage reduction of a low tariff usually is less meaningful than the same percentage reduction applied to a higher tariff. For example, a 50 per cent reduction in the 60 per cent tariff on certain types of household chinaware represents a cut of 30 "percentage points," whereas a 50 per cent reduction in the 11 per cent tariff on condensed milk represents a cut of only “5½ percentage points."
The tariff reductions agreed to under the Kennedy Round can be seen in clearer focus if they are measured in terms of "percentage points" reduced rather than in terms of percentage reductions.
Thus, the European Economic Community granted a 20 per cent reduction on imports of fresh salmon, representing a reduction from a tariff of 10 per cent to one of 8 per cent – a reduction of 2 "percentage points." Similarly, the 50 per cent EEC reduction on parts for statistical and punch card machines represents a cut of only 4 "percentage points" – from a tariff of 8 per cent to one of 4 per cent. It is doubtful whether tariff cuts that are deep in terms of percentage reduction, but which are little more than nominal in terms of "percentage point" reduction, can have a marked effect in expanding trade. In many instances import quotas and production subsidies are more significant than tariffs as impediments to trade. For the most part, the tariffs that have not been reduced are on products, the imports of which would be substantially larger in the absence of restrictions.
The average tariff level is determined not only by governmental action but also by changes in prices. When prices are rising, tariffs that are levied on a "specific" basis (so much per unit of physical measurement such as pounds, yards, or tons in contrast to those that are levied as a percentage of value) decline in terms of their ad valorem (according to value) equivalents. This is a phenomenon that has been present since prices began rising in the late 1930's. Conversely, during periods of falling prices the ad valorem equivalents of duties levied on a specific basis rise.
Had the President used all of his tariff cutting authority under each of the enabling acts since 1934, the average tariff level of the United States in 1962 would have been 8.8 per cent, compared with an actual average ad valorem equivalent in that year of 12 per cent. Had the President used his tariff cutting authority to the full in the Kennedy Round, the average tariff level of the United States over the five-year period 1968-1973 would be 6 per cent. Instead, the cuts in U.S. tariffs under the Kennedy Round average approximately 35 per cent. Assuming no major change in price levels, the average tariff level in 1973 will be 7.8 per cent.
The deepest cuts in U.S. tariffs were made under the Trade Agreements Act of 1934 and the Trade Agreements Act of 1945, covering a period during which prices were rising. The average ad valorem equivalent of duties collected declined from 47 per cent to 28 per cent between 1934 and 1945 and to 12 per cent in 1955.
The tariff cuts authorized by the Acts of 1955 and 1958 were nominal in terms of "percentage point" reductions, amounting to only 1.8 and 2.2, respectively. The ratio of total duties collected to the value of total dutiable imports remained constant at approximately 12 per cent between 1961 and 1967.
What started out as "across-the board," or linear, tariff cutting at the outset of the Kennedy Round soon fell into the familiar pattern of selective tariff cutting. However, instead of starting out, as in previous tariff cutting exercises, by singling out those tariffs that can be cut safely, the procedure under the Kennedy Round was to start out with an overall horizontal cut and to negotiate "exceptions." In consequence, the list of products subjected to tariff cuts undoubtedly was longer than would otherwise have been the case, but the "bare minimum" of exceptions that had been promised proved to be substantial in terms of potential trade expansion.
In its 1954 Staff Papers the Commission on Foreign Economic Policy (Randall Commission) presented estimates that had been previously published showing, on the basis of informed judgments by technical staff experts of the U.S. Tariff Commission, the extent to which U.S. imports would increase if all U.S. tariffs and import quotas were suspended.
It was stated, on the basis of these expert judgments, that, with economic conditions as they were in 1951, dutiable imports would increase 42 per cent, from $4.8 billion to approximately $6.8 billion, or by approximately $2 billion of which $1.4 billion would be accounted for by twenty-seven "import-sensitive" items including: sugar, fine wools, cattle and beef, woolens and worsteds, earthenware, fish fillets, lead and zinc.
It is significant that none of these twenty-seven sensitive items was subjected to trade barrier reduction under the Kennedy Round. Imports of all other items, together, would increase 18 per cent, or by $600 million.
Except for the fact that the total volume of trade has increased substantially, the economic conditions prevailing today are not vastly different from those prevailing in 1951-1953. It is not unreasonable, therefore, to apply the percentage increase of the earlier period to more recent figures.
