BOARD OF TRUSTEES

STATEMENT OF J. D. ZELLERBACH, CHAIRMAN OF THE BOARD OF TRUSTEES,
COMMITTEE FOR ECONOMIC DEVELOPMENT1

My name is J. D. Zellerbach. I am chairman of the board of trustees of the Committee for Economic Development, and president of Crown Zellerbach Corporation of San Francisco.

I am glad to convey here for the record, at the invitation of the Subcommittee on Customs, Tariffs, and Reciprocal Trade Agreements of the House Committee on Ways and Means, the views of the CED's research and policy committee on tariff policy. The views expressed here are based upon and are in agreement with a statement of our research and policy committee on United States tariff policy published in November 1954 after intensive study of this question. I have submitted full copies of this report for the use of your committee in considering tariff policy. Of the 38 members entitled to vote on this policy statement, one was absent from the country and took no position on it and two dissented. The dissenting views are expressed in the footnote on page 18 of the policy statement.

Following a statement here of CED's general conclusion with respect to tariff policy, I shall summarize the considerations that led the committee to this conclusion. Finally, I shall list the specific recommendations of the committee on the elements of a tariff policy to strengthen the domestic economy, and increase our national security.

I. The committee favors a policy of gradual and selective tariff reduction. The United States is the strongest nation of the free world, and as such it has the responsibility to take the lead in lowering import barriers and freeing world trade. The committee also believes, however, that although the case for our taking the initiative is very strong, the course of our tariff policy should be conditioned by the manner in which other countries respond to our lead. The effectiveness of our efforts to expand world trade cannot depend alone upon our own policies.

The CED does not favor unlimited free trade. We do believe that it is in the national interest of the United States to follow a policy of gradual and selective tariff liberalization. With gradualness and selectivity, significant tariff reductions can be made without hardship to domestic industry or damage to domestic production that is truly essential to national security. We believe a tariff policy of this kind will, on balance, strengthen our domestic economy and increase our national security.

Moreover, the committee believes that the expanding American economy will be better able to maintain its dynamic forward movement in a climate of trade liberalization than in a climate of trade restriction. Simultaneously, our expanding economy will tend to absorb those adverse effects of trade liberalization which may be felt in particular segments of the domestic economy.

United States tariff policy has gone through four distinct phases and is in a fifth. Before 1860 tariffs were imposed mainly to raise revenue, and until that time they were the chief financial resource of the Government of this country. After 1860 the country entered a period of great industrial growth, an expansion of our industrial community carried out in the face of strong competition from well-established industries in Europe. High tariff policy was based on the desire to provide our infant industries à tariff shield in their formative years. The shield was often retained long after the formative years.

World War I disclosed, when it cut us off from traditional supplies of many essential materials, notably chemicals and pharmaceuticals, our dependence upon foreign sources of some materials. The tariff increases of the 1920's were partly a response to this disclosure, a use of the tariff to build up and maintain industries considered essential to this Nation's security. The Tariff Act of 1930, the Smoot-Hawley tariff, raised tariffs to the highest point in our history.

Since 1934, under the Trade Agreements Act and its various extensions, this country has been following a policy of selectively negotiated tariff reductions. This phase of our tariff history reflected in legislation the beliefs of those who felt that freer trade policies would strengthen rather than weaken American

1 The Committee for Economic Development is a private, nonpolitical organization of businessmen and educators formed to study and report on the problems of achieving and maintaining a high level of employment and production within a free economy. Its research and policy committee issues from time to time statements on national policy containing recommendations for action which, in the committee's judgment, will contribute to maintaining productive employment and a rising standard of living. A list of members of the CED research and policy committee is included in the policy statement.

industry. The aim of increasing domestic employment by getting other countries to lower their tariffs against our goods through bargaining United States tariff concessions against foreign concessions to us was fundamentally involved.

The fifth, current phase of American tariff policy grew out of World War II. Before that time, tariff considerations were almost completely domestic. World War II and its aftermath made tariff policy a major element in United States foreign policy. This resulted from the overwhelming strength of the American economy in the wake of the war, and growing realization of the interdependence of American security with that of its allies. American tariff policy is now made with an eye both to its domestic effects-economic and security-and to its impact abroad, where it may bear not alone upon the economic well-being of foreign peoples, but also upon their political stability and their attitude toward this country.

II. Despite the strength of differences about tariff policy, there are a number of fundamental propositions on which most supporters and opponents of tariff liberalization can agree. In our opinion this area of agreement includes at least the following points:

1. Taking the economy as a whole, we enjoy higher real wage levels and better living standards with, than without, foreign trade. We get some things in foreign trade, like coffee, bananas, and tin, that we do not produce at all. In terms of economical use of our resources, it would be extremely expensive to develop substitutes for them within our borders. Other things like pottery, fine woolens, and hats, we produce in some quantity at home. We supplement domestic production with foreign purchases. The penalty of producing our entire requirements of such things at home would be higher prices, lower wages, lower demand, and loss of the sales of our goods abroad that are paid for by our imports of these things.

2. Sales of foreign goods in this country to a large extent pay for the purchases abroad of United States goods. Thus, United States tariffs can hurt American industry and employment by inhibiting United States sales abroad. United States dollar investments abroad, dollars spent abroad by tourists, and foreign aid are other means by which foreign countries can get dollars to pay for American goods. Some dollars that we spend for foreign goods go into foreign reserves, but most of them return here shortly as increased orders for American goods.

