More Imports Needed

by SUMNER H. SLIGHTER

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THE holding of the first Congress of the Communist Party in Russia since 1939, the recent purges of the Communist parties in Eastern Europe, and Stalin’s lengthy pronouncement on Russian policy in the magazine Bolshevik all indicate that Russia is taking a new look at her policies and is about to make new efforts to divide the countries of the West.

These developments follow closely the acute foreign exchange crisis among many non-Communist countries in the first half of 1952. This crisis, the third foreign exchange crisis since the end of the Second World War, has caused the sterling area to lose half of its gold and dollar reserves: it has led Britain, France, India, Australia, South Africa, New Zealand, and other countries to make drastic cuts in their imports; it has caused the British Trades Union Congress to pass unanimously a resolution demanding expansion of trade with the Soviet Union and Communist China; it is forcing Britain and France to cut their defense outlays below the targets set at Lisbon last winter; and it is bringing about high-level talks between the British and Americans in Washington early this year on the fundamentals of world economic conditions.

The economic troubles of the non-Communist countries make clear an important and startling fact — namely, that the United States has failed to develop an adequate economic foundation for its foreign policy. Consequently, our foreign policy is in danger of collapse. The essence of our foreign policy is nothing less than the building of a community of nations united in their opposition to Communism and willing to support a common defense against it. A good start has been made in developing arrangements for military and political coöperation. But a group of nations cannot be regarded as a community unless they are bound together by close economic ties. Certainly the absence of close economic ties would make the future of any military or political alliance quite uncertain. The best single indication of the degree to which a group of countries constitutes an economic community is the extent to which their currencies are freely convertible. Until a considerable degree of convertibility has been established, trade among the countries cannot be permitted to grow freely — indeed, the very success of one country in selling abroad may cause it to become the owner of large quantities of currencies which it cannot spend where it wishes.

The failure of the United States to provide an adequate economic foundation for its foreign policy has been due to the fact that the economic difficulties of the non-Communist. world have been grievously underestimated. It was originally hoped that the post-war recovery of production would in a few years enable the principal countries to restore the convertibility of their currencies, and that generous aid from the United States for a few years (the Marshall Plan was for five years) would permit most countries to raise output to the needed levels. The United States has put more than $35 billion into foreign aid, and the output of Western Europe is more than 40 per cent above pre-war. There has also been a big increase in trade between countries, including a large rise in sales to the United States. And yet only very limited progress toward achieving the convertibility of most currencies has been made — as is indicated by the foreign exchange crisis of 1952.

Hence, the United States finds itself confronted with a very fundamental choice. Either it must develop proper economic support for its foreign policy, or it must abandon its essential policy of attempting to build a strong community of nonCommunist countries. It is dramatic, and I think salutary, that the choice must be made by the Republican Party, which has been the principal vehicle of conservatism but which has also viewed close foreign ties with skepticism. Can the Republicans do what the Democrats have failed to do — namely, provide our foreign policy with an adequate economic foundation? Or is the task of bolstering up the economies of the non-Communist world beyond the capacity of the United States, and would the Republicans be wise to replace our present foreign policy with a much less ambitious one?

It is the thesis of this paper that the United States can enormously strengthen the economies of the non-Communist countries and help them to achieve a considerable degree of convertibility for their currencies within several years; and, furthermore, that we can do this by methods which would greatly strengthen our own economy. Rarely indeed has a country been so well situated to give great help to the rest of the world by policies which would also enhance its own economic welfare.

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THE greatest single obstacle to American efforts to build a strong community of non-Communist countries has been the difficulty of these countries in selling to the United States. Their chronic excess of purchases from us over sates to us has kept most non-Communist countries short of foreign exchange and has forced them to place numerous restraints on both their imports and their exports.

For two or three years more the excess sales by this country above its purchases can be financed by foreign aid. But everyone agrees that foreign aid must soon stop. It is burdensome to American taxpayers; it is offensive to the pride of other countries; and it creates dangerous misconceptions of other countries among American voters. To a limited extent the excess of exports by this country above its imports can be met by new American investments abroad. But investment opportunities abroad are limited by several circumstances — by scarcities of managerial skill and technical knowledge among many foreign populations, by political instability, and by fears that industries will be socialized. Hence, the only real solution to the economic problems of the non-communist world is a substantial rise in sales to the United States. The alternative would be a drop in purchases from us. This latter kind of adjustment would hinder other countries from obtaining the goods that are badly needed to develop their industries; it would tend to prevent the currencies of the non-Communist countries from becoming freely convertible; and it would give Russia opportunities to disrupt the non-Communist world by offering to buy goods which cannot be sold in the United States.

But is a large rise of imports into this country a practical possibility? Let us concede that if will not be easy for other countries substantially to increase their sales to us. The principal reason is the superior efficiency of most American industries. This superior efficiency is indicated by the fact that output per capita in the United States is twice as large as in Britain, three times as large as in France, and about nine times as large as the average for the rest of the world as a whole.