Dutiable imports in 1965 totaled $13.8 billion, of which $7.9 billion are subject to tariff reductions under the Kennedy Round. If it is assumed that the same percentage increase of all imports on which tariffs were reduced would prevail if all tariffs and import quotas were suspended, import would increase by $1.4 billion (18 percent of $7.9 billion).
However, the Kennedy Round does not provide for the elimination of all tariffs and import quotas but only for tariff cuts averaging 35 percent, or 4.2 "percentage points," from a level of 12 percent to a level of 7.8 percent.
On the basis of these estimates and comparisons, it seems reasonable to conclude that the tariff reductions granted by the United States in the Kennedy Round might result in increasing U.S. imports by as much as $350 million to $700 million (one quarter to one half of $1.4 billion).
This figure does not constitute a forecast, however, as to what can be expected in the way of increased imports over the next few years. It is only an estimate of the likely effect on U.S. imports of the U.S. tariff cuts made in the Kennedy Round.
There has been, and there continues to be, a close relationship between imports and the country's gross national product, with imports equaling approximately 3 per cent 6f the GNP. As the country's gross national product increases it can be expected that imports will also grow, maintaining approximately the same over-all ratio. Thus, if the GNP over the next five years increases by 35 per cent, as it did between 1960 and 1965, it can be expected that imports will increase by $4.5 billion – from $25.5 billion to $30 billion. It is not likely that the close relationship between imports and the gross national product will be changed markedly by the tariff reduction made under the Kennedy Round.
FOREIGN TRADE AND INVESTMENT ABROAD
The foreign trade of the United States has a much broader scope than the export and import of commodities. Manufacturers may supply foreign markets by exporting, or through direct investment and building plants abroad, or through licensing, or by a mix of all methods.
As Judd Polk has pointed out: "The concept of total foreign sales properly brings together U.S. deliveries in response to foreign demand whether involving products made here or there. Basically, the two sources of supply are complementary, and, in fact, they have grown in parallel and vigorous manner.... " Polk also points out that there is a "powerful inference from export and production trends that investment is a major stimulant to exports."
The two decades since World War II have seen a marked expansion in international trade but a much more rapid growth in American direct investment abroad. This has been a dynamic factor in world trade development. It is reflected in the tremendous growth of the international firm and this, in turn, has aided growth not only in the United States but abroad. The reason for the rapid development of plants abroad are numerous, but an increasing number of manufacturers have concluded that in the light of nationalistic tendencies abroad, trade barriers, and lower costs abroad they have no choice but to begin producing abroad .
In fact, growth of these international corporations has been so great that they have an impact on national economic policies. As former Assistant Secretary of State George Ball has said: "The ability of the multinational corporation to fulfill its real objective, which is the use of resources wherever they are found in the most efficient manner for markets wherever they are developed – this implies a gradual washing out of the restrictions that are based on national lines. These multinational corporations are simply too big to operate within national restrictions. And when such restrictions are imposed, they interfere very seriously with the fulfillment of the purpose of these corporations. And I think that the realization of this point may over time, tend to erode away these impediments based on national boundaries." It may be that a growing recognition of the long-range implications of the international firm is what is causing various countries to attempt to halt or slow down the massive growth of U.S. investments through drives for partnerships and joint ventures in Western Europe, nationalism and renegotiation of existing arrangements in the Middle East, or through limitations on foreign ownership in South America. There are even flurries of activity in this direction in Canada, our next-door neighbor.
The excess of American investments abroad over foreign investments in the United States is large and has been increasing. In 1950 U.S. foreign investments and claims on foreigners totaled $31.1 billion, while foreign investments and claims on the United States totaled $17.6 billion, an excess of almost $14 billion on the plus side. By 1967, American foreign investments and claims on foreigners had increased to $113 billion, while foreign investments in the United States increased to $62 billion. Whereas 85 per cent of American claims against foreigners are long term in nature, just under 55 per cent of all foreign claims against Americans are short term.
"Since 1960, the value of U.S. direct investments abroad has climbed by 70 per cent to $54.6 billion at the end of 1966. Nearly half of the substantial growth of $22.1 billion stemmed from investments in manufacturing affiliates, a fourth went into various sectors of the petroleum industry and the remainder into mining and other operations. Western Europe absorbed about $9½ billion of the increase in our direct investments during the period and Canada about $5¾ billion."
