Specifically Unit labor costs in manufacturing-virtually stable in the United States in the first half of the 1960s-increased rapidly between 1965 and 1970. U.S. unit labor costs in manufacturing actually declined between 1960 and 1965 while the unit labor costs of our leading competitors rose 20 percent. Between 1965 and 1970, on the other hand, U.S. unit labor costs, in manufacturing rose by 21 percent, while our competitors' unit labor costs increased only 15 percent. U.S. unit labor costs did improve relative to our competition in the period 1970-72. This can be expected to work its way through in the form of a favorable Snpact on the U.S. balance of trade. Relative price information tends to confirm the picture given by the unit labor cost data. During the 1960-1964 period, U.S. prices rose more slowly than those abroad; between 1965-1970 U.S. prices, as measured by changes in the wholesale price index, rose by a greater percentage than all but three of our competitors. TABLE 3.-CHANGES IN UNITED STATES AND FOREIGN WHOLESALE PRICES (AVERAGE ANNUAL RATE OF CHANGE) WEIGHTED BY U.S. EXPORTS 1 1 Includes EC member states, United Kingdom, Sweden, Switzerland, Japan, and Canada weighted by share of U.S. exports. Mr. Stewart's use of 1971 as the terminal year in his analysis distorts the statistical evidence and results in erroneous conclusions. The trade developments of 1971 and 1972 will always be difficult to analyze. 1971 was a year in which "special factors" such as devaluations and the threat of devaluations as well as strikes and the threats of strikes exerted dominant influences on the U.S. trade performance. The underlying overvaluation that had existed much longer but which had been hidden by the extraordinary strong price and productivity performance of U.S. industry during the early 60s was revealed. Hendrik Houthakker, testifying before the Joint Economic Committee in 1963 said, "This overvaluation is at the heart of the American balance of payments problem . . . the dollar is probably overvalued by some 15 to 20 percent with respect to most European currencies." The currency realignments of 1971 and 1973, restored the dollar to a more realistic value relative to other currencies and promise substantially to improve the international competitive position of the U.S. We are already beginning to see the consequences reflected in our trade account, which has improved each month this year and was in surplus in April. It should be clear from the foregoing analysis that the principal causes for the deterioration in the U.S. balance of trade and recent improvement, although complex, do not include the effects of tariff reductions negotiated during the Kennedy Round. (4) The Trade Balance and Employment in the United States.-Introduction : Mr. Stewart contends that the increased trade deficit was a major cause of the increase in unemployment during the period 1967-1971 and that "two-thirds of American industry . . . have suffered as a result of the import and export trends. . . ." As shown in the previous section, the Kennedy Round concessions did not cause the deterioration in the balance of trade. The relationship between international trade and employment is far more tenuous than indicated by Mr. Stewart's testimony. The level of employment is determined by the overall level of spending in the economy. Since total imports are less than 5 percent of gross national product, it is not surprising that the likely effect of trade on employment is modest. This can be seen by comparing some recent trade and employment data and by noting that such factors as productivity increases and net labor force accretions force more substantial adjustments on the economy than do changes in the trade balance. Trade and Employment Data: The period of analysis chosen by Mr. Stewart, 1967-1971, encompasses both an expansion (1967-1969) and contraction (19701971) phase of the business cycle. If we divide the period into these two phases, it becomes clear that changes in the trade balance do not have a significant impact on changes in the level of employment or in the unemployment rate. Table 4 provides selected employment, wage, and trade balance data for the two phases of the 1964-1971 period. The 1964 starting year was selected because it marks the beginning of the expansion phase that ended in 1969. TABLE 4.-SELECTED EMPLOYMENT, WAGE AND TRADE BALANCE DATA, 1964-71 During the 1964-1969 expansion the total number of individuals employed as well as the number of individuals employed in the manufacturing sector registered impressive gains while the unemployment rate fell substantially. These changes were accompanied by a deterioration in the trade balance, the excess of exports over imports, of over $6.2 billion. That is, during a period of increased employment and reduced unemployment merchandise imports increased by $6.2 billion more than merchandise exports. During the 1969-1971 contraction, total employment continued to rise, but the number of individuals employed in the manufacturing sector fell while the overall unemployment rate increased. These employment changes were accompanied by a $3.3 billion deterioration in the trade balance. Quite clearly, the 1964-1971 data permit no conclusion of a significant impact of trade on employment. In each period, 1964-1969 and 1969-1971 the trade balance deteriorated, but the employment indicators moved in opposite directions in the two periods. If additional evidence is required one need only observe that the biggest increase in imports over exports of the two periods, 1964-1969, occurred when employment was increasing and the unemployment rate was falling. By choosing