the implied gaps between U.S. prices and the lowest available world prices. If other things were equal, the average narrowing of the disparities for manufactured goods would be of the order of 4.6 percent. The Kennedy Round tariff cuts were most important in sectors producing capital-intensive, highly differentiated, or technologically sophisticated products, such as chemicals, miscellaneous manufactures other than clothing, and machinery and automotive equipment. They were less important in beverages and tobacco, oils and fats, iron and steel, and clothing. No concessions were made in supported foodstuffs or fuels, while in raw materials and tropical agricultural products there was little to cut. The peaks in the post-Kennedy Round tariff profile continued to be in beverages and tobacco, textiles and clothing, and benzenoid chemicals. "Nominal" protection is defined directly in terms of the international price disparities resulting from protective measures and takes account not only of the tariffs (to the extent these are non-redundant), but also of the relative-price effects of quotas and other quantitative restrictions, whether "voluntary" or legally sanctioned. Rough estimates of the price disparities associated with QR's indicate very wide international disparities in shipbuilding (122 percent), sugar (100 percent) dairy products (90 percent), peanuts (70 percent), petroleum and petroleum products— other than residual fuel oil in District I-(60 percent), and wheat and flour (50-60 percent). "Voluntary" quotas for cotton textiles, meat, and iron and steel are estimated to have increased rates of nominal protection by 10 percent in each category, over and above the tariff protection. In strongly competitive exports, on the other hand, tariffs are presumably redundant, lowering somewhat the levels of protection indicated by tariffs. Export controls result in negative nominal protection for some products. Estimation of rates of "effective" protection gives a more complete picture of the incentive effect of protective measures. This takes account of nominal protection on material inputs as well as on outputs and compares value added in different industries with what it might have been under free trade. The highest average rates of effective protection, after the Kennedy Round, are estimated by Professor Baldwin to be in the industries producing intermediate textiles (86 percent), scientific and controlling instruments (71 percent), and crude petroleum (64 percent). At the other end of the scale, negative effective protection is shown by industries producing certain miscellaneous textile goods and floor coverings (-12 percent), farm machinery and equipment (—6 percent), various extractive industries, paper (-3 percent), paints (−2 percent), and-significantly-the automotive industry (-1 percent). The analysis brings out the important influence of quota and other protection of steel in reducing effective protection in the numerous industries in which steel is an input. Oil quotas have similar effects. especially in petrochemicals, except to the extent that ad hoc measures give partial exemption from quotas. Unless subsidies offset quota effects (e.g. in supported agriculture), high nominal and effective protection is not only a symptom of poor international competitiveness of the products concerned, but also creates a bias against exporting, since higher product prices and value added can be obtained on the domestic market. High protection of inputs also obviously puts consuming industries at an export disadvantage. This is mitigated, however, by customs drawbacks. Analysis of the behavior of domestic price indexes shows that, during critical stages of the Vietnam War inflation, the prices of goods subject to quotas tended to rise much more rapidly than those of tradable goods subject to tariff protection. In this respect, they resembled prices of non-traded services and construction. Quota policies probably contributed to the cost-push spiral. Finally, it is shown that, for every productive activity enjoying high effective protection, the position of some other industries is worsened. This is most apparent in the case of those industries having negative effective protection at the existing exchange rate, but a number of other industries having relatively low-but positive-effective protection also find themselves in a disadvantaged position because of the differentiation of the protective structure. Policy Conclusions 1. Whenever a choice is possible as among different kinds of protective measures, preference should be given to those which make the expected. margin of international price disparity most visible. Conventional ad valorem tariffs, set at non-redundant levels, best meet this criterion. 2. When, for strong reasons of domestic policy, it is desired to support producer prices in a given sector at autonomous levels, independent of international prices (e.g., because of agricultural "parity" considerations or for "national security" reasons), it is desirable on national policy grounds that the differential be subsidized so as to prevent loss of foreign export markets and that arrangements be made to make the product available to domestic processors at international prices. Since such policies may cause international retaliation, it would be still better to take advantage of periods of rising world prices to consolidate a narrower margin of support through conversion of quotas into fixed tariffs. 3. Similarly, advantage should be taken of periods of short steel supply abroad to eliminate the present "voluntary" quota system, which seems to have serious cost-raising effects in a number of U.S. industries. 