The irregular but consistent growth in new direct investment abroad and the almost constant growth of earnings from direct investment abroad testify to the increasing importance of these expanding operations in world trade. The outflow of funds for new U.S. direct investment has grown from not quite two thirds of a billion in 1954 to $3 billion in 1967. Earnings, including royalties and fees, received on direct investment abroad have increased from $1.9 billion in 1954 to $5.6 billion in 1967. It is clear, too, that the relationship of earnings on investment has declined somewhat since 1957. Expressed as cumulative totals, the outflow of funds for new direct investment over the thirteen-year period amounted to $27.8 billion, while earnings on outstanding direct foreign investment over the same period amounted to $47.3 billion.
These figures do not include undistributed earnings of subsidiaries, which do not affect the balance of payments which do not involve international transfers and therefore are not included in the balance-of-payments accounting.
Total earnings on U.S. direct investment abroad amounted to $5.6 billion at the beginning of 1967 and were second in importance, on the receipts side of the balance of international payments, only to merchandise exports.
Table 27 reflects the growth of American private investments and earnings by major areas. It will be noted that net capital outflow for investment in manufacturing industry represented almost half the total outflow in 1966, with petroleum adding another 25 per cent. Petroleum earnings, however, amounted to almost a third of the total, while earnings from manufacturing industries abroad amounted to something less than 40 per cent. In book value, manufacturing represented about 40 per cent of the total at the year-end 1956 and has doubled since 1960.
Canada has shown rapid growth in capital absorption in the seven-year period. Investment in Western Europe, while growing at a slower rate, still in substantially greater than in any other area. Similar trends are reflected in earnings for Canada and Western Europe.
Table 28 on foreign direct investments in the United States for the same period indicates that at the end of 1966 total value of these investments amounted to only about 16 per cent of the book value of our private direct investments abroad. The United Kingdom and Canada make up over 60 per cent of the total, with other European countries making up approximately 30 per cent. Total earnings of direct foreign investments in the United States were only a little over 11 per cent of the total earnings of American private direct investments abroad in 1966.
SALES FROM AMERICAN PLANTS LOCATED ABROAD
International investment has brought a new and extremely important dimension to our world trade. According to the Committee on Commercial Policy, U.S. Council of the International Chamber of Commerce, Inc.:
Total product delivery to foreign markets associated with U.S. direct investment abroad is estimated to be in the neighborhood of $110 billion a year. When products associated with U.S. investment other than direct is included, the figure grows to $150 billion."
Judd Polk estimates that gains in U.S.-initiated output abroad for Europe "grew from $6 billion in 1950 – against U.S. exports of roughly half that amount – to some $32 billion in 1966 – against exports of $10 billion, or less than a third."
According to the U.S. Department of Commerce, the sales of American manufacturing affiliates, i.e., of American-owned manufacturing establishments abroad, in 1965 were approximately $42.4 billion. It is likely that they increased to at least $47 billion in 1966 and to $50 billion in 1967. It thus appears that sales of American-owned manufacturing corporations abroad are about two and a half times U.S. domestic exports of manufactured goods.
In discussion of this question at the Senate hearings on removal of the gold cover, it was suggested that sales from all activities may be as much as $165 billion annually, although it was stressed there was a possibility for a large margin of error in this estimate. These estimates of sales of American corporations abroad, which could be anywhere from five to five and a half times our exports, are based on a study of the ratio of sales to book values of corporations.
Manufacturing concerns at present are estimated to represent about one third of total direct investment abroad and about one sixth of the grand total investment .
Decisions by American firms to produce abroad are influenced by political as well as economic conditions. Among other things, nationalistic preferences, tariffs and other trade barriers to exporting to a particular country, competitive conditions, lower costs and efforts to save foreign markets, potentials for new market growth, and access to raw materials may enter into these decisions. One opinion in this matter is worth citing: "It is important, however, to note emphatically that intensive case study rarely turns up a situation in which the producer abroad could have continued to export as an alternative to producing locally abroad."
While some investments may retard exports, others may aid exports. U.S. subsidiaries, for example, are one of this country's best customers. According to the U.S. Department of Commerce, 25 per cent of total U.S. merchandise exports in 1964 went to American-owned subsidiaries abroad.