the 1967-1971 period, which spans the transition of the economy from expansion to contraction, Mr. Stewart has presented a distorted picture of the effect of trade on employment. A close look at his tables will show that U.S. employment actually increased by 3.5 million between 1967-69, and that the major increase in unemployment occurred during the 1970-71 economic downturn, although the rate of unemployment began to increase in late 1969. An examination of the 1970-71 recession period shows that imports were not a major factor causing increased unemployment. Lawrence Krause of the Brookings Institution has estimated that the net loss in our trade balance during this same period accounted for only 16,600 of the individuals becoming unemployed or less than one percent of the 2.0 million increase in unemployment. Relative Unimportance of Trade Induced Changes Another way of demonstrating that trade has no more than a modest impact on employment is by noting that trade induced changes are small and unimportant compared to the changes, which the economy must regularly absorb, that are induced by productivity increases and labor force additions. On average, labor productivity increases by about 3.0 percent annually. This means that 3.0 percent fewer workers would be required to produce last year's volume of output this year. In addition, the labor force grows by about 1.7 percent per year. Assume that the economy is "frozen" and that it makes absolutely no adjustment to the productivity and labor force increases occurring each year. Individuals are thrown out of work because the economy, by assumption, does not adjust to the changes. This would mean that roughly 4.7 percent (3.0 percent from productivity increase and 1.7 percent from labor force additions) of the labor force would be added to the rolls of the unemployed each year. Of course this does not happen. One does not observe a long term increase in the unemployment rate in which an additional 4.7 percent of the labor force is added to the pool of the unemployed each year. The increase does not materialize because the economy does adjust to these rather significant changes. A fortiori, The ed impom penetration is erosistent in the create, with ineaved TS, emplignent and terme. it is true that increasing impiets have excited to Subining engityment in serer specie industries. Berect testicy inding that We open 166 pement of our 3 21 aperis £f the. We import 96 perent of our mamede tape resseders. We import 19 penner i ser portable typewriters and more than 50 persent of crur buais and white telerisi ́T SES And wine recent tastiniet te empörgment erosegpeores in particular industries: “Nice industries are parmiany hard in Fe example, employment of pressive winkers in the ecosiner bice entertainment electricis industry hax declined from 15.50 % 9600 snee 1900 as impress eretizne to rise. These are striking igures. The manifest oe of the crosegpeones of comparatire advantage that sice industries face growing import competition while ochers expand exports. Worker ¿ications arising from increased imports are part of a more general pattern of employment that is characteristic of a free and get erronny. Just as one employs monetary and iscal policies to mazai aprecite employment, trade polley should include tools to assist individuals in adjusting to trade indoned changes. The administrative's trade bill recognizes that the individuals who bear the major costs of adjustment from made deserve priority attention. Two remedies to ease this burden are included in the administration's bill A sfegar meritatison would allow for the imposition of temporary restraints Then imports create distress for a particular industry or region Adjustment assistance would provide for financial relief and readjustment of workers suffering from or threatened with trade induced injury. Our analysis of a number of major industries affected by trade dows indicates that Mr. Stewart's policy recommendations would result in lower wage jobs at the expense of higher wage jobs. This amounts to an income redistribution policy that hardy can be supported as good publie polity for either the American worker or the future dynamie growth of the U.S. economy. (5) Trade and U.S. Welfare.—It is essential that we distinguish policies that may beneft a few Americans at the expense of the many from policies that beneft the majority of Americans. The generally restrictive policies advocated by Mr. Stewart might indeed benefit some industries, but only at the cost of decreaved welfare and lessened ability to compete for the majority of Americans. There are numerous benefits that flow to the economy from increased trade and economic growth. As the last section indicated, more and higher paying jobs are a consequence of this process. As has often been pointed out, in testimony before this committee, consumers also benefit. Many Americans remember fondly the small neighborhood store which has been largely displaced from the U.S. urban scene by the growth of the supermarket. While many of us might have preferred the friendly, neighborhood character of these stores, few were willing to pay the higher prices that their small volume necessitated or accept the limit on consumer choice that their small space dictated. Few of us have advocated that restraints be placed on the growth of supermarkets, especially if our incomes were limited and we needed to economize on our expenditures. Yet Mr. Stewart's proposals for limiting trade would have essentially the same effect as if we tried to limit the change from small stores to supermarkets— higher prices and less choice-the burden of which would fall more heavily on those least able to afford it, the aged, the welfare recipients and the poor. A recent study indicates that the burden of tariff and nontariff protection in the United States falls disproportionately more heavily on the poor and disadvantaged.