CHART 2.-Tariff Profile, U.S. Tariff (TSUS), Pre- and Post-Kennedy Round (C.I.F.

basis)

foodstuffs

Other

(not calculated)

Supported items

1.0

SITC O

Foodstuffs

numerical estimates in Table 2. The tariff levels thus adjusted are conceptually more consistent with the notion of nominal protection, as defined in the preceding paper, than are the f.o.b. tariffs. Moreover, disregarding possible margins of redundancy within certain tariffs, and also disregarding the price effects of any quantitative restrictions applied to some other products, the adjusted tariff averages imply price disparities between U.S. and c.i.f. world prices equal to 1 plus the ad valorem (c.i.f.-basis) tariff rate. (That is, the implicit international price ratio corresponding to a 15% f.o.b. tariff and a 13.5% c.i.f. rate would be shown as 1.135.) Such implicit price ratios are measured by the lefthand scale of Chart 2, and the implied percentage reductions of U.S. domestic prices relative to world-market prices are shown in the last column of Table 2.

Thus, by visual inspection of Chart 2 and of the last column of Table 2, one can learn a great deal-in capsule form-about the expected general impact of the Kennedy Round. Such "impact,” it is recalled, is measured here not in terms of import flows, but rather in terms of the constraints imposed by potential imports on the divergence of U.S. product prices from world-market prices. Of course, this does not literally mean that prices are being reduced in absolute terms by the average amounts indicated. World-market prices of many of

the products in question are themselves in movement, generally upward. Moreover, the Kennedy Round tariff cuts are being staged over a five-year period, 1967-72. Since the average relative-price impact on "total manufactures" (SITC 5-8) is estimated to be 4.6%,2 the downward price pressure is only 1% per year. Actual impact on prices is also further attenuated by the fact that there was undoubtedly a substantial margin of redundancy in pre-Kennedy tariff levels, especially in chemicals, miscellaneous manufactures other than clothing, machinery and transport equipment, etc.,-categories for which the cuts were particularly deep, not only on the U.S. side, but also on the part of the other principal industrialized countries. In many of these products, for which the income elasticity of demand is relatively high, the U.S. has for some time had a strong competitive position in export markets and should be able to profit from market expansion in the other industrialized countries. Meanwhile, the latter can increase their penetration into the U.S. markets for very similar goods, but which are differentiated by quality, style, or design. This phenomenon of increasing mutual cross-trade in differentiated goods of the same general type is known as "intra-industry specialization" and is characteristic of the process of reciprocal trade liberalization among advanced countries.3 The downward price pressure implicit in a given country's tariff reduction affecting such products may well be absorbed by increasing demand, at home and abroad, associated with high income and price elasticity. Market-structure characteristics of these capitalintensive industries, producing very differentiated goods, may also be a factor preventing the implicit price pressure of the tariff cuts from contributing to actual price reductions.1

The converse of the fact that the major Kennedy Round participants concentrated their concessions in these capital intensive, highly differentiated, or technologically sophisticated products is to be found in the failure of the Kennedy Round to achieve significant tariff cuts on resource-intensive, labor-intensive, or relatively standardized products. Referring again to Chart 2 and the last column of Table 2, it may be noted that no concessions were made in supported foodstuffs or the fuels sector. In raw materials, tropical agricultural products, etc. there was little to cut, so there was relatively little effect on average implicit

'See Bela Balassa, Trade Liberalization among Industrial Countries: Objectives and Alternatives (New York, 1967), pp. 86-92.

'See H. G. Grubel, "Intra-Industry Specialization and the Pattern of Trade," Canadian Journal of Economics and Political Science (Vol. 33, No. 3, August 1967). “The paper leads to the most important conclusion that the reciprocal removal of tariffs causes fewer adjustment problems than most observers expect because manufacturing industries tend to react to tariff removal like monopolistic competitors so that there will be only relatively minor quality or style-specific capital losses by labor and capitalists."