Many sectors of American manufacture and agriculture sell a large part of their output abroad. Approximately a quarter of our entire production of cotton, tobacco, and wheat is exported. Something like one-third of the value of farm marketings are highly dependent upon export markets. We also export a large part of our output of some manufactured goods. For example, in the latest years for which figures are available [1954 or 1955] we exported 34 percent of our earth-grading machinery, 25.5 percent of our tractor production, 27 percent of our textile machinery, 22.5 percent of our sewing machines, 13.5 percent of our typewriters, 16.8 percent of our printing machinery, 15.8 percent of our trucks and buses, 8.4 percent of our refrigerators, 34.2 percent of our complete civilian aircraft output, and 13 percent of our agricultural machinery. We exported chemicals and pharmaceuticals in large volume 42.6 percent of our DDT, 33.6 percent of our penicillin, and 7.1 percent of our dyes, colors, and stains, for example. We exported 6 percent of our production of cotton print cloth. A large volume of iron and steel products also went abroad.

3. The shelter of high tariffs may reduce the incentive of some United States industries to engage in the research that helps keep our economy dynamic and strong. Also, high tariffs can lead to earlier exhaustion of some natural resources when they are imposed upon imports that can substitute for the use of scarce, exhaustible natural resources of this country.

4. The economies of most of the other countries of the free world-particularly of our major allies-are considerably more dependent than our own on foreign trade. For example, Britain's imports are equal to about 18 percent of its gross national product, as compared with 3 percent for the United States. The corresponding figure for Holland is 40 percent; for Belgium-Luxembourg, 30 percent West Germany, 15 percent; Italy, 12 percent; France, 10 percent; and Japan, 11% percent. These figures all relate to the latest years for which statistics are available, 1954 or 1955.

The future economic growth and health of many countries depend, in considerable part, on expanding their trade with each other and with us. The economic strength of the whole free world is of great importance to us, from the standpoint of world political stability and our own national security.

5. Import quotas may well be as important in their effects on the overall volume of our imports as the tariff. In principle, quantitative import restrictions are an undesirable method of controlling imports, but the question what to do about our agricultural import quotas is inseperable from the problem of domestic agricultural policy.

6. Uncertainty about our tariff policy is a serious barrier to the expansion of trade. It makes foreign businesses reluctant to invest in the development of products and distribution channels adapted to the United States market. Uncertainty arises from the peril-point and escape-clause provisions of tariff legislation, from the extreme complexity of tariff classification, and from the methods in use for determining the value of foreign goods for tariff purposes, as well as from questions about the future of the Trade Agreements Act.

7. The import barriers of other countries are generally higher than those of the United States. They severely restrict foreign trade. In some cases, the barriers are specifically directed against restraining the entry of American goods because of a specific shortage of dollars in the foreign country. Lowering our tariffs would open the way for such countries to earn more dollars and thereby lower their barriers to our goods.

8. The most economical use of our resources must take second place in our considerations in some circumstances. This is so when the health of key defense industries is involved. Also, there may still be some "infant" industries deserving of protection by tariff. Further, American industry at large must be protected by tariff provisions from imports priced artificially low by means of foreign subsidies, or from dumping.

9. Expansion of imports into the United States will have adverse effects upon some United States industries and may in some cases cause hardship. These effects must be taken into account in deciding tariff policy.

10. In evaluating the possible magnitude of the effects of tariff reduction on domestic industry we should bear in mind the size of the import flow that might be affected. Only a part of our imports are subject to tariff. Of our total annual imports of approximately $11.3 billion in 1955, some $6 billion consisted of products which enter free of duty. Of the dutiable $5.3 billion worth of imports in 1955, only about two-thirds were subject to tariffs sufficiently high to have an appreciable effect on the volume of imports. This consisted for the most part of agricultural products and finished manufactures.

11. The fact that wages may be, and usually are, lower abroad, does not mean that United States industry cannot compete. In many cases, higher capital investment here in more efficient production, better managerial skills, and higher quality of labor add up to higher productivity and lower unit cost, despite higher wages.

The American unit cost is not always competitive. This is so where there is no special American advantage in cost of materials or productivity. In these cases, the lower wage paid abroad would give a price advantage in the absence of a tariff. Products that appear to fall in this field include heavy electrical equipment, watches, woolen and worsted textiles, flat glass, rayon staple fiber, bicycles, some chemicals, machine tools, handicraft products and products calling for a high labor content such as leather goods, felt hats, and hand-blown glass

ware.

12. The great bulk of American agricultural imports are of commodities we either do not produce at all, or do not produce in sufficient quantity to satisfy our market. In these categories are coffee, jute, cocoa, raw rubber, sugar, teɛ, and bananas. In the case of wool, oats, cigar tobacco, and edible nuts, lower tariffs would result in a substantial increase in imports. Most of American agriculture would have a decided price advantage abroad in the absence of price supports and other controls.

13. An expanding domestic market could absorb substantial increases in imports of a product without any reduction in domestic output or prices. Where the domestic market is not expanding, however, or where the increased import would be large relative to domestic output, tariff reduction might cause reduc tion of domestic output and employment. In some cases, the result of a tariff cut might be a decline in domestic prices and a ent in profits of domestic producers, without causing a reduction in output or employment. In other cases, foreign producers might raise their prices by the size of the tariff cut, and there would be no effect on domestic prices or production.

Competitive adjustments resulting from tariff cuts are basically no different. and have ordinarily been far less severe than adjustments continually taking place within our own competitive economy. Such adjustments are part of the