* This is so because a greater percentage of the poor's income is spent on items that they are forced to purchase at higher prices than would be the case if there were more trade liberalization. There are those who argue that the United States is rich enough to afford these inefficiencies and that a few pennies more spent by the average consumer is a small price to pay to maintain certain industrial plants and the jobs associated with their production. The implications of this policy are, however, of a more serious nature. By limiting trade the United States could worsen the predicament from which such a policy obstensibily tries to extricate us. Reducing the growth of trade diminishes the stimulus to efficiency within import competitive U.S. industries, and results in increased prices of both domestic goods and exports, thereby further weakening our competitive position in international trade. How might this happen? To the extent that import restraints, say on steel or electronic components, allow the U.S. price of these inputs to rise above the world price, these items become more expensive to producers who use steel and electronic components in the manufacturing process-for example, agricultural tractors or certain types of industrial machinery. This added cost becomes incorporated into the price of the final tractor and electrical machinery, thus raising both its domestic and export price. When restraints are levied across the board on a number of products this process is multiplied, affecting not only the prices of individual products but the entire price structure of the U.S. economy. Some economists have calculated that U.S. import restraints could add 2 percentage points to the wholesale price index. At a time when the economy is nearing capacity constraints in several areas and prices are already rising at too rapid a pace, the additional stimulus to inflation caused by trade restraints could be considerable. The result could be a repetition of the relative slow rates of produc tivity growth, high unit labor cost increases and the resultant decline in our balance of trade that we experienced in the late 1960's. This, in turn, would lead to more pressure for more trade restraints, further exacerbating the situation. These economic forces would be set in action even if foreign nations did not take retaliatory steps. However, we would have to expect they would. Reciprocity is the basic rule of international trade. Political and economic considerations in a number of countries would force retaliatory action. Are our export industries willing to accept limits on their shipments to some "representative period" and is Congress or the Executive likely to accept such limits without demands for further retaliatory action? By following this path all nations stand to lose. Prof. Stephen Magee of Chicago University has calculated the net welfare benefits that would accrue to the United States from a reduction in trade barriers or conversely the loss in total welfare that results from the maintenance of such barriers-taking into account both the costs to the consumer and to the producer that have been alluded to previously. He calculates the total cost to the United States of existing barriers to U.S. trade (imports and exports) at from $7.5 to $10.5 billion per year. This, however, represents the cost for one year only. Discounted overtime, the present value of these restraints is equal to $258 billion, $107 billion of which occurs before the fifteenth year. The gains that can be expected from more liberal trade are therefore substantial; similarly, the costs of following a more restrictive trade policy could also be substantial. Comments on Mr. Stewart's recommendations for changes in the proposed bill have been forwarded in a separate paper. *Norman Fieleke, "The Cost of Tariffs to Consumers" Federal Reserve Bank of Boston, September/October 1971. This is a response to the "critique" by the Administration of my testimony presented to the Committee on May 22 on behalf of the Trade Relations Council of the United States, Inc. The Administration's "critique" was presented in two segments, that dated June 21, 1973, being described as "an overall critique," and that dated June 15 as a "title by title analysis" of my testimony. I. RESPONSE TO THE ADMINISTRATION'S "OVERALL (1) The United States did not receive reciprocity in the Kennedy Round. In attempted disputation of my point, the Administration argues that the U. S. received equivalent concessions in the Kennedy Round from the linear participants. An examination of public data, however, indicates that the opposite is the fact. Based upon the percentage of trade between the United States and the other linear participants, the United States received concessions applicable to 62.6% of its exports whereas the other linear participants received concessions on 74.4% of their exports. In attempting to counter my point, the Administration presents data for the year 1964 only. It is of significance that by 1971 U. S. imports from the linear participants had increased to $19,607.0 million in contrast with U. S. imports from such participants in 1964 of $6,546.5 million. By contrast, U. S. exports to the linear participants increased by a far smaller amount during this period: from $10,826.6 million in 1964 to $18,652.4 million in 1971. [Walker and Company, 1964 World Trade Annual, Vol. 1 (N. Y., 1965)] |