But in addition to the efficiency of American industry, there are other reasons why other countries have trouble selling in the American market. For most countries the United States is 3000 or more miles away. Breaking into a remote market is expensive and puts the seller at a substantial disadvantage. Although there have been large reductions in our tariff during the last fifteen years, there are over 3500 duties still in effect and there are still several hundred duties of 25 per cent ad valorem (or its equivalent) or more. Even a duty of 15 or 20 per cent is usually a formidable handicap to a foreign seller. Surprisingly enough, the great American automobile industry is protected against its weak foreign competitors by a duty of 10 per cent!

American customs procedures are an additional obstacle to imports because these procedures are often complicated, cumbersome, and (worst of all) uncertain. Finally, many foreign sellers are discouraged from making long-range plans to sell in the United States by the possibility that success in selling here will cause the American duty to be raised. This possibility is created by the so-called “escape clause,”recently added to the trade agreements act. This clause authorizes the President to terminate concessions made in reciprocal trade agreements if the Tariff Commission finds that imports threaten serious injury to American producers.

It is not a light undertaking for a foreign producer to enter the American market. Long and expensive promotion is likely to be required. If success in selling here is likely to cause the duty on his goods to be raised, the foreign producer is not likely to attempt to enter the American market. What better device than the “escape clause" could this country have invented to discourage foreign enterprises from endeavoring to sell here?

Despite those obstacles to selling in the United States, it ought to be possible to bring about a sufficient increase in imports so that foreign countries will not need to cut their purchases from this country when foreign aid ends two or three years hence. In recent months, the United States has been exporting goods and services (exclusive of military goods) at the rate of about. $19 billion a year, has been importing at the rate of $13 billion a year, and has been investing abroad about $1.5 billion a year. If the rest of the world is to continue to buy from the Failed States at about the present rate after foreign aid ceases, it must increase its sales to this country by about $4.5 billion a year. This is little more than 2 per cent of the net annual output of private industry in the United States.

In spite of the great technical superiorities of most American industries and the big advantages of domestic producers over foreign producers in the home market, there must be at least 2 or 3 per cent of our output produced at higher costs than the cost of foreign competitors. Among the goods that might be imported in far greater quantities are machinery, toys, cameras, bicycles and motorcycles, chemicals, woolens, worsteds, cotton goods, automobiles, airplanes, optical goods, glassware, chinaware, lumber, lead, zinc, copper, petroleum and pet roleum products, sugar, wine, olive oil, nuts, fish, cheese, rice, canned meat. In many of these cases duties are so close to prohibitive that nearly all of the American market is supplied by domestic producers. In some cases, such as worsteds, cotton goods, or lumber, even a tenfold increase in imports would leave seven tenths or more of the market in the hands of American producers.

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WHAT steps are needed to enable foreign countries to increase their sales to this country by about $4.5 billion a year? Some of the moves must be made by other countries, but the first and most important steps should be taken by the United States. To begin with, Congress by joint resolution should proclaim that it is the national policy of the United States to buy from the rest of the world (that is, the non-Communist world) as much as other countries buy from us, less the amounts that we invest abroad or give as foreign aid. Thus, if the United States were selling $19 billion of goods and services a year to the rest of the world, and investing abroad $1.5 billion a year, we would undertake to import $17.5 billion of goods and services a year. If we were still giving a billion a year in foreign aid, we would undertake to import $16.5 billion of goods a year. The United States could not, of course, guarantee that our purchases from the rest of the world would equal our sales, because other countries might pursue inflationary policies that limited their ability to sell to us. But. the adoption of the definite policy of endeavoring to keep our purchases equal to our sales less investments and gifts would be a big step forward. The balance between imports and exports would apply, of course, to the totals for the United States as a whole, not to the trade with any given country.

How could the policy be implemented? Two principal steps would be required. In the first place, the use of the “escape clause” should be safeguarded to prevent it from unreasonably discouraging much-needed increases in imports. For example, Congress should declare that “serious injury” to American producers will not be found in cases where the absolute volume of sales by American producers has not decreased, where American producers still retain half of the domestic market, or where there are other industries into which American producers can readily shift without serious loss. In the second place, the Tariff Commission should be given the responsibility of watching the trend of imports and exports and of making such reductions in duties as may be necessary to keep imports as large as exports less current investments abroad and foreign aid. The Tariff Commission should be instructed to reduce those duties that promise to bring about the greatest increase in imports with the least disturbance to American producers, end specific duties should not be reduced without giving American producers a chance to protest. The Commission, however, should have the definite responsibility of keeping duties low enough to effectuate the basic policy that the United States undertakes to buy as much as it sells, less what it invests abroad or gives away.

The impact of these steps upon the rest of the world would be enormous. The economic position of every non-Communist country would be tremendously strengthened. Since the non-Communist count ries as a whole could count on a great improvement in their ability to earn dollars, many of them would be able to relax their present restrictions on purchases from this country. Furthermore, their improved ability to earn dollars would enable them to increase their dollar reserves and at the same time would raise the adequacy of the dollar reserves now in their possession. Thus the various countries of the non-Communist world would be able gradually to permit greater freedom to import and, step by step, to introduce full convertibility of their currencies. Finally, the greater ability of other countries to earn dollars would improve their ability to borrow here. All of this would mean that every non-Communist country would be better able to obtain the goods needed for developing its industries and raising the standard of consumption of its people.