Although the data are not yet available beyond 1965, Table 28 will illustrate the scope and trend in sales of foreign manufacturing affiliates by types of products as well as major areas. Total manufacturing sales to Canada about doubled between 1957 and 1965, while sales to Europe increased about three times. Transportation equipment, followed by chemicals, machinery (excluding electrical), food products, and electrical machinery were the most important categories of sales, in that order.
The immediate effect of new long-term American capital investment abroad on the balance of payments is similar to an increase of merchandise imports. The immediate and longer run effects, however, are of greater significance than the short-run effects because foreign investments yield continuing income to Americans.
Shortly after investment funds flow abroad there is a tendency for some of them to return to the United States as foreign affiliates of U.S. firms import equipment and supplies from the United States for their own use. As indicated above, exports to such affiliates in 1964 amounted to $6.3 billion, or 25 per cent of total exports.
In the longer run there is a tendency for funds to flow back to the investing country in the form of earnings on investment. This inward flow of funds has an effect on the balance of payments similar to that of increased exports. Over a considerable period of time, the excess of earnings on investment over new investment expenditures is likely to lead to increased U.S. expenditures on imports. A country that engages in large scale foreign investment over a considerable period of time can expect that eventually its merchandise imports will tend to increase relative to its merchandise exports. This is because the investing country receives returns on its investments, the anticipation of which was the reason for investing in the first place.
Foreign investment is also advantageous to recipient countries because it facilitates economic development and expansion. Economic development of the less-developed areas of the world for some time has been an important objective of U.S. foreign policy.
Beginning in 1965, American companies were asked to cooperate in a voluntary program of restraint in direct foreign investment to mitigate the persistent balance-of-payments deficit and the consequent drain on U.S. gold reserves. It is reported that possibly as many as nine hundred companies cooperated to slow down or postpone projects abroad to curb voluntarily the dollar outflow and finance through foreign borrowing and other measures.
With the balance-of-payments problem persisting, on January 1, 1968, the President announced stringent mandatory restrictions on direct investments. A complete moratorium was imposed on new capital transfers to Continental Europe and South Africa (excluding Great Britain, Greece, and Turkey) for direct investment, together with a cutback in other areas and forced repatriation of earnings. This was coupled with an order to the Federal Reserve to tighten voluntary restrictions by financial institutions on foreign lending.
All of this was done through an Executive Order based on the 1917 Trading with the Enemy Act (still on the statute books) and the special emergency powers of the Executive during the never-terminated Korean war emergency. The Act authorizes the President in case of war or a declared state of emergency to restrict foreign transactions in any way deemed necessary.
Concern has been expressed in both trade and financial circles over the investment restrictions.
Undoubtedly some action was necessary at the beginning of the year and the action taken was probably thought to be, from a practical as well as psychological point of view, the least harmful of all possibilities to our international posture. Financial experts generally believe it will help the balance-of-payments problem in the short run although, in the long run, it will cut investment income.The importance of this income factor is illustrated in a calculation by Piquet: "If you add the amount of money that Americans sent abroad over the past thirteen years in the form of new direct private investment and, in a column alongside of it how much Americans collected over those thirteen years on that cumulative investment, in the form of dividends, royalties, et cetera, you will come up with a plus balance of $19 billion. Restricting such investment is truly tantamount to killing the goose that lays the golden eggs. There is good reason, therefore, for concern over the possible long-run extension of investment controls.
The impact of investment restrictions on trade remains to be seen. As Polk has pointed out, there is a close relationship between investment and international trade: "Moreover, when international trade – especially in the case of the United States – is seen in proper relation to production abroad, very serious doubt is cast upon the workability of any trade policy initiative, such as export expansion, unless taken in compatible relation to policy initiatives pertaining to the entire range of our foreign production – here namely the encouragement of investment in production abroad."
In the past, U.S. producers have had the choice of exporting to expand markets or investing in production facilities abroad.
The result has been a rapid growth in U.S. investment abroad, and this has been the most dynamic force in the great expansion of world trade. It has not only produced sales about five times the value of our exports but has been responsible for at least 25 per cent of our exports. Any long-run extension of the restriction in investment abroad could not only slow down the growth of world trade but also curtail our own exports.