4. Since it is presumably not feasible to reduce nominal protection on cotton textiles and apparel, consideration should be given to conversion of import quotas to conventional tariffs. Since both EEC and the U.S. made their acceptance of the Kennedy Round cuts in this sector contingent on renewal of the LTA, it should not be impossible to go back on these meaningless concessions without "unwinding" the rest of the Kennedy Round. 5. Eventual future developments in the domain of the international adjustment process (e.g., upward revaluation of certain foreign currencies, etc.) might provide opportunities for unburdening the U.S. protective system of its present stop-gap role in balance-of-payments policy. INTERNATIONAL PRICE COMPETITIVENESS Prepared by the Bureau of Labor Statistics II. SOME I. PRICES AS A FACTOR IN INTERNATIONAL COMPETITION. Recent writings in the press, testimony before Congressional Committees, and reported comments of U.S., foreign, and international officials have raised questions concerning the competitiveness of U.S. products and services in world markets. Most of these statements have used the word "competitiveness" without providing a precise definition. However, the questions have related to various factors which might influence the competitiveness of the United States in trade-among them the U.S. inflation relative to the rest of the world, technological change and the spread of technology, trade barriers and exchange restrictions, as well as changes in pricing and marketing practices and monetary and fiscal policies. It is beyond the scope of this paper to discuss possible definitions of the term competitiveness. Indeed, at this stage it appears that there is no precise technical definition that would be generally accepted. The purpose of the paper is to discuss the extent to which price information can yield insight into changes in international trade patterns. I. PRICES AS A FACTOR IN INTERNATIONAL The importance of the role of prices in competition and the allocation of resources is unquestioned. Prices reflect the operation of supply and demand, which are in turn determined by the availability of resources, the state of technology and the incomes, tastes and awareness of buyers. The effect of prices on the competitiveness of products is as important in international as in domestic exchange. There are, however, other factors which will affect the decisions of potential buyers. Some of these are to a degree controllable by the individual seller and are therefore to be regarded as instruments of competition. They include aggressiveness of marketing, delivery time, financing, adaptability to customers' specifications, guarantees, installation, service and the availability of spare parts. These too will have some role in international dealings. It is likely also that governmental policies will have at least as important an influence on the international competitive situation as on the domestic. For exporting countries, there may be special provision of export financing, subsidized shipping and insurance, and tax rebates in excess of the actual taxes paid. For importing countries, the special measures include tariffs and quotas, artificial or unrealistic trade regula tions, exchange controls, border tax adjustments where the tax exceeds that applied to domestic substitutes, and subsidies given to import competing industries. Nevertheless it remains true that the most important single factor affecting competitiveness continues to be price. II. SOME RECENT ESTIMATES In the post-war period, many studies have assessed the impact of price changes upon the value and physical volume of international trade flows and upon individual industries located in different areas. These studies have ranged from industry studies to analyses of economic integration and consequent removal of artificial price differences. A recent study of the effect of price changes on the volume of imports and exports of several countries is that of Houthakker and Magee.1 The authors found that price changes were important in influencing the amount of imports and the amount of exports. For example, for the United States, they show that a one percent increase in U.S. prices will lead to a 12 percent decline in U.S. exports, other things remaining unchanged.2 An earlier and widely recognized study was undertaken by G. D. A. MacDougall. Unlike Houthakker and Magee, MacDougall did not estimate price elasticities. Instead, he showed that there was an inverse correlation between the relative prices of the U.S. and British goods. Thus, if U.S. export prices rise relative to British export prices, U.S. exports will fall relative to British exports. The converse is also true. III. METHODS OF MEASURING RELATIVE PRICES The most widely used method of measuring changes in the prices of a country in relation to other countries compares changes in the price level of one economy with changes in the price level of the other economies. Such comparisons often involve the implicit pair-wise comparison of changes in consumer price indexes (sometimes erroneously called cost of living indexes). According to this measurement, if the ratio of the consumer price index of country A to that of country B rises, then it is concluded that A has suffered a relative decline in price competitiveness. 1 1 Houthakker, H. S. and Magee, S. P. “Income and Price Elasticities in World Trade", The Review of Economies and Statistics, LI, no. 2, May 1969. 2 The estimate showed a high standard error. Ibid, Table 1, p. 113. 3 MacDougall, G. D. A. "British and American Exports: A Study Suggested by the Theory of Comparative Cost," Economic Journal, LXI, December 1951 and LXII, September 1952. |