Most important of all would be the political consequences of the new economic policy. Hope in every country for its industrial development would be stimulated. The ties of friendship between all non-Communist countries and the United States would be strengthened. The growing demand for the opening up of trade between Eastern and Western Europe, which the German Socialists, the British trade unionists, and others are now pressing and which threatens to split the nonCommunist countries, would be weakened. The minorities that are promoting in various countries the view that the United States is attempting to dominate their economies would lose much of their influence. All of the non-Communist countries would feel that in the United States they had a powerful economic friend who stood ready at all times to assure them that their efforts to expand their economies would not be held down by artificial obstructions to their ability to sell.

Would not a rise of around $4.5 billion in imports be bad for the American economy? Would it not create unemployment and perhaps even depression? The answer to these questions is “No.”A rise in imports sufficient to prevent a drop in our exports would be good, not bad, for our economy, in the first place, it would raise the efficiency of American industry by introducing wholesome competition at many points. In the second place, it would make foreign economic aid unnecessary, thus permitting taxes to be reduced by several billion dollars a year and enabling Americans to raise their standard of consumption by the amount of the reduction in taxes. In the third place, it would prevent our exports from dropping as economic aid is reduced. Thus it would prevent the rise of unemployment in our export industries. In the fourth place, the improvement in the credit of other countries made possible by their greater ability to earn dollars would increase their ability to borrow in the United States. As a consequence, demand for American exports would be raised, employment in the United States would be increased, and the productivtiy of American industry would be raised by the shift of labor and capital from industries that have trouble in meeting foreign competition to industries that can undersell foreign rivals — in other words, from less productive to more productive industries.

But would the American voters tolerate a rise of even $4.5 billion a year in imports? American businessmen have been quite ready to lecture the rest of the world on the virtues of competition, to boast of the superior productivity of American industry, and to invite other countries to imitate American methods. But let some country achieve modest success in selling its wares here and the American champions of competition emit loud cries of distress. In the words of the London Economist, American business “when faced with signs of foreign competition in the domestic market . . . behaves rather like a young girl straight from the vicarage might be expected to do if she found herself alone in the Kasbah.”

In the last year or two there has been a striking rise of protectionist sentiment in the United States. The President, it is true, has refused to raise the duty on watches or garlic, and Congress has rejected the plea of the tuna fishermen and canners for a tariff on Japanese and Peruvian tuna, but the cheese quota, in a slightly milder form, has been extended. Under the “escape clause" of the trade agreements act, higher duties or quotas are being asked on motorcycles and bicycles, musical instruments, chinaware, clothespins, figs, and other articles. Whether the voters will tolerate a large rise of imports will depend upon 1) how well American exporters promote their own interests; 2) the policy of Russia; and 3) the condition of business here.

The opponents of imports into the United States have always been far more effectively organized than the businessmen who are interested in exporting. But now that the foreign aid program has built up a considerable volume of exports which will disappear unless imports are increased, perhaps the exporters will champion their interests more effectively than in the past.

The policies of Russia will have much to do with the attitude of the country toward imports because an effort by Russia to use economic weapons in the cold war will help the voters see the economic implications of American foreign policy. If Russia offers substantial quantities of timber, wheat, coal, copper, and gold in return for goods from the rest of the world, she will create serious dissension among the non-Communist countries — unless the United States accepts a substantial rise in imports.

Most important of all, the willingness of this country to accept a large increase in imports will depend upon business conditions. Large and persistent unemployment will cause barriers against foreign goods to be made higher. And even in prosperity a rise of imports will produce strong pressure for higher tariffs or for quotas unless the expansion of demand for goods in general is so vigorous that men and capital can shift readily out of the industries most affected by foreign competition. Hence, the present state of the world and the foreign policy that the United States has developed to meet the menace of Communism require vigorous policies to encourage domestic expansion and to check recessions.

This survey indicates that the United States is in the precarious position of having adopted a foreign policy that is in danger of failing because it requires changes in the country’s tariff policy which the voters and pressure groups may not be ready to approve. Fortunately there is a good chance that the Russians will be discouraged from using economic weapons in the cold war by the Marxist dogma which causes them to underestimate the strength of capitalism and to count on its collapsing from internal causes.

But, even if the Russians do not use offers of trade to destroy the united front of the non-Communist countries, the United States cannot escape choosing between liberalizing its tariff policy and drastically modifying its foreign policy. The real question is not how more imports by us would affect this, that, or the other industry—bicycles, cheeses, worsteds. The unity of the Western world is at stake. A military and political alliance of nonCommunist countries will not endure if lhis country handicaps its associates in restoring the convertibility of their currencies and in expanding their economies by failing to buy from them as much as we sell to them. Fortunately for the United States, the voters, in approving the new policy of our buying as much as we sell, would be advancing the economic interests of this country as well as providing a solid foundation for its military and political policies.