INTERNATIONAL TRADE AND THE BALANCE OF PAYMENTS
Merchandise trade is the largest single item in the international accounts and contributes the most important foreign exchange earnings of the country. Exports provide foreign exchange equal to the total dollar volume of sales, while production abroad from U.S. investment returns foreign exchange only to the extent of profits sent back to investors. Although the borrowing and lending of funds and payments for such services as shipping and insurance are important, their magnitude is dwarfed by merchandise exports and imports. In the United States merchandise exports account for about 64 per cent of all receipts from abroad, while merchandise imports account for more than half of the country's payments abroad – receipts and payments being on both government and private account. The remainder of the receipts are principally returns on American investments abroad, foreign funds seeking long-term investment in the United States, and travel and transportation, while the remainder on the payments side is accounted for by support of the U.S. military establishments abroad, nonmilitary foreign aid, travel and transportation, and new foreign investments.
The exports and imports of a country are interrelated even though the merchandise exports and merchandise imports of a country seldom are in exact balance with each other. The total monetary out-payments of the nationals of a country, however, tend to be balanced by their total in-payments. Payments received from foreigners for services rendered, such as transportation and insurance, have the same effect on a country's international payments as merchandise exports, while purchases by the nationals of a country of the services of foreigners have the same effect as payments made for merchandise imports.
A country can have an excess of either merchandise exports or merchandise imports over a considerable period of time, provided other payments offset the excess. Thus, throughout the latter part of the nineteenth century the United Kingdom's merchandise imports exceeded its merchandise exports because Britons were receiving large sums in the form of interest and dividends on investments previously made by them in other countries. The excess of receipts over outgo was used by them to import the food and other consumption goods that made their high standard of living possible.
The over-all balance-of-payments deficit (or surplus) can be shown in different ways. The two most usual approaches, both of which are shown in the official figures of the U.S. Department of Commerce, are known as the "liquidity" concept and the "official settlements" concept.
The balance, computed on the liquidity basis, is measured by changes in U.S. official reserve assets and in liquid liabilities to all foreigners. It includes as liabilities, which are a potential drain on U.S monetary reserves, all short-term liabilities to foreigners, private as well as those payable to foreign monetary authorities. It does not include U.S. private short-term holdings as an offsetting asset entry, however, on the theory that the U.S. Government exercises no direct control over them and therefore cannot mobilize them in support of the dollar in an emergency.
The balance, computed on the official settlement basis, is measured by changes in U.S. official reserve assets, together with changes in liquid and certain non-liquid liabilities to foreign official agencies. Under this concept foreign short-term capital inflows are included, as are U.S. short- term outward capital flows, as regular transactions. According to this concept, the large inflows of foreign commercial bank funds in recent years have represented predominantly market- oriented business phenomena.
The United States has had deficits in its international accounts every year, with only one exception, since 1950. Unlike Western Europe after World War II, and unlike the situation prevailing in the less-developed countries today, the United States has ample productive capacity to make up the difference between American expenditures abroad and American receipts from foreigners. It is obvious from the magnitudes involved (a GNP of well over $800 billion, compared with balance-of-payments deficits of between $1.3 billion and $4 billion a year) that the difficulty does not arise from lack of economic strength. It is, rather, a technical problem in the international balancing mechanism and evidences lack of willingness by governments to allow their national economies to adjust to each other through the international flow of capital and trade.
During the period between World War I and World War II countries experienced the difficulties of widely varying exchange rates. Countries vied with each other to depreciate the exchange values of their currencies so as to expand exports while trying to curtail imports. The result was that international commerce became hazardous and its volume dwindled. The desire for stable exchange rates became so strong that fixed exchange rates became the very foundation of the International Monetary Fund, which was established by international agreement in 1944.
With currencies pegged at fixed ratios relative to each other and with all sorts of obstacles impeding the international movement of goods and capital (so as not to interfere with domestic policies deemed necessary to assure national economic growth and full employment), it becomes exceedingly difficult to keep the international accounts of all countries in balance with each other.
In most years the balance-of-payments deficit of the United States has been considerably smaller on the official settlements basis than on the liquidity basis. On either basis, the over-all deficits in 1965 and 1966 were considerably smaller than in the years immediately preceding. In fact, in 1966, there was a balance-of-payments surplus of some $200 million on the official settlements basis. In 1967, however, the deficit on both bases widened markedly to $3.6 billion and $3.4 billion, respectively.
In the first quarter of 1968, the deficit on a "liquidity" basis declined, after seasonal adjustment, to $600 million from $1.845 million in the fourth quarter of 1967. On an official reserve transaction basis, the balance after seasonal adjustment, in the first quarter of '68, showed a deficit of $520 million compared with $1.220 million in the fourth quarter of 1967.